FormFactor Inc (FORM) 2012 Q1 法說會逐字稿

Thank you and welcome everyone to FormFactor's First Quarter 2012 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. The 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 within the meaning of the Federal Securities law. Such forward-looking statements include but are not limited to projections including statements regarding business momentum, demand for our product and future growth, [statement] of outer development introduction and/or qualification of next generation matrix, or new associate products and statements that contain words like expects, anticipate, believe, possibly, should, and the assumptions upon which statements are based. These forward looking statements are based on current information, 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 recent actual results could differ materially from those anticipated in the forward looking statements. For more information, please refer to the Risk Factor Discussions in the Company's form 10-K for the fiscal year 2011 as filed with the SEC, subsequent SEC filings, and in the press release issued today. With that, I would like to turn the call over to CEO, Tom St. Dennis. Sir, you may begin.

Good afternoon. Before Mike Ludwig presents our Q1 results, I'd like to make some comments on the probe card market in Q1 and the progress we made operationally through the quarter. Demand for probe cards remained weak at the beginning of Q1, similar to Q4 of 2011. Late in January, though, we began to see increased orders that continued to improve throughout the quarter. Unfortunately, the orders came in too late in the quarter to contribute significantly to Q1 revenues, but will be reflected in higher Q2 guidance. The demand increases appear to be the result of our end customers rebuilding inventories and preparing their new products for the second half of 2012.

DRAM pricing appears to have stabilized, but we do not have good visibility into end market demand for the second half of the year. The filing by Elpida in February for bankruptcy protection in Japan had little effect on our business during the quarter, and at this point in time our interactions with Elpida have returned to normal.

The SOC market had challenges in Q1, as many manufacturers were cautious regarding capacity increases. For our served SOC probe card markets, we saw revenue increases in automotive applications, micro controllers, and image sensors, as our 3D MEM springs gained traction with those customers. While some customers are forecasting that the second half of 2012 will be stronger, and that the first quarter was a bottom for their demand, at this point in Q2, these customers are still investing cautiously.

Our overall flash memory probe card sales were down in Q1 compared to Q4. NAND flash revenues and bookings increased in Q1, while NOR flash revenues and bookings decreased. The NAND flash increases are the result of certain customers using more complex probe cards which allows FormFactor to be more price competitive. Entering Q2, we see an increased demand for both NOR flash and NAND flash probe cards.

New product development continued in the quarter for both our vertical spring probe card for the SOC market and our next generation matrix product for the DRAM market. The new matrix product will strengthen our DRAM revenue base, while the vertical SOC product will open up a new $100 million plus market for FormFactor. We completed several important milestones in the development of our vertical spring product for SOC during the quarter. In addition we've begun the manufacturing, planning and process development in parallel to our product development and ordered short in our time to market once product development is complete.

Two customers that are currently evaluating our next generation matrix product for DRAM and a third customer, will receive their first card in June. Our first customer has completed their engineering evaluation successfully, and will begin production testing this quarter. Our second customer is continuing their engineering evaluation work, which should be completed by the end of this quarter. We expect that both of these products will begin to contribute to revenues in the second half of 2012, and both products are important to grow revenue as well as profits for FormFactor, and we expect them to be important parts of our revenue stream in 2013. Now Mike Ludwig will review Q1 and our Q2 guidance.

Thank you, Tom. Revenues for Q1 2012 were $34.8 million, just above the high end of our guidance, and an increase of 15% from Q4 2011. Compared to the fourth quarter, revenues in Q1 increased in DRAM and SOC but declined in flash. First quarter revenues for DRAM products were $21.9 million, an increase of 19 percent from our fourth quarter. The DRAM industry continued to be negatively impacted in the first half of the quarter by falling DRAM device prices and by the limited availability of hard disk drives impacting the PC market, which is a significant source is of DRAM demand. In the second half of the quarter, DRAM device prices improved and stabilized, which had a positive impact on orders and revenue. ¶ Flash revenues were $5.1 million for the first quarter, a decrease of 13% from the fourth quarter. Our NAND flash revenues for Q1 were up slightly to $2.7 million, but the increase was offset by a larger decrease in NOR flash revenues for Q1. SOC revenues were $7.8 million, an increase of $1.8 million, or 30% from Q4. As Tom mentioned, we saw revenue increases in automotive applications, micro controllers, and image sensors.

First quarter 2012 GAAP gross margin was $4.2 million, or 12% of revenues, compared to negative $5 million, or negative 16% of revenues for the fourth quarter of 2011. On a non-GAAP basis, gross margin for the first quarter was $4.7 million, or 13% of revenues, compared to negative $3.8 million, or negative 13% of revenues for the fourth quarter. Non-GAAP gross margin for the first quarter was favorably impacted by approximately $3.4 million from fixed spending leverage on incremental revenues. In addition, the Company reduced its excess inventory charge by $1.6 million, compared to the fourth quarter. The Company also mitigated customer cancellation charges and significantly reduced inventory costs associated with account penetration efforts at certain customers in the first quarter, as compared to the fourth quarter.

