FormFactor Inc (FORM) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the first-quarter 2007 FormFactor earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call Ms. Annie Leschin, Investor Relations. Please proceed, ma'am.

Good afternoon. Thank you for joining us for FormFactor's first-quarter 2007 earnings conference call. With me on today's call are Igor Khandros, CEO, and Ron Foster, Chief Financial Officer. Igor will provide a summary of our first-quarter performance, review our market segments and provide an update on outlook and long-term strategy. Ron with then take us through the financials, operational details and provide guidance.

I would like to take a moment to mention that during the second quarter of 2007 the Company will be presenting at the Merrill Lynch conference in New York on May 2. As other events and details become available, we will make additional announcements.

Finally, before I hand the call over to Igor, 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 manufacturers modify announced capital expenditures and device roadmap; the Company's ability to efficiently execute on its new product introductions; customer selection of these new products and capacity expansion plans. Please refer to the Company's recent filings on Form 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 by market and geography and a GAAP to non-GAAP reconciling income statement is available on our website as is a schedule reconciling our GAAP with certain non-GAAP financial guidance with respect to FAS 123R stock compensation expensing.

I would now like to turn the call over to Igor Khandros.

Thank you. FormFactor achieved record levels of operating performance and revenue in the first quarter of 2007. The Company achieved an important milestone, crossing the $100 million mark in quarterly revenue, climbing 4% sequentially to $102.3 million as demand for advanced probe cards grew reflecting the strength of key market drivers. Non-GAAP gross margins improved to 54%, and operating margin was 24%. Our factory performance continued to improve with capacity now $130 million per quarter. We had record production performance and reduced lead times with excellent onetime deliveries and continued to invest resources in new technology and product development.

Market demand for advanced probe cards driven by bid and design growth picked up again in the first quarter as semiconductor manufacturers made progress towards advanced nodes. FormFactor's growth in the quarter was solid, driven largely by DDR2 modal RAM and known good die. DRAM remained the primary driver of FormFactor's growth during the first quarter as the transition to advanced nodes, 80 and 70 millimeter, has accelerated since the beginning of the year.

Based on recent industry data, we continue to expect strong DRAM bit growth of about 65% in 2007, despite recent commentary about reduced growth rate projections for PC shipments. With rapidly declining prices in DRAM, we are absorbing customers' accelerated integration plans to advance 80 and 70 nanometer nodes in order to reduce their costs of past improved productivity and device performance. This is leading to accelerated touring cycles for probe cards as well.

With the simultaneous tooling event of 80 and 70 nanometer for different manufacturers, we're seeing incremental probe card opportunities as a result of design proliferation.

Additionally, with the increasing adoption of Vista-based machines and Office 2007, 1 gigabit device volume is making its appearance in the market. We expect DRAM consumption in the PC segment to grow to 1 GB in first half of '07 and 2 GB towards second half of '07 in 2008. This will cause DRAM suppliers to accelerate production of one gigabit devices throughout the year and will drive associated probe card demand.

As the leader in the DRAM market, FormFactor is moving the industry to fewer touchdowns in high-yield, offering the industry the lowest cost of test. We're also seeing more complex test requirements driven by more challenging device designs such as lower power, higher speed and higher pin counts and smaller pad sizes, in addition to operational challenges such as test sell uptime, faster time to volume and faster time to yield, which are increasingly more important to our customers. FormFactor is uniquely capable of addressing this fundamental and increasingly complex customer requirement.

With our latest product platform, Harmony DRAM XP, we continue to deliver product that performs to the limits of available test resources. This platform is optimized for the industry move to 70 millimeter and 1 gigabit for high-density devices to enable two to three touchdown testing. It is designed to address the larger device sizes typical in commodity and graphics DRAM.

Additionally our recently announced PH150XP product is targeting primarily consumer markets, smaller density devices of 500 megabits or lower with smaller pad sizes and higher by die count per wafer, providing up to four touchdown testing.

We believe that PH150XP, combined with our Harmony XP platform, are the most technologically advanced solutions on the market, providing the lowest cost of test to our customers. We are currently in qualifications and expect volume shipments in second half '07 for both product platforms.

Modal RAM continues to be one of the driving forces behind the known good die market. As demand grows for devices such as 3G phones and PDAs requiring multiple packages, it will become paramount to provide cost-effective tests prior to assembly into expensive packages.

