Pivotal Systems Corp

ASX:PVS

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to the Pivotal Systems Second Quarter Cash Flow Report 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 second quarter activities in Appendix 4C cash flow report. I'm joined today by Michael Bohn, our acting CFO; and Michael will give an update as soon as I end my portion. It's been a busy quarter for Pivotal as we continue to leverage the significant growth in the wafer fabrication equipment market. 2021 is expected to show remarkable growth for the remainder of the year and well into 2022 as the demand for semiconductor chip manufacturing and integrated circuits continue to accelerate. I remind investors joining us on today's call that all amounts are expressed in U.S. dollars unless otherwise stated. As Pat Gelsinger, CEO of Intel, put it last week on their quarterly calls to investors, there's never been a more exciting time to be in the semiconductor industry. The digitization of everything continues to accelerate, creating the vast growth opportunity for us, our customers across both core and emerging business areas. On July 13, 2021, semi in industry organization supported the overall wafer fabrication equipment market or WFE, encompassing the bulk of Pivotal's original equipment manufacturer, OEM customers, continues to experience strong growth with recent analysis by semi indicating WFE growth of 34% versus the prior period to approximately USD 82 billion in calendar year 2021 and an additional 6% growth in 2022 to USD 87 billion. These are unprecedented industry growth rates off a progressively higher base. The second quarter of 2021 once again highlighted the growth in Pivotal Systems business as we increased sales into leading equipment manufacturers achieved solid growth in Korea and Taiwan, along with continued growth of Pivotal's GFC upgraded repair center in Korea. I will note that Q2 revenue was $7.3 million and is up 15% sequentially and up 27% on the prior corresponding period. Our first half of 2021 unaudited revenues of approximately $13.6 billion were up 35% on the previously reported period. These are solid numbers, and we expect further revenue growth in the second half and again confirm the company's anticipated revenue growth between 35% and 45% for the full year, representing revenues of $30 million to $32 million. Most importantly, our standard etch GFC continued to take market share in the second quarter as more original equipment manufacturers transition over to Pivotal's industry-leading flow control technology. We see that trend continuing in the second half of 2021. Some of our second quarter highlights include multiple repeat orders for the standard GFC with a leading atomic layer deposition or ALD OEM. Taiwan-based IDM record order is up 52% from Q1 2021. Remote GFC order is up 38% from Q1 2021 with a leading Japanese original equipment manufacturer. We received a further progress payment of $180,000 for advanced atomic layer deposition GFC milestone achievement under the development agreement signed with a leading Japanese original equipment manufacturer back in September of 2020. Our unaudited Q2 2021 pro forma gross margin of 29.9% were up 5.5% from the prior period and down slightly from the 40.2% in Q1 of 2021. Backlog or confirmed orders not yet shipped at 30 June was $3.9 million. The Korean upgrade and repair center in Q2 2021, revenue was up 60% from Q1 to $400,000. Standard GFC for etch applications continued its qualification with a leading Japanese equipment company. And during the period, we maintained all of our manufacturing activity in China, Korea and the United States. In the area of products, we will continue to progress on the development program with a leading Japanese equipment company and a leading U.S.-based equipment company for ALD products. Our engineering team passed a major milestone in the development program with the demonstration of the industry's highest flow piezoelectric positive position control valve. This valve contains Pivotal's proprietary nanometer level control and achieves turn on and turn off times of less than 10 milliseconds, making it the fastest and most accurate ALD valve available. Accordingly, the company received the additional milestone payment in the second quarter. Also, the company shipped GFCs for operations and temperatures up to 70 degree Celsius without requiring remote electronics. These GFCs, which will find immediate use in very challenging high-temperature gas applications, contain new electronics and the Pivotal supply piezoelectric actuator designed to operate at these elevated temperatures. The qualification of Pivotal standard GFC for etch applications at the leading Japanese equipment company remains on track to commence tool testing during the second half of 2021, with first commercial sales anticipated sometime thereafter. At this time, I'll pass the it over to Mr. Michael Bohn to discuss the operations and finance.

