FormFactor Inc (FORM) 2003 Q4 法說會逐字稿

Good day, everyone. Welcome to the FormFactor fourth quarter and year end earnings conference call. This call is being webcast live on the Investor Relations page of FormFactor's website at www.formfactor.com. At this time all participants are in a listen-only mode. As a reminder today's call is being recorded. I would now like to turn the call over to Ms. Erica Manion, Investor Relations for FormFactor, Inc. Ms. Manion, you may begin.

Thank you. Good afternoon, everyone; and thank you for joining us for FormFactor's 2003 fourth quarter and fiscal year end earnings conference call. Shortly after market today the company put out a press release announcing it's fourth quarter and year end financial results. If you did not receive a copy of the press release you can obtain one from the investor section of FormFactor's website at www.formfactor.com. You may listen to an audio replay of this conference call by dialing 888-203-1112 and entering reservation number 123050. Also, a webcast replay will be available in approximately two hours on the investor section of the company's website. With me today is Igor Khandros, President and Chief Executive Officer; and Jens Meyerhoff, Senior Vice President of Operations and Chief Financial Officer. Igor Khandros will begin with an overview of the company's achievements and progress during the quarter and for the fiscal year. Jens Meyerhoff will provide you with details of the fourth quarter financial results and financial guidance for the first quarter of 2004. We will then open the call up for questions. The company has allocated approximately one hour for today's call. During the Q&A period as a courtesy to those individuals seeking to ask questions, we ask that participants limit themselves to one question and one followup. Now, I would like to make a brief statement regarding forward-looking remarks that you may hear today on the call. During the course of this call, the company will make projections and other comments that are forward-looking statements within the meaning of the federal securities laws.

These statements include a number of risks and uncertainties. In addition, statements regarding design wins and bookings should not be read as predictions or projections of future performance. These statements are based on current information and expectations that are inherently subject to change and involve a number of risks and uncertainties. We caution you that actual events or results may differ materially from those in any forward-looking statements due to various factors including, but not limited to, the demand for certain semiconductor devices, the rate at which semiconductor manufacturers make the transition to 110 and 90-nanometer technology nodes, the rate at which semiconductor manufacturers expand their 300 millimeter wafer manufacturing capacity, the performance and market acceptance of the company's new products or technologies, the implementation of volume production of the company's new products, changes in semiconductor manufacturers' test strategies, equipments or processes, and the company's relationships with customers and companies that manufacture semiconductor test equipment.

Additional information concerning factors that could cause actual results to differ materially from those in any forward-looking statements is contained in the company's latest form 10-Q filed with the Securities and Exchange Commission, in subsequent SEC filings made by the company, and the Safe Harbor language in the earnings release sent out today. Copies of the filings made by the company with the SEC are available at the Investor section of the company's website. The company assumes no obligation to update any statements made 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. It is now my pleasure to introduce Igor Khandros, President and CEO of FormFactor. Igor.

Thank you, Erica. And thank you for joining FormFactor's fourth quarter earnings call. With the end of the fourth quarter, we have completed our first fiscal year as a public company. We are leaving 2003 at the turning point in the industry's current cycle. Looking back, 2003 has been quite a remarkable year for FormFactor. Our revenues grew 25% in 2003 over 2002. Our penetration strategy into new market segments was successful. We increased our revenues in flash memory by 97% and our flip chip logic revenues grew by 37%. We demonstrated strong operating leverage with an incremental operating margin of 29%, increasing our operating income by 86% in 2003. And we increased our cash and marketable securities from $37 million to $181 million. In the fourth fiscal quarter, FormFactor continued it's growth with increased momentum. As described in our press release, our revenues were up 21% sequentially and 42% year-over-year. Our net income increased by $1.6 million sequentially and our bookings for the fourth quarter were up 28% sequentially, and 57% year-over-year. All of our fundamental growth drivers contributed to FormFactor's fourth quarter results with a particularly strong contribution from the DRAM segment. Let me remind you that the source of the business resilience which we have exhibited in the past was provided by the diversified and the times of setting contributions of product design changes, technology and architecture transitions and capacity expansions.

