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Executives

Thomas St. Dennis - Chief Executive Officer

Michael Ludwig - Chief Financial Officer

Analysts

Wenge Yang - Citigroup

Patrick Ho - Stifel, Nicolaus

Olga Levinzon - Barclays Capital

Tom Diffely - D.A. Davidson

FormFactor Inc. (FORM) Q2 2012 Revenue Plan Update Call May 30, 2012 8:00 AM ET

Operator

Thank you and welcome everyone to FormFactor’s Q2 2012 Mid Quarter Update Conference Call. On today’s call are Chief Executive Officer Tom St. Dennis and Chief Financial Officer Mike Ludwig.

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 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 risk and uncertainties. FormFactor’s actual results could differ materially from those projected in the 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 the forward-looking statements. For more information, please refer to the Risk Factor discussion in the company’s Form 10-K for Fiscal 2011 and the company’s subsequent Form 10-Qs in Fiscal 2012 and in the press release issued yesterday.

With that, we will now turn the call over to CEO, Tom St. Dennis.

Thomas St. Dennis

Thank you for joining us this morning. FormFactor’s second quarter revenue is developing to being stronger than we first anticipated. We are seeing strengths across the DRAM and Flash Memory segments. Historically, the second and third calendar quarters are generally the strongest quarters for FormFactor, with the fourth quarter and first quarter being seasonally weaker.

Several industry analysts as well as key semiconductor manufacturers have pointed to a stronger forecast for the second half of 2012. We also expect to see more investments in Q3 than in Q2 this year and in fact some of the revenue growth in Q2 is coming from customers accelerating demand from early Q3. Additionally some of the growth is coming from market share gains in Flash, while DRAM market share is flat to slightly up.

The growth in DRAM is surprising, given the recent negative announcements related to personal computer shipments. The mobile portion of our DRAM revenue is up quarter-over-quarter to about 40% which is the highest percentage in the past year. With the growth of mobile devices and the growth of DRAM content in some tablets and smart phones, we believe the DRAM manufacturers are allocating more of their capacity in this area.

Our Matrix product line revenue continued to grow for both DRAM as well as Flash. In this quarter, we expect to have record unit shipments of Matrix products. Well we are encouraged by the marketplace momentum for our Matrix product line, our outlook for the second half of the year is tempered by concerns about softness in the personal computer market and the potential impact of the macroeconomic forces.

We will continue last years (inaudible) and provide more updates at the second quarter earnings call at the end of July.

With that I will turn it over to Mike to give you our updated Q2 guidance.

Michael Ludwig

Thank you and then good morning. As Tom mentioned strength in DRAM probe card demand came from customers seeking shipments of orders that have been anticipated for the second half. Additionally, our reduced lead time has allowed the company to compete more and win additional DRAM and complex Flash memory opportunities at certain customers. Overall we are seeing positive impacts to our Q2 revenue outlook.

We expect Q2 revenues to increase to $50 million to $54 million, higher than our previous Q2 revenue guidance of $43 million to $47 million. We expect revenues to increase in both DRAM and Flash Memory markets compared to the first quarter of 2012 levels.

Given the new revenue guidance, we expect non-GAAP gross margins to be in the range of 26% to 28%, compared to our earlier guidance of 22% to 24%. Non-GAAP gross margins are being positively impacted primarily by higher absorption of fixed costs and direct labor from higher revenue levels. Our non-GAAP operating expense guidance remains unchanged. We continue to expect Q2 non-GAAP OpEx to be roughly equivalent to the amount expensed in Q1 2012.

Higher receivables and inventory expenditures from increased revenues will be offset by increased collections[ph], resulting in a cash burn of $4 million to $6 million excluding stock repurchasing.

Our visibility is so limited with respect to Q3therefore we will not provide any guidance with respect to Q3 2012 until our second quarter earnings call at the end of July.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Terence Whalen from Citigroup, your line is open.

Wenge Yang – Citigroup

Hi, this is Wenge Yang for Terence, thank you for taking my question. First of all regarding the DRAM strengths, could you comment is this more a seasonal factor or do you see some secular change in the shift from PC to mobile, that is at the last not more than one to two quarters?

Thomas St. Dennis

I don’t know if we can separate the two Wenge on this very clearly, as I mentioned the mobile portion or the mobile percentage of the DRAM revenues for us this quarter are higher, they are almost 40%, that’s the highest it came in the last year. There are just some seasonal effects as people are after perhaps under investing or delaying investments have accelerated some of those investments and certainly some of this in anticipation of some of the product announcements that are coming out later in the year. So at this point in time, there is a blend between perhaps a higher percentage of mobile, but it is understandable with the major products out there and perhaps some catch up on delayed investments.

Wenge Yang – Citigroup

Okay, understanding and Flash Memory traditionally is slow on adopting advanced broadcast technology so, you see some nice bounce back in the Flash side, is this a trend, (inaudible) more adoption of the alliance[ph] cost or again it is just a seasonal phenomena?

Thomas St. Dennis

No, this is, as we said in the past we would be opportunistic upon the Flash, on the NAND Flash side of the market, where our probe cards are really more geared towards the higher end of it and in fact that’s what we are seeing, some acceleration by certain customers towards the high-end and we are also seeing some strength on NOR Flash also this quarter, so the two combined leads up to, to comment on the fact that we are seeing Flash market share gain.

Wenge Yang – Citigroup

I understand, just one last question, you mentioned couple of things that, kind of affect your Q3, one is your (inaudible) to be pulling customer demand and pulling some orders into Q2, on the other side Q3 is traditionally a strong quarter. So give us some takes[ph] do you see the strength to continue in Q3 or is being with kind of picking some money of the payroll for Q3 at this point?

