FormFactor Inc (FORM) 2009 Q1 法說會逐字稿

Thank you and welcome, everyone, to FormFactor's first-quarter 2009 earnings conference call. On today's call are Chief Executive Officer Mario Ruscev and Chief Financial Officer Jean Vernet.

Before we begin, let me remind you that the Company will be discussing GAAP P&L results and some key non-GAAP results to supplement understanding of the Company's financials. A schedule that provides GAAP to non-GAAP reconciliations is available on the investor portion of FormFactor's website.

Also, a reminder for everyone that today's discussion contains forward-looking statements and that FormFactor's actual results could differ materially from those projected in our forward-looking statements. For more information, please refer to the risk factors discussions in the Company's Form 10-K and subsequent Form 10-Q in the press release issued today.

With that, we will turn the call over to Mario.

Hello, everyone. The economic weakness continued in our first quarter, resulting in total revenues that were lighter than our internal target of in the low $30 million range. Also, we saw disappointing.

We did have product shipped to customers in the quarter that were approximately $32 million. Jean will spend time discussing the financial in more details later in the call, but first I'll discuss our market on performance during the quarter. The overall [pro cut] market is still under considerable stress. Weak end market demand for PC and cell phones is resulting in lower memory consumption as indicated in recently revised 2009 [bee gross] projections.

Slowing [bee gross] itself will not be a concern for our business as long as customer were driving to [what verone] for efficiency through technology strengths, to drive growth and profitability.

Given the current situation of operating loss, weak end demand, and capacity utilization at record lows, memory customers are much more cautious about moving on NOR shrinks and overall design in volume, especially outside of the commodity DRAM.

In addition, an important component of the market, Taiwan, remains idle without the much-needed resolution. Taiwan is an important manufacturing hub within overall memory market, and we consider consolidation of the memory companies in Taiwan as a healthy development for the DRAM industry and for FormFactor in particular.

One of the most -- more encouraging aspects of the last few months is -- has been the recovery in DRAM prices. DDR 21 Gb spot price for DRAM producers at the leading edge of 6050 nanotechnology nodes are close to cash costs, according to our analysis and validated through third-party research.

Also, demand is still weak. Our customer should be in improved financial conditions heading into 2010, due to sufficient capacity coming offline over the past six to nine months.

Improvement in our customer's profitability is critical to driving toward higher volume designs. The move to efficiency would result in a more broad-based recovery in the DRAM advanced [pro cut] market in 2010 and beyond.

Also, clearly, there are still many concerns. We consider improvement in DRAM prices as a reason for optimism.

Let's quickly review the performance of our market segments, starting with DRAM. The DRAM business remained weak, declining quarter over quarter. The weakness reflects our customer hesitancy to invest in NOR shrinks due to uncertainty about end demand.

We originally anticipated more DDR3 activity in our first and second quarters. But the orders have been pushed out due to weak demand, so the overall ramp in DDR3 activity has shifted out in time. As DRAM prices get above cash costs for our customer, which we anticipate will occur by the second half of the year, we will start to see an improvement in design activities and volume, especially around DDR3 and 50 nm designs.

In Flash, revenue remained weak in both NOR and NAND. Overall end-user demand for memory consumption is down compared to 2008. But solid-state drives, which would be a significant long-term driver for the Flash business, is continuing to show robust growth, also for a very small basis.

During our first quarter, we did introduce Harmony OneTouch ATC for evaluation in high-density testing as well as for a new test platforms. We believe this evaluation has the potential for creating demand in the second half of the year.

From a new design standpoint, we see another driver for the NAND business over the next year. Migration to 3X nanometers in late Q2 and Q3, adoption of eight-level cells in the later part of '09, entry of 64 Gb sales toward the end of '09. These drivers, combined with our new product introduction into NAND in the second half of 2009, will position us well in the Flash market for 2010.

In SoC, test capacity utilization is at very low levels. SoC customers are not reordering high [polysm pro caps], which is model for what FormFactor sells to SoC market. We have seen orders from the automotive market drop to nearly zero, reflecting the severe downturn in the industry.