Over the past three years, we have seen product designs and technology transitions as the primary growth engines in our third markets. While some semiconductor manufacturers began the transition to 300-millimeter wafer capacity early in 2003, it was during the fourth quarter of 2003 that capacity expansion became the third cylinder of our growth engine. While we experienced significant growth during the first nine months of 2003 outside of DRAMs, the fourth quarter's growth was mainly driven by our strong leadership position in the DRAM market segments. During our last conference call we reported to you a 23% sequential increase in our DRAM bookings. This strength continues during the fourth quarter with another 66% sequential increase in bookings. Given the turns nature of our business, DRAM revenues grew by $7.5 million, or 53% over the prior quarter; and 35% over the same period last year. Since our IPO we tracked with you the major transitions occurring in the DRAM industry: 110-millimeter technology, 512 megabit density, 300-millimeter capacity rams, and DDR II architecture transition. During the fourth quarter we saw the following developments in our business: 110-millimeter shipments gained strong momentum after the small pause encountered during the third quarter.

Our DRAM 110-millimeter revenues increased by 124% sequentially, and accounted for 49% of our DRAM revenues in Q4; compared to 34% in Q3. As we experienced production ramps of earlier designs. The 110-millimeter bookings continued to underline this momentum indicating that we should see substantial completion of this tooling cycle during the first half of 2004. The 512 megabit designs accounted for $7.8 million of our revenues during the fourth quarter, up from $5.9 million in the third quarter. The industry continues to move to the 512 megabit primary due to an increase and an end user demand for notebook computers in both consumer and corporate applications. However, 256 megabit design based revenues increased from $6.5 million during the third quarter to $10.5 million in the fourth quarter; indicating that we may see further product designs in this density transition. The bringup of new 300 wafer capacity continued to be an important growth driver. Our leadership position in high power leads and 300-millimeter wafer probe continues to make us a key partner and enabler to our customers, as evidenced by another 39% sequential increase in 300-millimeter DRAM revenues in the fourth quarter. DDR II shipments increased to $3.3 million during of the fourth quarter, compared to $478,000 during the third quarter of 2003; showing the first signs of this significant architecture transition. Consistent with our reports on prior calls, we expect this transition to gain momentum by mid-year of 2004. Historically, the DRAM market has been solely driven by PC applications such as notebooks, desktops, and servers. During the past six months we have seen an increase in design activity for low power DRAM devices such as pseudo SRAMS and mobile rams, which are utilized in low power portable applications particularly, later generation cell phones.

When we entered the second half of 2003, we had indications that increasing low power DRAM revenues would be a 2004 event. During the fourth quarter, however, we received a request from one of our customers to accelerate the schedule. This acceleration drove upsides in both bookings and revenues, with low power DRAM related revenues accounting for $4.3 million of our fourth quarter revenues. After a significant increase in flash memory revenues during the third quarter, driven by a tooling event at one major customer, we saw revenues for flash memory applications decline from $7 million in the third quarter to $4 million in the fourth quarter. Flash revenues increased 23% over the same period in the prior year. Flip Chip logic based revenues grew by 5.4% sequentially since the substantial completion of the tooling cycle of some current production designs we reported to you during our last call.

The significant customer concentration in this market segment has and will continue to drive quarter to quarter cyclicality from the tooling cycles. If addition, we are experiencing some delays in the product introduction of our blade runner 175 product line due to product qualification. as well as volume manufacturing ram. The combined impact of these factors caused a sequential decline in bookings of $1.9 million. During the second half of 2003, FormFactor's customers entered into a cycle of increasing demand driven by rapid semiconductor technology changes and the beginning recovery in end user demand. Through 2003, we have successfully executed capacity expansion plans in our existing manufacturing facilities that have allowed us to meet our customers' dynamic demands. Our investment into the accelerated transition to 7X24 shift structures paid off during the fourth quarter. The strong surge in bookings during the fourth quarter was met with increased capacity which enabled us to generate upside in revenues over our guidance. Looking ahead to this first quarter of 2004, we will continue our manufacturing hiring strategy from the fourth quarter as the near term capacity constraints are primarily head count related. And we are pressing forward with the buildout of our new production facility with the current target for initial equipment installation by mid-2004.

