FormFactor Inc (FORM) 2011 Q1 法說會逐字稿

Thank you, and welcome, everyone, to FormFactor's first quarter 2011 earnings conference call. On the call today are Chief Executive Officer Tom St. Dennis, Chief Financial Officer Rich DeLateur, and Vice President of Finance Michael Ludwig.

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 in the press release issued today, and also on the investor relations at FormFactor's website.

Also, a reminder to everyone that today's discussion contains forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements include, but are not limited to, projections including statements regarding business momentum, demand for our products and future growth, statements that contain words like "expects," "anticipates," "believes," "possibly," "should," and the assumptions upon which such statements are based.

These forward-looking statements are based on current information and expectations that are inherently subject to change, and involve a number of risks and uncertainties. FormFactor's actual results could differ materially from those projected in our forward-looking statements. The Company assumes no obligation to update the information provided during today's call, revise any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in forward-looking statements.

For more information, please refer to the risk factor discussions in the Company's Form 10-K for the fiscal year 2010 as filed with the SEC. (inaudible) 10-Q, SEC filings, and in the press release issued today. With that, we will now turn the call over to CEO Tom St. Dennis.

Good afternoon. The first quarter of 2011 represented yet another positive step forward in the turnaround of FormFactor's performance. The Company continued to make progress on reducing expenses in cash burn while improving gross margins.

Lead times decreased again by approximately 10% over Q4, and I expect all of these trends to continue in the coming quarter. As we indicated in our December call, we expected our Q1 revenues to be down significantly from Q4. The quarter ended a little better than we expected, primarily from increased turns in the DRAM area of the business, including business resulting from recent qualifications.

In the end, DRAM and SoC were essentially flat quarter-over-quarter, with flash being the primary driver of the quarter-to-quarter decline. While there are promising developments in flash, as I discussed at the last conference call, it may take a while for flash to rebuild to last year's levels and show year-over-year growth.

The tragedy that struck Japan on March 11th created some significant challenges for our customers and our suppliers. There are a couple of customers who had to moderate their manufacturing plans due to plant damage, which will impact our business with them somewhat in Q2 and Q3. Additionally, there have been some supply delays that impacted our deliveries early this quarter.

At this point, our supply chain in Japan has returned to normal levels, and our thoughts and prayers go out to all the people of Japan as they work to recover from this disaster.

Customer qualifications in the matrix product line continued in Q1, with successful closer at one DRAM customer and one NAND flash customer. We expect that revenues will ramp up with these two customers through Q2 and Q3. We still have one major customer left to qualify in each of the DRAM and Flash markets. At a high level, business is showing an uptick consistent with seasonality experienced in past years, and as discussed previously, we expect Q1 to have been our low point for revenue.

Going forward, our focus remains on improving execution across all areas at FormFactor. Our first goal is to structure FormFactor to be cash flow break-even at a revenue level of $50 million per quarter. This requires further improvement in our product cost and overhead, as well as our operating expenses. In manufacturing, we will further reduce lead times while improving on-time delivery and quality.

Though we have a substantial amount of R&D dedicated to all areas of memory technology, we have recently kicked off an incremental investment in vertical spring technology and platforms for the SoC market. This technology will open up a large portion of the SoC market that our current TrueScale and TrueScale Matrix products do not serve, and we expect that the SoC market will be the fastest-growing portion of the advanced probe card market over the next three years.

Beyond regaining our market share in DRAM, SoC remains the most promising avenue of growth for FormFactor. Even with this incremental investment in the SoC market, we expect to meet our goal of getting non-GAAP OpEx below $20 million per quarter.

As we announced today, Mike Ludwig will become Chief Financial Officer on May 16th, succeeding Rich DeLateur. We have been very fortunate to have this depth of executive talent during the past year, and it allows us to make a seamless transition in the finance leadership at FormFactor.

Rich has been a driving force in FormFactor's turnaround, and I want to thank him and acknowledge him for his critical contributions through a very difficult time. Rich will be joining FormFactor's Board of Directors, so please be assured that he will remain dedicated and focused on FormFactor's success, and we expect him to be an active board member.

Mike Ludwig has a long history with FormFactor, having been the Corporate Controller when FormFactor went public, and has been a key member of the executive team as we have navigated through the past year. I look forward to working with Mike as we complete the turnaround in FormFactor and get back to profitability and growth.

Now, I'll turn it over to Rich to go through our operational performance and our Q2 guidance.

