FormFactor Inc (FORM) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FormFactor, Inc. first quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. At this time I would now like to turn the call over to Ms. Anne Leschin. Please proceed.

Thank you. Good afternoon and thank you for joining FormFactor's first quarter 2006 earnings conference call. With me on today's call are Joe Bronson, President, and Ron Foster, Chief Financial Officer. Igor Khandros, CEO, will not be with us on today's call as he is in Asia visiting strategic partners and customers this week.

Joe will provide a summary of our first-quarter performance and then review our market segments and recent announcements, and provide an update on our capacity plans and corporate priorities. Ron will then take us through the financials in more detail and provide guidance.

And finally, before I hand the call over to Joe, I will review our Safe Harbor statement. During the course of this conference call, we may make projections within the meaning of the federal securities laws, including statements regarding FormFactor's growth and financial performance, as well as our strategic and operational plans. These forward-looking statements are based on current information and expectations and are inherently subject to change. Actual results may differ materially and adversely to those in our forward-looking statements due to various factors, including but not limited to the rate at which customers adopt the Company's newly released architectures, technologies and products, the extent to which chip manufactures modify announced capital equipment expenditures and device roadmaps, and the Company's ability to efficiently execute on its capacity expansion plans. Please refer to the Company's recent filings on Forms 10-K and 10-Q for more detailed discussions of the relevant risks and uncertainties. FormFactor undertakes no obligation to review or update any forward-looking statements, or update the reasons actual results could differ materially from those anticipated in forward-looking statements.

Finally, a breakdown of revenues and bookings by market and geography and a GAAP to non-GAAP reconciling income statement is available on our Website. In conjunction with Ron's comments, a schedule that reconciles our GAAP financial guidance and certain non-GAAP financial guidance with respect to FAS 123R, Stock Compensation Expensing, will also be available on our Website. I would now like to turn the call over to Joe Bronson.

Thanks, Annie. Welcome, everyone, and thanks for joining us today. FormFactor had another outstanding quarter, with record performance in revenues, bookings, production and profitability, all reaching historical highs. Market demand for advanced probe cards continued to reflect the robust trends in the fourth quarter as customers ramped their back-end production for both memory and logic products throughout the first quarter of 2006. We successfully ramped the new facility, which has become a significant competitive advantage as we execute and reduce leadtimes to customers.

Revenues grew 13% sequentially to 81.3 million from 71.8 million last quarter. Gross margins continued to improve, reaching 50.8% this quarter versus 49% in the fourth quarter. And our profitability also improved. Ron will provide further details.

Strong market demand for advanced probe cards continued this quarter due to a variety of factors, including the increased demand for mobile and consumer applications, increased design activity, the move to advanced nodes such as 90, 80 and 70 nm, and the ongoing buildout of 300 mm factors.

All of FormFactor's key market indicators were positive in the first quarter. Bit growth and design growth continued to benefit FormFactor, as customers adjusted their capacity between products such as DRAM and NAND flash in order to optimize their revenues and margins. We also saw significant movement to DDR2 designs, as DDR2 is rapidly becoming the dominant technology.

FormFactor benefits every time a customer changes a chip design or implements a production shrink, as new versions of probe cards are required. FormFactor enables customers to make these capacity shifts in a cost-effective manner, which continues to fuel demand for our products.

We are beginning to see a noticeable (technical difficulty) to known good die testing, KGD, as customers begin to require more testing on the wafer instead of line package testing. This is due to the high cost of a single device failure in a multichip package such as a stack package, as it causes the entire package to fail. Customers can no longer afford to wait to test devices at the package level. Only FormFactor can provide customers with a complete cost-effective solution for parametric sort, burn-in, stress, and high-speed functional testing required for such devices.

New product development continued to proceed. 2006 will be a significant product development year, as we plan to introduce new product offerings in NAND flash on a new platform architecture, Harmony, new logic market entry in fine-pitch logic, and derivative DRAM probe cards that will lengthen our lead over competitive product offerings.

We remain on track to penetrate the NAND flash segment of the market with our 1 Touchdown and Harmony-based product architecture in the second half of 2006. We are currently engaged with three early adopter market-leading customers. We are also pleased with the pace and performance of the fine-pitch wirebond logic product, as we shipped our first prototype card to one of our customers in early April. We plan to introduce this product toward the end of the year, and we expect it to be another growth driver for the Company in 2007.

