FormFactor Inc (FORM) 2009 Q4 法說會逐字稿

Thank you and welcome, everyone, to FormFactor's fourth-quarter and fiscal 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 reconciliation is available in the press release issued today and also on the investor section 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 discussion in the Company's Form 10K and subsequent Forms 10-Q and in the press release issued today.

With that, we will now turn the call over to Mario. Please go ahead.

Thank you and hello, everyone. Our fourth-quarter results concluded one of the most challenging periods of the Company's history. Over the past two years we have seen what we call a triple whammy of events. Certain internal manufacturing challenges, [overcapacity] in DRAM that turned into broader economic downturn within the semiconductor industry, and a global financial crisis.

During this period, we have seen specific regions that were historically significant memory producers going to hibernation. Billion dollar chip companies filed for bankruptcy on an industry consolidation, resulting in a meaningfully different and smaller customer landscape than in the past many years. The industry has had to adjust accordingly.

This adjustment for FormFactor has manifested itself in many ways, from restructuring our operating model to our regional [icing] manufacturing capability to increased investments in new products. We will continue to focus on strengthening FormFactor into a more diversified global technology leader in test efficiency.

Our efforts in manufacturing on product development have resulted in a more flexible cost structure with an eye on building our regional presence. This has been and will continue to be an important initiative for the Company, due to the positive impact it has on our customer relationships, as we are more able to meet local market requirements.

Currently we are incurring some duplicative costs in California and Singapore as we get our facilities up and running without disrupting any potential volume or opportunity. Therefore, short-term, our costs have been higher than we would like, but we will begin to see the short -- the long-term impact of the back end manufacturing move to Asia by our fourth-quarter 2010.

While our current set of products continues to be recognized as best in class, it is our investments in new platforms on technologies that are gaining momentum in the marketplace. I recently announced new full wafer contact to product architecture that was released in both DRAM, called SmartMatrix, and in Flash, called TouchMatrix are being well received by customers as a [procast] moved through qualification into volume production use.

Both are SmartMatrix products for the DRAM market on our TouchMatrix product, serving the Flash market, are in evaluation or are being adopted by all top-tier manufacturers. These breakthrough new product technologies extend customer technology roadmaps, lower cost of tests, improves reliability, decreases lead time and provides significant time-to-market advantage to our customers.

Continuing with technology, our proprietary advanced theory for tester results enhancement solution was introduced to market in volume in early 2009. And we are from now shipped over 125 wafer Probe cards incorporating this technology.

This [enabling] technology allows customers to extend their use of already invested [ATE] capital equipment well beyond the time it has been originally designed for, resulting in as much as 30% cost reduction in tests. As test capacity becomes tight, the interest level in this capability increases.

Our investments in technology are not being limited to only the memory market. We have also invested in our SoC products. We have had significant advancement that will expand our other industry footprint and further enable our SoC market growth. A key advancement is introduction of a new breakthrough multi-tier spring technology that's targeted to the smaller pitch part layouts to the high [handover] market.

We believe this new spring technology, technology will enhance our competitiveness and expand our addressable market opportunities.

As we exited 2009, we believe we can look back and see a lot of progress towards positioning the Company to gain share and extend customer roadmaps as a recovery against [DEM]. For example, during our fourth quarter, we improved our original mix by increasing business in Taiwan and Korea and gained share through the memory sector. Unfortunately at the same time we are experiencing weakness in Japan.

So progress has been made, but there is more to follow.

As we move into 2010, we see a number of positive drivers to our business. The DRAM design activity in our fourth quarter was at the highest level since early 2008, up 40% from our third quarter.

We are seeing a significant shift to our full wafer contact probe cards driven by Korea and Taiwan. The DDR3 cycle with a transition to 5X and 4X nanometers and nodes as well as a transition from 1 gig to 2 gig devices. Industry experts expect a strong bid gross of 45 to 50%. And a strong memory price results in positive cash growing in the memory space which would lead to continued investment in shrinks and efficiencies.

