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Edited Transcript of RVS.AX earnings conference call or presentation 22-Aug-19 12:00am GMT

Half Year 2019 Revasum Inc Earnings Call

Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Revasum Inc earnings conference call or presentation Thursday, August 22, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jerauld J. Cutini

Revasum, Inc. - Executive Chairman, President & CEO

* Ryan A. Benton

Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director

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Conference Call Participants

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* Brendon Kelly

Moelis Australia Securities Pty Ltd, Research Division - Analyst

* Darren Vincent

Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Life Sciences and Industry Consolidators

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the half-year business update. (Operator Instructions) Please be advised that today's conference call is being recorded. I'd now like to hand the conference over to your first speaker today to Mr. Ryan Benton. Thank you. Please go ahead.

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Ryan A. Benton, Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director [2]

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Thank you, operator. Good morning, everyone. Before we begin, I remind everyone that during the course of this conference call, we will be making forward-looking statements that involve a number of risks and uncertainties that are not guarantees of future performance or results. You are encouraged to review the safe harbor and disclaimer statements contained in today's release as well as the other risks detailed from time to time in the company's regulatory filings with ASX.

And with that, I'd like to turn the call over to Jerry. Jerry?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [3]

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Good morning, everyone, and thank you for joining us on the call today. It is a pleasure to speak with everyone and provide commentary around our most recent half-year results. Here on the screen is today's agenda. We will start with Ryan reviewing the 2019 half-year financial performance. After that, I will add some general update on the industry and more specifically on our business to give you some color on our near-term outlook.

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Ryan A. Benton, Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director [4]

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Thanks, Jerry. Let's jump right in. On Slide 5, we show 18-month history of revenue. For the first half of 2019, total revenue, as previously announced, came in at $15.2 million, up 43% from the comparable period a year ago. For each of the reported periods, this slide shows revenue mix by category.

On the top in orange, we show the recurring revenue portion of the business, which is spares, service and commission. As the installed base grows, so does this revenue stream. This portion of the business was up a very nice 46% year-over-year coming in at $3.4 million. The other categories of revenues are associated with the sale of equipment.

Here on this chart, we had split the equipment revenue into 2 pieces. In blue, we have equipment revenue from the sale of legacy systems used to process traditional silicon wafers. Legacy silicon equipment revenue was $10.4 million for the first half of 2019, up 28% year-over-year but down 19% sequentially from the second half of 2018.

As we have previously discussed, our largest customer in Asia is taking a pause in ordering as they get new factory capacity operational and end customers qualified. We expect them to resume ordering in 2020. Jerry will talk more about the market dynamics driving this later in the presentation.

And finally, in green, we had revenue from the sale of silicon carbide processing tools. Sales to date are from existing grinder product, which has been optimized to process silicon carbide. These aren't big numbers, but we're excited that we're starting to get market traction. More about this, along with the timing of the new silicon carbide polisher sales from Jerry, later on.

As we turn to Slide 6, we can see the full financial highlights. In the top chart, we have the income statement through operating income. We show here the first half results in the comparable period a year ago. We compare this to the guidance we previously provided as well as the IPO prospectus forecast.

In the bottom chart, the same data, we had a reconciliation from operating income to adjusted EBITDA, which excludes share-based compensation, depreciation and amortization. I've already talked a bit about revenue, so I won't repeat that. Margin came in at 28.2%, lower than the 34.2% a year ago. Lower margin is principally driven by product mix at the first half of '19 and quite a few refurbished tools.

Historically, we would've expected this to be margin accretive. However, it's a bit hit and miss. In this case, we ran into some negative production variances. The costs were also impacted by tariffs associated with the ongoing U.S.-China trade dispute assessed on parts imported from China.

Operating expenses came in at $6.9 million. Research and development was more or less flat year-over-year coming in at $1.9 million. General and administrative costs increased approximately $600,000 as the company added public company infrastructure and service provider costs.

Sales and marketing costs increased year-over-year to $2.4 million. The increase includes costs associated with the larger sales force, higher commission costs associated with higher sales year-over-year, and the current figure also includes a $227,000 onetime settlement related to a now terminated transition services agreement.

With respect to adjusted EBITDA, we came in at a loss of $1.4 million, a good bit better than our previous estimate, which was between $2 million and a $2.5 million loss. Of that $200,000 was an apples-to-apples favorable variance, while $400,000 was a favorable impact realized from adopting AASB 16, the new accounting standard for leases.

