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StockTalk
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TMF Interview With Innovex Inc. CFO Douglas Keller
November 20, 1998
With Brian Graney (TMF Panic) and Jeff Fischer (TMF Jeff)
Innovex Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INVX)") else Response.Write("(Nasdaq: INVX)") end if %>, based in Hopkins, Minnesota, manufacturers and markets electromagnetic products for thin film disk drives. It has been a Fool Port holding since June 1997. We caught up with CFO Douglas Keller, who filled us in on how the disk drive industry is doing and explained some of the company's new products.
TMF: Could you explain a little bit how Innovex is trying to set itself apart from other companies in the disk drive sector?
Keller: One of the things that we're really trying to do is take the technology we have and keep the position we have in the disk drive sector, but also expand to other industries. It might be helpful to throw a little history in here.
Historically, the bulk of our business has been making interconnects for the disk drive industry and, historically, that product has been a wire product. The industry is transitioning away from wires to integrated interconnect solutions. Initially, we came up with a product called Head Interconnect Flex (HIF), which is a flexible circuit that will do the same thing that the wire will do. There are other competing products out there which also have the interconnect integrated suspension. That's really what we're competing against.
One of the things that we did is we underestimated what the market was looking for. Seagate is our primary customer for the HIF. They really proved the concept, we think. They use the HIF and they attach it to the suspension themselves. In fact, all the new programs that they're coming up with right now have that flexible circuit design. Other customers, though, are actually looking for a solution with the interconnect already attached to the suspension. That's why we came up with our product called FSA, or Flex Suspension Assembly. That product right now is being tested by a number of customers out there because it is significantly cheaper than any other alternatives out there right now.
The one thing that we think really differentiates our product from the other products is the price. It's the way we manufacture the product. We're able to use a roll-to-roll process to make the product instead of a batch process. As a result, we are able to make them significantly cheaper. All the portions of making those products that we haven't been able to automate, we've been able to use low-cost labor in Asia to finish the product. But the reel-to-reel or roll-to-roll manufacturing process is really, I think, the key. We're able to make flexible circuits with very high levels of precision, and that's really what's required for this application, for the disk drive industry.
TMF: You have a new product called Bridge Flex. I'm wondering if you can explain how this came about and how large of an effect it will have on your revenues down the road?
Keller: The one thing I did talk about is that we did underestimate the number of customers that would be interested in the HIF and customers that were interested in more of a complete solution, that already have the interconnect attached to the suspension. So, it would be a while to get the FSA qualified with those other customers.
Some of those competing products don't have what we call the tail. In a complete solution, the interconnect will go from the head at the end of the suspension where it's attached all the way back to the actuator flex where it takes the information to the back end of the drive. A lot of the competing products cut off at the tail of the suspension and they don't have the tail of the full interconnect that goes all the way back to the actuator flex. So, what the Bridge Flex does is it bridges that gap in between the suspension and the actuator flex.
You can look at Bridge Flex as a bridge in more than just one way, I guess. One way is it bridges that gap for the interconnect and also it bridges the revenue gap we have between when the wire orders start to trail off and the FSA business starts to pick up.
TMF: Are many customers set up to use Bridge Flex in the near future?
Keller: It's going to be like any other product. It's a new product for us. As a result, you start with one customer and then move forward. We have a number of customers that are interested in it, but we have one customer which will be our lead customer.
TMF: Regarding FSA, I have a quick question. In the Q3 conference call, we covered it and we heard several times in the conference call that it would ramp early in the new calendar year and be in testing, as it is now. But in the Q4 call, the ramp date was essentially moved back to the end of calendar 1999. Is there a delay or did I misunderstand the process? A lot of our readers are asking that as well.
Keller: What we talked about in that conference call was that we expect to have some FSA production in the third quarter of 1999. We should have some in the third quarter, and larger volumes in the fourth quarter of 1999.
TMF: Has that been moved back from what you were previously hoping?
Keller: I think we are expecting to see it may be a little bit earlier, but it takes a while to get a new product design. You do have to remember that this is a new product we just introduced. So, it hasn't been around that long. It isn't something that you design and get into production overnight. We have a number of customers that are very interested in it because the alternatives out there are more expensive, and also it is very difficult to get the quantities that you need to support drive programs.
Like we talked about earlier, we did underestimate and we were late to market with the product. But the idea of being in the disk drive industry is that no matter how late you are with the product, if the product makes good sense for the customer they're going to move to it. So, if we can make a product that can be used in the same process that we've already developed, that's lower cost. There's a good chance that we're going to get a chunk of business.
TMF: This might be too early to know, but do you still foresee FSA production capacity of 3 million units per week by the end of calendar 1999?
Keller: Yes. Of course, the one thing to keep in mind is that we won't add capacity we don't need. If we think we need more capacity, we should have more at some point in time. The flexible circuit itself used in FSA is manufactured in our high volume roll-to-roll manufacturing facility. So, that's really not an issue. The issue then to go to the FSA from the HIF is the connecting equipment. Once the initial equipment has been designed and is working, then its just a matter of how many pieces of equipment do you have in place and when you get them in place.
TMF: Your lead wire production figure has fluctuated a little bit over the past few quarters. Is this the result of customer demand due to market conditions or is it really competition maybe coming in?
