FormFactor Inc (FORM) 2013 Q1 法說會逐字稿

Thank you, and welcome, everyone, to FormFactor's first-quarter 2013 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 a 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; financial and business performance projections; statements regarding macroeconomic conditions and business momentum; statements regarding the demand for our products and technologies; statements regarding business integration activities and operational synergies relating to the Company's recent merger with Astria Semiconductor Holdings Inc., referred to today's discussions as MicroProbe; 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 2012,as filed with the SEC, subsequent SEC filings and the press release issued today. With that, we will now turn the call over to CEO, Tom St. Dennis.

Thank you, and good afternoon. The first quarter of 2013 was another quarter of progress for the combined operations of FormFactor and MicroProbe. The integration of the two businesses has gone well and we continue to make progress on realizing our operational synergies. We're now focused on delivering on the long-term growth opportunities that the combined Company has in the advanced probe card market. Our SoC business slowed in Q1 relative to the full 13 weeks of Q4 2012 as the impact from significant reductions in personal computer unit shipments and product transitions in the mobile devices market reduced demand for advanced SoC probe cards. We expect this demand to increase in the latter part of Q2 and should show strength in the second half of 2013. The growth opportunities for the Company remain significant in this market driven by the growing number of smartphones, tablets and other mobile devices.

One of the important trends in the SoC packaging market is the transition from bump, or wire bond packaging, to copper pillar packaging because of its lower total cost. The market momentum for copper pillar packaging continued in the second quarter and appears to be accelerating from schedules that customers had as recently as Q4 2012. FormFactor is well-positioned for this transition in packaging as we've been supplying leading-edge copper pillar production for over five years. In Q1, we received multiple orders from two additional customers representing early production applications for them that are expected to ramp going into Q3. Yole Development forecasted by 2014 50% of all the flip chip package wafers will use copper pillar technology. We believe that FormFactor's technologies are very well suited for this fast-growing market and represent an opportunity for us to grow our SoC market share in 2013 and beyond.

The memory market recovered in Q1 from the significant drops that we saw in the third and fourth quarters of 2012. While the recovery is not currently as strong as we saw at this time in 2012, our DRAM revenue was up 33% in Q1 and we expect to see a slight increase in Q2. The recent increase in DDR3 DRAM spot market prices appears to be the result of DRAM manufacturers reducing the available supply and shifting their production away from the PC DRAM market and allocating their wafer starts for low-power DRAM to supply the mobile devices market. Overall, our DRAM customers' profitability has improved in the past quarter and this should help to stabilize probe card demand going forward. The mobile DRAM market is growing quickly as more mobile computing systems enter the market. Mobile device manufacturers are requiring new wafer test techniques they are creating an opportunity for FormFactor to expand our market share. Today we are engaged with all four major DRAM manufacturers to develop leading-edge mobile DRAM probe card solutions.

Our revenue from the flash market was down in Q1 relative to Q4 2012, but appears to be improving to Q4 levels, and possibly above this quarter. Our current product offerings focus on the high parallelism portion of the flash business, which we estimate to be approximately 10% of the total flash probe card market. Throughout 2012, we were focused on expanding FormFactor's product offerings from a predominantly memory-centric portfolio to one that can serve the entire semiconductor industry, especially the fast-growing mobile SoC market. The acquisition of the MicroProbe products and our ongoing product development investments have achieved that objective, and in Q1 50% of our revenues came from the SoC market even with a 33% growth in our DRAM revenues over Q4 2012. We've also been focused on restructuring the Company to be non-GAAP profitable with positive cash flow in the $64 million to $66 million revenue range. The benefits of the synergies realized in the merger with MicroProbe, plus improved product gross margins, has positioned us to deliver on our profitability and cash flow objectives going forward. Mike Ludwig will now review our first quarter performance and provide guidance for the second quarter.

Thank you, Tom. Good afternoon.

Revenues for Q1 were $52.6 million, an increase of $4.9 million, or 10%, versus Q4 2012. Compared to the fourth quarter, revenues in the first quarter increased in SoC and DRAM, but decreased in Flash. SoC revenues in Q1 were $26.4 million, an increase of $1.6 million or 6% from Q4. The increase in SoC revenues was driven by the additional two weeks of MicroProbe revenues in Q1 compared to Q4. When compared to fourth quarter with 13 weeks of MicroProbe revenues, Q1 SoC revenues were $2.2 million less than Q4.

