FormFactor Inc (FORM) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter 2007 FormFactor Inc. earnings conference call. My name is Lisa and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to open presentation over to your host for today's call, Ms. Annie Leschin, Investor Relations.

Good afternoon and thank you for joining FormFactor's fourth-quarter 2007 earnings conference call. With me today on today's call are Igor Khandros, Chief Executive Officer; Ron Foster, Chief Financial Officer and Mario Ruscev, President. Igor will provide a summary of our fourth quarter performance, review our market segments and provide an update on outlook and long-term strategy. Ron will then take us through the preliminary financial operational details and provide guidance.

Finally before I hand the call over to Igor, I will review our Safe Harbor statement. During the course of this conference call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding the markets in which we compete, our new product execution, demand for our products, our financial performance and our strategic and operational plans. These statements are based on current information and expectations that are inherently subject to change and involve risks and uncertainties. Actual events or results may differ materially and adversely to those in our forward-looking statements due to various factors, including but not limited to the continuing challenges and deterioration of the markets in which the Company's products are used, including DRAM; the demand for certain semiconductor devices; the rate at which customers adopt the Company's newly released products, implement manufacturing capability changes, make transitions to smaller nanometer technology nodes and implement tooling cycles; the Company's ability to develop and market innovative testing technology on a timely basis; to address production issues and efficiently scale production of its Harmony architecture product lines; to deliver and qualify new products that meet its customers testing requirements on a timely and efficient basis; to execute its cost reduction plan and implement measures to enabling efficiencies and supporting growth in its design, applications and other operational activities and the Company's ability to obtain tax and other cost advantages from its expansion of its expansion of operations into Singapore.

The Company assumes no obligation to update the information in this presentation to revise any forward-looking statements or to update the reasons actual results could differ materially from those anticipated in our forward-looking statements. Please refer to the Company's recent filings on Form 10-KA for fiscal 2006 and 10-Q for Q3, 2007 for additional information regarding the relevant risk and uncertainties. Finally, a breakdown of revenues by market and geography and a schedule reconciling our GAAP and certain non-GAAP financial information and guidance is available on our web site.

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

Thank you, Annie. Hello everyone, and thank you for joining us. By this point, most of you have seen our press release. We're entering 2008 at an especially challenging time for FormFactor. Our customers are seeing deteriorating markets in their markets, especially in the past 60 days, and particularly tough pricing environment in the DRAM segment.

We're also continuing to feel the effects of the new product execution challenges we experienced in 2007 which have contributed to a more difficult competitive environment. The combination of these factors have significantly reduced the outlook for the first half of this year. We are reacting to this negative confluence of events proactively by adopting a cost reduction plan that will among other things reduce our worldwide headcount by about 14%. We are modernizing the Company to deal with the term challenges efficiently but will continue our research and development investments so that over the long-term we can maintain and extend our technology and market leadership.

Now let me quickly mention some key highlights from 2007 before I discuss the market segments and the outlook. FormFactor ended 2007 with revenues of $462 million, or 25.2% annual growth, roughly in line with our estimate of market growth for advanced probe cards. DRAM remained the largest part of our business though all sectors grew in double digits. During the year, the Company achieved a number of milestones, including the extension of its product line with the introduction of its fine-pitch wire bond logic products for mobile consumer and automotive applications. The qualification and improvement in the manufacturing of the Harmony product for both DRAM and Flash applications and the strengthening of our management team with mostly our new President, Mario Ruscev.

The year ended on a challenging note for FormFactor with fourth quarter revenues decreasing 4% sequentially to $120.5 million. The slower fourth quarter was largely due to the weakening market conditions and the early execution issues associated with Harmony DRAM. DRAM remained FormFactor's most significant contributor in 2007, responsible for more than half of the Company's growth. In the fourth quarter, 70 nanometer DDR2 and 1 gigabit were the major drivers behind the increase in DRAM revenues. However, our new product ramp challenges with Harmony resulted in missed opportunities with a few customers causing the majority of the overall revenue shortfall in the quarter. We made significant progress in the manufacturing readiness of our Harmony DRAM product during the quarter having reduced lead times by 30% and shipped volume orders of this product to several customers.

Looking at the first quarter of 2008, DRAM market conditions have deteriorated dramatically in the past two months. Typically, the advanced probe card market is not subject to the same cyclical fluctuations as the semiconductor or capital equipment industry. However, when memory prices are either very high or very low, near cash cost, the probe card market can be significantly impacted. While bid growth has remained healthy, device prices for DDR2 512 Mb equivalent have stayed below manufacturing cost for several quarters.

