Welcome to inTEST Corporation’s 2021 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today. A replay will be accessible at www.intest.com. I will now turn the call over to inTEST Investor Relations Consultant, Laura Guerrant. Please go ahead, ma’am.

Thank you, operator, and thank you for joining us for inTEST’s 2021 First Quarter Financial Results Conference Call. With us today are Nick Grant, inTEST’s President and CEO; and Hugh Regan, Treasurer and Chief Financial Officer. Nick will briefly review the quarter’s highlights as well as current business trends. Hugh will then review inTEST’s detailed financial results for the quarter and discuss guidance for the 2021 second quarter. We’ll then have time for any questions. A copy of today’s press release can be obtained on inTEST’s website, www.intest.com. In addition to our press release we have issued supplemental information, which can be downloaded from our website on the investors’ page just mentioned. The supplemental information is offered to provide shareholders and analysts with additional information and detail for analyzing our results in advance of the quarterly results conference call. Before we begin the formal remarks, please note that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements do not convey historical information, but relate to predicted or potential future events that are based upon management’s current expectations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In addition to the factors mentioned in our press release, such risks and uncertainties include but are not limited to, the risk factors set forth from time to time in our Securities and Exchange Commission filings, including but not limited to, our Annual Report on Form 10-K for the year ended December 31, 2020. Any forward-looking statement made by us in this conference call is based only on information currently available to us and speaks to circumstances only as of the date on which it is made. We undertake no obligation to update the information on this call to reflect events or circumstances after the date hereof, or to reflect the occurrence of anticipated or unanticipated events. During today’s call, we will make reference to non-GAAP financial measures. We have provided additional information concerning these non-GAAP financial measures, including a reconciliation to the directly comparable GAAP financial measure in our press release as well as in the supplemental information and the slide presentation for this call. The release, supplemental information and the slide presentation are posted on the Investor page of our website, www.intest.com. And lastly, we will be participating in the CEO Summit Virtual Investor Conference on June 15. And we’ll be joining Colliers Securities for a virtual NVR, May 14. And with that, let me now turn the call over to Nick Grant. Please go ahead, Nick.

Thanks, Laura, and welcome, everyone. Thank you for joining us for the first quarter 2021 financial results conference call. inTEST has delivered truly solid financial results in the first quarter. The momentum we cited on our Q4 and full year 2020 call back in March has continued unabated, with strong demand for our innovative test and process technology solutions across a diverse set of end-applications. We continue to make progress, developing vertical growth markets and segments outside of the semiconductor market, which will serve to lessen our dependency on this cyclical industry. However, at the present time, Semi is a considerable driver of our growth, given the strong industry tailwinds and broad end-market demand for semiconductors compounded by chip shortages. Let’s look first at bookings and backlog. Bookings have been steadily increasing over the past year, and order flow during the quarter was exceptionally strong. Q1 consolidated bookings of $25.2 million approached the record levels we saw back in 2000, increasing 43% sequentially and 83% year-over-year. This level resulted in a book-to-bill ratio of 1.3. While this is clearly an elevated level from our target of just over 1, the team has worked diligently to ramp up revenue in the quarter, and we expect to bringing us back in line in Q2. As noted, first quarter bookings were fueled by the Semi Market, which accounted for 68% of our consolidated bookings. Multi Market made up 32% of the overall bookings, driven by a solid rebound in demand from our customers in the industrial markets. This is similar to the 63%, 37% split for Semi and Multi Markets last quarter. Both grew nicely sequentially as Multi Market bookings increased 24% to $8.1 million and Semi bookings increased 54% to $17.2 million. Our backlog continues to be healthy, standing at $17.1 million…

Thanks, Nick. Our first quarter gross margin of 49% came in at the bottom of our guidance range and was improved from the gross margin we reported for the fourth quarter. While our fixed manufacturing costs of $2.5 million were better absorbed at higher net revenue levels in the first quarter, representing 13% of net revenues in Q1 compared to 17% in Q4, our Q1 2021 component material costs were 36.2%, up 110 basis points compared to 35.1% in the fourth quarter. The increased component material costs were experienced across all business units and were driven by changes in customer and product mix along with increased supply chain costs. Selling expense grew 22% sequentially to $2.4 million in the first quarter, driven primarily by increased commission expense on higher net revenue levels and, to a lesser extent, to increased salary and benefit costs and accruals for product warranty. Engineering and product development expense increased 6% sequentially to $1.3 million, primarily as a result of higher levels of employee benefit costs as well as increased spending on product development supplies and consultants, partially offset by reduced spending on patent legal. General and administrative expense increased 8% sequentially to $3.2 million, driven primarily by increases in profit-related bonuses and higher levels of stock-based compensation costs. The increased stock-based compensation expense is being driven by several factors, including a broader distribution of stock-based awards in line with our recently adopted strategic plan. A tenet of which is the motivation and retention of key employees vital to our future growth and success and larger award amounts. But the most significant factor behind the increased stock-based compensation expense has been the recent improvement in our stock price, which has tripled over the last 6 months. We currently expect our 2021 stock-based compensation expense will be…

Thank you. [Operator Instructions] And we can now take our first question from Jaeson Schmidt of Lake Street. Please go ahead.

