FormFactor Inc (FORM) 2012 Q3 法說會逐字稿

Thank you. Welcome, everyone, to FormFactor's third 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. A schedule that provides GAAP to non-GAAP reconciliations is available in the press release issued today and also on the investor's 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 and macroeconomic conditions, demand for our products, and future growth. Statements about our development, introduction and/or qualification of next generation Matrix products and statements about the Company's recent merger with Astria Semiconductor Holdings Inc, such as projected technology and product development, results and/or synergies, 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 the 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 2011, as filed with the SEC, subsequent SEC filings, and in the press release issued today. With that, we will turn the call over to CEO Tom St. Dennis.

Good afternoon. FormFactor's revenue in the third quarter of 2012 was down significantly from our second fiscal quarter, consistent with our guidance in July. There are two key factors that led to this decline. The first key factor is the macroeconomic uncertainties facing companies and consumers globally. This impacted all of our customers in both the memory and logic businesses and appears to be continuing into the fourth quarter.

The second key factor is the structural change that the personal computing industry is going through as personal computers, especially desktop PCs, decline and are replaced by mobile computing devices. This has had a severe negative impact on DRAM demand and pricing. As a result, our customers substantially reduce their purchases of DRAM probe cards in the quarter. Looking ahead, there are demand drivers for DRAMs that are growing rapidly and should play a significant role as macroeconomic conditions improve. Smartphones and tablets in particular represent a rapidly growing market for mobile DRAM and could replace a meaningful portion of the PC DRAM market declines over the next two to three years.

The server market for DRAMs appears to be growing strongly and notebook PCs are still growing, although more slowly. FormFactor has continued to improve its operational performance throughout this year, and our results in Q3 reflected that progress.

On a non-GAAP basis, gross margin in Q3 were nine points higher compared to Q1 2011 when we had similar revenues. This improvement reflects the continued progress that we've made in both direct and indirect costs. Operating expenses have declined 35% in the past eight quarters and will continue to improve in Q4. During Q3, we took further restructuring steps by closing our manufacturing activity in Japan and reducing headcount related to memory technology. Our next generation Matrix card was successfully qualified for production at three advanced DRAM customers during the third quarter. These were the most advanced probe cards that we've ever built and they were successfully qualified in the most advanced DRAM processes in the industry. We've engaged with the customers on follow-on designs and expect to see this product begin to contribute to revenues as early as this quarter.

The structural change in the computing industry from a PC-centric world to a mobile computing centric world was a key factor in our decision to merge with MicroProbe. This merger enables the transformation of the Company from a primarily DRAM focused business with 65% to 70% revenues from DRAM alone, to a Company with over 50% of revenues from Logic and SoC and less than 40% of revenues from DRAM. The combination of FormFactor and MicroProbe has created the largest probe card supplier in the semiconductor industry, with industry leading technologies across the SoC and memory markets.

The two companies are very complementary with virtually no product overlap, which allows us to move forward together immediately with no customer confusion about product direction. Combined, we have the broadest portfolio of products and the largest customer service and support organization in the industry.

On October 16th, we completed the first step of this transformation by closing the merger with MicroProbe and since then we've been working with the worldwide organization to combine our capabilities and technologies. We've already identified several product and manufacturing opportunities that we expect will improve product performance, reduce costs, or shorten lead times.

We're still early in the merger process, but I'm very impressed by the combined capabilities of the new organization, and I feel we're very well positioned going into 2013.

Mike Ludwig will now review our Q3 performance and discuss the guidance for the fourth quarter.

Thank you, Tom. Revenues for Q3 were $41.3 million, a decrease of $13.5 million, or 25% versus Q2 2012. Compared to the second quarter, revenues decreased in all markets, DRAM, Flash, and SoC. Third quarter revenues for DRAM products were $26 million, a decrease of 32% from our second quarter. The decrease in DRAM probe card demand resulted from an oversupply of DRAM devices, DRAM device price declines, and reduced demand for PCs in the quarter, all negatively impacting our customers' DRAM production.

We do, however, continue to see an increased percentage of DRAM probe card revenues from customers that are transitioning to probe 4-gig devices and 3x nanometer nodes probe card for mobile devices continue to be a strong revenue component.

Flash revenues were $8.4 million or the third quarter, a decrease of 13% from the second quarter. Our NAND flash revenues for Q3 were flat compared to Q2 $5.3 million, while our NOR flash revenue decreased $1.3 million in the quarter to $3.1 million. SoC revenues were $6.9 million, a decrease of $0.2 million, or 3% from Q2.