Michael Ludwig

At this point, Wenge, we don’t really have enough visibility into how that’s all going to net out. So I think when we give our guidance at the Q2 call I think we will have a better sensible comment at that time.

Wenge Yang – Citigroup

Do you see the strength that you see right now in terms of mobile and flash to continue? Do you see the momentum still there in Q3?

Thomas St. Dennis

If I understood better, what was driving all of the end demand for the higher-end flash-related products and the mobile products, I could probably comment on that. These do represent some share gain for us. So I think that’s positive and I think we are building some momentum in to that. But really don’t know where Q3 goes. As I said, there is so many negative comments out there on the PC space and with the kind of backdrop of a lot of the macroeconomic things pardon to say are the safest things.

Wenge Yang – Citigroup

Okay. Thank you.

Operator

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

Patrick Ho - Stifel, Nicolaus

Thank you very much. Maybe just looking at the customer side of things, this pickup in business that you are seeing, could you comment whether you are seeing it from a one or two customers, are you seeing a broader pickup across a few of your customers in terms of the upside?

Thomas St. Dennis

Well, in the DRAM space there is only four. If we get one or two I guess we have got 50% of it going that way. At this point in time it really is just a couple of customers that have kept up and accelerated on the DRAM side of it. On the flash side, on the NAND flash side it’s just one customer that has really moved towards a higher-end of complexity that has created some opportunities for us. NOR flash is just some market share gains with one customer.

Patrick Ho - Stifel, Nicolaus

Great. Tom, could you just remind us of the gains you have made in the lead times over the past 18 months and what some of your targeted goals are for on 12 months going forward basis?

Thomas St. Dennis

Well, we have talked about in the past as we broadly it times down from over 80 days to the mid-50s. So, that’s helped substantially. We have also been able to get deliveries into the below 50-day range for the number of different customers and products. As a result, we were able to capture some of this current uptick right now because we are in a favourable lead time position. Over the course of this year we intend to take our lead times down by approximately another 10 days and after the end of the year around a 7-week lead time for first articles and less than that for reorders. So, those activities, those investments I think are gaining off for us right now, as well as I think a reflection improved, gross margin brought it to Q3 a year ago when we were at similar revenue levels.

Patrick Ho - Stifel, Nicolaus

Great. Thanks a lot guys.

Operator

Our next question comes from C. J. Muse from Barclays. Your line is open.

Olga Levinzon - Barclays Capital

Hi, this is Olga calling in for C. J. Thanks for taking the question. I guess touching on the market share comments, is there any way for you to quantify where your market share stood in both DRAM and flash in 1Q and based on your new guidance how will it trend into 2Q?

Thomas St. Dennis

I don’t think there is Olga. It’s really hard to track by quarters. Some of this in customer mix, which customers are buying and if we happen to have a larger percentage of their business that can be reflected in the market share gain. I really can’t quantify it to numbers comparing Q1 and Q2 unfortunately.

Olga Levinzon - Barclays Capital

And then on the margin side, recognizing data over fully loaded second half itself is pretty limited in terms of your customers’ activity. But in the scenario where you have flattish revenue, let’s say in the September quarter, any reason to assume that your non-GAAP gross margin would be higher or lower than the updated guidance for Q2?

Thomas St. Dennis

Can you repeat that question, kind of dropped out here a little bit?

Olga Levinzon - Barclays Capital

Sure. I guess, in a scenario where your September quarter revenues are flattish with the updated guidance. Any reason to assume that your non-GAAP gross margins will either be higher or lower than the updated range?

Michael Ludwig

If we had similar revenue levels I would expect that we would have gross margins in the same ballpark. One factor that could impact that would be mix of products between DRAM and flash and SOC. So, certainly product mix would have an impact, mostly by a couple of percentage points, but wouldn’t swing it dramatically.

Olga Levinzon - Barclays Capital

Got it. Thank you.

Operator

Our next question comes from Tom Diffely from D.A. Davidson. Your line is open.

Tom Diffely – D.A. Davidson

Well, good morning. Based on the product mix you are seeing for the quarter, can you just make some comments on just the free cash flow that you expect?

Michael Ludwig

We’ve said that we would have – you have heard about $4 million to $6 million and that’s pretty much would equals free cash flow. We have a few line items below free cash flow, but I would expect that free cash flow would come in about that same $4 million to $6 million number.

Tom Diffely – D.A. Davidson

Okay. So there is no change based on the higher revenue?

Michael Ludwig

It did change. We actually had forecasted $6 million to $8 million of (inaudible), we have guided $6 million to $8 million in our call earlier. The one area that again, when the revenues increased from $34.8 million in Q1 up to the current guidance, certainly I think we have done a pretty good job to manage the balance sheet to where we are. So, yes, we have increased revenues, but a lot of that increase in revenues in inventory could get stuck on the balance sheet. So, I think again, we are pretty comfortable with how we are managing our balance sheet and cash flow.

Tom Diffely – D.A. Davidson

Okay, great. And then, (inaudible) Matrix 2 within this quarter is that future?

Thomas St. Dennis

Can you repeat that?

Tom Diffely – D.A. Davidson

Yes, are any of your matrix two products and next generation matrix?

Thomas St. Dennis

Didn’t comment at all on where we stood on Matrix II product. We are on our vertical SOC product. We are in process on the call so I can talk about on our conference call and we will update the status on those products at our Q2 range call in the July.

Tom Diffely – D.A. Davidson

Okay, thank you.

Operator

I am showing no further questions at this time. I will now turn the call over to management for closing remarks.

Thomas St. Dennis

I think that’s it. Thank you very much, operator. Thank you everyone for calling in.

Operator

Ladies and gentlemen, that does conclude today’s conference, you may all disconnect and have a wonderful day.

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