Pivotal Systems Corp

ASX:PVS

Earnings Call Transcript

[Operator]

Thank you for standing by, and welcome to the Pivotal Systems Third Quarter Investor Call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Mr. Kevin Hill, CEO. Please, go ahead.

[Kevin Hill, executive]

Thank you, Melanie. Joining me on the call today is Ron Warrington, Pivotal's Chief Financial Officer. Today, I will share Pivotal's third quarter 2022 results with you. Please note that all figures on today's call are expressed in U.S. dollars unless otherwise indicated.

I would like to commence the call today with the key messages of our third quarter ended September 30, 2022. Unaudited Q3, 2022 revenue of $4.0 million was constrained by semi component shortages and was down 26% sequentially over the last quarter and down 45% on the prior corresponding period or PCP. However, our unaudited gross margin significantly improved to 25.2% from minus 7.3% in Q2, 2022. Our operating expenses driven by management directed spending controls decreased by 22% to $3.3 million for Q3, 2022 versus $4.2 million in Q2, 2022 and significantly down from the high of $5.0 million in Q1 of 2022.

Backlog, which represents confirmed orders not yet shipped as of September 30, 2022, was $4.6 million versus $5.8 million in Q2, 2022. Overall, we saw a disciplined approach to cash flow management for the quarter with net cash flows from operations of minus $1.8 million versus minus $3.3 million in the PCP, an improvement of 24% and a 58% improvement on Q2, 2022. Our cash balance at September 30, was $3.8 million. On September 30, our full-time head count was 46 employees versus 45 employees during Q2, 2022. Unfortunately, the company continued to encounter significant upstream supply challenges in Q3, the most significant impediments for the company since the supply chain crisis began. The company was impacted by scarcity as well as exceedingly high pricing for certain commodity chips. This impacted both our sales as well as our financial performance for the period.

Turning to the product update, I would now like to provide you with a brief update on the activities of the quarter as they relate to our portfolio of GFCs. The following are the top 3 key advancements achieved during the quarter. First, Pivotal furthered our atomic layer deposition product development with a leading Japanese OEM to the next stage, involving integration of Pivotal flow controllers on the OEM's wafer processing equipment. Second, Pivotal was selected by a major Korean IDM to furnish gas flow controllers to control flow rates or etch applications. And then third, Pivotal qualified by a major North American IDM to provide GFC replacements for incumbent silane flow controllers on installed base deposition equipment.

I would now like to comment on the industry outlook for a moment. After Q3 close on October 7, 2022, the U.S. government announced new export regulations that prevent U.S. OEMs from supplying certain Chinese chipmakers with wafer fabrication equipment as well as related parts and services used in the production of certain advanced chips. This has resulted in at least one revision in revenue outlook for a leading U.S. OEM. As an upstream supplier to wafer fab equipment or WFE OEMs, Pivotal could see modification to demand as implementation begins, but does not foresee this as a significant long-term negative impact to its markets for 2 reasons. First, Pivotal's largest served market are the Korean memory makers will only stand to benefit from this regulation. And second, the leading multinational manufacturers of memory in China are expected to successfully secure annual licenses or find a pathway to continue normal operations.

Furthermore, beginning on October 12, 2022, following the leading U.S. OEMs' reduced near-term outlook, other wafer fab equipment OEMs, IDMs and industry analysts have stated or signaled expectations of significant contraction in WFE spending in 2023. This is driven by the macro forces of inflation, rising rates, COVID headwinds, geopolitical instability plus the micro force's team in weakened consumer demand for chips, especially in the memory segment, a leading indicator for the industry. As we mentioned, the company is carefully monitoring and assessing this shift in outlook and adapting our businesses accordingly.

I would like to transition the topic to a breakdown of our further financial performance for the second quarter. Ron?

[Ron Warrington, executive]

Thank you, Kevin. Again, I would like to remind investors that all financial figures provided are in U.S. dollars unless otherwise stated. The company's cash position at September 30, 2022, was $3.8 million. The decrease is largely related to lower-than-anticipated sales as integrators pushed out over $1.2 million of orders in Q3 to Q4 to balance their own inventory requirements. As we disclosed today, revenue was mostly impacted by supply chain shortages. Several semiconductor components supplied to an upstream contract manufacturer and printed circuit boards did not meet the rigorous specifications and quality standards of Pivotal's precision manufacturing. As a result, those components were rejected after thorough screening. Replacement parts arrived too late in the quarter to complete shipment of the backlog in Q3. The shortage was resolved and products shipped during the month of October.

Combination of [Technical Difficulty] cash position, which was partially offset by improved gross margins, lower operating expenditures and improvements in working capital, particularly inventory. Cash receipts from customers for the period were $5.2 million, a 6% increase compared to Q2, 2022. Cash payments for product manufacturing were $3.5 million, down from $6 million in Q2, 2022. The primary driver was a decline in customer receipts. The decrease in payments for product manufacturers reflected the lower level of manufacturing activity during the period as the company focused on releasing cash operations to be prudent inventory management and a focus on backlog shipments as well.

Pivotal continued to invest in product development with $1 million -- $1.1 million in costs incurred during the quarter. In these difficult times, the company continues to monitor and manage its cash position with due consideration of the industry's slowdown. Pivotal has maintained a tight focus on expenses, cost containment efforts to date have improved our cash runway and remain at the forefront of management's attention during this volatile period.

I'll now turn the call back to Kevin.

[Kevin Hill, executive]

Thank you, Ron. Turning now to Pivotal's outlook. In the near term, volatility in component supply and gas panel integrator demand will continue to be evident, but Pivotal has adjusted cost infrastructure, reduced inventory and adjusted supply chain to respond to this volatility. Despite the near-term industry outlook, Pivotal remains well positioned with a portfolio of robust product lines and growing applications at the leading-edge geometries as well as the capability to scale as demand increases.

That concludes the formal aspect of today's call. I would like to now hand over to the operator for Q&A. Melanie, please go ahead.

[Operator]

Thank you. [Operator Instructions] We are showing no questions at this time. I'll now hand back to Mr. Hill for closing remarks.

[Kevin Hill, executive]

Thank you, Melanie. I wish to thank everyone for joining the call today and for your questions. If they come in online or if they come in afterwards, we'll be happy to answer them. We look forward to updating the market with our progress during the remainder of the 2022 financial year. Thank you, and goodbye.

[Operator]

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