FormFactor Inc (FORM) 2004 Q1 法說會逐字稿

Good day, everyone, and welcome to the FormFactor first-quarter 2004 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. Just as a reminder, this conference is being recorded.

Now, at this time, I would like to turn the conference ever to Ms. Erica Mannion, Investor Relations for FormFactor, Inc. Ms. Mannion, you may now begin.

Good afternoon, everyone, and thank you for joining us for FormFactor's 2004 first-quarter earnings conference call. Shortly after market close today, the Company put out a press release announcing its first-quarter-end financial results. If you did not receive a copy of the press release, you can obtain one from the investors section of FormFactor's Website at www.FormFactor.com. You may listen to an audio replay of the conference call by dialing 888-203-1112 and entering reservation number 553407. Also, a webcast replay will be available in approximately two hours on the investors 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 first quarter of 2004. Jens Meyerhoff will provide you with details of the first-quarter financial results and financial guidance for the second 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 follow-up. Please note that we have modified the format of our earnings call in an effort to provide more detail about the Company's business performance. Details about revenues and bookings by market segment, as well as the regional breakdown of our revenues, can be obtained from the investors section of FormFactor's Website at www.FormFactor.com on the conference call and webcast link. This information will remain available until April 27, 2004, at 9:00 PM Pacific Daylight Time.

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 Law. 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 statement, 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-nm technology nodes; the rate at which semiconductor manufacturers expand their 300-mm 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; the company's ability to efficiently build out and move into its new manufacturing facility; changes in semiconductor manufacturing test strategies, equipment or processes; and the Company's relationships with customers and companies that manufacture semiconductor test equipment.

Additional information concerning factors that could cause actual events or results to differ materially from those in any forward-looking statement is contained in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission, and subsequent SEC filings made by the Company, and in the Safe Harbor language in the earnings release sent out today. Copies of filings made by the Company with the SEC are available at the investors section of the Company's Website. The Company assumes no obligation to update any statement made during today's call, to revise any forward-looking statements or to update the reasons actual events could differ materially from those anticipated in forward-looking statements.

It is now my pleasure to introduce Igor Khondros, President and CEO of FormFactor. Igor?

Thank you, Erica, and thank you, everybody, for joining FormFactor's first-quarter 2004 earnings call. During the first quarter of 2004, we continued to see a strong business momentum. Our revenues were up 18 percent sequentially and 99 percent year over year. Our net income rose 27 percent sequentially to 5.2 million. During our last conference call, we reported to you a 66 percent sequential increase in our DRAM bookings. This solid demand continued during the first quarter, with another 25 percent sequential increase in DRAM bookings. As a result, DRAM revenues grew by 7.3 million or 34 percent over the prior quarter, and 163 percent over the same period last year.

The DRAM industry continues to execute on its major transitions of 110-mm technology, 512 Mb density, 300-mm capacity RAMs (ph) and DDR2 and mobile DRAM architecture transitions. During the first quarter, we saw the following developments in our business. 110-mm shipments increased by 82 percent sequentially over Q4, which in itself was a strong growth quarter for us. 110-mm-related DRAM revenues accounted for 67 percent of our DRAM revenues in Q1, compared to 49 percent in Q4.

We expect substantial completion of this tooling cycle during the first half of 2004, which is consistent with our guidance in prior quarters. As we near the completion of this important node transition, we are beginning to see first engineering designs at the 90-mm node. 512-Mb designs accounted for 9.7 million of our revenues during the first quarter, up from 8 million in the fourth quarter. During the first quarter, we saw for the first time a sequential decline of 256-Mb-design-based revenues, with 512-Mb-based bookings also surpassing 256-Mb bookings in the quarter.

The uncertainty in density mix continues to create a favorable demand situation for FormFactor, as the industry tools both design -- both density possibilities. The bringing up (ph) of new 300-mm wafer capacities continues, and remains an important growth driver for us. After the strong increase of 39 percent in 300-mm shipments during the fourth quarter of 2003, we witnessed another 13 percent sequential increase in 300-mm DRAM-related revenues during the first quarter. The announcements of new 300-mm projects with our customers, as well as expected order strength for 300-mm fabrication equipment, point to continued revenue growth from this important wafer size transition.