Third quarter GAAP gross margin was $8.2 million, or 20% of revenues, compared to $16.2 million, or 29% of revenues for the second quarter of 2012. On a non-GAAP basis, gross margin for the third quarter was $8.7 million, or 21% of revenues, compared to $16.9 million, or 31% of revenues for the second quarter. Non-GAAP gross margin for the third quarter was unfavorably impacted by lower fixed spending leverage from the much lower revenue levels and an unfavorable product mix. As lower margin NAND flash revenues comprised a higher percentage of revenues in the third quarter.

Our GAAP operating expenses were $20.2 million for Q3, a decrease of $2.3 million compared to Q2. Non-GAAP operating expenses for the third quarter were $16.6 million, a decrease of $3.1 million compared to the second quarter. The decrease in non-GAAP operating expenses in the third quarter was due to reduced R&D project spending, reimbursement for test vehicles for our next generation Matrix product, increased savings from additional time off, and reduced incentive compensation charges. In addition, our trade compliance audit with a foreign jurisdiction that commenced in Q3 2011 is concluding, resulting in a reduction of our non-GAAP OpEx expenses of $0.6 million in the third quarter.

In the third quarter, the Company commenced execution of a plan to reduce our cash flow break-even target to $50 million of revenues from the previous $54 million to $56 million level. A significant action taken as part of the plan reduction included reducing our manufacturing footprint in Japan and moving the equipment capacity back to Livermore. The transition is underway and will be completed in the fourth quarter. When all actions are completed, we will have reduced our headcount by approximately 65 positions, including regular employees and contract positions, as well as taken certain actions to reduce other discretionary spending. The actions will be completed by the end of 2012.

The Company recognized $2.5 million of restructuring costs in the third quarter resulting from the actions and expects to save approximately $5 million per quarter or $20 million annually. The Company realized approximately $1 million of benefit in Q3 related to these actions.

In the third quarter, the Company recorded a tax provision of $0.2 million compared to a tax benefit of $1.6 million in Q2. The benefit in the second quarter was derived primarily from the exploration of the Federal Statute of Limitations around specific uncertain tax positions. Average weighted shares outstanding for the third quarter were 50.2 million shares compared to 49.8 million shares in Q2. The Company did not repurchase any of its common stock in the third quarter. GAAP loss per share was $0.29 in Q3 compared to a loss of $0.08 per share in Q2. Non-GAAP loss per share was $0.15 in Q3 compared to a loss of $0.01 per share in Q2.

Cash, comprised of cash, short-term investments, and restricted cash, ended the third quarter at $276.5 million, $1.6 million lower than Q2. The Company used approximately $700,000 of cash from operations in the quarter. However, cash of $5.8 million was provided from decreases in current asset investments as a result of strong cash collections in the quarter, coupled with decreased shipments.

Here are some other financial details. Our depreciation and amortization in the third quarter was $2.6 million, consistent with the second quarter. Our capital additions in Q3 were $2.2 million compared to $2.1 million in Q2. Our stock-based compensation expense for the third quarter was $3 million compared to $3.5 million in the second quarter.

On September 3rd, we announced the acquisition of MicroProbe's parent company, Astria Semiconductor Holdings for $100 million of cash and just over three million shares of FormFactor stock. As Tom mentioned, this transaction is transformational for both companies, will be immediately accretive to FormFactor. FormFactor incurred $1.2 million of expenses in Q3 for this transaction. These expenses were excluded from our non-GAAP operating expenses.

The Company acquired approximately $21.6 million net book value of tangible assets in the transaction, including net current assets of $18.3 million. Cash of approximately $4 million is included in the net current assets. Post-acquisition, the combined Company has approximately $181 million of cash, short-term investments, and restricted cash.

With the actions FormFactor has taken to reduce its cash flow breakeven, we expect the combined Company to be cash flow break even at the $68 million to $70 million levels in the first half of 2013. While there is virtually no product overlap, the Company is aggressively pursuing synergies to reduce OpEx expenses, most notably in the SG&A areas. In the fourth quarter, we expect to realize over $1 million of savings from OpEx synergies. We expect the quarterly OpEx synergies to approximately double by the end of 2013 and we'll update our progress in subsequent communications.