And orders from our Japanese customer also dropped significantly, reflecting the severe downturn in Japanese consumer exports.

The high end of the three chip markets continue to move to smaller [peaches], with 160 micron design becoming dominant at leading companies. FormFactor remains a leading provider of [mens pro cap], the [rethera part], and three chip SoC markets.

From a competitive perspective, we are strengthening our position in core markets, such as DRAM and Flash, with product announcements and new product architectures on the horizon that will add to our differentiation. We believe we are getting market share with leading customers.

To summarize, we see end demand across all business segments as currently weak. However, we do see a few potential signs that supply demand are coming back into balance in both NAND and DRAM. This should provide some stabilization at current revenue levels, with the potential for improved activity later in the year.

We have made considerable progress in improving our cost structure and limiting our cash usage. We will continue to manage costs efficiently to ensure financial staying power through this historic downturn and ensure a return to profitability as business recovers.

With that, let me turn the call over to Jean for more details on the financials.

Thank you, Mario. Let me start with a summary of our first-quarter results. Revenue was down, due to weakness across all segments. Total revenue was $27.4 million, down 31% sequentially.

Product built and shipped to customers totals $32 million during the quarter. First-quarter revenue for DRAM was $25 million, down 20% from the fourth quarter, and a decline of 38% versus the first quarter a year ago.

Revenue in the Flash business was down due to a weak NOR market. Flash revenues for the first quarter were $300,000, down 86% from the fourth quarter, and 98% versus the first quarter a year ago.

Revenue in the SoC business was down, due to weakness in the microprocessor and handset markets, leading to a reduction in order activity. Logic revenue was $2.1 million, down 68% versus the fourth quarter, and a decline of 78% year over year. Revenue in all geographies declined year over year.

GAAP gross margin was a negative -- 13.4%. Onn a non-GAAP basis, gross margin was minus 10.7% for the first quarter. The gross margin deterioration, compared to last quarter and compared to our guidance, was mainly due to the lower-than-expected revenue level and product mix weighted towards the low end.

As we responded to reductions in demand, we scaled back costs across functional groups. On a GAAP basis, operating expense totaled $40.4 million before restructuring charges. These GAAP operating expenses were lower by approximately $2 million from the fourth quarter.

On a non-GAAP basis, operating expenses were $36.6 million, down approximately $2 million from the fourth quarter. On both a GAAP and non-GAAP basis, operating expense included a reserve of $5.2 million against Accounts Receivable for potential losses related to bad debt reserves. Without this reserve charge, total operating expenses would have been $31.4 million on a non-GAAP basis, which were in line with our plan.

In a separate category for restructuring charges, expenses were approximately $7.7 million. The restructuring charge was related to the cost reduction completed in January.

Our effective tax rate for the first quarter was a benefit of 26%, which was lower than our anticipated rate of approximately mid-30s, 30%, primarily due to a non-cash, non-recurring reduction in our long-deferred tax assets. This reduction was a result of a California law change in February 2009. This change in law impacted GAAP EPS by $0.08 after tax.

Total cash and investments comprised of cash and short-term investments ended the quarter at $519 million, approximately $4.2 million lower than the previous quarter. Capital spending was $5 million. Operating cash flow was approximately $750,000 negative during our first quarter.

We did receive a one-time IRS refund of $29 million on a loss carryforward, and $6.3 million refund on our Singapore long-term lease net of tax.

As we turn now to the outlook for the second quarter, we continue to have limited visibility over the near term. We are not providing any revenue guidance, but internally, we are currently planning our business for second-quarter revenue to be similar to that of our first quarter, plus or minus a few million.

Based on our current view of the market, we expect non-GAAP gross margin for the second quarter to be in line with our first-quarter results. Although, as the quarter unfolds, changes in demand levels and pricing of products could impact mix and unit costs, and potentially create an additional several points of margin variability.

Non-GAAP spending for R&D and SG&A in the second quarter should be approximately $27 million to $28 million, down $3 million to $4 million from the first quarter, if you back out the $5.2 million charge against Accounts Receivable.