More recently, prices have been below cash cost for some suppliers. When customers are faced with such challenging economics, they must immediately take action to improve productivity and reduce costs by any and all means in order to preserve cash. This is causing customers to delay test capacity expansion on existing nodes and implement aggressive reductions in test times, and in some cases in the degree of testing. In the Company's history, the only example of a DRAM environment resembling these current extraordinary conditions was in 2001 when the price of DRAM reached a low of about $0.75.

Due primarily to the market conditions as well as the delay in the Harmony RAM, FormFactor's DRAM bookings declined significantly. Our focus going forward has shifted to demand generation side of the equation as we work to regain our loss position with DRAM customers who could not wait for our Harmony products. Although we have made significant progress in manufacturing our Harmony product, the precise timing of the market recovery is still uncertain. The competitive pressure we're experiencing is in the lower end wafer contact applications which is affecting pricing and margins in the near-term. For more complex high-end applications, we believe our products are differentiated, able to work in a wide temperature range in the smallest test size and pitch with the highest pin count in the industry.

As the market moves to sub-70 nanometer and DDR3 in the second half of 2008, the requirements for full wafer contact will become even more stringent, requiring the differentiated capabilities of our Harmony-based products.

Flash grew 53% for the year. NOR Flash experienced a very robust year, driven largely by the increasing demand for [non-glue die]. During the quarter, Flash revenue fell due to slowness in one NOR customers' buying patterns and (inaudible) Harmony ramp issues. Bookings rose in part to Harmony one-touch orders while NOR slightly decreased, driven again by the ramp for one customer's tooling of 65-nanometer specific timing.

Our NAND Harmony one-touch cards are now being used in high-volume manufacturing, are showing excellent performance. As our manufacturing has improved, our lead times decreased. We now have the opportunity to grow in this area. Additionally, we expect our non-glue die product offerings to continue to differentiate us in the NOR and specialty NAND markets.

SoC logic business grew 15% in 2007 as we maintained our market share. In the fourth quarter, total SoC revenue fell due to a seasonal decline at a key customer. However, we continued our successful penetration of the wirebond logic market, rapidly increasing revenues from a small base for the second quarter in a row. We received new design wins in the automotive segment and penetrated the consumer application segment with our True Scale product.

We reached another technology milestone for the true scale product family for the wirebond logic market achieving 40-micron pitch. This product was qualified by new customer during the quarter and is now ready for volume shipment. We believe True Scale will address the limitations of conventional probe card technology which cannot scale below 15 micron of [high] (inaudible). True Scale is designed to increase manufacturers' throughput and lower test costs while supporting their technology roadmap for smaller path pitches. We expect to make continuing progress with this product family into the wirebond market.

Our known good die products had another very strong year, growing 95% over 2006. Wafer level burning grew 44% in 2007 as customers moved more burn-in of their devices to the wafer level. During the year, we shipped our first 300 mm one-touchdown Harmony wafer-level burning product, setting an industry record of 40,000 [pins]. Wafer-level burn-in ended the year with a strong quarter, growing 38% due to the ramp of 1-gig DDR2.

HFTAP, high frequency test at probe, also had a very strong year, nearly tripling over 2006. We continue to see increased adoption of our HFTAP products for NOR, [NOR RAM] and PSRAM for at-speed testing. Having doubled our customer base in 2007, there are now nearly 20 semiconductor manufacturers using FormFactor HFTAP products for their known good die applications. We are confident that known good die will continue to be an important contributor to FormFactor's 2008 and longer-term growth as our complete suite of known good die products serves as a significant differentiator.

Now I would like to turn to 2008 outlook. As I stated earlier, we experienced a sudden slowdown in our year end business due to customers' cash preservation behavior. Though the overall good growth remains positive, DRAM semiconductor revenue in particular is currently projected to decline significantly, nearly 20% in 2008, due to the protracted oversupply. The recently communicated capacity investment pullbacks by DRAM manufacturers will hopefully be a step toward balancing the market supply and demand and pricing conditions are expected to improve in the second half of the year. FormFactor operates best when DRAM pricing stays above customers' manufacturing cost, and certainly above their cash cost.

In light of near-term market uncertainties, we do not have a reliable basis on which to project either market growth as a whole or FormFactor's growth for 2008. So let's talk about the visibility we do have. The current quarter looks very difficult. Ron will give you more details, but we think that the overall market and FormFactor revenues will both be down in the first quarter. We are helpful then the second quarter will improve over first, and then the second half of the year will be significantly better than the first half. But the precise timing of the recovery is speculative. Broadly speaking, we know that the technology transitions will continue such as RAM of 65 to 68 nanometer technology and the introduction of DDR3 in the second half, and we as the market leader will benefit.