We are entering the supply constraint phase of the industry cycle. As our customers race to market with new products, FormFactor's immediate focus will be on satisfying the surge in demand for our enabling products. We will balance that overriding priority with our continued investments in long-term growth; including new products, and increasing manufacturing capacity. We will keep our focus on driving consistent leverage from growth in order to safeguard FormFactor's steady progress towards achieving our long-term financial performance model. With that, I hand it over to Jens.

Thank you, Igor. Good afternoon, everybody. Before I start my overview and discussion of our financial and operational performance during our fourth quarter I would like to inform you that FormFactor will be attending at the following conferences during the first quarter of 2004: Thomas Weisel Partners Tech 2004 conference in San Francisco on February 2nd; Goldman, Sachs Technology and Investment Symposium 2004 in Phoenix on February 24; and Morgan Stanley's Semiconductor and Systems Conference in Dana Point on March 2. We are looking forward to seeing you at one of these events. With that let me address our financial performance.

Revenues for the fourth quarter were $31.5 million, which is an increase of $5.4 million or 21% over the third quarter of 2003; and an increase of $9.3 million or 42% compared to the same period of last year. Revenues by geographical regions were: revenues for North America in the fourth quarter of 2003 were $11.5 million, down from $13.6 million in the third quarter of '03 and up from the $10.7 million in the fourth quarter of 2002. Revenue in Europe was $4 million for the fourth quarter of 2003, up from $1.6 million during the third quarter of 2003, and down from the $4.3 million during the fourth quarter of 2002. Revenues in Japan were $9.3 million in the fourth quarter of 2003, up from $5.9 million in the third quarter of 2003, and up from $2.2 million during the fourth quarter of 2002. Revenues for Asia Pacific accounted for $6.7 million in the fourth quarter of 2003, up from $5 million in the third quarter of 2003, and up from $5 million from the fourth quarter of 2002. Please, note that revenues for North America include shipments to Korean customers with the North American subsidiaries.

Our revenues by market segment breakdown as follows: Revenues for DRAM based applications were $21.5 million in the fourth quarter of 2003, up from $14 million during the third quarter of 2003, and up from $15.9 million during the fourth quarter of 2002. Flash memory related revenues were $4 million in the fourth quarter of 2003, down from $7 million in the third quarter of 2003, and up from $3.3 million in the fourth quarter of 2002. Flip chip logic related revenues accounted for $5.3 million during the fourth quarter of 2003, up from $5 million during the third quarter of 2003, and up from $2.9 million during the fourth quarter of 2002.

Bookings by market segment reflect a strong surge in DRAM demand. Bookings for DRAM applications in the fourth quarter of 2003 were $28.5 million, up from $17.2 million during the third quarter of 2003, and up from $15 million during the fourth quarter of 2002. Flash memory related bookings were $4.6 million in the fourth quarter of 2003, down from $5.9 million during the third quarter of 2003, and up from $3.9 million during of the fourth quarter of 2002. Flip chip logic related bookings the accounted for $3.8 million during the fourth quarter of 2003, down from $5.7 million during the third quarter of 2003, and down from $4.9 million from the fourth quarter of 2002.

