Pivotal Systems Corp

ASX:PVS

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to the Pivotal Systems first quarter investor 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, Executive Chairman & CEO]

Good morning. Thank you again for taking the time to join the call. It's a pleasure to speak with everyone regarding the release of our March 2020 quarterly. As we mentioned during previous announcements, we're committed to providing commentary with each of our 4C releases. The first quarter of 2020 was in line with our expectations of improving momentum in the semiconductor industry as it continued its recovery from the 2019 downturn. However, during the quarter, we began experiencing the effects of the COVID-19 pandemic. In California, while Pivotal manufacturing employees were exempt from the stay-at-home shelter-in-place orders because of our status as an essential business, we suffered from some of the impacts of the new federal distancing guidelines. For example, 75% of the workforce in Fremont were classified as nonessential work from home. These were in the areas of sales, marketing, finance as well as some portions of research and development. And our work teams utilize the latest information technology to begin working together as remote teams. While this started off with challenges, the employees reacted quickly, and we saw our productivity on internal business return to near-normal levels. However, our sales team has been unable to travel to Asia, and this has led to an initial slowdown in 3 of our customer-led initiatives. As the quarter progressed, we saw a recovery by both Pivotal our OEM and our IDM customer engineering teams as we all became better acclimated with this new normal. At this time, I'm happy to report that all of our customer-led initiatives are back on schedule. In the area of manufacturing and supply chain, we were able to ship all of the Q1 revenue to plan. This did not come without challenges as we actually had to add a second shift to our Fremont facility to maintain guidelines for social distancing on our factory floor. Also, our activities to bring up the new transformation center in Korea were slowed by late shipments from component suppliers due to the COVID-19 factory closures here in the U.S. Our repair and upgrade center in Korea, however, was up and fully operational in January, and we've seen increasing demand for that recurring revenue stream throughout the reported period. I would add that our primary integrator in China had a 3-week shutdown during the reported period as they battled COVID-19 in Shenzhen, China. As you know, Shenzhen is the next-door province to Wuhan. While our shipments from the CM were delayed, we were able to use safety stock in Fremont and in Korea to meet all of our requirements. Since the 3-week shutdown, our CM has been operating at normal output and has been on time 100% of their deliveries. We continue to monitor that output daily. I would like to mention several of the highlights then around our first quarter 2020. During the quarter, we actually made good progress with customers in -- both in the beginning and at the end of the COVID-19 situation. We were able to maintain U.S. manufacturing operations despite shelter in place, and we were able to get all of our units out on time. GFC production at our China-based CM manufacturer and our Fremont facility was thus maintained without interruption, with the exception of the 3-week period from Shenzhen. All GFC product shipments were on time to customer request. We received repeat production orders from a leading Japanese equipment company. We successfully qualified the GFC at 2 leading Chinese foundries. We received multiple repeat orders from a leading European foundry. We received multiple repeat orders from Taiwan and multiple repeat orders from customers in the United States. Unaudited revenue was $4.3 million for the first quarter of 2020. Our net cash outflows from operating and investing activities of USD 3.4 million reflects business operations, product development, inventory, purchases of production tooling and fixed assets. Backlog, which are confirmed orders not yet shipped, at March 31 was USD 2.5 million, and the company successfully closed the RBI preferred stock financing on February 24, 2020. In the area of products, sales of the standard low flow GFC commonly used for etch application continued its momentum in the first quarter of 2020, driven primarily by spending by IDMs in Korea as well as deliveries to IDMs in China, Taiwan, Japan and Europe. The company continued its high-temperature GFC fan-out with a leading Japanese OEM during the quarter. The SmartStik architecture was successfully used by Pivotal as part of the qualification process at a Korean etch OEM and is currently continuing trials with a leading Chinese etch OEM. The SmartStik architecture provides a live demonstration of the standard GFC's industry-leading performance in both speed and accuracy, while also demonstrating the ability for the OEM to effectively eliminate redundant hardware required by the older technology, pressure-based and thermal MFCs utilized by our competitors. SmartStik continues to demonstrate a method for etch OEMs to improve process tool performance and reduce costs. The recently introduced flow ratio controller for etch applications, that's a 3-channel controller, continues to perform well in production at a leading Korean IDM, which we spoke of in the past. During the quarter, Pivotal successfully demonstrated the new 2-channel flow ratio controller for deposition applications at a leading U.S. OEM factory. Additionally, Pivotal expects to officially launch the 3-channel during the first half of 2020. At this time, I'll hand it over to our CFO, Mr. Tim Welch.

