FormFactor Inc (FORM) 2011 Q4 法說會逐字稿

Thank you, and welcome, everyone, to FormFactor's fourth quarter 2011 earnings conference call. On today's call are Chief Executive Officer Tom St. Dennis and Chief Financial Officer Mike 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 section of FormFactor's website.

Also, a reminder for 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 about our development, introduction and/or qualification of next-generation Matrix or new SoC products, and 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, to 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, subsequent SEC filings, including the Company's Form 10-Qs filed in fiscal 2011, and in the press release issued today. With that, we will now turn the call over to CEO, Tom St. Dennis.

Good afternoon. Demand for probe cards remained weak in the fourth quarter. Significant drops in DRAM prices caused by DRAM manufacturers to reduce wafer starts and delay introducing new designs. As a result, the demand for DRAM probe cards was reduced by approximately half compared to the third quarter. The impact on the hard disk drive market from the Thailand floods appears to be improving and estimates are that approximately 80% of the manufacturing capacity will be restored by the end of Q2 2012.

We expect to see the market for DRAM probe cards improving later this quarter or early in Q2 as a result of increased hard drive shipments. The market for SoC probe cards also slowed in the fourth quarter although not as significantly as DRAM. IC manufacturers invested cautiously in the fourth quarter due to macroeconomic uncertainty, and as a result, some of their programs were delayed or postponed.

Operationally, we took the opportunity given by the slowdown in Q4 to expand training and to continue to reduce cycle times. We ended Q4 with first article lead times for our Matrix product at approximately 54 days. This is over 30 days less than Q4 of 2010. We are continuing to drive lead times down throughout our factory and with our suppliers to achieve a lead-time goal of 42 days by the end of 2012.

Our product development programs made solid progress during Q4 as we continued to work closely with our customers. Two customers have installed our next-generation Matrix cards and are evaluating them currently. We're in the process of designing a card for a third customer, which will ship in Q2. We expect the next-generation Matrix product to begin to contribute to revenues in the second half of this year.

The development of our vertical probe technology for the SoC market continued in Q4, also with solid progress. We're currently working with our development customer to characterize and evaluate all aspects of performance of this new product. The development phase of this product should be completed in Q2 and then we will begin customer evaluations.

Recently, we have begun to make capital investments for production tools that will come online in the second half of 2012.

Despite the recent disruption in the DRAM probe card market, FormFactor's opportunity for growth in probe cards remains strong. We intend to achieve this growth by increasing our focus and products in the SoC segment of the market. We believe the SoC probe card market is poised to leverage the same technologies that significantly reduced the cost of tests for our memory customers.

FormFactor's products and technologies are well positioned to take advantage of this market opportunity. Revenue growth in the SoC market on top of the base of revenues from the DRAM market will improve our profitability and the diversification will reduce revenue volatility. This is our primary focus going into 2012 and we expect to make significant progress towards this goal.

Last Thursday, Jim Prestridge notified FormFactor's Board that he will not stand for reelection at this year's shareholder meeting. Jim has served as a Board Member for ten years and was Chairman of the Board for four years. On behalf of the FFI Board, I would like to thank Jim for his years of service.

Now, Mike Ludwig will review Q4 and our Q1 guidance.

Thank you, Tom. Revenues for Q4 were $30.2 million, a decrease of 42% from Q3 2011 and 31% from Q4 2010 respectively. The revenue decline from the third quarter came from all sectors of the business.

Fourth quarter revenues for DRAM products were $18.4 million, a decrease of 50% from our third quarter and a decrease of 32% versus the fourth quarter a year ago. The DRAM industry continued to be hit hard in Q4 by falling DRAM device prices, by the limited availability of hard disk drives impacting the PC market, which is a significant source of DRAM devices, and by the EU debt crisis weighing on the global economy.

Flash revenues were $5.8 million for the fourth quarter, a decrease of 21% from the third quarter and 37% compared to the fourth quarter of 2010. Our NAND flash revenues for Q4 were $1.7 million and NOR flash revenues for Q4 were $4.1 million.

SoC revenues were $6 million, a decrease of $2.3 million or 27% from Q3 and a decline of 22% versus the fourth quarter of last year. As Tom mentioned in his remarks, SoC IC manufacturers invested cautiously in the fourth quarter.

Fourth quarter GAAP gross margin was negative $5 million or negative 16% of revenue compared to $12 million or 23% of revenue for the third quarter. On a non-GAAP basis, gross margin for the fourth quarter was negative $3.8 million or negative 13% of revenue compared to $12.7 million or 24% of revenue for the third quarter.

