ALEXANDRIA, VA (April 21, 1998)/FOOLWIRE/ -- Electronic component manufacturer Innovex reported second quarter 1998 earnings of $4.26 million, or $0.28 per share, on revenue of $25.1 million. These numbers met analyst estimates.
As predicted, the quarter was down from the prior year due to the changing and currently weaker dynamics of the disk drive industry. For the six months just ended, Innovex earned $11.5 million on $58 million in sales, compared to net income of $16.3 million on $67 million in sales in the first half of the prior year. Despite the lower numbers compared to last year, the company is fairly happy with its performance in a difficult industry environment.
Conference Call. Mr. Thomas Haley, CEO and Chairman of the Board, opened the conference call by stating, "We believed that this quarter would be difficult, and it was, though we believe that we still performed well in light of the situation." Revenues declined 34% from the prior year and net income dropped 42%. Despite lower sales, the company achieved gross margins of 64% and operating margins of 24%. These are strong margins, but they are lower than last year.
Gross margins declined primarily due to lower sales volume in the company's main lead-wire operations. As a result, net margins were 17% and are 20% year-to-date, down from last year when the profit margin was closer to 25%. However, "The outlook for the remainder of the year is somewhat positive," the CEO stated. Innovex is "pleased that order input is up slightly, and that the industry has a much more favorable outlook towards what's happening going forward." Mr. Haley then said, "As a consequence, we're optimistic that this will be the bottom quarter in terms of operations for us."
He also stated that Innovex has a strong balance sheet and has the means to take its desired business initiatives forward. On that front, the company has entered an agreement in principle to sell its medical products division, InnoMedica. After analyzing this business segment and looking closely at the investments needed to achieve the division's goals, Innovex decided that further investments were not in the company's best interest. This division should be sold during the current quarter.
Meanwhile, Innovex's Litchfield division continues to make progress. The division is ahead of plans in its throughput and yields for its key operations, and the division is also "making a determined effort to develop an automatic attachment for [Innovex's] HIF suspension product." Mr. Haley stated, "There is very strong customer interest in our HIF product and in our other certain chip packaging products. We anticipate that certain production ramps [for new chip packaging] will start before the end of the year."
Question and Answer Session
Question: Could you break out Litchfield revenues vs. Precision Product's revenue?
Answer: Litchfield's revenue was $5.5 million for the quarter. Precision Products made up the bulk of the remaining revenue (which would be around $20 million).
Question: In what direction has lead-wire pricing gone? Down, up, or flat?
Answer: Pricing has held up relatively well in light of the demand situation. ASPs (average selling prices) have stayed in the range that Innovex expected. Volume production should trend upward from here, as it did during the end of the last quarter, while pricing should remain stable.
Question: Can you characterize the acceptance of HIF in relation to the competition? [HIF is "head interconnect flex," Innovex's new disk drive technology.]
Answer: HIF has been very well accepted, Innovex continues to ramp up production, and the company has reduced HIF prices and improved its production yield greatly throughout the quarter. The pricing and performance advantages of HIF that Innovex believed were true are holding true. HIF is in a drive (Seagate's Cheetah disk drive) that is performing very well, and the pricing issue has generated much renewed interest in HIF because Innovex has shown that it can reduce prices on schedule. HIF is priced more favorably compared to all of the competitors' products, and yes, the decline in the pricing of HIF was absolutely in Innovex's plans.
Question: Can you share your main customers for the quarter?
Answer: As expected, Seagate, Read-Rite, and Yamaha are the three largest customers, though not always in that order. The next tier customers include Applied Magnetics, Quantum, and TDK.
Question: What was the net contribution or drag made by InnoMedica last quarter, and can you provide more details on the division and its impending sale?
Answer: InnoMedica made some money this quarter, but Innovex looked at the future projections and the cost involved and -- compared to the potential of its other businesses -- decided that InnoMedica wasn't worth further investment. Anyway, the division was breakeven or even added a penny or two in the last quarter, while last year the company lost a few cents per share. For the past six months it lost money. Revenue wasn't ramping up quickly enough to continue funding it. The net asset value of the division is slightly above one million dollars. The gain or loss on the sale of the division should be somewhere around that area -- not very significant.
Question: What is the inventory position of your customers?
Answer: Innovex believes that it's seeing reduced inventories at significant customers, though each one is different, of course.
Question: What is your production volume in the wire assemblies and the HIF?
Answer: Traditional wire production for the quarter as whole was less than 7 million units per week, on average, but at the end of the quarter it was above 7 million and it should continue to be above that as Innovex moves through fiscal Q3.
HIF production ramped steadily throughout the quarter, and though it didn't quite reach 1 million units per week, it was getting close to that at the end of the quarter. While MR (magneto-resistive recording heads) accounted for 83% of Innovex's overall wire business for the quarter.
Question: Mr. Haley mentioned chip packaging business opportunities. Does Innovex have customers lined up for this?
Answer: "Yes, lined up absolutely, but we can't give out names." Innovex is in qualification and anticipates a ramp-up to production towards the end of the calendar year.
Question: Is Innovex adding any equipment at Litchfield?
Answer: A couple of million dollars worth of equipment that had been order will be put into place during July. Nothing significant.
Question: Should gross margins improve as sales increase?
Answer: Primarily it was lower sales volume that lowered margins, though there was some pricing pressure. But yes, gross margins should improve with volume.
Question: Was there any shift in order volumes from top customers?
Answer: That shifts every month, but some of the smaller companies have been increasing orders in relation to other larger customers.
Question: What might your product mix be in two years?