In closing we are delivering breakthrough in our product offering and expanding our share and customer reach. I recently launched new architecture product are critical to our ability to meet with [used] lead times and enabled the Company to expand into market it has not been able to fully address in the past, like NAND and SoC. d Also the timing of volume ramps for our customers is still uncertain. We remain confident that we will return to strong growth in 2010 and that our investment over the past few years will bear fruit.

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

Thank you, Mario. I will begin with a summary of our fourth-quarter results.

Total revenue was $33 million, down 25% from our third quarter and down 17% year over year. As we indicated in our pre-announcement, the weakness was due primarily to a delay in the timing of customer technology transitions, tooling cycles and volume plans.

Fourth-quarter revenue for DRAM was $23.6 million, down 35% from our third quarter and down 24% versus the fourth quarter a year ago. The weakness in DRAM was due to a drop in DDR3 activity as customers prepare to the next tooling cycle at 5X and 4X nanometers in volume.

The results of these [pose] in DDR3 activity was a slight increase in DDR2 revenue as customers opportunistically consumed more DDR2 to maximize cash flow.

The Flash business grew sequentially in the fourth quarter. Flash revenues for the quarter were $2.7 million, up 29% sequentially and resulting in growth of 22% from the fourth quarter a year ago.

The improvement in revenue was due to an increase in [node] demands. Revenue in the SoC business was up 28% sequentially to $6.7 million due to improved traction in the wire bond market. The SoC business rose 2% when compared to the fourth quarter a year ago.

For the fourth quarter, GAAP gross margin was minus 8.5%. On a non-GAAP basis, gross margin was minus 5.9%. The gross margin was impacted negatively compared to last quarter, due to the lower than expected revenue level, the product mix and an increase in new first article designs requests that carry higher initial material costs. As these new designs lead to volume orders, we'll see a positive impact on the gross margin line.

Moving to operating expenses, on a GAAP basis, operating expenses totaled $33 million. These GAAP operating expenses were higher by approximately $2 million from the third quarter. Higher GAAP operating expenses were due to $1.9 million increase in R&D spending. The increase was primarily due to a further investment in new product of approximately $600,000 and an increase of $800,000 related to employees who joined FormFactor after the asset purchase of Electroglas during the fourth quarter.

On a non-GAAP basis, operating expenses were $28.7 million, up approximately $1 million from the third quarter and in line with our plan. Our tax rate was 19.5% for the fourth quarter, resulting in a benefit of $6.8 million to net income.

This tax benefit was primarily related to a recent tax law change, allowing for a longer carryback period. To reiterate what we said from last quarter, we expect the tax rate to remain near 0% until we prove the sustainability of the profitable quarterly trend. Therefore the tax rate is likely to stay at or near 0% throughout 2010.

During our fourth quarter, we had solid cash management and strong cash collections, which resulted in an improved DSO of 103 days versus 116 days last quarter and lower than expected cash usage. Total cash investments comprised of cash and short-term investments ended the quarter at $449.2 million, approximately $13.4 million lower than the previous quarter.

As we turn now to the outlook for the first quarter and fiscal 2010 and as we indicated in our revenue results, we expect our revenue for the first quarter to be approximately $40,000,000 plus or minus 10%. We are still highly depending on timing of specific customer engagements, which could move revenues from one quarter to another.

For our fiscal year 2010, we expect revenue growth of 60%, plus or minus 10%. In the short term, [keva] revenue drivers have more to do with the timing of specific customer ramps and no transitions than to general seasonality.

In the short term, we expect gross margins to remain under pressure for a couple of reasons.

First, our cost of goods sold will be impacted by our investments related to our Asian manufacturing operation, resulting in approximately $3.5 million of additional costs during our first quarter with a similar or higher level of cost expected in the second and, somehow, third quarter.

Second, we are transitioning from a legacy product to our new product architecture in 2010. The improvement of our gross margin will be driven by the timing of customer qualification of our new products and corresponding volume ramp. We expect to achieve the full benefits of the transition of our new product architecture and the ramp-up of our back end manufacturing exiting our third quarter.

