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Edited Transcript of TTMI earnings conference call or presentation 2-May-18 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2018 TTM Technologies Inc Earnings Call

SANTA ANA May 4, 2018 (Thomson StreetEvents) -- Edited Transcript of TTM Technologies Inc earnings conference call or presentation Wednesday, May 2, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sameer Desai

TTM Technologies, Inc. - Senior Director of Corporate Development & IR

* Thomas T. Edman

TTM Technologies, Inc. - President, CEO & Director

* Todd B. Schull

TTM Technologies, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Paul Coster

JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies

* Steven Bryant Fox

Cross Research LLC - MD

* William Stein

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Woo Jin Ho

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Presentation

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Operator [1]

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Good day, and welcome to the TTM Technologies, Inc. Q1 Earnings Call. At this time, I would like to turn the call over Sameer Desai, Senior Director of Corporate Development and Investor Relations. Please go ahead, sir.

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Sameer Desai, TTM Technologies, Inc. - Senior Director of Corporate Development & IR [2]

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Thank you. Before we get started, I would like to remind everyone that today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the factors explained in our most recent annual report on Form 10-K and our other filings with the Securities and Exchange Commission. These forward-looking statements are based on management's expectations and assumptions as of the date of this presentation. TTM does not undertake any obligation to publicly update or revise any of these statements whether as a result of new information, future events or other circumstances, except as required by law. Please refer to the full disclosures regarding the risks that may affect TTM, which may be found in the reports on Form 10-K, 10-Q, 8-K, the registration statement on Form S-4 and the company's other SEC filings.

We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA. Such measures should not be considered as a substitute for measures prepared and presented in accordance with GAAP, and we direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press release, which was filed with the SEC and is available on TTM's website at www.ttm.com.

I would now like to turn the call over to Tom Edman, TTM's Chief Executive Officer. Please go ahead, Tom.

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [3]

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Thank you, Sameer. Good afternoon, and thank you for joining us for our first quarter 2018 conference call. I'll begin with a review of our business strategy, including highlights from the quarter, followed by a discussion of our first quarter results. Todd Schull, our CFO, will follow with an overview of certain key balance sheet and cash flow metrics, our Q1 2018 financial performance and Q2 2018 guidance. We will then open the call to your questions.

First and foremost, I would like to welcome to the employees from Anaren, who joined TTM 2 weeks ago. In fact, we are in Syracuse today for this call. We are very excited to have all of you onboard and to be able to move forward together in building on TTM's strong operational foundation with your tremendous depth and expertise in RF engineering. Together, we will provide a more and comprehensive and value-added solution to our aerospace and defense and commercial customer base.

I would also like to thank all of our employees for their achievements in the first quarter of 2018 for TTM. We achieved the highest revenues for our first quarter in the history of the company and non-GAAP EPS within our guidance despite some challenging seasonal trends.

We continue on our journey towards diversification of our end markets and differentiation of our capabilities. The last several months have validated many of the elements of this strategy, which we have communicated over the past 2 years. First, the diversification of our end markets helped to reduce quarterly volatility and grow total company revenues in what was a challenging quarter in 2 of our end markets. Specifically, growth in our aerospace and defense and automotive end markets helped to offset the difficult conditions in the networking/communications and computing end markets.

Second, we continue on our path towards differentiation in the automotive and aerospace and defense end markets. The automotive end market continues to be a core growth driver due to increasing electronics content as well as the adoption of advanced technologies. We see 4 key mega trends driving automotive PCB content growth: first, vehicle safety and autonomous driving; second, increasing adoption of hybrid and electric vehicles; third, advanced infotainment; and fourth, increase connectivity. Estimates of the $62 in PCB content per vehicle in 2016 are expected to grow to $75 by 2020. Some hybrid and electric vehicles currently employ well over $150 of PCBs per vehicle. Despite some concerns over autonomous driving, we continue to see significant design activity in both the sensor area as well as artificial intelligence processors. In addition, we are also seeing early design work in vehicle-to-vehicle communications, including 5G. These technologies will use much more sophisticated semiconductor, RF and LiDAR technology, driving increasingly complex PCBs, which is an inherent facet of our differentiation strategy.

