FormFactor Inc (FORM) 2004 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the FormFactor 2004 fourth quarter and fiscal 2004 year end conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer period. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Erica Mannion, Investor Relations.

Good afternoon, everyone, and thank you for joining us today. Shortly after market close, the Company put out a press release announcing its 2004 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 800-642-1687 and entering reservation number 327-7602.

Also a webcast replay will be available in approximately 2 hours on the investor section of the Company's website.

With me today are Igor Khandros, Chief Executive Officer; Joe Bronson, President; and Jens Meyerhoff, Chief Operating Officer and Chief Financial Officer. The Company has allocated approximately 1 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 1 question and 1 follow-up.

Please note that details of the Company's revenues and bookings by market segments as well as the regional breakdown of its revenues can be obtained from the investor's section of FormFactor's website at www.FormFactor.com. This information will remain available until February 14th at 9 PM Pacific time.

During the first quarter of 2005, the Company will be presenting its following conferences. Morgan Stanley Semiconductor and Systems Conference in California, March 7th; and Goldman Sachs Technology Conference in Arizona, on February 23.

Now I'd 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 security 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 statement due to various factors including, but not limited to, the demand for certain semiconductor devices, the rate at which semiconductor manufacturers make the transitions to 110 and sub 110 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 add manufacturing capacity and to stabilize production yields, the Company's ability to officially build out and move into its new manufacturing facility, the accuracy of the Company's estimates of cost, schedule, and capacity of its new production facility, 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 events or results to differ materially from those in any forward-looking statement is contained in the Company's Form 10 amendment for the period ending September 25, 2004 filed with the Securities and Exchange Commission, in subsequent SEC filing made by the Company and the Safe Harbor language in the earnings release sent out today.

Copies of filing 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 statement 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 Joe Bronson. I am sorry, Igor Khandros.

We thank all listeners for joining FormFactor's 2004 fourth quarter and year end earnings call.

In today's call, we will give you a summary of our 2004 performance. We will address in more detail to bring up of our new factories for 2005 and we will update you about significant changes in our market since our last call on January 6th.

Before I turn this call over to Joe, I would like also to inform you that we have completed the search for a new CFO. We will officially announce the appointment in the next few days due to confidentiality reasons and SEC disclosure requirements. Joe.

Thanks, Igor. Let's continue with some good news since our last update on January 6th when we preannounced the miss of our fourth quarter revenue target. The cause of the miss was a contamination problem in our manufacturing line. As of today, we have successfully isolated the root cause for the repeat in yield decline in our manufacturing process.

Our yields have recovered and we are now ramping production volumes in our old site back to full capacity levels.

2004 was a remarkable year for FormFactor. We grew our revenues by 81 percent to 178 million. We grew earnings by over 300 percent From 7.5 million in 2003 to 25.2 million in 2004, demonstrating significant operating leverage. We effectively funded the 2004 capital investment of 33 million for our new factory from operating cash flow. Our cash balance grew by 12 million to 194 million at the same time while maintaining a debt free balance sheet.

As we move into 2005, understanding the startup of our new factory becomes critical to the evaluation of our ongoing operation performance. An analysis daily detailing gross margin performance, net of new factory startup costs, reconciled to GAAP results has been posted on our website. Based on this analysis the majority of startup cost occurs in the first six months of 2005, due to facility redundancy and totals $9.1 million or 15 cents per share, indicating the peak of new site earnings dilutions through this period.

This analysis also shows that, with the ramp of the new factory and the closure of our old facility, we should reach a gross margin performance in line with our published financial model of 53 to 55 percent which assumes a time horizon of two to three years from the date of the initial public offering.

Jens will cover more details of this analysis in his prepared remarks.

As we enter 2005, the outlook for our largest market segment remains robust. Our DRAM customers are ramping their DDR2 (ph) reduction capacity and are preparing for the next technology transition to 90 nm. We now have all major chipsets supporting DDR2 released into the market with the Alviso (ph) chipset for notebooks being the most recent.

Benchmark sets for DDR2 based notebooks are indicating improved performance in terms of speed but more importantly battery life, which will raise the adoption of DDR2 devices in this important market segment of personal computing. We reported to you an increase in DDR2 bookings of 4.2 million to 18.5 million during the fourth quarter. We are seeing a continuation of this trend in Q1, an indication of the projection for bit parity in this transection is on track for the third quarter of 2005.