Our current ratio for the fourth quarter was 47% compared to 48% in the third quarter of 2003. The decline in turns ratio has been driven by further increases in 300-millimeter DRAM orders which command longer lead times, as well as the customers booking their orders into the second quarter. Gross margins for the fourth quarter were 50.9%, up from 49.3% in the third quarter, and up from 50.7% in the fourth quarter of 2002. The increase in gross margins was driven by both increased revenues and a continued favorable product mix. As indicated to you during our last conference call, we expected further efficiency gains from our transition to 7X24 operations. I am pleased to inform you that we reached an incremental gross margin performance of 59% during the fourth quarter, compared to 56% in the third quarter, and 51% in the second quarter of 2003. Incremental gross margin performance will be impacted as we begin to incur non-recurring expenses related to the bringup of our new production facility; as well as continued step functions from further capacity increases at our existing production site.

Operating expenses increased from $9.3 million in the third quarter to $10.2 million in the fourth quarter of 2003. The increase is the result of increased personnel expenses and R&D as well as increased SG&A spending for sales commissions driven by the increase in bookings and revenues. Operating expenses, excluding stock based compensation, continued to decline as a percent of sales from 34% in the third quarter of 2003 to 31% in the fourth quarter; as a result of higher revenues. Operating income for the fourth quarter was 18.5% of sales, or $5.8 million, an increase of $2.3 million over the third quarter of 2003, and an increase of $3.4 million over the fourth quarter of 2002.

We continued to generate strong operating leverage from our revenue growth with an incremental operating margin of 43% in the fourth quarter, and 29% for the fiscal year 2003. Operating income for the fourth quarter included $384,000 for the amortization of deferred stock based compensation resulting from pre-IPO stock option grants, compared to $396,000 in the third quarter, and $289,000 in the fourth quarter of 2002 for such expenses. Interest income for the quarter was $416,000, reflecting an average yield of 1.04% for primarily tax exempt commercial paper. Our accounts receivable denominated in Japanese yen increased further as a result of continued business momentum in Japan. The current weakness of the U.S. dollar created gains from foreign currency exchange of $417,000, or $258,000 after taxes during the fourth quarter of 2003. I mentioned during our last call that we were evaluating options to minimize the currency exchange risk; and in light of the business momentum in Japan we plan to implement certain programs this quarter. The tax rate for the quarter was 38%; consistent with the third quarter of 2003, and down from the 41% in the fourth quarter of 2002. The year-over-year decrease in the effective tax rate was due to increase in R&D credits, as well as higher foreign sales during the fourth quarter of 2003. Net income for the quarter was $4.1 million, or 10 cents per fully diluted share on a pro forma basis compared to $2.5 million or 7 cents per pro forma fully diluted share during the third quarter of 2003, and $1.6 million or 4 cents per pro forma fully diluted share during the same period in 2002.

Please refer to our press release on the investor section of our website for a detailed presentation of the share count reflecting the recent followon offering, the IPO, and the conversion of our preferred stock; and the reconciliation of the pro forma presentation to GAAP. Cash and marketable securities increased by $60.2 million during the fourth quarter. The increase was the result of the completion of the followon offering in November which provided net proceeds of $55.9 million to the company. Cash flow from operations during the fourth quarter of 2003 was $4.4 million, compared to $3.9 million in the third quarter of 2003, and $6.2 million during the same quarter of 2002. We spent $3.4 million in capital expenditures during the fourth quarter against depreciation and amortization of $1.3 million. Our DSOs increased from 48 days during the third quarter to 51 days in the fourth quarter of 2003, driven by further increases in revenues in Japan. Net inventory for the fiscal year ended December 27, 2003, increased by $3.8 million as a response to the increase in demand and continued ramp of production.

This brings me our guidance for the first quarter of 2004. We expect continued revenue growth for the first quarter. We target revenues of $34 to $35 million. Please, note that our guidance for revenue is subject to turns business expected during the first quarter of 2004, as well as overall capacity availability at FormFactor and it's suppliers. Operating income is expected in the range of 19 to 20% of revenues. We expect stock based compensation of $417,000 for the first quarter and we expect to incur approximately $300,000 of non-recurring expenses related to the bringup of our new production facility. We target earnings per share of 12 cents per fully diluted share. With that, we will now open the call for questions. Operator.

