Amtech Systems Inc

NASDAQ:ASYS

Earnings Call Analysis

Amtech Targets $180M Revenue, 18% EBITDA Margins

Amtech Systems closed fiscal 2023 with revenue of $113.3 million, a modest increase from $106.3 million the previous year, assisted by their acquisition of Entrepix. Despite facing a challenging demand environment, they are setting a long-term objective to reach $180 million in annual revenue and 18% EBITDA margins. Management plans to achieve this by leveraging its core market growth, capitalizing on emerging sectors like advanced mobility, and possibly through further acquisitions. They expect to improve margins and reduce volatility by increasingly outsourcing production.

Transitional Year with Opportunistic Acquisition Amidst Industry Challenges

In the midst of market turbulence, Amtech Systems navigated through fiscal 2023 with resilience and a strategic acquisition. The company completed the fiscal year with $113.3 million in revenue, a modest increase from the previous year's $106.3 million, bolstered by their timely acquisition of Entrepix, Inc. in January 2023.

Quarterly Context: Facing a Market Slowdown with Proactive Measures

The company's fourth quarter painted a picture of declining momentum, with net revenues falling by 10% compared to the previous quarter and by 14% compared to the same quarter in the prior year. This decline was largely attributed to lower shipments from its Shanghai facility, coupled with a broader industry slowdown affecting bookings across its business segments.

Strategic Cost Management and Financial Positioning

Amtech's success in preserving liquidity, reflected in the $13.1 million of unrestricted cash on hand, is paired with decisive cost-cutting measures to navigate current market headwinds. These measures aim to slash annual operating expenses by $4 million for fiscal 2024 and seek to achieve EBITDA breakeven by optimizing operations and aligning more closely with market cycles.

Short-Term Outlook Amidst Long-Term Optimism

The immediate outlook is cautious, with first-quarter revenue projections between $21 million to $24 million and an expectation of nominally negative EBITDA. Nevertheless, Amtech remains optimistic about the potential for its consumables and equipment in supporting advanced mobility and advanced packaging applications in the long haul.

Guidance Dependent on Market Dynamics and Currency Fluctuations

Amtech’s leadership underlines the cyclical nature of the semiconductor equipment industry and the consequential impacts on their operating results. The company's performance, particularly sensitive to order timings, logistics, and broader industry demand, also faces exposure to fluctuations in the RMB-to-USD exchange rate, which may influence actual outcomes in the fiscal quarters ahead.

Focus on Operational Efficiency and Long-Term Financial Targets

With a long-term revenue target of $180 million and EBITDA margins of 18%, Amtech aims for a strategic pivot to enhance profitability. They intend to capitalize on growth sectors, maximize shareholder value through operational excellence, and accommodate the cyclical nature of the semiconductor market with a flexible outsourcing model.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to the Amtech Systems Business Update Conference Call. Please note that this event is being recorded. I would now like to turn the call over to Michael Funari of Sapphire Investment Relations.

[Michael Funari]

Good afternoon, and thank you for joining us for Amtech Systems' Business Update Conference Call. With me on the call today are Bob Daigle, Chairman and Chief Executive Officer; Lisa Gibbs, Chief Financial Officer; and Paul Lancaster, Vice President of Sales and Customer Service.

After close of market today, Amtech released a summary of its revenue and business status as of September 30, 2023. The press 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 we 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 could cause actual results to differ materially from those in 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, capital allocation plans, the COVID-19 pandemic and our ability to effectively integrate our acquisition of Entrepix, Inc., which we acquired in January 2023. Other risk factors are detailed in our SEC filings, including Form 10-K and Forms 10-Q.

I will now turn the call over to Amtech's Chief Executive Officer, Bob Daigle.

[Robert Daigle, executive]

Thank you, Mike. Good afternoon, everyone, and thank you for joining our conference call. In today's call, we will provide a business update. Reporting of our full financial results will be delayed due to the complexity and judgment involved in the valuation and impairment analysis that's underway.

I'd like to share a few observations I've made about Amtech in speaking with both customers and stakeholders over the past 4 months and discuss the subsequent actions we are taking. Amtech is a company with well-recognized brands, great products and technologies, dedicated and talented employees and best-in-class service capabilities, which support the diverse customer base. Our company has tremendous promise and is well positioned to capitalize on several secular trends that will drive demand for our equipment and consumables. The advanced mobility market, including electric vehicles, is expected to drive growth, not only for semiconductors and subsystems within the vehicles, but also for battery cooling systems and a broad array of electric vehicle power modules, which our tools serve.

Within the broader semiconductor market, our tools are used for advanced packaging of processors for high-performance computing and artificial intelligence applications. And across the electric -- electronics industry as a whole, the pandemic and global tensions have made it abundantly clear that more resilient semiconductor and electronic assembly supply chains are needed. This will also expand the opportunities for our tools.