Revenues for mobile processors and parametric testing increased in Q1, but we saw a decrease in revenues from SoC devices for PCs. The SoC probe card market is being favorably impacted by the growth in mobile application processors which require more advanced probe card solutions and higher parallelism, but negatively impacted by the shift away from PC applications, as evidenced by a double-digit decline in PC unit volume in Q1. First-quarter revenues for DRAM products were $22 million, an increase of 33% or $5.5 million from the fourth quarter. The increase in DRAM probe card demand resulted from stronger mobile demand and the extended rise in the price of DRAM devices that began in late Q4 2012. The device price increases resulted from the rationalization of supply with current demand.

We continue to see an increased percentage of year end probe card revenues from customers that are transitioning to probe -- devices 63% in Q1. (technical difficulties) While probe card revenues for mobile devices continue to be a strong revenue component and Q1, increasing $8.5 million or 39% of DRAM probe card revenues compared to $6.7 million in Q4. Flash revenues were $4.2 million for the first quarter, a decrease of 34% from the fourth quarter. We saw similar decreases in both our NAND flash and NOR flash revenues compared to Q4. NAND flash revenues were $2.5 million for the quarter.

First quarter of GAAP gross margin was $9.1 million or 17% of revenues compared to a negative $3.1 million or negative 7% of revenues for the fourth quarter of 2012. GAAP expenses in Q1 included $2.7 million for the amortization of intangibles, $1 million of expenses for inventory and backlog written up in the acquisition in Q4 and sold in Q1, and $0.5 million for stock-based compensation. On a non-GAAP basis, gross margin for the first quarter was $13.7 million or 26% of revenues compared to $6.1 million or 13% of revenues for the fourth quarter. Non-GAAP gross margin for the first quarter was favorably impacted by higher revenues, a favorable product mix, lower manufacturing costs from restructuring activities taken in Q3 2012 through Q1 2013, and significantly lower manufacturing variances.

Our GAAP operating expenses were $29.6 million for Q1 2013, an increase of $7.7 million compared to Q4. Q1 GAAP operating expenses included $4 million for restructuring expenses, $2.5 million for stock-based compensation, $0.8 million for amortization of intangibles, and $0.8 million for acquisition- and integration-related expenses. Non-GAAP operating expenses for the first quarter were $21.4 million, an increase of $1.9 million compared to the fourth quarter. The increase in non-GAAP operating expenses was due in part to the full quarter of MicroProbe operating expenses in Q1 compared to 11 weeks of operating expenses in Q4. In addition, operating expenses increased in Q1 compared to Q4 from higher personnel-related expenses.

In the first quarter, the Company recorded a GAAP tax benefit of $0.2 million compared to a tax benefit of $25.1 million in Q4. The Q1 tax benefit included discrete tax benefit items from the R&D tax credit reinstatement for 2012 that was passed by Congress in January 2013, and the expiration of the statute of limitations on certain tax positions reserved previously. The benefit in the fourth quarter was derived primarily from a one-time benefit that resulted from recording a deferred tax liability and a release of a portion of valuation allowance against the deferred tax assets as a result of the acquisition of MicroProbe.

Basic weighted average shares outstanding for the first quarter increased to 53.7 million shares compared to 52.7 million shares in Q4. The increase is due to the full quarter impact of the shares issued in Q4 to acquire MicroProbe. Basic GAAP loss per share was $0.37 in Q1 compared to income of $0.01 per share in Q4. Non-GAAP loss per share was $0.13 in Q1 compared to a loss of $0.25 per share in Q4. Cash comprised of cash, short-term investments and restricted cash ended the first quarter at $154 million, $12.1 million lower than Q4. The Company used $11.1 million in the business in the first quarter and $1 million for payments related to the acquisition and our first quarter restructuring.

Here are some other financial details. Our depreciation and amortization in the first quarter was $6.2 million, including $3.5 million for amortization of intangibles and $2.7 million for depreciation. In addition, the Company recorded $1.3 million of expenses associated with tangible assets written up as a result of the acquisition and expensed in the first quarter. Our capital additions in Q1 were $2.7 million compared to $2.3 million in Q4. Our stock-based compensation expense for the first quarter was $3 million compared to $3.6 million in the fourth quarter. As we discussed on our last call, in Q1 the Company took additional actions to further reduce our expenses to better align with projected bit growth in both DRAM and flash markets, as communicated by several device manufacturers.

