FormFactor Inc (FORM) 2012 Q4 法說會逐字稿

Welcome, everyone, to FormFactor's Fourth 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 section of the 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 and macroeconomic conditions, demand for our products and future growth, statements about next generation matrix products, statements about the Company's recent merger with Astria Semiconductor Holdings, Incorporated, such as projected technology and products developments, results and/or synergies and statements that contain words like expects, anticipates, believes, possibly, should, and 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 factors 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 now turn the call over to CEO, Tom St. Dennis.

Good afternoon. The fourth quarter of 2012 was one of the most significant quarters in FormFactor's recent past. The acquisition of MicroProbe has transformed the combined company to be the largest probe card manufacturer in the semiconductor industry and the largest supplier of probe cards to the fast-growing SoC probe card market. FormFactor is now in a strong position to leverage the continued growth in mobile computing to drive our own revenue growth. Looking at our revenue mix in 2013, our SoC business should be 50% to 55% of total revenue, with DRAM now at 35% to 40%; a significant change compared to 65% to 70% of revenue from DRAM, which we had prior to the merger.

The integration of the two companies is proceeding forward with great progress in many areas. Together, we have identified opportunities to leverage our combined technologies to increase product capability, to reduce product costs, to expand customer relationships, to strengthen supplier engagements, and to create new opportunities for our employees. The cooperation between the MicroProbe and the FormFactor employees and their enthusiasm for joint projects has been very exciting to see. Additionally, we expect to realize greater OpEx synergies in 2013 than we had previously guided for. All in all, great progress for the first three months together as one company.

The DRAM market continued to be impacted negatively in the fourth quarter, as secular changes in the personal computer market have significantly lowered demand for commodity DRAM. This negative trend is forecasted to continue through 2013 and into 2014 by some of our customers and market research firms. Customers are therefore forecasting lower investment in DRAM test and lower spending on advanced DRAM probe cards. To align with this shift by our customers, we've taken steps to reduce the scope of our investments in this market segment, but continue to develop product capabilities for mobile DRAM.

To this end, we have suspended development activities on our next generation matrix platform and are consolidating our development and engineering efforts to extend the capabilities of the current matrix platform. We believe this consolidation will allow us to optimize our engineering investments while staying engaged with all four major DRAM manufacturers. We will continue to support all DRAM probe card applications, but will focus our engineering investments on mobile DRAM requirements. We expect the market for DRAM probe cards will recover as the industry goes through a structural change from PC-centric computing to mobile and cloud-centric computing. Mobile computing drives the demand for mobile DRAM and recent forecasts from Gartner show DRAM usage in smartphones exceeding DRAM usage in desktop PCs in 2013. Smartphone DRAM usage is forecasted to be about equal with notebook DRAM usage in 2014 and by 2016, mobile DRAM and server DRAM usage will exceed all PC-related DRAM usage.

During this transition period, we're going to invest in critical technology areas and redirect our reduced R&D spending to focus on our profitability and on the expanding SoC probe card market. The SoC probe card market has growth drivers over the next several years. The growth of mobile computing devices and the resulting growth in mobile application processors will be the primary driver. These processors utilize grid-array packaging techniques, with fine pitch solder bumps that we believe will increasingly require advanced capability probe cards. This is precisely the area where MicroProbe has seen its greatest growth in the past two years. Gartner forecast the grid-array package market to grow from 12 billion units in 2011 to over 29 billion units in 2016, for a compound annual growth rate of 19%. Every one of those units will be probed by advanced SoC probe card before being put in to a grid-array package.

Another area for growth is and industry shift to copper pillar packaging techniques, which will require even more advanced SoC probe cards than the ones in use today. The technical challenges of copper pillars creates an opportunity for us to leverage the technical capabilities of the combined company to further grow our market share as that industry adopts this new approach.

