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Edited Transcript of PVS.AX earnings conference call or presentation 29-Oct-20 10:30pm GMT

·20 min read

Q3 2020 Pivotal Systems Corp Earnings Call Oct 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Pivotal Systems Corp earnings conference call or presentation Thursday, October 29, 2020 at 10:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dennis R. Mahoney Pivotal Systems Corporation - CFO * John P. Hoffman Pivotal Systems Corporation - Executive Chairman & CEO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for standing by, and welcome to the Pivotal Systems conference call. (Operator Instructions) I would now like to hand the conference over to Mr. John Hoffman, Chairman and CEO. Please go ahead. -------------------------------------------------------------------------------- John P. Hoffman, Pivotal Systems Corporation - Executive Chairman & CEO [2] -------------------------------------------------------------------------------- Good morning. It's a pleasure to speak with everyone regarding our third quarter 2020 4C. You know that we provide commentary each quarter to keep you appraised of our progress and to answer any of your questions. The third quarter of 2020 was very exciting for Pivotal as we achieved a very significant corporate milestone with 2 of our original equipment or OEM partners. As we've discussed since the IPO, Pivotal continues to be focused on moving up the semiconductor production cycle value chain. I've mentioned that this can be associated by 4 stages of business growth. Phase 1 for any new company in this space is the introduction of advanced technology that provides a great deal of value and the product must work to its specifications. It has to provide a great deal of value because of the very high switching cost of our multibillion-dollar end customers or IDMs, and at the same time, there's $1 million switching cost with the equipment companies. So if there isn't that advanced value, it's very difficult to get entry into this market. Phase 2 is when the product in the manufacturing is able to come up with the manufacturing volumes required to prove that the enterprise itself can scale. Phase 3 is when the company or product solves tough problems that our customers bring to us, and we use both our speed and innovation to resolve those issues. And finally, Phase 4 and that's as requested by production tool providers, we're able to adapt our technology and be designed into the next-generation technology equipment from the equipment companies. And I think that's the final phase of growth and penetration in our market as a new company. Third quarter was especially significant as we are able to sign an advanced development agreement to provide a leading Japanese equipment company with the next-generation flow controller for the fast-growing atomic layer deposition market. This new agreement was a direct result of the successful culmination of the 2018 development agreement with that same partner. If you recall, I'd mentioned that we have successfully completed and shipped product in accord with that 2018 agreement during our first half 2020 results call on August 28. In that same call, we discussed that the top 4 equipment makers collectively hold 86% market share in the ALD single-wafer market, which was estimated at $1.1 billion in 2019 and is expected to show a combined annual growth rate of over 9.2% through 2024. Also, as a reminder, during Lam Research's Investor Day call in June of 2020, Lam estimated that unique ALD applications will double by 2023, and Lam is forecasting a transition from batch ALD processing tools to new single-wafer processing tools due to advanced materials and new process requirements. This would include significant portions of the overall CBD market. In our view, it includes furnace, high-pressure CBD, spin on silicon glass, flowable CBD and physical vapor deposition, all moving to an ALD single-wafer platform. This is important because it provides further insight on the strategic value of our latest agreement with this OEM partner. On September 8, 2020 semi, the industry consortium reported that COVID-19 inspired increases in global fab equipment spending of 8% in 2020, growing to 13% in 2021. Once again, that's up from the forecast we discussed in July. This represents an upgrade from July of 6% and 12% in 2020 and 2021, respectively. The principal driver of the growth profile is rising demand for semiconductors for data center infrastructures and server storage due to structural changes in the traditional workplace and connectivity under COVID-19, along with increases in safety stock as U.S.-China trade tensions intensify. Pivotal, like SEMI believes that these structural changes we're seeing in the workplace will continue forward. According to SEMI, memory or memory devices will see the largest spending increase in 2020, growing USD 3.7 billion or 16% year-over-year, to a total of USD 26.4 billion and then tack on at 18% to reach USD 31.2 billion in 2021. 