Due to the protracted Harmony ramp issues we experienced in 2007, FormFactor was not the first full wafer contactor probe card company qualified at some DRAM suppliers. This resulted in the loss of business in the fourth quarter which we believe the competition picked up at lower end DRAM applications. With the recent improvement in our Harmony execution, we demonstrated our ability to manufacture the industry's most advanced full wafer contactor for high-volume production environments. For example, FormFactor has already delivered 40,000-pin probe cards. With the fundamental advantage of our 3-D technology over 2-D MEMS technologies, we believe FormFactor product is scalable for finer geometries and more complex architectures, such as DDR3 which will drive the wafer contactor market to more than 60,000 pins by second half of 2008.

As the advanced probe card business is fundamentally a design-based business, every new design presents an opportunity for us to demonstrate our technological differentiation and capture customers' next designs. We take our competition very seriously. But we will work hard to translate technological and operational advantages to improve full wafer contactor probe card market position as we have done in the past.

In summary, we are with witnessing extraordinary conditions in our business, but the long-term advanced probe card market drivers continue to point to growth at a rate faster than the rest of the semiconductor industry. Our products and technology are on the leading-edge and though we have experienced significant difficulties with our Harmony product ramp, we have learned invaluable lessons and will be a much stronger company for it.

During difficult times, strong companies make the right investors in technology. They are 100% committed to doing just that. We believe that FormFactor will continue to lead this market for many years to come. As our full wafer contactor Harmony-based DRAM enters the market in volume, we believe we will demonstrate our advantages.

Additionally, we're just beginning to penetrate SoC and NAND Flash markets where we can significantly grow our market share in the next few years. We see 2008 as a transition year as we work to resolve the issues we have had in introducing new products, invest in R&D, accelerate our product cycles and improve our execution, all of which will better position FormFactor as the leader for the next decade.

Before I hand the call off to Ron, I would like to take a moment to introduce Mario Ruscev, our new President, who comes to us after many years as Schlumberger.

Thank you, Igor. Hello everyone. I feel privileged to be a part of the FormFactor management and I look forward to speaking to all of you in the future calls.

There have obviously been some significant changes in our environment in my first month at the Company. In order to weather these challenging times, we are taking a few of the following actions. First, we are reducing our cost structure as announced and this includes a workflow reduction that Igor mentioned in order to maintain our financial health. We are also improving our ability to deliver our custom products to customers worldwide on a timely and cost-effective basis by moving design and application activity closer to them and increasing our presence in our geographical areas where they operate. As an example, by the third quarter, all design needed for the Japanese market will be done in Japan and this will also be true for Korea by the fourth quarter.

We also are continuing our investment in R&D in order to maintain our technological leadership. In 2007, we do estimate that our R&D investment was about twice as high as for all of our competitors combined.

Last, we are conducting a thorough review of our Harmony product introductions and will implement the changes to our product introduction processes. Now I would like to turn the call over to Ron Foster.

Thanks, Mario. I will focus my comments on three areas. First, I will provide a summary of fiscal 2007. Second, I will review our Q4 results; and third, will conclude with guidance for Q1.

Let's start with a brief summary of 2007. 2007 was a solid year from both an operating and a financial performance perspective. Here are some of the key highlights. Revenue grew 25% to $462 million. Gross margin improved from 50.1% in 2006 to 53.4%. On a comparable non-GAAP basis excluding FAS-123(R) option expense, gross margin improved from 51.3% in 2006 to 54.6%. GAAP operating margin was 20.2% in 2007 compared to 18.1% a year ago. Operating profit dollars on a comparable non-GAAP basis grew 37% year-over-year.

We achieved our target annual non-GAAP operating profit model of 25% for the year. GAAP earnings per fully diluted share grew $0.26 over last year to $1.47. We added $84.8 million in cash from operating activities and free cash flow was $36 million for the year. 2007 ended with $572 million in cash and investments, an increase of $78 million compared to 2006.

Looking at our various market segments in 2007, DRAM revenue increased 19% to $323 million, accounting for 70% of our revenues in 2007. We expanded in the Flash market, increasing revenue 53% to $89 million or 19% of total revenue. Known good die revenue, consisting of our wafer-level burn-in and HFTAP products, was up 95% in 2007 to approximately $78 million as we saw increased adoption for mobile and PSRAM app speed testing. And finally, logic revenue grew 16% to $45 million, representing 10% of total revenue in 2007.