[Michael Bohn, Corporate Controller & Acting CFO]

Thank you, John. We are pleased to report our appendix 4C quarterly cash flows for the period ending March 31st 2021, and in addition, the company's unaudited revenue and gross margin position over the same period. All amounts I'm about to report are in U.S. dollars unless otherwise stated. Company's cash position on June 30, 2021, was $5.5 million on a pro forma basis following the recent $6.7 million. Capital raise was about $12.7 million. Cash receipts from customers for the period were $7.4 million, up 5% from USD 7.1 million in Q1 2021. Cash payments for product manufacturing were USD 5.7 million, down 14.2% from $6.7 million in Q1 2021. Pivotal continued to invest in product development with [ $325 million ] in capitalized costs incurred during the quarter. Pivotal's reported gross margin performance of 13.1% included onetime charges for closing the company's Korea legal energy and is no longer required and our material expedite charges to our second quarter's premium circuit board and associated components. Proforma gross margin after adjusting for these events was 29.9%. Pivotal continues to work with its key suppliers and customers to minimize any potential disruptions to component supply, which have included the advanced preorders of certain components. We will continue to keep investors informed as we navigate the second half of 2029. Now I'll turn you through our operations update. Our second quarter full-time headcount was 32 employees, down from 45 at Q1 2021. In response to increased customer demand, Pivotal continued to increase production to maintain the pace of effective industry growth. The company's China- and Korea-based contract manufacturers continue to maintain a capacity of 4,000 units per month based on 5-day, 2-ship production. As commented at Q1 2021, Pivotal's [ point ] capacity is expected to be sufficient to reap 2021 expected GFC demand from customers. Finally, supply chain shortages continue to emerge as the industry ramps up CapEx spending. Pivotal has been dealing with various shortages in the first half of 2021, and expect to continue shortages to emerge going forward. While these shortages have been effectively managed in the past, Pivotal will continue to monitor and manage to the best of its ability going forward. All in all, we are pleased with our business performance, the level of flexibility in our manufacturing and the efforts of all of our valuable Pivotal team members. At this time, I will hand it back to John.

[John P. Hoffman, Executive Chairman & CEO]

Thanks, Michael. And this -- the appendix posted quarterly cash flow was for the period ending in June to be consistent. Overall, we're pleased with the company's performance in the second quarter, and we expect continued improving conditions in the second half of 2021 as the semiconductor industry moves forward. We see second half revenues to show half-on-half growth. And overall, we see the company's 2021 being between 35% and 45% growth. This is primarily driven by market share gains in our standard etch products in Korea, Taiwan and China. And as mentioned earlier, there really hasn't been a more exciting time to be operating within the semiconductor industry. The confluence of so many positive tailwinds continue to boost both our customers and Pivotal Systems. We're excited by what the remainder of 2021 holds and look forward to updating our investors on our progress. Following the company's recent $6.7 million share placement, we are also well funded to meet the expected demand in Pivotal's products and services going forward. At this time, Michael and I will be happy to take any questions.

[Operator]

[Operator Instructions] Our first question comes from David McFadyen of Shaw and Partners.

[David McFadyen, Analyst]

I just wanted to ask a couple quick questions. Firstly, on gross margins, just the difference between that pro forma figure and the reported figure. If you could give any sort of color around maybe the split between the sort of impact of the Korean legal entity closing and then the expedite charges and then also on maybe the extent to which those latter charges might continue in the current quarter.