In the automotive market, customer engagement begins well before a product ramp. The growth we expect in 2018 is being driven by design wins in 2017 with both larger, more established automotive suppliers and OEMs as well as smaller, newer, high-growth companies. In 2018, we expect product ramps with 12 of these high-growth OEMs in the autonomous vehicle, electric vehicle and sensor areas. Combined with more established automotive customers, we registered more than 30 new design wins with 14 different OEM platforms in 2017 that will be ramping in 2018. Additionally, in the first quarter of 2018, we have won 6 new major design platforms for 3 of our current customers, which will be ramping in 2019 and 2020. Two of the wins were large, next-generation radar programs, which brings our total active production radar customers to 12. We expect increasing adoption of advanced technologies to drive growth in 2018 and beyond.

The Anaren acquisition represents another critical step in our differentiation strategy. Anaren will increase our presence in the aerospace and defense end market and greatly enhance our focus on the high-growth radar and satellite portions of the market. A number of Anaren's products are used in AESA radar systems, which are expected to grow at an 18% CAGR. AESA stands for active electronically scanned array and represents the next-generation technology for defense radars. The aerospace and defense end market represented 72% of Anaren's revenue in 2017. The remainder of Anaren's revenue, 28%, is in the networking/communications end market, specifically wireless infrastructure for use in base stations and microcells. Anaren designs and manufactures a number of proprietary RF components, whose demand is driven by increasing data traffic as well as technology transitions such as 5G. We expect that 5G will drive a substantial increase in Anaren's addressable market for wireless components.

In regards to how Anaren fits in with TTM, we have consistently emphasized that a key part of our strategy is to add value and differentiate the product solutions that we deliver to our customers, particularly in the aerospace and defense and automotive markets. The Anaren acquisition represents a critical step on this journey. We have spoken to you about our integrated product solution in aerospace and defense, which includes assembled solutions and engineering services built around PCB products. The acquisition of Anaren adds RF design, engineering and test capabilities and products to this solution. This will enhance TTM's ability to provide build-to-specification products versus build-to-print, allowing us to engage earlier in the design process with our customers. RF technologies represent the fundamental building block required for sensors used in aerospace and defense, automotive, networking/communications and Internet of Things applications. To bring in more than 200 engineers with this experience enhances our growth prospects going forward.

The process of integrating Anaren into TTM is proceeding on track. For the first several months, Anaren will operate as a separate business unit under TTM. Our ultimate plan is to integrate Anaren's commercial and aerospace and defense businesses into TTM's existing commercial and aerospace and defense sectors. I am thrilled to report that Larry Sala, former CEO of Anaren, will remain with TTM, reporting to me, as he leads the Anaren business units through this transition and subsequently will assist with ongoing business integration and strategy execution.

Over the past 4 months, I have met with a number of our critical customers and with Anaren employees. The reaction from both constituencies has been positive. Our internal employee teams are communicating very well with one another and are now able to share best practices across all of our businesses. Our message to employees and customers from day 1 of this acquisition has been to remain focused on execution on behalf of our customers. This has allowed us to really emphasize our expanded capabilities to our customers and to explore new opportunities with them.

The major goal of this acquisition is to add to TTM's revenue growth. The addition of Anaren moves TTM higher up in the value chain, allowing us to engage with customers earlier in the design cycle. Our customers can now rely on TTM to deliver a completely designed RF solution to meet their needs.

An additional aspect of the integration will be to realize the $15 million in annualized run rate cost synergies within 2 years of the closing of the acquisition, as we have previously outlined to our shareholders. We have already identified many of these opportunities and have firm plans in place to execute on them over the 2-year time line. We see compelling value creation in this transaction, with Anaren expected to be immediately accretive to non-GAAP operating margins, adjusted EBITDA margins, non-GAAP EPS and free cash flow.

Now I'd like to review our end markets. Automotive sales represented 20% of total sales during the first quarter of 2018 compared to sales of 20% in the year ago quarter and 18% during the fourth quarter of 2017. We expect year-on-year revenue growth to accelerate in Q2, particularly in our E-M Solutions segment, and expect automotive to contribute 21% of total sales.

