Feb 1, 2011
Executives
Thomas St. Dennis - CEO Richard DeLateur - CFO
Analysts
C.J. Muse - Barclays Capital Timothy Arcuri - Citigroup Kate Kotlarsky - Goldman Sachs Patrick Ho - Stifel Nicolaus
Operator
Welcome, everyone to FormFactor’s Fourth Quarter and Fiscal 2010 Earnings Conference Call. On today’s call are Chief Executive Officer, Thomas St.
Dennis; and Chief Financial Officer, Richard DeLateur. Before we begin, let me remind you that the company will be discussing GAAP P&L results and some key non-GAAP result as supplement the understanding of the company’s financials.
A schedule that provides GAAP to non-GAAP reconciliation is available in the press release issued today and also on the investor section of FormFactor’s website. Also as 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," 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 risks and uncertainties.
FormFactor’s actual result 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 to update the reasons, actual results could differ materially from those anticipated in forward-looking statements.
For more information, please refer to the risk factors discussed in the company’s form 10-K for the 2009 fiscal year as filed with the SEC and subsequent Form 10-Q SEC filings and in the press release issued today. With that, we will now turn the call over to the CEO, Thomas St.
Dennis.
Thomas St. Dennis
Good afternoon. The fourth quarter of 2010 represented another positive step forward in the turnaround of FormFactor’s performance.
The company continued to make a progress on reducing expenses and cash flow while improving gross margins. On-time delivery performance improved significantly over Q3, while lead times decreased by approximately 10%.
We expect all of these trends to continue in the coming quarter. As we indicated in our December call we expect our Q1 revenues to be down significantly from Q4.
The quarter-over-quarter decrease is due primarily to late product qualification at key customers and cautious spending at DRAM manufacturers due to recent ASP declines. Additionally, recent changes in the DRAM market have caused our customers to reprioritize their manufacturing capacity to pursue specialty markets for consumer and mobile, further impacting our qualification cycles.
We expect to complete several critical qualifications this quarter and as a result we expect Q1 to be the low point in our revenues for this year. Overall, we expect the advanced probe card market to grow in 2011, driven primarily by increased demand for NAND Flash and SoC or System on a Chip card, while the DRAM portion of the market is uncertain based on current trends.
As the NAND Flash markets move to the 2X technology node, we see opportunities to grow market share driven by increased pin count per device under test, shrinking path sizes and increased test complexity. These characteristics align very well with the capabilities of our TouchMatrix product line.
Some customers are currently evaluating these applications with qualifications expected in Q1. In the SoC market we’ve begun to ship our true scale matrix product to customers with qualifications beginning this quarter.
Our SOC revenues have been growing over the past two years and we expect further growth in this year in this high growth portion of the advanced pro current market. Going forward our focus remains to continue improving execution across all layers of Form Factor.
Our first goal is to structure Form Factor to be cash flow breakeven at the revenue level of $50 million per quarter. This requires further improvements in our product cost structure as well as operating expenses.
In manufacturing, we’ll further reduce lead times while improving on-time delivery and quality. In product development we have a solid pipeline of new products that will be released this year and volunteer that they hit the ground running.
The past year has been a period of significant changes and challenges for Form Factor. The company’s revenue grew 39% on a year-over-year basis.
However we fell short in many areas of product and operational performance. The process of turning our performance around began seven months ago through solid progress in many areas and today Form Factor enters 2011 in far better shape than we were entering 2010.
We’ll continue to improve our performance as we move through 2011 and position the company for growth and success. I appreciate the support we’ve received from our customers, our shareholders and our employees as we build the company for the future.
Now I’ll turn over to Rich to go through our operational performance and our Q1 guidance.
Richard DeLateur
Thank you Tom. For our fiscal year 2010, revenue was $180.6 million; an increase of 39% over fiscal 2009 revenues.
The results were as follows. Total revenue was $43.9 million, down 7% sequentially and up 33% on a year-over-year basis.
Revenue declined from the fourth quarter came primarily from the DRAM sector of the business. The details are as follows: Fourth quarter revenue for DRAM products was $26.9 million, down 11% from our third quarter and up14% versus the fourth quarter a year ago.
The lack of qualification on this SmartMatrix family for certain applications continues to dampen our DRAM revenues. Flash revenue was $9.2 million, an increase of 2% from Q3 and 241% versus the fourth quarter a year ago.
NOR revenue increased significantly while the NAND revenue was decreased. NOR revenue was $8.4 million.