The transition to 90 nm appears to be gaining momentum, with 15.4 million of some 110 nm business booked during the fourth quarter 2004. Technology transitions are the most powerful tooling cycles in our business, effectively replacing the entire installed base of products. The build out of front end capacity continues to DRAM, especially in 300 mm. This ramp which currently drives CapEx for the industry during the first half of 2005 will require wafer test capacity through 2005 as bit growth continues in excess of 50 percent.

Business conditions for flash memory wafer code cards remain unchanged from our recent update. Near-term bit growth has essentially been pulled, through the strong bookings surge during the second and third quarter of 2004. Let me reiterate what we see as the main growth drivers and tooling cycles in flash memory.

First, it is the ramp of our newly introduced flagship NAND product and that's 150S, 90 nm conversions and ramp of 300 mm capacity. We expect these drivers to gain momentum towards mid 2005 while near-term growth will be predominantly coming from both DRAM and Logic.

During our January call, we reported essentially flat business conditions for Logic flip chip applications. However, we have started to see momentum building in this market segment and expect to growth to resume in the first quarter of 2005 from the business levels experienced through the second half of 2004.

Let me take a minute to update you on the status of our pending Korean litigation. You will recall approximately one year ago we filed complaints in Korea, alleging Phicom Corporation's infringement of four different FormFactor Korea patents. We announced last month that the Korean intellectual property office had upheld the validity of three issued FormFactor Korea patents by dismissing challenges against the patents brought by Phicom.

While Phicom has appealed these rulings, the rulings are an important step for FormFactor as we seek to enforce intellectual property rights, embodied in our proprietary technology. We believe the decisions issued by the Korean intellectual property office provide strong support for our pending lawsuit and confirm the strength of our growing global patent portfolio.

A ruling from the Korean intellectual property office is not expected on the fourth patent for at least two months; and we expect that the Seoul Southern District Court will conduct substantive hearings on all FormFactor's (indiscernible) claims in the next several months.

With that summary I'm going to turn the call over to Jens so we will talk about business.

Revenues for the fourth quarter were 46.1 million, consistent with our preliminary report in January, completing the year with growth of 81 percent over 2003.

Bookings for the fourth quarter were 40.7 million, a 10 percent decline over the third quarter of 2004. Geographic (indiscernible) continued to be driven from Asia, especially in Taiwan and Korea, while other regions continue to experience moderate declines over the prior quarter. Our trends ratio for the quarter continue to increase from 43 percent reported for the third quarter to 46 percent in the fourth quarter and we expect to further normalization of our trends ratio in the first quarter of 2005.

Gross margins for the fourth quarter were 42.2 percent, down from 50.1 percent in the third quarter and down from 50.4 percent in the fourth quarter of 2003. The decrease in gross margin during the fourth quarter was driven equally by the decline in revenues, as well as increased startup costs for the new factory. Fourth quarter startup costs increased by $1.7 million over the third quarter to 2.9 million due to the pull in and ramp of redundant facility expenses.

Gross margins net of new factory startup costs were 48.6 percent. As Joe mentioned, we have published an analysis on our website that outlines the financial impact of the transition from our old factory to the new factory through 2005. The schedule is consistent with our communicated timeline and anticipated phaseout of production at our old factory in the third quarter of 2005.

Over the next nine months, we will continue to incur startup costs that include non-recurring personnel and material expenses required for the new site ramp and qualification, as well as redundancy cost for maintaining two production sites in parallel. It is important to note that the capacity assumptions in this analysis are not intended to be used as revenue guidance for 2005 and are strictly based on a standard capacity utilization rate of 80 percent.

Based on this analysis, we continue to maintain solid operating performance through this transition. The analysis indicates the gross margin performance of 53 to 55 percent in the fourth quarter of 2005, the first quarter of new factory stand alone operation and is consistent with our published financial target model.

The factory bring up is proceeding well and we are observing improvement in both efficiency and capability. We have installed 74 percent of the required new toolsets and are running process qualifications on 18 of the 20 required process models. Our qualifications plans have been approved by all key accounts and we expect to shift new site production products by the beginning of April.