Because of these market trends, our known good die business remains a major driver for FormFactor in 2007. With robust growth in the model and newer segments, KGD should reflect multiple growth trends in a variety of memory applications. During the quarter we saw more DRAM customers validating our High-Frequency Test at Probe product, which we believe will become increasingly important to customers as mobile device speeds increase. As a result, we're beginning to see increasing demand for higher speed HFTAP products. We expect strength from High-Frequency Test at Probe during the year driven by demand for stacked packages, drive for higher throughput, the introduction of high-speed capable testers and the need for increased yields for package devices. Wafer level burn-in is aligned with the transition to 70 millimeter, causing us to expect it to ramp throughout the year.

Development and qualification of our NAND Harmony OneTouch product continued in the quarter, though we did not make the progress we had hoped. We continue to encounter integration challenges with one of our Harmony NAND Flash applications. Although this has taken longer than expected, our technology has been validated as another customer to whom we are currently shipping in volume.

We have also qualified our card at a third early adopting customer, though the card is not in volume production as the customer currently shifted their wafer starts to DRAM.

We are continuously investing in the Harmony Flash area to accelerate resolution of the issues and complete customer quotes. Our target with Harmony Flash products is to significantly exceed the performance and value proposition of other products in the NAND market. We believe our Harmony OneTouch designed for high productivity, serviceability and technology scalability will afford FormFactor success in gaining revenue share in this market.

Our outlook for total Flash market and our prospects for 2007 are unchanged. We continued to see healthy growth in NOR Flash and maintain our strong market position as suppliers transition to 65 nanometer and increased demand for High-Frequency Test at Probe products.

We remain well-positioned to succeed in the Logic SOC market and are excited about our opportunities in this area. As Logic products, such as automotive microcontrollers become more complex with new features such as embedded memory causing test times to increase, the SOC wafer probe market will be demanding high-power testing. Additionally the size of some SOC devices is determined by the bonding and probing pad size and pitch, rather than the active circuit area real estate, defining so-called pad limited devices. This drives the need for finer pitch, smaller pad size probing. While existing solutions, mostly needle cards, can test one or few fine pitch devices in parallel, FormFactor is working on the transaction of advanced probe card technology for this market in order to enable the testing of four to 32 devices in parallel, dramatically reducing wafer test time and cost.

During the first quarter, we also engaged new customers for our existing Logic products and received design wins from several existing and new customers for other market applications, including chipsets for cellphones and automotive microcontrollers. The Logic business is fragmented with a highly diverse customer base and offerings. Therefore, customer acquisition, qualification and volume RAM are more lengthy processes.

As we progress in this market, first we will see new design wins with existing and new customers. We will then increase our customer base and grow our probe card volume per design. We plan to expand this customer engagement with Next Generation technology to enable their roadmaps for finer pitches, down to 40 Micron and will then move this fine pitch product to higher parallelism.

Our outlook for the growth of the advanced probe card market in 2007 remains strong. Based on the growth trends within memory and Logic, including the transition to advanced nodes and DRAM gaining strength throughout the year, the increasing need for KGD, the migration to higher parallelism and Logic market and a strong second-half Flash market, we do expect the overall market for advanced probe cards to grow approximately 25% in 2007. With this market outlook and our strong product portfolio, our differentiating technology and solid customer relationships, FormFactor is well-positioned to take advantage of this market opportunity.

We continue to lead the DRAM and NOR markets and are focusing on our NAND execution. In SOC we are increasing our focus on customer penetration and product adoption. With these advantages, we are planning to grow better than 25%.

We continue to execute on our long-term growth plans as we are expanding our operations and further organizing the Company to improve our customer focus and product execution globally. Our Singapore expansion will provide manufacturing presence in Asia where we conduct a significant amount of business. And over time it will provide lower after-tax costs.

Organizationally we are addressing the challenge of the expanding breadth of product offerings and customer base. We are transitioning from a purely functional to a business unit-based management structure with new business units focused on the DRAM, Flash, SOC and parametric markets. We have installed a very strong team of general managers to drive the individual businesses. We believe this new structure will enable us to deliver different shaded products and solutions optimized for each of our customers' needs and roadmaps worldwide and drive growth in each of these markets. By doing this, we expect to further increase our customer focus and increase our ability to develop and execute on the introduction and winning with differentiated products.

In summary, first quarter of 2007 was yet another strong quarter for FormFactor. We're very pleased with the Company's performance of record revenues, expanded manufacturing capability and continued development on the breadth of the product portfolio that has set the stage for a successful 2007.