SoC revenue was $7.8 million in the fourth quarter, down 5% sequentially and up 16% versus the fourth quarter a year ago. Revenue from our new product architecture, SmartMatrix and TouchMatrix was $15.8 million which represents 81% of our full wafer contact business.
As a result of the transition to SmartMatrix and DRAM from Harmony, our gross margin percent was positively impacted. Fourth quarter GAAP gross margin was $3 million or 8% of revenue compared to a negative $7.2 million or negative 15% of revenue for the third quarter.
On a non-GAAP basis, gross margin from the fourth quarter was $4.3 million or 10% of revenue compared to a negative 13% in Q3. Improved product mix, a reduction recharge for excess and obsolete inventories reduced depreciation from the Q3 enterprise wide impairments and the absence of the Q3 prior period accounting assessments of $4.1 million contributes to gross margin improvement.
Lower absorption fixed spending due to reduced revenue levels and continued excess inventory charges due to reduced demand continue to weigh negatively on gross margin. Our GAAP operating expenses were $27.2 million for Q4 compared to $93 million for Q3.
As you will recall, Q3 included a number of extraordinary items including enterprise wide impairment. Q4 operating expenses include $1.3 million of restructuring changes and additional charges for our transitioning of manufacturing activities in Singapore.
Non-GAAP operating expenses in the quarter were $22.5 million, down $3.2 million from $25.7 million in Q3, demonstrating continued reductions in our operating expense. We continue to review all aspects of our spending and we will continue to take required actions to achieve our target structure by Q2 2011 with OpEx less than $20 million per quarter.
Cash, comprised of cash and short-term investments ended the quarter at $348 million, approximately $25 million lower than the previous quarter, and lower cash burn than anticipated. This improvement was driven by higher than anticipated collections.
In Q4, we purchased 70,000 shares of our stock at approximately $626,000. In addition, we purchased an additional 130,000 shares at approximately $1.164 million subsequent to our year end.
These purchases involve an average price of $8.95. Under our current program, we were authorized to purchase an additional 48.2 million shares, dollars worth of shares over the next nine months.
Here is some other financial detail. Our depreciation and amortization in the fourth quarter, was $3.4 million, a reduction of $4.4 million primarily resulting from the enterprise wide impairment recorded in Q3.
Our capital additions were 5.2 million. We expect capital spending for all of 2011 to be approximately $12 million.
Before I discuss Q1 I want to reaffirm my views on our breakeven. We continue our efforts restructuring the company at the cash flow breakeven at 50 million revenue level by mid year.
It should be noted due to Q3 enterprise wide impairment, non-GAAP breakeven should occur revenue in the mid to high fifteens. We respect to Q1 we expect Q1 revenue to be in the range of $35 million to $40 million.
We expect continued improvement in the management of our excess inventory charges and reducing spending from the installation of manufacturing activities in the second quarter. That will be partially offset by the negative impact of reduced overhead leverage from reduced revenue levels.
Consecutively our non-GAAP gross margin should be similar to Q4 non-GAAP gross margin of 10% plus or minus a couple of points. We continued improvement in non-GAAP OpEx, which should drop by approximately $1 million in Q1 2011.
We expect Q1 cash burn to be 10% to 15% below Q4 cash burn level. With that lets open the call for Q&A.
Operator?
Operator
(Operator Instructions) Our first question from C.J. Muse with Barclays Capital
C.J. Muse - Barclays Capital
Good afternoon. Thank you for taking my question.
I guess, first question, you talked on the SoC front, there is optimism there for further growth and I was hoping you can elaborate on what you’re seeing are the key drivers there? And in particular your positioning as a leader there and I guess your recapture or holding on to share there would be very helpful.
Thomas St. Dennis
Well the SoC market has been a large market; it’s pretty fragmented as there is so many different approaches; different certainly different devices manufactured different approaches to test and to probe in that stage. What is happening though is that the pad pitch and the challenges for increasing parallelism and test continue and as that increases and frees opportunities for us.
The true scale matrix product that we have allows customers to go into significantly higher levels parallelism while testing their more leading edge SoC products. So we’re serving a portion of that market.
So they said it’s grown force over the last two years, it looks like it’s positioned to grow again significantly for us this year. Last year it was, it’s a little bit over 10% of revenues in fiscal year ’10 and we would expect it to be a bigger percentage overall this year and we’ll see as we go through the year how successful are touch matrix product is.
C.J. Muse - Barclays Capital
That’s helpful. A quick follow up.