I will now provide specific comments on our Q4 results. Revenues were $120.5 million, down 4% over the third quarter and up 22% versus Q4 '06. Weaker than expected order flow in the quarter reduced the amount of business that we had expected to book and turn in the quarter. DRAM revenues, which accounted for 75% of revenues in the fourth quarter, increased 10% sequentially to $90.2 million. Flash revenues declined 38% sequentially to $19.9 million, representing 17% of revenues in the fourth quarter coming off a strong tooling cycle for NOR in Q3.

Logic revenue was $10.4 million, representing 9% of revenues, a decrease of 5% over the third quarter due to the cyclical declines related to a key customer's product transition. However, we are well positioned as our existing customers move to high-parallelism, high-speed testing. KGD revenue in Q4 up 18% from Q3 at $25.6 million and up 284% over a year ago.

Fourth quarter bookings were unexpectedly weak at $93.9 million, a decrease of 25% over the third quarter and an increase of only 3% over the same period last year. Although Flash and SoC bookings were up sequentially, DRAM bookings dropped 36% as some customers have delayed or canceled the purchases of probe cards to deal with severe margin problems. The weak bookings led to a lighter than normal loading in our factory in the last month of the quarter and generated the lowest level of beginning backlog for the upcoming quarter since Q4 2005. Good execution and shortening cycle time enabled us to turn 62% of the bookings in the fourth quarter.

Now I will discuss our GAAP P&L results and some key 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. Let me review some key financial information for Q4.

GAAP gross margin for the quarter was 51.1%, below the 53.2% for the third quarter, primarily due to lower production levels in the third quarter. Non-GAAP gross margin was 52.2%, also down from last quarter. GAAP operating income for the quarter was $22.1 million, or 18.4% of revenue compared to $27.1 million and 21.6% in the third quarter. On a non-GAAP basis, operating income for the fourth quarter was 23.3%. Interest and other income for the fourth quarter decreased slightly quarter-to-quarter to $6 million from $6.2 million last quarter. The decrease was attributable to slightly lower interest rates. The yield on our cash investments in the quarter was 4.3% with a mix of tax-exempt and taxable investments. Given the current outlook for interest rates, we would expect our interest income to come down to a level of approximately $5 million per quarter in Q1.

The effective tax rate for the fourth quarter was 37%, excluding the impact of the onetime Singapore intellectual property buy-in. As we mentioned last quarter, a cornerstone of our plan to expand in Singapore includes transferring intellectual property rights there, along with manufacturing. This quarter's tax rate includes a onetime royalty prepayment as a partial buy-in for the IP transferred to Singapore. This payment increase the Q4 tax rate 12 percentage points to 49%. Given the market challenges we see in the very near-term, we have decided to revise the timing of our expansion plans in Singapore. We still expect to have customer support and sales and marketing activities up and running as planned in 2008, but we are delaying the production ramp by approximately six months and expect to begin manufacturing in Singapore no sooner than late 2009. The planned tax rates for 2008 and 2009 will be in the mid 30% range. With the ramp of production, tax rates in 2010 and beyond should decline significantly.

Net income for the fourth quarter was $14.3 million and $0.29 per fully diluted share on a GAAP basis, including the impact of the onetime buy-in of intellectual property by Singapore. Excluding the buy-in, net income was $17.7 million and $0.35 per fully diluted share. This compares to our guidance range of $0.32 to $0.36 per share and $22.2 million or $0.45 per fully diluted share for Q3.

Now turning to the balance sheet and cash flow statement, cash and marketable securities totaled $572.3 million in the fourth quarter, an increase of $32.9 million from the third quarter. Cash from operations was $43 million. We spent $19 million on capital expenditures compared to $14 million in the third quarter. DSOs declined to 45 days in the fourth quarter compared to 48 days in the third quarter. Net inventories decreased by $3.3 million during the quarter to $29.3 million. Inventory turns were 6.9 in Q4, down from Q3.

Now let me give you guidance for Q1. Weak beginning backlog and some DRAM customers' decisions to delay probe card purchases and to reduce expenses in the near-term has resulted in a declining outlook in the first quarter. Consequently, we expect revenues to be in the range of 70 to $80 million. With the rapid revenue decline in Q1, we expect to have a GAAP net loss in Q1. Excluding onetime restructuring costs that will be incurred in the quarter, the net loss is projected to be between $0.09 and $0.19 per share. Onetime restructuring costs, which consist primarily of severance costs related to the workforce reduction, will be 4 to $5 million, or $0.05 to $0.07 per share. The GAAP EPS includes about $0.09 of incremental stock comp expense. On a non-GAAP basis, excluding stock comp expense and onetime restructuring costs, we expect an operating loss of between 6% and 19% and earnings per share to be between a loss of $0.10 per share and breakeven.