During the first quarter, we continued to see DDR2 wafer probe card shipments increase, growing to 4.8 million compared to 3.3 million during the fourth quarter of 2003. At the same time, we also saw a significant increase in our DDR2 bookings during the first quarter. As a result, and consistent with our reports on prior calls, we expect this transition to gain momentum throughout 2004, as it relates to FormFactor's business.

I would like to remind you that FormFactor's product ramps supersede our customers' product shipments by three to six months, depending on the nature of architecture of process (ph) transition.

Modal and low-power DRAM-based revenues increased by another 67 percent to 7.2 million, as compared to 4.3 million during the fourth quarter of 2003, as DRAM chips continue their migration into portable applications. While we expect sequential growth rates to fluctuate over the coming quarters, we expect solid year-over-year growth for modal and low-power DRAM applications.

Flash revenues increased moderately, by 5 percent, from 4 million in the fourth quarter to 4.2 million in the first quarter of 2004. In our Flash-related business, we continue to focus on high-density, high-parallelism applications, where we offer an enabling solution. In the fourth quarter, we made this decision to limit the intake in Flash to these products. During the first quarter, we experienced a rise in demand for high-parallelism Flash wafer probe cards, which resulted in an increase in bookings to 9.2 million in that market segment.

Flip-chip logic-based revenues declined to 3.9 million from 5.2 million sequentially, driven by substantial completion of the tooling cycle for some current production designs and the resounding bookings decline during the fourth quarter of 2004, which we reported to you in our last call. However, we are now seeing booking strength in this market segment, indicating the ramp of the next-generation chip set to microprocessor platforms throughout the coming quarters.

Throughout 2003, we saw a strong degree of innovation in the semiconductor industry, and FormFactor's leadership in enabling this innovation has made us an important partner to our customers in key technology transition implementations. Over 90 percent of our products shipped today drove 130-mm and below silicon. And our high-parallelism platforms of PH100 and PH150 enabled the industry's cost-effective 300-mm memory wafer disk. The latest example of our leadership in 300-mm wafer probe is our first shipment of a four-touchdown 300-mm wafer wafer probe card. This specific design, which we shipped recently to an early-adopting customer, probes 110-mm, 512-Mb DDR2 devices.

We believe that FormFactor's four-touchdown solution for wafer testing of 300-mm memories will be the standard for high-volume, lower-cost-of-ownership wafer test for the industry for several years to come. We're continuing to propagate our advanced technological solutions into other market segments. Our fine-pitch, low-force probing capability makes us a partner in advanced 90- and 65-mm logic wafer tests, and in unobtrusive probing of copper interconnect wafers. The superior electrical signal fidelity of our AS-200 (ph) product enables our customers to supply known good die for low-power portable applications. In this first step, it was increasing migration of final tests from packaged components onto wafers. And we are continuing productization (ph) of our wafer-level burn-in platform, another enabling step toward consolidation of testing onto wafers.

All indications are that 2004 will be a year of continued technology traditions. Our customers are accelerating designs of differentiated products, in order to intercept higher ASPs in the narrowing market windows in an increasingly competitive industry. FormFactor is seeing a significant rise in volume of designs and in the variety of the devices, in both Flash and DRAM markets.

What is different about FormFactor is that we deliver products and solutions to customers which are specific to every new customer product introduction and every new customer design implementation. In contrast to most equipment companies, we match our customers' product with our custom product, one for one. With designs and design varieties on the rise, on top of multiple ongoing transitions in processing technology nodes, product architectures and densities, we believe that the advanced segment of the wafer testing industry is poised for continuing strong demand. The advanced wafer probe card segment of the industry is growing faster than the then the rest of the wafer testing industry, and FormFactor is not only the strong beneficiary of this increase in demand, but a force in amplifying the size of our target market, as we replace legacy products with advanced products, sold based on total cost of ownership.

Our future growth will bring new execution challenges. This year, we are bringing our new manufacturing facility online, which will allow us to supply our customers more predictably and more efficiently, and from a significantly increased capacity base. As we are becoming an important contributor to the industry's wafer testing roadmap, we are preparing for a growing number of customers to depend on the precision of our execution on existing product and solution deliveries, as well as on our timely invention and introduction of innovative new products and solutions.