The actions resulted in the reduction of slightly more than 50 positions worldwide, principally from our manufacturing and engineering organizations, and were completed by the end of Q1. These actions resulted in savings of greater than $1 million in Q1 and we expect an additional $1 million of savings in Q2 related to these actions. As we communicated earlier, and reaffirmed by Tom in his remarks, our cash flow break-even is $64 million to $66 million of revenue. 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.

With respect to Q2, given an improved DRAM pricing environment and continued growth of our SoC revenue base, we expect second quarter revenues to be in the range of $58 million to $62 million. We expect the non-GAAP gross margin to be in the range of 28% to 31% for the second quarter, non-GAAP operating expenses to be approximately $21 million to $22 million and the Q2 cash usage to be between $3 million to $5 million. With that, let's open the call for Q&A. Operator?

Certainly.

(Operator Instructions)

Our first question comes from Terence Whalen from Citi. Your line is open.

Good afternoon, thanks for taking my question.

This question is a little bit of a longer-term question on the NAND market. As we eventually see migration toward 3D NAND into next year by some of the larger NAND suppliers, how does that change the test opportunity within NAND? Thank you.

Well, Terence, I think everything that we've heard from customers so far about their 3D NAND requirements are that from a probe standpoint they expect it to remain relatively similar from a physical standpoint. That meaning the number of probes, the size of the bond pads, things like that -- so the physical task of it should be the same.

In terms of what the actual electrical test requirements will be for 3D versus floating gate, I'm sure that will be dramatically different. How much of that we are going to see, we don't know yet. To the best of our knowledge we haven't supplied a probe card for a 3D vertical test yet; certainly, not on a full wafer basis. Perhaps we've gotten in probe cards on that, but customers are being very careful about what they say around their 3D NAND timing.

So at this point in time I would assume that it will be similar to today's test requirements, at least as it affects the probe card.

Okay, great, that's very helpful.

And then, the follow-up question that I had is, as we continue to see the mix of DRAM migrate more toward mobile DRAM, can you just talk a little bit about how you see that opportunity developing over the next year? Perhaps where you think that might go one year from today? And then also, talk a little bit about, market share-wise, how you feel market share in the DRAM test market has progressed, and whether you have made progress specifically at some Korean accounts? Thank you.

Mobile DRAM as a percent of total DRAM, Gartner estimates to be somewhere around 43% -- 41% to 43%. I think it was 41% in 2012 and it should be 43% or so in 2013. And that is expected to grow. They are also forecasting that DRAM consumption in smartphones will exceed PC DRAM consumption, in terms of total megabytes of DRAM consumed, by 2015. So, clearly, the mobile DRAM market is going to grow relative to commodity or the kind of standard DDR part of the market.

The shift that goes on there is that there appears to be a potential that more and more mobile DRAM will be sold in an unpackaged format or in a Known-Good-Die format that ultimately gets packaged into a multichip package or a stacked die package. And that has some impacts then on what would unfold from a test standpoint from a probe card standpoint. It is in fact in those areas that we are investing right now to participate in that, position ourselves. We think we have, for a couple of those test insertions, we have some specific strength in our products that we think will be useful.

With regards to market share for the Company -- in the last 12 months, I would say that our market share has been up slightly at a couple of our key customers. In terms of an overall difference, I think it is hard to measure market share accurately against independent industry analysts. So I don't think I can give you an outside number to reference against. But we know that in a couple of customers we've gained their -- and particularly in Korea, for some of the more advanced applications, it appears that the local suppliers don't have the kind of high parallelism capabilities that FormFactor has. But also our competitor in Japan also has the capability, so we generally compete together on that. But in the course of the year, we know that our market share did gain at least one of the two key suppliers in Korea.

Okay, thanks, Tom. And maybe if I could fit one last one in for Mike.

Mike, you guys have done a good job of improving the cost structure and enhancing the gross margin capability. Can you let us know on a go-forward basis where we are in all the cost restructuring? It sounds like we are in later phases of realizing that. Are there any other milestones looking forward in terms of aligning the cost structure? Thank you.

Yes. Terence, if you look at what we've done from Q3 through Q1, we've taken two pretty significant actions, one in Q3 that reduced our structure by $5 million a quarter, and then the one we took in Q1 this year which reduced our structure by another $2 million -- $1 million that we recognized in Q1 and another $1 million that we expect to recognize in Q2 going forward. So I'd say, in general we've accomplished what we set out to accomplish. I don't see any other major actions at this point in time that we have planned.

Terrific. Thank you.

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

Thank you very much, and nice work on the cost structure there, Mike.