In the defense market, we were encouraged to see that a 2-year budget deal was signed funding the Department of Defense with $700 billion in 2018 and $716 billion in 2019, which represents 20% growth over the 2-year period. Two significant areas for TTM, missiles and munitions and radar systems, are expected to grow the fastest. For TTM, the aerospace and defense end market segment represented 18% of total first quarter sales compared to 15% of Q1 2017 sales and 15% of sales in Q4 2017. On a year-over-year basis, we saw strong growth of 23%, driven by our larger defense customers. Q1 2018 A&D revenues were a record high for the company. Program backlog rose to $269 million from $245 million last quarter, which is also a record level for TTM. Including Anaren, total program backlog at the end of Q1 would have been $427 million. We expect sales in Q2 from this end market to represent about 22% of our total sales. This includes approximately 3 points from the additional Anaren revenues.

Networking/communications accounted for 16% of revenue during the first quarter of 2018. This compares to sales of 20% in the first quarter of 2017 and 17% in the fourth quarter of 2017. Sales declined on a year-over-year basis largely due to weakness from the networking market, partially offset by relatively stronger demand in the telecom market. In Q2, we expect this segment to be 19% of revenue, and we expect to see initial revenues for 5G-related applications.

The cellular phone end market accounted for 15% of revenue in the first quarter, compared to sales of 14% in Q1 of 2017 and 27% in Q4 of 2017. We saw year-over-year growth of 17%, largely driven by higher ASPs. We expect cellular to represent 9% of second quarter sales, as inventory levels are reduced prior to new model launches in the second half.

The medical/industrial/instrumentation end market contributed 15% of our total sales in the first quarter compared to 15% in the year ago quarter and 12% in the fourth quarter of 2017. We expect sales for this end market to represent approximately 13% of sales in the second quarter.

Sales in the computing/storage/peripherals end market represented 12% of total sales in the first quarter compared to total sales of 15% in Q1 of 2017 and 10% in the fourth quarter of 2017. We expect sales in this end market to represent approximately 14% of second quarter sales, as we see continued growth in high-end data centers that include machine learning and artificial intelligence capabilities as well as new product rollouts in high-end laptops.

Next, I'll cover some details from the first quarter. During the quarter, our advanced technology business, which includes HDI, rigid-flex and substrate, accounted for approximately 34% of our company's revenue. This compares to approximately 35% in the year-ago quarter and 44% in Q4. The sequential decline was driven by the cellular end market.

We are continuing to pursue new business opportunities and increased customer design engagement activities that will leverage our advanced technology capabilities in new markets. Capacity utilization in Asia Pacific was 78% in Q1 compared to 81% in the year-ago quarter and 92% in Q4. Our overall capacity utilization in North America was 61% in Q1 compared to 57% in the year-ago quarter and 53% in Q4, as growth in our A&D and computing end markets drove additional production in North America.

Our top 5 customers contributed 32% of total sales in the first quarter of 2018 compared to 34% in the year-ago quarter and 44% in the fourth quarter of 2017. Our top 5 OEM customers during the quarter, in alphabetical order, were Apple, Bosch, Google, Huawei and Tesla. Our largest customer accounted for 16% of sales in the first quarter versus 16% in the year-ago quarter and 28% in Q4.

At the end of Q1, our 90-day backlog, which is subject to cancellations, was $479.6 million, compared to $414.4 million at the end of the first quarter last year and $481.9 million at the end of Q4. Our PCB book-to-bill ratio was 1.01 for 3 months ending April 2.

In summary, during the first quarter, we demonstrated the benefits of our diversified end-market mix, achieved better-than-expected results in the aerospace and defense market, managed the seasonality in our consumer-oriented markets and continued to see positive results from our focus on operational execution. We remain optimistic about the future of TTM.

Now Todd will review our financial performance for the first quarter.

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Todd B. Schull, TTM Technologies, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Tom. And good afternoon, everyone. We knew going into the first quarter that we'd face some challenges, but in the end, we executed well and delivered on our commitment. Revenue in the quarter of $663.6 million grew 6.1% year-over-year. Non-GAAP operating margin was 6.7%, and non-GAAP EPS was $0.26, above the midpoint of our guidance.