I would like to thank the entire FormFactor team for their hard work and effort to make this another successful quarter for FormFactor. I will now turn the call over to our CFO, Ron Foster, who will elaborate on operating results, financial performance for the first quarter and provide guidance for the second quarter. Ron?

Thank you, Igor. Climbing for the ninth consecutive quarter, revenues once again hit record levels, reaching $102.3 million, up 4% over the fourth quarter and up 26% over Q1 of 2006. DRAM revenues increased 10% sequentially to $75.5 million, accounting for 74% of total revenues in the first quarter. This growth was primarily driven by a manufacturer's accelerating transition to 70 and 80 nanometer and 1 gigabit devices as evidenced by strong DDR2 revenues which rose 12% from the fourth quarter. Flash revenues decreased slightly 1% from the fourth quarter to $16.7 million and increased 138% over Q1 2006, representing 16% of total revenues in the first quarter.

Our market position in NOR remains strong, though our business slowed due to seasonality and one customer's tooling cycle. We did, however, see strength in our NAND Flash revenues, driven primarily by our existing product offerings. As Igor mentioned, we're still focused on bringing Harmony Flash to market in volume.

Logic revenue was $10.1 million in the first quarter, representing 10% of revenues, a decrease of 24% over the fourth quarter but an increase of 21% from the first quarter of 2006. Our Logic SOC business slowed in the quarter due to a key microprocessor customer's tooling cycle in the flip-chip market.

Revenues from known good die products, which consists of wafer level burn-in and HFTAP, were strong at $12.5 million, an increase of 87% over the seasonally weak fourth quarter. Our KGD business was impacted by strong growth in the mobile segment. The breakdown of revenues by market and geography is available on our website.

Bookings for the first quarter grew to $111 million with strong booking growth across all segments. This resulted in strong backlog as we entered Q2. We are also encountering the highest level of design demand the Company has ever experienced. Resources were added in the first quarter and continue to be added in Q2 to accommodate this surge in design demand.

Now I would like to highlight some of the key GAAP and non-GAAP results to supplement understanding of our financials. A schedule that provides GAAP to non-GAAP reconciliations is available on the investor portion of our website.

GAAP gross margin for the quarter was 52.5%, a healthy pickup from 51.8% in Q4. Higher factory utilization and productivity increases contributed to this improvement. Non-GAAP gross margin of 54.2% was up 100 basis points from last quarter, in line with our target range of 53 to 55% for the fourth consecutive quarter and the highest we have recorded to date. We continue to effectively balance capacity investment and factory utilization with financial performance. Current factory capacity is about $130 million per quarter as productivity and yields continued to leverage our factory capability. GAAP operating expenses for the quarter were $37 million or 36.2% of revenue compared to $31.7 million or 32.1% of revenue in the fourth quarter. Operating expense growth was in line with expectations resulting from previously communicated severance costs, seasonality of our annual fringe costs and increased R&D investment to drive new product introduction.

Operating income for the first quarter was $16.7 million or 16.3% of revenue compared to $19.4 million and 19.7% in the fourth quarter. On a non-GAAP basis, operating income for the first quarter was 23.8% at the high-end of our projection. The tax rate for the quarter was 32.6%, and the Company implemented the new FIN 48 tax regulations in the quarter. The tax rate for the remainder of the year is projected to be 34%. Net income for the first quarter was $14.8 million or $0.30 per fully diluted share on a GAAP basis. Stock compensation charges were $7.7 million or $0.11 per fully diluted share, which included about $1.4 million for a separation agreement.

The Singapore expansion is progressing. We're beginning to hire key management and are closing on our real estate acquisition plans. We will be hiring Singapore design engineers this quarter who will be training in California for a few months. Singapore provides us a new base to access design talent in Asia at lower cost. Our factory expansion in Singapore will provide us a second lower-cost operation that will yield substantial after-tax benefits as it ramps. We will incur some incremental costs this year and into 2008 associated with the planned startup in the second half of 2008. With anticipated growth, we expect to manage these investments within the construct of our annual financial model.

Now to the balance sheet. Cash and marketable securities totaled $508 million in the first quarter, an increase of $13 million from the fourth quarter. Operating activities generated $6 million of cash in the quarter as strong operating performance was partially offset by accounts receivable and inventory increases and annual employee performance bonus payouts. Days sales outstanding or DSO increased to 43 days in the first quarter compared to 37 days in the fourth quarter as revenue linearity within the quarter to support our customer delivery schedules was back-end loaded. Net inventories increased by $3 million during the quarter to $27 million to accommodate increased customer demand we are seeing in Q2.