On Slide 7, we have the summary balance sheet. Let me quickly hit the highlights of the 2019 June figures. At 30 June 2019, we had $12.1 million in cash and no debt. Receivables increased $9.2 million, reflecting the fact that we had shipped a number of tools during June. In the current quarter, the sales and finance teams had worked hard to collect $3.7 million of this already. We have built up our inventory balance to $11.1 million during the period as we started to build our new silicon carbide polisher units.

In the current period, as previously mentioned, we adopted AASB 16, the new leasing standard. As a result of this, you will see the right-of-use asset for the company headquarters in California and a corresponding increase in lease liabilities. Spending on new product development on our new ERP system ramped significantly during the half. This is reflected in the $4 million increase in intangibles.

And finally, moving to the cash flow on Slide 8. Receipts from customers were $12.4 million for the half, weighted heavily towards the first quarter with $8.7 million of this received in Q1. This is a result of the lack of linearity of shipments during the half and large number of tools shipped in June.

During the first 6 weeks of the second half, as mentioned, we have collected a further $3.7 million from our customers. Payments to suppliers and employees were higher than previous periods. This was in large part a result of us bringing in large amounts of inventory. During the first half of 2019, we had invested -- investing cash outflows of $5.4 million, which shows according to plan we are investing in future revenue streams. We invested heavily in new product development to the tune of $3.8 million, which is virtually exclusively spent towards completing the development of the silicon carbide polishing tool.

We also spent $500,000 towards modernizing our infrastructure. We are midway through implementing a new ERP system. This project is expected to be complete early next year. We did delay some of the purchases of -- planned purchases of property, plant and equipment as we focus on new product development. Financing cash outflows of $376,000 are a result of the adoption of AASB 16, the new leasing standard.

We exited the first half with a cash balance of $12.1 million and no debt. As previously announced and discussed on a recent 4C call, the company, in order to increase our capability, flexibility and liquidity in a non-dilutive manner, closed a $10 million senior debt facility financing arrangement with Bridge Bank of San Jose, California, a division of Western Alliance Bank of Arizona.

This facility has 2 major elements. First, there is a $2 million term facility that financed capital expenditures. Second, the facility provides up to $8 million formula-based lending working capital facility. The amount of liquidity available under this facility is based upon the company's balances and composition of customer receivables in the inventory.

This non-dilutive financing further strengthens our balance sheet and allows us to continue to pursue our growth strategy and attractive cost of capital. Net-net, I'm very happy with the results as the company is now on the cusp of launching its first pure new product in quite some time.

And with that not too subtle segue, I'll turn the call back over to Jerry. Jerry?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [5]

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Thanks, Ryan. I would also like to start by providing some general updates on the industry and then I'll discuss our business. We see a growing chorus of large automobile companies announcing their plan for electric vehicles. This will only increase the number of chip companies that enter the markets for silicon carbide chips simply because they know silicon carbide is the material of choice for advanced electric vehicle's power conversion and storage needs. Our demand is directly tied to the growth of the electric vehicle and supercharging station markets.

The headlines continue into the device and substrate companies. We see continuous press releases from well-known companies in our industry that announced their efforts related to both silicon carbide substrates and devices. In 2019, we've engaged nearly 15 different customers that make both substrates and devices and were wanting wafers on both of our of products, the grinders and the polishers. We believe we've engaged with 100% of the known substrate manufacturers and the top-tier power integrated circuit companies around the world.

We see absolutely no slowdown in the customer activity for silicon carbide projects. The only headwind relates to our activity in China and possible U.S. export control restrictions. As more companies enter the silicon carbide device business, it will continue to increase demand for substrates, which by definition, increases the demand for our machines. It's only a matter of time before these chip companies start increasing their design wins for silicon carbide devices. And over the next few years, I see nothing in the way of slowing down that opportunity. The only question is the slope of the ramp.

Now I want to share some exciting news. We have completed the build on our first new silicon carbide polishers. We are currently finalizing the startup and we'll be turning it over to our process engineering team to put it through its bases. I cannot tell you how exciting it is to see the machine up and running. We will officially be launching the tool at this year's International Conference on Silicon Carbide and Related Materials during the first week of October. Keep an eye out for the news and events around this launch.

Turning the conversation to the general markets and ourselves. We see our 2019 revenue coming in around flat to our $27.3 million in 2018 with the second half expected to be in the $11 million to $13 million range. In a challenging market and when we've had large customers push out expected deliveries and orders, we feel good about these results. Our team is working hard to mitigate the challenges.