Hey, guys. Thanks for taking my questions. I just want to start on the supply chain. Obviously, it’s been well discussed from the component and supply chain constraints out there. Just curious if you’re seeing an impact from that and how you’re positioning yourselves going forward to deal with those challenges.

Hi, Jaeson. This is Nick. And thanks for the question and a great one. Supply chain is something we’re managing very carefully here. And I’m quite pleased with the ability our team’s been able to ramp these guys up and be able to meet customer deliveries that we have committed to in that. So at this point, I’d say, they’re working really well with the supply chain. And I think there are opportunities for us over time to strengthen our supply chain. But right now, everything is working well.

Okay. That’s helpful. And I guess, relatedly, are you seeing any sort of gross margin impact due to expedited freight costs, increased costs along those lines?

Yeah, absolutely, I would say. With the surge we saw in our EMS business there was quite a bit of expediting going on in Q1. And expediting happens regularly as part of any business, so to speak. So it was updated for sure in Q1 as we work to bring in materials to support the volume that was being requested. So it was quite heavy in Q1, now we’ve increased our inventories. We’ve got the material flow coming through there. So I’d expect that to be back in normal levels in Q2.

Okay. And then, just a last one for me and I’ll jump into queue. Seeing some really nice traction with your handler products, can you just talk about what sort of is driving that uptick?

Yeah, well, it’s a combination of, we’ve been working with customers on the technology to better support their applications out there. And so, this high-voltage, high-current application that we penetrated on the power side is one that started working with an ATE and the end-user and implemented quite successfully. But one of the key drivers behind this is, when I came onboard I’m challenging the teams to look at our market spaces and how we can further penetrate new customers, new segments like power. And the teams are doing a great job. And it takes time to penetrate accounts, as we all know. But I’d say, they’re actively working it, and we’re really pleased with the progress.

Okay. Sounds good. Thanks a lot, guys.

Thanks, Jaeson.

And we can now take our next question from Dick Ryan of Colliers. Please go ahead.

Thank you. Hey, Nick, what sort of visibility do you have into the second half of the year? I know the general Semi cap commentary has improved with that. What’s your sense? I’m not asking you for specific guidance, but how do you handicap second-half versus first-half?

Yeah, great question, Dick. And it’s something that Joe McManus and I as the new leader of EMS business there, we discussed that and try to – looking at the funnel health and everything. And really, they only have about a 90-day visibility of with – let’s say, meaningful clarity on what’s in the pipeline. With that said, the orders have been strong. We’ve been backfilling these projects as we book them with other projects. And we aren’t seeing right now any kind of slowdown, but we really only have that 90-day visibility beyond that. But I do like what the industries, a lot of the folks are saying out there around us having more legs and everything else, and we’re positioned to capture it as long as we can.

One of your nice initiatives is to increase your service revenue. What level percent of revenue is service now and where can that drive eventually?

Yeah, great question. I’ll let Hugh give you the specific on service level there. But I could tell you, we haven’t quite got our initiatives underway yet on that particular aspect there. So it’s more of the traditional service that’s still resulting in the numbers here. So, Hugh, do you have the Q1 service figure?

Yes, I do, Nick. Q1 service, actual service component was just over $1 million. That was down from about $1.2 million that we saw in Q1 and $1.2 million we saw about a year ago the same quarter. And that was due to a number of factors and not seasonality, but just an ability to get into some of our clients in order to perform service during the first quarter. But we expect that level to return to a more seasonably normal level in Q2.

Okay. And, Hugh, I heard your stock-based comp commentary for the year, but I may have missed what it was in Q1.

Oh, in Q1, stock-based comp was $269,000.

Okay. One last one for me. Nick, you talked about expanding into these other markets and you mentioned EV and cannabis. But you said kind of organically. What’s your view of M&A at this point? And where would you be looking at any M&A efforts out there?

Yeah. Great question. As you know, 1 of our 5 core strategies is strategic acquisitions and partnerships. And it’s an area that we are spending fair amount of time on and absolutely looking at technologies that would complement our current portfolios as well as companies that would position us in targeted markets that we see as long-term strategic fit for us. So it’s a space we’re active in, and as inTEST has always done, we really can’t go into details too much on that. But certainly being one of our core strategies, we’re focused on it.

Okay. Great, thank you. And congratulations on strong execution.

Hey, thanks, Dick.

And we can now take our next question from [Robert Merson with Pic Capital] [ph]. Please go ahead.

