FormFactor, Inc.
Q2 2011 Earnings Call Transcript

Published: 28 Oct 2011

[Operator:]

Thank you and welcome everyone to FormFactor’s Third Quarter 2011 Earnings Conference Call. On today’s call our Chief Executive Officer Tom St. Dennis and Chief Financial Officer Michael 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 on the press release issued today and also in 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 projections, including statements regarding business momentum, demand for our products and future growth; statements that contain words like expect, anticipate, believes, possibly, should; and the assumptions upon which 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 update those reasons actual results could differ materially from those anticipated in the forward-looking statements. For more information, please refer to the Risk Factor discussions in the company’s Form 10-K for the fiscal year 2010, as filed with the SEC, subsequent SEC filings, and in the press release issued today. With that, I will now turn the call over to CEO Tom St. Dennis.

[Thomas St. Dennis:]

Thank you, good afternoon. FormFactor’s market in the third quarter had two very different phases to it. First phase was a continuation of strong DRAM probe card demand from the second quarter which challenged our capacity for several weeks in July and August. Second phase, was in a broad drop after demand for DRAM probe cards beginning in September. This continuing into Q4 consistent with DRAM industry trends, the market for DRAM probe cards can be very volatile when prices drop below the cash cost to manufacture DRAM chip. And that is a situation that many of our customers have found themselves in during the past few months. Until DRAM prices stabilize at levels somewhere above the variable cost of manufacture, we expect probe card demand from this segment of the market to remain weak. The technical drivers within the DRAM probe card market continue in spite of the current market swings. Today there is a strong push by DRAM manufacturers in two key areas. One area is related to shrinking the bond path size. At lithographic strengths are pushed out due to delays in EUV technology DRAM manufacturers are looking for all possible ways to increase the number of die for wafer. Our reducing area necessary for bond pads DRAM manufacturers can see meaningful increases in the number of die for wafer. FormFactor’s current and next-generation of 3D MEMS spring technology will enable the strings and ways are highly differentiated as compared to the 2D strings from our competitors. The second area of investment for DRAM manufacturers is in High-Parallelism Wafer test. Next year, we expect to see the market for probe cards migrating to design, to test 1,200 to 1,400 devices simultaneously as compared to the 600 to 800 devices that are tested simultaneously today. To meet this market demand, we’ve been investing in the next generation of the Matrix architecture beyond this SmartMatrix 100 and SmartMatrix 100XP. Earlier this year we shipped engineering prototypes to customers and this quarter we’ll ship our first production evaluation products to two customers followed by a third customer in Q1 of next year. This new Matrix product is capable of meeting customer demands for high parallelism testing and will incorporate the latest component of our ATRE technology. We expect this new product to contribute to revenues in second half of 2012. As I mentioned last quarter, we’ve increased our investments in vertical probe card technology for the SoC markets. We made great progress through the third quarter on this innovative men’s based technology and have demonstrated a prototype cards at our development to customer’s facility. We’re planning to deliver more cards to our customers this quarter to support this fast pace development. Market for advanced SoC probe cards is larger than market for DRAM probe cards and is an important part of the strategy to diversify and grow FormFactor. We expect this new product will contribute to revenue in the second half of 2012. We continue to make progress in Q3 on an operational basis. We reduced lead time for the Matrix product by approximately 10%, while increasing our weekly capacity. Operating expenses were further reduced in spite increased R&D spending on the next generation Matrix product and the new SoC product. Cash use in operations was reduced to $3.1 million from $8 million in Q2. We believe that the abrupt and significant drop in DRAM probe card demand is a reaction related to global market uncertainties that have affected many parts of the semiconductor industry. These uncertainties plus the seasonal slowdown in the overall probe card market in Q4 combines a challenging quarter ahead for us. While the market drivers for DRAM growth appeared to be slowing, the opportunities for FormFactor to enable our customers to significantly reduce their cost of test and increase the number of die for wafer are in fact growing. As the DRAM market bottoms, we expect to see the DRAM probe card market to return to levels that will support FormFactor’s continued growth in revenue and profitability. Our continued progress and operational performance and the strong interest in our new products reinforce the need of making the right investments for FormFactor’s future. Now, Mike Ludwig will review our third quarter financial performance and our fourth quarter guidance.

[Michael Ludwig:]

Thank you, Tom. The results for our third quarter are as follows

[Operator:]

(Operator Instructions). Our first question comes from Patrick Ho from Stifel, Nicolaus.