More broadly and to put our forecast into context, the worldwide chip industries in the midst of a down cycle with global economies slowing and along with trade tensions, which is causing general market uncertainty. Year-to-date, the worldwide IC markets are down about 16% according to the U.S.-based Semiconductor Industry Association. SEMI, our equipment trade group, estimates that 2019 will show a global decline for overall equipment market of nearly 20%. While this makes the near-term situation slower, everyone generally agrees that over the longer term, the slowdown will make for a stronger recovery.

As a rule, every time we've seen a prolonged downturn, we've seen markets come back stronger. Although the weaker economy is impacting our legacy machine sales related to 200-millimeter silicon market, it is not impacting the silicon carbide opportunity. We expect silicon carbide revenue for both grinders and polishers to increase to $5 million in the second half, a significant increase from the first half, demonstrating the strength of that market. As you can see in the chart, this is the first time we've broken out the silicon carbide business for our investors.

During the IPO process last December, I explained that I felt we had a unique view into the silicon carbide world. We have been processing silicon carbide wafers for more than a decade, and we have the largest installed base of silicon carbide grinders in the world.

Our thesis was simple, there were 4 drivers impacting the silicon carbide market. Demand from the auto companies was there, but lack of a silicon carbide substrate supply was impacting the adoption. Two, the substrate companies started needing to convert 4-inch to 6-inch wafers and then to 8-inch wafers, and there would be demand for new machines because the larger wafers are so much difficult. Three, the wafer companies would largely move to single-wafer processing because of the control and yield benefits. And last, we thought many players would enter into the market for silicon carbide wafers and devices. This scenario is evolving right before our eyes.

The bottom line is we have continued to execute, and we are on the cusp of entering the large and growing market with the release of our new silicon carbide tool. I am happy with how our team is executing and with the response we are getting from our world-class customers. I look forward to our next update where we plan to share more details on the launch of the new product.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Darren Vincent from Shaw and Partners.

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Darren Vincent, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Life Sciences and Industry Consolidators [2]

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Just around the gross margin, can you talk to that again and just give us a little bit more color about the underlying factors that have played into that and how you see it impacting this half and then further out as you start to transition away from some of those legacy tools towards the newer silicon carbide tools?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [3]

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Well, it's always a mix question. And you hit the nail on the head, there was a large quantity of the older products. We had a lot of -- when you refurbish a machine, there's a lot labor involved and there was a little more discovery on some of the machines that went out.

I -- over the next 3, 4 quarters, 5 quarters, as we ramp the new products, the number of those legacy machines is going to go down. It will have obviously a favorable impact because we're designing the newer machines for a better margin structure. So it was entirely related to the mix with the older legacy products and the lower volume, right? We have been adjusting the overhead infrastructure, which really just now is taking place to account for the lower number of units going through the factory.

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Darren Vincent, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Life Sciences and Industry Consolidators [4]

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Those machines that you're acquiring to refurbish, like I get that this is not a big part of the reason to own your stock going forward, but it is still going to be playing into this half's results, and so let's extend into the 2020. So what's the state of the market for acquiring used equipment? And what's the quality of machine you're capable of acquiring now? Has it declined over the last year or so?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [5]

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So that's a -- it's a great question. And the answer is we have a good enough inventory for what we need, we think, over the next 6 to 9 months. And then hopefully, we don't need to sell them anymore. We won't care. So we did have inventory and it is on our balance sheet. It's good inventory. As we get into taking a machine's part, we realize maybe it needs a new motor instead of the one that was on there. So it's a little bit of peeling the onion.

Again, I would say our strategy all along was to start minimizing the legacy tools. I don't foresee needing to acquire any more cores than we already have. And I foresee that inventory declining steadily over the next 3 or 4 quarters. And we're planning to ramp the new machines. And so it's -- that's really the state of it. I don't -- I think the cores are what we have -- the cores that we have are fine. And I think we have enough inventory to just leave this out over the next 3 or 4 quarters.

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Ryan A. Benton, Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director [6]

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Yes, Darren. And Darren, this is Ryan. I'll just chime in. You heard everything Jerry said, of course. And again, as you look to the second half, as Jerry said, it's all about mix. So that green portion of the chart, which shows silicon carbide, which has a higher contribution than the legacy refurbished tools, so you could see, even though the top line is declining sequentially as you go from the first half to the second half, you could see very similar margin dollars. And it's upwards from there as, again, the mix of the new polished units in 2020 grows over time.

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Darren Vincent, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Life Sciences and Industry Consolidators [7]

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Okay. All right. I think everyone appreciates that -- what else that you provided in terms of silicon carbide versus silicon. Unfortunately, I think it just begs the question of when are you going to be ready to talk about '20 and how do you some mix might start to look.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [8]

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Well, it's August. So I'm going to guess, I'm not going to be able to talk much about 2020 until December, around Christmastime. We do have a lot of people talking to us about delivery for polishers and grinding machines, and we're just not at the point where I feel comfortable giving any guidance on 2020 yet, but we are going to get there. Let's get the tool launched, let's get some deliveries under our belts and let's move forward. So I -- we're -- it's going to be Christmas before we start being able to look into 2020 with confidence.