Growth in DRAM was strong, with trends continuing such as the ongoing transition to advanced nodes 90 nm and below, 300 mm factories, consumer demand in mobile RAM, and the acceleration of the DDR2 transition. We expect DDR2 to be a major contributor to DRAM revenues throughout the year, driven by major customer conversions, simultaneous with node and density transitions.

The transition to smaller nodes also continued during the quarter. These transitions can vary from quarter to quarter, depending on our customers' tooling decisions. But overall, we expect this trend to continue.

We saw seasonal strength in mobile RAM continuing, driven by the strong demand in the consumer and mobile markets. With the proliferation of devices such as 3G phones and PDAs, the need for KGD in this segment is also growing, as it becomes more and more important to cost-effectively test die that are assembled into expensive multichip packages.

Overall, we expect growth in memory to continue, as new applications for consumer and industrial markets are implemented by our customers. Graphics memory is a significant growth segment as products such as game consoles, streaming video and 3G phones grow. Although the launch of Microsoft's Vista OS originally anticipated at the end of 2006 has been delayed, we do not believe the delay of Vista will impact the bit growth forecast for this year, and the industry supply chain will continue to put Vista-ready products in place in the second half of 2006. We do believe the Vista OS launch will provide another significant growth driver for our DRAM segment for PCs in 2007.

NAND flash continues to be a very important business for FormFactor, and we had significant orders for our existing NF 150 product line this quarter. We have designed our next-generation 1 Touchdown Harmony technology and cost structure specifically for the flash market. Although there are a few 1 Touchdown 300 mm products rumored to be entering the market, we believe our Harmony product will provide a significant value-added proposition to customers in a similar way that we demonstrated in the DRAM market. We plan to introduce the first production-worthy product with higher throughput, reliability, performance and uptime. We believe this product positions us well to significantly impact and penetrate the NAND market, which will serve as a critical launch pad to our overall strategy of expanding our market share across all market segments.

Additionally, as customers begin to address their 300 mm 1 Touchdown challenges in markets such as DRAM and wafer-level burn-in, they are seeing the need for more of a platform solution. We believe our standardized Harmony architecture will lay the foundation for FormFactor to become the only provider of complete testing solutions for our customers scalable to future roadmap requirements.

FormFactor continues to be the market leader in the NOR flash market. NOR flash is a strong, consistent market for us, in an area driven largely by 3G phones and multichip packages. These products and their associated costs are driving our existing NOR customers to purchase additional FormFactor probe cards to enable KGD.

Logic continued strong at near record levels as we saw a great deal of tooling activity and 65 nm in the last two quarters. We expect stable growth from our flip chip gaming and graphics customers throughout the year. We also believe our entry into fine-pitch logic later this year will be a significant driver for FormFactor, which the Company has not addressed in its history.

Multichip packages for mobile electronics will continue to see strong demand, driven by the digital consumer market. Mobile customers are increasing their requirements for KGD in terms of capacity, testing and quality. In response, our mobile customers are driving more final tests to the wafer in order to reduce their overall cost of test and to enable KGD. Customers are utilizing our advanced products to meet the challenging test requirements for KGD applications, and to offset the rising cost of packaging.

FormFactor's upstream wafer-level burn-in product is one component of this where we see increased demand occurring with the tooling of mobile RAM. In addition to buying a conventional wafer sort card, customers are now buying a second upstream card from FormFactor. We expect demand for upstream wafer-level burn-in products to continue to grow throughout the year.

In addition to the short and new wafer-level burn-in cards we are selling, customers are beginning to add a third wafer test card known as [HF tab], or high frequency tested probe, to enable final test on the wafer. HF tab has begun to show momentum this quarter, as some of our memory customers are starting to move high frequency final test to the wafer. This demand is driven primarily by 3G cell phones and mobile devices. We believe the demand for high frequency test on the wafer is just beginning, and expect continued adoption in flash and DRAM customers.

Turning to operations, we have successfully ramped our new state-of-the-art manufacturing facility, and achieved a record level of production in the quarter. This was accomplished by improvements in wafer fabrication, which resulted from increased yields, and learning curve improvements in equipment and workforce performance.

