FormFactor's CEO Discusses Q2 2012 Results - Earnings Call Transcript

FormFactor, Inc. (FORM)

Q2 2012 Earnings Conference Call

August 1, 2012 16:30 ET

Executives

Tom St. Dennis – Chief Executive Officer

Mike Ludwig – Chief Financial Officer

Analysts

Vernon Essi – Needham & Company

Mark Delaney – Goldman Sachs

Olga Levinzon – Barclays

Patrick Ho – Stifel Nicolaus

Terence Whalen – Citi

Tom Diffely – D.A. Davidson

Presentation

Operator

Thank you and welcome everyone to FormFactor’s Second Quarter 2012 Earnings Conference Call. On today’s conference call are Chief Executive Officer, Tom St. Dennis and Chief Financial Officer, Mike Ludwig. As a reminder, today’s call will be recorded.

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 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 projections, including statements regarding business momentum in macroeconomic conditions, demand for our products and future growth. Statements about our development, introduction, and/or qualification of next generation matrix, or new SOC products and statements that contain words like expect, anticipate, believes, possibly, should and the assumptions upon which such statements are based. These forward-looking statements are based on the current information and the 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 the reasons, actual results could differ materially from those anticipated in forward-looking statements. For more information, please refer to the Risk Factor discussions in the company’s Form 10-K for the fiscal year 2011, 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.

Tom St. Dennis – Chief Executive Officer

Good afternoon. During the second quarter, FormFactor experienced a strong recovery in orders and revenue relative to the first quarter of 2012. The increased demand was led by both our DRAM and flash customers. We achieved record shipments of our matrix product line and now have over 1,400 cards shipped.

Gross margins, as a percent of revenue, were the highest since the fourth quarter of 2007, reflecting continued improvement in our manufacturing operations and supply chain organizations. Orders for the second quarter were also the highest since the fourth quarter of 2007, as we have continued to improve our market share with key customers.

Lastly, our cash flows from operations were positive in the quarter. All of these were important milestones for the company. We continued our product development and customer evaluations of our next generation matrix products in Q2 with three customers, and we expect to complete the evaluation phase with all three customers during Q3 with revenue beginning in Q4.

Our vertical SoC product development is continuing with our focus now on customer-specific designs versus engineering test vehicles. We expect to ship the first complete card for customer testing later this quarter. Similar to Q3 last year, we have recently seen a significant slowdown of orders for DRAM probe cards. The 10% decline of DRAM spot prices since May of this year along with slower personal computer sales appears to have reduced our customer’s demand for DRAM probe cards. In the NAND flash and NOR flash markets, price drops for NAND flash and overall volume decreases have reduced orders for our probe cards in these segments.

Our SoC customers have been forecasting improved performance in the second half of the year, but at this point, it doesn’t appear to be developing quickly. Several of our customers have had recent announcements indicating difficult market environments. As a result, our SoC sales are down slightly in Q2 from Q1 and don’t appear to be improving for Q3. This is normally a seasonally stronger time of the year for our customers and the probe card market in general

But the fact that the market has weakened up roughly after a strong recovery in Q2, we just believe that a weak macro economy and the lack of a clear DRAM industry demand driver will keep demand levels depressed in the near-term. Multiple product platform transitions that are occurring now may also be contributing to erratic ordering. The upcoming transitions to next generation smartphones, tablets, and ultrabooks caused the overall semiconductor industry supply chain to manage inventory very cautiously.

As a result of this market environment, we are taking actions to control expenses this quarter. And additionally, we are revisiting our cost structures and breakeven levels with the intention of reducing them further during the second half of 2012.

I’ll now turn the call over to Mike Ludwig to review our performance and Q3 guidance.

Mike Ludwig – Chief Financial Officer

Thank you, Tom. Revenues for Q2 were $54.8 million, an increase of $20 million or 57% versus Q1, 2012. Compared to the first quarter, revenues increased in DRAM and flash, but declined in SoC. Second quarter revenues for DRAM products were $38 million, an increase of 74% from our first quarter. The positive momentum we experienced in the back half of the first quarter from DRAM device price stabilization continued through the second quarter.

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