Pivotal Systems Corp

ASX:PVS

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to the Pivotal Systems First Quarter 2021 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. It's a pleasure to speak with everyone regarding our first quarter 2021 4C. As I've mentioned in the past, we provide a commentary every quarter to keep our investors apprised with our progress as well as to answer your questions. The first quarter 2021 was solid for Pivotal Systems as we were able to continue our strategic development programs with 2 leading OEMs, while leveraging our China-based CM and our new Korean transformation center to maintain on-time delivery in a very aggressive industry ramp. Most importantly, our standard etch GFC continued to take market share in the first quarter as more OEMs transitioned over to Pivotal's industry-leading technology. We see that trend continuing in both the second quarter of 2021 as well as the second half of 2021. As I will discuss later, the semiconductor market has experienced significant growth in the first quarter of 2021 and is expected to continue throughout the year and beyond. Accordingly, today, I'm pleased to report to investors on our financial year 2021 revenue expectations to 31 December, '21, as a result of search and demand for Pivotal's innovative GFCs, the company anticipates revenue growth between 35% to 45% for the full year, representing revenues between $30 million to $32 million. I remind investors training us on today's call that all amounts are expressed in U.S. dollars, unless stated otherwise. Some of the first quarter highlights include Pivotal has initiated qualification of our standard etch GFC with a leading Japan-based original equipment company. Our unaudited Q1 2021 revenue of $6.34 million was up 5.4% sequentially, excuse me, for the fourth quarter 2020 of $6.06 million and up [50. 9 % ] from the same period a year ago, Q1 of 2020, which was $4.3 million. We received a progress payment of $185,000 for our advanced GFC for atomic layer deposition under the development agreement signed with a leading Japanese equipment manufacturer in Q3 of 2020. Unaudited Q1 2021 gross margins of 30.1%, up from negative 3.9% in the prior period and up from 29.6% in Q4 2020. The remote GFC revenue with a leading Japanese equipment company as well as a Korean equipment company increased from about $104,000 to $209,000 in Q1, representing 100% growth quarter-over-quarter. Continuing qualifications of our 2-channel flow ratio controller, or FRC, and a leading U.S.-based OEM for depositions continues forward. Backlog or confirmed orders not yet shipped at 31 March was $4.9 million which was up 40% for the fourth quarter backlog of $3.4 million. During the period, Pivotal was able to once again maintain all of our manufacturing activity in China, Korea and Fremont. And we're able to make on time deliveries. Semiconductor industry growth in 2021 is accelerating from previous forecast. In the area of products, sales of our standard low flow gas load controller, commonly used for etch applications continued its momentum in Q1 2021 driven by spending in the United States and Japan and both the IDM and OEMs in Korea and also Japan. In late Q1 2021, Pivotal began qualification of its standard GFC used for advanced applications with the leading Japanese original equipment manufacturer. Pivotal currently expects to complete this qualification by the end of fiscal year 2021. Our high-temperature GFC fanout continued in the first quarter with multiple repeat orders, including on the newly qualified gases we spoke about in the fourth quarter of 2020. This momentum is expected to continue and accelerate in 2021. Pivotal also released an internally designed high-temperature piezoelectric actuator capable of operating that up to 150-degree Celsius. As many investors may appreciate, piezoelectric actuators are crucial semiconductor manufacturing components and used widely. This new piezo provides Pivotal Systems extended capabilities in high-temperature applications which is expected to increase significantly in the future of the atomic layer deposition and atomic layer etching require higher temperatures. The current piezoelectric actuators were not designed for these higher temperatures. Pivotal has already incorporated this new capability in several of our new products. Overall, Pivotal strategic partnerships with leading equipment companies continued in the first quarter as our team worked diligently on high-temperature applications with the existing Japanese equipment partner as well as an additional Korean equipment partner. As we indicated, the anticipated growth continues. The company also continued its development of a flow ratio controller application with -- for deposition at a leading U.S.-based OEM. And finally, the strategic development program on accommodator deposition applications with the leading Japanese equipment company remained on track and as evidenced by the receipt of a progress statement versus program milestones. At this time, I'll pass it over to Dennis Mahoney to discuss operations and finance.