In the first quarter, we adopted the new revenue recognition standard, ASC 606, which requires us to recognize revenue as we build the product. Essentially, WIP and finished goods inventory become revenue. The adoption of this new standard added $14.1 million to our revenue results in the first quarter and $2.1 million of pretax profit or $0.017 of EPS. In future quarters, the impact of this new standard could be either positive or negative depending on whether we are increasing inventories or reducing them in a given quarter. From an end-market perspective, we bucket these revenues in the other category.

So on to the detail. For the first quarter, net sales were $663.6 million compared to net sales of $625.2 million in the first quarter of 2017 and compared to fourth quarter net sales of $739.3 million. The year-over-year increase in revenue was due to growth in our aerospace and defense, cellular and automotive end markets and the impact of the new revenue recognition standard, partially offset by lower revenue in our networking/communications and computing end markets.

GAAP operating income for the first quarter of 2018 was $30 million compared to $52.6 million in the first quarter of last year and $71 million in the fourth quarter.

On a GAAP basis, net income in the first quarter of 2018 was $10.1 million or $0.09 per diluted share. This compares to $33 million or $0.28 per diluted share in the first quarter of last year and net income of $49.2 million or $0.40 per diluted share in the fourth quarter of 2017.

The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes acquisition-related costs, certain noncash expense items and other unusual or infrequent items as well as the associated tax impact of these items. Additionally, we exclude nonoperational changes in our tax expense such as noncash discrete items. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to provide better insight into the company's ongoing financial performance.

Gross margin in the first quarter was 13.4% compared to 16.9% in the first quarter of 2017 and 17.9% in the fourth quarter. The year-over-year decrease in gross margin was due to lower volumes versus last year of cellular, computing and network products; a strengthening RMB, which is the Chinese currency, which negatively impacted our operating cost; and the absence of a $3 million insurance settlement which we received last year in Q1. The sequential decline was due to seasonally lower volumes in our advanced technology facilities.

Selling and marketing expense was $17.3 million in the first quarter or 2.6% of net sales versus $16.4 million and 2.6% of net sales a year ago and $16.6 million or 2.2% of net sales in the fourth quarter. First quarter G&A expense was $27.4 million or 4.1% of net sales compared to $27.7 million or 4.4% of net sales in the same quarter a year ago and $31.6 million or 4.3% of net sales in the previous quarter.

Our operating margin in Q1 was 6.7%. This compares to 9.8% in the same quarter last year and 11.4% in the fourth quarter.

Interest expense was $10.5 million in the first quarter, a decrease of $0.5 million from the same quarter last year due to the repricing of our debt as well as prior debt repayments.

During the quarter, we recorded $3.4 million of foreign exchange loss. This was partially offset by government incentives for a net expense of $1.1 million. This compares to a net loss of $1.7 million in Q1 last year. The foreign exchange loss in Q1 2018 was due primarily to the 3.4% appreciation in the Chinese RMB versus the U.S. dollar during the quarter.

Our effective tax rate was 15% in the quarter. It was 19% in the same quarter a year ago.

First quarter net income was $28 million or $0.26 per diluted share. This compares to first quarter 2017 net income of $39.2 million or $0.37 per diluted share and fourth quarter 2017 net income of $61.2 million or $0.57 per diluted share.

Adjusted EBITDA for the first quarter was $83.2 million or 12.5% of net sales compared with first quarter 2017 adjusted EBITDA of $95.6 million or 15.3% of net sales. In the fourth quarter, adjusted EBITDA was $121.7 million or 16.5% of net sales.

Moving on to our segment performance. The PCB segment had net sales of $616.4 million in the first quarter, up from $583.6 million in the first quarter of 2017 and down from $684.5 million in the fourth quarter of 2017. Gross margin for this segment was 14.3% in the first quarter compared to 18.2% in the same quarter a year ago and 18.7% in the fourth quarter. The year-over-year change in sales and gross margins were noted in my earlier comments. The PCB segment's first quarter operating income was $64.2 million, compared to $82.2 million in the same quarter last year and $102.3 million in the fourth quarter.