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Darren Vincent, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Life Sciences and Industry Consolidators [9]

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Okay. And then of course, there is a second new tool coming. I think it's the same tool. Can you give us any color around likely timing of launching that one?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [10]

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Well, given that we had the revenue pushups this year that we had, I think we took a prudent approach and we slowed that program down a little bit and we slowed appropriately the spending down. We have some internal programs on specific pieces of that machine. I don't foresee any revenue until, at best, late 2020 right now. But we're more focused on the silicon carbide opportunity because it's right here in front of us. If I had the polisher, I've said it before, I'll say it again, we'd be twice the size we are the CMP tool. But we've got to get this easy launched and we got to get the customers happy. So we're -- I think we're focusing appropriately.

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Operator [11]

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(Operator Instructions) And our next question is from Brendon Kelly from Moelis.

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Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [12]

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Couple of questions for me. Firstly, just on the silicon carbide engagements. Good to see you've had strong early interest from customers. Just wanting to understand the potential size and level of engagement of those 15 customers that you're talking to.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [13]

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Well, you've been here. You've seen our demo lab. And for those that haven't had the pleasure of visiting us, our demonstration lab is where we have our machines installed and customers come in and bring their wafers in most cases and we run them and demonstrate the machines. It's a huge investment for us. And those -- that demo cycle usually involves 2 to 3, maybe 4 turns of wafers. It takes many months to go through that process. We have a lot of polish activity right now in the demo lab, and that's going to be driving some system sales.

The grinders, we can turn those demos up pretty fast because we have the equipment, the processes are pretty routine now. So I think maybe the best way to characterize it for you, Brendon, is we always have 10, 12, 15 customers in, in various stages of the demo cycle and they -- sometimes, they just convert when they convert it. It just takes time. We feel good about where we are from a revenue forecast right now.

The earlier question about 2020, I would say that where we are in the demo cycle right now all points to 2020 revenue based on time it takes for them. I'll give you a specific example. One customer was here 3 months ago and they're still evaluating the devices coming off of those wafers, which is looking very good. It takes a lot of time for the customer to collect the data and then start the purchasing process, so it is good. It's moving away -- the way we expect it.

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Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [14]

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That's good to hear. And just in terms of the potential size of those 15 customers like in terms of like the system sales per year, where do you think that could end up on -- across the average or...

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [15]

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I think each one of these customers is -- what's going to happen is they're going to buy 1 and they're going to bring it in. And in some cases, we're going to sell a grinder with a polisher, so that's 2. They're going to ramp their capacity and then they're going to buy 3s and 4s and 5s. So you get enough of these stacked up in the pipeline and you have a ramp.

And so I think one -- I've said this a couple of times in the past. We're going to sell a lot of machines to a lot of customers, and it's going to be another year before we sell a lot of machines to one customer, right, where they're -- you're really starting to see volume ramps. So we see so much activity that we're going to sell 1s and 2s to 5, 10 different companies. So that's how it's going to play out. I don't think any one customer is going to -- except for one customer, is going to be very significant from a unit volume at any one point in time.

We're surprised of the breadth of customers coming through. I have to say, we knew the substrate people were coming through. We're really surprised that the device company is coming through.

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Brendon Kelly, Moelis Australia Securities Pty Ltd, Research Division - Analyst [16]

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That's good to hear. And then just lastly for me. Just on the second half revenue forecast, just in that -- the $5 million of silicon carbide systems, just wanting to understand the level of that $5 million, which is backed by purchase orders.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [17]

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We have a couple of those purchase orders right now. We're expecting more over the next 30 to 45 days.

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Ryan A. Benton, Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director [18]

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I mean -- and Brendon, what you got to appreciate obviously is the mix of grinders and polishers. And the 6DZ polisher, of course, (inaudible) machine running downstairs, but it's being launched, of course, weeks away, October 2. So we've got to get to that point before we can take orders.

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Operator [19]

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(Operator Instructions) Our next question is from [Mischel Gina], who's a private investor.

Since Mischel Gina is not responding, we'll head over to the next question, which is Darren Vincent from Shaw and Partners.

