Revasum manufactures a portfolio of precision solutions that are integral to the manufacturing of semiconductor wafers. The company’s portfolio includes – polishers, grinders and chemical-mechanical planarization (“CMP”) systems for both Silicon and Silicon Carbide (SiC) wafers.
We were introduced to Revasum at the pre-IPO round. So what got us interested in Revasum at this stage? Let’s start with the end market. Revasum’s key end market drivers include:
- Electric vehicles
- The rollout of 5G
- Connected devices and the rise of the Internet of Things (“IoT”)
We believe these are large and growing markets that will require a greater demand for semiconductors for many years. Having exposure to a company with such strong industry tailwinds was a great start to our investment thesis.
Importantly, Revasum is not exposed to the segments of the market where headline cyclicality concerns are heightened. In fact the segments mentioned above are all entering the start of extended cycles. The chart below from Bloomberg highlights this significant ramp up in electric vehicle sales expectations.
Investing at the pre-IPO stage enabled us to do a great deal of due diligence on the company before its listing on the 6th of December. This included a site tour of Revasum’s head office and manufacturing facility in San Luis Obiso, California.
Having seen the progress versus the pre-IPO forecasts, and with more confidence in the business we also added to our position in the IPO across several funds. We believe Revasum is well positioned to capture the strong industry tailwinds for the following 5 reasons:
Excellent Management Team
Revasum has a very experienced management team led by Jerry Cutini and Ryan Benton. Jerry and Ryan have over 60years combined experience in the semiconductor and finance industry. Jerry has overseen two successful IPO’s on the NASDAQ and has completed multiple M&A transactions in the semiconductor space. Ryan is currently a non-executive director and Audit Committee Chairman of Pivotal Systems (ASX: PVS). We are attracted to management’s long term commitment to the business. Key management will own 19.1% of the company along with Firsthand Ventures who will own 61.7%. At the IPO there is no sell down and there is a significant escrow period. This highlights the commitment to the success of the business.
Clear pipeline of products
Revasum has a strong pipeline of future products including, a SiC polishing tool, 200mm CMP system and a 300mm CMP system. The company works closely with its customers on its product initiatives and are developed to meet their needs. As such there is already pent up demand for Revasums next generation products. All these products have a higher average selling price (ASP) than the company’s existing products.
Image: Site tour or Revasum, Pictured in front of their Polisher Machine
Strong visibility into future earnings
Revasum takes pre-orders on its machines. As per its prospectus the company has over USD21.6m of purchases in hand with a total sales pipeline of USD74.7m post 30 June 2018. Having this higher degree of visibility into future sales gives a greater degree of confidence that Revasum can hit and exceed sales expectations.
Early mover advantage in SiC
Traditionally semiconductor chips have been built on Silicon wafers. However as technology has advanced Silicon Carbide (SiC) has become more attractive due to its superior physical properties. Whilst adoption of SiC is still early, it is expected to grow rapidly. During my recent trip to the US I managed to spend time with Tesla. Tesla verified the understanding that SiC will be a more popular choice of wafers used in Electric Vehicles. Revasum is one of the leading players in SiC processing and is well positioned to capitalise in the increased market adoption of SiC.
Underappreciated cost out strategy
Revasum has a well-defined and laid out cost out strategy within the business. Whilst we appreciate the fact that building such complicated machines will always require a need for manual labour, Revasum has identified other input costs that they can reduce. For example on the trip we took to the company’s manufacturing facility we could identify with management their ability to reduce the amount of steel required for the base of the machine. This could reduce the cost by 25%. Along with outsourcing aspects of the manufacturing process we believe there will be a continual improvement in Revasum’s Gross Profit Margin.
This article was written by Ryan Sohn our Equities Analyst.
Disclaimer: Please note that these are the views of the author. This article does not take into account your investment objectives, particular needs or financial situation.
Some additional matters to perhaps consider: 1. What is their durable competitive advantage? Why are these machines not going to a commodity in the long run? 2. There does not appear to be a reoccurring revenue model. If the machines are high quality the need to replace them frequently may not exist. Therefore, past revenue and sales would not be indicative of future sales and could be very lumpy.
Thanks Clinton, see detailed response from our analyst Ryan Sohn "Revasum has an intellectual property portfolio built up through over 30years of technology development. This by its nature is difficult to replicate and presents significant barriers for new players. The marker is very consolidated with 0-2 competitors in each of Revasums product segments. Importantly these players are extremely large and are focused on larger segments of the market thereby creating a vacuum for Revasum to exploit. Revasum revenue model is dedicated to the construction of new fabs and production facilities. As such, there is a degree of lumpiness to the equipment cash flows, however this needs to be considered with regard to the overall outlook for semiconductors with numerous powerful growth drivers that are only beginning to play out and will likely to support new equipment sales over the long term (Electric Vehicles, 5G and Internet of Things). Revasum also provides consumables and services which by its nature act as a recurring revenue stream. Overlaying this with the low valuation in comparison to its peers and the broader market Revasum provides an attractive investment proposition. "