During the quarter, we concluded that the new challenges and opportunities require a new organizational structure, which will combine the precision in day-to-day execution with the sharpened focus on advanced technology and business development, independent of daily operational demands. We decided to create a Chief Operating Officer position into which operations, marketing, sales, service, applications and development activities will report. I'm excited to announce that we're promoting Jens Meyerhoff to lead this newly-formed organization. Jens has served as our Chief Financial Officer since August of 2000 and, in addition, as Senior Vice President of operations since January of 2003. Over what is now almost four years, Jens has earned the respect and the trust of FormFactor's management team, FormFactor's Board of Directors and the entire company. Jens' leadership in implementing the financial and operating controls, systems and processes and in forging the results-oriented culture at FormFactor has been a big factor behind our past and current successes. We believe his future leadership in what is now a larger role will lead to more successes.

Today, we are kicking off a search for the next Chief Financial Officer of FormFactor. Jens will continue as our CFO until the new CFO is on board. This organizational change will allow me to work more closely on the next steps in FormFactor's growth, as I can focus my energy on our strategic planning and strategic initiatives. Our future growth will increasingly depend on a revolutionary product -- sorry, will depend faster launch of new products and our access to a larger cross-section of revolutionary technologies and complementary capabilities. We will continue redefining the wafer testing industry, and that is where I will apply the majority of my efforts.

I remember very well the excitement that permeated our Company in 1995, when our first customer took a chance on a revolutionary product from FormFactor, which then was a Company of less than 10 people. I remember the excitement at FormFactor in 1997, when we made our first 32 in-parallel (ph) DRAM product work on a customer's test floor. The atmosphere today reminds me of those days. There was excitement, and there was a can-do approach to challenges. There was a deeply ingrained belief that we're on a mission to enable the industry to scale the costs of tests down, to enable the industry to streamline the semiconductor pipeline from design to end-user applications to enable known good die and smaller, faster, lower-power products for our customers' customers. We are committed to turning these large business opportunities into long-term profitable growth of our Company.

And now, I would like to transfer the microphone to Jens Meyerhoff, our brand-new Chief Operating Officer and our Chief Financial Officer, who will complete the summary of the Q1 results.

Thank you, Igor, and good afternoon. Before we get started with a review of our financial and operational performance during the first quarter, I would like to inform you that FormFactor will be presenting at Credit Suisse First Boston semiconductor conference on May 26 in San Francisco. As always, we're looking forward to meeting you at this event. For this call, we have solicited some of your input to address key questions regarding our performance and markets, and plan on broadening your input into this call in the future, in an effort to increase information content.

With that, let's get started. As indicated in today's press release, we achieved record bookings of $50 million during the first quarter. We see these bookings as an indicator of continued demand strengths in our served markets in general, and for our product in particular. Bookings activity was strong across all market segments, as our customers have accelerated their order patterns.

As you know, we focus more on turns fill (ph) than bookings, and our unconstrained turns ratio continued to decline from 58 percent in the third quarter to 53 percent in the fourth quarter to 50 percent in the first quarter, counterbalancing somewhat the strong sequential increase in bookings. This decline in turns ratio indicates that our customers are responding to the tight supply situation for our product by placing orders well into the third quarter, providing us with extended demand visibility beyond the current quarter.

Revenues for the first quarter were $77.1 million, an increase of $5.7 million or 18 percent over the first quarter of 2003, and an increase of 18.4 million or 99 percent compared to the same period of last year. Our strongest growth region continue to be Japan, with an increase of 58 percent accounting for 39 percent of the first quarter's revenues. Our progress in building direct sales application service organizations in Japan continued to provide us with design wins and significantly reduce channel costs in this important growth region.

We continue to execute our near- to mid-term capacity plan by hiring an additional 30 employees in operations during the first quarter, and by accelerating equipment orders in key manufacturing areas. We have successfully established two core teams, one that deals with a new site bring-up, and the other one that is focused on the continued ramp of our existing production facility. This structure allows each team to deliver to it set goals without impairing each others' success. The buildout our new factory is progressing, and we're looking forward to first equipment installation by the end of this quarter.