During the first quarter, $15 million was spent on capital expenditures in support of our factory capacity, service center and IT upgrades and new product technology. Net property, plant and equipment increased $10 million with $5.8 million booked for depreciation expense in the quarter. Headcount increased to 1109 versus 1047 in the fourth quarter. Design engineering, applications, R&D and sales personnel were the primary additions.

Now for our guidance for the second quarter of 2007. We expect revenue to be between 107 and $111 million. We project non-GAAP operating income in the range of 23.5 to 24.5% and estimate about 6 points of incremental stock comp expense. GAAP EPS should be in the range of $0.32 to $0.35 with non-GAAP EPS of $0.41 to $0.44. We continue to invest significantly in operating expenses for design, R&D and applications resources to keep pace with customer demand and with their product roadmaps. A schedule of our guidance is now available on the website.

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

(OPERATOR INSTRUCTIONS). Jim Covello, Goldman Sachs.

Congratulations on the good performance. A bunch of questions. I guess big picture-wise, on the expenses you obviously have great revenue growth. You have to invest today to drive that. Do you think that the expenses at some point moderate, the expense growth moderates and ticks back down, or do you think the revenue growth eventually swarms over the expense growth? That would be the first question.

In terms of our expense expectations, as I mentioned, we are investing here in the near-term in early 2007 to prepare for growth that we are foreseeing going forward. We do expect that we will perform in the year as previously communicated to our annual financial model of 25% non-GAAP operating income and that the expense structures and gross margin will fall within that range for the year.

But, on the front end of the year, we are investing more as I mentioned in areas of design. We're building out an applications team, which is creating linkages with our customers in a much stronger and more significant way as their test challenges become more complicated and in R&D development.

Great. Next question. On the NAND side, Igor, can you talk a little about when NAND test speeds will increase to the point that you think your solution will be required as opposed to some of the more commodity-like solutions that can address the NAND Flash market today?

So, as you look at the NAND markets right now, we believe that the Harmony Flash product we're bringing to market will have compelling advantages. They will mainly center around productivity improvement.

As NAND architecture progresses, you already have some high-grade NAND NOR devices where, indeed, performance is going up, and even more significantly you have a roadmap towards finer pitches and smaller pad sizes in the future.

So all of that should over time play to our strengths. But we believe that the product will introduce when it is in volume production, and you need to be in volume production to validate productivity improvement. When it is in volume production, multiple customers will still believe that there will be compelling advantages.

Terrific. And then final question for me. In the NOR Flash business, it looks like over the next six or nine months there is probably going to be some consolidation activity or divestiture activity from some of your customers in the NOR Flash segment. Unclear what exactly what form they are going to take. But how do you think consolidation or divestiture activity in NOR Flash would impact your NOR Flash business?

Well, our business is very much driven by the wafer starts and by bits, and it is really more of a big picture in terms of market demand that would drive our business. We are successful in NOR market. So, as long as there is a healthy demand for NOR devices, we should do well in this market.

Regardless of who is supplying that bit growth, we are certainly seeing continued strength in the NOR market and design proliferation going on. The same amount of activity and the same expectations we had last quarter in terms of the opportunities this year.

Mark Bachman, Pacific Crest Securities.

Mark Bachman, Let's see, first off, can you give us some more color on the bookings? How linear were the bookings during the quarter, i.e. were they more weighted towards the month of March? And when you answer that, if you can kind of give us a level of turns business in the quarter, and then I have one follow-up.

Yes, I don't normally try to break out the actual exact timing of bookings, but I guess it would be safe to say that we are seeing the growing momentum. We did through the quarter, and we're seeing strength going into Q2. So it has been building over time. I guess that would be the general characterization. In terms of your turns question, we turned about the same as last quarter. About 60% were turned in the quarter.

Okay. And then you probably know my other question here. You did an equity offering a year ago, and since that time you had operating cash flows in excess of $100 million and you have yet to touch that cash for any meaningful projects to further the Company's revenue growth. And I further contend here that what you have invested, you probably could have done that through operating cash flows. So my question is, what was your justification for doing the equity transaction, and when are we going to see you put the cash to work?

I think, as we communicated, then we have looked at opportunities I think. We are seriously considering the nonorganic ways to accelerate business growth, to accelerate our strength building, especially in Asia. We have looked at some opportunities carefully, and of course, we consider it carefully, and in some cases we just decided that it was not the right opportunity.