Operating expenses for the quarter were 14.2 million, up from 13.9 million in the third quarter of 2004. Legal and compliance cost increased by $500,000 over the third quarter of 2004. We spent $500,000 on current litigation and 1.3 million on SOX 404 compliance during the fourth quarter. These increases were partially offset by reduced personnel expenses such as management bonus expense.

Operating expenses excluding stock based compensation as a percent of revenues was 30 percent in the fourth quarter, up from 26 percent in the third quarter of 2004 due to the reduced revenues. Operating income for the fourth quarter was 12.7 percent or 5.8 million -- a decline of 6.6 million over the third quarter of 2004 due to lower revenues, increased new site startup cost and higher compliance cost. Operating income for the fourth quarter included $622,000 for the amortization of deferred stock based compensation.

Interest income for the quarter was $710,000, reflecting an average yield of 1.5 percent for primarily tax exempt investments.

Other income for the fourth quarter of $1.3 million, due to the collection of $1 million of consumption tax refunds in Japan. The tax rate for the fourth quarter was 19.4 percent, reflecting an annual tax rate of 35.5 percent for 2004. Down from 39.1 percent in the third quarter of 2004 and down from 38.1 percent in the fourth quarter of 2003. The decline in tax rate was driven by higher R&D credits and ETI benefits.

Net income for the quarter was 5.8 million, or 14 cents per fully diluted share, compared to 7.5 million or 19 cents per fully diluted share during the third quarter of 2004 and 3.8 million or 10 cents per fully diluted share during the same period of 2003.

Earnings per share included 5 cents per share for new factory startup costs. Cash and marketable securities increased by 10.3 million during the fourth quarter. Cash flow from operations during the fourth quarter of 2004 was $19 million, compared to $9.3 million in the third quarter of 2004 and 4.4 million during the same quarter of 2003.

We spent $14.3 million in capital expenditures during the fourth quarter against depreciation and amortization of 2.5 million, and received $13.8 million from the issuance of stocks driven by employee stock option exercises.

Our DSO was 50 days during the fourth quarter of 2004, compared to 48 days during the third quarter of 2004. Net inventories increased by 1.2 million during the quarter. Our cash generation remained very strong during the quarter and set a new record as we remained focused on working capital management.

With this, I get to our guidance for the first quarter of 2005. We expect revenues for the first quarter to be $47 to $48.5 million. GAAP operating income is expected in the range of 11 to 13 percent including 8 to 9 percent of new factory startup costs. We expect stock based compensation of $800,000 for the first quarter. We target GAAP earnings per share of 8 to 10 cents for fully diluted share. We expect new factory startup costs of 4.2 million or 7 cents per share.

With that, we will now open the call for questions. Operator.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Jim Covello of Goldman Sachs.

On the gross margin side, can you quantify how much the gross margin is being impacted by the residual from the contamination problem both in Q4 and Q1? And then can you also quantify what kind of margin improvement you think you can see as you get better yields in the new factory over time?

So I am going to take a shot at your question, Jim. So first of all the (indiscernible) issue in itself probably didn't have a too significant gross margin impact but the resulting loss of revenues out of the yield impact is really what impacted gross margins in Q4. With respect to the gross margin improvement, as we ramped the new factory referred in our script to an analysis that we have published on our website and that analysis actually details out all in the next quarter gross margin performance from ongoing operations vs. GAAP gross margin. And it achieves in the fourth quarter assuming an 80 percent capacity utilization of gross margin performance of 53 to 55 percent.

Is that reflective -- I see that analysis on the web, if there any incremental yield improvement which could potentially drive gross margins beyond that or do you think that is at a steady-state yield in the new factory? That's (MULTIPLE SPEAKERS)

That fourth quarter is the first quarter of stand-alone performance. Obviously over time you drive yield learning and process efficiencies beyond that.

Makes sense and relative to the first question I understand that it is actually an absorption issue which is driving the gross margins lower. So it's sort of indirectly related to the yield problem. Can you quantify the impact on gross margins on the absorption issue?

For the fourth quarter?

Yes.

If you look at it for the fourth quarter, the lower revenues from a gross margin and operating income point of view were impacted approximately $4 million in the fourth quarter.

So you had a sequential decline in revenue of 6 million and this happened very shortly, really, get hit so all that leaves is incremental cost. You are seeing an impact of $4 million so that is about what 9 percent of sales.

Edward White of Lehman Brothers.

