FormFactor Inc (FORM) 2013 Q2 法說會逐字稿

Thank you and welcome, everyone, to FormFactor's second 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 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, financial and business performance projections, statements regarding macroeconomic conditions and business momentum, statements regarding seasonal, business turns, statements regarding the demand for our products and technologies, statements regarding operational synergies relating to the company's recent merger with Astria Semiconductor Holdings Inc, referred to during today's discussion 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 that 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 in the press release issued today. With that, we will now turn the call over to CEO, Tom St. Dennis.

Good afternoon. FormFactor's reached several critical milestones in the second quarter of 2013. For the first time since the fourth quarter of 2007, we generated positive operating cash flow. In the past 5.5 years, the Company has had to work through dramatic changes in our market, a fundamental restructuring of the Company and its products, a transformative acquisition, all while working to drive significant improvements in operational performance. The employees that have contributed to this turnaround should feel very proud of this significant accomplishment.

Our Q2 non-GAAP earnings were within $300,000 of breakeven at $62.7 million of revenue. While sure to breakeven, it demonstrates the significant improvements we've made in product costs, as well as operating expenses. We shipped our Copper Pillar Probe Cards for [roll-in] production of 110-micron pitch wafers to multiple customers during the second quarter. While Copper Pillar is still in the early phases of adoption for mobile SoC products, these early wins reflect the significant experience the Company has, and the leading MEMS technology that FormFactor can deliver to our customers.

From a markets perspective, the second quarter was very dynamic and it appears that will continue into Q2. The reported 11% decrease in PC shipments had a significant impact on both our SoC and DRAM business. The delayed or extended product cycles for smartphones and personal computers, as well as reduced demand for premium smartphones has also slowed our SoC business. The demand for DRAM probe cards did improve, as our customers benefited from higher DRAM prices and increased demand related to mobile computing. The increase in mobile DRAM demand was reflected in our business, with 56% of revenues driven by mobile DRAM.

While smartphone and tablet demand increased, those increases were offset partially by the sharp drop in PC related DRAM demand. Our flash market revenue increased quarter-over-quarter, reflecting specific customer buying patterns. Since we only serve a small portion of the NAND flash market, we don't believe our revenue changes reflect overall market demand.

The demand for probe cards serving the automotive and industrial markets appear to be improving after a period of decline. While those markets are not as dynamic as dynamic as the mobile computing market, it is reassuring to see them improve, as they are part of the overall revenue foundation of the Company.

The second half of the year has been full of challenges in the past two years, so we remain cautious about a six-month view of our business. With respect to the third quarter, we expect the same market trends of slowing PC sales and reduced growth for premium smartphones to continue. The third quarter will benefit from some key product cycles in the mobile computing market, and the continued growth of low and mid-range smartphones.

Overall, the advanced probe card market continues to provide growth opportunities for FormFactor. The mobile computing market is driving growth for DRAM probe cards that's helping to offset the decline in DRAM demand from the PC market. Mobile computing is also driving new IC package solutions in the form of Copper Pillar packaging. We expect this trend will deliver double-digit growth rates for probe cards in this new segment over the next few years.

This quarter's results show that our actions to improve our operational performance and cost structure are delivering bottom line results that are the best in over five years. As the semiconductor industry strengthens, FormFactor's market opportunity will grow, enabling us to deliver improved cash flow and profitability.

With that, I'll turn it over to Mike Ludwig to review our Q2 performance and provide our Q3 guidance.

Thank you, Tom and good afternoon.

Revenues for Q2 were $62.7 million, an increase of $10.1 million, or 19% compared to Q1 2013. Revenues in the second quarter increased in all markets. SoC revenues in Q2 were $27.5 million, an increase of $1.1 million or 4% from Q1. Similar to Q1, revenues for mobile processors and parametric testing increased in Q2, but revenues from SoC devices for PCs decreased in Q2, consistent with the continued double-digit decline in PC unit volume. In addition, we experienced some growth in our SoC wire bond business from industrial and automotive applications.

Second quarter revenues for DRAM products were $26.7 million, an increase of 21% or $4.7 million from our first quarter. The increase in DRAM probe card demand resulted primarily from stronger mobile demand. Revenues for mobile device probe cards increased to $15 million or 56% of our DRAM probe card revenues, compared to $8.5 million or 39% of DRAM revenues in Q1. A continued strong DRAM pricing environment throughout the second quarter also contributed to a healthier DRAM probe card market.