Gross margins also achieved our internal targets, and we continue to expect sequential improvement in future quarters as we implement further improvements in all of the aforementioned areas.

We also made improvements in our production cycle times. Our on-time delivery to customers and our (technical difficulty) commitments, which will further enhance our competitiveness as we expand into new markets. Having successfully made the transition to the new facility, we are now leveraging our increased scale with strong operational performance and industry-leading technology, to further differentiate ourselves from any other company in the industry.

With multiple new products in the pipeline and strong demand, we have begun planning for the next stage of FormFactor's growth. We currently have approximately 100 million of quarterly manufacturing capacity in place, and are working to ramp the factory to the next level. In the next six months we will increase the capacity in our Livermore facility through a combination of facility and tool investments, plan process technology improvements and overall factory yields, and ERP system improvements. When completed, we believe the capacity in the new facility will reach 125 million per quarter.

We are also planning to expand our back-end manufacturing for assembly and test into the Asian markets in 2007, where many of our customers reside. Having some operations overseas can provide a number of advantages to FormFactor, including making us a more local and responsive supplier to customers, thus reducing cost and cycle times, and maximizing capacity with minimum investment. This global expansion plan via distributed model will leverage the introduction of our new products in NAND flash, fine-pitch logic, and advanced DRAM to further our competitive position in the marketplace.

In order to achieve this longer-term gold and beyond, we raised $182 million in a follow-on equity offering at the end of this quarter. We plan to use the proceeds from the offering to execute on this strategy.

Overall, we were pleased with the Company's performance this quarter. We believe FormFactor remains mission critical to its customers, and the market trends are increasingly playing to our strengths. We continue to focus on putting the infrastructure and capacity in place on a global basis to support our innovative market-leading product and technology efforts. We are well-positioned to lead the market in advanced wafer probe solutions, and to capture a significant portion of the large opportunity ahead.

I would like to thank our employees for their hard work and dedication in making this a successful quarter. Now I'd like to turn the call over to Ron Foster, our CFO, who will provide more detail on the first quarter and give our guidance for the second quarter of 2006.

Thanks, Joe. Revenues once again hit record levels this quarter, climbing for the fifth consecutive quarter, reaching $81.3 million. This represents an increase of 9.5 million, or 13% over the fourth quarter, and 30.4 million, or 60%, versus Q1 of 2005.

From a geographical perspective, sales grew in most regions, especially Asia. As we continue to RAM our direct sales service and support operations in Taiwan, we are seeing strong results in this country, as revenue hit another historic high this quarter. Japan declined slightly sequentially, but remained near record levels in the quarter and nearly four times the level of a year ago.

DRAM market trends remain strong, as DRAM revenues grew 21% sequentially. This was due largely to an increase in mobile RAM revenue, which we attribute to seasonality in the consumer segment. Also contributing to the growth was the move to smaller nodes, as roughly 80% of DRAM revenue came from 90 nm products and below. As expected, 80 nm volumes are increasing as a number of customers make an interim move with DDR2, prior to transitioning to 70 nm.

Flash revenues fell 13% versus the last quarter as both NAND and NOR declined sequentially. NOR revenue is moving with the normal seasonal cycle in the market, while NAND is expected to show meaningful growth later in the year with the introduction of our new 1 Touchdown offering.

Logic revenue was down 8% from the record high level in the fourth quarter and up 171% from the first quarter of 2005.

Adding to Joe's comments, we continue to experience increasing traction in KGD. Wafer-level burn-in revenues grew significantly in the quarter, up 65% sequentially. In the first quarter of 2006 we shipped the first multi-million dollar quarter in HFTAP, high frequency test at probe. The total revenue for wafer-level burn-in plus HFTAP was approximately $9 million in the quarter, up from 5 million in the fourth quarter. In addition, customers are utilizing our sort cards as well in KGD applications.

The breakdown of revenues by market and geography is available on our Website.

Bookings in the first quarter also grew to record levels, reaching 95.9 million, up 17% over the fourth quarter and 89% over the same period last year. Sequential increases occurred in DRAM and flash, and all segments increased year-over-year. Order growth was the strongest in Asia and North America.

DRAM bookings increased 7% over the fourth quarter, as the conversion to DDR2 is in full swing. Mobile RAM recorded its highest bookings level ever, as the leading edge of the seasonal consumer market cycle is beginning.

