Q3 2019 Earnings Call
Well I, Chief Executive Officer, Mike Slessor, and Chief Financial Officer shy Shahar before we begin Jason I'll hand, the company's general counsel well in line do you have some important information.
Thank you today the company will be discussing got piano results and some important non-GAAP results can tend to supplement your understanding of the company's financials reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the Investor Relations.
Actionable ABS site.
Today's discussion contains forward looking statements within the meaning of the federal Securities laws. Examples of such forward looking statements include those with respect to the projections of financial and business performance future macroeconomic conditions foreign exchange rates business momentum business seasonality the anticipated demand.
For products customer requirements, our future ability to produce and sell products the development of future products and technologies and the assumptions upon which such statements are based.
These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call.
Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the FCC for the fiscal year ended 2018, and our other FCC [laughter], which are available on the Fccs website at Www Dot FCC Dot Gov and in our press release issued today.
Forward looking statements were made as of today October 30, 2019, and we assume no obligation to update though.
With that we will now turn the call over to form factor CEO , Mike Slessor.
Thanks, Jason and thank you everyone for joining us today.
One factor again delivered strong results in the third quarter with revenue and profitability consistent with our late July outlook.
The outlook, we provided today for the fourth quarter implies sequential revenue and profit growth as we capitalize on particularly strong year end demand for foundry and logic probe cards layered on top of steady demand for other products.
Together these results and outlook continue to validate form factors broadly diversified leadership positions in attractive consumables and R&D driven semiconductor test and measurement markets. These positions are further complemented by the October 9th acquisition that party a leader in surface metrology for emerging advanced.
Packaging and Mems applications.
I'd like to spend a moment on foreign factors third quarter results to reinforce an important point about our business model.
We again reap the benefits of our leadership position in advance probe cards with strong demand in both DRAM and flash applications more than offsetting a moderate sequential reduction in foundry and logic.
DRAM was the particular highlight with third quarter revenues at the highest levels in over a decade in contrast to the well documented weakness in DRAM equipment spending.
As a device specific consumable demand for advanced probe cards is driven by both customer node transitions and new design releases.
As such we benefit is each of the major DRAM manufacturers continue to execute not only on node migrations, such as transitions to one why and Wamsi nanometer, but also architectural and product advances such as DDR five in both server and mobile implementations.
As expected the memory heavy product mixes the third quarter produced gross margins that were slightly lower than the second quarter, even up moderately higher revenue levels.
As we've described in the past, while the customize nature of probe cards in engineering systems generates a relatively stable overall demand profile the diverse mix of products in configurations also produces correspondingly dynamic gross margins.
This mix dependent is an intrinsic element of our business. It has been evident in our recent results. It's an important factor in our fourth quarter outlook and is a characteristic that we expect will continue.
Turning to the fourth quarter, we're experiencing robust demand for foundry and logic probe cards with memory probe cards and engineering systems operating at similar levels to the third quarter.
This foundry and logic demand is broad based coming from both microprocessors as well as an assortment of designs ramping at the two leading edge foundries.
In the microprocessor space probe card demand and for 14 nanometer designs continues at high levels at the same time as 10 nanometer designs ramp in significant volume.
As Moore's law slows this extended node overlap is another example of form factors broaden diversified demand drivers.
Since probe cards or a consumable to this specific to each new chip design, we are benefiting from the 10 nanometer node transition and the ramp of new designs on the existing 14 nanometer node.
In the foundry space. We are currently shipping probe cards to support the simultaneous ramp of multiple mobile application processor and high performance compute designs.
These designs are being produced on the various flavors is a seven nanometer node available from the two leading edge foundries.
Many of these designs also incorporate advanced packaging like integrated fan out to both improved device performance and reduce device footprint.
As we've noted before the high interconnect entities and uncompromising electrical test performance requirements of advanced packaging techniques like fan out as well as HCM and memory drive general growth for probe cards, and amplify form factor specific competitive advantages.
Although in a major contributor to our fourth quarter outlook. We are also shifting initial units to support development and pilot production for both Fiveg RF and five nanometer projects.
To capitalize on the foundry logic opportunity, we are adding incremental capacity since our memory probe card business is also operating at high demand and utilization levels.
With both product lines now highly utilized we cannot simply shift capacity between these products a tactic we've employed several times in the past few years when mix has changed.
Because our visibility is limited as always our average lead times are less than a quarter as we add this capacity we are minimizing fixed cost additions, while retaining the flexibility to reduce capacity. If this elevated demand is not sustain.
Turning to engineering systems. This business again produced solid results in the third quarter.
Looking ahead. The addition of F., our teeth leadership position in optical multi sensor surface metrology opens up an incremental $150 million of addressable market, primarily serving advanced packaging in Mems applications.