Our GAAP operating expenses were $22.1 million for Q1 2012, a decrease of $1 million compared to Q4 2011. Non-GAAP operating expenses for the first quarter were $19.5 million, a decrease of $0.1 million, compared to the fourth quarter. The decrease in non-GAAP operating expenses in the first quarter was due to lower professional fees incurred in the quarter partially offset by higher development costs for our next generation matrix product and our vertical spring SOC product.

In the first quarter, the Company recorded a tax provision of approximately $100,000, slightly lower than the tax provision recorded in the fourth quarter. Cash comprised of cash, short term investments and restricted cash ended the first quarter at $280.6 million, $16.4 million lower than the year end. The Company did not repurchase any of its common stock in the first quarter. The Company repurchased $7.5 million of its stock in Q4 2011. Excluding the repurchases of common stock, the cash used for Q1 was $16.4 million, compared to $11.8 million for Q4. The additional cash usage was due to an increase in the accounts receivable resulting from the strong shipments in the last half of the first quarter, offset to a degree by the increase in accounts payable in the quarter.

Here are some other financial details. Our depreciation and amortization in the first quarter was $2.8 million. Our capital additions in Q1 were $1.8 million, compared to $2.8 million in Q4. Our stock-based compensation for the fourth quarter was $3 million. As Tom discussed, our focus on 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.

With respect to Q2, we are encouraged by the acceleration of momentum in design activity and bookings experienced in the back half of Q1 that carried into Q2. As such, we expect second quarter revenues to be in the range of $43 million to $47 million. With respect to gross margin, the increases should have a positive impact on fixed spending leverage. Therefore, we expect our non-GAAP gross margin to be in the range of 22% to 24%. We expect Q2 non-GAAP operating expenses to be roughly equal to our Q1 expenses. We expect Q2 cash burn to be $6 million to $8 million, not including any stock repurchase activity. With that, let's open the call for Q&A. Operator?

Patrick Ho from Stifel Nicolaus.

Thanks a lot. Tom, first on the new next generation matrix product that you talked about in the prepared remarks with two new DRAM customers. Can you, one, give us some of the differentiators between this next generation product from what you're currently offering? And second, when do you believe that you'll get some of the additional other DRAM customers to begin the evaluation process?

So, the primary differentiation on it is really for the most advanced, highest levels of parallelism for DRAM cards. So, this is for applications of more than a thousand devices in parallel, I'm going to say more than 900 devices in parallel. And we see many customers doing planning now that indicates in the 2013 time frame that that will be a important part of their overall test strategy.

In terms of the engagement on it, three out of the four major DRAM companies today have that plan. One does not, but -- and currently we have engaged all three of them, and have product designs underway or delivered that are giving them a chance to work on this with the more advanced test ATE platforms that are out there.

Great. Maybe a question for Mike in terms of the variables for gross margins. Obviously, you guys did a nice job this quarter, and it's improving into the June quarter. Is it right to assume that fixed cost absorption is the biggest variable right now? And then second part of that question is, as you get some of these new products out in the second half of the year, what kind of impact will that have to gross margin since they're new products?

Yes, so the answer to the first question is yes. Probably the greatest leverage that we have on the gross margin line is the increased revenues with a good drop-through of, again, something in the ballpark of 60%. When the new products come on line, we actually believe that, again the drop-through -- we don't believe it will take a hit. We expect that, depending on the mix of those new products, that will have an influence on how much greater the drop-through is with respect to gross margin and incremental revenues.

Great. Thank you very much.

Jim Covello from Goldman Sachs.

Yes, hello this is Mark Delaney calling in for Jim. Can you guys hear me now? Okay. Sorry about that. I was hoping you could talk about the revenues in South Korea. I saw that was up almost three times quarter-on-quarter, and I was wondering if you had picked up any share there in the quarter?

It's hard for us to say overall on it. I think that there was some -- there was some share gain. Certainly in the overall market, South Korea was more aggressive in their investments in the quarter than other regions. So, participating in that as we did was certainly positive for us, but I can't really give you a specific delta share kind of number from it.

Okay. And on the last earnings call, seems like you talked about some access applied potentially in the mobile DRAM segment, and I was wondering how that's factoring into your outlook, if at all?

At this point in time, it really doesn't have a significant impact. The customers move around between mobile and commodity or main memory type allocations for wafer starts. So, we see a certain amount of dynamics in designs and which ones they're choosing to ramp or not ramp, but in terms of the overall forecast it's all factored in to the -- to kind of the start dynamics that are laid out by the customers.