Flash bookings were unusually strong, up 120% sequentially, as both NAND and NOR grew. It was encouraging to see the strength in our current NAND flash 150 NAND product line, while we anticipate sustained NAND flash growth to come from our new 1 Touchdown Harmony product under development for volume release in the second half of 2006.

Logic bookings dropped 7% from a strong fourth-quarter level, still up 46% from the prior year. The increased level of bookings in Q1 left ending backlog on the high-end of our normal six to eight-week backlog range.

Q1 2006 is the first quarter that we implemented FAS 123R option expensing. Consequently, most expense and income numbers on the Q1 income statement are not directly comparable with prior periods that did not include FAS 123R, but only included APB 25 option expense associated with pre-IPO cheap stock charges. Going forward, in addition to reporting GAAP results, I will also call out non-GAAP numbers that exclude the new FAS 123R charges where it provides comparative clarity. The original pre-IPO option expense will continue to be reported in the non-GAAP numbers as it gradually declines to zero in 2007. A schedule is available on the investor portion of our Website that provides comparability with prior periods.

GAAP gross margin for the quarter was 50.2% and 50.8% on a non-GAAP basis, which compares to 49% in the fourth quarter. Factory productivity and yield improvements enabled the revenue growth, which in turn lifted margins sequentially. Though we are no longer reporting costs related to the buildout of the new facility, some startup costs were incurred and are recorded in gross margin.

As anticipated, all processes are now running at the new facility. We have elected to meet increased customer demand by continuing to operate some equipment in the old facility for incremental capacity, while the new facility is equipping to handle still higher volumes in the coming quarters. While this does have an impact on margins currently, it gives us near-term capacity of about 100 million revenue per quarter, and provides flexibility to optimize the layout of the new facility for higher capacities. As revenue grows and productivity improves, we expect margin progress to continue over the next several quarters.

The first quarter of 2006 marked a milestone for the Company, as we continued to improve our manufacturing processes and increase productivity in the new factory. These efforts reached an inflection point over the last few months, where we have begun to see benefits to production processes in the form of improved throughput, yields and on-time delivery, which we believe will result in financial leverage going forward. We expect to achieve additional labor overhead and material efficiencies through these continuing yield and productivity improvements.

Operating expenses for the quarter were 25.5 million on a GAAP basis, or 22.2 million non-GAAP, up from 21.3 million in Q4. As a percent of revenue, operating expenses were 31.4% on a GAAP basis, as FAS 123R option expenses added 3.4 million, or 4.2 percentage points. On a non-GAAP basis, operating expenses for the first quarter were 27.2%, which compares to 29.7% last quarter.

R&D expenses excluding FAS 123R fell slightly, due primarily to somewhat lower new product startup costs and an accounting reclassification of patent filing costs into SG&A. Sales, general and administrative expenses, excluding FAS 123R option expense, increased 1 million to 13.1 million, but declined as a percent of revenue from 16.9% to 16.1%. Non-GAAP stock option expense for Q1 related to APB 25 cheap stock was $437,000.

Operating income for the quarter was 15.3 million, or 18.8% GAAP, and 19.2 million, or 23.6% non-GAAP, up from 13.9 million, or 19.3% of revenue last quarter. Non-GAAP operating income of 23.6% also compares favorably to our guidance of 20 to 22%.

Interest and other income from the quarter increased to 1.5 million from 933,000 the preceding quarter. The increase was attributable to higher interest rates, a decrease in foreign currency losses due to an improved hedging program, and investment returns on the 182 million in proceeds from the March equity offering. The yield on investments in the quarter was approximately 3.8%.

Litigation and compliance expenses for the quarter were $1.7 million. We continue to take actions to protect our intellectual property in Korea, Taiwan and the U.S., as part of our long-term strategy.

The tax rate for Q1 was 35.9% compared to 29.1% in the fourth quarter, as the R&D tax credit has expired and has not been re-enacted yet by Congress.

Net income for the quarter was a record at 10.8 million, or $0.25 per fully diluted share on a GAAP basis, and 13.2 million, or $0.30 per fully diluted share on a non-GAAP basis. This compares favorably to 10.5 million, or $0.25 per fully diluted share in the fourth quarter, and 4.9 million, or $0.12 per fully diluted share in the same period of 2005. The equity offering of 5 million shares executed in March had a nominal dilutive effect in the quarter of less than $0.01 EPS.