Non-GAAP gross margin for the fourth quarter was negatively impacted approximately $14 million by lower absorption of fixed cost and direct labor from measurably lower revenue levels. In addition, the Company incurred a $1.7 million increase in excess inventory charges compared to the third quarter, customer cancellation charges and inventory costs associated with account penetration efforts at certain customers.

Our GAAP operating expenses were $23.1 million for Q4, an increase of $1.1 million compared to Q3. Non-GAAP operating expenses for the fourth quarter were $19.6 million, an increase of $0.6 million compared to the third quarter. The increase in non-GAAP operating expenses in the fourth quarter was due to increased professional fees incurred in the quarter. In the fourth quarter, the Company recorded a tax provision of approximately $150,000 consistent with the charge incurred in Q3.

Cash, comprised of cash, short-term investments, and restricted cash, ended the year at $297 million, $19.3 million lower than the third quarter. The cash used included $7.5 million for the repurchase of common stock during the fourth quarter compared to $5.5 million of stock repurchased in Q3. Excluding the repurchases of common stock, the cash used for Q4 was $11.8 million compared to $3.1 million for Q3. The additional cash usage was due to lower cash collections resulting from lower shipments in the fourth quarter.

Our stock repurchases for the fourth quarter were slightly over 1,250,000 shares at an average price of $5.98 per share, compared to just under 700,000 shares repurchased in the third quarter. Since inception of the program, we have repurchased just over 2.4 million shares for $17 million, an average price of $7.08 per share. We are authorized to purchase an additional $33 million worth of shares through October 2012.

Here are some other financial details. Our depreciation and amortization in the fourth quarter was $2.2 million. Our capital additions were $2.8 million. Capital spending for all of 2011 was $7.7 million compared to $30.9 million in 2010. Our stock-based compensation for the fourth quarter was $4.2 million, including an additional $0.3 million for certain terminations.

The Company reduced its manufacturing and OpEx cost structures measurably over the past year and a half in an effort to lower our cash flow break-even revenue level. As discussed in Tom's comments, our focus in investments continue to be concentrated on developing and delivering new Matrix and SoC vertical technologies to exploit the market opportunities in DRAM as the market returns to better health, and in SoC, to diversify our revenue base and penetrate the fastest growing segment of the advanced probe card market. Hence, we do not have plans to make additional significant cost structure reductions.

Although our turnaround is not complete, the Company made considerable progress in 2011. While revenues declined 10% to $169.3 million, SoC revenues increased 6% compared to 2010. For 2011, our GAAP gross margin was $21 million or 12% of revenue compared to negative $2.3 million or negative 1% of revenue for 2010. Our GAAP operating expenses were $91.3 million in 2011 compared to $194.9 million in 2010, which included a $52 million charge for enterprise wide impairment.

For 2011, the Company used $50.9 million of cash, including $16.4 million for stock repurchases compared to $102 million, including $0.6 million for stock repurchases in 2010.

With respect to Q1, we are encouraged by recent momentum in design activity and bookings. However, the momentum is occurring too later in the quarter to have a measurable impact on first quarter revenues. Consequently, we expect first quarter revenues to be in the range of $30 million to $34 million.

With respect to gross margin, the low volumes will again put pressure on our gross margins. Our non-GAAP gross margin will be in the range of negative 10% to break even. We expect Q1 non-GAAP operating expenses to be roughly equal to Q4 expenses at $19.5 million.

While we will not have the additional week of payroll expense that we experienced in the fourth quarter, the first quarter has incremental benefit and payroll tax expenses compared to the fourth quarter. Employees have been asked to take additional time off to lower our first quarter expenses.

The significant reduction in shipments in Q4 and early Q1 will have a negative impact on cash usage for the first quarter. We expect Q1 cash usage to be $16 million to $18 million, not including any stock repurchase activity.

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

(Operator Instructions) Our first question comes from Terence Whalen with Citi.

Hi, good afternoon. Thanks for taking the question. This relates to one of the comments you made later on the script, Mike. You had mentioned that bookings activity had picked up pretty considerably but that it wouldn't be enough to turn in the March quarter, that it would lead to shipments in the June quarter. Can you just dig into a little bit more detail, where you're seeing that activity in terms of the customer base, in terms of also what nodes you are seeing that activity at?

And then also, it sounds like, based on that statement, you have some visibility into the June quarter or at least to some dynamics into the June quarter. Could you share with us what you are observing there? Thanks.

Yes. I think, so won't get into specific customers but I will say we are seeing a pick up certainly in the DRAM bookings activity and the one thing that we want to be careful about is I don't know that we necessarily then have much visibility into the second quarter. The one thing that we would say is we saw a similar activity early in Q3 and then it dropped off pretty dramatically.