In parallel, we have implemented ways to maximize floor space at our existing site to provide for incremental capacity beyond our initial plans. Hiring and training of operators and technicians remains our main constraint in the near term, which means we will continue to operate in a capacity-constrained mode throughout the second quarter. Gross margins for the first quarter were 51.4 percent, up from 50.9 percent in the first quarter and up from 47.5 percent in the first quarter of 2003. The increase in gross margin continues to be driven by both increased revenues and product mix.

During the quarter, we incurred $340,000 of nonrecurring expenses related to the new site bring-up. Excluding such expenses, we achieved an incremental gross margin performance of 60 percent during the first quarter, indicating continued gains in operational efficiencies. Operating expenses were $10.6 million in the first quarter of 2004, up slightly from 10.2 million in the fourth quarter of 2003. The increase is a result of increased personal expenses in R&D, as well as increased SG&A spending for personnel-related expenses and sales commissions, driven by the increase in bookings and revenues.

Operating expenses, excluding stock-based compensation as a percentage of sales, were 28 percent in the first quarter, which was a decline from 31 percent in the fourth quarter of 2003, as a result of higher revenues.

Operating income for the first quarter was 22.8 percent or $8.5 million, an increase of $2.6 million over the fourth quarter of 2003 and an increase of $7.5 million over the first quarter of 2003. Operating income for the first quarter included $409,000 for the amortization of deferred stock-based compensation, resulting from PIPO stock option grants, compared to $384,000 in the fourth quarter of 2003 and $333,000 in the first quarter of 2003 for such expenses.

Interest income for the quarter was $533,000, reflecting an average yield of 1.23 percent for primarily tax-exempt commercial paper.

Other income and expenses was impacted unfavorably by losses from foreign currency exchange of $395,000 or $157,000 after taxes during the first quarter of 2004. During the first quarter, we engaged in multiple forward contracts, in an effort to hedge our receivables denominated in Japanese yen. These contracts range in exchange rates from 106 to 112 yen per dollar, driven by some temporary strengths of the U.S. dollars during the first quarter. The implemented hedge provides us with stability and visibility for foreign currency risk for the second quarter of 2004.

The tax rate for the first quarter was 39.8 percent, up from 38 percent in the fourth quarter of 2004 and up from 38 percent in the first quarter of 2003. The increase in the effective tax rate was primarily driven by the expiration of the current legislation for R&D credits projected by midyear.

Net income for the quarter was $5.2 million or 13 cents per fully-diluted share, compared to $4.1 million or 10 cents per pro forma fully-diluted share during the fourth quarter of 2003, and $700,000 or 2 cents per pro forma fully-diluted share during the same period of 2003. Please refer to our press release on the investors section of our Website for a detailed presentation of our share count, reflecting the recent follow-on 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 $2.5 million during the first quarter, as a result of increased net income. Cash flow from operations during the first quarter of 2004 was $6 million, compared to $4.4 million in the fourth quarter of 2003, and cash usage of $1.3 million during the same quarter of 2003.

We spent $8.3 million in capital expenditures during the first quarter, against depreciation and amortization of $1.4 million. And we received $4 million from the issuance of stock driven by employee stock option exercises.

Our DSO for the quarter was 52 days, compared to 51 days in the fourth quarter of 2003. Net inventory increased by $700,000 during the first quarter, as a result of increasing demand and continued ramp-up of production.

This brings me to our guidance for the second quarter of 2004. We expect continued revenue growth for the second quarter. We target revenues of $39 to $41 million. Our operating income is expected in the range of 22 to 23 percent. We expect stock-based compensation of $500,000 for the second quarter. We expect to incur approximately $900,000 of non-recurring expenses relating to the new site. We expect to incur approximately $250,000 of legal expenses on current litigation. We target earnings per share of 14 cents per fully-diluted share.

Before I turn the call over for Q&A, I would like to express my sincere appreciation for the trust and confidence our team has put into me in my new role as the COO at FormFactor. I will do my very best to meet and exceed your expectations. I look forward to the challenges in this new, important role.

With that, we will now up the call for questions.

(OPERATOR INSTRUCTIONS). Jim Covello, Goldman Sachs.

I guess, some questions on the guidance first. The $900,000 in non-recurring expense -- can you give us a little bit of detail around that?