The electro-mechanical solutions segment had net sales of $47.2 million in the first quarter, up from $41.7 million in the first quarter of last year but down from $54.9 million in the fourth quarter. The year-over-year increase was due to stronger volumes in our automotive end market. Gross margin for this segment was 5.5% in the first quarter compared to 2.7% in the same quarter a year ago and 9.7% in the fourth quarter. The gross margin year-over-year improvement was due to the absence of special inventory reserves incurred last year. The sequential gross margin decline was due to lower volumes. The electro-mechanical solutions segment's first quarter operating income was $40,000 compared to a loss of $1.4 million in the same quarter last year and a profit of $2.8 million in the fourth quarter.

Corporate SG&A expense not directly associated with either of these segments was $18.3 million in the first quarter of 2018, $17.8 million in the first quarter of last year and $19.8 million in the fourth quarter.

Cash flow from operations was a use of $14.3 million in the first quarter versus a source of $49.6 million in the year ago quarter. The decline in cash flow in the quarter was due to increased working capital levels. As mentioned in previous calls, our cash flow can be choppy quarter-to-quarter. The combination of the seasonal slowdown in certain of our end markets, coupled with the timing of significant customer payments, resulted in the increase in Q1. Our fundamentals, however, remain under good control. And over the annual cycle, we expect to generate strong cash flow.

Cash and cash equivalents at the end of the first quarter totaled $352.6 million versus $409.3 million in the fourth quarter. Depreciation for the first quarter was $39.8 million, and net capital spending was $42.1 million.

Now I'd like to turn to guidance for the second quarter. We expect total revenue for the second quarter of 2018 to be in the range of $700 million to $750 million, which includes $55 million of revenues from Anaren for the partial period of approximately 10 weeks. This revenue guidance also includes approximately $11 million from the new revenue recognition standard. As a reference point, our second quarter revenue last year was $627 million. We expect non-GAAP earnings to be in the range of $0.34 to $0.40 per diluted share, which includes a positive $0.05 contribution from Anaren and a negative $0.02 headwind from the new revenue recognition standard. This compares to an EPS of $0.31 per diluted share reported in the second quarter of last year.

In terms of modeling Anaren for the rest of the year, we suggest growing revenues at a high single-digit growth rate year-on-year, with aerospace and defense growing faster than the communications end market. Operating margin should be modeled in the low 20s before synergies. And we are targeting annualized run rate synergies of $15 million by the end of 2 years from closing, with a linear ramp starting in our third quarter.

The EPS forecast is based on a diluted share count of approximately 107.5 million shares. Our share count guidance includes dilution from dilutive securities such as options and RSUs as well as roughly 2 million shares dilution associated with our convertible bonds, which is a function of our future stock price. As a reminder, for every dollar increase in the average share price above $14.26 during the quarter, our shares outstanding would increase by approximately 1.5 million shares.

We expect that SG&A expense will be around 7% of revenue in the second quarter. We expect interest expense to total about $16.2 million, which reflects the additional term loan associated with the acquisition of Anaren. Finally, we estimate our effective tax rate to be between 13% and 17%.

To assist you in developing your financial models, we offer the following additional information. We expect to record during the second quarter amortization of intangibles of about $6 million, stock-based compensation expense of about $6 million, noncash interest expense of approximately $3.4 million and we estimate depreciation expense will be approximately $41 million. The amortization of intangibles does not yet factor in the recent Anaren acquisition, which is pending completion of our purchase accounting process.

Finally, I'd like to announce that we'll be participating in the JPMorgan Technology, Media, and Communications Conference in Boston on May 17; the Stifel Cross Sector Insight Conference in Boston on June 12; and the Barclays High Yield Bond and Syndicated Loan Conference in Colorado Springs on May 22. We will also be hosting an Analyst and Investor Day in New York City on May 24.

That concludes our prepared remarks, and now we'd like to open the line for questions. Stephanie?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Matt Sheerin with Stifel.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [2]

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Just a question regarding your mobile -- your cellular business, which was down, I think, greater than you had expected in the March quarter, which no surprise, and then you're guiding down significantly. It looks like you're going to be down around 14% in revenue year-over-year in that sector. In the past time, you've given outlook for the year for different sectors. And your outlook at the beginning of the year, I think, was in the mid-single-digit growth range. And obviously, you're starting at a much lower base here. So what is your outlook or -- that you can -- the visibility that you have into Q3 and Q4 and your relationship with that big customer?