So I am not saying that that's what's going to happen here but we are seeing some good activity now, but I am not going to tell you that it will continue on. We're certainly hopeful that it will but I am not forecasting that at this point in time.

Okay, fair enough. And then if I could ask as a follow- up maybe a higher level question. It seems like every day we hear news and rumors of consolidation in the DRAM industry. Can you just share with us your observations of maybe how things have progressed there in terms of your expectations of how that industry perhaps restructures throughout 2012?

And then also conclude by just giving us an understanding of what your perspective is, as how consolidation in DRAM will affect the spending. Thank you.

Well, I think that you can see that throughout 2011 the DRAM industry was reducing wafer starts, certainly in the second half of the year, to try to get a balance between supply and demand. I think any consolidation that goes on will help to bring that into a balance. All that said, it's not clear at this point in time, what's going to happen, how that is going to go forward.

Right now, it's a rebalancing of production capacity against demand with uncertainty about what's going to happen with Elpida or Micron and others. So I can't really say, 'til we really understand what the structure is going to be, what the overall impact would be. We'll just have to wait and see how things unfold.

Great. Thank you.

Our next question comes from the line of Jim Covello with Goldman Sachs.

This is Mark Delaney calling in for Jim Covello. Thank you very much for taking the question. I guess, I was hoping you could talk a little bit more about the DRAM market, that Samsung and others are expecting about 30% bit growth for 2012. And if the supply environment does end up materializing as they are expecting, do you think you can be profitable at those types of levels? And you know so how can you get there, I guess on those dynamics?

Yeah, this is Mike. When we look at -- so certainly for us to become profitable the DRAM market is going to have to, we'll say be somewhat consistent with where it was at early Q3. As you recall, while we weren't profitable per se, we were close to cash flow breakeven at $52 million of revenue in Q3. So certainly, it's important that the DRAM market comes back to those types of levels for us to approach profitability.

In addition to that, we'll have to see a little bit of growth in our current SoC product offering excluding any benefit that we might get from the vertical technologies that we're developing in SoC. So I think that's what it's going to take for us to really kind of get back to cash flow breakeven and turn the corner.

Okay. That's helpful. Thank you. And then just following up on the DRAM market, I know there has been lot of moving parts, maybe some of the test companies have acquired probe card companies, maybe there's even been some equity investments in some of the manufacturers themselves. But there's also the opportunity, I know you talked last call about higher throughput requirements next year in DRAM. So just, as you start looking at your design traction, how do you think all that plays out for your DRAM market share?

Well, I think it's promising for us this year. We've got to see what unfolds obviously with the whole market.

We were successful in getting back into full normal operations if you will with three out of the four DRAM customers. Our next-gen product is currently in at the fourth DRAM manufacturer and as that gets through qualification and all, we'll be able to get that, some portion of their business back into our DRAM revenue stream. So that will help to strengthen share there, as we have not been providing them any meaningful amount of production over the last almost two years now.

With regards to what really happens overall in demand in the market, I think that capacity choices and manufacturing strategies vary amongst all four major suppliers and they tend to choose, and invest, and ramp at different rates. And depending on who is ramping certainly has an impact on what kind of revenue opportunities we get. Currently, it would seem like everyone has seen something that is positive and they are looking to put in place capacity that will be there going into Q2.

Okay. Thank you. And then just finally, I know in the past you guys have talked about what your expectations are just in terms of your share of available market for the SoC business. Do you kind of have any update on kind of how big that opportunity is and when you might be able to maybe get a little bit larger revenues in that business? Thanks very much.

So we expect that the SoC market will be the highest growth segment of the advanced probed card market over the next four years, looking at it through 2015. It will exceed or currently it exceeds the DRAM market or the flash market.

Our current product offering only serves a relatively small portion of that market, perhaps around 25% of that. The vertical card, that technology that we're developing should open up 25% to 30% more of that advanced SoC probe card market. And as I said, we intend to see some revenue of that in the latter part of this year and the second half of 2012 with momentum building as we go into 2013.

Great. Thank you very much.

Our next question comes from the line of Patrick Ho with Stifel Nicolaus.

Thanks a lot. Tom, maybe can you give a little bit of color in terms of the next-generation Matrix and how there may be I guess from your standpoint internally different manufacturing processes, maybe improved supply chain and lead times? Can you discuss how that will be different from your current Matrix products?