Now having said all that, we recently made an announcement that one of the key executives at FormFactor who used to run our sales organization will now run our new business development organization. And all of these activities will gain a lot of focus within the Company. So we will look at opportunities, but we just won't do something that we feel we cannot execute or is not executable well.

From your answer then, it sounds like then that you do have an appetite for acquisitions right now in order to accelerate your revenue growth rather than build it yourself?

I mean anybody would. If it makes sense, anybody would. Our main motivation is to help us accelerate building worldwide infrastructure and infrastructure in Asia, gain knowledge of customers that we don't have at a faster rate than doing it internally and where it makes sense. There are not too many probe card companies with more advanced technology than FormFactor, and opportunities in probe card markets seem to be in very advanced market segments. But again, we have looked at some opportunities, and we will continue looking at those opportunities. And now with our key executive heading the activity, you will see more focus on that.

It is not an either/or. It is probably an and. We're certainly going to do the organic moves expansion in Singapore. We are also looking at actually acquiring things such as real estate if the economics and financials make sense versus leasing, which we have historically done. So I would see it as an and scenario.

Operator?

Do I still have the floor? I will just keep asking questions.

I am just wondering if it is just you and us. Do you have call blocking capability? New technology.

Apparently everybody else ran away. Well, listen, (multiple speakers)

I guess we will follow-up and see if we can find out what is going on here. Go ahead.

On the Logic side of the business, does organic or acquisition make more sense to you right now in order to penetrate where you want to go with the SOC market?

There are always several facets to it. In terms of technology, the real opportunities in SOC are number one in so-called pad limited devices. In other words, devices where the size of a chip is actually gated not by the real estate required to put all of the transistors and (inaudible), but in some cases is defined by the minimum bonding and probing page of pads and size of that so-called pad limited devices. So there there is a big opportunity in cases where the size of the device is limited by probing to introduce a new technology that will allow customers to reduce the size of the chips and make more chips per wafer, which is huge.

And then the second driver in SOC market is that increasingly they are testers available to support higher parallelism in testing. And they are really needed because SOC's now have -- are becoming very complex chips. And some of them have embedded memory, so test times are just going through the roof. In those cases what one must do is to do testing at high parallelism.

But to introduce products in terms of just technology capability, that could do very fine pitch and high parallelism. That requires really extremely advanced technology. We believe that we have the R&D capability and development capability to do that.

Now, as far as in the future, acquiring customer relationships or acquiring infrastructure to be closer to customers, that, of course, is certainly worth a close look in terms of finding whether we, indeed, could do it nonorganically and accelerate our presence.

Operator, are you there now?

(OPERATOR INSTRUCTIONS). Timothy Arcuri.

A couple of things. Number one, so you're guiding options expense it looks like to about $7 million pretax. So I'm wondering if I multiply that by 4, that is kind of like $30 million for the year. Is that going to be even higher for the year because it scales with revenue, or is 30 pretax the right number for the year?

We have not guided options expense for the year. So what we guided or gave a view of was the 2007 operating income number on a non-GAAP basis as you know. The part of the challenge is actually being able to predict the variables such as stock price that occur in order to make the call on that kind of number.

That being said, obviously your option expense will tend to move with your headcount growth rate over time. And so it will be somewhat correlated with your revenue growth is a way to think about it, but not necessarily linearly.

Okay. I understand that you do not want to guide the number, but the street looks at GAAP numbers, and the numbers now are going to come down -- the consensus numbers are now going to come down for about the third quarter in a row, and part of it is because of the options expense. So I'm wondering already even if that flat lines, it is kind of $0.60 annually on the earnings line in options expense. So I'm wondering, it is kind of fair to say that that number should not come down from that $7 million, right?

Well, as I said, option expense is a function of a number of variables. One of them is obviously headcount. And, as we are a growing company, our headcount growth does go up over time somewhat correlated with our revenue growth. So that would argue depending upon how the other variables play out that it won't necessarily be a constant dollar number. You are correct. It will tend to move somewhat with revenue, but not necessarily a one-to-one correlation.

Okay. Great. Then can you give us some idea of the greater than 10% customers?

We call them out on our 10-Q and don't normally put them on the call. There were four of them this quarter and the same list plus one from last quarter.

Gary Hsueh, CIBC World Markets.

A quick question here. Ron, you talked about continued order momentum off the 111 kind of bookings that you reported here in March. How come you're only guiding here to 107 to 111? I would have thought if you were seeing continued momentum in orders off 111, you could probably guide a little bit higher. Is there some concern here in terms of leadtimes maybe stretching out, some growing pains that you are experiencing with some of the infrastructure growth you are seeing?