Thank you, the question and answer session will be conducted electronically today. If you would like to ask a question, signal by pressing the star key followed by the number one on your touchtone telephone. If you are using a speaker phone, make sure that your mute button is turned off to allow your signal to reach our equipment. If you find that your question has already been and remove yourself from the queue by pressing star 2. Press star one to ask a question. We will take our first question from Edward White with Lehman Brothers.

I was wondering if you could talk a little bit about which of the major DRAM technology transitions you think will be most important. Clearly DDR II is ramping up and that will become more significant, but how do you see the relative importance of the others as we go through the rest of the year?

This is Igor. We are well into 110-millimeter transition. The 110-millimeter technology is an enabling processing technology for DDR II, and actually for some mobile RAMs as well, so we are well into that as we just mentioned. The 512 megabit, some of it is still ahead of us. DDR II, as we mentioned, is a mid year event. And as we discussed, mobile RAM or low power RAMs is a very interesting development that drove significant demand in Q4, and there was reason to believe it will continue this year.

Okay. And the 300-millimeter transition you see that continuing as we go through the year, you know, you see momentum continuing to build.

Yes, we believe quite a bit of it is still ahead of us.

Okay then --

Sorry.

Oh, sorry.

Go ahead.

Okay. And then the one other followon. Is the guidance for 12 cents per share, does that include or exclude the $300,000 non-recurring for the new facility and the $417,000 stock based compensation?

Ed, this is Jens. The 12 cents per share is GAAP net income, so it would include both of them.

Okay, okay. Great, thank you.

We'll take our next question from Jim Cavello with Goldman Sachs.

Good afternoon. Thanks so much. A couple quick questions. First on the mix. Do you think the strength in DRAM in the fourth quarter was more seasonal, or is that just more of a cyclical effect at this point?

I think it is a testimony to where the end user demand is for various products, and it is a testimony to continuing transitions--transitions that we have tracked. And that's in 110-millimeter, in 512, in 300-millimeter and now we have this mobile, or low power, RAM that is increasingly used in cell phones. So, of course, you know, we are not the oracle for seasonality. But I think it just -- these are fundamental, end user driven demands and uptick in the market.

So to that end would you expect the DRAM strength to continue on a relative basis into the first quarter then?

The answer is, yes.

Okay, great. One final question for now. You talked about we're entering the capacity constrained portion of the cycle. Are you worried about double bookings at all in terms of orders? I mean you had terrific order growth. Are customers starting to get worried they may be placed on allocation, and if so do you see them placing any double orders? Thanks so much.

I will take a shot at that question. This is Jens. If you look at our business since the business is highly custom to the ship design I think we are less subject to double ordering because it means really to a customer to place designs in multiple and multiple ends of the supply chain; and with that I think we don't -- we don't see too much of that. At the same point in time, as you know, we have also cancellation language with respect to order placement which makes double books at least from that end potentially painful event.

That's very helpful. Thanks so much.

We'll take our next question from Bill Lu with Morgan Stanley.

This is Gary Schway with Morgan Stanley. A quick question on the DDR2 II transition. I think a lot of people are placing their bets on the extent of mainstream adoption. What are your views, what do you think mainstream adoption will come whether '04 or '05; and if I were to kind of overlay the SD RAM to DDR transition to the DDR to DDR II transition occurring this year, what kind of year-over-year growth rate could I expect from the $3.3 million that you guys got from the DDR II in the fourth quarter?

As I mentioned, we see DDR II at FormFactor as a mid-year ramp event basically. And all the other industry trends probably are better addressed with their makers or, you know, companies that do research.

Okay. But if I look at DDR II as a percentage of revenues, $3.3 million in Q4, if I was to apply the same kind of ramp rate from SD RAM to DDR what number should I be exiting fiscal year 2004 with?

