Analyst Conference Summary

conference date: July 30, 2014 @ 1:30 PM Pacific Time
for quarter ending: June 30, 2014 (Q2, second quarter)

Forward-looking statements

Overview: Solid start to a recovery, with surprisingly good guidance for Q3.

Basic data (GAAP) :

Revenues were $297.6 million, up 2% sequentially from $291.9 million, but down 12% from $338.0 million in the year-earlier quarter.

Net income was negative $3.1 million, up slightly sequentially from negative $3.8 million, but well down from $13.1 million in the year-earlier quarter.

EPS (earnings per share) was negative $0.04, up slightly sequentially from negative $0.05, but well down from $0.16 year-earlier.

Guidance:

Q3 2014 revenue expected between $325 and $355 million [it was $339 million in Q3 2013]. Non-GAAP EPS between $0.11 and $0.17.

Conference Highlights:

Sales and earnings were in line with TTM Technologies' expectations. "We are very encouraged by booking trends in cellular phones and aerospace and defense."

While revenue is down, partly this is from the sale of the SYE plant during Q2 2013. Also, Q2 2013 results included a $17.9 million one-time gain from the sale of the plant. Adjusted for SYE impact, revenue was down 5% y/y.

Non-GAAP net income was $3.9 million, up sequentially from $1.2 million. EPS was $0.05, up sequentially from $0.01 and down from $0.09 year-earlier. EBITDA was $32.8 million. $1.9 million stock-based compensation, etc.

Non-GAAP gross margin was 13%. It was negatively impacted by the decline in percentage of smartphone and tablet PCB production, which uses more advanced technology than other end markets.

34% of Asian revenue came from HDI, flex, rigid-flex and substrate, down from 37% in Q1. $166.7 million total revenue in Asia in the quarter, up slightly sequentially but down y/y from $209.6 million, partly due to the plant divestment. Blended utilization improved sequentially, but not higher technology processes. ASPs (average sales prices) declined 4% sequentially.

North American facilities operated at 60% capacity, a slight decline sequentially. Total revenue was $131.6 million, up both sequentially and y/y. ASPs increased slightly.

Aerospace/defense market had strong performance and represented 18% of revenue, up sequentially from 17%. Q3 should be up slightly on a $ basis, but will decline to 16% of total revenue.

Cellular Phones represented 12% of revenue, down sequentially from 15%. Revenue should be up seasonally in Q3, to about 27% of total sales.

Computing, storage and peripherals market was weaker than expected and represented 14% of revenue, down sequentially from 18%. Tablet seasonality and server/storage weakness led the decline. But expects a sequential increase in Q3.

Medical and industrial was strong, representing 11% of revenue, up sequentially from 10%. Increase was mainly in instrumentation. Expects a decline in Q3.

Networking and communications end market performed well and represented 40% of revenue, up sequentially from 34%. Revenue was up 22% sequentially. Benefited from 4G LTE build out in China. Now seeing 4G sales plateau, so expecting a modest Q3 sales decline.

Other was 5% of revenue, down from 6%. Expected to be stable in Q3.

Top five customers: Apple, Cisco, Ericsson, Huawei, and Juniper. They accounted for 37% of sales in quarter. No customer accounted for over 10% of sales in the quarter.

Book to bill ratio 1.08 at end of quarter. Backlog was $190.1 million, up sequentially. In July the book to bill rose to 1.50. But ASPs (prices) declined in Q2 due to an unfavorable product mix.

Cash and equivalents ended at $282 million, down $36 million sequentially due mainly to increased accounts receivable. Cap ex $24 million. Gross debt remained flat sequentially. $322.3 million net debt, up $36 million sequentially. Total debt outstanding was $127.3 million short-term and $419 million long-term. $23.4 million depreciation in quarter.

Cost of goods sold was $259.0 million, leaving GAAP gross profit of $38.6 million. Operating expenses of $35.4 million consisted of: sales and marketing $8.6 million; general and administrative $22.6 million; amortization $2.2 million; and impairment of long-lived assets $1.8 million. Leaving operating income of $3.2 million. Interest expense was $5.9 million. Other income $0.1 million. Income tax $0.5 million.

Concentrating on increasing factory utilization and a higher proportion of higher technology PCBs. Gross margin should increase in Q3 and Q4 as a result.

Q&A:

Smartphone demand, how broadly based? This is the time of product transitions for a number of customers. We are seeing multiple customer transitions to new models. Demand is broadly based.

Margin and ASP trends? Target model is potentially at 19%, but that requires about $400 million in revenue per quarter, but also depends on mix. The key is utilization at the advanced technology factories. We expect margins to improve sequentially in Q3. ASPs should improve as the % of advanced technology increases.

Do new program ramps dampen margins? Backlog is the first factor. Book to bill ramped in Q2 and then more in July. We should have full loading in August. Yield is the second factor. We are moving from prototyping into ramp, where yield is critical.

Are you looking at restructuring in North America? We are always looking at capacity, but plating is what we look at. In low volume, high mix there are other elements in the process. Quick-Turn requires us to have ability to react, which requires more capacity than with production runs in China. We have no immediate plans to change the footprint in North America.

What happens when you get the seasonal downturn in Q1 next year? On the market side the drivers behind mobility are also driving markets like medical and automotive. Advanced HDI is the best way to achieve that, and we are marketing that. We are increasing our HDI percentage in North America. In smartphones we are working with second-tier Chinese customers who are trying to gain share and have a different introduction cycle than the higher-volume OEMs.

Can we assume for now that margins are 12% to 13% in the first half and 16% to 17% in the second half? Yes, margins are revenue dependent, as well as on HDI. This year HDI went softer in the first half than in previous years. We are focuses on revenue opportunities that can balance out the year better in HDI, but that will take some time.

Market share in advanced technology segment? Look at our book to bill. We are working on improving our share across the board with critical customers. We are improving our share on the high-end smartphone side, but there is a limit. In Q3 and Q4 we focus on meeting demand rather than improving share.

4G LTE rollout? In Q2 we had poor forward visibility, but telecom was strong in Q2. So for Q3 we see a plateau or sequentially down, but that is still strong demand. Our customers are planning for another cycle in late Q4 and then in Q1 2015, so we appear to have better visibility now.

Are margins different, smartphone vs. tablets? We don't get that specific. Advanced technology has better margins than non-advanced. There is some variability within the advanced technology device PCBs.

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