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Darren Vincent, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Life Sciences and Industry Consolidators [20]

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When Brendon was asking his question, it just prompted me to think back to the need for evaluation tools and placing them with [potential clients]. Just wondering, how is that panning out? And are you thinking -- you're still thinking that you'll need to produce tools to place eval tools?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [21]

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The way it's turning out right now, I -- we might get lucky. We may not have to ship eval tools. Let me put it this way. I don't think we're going to -- the first tools that go out the door are going to be for real purchase orders this year. We may get into it next year if it's a new customer that we haven't gone through our paces with. But as it stands right now, I do not think we're going to have to do that this year.

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Darren Vincent, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Life Sciences and Industry Consolidators [22]

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And then given the 15 customers that you're engaging with at the moment, what's the likely level of eval tools down the track that you might have out there?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [23]

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Right now, Darren, I don't really -- we don't have a plan right now to put an evaluation tool in the field. With all the people we're talking to, it has not been a topic of conversation. It can always change. But the way -- where we sit right now, we are not having those conversations where the customer said, "Hey, I really like what you have, but we're going to need an eval tool." We have not had that conversation, and everything has been pushed over into real purchase orders. So I'm optimistic where we sit today.

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Ryan A. Benton, Revasum, Inc. - Senior VP, CFO, Company Secretary & Executive Director [24]

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And the CFO is happy about that.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [25]

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As are our investors.

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Darren Vincent, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Life Sciences and Industry Consolidators [26]

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Yes, I'm sure investors are, too. So what do you think underpins that, the fact that they're not requesting eval tools?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [27]

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I don't want to brag, but I think it's the results they're seeing on the wafers. I really think that when they come in and they see the machine run, I think it changes the dynamic. I think they see we have the experience. I mean we have customers that tell us that it's better than they thought it would be. The results, they're impressed.

So I think it's an artifact of really good experience and we really know what we're doing. We just took delivery this week. And I had mentioned this one time in the past, there's a specific piece of metrology related to looking at the surface of a polished silicon carbide wafer. These are very expensive metrology tools. We're one of the few equipment companies that have one of these things. It's a specialized tool out of Japan from a company called Lasertec and there's a line to get them.

So we have the right people, we have really, really good demo results. I mean I think the conversation changes when we show them results on the wafer. And now that we can do these experiments in-house with this metrology, I feel very comfortable with the technology we're offering. I mean we're seeing a lot of really good data come off our machines.

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Operator [28]

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And we have another question from [Mischel Gina].

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Unidentified Analyst, [29]

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Jerry, I don't know if you recall, I promised that I would dial in. I missed the last teleconference. So -- but I wanted to actually commend yourself and your team on getting these new products to the market as quickly as you plan to do. So well done.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [30]

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Thank you.

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Unidentified Analyst, [31]

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So I have 2 questions. One is in regards to your recurring revenue and sparing. Now considering that you're coming off your legacy products, does the recurring revenue profile in the outer years change or dip? And the second question is to do with your facilities in terms of creating the infrastructure and capacity to expand your product line. How is that going?

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [32]

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Two very good questions. So the beauty of the recurring revenue is that it is, in fact, recurring. And even though we're not selling more legacy machines, there are still a lot of machines in use in the field. I actually see that line increasing as we go forward because every machine that we sell is going to start generating $20,000 to $25,000 per year after the warranty period of spare parts and consumables and the occasional labor, which isn't a big number in there.

So I think that number is a good number. I think it's just going to continue to go up. Our -- we never underestimate our -- ability of our customers to continue to use old machines. And that revenue number is not going to change. It's going to go -- increase, sorry, it will keep going up.

Now on the facility, we're doing a lot of work as we prepare for the manufacturing ramp of the new product. And I think you're going to hear more about this later on as we talk about how we plan on increasing the output without increasing our footprint. And I want to save that for after we launch the new product when we can talk more specifically about what our plans are. But what I can tell you, it is a daily topic of conversation, how are we going to ramp this tool reliably and cost effectively. So it's something that is near and dear to our heart, and we're working a lot on it right now.

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Operator [33]

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There's no more further questions at this time. I would like to hand the call back to the speakers for any closing remarks.

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Jerauld J. Cutini, Revasum, Inc. - Executive Chairman, President & CEO [34]

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Thank you. I'll conclude by saying we appreciate this continued support of all of our important shareholders. One last reminder, Revasum was invited to present at the ASX Small and Mid-Cap Conference in Sydney on September 5. I'm excited that we're going to be down there. I think it's a privilege that the ASX invited to this. And hopefully, I'll get to see some of you while we're down there. Thank you.

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Operator [35]

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Ladies and gentlemen, that does conclude the call for today. Thank you for all participating. You may all disconnect and goodbye.