Flash revenues were $8.5 million for the second quarter, an increase of 102% from the first quarter. NOR Flash revenues increased by $3.6 million in the quarter and NAND Flash revenues increased by $0.7 million compared to the first quarter.

Second quarter GAAP gross margin was $15.4 million, or 26.2% of revenues, compared to $9.1 million, or 17.2% of revenues for the first quarter of 2013. GAAP expenses in Q2 included $0.6 million for stock-based compensation and $3.4 million for the amortization of intangibles, including $0.3 million of expenses for inventory and backlog written up in the acquisition and sold in Q2.

On a non-GAAP basis, gross margin for the second quarter was $20.5 million, or 32.6% of revenues, compared to $13.7 million, or 26% of revenues for the first quarter. The fall-through rate of 67% on the incremental revenues was higher than our model rate of 60% due primarily to a favorable product mix compared to the first quarter. Non-GAAP gross margin for the second quarter also benefited from increased manufacturing efficiencies and lower inventory reserves for excess inventory.

Our GAAP operating expenses were $24.9 million for Q2 2013, a decrease of $4.7 million compared to Q1. Reduction in GAAP operating expenses in Q2 resulted primarily from the reduction of $3.9 million of restructuring expenses compared to the first quarter. GAAP operating expenses in the second quarter included $2.5 million for stock-based compensation and $0.8 million for amortization of intangibles.

Non-GAAP operating expenses for the second quarter were $20.8 million, a decrease of $0.6 million compared to the first quarter. The decrease in non-GAAP operating expenses in the second quarter was due to the full impact of restructuring actions taken in the first quarter and decreases in outside service expenses. In the second quarter, the Company recorded a tax expense of $0.2 million compared to a tax benefit of $0.2 million in Q1. The Q1 tax benefit included the reinstatement of the R&D tax credit for 2012.

Basic weighted shares outstanding for the second quarter increased to 54.1 million shares compared to 53.7 million shares in Q1. Basic GAAP loss per share was $0.16 in Q2 compared to a loss of $0.37 per share in Q1. Non-GAAP loss per share was $0.01 in Q2 compared to a loss of $0.13 per share in Q1.

Cash, comprised of cash, short-term investments, and restricted cash, ended the second quarter at $155 million, $1 million higher than Q1. As Tom mentioned, Q2 was the first quarter of positive cash flow since Q4 of 2007. Similar to our non-GAAP gross margin discussed earlier, our second quarter cash flow was slightly better than our communicated financial model. Q2 cash flows were assisted by $1.3 million of collections from the working capital adjustment resulting from the MicroProbe acquisition.

In addition to being cash flow positive, the Company also generated positive EBITDA in the second quarter of $2.5 million, another highlight of our second quarter.

Here are some other financial details. Our depreciation and amortization in the second quarter was $7.2 million, including $2.7 million for depreciation and $4.2 million for amortization of intangible assets resulting from the MicroProbe acquisition. Our capital additions in Q2 were $2.6 million compared to $2.7 million in Q1. Our stock-based compensation expense for the second quarter was $3.1 million compared to $3 million in the first quarter.

With respect to Q3, we expect to see market conditions consistent with the second quarter, including stable DRAM pricing, a strong mobile DRAM environment, a soft PC environment, and slower growth for premium smartphones. As such, we expect third quarter revenues to be in the range of $65 million to $69 million. We expect the non-GAAP gross margin to be in the range of 32% to 35% for the third quarter, non-GAAP operating expenses to be approximately $21 million to $22 million, and Q3 cash generation of breakeven to a positive $2 million.

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

(Operator Instructions) And our first question comes from Patrick Ho from Stifel Nicolaus. Please go ahead.

Thank you very much and nice quarter and finally generating some cash. Maybe Mike, first question for you. In terms of the gross margin, you guys performed pretty well in the last quarter and you're giving another uptick in terms of the September quarter. I know there's a lot of moving pieces and variables. Which one do you believe is the biggest influence? Is it going to be just the simple revenue growth and absorption, or is product mix going to also help you in the third quarter?