3D NAND spending will lock the largest percentage surge this year expected to be 39% and registered growth of 7% in 2021. DRAM is expected to see a 4% growth in the second half of 2020 before jumping 39% in 2021. Some of Pivotal Systems third quarter highlights include an unaudited Q3 2020 revenue of USD 5.9 million, which was up 2% from our second quarter and 556% from the same period a year ago of Q3 2019. Unaudited Q3 2020 year-to-date revenue of $16.0 million was up 80% from the same period a year ago, which was $8.9 million. As mentioned earlier, we reached agreement with a leading Japanese equipment company to develop a next-generation flow controller for its fleet of planned atomic layer deposition tools. This agreement provided Pivotal with a nonrecurring engineering fee of USD 1 million. The initial neurotic prototypes are to be delivered in Q4 of 2020 and released GFC products are to be delivered to the equipment company in 2021. Also in the period, we achieved qualification in multiple repeat orders for the standard GFC using a new ultra-high-speed communication protocol with ethernet control automation technology, also known as EtherCAT. We had multiple repeat orders at a leading Chinese equipment company. We continued our ongoing qualification of a 2 channel flow ratio controller with a leading U.S.-based OEM. We maintained all of our manufacturing activity in China, Korea and the United States. And finally, the GFC transformation center in Korea, which was successfully launched in June of 2020 was cleared for production by leading IDMs and leading OEM customers in July. This thereby eliminated the U.S. duty drawback for the remainder of Pivotal Systems revenue for the second half of 2020. In the area of products, the standard low flow GFC commonly used for etch applications continue to gain market share at leading device manufacturers in Europe, Taiwan and Japan. Significant wins included the qualification of the standard GFC at a leading etch OEM for EtherCAT communications. The EtherCAT communication protocol has been under development in this industry for the past few years. Its primary objective is to speed up the communications between the tool and the components as well as communication to the factory host system. As you know, Pivotal System has been at the forefront of this effort for almost a decade. Our flow controller products have been communicating at EtherCAT levels of speed since our inception. We believe that EtherCAT will be further differentiating for Pivotal as the process tools will now be better equipped to act on the various industry-leading information stream that the Pivotal Systems slow controllers can provide. As a note,[Mr. André Smachov], a leading Pivotal Systems engineer has been chairing the EtherCAT MSC task force for the past few years. If you recall, we introduced the remote electronics, which was for higher gas temperatures GFC during the first half of 2019. This GFC was developed in partnership with a leading Japanese equipment company in order to function in the heated gas box at approximately 65 degrees centigrade. We believe at that time that as the semiconductor industries continues to migrate to advanced technology nodes, the new materials required will require a very low vapor pressure gases. These new gases will need to be heated in order to provide the prerequisite gas flows required in advanced wafer processing. As you recall, in 2019, we believe that the remote GFC would become required on future advanced wafer processing tools. Throughout 2020, we've received multiple repeat orders of the remote GFC, and we've also had a request during the reported period to qualify the remote GFC on 3 new additional gases. We're the leading Japanese equipment company. This is a great example of Pivotal solving and then leveraging Phase 3-type opportunities with leading equipment companies. We believe that our success with the remote GFC led to the new Phase 4 opportunity for our next-generation ALD solution. Overall Pivotal Systems maintained its commitment to a pipeline of new product as our history demonstrates. We strive to maintain the technology leadership that we have achieved in the flow control markets by being the go-to technology partner for both leading device manufacturers and leading equipment companies. We believe that as the semiconductor industry continues to advance to smaller geometries, the superior performance of our flow control product family becomes even more compelling. At this time, I'll pass it over to Dennis Mahoney, our CFO, to discuss operations and finance. -------------------------------------------------------------------------------- Dennis R. Mahoney, Pivotal Systems Corporation - CFO [3] -------------------------------------------------------------------------------- Thank you, John, and good morning, everyone. I will be reporting on our third quarter financial performance. For unaudited profit and loss, we will be comparing against the third quarter of 2019. For the balance sheet, we will be comparing September of 2020 to September of 2019. Investors should please note that all numbers are in U.S. dollars unless otherwise stated. Further details can be found in our Appendix 4C was launched with the ASX today. I'll