Wanted to dive in a little bit on the guidance, and specifically around the SoC side of the business. When you look into the next quarter, I'm curious what visibility you're getting out of your customers. And should we'd be looking for a lot of the sequential growth in this guide to come from SoC? And as we get into the middle of the year, will we have the usual seasonal uptick of that business? Or should we -- do you have that visibility, I guess, is really the question there, or should we be thinking that maybe this is going to be hand to mouth sort of behavior going into 2013? Thanks.

There's a lot of components to your question there, I think, Vernon.

What I would say is the way it looks like to me is that -- and I made a comment about it that, compared to this time last year, while demand is up for us in memory and in SoC, it is not up as strongly as it was a year ago at this point in time. And I think that there's a lot of different factors that may be contributing to that. Some of this is related to product transitions and some of the new mobile product introductions that are going on, whether it is an Apple product or a Qualcomm product, or a Samsung product -- how that affects Qualcomm and Samsung and the market is a little bit difficult to see today.

Smartphone unit volume shipments decreased in the first quarter from the fourth quarter, so there's a little bit of a pause in some areas that have been pretty hot. There's a lot of speculation about what's been going on with Apple and new product introductions and all there, and they have been taking their lumps on that. So I would say that -- and that coupled then also with what has happened on the PC market, with the unit volumes dropping so significantly in the first quarter at 14% or so, that IDP or IDC reported. All that, I'd say, has clouded things for us.

I would say, and I know it is kind of trite, but everyone is certainly looking at the second half of the year as being a period of some growth and some significant growth. And we've talked to top five semiconductor companies that have given us specific statements with regard to what they expect the Q3 and Q4 demand to be like. And they see it as up significantly from the first half. I think they've got that tied to specific product launches and other things, so there's some structure behind that, versus just hope and some expectation out there.

All that said, I would say that from a FormFactor standpoint, typically our first quarter and our fourth quarter are the slower quarters in the year, and the second quarter and the third quarter are the stronger quarters in the year. And in some years the second quarter is bigger and in some years the third quarter is bigger. I would say that this year is sizing up to be stronger for us in the third quarter, based on different inputs from customers as well as some of the industry things going on. That's about as good as we've got it right now.

And I appreciate that. And I'm sorry I gave you a lot on the front end of that question, but you answered the long-term part. But going into the second quarter, I'm assuming -- you said DRAM would be up a little, but I'm assuming that you're going to get a bigger growth belt out of the SoC business for this Q2 guide, is that correct? At least dollar terms?

Yes, we didn't provide breakout by markets, but the answer is, yes, we will get a little more sequential growth out of SoC.

Okay, and then just to follow-on to Terence's cost question, specifically on the gross margin -- Mike, it seems as though -- I always like to track the gross margin pretty carefully here -- it seems like you are getting better traction than I would've expected off of the same revenue levels. Is this more from just optimizing the operation side of the business? I realize you've taken these cost reductions, but it seems as though -- I would almost even say it is the pricing -- are you getting better pricing from your vendors, or your customers rather, in the process as you are growing the revenue?

It is definitely a combination of both, Vernon; that certainly the actions that we've taken over the last three quarters have been pretty significant with respect to increasing efficiency of manufacturing operations. But also the group has done a very good job of leveraging supply chain, negotiating good cost reductions with respect to our material. So it has really been a combination of both.

If you really think about the model that we have communicated, the results are probably pretty much in line with this volume of revenue. So I think it was just really trying to get back, making sure that we took the actions to get the model, or results, back closer to the model, and I think over the last two or three quarters we definitely have done that.

Okay, very well. Thank you.

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

Thank you very much.

Tom, maybe you can give a little bit of color in terms of the mobile DRAM outlook? With a lot of the conversions that are going on in the industry right now, from commodity DRAMs and mobile DRAM, what's the kind of lag time when they start production on those lines versus when you start seeing, I guess we'll call it, orders and [Q4] revenues?

Well, at one level, Patrick, we're driven by the number of wafer starts, or wafer outs, per month from the factories. So, given that they have been managing their capacity pretty tightly -- and, frankly, I think, have been reducing it for the last couple years -- the fact that they shifted around internally to have one level says that maybe the design on the probe card changes, but the total number of wafers per month don't change. There is a shift, though, that's going on, and that is that there's, the mobile DRAM parts require some longer test periods. In some cases they require a different test -- an additional test insertion. So in general it has got some growth in it for us that way.