It's actually both. So certainly increased volume helps quite a bit with respect to absorption of fixed overhead. So that's going to be a piece. I would expect that the product mix is going to be fairly similar. We may get a little bit of benefit from a small increase -- bigger increases in SoC would actually provide a bigger uplift as well.

Maybe then moving to the capacity situation with you guys internally. I know that you're still trying to fill up some of your [fabs]. What kind of revenue levels do you feel you need to get to, to get to the optimal absorption levels that you've had in the past? What type of revenue levels are you looking for?

I would say, Patrick, we're actually getting pretty close. I would say that the factories are now running probably in the close to 70% utilization, 70% to 75% utilization. So I actually think that from that perspective we're doing well. I think we have probably last year a sales value capacity of somewhere in the ballpark of probably $75 million, $80 million. So the closer we get to that, obviously the more optimum our gross margin is going to be.

Final question. Maybe Tom, bigger picture in terms of the adoption of Copper Pillars. We're starting to see some devices adopt that technique. I guess what's going to be the next catalyst and what's the driver for increased adoption? Because there are some issues out there in terms of cost and the transitions there? What's going to be the key driver to get a wider spread adoption of this process?

Well, it seems to be behind it. There's a substantial cost savings for customers to get through it. So I think it's a matter of customers working through their specific devices and working through kind of their packaged engineering and implementation on it. As we said, we had the first kind of multiple customer volume shipments here in the second quarter. Still, that production needs to ramp up. I would expect those devices to start shipping and higher volume in Q3. And there needs to be some infrastructure in the OSATs and things like that to, I think, to ramp this up.

But I think we're right now, the customer motivation is there. It's a matter of them working through the engineering on it right now.

Thank you very much.

Thank you. And our next question comes from Vernon Essi from Needham and Company. Please go ahead.

Thank you and I'll echo my congrats. This was a very strong gross margin and guide, as well as revenue. Nice to see things turning around here. I was wondering if you could, I guess Mike, expand a little bit more on the OpEx side. It seems like your guide is about what you would expect, but it seems like you came in even a little bit better though in the second quarter. And I'm wondering what might be the moving pieces there to bump that up a little bit on a sequential basis.

So actually, we were slightly better than what we had guided. We had the full impact of the actions that we took in Q1 certainly benefited us in Q2. In terms of what probably increases in Q2 relative to Q1, it's probably if we perform like we expect to perform then I would expect to see a little more incentive compensation being accrued for as a result of better performance. So that's better, I would suggest, the only thing that probably is a difference between a Q2 actual and a Q3 guide.

And would you say that the OpEx are pretty much, I guess, rinsed out as far as cost improvements are concerned? I mean it's probably always cost improvements on your end of things, but do you think you're getting toward the end of what you think you can squeeze out of that?

I think, like you said, we're always going to be looking to be more efficient at what we do. But I think generally the most significant actions have taken place.

Okay, and then just moving onto the revenue guide and Tom, you had a lot of different pieces to the puts and takes of what went into that. But I was wondering if you could just expand a little bit more on the mobility front as it relates to SoC, and what sort of formulated into the guide itself. In other words, obviously there's some big customers that are out there that could be ramping at any moment. And how much of that are you looking to grab into the second half of the year versus it's a possibility that gets pushed out? Could you just kind of talk about that a little bit more?

Well, it looks like the supply chain is ramping up now for some September product launches and shipments. And then I assume a ramp in volumes as they go into October, November, and all that. And that -- I'd say there's been some mixed signal on this. When I said it was dynamic, what I mean by that is there's been positives but there's also been pauses, and slow downs, and all the rest as we've kind of sorted through things. In the last couple of weeks, I'd say it ticked back up again. It looks like there's maybe been some increases in the expected volumes, as we had some customers come back around both on memory and on SoC in the last two or three weeks, indicating that they needed some more capacity on that.

So right now, third quarter smartphone, tablet shipments, the new products that are going to get introduced there are driving things ahead. It looks, I'd have to say that by everything we see, the low and midrange smartphone demand from China, the demand that's being put on the memory customers remains consistent there, I guess. I wouldn't say it's booming, but it's still relatively strong. So it looks like that is in place. And then as I said, I think that it doesn't appear that there's any catalyst on the horizon here on the PC front. It seems to be kind of skidding downwards and I think we're -- we've really gone through an inflection where DRAM has been a PC driven thing and today it's a mobile computing driven portion of the market, and is growing, growing as a bigger percentage, anyway, of our overall DRAM product shipments. Just with the one note that it does look like the spot price on the commodity DRAM has been eroding here for the last few weeks. And so that's kind of another little bit of a down cycle there, I guess, or down draft.