We are making solid progress toward our $50 million cash breakeven target. We will continue to drive costs lower over the near term, to strengthen FormFactor financial staying power in these challenging times. Given our outlook, we are scaling back capital spending intentions, and now expect that capital expenditures -- now expect capital expenditures to be below $20 million, down more than 34% when compared to 2008 levels.

We expect cash usage to be around $25 million in our second quarter.

We have been in severe market conditions for well over a year now, and through it, have been able to maintain our financial health, and still invest in next-generation architectures and position ourselves well for a recovery. Strong balance sheet and the focus we continue to have on improving efficiency will allow us to withstand these downturns.

With that, let's open the call for Q&A.

(Operator Instructions). [PJ Meese], Lehman Brothers.

Good afternoon. Thank you for taking my question. First question, could you identify 10% customers, and what the percentages were?

We had, in this quarter, two customers above 10%. And you'll see the details of that in our 10-Q.

Okay. And then, just looking for some clarity on the Q1 results in terms of pro forma. You talked about -- I guess the $750,000 pro forma expensed out on the gross margin side, or COGS side. What were the pro forma SG&A and R&D?

Sorry, the $750,000 we mentioned was the operating cash flow, negative.

Well, no, I'm just doing the math on the 10.7% minus (multiple speakers) gross margins.

What was the question again, sorry?

If you could help us understand, pro forma-wise, COGS and R&D and SG&A.

All right. So on the gross margin, essentially what we have been seeing in the first quarter is primarily a soft revenue level versus our internal plans. So the COGS in itself is pretty much in line with what we expected.

The fact that we have a lower revenue level means that the underabsorption is higher and the fixed costs have a bigger impact. What we have been seeing within manufacturing cost structure is that, as the mix of the product was more towards the standard type of products in the quarter, essentially the margin was further impacted by that.

At -- for standard products, knowing that we are increasing our market share in various key accounts, these sales are subject to most price pressure. So that impacted a little bit further the margin.

In terms of our OpEx, essentially our OpEx, if you back out the $5.2 million of bad debt, was $31.4 million, which was roughly in line with what we expected. I mean, R&D is $13 million of that amount. And you have to remember that in the SG&A, we still have a sizable amount of ITC legal expense, about $3 million for the quarter. And this should drop significantly -- actually almost entirely -- in the second quarter.

I apologize. Per the GAAP results, you said R&D was $14.11 million, and now you just said $13 million. So I guess -- was there a $1.11 million charge related to the write-down? Is that coming out of R&D?

No, sorry, the $13.1 million is non-GAAP. The GAAP R&D is $14.1 million. The difference is about 1 million of SBC charge.

So pro forma R&D is $13.1 million.

Non-GAAP, yes. Pro forma non-GAAP R&D is $13.1 million, yes.

And how about pro forma non-GAAP SG&A?

$23.5 million. In this, you have $5.2 million of bad debt reserve.

That's helpful. Thank you. I guess, last question, considering the depths of the downturn here, I guess you're seeing some signs of a glimmer of hope, but I guess, considering perhaps things could take a while before they get better, do you think you have the R&D bandwidth to continue to focus across DRAM, NAND, and SoC? Or do you think you would be better off focused on one or two of those segments?

We are in typical situation. We are with dilemma, you know? On one side, it's obvious that our structure is obviously not right for the amount of business that we are now. And it's very obvious that our structure is not set for this kind of business.

On the other side, one of the big thing we ought to start seeing is -- 2010, if -- honest, who knows what, but should be a year where we recover, and we want to make sure that when this business recovers, we can take the maximum out of it.

So like I said, all of that is about one quarter too many, one quarter not enough. And what we do is we try to [run it over at the best] and take the decision as they go.

So certainly, I said that before, but like I said, we are going forth with a $50 million breakeven on cash because we assume that was the right business. If we realized that timing is just going away, we will have to act on it.