The $900,000 of non-recurring expense relates to the bring-up of the new site, so this is primarily personnel-related expense at this point in time for the bring-up of the site and the process characterization (ph) and transfer.

And the 14 cents in EPS guidance includes that 900,000?

The 14 cents is a GAAP number, yes.

And can you help us out with some gross margin guidance, whether it would just be the actual numbers or some drop-through kind of targets that we're talking about for the June quarter on gross margin?

So as you know, we have never guided to gross margins. And I have got to make you make a living, too, so you have got to live with the operating income range that we have given of 22 to 23 percent, and then you probably can model it from there.

Fair enough. A couple of other quick questions. In terms of any competition you're seeing from either the Japanese market or the Taiwanese market, is there anything you can talk about there? You didn't mention any competition on the prepared remarks.

What we see is a clear rise in demand for advanced wafer probe cards. We, of course, see all this new 300-mm equipment installed. And when people plan to probe it, they plan to probe it with advanced solutions to stay in sync with the investments they make in fabs.

The rising demand in advanced wafer probe cards is largely satisfied today by FormFactor probe cards plus manually assembled vertical probe cards. So on the non-manually assembled advanced probe card front, the development that we had this quarter was that it came to our attention there were product shipments by a company called Vicom (ph), a company based in Korea. We studied the information very carefully, and as a result we initiated a legal action that we announced during the second quarter.

But the big picture on production floors today is that this rising demand and significantly rising demand in advanced wafer probe cards is largely satisfied by FormFactor, MicroSpring, and what we see are manually assembled vertical probe cards. That's basically the picture we have from production floors.

That's helpful. Maybe if I could just sneak in one more question, on the DDR2, Igor, you made a comment about FormFactor's revenue superseding customers' by three to six months. Did superseding mean preceding, or --?

Preceding, yes. Sorry, preceding.

That's okay. Okay, great. Since that was a short one, I'll ask one more quick one.

Educated in Russia, sorry. Go ahead.

The ASP difference on the four-touchdown probe card, the 300-mm four-touchdown probe card, are you seeing an ASP increase? I know you don't want to talk about ASPs, the absolute dollars. But are you seeing an increase on a directional basis for the four-touchdown 300-mm probe card?

So as you know, Jim, we are selling in a total cost of ownership mode, and four-touchdown improves the total cost of ownership at wafer test with this product.

Edward White, Lehman Brothers.

I was wondering if you could talk about the logic market outlook, especially as we go out into next year. There is a lot of talk about more logic chips going to flip chip for next year, and certainly it seems as though that will be an important trend going forward. How are you looking at that, particularly as you look at next year and you look at where your product line fits up with respect to that?

Yes, 2005 we see as the broader logic engagement year. We are working, right now, hard and smart on new products and new product platforms for future flip chip logic applications, and we believe we are the leader in that area, and we believe that we will be the leader for a very long time, if we continue doing our work. So we are getting designed in into applications that will probe technology generations beyond 90-mm today. So we will be ready with products and product platforms for the rising demand in flip chip logic in 2005.

And then a second question is, as you look to the second half of 2004, given the strong momentum you're seeing right now, what sort of indications are you getting from your customers about how they see their plans for the second half? Because -- do you get any extra visibility as a result of looking at some of the roadmap stuff, some of the new product developments that are coming down the road?

Well, what we are seeing in our focus market segments is continuing transitions in technology. We see richness in design mix, we see companies very much focused on differentiated products, because that is where they plan to make money, and we see really increase in design activity.

One example that we started discussions in Q4, for example, mobile RAM, and DRAM markets in general will be different moving forward. You have mobile RAM being, this year, projected to be as large a portion of DRAM market as servers. And next year, it may go up to 15 to 20 percent of overall DRAM markets. And there is a market segment for us that is not PC-driven, that require significantly more sophisticated tests, because of the pin count considerations, because of the test times going up as they reduce power by control and refresh behavior. So all of these things, we see nothing but continuing innovation and richness in designs and growth in business.