[Timothy D. Welch, Former Chief Financial Officer]

Thanks, John. Good morning. I'm pleased to cover our 4C cash flow information. As a reminder, all financial numbers are in U.S. dollars and are unaudited. The company finished Q1 with a cash balance of $11.7 million, which included borrowings of $2.5 million against the Bridge Bank term loan. There are currently no borrowings against the Bridge Bank revolving line of credit. Cash flow from financing increased $9.7 million as the company closed a $10 million RBI preferred stock funding previously announced in February. Cash received from customers for the period were $4.7 million, up from $3.1 million last quarter due primarily to collections from strong shipments at the end of 2019. Cash payments for product manufacturing were $5.6 million due to increased shipments and certain cost increases while we temporarily transitioned select manufacturing activities back to Fremont, California. We also added a second shift in our manufacturing facility in Fremont to address social distancing measures. Pivotal continues to invest in product development with $800,000 in capitalized engineering costs during the quarter, even though product development has been limited to some degree by shelter-in-place order in California, which has now been extended through May 2020. As commented on previously, Pivotal has made this investment in response to 4 customer-led product initiatives, along with increased inventory build to the new high flow GFC and the new high temp GFC also called the remote GFC. Other Q1 highlights include unaudited revenue of $4.3 million, net cash outflows for operating and investing activities of $3.4 million, which reflects business operations, product development, inventory and purchases of production tooling and fixed assets. As John mentioned, our backlog at the end of the quarter was $2.5 million, and the company successfully closed its RBI financing in February 24, 2020. Following the end of the March quarter, the company was able to secure a loan with Western Alliance Bank for $900,000 that is guaranteed by the U.S. Small Business Administration, or SBA, and is part of a program created by the U.S. Coronavirus Aid, Relief, and Economic Security Act called the CARES Act, which provides financial relief from the COVID-19 emergency. The loan will mature in 2 years and the SBA may forgive the loan if all the employees are kept on the payroll for 8 weeks and the money is used for employee payroll and associated expenses. Moving now to the area of operations. Head count at the end of the first quarter was 46 employees. Pivotal will complete the establishment of the new transformation center in Korea in the first half of 2020. During Q1, Pivotal continues its previously announced temporary transition of certain manufacturing activities to Fremont as it completes initiation of final product transformation in South Korea. This resulted in continuation of final product transformation activities and product shipments from Pivotal's Fremont facility. In future periods, the Fremont facility will serve as auxiliary capability to Korea. Pivotal has enough capacity to meet expected customer demand for Pivotal GFCs, commensurate with continued improvement in the semiconductor manufacturing equipment sector for 2020. Pivotal has also established the repair and upgrade center in Korea. The facility, which will be operated but not owned by Pivotal, commenced operations in Q1 of 2020 and will provide both repair and software upgrades to both IDM and OEM customers globally. As noted previously, Pivotal's large global installed base continually has an increasing number of units coming out of warranty. Pivotal, therefore, expects the repair and software upgrade business to grow in scale over the short and medium term. At this time, I will turn it back over to John.

[John P. Hoffman, Executive Chairman & CEO]

Thank you, Tim. So to summarize, as expected, Pivotal saw the industry continue momentum early in the period of Q1 2020. Prior to COVID-19, SEMI had estimated that the global semiconductor manufacturing equipment sales were expected to increase 5.5% to USD 60.8 billion in 2020, but the industry has had to adjust its expectations and plan due to the COVID-19 pandemic and related challenges. SEMI expects the 2020 equipment market recovery to come primarily from advanced logic and foundry, new projects in China and, of course, memory. In the first quarter, it was apparent that data centers and mobile computing customers increased demand or did not reduce orders on concerns of future supply allocations. While this is promising in the near term, the industry has entered a low visibility period for the second half of 2020. Both our OEM and IDM customers remain cautious in this period of uncertainty. The recent coronavirus pandemic is a reminder to all of us that the future is always uncertain and things can change quickly. With the worldwide economic disruption, we caution that the company may be adversely affected going forward in ways we cannot foresee. That said, we will keep the market informed of any updates to our outlook as we receive more visibility around material changes of timing of orders and shipments from both the major IDMs and OEMs. While the overall market may be murky, there's much -- and there's much uncertainty about the overall 2020 second half outlook, we continue to execute to our growth strategy of continuing to take market share in all markets we serve, expand our served available market with the introduction of new products and developing recurring revenue streams in the markets we compete in, as we mentioned on the Korean repair and upgrade center. The underpinning of our strategy is maintaining leadership as the #1 innovator in the flow control market for the semiconductor industry. Innovation is the key to better ideas and increased value for both our customers and our shareholders. Pivotal maintains itself as the innovation leader in our markets as evidenced by the number of development programs with our key partners that are maintained even the event of such turbulent times. We view these partnerships as a critical step towards achieving our overall strategic objectives. As a reminder, we'll hold a virtual AGM now on May 22 in Sydney. While Tim and I will still be sheltering in place, we look forward to speaking with all of you on that teleconference. And of course, if you have any questions in regards to the AGM, please feel to reach out to Tom Duthy in Investor Relations, Tim or myself at any time. Perhaps now would be a good time to take questions.