Additionally, the combined Company has identified several opportunities to leverage the supply base to reduce product cost, as well as leverage design and factory automation to achieve greater efficiencies and reduce costs. These opportunities are in the early phases of discovery and we will update you on their progress going forward.

With respect to Q4, our guidance will reflect results from the combined Company with MicroProbe business consolidated into our results and guidance from October 17th through December 29th. We continue to experience demand contraction, particularly in the memory market, similar to that experienced by some of our customers, resulting from market uncertainty and depressed pricing for memory devices. As such, we expect fourth quarter revenues to be in the range of $46 million to $51 million. We expect memory revenues to be $20 million to $23 million and SoC revenues to be $26 million to $28 million with MicroProbe's SoC business contributing $21 million to $23 million.

With respect to gross margin, the decreased revenues and unfavorable product mix for the FormFactor business will have a negative impact on fixed spending leverage and factory utilization. Therefore, we expect the combined non-GAAP gross margin to be in the range of 11% to 17% for the fourth quarter. We expect Q4 non-GAAP operating expenses to be approximately $23 million to $24 million. With the reduced revenues and demand for the FormFactor business, we expect Q4 cash usage will be $12 million to $14 million from the combined operation. The Company will also spend approximately $5 million to $6 million one-time payment for acquisition and restructuring costs. Therefore, total cash usage for the fourth quarter will be $17 million to $20 million.

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

(Operator Instructions) Our first question comes from Jim Covello from Goldman Sachs. Your line is open.

Hi, it's Mark Delaney calling on behalf of Jim Covello. Congratulations on getting the MicroProbe deal closed. I was hoping first if you could just talk a little bit about the top line drivers of the MicroProbe segment. I know it's historically been big growth, and production transitions, and DRAM, and hoping you can provide some color on what the similar dynamics would be for the SoC business.

Sure. The MicroProbe's products serve and are really targeted at the mobile application processor space. So it's all of the computing processors, both PC server as well as mobile applications. But the strongest growth, of course, is in smartphones, tablets, et cetera, and that's where they have the greatest product traction. That's where their growth has come from, and with forecasts for substantial continued growth in those markets, I think it bodes well for their product and for our opportunity there.

Got it. In terms of the memory segment, specifically DRAM, industry growth forecasts are for DRAM bit growth to be in line or maybe below what it was in 2012 in 2013. So if that is true, what would that imply for the DRAM probe card TAM for next year?

I don't think we really got a good sizing together today on what that will look like. With the reductions that the customers have taken in the third quarter and the fourth quarter, I would think that we would see some strength as we get into 2013 as they tool up for new nodes and for some of the mobile applications. But we don't have a 2013 forecast for you.

Thank you. Good luck.

Thank you. Our next question comes from Vernon Essi, Needham and Company. Your line is open.

Thank you very much and I'll echo the congratulations on the MicroProbe acquisition. I was wondering, Mike, if you could elaborate a little more about the restructuring and this $5 million in quarterly savings and sort of how that gets spread across cost of goods and OpEx on a go-forward basis?

So of that I would say, Vern, that about half of it is associated with people, the reduction of people, and the other is really sort of reduction of discretionary spending. And then also, as we exit Japan certainly will have less facility costs associated with that. So of the $5 million, I would expect somewhere around $2 million to be roughly in the cost of goods area and about $3 million to be in the OpEx area.

Okay, and you had said, just so I understand correctly, and I apologize I know you had said, how much of it was -- was it $1 million that you said was a result in the third quarter of savings already?

Yes, I think we probably had about $1 million savings from the actions and most of that would have been discretionary spending, and a lot of that was within the R&D area.

Then just to back up a step and I may go back into the queue and ask more questions on MicroProbe. But I want to first address the DRAM side of things. You had the same situation I guess happen in the fourth quarter last year where memory -- well, memory in general, but DRAM presumably dropped sequentially in the fourth quarter. I know you cited the combination of all these things. However, you talked about new qualifications on your next generation. Can you sort of discuss, I guess, the gives and takes between the two and if there is perhaps a cannibalization going on there of the new products taking over from the old, and if that's going to be a new driver or not. Just to give us a feel for how that's going to play out maybe even into the first quarter without being too specific. That'd be helpful.

The next generation card is really targeted at the high end application in DRAM and is -- and will go forward in combination with the current Matrix card, as it really is serving a particularly high parallel portion of the DRAM card market. I would expect it to ramp slowly. The reason for that is, is that these cards are targeted at some of the most advanced testers that are out there from Advantest, and Teradyne, and all. And they, for the most part, frankly, there's not very large installed base of those testers out there.