You talked about confidence that the March quarter will be a revenue for you guys, and I guess I was hoping to get a little bit of help around what’s driving that expectation I am assuming it’s on the DRAM front. So we would love to hear on how you see the trajectory or improvement there beyond the end of March quarter.
Thomas St. Dennis
As we said that you know the challenges we’ve had had been going through a some of the product qualifications in the middle of that and through kind of Q4 and coming into Q1, a number of customers have shifted their production planning, around out of commodity DRAM into mobile and consumer applications which cause SME to re-vector some of the qualifications of those applications. We’re -- based on data that we are seeing from the qualifications going on now, it looks promising that those will close out here in this quarter and our view of the year is that it will certainly will be a strong growth year for NAND Flash going into mobile products if you will or whether it’s smartphones or Tablets or other consumer products and as we get these smaller DRAM calls and such confirmed herein Q1, that’s going to allow us to get, to get opportunities for Q2 and the rest of the year and begin to focus more on design wins there.
As opposed to just qualification.
C.J. Muse - Barclays Capital
That’s helpful. Thank you.
Operator
Our next question comes from Timothy Arcuri with Citigroup.
Timothy Arcuri - Citigroup
Hi, a couple of things and first of all Rich, can you just sort of again go through what the P&L breakeven is. I know that the cash flow breakeven is still fifty but it seems like P&L breakeven is sort of in the low sixties given where option expense is.
I just want to confirm that.
Richard DeLateur
Yeah. On a non-GAAP basis like I said a breakeven from P&L should occur somewhere in the mid to high 50s and a GAAP breakeven should occur around the mid 60s to 65 million.
Timothy Arcuri - Citigroup
Okay and what -- are there any additional actions that has happened to get there or is that a disguised gun today and you’re just sort of it’s volume referring to there.
Richard DeLateur
The bulk of the activities have been done and volumes is a very important part too restoring gross margin that allows you to achieve that breakeven. We still have to identify a few areas but it's in the 1% or 2% type error terms.
The bulk of what we need to do is, there has been done or is process.
Timothy Arcuri - Citigroup
Okay. And then, just on NAND stuff, that’s continued to be a big opportunity.
But it really hasn’t amounted to much, yet. So, given that there is a pretty significant amount of front end solution being into the NAND market, you are going to see units grow there, pretty significantly.
What sort of competitor dynamics has the shrink more aggressively. Is there a switch that has to flip for that to really turn on for you.
I know that the chips are sort of fundamentally not as complex as in DRAM, with not as many pins. But is that changing and if so, what's going to be the switch that sort of flips to make that market turn on.
Thomas St. Dennis
So, Tim this is Thomas, I was trying to get across there. My comments on NAND was that the ongoing shrinks down in 2X and probably there is a couple of generation in 2X, a decade there, if you will.
What we see happening now is, pad sizes are starting to shrink and where they use to be kind of 90 microns by 90 microns there, they are starting to come down into a range where DRAM was a couple generations ago. Also the pin count is going up as they are looking at expanding some of the test data that they want to collect.
And those two things together make a MEMS-based solution like FormFactor's products, substantially more competitive. When the pad sizes were larger, if it's is, you can use other technologies to pursue that.
And when pin counts are exceptionally low, that’s not a place where we are particularly cost effective or good value for them there. What we see are these indications that, things are shifting now towards a higher number of I/Os and pins on each DUT and then the change in pad size.
So, it looks like its coming our way. We have a couple of key examples of that, that we are working on right now and are optimistic that there will be important wins for us in strengthening and building a stronger base in NAND.
Timothy Arcuri - Citigroup
Got it, okay. Tom thanks.
Operator
Our next question comes from Jim Covello with Goldman Sachs.
Kate Kotlarsky - Goldman Sachs.
Hi, this is Kate Kotlarsky for Jim Covello. Thank you for taking my question.
I wanted to ask a question about your -- the TAM comments that you had made previously about, you know, expecting the advance probe card TAM to grow year-over-year this year. If we thought about that across applications still looking at DRAM portion versus the NAND portion versus the SoC portion of the market that you are serving, how are you thinking about those of the various segments?
I would assume that DRAM is probably down year-over-year and then the other segments are up. Is that the right way to think about it?
Thomas St. Dennis
Well, the way I tried to profile in my comments, there was a -- the highest growth segment that we see today is in the SoC market, which is really just a technology shift from many of the alternative technology that are used towards some of the more advanced probe card solutions that gets better into FormFactors product portfolio. NAND Flash is clearly on a extremely growth curve at this point in time, if for no other reason than just a huge amount of capacity in terms of wafers per month that will be coming out.