Our focus in 2013 is to drive improved profitability by investing in the market segments where we can get a profitable return, while continuing to closely manage expenses in all areas. From an operational standpoint, we continue drive for improved gross margins with lower total operating costs, to deliver improved profitability, and eliminate the use of cash. To that end, we've taken additional actions this week to further reduce expenses and thereby further reduce breakeven levels for the Company. While the DRAM industry goes through a difficult transition, the SoC market is a significant growth opportunity for us. With the changes that we have taken and are undertaking, FormFactors is better positioned today than any time in the past four years to return to profitable growth.

Mike Ludwig will now review our fourth quarter performance and provide guidance for the first quarter.

Thank you, Tom. Revenues for Q4 were $47.7 million, an increase of $6.4 million, or 15%, versus Q3 2012. Compared to the third quarter, revenues in the fourth quarter increased in SoC, but decreased in DRAM and flash. The increase in Q4 SoC revenues resulted from the 11 weeks of MicroProbe revenues, which were $19.9 million. Fourth quarter revenues for DRAM products were $16.5 million, a decrease of 37%, or $9.5 million, from our third quarter. The decrease in DRAM probe card demand resulted from the continued oversupply of DRAM devices, DRAM device price declines through most of the fourth quarter, and a continuing decline in demand for PCs; 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 gigabyte devices; 56% in Q4 compared to 40% in Q3, while probe cards for mobile devices continue to be a strong revenue component in Q4 as well, 41% of our DRAM probe card revenues.

Flash revenues were $6.4 million for the fourth quarter, a decrease of 24% from the third quarter. Our NAND flash revenues for Q4 were down 30% compared to Q3 at $3.7 million, while our NOR flash revenues decreased $0.4 million to $2.7 million. SoC revenues in Q4 were $24.8 million, an increase of $17.9 million from Q3. The acquisition of MicroProbe added $19.9 million for the period October 17, the day following the close of the acquisition, through December 29, 2012. For the full 13-week period, MicroProbe revenues were $23.5 million.

The SoC probe card market continues to be driven by the shift away from PC applications to the growth in mobile application processors requiring more advanced probe card solutions and higher parallelism. Fourth quarter GAAP gross margin was a negative $3.1 million or a negative 7% of revenues compared to $8.2 million, or 20% of revenues, for the third quarter of 2012. GAAP expenses in Q4 included $2.1 million for the amortization of intangibles, $6.1 million of expenses for inventory and backlog written up and sold in Q4 and $0.8 million for stock-based compensation.

On a non-GAAP basis, gross margin for the fourth quarter was $6.1 million, or 13% of revenues, compared to $8.7 million, or 21% of revenues, for the third quarter. Non-GAAP gross margin for the fourth quarter was unfavorably impacted by lower fixed spending leverage from the much lower revenue levels for FormFactor's business compared to Q3, mitigated by a favorable product mix as MicroProbe's business in Q4 was accretive to margins.

The Company saved $2.3 million in manufacturing-related costs in Q4 from the restructuring actions taken in Q3. Our GAAP operating expenses were $21.9 million for Q4 2012, a decrease of $0.9 million compared to Q3. Q4 GAAP operating expenses included $0.7 million for amortization of intangible assets, $2.8 million for stock-based compensation, $1.8 million for acquisition and integration-related expenses, and $0.3 million for restructuring expenses. In addition, the Company recorded a $3.3 million gain from the settlement of litigation with MicroProbe.

Non-GAAP operating expenses for the fourth quarter were $19.5 million, an increase of $2.9 million compared to the third quarter. The increase in non-GAAP operating expenses was due to the acquisition of MicroProbe, which added $4.2 million of operating expenses for the 11-week period. Excluding MicroProbe expenses, non-GAAP operating expenses declined in the fourth quarter from reduced R&D project spending and reduced headcount expenses, resulting from additional time off and savings from the restructuring actions taken in Q3. In the fourth quarter, the Company recorded a GAAP tax benefit of $25.1 million compared to a tax provision of $0.2 million in Q3. The benefit in the fourth quarter was derived primarily from a $25.5 million one-time benefit that resulted from recording a deferred tax liability associated with the $77 million of intangible assets recorded as a result of the acquisition of MicroProbe. The deferred tax liability resulted in the release of a portion of the valuation allowance against the deferred tax assets.

