FormFactor Inc (FORM) 2013 Q4 法說會逐字稿

Thank you, and welcome, everyone, to FormFactor's Fourth-Quarter 2013 Earnings conference call.

On today's call are Executive Chairman and Chief Executive Officer, Tom St. Dennis; President, Mike Slessor; 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 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 seasonal business trends; statements regarding our ability to resolve favorably product issues, the demand for our products and technologies, and our ability to design, develop, introduce, and qualify new products with one or more customers and realize revenue from those product; statements regarding operational synergies between the FormFactor and MicroProbe product groups; 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 discussion 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.

Thank you and good afternoon.

Our focus during the fourth quarter of 2013 was to address key issues that caused our shortfalls in Q3 and led to our low-revenue guidance Q4. As we reported on our December 10 call, we've made progress on key issues that interrupted our supply chain and manufacturing.

Since then we have made further progress to reestablish ourselves as key supplier to our (inaudible) customer. Evidence of this progress is seen in the multi-card order that they placed with us for (inaudible) volume production in mobile DRAM probe cards.

These were the first orders that we've received from the customer for this application since the summer of 2013. We regret these shortfalls occurred, but we believe we have taken appropriate and effective corrective actions and are on track to have these issues behind us as we exit Q1.

Elsewhere, we have continued to increase our shipments of probe cards to support copper pillar packaging. More customers are beginning to use this packaging technique, and in the fourth quarter we saw three more customers start their first copper pillar designs with us. We expect copper pillar to be an important growth area for the SoC portion of our probe card business in 2014 and beyond.

We are continuing to grow our business at our key Korean DRAM customer following our recent qualification. We expect to have full designs in volume for this customer by the end of Q1.

In the flash market, we're continuing to make progress on the development of our new product. Recently, we successfully completed the first installation and test of an engineering prototype at our customer's facility.

The next step will be to deliver preproduction probe cards [end of] this quarter for a full product evaluation; this should be completed by [the end of Q2].

Additionally, a second major NAND flash manufacturer was recently engaged with us to evaluate this product. Successfully completing the development of this product will open up approximately $200 million of new market opportunity for us. As we've said before, we expect this product will begin to contribute to revenues in the second half of this year.

Last week, we issued a press release announcing a restructuring and cost-reduction action by the Company. It's been just for one year since we brought the MicroProbe and FormFactor organizations together as one Company. During that time we focused on the execution of customer and product plans the organization has going into 2013.

After working together for one year, it became apparent that we could achieve further efficiencies and cost savings through a simpler organizational structure. Since Mike Slessor's promotion to President of FormFactor in October, he is focused on bringing the two groups together as one organization.

Today we have one technical and manufacturing team leveraged across multiple product lines, which we believe will be more efficient and effective at driving our business ahead.

Overall, conditions for the wafer test probe card business look positive entering into 2014. While we expect the portion of our business driven by personal computers to continue to contract in 2014, we see positive transfer unit growth of SoC DRAM and NAND flash probe cards as mobile computing, automotive, and other applications grow.

It's early in the year; and, short of major market or industry disruptions, we believe that we have the products and cost structure that will allow us to deliver a profitable year in 2014 and positive cash and positive non-GAAP earnings.

Mike Ludwig will now review our financial performance in Q4 and give our first-quarter guidance.

Thank you Tom, and good afternoon.

Revenues for Q4 were $48.5 million, a decrease of $19.1 million, or 28%, compared to Q3 2013. SoC revenues in Q4 of $29.9 million represented 62% of the Company revenues, but were down $1.8 million or 6% from Q3.

Revenues from probe cards for mobile processors and PC applications increased slightly during Q4. But Q4 revenues from wire bond applications, primarily industrial and automotive, decreased by $2.1 million compared to the third quarter.

Fourth-quarter revenues for DRAM products were $15.1 million, a decrease of $13.7 million, or 48%, from our third quarter. The decrease resulted primarily from lost orders from a key DRAM customer due to certain execution challenges we discussed previously, as well as market seasonality.

Mobile device revenues in the quarter decreased to $5.7 million, or 38% of our DRAM probe card revenues, compared to $19.6 million, or 68% of our DRAM probe card revenues in Q3.