Gary, this is Ron. No, we don't have any leadtime stretching out issues. In fact, our factory cycle time and leadtimes have been improving. In the last 12 months, they have improved about 25%, and the factory is performing very well. It is simply a matter of scheduled customer deliveries and what our customers are looking to have delivered within the quarter based upon what we can see. And, as you know, we have some visibility, but it is always somewhat limited because we book and turn 60% of our business in a quarter. And that means that we get visibility of it as we go through the quarter.

Okay. Let me switch gears a little bit here. Just on the 10% customers, I'm just wondering if you happen to have that number on how big [Alpeda] in terms of your March revenue number? Alpeda has historically been around 25% of revs. Are they roughly around 20 to 25% of revs in March, and I have got a follow-up.

We don't normally call it out, but it is in that range. We will show it in the Q.

Okay. I guess my broader question is, just where are we in the 70 nanometer/80 nanometer kind of design cycle for DRAM? I would have thought this thing would have started taking off, and we could see a little bit more revenue growth just out of DRAM alone in the June quarter. Where are we in terms of that 70/80 nanometer transmission? Are we just in the first third, or are we somewhere in the middle?

I will give you a couple of statistics and maybe Igor can comment on the strategic trajectory here. We had significant amount of business in the first quarter on 70 and 80 nanometer nodes. As a matter of fact, the 70 nanometer node was about equal to the 90 nanometer business in DRAM in the quarter, and 80 nanometer was close. So there's a substantial shifting going on, and we expect to see that ramping going forward. So we're certainly getting good momentum.

In terms of the trajectory, we have communicated previously that it is typically a two-year kind of cycle on these node transitions. So we are still in the early stages of the 70 nanometer transition. Igor, did you have any more to add?

Well, you have the difference between the 90 nanometer transition and 70 and 80. You do have two nodes, so you have some incremental added revenue for us because of the coexistence of two nodes where companies -- most companies not all -- but most DRAM makers have gone to 80 and 70, and consistence of design always drives probe card revenue somewhat up. But we're still early in 70 nanometer transition. Some of the manufacturers are yielding it remarkably well, but you will see it accelerating throughout the year. So we are I would say probably just where we thought we would be right now. Maybe it is even at some makers it is going even a little better. So it is likely to accelerate.

Doug Reid, Thomas Weisel Partners.

A couple of questions. Forgive me if you addressed this earlier. I'm wondering if you did, in fact, disclose the exact amount of revenue from wafer level burn-in and HFTAP during the quarter?

Yes, I believe it is $12.5 million.

That is combined or --?

That is wafer level burn-in plus HFTAP. We report them combined. It was up 87% from the fourth quarter, which was a seasonally low period in the fourth quarter.

Let me just push it a little further and see if we can get you to break that out in anyway if not explicitly.

We don't normally give the breakdown, but both of them did well. As Igor mentioned, we anticipate seeing wafer level burn-in and HFTAP growing through the year moving with a 70 nanometer node and the seasonal cycle on consumer devices.

We're seeing that actually the speeds for mobile devices will probably be going up, and actually 70 nanometer is yielding, is allowing higher speed mobile devices, which may drive demand for our K3 product, which is a 300 megahertz capable product in the future. So we believe the outlook both for HFTAP and wafer level burn-in is very good.

If I look at my own model, I think you did more in revenue from wafer level burn-in in '06, but your commentary seems to suggest the growth is as much or more on the HFTAP side. Can we expect HFTAP revenue growth to significantly exceed that of burn-in?

No, I did not comment with respect to HFTAP being stronger than wafer level burn-in. I just outlined one of the reasons why HFTAP should be strong. In order to yield known good die, manufacturers must use wafer level burn-in.

Understood. Also, I'm wondering if we can get a little more color on how the startup costs are rolling over the next couple of quarters, Ron?

In terms of Singapore?

Yes.

Well, they are going to obviously -- we're going to be investing in both capital and some expense structure gradually over the next few quarters with a second-half 2008 ramp. So it will be gradual through 2007, accelerating more in 2008. We certainly anticipate with our growth expectations that we have communicated for the year and opportunities that we see in 2008 that we can accommodate both the capital and the expense increments within our financial -- our annual financial model as we have had communicated it for the year '07 at 25% non-GAAP operating income.