Cash and marketable securities were 402 million in the first quarter, up 188 million from the fourth quarter. Of the increase, 182 million came from net proceeds of the March equity offering. Another 8.7 million of cash was generated from operations, even though the first quarter of each year is impacted by payments for annual incentive programs.

During the first quarter, 9.7 million was spent in capital expenditures, versus 7 million in the fourth quarter. The majority was spent on factory and global service center expansions. As business volumes increase, we continue to anticipate capital expenditures to support business growth will average between 10% and 12% of annual revenues.

DSO continued low at 45 days in the first quarter, compared to 42 days in the fourth quarter. Net inventories increased by 2.7 million during the quarter to 21.1 million. Inventory turns increased to 9.3 on the strength of higher revenue volumes, compared to 8.8 in the fourth quarter. Headcount increased to 928 from 850 in the fourth quarter.

With this, let me give you our guidance for the second quarter of 2006.

We expect revenues for the second quarter to be 85 to 88 million. GAAP operating income is projected to be in the range of 18.5% to 19.5%, including about 5 points of incremental FAS 123R stock comp expense. Excluding FAS 123R, non-GAAP operating income guidance is 23.5 to 24.5%. As we approach the target range of 25% operating income, excluding FAS 123R stock option expense, we expect to make continued improvements in gross margin in the next several quarters, and to continue investing in R&D and SG&A infrastructure to support our growth.

We target GAAP earnings per share of $0.26 to $0.27 per fully diluted share. FAS 123R expenses will have an additional $0.06 EPS impact related to stock-based comp in the GAAP results. This will translate to non-GAAP EPS guidance of $0.32 to $0.33 for the second quarter. The dilutive effect of the follow-on equity offering last quarter in this quarter is projected to be about $0.01 EPS in the guidance. The tax rate is expected to remain in the 36% range in the second quarter and the year.

Finally, before we open the call for questions, we would like to announce that FormFactor will be hosting an analyst day on Tuesday, June 6 at our headquarters in Livermore, California. Now let's open the call for questions. Operator?

(OPERATOR INSTRUCTIONS). Jim Covello, Goldman Sachs.

Great results. A couple of quick questions. If I look at your bookings for Q1 versus your revenue guidance for Q2, is it kind of a similar situation where you take a little bit of a conservative approach to the revenue guidance vis-a-vis the bookings, just like you did from last quarter?

We had strong bookings in the quarter. Obviously, there can be some variability in bookings levels. Also, some of the bookings that came into the first quarter are actually scheduled for delivery on some of our new products out in the third quarter. So, we believe the guidance we gave you is in the right range.

Terrific. A couple of clarification questions. How are you classifying known good die in the segment breakout? Because that could fall into any one of a couple of categories there.

Known good die is (technical difficulty) products that go into known good die testing, and they're dominantly today in DRAM, but also in flash segments. We expect to get penetration in both those areas with known good die revenues. I broke that number out; the HFTAP and wafer-level burn-in numbers of $9 million for the quarter is combined into those two segments.

The only other things is on sort cards, which would be included in a KGD-type of number, we do not have the visibility yet to see how the customers are using -- there could be a multipurpose use for the sort card. So, we don't have visibility in terms of how much the sort cards are going into KGD applications.

Terrific. A couple of other quick ones. On the back-end capacity expansion into Asia, do you think that's more likely a build or a buy expansion?

Can't say yet. We're looking at both options.

Fair enough. One other one. I might have missed this, but wirebonded logic -- this is a wirebonded logic probe card; that's something you had talked about a little bit in your most recent presentation on your Website. I might have missed it if you talked about it on this call. But any update there?

I gave a little bit of an update. We have shipped our first what I will call prototype card to a customer, in terms of giving the R&D update. So, we're working with that customer. The plan is to introduce this product towards the end of the calendar year, and start to ramp it through 2007.

Terrific. Thanks so much. Terrific results.

Just one addition to that point. When we enter the fine-pitch logic market, we will virtually cover every segment of the marketplace with offerings. Next question.

[Chris Blancett], JP Morgan.