[Dennis R. Mahoney, Chief Financial Officer]

Thank you, John. We are pleased to report our appendix 4C quarterly cash flows for the period ended March 31, 2021, and in addition, the company's unaudited revenue and gross margin positioned over the same period. All amounts I'm about to record on U.S. dollars, unless otherwise stated. Cash receipts from customers for the period were $7.1 million, up 23% from $5.7 million in Q4 of 2020, evidencing stability in receivables management. As noted in our appendix 4C and commentary, an additional $1.3 million in cash from customers was received by Pivotal on April 1 and April 2, immediately following the close of the quarter. Cash payments for product manufacturing were $6.7 million, up 39% from $4.8 million in Q4 2020, reflecting current and expected revenue growth as we build product to meet this increased demand. Pivotal continued to invest in product development, with $0.75 million in capitalized costs incurred during the quarter. During the quarter, the company made salary and payments of $0.34 million to related parties and...

[John P. Hoffman, Executive Chairman & CEO]

It seems as if we lost Dennis. I can continue with his portion. As you indicated, we made solid payments of about $0.34 million to related parties and associates, including the executive director's salary payments, nonexecutive director fees and fees for consulting parties provided by Director related activities. In operations, our first quarter full-time headcount is 45 employees, which was identical to our fourth quarter. Our continued growth in business operations were accomplished with no increases in our headcount. And during the first quarter, Pivotal continued to increase production to maintain pace with the industry growth and beyond. The customer currently -- the company currently estimates that our existing aggregate capacity in China and Korea is approximately 4,000 units per month for 5 day, 2 shift production. This capacity of 4,000 units per month is expected to be sufficient to meet what we currently see at the 2021 upside demand. All in all, we're pleased with our business performance. The level of flexibility in our manufacturing group and the efforts of all of our important people in Pivotal. I'd like to turn now to a snapshot of expectations for the semiconductor industry in 2021 and beyond. As we mentioned in our market release, on April 26, SEMI reported North America-based manufacturers of semiconductor equipment posted $3.3 billion in billings worldwide for the third consecutive month, which representing growth of over 48% over the prior period, driven by robust secular semiconductor demand for leading-edge technologies across diverse end-use markets and digitization of industries worldwide. Resulting in rising investments in semiconductor equipment. In December of 2020, SEMI estimated the global semiconductor manufacturing equipment market reaching USD 71.9 billion in 2021 and USD 76.1 billion in 2022. In late March, Citi Research Group forecasted that the equipment market in 2021 is expected to now be $73 billion, up 26% on the prior period and growing up to USD 100 billion by 2025 due to the significant step-up in the domestic semiconductor manufacturing in Europe and the U.S. driven by TSMC, Intel and Samsung. According to the Semiconductors Industry Association, growth in semiconductor demand is projected to require a 56% increase in manufacturing over the next 10 years. Pivotal Systems remains absolutely focused on our customers and providing them with the advanced technology they required today as well as in the future. Our market share gains in 2020 and early 2021 indicate we're making significant progress to our goals. We are pleased with the company's performance in the first quarter, and we expect continued improving conditions in 2021 as the industry moves forward. We see second quarter 2021 revenues to show continued quarter-over-quarter growth and overall, we see the company's 2021 versus 2020 growth being between 35% and 40%, as we mentioned earlier. This is primarily driven by continued market share gains in our standard etch products in Korea, Taiwan and China. At this time, I'll be happy to take any questions from any of our investors.

[Operator]

[Operator Instructions] Your first question comes from SujI Desilva from Roth Capital.

[Suji Desilva, MD & Senior Research Analyst]

Congratulations on the results and progress. So John, could you talk about perhaps how the trends you're seeing differ in deposition versus etch across the GFC demand?