Thank you, Tom. The results for our first quarter are as follows. Total revenue was $40.4 million, down 8% sequentially and slightly up 2% on a year-over-year basis. The revenue decline from the fourth quarter came primarily from the flash sector of the business. The details are as follows.

First quarter revenue for DRAM products was $26.9 million, flat from our fourth quarter, and down 15% versus the first quarter a year ago. Flash revenue was $6.2 million, a decrease of 33% from Q4, and up 77% versus the first quarter a year ago. Born (ph) flash continue to be the majority of our flash revenue at $4.2 million.

SoC revenue was $7.3 million in the first quarter, down 6% sequentially and up 66% versus the first quarter a year ago. Revenue from our new product architecture, SMART Matrix and TouchMatrix was $13.1 million, which represents 93% of our full wafer contact business.

First quarter GAAP gross margin was $4.1 million, or 10% of revenue, compared to $3.3 million, or 8% of revenue for the fourth quarter. On a non-GAAP basis, gross margin for the first quarter was $4.9 million, or 12% of revenue, compared to 10% in the fourth quarter. Write-offs related to excess unsold inventory came down significantly, but were offset by a negative product mix and lower absorption of fixed spending due to reduced revenue levels.

We expect the improvement in inventory write-offs to continue, and the impact related to product mix to be more temporary. Lower absorption of fixed spending due to reduced revenue levels will continue to wait negatively on our gross margin until we grow our revenue.

Our GAAP operating expenses were $25.3 million for Q1 compared to $27.2 million for Q4. Q1 operating expenses include $1 million of restructuring charges, and an additional $0.4 million charge for impairment of certain aspects. Non-GAAP operating expenses for the quarter were $20.8 million, down $1.7 million from $22.5 million in Q4, demonstrating continued reduction in our operating expenses, and better than our previous guidance.

We continue to review all aspects of our spending and will continue to take the required actions to achieve our targeted structure by mid-year with OpEx less than $20 million per quarter on a non-GAAP basis.

Cash, comprised of cash and short-term investments, ended the quarter at $334 million, $14 million lower than the previous quarter, which is lower than our previous guidance. This cash usage includes $2 million for the repurchase of common stock. This improvement was driven by higher-than-anticipated collections and lower-than-forecasted fixed asset additions.

Our stock repurchases since inception of the program have been 332,712 shares at an average price of $8.88. Under our current program, we are authorized to purchase an additional $47 million worth of shares over the next six months.

Here are some other financial details. Our depreciation and amortization in the first quarter was $2.9 million. Our capital additions were $1.8 million. We expect capital spending for all of 2011 to be at or below $12 million.

Before I discuss Q2, I want to discuss our position around break-even. To continue in our efforts to structure the Company to be cash flow break-even at $50 million revenue by mid-year. Though considerable progress has been made towards this goal, we still have $3 million to $5 million worth of actions that will drag into Q3 and possibly Q4.

With respect to Q2, we expect Q2 revenue to be in the range of $42 million to $46 million. We expect continued improvement in the management of our excess inventory charges, and reduced spending from the cessation of manufacturing activities in Singapore, as well as other cost-saving activities. Consequently, our non-GAAP gross margin should improve from Q1 and be around 14% to 20% of revenue.

We expect continued improvement in non-GAAP OpEx. It should drop by as much as $1 million in Q2 2011 to be at or below $20 million. We expect Q2 cash burn to be roughly equal to Q1, not including any stock repurchase activity.

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

Certainly, sir. (Operator Instructions). Our first question comes from the line of Timothy Arcuri from Citi.

Hi, this is Wayne Nguyen for Tim. A couple of questions. In terms of the Japan earthquake, can you provide more color on the impact on you and your competitors whereas the market share situation in the near term and long term?

We don't get the data real-time to do exact calculations, but for the DRAM market, I would imagine we garnered about 50% in Q1.

So, your share increased to 50% from-- what was your previous estimate before the earthquake?

That's about right up with what we expected, and Q4, it's very difficult to calculate a share of market calculation, because they have a large amount of deferred revenue in Q4 in the competitors' calculations.

Okay, so, obviously, Q1's number is a little bit on the high end of your guidance. Do you see-- what do you see the dynamics (inaudible) in Q2? You mentioned about some of the impact in Japan in terms of yourselves-- revenue from the Japan side, but also there is increasing kind of new development opportunities. So-- can you give us more color on what DRAM is shaping up in Q2?