[Patrick Ho:]

Thanks a lot. Tom, can you give us a little bit of color in terms of the SmartMatrix qualification in your next generation products? What are some of the ideas technical hurdles that customers are trying to qualify now and what’s kind of the timeline of these type of qualification process?

[Thomas St. Dennis:]

Well the card is targeted at high parallelism testing as I was mentioning and what we are seeing now is, customers going at simultaneous testing at a 1,000 to 1,400 devices simultaneously. So the purpose of the target purpose of the card in this new architecture is to enable us to do that with high signal fidelity and with all of the continued benefits of high percentage of our NIMs probe technology that enabling them to make a dramatic reduction in their total cost adjust. The evaluations and all will be cards there by the end of this quarter to two customers as I said. I would expect that we’ll get our first feedback from them in the middle end of Q1, and depending on that then we’ll start to look at further production designs for them moving into Q2 and the second half of 2012.

[Patrick Ho:]

Right. And is it fair for me to characterize that these are for the 2x nanometers DRAM – for the 2x nanometer note?

[Thomas St. Dennis:]

Yeah, I think they will be used both 3x and 2x, what happened in the DRAM industry, it seems is that increasing bits per has slowed, people seemed to be focused mostly now on 2 gigabit and 4 gigabit type devices, but what is happening, as they continue to make progress on shrinks, there the number of die per wafer has gone to 2,000 and up to 3,000 die per wafer. So they’re looking for ways to test that many die more cost-effectively, but it’s in the 2X and 3X numbers.

[Patrick Ho:]

Great. Question for you Mike. In terms of the leverage in the model, you guys have done a good job of making OpEx and putting now range. In terms of the cost of goods side, do you have any leverage that you can maneuver at least as you navigate through this part of the cycle or have those actions being spent?

[Thomas St. Dennis:]

I think the majority of those actions have taken place, Patrick. I think we still have execution opportunities where we can gain additional leverage, but in terms of the structure itself I think most of those have taken place at this point in time. We will continue to look and be prudent about it, but we think at this point in time mostly taken place from the card side.

[Patrick Ho:]

Great. Final question from me in terms of the products itself. With lot more to talk about vertical NAND device structures, what do you see potential opportunity for FormFactor as the industry moves towards that?

[Thomas St. Dennis:]

I think that, what that’s kind of allow is, the continued cost reduction obviously prepares for NAND devices, at this point in time what we know of the, we would expect that the probe requirements would be similar to what they are today. The opportunity in Flash is that as the demand for Flash cards grows, obviously the demand for wafer starts and probe will grow. We’re still targeting in that market really just about 10% of the market, it’s the higher end in the market, but it will grow with the overall market. So we should be able to continue to see growth in our Flash business, albeit we’re only really going after that higher end of the market.

[Patrick Ho:]

Great. Thank you very much.

[Operator:]

Thank you. Our next question comes from C. J. Muse from Barclays Capital.

[C. J. Muse:]

Hi, this is (inaudible) for C.J. Thank you for taking my question. I was wondering the visibility remains pretty well, but if we assume that DRAM remains in the similar sluggish pace into the first half of 2012, how do you view your other segments? Is there room for SoC to expand much more significantly or will it have to happen to drive Flash or ATRE to much higher up of current levels?

[Thomas St. Dennis:]

Well, the SoC market continues to be an area for us that has growth opportunities and it has been growing for us through 2011. I think all the semiconductor industry has been impacted recently by macroeconomic effects and also both SoC and Flash I think have even slowed, nothing like DRAM. But going forward the SoC business is an opportunity for growth with our current products, the really exciting part of it is in the vertical card space where we’re making investments now that look very promising albeit for the second half of 2012.

[C. J. Muse:]

Got it. And then you mentioned that part of the gross margin drop that you’re seeing in the December quarter has to deal with collections from the customer, is that something that we (inaudible) for that to remain a headwind going forward and do you see this to other customers as well. I just want more color in terms of where this is coming from?

[Thomas St. Dennis:]

No, we actually see this is in an isolated customer that we had a challenge on, but we’re actually not seeing any other challenges in our customer base. So we do not expect it to be headwinds going forward.

[C. J. Muse:]

On the DRAM customer.

[Thomas St. Dennis:]

Yes.

[C. J. Muse:]

Got it. Thank you.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from Wenge Yang from Citigroup.

[Wenge Yang:]

Hi, thank you for taking my questions. The guidance clearly is pretty low in terms of revenues, is that the DRAM cost issues, is there any other reasons that the DRAM customer continue to slowdown their probe card purchase?