first summarize our unaudited revenues for the quarter. As John mentioned, unaudited Q3 2020 revenue of USD 5.9 million was up 558% from Q3 2019 revenue of $0.9 million. Unaudited Q3 2020 year-to-date revenue of USD 16 million was up 80% over the previous corresponding period. This was a particularly pleasing result for the company, and highlights the resilience of our business despite global uncertainty across manufacturing and supply chains. Our innovative gas flow controllers are used in critical industries, such as semiconductor manufacturing and medical devices and where substantial growth continues to be forecast for 2021 and beyond. I will now turn to our Appendix 4C quarterly cash flow highlights. The company finished the third quarter of 2020 with a cash balance of USD 6.2 million, which included $1.9 million outstanding balance drawn against our term loan with Bridge Bank as well as $907,000 from the United States Government Small Business administration, or SBA, Payroll Protection program which is part of the national fiscal relief program created by the coronavirus, Aid Relief and Economic security Act or the Cares Act. The Care Act provides financial relief from the COVID-19 pandemic. This PPP loan bears interest at a fixed rate of 1% per annum and is payable monthly beginning December 2020 and the loan matures in 2 years. The company fully expects to qualify for full forgiveness of the loan and will commence and submit its application for full forgiveness in the coming weeks. Cash receipts from customers for the period were USD 5.5 million, up from $4.9 million from the second quarter of 2020, highlighting the stability in our receivables management. Cash payments for product manufacturing were $5.6 million, up 14% from $4.9 million in the second quarter of 2020, reflecting an increase in payments to key suppliers, contract manufacturers, labor and utilities to support the production schedules. Pivotal continued to invest in product development with $930,000 in capitalized research and development costs incurred during the quarter. I will now turn to operational highlights. I am pleased to further explain that during the quarter, Pivotal's Korea contract manufacturer reached full operations at its newly established transformation center. Transformation manufacturing activity was transferred from Fremont, California during the second quarter to our Korea contract manufacturer, and this process was fully completed in July. Both the CMs production line and its personnel have also now been qualified with all of Pivotal Systems and customers as required. Pivotal's Fremont, California facility has evolved to our primary new product development center and also will continue as an auxiliary capability to our Korea CM. A significant financial benefit to Pivotal from this transfer of transformation from Fremont, California to our Korea CM is, as John mentioned, Elimination for the United States custom's duty that would otherwise continue to be levied at the rate of 25% on shipments from our China CM of partially finished product to Fremont, California for the transformation steps which will now be performed in Korea. You will see this benefit materialize and improved gross margins in future periods. Regarding the duty that has already been levied by U.S. customs and paid by Pivotal in prior periods, Pivotal has claims drawback or refund, an approximately $1.6 million of $2.6 million of total duties paid. We expect to receive refunds of approximately $1 million to $1.5 million over approximately the next 6 months. We received our first refund payment last week. The United States government cash disbursement process is both slow and unpredictable. So we cannot predict with full accuracy, the timing of these pending cash receipts. Therefore, I will continue to update you in future calls. Pivotal also fully qualified the repair and upgrade center in Korea, which is operated by the same contract manufacturer. This center provides both repair and software grades to IDM and OEM customers globally. During the third quarter, the company experienced a 520% growth rate in repair revenue to USD 279,000 in Q3 2020 versus USD 45,000 in Q3 2019. As Pivotal's large global install base continues to grow over time, an increasing number of gas flow controllers will progressively come out of warranty and require both repair and upsell features for our customers. Pivotal expects this business to scale over time. We closed the second quarter with a full-time headcount of 44 employees. As John mentioned, despite the impacts of COVID-19 across a number of manufacturing centers -- sectors in California beginning in mid-to-late first quarter and continuing through today Pivotal's designation as an essential business has allowed us to meet all of our customer commitments and shipments as well as new product development. At this time, I will hand it back to John. Thanks, Dennis. -------------------------------------------------------------------------------- John P. Hoffman, Pivotal Systems Corporation - Executive Chairman & CEO [4] -------------------------------------------------------------------------------- We're