I was wondering if you could trace through a little bit of the product transitions and how you think they will unfold as we go through the year? In other words, the DDR2 is quite strong right now and it appears to us as though that is going to be strong. But when would you expect to see the Flash transitions come in and flip chip Logic and wire (indiscernible) logic as opportunities?

So as Jen's mentioned in his remarks so -- DDR2, we are in the middle of their transition and that is going to be a large transition for us, significant to larger than DDR1 and the big parody which is the milestone or significant DRAM memory transitions, we expect in Q3. 90 nm is happening in DRAM, so that is going to be a significant transition through this year. And as also Jens mentioned, you have this new 300 mm capacity coming online and first people put in the capacity and then with some time lag they need express capacity to test it. So those are very significant transits going on in DRAM. In Flash, you have 90 nm that is happening this year. You have 300 mm capacity and what Jens also mentioned is that we are rolling out -- I believe Joe mentioned it. We are rolling out a new product platform for NAND Flash that is going to be very significant we believe this year. And in Logic also I believe in prepared remarks we mentioned that we are beginning to see positive signs.

But all of those other things more loaded toward the second part of the year or pretty evenly distributed through the year as we look at how they transition? In other words, should we anticipate that we get all that strength in each quarter or are there particular times when you think that you'll get more opportunity on the Flash side or the flip chip Logic side?

So if you look at it, if you tried to time phase some of these events, I think what you will see DDR2 -- we are in the middle of the ramp of the DDR2 conversion. We -- I think -- communicated in the script that bit parity is expected around the third quarter of 2005. So that is when you usually start to see the first momentum leg taper off the tooling cycle. 90 nm is going to follow in volume production with DDR2 transition. I don't think you are going to see too much DDR2 designs right away ramped at 90 nm. So that is going to follow and that is going to more be trending towards the end of the year and it is going to be separated between leaders and followers.

For Flash we believe that Flash, substantially, if you split the year is going to be stronger in the second half of '05 than in the first half of '05.

I think what Igor mentioned is important. You see, today at this point in time, a lot of front end capacity should be in to it primarily for 300 mm. That capacity ramp provides bit growth then later on it should be validated at wafer test.

Mark Fitzgerald of Banc of America Securities.

On the gross margin guidance of target 53 to (technical difficulty)

We lost you.

Disappeared. You should repeat it.

For the gross margin targets that you have, the 53 to 55, do I read you correctly? It is the first quarter of '06 where you will have all the manufacturing up and running and be able to achieve those?

If you look at the analysis of standalone, first standalone quarter, we are targeting as the fourth quarter of 2005 in this analysis and I think I want to reiterate this is an analysis that shows the transition of moderate guidance for gross margin. (technical difficulty)

Is there any evidence that any of these competitors are making any share gains against your 80 percent plus market share in the high-end here?

We do not believe there has been a significant change in competitive picture from our last update. I believe it was in the Q3 earnings call. As you know the more significant parameter for us is through significant growth in 2004. We have to make sure that we address applications and customers, where we are absolutely mission critical to their running their businesses. And that pretty much dictated what the Company had to do and the Company's in transition from the old site to the new site and that is clearly a challenging transition.

So what's our position vs. competition is defined by those top factors right now. Although there are always developments in the field, but that is pretty much how how I would sum it up.

The thing that I would like to add is the situation with competition is that we had to get the new factory up and running faster to reduce lead times. Lead time and cycle time reduction is very critical to not only take advantage of the technology advantage we have, but also speed to market because if we are slow, the customer may have to buy inferior technology to keep his ramp going. So big focus on getting the new factory up and running and reducing lead times to customers.

And when you look around the world, does the new factory put you well ahead of everybody else in terms of capacity?

I believe it does. I believe it does, with the learning that we will get out of it because we are not just bringing processes from the old site to the new site, we are bringing new equipment as well as different processes into the site.

We believe we are clearly technology and product leaders in this industry in terms of the fab capability we have, 100 percent of what we do, our NAND space probe cards that are produced on scalable semiconductor like processes. We believe the factory we are building is maybe one of the most advanced facilities of its kind. So we feel good about it.

Kevin Vassily of Susquehanna Financial.

Kevin Vassily First, question for Jens. The analysis that gets you to 53, 55 percent gross margin in Q4, you mentioned that this assumes capacity utilization in new facility of around 80 percent. Should we assume this is your targeted utilization goal for Q4?