Absent this one-time benefit, the non-GAAP Q4 tax provision is $0.4 million. Basic weighted shares outstanding for the fourth quarter increased to 52.7 million shares compared to 50.2 million shares in Q3. Fully diluted weighted average shares outstanding for the fourth quarter were 52.9 million shares. The Company did not repurchase any of its common stock in the fourth quarter. GAAP income per share was $0.01 in Q4 compared to a loss of $0.29 per share in Q3. Non-GAAP loss per share was $0.25 in Q4 compared to a loss of $0.15 per share in Q3. Cash, comprised of cash, short-term investments, and restricted cash, ended the fourth quarter at $166.1 million, $110.4 million lower than Q3.

The Company acquired MicroProbe for $99.5 million of cash and used $13.7 million in the business in the fourth quarter, including $8 million for payments related to the acquisition and our third quarter restructuring. Here are some other financial details -- our depreciation and amortization in the fourth quarter was $6.1 million, including $2.8 million for amortization of intangibles and $3.3 million for depreciation. Going forward, the amortization of intangible assets will be $3.6 million in Q1 2013 and increase to $4.1 million by Q4 of 2013. In addition, the Company recorded $6.3 million of expenses associated with tangible assets written up as a result of the acquisition and expensed in the quarter. Our capital additions in Q4 were $2.3 million compared to $2.2 million in Q3. Our stock-based compensation expense in the fourth quarter was $3.6 million compared to $3 million in the third quarter.

As we discussed on our last call, the Company commenced execution of a plan at the end of the third quarter to reduce our cash flow breakeven target. As a result of those actions, the Company saved an incremental $3.3 million of expenses in the fourth quarter compared to the third quarter. Approximately $2.3 million was saved in cost of goods sold and approximately $1 million was saved in operating expenses. This week, the Company took additional actions to further reduce our expenses to better align with the current market conditions, including subdued bit growth in both DRAM and flash markets, as communicated by several device manufacturers. The actions will result in the reduction of approximately 50 employees worldwide plus some temporary employees, principally from our manufacturing and engineering organizations and will be completed by the end of Q1.

We expect those actions will cost the Company $1.8 million to implement and save an additional $2 million to $2.5 million per quarter starting in Q2. With these actions, we will reduce the combined Company's cash flow breakeven from $68 million to $70 million, communicated in our last call, to $64 million to $66 million. At these levels, we would expect non-GAAP gross margins to be 31% to 33%, depending on product mix, non-GAAP R&D expenses to be 14% to 16% of revenues, and non-GAAP SG&A expenses to be 15% to 17% of revenues. We would expect the revenue mix to be approximately 50% SoC, 40% DRAM, and 10% flash.

In the fourth quarter, we realized close to $2 million of savings from OpEx synergies resulting from the acquisition. We now expect to slightly exceed the $2 million per quarter of synergies that we communicated in our last call and we expect to reach that level of savings in the first half of 2013, as opposed to the second half of 2013. Additionally, the combined company has identified several opportunities to leverage the supply base to reduce product costs, as well as leverage design and factory automation to achieve greater efficiencies and reduce costs. These projects have not progressed to the point where we can quantify a savings commitment. We will update you when we can quantify the expected manufacturing and production-related synergies.

With respect to Q1, we continue to see weak demand in the memory markets, similar to that experienced by some of our customers, resulting from market uncertainty. But we will receive a benefit of two additional weeks of SoC revenues from MicroProbe business in Q1. As such, we expect first quarter revenues to be in the range of $48 million to $53 million. We expect memory revenues to be $21 million to $24 million and SoC revenues to be $27 million to $29 million. We expect the non-GAAP gross margin to be in the range of 17% to 21% for the first quarter, non-GAAP operating expenses to be approximately $21 million to $22 million, and Q1 cash usage to be in the $10 million to $12 million range from the combined operations. With that, let's open the call for Q&A. Operator?

(Operator Instructions)

Jim Covello, Goldman Sachs.