Ed, I want to maybe add to that a little bit. There is also a continued very strong pull on the pure capacity side of the business that we see extending well into the next coming quarters. All the tester bookings and shipments that you see right now will receive -- will have a test (ph) that will receive one or two probe cards, depending on the application. There is a lot of 300-mm capacity coming on-line in both DRAM and Flash, and as you know, here we are a very strong leader, and PH150, with four-touchdowns now shipped, is even extending that leadership strongly. So also, the capacity piece next to all the transitions is going to drive strong momentum as we reach the second half.

Finally, for you, Jens, in the past you have drawn charts where you looked at different phases of DRAM pricing and the effect that they have on your business, and given the strong DRAM pricing we have seen recently, where do you sit on that roadmap? I know in some of the really strong DRAM environments, you would see the capacity ramp, you would see the technology investment. Do you feel you are at that stage, and do you feel that's sustainable?

You may recall, Ed, that really there is not that tight of a correlation between DRAM pricing and, really, our business. The purpose of the chart in the past calls were you end up in extremes of pricing that are either extremely high or extremely low. I don't believe we're in that stage. I think there is a strength in the pricing, without a doubt, but I really don't see right now a direct correlation between the DRAM pricing and our business. But there is an overall expansion in capacity driven by demand and by diversification of the DRAM industry beyond the PC.

Let me just add to that that, in addition to that, what is important for our business are different designs and different architectures emerging in DRAMs. It will require more sophisticated testing, and it will require more sophisticated product on our part. And where our product revenue per bit tested is likely to go up, and those would include mobile RAMs and DDR2. So that will have additional impact on our business.

Mark Fitzgerald, Banc of America Securities.

Jens, given the bookings data here, it looks like you're sandbagging us on the quarter here a little, is my first interpretation of it. Why wouldn't you convert this 50 million in bookings more quickly into revenues?

Okay, so Mark, there is two reasons for this. So number one is we're reporting our bookings because it's something, I think, that's like to be seen. We are focusing on the transfer much more here. And so there's two reasons for your question. Number one is actually the turns fill has dropped, which is actually counterbalancing that $50 million booking, which means some of the backlog actually is shippable in Q3.

But the other component is that our guidance actually is subject right now to near-term capacity availability as well.

Can I ask why has turns fill dropped? Is it people are just planning longer term, or your lead times have moved out? What's the deal there?

This is a non-constrained turns fill, so this is independent of any of our lead time capabilities. This is more or less the customer-driven request date. And in a constrained capacity situation, you'll see that our customer is reaching further out in order to secure delivery slots.

So when you talk about constrained capacity, it's your constrained capacity?

It is our constrained capacity.

And can you give a sense on the 37.3 million in the December quarter, how that was in terms of these turns fills?

I had that in my script. This is unconstrained turns fill; right? Well, it came from 58 percent in the third quarter to 53 percent in the fourth quarter to 50 percent in the first quarter.

And one other question here. In terms of going after your competitor with lawsuits, I'm a little curious -- kind of the legal environment and filing lawsuits in places like Korea and stuff, if you can really accomplish anything. Can you just give us a little read on that?

Well, it's a good question, Mark. I think the world is changing. I think in Korea, there are very large and important companies that now generate their own IP. And for these companies to enforce IP in other countries that are emerging, like Korea used to, they probably need to create an environment in their own place that enforces IP rights. So we, of course, are pursuing strategy of taking the legal routes, and we have worldwide patents, and we will pursue options available to us to defend our IP. I think it's important not only for FormFactor, but it's important for the entire industry, as these companies do innovation, that companies invest in R&D because if FormFactor doesn't do it, then who will develop four-touchdown solutions for the industry?

But of course, when we see somebody, what appears, using our technology, then we will really strengthen our rights and uphold our rights.

Can I just ask, is Vicom shipping outside of Korea at this point? Or is it very much a domestic supplier to Korea?

We really would not comment on something on an ongoing -- information that has to do with ongoing litigation, right? All I can tell you is that it came to our attention that there was a shipment, and we studied information available to us and we took the action.

Doug Reid, Thomas Weisel Partners.

Jens has actually answered most of my questions. Just a follow-up, though, to the capacity we may see added to the existing facility. I'm wondering if you could, perhaps, quantify what percent or, in another measure, of new capacity could be added to the existing floor space?