[Operator]

[Operator Instructions] Your first question comes from Brendon Kelly from Moelis.

[Brendon Kelly, Analyst]

A couple of questions from me. Firstly, just in relation to the revenue, can you just give us a sense for the current run rate of the business? I understand that visibility is difficult beyond a quarter or so, but just looking at the previous quarters, you've done $6.4 million in the December quarter and then $4.3 million in this quarter, and which includes $800,000 contribution from a shipment which fell into the early days of January. So just trying to get a sense for where the business is at as things stand today.

[John P. Hoffman, Executive Chairman & CEO]

Thanks, Brendon. If we look at our Q1, based on the way we entered it, we had basically 2 schemes. Fortunately, for what we were planning, we were able to exceed our internal expectations for Q1, basically because we saw the industry really do some remarkable things in Q4 of 2019 to ramp itself. And so there was a lot of things that people were trying to get done in Q4. And ultimately, I think some of the things in Q1 got pulled in. We would have loved to have shipped that $800,000 in Q4 as an example. So from a run rate perspective, if you look at the $10 million thereabouts that you're talking about, we obviously have very limited visibility on the second half. But at this point in time, we continue to see the industry do slightly better here in Q2.

[Brendon Kelly, Analyst]

Sure. So just to understand your comments correctly, John. So you're saying that the $10 million that you've done over the last [ 6 or 5 ] months is basically the run rate as it stands today and acknowledging that it's difficult visibility?

[John P. Hoffman, Executive Chairman & CEO]

Well, I mean, the $10 million is pretty much -- it is what it is. It's what we've done. We think Q2 is slightly stronger than Q1 at this point. We haven't given any guidance. We haven't seen any of that change yet, so we'll see.

[Brendon Kelly, Analyst]

Cool. And then secondly for me, just if you can just give us a sense for how the customer demand is that you're seeing today versus 3 months ago?

[John P. Hoffman, Executive Chairman & CEO]

Yes. It's very interesting, Brendon, because what we're seeing, I think there's been a number of documents, and you probably have been following things like the Micron earnings call, the Lam earnings call, we have not seen any slackening at all from the pace. We believe -- and I think we've talked about it in the past. I was very -- it was very questionable for me what was going to happen with the low-end cell phone markets. We believe, as part of the pandemic and this whole work-from-home shelter-in-place activity that's pretty much happening globally, that there would be a major upgrade in technology. I noticed it myself in that I was trying to have Zoom meetings with people, and the bandwidth I have at my home or the hardware that I have at my home is not capable to do what I need to do as fast as I need to do it. So immediately, I had to go buy more hardware. Well, I think that's happening around the world. And what we see is the one area that's growing is this area of data centers and the bandwidth associated with them. There's major hardware upgrades going on there. And so that has not slackened. And there's -- I think you can read reports from Morgan Stanley. You can read reports from Goldman Sachs and others around that in Q -- that so far in Q2, that's being maintained. So I would suggest the second half is murky as everybody is trying to understand GDP and what's going to happen with spending and how that will affect consumers and people who are out of jobs today. But in the near term, people are -- and corporations are upgrading hardware.

[Operator]

Your next question comes from [ Mark Fitzgerald ], private investor.

[Unknown Attendee]

Could you give us an idea of cash breakeven on -- what run rate you'd expect to be cash breakeven on given that we are back to normal conditions and out of this shelter in place?

[John P. Hoffman, Executive Chairman & CEO]

Tim, I don't know if you want to take a whack at that first.