Right, and you sort of tiptoed into the other question I wanted to kind of dig into a little bit and that's on the DRAM split there. And so it's fair to say that in this guide you're giving, you're not really looking for any considerable lift or even reasonable lift in the PC market on the DRAM front. You're seeing all this demand on the mobile side?

Right now, we would assume the DRAM demand goes down this quarter for PC.

Got it. And by the way, great job on that, the mobility side. Quite nicely sequentially. So that's all. Thanks, guys.

Thank you. And our next question comes from Jim Covello from Goldman Sachs. Please go ahead.

Great guys. Thanks so much for taking the question. I appreciate it. The I guess first question, when you think about going forward, obviously you just gave the commentary about kind of the views on the PC DRAM market. When you think about mobile DRAM versus unit growth of that market, content per box growth, if you will, in that market and then your share gain potential, particularly at one big customer, how would you rank order the growth opportunities between smartphone unit growth, content per box growth, if you will, and then share gain potentially at a big customer?

Well, I think content per box kind of swamps it because the volumes are so darn high. So I think that's one pretty constant driver for growth overall for us. I do think that getting our self in a position where we're serving all of the mobile DRAM manufacturers is probably the biggest near term incremental revenue opportunity for us. So that would be the -- that would make a significant difference, I guess, or it would make a meaningful difference in our quarterly revenue there.

But in terms of kind of the long-term, you look at 2014 and all, I do think that the content per box would be a pretty big driver there.

And then how do you handicap the opportunity to kind of hit the trifecta, if you will, on picking up the additional big customer in mobile DRAM?

How do you handicap it? In terms of what's my confidence level or whatever on that?

Yes.

Jim, I think I'd hate to speculate on that. I think from my standpoint, I prefer to report what we've accomplished versus speculate about what we're going to do. Obviously, it's very important to us. We're all in on it. Good progress. I'd say good progress so far, but more important milestones to close out and it will be stuff that we'll know it before the end of the year.

Terrific. I appreciate it. Good luck.

Thanks.

Thank you. And our next question comes from Terence Whalen from Citi. Please go ahead.

Hi, good afternoon. Thanks for taking my question. This one relates to the foundry business. As we look at the foundry market broadly, a lot of tests have been done in-house. My question is as we move to things like Copper Pillar, what's the prospect for that being externally done versus internally done? Thanks.

Well, internal-external is going to be a choice of fabless or of the IC designer and the product owner on it. There is a blend of -- foundry is doing some of that Copper Pillar processing, as well as OSAT is doing Copper Pillar processing. And that ends up, I think, being a commercial technical choice that IC companies have to make sure that they've got multiple sources of supply, and they also use it to manage the overall commercial part of that.

Is that specifically what you're talking about, Terence?

Yes, that's right. Thanks. That's helpful. The follow-up question I had is, it sounds like the outlook incorporates some deceleration that we've seen and some inventory correction of customers in the smartphone market. Perhaps the way to ask the question is, two to three months ago, prior to seeing some inventory correction ripple through the supply chain, what would have been a revenue outlook prior to incorporating the inventory correction? I'm just trying to understand the differential incorporating the revenue guidance because of the recent inventory correction we've seen. Thank you.

As the numbers that we were looking at were probably midpoint of the range, high 60s to low 70s. So 69, 70, I don't know quite 71, but certainly between 68 and 70 I'd say would have been kind of what we were looking at. But as we've gone through the last couple of months, and just all of the inventory corrections, as you said, I think there was -- a month or so ago there was kind of a relatively high profile article that got out around communication or alleged communication from Apple to their suppliers going from 115 to 120 million iPhones in the second half of the year down to like 90 million to 100 million. And some of those things certainly have shaken through the supply chain and adjusted or impacted what people's guidance and plans were there.

So it's taken it down 5%, $2 million to $4 million probably from what we were thinking.

