Amtech Systems Inc Q3 FY2024 Earnings Call

Good day, and welcome to the Amtech Systems' Fiscal Third Quarter 2024 Earnings Call. Please note that this event is being recorded and simultaneously webcast. I would now like to turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.

Good afternoon and thank you for joining us for Amtech Systems' fiscal third quarter 2024 conference call. With me on the call today are Bob Daigle, Chairman and Chief Executive Officer, and Lisa Gibbs, Chief Financial Officer; and Wade Jenke, Incoming Chief Financial Officer. After close of market today, Amtech released its financial results for the fiscal third quarter of 2024. The earnings release is posted on the company's website at www.amtechsystems.com in the Investors section. Before we begin, I'd like to remind everyone that the Safe Harbor disclaimer in our public filings covers this call and our webcast. Some of the comments to be made during today's call will contain forward-looking statements and assumptions that are subject to risks and uncertainties, including, but not limited to, those contained in our SEC filings, all of which are posted within the Investors section of our corporate website. The company assumes no obligation to update any such forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of today. These statements are not a guarantee of future performance and actual results could differ materially from current expectations. Among the important factors, which would cause actual results to differ materially from those in the forward-looking statements are changes in the technologies used by customers and competitors; change in volatility and the demand for products; the effect of changing worldwide political and economic conditions, including trade sanctions; the effect of overall market conditions, including the equity and credit markets and market acceptance risks; ongoing logistics, supply chain, and labor challenges; and capital allocation plans. Other risk factors are detailed in our SEC filings, including our Form 10-K and Form 10-Q. Additionally, in today's conference call, we will be referring to non-GAAP financial measures as we discuss the third quarter financial results. You'll find a reconciliation of these non-GAAP measures to our actual GAAP results included in the press release issued today. Now, I would like to turn the call over to Amtech's Chief Executive Officer, Bob Daigle.

Good afternoon, everyone. Thank you for joining Amtech's quarterly conference call. In the third quarter, we continued to optimize our cost structure to match the current demand environment and lay the foundation for meaningful operating leverage as the markets we serve recover. Revenue of $26.7 million exceeded the high end of our guidance range, and our adjusted EBITDA was $2.3 million. I'm pleased that we're beginning to see the financial benefits of the actions we've taken over the past few quarters. The macroeconomic landscape for our end markets remains somewhat mixed. Within the semiconductor industry, we have begun to see incremental improvement in demand for advanced packaging applications. While we have not seen a sharp recovery, we are seeing a gradual increase in demand from the cyclical lows of the past few quarters. Based on quoting activity and discussions with our customers, we expect to see continued improvement. Offsetting this incremental tailwind, we have experienced a softening of demand for our horizontal diffusion furnaces since these tools are primarily targeted for power electronic semiconductor applications in automotive and industrial markets. While this impacts both our backlog and the future revenue in the near term, our overall profit levels remain neutral, as the contribution margin from these products was significantly lower than our corporate average. Within our materials and substrates end markets, we are seeing a stabilization in overall demand. Although demand for consumables used for semiconductor fabrication remains somewhat lumpy, the demand for replacement parts continues to improve. Taken together, we believe we've passed the trough in demand for this segment, although we do not expect a sharp recovery in the near term. While we await the rebound in demand across broader markets, we are continuing to focus on optimizing our operations. In the third quarter, we completed the relocation of our US VTU facility to a smaller, more cost-effective facility in Massachusetts and expanded our partnership with contract manufacturers to improve operational efficiency and manufacturing flexibility. The smaller facility reduces our fixed cost by about $1 million a year without impacting the production capacity. In addition, we are beginning to see the benefits of pricing actions we've taken over the last several quarters. That said, it will still be a few quarters before we see the full impact due to existing backlog in parts of our business. Overall, we believe the measures we've implemented over the past few quarters have better aligned our organization to support current market demand, while delivering positive near-term adjusted EBITDA profitability. The success of our initiatives has resulted in approximately $7 million in annualized cost savings and allowed us to deliver our third consecutive quarter of positive adjusted EBITDA and operating cash flow despite the ongoing softness in the markets we serve. Looking ahead, we believe Amtech is well positioned to capitalize on several secular trends that will drive demand for our products. Within the automotive market, we expect continued growth of power electronic applications in hybrid and full electric vehicles that will generate strong demand for our consumables and equipment. Within the broader semiconductor market, our tools play a critical role in the advanced packaging of processors used in high-performance computing. As OSAT and OEM utilization rates increase, we expect to see a stronger rebound in demand for our reflow equipment. In addition, we expect to benefit from the near-shoring investments being made by government and industry players to build more resilient and secure semiconductor and electronic assembly supply chains. In summary, we remain confident that the strategic initiatives we are implementing to enhance operational efficiency and reduce working capital will generate significant shareholder value as our target markets regain momentum. With that, I'll turn it over to Lisa for further details on the third quarter.