This is Mark Delaney calling on behalf of Jim Covello. Tom, I was hoping you could help us understand some of the thought process around exiting the PC DRAM and any feed back you're getting so far from your customer base and what your expectation is in terms of what that could do to your market share in PC DRAM?

We're not exiting the PC DRAM space, to be clear. What we did was, we suspended doing any further development on a next generation matrix card. Today, in PC DRAM, we are doing DDR4 designs and shipping cards for PC DRAM. The principle development around this next generation matrix card was to -- really was to provide a platform that was compatible with some of the high-end testers. What's happened is, as we have gone along, is customers have reduced their investments on the ATE test side and redirected spending to other areas and are utilizing their installed base of test equipment, as it is there today.

Our current generation matrix card, plus some technologies that we can incorporate into that, are going to allow us to extend that technology going forward. I think the biggest change on this is that the return that we would get from pursuing some of the high-end testers was just not there and that the revenue that we forego in that area, we believe, can more than be compensated for by growth in SoC areas, with a higher degree of profitability on it and we'll be able to avoid a substantial R&D investment.

Understood. That's helpful. For my second question, I was hoping you could help us understand your outlook in SoC. Adjusting for the fact that you have a couple of extra weeks, your SoC revenue is flat in the first quarter, which, I would think, would be a period of weaker seasonality for some of the SoC probe-type applications. Can you help us understand what's driving the relative strength there?

Realistically, I think, SoC revenues quarter-over-quarter are essentially flat. You're right, the seasonality is that the first quarter and the fourth quarter are the slower quarters in any given cycle. The second quarter and the third quarter are traditionally stronger as new designs come to market and as people ramp up for third quarter holiday-type manufacturing. We believe that today we see the designs in process today and the qualifications in process today that would represent that same kind of seasonality where we would see upticks in the second and third quarter. We're planning accordingly and we would expect to see that come through.

All right. Could you just remind us what the MicroProbe revenue was for 2012 overall? Do you have a view of 2013 revenue?

The revenue for 2012 was right around $103 million, I believe.

We haven't provided any guidance for 2013.

Okay. Thanks very much. Good luck.

(Operator Instructions)

Vernon Essi, Needham and Company.

I was wondering if you could elaborate a little more on what you're seeing in the mobile DRAM market on a go-forward basis? It seemed like you had a nice lift in the first half of 2012. Would we expect a similar seasonal pattern to occur in 2013 as all these smartphone shipments and what not gear up for the back half of the year?

On the memory side, similar to the conversation we just had on SoC, the seasonality seems to be in there, where the second and the third quarters are the larger quarters or stronger quarters, and the first and fourth quarter are down. In the DRAM space, obviously the PC DRAM part of it is down significantly. As you said, last year, we saw improvements going into the second quarter and into the third quarter, although by the end of the September timeframe of the third quarter, things had already started to roll off. There's no reason that I would expect a different cycle this year than we had last year. I would hope that there's some greater macroeconomic stability that might treat the overall market a little bit more favorably. But I would expect to see the same kind of seasonal cycle in the second and -- the second and third quarter.

You would say the mix sequentially from the fourth to the first quarter should be relatively the same between mobile and non-mobile DRAM?

Yes. I think that consistent with this secular change on the PC market, unless something hits on the ultra books or something in that category, I would expect to continue to see it be weak on the mobile side. As you said, with all the smartphone tablet mobile applications that are going on, that continues to seemingly be pretty strong. The one thing that gets grouped into quote-unquote the PC market is the server DRAM aspect of it. These are the DDR3 and DDR4-type architectures.

We believe that the cloud and the server infrastructure for that is pretty closely coupled to mobile. Depending on how server shipments go, that could help mitigate some of that commodity like DDR3, DDR4-type design drop-offs that just being lost by PCs, some of that will be absorbed by servers. As I said, whether you believe the Gartner forecasts or not, they certainly are forecasting strong growth in the consumption of DRAM in the server space over the next couple of years. In some ways, I think 2012 and maybe the first half of 2013 or something are a bit of a transitional state there. But I would expect to see that play a bigger and bigger role as we go through 2013 and on into '14 and '15.