So you will see both products coexist. You'll see the next gen product begin to ramp up as we go into 2013. It is important in that it does get us qualified in with one of the key DRAM customers and gets us in a position where we can bid on more business opportunity as we go into Q4 and into Q1. So it opens up an incremental market opportunity for us there. But the two will coexist over time. It's really not a cannibalization really. It's a portion of the market that the current Matrix product didn't serve well and this opens up that higher end, albeit smaller for us.

Okay, and sort of a housekeeping question. Do you have any idea how much of the DRAM business was mobile related in the third quarter?

Yes, Vernon. Our mobile related business was mid-30s in terms of percentage of our DRAM business, mid 30%.

Okay. Thank you very much.

Thank you. Our next question comes from CJ Muse from Barclays. Your line is open.

Thank you for taking my question. I guess first question, when you think about the two combined companies today and you alluded to it briefly in your prepared remarks regarding supply chain and commonality on the design side, when do you think you'll have a better vision of what cost savings might look like as a combined entity?

Well, we've got some insight on this as we go forward in the year ahead and expect that we should be able to realize a couple of million dollars a quarter on those things that we see immediately. I think that some of the more complex parts of it with regards to things like supply chain and some of the design activities will take us, I think it will take us until the second half of 2013 to see the best way forward on those and how we can get the most leverage.

That's helpful. And then as you think top line synergies, now that you have MicroProbe in the house, is there anything that you see today that could be a real opportunity? And here I'm thinking maybe the embedded memory and SoC where you combine probe card. Anything on that front where there would be an opportunity for you guys?

Nothing immediately on it. As I said, the products are -- the product overlap is really de minimis. Insofar as combining memory and logic needs together, there are some product application areas that I think our memory product architecture combined with the probe technology that MicroProbe has could play out in time. But I think that's probably a 2014 thing if it works out. But there's a couple areas that we've had some kind of out of the box thinking.

That's helpful. And then I guess lastly for me on the financial side, can you share with us what pro forma share count and combined G&A is for your actual Q4 and then what you think it is for a full quarter in Q1?

What was the second part? The first part was the share count. What was the second part of this?

G&A.

On the share count, I think we're going to be ballpark around 54 million shares for Q4. I would expect Q1 to be somewhere in that same ballpark, about, again $3 million, or, excuse me, 3 million shares higher than maybe where we were in Q3. So it would probably be 54 to 54.5. On depreciation amortization, that one's tough because, again, we have to go through the valuation exercise and not sure what intangibles or the value of the intangibles that will come out of there that will be amortized. I think -- so depreciation is probably going to be somewhere in the $3.5 million range, but it's hard to say what the amortization of the intangibles will be.

So I guess when you talk about $68 million to $70 million cash flow breakeven in the first half of '13, what assumptions are you making? So how do we back into what that breakeven looks like a net income basis?

I can't get it to you on the net income, again, because -- I can get it to you on sort of a non-GAAP, but I can't get a net income on a GAAP basis because, again, I just don't know what the amortization of the intangibles or what the intangibles going to be at that point in time. And in addition to that, we also have the stock-based compensation that will be changing as a result of issuing shares and RSUs to the MicroProbe employees. So that still has yet to be worked out.

Okay. Thank you very much.

Thank you. Our next question comes from Patrick Ho from Stifel Nicolaus. Your line is open.

And the manufacturing processes going forward, I know the industry has obviously slowed down in the near term because of the overall market. But the industry transition from, say, the 30-nanometer node to the 20-nanometer node. And given some of the, I guess, manufacturing challenges that are anticipated at that note, does that help you guys at all in terms of I guess expanding the TAM or expanding the opportunities for probe cards at the 20 nanometer node?

Well, the transition itself will drive new designs and new probe card opportunities there. So we'll see that. I think the growth of mobile as a percent of the total DRAM market, and now it's considered to be at 50% or perhaps even slightly higher than that. Mobile has a higher number of designs, which doesn't necessarily increase the total number of probe cards, but it will drive it up marginally as there's a greater percentage of the overall mobile market.

I think the more interesting thing is, is that the next kind of 2x nanometer shrink could very well be the last available DRAM shrink until EUV is a mainstream production. And at that point in time, bid growth is going to come from wafer start growth and we could see some up side from that.