Non-GAAP spending for R&D and SG&A in the first quarter will be slightly up compared to the fourth quarter. The increase in operating expenses for the fourth quarter from the fourth quarter is due to a seasonal increase in employee fringe benefits.

For fiscal 2010, non-GAAP operating expenses will remain in the quarterly range between $28 million and $32 million as we start to normalize as a company and bring back some employee-related benefits such as 401(k) match and bonuses that were temporarily outed due to the economy climate. While the environment remains uncertain and this will have varying outcomes over the near term, we believe we will we will attain profitability in the second half of the year with a non-GAAP P&L breakeven at $60 million run rate exiting the third quarter.

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

(Operator Instructions). Patrick Ho with Stifel Nicolaus.

Thanks a lot. You know, as your new products ramp up through the year, can you give us an idea of what your future business model on a high-level -- you know, on a normalized basis will be? What type of gross margins and what type of operating margins are you looking for as these new products began to ramp?

So what I can give you as data point is -- and this incorporates the new products. At the end of the third quarter we expect to be at revenue breakeven of 60, which is approximately a gross margin of 40 -- low 40%. Between 40 and 45%. And then thereon, thereafter have a drop through incremental margin of at least 60% for every $1.00 of revenue.

That's very helpful.

Now we said in earlier calls our OpEx is intended to stay flat, if not going slightly down in the course of the year. So that drop through into the gross margin we expect to go all the way down to operating income as well.

Okay. Great. Now with regards to some of the timing issues and the delays that your customers are experiencing in terms of transitioning from one node to the next, did they not backfill, I guess, with some of your legacy products in the interim? Because the DRAM markets obviously picked up. I guess the disconnect I still have is how come they didn't backfill some of your older legacy products as they were transitioning to the next technology node?

Well you know, as I go to a new design, I have any delay in a new design and they continue to run older design. Our [procast] are pretty robust and solid over the lifetime and many times exceeding enormous cycles of it.

So we are seeing sure the last couple of quarters in fact when (inaudible) up and also even when people decide to just opportunistically elongate DDR2 because the price was so good. We have seen them just using a Probe card that they already had in inventory if it was not a new design and just run it for quite a while.

Okay. Final question for me is, Jean, what do you expect in terms of cash burn in the first quarter? And maybe if you have any color on a going forward basis?

In the first quarter, we are working at getting IRS refund like we did last year. Taking that into account, we should be in the single digit cash consumption in the first quarter.

After that, our plan for the year is sizable growth and we will generate cash, certainly in the second half. Some of that may depend on the steepness of the growth and the need of working capital financing. But I would say the first quarter, the first half is going to be depending on how steep that curve is going to be.

Great. Thank you very much.

Jim Covello with Goldman Sachs.

This is Mark Delaney calling for Jim. Just first question, when you think about your SSE business and contacts of your 60% growth for next year, do you think the SSE business grows above that or below or any color you can provide there?

The biggest growth, obviously, next year our growth will be two things. First, recovery of the DRAM which is still a very large factor. Second, I think the highest growth we will experience in fact in the next year is the NAND flash because we come with new products where we have never been.

And SoC, we are also investing in SoC. We are starting getting into it. The slope will be pretty decent, but in absolute terms, too big a gross will still be recovery of DRAM and the NAND flash.

Okay, great, thank you. And just one follow-up. When you think about the midpoint of your guidance about 60% in 2010, obviously a lot of fluidity, but what type of capacity expansion do you think you need to see if any to get to the 60% growth?

We can be at this level with basically -- you know we are in the transition period, but basically with the capacity that we have kind of into the plan, we can take care of that.

Okay. Great. Thank you.

Gary Hsueh with Oppenheimer.

I just wanted to get a little bit more color and, hopefully, get some quantification on the mix of business from a customer standpoint and going from Q3 to Q4. Just wondering if you could disclose or talk about greater than 10% customers. I know throughout the year, in 2009 you've consistently been [Elpida] from your filings and you know around 40 or 60%.

So I was wondering to what extent did they kind of fall down in the December quarter and if there are other greater than 10% customers making them up in Q4?