So obviously so we think 80 percent because that is around 80 to 85 percent is usually where you have a normalized capacity utilization in the factory. Historically, obviously, we have run our factories higher.

The second question. I think, Joe, you may have mentioned this in your opening comment. Did I hear correctly that you said management bonuses in Q4 were down and is that down from Q3 and was there some -- if I heard that correctly, was there something that the Company did not trigger to bring these numbers down?

So I, actually that wasn't mine. So as you know we had the key management bonus plan and the key management bonus plan is driven off the financial performance of the Company. The fourth quarter financial performance was not at the target level, obviously, based on the January 6th call and with that, such expenses declined in the fourth quarter.

Is this plan paid out on a quarterly basis?

(MULTIPLE SPEAKERS) annual plan.

Methi Hassani (ph) of SBR.

(inaudible)

You may have to speak up (MULTIPLE SPEAKERS)

We can hardly hear you.

First one, regarding DDR2 market and we're all talking about the ramp, significant ramp, in the second half of 2005. Could you please help us understand what the size of the market and give us color, kind of addressable market that you are facing? And beyond the DDR2 if you could provide us with some update on the burn-in and any part of it you are working on for the larger market?

I am going to answer this question. So I think our outlook for the market size of DDR2 -- the market opportunity has not changed. I presented this at a couple of occasions that we expect DDR2 to be around $300 million, twice the size of the DDR1 tooling cycle. Nothing in that estimate has really changed.

With respect to burn-in, the burn-in product line continues to make progress. If you summarize 2004 and pretty much the main activity for the product line was in the second half of 2004. We booked $2.8 million of wafer-level burn-in product in 2004 and we shipped 2.5 million. And, obviously, this is in the first adoption cycle.

We have sufficient customer engagement at this point in time and expect continued growth in the product line.

And I believe you asked about Logic. And in Logic as you know we always this Company is very much focused on future long-term engagements and the Company is executing to those. So we also hope those will be (indiscernible) -- yes.

If I may have some followup. Going back to the DDR2 if you are going to see a significant capacity DDR2 capacity coming online, should we assume that a big chunk of this additional market is going to be recognized as bookings for you? Or how do you see your customers with your lead times coming down less than a quarter? How should we view the capacity ramp and your booking prospect in the second half?

And going back to the burn-in as a followup, I guess I was just interested more in opportunities going forward if you could help us understand those opportunities?

(MULTIPLE SPEAKERS)

Okay, so let me -- you want to take one? I'll address the first one, the first one here, Methi. We usually tool the demand three to six months ahead of the device ramp and that model is still intact. I think it is getting more and more towards the three-month rather than the six-month driven by increasing cycle times in the industry. And I think that is where Joe's comment came as well. We are focusing very much on that. So from that perspective, if you look at the $300 million DDR2 opportunity, the entire architecture transition in that opportunity spans beyond 2005, obviously. The $300 million is not an opportunity you recognize in six months but over the life of the architecture transition. And so one thing that we are observing is that these tooling cycles stretch out more because you have got people that ramp and use these devices more successfully early and then you have a second wave of followers.

So if you put that into 2005 as I mentioned in my comment to Ed we believe that DDR2 is going to be the core driver here into the second half of 2005, followed by 90 nm activity.

The second part of your question about wafer level burning. Wafer level burning goes hand in hand with spinal test (ph) in a wafer and that is what customers need to do on the start and year end and also you'll see that in Flash; and in order to provide NAND (indiscernible) for model year end publications where people use fab packages where you cannot afford not to pre-validate each piece of silicon before you put it in a fab package, but also as the next stage, you will see people embedding it in their test flows, as a way they do business. In order to gain cycles of learning in order to shorten their entire supply line. And when that happens, this early engagement that we had and we will get into more of a scalable growing revenue; as we communicated sometime ago, it has a time horizon.

Now it is probably two to four years where you'll see very significant ramp, we believe, in final test and wafer level burn-in and wafer.

There is another important point to make here and that is, it is a beginning of a very important trend where customers will really need solutions per design. Customers will need to be acquiring testing, solution and testing products per design because customers are in business of designing something and shipping an bringing it to market as fast as possible and it was (indiscernible) high hit rate as possible and FormFactor is the Company that may be unique in the industry, that we actually sell something to customers for every product, for every design that they do.