[Timothy D. Welch, Former Chief Financial Officer]

Yes. I'll -- so we'll probably -- cash breakeven-wise, we have a number of initiatives in place right now that are directed towards reducing inventory, improving margins or reducing product costs as well as reducing expenses. And based on those, if we execute the plan, we see the cash breakeven somewhere probably as we get closer to kind of the $10 million per quarter revenue level. I don't want to be any more specific than that at this point, but we still have ways to go to get there, but we have, again, a pretty solid or favorable outlook in terms of coming off of last year, which is pretty low in terms of the industry and expecting revenue growth and some of these expense reduction, cost reduction things to [ come in ]. So again, it will be as we get closer to the $10 million per quarter revenue level.

[Unknown Attendee]

Okay. And then can you give us some sense as we move into the second half of the year, are the new products going to be meaningful in terms of a mix here? I mean is there any sense -- or can you give us any guidance on what the mix would be for new products, percentage of revenues?

[John P. Hoffman, Executive Chairman & CEO]

Yes. This is John again, [ Mark ]. Good question. So it's really going to come down to a couple of things for us. One is the remote GFC or high-temperature GFC. We're seeing that grow quarter-on-quarter now. And as you remember, in Q4, we indicated we had several -- for our new product, large orders coming out of a Japanese customer for that. That has continued in Q1. So we believe that while it's the standard GFC in terms of it's an etch GFC now, but it's been remote. And it is a new product, and so you'll see that revenue. Perhaps we can talk a little bit about that as we go forward and bifurcate that revenue for folks.The big question is going to be how quickly we ramp the flow ratio controller for deposition especially in the second half. And that's a function not only of the product, but it's a function of the equipment company, right, the OEM that we're working with and how quickly their new products ramp. So for Pivotal, that's a difficult thing to forecast, right? We're talking about product acceptance at leading IDMs of an OEM's product. But we've got it in the plan for it to begin to take revenue in the second half. And ideally, we'll see how it goes. Right now, we're meeting or beating all of the specs that we've signed up to.

[Unknown Attendee]

Okay. And the other question is, what are you quoting lead times for your customers at this point?

[John P. Hoffman, Executive Chairman & CEO]

Yes. Good question. We're still quoting 4 weeks. Our customers behave the way you -- you've been doing this with -- in the industry for 30 years. They have not changed. They generally like to give us 15 minutes and -- because their ability to plan is somewhat challenged. But on average, we're still at 4 weeks, and we're meeting those delivery requirements. As we mentioned, though, there was a period there in February where the CM was down. They were battling the virus, trying to get their shop clean. They were out for 3 weeks. So we, as you'd expect, had buffer inventory ready to go, and we still met all those shipments, and we're beginning to build that inventory back up, which allows us to deal with inside lead time requirements.

[Unknown Attendee]

All right. And then one final question on the SmartStik. You mentioned in the opening comments that you're working with Korean etch and Chinese etch. Are any of the U.S. or Japanese etch suppliers looking at SmartStik at this point?

[John P. Hoffman, Executive Chairman & CEO]

Yes. So I think we've had -- the answer is yes. We've been working with a U.S. etch company in the Bay Area, in discussions around that and testing it. And let me explain that for a moment. What it -- it's not a function of whether or not the GFC itself is meeting specs. The real question is, can that equipment company pull out things like pressure regulators and positive shutoff valves and other components on their gas stick while meeting the tool specifications? And so for Pivotal, that means there's a lot of lab testing, as you'd imagine, with this new architecture because, as an example, if the process shifts, you're going to have a major problem. And the difficulty is a lot of these tools that we're working with are older tools, as you'd imagine, and they've compensated for, let's say, sloppy performance by our competitors. So it's a -- and let's -- I could be talking about Lam, TEL or Applied on etch. As you know, if they've got 25 customers and each customer probably has 7 to 9 major etch processes, you can -- and they certainly all don't do it the same way, it's a lot of work. And so that's where we are. I think we've made really good progress with the Korean company, which is what we've highlighted. It's resulting in orders and revenue, which is one of the barrier or benchmarks we use to talk about it. And the same thing is true now with the Chinese company. I'm hopeful that the equipment companies are able to -- in the U.S., especially, and in Japan, able to move forward with us. And it's always a set of which priority comes up first, right? They're busy, and we're all working together. So the answer is yes. Continued caution. We're working together, though, with both U.S. and the Japanese OEM.

[Operator]

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Hoffman for closing remarks.

[John P. Hoffman, Executive Chairman & CEO]

Once again, I'd like to thank everyone for joining us on the call. This is actually the first call I've taken from a Burger King parking lot as I have better reception here than at my home, hence, more hardware is needed. I very much regret that we haven't been able to come over and meet with investors personally. You have my assurance, once this is lifted, that I'll get there as quickly as possible. And once again, thank you very much. And if you have questions, please let us know. Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.