In terms of magnitude, like I said, we will be hiring some people to do design. That would not be a specific Singapore cost. Because if we did not hire them in Singapore, we would hire them here. And so it is part of our normal structure and certainly a leading indicator of our business picking up. So that is happening early on here. And then we're making some investments in management that will help us move the activities ahead, and that has already begun at very initial stages with some leadership. And it will be much later in the year and in early '08 when we start putting in significant numbers of people.

Okay. And lastly, I just wanted to get your prospective, Igor, on how the competitive landscape in DRAM has changed over the past three to six months for FormFactor?

Well, in DRAM, as you know, we are introducing two new products. And one of those products is specifically targeting smaller devices, 512 megabit and below with PH150XP and Harmony XP, which we will start qualifying this quarter is targeting commodity DRAM and server chips.

I was just going to say, certainly I have seen the releases. I was more interested in how you see your competitors' responses to your new product launches?

In DRAM we believe that we do have product portfolio to support whatever testers out there can offer both existing and new testers. And on top of that, we do have (inaudible) technology. So our position in DRAM remains to be strong.

Harlan Sur, Morgan Stanley.

Igor, one of your larger DRAM customers started transitioning to your DRAM products last year. They have adopted Harmony, and now we're hearing that they are make an aggressive move to adopt your wafer level burn-in products. So is this sort of the same trend you are seeing in customers that once penetrated proliferation and attach rates for other products accelerate to your existing customer base?

I'm not sure which customer you mentioned as normally we don't comment on specific customers. But yes, normally what happens is FormFactor establishes its sort products, and then when customers are beginning to do known good die testing, we then per design have the opportunity to sell three kinds of probe cards. One is a sort probe card, the second is wafer level burn-in probe card, and the third is HFTAP probe card. And that in general is the trend, yes.

Okay. You mentioned in the last call a Logic opportunity with a major gaming console customer that should start to ramp in the second half of the year. Can you just give us an update on that opportunity?

We're making progress in that application, yes.

Okay. Great. Then I guess one final question. With the pricing declines here in DRAM being so aggressive year-to-date, in addition to things like technology transitions which obviously benefits Form, the suppliers are also starting to aggressively try to squeeze cost out of their assembly and test vendors as well. For example, reducing test times now. I think this is mostly being done at the package level, so it does not really affect you guys. But if pricing continues to decline from here, what do you think the impact to FormFactor's business will be?

So when customers try to reduce overall cost of test, and, for example, you mentioned reducing package test time, they end up doing somewhat more testing at the wafer. So that is a positive trend for us. Customers always aggressively attempt to reduce test times.

However, as you transition to new technology nodes, you normally encounter new failure modes. So, therefore, when you start ramping these new technologies, you probably are doing more involved testing. As it becomes more mature, technology and the products become mature, you have an opportunity to reduce test time, and manufacturers always work to reduce test time.

As far as reducing cost of test, I mean that is how FormFactor grew. I mean what is behind our success is the fact that we always take pride in offering our customers the lowest cost of test. And we do it by reducing the number of touchdowns at the wafer level, and we do it by incorporating our proprietary technologies both in terms of probing and in terms of allowing them to reduce the number of touchdowns such as, for example, (inaudible) technology. So whenever there is a strong desire to reduce costs of test, we see it as an opportunity. This has not changed for us.

Edward White, Lehman Brothers.

Igor, can you talk about -- looking at the SOC opportunity, can you talk about where you think the best opportunities are in terms of specific devices? You mentioned the pad limited devices are where your technology might work the best. But, as we look at the landscape of SOC, which is pretty broad, where do you think the opportunities are likely to be the brightest?

So the immediate opportunities are in areas where our existing technology is. For example, technology we use today for high parallelism and DRAM testing where the devices would allow testing by their technology, and that immediately allows us to offer customers high parallelism. And we're taking advantage of those opportunities.

The additional benefit of that is that we are learning about the business, and we are learning about new customers and how to service them. So that is an immediate opportunity.

Of course, in flip-chip area, opportunity is to be gaining additional customers, and we are working on that. And longer-term and again we're working on it, as I have said earlier, opportunities to introduce probe cards that are capable of testing pad limited devices, but then do it in higher parallelism. And that combination would be a very, very successful business.

Now would these tend to be SOC chips with heavier analog content or heavy digital content, or would it matter? In other words, which are more pad limited if you look at that spectrum?

There is a number of SOC devices where you have embedded memory applications for a variety of applications that are pad limited. I mean I'm not sure that you can segment it necessarily. It is whereever you use a system on a chip. A designer will take as many PEDs as they can get their hands on. Especially because the power requirements are now such that you need a lot of power and ground chips -- pads.