So some of this wafer-level burn-in and final test on a wafer opportunity will be a scalable testing process that is customized for every design that customers can do in the future. So we are pretty excited about outlook for that in the future.

Mark Bachman of Pacific Crest Securities.

Can we go through the contamination issue here? I saw your comments in the press release and you had mentioned it a couple of times, but talk to us about, has the problem -- I know you have identified it. Has it been fixed? Where are your yields compared to where they were prior to the problem? How much was Q1 impacted? And did you lose any business to competitors because of it?

I will answer this question probably, in a little more summarized way than you are asking in detail. So we have identified the root cause; and we have eliminated, isolated the root cause. Which means as of today, our production performance and yields are back to the levels where they were before. With respect to, have we lost customers out of it? At this point in time to my knowledge we have not lost customers out of this event.

Was Q1 further impacted because of this?

Obviously, we talked in January about where we were still dealing with the issue and so the answer is yes -- the first part of Q1 was impacted by it.

Could you quantify that for us please?

I have personally really not gone through the exercise, Mark, I focused on fixing the root cause.

DDR2.

PCIExpress is out there, a lot of comments from Micron, LP2, Samsung, cutting prices the whole nine yards. Has your outlook changed in the past three months as far as the speed of the ramp -- the DDR2?

I think the ramp really has not substantially changed but as you may recall on prior calls we were discussing what were the trigger points. Pricing was obviously one of the trigger points and that trigger point set a while ago.

The thing that I've want to add is that we reduced the cost of tests to the customer so the only thing we are really concerned about is bit growth continues to increase and as long as that happens, is they want our cards and they want them fast.

So I still believe we are a little bit supply constrained until we get out of -- we have the factory running full tilt now and we have got to get the new site up and running to be able to take even more advantage.

So the marketplace is going to do what it does with respect to pricing, but it is a long way to impacting bit growth.

Final question here on Flash. You talk about 90 nm, 300 mm, NAND vs. NOR and you think it is going to be back half weighted. Please give me convincing argument here that it is a tooling cycle rather than losing business over to your competitors?

Let me -- I will try to give you a few convincing points here. No. 1, we grew also in Flash over 80 percent. We grew in NAND Flash in 2004 four times, 4X. As you recall we started a Flash penetration on the NOR side. So that is the hard data. The Flash market is more competitive than the DRAM market especially the NAND Flash market so we do see more head-to-head competition but at this point in time, we really believe that the capacity requirements for the first half of 2005 in Flash have largely been tooled at our customer base. And we need to wait for the triggers that Joe mentioned with respect to 300 mm ramp, 90 nm and then obviously our four touchtone product for NAND Flash will drive resumption of growth in Flash.

The pricing that you actually see here, coming down on the north side. Shouldn't that be a driver for more Flash products assuming your value proposition?

Again I think the NOR, the NOR capacity has been tooled. There are no major design cycles where it is not happening on the NOR side.

Bill Liu (ph) of Piper Jaffray.

Just a clarification on your guidance for the first quarter. Now I understand that is your capacity right now. So what does the real demand look like?

I think Joe made the comment that we will probably at this point in time still more supply constraint than demand constraint for the quarter.

Right. So what do you think you think the real demand is?

The real demand is in excess of the guidance. That probably is (MULTIPLE SPEAKERS)

That fine. That's fine. Secondly, you talk about Flash being flat, DDR2 growing. You haven't talked a lot about mobile DRAM in this call. Can you talk a little more about that in near-term?

On mobile DRAM, I think we covered this on January 6, so that is probably one reason why maybe we haven't highlighted it that much. The mobile business is a little bit in line with the Flash side. It relies on the consumer electronic end and we reported in the beginning of January, a general weakness in those market segment. That condition really has not changed.

Peter Wright of CIBC World Markets.

Looking back at a couple of the recent conference calls from some of the equipment suppliers, they were commenting about possibly more cautious outlook than people thought three to six months ago in the DRAM market, specifically looking to the second quarter. And I understand that your guys' revenue is a little bit insulated from that. However I was hoping you could comment on what you are seeing there and what the drivers are that might be delaying some of that spending?