Thank you, Bob. Net revenues increased 5% sequentially and decreased 13% from the third quarter of fiscal 2023. The sequential increase is primarily due to increased sales of our reflow and wafer cleaning equipment and higher parts and services revenue. The decrease from prior year is primarily attributable to lower sales across most of our product portfolio due to a slowdown in the broader semiconductor market. In the third quarter of fiscal 2024, GAAP gross margin increased sequentially compared to the same prior year period. On a sequential basis, GAAP gross margin in our semiconductor segment was positively affected by product mix, contributing to increased revenue for refill equipment, parts, and services. GAAP gross margin in our Materials & Substrates segment decreased on a sequential basis due primarily to a less favorable product mix of consumables and equipment. Compared to the same prior year period, GAAP gross margin was relatively consistent between periods. Selling, general, and administrative expenses decreased approximately $40,000 on a sequential basis and decreased $2.1 million compared to the same prior year period. The sequential decrease is due primarily to reductions in labor-related expenses, partially offset by increased commissions and shipping expenses on higher sales. Compared to the same prior year period, the decrease is due primarily to lower labor and labor-related expenses as a result of our cost reduction initiatives, as well as lower shipping expenses on lower revenues. Research, development, and engineering expenses decreased $0.2 million sequentially and decreased $1.1 million compared to the same prior year period, with a sequential decrease due primarily to the timing of purchases related to specific projects in both segments and the decrease from prior year attributable to development efforts in our Materials & Substrates segment that did not recur. GAAP operating income was $0.8 million compared to GAAP operating income of $1.4 million in the second quarter of fiscal 2024 and GAAP operating loss of $1.1 million in the same prior year period. Non-GAAP operating income was $1.5 million compared to non-GAAP operating income of $0.2 million in the second quarter of fiscal 2024 and non-GAAP operating income of $0.4 million in the same prior year period. GAAP net income for the third quarter of fiscal 2024 was $0.4 million or $0.03 per share. This compares to GAAP net income of $1 million or $0.07 per share for the preceding quarter and GAAP net loss of $1 million or $0.07 per share for the third quarter of fiscal 2023. Non-GAAP net income for the third quarter of fiscal 2024 was $1.1 million or $0.08 per share. This compares to non-GAAP net loss of $0.2 million or $0.01 per share for the preceding quarter and non-GAAP net income of $0.3 million or $0.02 per share for the third quarter of fiscal 2023. Unrestricted cash and cash equivalents at June 30, 2024, were $13.2 million compared to $13.1 million at September 30, 2023. Debt payments during the three months ended June 30, 2024, were $0.3 million. Net cash as of June 30, 2024, was $8.9 million compared to $2.4 million as of September 30, 2023. As Bob touched on, we are seeing differences in the order values and margins for new orders booked compared to some of the products shipping from older backlog. Our shipments for the third fiscal quarter of 2024 include a mix of larger furnaces whose profit levels are below our current expectations and corporate average. New orders are trending towards lower order value, but higher-margin products. And as the semi market recovers, we will have higher volumes of these types of bookings. As we continue to work down this backlog, we expect our book-to-bill, especially in the semi segment to stay below one. But over time, our book-to-bill should be closer to or exceed 1:1 as a higher portion of our business trends toward book and ship orders. As we've discussed previously, we expect the gross margin of our backlog and our future gross margins to improve, but it will take another two to three quarters for this to work its way through. Now turning to our outlook. For the fourth quarter – fourth fiscal quarter ended September 30, 2024, we expect revenues in the range of $22 million to $25 million with adjusted EBITDA nominally positive. Although the near-term outlook for revenue and earnings remains challenging, we remain confident that the future prospects are strong for both our consumables and equipment serving advanced mobility and advanced packaging applications. We took action during the first and second quarters of fiscal 2024, which will reduce Amtech's structural cost by approximately $7 million annually and better align product pricing with value. These steps should significantly improve results and enhance profitability through market cycles. Operating results can be significantly impacted positively or negatively by the timing of orders, system shipments, logistical challenges and the financial results of semiconductor manufacturers. Additionally, the semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Actual results may differ materially in the weeks and months ahead. A portion of Amtech's results is denominated in RMB, a Chinese currency. The outlook provided is based on an assumed exchange rate between the United States dollar and the RMB. Changes in the value of the RMB in relation to the United States dollar could cause actual results to differ from expectations. As I sign off, I would like to welcome Wade to Amtech and thank the Amtech team for all of their hard work and dedication. I would also like to thank Bob and the Board for their support. I am excited for the road ahead for Amtech and its strong leadership and strategy. Bob, I will turn the call back over to you...