Flash revenues were $3.5 million for the fourth quarter, a decrease of $3.6 million or 51% from the third quarter. NOR Flash revenues increased by $0.6 million in the fourth quarter to $2.5 million, while NAND Flash revenues decreased by $4.2 million to $1 million in the quarter. The decline in NAND fFash revenues resulted from less high parallelism design opportunities and customers.

Fourth-quarter GAAP gross margin was $4.3 million, or 8.8% of revenues, compared to $12.5 million, or 18.5% of revenues, for the third quarter of 2013.

GAAP expenses in Q4 included $0.7 million for stock-based compensation and $3.2 million for the amortization of intangibles. On a non-GAAP basis, gross margin for the fourth quarter was $8.2 million, or 16.9% of revenues, compared to $16.3 million, or 24.1% of revenues for the third quarter.

The decline in the non-GAAP gross margin resulted from lower manufacturing utilization and lower absorption of fixed costs in the fourth quarter, due to the measurably lower demand level.

The reduction to non-GAAP gross margin from the lower fourth-quarter revenues was mitigated by a favorable product mix and lower cost, including reduced warranty and excess inventory charges compared to the third quarter.

Our GAAP operating expenses were $23.2 million for Q4 2013, a decrease of $0.2 million compared to Q3. GAAP operating expenses in the fourth quarter included $2.3 million for stock-based compensation, $0.7 million for amortization of intangible assets, and $0.6 million for impaired assets.

Non-GAAP operating expenses for the fourth quarter were $19.2 million, a decrease of $0.8 million compared to the third quarter. The decrease in non-GAAP operating expenses in the fourth quarter was due primarily to lower personnel costs and lower spending on outside services.

Basic weighted average shares outstanding for the fourth quarter increased to 54.6 million shares, compared to 54.4 million shares in Q3. Basic GAAP loss per share was $0.34 in Q4, compared to a loss of $0.20 per share in Q3. Non-GAAP loss per share was $0.20 in Q4, compared to a loss of $0.06 per share in Q3.

Cash comprised of cash, short-term investments, and restricted cash ended the fourth quarter at $151.5 million, $5.2 million lower than Q3. Cash flow in the fourth quarter was benefited by higher-than-forecasted customer receipts.

Here are some other financial details. Our depreciation and amortization in the fourth quarter was $7.1 million, including $2.9 million for depreciation and $4.2 million for amortization of intangible and tangible assets.

Our capital additions in Q4 were $1.1 million, $1.2 million lower than Q3 additions. Stock-based compensation expense for the fourth quarter was $3 million, consistent with Q3 expense.

With respect to our financial model, restructuring activities that were announced on January 27 will save the Company approximately $10 million in Q1, excluding one-time cost of $1.2 million to effect the plan, and $2 million per quarter beginning in the second quarter. $1.3 million of savings will benefit gross margins, and $0.7 million will be realized under reduction of operating expenses.

Beginning in the second quarter, our cash flow breakeven revenue level will be reduced from the previously-communicated $64 million to $66 million, to $61 million to $63 million. At $61 million to $63 million of revenue, gross margins would be in the range of 30% to 33%. R&D expenses will be 14% to 16% of revenues.

Attainment of the model will depend on improvement, consistent execution, continued focus on manufacturing efficiencies, and consistent quarterly demand.

With respect to the first quarter, we expect to see (inaudible) conditions that existed during Q4, but with increased demand resulting from our continued improved execution. As such, we expect first-quarter revenues to be the in the range of $53 million to $57 million.

With greater demand in the first quarter and a seasonably better second quarter to follow, we expect to increase our production activities and the absorption of factory cost in the first quarter. The increased absorption, combined with a lower quarterly cost will (inaudible) greater than 60% follow-through of the incremental revenues to absorption.

We expect the non-GAAP gross margin to be in the range of 23% to 27% for the first quarter, and non-GAAP operating expenses to be approximately $18 million to $20 million.

Stronger customer collections in the fourth quarter, along with the costs of the restructuring actions in the first quarter, will result in additional pressure on cash usage in the first quarter. First-quarter cash usage will be $6 million to $10 million, including the $1.2 million for the restructuring activities.