Headcount at the end of the fourth with was 1187. The cost reduction actions we announced today will result in a workforce reduction of about 14% from current level. This, combined with other cost-cutting actions we are taking in the quarter, will reduce our spending run rate by about $4 million per quarter beginning in Q2.

Now let's open up the call for questions. Operator?

(OPERATOR INSTRUCTIONS) Jim Covello, Goldman Sachs.

The first question, two questions. The first question is just -- how do you figure out with everything that is going on what is a secular problem in your business versus what is a cyclical problem in the DRAM industry? So, when you're making the cuts, how do you decide how deep to cut to fix some manufacturing problems and some potential share loss that might not get back, versus the cyclical DRAM issue that will eventually recover?

Well as you can imagine, this is a highly unusual time for us. The way we look at it, as I mentioned, if you look for example at Q4 and you look at the $5 million shortfall between mid-range of guidance and what we delivered, you know the majority of that $5 million in where FormFactor did not repeat for full wafer contactor business. So that was a loss to competition.

If we look at outlook for Q1, roughly -- and it's very high to be precise -- but roughly, we see that two-thirds is a basically market conditions issue. It is extraordinary times where people, basically people wake up one day and their DRAM cost is below cash cost. And what you need to do immediately is to take actions the next day that -- where you bring it to or above cash costs. And your costs you bring up to or above pricing. So in order to do that, you take whatever actions you must take, you take whatever risks actually you must take, and that has a reflection of our business. We believe that's two-thirds of the problem. One-third of the problem is that FormFactor. especially at one customer, [Constellation], but it's when the full wafer contactor demand was there, we did not compete due to Harmony introduction problems. And now, we have to -- you know, some of these issues are behind us where we are ramping Harmony and we have to go back and compete.

Thanks for that. The other question is, relative to the cash position, if you look at where the stock is in the aftermarket, it's really not that far above the net cash position of the Company. It obviously sounds like you will burn a little cash in the first quarter. But at what point does the Company step in and take actions relative to buying back stock, being aggressive in that regard, considering the cash position relative to the overall market cap of the Company?

We are certainly seriously considering stock repurchase scenarios and actively looking at that relative to our total cash position. By the way, looking at Q1 based up the guidance I gave you, I think we will still be on an operating cash flow flat kind of scenario. And we are also looking at our cash balance, looking at repurchase, but also weighing against other potential future uses of cash as we continue to invest in our business and expand for growth.

But Jim, really, what the Company's going to do is what companies that aspire to be great do in such cases, and that is we're just going to go back to basics, we're going to learn lessons, learn, as Mario mentioned, this Harmony introduction and we will make sure that we do things a lot better in the future. We'll continue investing in R&D and we will make sure that technologically we will continue building the gap between us and competitors. And based on doing things fundamentally right, we believe that we will regain our financial performance and we'll regain our market position and we'll regain confidence of investors. That is fundamentally what needs to happen and what we are committed to do.

Harlan Sur, Morgan Stanley.

It still seems like the team is losing opportunity to your competitors here in the first quarter because you're not satisfying the Harmony demand out there. I think your previous target was to improve Harmony capacity by about 2X in Q1. First question is, did you hit that target? And second question is, will FormFactor be in a position to satisfy the pipeline of Harmony business starting in the June quarter?

Yes, we actually are on track now with Harmony, and yes, we will increase capacity by a factor of two or more. And yes, we believe that we will be on track to ramp Harmony production. We will compete very, very hard with both DRAM and Flash products.

So do you think, Igor, you will be in a position to satisfy the pipeline of Harmony demand for the second quarter?

The answer is yes, and we work very, very hard on demand generation right now.

Great. You have talked a lot about weakness in the DRAM market space. What are the demand trends you're seeing in the NAND Flash business? Capacity adds there are still fairly robust, technology transitions are still progressing as planned. I'm just curious as to what you're seeing in that segment of the business.

