Pivotal Systems Corp

ASX:PVS

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to the Pivotal Systems Third 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]

Thank you, Cameron. I’m pleased with the third quarter performance for Pivotal Systems with notable highlights relating to, first, the establishment of a Scientific Advisory Board and appointment of our founding member, signing 2 memorandums of understanding with South 8 Technologies and Forge Nano, recorded unaudited revenues of $7.4 million, representing the sixth consecutive quarter of revenue growth for Pivotal.Solid improvement in gross margins both sequentially and over the prior corresponding period, or PCP, continued progress on the development program with a leading Japanese original equipment manufacturer and a leading U.S.-based original equipment manufacturer for atomic layer deposition, or ALD. And completion of a $6.7 million share placement and closing cash of $7.4 million.I’d like to begin today’s call by reiterating the pace of the digital transformation brought on by both the COVID-19 pandemic as well as the worldwide economy and the resulting in seismic increase in the demand for semiconductor chips, which positively impacts the equipment manufacturers as new fabs are being built and new process tools are being installed. For Pivotal, we continue to believe that the long-term durability of the current upcycle in semi which we will see increased demand for Pivotal’s products and services moving forward continues.When these organic aspects are overlaid with new government spending initiatives in Korea, Japan, the United States and Europe to secure or expand domestic manufacturing capacity, the future indeed looks very bright for our business. In the short-term, we are battling supply chain constraints given the levels of demand. However, our team has done a commendable job in navigating these headwinds and delivering on revenue growth for the company. These supply chain bottlenecks, perhaps ironically, relating to the supply of semiconductor chips are expected to normalize in early 2022.Just last month, semi provided an updated forecast of the global fab equipment spending, which is anticipated to exhibit growth of 44% in 2021 to $90 billion and a further 8% growth in 2022 to near $100 billion, driven by the digital transformation and secular technology trends. This number is expected to grow by another $100 billion into the 2030s.Before I provide product and operations comment, I would like to update and announce to our investors a number of highly strategic corporate initiatives for the company relating to the commencement of strategic execution in regards to new business opportunities across several new verticals and the establishment of a very important scientific advisory board for the company. At the first half 2021 results, Pivotal announced new strategic initiatives to develop new market opportunities for the company’s leading-edge flow technology based on the continued success and growth of our products within the semiconductor industry. Across a number of new verticals, including clean energy and batteries, health care and life sciences, there is increasing demand for better flow control to improve manufacturing efficiency.In the third quarter of 2021, the company announced the signing of its first MOU with South 8 Technologies. South 8 Technologies has developed a breakthrough new liquefied gas electrolyte chemistry for electrochemical energy storage devices, including lithium batteries and electrochemical capacitors. The 2 companies will collaborate on the integration of next-generation gas load controllers optimized for liquefied gas electrolyte research and production, which is intended to underpin a long-term commercial relationship between Pivotal and South 8 technology.In addition, the company has now signed a second MOU with Forge Nano, a company whose breakthrough ALD technology is revolutionizing material design and creating a paradigm shift for numerous applications, including lithium ion battery component manufacturing. Under the terms of the MOU, Pivotal Systems and Forge Nano will explore implementation of Pivotal’s advanced flow control systems into Forge Nano’s powder ALD systems for high-performance next-generation lithium-ion battery materials, which pivotal anticipates on opening a new and large potential market for our GFCs.Pivotal has already provided gas flow controllers to Forge Nano for research and testing purposes as the initial phase of a commercial relationship. The party’s initial view is that Pivotal’s advanced gas flow controllers have the potential to provide significant performance improvements and fine control of sensitive processes to Forge Nano’s equipment. We are very excited by these 2 new opportunities for Pivotal with further MOUs expected in the future, which we expect will lead to binding agreements over time.In September, Pivotal established a new scientific advisory board that will consist of internationally recognized experts who will bring depth and experience as well as leadership to the company. Pivotal’s new advisory board will institutionalize its approach to seeking expert external perspective on strategic initiatives. Pivotal’s research and development efforts will leverage the scientific expertise and deep business insight from this board of the distinguished experts who have deep content knowledge in areas which Pivotal is developing increased commercial presence as the company pursues additional commercialization opportunities in semi as well as adjacent markets.Pivotal appointed Professor Stacey F. Bent as the founding member of our advisory board. Investors can read about Professor Bents very deep and considerable scientific insights and expertise in today’s release. Professor Bent is one of the world’s leading experts on atomic layer deposition and is the Jagdeep and Roshni Singh professor at Stanford University.At Pivotal, Professor Bent’s expertise will help guide research and development programs in ALD and related fields, including electronics and renewable energy. Additional members of the advisory board are expected to be appointed prior to the end of 2021. From a capital perspective, during the quarter, Pivotal completed a $6.7 million U.S. placement representing AUD 9.1 million to new and existing institutional investors, including cornerstone commitments from the company’s largest Australian institutional investor Viburnum funds, along with participation of the company’s second largest shareholder in the United States, Anzu Partners, LLC.Fundraise and the majority will be deployed to fund working capital in inventory to meet expected demand. As Ron will highlight, we have already commenced deploying these funds into the business. Turning now to products. During the quarter, the company passed a major milestone in the development program with the demonstration of the industry’s fastest and highest gas flow position-based control valve. This valve contains Pivotal’s proprietary nanometer level position control and achieves turn-on times of less than 10 milliseconds, making it the fastest and most accurate flow control valve available.I would remind investors that Pivotal standard GFC used for plasma etching as a turn-on and turn-off times that are in the range of 50 milliseconds. Pivotal’s new valve is a result of device manufacturers and process equipment companies advanced requirements versus competitive pressure. This new valve is at the heart of Pivotal’s next-generation high-speed valves needed for leading-edge etch, atomic layer etching or ALE, and deposition, atomic layer deposition, or ALD process development. This valve is covered by all existing pivotal patents and is leveraging Pivotal’s best-in-class software.The remote electronics GFC continued to increase in its adoption, with sales up 82% from Q3 2020 to $0.15 million. In addition, the company shipped CFC’s operations at temperatures up to 70 degrees C that do not require remote electronics. These GFCs, which will find immediate use in very challenging high-temperature gas applications to contain new electronics an advanced high-temperature piezoelectric actuators designed to operate at these elevated temperatures. This demonstrates both unique as well as industry-leading capabilities.Turning to operations. Our third quarter full-time head count was 45 employees compared to 42 employees at the end of the second quarter. As with previous quarters, in response to increased customer demand, Pivotal continued to increase production as required to remain pace with industry growth and the company’s China and Korean-based contract manufacturers are capable of operating at a capacity of 4,000 units per month based on a 5-day 2-shift production. This flexible manufacturing model enables Pivotal the ability to react to supply chain disruptions that may emerge. Our backlog, which represents confirmed orders not yet shipped at 30 September was $2.6 million versus $3.9 million at the end of 30 June 2021. The reduction reflects the pace of demand for Pivotal’s products currently being experienced.I would now like to hand the call over to Mr. Ron Warrington, Pivotal’s Chief Financial Officer, for a breakdown of our financial performance for the third quarter. Please go ahead, Ron.