[John P. Hoffman, Executive Chairman & CEO]

Yes, absolutely. If we look at this, we believe the etch portion of the flow control market has been critical for many, many years. As you may know, in flow control, which is fundamental to plasma technology, if we're not putting the right chemicals in the right place at the right time, when you strike a plasma, ultimately, you could go into deposition mode. And this makes it very difficult if you're doing deep projects, etch [Indiscernible] , et cetera. So that trend has been there. And what Dr. Monkowski and I had discussions about a few years ago, is we believe deposition is going to move in that direction as Moore's Law continue to drive people below 5-nanometer. And it was very interesting to us back last summer when Tim Archer, who's the CEO of Lam gave a really interesting Investor Day presentation. And he actually and his team kind of shared something we hadn't heard before, but we believe, which is the deposition business is going to be moving more and more critical, and they actually believe that maybe 70% of the market will move towards atomic layer deposition. So what does that mean? It means that having the ability to turn on and turn off your gas flows of 50 milliseconds or below and then having that repeatability time after time after time, when you put that on top of 0.5% accuracy on every flow that you process, the ability to make a meaningful difference on film properties, deposited films will be measurable. And so that's what we think is happening. The deposition side of the business is going to begin to move more and more critical. The etch business continues and will always continue to be the most critical, and we believe our products are positioned to take share in both.

[Suji Desilva, MD & Senior Research Analyst]

Okay, John. And then more broadly, in our research teams, we've been focusing on some -- more recently autonomy, data center and so forth. And industrial IoT kind of semiconductor manufacturing scenario where there's opportunity as well. Can you talk about the information you're getting out of your cash flow controllers that you can help in the semiconductor manufacturing intelligence systems, costs, all those things, it seems like you can help with automation there. So color there would be helpful?

[John P. Hoffman, Executive Chairman & CEO]

This is spot on. Exactly right. As you know, these equipment companies are measured by cost of ownership on a daily basis by the leading device manufacturers. So speed and improving yield are really, really important and that allows these factories to produce more and better outlet. But there's another side to pivotal that you've touched on. And we're the flow control company that's not using a pressure based low controller. We're using a physician-based to controller, but we're actually able to use or capture information right now at the 1,000th of a second. And soon, we'll introduce technology that goes even beyond that. What does it mean? We can measure our valve position in a given pressure, given the temperature regime, and it can be dynamic. And 2 nanometer. So why is that information important? If you're producing semiconductor devices, and you're actually changing that valve position when there's the same pressure and the same temperature, there's something wrong in their process. And so our ability to feed that smart or intelligent information onto the tools or to a factory host that's doing the management of deal is absolutely meaningful. And that's super important. And what's also important to realize is there's only one company that can drive things like valve position, gas pressure, temperature of that gas, real time, and that's Pivotal. So we think that, that intelligence is going to be industry-leading and also industry-changing in our ability to help the device manufacturers, produce more and better product. Does that make sense to you?

[Suji Desilva, MD & Senior Research Analyst]

Absolutely. It's an exciting opportunity, guys. Well, again, congratulations on the progress and the customers and the guidance with strong outlook of the year. So it's obviously a good sign there.

[Operator]

Your next question comes from Stephen Scott from Annapurna Microcap.

[Stephen Scott]

Stephen Scott calling from Annapurna Microcap. Just had a question around the typical seasonal quarters of the business leaving side pandemic and maybe the growth now, when is your biggest quarter? And like how does that typically look in the industry?