This is Jens. I probably want to jump in here really quick. We real haven't given historically that far out guidance on these technology transition because there are many factors that drive these transitions. So we probably want to stay away from giving you an idea of DDR II growth. However, what we have communicated in the past is that the overall DDR II architecture is a huge benefit with respect to our product capability. With respect to pin count, with respect to operating voltages et cetera so we are continued to be very excited about the DDR II ramp. You brought up another point that I want to emphasize that I see as a positive development as well; and that is there has been an increase in SD RAM shipments again. There is also, as Igor mentioned, a lot more speciality DRAMs like low power DRAMs coming into the market; which means we are seeing overall much more design diversity right now in our industry, which drives the demand for more wafer probe cards.

One final question, you talked about an improving mixed shift. Can you give me a sense as what percentage of revenues are coming from the 253 buy probe card solution?

When I refer to the mix shift we usually categorize it in high end, lower parallels in product, and so we continued-- as Igor mentioned, we continued increased demand--we see increased demand for 300-millimeter probe which will drive high parallels and probe solution 128 and above.

Okay.

We'll take our next question from Mark Fitzgerald with Banc of America Securities.

Just a followon from the last question here. Your guidance on DDR II by the second half of the year being a factor, are you assuming that pricing comes down significantly on DDR II technology relative to DDR?

No, we are basing it on evaluating how we historically see initial orders and then follow orders to happen and basically discussing these things with customers. So where it looks right now it is a mid of the year ramp event.

So this discussion about the mother board manufacturers having a price with DDR II technology is not factoring into your outlook?

No, we track our own indicators and try to understand what it means for FormFactor.

Okay. Has there been any discussion with your own-- with the chip customers at this point about this pricing issue?

We are not in the middle of price discussions, Mark, as far as DDR pricing goes or DDR to DDR II.

Okay. And then just switching gears here, can you give us a quick update in terms of the transition to the new manufacturing facility, where you stand and what has got to still be done here?

Okay. I'm going take that one. So we are at this point in time on track with the communicated plan. We told you that we would finish substantially the buildout of our production facility, we refer to as building three, in the first half of this year; and that we would see first equipment installation by the second quarter and that plan remains on track.

Okay. And is there any guidance for the charge for the next quarter here?

So I actually so this one I can give you because I disclosed it before. We said for the second quarter non-recurring expenses would be in the range of $1 million to $1.2 million.

Okay. Thank you.

Our next question comes from Kevin Vasily from Susquehanna Financial Group.

Two quick questions. First, seeing any initial interest from customers designing at geometries below 110 nanometers, and secondly did you add any new customers in the quarter? Thanks.

So at this point in time if you look at -- if you look at 90-nanometer designs in DRAM, I think there is very moderate activity at this point in time. So we believe that at this point in time the industry is really in the completion of of the 110 conversion; however, we have seen first 90-nanometer designs but not at material revenue levels at this point in time. With respect to new customers we really haven't disclosed any new customers from our perspective; we disclosed customers during the last quarter, five new customers and our philosophy is that we disclose new customers as they generate material revenues.

Great, thank you.

From CIBC World Markets, Peter Wright.

Just a followup on the last question, was there any significant customers you can list for us in 2003?

Peter, this is Jens. I probably -- I mean if you look at -- if you look at the key DRAM players, you look at our geographical distribution with respect to strength in Japan, I think you can probably make out which customers were significant growth drivers during the fourth quarter; and with respect to more detail please wait for our K and Q to be filed and you will see the disclosable customers.

Just two other questions real quick. On market share you've had a nice trend from '99 to 2002. One of you competitors has, in the past couple weeks, seen a recovery in their test business; and I'm wondering if you were to project the '03 market share do you see that trend continuing?

We normally wait for the industry reports to -- that would detail that and normally it comes out, I believe, around April, May. And so we do deliver those market shares.

Staying north of 50%.

Let's wait for the report.

Okay. And then the final question is, in your analyst day you referred to some expansion into new markets specifically burn in interfaces. Would you be able to give us an update there?