Just a couple of quick questions. Your high-growth rate in the Asia-Pacific area -- are you allocating this towards your rollout of direct sales in Taiwan, or is this kind of Taiwan or Korea? I'm trying to figure out which country this came from.

It's pretty broad-based throughout Asia. You just have to take all the memory manufacturers, and we are penetrated in all of those situations. So, wherever they are located is where we are getting very good business. That would be in Japan, Korea, Taiwan.

On your flash bookings, can you give some color on how much was NOR versus NAND for the quarter?

I'll have to check that quickly, but I think on the bookings it was heavy to NAND.

Medhi Hosseini, Friedman Billings Ramsey.

If you could also help us with the mix of DRAM bookings, DDR2 versus mobile RAM.

It was very heavy to DDR, especially the bookings, as we're seeing a real ramp-up in DDR2. A very significant percentage of our volume and bookings is now DDR2. And DDR1 is tailing off.

And then you talked about flash booking heavily towards NAND. I assume that doesn't include yet the Harmony product.

That's right; we had no bookings from Harmony.

(multiple speakers) NF 150 product.

So, when I look at your presentation on the Website, you're talking about the $200 million flash market by 2009. And correct me if I'm wrong. So, right now you are around 50 on an [analyzed] basis, actually 40 million per year. Are we going to see a step-up in quarterly flash booking and revenue? Or how should we think about the ramp here, as we go from 40 million a year to 200 buy 2009?

That's all predicated on the introduction of our new product in NAND flash. So, we expect to be able to achieve good market share performance with this product which we're going to introduce in the second half of 2006. So, we recognize this is a very good market, and it's one that we presently have a low share. And with the transition to 300 mm, 1 Touchdown applications, our product offering is designed to address that need.

Let me rephrase the question. Have you had -- if you could talk about the number of design wins or qualifications that you have going, to what extent you're existing NAND flash customers would migrate to Harmony. Any color you could provide on those trends?

We said in our scripted comments that we have early adopting cards with three of the major customers. That's where we are right now with the product.

And do you think when it comes to NAND and 65 nm and the Harmony product, would competitors still be far behind you like they are in DDR2?

I can't speak yet to competitive product offerings, but we believe that we are going to have a very significant value proposition for the customer. So, we plan on being the market leader, but we have to execute it.

Kevin Vassily, Susquehanna Financial Group.

Joe, a question for you. Where do you think your customers are right now in terms of the tooling cycle for DDR2? Or maybe asked a different way, how much more opportunity do you guys see in front of you from this segment?

I think it's going to be a very strong year. Customers are into 90 nm full production, and so DDR2 is really dominant right now. But there are customers that are going to -- not all, but there are going to be some customers that going to move in 10 nm segments from 90 to 80, and some will be at 70 by the end of the year. And we're providing probe cards for all of those applications.

Do you see any continued -- I don't want to call them half steps -- but maybe as you call them, 10 nm step-downs past 70 nm, extending some of the opportunities for DDR2?

We think there will be continuous step-downs as we go along.

Mark Bachman, Crest Securities.

Ron, can you -- if I go back on the gross margin targets, the long-term targets here, I believe that these were set before FASB 123, and they probably didn't include any additional buildout of existing facilities, things like this. Talk about your commitment level to get to 53 to 55% gross margins. And does that include these additional charges?

I hope you're feeling okay. I heard that you had some challenges, but glad to hear you on the phone. In terms of gross margin, we did set our model sometime back. It does not include or contemplate FAS 123 option expensing. So, the comparability is with our non-GAAP numbers. We fully expect that we can operate on average in that range of 53 to 55% gross margin, and including in that the cost of expansion and growing at greater than 25% per year, as we have previously communicated. And it would fit within that structure.

On the KGD side, can you discuss the amount of customers that you're engaged here with on both the upstream and HFTAP products, the types of customers that are using it? I know that you've kind of talked in generalities, but give both me and the investors here something to hang our hat on as to the adoption rate here and your ability to continue to break out these revenues going forward.

What I'll say is that memory -- the leading memory customers are migrating to KGD. So, it's just a matter of time. Just as we are penetrated in all of these situations, as the customers move, they are moving in lockstep with us. So, as soon as they move along, we're capable of meeting that requirement. This is also very application-specific, and so we are certainly supporting the customers in this manner to get them to this point. As they -- right now, mobile RAM is a major driver, so the mobile RAM leaders are adopting these types of products. In high frequency test at probe, we booked more business this quarter than we did all of last year, in one quarter. Now, I don't know if that's a trend that's going to continue, but we still believe it's a very high-growth area for us.