pleased with our performance in the third quarter, and we expect continuing improving conditions in the fourth quarter 2020 as the semiconductor industry continues to move forward. It should be noted that our revenue thus far in 2020 has already eclipsed our total 2019 revenue. We expect our final 2020 results to show Pivotal Systems growth at a rate that is far better than our nearest competitors as we continue to take market share. Importantly, being designed into next-generation process tools represents a strategic tipping point that enables the company to ship its flow control solutions to all IDM customers around the world through our OEM partner. We expect this to further accelerate our growth in 2021 and beyond. Once again, we continue to execute on our growth strategy, which has not changed. We want to take market share in every market we serve. We want to expand our served available market by introducing new products, and we want to develop a recurring revenue stream in the markets we currently compete in. Currently, it appears the fundamentals underpinning the IC industry continue to be strong and improving. Pivotal Systems remains absolutely focused on our customers and providing them with the advanced technology they require not only for today but for the future. Our market share gains thus far in 2020 indicate that we're making progress to that goal. The company expects the second half 2020 revenues to continue to improve as our customers continue to find increasing value in our products. We see positive signs that the industry is not only doing quite well but we maintain, we currently see stronger momentum in 2021. At this time, Dennis and I'd be happy to take any questions you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from [Mark Fitzgerald], a Private investor. -------------------------------------------------------------------------------- Unidentified Shareholder, [2] -------------------------------------------------------------------------------- John, Dennis. I've got a couple of questions here. First one, can you tell us on the -- just to be clear, on these 2 OEM partners, are they independent in terms of the ALD applications at these 2 OEM partners is what you're talking about here? -------------------------------------------------------------------------------- John P. Hoffman, Pivotal Systems Corporation - Executive Chairman & CEO [3] -------------------------------------------------------------------------------- We highlighted the ALD partner, Dennis, in the release. The other OEM development program is actually going on in etch. And there's a number of new platforms that company is introducing, and we are working closely with them on all 3 platforms. And again, [Mark], thanks for the question. Sorry, I should have started with that. -------------------------------------------------------------------------------- Unidentified Shareholder, [4] -------------------------------------------------------------------------------- Okay. And the second question is the EtherCAT sales at this point, are you not shipping EtherCAT on anything, and that's going to be a major switch in terms of basic communication software going out on the products? -------------------------------------------------------------------------------- John P. Hoffman, Pivotal Systems Corporation - Executive Chairman & CEO [5] -------------------------------------------------------------------------------- Yes. So good question. EtherCAT is being fully leveraged by only really one IDM around the world at this point and then the rest of the industry has a migration path around it. If you recall, [Mark], I think it's similar to what we saw back in the '90s on 300 millimeter. Where, at that time, if you recall, IBM was kind of the lead horse taking 300-millimeter market. In this case, it's a Korean IDM that's kind of driving EtherCAT to market. And you can imagine now that basically the entire communication structure of their leading factory is going to change to a very high-speed network with probably 10x the number of inputs flowing into it from either components or the tools themselves. So it's really no small feat because what we found and André has been a big part of this because Pivotal is ahead of that. Pivotal has so much information coming off of our devices based on the AI in there that we've had to actually filter that. So we only provide, let's say, actionable information that the equipment companies and the IDMs can leverage. What we're seeing is that with the entire fab and the toolsets themselves moving to EtherCAT, the amount of actionable information is going up by probably an order of magnitude. Now what does that mean for Pivotal? It means basically the rest of the industry agrees the granularity and the amount of information we provide is essential when you're trying to improve yields and get more output. So you're going to see the industry moving that way. As far as EtherCAT goes, at this point, I believe we've shipped over 300 devices into our partners and associated partners in this effort, and we have been taking revenue on those, and we saw that continue in the third