Keller: This last quarter, I think, is the first quarter that we've really started to see some erosion due to alternative technology. Our HIF has picked up some volume and some of the competing products have also picked some volume in the last quarter. So, there has been a little bit of erosion of share. As far as our portion of the wire business, we still have the same share that we always had. But a good deal of the volume fluctuation in the wires has also been tied to the fortunes of the disk drive industry. And I think everyone has really been reporting seeing a little bit of firming of that demand for disk drive heads in the recent months or so here.
TMF: Have you seen that, too?
Keller: Yes.
TMF: So, your lead wire run rate right now is around 5 million?
Keller: It was around 4 million in the quarter ending September. This quarter it's probably closer to 5. We think it's going to be stabilizing there, even though there's still a larger portion of alternative technologies being produced in the coming quarters here. The wire business looks like it's stabilized due to increases in demand in the overall drive market.
TMF: In one of your recent conference calls, you mentioned that the company always has an eye out for possible acquisitions and is always looking for good acquisition candidates. What criteria make a company a really good candidate in Innovex's eyes?
Keller: At this point, your criteria change with the situation. But right now we really see the future in high volume, high-end flexible circuits. And any acquisition we make right now is going to be either vertical or horizontal play on our existing flexible circuit business. A horizontal would be a customer mix that we don't have right now or maybe an extension of our high-end flexible circuit technology. On the vertical side, materials capabilities are something we don't have right now that would be nice to have also. So, it's going to tie very closely to the high-end flexible circuit business.
TMF: Your goal is that semiconductor packaging should represent over 50% of your revenue in fiscal year 2000. From the looks of your conference calls, I certainly feel that could be true. My question today was if you could explain what the business is so that investors will understand it and will it become a key part of your operation?
Keller: I got a call from someone the other day who thought that the packaging application was putting it in a box. (Laughter.)
TMF: That's where the question comes about.
Keller: When you think about integrated circuit packaging, the best description I can give you is look inside your computer and you see all those ceramic little hard black squares in there with steel legs coming out of them. That's really an integrated circuit packaged in ceramic and the purpose of the packaging is to get that integrated circuit to communicate to the outside world. So, you get all those lines and everything built into that circuit so it can talk to the outside world. Right now the bulk of it is ceramic. You take integrated circuits, you encase it in ceramic, and then you use the little legs on the ceramic to plug it in and get signal to it and from it.
What you're looking for in using a flexible circuit for packaging is as the lines and spaces get closer and closer together they start generating a lot more heat. Some of the ceramics start breaking down because of the heat that's being generated. So, number one, you're looking for heat dissipation. Number two, you're looking for a smaller way to package it. Those big ceramic chips when you get them into a small pager, cell phone or whatever, you don't want to put too many big ceramic chips in there.
So, what we're looking at doing is making the flexible circuit for use in packaging applications. So, what you would do is take the integrated circuit and then mount it directly on to the flexible circuit. The flexible circuit will help dissipate the heat better than the ceramic does right now. Also, the flexible circuit can be what connects the integrated circuit to the outside world. So, you aren't increasing the amount of space that you take up, since it's not much bigger than what the integrated circuit is itself.
And that's what I mean by the real benefit of moving towards the flexible circuit packaging versus the ceramic packaging. It's looking like there have been some flexible circuits used in packaging applications in the past and they've been really a different design from what people are going to be looking at going forward. Going forward, they're looking at more dense flexible circuits, more lines and spaces built into that flexible circuit.
That's really the type of thing that we do, using our volume flexible circuit facility right now. So, the one thing I want to make clear is that when we talk about the HIF and the FSA, the real core to those products is a very high-end flexible circuitry. When you talk about chip packaging applications, it's the same thing -- very high-end circuit products. We can utilize the same manufacturing facility, the same equipment to make those products with very few modifications.
You can use the same equipment to make different flexible circuits by just changing the photo tool. Of course, I'm oversimplifying. But in general it's really not that difficult for us to convert a line from making an HIF and also the HIF portion of an FSA over to making a chip packaging application. Both of them are high volume products and both of them are very high-technology flexible circuits.
TMF: Listening to you guys for the past year and a half, your message is so consistent. The direction seems to make so much sense.
Keller: You do have a lot of other companies that over-promise and under-deliver. We try to only promise what we can deliver. If you do take a look back at what we've done, we have had some timeline slips, but really not that many. For the most part, though, we've never told anyone we can do something we haven't been able to do.
TMF: This is an opinion question. Is there a competitor or company out there in the disk drive world that you respect the most out of any of the others?
Keller: You know I hate to cop out on you. (Laughter.) But we are supplier to the disk drive industry, so it is pretty dangerous for us to comment.
TMF: Are there any competitors that you respect the most? Looking at their financial statements, that might be a tough question. (Laughter.) You're the only profitable one. Is your company modeled on any certain business? Have you learned lessons from other companies, maybe misfortunes or what's worked for other companies?
Keller: Not particularly. We do have certain companies that we do look into how they are structured. We took that into account when we did our strategic plan. We looked at some large companies that have been very successful, but I guess not any one in particular.
The key that we've really kept in mind is to make sure that we have plenty of capabilities to move in whichever direction we need to go in the future. That's what the cash position and the lack of debt out there right now really give us -- the flexibility that we need to go in whichever direction that we think we see the best opportunity in. It's giving us the ability to go after the chip packaging business and the ability to expand our business.
TMF: Sounds great. You've been really generous with your time, Mr. Keller. I really appreciate it.
Keller: Thank you for the opportunity.
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