As we move into 2014, we believe that it is helpful to provide insight into a six-month demand horizon which corresponds to our visibility in the business. As we have communicated, the historical seasonality of our memory business is such that demand is higher in the second and third quarters and lower in the first and fourth quarters.

The seasonality of our demand generally follows the design and production cycles of our customers. As such, we see demand in the second quarter increasing to $59 million to $65 million.

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

Operator?

(Operator Instructions)

Our first question comes from Vernon Essi of Needham and Company. Please go ahead.

Thank you very much, guys. Just for clarification here, your line was sort of garbled and I apologize. I want to kind of go over some of the items that you described in terms of your guide. Can you both hear me all right?

Yes, we can Vern, sorry, we understand that the quality of this is poor. But we will try to shout through it, I guess.

That's all right. Just to revisit the guidance itself, $53 million to $57 million in gross margin is 23% to 27%, was that correct?

That's correct.

And what was the second quarter? I lost you on the second quarter guide. You are expecting growth and I missed the range.

The range was $59 million to $65 million.

Okay, $59 million to $65 million. And then just to go back to the mechanics and housekeeping point for the actual quarter itself, what did you say was the level of mobile DRAM?

The level of mobile DRAM was $5.7 million, which was 38% of our DRAM probe card revenues.

Okay. And then the split between NAND and NOR was garbled as well, I'm sorry to ask this, but what was that again?

That's okay. NAND -- excuse me, NOR revenues were $2.5 million, and NAND revenues was $1 million.

Okay, thanks. So then just to go into the questions, now we've got that out of the way. Can you just discuss sort of an update on the copper pillar adoption rate? You had said -- you'd made some mention about a Korean customer, just sort of give us a 30,000 foot view of what they've look like from a pipeline basis for 2014. That would be helpful.

Vernon, this is Mike Slessor, I'll take that one. We're seeing a pretty good penetration trajectory associated with copper pillar. As Tom mentioned, we took designs in from three additional customers who had not been on copper pillar packaging platforms in the past, and are working through those designs for shipment and installation here in the first quarter.

Of the customers, some of the leading-edge fabless and foundry customers we have been working with on copper pillar, we've seen some really strong follow-through adoption. For example, with one of the major designs we've now shipped over 40 units of an advanced probe card for probing those copper pillar packaged devices.

I would say the adoption overall on an industry-wide basis seems to probably be a little bit more muted than some of the industry research firms had predicted early in 2013. But certainly the facilities are being built out, the capacity is being put in place, and we are seeing, as I said, increased momentum around design activity and full-scale production adoption by the guys on the leading edge using that packaging technology.

What would you say would be the disconnect, other than just consulting optimism on those market studies? I mean, is that really it? Is there anything that seems to be slipping in terms of what would be I guess mitigating the adoption rate, if there's anything?

I think you probably hit it on the head. I think it was an overly optimistic view by some of the market research firms on how fast this would take off, as is often with the case with any new semiconductor technology, whether it's packaging or not.

But I think we see again the capacity being put in place, customers committing to these designs, and the fact that we have had one customer that we have shipped over 40 cards for this one device would indicate that there is no real fundamental hiccups to volume production, given that that level of volume corresponds to some pretty heavy unit chip sales for that customer.

Okay. And then just to follow-up here on the manufacturing side of things, and I think I did hear this correctly, but Mike Ludwig, just to confirm you said $1.3 million savings in the COGS line or the gross margin with these cost reduction efforts going forward, is that correct?

That's correct.

Okay. And you've been tracking really well always on the -- keeping your revenue levels on that, and I've always asked if you can squeeze anything more out of the operation, and here you are introducing a little bit more traction there. Are there any other things that we might be looking for for milestones in 2014 that could help the gross margin other than just revenue lift? Or is there any sort of purchasing situation, or any suppliers that you may be changing that might give you a little more boost, or should we just look at it where it is right now with the usual drop-down math that we use as for where gross margin is probably going to be?

Vernon, it's Mike Slessor again. I think for 2014, the significant gross margin cost reductions really are encapsulated in what Mike talked about earlier on the call. I think we will see some more incremental improvements as we optimize a little bit on the new organizational structure.