[John P. Hoffman, Executive Chairman & CEO]

Okay. Generally speaking, SEMI is not an industry that's seasonal in demand in terms of how it used to be. If I go back 15 to 20 years, we'd all be looking around in really November, to figure out it's the forecast back in August about PC demands and then behind PC, it was tablets, laptop, then behind that, it is smartphones. That would drive a seasonality towards the Christmas season. What we see now is the growth of the industry is so much diversified, probably more so than we've ever seen it. Suji talked a little about the Internet of things, the automotive sector and its not only in electric vehicles, but also in standard vehicles as people try to put more and more intelligence on automobiles. The data center business, as we've talked about, absolutely, flourishing and will continue to flourish. As you never -- or you may know, there's an initiative in China to have as much data center capacity as we have in the U.S. as a way of just keeping some of the capability in China. So that's leading to more and more spending. Behind that, you've got all these trends in artificial intelligence. You've got all of your trends around life sciences, which are heavily weighted on computing and computing horsepower. So a long answer to a short story, we're not as seasonally dependent as we have been. And in Pivotal's case, we haven't seen seasonality in many, many years. So I don't think this is at once was.

[Operator]

Our next question comes from Sean Kiriwan from Moelis Australia.

[Sean Kiriwan, Vice President of Australian Equities]

John and Dennis, congrats on another solid result. My question is around, given the supply shortages in the -- market has been widely reported. Are you seeing increasing inbounds from your customers, in particular, the device manufacturers wanting to retrofit their existing production lines, just to get, I guess, better efficiencies while they're building out, I guess, new fabs?

[John P. Hoffman, Executive Chairman & CEO]

Yes. You're seeing heavy volumes in the, we call it, the upgrade business, like, the repair and upgrade business. I think the older technology, 200-millimeter and some of the older devices, there's an absolute drive right now for more devices, as you know, major automotive manufacturers in the U.S. and have the delayed production because of the lack of chips, a lot of those are older chips and analog chips in some cases. So the answer is yes, we are seeing that. And I think we're also seeing, obviously, major IDMs, bringing our capital -- the equipment as fast as they can, and we're supporting that.

[Sean Kiriwan, Vice President of Australian Equities]

Got it. And in terms of just new capacity coming online, what's the typical lead time from when -- what is an IDM oil foundry IDM announcing, I guess, a new new capacity to what your products actually gets ordered?

[John P. Hoffman, Executive Chairman & CEO]

Yes. I generally use 2 years as a rule of thumb. The first year is putting in the actual factory itself, which is a lot of steel in brick-and-mortar that takes place. You don't just have a factory in the clean ends, you've got a gas pad and all the associated support of water factory to produce all the ultra clean water. So generally, that's about a year or so. And then based on bringing in the equipment within the next 6 months, and then they phase it. They'll bring it in in a number of, let's say, the total factory is going to give 120,000 liters per month. They'll bring in their pilot line, it will be 20,000, they can bring in phases of 40,000 or 30,000, depending on how heavy their product demand is. So about 2 years, 2.5 years, Samsung is very, very efficient as is TSMC.

[Operator]

Your next question comes from David McFadden from [Indiscernible]

[Unknown Analyst]

Nice result overall. Just a quick question on the backlog, in particular, relative to the full year revenue guidance figures after backlog, I think you said about $5 million, obviously, up from $3.5 million in the last quarter. Can you give any sort of guidance as to how often you might expect that to expression rolled overall rates at out of the next year, how that sort of gets you contributed to $30 million to $32 million?

[John P. Hoffman, Executive Chairman & CEO]

Okay. Generally speaking, and I would probably say 100% of our backlog is shipped -- is going to be shipping between Q2 and Q3. There's not a whole lot past that the IDMs. Generally look at 4 week lead times when they're talking about retrofits with us. That's been pushed out now to probably 6 to 7 weeks, just based on capacity and what we're working on. What we're seeing on the equipment side is we're getting really solid forecast 3 major equipment companies. So generally speaking, we're getting 12 weeks, I would suggest there are exceptions because they're having to deal with major pull-ins as well, and we try to facilitate that, obviously, every time we can. In the past, we talk about 600 units in our safety stock, as we call it. So one of the things that we think is important as a growth company is when a company -- one of those equipment companies or one of the top 2 or 3 IDMs call us and they're going to trust and qualify a new device on a new gas or a new recipe, we want to drive a device event tonight. That's how engineer says. The one thing I've noticed is our safety stock levels are down because we're shipping to 2 shipments on-prem from the equipment companies. So long answer, but a lot of context, both in the repair side and the new equipment side.

