FormFactor Inc. (

FORM

)

Fourth Quarter Revenue Plan Update Call

December 14, 2011 09:00 am ET

Executives

Tom St. Dennis - CEO

Mike Ludwig - CFO

Analysts

Wenge Yang - Citigroup

Patrick Ho - Stifel, Nicolaus

Presentation

Operator

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» FormFactor's CEO Discusses F2Q 2011 Results - Earnings Call Transcript
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Thank you ladies and gentlemen and welcome everyone to FormFactor’s Fourth Quarter 2011 Mid Quarter Update Conference Call. On today’s call are Chief Executive Officer Tom St. Dennis and Chief Financial Officer Mike Ludwig.

As a reminder for everyone, 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 and the subsequent Form 10-Qs and in the press release issued yesterday.

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

Tom

St. Dennis

Thank you for joining us this morning. The continued price declines and demand reductions in the DRAM market have reduced demand for advanced probe cards significantly this quarter. It appears that the hard disk drive supply disruption in Taiwan has reduced personal computer output and as a result the demand for DRAMs. With DRAM prices now dropping to near the variable cost of manufacture, some DRAM manufacturers have reduced wafer starts and cutback investments.

As a result we've seen significant quarter-over-quarter reduction in probe card investments from our customers across all markets. It’s difficult to forecast when DRAM prices and demand will improve given the situation in the disk drive market today. When DRAM prices improve we expect that there will be a strong demand cycle for probe cards if DRAM manufacturers are continuing to drive technology transitions and new designs during the slow period.

We are managing expenses closely during this period of time, while continuing to invest in our next-generation Matrix products as well as our new SoC products. The schedule for these new products will not be affected by the current market cycle. We believe these investments will position FormFactor for market share growth in the second half of 2012 and 2013.

With that, I’ll turn it over to Mike to give you our updated Q4 guidance.

Mike

Ludwig

Thank you, Tom. As Tom mentioned, due to exacerbated DRAM market conditions caused by both volume DRAM prices and the impact of flooding in Thailand, we expect fourth quarter revenues to be $28 million to $31 million, lower than our prior guidance of $30 million to $34 million. We expect revenues to decrease in all markets, DRAM, Flash and SoC compared to third quarter 2011 levels.

Given the revenue guidance, we expect non-GAAP gross margins though difficult to forecast to be in the range of negative 2% to negative 9%. Non-GAAP gross margins are being negatively impacted primarily by lower absorption fixed costs and direct labor from lower revenue levels, customer cancelations and an increase in excess and obsolete costs resulting from decreased demand. We expect to meet our non-GAAP OpEx guidance unless they are equal to $19 million while we remain committed to our investments in our next-generation Matrix products in our vertical spring technology for the SoC market.

Lower revenues and higher costs will result in a cash burn of $13 million excluding stock repurchases higher than our previous estimate of less than $10 million. Our visibility is still limited with respect to Q1 therefore we will not provide any guidance with respect to Q1 2012 until our fourth quarter earnings call in February.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Tim Arcuri of Citigroup. Your line is open.

Wenge Yang -

Citigroup

This is Wenge Yang for Tim. First of all, the revenue decline, is it solely related to DRAM fundamentals or is there any market share loss issues, also pertaining to the loss?

Mike

Ludwig

We believe that the full impact of this on DRAM is related the market declines that have gone as a result of the broader industry issues that I mentioned.

Wenge Yang -

Citigroup

Okay. So there is no market share loss at this point?

Mike

Ludwig

This is not related to market share loss, no.

Wenge Yang -

Citigroup

I understand. So given the Q4 revenues and I think in Q1 and Q2 traditionally you know its low for DRAM, what should be your cost structure; are you going to take another look at your breakeven level and cost structure at this point?

Tom St. Dennis

You know at this point Wenge and we again I think we communicated that we think the cost structure is what's required in order to take advantage of the opportunities that we have in front of us with respect to next-generation Matrix products as well as the SoC products. We will look at some actions like maybe additional PTO etcetera to reduce some costs in the short term but ultimately I don't think that we are not at this point in time changing our thought process with respect to breakeven point.

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