[Thomas St. Dennis:]

No, I think that’s the current cost pressure on them has caused them to react pretty aggressively in reducing cost and including reducing output for some of the manufacturers. As Mike mentioned, we had a number of first article design wins and these are designs that are targeted at 3X and 2X technology that occurred in the Q3 timeframe, both technologies need to ramp for us to see the follow-through in the volume follow-through on that and would appear at this point that customers are staying with current generations of technology in many instances, not all, either because of the cost of their input or the fact that yields are not yet at the levels that they need to ramp it further. But given that there seems to be a weakness in demand and more than enough supply, many of these new technologies right now represent further strengths which would essentially expand capacity and drive the oversupply further ahead. So I think some customers are comfortable staying with the existing technology, running their fabs on that until they see the opportunity to get better prices and then move to the strengths.

[Wenge Yang:]

So one of the upside for your DRAM business is to get into the door of the biggest DRAM maker, what’s the program there so far?

[Thomas St. Dennis:]

Well, as we said we shift designs and first designs to them last quarter for the Matrix product and they are very interested in our follow-on technology product. So both of those are in valuation or will be in valuation through the quarter here and we will see how that goes, that would be a significant opportunity for us.

[Wenge Yang:]

So face-to-face you haven’t seen (inaudible) contributions on that customer yield?

[Thomas St. Dennis:]

Not yet.

[Wenge Yang:]

Okay. So you talked about this new product which can do 1,200 to 1,400 chips versus 600 to 800. Could you update us on is this the unique capability from FormFactor what is your – what’s the capability of the competitor at this point versus the new product?

[Thomas St. Dennis:]

Well I think all the suppliers in the market are realized at this point that the high parallel as a test will become a reality in the course of 2012. So everyone is working hard to bring products to market for that. It’s at this point in time where the uniqueness of our 3D MEMS technology in-terms of being able to place, now this is upwards of 60,000, 70,000 springs on these cards going potentially up to even a 100,000, where I think that our product architecture and the mechanical characteristics, as well as the precise location of our springs gives us a substantial advantage. No one’s proven that they can do it yet at the extremely high levels, but I think we’ll know by the end of Q2 next year just how everyone performs. At this point, we are frankly, I’m really welcoming this as I think it’s a real opportunity for FormFactor to differentiate in this space.

[Wenge Yang:]

That’s helpful. One last question regarding the breakeven level, so you mentioned about $50 million cash, $65 million revenue for quite a while and now the breakeven both in-terms of numbers and also timeline has shifted. What’s the explanation here and can you just reiterate your cash as well as revenue breakeven that will end of timeframe (inaudible).

[Thomas St. Dennis:]

Yeah. I think for us we, I think we have been fairly prudent about our investments and where we are cutting. And we certainly have looked and I think done a very good job over the last five quarters. And we believe that we will continue to look at opportunities, but we believe that what we really want to do is to take advantage of the opportunities to drive our technology leadership, and continue our market leadership. And we think if we cut much more than that we are going to put that in jeopardy. So the answer is at this point in time, we’ll continue to look for opportunities that we think we’ve done as a bulk of the work there. And so I think at this point in time, people should look at our cash flow breakeven at the $54 million to $56 million of revenue that we discussed. And I don’t think there is a timeline as this point in time to say that we will get it to the $50 million level.

[Michael Ludwig:]

Randy, it’s really about us having the opportunity to be the clear leader in the probe card industry, and in all three market segments. And right now, the best thing we can do for the company and for our shareholders is to drive the investment on these new products, get them to market and continue to focus on gaining our share in those different accounts. I think we’ve – we will continue to look for opportunities to improve our overall operational efficiency, but we are not focused solely on that now. Now, we see the opportunity to really go out and increase our position.

[Wenge Yang:]

That’s helpful. So along that line, you look at suite product line, it’s clear that DRAM is not growing as fast as NAND and SoC. It’s probably going to be the similar case in the next several years. So, the company is thinking about strategically shifting your product direction more towards the growth areas in SoC instead of continue to spend in the DRAM sector?

[Thomas St. Dennis:]

Well. As we mentioned, as I said a quarter ago, we have been on a product development for SoC now for about almost a year. And as we have been able to validate the technology, which is very innovative. We accelerated that investment beginning in Q2 and that’s all about moving into a market segment that is larger than the current DRAM probe card market area. And so I think that’s – I think that should be a clear indication of the fact that we see an opportunity to putting what we do well to that market segment and accelerate revenue and profitability there, so, that’s our current focus.

[Wenge Yang:]

Thank you.

[Operator:]

Thank you ladies and gentlemen. This concludes the FormFactor third quarter conference call. Thank you for your participation.