[Operator]

Your next question comes from Sinclair Currie from NovaPort Capital.

[Sinclair Currie, Portfolio Manager]

Look, I'm kind of pleasing to say that gross margin. So we get back to the 2018 levels. I was just wondering of spots of longer-term targets, which see some improvement in that. Just recap what we think gross margin can get to and what has sort of plays with volume. And so you've got that sort of 4,000 units like that 2 shifts? Does it sort of rely on sort of volumes getting to a different kind of shift structure or something?

[John P. Hoffman, Executive Chairman & CEO]

I think there's 2 trends that have to be discussed here. Number one, our existing products that we have were introduced and I guess the best way -- I've used this example many times, the idea of breaking into a world where every major car companies using carburetors and all the [Indiscernible] with fuel injection. What that leads to is almost a competition there on the state of it versus should. And then over time, as products and companies evolve, people start to understand that the value Pivotal places on their products or or equipment companies and device manufacturers far outweigh the commoditized technology that we compete against. So what does that mean? It means that these development programs that we're working on with these major equipment companies, multibillion-dollar equipment companies, are allowing Pivotal a chance to step-up the value chain because we're providing increased value through taking away our components that are not needed anymore or just better performance. So you'll see continued efficiency coming out of the company, right, on our existing product base. So you'll see the gross margin improve slightly, and we've set that. But what's really important to realize is that we're trying to change the entire fuel control opportunity. And based on, I would just say, improved revenue structures on a per product basis, we'll see gross margins improve. And that's what we'd expect of the company trying to step-up the value chain. So hopefully, that makes sense.

[Operator]

Your next question comes from [Indiscernible].

[Unknown Analyst]

Congratulations on great results. And [indiscernible] to get to this point where we'd like to participate. My question relates to the operations update and the reference you've made to capacity of 4,000 units per month. I'm getting one of you're sort of inferring there is at an exit rate at the end of calendar year '21. Can you give us a guide as to what your utilization rates might be across the network at the end of the year. I mean, really down the $32 million, you're growing quarter-on-quarter to get to that number. So how do we think about sort of the company having to sort of provide extra capacity going forward?

[John P. Hoffman, Executive Chairman & CEO]

Yes. It's a good question. I mean if you look at 4,000 units a month, you're talking about 48,000 units a year, let's say that our current plan is somewhere around 20,000 units and above. But look, our choice is I've got enough capacity to take on a lot of new business and major pieces of that business. And that's very important for me as I talk to these equipment companies who are capable of shipping large volumes of demand in our way. And I want to make sure everybody realizes we're ahead of this. Pivotal is ready to take increasing business from all of the equipment companies, and we have the capacity already in place to do it. And for those that did understand, we're using contracted manufacturing organizations where our cost per unit isn't changing. What's happening is that the efficiencies you see generally flow through a company that's got fixed out. So for us, we want to make sure, a, our contract manufacturers have more capacity than we believe we're going to need. Because we're going to leverage that to try to get even more volumes. So hopefully, that makes sense. It's not about exit velocity is as much as it's about take market share now, and we can do it.

[Unknown Analyst]

Yes. Okay. So what would be your utilization rate at the year-end of the capacity?

[John P. Hoffman, Executive Chairman & CEO]

Difficult to say. And let me just explain why. I'll give you an example. Those a factor in Korea [Indiscernible], they're still trying to figure out what the equipment even distribution looks like, who's going to get what market share in at your deposition, et cetera. So we're dependent on that, right, because we have market share with all of the equipment companies for good or for bad. And so once those decisions they made, we need to be prepared to execute on it. So those -- as I said, our lead times were 12 weeks. So we don't see that yet. All we need to know is we need to be ready for it. We know that there's a big growth coming, and we want to get as much of it as we can.

[Operator]

[Operator Instructions] There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.