Okay, that's very helpful to understand that magnitude. Then my last question is regarding fourth quarter. Is it too early to have a defined view on whether fourth quarter has any possibility of being up? Or would we expect it to be sort of down modestly seasonally? Any sort of early indications or thoughts on fourth quarter? Thanks.

Right now, I think the best that we could say is it should -- we would expect it to behave seasonally, which it would be down relative to second and third quarter as the fourth quarter and the first quarter are seasonally down. The second and the third quarter are seasonally up. As I said, the last couple of years, the second half of the year has been full of challenges if not just outright surprises and market collapses. So I'll have to turn to you with a broader view of the world and the electronics industry to speculate about what's the likelihood that we get something that's a big dislocation or change there.

The one thing that does seem going on this year to me is that it does seem like the product development cycles have been extended. They haven't been quite as frenzied, if you will, as maybe they were last year or in 2011 just in terms of kind of the volatility of the ramps and all the rest of it. The only other thing is I don't know how long PCs are going to degrade. I think the whole thing is exacerbated by the confusion around Windows 8, and ultrabooks, and all the rest of it. And we'll have to kind of see where all that goes. But if that came back in some meaningful way then that might have an impact at least on some of the memory side, and on some of the SoC side as well. But that would be kind of wildcard, I guess, in the second half of the year.

Very helpful. I appreciate the insight, Tom. Thanks.

Thank you. And our next question comes from Tom Diffely from DA Davidson. Please go ahead.

Good afternoon. So obviously, the PC market is a little weak right now and units are down. But what's your view on the timing of design changes for both kind of the SoC chips that serve the market and also just the commodity DRAM? At some point are they going to change designs here just to reduce costs?

Well, some of that is at work today, but I do believe that in the new DRAM industry structure that the companies are being pretty effective at managing how they choose to invest in that market. And right now, the wafer stars, the allocations, and the transitions for mobile are where they're putting their time in. And since prices are holding up on commodity, I don't really think that there's a tremendous amount of work going into ramping volume on that. I would say that all the suppliers have got a 2X node solution from a technology node standpoint, and we've got the engineering development cards built for two gig, four gig, and eight gig to support that.

In terms, what their yields are and all, and that kind of thing, we don't know. But I think when they're ready to pull the trigger, they're in a good position to do that. I believe that today they're just doing a good job of managing supply in that space to make sure that it's profitable. And then I would guess it's going to be on a customer-by-customer basis whether or not they want to pull the trigger, go to a smaller node with the expected cost benefits of that.

But it would seem today that today everyone is quite focused on their mobile solutions, and that's where they're investing their time, and capacity, and technology.

Okay. And then on the SoC side of the PC, does it look like '14 is more of a design change driven year with new technology nodes for the actual processing?

Well, I think that will have -- that will play an important role in '14. There's been enough announcements about some of the new [thin fat] 3D type solutions and apparently some significant performance with some notable design wins and things like that, that are perhaps outside the PC space, but in the mobile space. So don't know just exactly what that's all going to unfold like here at least in the second half of the year. Going into '14, I would think that there's -- it should be quite active as that -- as those designs get released and some of those parts get into market, and you get some ramp and some volume on that.

Okay, thanks. And then Mike, on your guidance I assume it's all non-GAAP?

That's correct.

The margins? Okay, thank you.

Thank you. And our next question comes from Srini Sundararajan from Summit Research. Please go ahead.

Hi, thanks for taking my call and congratulations on a good quarter. Do you guys classify your revenues in terms of PCs versus mobile? Or that is basically supposed to be caught in some of your comments?

It's really got to come out from the comments. We did talk on the DRAM side, specifically what portion of our DRAM revenue, which we report our overall DRAM revenue and then Mike gave the report out on $15 million in mobile DRAM revenues, which was 56% of total DRAM revenues. But that's the only specific information we give for mobile revenues there. And I guess you could imply that the non-mobile is PC and I think there's also games, and servers, and things like that in there. So we don't break out PC as a standalone.

Also, on your [10%] customers this quarter, would Micron be there in Q3? Because (inaudible) would presumably be part of the Micron structure?

We certainly would expect that to be the case.

Okay, thank you.

(Operator Instructions) And I'm not showing any further questions at this time. Ladies and gentlemen, this concludes the FormFactor second quarter conference call. Thank you for your participation.