Well, we look at the market requirements for lead-time and everything irrespective of what our products are. So our -- the next-generation product needs to flow into our overall manufacturing processes and cycles to match-up with our lead time goals and that's part of what we are working through right now to begin to transition that into our volume manufacturing if you will, pending getting through all the final qualifications with customers currently.

The product itself is targeted at the high-end of the DRAM market where higher parallelism and higher performance is required. And we see today that DRAM companies are investing in the next-generation of test capability and capacity, which will be able to use the higher levels of parallelism that our next-generation Matrix card will be able to provide. So I would expect to see it begin to grow in its volume again in kind of second half of this year, but in line with some of the more advanced tester, as the more advanced tester installed base grows.

Okay, great, and maybe following up on that question, in terms of some of the capital investments you mentioned in your prepared remarks, are those capital investments to support the next-generation Matrix?

And what I am getting by that is, now that you are starting to see some signs of life coming back from I guess the recent events in Thailand, you've got the capacity in place for that, is the additional capacity that you are putting in place to kind of supplement when second half '12 rolls around, that's to support the roll out of the next-gen product?

The comments that I made were specifically about capital investments that we are making now for production on the vertical SoC card. We have some longer lead items that we need to get in place to support production in the second half of the year. All that said, we are also making capacity investments and purchasing capital to support the next-gen Matrix card. So we are investing in both.

Okay, great. And a final question for me in terms of the near-term environment again you are starting to see some signs of life. How quickly can you I guess satisfy customer needs if they ask for expedited orders, if they decide to start pulling in? I guess are your capabilities ready to handle those type of demand?

Well, it's what we've worked on through the year to shorten cycle time and responsiveness and we have worked through the most recent slowdown that really started kind of in the September time frame of last year. We have been focused on training and working closely with our suppliers on cycle time.

So we would like to think that we are well positioned to take advantage of a sharp recovery or a strong recovery and so far so good. And we are just trying to stay in touch with customers as they make their decisions. I am afraid that in the last six months we have seen an awful lot of volatility from DRAM manufacturers and where they have given some start and stop signals that were only four weeks apart as they were trying to figure out which way to go. So we are being cautious but we are currently able to satisfy the demand and are ramping to make sure we can meet any increases from there.

Great. Thank you.

Our next question is a follow up from Terence Whalen with Citi.

Hi, thanks for fitting me in on the follow up. I don't know if you addressed this, but I think in the past you talked about $50 million being a breakeven level on the cash side of the business. Can you just revisit whether you are there yet or what needs to be done on the cost side and if that target is still applicable in the next several quarters? Thank you.

Yes, Terence. This is Mike. So at the end of the third quarter, I think on our third quarter call, we actually had changed that number from $50 million and gave another range that was $54 million to $56 million. And at this stage, we do not see anything that would suggest that we are outside of that range. So despite the challenges in Q4, we still believe the $54 million to $56 million range is appropriate with respect to cash flow breakeven.

Okay, terrific. And then the follow up question I have is on, there is one customer in particular in DRAM that you have not penetrated but there is obviously lots of engagement. I am just wondering if you can point to any indications that you think you can make progress in that one customer you haven't penetrated and whether you have any sort of confidence, whether that's second half of '12 or the timing on that engagement. Thank you.

Well, it's been -- I am encouraged by the level of engagement or reengagement that we've had. They've got high performance standards and so we've been working to really optimize various parameters on our cards to meet their specific requirements. They are unique compared to other DRAM manufacturers.

But at this point, I think we have a clear path to get that done and we expect to get those qualifications done in the first half of the year and participate in some of their volume as we go in the second half of the year. We'll know more in the next quarter here as we go along.

Okay. And then, I am sorry, my final question, in order to get DRAM back up above $35 million per quarter, do you think it's more going to be a factor of demand resurfacing, including the alleviation of the hard drive problem, in addition to just a little bit better consumer spending? Or do you think it's going to be more based on structural changes to the industry?

I was wondering whether you had a view of getting back to that $35 million level, whether it would be based more on supply reorganizing or whether it's totally dependent on demand. Thanks.

I think at this point in time that we need to see it get back to normal levels and I think that those levels don't exist yet today at least. Western Digital on their call said that they would achieve 60% by the end of Q1, and as near as I can tell, they've got about 50% of the market. So I think the demand is still held back from a PC standpoint.

Now, perhaps Q1 is a seasonally low point for different parts of the industry and perhaps that will mitigate things there a little bit. But we need to see the DRAM demand come back to normal levels more consistent with probably the first half of 2011 for us to get back into that $30 million, $35 million range.

Perfect. Thanks.

Ladies and gentlemen, this concludes the FormFactor fourth quarter conference call. Thank you for your participation.