So, as you see, I think we've never really precisely gave a number or guidance on that. But I think I stated prior that overall, we feel comfortable and confident that the capacity plan that we have in place will satisfy the demand that is right now visible to us. So I see the current capacity constrain as a near-term issue that we are in the process of solving.

Bill Lu, Morgan Stanley.

Good quarter, and Jens, congratulations on the new promotion.

Thank you very much, Bill.

I've got a couple of questions. First of all, on the capacity issue, are you now planning on moving to the new building in the third quarter?

Yes. So the second half, as we stated before, the second half of 2004, we will start to provide incremental capacity to the existing site. So, as I stated before -- that's why I'm saying we're seeing right now unconstrained as a near-term issue.

Can you, then, give me some guidance on what depreciation expense would be in the third quarter, and what that does to gross margins?

Our current depreciation run rate is around $1.4 to $1.5 million per quarter. In the third quarter, you will not yet see a sizable increase in depreciation from the new site. That will more happen as we go toward the fourth quarter, and we will guide to that when the time comes.

And then just one more follow-up. Last quarter, you guys have talked about some delays with the BladeRunner product. Can you just give us an update on that?

I think at this point in time, if you look at our numbers in the overall logic and flip chip area, I think you heard from Igor that this is driven really, right now, by GAAP and tooling cycles. I think it's well-known that we are in front of some major ramps of new chip set architectures. And we are still debugging our BladeRunner 175, but we are ready for this ramp.

I'm sorry; if I can just sneak in one more here, if I look at your increase in revenues and bookings, can you just help me quantify that, as far as what increased more, whether those units were ASP?

As you know, we have historically really not discussed our units or ASPs, as we see that as very sensitive information.

Peter Wright, CIBC World Markets.

Congratulations on a great quarter, and specific to Jens, congratulations and good luck on the new promotion.

Thank you very much, Peter.

I was hoping you could quantify the increased demand that's coming specific in your DRAM markets, in the context of increased capacity and new design activity, as compared to replacement demand for increased parallelism. For example, do you see customers out there replacing existing PH50 cards for PH150's?

I think, at this stage of the growth cycle, the capacity expansion that we see is very much driven from new wafer starts, which is also paired (ph) with new tester purchases. So you ship very high parallelisms in most advanced platforms into new test floors and new tester applications.

I guess another way of putting it is kind of a follow-up to Bill's question, which is, when trying to quantify units versus blended ASP growth, what are the drivers there? Is there a favorable mix shift specific to any of your end markets?

So the improvement in gross margin came from both revenue increase and product mix. We're seeing both; we're seeing increased unit shipments, as well as favorable product mix.

And again in the DRAM segment, do you see customers expending 200-mm facilities in tomorrow's (ph) technologies, specifically any of the initial demand that you're now seeing for DDR or any substantial share of the 512-Mb density demand? Is that being enjoyed among your 200-mm customers, or is that fairly 300-mm-specific at this point?

I think we're seeing demand on both wafer sizes, but 300-mm is definitely what has more momentum.

(OPERATOR INSTRUCTIONS). Stephen Rostin (ph), Glen Capital Management.

Good progress and congratulations, Jens. Can you elaborate on three things you talked little bit about in the call? First of all, Igor, you talked about the continuing productization (ph) of the wafer-level burn-in product. Maybe you could help us understand where you are and where you are going.

And then, Jens, you talked about the four-touchdown 300-mm product. Can you give us an understanding of where you think you are, in terms of customer acceptance, and where you need to go beyond where you are today?

And third, in the flip chip area, you just cut out, and you said getting design into applications, and I could not hear what you said beyond that. (multiple speakers) which applications?

On the last comment, are you commenting on something I said or Jens said?

I think it was Jens, but I'm not sure.

Okay. Let me start with wafer-level burn-in. This is a new product, and it's a new product platform, which is still being supplied to early adopters, early adopters and we now have early adopters. The importance of this product is that, when combined with our AS-200 product, it can basically enable full validation of, for example, mobile RAM on the wafer, which means that now you have fully validated known good die that you could put in a stack package, or in its native form you could place it on a little board in a cell phone, for example.

So this is, as I mentioned, the beginning of a trend, a long-term trend of moving more and more testing, final testing of package devices onto wafer. And we are beginning to -- continuing gaining momentum there. Now, as we indicated when we first mentioned this product, it's going to be probably some meaningful revenue by the end of this year. And we have now been focused on initial design wins and learning together with customers have to apply this product. But we are very pleased with how it's proceeding.