This is resident with too familiar themes for form factor one the increased emphasis on optical technologies, such as Silicon Photonics, Vixel Micro Ltd, and image sensors and to the secular growth opportunities driven by advanced packaging.
Sure I will provide some more financial details in a moment, but we're excited about the potential to inject f. Rts, leading technologies and products into foreign factors longstanding partnerships with the top semiconductor customers worldwide.
Finally, with average lead times of less than a quarter, our visibility remains limited as always but as is reflected in our revenue outlook range. We're encouraged by the broad based strength in our diversified consumable and R&D driven demand profile.
The strength is being demonstrated in 2019, where we are experiencing strong year end demand and expect to deliver annual growth in a year, where where equipment spending is forecasted to be down double digits.
By capitalizing on structural opportunities like advanced packaging in Fiveg, we're making progress towards our target financial model growing the top line to $650 million, while delivering a dollar and 25 cents of non-GAAP , EPS and $110 million to free cash flow.
One more note before I turn the call over to shy during the quarter, we welcomed robeco overgaard human as to our board of directors with 25 years of engineering and executive experience in packaging and test Rebecca brings a wealth of relevant technology and market knowledge to our boardroom, who will help us navigate to our target financial model.
And beyond.
Shot over to you.
Thank you, Mike and good afternoon.
As you saw in our press release and as Mike noted, our third quarter revenue and gross margin or the midpoint of our outlook ranges and our EPS exceeded the midpoint of ROE to Greg.
These results again show the benefits of our diversified leadership in brokered and engineering systems, which dumplings cyclicality and enables us to participate in industry spending on both know transitions and new design releases.
Form factors revenues for the third quarter of 29 team were $140.6 million, a 1.9% sequentially increase and the 4.2% increase over Q3 2018.
Global card segment revenues were $116.4 million into third quarter, an increase of $2.8 million or 2.5% from Q2 2019.
Systems segments revenues of $24.2 million in Q3 were basically flat with the second quarter.
We seem to probe card segment foundry and logic revenue decreased to 6.8% from Q2 to $68.4 million and was 49% of total company revenue in Q3 down from 53% into second quarter.
DRAM revenues were $39.4 million in Q3, an increase of $3.4 million from the second quarter and were 28% of total quarterly revenue as compared to 26% during the second quarter.
Continuing to strengthen demonstrated over the past two years and in contrast to generally weak industry results. This was our highest quarterly revenue from DRAM since Q1 2008.
Flash revenues of $8.3 million in Q3 or $4.1 million and higher than into second quarter and were 6% of total revenue in Q3 up from 3% in Q2.
Approximately $5.6 million of the flash revenues in Q3 were from NAND Flash applications.
Consistent with our opportunistic approach to these market, we continue to expect flushed revenues to be lumpy.
GAAP gross margin for the third quarter of 2019 was $55.3 million or 39.3% of revenues.
80 basis points lower than to 40.1% GAAP gross margin in Q2.
Cost of revenues included $5.8 million of GAAP to non-GAAP , we've been selling items, which we outlined in our press release issued today and into reconciliation table available on the Investor Relations section of our website.
On a non-GAAP basis gross margin for the third quarter was $61.1 billion or 43.5% of revenues 80 basis points lower than to 44.3% non-GAAP gross margin in Q2, and the midpoint of our outlook range.
The decrease from Q2 was the result of lifts favorable product mix, partially offset by better factory utilization.
Our club card segment gross margin was 41.3% into third quarter, a decrease of 140 basis points compared to 42.7% in Q2.
The decrease was due to the factors I described earlier.
Our Q through our Q3 systems segment gross margin was strong at 53.9% as compared to 52% during the second quarter.
The increase of 190 basis points was driven by more favorable product mix.
As mentioned in prior earnings releases, we expect our system segment gross margin to be at a high fortys too low 50 range.
Our GAAP operating expenses were $46 million for the fourth quarter zero point $4 million lower than in the second quarter.
Third quarter operating expenses included $7 million of GAAP to non-GAAP reconciling items similar to the 6.8 million those of reports on the items in Q2.
[noise] non-GAAP operating expenses for the third quarter were $39 million or 27.7% of revenue compared to $39.6 million or 28.7% of revenues in Q2.
The decrease was zero point $6 million is mainly due to lower R&D spend related to timing of projects and lower sales and marketing expenses during the quarter, partially offset by higher performance based compensation.
Company non cash expenses for the third quarter included $6.1 million for them or dilution of intangible assets 6.5. These numbers for stock based compensation and depreciation of $4.4 million.
Amortization of intangible assets was $1 million lower than in Q2 due to certain intangible assets to reaching full motivation during the second quarter.
Stock based compensation was 1.2 million Boes hired in Q2 due to the timing of annual grants.
GAAP net income for the third quarter was $8.3 million or 11 cents per fully diluted share compared to GAAP net income of $6.9 million or nine cents per fully diluted share in Q2.