But for now, what is sure is that, doing all these downturns, we always said we tried to do two things to make sure that this Company can really take full advantage of the recovery. Is one, keeping our technology advanced and making sure we invest so that we can bring the new technology and take full advantage.

The other one is being able to serve all our customers and support our customers. That's what we have been trying to do as we go.

It's also very important in the technology -- you know, one of the big issues that we had in 2008 was that we are very heavily weighted to have one business. And it's very important for the long-term future of our Company that we become less sensitive to only one business. So this is what we are trying to play with over time, really.

Sounds good. Thank you.

Tim Arcuri, Citigroup.

This is actually Brian Lee calling in for Tim. I had a couple of things. I guess, clarification from the last question. Is bad debt reserve -- is that embedded in your SG&A or is that in COGS?

Bad debt reserve is embedded in SG&A, yes.

Okay, okay. That clears that up. I guess you talked in the prepared remarks about DDR3 being delayed here. Could you elaborate a bit more on what you're hearing from your customers on that ramp? And, specifically, I guess, are you hearing any difference in tone around design activity, especially in the past few weeks?

You have to remember, for all our customer now, you know, I tried to step back just to come back to that. You know, remember, it's only recently unseasonal. Many of our customer were still trying to settle the debt and didn't really know exactly how much cash they will have to basically invest and put their plan together.

Even now, you know, in many of our customers, this is not totally resolved yet. So we have seen an incredibly -- we've seen our customer really try to adapt very fast to any little changes in the market. [We're sure] that we are seeing -- we've seen, in some cases, DDR3 being pushed back to get -- to take some opportunity in DDR2, etc., and we really see -- we have really seen through Q1 a lot of changes as we are going through the quarter, in fact.

In orders changing, the order change in design, etc., etc.. So there was a lot of this, which really made the visibility even less. The global result of that, if we look at -- we have seen some pushback from DDR3, which we don't believe it's dramatic or very long, but we certainly see that the activity we expected to have in DDR3 in Q2, part of it has been pushed back. Probably so people can take care of some opportunities they're seeing in DDR2, in fact.

That's helpful, guys. And I guess on the inventory, did you have any write-offs in the quarter or take any incremental reserves, relative to what you took last quarter?

Yes, so we had to take some reserve inventory really related to what Mario just talked about. A combination of product substitution from one type of product to another, and as you know our inventory is very customized and our policy for reserve of inventories is quite conservative, which means that if we don't have either appeal or a very highly probable business opportunity in the short term, we reserve the components of our inventory.

So due to that order substitution type, we took a reserve in Q1. We also have somehow of an impact of some pushouts of those DDR3 orders. But overall, on the net gross margin, this effect was minimal because we had other things offsetting that.

To your earlier question on design wins, we actually have seen at the very end of Q1, and we see that in Q2 definitely, an increase in new designs. So this in itself is both a little bit of a hurdle on Q2, but also good news, so the hurdle being that, although these new designs come up with incremental engineering costs to them, they also are limited series, which means that minimum order quantity will tend to drag the cost up, but the good sign is that these are further -- I would say for the first time in a while, we see that as positive signs of possibly further business down the road, further in the year.

Just so I'm clear on that color, is that increase in new design specifically related to DDR3, and also is it, I guess, is it concentrated among one or two customers, or is that -- are you seeing that from a broad array of customers?

Overall, we have -- obviously, we are more weighted over some customers than others. But what we see is an increase in design altogether. And we see increase in DDR3 designs. We also see some increase in specialty DRAM designs, which come -- and which, some of our customers become more -- most secure about that, which we have not seen for a while also.

So it's really a mix. Overall, we can see that it's really -- it's very recent, so nobody knows if this will stay, but we do see a little increase in activity and design. Also, we come from such a low level, that we really need any hope.

One last thing for me and I'll get back in the queue. With all the cost-reduction activities you guys have implemented recently, is there any way, I guess looking longer-term at the model, that you can help us with getting an idea of how the model will look at different revenue levels? Say, as you get back up to $40 million, and even into the $60 million run rate range, can you give us a sense for what the margins would look like at that point?