Obviously I don't think, Peter, we probably can't comment really on what impact the front end companies and their outlook for 2006. Our business is fundamentally driven by bit growth, by design activity and tooling cycles. And I think we laid out in detail what we expect in DRAM for 2005. I think Joe probably has a few comments on it as well.

I would certainly agree with what Jens says. But I think there is a lot of the still front end tooling going on in the memory space in 300 mm and the 110 and below applications. And that bit demand capacity is being installed now and will come on in the second half. You can name a bunch of companies in Japan, Korea and Asia that essentially are ramping installed capacity. Those tools are being delivered now.

So the order rates for front end equipment are low, but the capacities being put in place by the customers and we see it in the second half where that capacity comes on stream and these devices need to be tested. And once again we still believe bit growth is there for us.

But I do want to add one thing and that is for equipment makers, that is something that I think we have done in detail before. It is capacity expansion that matters. For us for example a 90 nm transition is both a bit growth event and it is a tooling event. It drives our business both those ways and it would be (indiscernible) for a majority of equipment makers.

When looking at your Q4 '05 plant capacity at 75 million in revenue, it seems that that is about half the total capacity of the facility you are building. Is that accurate? And if so, what are the plans for the other half? Is it future requirements for probe card demand or are there some other initiatives?

If you look at it, so the 75 million you see here, that's our estimated capacity for the quarter, based on the equipment that is going into the new factory. Then the next leg, actually, of capacity expansion you would have out of that would primarily come from hiring until you ultimately could fill the factory both from an equipment as well as a personnel point of view to what we said are approximately three acts of our old site.

So your math of 50 percent is correct and obviously the further tooling of it will be based on our industry outlook.

I was hoping two last questions. If you could give us some insight into your expected depreciation through '05? Is that likely to be ramping with your new facility? It seems your actual product margin is ramping maybe even quicker than these numbers would reveal?

I am going to answer shortly. Yes, depreciation is ramping, obviously, as you bring up the new factory.

What's a good full year estimate?

I think I have not given that. Maybe if you give me time for the next call I give you the number after I go through many pages here. And we will take the next question I will follow-up with you on it.

Right. The last question is, if you have seen any extension of DDR1 specifically 512 Mb or if you see most of the transitions hitting DDR2 at this point?

At this point in time, people are very much focused on DDR2.

Morelli Alberi (ph) of J.P. Morgan.

You mentioned that the competition is a little higher for NAND Flash than for DRAM so does it mean that as NAND increases a percentage of your revenues, your gross margins are going to be negatively impacted?

What it means is that one factor as we grow we need to introduce products that allow us to successfully growth within that market segment within the financial model that we communicate. And an S150 S is one such product. What the Company needs to do when we grow is grow in that market.

I think it was Joe who talked about flip chip growth increasing, starting in 1Q queue again. Is that coming mainly from existing customers or do you have any new customers that are driving the growth?

That, actually, is coming from both existing customers, but we also reported in earlier quarters that we were actively penetrating new accounts and we are starting to see activity there as well.

So you are (indiscernible) revenue from those new accounts starting in 1Q?

We are looking at both growth out of existing and new customers in Logic.

For the (indiscernible) logic market is that a segment that that you can address with your existing suite of products or would you have to introduce a new product there to that segment?

We do have some revenue in that market today, albeit small. And the last address -- a large portion of this market, yes, we would need new product. As you know last year, we founded advanced development line and put in significant investment and research which will continue in this year. We believe that, in due time, we will be able to address attractive applications in (indiscernible) logic.

We don't have precise timing for you today.

So can you give me a guide here, is it is going to be in '05 or '06 timeframe event?

So I think we will update you probably on the timing in later calls.

Any changes in your 10 percent customer list for the quarter?

There are dynamics on that list, I think, as we file the Ks, you are going to be able to review that.

What is your tax rate guidance for the next quarter and maybe for '05?

For 2005 tax revenue, expect 35, 36 percent.

And similar for 1Q?

That is correct. That will be the rate for the year and for the first quarter.

Tim (indiscernible) of Morgan Stanley.

Two questions. The first one to Jens. I'm looking at the margin guidance you have given and I'm comparing the second quarter and the third quarter; and basically the ramp up of the new facility's perfectly compensating the ramp down of the old facility. Can you swim me through how you are still getting about 3 million of startup cost? What is in that for the 6 percent compression? And you talk at the bottom of the disclosure there about closeout costs not being (indiscernible) currently. Can you give us some kind of range? Is that millions? Tens of thousands, hundreds of thousands? And what quarter they would come or would they be spread and then I have a follow-up, please?