The non-GAAP effective tax rate for the third quarter, 2019 was 22.8% 250 basis points lower than the 26.3% in Q2 due to certain discrete items recorded in the quarter and in line with our previously communicated estimate of approximately 25% for the year.
As a reminder, our cash tax rate is expected to remain at 5% to 8% of non-GAAP pre tax income due to refer to fully utilize our remaining $180 million of us based enrolls in R&D credits.
Third quarter non-GAAP net income was $17.3 million or 22 cents per fully diluted share compared to $16.1 billion or 21 cents per fully diluted share in Q2.
Moving onto the balance sheet and cash flows we generated $25.6 million of free cash flow into third quarter compared to $29.8 million in Q2, taking our total cash and investments to $202 million at the end of the quarter.
The decreases in freaks in free cash flow into third quarter as compared to the second quarter was mainly a result of timing of payments and collection.
We did not have scheduled principal payments on our term loan during the quarter and the loan balance remained $46.2 million at quarter end.
As scheduled payment of $11.3 million was laid on September 30 at the beginning of a fourth quarter.
Our total cash balance exceeded the debt balance by $155.6 million, an increase of $22.6 million.
While paying down the term loan remains our first priority for using cash M&A continues to be an important part of the strategy.
And we intend to continue to deploy capital to acquire leadership positions and to expand our served markets as we did with acquisition over 40 earlier this month.
We funded therefore to acquisition with the three years 21 million Euro denominated loan utilizing the low euro based interest rates to optimize our cost of capital.
We invested $2.8 million in capital expenditures during the third quarter of 2019, bringing our year to date investments to $14.2 million.
At the current period of investments, we expect to beat the high end of our analog Pepsico spending plan of $16 million to $20 million for fiscal 2019.
Turning to the fourth quarter non-GAAP outlook.
As Mike mentioned, we expect a strong year end demand for foundry and logic probe cards layered on top of continued solid demand for other products, which result in our Q4 revenue outlook to being the range of 145 to 155 million Boes.
This includes the contribution of $2 million to $3 million from their 40, which was acquired at the beginning of the quarter.
The revenue is expected to be higher than in Q3, primarily from from an increasing foundry and logic revenue. The specific design mix is expected to be less favorable.
These factors, partially offset by continuous expense controls and good operational execution led us to estimate the non-GAAP gross margin for Q4 and billions of 42% to 46%.
non-GAAP earnings per fully diluted share for Q4 is expected to be in the range of 22 to 30 cents.
Although accretive. The addition of for fees not expected to significantly change or Q4 gross margins or reviews.
A reconciliation of our GAAP to non-GAAP Q4 outlook is available on the Investor Relations section of our website and in our press release issued today.
With that this open Dakota questions operator.
Ladies and gentlemen, I ask the question you will need to press star one on your telephone enter retry question for parakeet. Please standby, while we compile the culinary roster.
Your first question comes from the line up Craig Ellis Fiomi. Your line is open.
Thanks for taking the questions and Mike and China. Congratulations on the strong financial performance in the outlook, Mike I couldn't help but notice thing that with.
December quarter guidance, the fourth consecutive quarter of for both sequential and year on year growth for the business. So I wanted to use that as I take off point for a longer term question. As you look out to calendar 20 can you just help us frame, what you think or some of the more powerful growth drivers for the business and to the extent that you see any headwinds can you help us.
I understand what those would be is we think about the coming year. Thanks.
Sure. Thanks, Craig.
I think Q4 is an interesting data point for us as you know it represents sequential growth annual growth and a step up to a new operating level for us and.
Context, we're hopeful that cautious in a business. This a turns business with less than one quarter lead times, our visibility is limited on the other hand as as we mentioned in the prepared remarks, we are adding capacity and in a flexible way. So maybe maybe one way to approach. This is to talk about the components of that step up really.
As we conveyed in the prepared remarks, if some increased foundry and logic demand coming from.
Both an overlap in the 10 nanometer in 14 nanometer nodes with our largest customer.
That's strengths, we probably think is reasonable to think about extending into the first half of 2020 beyond that again, given the visibility limitations, we have very difficult to make any statements.
But we would expect 14 nanometer to roll off sometime in 2020 and return that customer to kind of 100 million dollar annual run rate level.
The second component present their work in the fourth quarter is this seven nanometer foundry activity and I want to emphasize that this is that multiple foundries with multiple fabless customers on designs for both mobile application processors and high performance can be so it represents again.
An increase in form factors footprint in serving the foundry space at these advanced nodes seven nanometer in particular I.
I think one of the things were seeing there.
He is kind of construction of multiple designs at the same time, which we might consider to be.
A little bit of a onetime pop the other thing that we're keeping our eye on his early in the seven nanometer node. We would expect that test intensity is are fairly high which will drive an outsized probe card spend so having said all of that I think we're cautiously optimistic about 2020.