As we evaluate the strategic road map for Amtech, we are focusing on those areas where we have strong differentiation and are able to add significant value in the markets we serve and for our shareholders.

As a part of this evaluation, we have come to 3 realizations. First, technology, innovation and customer partnerships remain core to what sets Amtech apart in the industry. Often, the applications we target are amongst the most difficult in the industry, requiring not only industry-leading performance and precision but also a support organization well equipped to assist customers as they refine their own manufacturing processes.

Second, as we dug in deeper into the product set Amtech currently offers, we have realized some products are not particularly well suited for the opportunities they target today. This includes products that have matured and provide limited profit opportunity as well as other products requiring significant investments to deliver capabilities that are not yet needed.

Third, the past 3 years have demonstrated to us the need to be nimble, both in our supply chain and manufacturing operations, to have the ability to quickly adapt to rapid cyclical changes in the industries we serve.

Going forward, we will continue to invest in the products and customer support organizations within the semiconductor segment where Amtech has the strongest differentiation in the market. This includes equipment utilized for advanced packaging, electronic assembly, EV battery cooling systems and power semiconductor substrates.

While the advanced packaging and electronic assembly business has been meaningfully impacted by the slowdown in the semiconductor market, our tools continue to be very highly regarded. We are confident that as markets recover, we will see orders rebound commensurate with our position, with further opportunity to gain share as applications such as advanced packaging for artificial intelligence processors continue to gain greater traction.

Within the Substrate and Materials segment, we similarly see a very strong opportunity for consumables as well as our cleaning tools, chemical mechanical polishing equipment upgrades and our CMP foundry services.

Related to each of these product sets, our goal going forward is to ensure that we are tightly aligned with our customers. By understanding the problems they are trying to solve and developing our own product road maps, to address these needs we will be well positioned for growth.

As we evaluated the products in the Material and Substrate portfolio, we came to the conclusion that our legacy polishing machines are no longer a strong fit for the marketplace. And while demand does exist, it is not large enough to justify continued investment. As a result, we have notified customers that we will cease manufacturing of these products.

With regards to the latest version of these machines, which we have been testing with silicon carbide customers, we have realized that the market is not yet ready for the capabilities we offer. With many players still in the early stages refining their own production processes, primarily with establishing repeatable, high-quality bulls for wafer production. The market for high-volume batch tools has not materialized along the time line that we originally estimated. Unlike our legacy polishing machines, however, we are moving this technology to Entrepix, where we will continue to provide customer access for trials.

Operationally, as we discussed on prior calls, we have begun the qualified third-party contract manufacturers to add incremental capacity for select products where we have high demand and to optimize our cost structure. For example, in the fourth quarter, we shipped over a dozen high-temperature belt furnaces that leverage significant content from manufacturing partners.

As we look ahead, our manufacturing operation will focus on large complex systems, and we will outsource simpler units and subassemblies where practical. This will allow us to improve profitability and our ability to respond quickly to changes in demand.

While we are exposed to several large market opportunities, which we believe will drive strong growth in the mid to long term, we also need to ensure that Amtech can generate sufficient profitability and cash flow even in downturn conditions like we are currently experiencing.

After taking time to evaluate the performance and opportunities for each of our businesses, I made the decision to take several actions to reduce fixed costs and expenses. These actions are expected to contribute over $4 million in annualized savings without jeopardizing the long-term growth opportunities for the company.

Provide investors with a framework on how we view the opportunity ahead, we are rolling out a long-term target model of $180 million in annual revenue, with 18% EBITDA margins. Our top line target is based on several factors, including a return to cyclical growth in our core markets, continued growth in emerging opportunities such as advanced mobility applications and the potential for additional inorganic opportunities. While today, we are inwardly focused on optimizing our existing operations, over time inorganic investments will remain a part of our strategy.

Related to the associated EBITDA margin at these levels, we believe leveraging an outsourcing model where appropriate, will help us generate better margins while limiting volatility. We will scrutinize all investments to ensure that they generate strong returns on invested capital.

In closing, Amtech is a unique company with differentiated exposure to a number of high-growth markets. Our mission at this stage is to fully capitalize on these growth opportunities while addressing operational and supply chain issues to create meaningful shareholder value from this growth.

With that, I will turn it over to Lisa for further details on the fourth quarter.

[Lisa Gibbs, executive]

Thank you, Bob. We closed fiscal 2023 with revenues of $113.3 million compared to $106.3 million in fiscal 2022. In a challenging demand environment, our acquisition of Entrepix completed in January of 2023 contributed to this increase in year-over-year revenues.