So actually, if you look at current environment, there is a confluence of several things here, and that is when your cost is at or below cash cost, you immediately take actions in order to not basically hemorrhage cash; I mean, we all know that. So what people do is, for example, 200 millimeter capacity went off the market, so that had an impact. Second is, people will delay, and of course they communicate it. The capital investment, they are lowering. Most of the companies are lowering the outlook. You will probably see very short-term, say Q1, you will see fewer bids produced. And what happens is that, as 65 to 68 technology transition is still very early, it's really yielding, companies are putting an unusual amount of emphasis -- and I must emphasize an unusual -- on squeezing whatever extra percentages of yield on existing 70 nanometer product. Some, there is really -- most companies ramp 70 nanometer. There is maybe one, Constellation, that's ramping it right now. But what people will do is, they will put their engineering not on running new things, they will put it on squeezing out extra percentages of yield. That will not result in extra probe card business.

And the last thing is, in the past we have always benefited from customers carrying suites of probe cards in the likelihood that you can sell two 512 Mb devices for more money than one gigabit. It's just an example, but there have been many, many situations like that when densities coexisted in the market or architectures coexisted in the market. In the environment like this, you're just not going to do that. You will just take a risk and basically just carry one. And they will do for 1 gigabit DRAM so that you spend less on packaging. You need to package two 512 devices and you only need to package 1-gig device. So all of these things in the very short-term are impacting our business. As you said, as you look at mid or long-term, yes, people will ramp 65 to 68 nanometer technology very, very hard. They have to. Those who by the midyear are not really yielding that technology will be at a huge disadvantage. So they will be ramping. That is why we feel that the first half will be challenging. We believe second half will be stronger, and that is one of the main reasons. People will be ramping DDR3 in the second half, that's going to be a major event. So these things will happen. But when you are operating at about cash cost, it's almost like deep freeze, and you basically think of cash preservation. You do very few new things, right? And this is the confluence of kind of events that we are facing right now.

Last question for Ron. How many and who are your 10% customers in the December quarter?

Harlan, there were three, same as last quarter, so roughly the same breakdown -- (inaudible) expansion and power chip.

Timothy Arcuri, Citigroup.

Obviously the issues with Harmony seem like they were not really capacity related, so it was not a shortage of your capacity as I think you were suggesting last call. It seems like the issue was more or is more product specific with maybe an architectural or a technical issue with the actual product. Can you go back and can you really detail what the specific issue was? Because I know last quarter, you were saying you did not have enough capacity, but it sounds like it was a product-specific issue. Maybe you can detail exactly what it was and maybe that would help must be convinced that it's behind you.

The problem we communicated last quarter was capacity related. In other words, we just -- where we were as I mentioned then or in the assembly and test part of the flow of the product. We clearly had a bottleneck and we were doing a lot of learning. And actually, Q4, we have made some major progress there. And what we started doing in Q4 is using automated tools for clarification and assembly of that product. So there has been a lot of work done in the factory. We reduced cycle times in Q4 by 30% on the product. So reducing cycle time also increases your basically capacity because you move more through the factory. And we now -- for example, we have shipped now I would say almost 20 two-touchdown probe cards. Remember, a majority of full wafer contactor market [today] is probably at four- to three-touchdown. We shipped I would estimate 20 two-touchdown probe cards. We have several one-touchdown probe cards with 40,000 pins in production.

So there has been a lot of learning. It is a complex product to produce. So this is not a situation where you say, I have solved all the problems. As you try to ship hundreds of these cards per quarter, you have to streamline your manufacturing, you need to automate more, you need to put more tools, you need to train more people. So it's going to be work. It is a complex product, but it's a very capable product. It's a product that will afford us differentiation at very high pin counts at very fine features. So the Company is working very hard and that is one of the focuses for Mario, and that is to understand what lessons we must learn, where we need to change our skill mixture structure, where do we need to automate and we must -- you will see us doing better as we go.

One quick follow-up on that, Igor.

The only way I can convince you is when you see us performing. I cannot convince you by talking.

I agree. I guess on that point, can you -- there has been a lot of concerns about the competitive gap between your product and other folks' product narrowing. However, some of that sounds like it was due to your own inability to actually build the product. So I guess, are there any recent examples that you can maybe point to that the new card is in the marketplace competing against the competition's card and at least recently has won based upon your newly found ability to actually build the card?

Remember, this is still early in this market and getting this precise information at this stage in full wafer contactor rollout in the industry is difficult. I can tell you that we have products out there that it is our belief today, products we shipped in fourth quarter of last year, that we don't believe other companies could ship. That doesn't mean that competitors are not learning and making progress. So that is a dynamic situation. But we also are making further improvements. And as you know, we're also investing in R&D. So again, we believe that -- we shipped one-touchdown product at 40,000 pins. We believe that it was the most capable product in the market. Now, clearly competition took up some demand at some customers that caused a (inaudible) right? So they're clearly capable. And again, this is not a situation where you talk your way out of it. We will compete our way out of it. We believe as we start shipping Harmony in higher and higher volume, putting it in customers' floors that we will demonstrate basic fundamental advantages of our technology. That is what we believe and we need to prove it now.