Thank you, Lisa. I would like to take a moment to recognize and thank Lisa for her contributions to Amtech over the past eight years. Lisa's commitment to the company and our professional excellence has been invaluable, and I wish her great success with her new role. I'm pleased to welcome Wade Jenke, Amtech's new CFO. Wade has over 15 years of financial and operational experience with global companies. Most recently, he served as the CFO of the EMS Group at ASSA ABLOY, a $30 billion publicly traded company headquartered in Sweden. Prior to that, he served in a number of senior financial roles within ASSA ABLOY and BAE Systems, spanning SEC reporting, FP&A, cost accounting and manufacturing accounting. He has also led back-end acquisition integrations and ERP implementations. I'm excited to welcome Wade to our team. His experience in both financial and operational functions will greatly contribute to our efforts to fully optimize our operations and create greater shareholder value in the quarters and years ahead. Welcome aboard Wade.

Thank you, Bob, and hello to everyone on the call today. I'm excited to join Bob and the talented team at Amtech. I firmly believe Amtech has the potential for significant growth in revenue, profit, and cash flow given the company's leadership position in the markets that it serves. I look forward to the exciting journey ahead and getting to know many of you personally soon. I will now turn the call over to the operator for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Mark Miller with Benchmark. Please go ahead.

Please, I'd like to wish you best in your new endeavor, Wade. I welcome you to the Amtech conference call.

Thank you, Mark.

You're welcome. Talking about some pricing actions, what areas were these pricing actions taken...

Yes, Mark, as we mentioned earlier, it has been quite widespread. Most areas of our business required us to take actions to address the inflationary pressures we've experienced over the past 18 to 24 months. To answer your question more directly, the impact has been broad across our portfolio. However, I would say that some of the most significant effects have been felt in the equipment we manufacture, where inflationary pressures on parts and various components in our systems have been particularly pronounced and required our attention.

General Motors and Ford both recently reported strong results for their EV sales. Have you seen any impact from that or any in terms of quoting activity? Any thoughts that's positive for your future outlook?