Thanks for taking my question, guys. Congratulation on an excellent quarter also. Regarding the EMS business, Nick, you mentioned that when you came aboard, there was a material amount of low hanging fruit in pursuing geographical diversification as well as increased penetration in other applications for the products. Have you been able to size the increase in the TAM since you’ve made the adjustments and have invested money in going after these markets? Just another way of asking peak-to-peak in the Semi cap equipment cycle, what kind of improvement in your addressable market do you think you’ve achieved?

Yeah. Hey, Robert. Thanks for the comments about the quarter. Certainly, [size was there] [ph]. Relative to your question on EMS from TAM, we absolutely targeted on expanding our TAM. Today, working with Joe, we believe the TAM, their served available market is roughly $135 million. And they are actively with their new product expansions like the intelligent test cell, pushing that higher as well as this new high-power, high-current test solution that they’ve been working with the ATE on. They see that is also opening up a nice attractive space. So we’re inching that up higher and higher over time. And when we say how much are we expanding as we enter these spaces, it’s coming in at chunks of $5 million to $10 million of additional TAM. But as we succeed with additional ATEs and opening up other geographic regions with our solutions, that will only increase.

Is there upside to 2x, the number you cited, over a 2- or 3-year period? Or is that being too optimistic?

Well, that’s a huge space, as you know, as this EMS test market that we’re playing in, and that – but we do have some limitations due to the fact that these ATEs have certain capabilities internally in that. So we’re working around that, working with them and trying to penetrate and expand our space as much as possible there. But could we give 2x? I don’t know if I have enough visibility yet to be able to say that.

All right. Regarding acquisitions, which you’ve already address a question. I’m going to come from it from a different perspective. The – obviously, you want to keep diversification, but that means adding non-Semi business. The non-Semi business in the marketplace today for industrial, I guess, thermal products is probably priced for small businesses around 1 times revenues, maybe 1.5, 2, something like that. That’s where we’re priced. The semiconductor equipment business, the big guys or your customers are priced at 4 to 5, 6 times sales. So you do face and issue, in that the Semi business tends to be more highly valued for both acquiring and valuing your own stock. But at the same time, you obviously want some more diversification away from the deeper cyclicality of that business. As you’ve been there now 3 quarters, have you had a chance to look at the valuations and the benefits and the trade-offs of acquiring more semi-cap-equipped niche businesses versus the industrial businesses? And have you come to any conclusions on where you’d prefer to go with your first acquisition?

Yeah, great question there. And you’re spot on. Semi Market being as hot as it is, valuations are elevated in there. But as I’ve alluded to in the past, it is a space that we will be looking to add inorganically to our portfolio. So we’ve got to make sure we do acquisitions when the time is appropriate and at the right valuations for the business and our shareholders there. So it is challenging in that space now. So I would say, our activity, our focus is more weighted in the non-Semi, just because valuations are more in line with what we would expect.

And you would stay in the thermal area or you would move outside of that and have a whole new area of market to address?

Yeah, no, we are – I think I alluded that we’re looking to expand our capabilities and technologies beyond just thermal, moving more into like environmental, getting into vibration testing and humidity, et cetera, so really expanding beyond thermal. There is a space that we’re looking into and then building out around our Ambrell process technologies, how do we do more to support automation and bring in technology that can benefit not only that side, but across the EMS and thermal piece that’s out there. So, yeah, we’re looking, I would say, automation, environmental and, of course, in electronics too.

So that’s very interesting. Good luck in that pursuit. Thank you.

Hey, thanks, Robert.

[Operator Instructions] We have now got our next question from Tom Diffely of DA Davidson. Please go ahead.

Yeah, good morning. I was intrigued by your comments about wafer-level burn in test. Is this a new market, a new trend, and is it traditional semi or is it some kind of specialty like optical or silicon carbide?

Yeah, hey, Tom. This is obviously the power to buy space, it’s a big space and is one that is well mature from that sense. But what we’ve been doing is working with the end-user there and the ATE to really looking at their challenges. And when they’re actually doing the testing, they wanted to move it earlier in the process in their operations. So prior they had been doing it, after they’ve already packaged device, a single package the device, and that’s doing the testing. They wanted to check the wafers much earlier before they get and start building these things up in order from a cost perspective. But if there’s a failure, they don’t waste time and improve yields at the end of the line there. So we work with them to move that testing earlier on in their process, in the burn in stage, it proved quite successful which has led to the follow-on orders at this one particular account. And now, we see working through the ATE here, opportunities to duplicate the success around.

Great. It sounds very interesting. I appreciate it.

Absolutely.

And this concludes our question-and-answer session. I would now like to hand the call back to Nick Grant for closing comments.

All right, thank you. And thanks, everyone, for listening in. Really again, pleased with the Q1 performance. I want to thank the entire inTEST team for delivering exceptional results here, and look forward to continuing our momentum here in Q2. And thanks again for your participation today.

This concludes today’s call. Thank you all for your participation. You may now disconnect.