Gary Hsueh, Oppenheimer & Co.

It seems like you've basically opened Pandora's box in here in terms of market share loss, and I certainly think you guys have the technological ability to gain it back with Harmony. But I just wonder how easy is it to recoup what your original thought was in terms of pricing on Harmony. And B, if you can't really recoup the introductory pricing that you had envisioned for this product, how do you go about lowering materials costs and lowering your total overhead and improving gross margins in a challenging marketshare environment in '08?

It's always easier to be the first one in than coming in and trying to recoup something. It's not easy, it will not be easy. The question is, do we feel we're capable of doing it? The good new is that our business is design-driven business. Every time there is a new design up for business, we have a chance to compete. It's a new game for every design. So therefore, there will be ample opportunities for us to go back and to regain our position where we lost it. We didn't lose it everywhere, right, but in cases where we are behind, there was a chance with every design to perform.

In the second half, you will have new DDR3 architecture ramping, and if you look at DDR3, it will drive higher pin counts. For example, there will be demand for 60,000-pin probe cards. We believe we can make one round. And now, again, we don't have precise information about competitive capabilities, and clearly competition was capable to pick up the business but we believe we'll have significant advantages as we head to more and more complex architectures, as we head towards 65, 68 nanometer technologies with finer pitches potentially, finer dimensions. So that's where it will get played out. But I do not assume it will be easy. It's going to be a lot of hard work for the Company.

That's fair. Igor, you mentioned basically a reduction in terms of cycle times. Certainly, that's going to be favorable in terms of gross margin going forward on the Harmony product. Anything else? Any other kind of low-hanging fruit in terms of material cost reduction on Harmony that you guys can basically implement to sort of buoy gross margins there in that product?

There are ongoing cost reduction, cycle time reduction and productivity improving efforts that are going on. So yes, you should expect to be continuing making progress. And, again, that is one of the things where Mario in his first month here has been very much focus with the team on.

Chris Vitesse, J.P. Morgan.

When you think about the personnel cuts throughout the Company, are they job-specific, or how should we look at these? And then, Ron, I guess you said earlier how it impacts your operational cost. Could you repeat that?

Yes. I will take the first part of the question there, Chris. In terms of the personnel cuts, we cut in most all areas with the notable exception of R&D where we continue to invest as Igor already mentioned. The heaviest cuts were in operations, obviously, given the lighter capacity loading, and some of those were temp employees etc., that we have in our factory. In terms of the operating cost reductions, it will cause us in restructuring costs about 4 to $5 million and we believe that we will get about a $4 million cost run rate improvement starting in the second quarter, $4 million expense reduction out of those headcount reductions and other cost reductions.

Should we see most of that show up in the SG&A side?

Both manufacturing and in SG&A.

When you think about the weaknesses you saw in DRAM, was this concentrated in your top DRAM customers, or was it pretty broad-based for all your DRAM customers?

I think the weaknesses in DRAM is broad-based. It basically is an issue that the price for the product [spending] on the Company, but it's hovering somewhere around the cash cost. And so it is -- it just cannot possibly be a long-term condition for the industry. So clearly, something is going to give here.

I have two quick ones here. Igor, you mentioned low-end applications for one-touch probe cards, and I'm a little confused because I would have assumed that any one-touch application is considered -- you get a better premium for that probe card?

I understand the question. The market is for full wafer contactor. Where competition came in is not for one-touchdown [testing]. Basically, you make a contactor that contacts most of the area, almost all of the wafer, but then you step it four times. And we already also made a contactor that just touches it in one -- [testers] in one-touchdown, so the market for full wafer contactor typically is one to four touchdown. Today, most of it is four- and three-touchdown. We've shipped significant amount of two-touchdown cards actually. And you will see at the end of this year and certainly in '09, you will see more one-touchdown, one to two-touchdown applications.

On the transition to Singapore, even though the near-term conditions are a bit weak, why would you want to delay that transition and not just shove it out there sooner to get the cost savings sooner?

We're continuing our plans with Singapore. We've simply delayed it six months. As I commented earlier, we are going to be rolling out in 2008 our sales activities, marketing activities in Singapore, which is a step in that direction. We're making the investments in the IP transfers, which is a step in the direction of Singapore. So all we're dealing with here is a slide out of about six months in terms of our plan schedule.