I think if we see a 10% growth in the kind of distribution of mobile DRAM within the total DRAM space over the next 18 months or whatever, it will add measurably to the DRAM probe card market for us. But, maybe it will add 5% or something like that. It is speculation on my part, but there is a benefit to us as they convert more into mobile.

Okay, great, that's helpful.

Again, maybe looking towards next year -- as you mentioned, product introductions, new devices coming out -- as the industry starts to migrate to 20-nanometer devices, you've got a whole set of new mobile application processors that will be built on 20 nanometers. What is your outlook for the opportunity between 28 nanometer and 20 nanometer from the probe card side?

A portion of that is tied up in what I was talking about in the prepared comments with regards to copper pillar packaging. A lot of those transitions that are going from 28 nanometer down to 20 nanometer are also incorporating this new packaging technique of utilizing copper pillars. It provides some cost savings and it has got a, frankly, it has got a space savings because it is a tighter pitch. And in that case, then, I think it really plays to our strengths.

The Company is a leader in terms of the finest pitch in the bump market today. It is where we've utilized MEMS technology to enable substantially tighter pitch applications in probing. And this transition down to 20 nanometer will bring with it this copper pillar packaging, reduced pitch, and that really should create an opportunity for us to grow our share within the SoC space.

Great, and final question for Mike.

I just want to make sure I understood the answers to the last few questions correctly about the margin profile. Would it be fair for me to characterize that, on a going-forward basis gross margins -- the biggest variables, or the biggest levers for gross margins are product mix and absorption? And it is not any restructuring or any of those kind of things that will have the biggest impact?

On a go-forward basis, Patrick, you are correct.

Great, thanks a lot, guys.

Thank you.

(Operator Instructions)

Our next question comes from Tom Diffely from D.A. Davidson.

(no audio) SoC market. I guess, just first -- how big is that market? And what kind of projected growth do you think is reasonable for this year?

Which market are you talking about?

The advanced logic, or advanced SoC market.

The last numbers that we had -- the numbers are the same ones we had from last year -- there hasn't been any new independent industry analysis out on that. But we've got the SoC market for the 2011 time frame was right around $400 million. And we would expect to see that having grown during 2012 by 10% or 15%. We will see, as some of the data comes out now in the next month or so.

Okay. I guess your strategy in that market, though -- is it really just the market itself is going to have some fairly good growth over the next few years? Or is it you gaining share inside that market?

It is a combination of both. The market is attractive because it is growing, and growing at a pretty healthy rate of 10%-plus. Certainly, our objective in this, and our strategy in that, is to grow our share within that market as more and more of the SoC products move into grid array packaging in general -- the so-called bump packaging. And more recently, this technology that's coming forward now for cost and performance is this copper pillar packaging. And so both of those are market segments that we think we're very competitive in, and we think that the total offering of the Company with regards to manufacturing, customer support, and the technology we have, is attractive for that.

We know that the market for packages in which these chips are placed and packaged subsequently -- we know that market is growing rapidly as more companies adopt a grid array-type package. So bottom line, the market is growing. We expect to benefit from market growth, but we also expect to be able to leverage our technologies and our capabilities as more people move to this more advanced form of packaging.

Okay. That's good.

And is there normal seasonality in this, as well, with the fourth quarter and first quarter being a little softer? Or is this much more project-based?

Certainly, at least in the past -- we will see what Apple does in the future, I guess -- but in the past, if Apple introduced a product in January, not that I can recall one, but there was a clear project-based set of activities that went around some of those major product introductions. At this point in time, it seems that a lot of these product introductions are now timed to take advantage of the holiday season and get position out there for, I guess, probably back-to-school all the way through Chinese New Year.

So it seems like the seasonality exists really throughout the market from SoC to DRAM and flash, where at least the Q4/Q1 transition slows down and then things begin to build back up as you get into Q2, Q3.

Okay. All right, thank you. And one question for Mike.

The $64 million to $66 million break-even -- is that cash flow break-even, EPS break-even? And is it GAAP or non-GAAP?

It would be cash flow break-even on a non-GAAP basis.

Okay. What is the break-even level for EPS break-even?

On a GAAP perspective, that's going to be a pretty good-sized number because we'll have to overcome the $3 million to $3.5 million of stock-based compensation, as well as the amortization of intangibles, which is another, at this point in time, $3.5 million. So it would be a good-sized number.

Okay. All right, thank you.

(Operator Instructions)

I show no further questions at this time. Ladies and gentlemen, thank you for your participation. This concludes the FormFactor first-quarter conference call. You may now disconnect.