I think the more longer-term view of this is in combining the engineering product development and technology organizations, we're sort of setting ourselves up, and we won't get there in 2014, but certainly for parts of 2015 we will, on consolidating around key technology subcomponents, key enabling technologies, where we can then gain manufacturing efficiencies when we've sort of leveraged these common technologies, common subcomponents across SoC, DRAM, and NAND. So that's not really a 2014 P&L impact, but we've taken the steps in 2014 so that we do realize the impact in future years.

Okay. Great, thanks a lot guys.

Vernon, just one last thing on the copper pillar (technical difficulty) on what they're selling out there for tools to support the copper pillar packaging and [my checks on it] were pretty strong going into 2014 (inaudible).

Okay. Appreciate it, thank you.

Our next question comes from Brett Piira of B. Riley and Company, please go ahead.

Thanks for taking my questions, guys. Just a clarification on your Japanese DRAM customer. When you say issues will be behind you, I think you said heading into Q2, is that really just a finishing up of the new additional engineering programs, or will that be actually back to your original market share also?

I don't know if will be back to the original market share, but certainly in the Q2 timeframe we would expect to get back to some historical range anyway that we have had with that customer. So we expect to have it all completed in Q1, and to be growing our position as we move into Q2 and Q3.

Okay great. That's helpful. And then finally, can you give us a little update on your RAM, the newly qualified DRAM customer, your final one. You gave a little bit of a number of design wins, do you still think that that can be $3 million to $5 million after a couple quarters with the same ramp trajectory? Is that fair to assume?

Brent, Mike Slessor again. So for the qualification, as we said we got qualified late last year, we'll be shipping and have shipped four production designs here in Q1. I think when we look out through the year, certainly that $3 million to $5 million quarterly opportunity remains unchanged.

Part of the trajectory in getting there, whether it's in Q2 or Q3, will depend on how some of those devices ramp in volume to the customer, how many chips they're producing on those platforms. And it's still fairly early in this re-engagement with this customer, they're reasonably demanding, requiring a lot of engineering and support effort, which we are providing, so that we can realize this $3 million to $5 million opportunity later in the year.

Great, thanks guys.

Our next question comes from Patrick Ho of Stifel Nicolaus, please go ahead.

Thank you very much. If you could just give a little bit of color in terms of some of the transitions going on in the DRAM industry, particularly as it goes to 20 nanometers, talking about higher speed and the manufacturing process is changing somewhat. How does that potentially impact probe card demand, and does it potentially increase I guess more probe card demand, given these newer devices and the higher speeds that are required?

I think we're having sound quality problems, I apologize for that and hope you can hear okay, Patrick. As the shrinks go on these days with these [true] positions and these new nodes, it's driving more die per wafer; more die per wafer drives parallelism up, and that raises the complexity and the challenging part, so we think (technical difficulty) offer strength as they move into that.

What is a pretty clear transition on mobile is this move to go to the low-powered DDR3 and a -- +low-powered DDR4-type architectures, and in doing that customers and some of the end customers that are building cellphone towers and other things seem to be pushing for wafer-level testing at full functional device speeds and all. And that's opened up an opportunity for us, it's a smaller one, but it's a growth opportunity for us on the DRAM side, but it also plays to our strength. So as the complexity goes up and as the speeds go up, it does I think fare better for FormFactor on a going-forward basis.

Great, that's helpful. Maybe just going to the NAND flash side of things for a second. I know you've mentioned in the past about your probe cards being more advanced than what NAND flash or planar NAND flash devices need today; as the industry begins to transition to 3D NAND, can you refresh us of what potential opportunities there could be for you on the NAND flash side?

Well, the 3D NAND transition I think is being done in a way to be pretty transparent to the end user. The fact that whether it's a floating gate or if it's a 3D design, those parts are in principle intended to be interchangeable for different applications, whether it's mobile devices or enterprise storage, or what have you.

So as a result from the probing standpoint, they are pretty similar, as near as we can tell so far, anyway. So there is really not a significant difference as they make that transition at the wafer test level.

Great, thank you very much.

(Operator Instructions)

Our next question comes from Srini Sundararajan of Summit Research, please go ahead.