Retaining the flexibility to adapt our capacity and meet the demand levels with our customers are asking from us.
And that's really helpful and if I could as a follow up I noticed in the geographic revenue breakdown that we had a particularly strong quarter end, China and third quarter.
It seems that there's an upward trajectory took the longer term trends, although there's quite a bit of movement quarter to quarter, but can you give us some sense for how you see that business coming off bump up against a very strong calendar third quarter.
Yes, So Craig as you noted China was a little bit over 20% of our revenue in Q3 higher than it has been it's typically been in the high teens for the past couple of quarters.
As a reminder, that is composed of both the multinationals that operate in the region and the domestic Chinese semiconductor manufacturers.
If I characterize the here and now I think form factors winning on technology, obviously, a lot of these customers need our Mems technology to ramp meet our engineering systems technology to improve their yields and we're benefiting from more than decade presence in the region with a a strong team of local.
Support local sales of local applications that we've invested in over the years.
So in the here and now I think a pretty solid contribution I have a hard time, believing that this doesn't turn into a headwind at some point as a us supplier we are subject to tariffs and the trade war is something that customers bring up in conversations as.
Not an advantage for form factor, let's put it that way.
So I view this longer term is something that we're going to have to look at in terms of our strategy, but for now doing pretty well in growing the business as one of the few alternatives. They have that they want to ramp this advanced semiconductor industry.
That's helpful. Thanks, guys.
Thanks, Rick.
Your next question comes from the line Bryan Keane off Stifel. Your line is open.
Hi, Thanks, Mike has asked a few questions and congratulations on the strong Q3, and a very healthy outlook.
Ladies first question kind of going back I think we just talked a little bit about China and it sounds like Mike that you're saying that that maybe.
30 million run rate is kind of a hard hard place to stay at consistently is that what kind of above where it where the business has been operating.
I'm also curious on the DRAM side of business, which isn't necessarily a complete discreet event.
From China, but obviously if it.
You cannot be pretty healthy even move into next year, how you kind of characterize.
Sort of what visibility do have maybe even kind of beyond sort of Q4.
So I think maybe China in particular with DRAM and then transitioning to DRAM more broadly if I got the question right on their our components as some of the domestic China DRAM producers and the multinationals ramp more activity.
In producing DRAM chips in China, there is a pretty healthy component as domestic China DRAM in our fourth quarter.
And an encouraging sign where we are making inroads as that customer.
Starts to ramp I think DRAM more broadly as we said in the prepared remarks, we see kind of maintaining at the third quarter levels, which was.
Intensities App these new nodes and these complex new devices like DDR five that operate at higher speeds.
We're seeing an increased spend on form factors probe technologies for DRAM, not just in China, but more broadly overall globally.
We'll see as those nodes ramp and as those designs ramp as we said in the past and you've seen from our results.
Customers will work hard to get their test intensity down as their yields improve and so I don't want to create an expectation that we'll be continuing to ratchet up all time DRAM revenue records, but we do see this being a robust business driven by some pretty healthy fundamental drivers.
Okay, great and in terms of like what you referenced in terms of maybe adding capacity sounds like it will still be a heavy sort of materials labor component that just fixed costs, but in capex is running sort of three 5% of sales of way can you give us a sense of of where Capex could go kind of in the very near term how quickly you can get add add some revenue capacity.
Sure. So when we talked about adding capacity in Q4 at this point, we are mainly talking about their direct labor and we did add some tools to support decreased deliver revenue and notable in Q4, but at this point, mainly direct labor very flexible we continue to be Joe reduce.
Horses, and we're not expecting to increase our capital plan over the $20 million. So that we talked about 16 to 20 million a year and boosting 29 to indices to arrange no change there.
Okay, Great and maybe just one last question.
Circle back now efforts.
Mike can you give us a sense of of sort of the relative positioning historically inaccurate tedious relative to.
Lab configurations higher volumes are fab configuration tools.
Maybe kind of in this past year, and then even kind of moving forward. What you think that next to good more or less look like an off sort of what you think this or the steady state profitability on the business will be and kind of that you know maybe just to throw one more question within that one question via where you kind of view the key differentiation of the product and technology.
Yeah.
So on F. R. T I think when you look at.
Some of the attributes of this business a lot of commonalities in residences with our existing engineering systems business.
A couple of them you've heard us talk in the engineering systems segment.
Increasing optical content in both the applications to end the sensors in instruments that we're putting on the tools either driven by things like silicon photonics applications micro level stuff like that obviously those are optical applications, but they require optical instruments as well. So we saw we saw nice residents with fr T. there.
The business right now primarily in the lab in R&D applications in a very similar way to our engineering existing engineering systems business and serving some interesting new advanced package.