Answer: Tomorrow, April 22, Innovex is presenting its strategic long-term plan to the Board of Directors, and it hopes to share this information with shareholders in the near future. Innovex can't do so until the Board approves and finalizes the plans. Also, for competitive reasons, Innovex will not share everything.
Question: $5.5 million in sales during the quarter was at Litchfield... please break out these sales.
Answer: 40% was disk drive related, but not all HIF, and about 30% was medical products, while the remaining 30% was other flex circuit business. All of these sectors are growing, disk drives the fastest, but the other sectors should grow as fast or even faster by the end of the year. So, all of these product areas are growing. (HIF production was at 100,00 to 200,000 units per week at the beginning of the quarter, and is close to 1 million per week now.) Finally, the 30% of sales that came in the medical arena will NOT disappear with the sale of InnoMedica. This is business that isn't related.
Question: What production qualifications has Innovex earned?
Answer: Innovex is qualified in as many as ten programs and is in various stages of production in three to four programs and does have multiple customers. Innovex has five programs that add up to over one-half million units a week, while some single programs add up to more. The company wants high volume programs, naturally, not several different programs that are lower volume. So, Innovex is qualified in many programs, but rather than strive to be qualified in dozens of programs, the company plans to focus on high volume programs.
Question: Yields are up nicely on HIF, you said. Where are they now and what is your target and how close are they to your target?
Answer: "Our yield target is 100%. We're not there yet!" (Laughs.) Innovex aims to be at 90% by the end of the calendar year. It is currently 10% to 20% above where it aimed to be at this time, so the company is happy.
Question: What is the HIF pricing advantage?
Answer: The HIF pricing differential is in the 20% to 30% range, Innovex figures, and HIF's price has been declining more rapidly than the cost of competing technology.
Question: What were HIF unit shipments per week and what is the target for the end of the year?
Answer: This is unclear as forecasts shift month by month, so Innovex can't give a long-term target. The company plans for more capacity in the July and August time frame. Innovex should be able to produce up to 5 million units per week by then, though it won't need that much capacity. It can't predict the long-term production, though. As said, HIF was nearing 1 million units per week at the end of the second quarter.
Question: What are your thoughts on producing product overseas and what percentage of production costs are labor related?
Answer: Innovex already has three production units overseas, two in Thailand and a newer one in China. Much of Litchfield's production will probably move to Asia in the very near future. Innovex has up to 3,000 employees in Asia, and while the technical and primary operations are done in the U.S., offshore production makes sense for a few reasons -- namely, the bulk of Innovex's customers are in the region and the production costs are lower.
Question: What's the status of Iconovex, the software division?
Answer: This division continues to work to meet the specifications of customers and hopes to add to its customer portfolio soon. It also hopes to receive meaningful revenue by the end of the year. Iconovex has a customer that is set to use the software product when it's ready, but revenues were virtually nil for the quarter. The target for the use of the product and resulting revenue is July and August of this year.
Question: What was your peak unit production on lead-wires last year and what is the projected ramp-up of business now?
Answer: Innovex was approaching 12 million units per week during the peak in June of last year. The increase in business now should grow at about the same rate as the overall industry. Innovex projects a 5% to 10% per month improvement in volume, but there is not much visibility. Customers are varying orders as needed. Innovex currently has order numbers up to June and sees 5% to 10% growth per month, but customers are changing their orders on short notice. So, 5% to 10% per month, but numbers can change quickly.
Question: Can you summarize what happened in the past six months or so since the peak in business?
Answer: Many things happened at once. There was over-supply in the disk drive industry, which was exacerbated by the Asian problem, and then sales in the PC market declined over the time period for the first time in a long while, and finally changes in inventory practices at disk drive manufacturers changed order rates (companies are giving shorter lead-times and carrying much less inventory). But Innovex believes that the normal demand and growth in the disk drive industry, which has historically been fairly predictable, will again take root shortly.
Question: Regarding the new inventory practice of build-to-order, how much of that is affecting current orders? And in selling InnoMedica, are there any acquisitions coming in the next six months or so in the areas that you concentrate on?
Answer: Build-to-order inventory policies will continue, of course, but order levels will stabilize and we hope that they are close to stabilizing now. The company doesn't know, though, and can't know. As for acquisitions, Innovex can't answer that question. The company is always looking and interested -- Litchfield has been a great acquisition.
Question: Regarding the ramp-up of chip packaging products towards the end of the year, what are Innovex's competitive advantages and expectations?
Answer: Innovex's advantages are in its high technology flexible circuits -- which offer tight pitches, tight lines and spaces, alongside the fact that the company can offer product in high volume (affordably) from its new factory. There is only a select group of companies in the world that can do this, but Innovex believes, thanks in part to production in Asia, that it has the lowest cost.
Chip packaging is a very important part of the company's future. The semiconductor flex circuit packaging industry should grow 35% annualized over the next five years and Innovex is in a position to take advantage of this. The company should see a very solid ramp-up over the 1999 calendar year (Innovex's "turning point" in this business) and then over the next five years as well. Margins should be very favorable (in the tradition of Innovex's key businesses) if current prices are any indication.
Overall, management's target is to grow Innovex 20% per year on an ongoing basis... that's the goal. This new business should help to reach that goal.
Question: Other than the price advantage, what does HIF offer over the competition?
Answer: It offers at least a 20% price advantage and also the back-end hook up. A flex circuit allows you to automate the back-end hook up, making it much easier to hook up the wires. And there are considerable savings when you allow four wires to be hooked up at one time in the back-end, rather than one at a time. So the cost advantage is there over integrated suspensions -- and Innovex has this advantage over all of the competition. "We don't name the competition by name because our product holds the same advantage over all of them, in our opinion."
END.
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