Turning to our quarterly results. Net revenues decreased 10% sequentially and 14% from the fourth quarter of fiscal 2022. The decrease from prior year is primarily attributable to lower shipments from our Shanghai manufacturing facility, partially offset by an increase in shipments of our high-temperature belt furnaces and the addition of Entrepix in fiscal 2023. The sequential decrease is primarily due to a decrease in shipments across all of our business segments. We are experiencing lower bookings in multiple areas of our business due to the softness in the overall semiconductor market.

Due to the prolonged downturn and general economic conditions in the semiconductor industry and delays in the adoption of next-gen polishing tools, we anticipate an intangible asset impairment charge in our Material and Substrates segment as of September 30, 2023. Due to the complexity and judgment involved in the valuation and impairment analysis, we are working with our external auditors to finalize the audit procedures. When complete, the company will issue a press release with our fourth quarter and full year fiscal 2023 results as well as file our annual report on Form 10-K.

Unrestricted cash and cash equivalents at September 30, 2023, were $13.1 million compared to $14.3 million at June 30, 2023, approximately 56% of our cash balance as of September 30, 2023, is held in the United States.

We are clearly in a very challenging demand environment for our business. As we disclosed in the 8-K that was released on Monday, we have entered into a forbearance agreement with our bank. The purpose and intention of this agreement is to give us the runway we need and access to our revolving line of credit until demand picks up. We are making swift and decisive fixed cost reductions in our business, with a goal to get to EBITDA breakeven as quickly as possible, to give us the ability to weather this prolonged downturn and be ready when the growth returns.

For context, we estimate the actions we have already taken will decrease annual operating expenses by $4 million for the full fiscal year of 2024, and we will continue to evaluate opportunities for further cost savings. The timing of these actions occurred throughout this December quarter, our first fiscal quarter of 2024. Therefore, we expect the full benefit of the savings to be realized in our second fiscal quarter of 2024. These steps will significantly improve results and enhance profitability through market cycles.

Now turning to our outlook. For the first fiscal quarter ending December 31, 2023, we expect revenues in the range of $21 million to $24 million, with EBITDA nominally negative. Although the near-term outlook for revenue and earnings is challenging, we remain confident that the long-term outlook is strong for both our consumables and equipment serving advanced mobility and advanced packaging applications. The expense actions I mentioned earlier will 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 RMBs, a Chinese currency. The outlook I 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.

I will now turn the call over to the operator for questions. Operator?

[Operator]

[Operator Instructions] We do have a question from the line of Mark Miller with Benchmark.

[Mark Miller, analyst]

I'd like to ask a couple of questions about the recent forbearance agreement. It appears that you're reducing the size of your term loan and moving the balance to a larger revolver, is that correct?

[Lisa Gibbs, executive]

That is correct, Mark.

[Mark Miller, analyst]

Why did you do this? Why didn't you do this before violating the covenant? I'm just curious.

[Lisa Gibbs, executive]

We've been working with the bank and the timing kind of worked out with our Q4 results to work through this. Obviously, it takes some time to work through everything. And unfortunately, we weren't able to get it done before the Q4 results. .

But the reason for that is it gives us the lower monthly term payments, which helps with our monthly cash flows as well as increased access to our revolver. The other part of it is that the revolver expired in January of '24, and this extends it into January of '25.

[Mark Miller, analyst]

Okay. It also appears that the moving term balance on the revolver, the maturities going from 2028 to 2025. Is that correct?

[Lisa Gibbs, executive]

So the term loan is moving from 2028 to 2029. And then the revolver was maturing in '24, and now it's in January of '25.

[Mark Miller, analyst]

Okay. There's no -- so I guess there's no real change in liquidity, is this confirmed?

[Lisa Gibbs, executive]

That is confirmed. We're working on getting to cash breakeven and managing during this cycle, and we'll have access to that revolver as demand returns if we need access to working capital. So we're going to just continue to strive for that breakeven so that we can stay in this spot until things -- demand comes back.

[Mark Miller, analyst]

And then one final question. What is the margin paid on the floating rate and the new interest payment?

[Lisa Gibbs, executive]

My estimate is the interest rate will be right around 10%.

[Mark Miller, analyst]

Okay. Just one other question. In terms of your backlog, do -- have you or do you anticipate having to remove any of the orders from your backlog?

[Lisa Gibbs, executive]

We've not had cancellations. We've had a couple of customer pushouts. But at this point, we've not had cancellations. We've talked about our backlog in the past and the importance of shipping it and bringing it down. So that's part of what we saw this quarter with our contract manufacturer partner helping us get more units out the door.

[Operator]

[Operator Instructions] There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

[Robert Daigle, executive]

Yes. This is Bob Daigle, again. I'd just like to thank everyone for joining our conference call today, and we'll be happy to -- once we file the K, happy to jump on calls with folks to have more discussions.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.