So we expect it to grow kind of consistent with the way that the capital investments are going for NAND flash with the addition of the comments in made just a minute ago about the fact that the testing requirements are giving more physically challenging with some smaller pad size as well as the test complexity is going up with some more pins per DUT. DRAM is I’d say is uncertain at this point in time, the ASP decreases happened in the fourth quarter, I think and you can see that reflected in customer spending adjustment decisions going on throughout the industry.
I do think that the second tier companies are more strongly impacted by that than the first tier companies. But of the three segments; in those three market segments in 2011, I have the lowest expectations for DRAM followed by greater expectation for flash with the highest expectations ...
Kate Kotlarsky - Goldman Sachs.
Okay that’s very helpful and then maybe one other question on a different topic, I wanted to ask you about your thoughts around MNA. Do you guys kind of look out into the market?
Are there any combinations do you feel like make sense in companies out there, that are highly compliment to your business or you think you might be open to a combination?
Richard DeLateur
Yeah we think the right time for MNA both in acquired or being acquired is one year of healthy company that has funds and cash flow so it’s still not a focus of ours.
Kate Kotlarsky - Goldman Sachs.
But is there something that you would be open to once you got to a point where your cash flow positive?
Richard DeLateur
We agree absolutely, the fact that combinations can provide operating leverage is pretty obvious and it will be able to remind you.
Kate Kotlarsky - Goldman Sachs.
Great, thank you so much.
Operator
(Operator instructions) And our next question comes from Patrick Ho with Stifel Nicolaus.
Patrick Ho - Stifel Nicolaus
Thank you very much. First, can you guys discuss, I guess some of the concrete measures that helped you improve on time delivery with customers.
Tom, I know this was the problem before you copy it. Can you use it qualitatively, what you’ve done or what you guys had skillfully made it to improve that on-time delivery now and on a going forward basis?
Thomas St. Dennis
Well, that’s going to be a number of things. It really starts with our supply chain and getting the supply chain, understanding what was impacting the supply chain and causing delays in the past.
In early 2010, I think the industry at large was suffering with component availability and all. So we had three of the major suppliers to Form Factor while performing below 50% on-time delivery and so there were a number of different initiatives that went through to understand what was impacting them and working through that with our engineering teams and with our supply chain team to clear that.
In some cases, they had to add capacity and some cases they had to add capability in order to move through that. And in other cases there were some significant quality issues that were impacting yield on the PC boards and such that the suppliers had to work through.
Those started to come back in a substantially better way in the late in Q3 and then moving into Q4. So, Q4 as I said, on-time delivery, improved substantially.
And I would say, largely impacted by improvements in our supply chain. What we have been doing further in-house is working through our complete order fulfillment process and really understanding where there are kind of intrinsic delays or gaps within our own processes and also in different areas or delays in transmission of information orders or what have you.
And so we've been able to flush out significant amount of that. That allowed us to reduce lean times while maintaining significantly improved on time delivery performance.
As I said, we expect to continue that going into this quarter, and we would expect to see another 10% improvement in lead times without degrading any of our on-time delivery. The second phase of on-time delivery with our suppliers now is working with them to decrease their own cycle times and understanding what's been impacting them there and it's just that it improves execution throughout the whole supply chain and I would say today, we understand the causes significantly better than we did six month ago and now we are at this point of working through the opportunities that exist to improve lead time without having any degradation on on-time delivery.
Patrick Ho - Stifel Nicolaus
Great. And a follow up question to some of the types you just mentioned.
I think on the prepared remarks you said something about getting better design to manufacturing that process improve. Can you just give a little color what efforts you’re making on that front to get better I guess results once you go from design to the actual production?
Thomas St. Dennis
Well, on the design, the upfront design process when we get our first article product and is certainly is complex. These are not simple technologies if you will.
But we’ve had a number of initiatives to understand both the sources there and the areas that impact overall cycle time and have packaged that much better in terms of what a release package is to the complete manufacturing cycle. That part that goes to our suppliers as well as those components internally.
That had a significant impact in our overall performance and I think we continue to make improvements on that. So, one is getting the basic process well defined and kind of cleaning up the gaps that allow for some blaze there.
And then what we are working on now is in that area of course, is further reduction in overall cycle time. So that’s helped by some design tools and it’s helped by some process approach and kind of scheduling approaches that we have changed.
Patrick Ho - Stifel Nicolaus
Okay, thanks a lot guys.
Operator
Ladies and gentlemen this concludes the FormFactor fourth quarter conference call. Thank you for your participation.