Hello, can you hear me okay?

Yes.

Yes.

My first question is where do you think is going to be the incremental CapEx difference for DRAM and NAND for this year compared to 2013? I'm just trying to use that to guess as to how things might proceed for you guys based on DRAM and NAND CapEx.

I'm sorry Srini, are you asking about what FormFactor's capital investments will be, or what we think the industry --

No. Industry will be?

I don't have it. We don't really have any better information, I think, than you do. The recent comments by Lamb, I think, indicated that they thought that it was another kind of $32 billion a year plus/minus on wafer fabrication. But I don't -- we don't have any more, I'd say, insight to that.

I would make a comment that there has been some public announcements about the investments that SK Hynix will make in a new DRAM facility in Ichon, and also the fact that Elpida Micron Japan now is looking at making a $700 million or $800 million investment, mostly for technology transition, but it's certainly for technology capacity, if you will, at their Hiroshima facility. And when I look at that, it's certainly a more investment positive environment there on the DRAM side.

And NAND flash obviously Samsung's Xi'an facility is probably the biggest one there. But I think you would have to look at Toshiba, Samsung, Micron, and SK Hynix hasn't been quite as visible, but all of them have been pretty strong about their capacity investments, albeit I think they will manage the timing against the market demand. But they all seem pretty positive on that going into 2014.

Thank you. I have one more question. Are you guys going to, in terms of the SoC-based revenues for -- specifically related toward smartphones and tablets, how do you see FormFactor doing the rest of the year, and the next year, on the associated news dedicated toward smartphones and tablets?

So Srini, Mike Slessor again. I think if you look at our SoC revenues in the fourth quarter, and I think this is consistent with the themes that we see throughout the rest of 2014, there's two major overall trends that are going in different directions, although we see the SoC probe card market continuing to be a high single-growth CAGR opportunity. The PC market continues -- the PC-driven part of that market continues to decline, while some of the mobility for those applications, whether they're application processors, [data] processors, [some of them] modems, continue to grow pretty rapidly.

What you're seeing our SoC revenues kind of hold flat; as those two things compete against each other, we continue to see strong market adoption, strong overall growth in that mobile part of our SoC segment, again essentially compensating for the continued downward trend of the PC market, although that looks like it may be at least stabilizing here in 2014.

Okay. But you think that it's going to be either -- stable [going] this year and next year, the mobile portion of the market?

I'm sorry, we didn't really get that, can you repeat it, please?

Yes. The mobile portion of your revenues, are they going to be stable or rising in 2014 and 2015, if I were to ask --

The mobile part of our SoC revenues, given the trend [we've had in the] past associated with advanced packaging, the market share [improvements we're making], we see those rising through 2014 and through 2015.

Okay. And last question. Do you foresee somebody with the SoCs won't have their own SoC probe card capability? Do you see them to be one of your customers in the near term and the (inaudible).

I think again where we made some of the advanced technology investments in introducing [NANDs] probes into the SoC probe card market, we're [seeing] customers and various users of probe cards who historically have been able to use some commodity higher technologies, or needle technologies, really get sort of compelled in the drive to the smaller (inaudible) kind of structures to adopt NAND technology. Clearly, we lead the technology race, and sort of no matter who it is, we seem to be doing a pretty good job of solving the customer problems associated with the advanced copper pillar packaging and other advanced packaging. So I think that any of these customers, fabless, foundries, move toward these advanced packaging that (technical difficulty) --

Okay. Thank you for the information. I was just trying to see how (inaudible) the business is (inaudible) or not. So that was the motivation for my question. Also to what degree it's going to (inaudible). So, thank you very much.

Thank you.

And we have a follow-up question from Brett Piira of B Riley and Company, please go ahead.

Thanks, guys. Just one other clarification, a repeat number that kind of faded out. Can you provide your new breakeven numbers, I think that faded out during the OpEx?

Yes, the new breakeven numbers are $61 million to $63 million of revenue, that should provide a gross margin of -- non-GAAP gross margin of 30% to 33%.

Okay, perfect, thank you.

Ladies and gentlemen, this concludes the FormFactor fourth-quarter conference call. Thank you for your participation.