Finally here, just on your customer base. Any change in your top 10 customers here? And also, can you identify how many customers that you have initial designs for on DDR3?

DDR3, we only have a few. It's just getting started on designs. On the customer breakout, I think you have to wait for the 10-Q. That's the easiest way to deal with it. That will be disclosed in a few weeks.

I'll wait for it. Thanks.

Edward White, Lehman Brothers.

Looking at the relative scale of opportunities this year, if you compare NAND flash versus logic, given the strength of NAND flash in the quarter, the fact that you get a big driver with Harmony coming along, what -- which of those two do you think may be the bigger opportunity for this year, and which are maybe more opportunities as you look in 2007?

I would say that in the near-term, NAND flash will be -- we have a steady logic business. I'm not talking about the fine-pitch product. That is really going to complete development, and early engagement with customers will be a 2007 driver, the fine-pitch side. The logic business that we have is doing quite nicely and will continue to do so. In NAND flash, we've had some reasonably good business with our NF 150. That will provide some stream of revenue. And we do expect to get some revenue out of the Harmony-based architecture in the second half of 2006. But once again, these are two major drivers for revenue growth in 2007.

Can you talk a little bit more about the new facility, particularly in terms of yield performance, whether that's tracking what you would have looked for? And secondly, can you talk about the flexibility of the new facility? In other words, is there any sensitivity to the mix of business that you might get as you start to enter into the new areas, or do you think you can accommodate a fairly wide variety of product types there?

We think the new facility is operating pretty well, and it operated very well in the first quarter. So, when we talk about expanding our capability, we're not going to be going through another round of what I would call high-cost and nonrecurring items. We're basically going to tool the facility as we go. We also expect and are getting yield improvement. We have plans to continue to do that, because the more we get, the more capacity we can get. So, efficiency, productivity are really important, because we can then satisfy customers better. And this also leads to where our factory becomes a very significant competitive situation, because we'll be able to not only deliver, but we are able to deliver in volume, which is quite significant.

Some of the logic tool sets we do need some very specific equipment for, and they require factory layout. And once again, that's all in what I've just discussed. The factory is capable of doing that. And that was really the whole purpose of the entire exercise, was to get flexibility and increased capacity out of the tool set. And you match that with a good infrastructure and you've got a world-class facility. We're not done; we've got a ways to go, but we've really made some pretty good progress. We're going to continue to focus on increasing our production record quarter after quarter as long as it can continue to bring the business in.

Patrick Ho, Stifel Nicolaus.

Congratulations. Joe, I think you just briefly touched on it, but could you elaborate a little more in the type of tool sets or the differences between what you're using right now for, say, memory, and I guess DRAM and flash, and what you will be bringing in on logic? How different of a tool set is that going to be, and does that increase any cost or is it very comparable to what you're doing right now?

It's pretty comparable. I'm talking nuances, not wholesale different tool sets. So, you shouldn't take that away. These are just a few different tool sets that we'll insert into the factory layout. It's not going to change the cost or margin structure, or any of the things that we are committing to do.

A question for Ron. In terms of the stock option expensing going forward, are the numbers from Q1 something that we can use on a go-forward basis for the remainder of the year?

Actually, there's a schedule out on the Website that shows our guidance GAAP and non-GAAP adjusted. And the EPS effect in Q2 will be about $0.06 for the stock option expense. And that's in the range, what you can assume in the near-term.

Timm Schulze-Melander, Morgan Stanley.

Congratulations on a very solid set of results. Two quick questions if I could. I was just looking back over your last several quarters at the flash memory bookings, and just sort of comparing that volatility with DRAM bookings, which were much more stable. Given that flash has been such an explosive growth market, how should we sort of think about why the bookings have been volatile?

You mean vis-a-vis DRAM?

Correct.