[John P. Hoffman, Executive Chairman & CEO]

David, thanks, and appreciate the questions. When we closed the Korea legal office, it was really a function of negotiating new contracts with our CM in Korea that does the software loading as well as our rep there for sales and also the refurb center there. And what we were able to do is basically eliminate the need for Pivotal Systems Korea or PSKL in the past. So what we ended up having to do there is we moved a number of Pivotal employees off of our legal entity into the CM as well as the manufacturer's legal entity. And so we have some onetime charges there on people and moving people, et cetera. And then we also basically turned over at a sale of a portion of the equipment on the line there, both in the repair center as well as the manufacturing center. And so there's a onetime write-down of residual values. So the net of that is it's not recurring. The good news is those are all actions that are designed to continue to improve our gross margins and also limit the tax exposure for Pivotal in Korea. So that was our plan, and I think the ops team did a really solid job getting it done. And on the expedite fees, I would suggest that was probably a couple of hundred thousand dollars of the problems that we faced in the second quarter. That's going down, but it's also unpredictable. We were talking with Kevin Hill, our Operations VP, about this. And I think he had indicated here somewhere on the magnitude of 14 surprises that he and the supply chain team were dealing with during the quarter. And while we were very effective overall, taking them down as they showed up, what would happen is that the Korean line or the compart line in China would go down for a day because we are waiting for a specific group of components. So those type -- onetime cost things did slow us down, and it caused us that to expedite materials. While we see that continuing, we saw during the second quarter that the number of events were going down, right? The number of surprises we were seeing from our supply chain were ratcheted down. So our expectation is, is that we'll continue to operate down that curve. But as I saw, I read today, I believe even Tesla right now is starting to see supply chain shortages. There was an article in the Wall Street Journal about that. So we have to be always cautious, and I hope I'd given you enough color and context to better understand that. Is that good?

[David McFadyen, Analyst]

Yes, absolutely. Yes. No, that's very, very helpful, and that touched on the sort of the supply chain comment you also made in the commentary this morning and then a little bit of a left field one. But in the FTE decline going down to 42, I noticed that I think you guys have been 45 flat to the last, it seems like, 2.5 years. So presumably, one of those [ focals ], et cetera. Is there anything else interesting around that number?

[John P. Hoffman, Executive Chairman & CEO]

Yes. Could you go back a little bit on that? I missed it.

[David McFadyen, Analyst]

Oh, sorry, sorry. The full-time employee is declining from 45 to 42.

[John P. Hoffman, Executive Chairman & CEO]

Oh, got it. Yes. Yes, we got a couple of folks -- yes. No, we've got a couple of folks that we're looking at in one area, right? We're working on replacing dentists because of this medical issue. So that was one of them. But we've also had 2 engineers that have decided to do different things. We've actually had a major hire we didn't talk about. Derek Brodie has joined Pivotal as the VP of Worldwide Field Operations after a 25-plus-year career in applied materials. And so what we've been seeing is that we continue to ratchet up our core talent because all of our executives and senior managers are taking on more and more responsibility. And also 2 of the headcount, remember, we moved out of Pivotal into lower-cost areas because of shutting down offices and the like.

[David McFadyen, Analyst]

Perfect. And it'd be remiss not to ask, but you're not going to give me anything on a potential U.S. listing, are you?

[John P. Hoffman, Executive Chairman & CEO]

We broke up, but I think you were asking about the potential U.S. listing.

[David McFadyen, Analyst]

Yes.

[John P. Hoffman, Executive Chairman & CEO]

Yes. Yes, so we've been doing a lot of work lately, and I've been doing a lot of presentations. I did the Roth conference in London. I did the Summer Solstice conference in the U.S. And what we're finding is that there's a number of European and U.S. investors that are super interested in our story and what we're trying to accomplish, and they've given me a lot of feedback around how it would be nice if we were joint listed so they could achieve better access to the stock. So we're exploring that. But as I said in the release, we have no intention of leaving the ASX. So we're trying to figure out if, in fact, we could get potentially new and excited investors around semi because, as you know, in the United States, the markets are just off the wire in this area. So that's what we're investigating.

[Operator]

[Operator Instructions] There appear to be no further questions at this time, and thank you for joining us. That concludes today's call, and we will speak to you shortly. Thank you.