Got it. Thank you very much.

Olga Levinson from Barclays.

Hello, thank you for taking my questions. I'm calling in for TJ. Specific to the gross margins that you afforded new very strong results, relative to your expectations coming in to the quarter, where you expected negative gross margins, what was the biggest area of surprise that drove the higher gross margins? Was it just the incremental revenues, or did something new emerge during the quarter that drove the upside?

There were two areas that were primarily responsible for the upside. One was a reduction in the excess and obsolete charge. So in Q4, we had an excess and obsolete charge of $3 million. In Q1 we had an excess and obsolete charge of $1.4 million as a result of much better demand outlook going into Q2 and Q3 this year versus the demand outlook going into Q1 and Q2 that we looked at in Q4.

The second area that was much improved was what we call some customer -- new customer penetration charges that were incurred in Q4. And we thought maybe we would incur less in Q1, but we incurred much less than what we had originally anticipated. So, those were the two primary areas for benefit relative to the gross margin improvement.

Got it. And then within your guidance for June quarter revenues, you talked about applications for both NOR and NAND flash to recover. What sort of -- how much growth or what directionality do you expect on the DRAM side and the SOC side?

At this point in time, I think we'd have to say that the SOC market looks to be flat quarter-over-quarter. There may be some changes late in the quarter, but at this point it looks flat. For both DRAM and flash, we see them both growing in the quarter on a quarter-over-quarter basis. And as I said, both NOR and NAND are showing increased demand right now.

And just as a final question, you talked about design wins within Logic on automotive, C-MOTS, image sensors and MCUs. Out of your SOC revenues currently and your expectations in for June, how many customers are currently embedded in that?

How many customers?

I would say probably seven to ten.

Yes, I'd say it's --

I think it's -- we have several customers, but some more than others. But I think the answer is about seven to ten customers probably represents that segment for us at this point in time.

Got it. Thank you.

Karen Swollen from Citigroup.

Thanks. The first question is, in the past you've talked a lot about putting effort forth effort to gain share at a large Korean DRAM maker. I wanted to understand if this quarter is a large step up in South Korean revenue was a reflection of the fruition of those efforts? Or whether it was just a cyclical bounce back from one or two customers? Thanks.

I think I'd have to characterize it as more the latter of your comment about a I don't know, cyclical bounce back. But it was -- it didn't reflect a significant shift in share on our part for DRAM. It was consistent with our share balance, if you will, between the two major suppliers in Korea, as it's kind of been over the last few quarters. There was some specific differences between them, but it doesn't represent a change in share there. We are still working through product evaluations and engineering tests on cards there to strengthen our share with both customers.

Okay. Terrific. And then on the SOC side, you talked about the vertical probe card test product. When is that product going to be launched? And when will it continue to revenue? And exactly what area of SOC tests are the target? Thank you.

So it's focused on the flip chip market and all the variations that go within that. But broadly, it's the flip chip market. And in terms of revenue contribution, it'd be in the latter half of -- the second half of 2012.

If I could just squeeze one last follow up, I think you said your cash burn, you expect about $6 million to $8 million. If I model the mid-point of your income statement, the net income is about $12 million. Are we going to see neutral working capital? Is that your expectation next quarter after the increases we saw in inventory and accounts receivable this quarter? Thanks.

Yes. I think even with the uptick in revenue for Q2 that we guided to, I believe that we'll -- we will look to keep the working capital basically cash flow neutral in Q2.

Okay. Terrific. Thank you.

Thank you. (Operator Instructions) Tom Diffely from D.A. Davidson.

Yes, good afternoon. Mike, first another question on the margin side. The 22% to 24%, do you consider that a normal margin for this revenue range, or are we still getting an impact from the excess and obsolete inventory, as well maybe the amount of NAND and NOR taking it down a bit?

No, I don't think Tom that this is about what we would expect for this revenue range.

Okay. And then when you look at the CapEx of $1.8 million, is that mainly just to build -- or for new equipment to help the new products coming out?

Yes. What we look for is generally CapEx in about the $10 million to $12 million for the range for the year. So, $1.8 is probably a little light. I would expect Q2 maybe to be slightly higher, as Tom said, as we -- well, Q2 and Q3 will be slightly higher as we prepare for production of both the new matrix platform, as well as the SOC vertical card.

Okay. And the new products, both the DRAM and the SOC that are coming out, are those kind of being in line with corporate averages for margins, or do you expect those to help margins overall?

Well, it depend on the mix. But I would expect that they will have a slight -- I think they will have a slight benefit to margin as we go forward.

Okay. That's it for now. Thanks.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session on today's conference call. Thank you for your participation, and have a wonderful day.