I think it's, overall, slightly too early to go into that, now. All I want to say is that -- what we are focused, now, really is obviously -- everybody knows how 2009 is, and it is coming.

What we really want to make sure in everything we do is that when the recovery comes, and everybody expects it to be at least -- you know, it's not a huge recovery -- there's going to be some recovery in 2010 -- is that when recovery comes in 2010 we are definitely and very obviously profitable.

Thanks, guys.

(Operator Instructions). Gary Hsueh, Oppenheimer.

Thanks for taking my question. If I got this right, the miss relative to your internal targets that you basically gave, or set guidance, was basically a RevRec timing issue. Your shipment level was $32 million, so I guess if you had RevRec'd $32 million, that would've been a little bit better.

Just what happened there? Were more customers actually trading up to newer products, maybe the Sequoia product, and in terms of RevRec, that takes a little bit longer? And just to help us out on an apples-to-apples basis, what do we expect for shipments here in Q2?

There are different --[lemons] in your question. The first thing is, indeed, if we had recognized all the billed shipment, this would have had a good -- an impact on the margin. And we would have probably bridged about -- I mean, a significant portion of the GAAP we had versus our internal forecast.

But on top of that, the revenue actually came a little bit softer altogether than internal assumption. And then, we had this adverse mix more towards the standard product versus leading-edge technology, which led to a further deterioration in margin for this particular quarter.

Just to come back, in this situation as you -- if you think of it, if you look at Taiwan, the overall activity in Taiwan is less than -- well below 40% of the total activity. And then, if you take away one or two other guys, which are running pretty high, I mean [leverage] activity level in Taiwan is more like 30%.

And overall, there is quite a lot of oversupply of testing capacity with our customer. So when we hear that, also, you know, [ver high], I would say the advanced [GRE pro cap] that we have also will still give a better cost. You know, the [ancesses] is not that much to efficiencies, so what we do see in these times, we have plenty of [tester siders], is that people don't -- go less -- I would say with this inventory [pro cap] and go to more standard product, which makes it a slightly different mix.

When the market improves, obviously this will change back to this higher efficiency and more advanced [pro cap], so we will see this impact coming as people pick up some activity in fact. But we certainly, in this quarter, we are certain to see this impact.

On top of that, like I said, we did gain market share with all of our leading customers, I would say.

Absolutely. I just wanted to see if your outlook for shipment guidance in Q2 was flat like your outlook, basically, for revenue guidance in Q2. And (multiple speakers) are we continuing to build that deferred revenue account number on the balance sheet further in Q2, coming from, I guess, $9 million in Q1?

I would say this is probably a fair picture of the situation. But you know, we also expect, as we build history with some of this deferred revenue, we will be about to recognize some revenue from a prior period. But this is not factored in this revenue number.

So yes, there is some upside, and I would say it looks -- [fell it see] out to the first quarter.

Perfect. Thank you.

(Operator Instructions). Jim Covello, Goldman Sachs.

Good afternoon, guys. Thanks so much for taking the question. A couple things. We talked a lot about DDR3 and some delays in DDR3. There is one big customer that, at least publicly, has committed to a significant ramp in DDR3, or there is one big DRAM company. Has there been any share issues at that big customer that might impact your ramp to go along with their ramp?

I know that there is one very large customer to make a big announcement on DDR3 not long ago, and remember now, we have just recently been qualified with all the DRAM manufacturers. We always said that also we are increasing all our market share. You know, some processes just take time.

So I would say this big announcement also, they will have an impact. I mean -- it just takes time to go through it. Or we speak of a different customer.

I guess, maybe, I had a different impression of where your existing relationship stood. There have been times in the past when Form did have good revenue with the biggest DRAM supplier, but that doesn't seem to be the case today.

But this is coming back. Let's reiterate. You spoke about share. We did not lose any market share with any customer. In fact, we have gained market share with all major customers that we have, as much as we know.

Okay.

Does that answer the question, Jim? Good.