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [3]

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Sure, Matt. So one thing in terms of just keeping in mind, with the ASPs the revenue itself, if you look -- so Q1 to Q1, actually we grew on the cellular phone side. You're right on the Q2-to-Q2 compare we'll be down. But if you look at that and then you think about the overall market forecast of 5% to 8%, it's -- that's not all of that difficult of a hill to climb given the ASP move between this -- the first half of this year and the first half of last year. And remember that in Q3 last year, we experienced a late start-up of -- particularly on the cellular side, and so that impacted our revenues in the third quarter. So as we look at the full year, we're still comfortable that we'll be able to move into that range of 5% to 8% provided we hit the ramp schedules as expected. And certainly at this point, we're in that -- the prototyping that's sort of the normal pace in terms of prototyping stage that you would expect to see.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [4]

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Okay. And last year, as you just pointed out, the seasonality of that business was different than you typically see. Are you getting a sense that there's more normal seasonality in that business this year versus last year? Or is it hard to tell?

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [5]

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Well, I think, yes, if you look at it, last year was a significant technology shift and, of course, on the printed circuit board side and with other -- in other areas as well. That -- the extent of the technology shift, at least on the PCB side, that we would expect to see this year would be left. That would certainly lead you to look at the PCB ramp schedules being one that would be more typical in terms of ramp cycles. Of course, we're not in control or have any influence on the rest of what goes in a phone. So I'm saying that with a grain of salt, but that certainly from what we're seeing and on the PCB side, a more normal technology shift as we look at this year's cycle.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [6]

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Okay. That's helpful. And then regarding Anaren, you talked about the contribution in the aerospace and defense area, which is significant. And then with your guidance on the network/communications in the June quarter, I think you're looking for a significant growth. Is that -- how much of that comes from Anaren in terms of the sequential growth in that network/communications business? Is the base business going to be flat to up slightly and the rest will be Anaren to get to that number that you have, the percentage?

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [7]

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Yes, yes. That's a good way to think about it.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [8]

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And is the -- I know your network/comm business has been declining it looks like 7 quarters in a row year-over-year. And so question one, is Anaren growing that business? And are they in different parts of the business, if they are? And second, when do you expect to kind of turn the corner on this business, which has obviously been a drag on top line? I know there's 5G. What's your outlook there, Tom?

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [9]

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Sure. And yes, the Anaren business very different from the standpoint of supplying RF components that are then used in the base station but also the microcell. And so as you're building on top of the infrastructure, essentially they would continue to see business. From a PC board standpoint, the PCB business is oriented around that base station rollout and so really see its growth as the infrastructure is laid out globally. So as you remember, we had a very nice spike in demand in networking/communications back with 4G as 4G rolled out. And at that point, at the peak of that 4G rollout, the telecom portion of our networking/communications space really grew to about 50%. When -- now we're back down and have been back down to less than 1/3 of networking/communications being that base station-related demand. So from a PCB standpoint, we would expect to see a similar kind of cycle with 5G. From an Anaren benefit standpoint, you would see again that initial spike certainly with base stations rolling out but then on top of that an ongoing strong business profile with microcells.

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Operator [10]

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Our next question will come from William Stein with SunTrust.

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William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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In automotive, I think we're well aware that the predictability or the, let's say, the pipeline of visibility tends to be very strong. You get design wins early there. But we noted that recently there was news of a fire at a factory of a competitor. And I'm wondering from a share perspective does that provide an opportunity? And are we seeing that in either of the near- or further-term outlook?

