FormFactor, Inc. ( FORM)

F2Q 2011 Earnings Call

October 27, 2011 4:30 PM ET

Executives

Thomas St. Dennis – CEO

Michael Ludwig – CFO

Analysts

Patrick Ho – Stifel, Nicolaus

C. J. Muse – Barclays Capital

Wenge Yang – Citigroup

Presentation

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.

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