Great. That's helpful. In terms of the finance side, the gross margin variable that you gave for the fourth quarter, it's a little bit wide in terms from 11% to 17%. Is that range assuming cost savings or synergies that you're going to be trying to get during the quarter? Or is it more of a product mix issue for at least the fourth quarter?

It incorporates some of the savings that we'll get as a result of the actions that FormFactor took. It does not incorporate any synergies as a result of combining the two companies, Patrick, and the range is wide because when you look at the FormFactor piece of that revenue, it's relatively low. And when you get down to that level, you're talking about some fairly low numbers and a lot of leverage on low numbers. And you talk about factory underutilization, some of those are a little bit more difficult to predict.

So it's probably more the FormFactor business is a reason why the range is wide.

Okay, great. And final question from me on the OpEx side. You mentioned some of the cost savings that you're going to try and get from the combined Company. As I look at specifically the R&D line, I know it's still early in the integration phase, but have you guys seen opportunities there where there could be duplicate projects that both companies were working on, but that you could get savings out of the R&D line by eliminating some of those I guess duplicate development projects for both companies?

Well, like I said, the product overlap was relatively small. There's a couple of areas of developments that we're looking at closely right now and in fact may be also complementary, if you will, from that standpoint. There were some development activities in areas of automation and such that I think we'll get some early leverage out of and some reduced spending and some synergies on that. So we'll get some of those here early on. We've also seen a number of opportunities where we've got changes for product cost reductions because of the supply chain position that FormFactor had or the volume that FormFactor had.

So we'll work on some things in the COGs area that should be kind of first six months type opportunities for us to realize supply chain synergies, if you will, from that standpoint.

Great. Thank you.

(Operator Instructions) Our next question comes from Tom Diffely with D.A. Davidson. Your line is open.

Good afternoon. Maybe first on the next generation Matrix product, with the success there and the qualifications, do you now serve all of the major memory players?

Yes, that product has opened up our opportunity to participate with all the major memory players, yes.

Okay, I just wanted to I guess confirm too that Matrix 2 is going to work for mobile DRAM as well as just the commodity DRAM?

Yes, we have been doing qualifications on both commodity as well as on mobile and a little bit more on mobile actually.

I think you said that mobile was only 30% of the DRAM. Would you expect that to go up quite a bit over the next year as both the market I guess goes more towards mobile and your penetration with some of the big mobile players goes up?

Yes, I would absolutely expect that.

Okay. And then when you look at the MicroProbe business over time, is there seasonality with that core business or is it purely just product cycle driven?

I'd say that to date it's, or in the last year it's been product cycle driven. In terms of prior years, I think the Company has been growing so successfully and the rate of growth of mobile application processors has been so high that it's been just a real driving engine for quarter-over-quarter growth. All that said, there are for sure product cycles of the big or mainstream processors that drive demand for them. And so, the short answer I guess is it's really a product cycle market as opposed to some of the more kind of seasonal things that we've seen.

Okay. And it sounds like based on some of your comments about what different DRAM makers are doing at this point that I guess the feeling is that the fourth quarter looks like the trough here?

Well, that's good to know. I'm glad to hear you say that. It's -- different people have been saying that the fourth quarter would be a trough on it. It seems to be that inventories are still pretty high. I think that probably DRAM inventories are a great indicator of how things are going. As those start to burn down, that will start to drive higher production, more probe cards, and we'll go out of that. But I haven't seen DRAM inventories decreasing at this point in time, which would be an indicator to me that we're starting to come out of it.

I guess I was thinking more along the lines of with some of this new Matrix 2 coming out as well as the move to more mobile that even if the core business stayed at low levels, that your overall business would be going up.

As we've seen more and more shift out towards mobile, I think that certainly helped. That's what's underpinned the revenue to date on it. But I think that the drops on the commodity DRAM or the PC kind of DRAM part of it have been so significant that they've offset some of the growth we've seen on the mobile side.

So while mobile is 50% on a -- perhaps headed that way on an annual basis with some quarters, I don't know, I think it could be -- and for some customers it could be substantially higher because the DRAM has dropped off so much, the PC DRAM has dropped off so much.

Can you give some guidance for OpEx 23 to 24? How does that split between R&D and SG&A at this point? Is it pretty evenly split?

I would say it's going to be -- R&D is probably in the ballpark of right around $10 million, $10 million, $10 million to $11 million.

Thank you. (Operator Instructions) One minute please. Ladies and gentlemen, this concludes the FormFactor third quarter conference call. Thank you for your participation.