Okay. I appreciate DRAMs, to some extent, may be the war of attrition between yourself and your main competitor, but is there new updates on the competitive nature of what's going on there and any possible share gains?

Because customer buying patterns it's hard to really tease that out of it. There's two companies in the space, that are doing, as we see it, 90%-plus of the market between FormFactor and MJC and I can't point to any dramatic market shifts in the fourth quarter.

Tom Diffely, DA Davidson.

Just to circle back on the next generation matrix cards that you're putting on hold from an R&D point of view, is that the same generation that you recently sampled with Samsung? It sounded like the cards were done at the end of the summer and your customers were just looking at them at that point.

We didn't talk about specific customers on this. We have shipped that card to three of the four DRAM customers that really had a test strategy and test road map that was going to require that kind of architecture. We got through testing and qualification of those cards at all three of those customers, but as they looked at their capital spending and their plans for 2013, they have stepped back from their investment plans on the high end of this. In order to really utilize these cards, it was the latest generation of testers and while they had plans to make substantial investments in those areas that they've talked about for the past couple of years, they have really put those plans aside as they backed off on capital investments throughout their DRAM factory. At this point in time, the amount of investment that we need to continue to ramp that product up and get it to volume production, isn't warranted in light of what we see as really the revenue opportunity for the year ahead.

As I indicated, several of the customers have reduced their planned spending in the DRAM space for 2013 and some of this is down substantially from where it was back in the 2011 timeframe, some of that was reflected in 2012. That, coupled with this delay or cancellation of their capital investment on the test side, really presented us with the opportunity to forego this investment, avoid this expense. Realistically on the incremental revenue that we would have gained in the year ahead, there would have been little to no profitability, due to the overall investment we would need to make. We can redirect some of that investment to SoC and deliver the rest of it to the bottom line against the priority that we have focused on getting to profitability.

Okay. But is this a situation where you could pick it up a year from now if the markets recover then?

Certainly, we're not destroying anything by doing this, but it would take some time to pick it back up.

Okay. I'm surprised you haven't seen a little more strength in the last month or two just because the pricing for DRAM, NANDs, and NOR, seems to all be much stronger than it was just 1 month, 1.5 months ago.

Yes, I agree, Tom. It's been, through December, I was pretty excited to see what was happening in the spot market, at least what was most visible there. Then that's been reflected in contract pricing; not as strong, but certainly contract pricing has come up. Apparently, the increases in prices have been simply the result of constrained supply. Back in the September-October timeframe, there was a number of articles out, reports out on the fact that people were cutting back wafer starts for DRAM and earlier in the year on flash.

It would appear their strategy worked. Some of those prices are up now over 50%, but it doesn't appear that's triggering a stampede to the door for the DRAM manufacturers to ramp up wafer starts. Honestly, I felt the same way. I thought it was reflective of demands coming back and things ramping up, but it doesn't appear that it's demand, it appears that it's just been constrained supply.

Okay. Hopefully, it'll make you customers little more profitable so when things picks up on a seasonable basis, they'll have more to spend with you.

Yes, absolutely. I want them to be healthy.

When you look at SoC market, you talked about some nice growth over the next few years. With the combined companies now, where do you think you are in a market share percentage point of view of the advanced SoC market?

We're kind of projecting back against the last set of data that was out for 2011. If we look at it and make an estimate at it, it's somewhere in the mid 20s. If we looked at it closely, I guess we'd say it'd be 27% in the 2011, 2012 time fame. We'll see how the market developed in 2012 once some reports get out. Clearly, the largest supplier in the advanced SoC probe card space today, somewhere 25% to 30%, I guess.

Okay. Then looking at the NAND and the NOR part of the business, in the past you'd said, it seemed like it hasn't been a big focus for you, is that still the case? Or is it a growing focus in light of DRAM being a little softer?