I just have one comment on that. When you do this move, it's very time-consuming for the management and now we have some -- we want our management to be very focused on a few other areas, as you expect. That's really the main reason to delay it.

Mehdi Hosseini, FBR.

Most of my questions regarding the current business have been answered, but Igor I was wondering if you could talk about logic. In the past, you have talked about all opportunities on everything. How come those opportunities have not materialized given the weakness you have seen in the memory market? I thought maybe by now, you would have made up for the miss, but what are the challenges there that you are facing in the larger market?

So in logic, actually where we sit right now as we look at 2008 and beyond, you will see logic being the fastest, potentially fastest-growing business at FormFactor. As a matter of fact, we've projected to outgrow all other segments of our business. So what was very important last year is to introduce this new what we call True Scale product, which addresses high parallelism fine-pitch wire bonded market applications. And it's actually performing well and we actually have additional design wins and it bodes well for 2008 logic growth. In the past, we described first known good die as an engine for growth, and as I mentioned previously, we almost dabbled last year and known good die longer term will still be a very, very important engine of growth for FormFactor. And logic, SoC, is also going to be a significant area for growth for us. So I do not necessarily see -- I see it as a good storage.

Does your technology or methodology require any changes to the test platform or tech methodology?

No. We actually design our new products for all market segments whether it's Flash, DRAM or SoC, to fit existing test platforms.

So this is more of like a plug-and-play?

When we roll out our products, we make sure that vast majority of installed base of testers out there can use our probe cards, yes. And there's quite a bit of work that goes into making sure.

As a follow-up, help us understand what needs to happen for your customers to adopt your high parallelism in the logic non-microprocessor market? What is the current challenge or what is the milestone that you have to have?

It's just a change -- in most cases, it's a change from traditional probe cards that people have had 10, 20 years of experience of using and they had their organizations designed and [forked] how to use the (inaudible) cards, and now you're using MENS-based probe cards. So it's basically, you need to qualify, people have to be confident that once they let you in, that they now run every follow-on design. So you need to synchronize the design rules, you need to synchronize how the metalization is contacted by this probe cards. You do quite a bit of work before you say, look, from here on, you can just use it. It takes an effort. But again, we're making good progress there.

Patrick Ho, Stifel Nicolaus.

Can you provide some clarity on the issues with Harmony? And I think Ron you mentioned the R&D will continue to be the focus for the Company. Are there still R&D and engineering issues that you're still trying to work out? Because I guess going back into just looking back at some of the previous quarters, you mentioned that there were production capacity constraints. I think one quarter before that, there were customer integration issues. Have all of the engineering issues been resolved, or is this something that could still linger over the next couple of quarters?

Harmony is no longer in R&D. Harmony is getting ramped in manufacturing. So the issue with Harmony is now automation. The transfer from engineering to manufacturing is largely finished. There is still quite a bit of engineering involvement, but you basically have now automation and manufacturing, engineering and assembly and test organization building and shipping this product. When we talk about our future R&D investments, and FormFactor spends on R&D twice as much as the rest of our five largest competitors combined, we are investing in multiple new products. So the comment that Ron made was that in this environment what FormFactor is going to do is continue investing heavily in R&D so that both in probe card market, but also in new markets that FormFactor -- and new businesses that FormFactor will build, that we will be the leader for the long-term. So the R&D in '08, it's not Harmony. Those will be new products.

Fair enough. And I know you don't want to give specific guidance on the June quarter, but given the steep decline from Q4 to Q1, is there any possibility of a snap back in Q2 based on the market conditions improving, or is Q2 dictated more by the market or your ramp of Harmony?

The short answer is that as I mentioned in my script, we expect today, we hope, that Q2 is stronger, clearly stronger than Q1 and we certainly believe the second half of the year will be stronger, significantly stronger, than the first half. Now having said that, you can see that we are in the environment right now where we just need to stay very, very focused on short-term execution. Now this is not an easy time to predict exactly the timing of this improvement.

I understand that part, but I guess I'm just trying to figure out, is the incremental gain going to come from the market turnaround or your execution on the Harmony?

It will be both. We believe that the market for our products, especially in the second half, will be significantly stronger. We believe that FormFactor will compete a lot stronger also in the second half. And we'll also, if anything else, we believe that the lessons we learned last year, this new product introduction, will make us a much better company and you will see us over the long-term introducing multiple new products a lot better than we have done it last year. So all of that will bode well for our growth.

With that, we thank you all for joining us today. That concludes our question and answer period, and we certainly look forward to seeing you at the upcoming conferences and on our next quarterly earnings conference call. Thank you all very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.