Yes. In Q3 we have three customers above 10% and a couple more very close to it. In terms of -- so, overall, it is five. Right?

In terms of mix, I would more refer to a product mix and this is between standard configuration that addressed the DDR2 or DDR markets. This is commodity versus specialty DRAM. And certainly when customers pause into their technology shrinks, we have more of those standard products and standard products, are more subjective to competitive pressure.

We see that being resolved as we go into the year and roll up on the technology which will allow us to better compete on those more standard products.

Okay. If I could just kind of follow up my first question just to dig into this old bit more. You said five customers greater than 10% or close to it.

Of the other four, which -- how many are existing customers? How many are customers where you're really planting the seeds for future market share gains?

Well, we always said that we planned we do plan to grow much more in Korea. So obviously, we are continuing our effort for Korea. And we have also a very strong push because we believe that this will be a big player in 2010 in Taiwan, when we have seen very good results.

Okay. Because I haven't seen a Korean customer pop up as a greater than 10% customer for some time. So that's encouraging.

Let me just ask another question here. In terms of drivers or levers getting to the $16 million breakeven at the low 40 to 45% range, Jean. Can you help me out with some of the levers because in order to get there I guess coming from the December quarter, I am going to have a few quarters here where I have the model incremental gross margins drop through of close to 100%.

I mean, can you give me a physical kind of basis of reality in terms of how some of this 100% kind of drop through quarters occur?

They are essentially four elements you have to take into consideration. One is the effects we just talked about. The mix between standard products and more advanced products. And this dynamic will be driven by the roll out of our new architecture.

The second effect is the speed of adoption of the new technology from our leading-edge customers.

Thirdly, we have experience, even most in Q4, and we will see some of that in Q1. A big uptick, a big surge in new design requests and every time we have a new design, this comes with very few cards attached to it because it's, by definition, it is the first article.

So some of that is, we believe, temporary. As we go further in the year it will be replaced by volume orders.

And then, finally we have an effect of our transition to Asia as well as a few other initiatives we discussed last quarter which for the next -- for the first half is going to lower the cost as I said to the tune of $3.5 million per quarter. Right?

So as you factor all those elements and we go out of this transition, this will lead us to the new economics.

Okay, great, perfect. Thank you.

(Operator Instructions). Timothy Arcuri with Citigroup.

Couple of things. First of all, Jean, just on the margin commentary, so it sounds like there's an extra $3 million to $3.5 million to COGS that's going to hit in Q1 and Q2. So can I roughly take the gross margin in September when you were doing this same sort of revenue range that you are going to do in March? Can I roughly take that COGS and just add $3 million to it and that is sort of the general range that you will be in in March?

No. Remember what Jean said also. I'm sorry, it's Mario. We also see now in Q4 and we are still seeing in Q1 is, we have a lot of first-order, first article orders, which usually comes with a cost, a design cost except that which we don't see in volume orders. And we had less of that in September. So that's probably one factor that you have to take into account also.

Okay, well, then I'm just sort of playing with numbers here. So--.

And again on vendor, the last factor is when we ship our broke out, sometimes you ship more to a more advanced application and sometime you ship more to what I like to call standard application when the pricing is not exactly the same. And the margins are not the same.

So these are still two factors which will still be here in Q1, that you also should take into consideration.

Okay so --.

Maybe, Jean, you want to add something onto that.

No, I think that's --.

Think that's fine.

Okay, so the (multiple speakers).

From September to now, if you just do that you might miss a couple of factors.

Okay so then gross margins and margin is going to be about zero, give or take?

For Q1, I would say the midpoint should be about zero. Yes.

Yes, okay. All right. Second thing. Can you give us some idea of what it would take for you to cut breakeven? You know we've talked about breakeven many times and you are still losing lots of money. And I'm just wondering, can you maybe put a stake in the ground in terms of what it will take for you to cut breakeven? So i.e., if in Q2 you don't see the Company being profitable in Q3, is that what is going to cause you to break even? What is the decision tree?

You have two main factors that needs us to break even basically. First we think we try internal, which means that you know we bring in new technology, we bring up the new manufacturing sites. And basically if we carry on these two practically this is what it will be.