I think the DRAM opportunities now are more stable and look more promising than they did in the Q2 timeframe. The customers went through, and seem to be settling out now, but went through a fair amount of searching around in terms of the mix of their products between mobile and commodity, DRAM or Server DRAM, and at this point in time, that appears to have stabilized somewhat, and is now-- now they are back investing more specifically and look to have that plan settled out, and that's reflected in our increase in revenue guidance in Q2.

Okay. Last question, in terms of flash memory. What's the reason that the revenue dropped in Q1, and what do you think Q2 will see? Will it bounce back or continue to be depressed?

Actually, Q4 had some unusual activity, and I think you'll be able to see what it looks like when the 10-Q comes out, and one particular account had an unusually large quarter with us, so Q4 was actually a little bit above trend for flash.

You will see flash recover in Q2, but not to the levels that we were used to last year. That will probably take a couple of quarters.

Great, thanks.

Thank you, and our next question comes from the line of C.J. Muse from Barclays Capital.

Yes, good afternoon, thank you for taking my question. I guess first question, in your prepared remarks, you talked about how you expected revenues in Q1 to be the low point, and I guess I was hoping to probe a little bit deeper into that in terms of the confidence level there on saying that's low for the year. I'm assuming that's the context.

I guess, if you can kind of walk through what you're seeing in kind of the various end-markets that provides that confidence, and if you can kind of juxtapose between what you're seeing in the markets and then what you're seeing in terms of your market share win successes so we can really see that confidence?

Well, the comments that we made about Q1 being the low point were related to the fact that we were still engaged in product qualifications for the Matrix product line, both SMART Matrix and TouchMatrix, and that we thought we would complete some critical qualifications that would allow us to re-engage with customers into their design flown and revenue stream as we move into Q2, Q3 and Q4.

We completed two of those key qualifications and have begun to receive multiple card orders and follow-on designs as a result of those qualifications. So, really, it was a matter of we were not qualified at several of the customers, and needed to get the products qualified so that we could participate in their full wafer contact requirements, and completing that in Q1 gives us confidence moving on, then, into Q3, Q4, to continue to participate there.

We also are, as I mentioned, focused on two more important qualifications that I would expect us to get completed over the course of the next two quarters, so with that and with the generally improved outlook that I think was reflected by Intel and several companies, we would expect to be able to see growth as we continue through the year.

That's very helpful. I guess, if I could add to that, in terms of the growth through the year, does that require those 200 quals to get completed or not?

I don't know at this point. The reason is that this market has a seasonality to it, as I mentioned in my remarks, and, generally speaking, Q2 and Q3 are quite strong. Q4 and Q1 are typically lower than Q2 and Q3.

So, we'll see how this year turns out, if it follows that or not, but obviously, the next two quals would be very important for strengthening the revenue in the Q4 and Q1 timeframe for next year.

Great, that's helpful, and if I could follow up on the gross margin side, just to be clear, in terms of the gross margin guidance, that is pro forma?

That's on a non-GAAP basis, yes.

Okay, and then, I guess, thinking about inventory right down to-- can you share with us what that number was in March and how we should see that trajectory through the remainder of fiscal '11?

We don't disclose the exact in-and-outs of inventories. Obviously, you can see the change in net which was down $2.8 million in the 10-Q, but, you know, at a high level, we probably have gotten half of the reductions we should have gotten from what was a pretty high level of Q4 and Q1, and we should be able to match that improvement going forward.

So, I guess maybe, asking another way, if you were to hit the midpoint of your guide again in September, I'm not saying that that's what you're saying, but if you were to, what kind of gross margin would you see there instead of the 14% to 20% that you guided to today?

Well, I can answer with regards to inventory. If we had executed perfectly, you might have seen 4% to 6% higher gross margin.

So, could be upwards of 18%, 26% in the second half of the year at a flattish revenue run-rate?

It should improve beyond that because of other activities beyond inventory that are going to help the margin out.

But the main thing--

I didn't quite catch your numbers, by the way.

Well, you guided 14% to 20% pro forma, and you said you thought you could add 4% to 6% on top of that, is that correct?

So, the pro forma guidance would include more improved inventory, probably not the 4% to 6% range, but at least 2%.

Okay. I'll follow up offline, then. Thank you very much.

Thanks, C.J.

Thank you, sir. Our next question comes from the line of Patrick Ho from Stifel Nicolaus.

Thanks a lot, and congrats, Rich, and good luck. In terms of the lead times and the improvements that you discussed, Tom, can you just give us a little bit of a timeline of how much more improvements you can make and when you believe you'll get lead times to optimum levels?