I'll tell you, Tom, first focus is, to get back to profitability. With the Company structured as we have it now, that is closer and we're better positioned than we've been any time in the past four years. If we get these seasonal cycles to come through for us this year, it would be our intention to demonstrate that profitability. The flash market, the NAND flash market, and to a lesser extent, the NOR flash market, continues to be an area where we participate, but we have not made significant product investments in that area. When you look at the overall growth, the NAND flash market growth, as forecasted by VLSI and all, looks to be similar in total dollars to that of SoC. Certainly, that's not lost on us. We're looking at things that we can do there with a greater opportunity for turn. But we haven't got significant programs on that as yet.

Just to add some color to that, Tom, if you look at where we were in 2011, we did about $25 million in flash business and in 2012, close to $30 million. Even though it's not a focus for us, it did grow about 20% year-over-year.

Okay. Final question here, when you look at the operating expense you guided to for the first quarter, how much of the restructuring that you mentioned earlier does that cover and how much would there be, then, beyond that?

Ask that again.

From the OpEx reduction, from some of your cost reduction programs that you're working on right now?

Yes.

How much of that is captured in the guidance for the first quarter and how much would be realized after the first quarter?

I would say probably a good 80% of that's captured in the first quarter and then there's a piece that rolls into the second quarter, as well. It's all captured in the cash flow breakeven thought process.

Great. Okay. Thank you.

Patrick Ho, Stifel Nicolaus.

As you look at 2013, R&D and engineering spending, how much do you plan, in terms of focusing on next generation SoC devices and where some of your targeted markets are on a going-forward basis?

As I talked about in the prepared remarks here, Patrick, we've recently taken some more cost structure really out of the memory side of the business, if you will, and all this is focused at getting to profitability at lower breakeven revenue levels, but to make sure that we continue to fund and resource the investments on the SoC side. We've got aggressive programs there, focused on the continued reduction in pitch for these advanced SoC devices. All of the advanced package parts are moving down from 175 micron, 150 micron pitch type bumps down to 120 and below 100. We've got specific programs and investments going forward on that. Additionally, there's a technology transition that customers are actively driving after to go to a copper pillar packaging format to do flip chip; some of that for grid-array, but generally speaking, even for just overall flip chip-type packaging.

That will take these pitches down below 100, down to 80 microns and such. We've got an integration of some of technologies from FormFactor before the merger with MicroProbe and combined together with technologies that MicroProbe has that's an investment there. Today, we've got an anomaly, 50% of R&D is focused in on growing that SoC opportunity in these kind of next generation or leading edge parts of the business.

Great. That's helpful. As you continue to make your efforts to grow share in the SoC probe card market, what are some target markets that you're going after, like mobile application processors? What type of areas do you see the biggest potential for you to grow share in that marketplace?

That's what's driving the unit volume growth the most dramatically is mobile application processors. There's a chart we've shown a few times that Mike Slessor at MicroProbe had put together and done the work on to look at really what's happening with all of these grid-array and C4-type packages out there. They're growing dramatically. They're growing, on a unit volume basis, the packages are growing at 19% over a number of years. What's driving that are mobile application processors, as you mentioned before. That plus, actually not just the application processors themselves, but all forms of support circuitry that's going into that; so there's power management devices and base band chips and all of these are going into this advanced flip chip packaging.

I think it's very encouraging to see the kind of demand that the IC customers are putting on to the package suppliers that they see that kind of growth. As I said, every one of those is going to get probed by an advanced SoC probe card. I think that, as this progresses down the pitch path, if you will, as it goes from 120 microns to 100 to 90 and 80 and things like that, the existing technologies that have been used get more and more marginalized and it creates an opportunity for some of the technologies that MicroProbe and FormFactor have together to create a real value add for customers. As the probing becomes a very critical part of making sure that the entire package has the kinds of performance and reliability and everything that customers need and potentially that creates a further market share growth opportunity for us where we can leverage some of the MEMS technology and all that together. It's really a very exciting part of the market.

Great. Thanks a lot, guys.

I'm not showing any further questions at this time. Ladies and gentlemen, this concludes the FormFactor Fourth-Quarter Conference call. Thank you for your participation.