Okay. The second question is, Igor, you mentioned that there is record design demand, and you talked about some of things that are behind that. But, in the context of the kind of semiconductor growth environment that we have this year, what specifically do you think is leading to that record design demand? Is there anything unusual happening out there that at this point versus what you have seen in previous years in terms of design demand?

In our case, of course, in DRAM, we're seeing significant design growth, and customers basically have 70 and 80 nanometers for same devices, and then -- again not all customers but the majority do. And now you have in DRAM 1 gigabit device. So again, you have more -- just an example of how you have more designs. In general also, as we enter SOC market, we should see acceleration in the number of designs because there is just an enormous number of different devices. It is a lot less streamlined than memory business, right?

So in general what we have seen over the years is about 20% design proliferation growth.

Okay. And that is consistent with what you're seeing this year about 20%? This year as well? Design proliferation growth?

This is Ron. It is running -- it is kind of hard to predict the year here, but it is running real hot right now in terms of design demand in our shops. So certainly running higher than that now.

Finally, at what point do you think you would get start to get the cost efficiencies of the facility in Singapore? I know for the near-term there is investment going in to get that up and running. But when do you think we begin to see the real cost benefit from that?

The significant financial benefit will come in 2009. We believe that will contribute in terms of low-cost of manufacturing as we ramp up, but of course, there will be a start-up curve. We're starting it with the back-end processors, though, which we think will come up fairly effectively, and wafers will be supplied out of here. There will be a lot of learning because that team will learn here. I mentioned how we are doing it with design. We will be doing the same thing with the factory, so there will be a lot of cross-coordination that goes on there. So we will get some cost reduction I think fairly quickly in 2009 as we come down that performance curve.

Secondly, we will also begin to see tax benefits related to our production coming out of Singapore, which as we ramp up production there will become significant for the Company.

Mark Fitzgerald, Bank of America Securities.

If I look at your guidance that you are going to outperform the market, I would suggest you have to see accelerating growth through the second half of the year and would put you over $134 million by the end of the year. Can you do that given your factory utilization or factory capacity is 130 right now?

We can actually scale our factory as needed all the way to where we start up Singapore. For example, I mentioned on the last call that we are now laying out a completely separated wafer fab process from our back-end process, and that will happen as needed through the year here and into 2008. And we can increment the capacity then by adding machines to add capacity where we need them. In some machines centers, we have got all we need for some time. In other areas, we will need to break those bottlenecks. But it will be incremental focused investments of equipment into that expanded facility that we are putting in place here. So we will be growing our capacity as needed through '07 and into '08 prior to the Singapore startup.

Okay. And then with that, the follow-on question is, it sounds like with the design activity being so great that you're going to run pretty close in terms of high utilization rates. So is it fair to say if you stay up here, that 52% plus gross margin is easily doable through the course of the year, assuming high utilization rates?

We are in our model range right now, which we actually model on the non-GAAP basis, again hard to predict stock prices, etc. on the stock comp expense. But yes, we are in that range now at 54%, and we believe we will be in the 53 to 55% gross margin range as we move through. That is an annual model. There could be a quarter where we vary from that, but certainly that's the average we expect to deliver as we go through the buildout here and the startup in Singapore.

Okay. And then one final question probably for Igor. Is there any push among your customers to when they look at the test sale here to drive the different suppliers in test sale to be more highly integrated? And is that an opportunity for you guys?

Well, right now our products are getting increasingly more complex. I mean these are some of the most complex electromechanical products on earth. So our focus right now is to work very closely with tester companies and very closely with prober companies to make sure it all works together. That is where our mind is right now.

Is there any advantage to owning a tester or a prober at this point as that integration pressure builds?

Right now I would repeat exactly what I just said. Right now there was a big advantage of working with market leaders on the tester side and prober side to make sure that the sale gets integrated in a way that customers can get our probe card and within hours run their wafers. That is what drives right now the business growth.

And we are the ones that are engaged in every design and working that out in every design application with our customer. That is where the application's resources come in to help facilitate that as well.

Okay. Thank you. It is always clearer the second time around.

Due to time constraints, that will conclude the question-and-answer session. I would like to turn the call over to Mr. Ron Foster for closing comments.

All right. Thank you, operator, and thanks to all of you for joining us today. I certainly look forward to seeing you on upcoming conference calls and at our next earnings call. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.