The other factor is all of our customers have put together plans. You see the need to come, you see the transition to come and if this also goes according to plan, there's nothing crazily optimistic. It is just what you can see everywhere.

If these two things happen then, obviously, we then, basically we should -- we will reach profitability in Q3.

I would add to that, Jean, that the combination of what we see from our customers, the micro trends and what we see in our design pipeline gives us a lot of very tangible signs that the increase is coming. So the high level of cost that we have currently in the system -- not only in the tax but also in COGS is related to ramping up this technology and to work at lowering, in a sustainable manner, our fixed costs.

To give you more -- a little more ground on that. You know if I look at the technology introduction, you know we have, by today we have chip rolling around 50 of these broke out. We are pretty happy with the results. So this is going pretty according to plan and pretty well in fact. And it is a very aggressive ramp-up, but up to now it has been going very well.

Our move on manufacturing was in our plan. You know we already moved all of our offices in the new building in Singapore where the Cleanroom is being manufactured and will soon be done. So this is according, we start moving equipment. So this is also going according to plan.

When you look at the amount of design that you will receive and one of the factors that is impacting our gross margin also the amount of first article that we are asked. For now -- like, I always say in the past few quarters I did teach us to be careful about it, but for now the business seems to be -- other activity seems to be coming also from what we expected.

Also we don't really (inaudible) quite a few times at the exact timing.

I guess just on that point then, can you give us and I -- I believe what you're saying, but can you give us some credible evidence? Maybe you can give us order numbers, some sort of design numbers. Something that we can hang our hat on that, in fact, this long-awaited revenue ramp that we've been talking about is finally here. Is there some number that you can give us? Either (multiple speakers)

Just to give you an idea that's where I (inaudible). You know our design activity in Q4 has been a full -- has increased by 40% from Q3. And our design activity up to date in Q1 has again a very large increase. So I should just take this which is always until something dramatic happens to the plan of our customers, this is still the first -- there is always a first time (multiple speakers) activity.

Yes. I'm just thinking back to June and it was the same story in June. So I'm just kind of looking for some bookings numbers or something like that.

But last thing for me is can you give us some split on DDR2, DDR3, because I'm sort of looking back at my notes and it looks like you were revenuing about $10 million back in June in DDR3. So the market has moved quite a bit since then. Obviously you had a customer issue this quarter, but I'm sort of wondering what's your DDR3 revenue (multiple speakers) base now?

If you look at examples, exactly for the numbers of revenue in Q4, but all I can say is for the actual booking that we have in both Q4, in fact if you look at the booking that you have in Q1 and also start the booking that you have for Q2 of 2010, I would say the vast majority is about -- is DDR3. It's probably about 80%.

Yes, so, I don't remember where you get the $10 million from, Tim. But what I can say is that of our commodity DRAM revenue volume in Q3, more than 80% was DDR3. And in Q4, it was 50-50. So we clearly see a pause.

However this is not reflected in the booking. In the booking, we still see in Q4 a large amount of DDR3. To the same tune of 80% plus of the total. Actually more than 80%. Of the total bookings. Right?

So we see this arbitrage between DDR2 and DDR3 happening in Q4 as just what it is -- an arbitrage. And we see the bookings are going up. The designs are going up at an extremely steep slope. And this validates what we know and we see externally from the gates that our customers are facing in terms of tooling cycles.

Right, okay, thanks.

Now Tim, just to close, something that you had underlining the question earlier is, we do see the fundamental of the business for 2010 still here now. And I want to tell it on the -- to illustrate it by some delay is is an understatement, but I mean we can all feel it.

But it is also certain that if within the next few months we have a tendency to believe that these parameters are not there anymore, we will certainly then revise completely our plan.

Okay. Thanks.

(Operator Instructions). Gentlemen, it appears we have no further questions. Mr. Magaro, I will turn the call back to you for any closing comments.

Great. Thank you. We will now conclude the call. Thank you, everyone, for joining us and we look forward to speaking with you again soon.

Once again this will complete today's conference call. We thank you for your participation.