I think -- so this is a load of -- I got to revisit this one question for persons (indiscernible). Let me now try to handle this. I think the first comment is that this is an analysis and not guidance. I want to reiterate that. Ja? Then, as you see from the schedule right? You see very much primarily both redundancy cost and also still a fair amount of non-recurring cost in the third quarter of '05, because that is the last leg of capacity ramp. Then, with respect to the fourth quarter of '05, where we say there may be closeout cost, there may be closeout cost with respect to our old factory as we vacate the premises. But at this point in time I really have no way of estimating what such expenses would be.

And the follow-up was just the SG&A run rate. What you think it's going to be in the quarter and is the fourth quarter (MULTIPLE SPEAKERS)

We don't give guidance at that level. I think I gave you operating income. You see the margins so, if you go in between, look at our target model for R&D that is out there, I think you'll be able to do the math.

Ladies and gentlemen, we are reaching the end of the allotted time for today's Q&A session. We will take two additional questioners.

Dennis Wasson (ph) of Adams Harkness.

Quick question on the flip chip Logic side. I know you talked a little bit about it on the call. Did the revenue in the bookings in that segment have been down from I guess a few quarters ago and I'm just curious, I think Joe talked about it, the flip chip Logic area as being a growth driver in the first couple of quarters of '05. Do you have specific applications or I guess is there any market dynamics that would cause that to be a growth driver? What do you see as the opportunity in the near-term in that space?

I mean, if you look at the near-term as we mentioned we said we would get growth from existing customers. So that, obviously, sits in both the chip set of microprocessor arena. On the new customers, since we have not revealed any of those I want to stay away from the applications because that would be pretty much conclusive.

Was there any market dynamics that would have caused the numbers to come down the last few quarters in that specific segment? Granted, it is a smaller piece of the total but --

As we mentioned in prior calls, Dennis, right? We have capacity constraints for the majority of 2004 and with that we have focused very much on mission critical applications.

I think what Jens said, again, I think it is for everyone's benefit. I mean that is the -- that was the most important factor in 2004 in terms of our market positioning. And that is the need and the focus on satisfying such mission critical requirements in capacity constrained situations.

Steven Rosten (ph) of Glen Capital Management.

I am going to choose one question. Joe, you have talked about the lead times and cycle times of how many need to drop as have Jens and Igor previously. Where do you think you need to be and what implications will that have for each of your different markets and potential markets?

I think when we drop these lead times and cycle times, it is actually going to reduce our costs. And it's going to make as competitive in many areas that we are currently not even quoting, because if the application is for needle (ph) cards we don't address that type of market. I think that our ability to get our cycle times way down will enable us to address bigger pieces of the market and actually drive our profitability higher, which gives us more money to spend in R&D and just proliferates our technology lead. We could do a heck of a lot more in Logic if we had the time and the focus to do it. We really have to address the customers' delinquency issues, get rid of it, and get our lead time significantly down which we are planning on doing shortly.

But it is not easy in the period where you are bringing down one site and bringing up another site at the same time. And also this (indiscernible) for contamination issue that hits in December didn't help matters, because it took time to fix and now that it is fixed we can get back to performing the way we should.

I understand it has been very challenging. Just to have you elaborate a little bit, when you're talking about Logic and delinquencies, is that one of the key priority end markets where you think you could improve and open up your market in an attractive market by lowering the lead time? And then secondly how far do you need to go in terms of lowering the lead times and cycle times?

I think the Logic market gives us a phenomenal opportunity to address and the achievement of these cycle times will enable us to do that. It depends pretty much on every one of our cards is a custom design. So it is hard to generalize, but customers would like to see a certain lead time for reorders; and then a certain cycle time for the initial design. So we have got to shave probably 30, 35 percent off the current cycle times in order to get there.

So, since this is the end of the call, I just wanted to answer Peter's depreciation question. It will be a run rate of probably around $3.5 million per quarter.

Ladies and gentlemen, that concludes the FormFactor 2004 fourth quarter and fiscal 2004 year end conference call. We appreciate your participation. You may now disconnect.

Thank you, everybody.

Thank you.