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [12]

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Sure. Thanks, Will. Yes, and I'd say -- so the fire that occurred, for those who haven't heard, was at a Chin Poon facility in Taiwan. And Chin Poon is really -- is the leader in automotive. TTM, at least as far as market forecasters are concerned, come -- is the second in position there. The facility affected was in Taiwan, not their largest facility, which would be in China. As -- and I'd really like to say, first and foremost, this was just a real tragedy, and our sympathies go out to the first-line responders who lost their lives in that incident as well as -- I understand there were 2 contract employees who were affected. And that, more than anything, boy, just really makes you concerned and heightens our attention to safety in our facilities. And -- but beyond that, in terms of customer support, certainly, we're determined to support our customers as they go through, as they experience the aftereffects of this. From a TTM overall effect, we're running very -- pretty much full out in our major automotive facility in China. So while we're going to go all out to support customers, I think it's a rather immaterial effect in terms of our prospects, and it's reflected in that second quarter forecast that we gave you.

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William Stein, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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Appreciate that thoughtful answer. Maybe one other -- any -- you've already given us some good details about Anaren and how we should expect it to progress through the year. Any early lessons or, let's say, surprises that might have -- that you might have seen in the Anaren business as you've closed it relatively recently?

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [14]

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Sure. I would say that more than anything else it's just been reinforcing our excitement about the business, about the prospects. I think the -- if anything, the customer reaction, certainly on aerospace and defense side, has been gratifying, I think, for all of us, I think the assurance that Anaren had found a good home for the long-term business. And then the synergy -- the revenue synergy opportunity in terms of the combination of just fantastic RF engineering capability with TTM's breadth of technologies on the PCB side has again excited our customers and also our employees. And so as we're planning now for the integration, for us it's really -- the key is prioritizing opportunities, making sure that we grow properly with those opportunities and that we take care of our customers. And that's where our attention is focused at this point. But really, tremendously exciting for us, and we're happy to be here in Syracuse today making this call.

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Operator [15]

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(Operator Instructions) And we will move next to Steven Fox with Cross Research.

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Steven Bryant Fox, Cross Research LLC - MD [16]

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A couple of questions from me. First of all, when you think about all the auto opportunity that you mentioned that's ramping just this year, can you give us a sense -- I know it's a little early, but a sense for what you think that means for your second half auto versus first half auto sales for the company? And then I had a follow-up.

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [17]

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So generally, we're looking still at a year-on-year growth level of that in the market forecast to range between 5% and 8%. Obviously, we're looking at what looks like a good, strong second quarter, which is tremendous as we -- and we will certainly update this as we get through the second quarter. But at this point, overall, comfortable with the 5% to 8% growth rate. We're very, again, excited about the RF area and ongoing development going on at our customers and our ability to provide the right kind of support for those customers during the course of this year. Most of that, from a commercial standpoint, will impact volume next year and the year after. But even the work that we've done the last couple of years is now paying off and contributing to that 5% to 8% percent growth rate.

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Steven Bryant Fox, Cross Research LLC - MD [18]

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Great. And then in terms of just thinking about the technology mix, like you mentioned, you got an ASP benefit year-over-year. How does that play out as you anticipate your mix into the rest of the year? Does the ASP year-over-year benefit sort of dissipate because these products become more standard? And if so, can you give us a sense for any other color around that?

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [19]

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Sure. So the ASP reference was specific to cellular and really was a result of that large technology change as we move to what's called a substrate-like PCB processing capability, and that was really driven by the need to get to finer lines and spacing or more dense circuitry in cellular phone. So that major move in technology, which occurred last year, of course, resulted in an ASP move. What we would see, as I mentioned earlier, this year less of a technology, therefore less of an ASP move. And so as you start thinking about ASPs, third quarter and fourth quarter to last year's third and fourth quarter, there would be a much less pronounced difference in ASPs. Of course, earlier in the cycle, you get the benefit. They're usually -- versus late in the cycle, so versus second quarter into third quarter. So the previous cycle to the new cycle, there will generally be a move up in ASPs. But given the fact that technology is not changing significantly, you'll see a rather -- that would be a smaller move. And then during the course of the ramp, you'd see that ASP -- a regular sort of reduction in the ASPs during the course of that ramp. So hopefully, that gives you a feel for what we're seeing.

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Operator [20]

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Our next question will come from Paul Coster with JPMorgan.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [21]

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Just a couple of quick ones. First of all, you've put in place some dedicated capacity for a major cell phone customer and the utilization rate fell with the -- as their products went through its cycle. Have you found additional customers for that capacity? And how should we think about that in terms of its impact on margins over the course of the year?