Well, currently, we are demonstrating an ability that I'd say to get to competitive and optimum levels on a one-off basis right now. Our target is to go into the third quarter, beginning in July, quoting at what I would say is the-- perhaps the high end of the optimum range, if you will, but certainly far more competitive than we were, for example, in the Q4 timeframe.

We will-- by that point in time, we will have reduced our lead times by over 30 days, so going into Q3, I would expect that we are at a healthy, competitive position with regards to lead times, although I wouldn't say that it's a competitive advantage on it, but I think it will neutralize any issues that we have had in the past, and we have had issues competing in the past because of lead time.

That's great. And in terms of the remaining qualifications that you're working on with these customers that you're trying to gain in 3Q and Q4, going back to the lead time, would you say that that's perhaps the biggest variable that would help you win that business, or are there still other variables that need to be worked through to get them on board?

Well, there's-- there are technical issues, particularly with their test strategies, that we have to work with them on, and they have some very unique test engineering requirements that we're learning more about as we engage with them, and that has been a part of the-- a key part of the program that has actually extended it.

I had hoped that one of them would have been complete by now-- I don't know if by the end of last quarter, but by now, anyway, and lead time-- I would say that lead time is not the key enabler with those customers. It's more of working through the technical requirements, and it's also vital on on-time delivery, and, of course, lead time plays a key role in that in terms of your overall execution, so on-time delivery is key in one customer's mind, and we have made-- we have demonstrated improvement there in our general business, but we are going to have to complete that to really see a ramp-up.

Right, and final question from me. Rich, in terms of the gross margin range, 14%, 20%, on the call, you talked about various things that have impacted Q1, like absorption, product mix and some of the inventory write-offs. Given that wide range, what are going to be the key variables on both ends of that spectrum?

Right, so there are things that are in our control, which have to do with the overall size of our factories' network, how we manage inventory, and in terms of the break-even goal, OpEx, which (inaudible) a gross margin item, and then there are things that are slightly in our control, which is product mix, and that counts from a product standpoint and from an account standpoint.

So, when I talk about that range of $3 million to $5 million, the $3 million really represents items that we have identified and are working on and can put our hands on. The second $2 million, which is why I give the range, really reflects that we don't know what the exact product mix will be at that $50 million level. If the product mix goes for us, you get a much higher margin. If it goes against us, we're back to the drawing board.

Obviously, margins-- I mean, mix, is a major part of the major calculation. So, a lot of moving pieces there, and that's why you get that $3 million to $5 million range.

Great, thanks a lot, guys.

Thank you. (Operator Instructions). Our next question comes from the line of Jim Covello from Goldman Sachs.

Great, guys, good afternoon. Thanks so much for taking the question. I understand and certainly applaud all the short-term things we're doing to get back to profitability and to get the expense structure under control and understand that from a quarter-to-quarter basis, this looks like the trough in revenue, and can we go higher from here, and there's some opportunities in that.

But if we look out a little bit further from sort of this day-to-day or quarter-to-quarter stuff, and go out a couple of years, how do you envision Form becoming a big company, a significantly profitable company, sustainably, over the course of this cycle? What's the long-term solution there? Thanks so much.

Well, Jim, the-- if you look at the recent data out from DLSI and all of the market opportunities in the probe card market are continuing to grow, and the advanced probe card market, meaning the areas where MEMS has probably its greatest leverage are growing the fastest of any sector within the overall probe card market.

So, I think our opportunities are out there in front of us. One of the struggles that FormFactor has had is being very narrowly focused in the market, almost exclusively DRAM, and then having gone through the product problems that we have gone through, it constituted a real setback without any diversification within a rather narrow market, but at least without revenue opportunities in flash and SoC, it made it a very difficult time for FormFactor.

As I mentioned today, we've got a new investment that we've kicked off to go and focus on the SoC market. We believe this market will be one of the strong growth areas within probe cards and advanced probe cards, and the Company is-- has a heritage of that from its beginning, but then revectored it-- the product towards DRAM, and really left a lot of the SoC market behind.

Reinvigorating that is going to give us an opportunity to access a couple of hundred million dollars a year of incremental market that we really can't access today, and I think what that does, then, is it gets us into a kind of critical mass within this market, where we can generate good revenue, good profits, and then, from that standpoint-- or from that point forward, go and explore other areas where our core competencies, market capability, channels, et cetera, could be leveraged to grow from there.

But, right now, focused on adding one more important market segment to the revenue profile over the next couple of years.

That's a really helpful perspective, thanks so much.

Thank you, sir. And we have no further questions in the queue. This does conclude the conference call for today. Thank you for your participation. You may now disconnect.