Innovex Q4 Conference Call
A Fool Conference Call Synopsis^*
by Debora Tidwell (TMF Debit)

Innovex, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INVX)") else Response.Write("(Nasdaq: INVX)") end if %>
1313 5th Street S.
Hopkins, Minnesota 55343
(612) 938-4155
http://www.innovexinc.com

UNION CITY, CA (Nov. 10, 1998) /FOOLWIRE/ — Innovex reported fourth quarter and fiscal year-end earnings. Earnings were $0.13 per share for the fourth quarter and $1.05 for the year. While this is well below last year's outstanding numbers, the company pointed out that they are one of the few in the disk drive industry that has managed to maintain profitability throughout every quarter of the year.

Sales picked up somewhat in September of the fourth quarter. Sales continued to be firm but the visibility is very poor going forward. For next year, the company believes they will have somewhat of a mirror image of this year. While every quarter was lower than the previous quarter this year, they believe next year every quarter will have increased revenues above the first quarter.

In addition, the company expects that the percentage of their total volume coming out of their Litchfield Performance Division, which has been merged in with Precision Products, will take up an ever-increasing percentage of their sales. For the year, it accounted for approximately 25% of their sales but for the fourth quarter it was 45% of sales. The company has four different products in qualification for the chip packaging industry. They expect chip packaging in the third quarter to significantly impact their sales for the third and fourth quarter.

Answers to Questions

Competition for FSA. Innovex is selling FSA-type product in components to some other people in the industry, so trade show presence that may seem to be competition is probably actually their product. Suspension product manufacturers are showing products supporting FSA as a technology at trade shows. The Japanese manufacturers are showing additive products, not necessarily the same as Innovex FSA products. These are more expensive from a process standpoint. Read-Rite, RightFlex, and 3M are showing flex circuits that are comparable to Innovex's. 3M is a competitor but Innovex believes it has the majority of the shipments. Read-Rite has very limited production and to Innovex's knowledge they are not in production with any disk drive programs on their product. Neither Read-Rite nor 3M was showing an FSA product where they were attaching the flex circuit to the suspension. Innovex is the only company doing that in high volume.

Suspension Products. Innovex has not had any interest in pursuing the suspension side of the business. They are interested in making the HIF circuit and doing the attachment to a suspension.

Qualification for FSA. Innovex is in qualification with a couple of customers and are prototyping to them, but are not looking for any significant volume from FSA until the third or fourth quarter of this fiscal year.

Production Volume. The company did about 4 million per week on the wire side. That did strengthen toward the end of the quarter. They had averaged about 5 million per week in the third quarter. As they exited the quarter and through October, they have been back up around that 5 million per week number on the wire side. They expect stability on the wire side through the first quarter and through the second quarter they think they will start to slide as they move into the third and fourth quarter. In their press release they talked about 1 million HIFs per week moving towards 1.5 million as they move through this quarter.

ASPs (average selling prices) have been very stable, really no change from where they were at last quarter.

HIF Interest Beyond Seagate. Seagate wants the HIF attached to the suspension, so the interest is in the FSA product. That was one of their largest motivators for developing the attachment process for FSA. Seagate is very committed to the HIF. They think at some point Seagate may move toward an FSA-type product, but the customers outside of Seagate want the pre-attachment so they won't be buying just the flex circuit. They currently have two customers for the FSA product. Qualification looks like mid-fiscal year and then production toward the end of the fiscal year.

Chip Packaging Qualifications. The qualification group is several customers and, within those customers, several different applications. The applications are huge and the customers they are dealing with are also huge — significant players in the chip packaging business. The competition at this time tends to be people that can't do wide-web type products.

Bridge Flex. From a unit standpoint they look for this quarter to be in the 2-3 million range for the quarter and that could triple or quadruple in the second quarter. It is safe to say the ASP is roughly the same as the lead wire.

Acquisitions, Share Buybacks, Use of Cash. The Wall Street Journal screwed up announcing the addition of a person named Mr. Love to head up acquisitions for the company. That was not Innovex, it is a division of a British pharmaceutical company that is known as Innovex and the WSJ mistakenly put the wrong call sign on the press release.

In terms of their $50 million plus dollars in cash, they have discussed the possibility of buying back stock.

On a forward-looking basis, the company has plans to expand. They believe that the chip packaging market is going to grow so quickly, that one of the first things they will have to do in the next 6-9 months is determine where they locate their second facility to duplicate what they have in Minnesota. It may seem strange when they are operating at less than 20% capacity to be talking about a new one, but they believe the market will expand so rapidly that they have to be prepared to invest this money in a second facility very shortly.

As far as acquisitions, they have looked at three different companies over the last 9 months. None of these ended up meeting the criteria they had -- something that was additive to their technology and to the capabilities they have both in the hard disk drive arena and the chip packaging arena. They have continued to look at some technology capabilities that are available through other companies. They have not reached any decisions at the present time but continue to look on an ongoing basis.

Cap-Ex and Depreciation. Cap-Ex for the year ended around $13 million. Depreciation and amortization for FY98 was right around $7 million. It looks like Cap-Ex for 1999 will be somewhere in the range of $10-15 million.

Margins are holding up nicely on the HIF product. One of the benefits they are getting now is the product is becoming more mature so they are filling up the factory, covering more of their fixed overhead in the new factory in Litchfield. They are also seeing their yields continue to improve so they are getting the benefit of that at the gross margin line. Even though they face pricing pressure as always, they are able at this point to be expanding their margins some because they are in a ramp and the product is beginning to mature a little bit.

FSA Outlook. They feel that FSA has a significant price/performance benefit over competitive technologies. On a percentage basis, maybe 20%. FSA is very early in the game and to gain wider acceptance they have to get products out to the marketplace and they have to get designed into programs. Those are the efforts going on right now. There is a 6-month lifetime between the time you start this process to the time the product is announced and ramping in volume. They are very pleased with where they are at.

Channel Inventories. The company thinks channel inventories have thinned out nicely and hopefully will stay that way.

Labor Markets. The labor market is very tight. Innovex has, over the years, continuously had an attractive program for technical people they have hired in terms of options and bonuses, so they are holding their own but it is difficult to find people these days. The good news is that the factory they have constructed in Minnesota is extremely automated and that is where most of their labor needs are coming from. They have probably doubled their revenue out of their Litchfield operation in the last year and their headcount is still the same. That is reflective of the automation they have put in place. The other thing they have done is move the labor-intensive processes over to Asia and there is no labor shortage there.

Pricing Pressure. Pricing pressure against the yen was certainly an issue during the last six months with some of their wire products. Over the past month or so the yen has declined some and is less of an issue today than it was in July or August. The company thinks they have always done a good job managing margins.

Demand for Double-Sided Capability. Innovex is in the process of developing a double-sided capability and expect to have it in production in roughly 12-18 months and that will be in plenty of time for their customers' requirements.

Summary. 1999 is a transition year in many ways for them. They expect the chip packaging market in the year 2000 will dominate their business, being over 50% of their total revenues.

(Innovex is a holding in the Motley Fool's real-money Fool Portfolio.)