[Ronald C. Warrington, Chief Financial Officer]

Thank you, John. I remind investors all financial figures provided are provided in U.S. dollars unless otherwise stated. The company’s cash position at 30th of September 2021 was $7.4 million. Cash receipts from customers for the period were $5.7 million, down 23.3% from $7.4 million in Q2 2021. Cash payments for product manufacturing were $6 million, up 4.6% from $5.7 million in Q2 2021.Pivotal will continue to invest in product development with $0.35 million in capitalized costs incurred during the quarter. Total operating cash flow for the quarter was $3.3 million. During the quarter, the company made salary and payments of $0.32 million to related parties and their associates, including executive directors, salary payments, nonexecutive director fees and fees from consulting services provided by a director-related entity.Turning now to revenues and margins. Pivotal’s unaudited Q3 2021 revenue of $7.4 million was up 1.6% sequentially over Q2 2021 and up 26% on prior correlated corresponding period, driven primarily by revenue from Taiwan and China, which was up $0.61 million or 125% from Q2 2021 and 121% on the prior corresponding period. And the Korean upgrade and repair center in Q3 2021 revenues were up 18% from Q2 2021 to $0.39 million. Pivotal has now recorded 6 consecutive quarters of revenue growth. Unaudited Q3 2021 gross margins of 24.4% were up from reported gross margin of 8.7% in the prior corresponding period and up 13.1% in Q2 at 2021.Gross margins were favorably impacted by volume discounts from our contract manufacturer in China, while also offset by expedite charges related to supply chain pressures from commodity parts, namely printed circuit board components. Pivotal expects to continue to achieve similar volume discounts from the company’s contract manufacturer in the future. We expect to see additional improvements in our gross margins in Q4 2021, with investors reminded that our longer-term goal is to achieve sustained product development -- product margins of 35%. I’ll now turn the call back to John. Thanks, John.

[John P. Hoffman, Executive Chairman & CEO]

Thanks, Ron. Pivotal Systems continues to meet its product and growth objectives for 2021 with client-led new product development efforts as the key catalyst for our long-term growth opportunities. While it’s important to note that the underlying drivers for demand for wafer fabrication equipment remain unchanged and is expected to show significant growth throughout the remainder of 2021 and 2022, supply chain bottlenecks do persist. However, we do believe that Pivotal has navigated these supply issues better than our competitors who have been progressively pushing out their lead times to customers.Pivotal does express caution and its ability to meet anticipated demand and timing of shipments to the customers in the fourth quarter. However, Q4 2021 revenues are expected to show an increase on our Q3 results and thereby delivering strong FY 2021 sales performance overall for the company. I’ll now hand the call back over to Cameron for the question-and-answer session.

[Operator]

[Operator Instructions] We do have our first question. This comes from David McFadyen at Shaw and Partners.

[David McFadyen, Analyst]

Very quick question around the operating cash flow figure, the $3.3 million outflow. The -- it looks like the admin and sort of corporate staff costs have increased sort of sequentially versus the average of the last 3 quarters. Do you have any sort of commentary you can provide around that?

[John P. Hoffman, Executive Chairman & CEO]

David, I’ll try and then, of course, Ron’s here to back me up. As you know, we’ve discussed at the end of the first half that we were beginning to explore a potential joint listing on NASDAQ. And so as part of that exploration, we’ve been looking at that not only the U.S. listing activity as well as NASDAQ SEC law, rules, timing, etc. So there’s been some expense around that, that we’ve been taking in the period. It’s been incurred as opposed to any other way. And that would be the primary area for this in terms of the overall spend, although we did complete successfully our audit with BDO. That’s probably a little bit of that expense. Ron, I’ll defer to you.

[Ronald C. Warrington, Chief Financial Officer]

That’s primarily it’s -- those are the costs that have been bumped up. They’re likely to come back down again, but I think that’s the primary drivers.

[Operator]

[Operator Instructions] Currently showing no further questions.

[John P. Hoffman, Executive Chairman & CEO]

Well, thank you, Cameron. I wish to thank everyone for joining the call today and for the questions, David. We look forward to updating the market with our progress during the remainder of FY 2021, and thank you all. Goodbye.

[Operator]

Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may now disconnect your lines.