(multiple speakers) little bit, if I could go onto the cash. There was a thought a little while ago that Form could end the year with maybe a $500 million cash balance, and that was kind of a goal for the year. Does the current environment change that at all, or do you still think you could be able to keep the cash balance at that number exiting the year?

The numbers we communicated a quarter ago had embedded some scenarios of revenue in the second half. Now if the revenue scenarios are lower than expected, obviously this would make this goal more challenging.

On the other hand, if the revenue scenario is better than our breakeven, then it will be greater than that. At this point, we have very little visibility for the later part of the year. I see this $500 million as a very healthy milepost for us, to compare ourselves against on our performance for the rest of the year.

Great. Thank you.

(Operator Instructions). Kevin Vassily, Pacific Crest Securities.

Can you guys provide an update on the ITC proceedings? Where are you? At what point do you expect some of the costs on the legal side to begin to dissipate as you move through that process? Maybe you could just give an update there.

Under ITC, to be -- I have it written so I can make sure that -- you know, with legal stuff, you better be precise. So we had a -- under ITC action against MJC and Phicom, we had a nine-day trial, hearing, which concluded in March 6. We expect to receive a determination from the judge mid-June.

The target for the final determination is October 19, 2009. On the cost, I think, basically, as Jean said, these costs should go dramatically down in Q2.

We expect a little bit of legal costs related to ITC in Q2, but this is the tail end.

And that's running at, you said, about $3 million a quarter? Is that right?

That was $3 million in the first quarter. We expect a number which is below $500,000 for the second quarter.

Is that the primary delta between your Q1 OpEx and the forecast for Q2?

(multiple speakers)

The non-GAAP OpEx.

This is a big portion, but we continue to expect some reduction in other lines as well. In R&D, as well as general other house accounts in SG&A.

And then, with regard to potential remedies, let's assume that, in the initial determination, the judge rules in your favor. What kind of remedies are available in this circumstance? Given that MJC and Phicom have limited exposure here in the U.S., what's the impact here for you?

I think it's much too early to discuss it. So, but overall -- you know. And anyway, look. Even -- if we win something like that, it puts you in a position, in a very good position altogether with most other customers. Because no customer wants to, very basically, deal with these things. Many have them have been burned in the past, also.

So I think it's too early to speak about the next [tape]. We are just looking at it step-by-step, but I think it's very important for us that, just on a question of imagine what it means, the way you deal with a customer, I think it's very important.

To your knowledge, do MJC or Phicom have any meaningful share in the U.S. right now?

Not really.

Okay, that's helpful. Thank you very much.

PJ Meese, Lehman Brothers.

Thank you. Just a quick follow-up. First, you talked about $27 million, $28 million OpEx for Q2. Does that fully reflect all the cost-cutting efforts that you've made, or should we see that head down in the September and December quarters?

You should see keeping this going down. I mean, if anything, on a daily basis, we are being very aggressive with coming up with new ways of cutting costs in OpEx, as well as in manufacturing, by the way. And because we are in a situation where the key is for us to come up with new short-term -- with immediate impact cost-reduction action.

We are also, in parallel, working on measures which take a little bit more time to implement, such as reducing our realistic footprint in the U.S., for example, which requires us to get out of some commitments, so this takes a little bit longer. We expect that, down the line, both on OpEx and manufacturing, the way we address this more fundamental cost structure will take effect to actually a bigger order of magnitude than what we have been doing until now.

And overall, it will complement those short-term measures. So to your question, we absolutely -- absolutely are factoring some further cost reduction, and you see that level that I mentioned for Q2 as a step in the right direction. Especially as the revenue -- as long as the revenue stays very low, we are even more aggressive to cut costs.

One last follow-up. Historically, you've provided a geographic breakdown of revenues. Could you do so here as well?

This is given on our website. I can give that to you after the call, if you want. No problem.

Thank you.

It appears there are no further questions at this time.

We'd now like to conclude the call. Thank you for joining us today, and we look forward to speaking with you again soon.

Ladies and gentlemen, that does conclude today's call. Thank you for your participation.