Yes. I continue to view EVs as having some pretty nice tailwinds. I think some of the improved results we've seen out of the more traditional automakers have been somewhat offset by the weakness from the market leader in terms of overall demand in the power electronics area. One of the things that I also think is encouraging, Mark, is that although they've tempered expectations in terms of full electric vehicle growth rates, the projections are still fairly substantial. So I see that as a nice secular tailwind. I also believe that there's probably a stronger push to hybridize, replacing traditional ICE vehicles with more hybrid vehicles given strong consumer acceptance for those vehicles to meet fuel efficiency requirements. This is helpful to us because we do play broadly in the power electronics equipment and consumables area. So when we weigh the tempered full EV outlook against the increasing projections for hybrid electric vehicles, we actually see that net-net as somewhat favorable for us.

You mentioned the reflow business that was one of the drivers for the upside in sales. Are you seeing increased quoting activity? What does it look like this will continue?

Yes, Mark. Both shipments and quoting activity are up. More importantly, the mix is improving. What had really softened was the packaging side of the business since we manufacture reflow equipment used for packaging and traditional surface mount assembly. We've seen several quarters with sequential increases in demand for the packaging side of the business, which comes in at a higher margin for us and a higher average selling price than the surface-mount equipment.

I just have a couple of housekeeping issues. I'll jump back in the queue. On the cash from operations and CapEx, what were those figures for the quarter?

I've got the year-to-date numbers in front of me here, Mark. We had cash provided by operations of $9 million year-to-date, which is great, and CapEx, a little bit over $5 million. We finished the build-out of the building in Massachusetts, which was a significant part of our CapEx. In the near term, I would expect that to be more maintenance-type CapEx.

Okay. So these were year-to-date over the last three quarters? Okay. Thank you.

Thank you. Your next question comes from Kevin Garrigan with Westpark Capital. Please go ahead.

Yes. Hey, guys. Thanks for letting me ask a few questions. Bob, I think I may have asked you this last time, but has anything gotten better or worse versus three months ago in the market to kind of give you hope that things may be turning around or getting better for your businesses?

Yes. Generally, I would say more positive. The areas that have clearly seen some rebound are parts side of the business, as we mentioned, which had dried up significantly about six months ago. We've seen incremental improvement in maintaining equipment and parts replacements. It's significant that we're not anywhere near peak demand for the reflow equipment, but sequentially, we're seeing improvements in demand and particularly for chip packaging. In the consumables area, although lumpy, I would still characterize it as stable. In general, I wouldn't say that it seems we saw the bottom in the industry a few quarters ago. Although we all hoped for a V-shaped recovery, we are not seeing that, but at least some incremental improvements are occurring.

Okay, got it. Yes, I’ve heard similar that we’re kind of just bouncing along the bottom at this point. Everyone's kind of still waiting. Yes, and then…

I can add something. Again, our strategy and approach have been that while we can't control market demand conditions, we can manage our cost structure and operating performance. That's really our focus while we wait for something more substantial, ensuring we are financially sound and doing the best we can to drive EBITDA.

Yeah, absolutely. That makes a ton of sense. Okay. Perfect. And then just as a follow-up, Lisa, congrats on the new role and your departure going forward. Can you just give us the focus for Amtech in terms of capital allocation for the rest of 2024? And is M&A kind of a bit of a focus for you guys?

Yeah. I would say that with a continued focus on positive EBITDA generation, even as we bounce along here at the bottom, as we mentioned, we've finished the build-out of the building in Massachusetts. In the near term, I think we will return to maintenance CapEx while running our annual budgeting cycle in the next month or two. I would expect potentially a little more CapEx next year as Bob and Wade look at areas to invest in the business. On the M&A front, I'll turn that back to Bob to keep the more forward-looking perspective at this table right now.

In the current environment, we are not looking at short-term M&A opportunities, but I do think it's definitely something that we're beginning to explore more in the medium-term in terms of how to deploy capital to enhance growth.

Okay. Perfect. I appreciate the color. Thank you.

Thank you. There are no further questions at this time. I will now turn the call back over to CEO Bob Daigle for closing remarks.

Well, thank you again for joining our conference call, and I look forward to updating you on the progress we're making in the coming months. Have a good afternoon, evening, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.