This is a new product for us and represents significant change in what customers would need to do to produce so-called known good dye which are unpackaged, fully validated devices. We believe the trend will take place first in mobile RAM applications; and, right now, we are basically with engineering products at customers and we see this again as -- to commercializing towards the year end this year.

So maybe in addition we had I think during the analyst day we referred to one customer in beta product mode, and we added a second customer operating with this product now in beta mode.

Great. And then if you could just comment on the gross margins of that business relative to the probe card side?

I think, number one, we never have broken down the gross margins with that granularity and I want to say away from; also we are still in a beta release so it would be from that perspective also too early to talk about that.

And a last question, is there any other lockup dates or all shares freely traded at this point?

So lockup, as you know, we had the followon offering. The followon offering locked up an additional 11.2 million shares. The expiration of the lockup for those 11.2 million shares is 5.6 million will be released on February 15th. And the remaining 5.6 million will be released on March 15th of 2004.

Great. Thank you very much.

Next we will go to Steven Rosten from Glen Capital Management.

I have one question. One of the things that you talked about was the-- you were seeing more diversity in terms of your design wins; and I think you were referring in particular to the low power or mobile RAM. Can you discuss what you are seeing in a little bit more detail and what implications that has for you, whether that means that there is higher revenue for you or that the same revenue is split across different product -- different products of smaller volumes of probe cards? Thank you.

Thanks. We will, we certainly saw material bookings and revenue impact in 2004 from these products. As we mentioned, originally we considered it to be a 2004 even but that got pulled in. It is driven by two applications in cell phones. Both for broadband processor and for applications co-processor, and in one segment pseudo SRAMs which is a DRAM core with SRAM interface, and the other one so called mobile RAMs. There are different names for them and they are in both cases very low power devices. And because of the nature of these devices they require more complex testing, longer testing; and because of the lower voltages it drives requirement for very high performance probe cards. So all of that results in pretty good demand for FormFactor products. As these applications ramp we see us benefitting by it. So, now, in this case I would say that the spread of this business among memorymakers is not that different from say DDR or DDR II. I think that was one of your questions.

And, once again, please press star one if you would like to ask a question. Next we will take a followup question from Mark Fitzgerald.

Can you give us a sense how many customers you are working with on DDR II at this point?

It's the DRAM industry, Mark.

So it is everybody?

It is the key players in the DRAM industry. Since you allow me, since you are coming up with a followon question, I wanted to talk about your comment on the pricing. If you look at historically, the pricing discrepancies in the architecture really hasn't had a major impact on our business. People will tool the line as they need to intercept a ramp.

So your point being that design activity wouldn't be slowed down by any sort of pricing issues?

At some point in time somebody will ship at a given price level these devices and the transition driven by the end demand for these devices will require you that you tool the line.

Okay, thank you.

Thanks.

We also have a followup question from Peter Wright.

Just on pricing again. Is it a fair assumption just for modeling purposes to help us out, is it a fair assumption to make that your technology that serves as the leading edge, for instance, DDR II versus the SD RAM cards sell with better margins?

I think essentially what we said in the past that we see favorable mix development of high parallels and probe cards, and if those parallels and probe cards have increased complexity and performance and we are selling in a total cost of ownership model; then you are on the right path.

And can you help us with any type of timing that you have historically seen, you know, is it -- is it -- a 4 to 6 quarter trend that you typically see the pricing premium sustainable or is there anything there that we should be aware?

I don't think we have ever really guided anybody to like a price life cycle momentum. As you know in the high parallels segment there is really-- at this point in time FormFactor is the supplier for 300-millimeter high parallels and microprobe.

Great, thank you.

And there are no further questions at this time. I'll turn the conference back over to Mr. Khandros for any concluding comments.

Thank you very much for participating in our earnings call, and we really appreciate your continuing interest in the company. Thank you and hope to talk to you at the next call.

That does conclude today's conference call. Thank you all for your participation. You may now disconnect.