As we've said, we see the big market opportunity to be in our 1 Touchdown product. And if you look back in history, bear in mind that we communicated that we have actually been capacity constrained for some significant period of time, and we're focusing on our DRAM customers who we were mission critical to and they had no options. Now that we have a factory that can ramp and scale, as we're already demonstrating here in the last couple of quarters, we have the ability to commit in a quite firm way to customers and roll out the products that will address the flash market. So, the bookings you've seen to date, including the significant bookings this last quarter, are predominantly current technologies. We are in the process of rolling out a radically new one in the second half, as Joe already commented.

Just thinking about HFTAP, would it be reasonable to assume that the bulk of your logic revenues are HFTAP?

HFTAP is for a KGD application for high-speed tests. So, it's a portion of that business. It is not a part of the logic business.

So right now it's involved in DRAM predominantly, and flash. High-speed test is DRAM, virtually exclusively. But KGD is DRAM flash markets; the high-speed test is dominantly DRAM.

[Dennis Cahn], Piper Jaffray.

If I look at the three segments -- DRAM, flash and logic -- how would you rank the growth rate year-over-year in '06?

We aren't specifically culling out segment growth rates, Dennis. But qualitatively, we anticipate seeing very robust growth in DRAM, not only in '06 but going forward. We've got a presentation out on the Website you can take a look at that we're projecting strong DRAM growth all the way out to 2009, probably greater than 32% average for advanced probe cards. We see significant growth opportunities in flash markets for us, because of entry into that market in a more significant way later this year. And in the logic market, it will be mainly an '07 big growth opportunity, but we see a significant opportunity in the coming years with our current logic offerings, as well as our fine-pitch logic product that's coming out.

The only thing I would like to add to make sure that you understand is that we are entering the fine-pitch logic market, peripheral logic market from zero. So, this is going to be a total growth driver for us from a zero base, whereas DRAM we have a very strong position. Flash less so. But in terms of our capability, those will be all pretty good growth drivers going forward.

If I look at your 10-K, it looks like [Intel] as a percentage of your total revenue is dropping year-over-year. Is this just because the market dynamic of more DRAM and flash growth versus -- NAND versus the NOR flash, or you're actually seeing some more competitive pressure in the NOR flash segment?

It's more a function of the size of that market. We're competitively doing extremely well there. So, that's not -- that's not a competitive situation. That's just the amount of product that they need.

Anymore update on your patent litigation with -- in Korea?

Let's try to go step by step here. First of all, the litigation is ongoing. It's a -- you should look at it as something that's going to take a while to be completed. In Korea, we have patent claims against Phicom that were upheld by their intellectual property office and were not ruled on by the patent court. We have appealed all three of the patent court rulings to the Korean Supreme Court, where Phicom was successful on appeal against those claims. Now they're being appealed to the Supreme Court; that will take some time. We've also sued Phicom in the United States, and that is just entering what we would call discovery. So that proceeding hasn't started yet, other than discovery.

These processes will go on for a long time, and that's not unusual with respect to patent disputes. The one thing we need to really understand -- we have a pretty significant patent portfolio. So, our rights are not limited to these patents that we're currently suing over, and we can assert additional claims potentially against competition. So, intellectual property is a very serious matter for our technology, and we will continue to be pursuing it in a very patient and persistent manner for quite a while.

Operator, we'll take one last question.

Doug Reid, Thomas Weisel Partners.

Congratulations on a great quarter. Most of my questions have been answered, but I did want you -- hopefully you can comment on the opportunity in parametric tests. I'm wondering if there are any milestones we can look to in that potential growth area.

The only thing I can say there is we're kind of on track in customer penetrations. As you know, it's a fairly small market, but we're doing very nicely in what we're doing. And this is a Japanese-based business that is -- we're now penetrating throughout the world. So, we're pretty pleased with what's going on. And this quarter we actually had a number of new customers. And basically the product was proved in about six months ago. And once value was demonstrated to the customer, the focus has been on multiple customer proliferations. And this is going on quarter by quarter. So, we're very pleased with the progress this product has made.

And even though the revenue is relatively low, it has strategic value in terms of getting more connected with the customer upstream from the wafer-level testing in their process flow and their test protocols, and expanding the options of our testing capabilities beyond the wafer testing we currently do. And that's probably one important element to keep in mind, and we'll see where it takes us.

I'd like to thank you all for joining us today. We look forward to seeing you at the analyst day, and we'll provide more details as the date nears. Thank you all very much.

Thanks.

Thank you for your participation in today's conference. This concludes the presentation.