The second question, I think, was to --

I think your second question was, where do we really stand in the introduction cycle of our four-touchdown product? So the shipments we're making are production-great shipments, but they are going right now into one first early adopter. And then, as we learn on the application side on the product and the bring-up of the product, we will make it and you're going to see press releases from us as we make it available to the broader market, probably in the second half.

And on flip chip, maybe you should state the question again. That would help us.

Sure. You said, I think, that the flip chip ramp going forward that you expected was a result of your getting designed into -- and then I didn't hear it.

That was my comment. So I think, as you well know, there's actually a significant amount of new chip set releases and ramps in front of us. And those we are ready to ramp. I think we have debugged most of our difficulties with BladeRunner 175.

Were you talking about specific applications that would cause that ramp?

These go into customer-specific that are somewhat -- while, I think, public knowledge, I would rather have you go through the current chip set roadmap than me stating it to you on this call.

Kevin Vassily, Susquehanna Financial Group.

A question on DRAM, as it pertains to kind of business processes for you guys. With all the different relationships developing in the DRAM industry, you can use Elpita (ph), I guess, using something like an SMIC, for example, to do some of their manufacturing. How are your customer kind of qualification processes affected there? Are you forced to requalify -- again, using an example, not inferring that you have these actual customers -- but would you have to requalify an Elpita product that is built at SMIC, or do you get some leverage from the original design qualifications?

I'm going to answer those questions. The emergence of the foundry model in the DRAM industry is actually extremely favorable to us, and we see it as a very leveraged activity, because we do get the benefit. We do not have we do not have to go through multiple qualifications. The qualification happens at the source of the design.

What about from a kind of kicker standpoint, in terms of products sold? Does the fact that there are two manufacturers of a specific design approximate something like the one plus one equals three, because you need a little bit of buffer stock of your cards, so to speak, in each of those manufacturers?

I think, overall, I'm going to answer those questions probably a little more broadly. And that is that the increase in diversity of designs requires our customers to tool multiple design flavors. And that in itself has an intrinsic inefficiency, where you see potentially not a one-to-one relationship of probe cards sold versus needed.

In other words, if you look at number of probe cards that actively exist at a given time, per tester head, it's likely to be more than one. Right?

Right. Thanks, guys.

Bill Lu, Morgan Stanley.

A couple of follow-on questions. First of all, Jens, you had a huge quarter here, in terms of bookings and backlog growth. Going forward, is there an ideal backlog level or turns level for you that you are managing to?

I'm not sure whether I got the question. Can you repeat that one more time, please?

I'm just wondering. You got a big increase here in order and backlog, and the turns decreased a little bit here. Is there a level for turns or for backlog that you are managing to?

We are not really -- so the turns fill again, that I gave you, is unconstrained. Right? So it comes from the pure demand of the customer. And you are right that the backlog has logically increased with the book to bill ratio that we have shown. So we are working hard to increase our capacity to ship that backlog.

So you don't think at a certain point you would think it's too high, or that it (multiple speakers)?

What we are doing is we, of course, monitor the quality of our bookings. And if I felt that these bookings aged out too far, I would not report them to you on this call as bookings.

Also, let me just state that -- keep in mind that a lot of this demand is coming from applications and from customers, where FormFactor is absolutely mission critical to what they do. So that pretty much describes the situation.

Okay, that helps a lot. And Jens, I'm wondering if you can give us some longer-term guidance as to what the Company might look like, say, at a $70 million run rate or operating margins?

I'm going to refer back here to our long-term model. Our long-term is a 25 percent operating margin. I have never correlated that to any revenue numbers. So that I leave to your analytical horsepower.

It just seems like you're getting pretty close to it now.

We are pleased with our progress (ph) and operating leverage (ph).

There appear to be no further questions in the queue at this point. Gentlemen, I will turn the conference back to you for any additional comments you may have.

Thank you very much, all of you, for your continuing support and interest in FormFactor, and we will talk to you again on the next call. Thank you.

Thank you very much.

That does conclude this conference call. Thank you all for joining us, and have a great day.