quarter. So it's not a product that's coming. It's a product that's there, and it's evolving. But the good news is from the Pivotal standpoint, our software is able to handle it. I don't think we've had to make any major changes to our software at all. But what we've been able to do is show the equipment companies, there's a lot of very meaningful data they need. And I'll give you one example. And this is the genius of Jo Monkowski because this is something that came up 6 years ago in a discussion we had, which is how do you track the position of your valve? And so if you recall, inside the GFC, our valve is operating every 1000th of a second, and we're controlling it to 1100th of a human hair, right? That's a nanometer. And so Pivotal can provide that information to the process tool, where the rest of our competitors, first off, they can't tell you what their valve is doing because their valve does nothing they have -- they're basically flowing pressurized gas through a fixed (inaudible), right? The latest, leading technology, flow controllers that are pressure-based. So what we see is people wanting and needing more information, and we're the one company that can actually give it to them in the area of flow control. And I think it's going to be even more differentiating as we move forward. Hopefully, I gave you a little context. So hopefully, that helped. -------------------------------------------------------------------------------- Unidentified Shareholder, [6] -------------------------------------------------------------------------------- It's very valuable. And then can you give us a sense of the split of the revenues between IDM foundry and OEM at this point? -------------------------------------------------------------------------------- John P. Hoffman, Pivotal Systems Corporation - Executive Chairman & CEO [7] -------------------------------------------------------------------------------- Yes. We'll give you a full breakout, [Mark], every half year. That's the way we've done it with the results deck. I would suggest if we look at the third quarter and this is an estimate, I think it's very similar to the first half probably 90% is the equipment company, 10% is device manufacturer. I think the mix may have shifted a little because China is a little bit bigger in terms of what's happening in the market today. But not to say Korea is not significant in Taiwan, it's not significant. We're seeing that as well. -------------------------------------------------------------------------------- Unidentified Shareholder, [8] -------------------------------------------------------------------------------- And then just a quick question on the trade issues with -- between the U.S. and China. The U.S. government is now threatening to block or you have to get signed off for sales to SMIC. Does that impact capital at all? -------------------------------------------------------------------------------- John P. Hoffman, Pivotal Systems Corporation - Executive Chairman & CEO [9] -------------------------------------------------------------------------------- Okay. And so thus far, the answer is no. There's an EAR code 99 as to units that are going into China that require specific approvals and permits. EAR99 products like Pivotal and even our competitors are not on that list at this time. But Dennis and our lawyers are monitoring this continually. So far, no issues there for Pivotal. But I think as you would agree, it's an evolving situation, we just keep our eye on it. -------------------------------------------------------------------------------- Unidentified Shareholder, [10] -------------------------------------------------------------------------------- Right. And then one last question. I appreciate Dennis is running us through the cash statement here. Will there be any requirements to tap the capital markets in the next 12 months to fund the company? -------------------------------------------------------------------------------- John P. Hoffman, Pivotal Systems Corporation - Executive Chairman & CEO [11] -------------------------------------------------------------------------------- Yes. Good question as well. We're looking at that, and we're looking at 2021 growth and what we're seeing. At this point, there's no desire from the company to raise any equity. But like always, [Mark], we always look at that, and I'll get back to you. But at this time, no. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions at this time. I'll now hand back to Mr. Hoffman for closing remarks. -------------------------------------------------------------------------------- John P. Hoffman, Pivotal Systems Corporation - Executive Chairman & CEO [13] -------------------------------------------------------------------------------- Okay. Thank you, Ashley. First, thanks, everybody, for joining us today on the call. We look forward to speaking to you as time moves forward, either individually or in other settings. Once again, thanks, and have a wonderful day. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- That does conclude our conference for today. Thank you for participating. You may now disconnect.