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [22]

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Yes. So as there has been additional work done on this technology, I think, you probably have seen there have been some announcements. I think both from an IP standpoint out of Korea as well as out of China, adoption I expect will be occurring through the course this year and then into next year. And from a TTM standpoint, again, I -- we're -- we look at -- when we hit that third quarter and fourth quarter, really, we're in full ramp. And so the effect that -- or any effect that you would see would be more on the tail end of the ramp in Q1, Q2 next year, so relatively small and for the next -- certainly through this year's cycle. And then we'll hope to see the benefit of that spreading of the technology as we move forward over the next several years.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [23]

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The other thing is that we're seeing in the E-MS space some evidence of the supply chain buying long lead time inventory and investing ahead of some of the customer ramps. I'm not quite sure what to make of your balance sheet at the moment just looking at it for the first time. But is there anything we should know regarding the way in which inventory is evolving heading into what was -- particularly, we've got onboarding Anaren and heading into the second half of this year.

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [24]

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Yes. Just -- Paul, I did want to cover off on sort of the second part of your first question which -- also to finish up on the technology because what you're seeing here is driven by circuit density. That is a drive that we see beyond cellular phone. So I would expect that you'll start to see that technology move into other areas, such as computing and automotive here as additional reliability data is gathered, so certainly a technology that has legs in terms of the breadth of application for it. With that, let me turn it over to Todd for the answer on inventory.

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Todd B. Schull, TTM Technologies, Inc. - Executive VP, CFO & Treasurer [25]

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Yes. So when you look at our balance sheet right now, it looks very strange, I think. You see -- inventory looks like it's way down year-over-year, and then we have this new asset that's called contract revenue or something like that, which is really this new revenue standard that's kicking in. And so what used to be WIP and finished goods inventory is now in this accrued revenue, if you will, asset. And it really muddies -- it makes it harder for you folks to be able to see or to discern what's happening at the underlying inventory levels. What I can tell you on a more apples-to-apples basis is that inventory is relatively unchanged absent this revenue recognition change rule -- or rule change. When you looked at our cash flow and some of my comments around cash flow, really, the bigger issue there wasn't our inventory. It was our receivables, which is really more a function of the timing of customer payments and whatnot. That's really what we saw the challenge in Q1 versus Q4, for example. But inventory levels in general are not too bad. What you're getting a lot in the E-MS world, because I've been reading about that also, is really kind of some of the very discrete components where they're having trouble, and that's really not on the circuit board side.

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Operator [26]

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(Operator Instructions) And we'll move next to Woo Jin Ho with Bloomberg Intelligence.

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Woo Jin Ho, [27]

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I just have one quick one in terms of the cellular phone market. I appreciate that you expect revenues to be down on a sequential basis given what's happened to your largest customer. But in terms of the near-term visibility, how should we think about order timing in terms of the next cycle? I mean could we potentially see orders come in a little bit sooner late into the June quarter? Or do you still expect that to be into September quarter?

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [28]

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Sure thing, Woo Jin, yes. Just as I mentioned earlier that because the extent of the technology move, again from a PCB perspective, is rather -- it's not -- we're not seeing a huge change. That allows for what I would call a more standard launch versus last year. But what I -- what we can't -- what I can't comment on is, again, what other areas that would affect the end product. And there we just don't have the visibility. So -- but certainly, as we prototype, we're very much on schedule for what I would consider a more normal ramp schedule for the phones.

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Operator [29]

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It does appear there are no further telephone questions at this time. I'd like to turn the conference back over to Tom Edman for any additional or closing remarks.

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Thomas T. Edman, TTM Technologies, Inc. - President, CEO & Director [30]

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Thank you. And I'd like to just close quickly by summarizing some of the points we made earlier. First, in the first quarter, we delivered results that were in line with the guidance we provided. While our first half is challenging, we are certainly executing well, and we're excited by the product ramps in the second half of the year as well as the integration of Anaren. I would -- finally, I'd like to thank our employees, our customers and our investors for your continued support and wish you all a good evening. Thank you.

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Operator [31]

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This concludes today's conference. Thank you for your participation. You may now disconnect.