FormFactor Inc (FORM) 2008 Q2 法說會逐字稿

Good afternoon thank you for joining FormFactor's second-quarter 2008 earnings conference call. On today's call are Mario Ruscev, Chief Executive Officer; and Jean Vernet, Chief Financial Officer.

During the course of this conference call, the Company will make forward-looking statements within the meaning of the federal securities laws, including statements regarding the markets in which the companies compete, new production, execution, demand for products, financial performance and strategic and operational plans. These statements are based on current information and expectations that are inherently subject to change and involve risk and uncertainties.

Actual events or results may differ materially and adversely to those in the forward-looking statements, due to various factors, including but not limited to continuing challenges in the markets in which the Company competes, including the DRAM and Flash memory markets; the Company's ability to develop and market on a timely basis; innovative testing technologies; to realize cost reduction and technology robustness in connection with its Harmony architecture product line and to deliver and qualify new product that meet its customers' testing requirements on a timely and efficient basis; 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 implement and execute measures for enabling efficiencies and supporting growth in its design applications and other operational activities, including execution of its cost reduction plans and the Company's ability to obtain cost advantages as its operations become more global.

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 these anticipated in our forward-looking statements.

Please refer to the Company's recent filings on Form 10-K for fiscal 2007 and subsequent SEC filings for additional information regarding the relevant risks 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 Chief Financial Officer, Jean Vernet.

Thank you, Natalie, and hello, everyone. Before I begin, let me remind you that I'll be discussing our GAAP P&L results and some key non-GAAP results to supplement understanding of our financials. The schedule that provides GAAP to non-GAAP reconciliation is available on the investor portion of our web site.

With that, let me start with a summary of our second quarter results. Total revenues were $52 million, down 21% over the first quarter and down 54% versus second quarter 2007. The softness in revenue was evident across all business segments but most significantly in our DRAM and Flash businesses as the memory market continues to be challenging. During the quarter we have focused on efficiently cutting and monitoring costs as we realign the Company for profitable growth when the business environment improves. Our GAAP gross margin was 21.3%, while non-GAAP gross margin ended at 23.6%.

Operating expenses excluding stock-based compensation and restructuring were down $1.6 million from the first quarter. The sequential decline in operating expenses reflects the cost-cutting initiatives put in place during our first and second quarter. These lower operating expenses resulted in a GAAP operating loss for the second quarter of $30.6 million, or 58.9% of revenue.

On a non-GAAP basis, operating loss for the second quarter was $20.9 million. Interest and other income for the second quarter was $2.5 million. The decrease was attributable to lower interest income and some foreign exchange losses.

The effective tax rate for the second quarter was 33.8%, up 250 basis points from the first quarter. Net loss for the second quarter was $18.7 million and the loss of $0.38 per fully diluted share on a GAAP basis better than our guidance range.

We ended the quarter with a headcount of 952, down approximately 100 from our first quarter.

Now turning to the balance sheet and cash-flow statement, cash and marketable securities totaled $545 million in the second quarter, a decrease of $13 million from the first quarter. Cash from operations was negative $2.7 million. DSO rose four days in the second quarter to 65. Inventory turns were 6.6 in Q2.

Before I turn to guidance, I wanted to share some thoughts on our financial model. As I stated on the last conference call, we are very focused on financial management during these times of uncertainty and want to align our net cash expenditures to current revenue levels. I also indicated that we were carefully analyzing the business to determine our breakeven point and would be most focused on limiting the cash usage.

On an operating cash flow basis, the current breakeven level for quarterly revenue is somewhat in excess of $70 million. This is based on our current product mix and expected pricing and excludes capital expenditures or interest income. We have several initiatives underway, both short and long-term, to reduce our operating cash flow breakeven level to the mid $60 million range. Note, though, that breakeven levels are, of course, affected by a range of factors, including pricing, mix and our ability to achieve manufacturing efficiencies. In addition, as our market visibility improves, we might decide to get more aggressive with our investments, which would temporarily impact the breakeven level.

With that, I'll now provide guidance for the third quarter. We are focusing revenues for the third quarter to be relatively flat with our second quarter, in a range of $45 million to $55 million. Turning to gross margin, we forecast third quarter, both GAAP and non-GAAP margin, are likely to be within a few percentage points from our second quarter. We forecast our third-quarter non-GAAP operating expenses to be up sequentially. The increase from our second quarter in operating expenses is primarily focused on research and development and some valuable compensation. We estimate other income for the third quarter to be between $2.5 million and $3 million.

We expect to have a GAAP net loss in the third quarter. The net loss is projected to be between $0.51 and $0.39 per share. The GAAP EPS includes about $0.08 of incremental stock compensation expense. On a non-GAAP basis, excluding stock compensation expense, we expect earnings per share to be between a loss of $0.31 to $0.43 per share.

Before I turn the call over to Mario, I would like to say that I have been quite encouraged with the energy and motivation that I've seen out of the entire organization during my first three months at FormFactor. These are unique times, and I believe we are implementing positive changes that will make sure we come out of this downturn a much stronger and financially sound Company. With that, let me turn the call over to Mario.

We continued to see a challenging environment during the whole second quarter. The memory market conditions are still weak, and customers are still in cash preservation mode. Since we last reported earnings in April, market conditions seems to be in a process of stabilizing also at the low level. During these times of continued market uncertainty, we do focus on things that are in our control, and on that front we have made solid progress, which I will outline later in this call.

During our second quarter our main focus was on managing cost, prioritizing our investments and operating more efficiency. I will provide some comments on the market on our outlook, but first let me quickly discuss the performance of our market segment during our second quarter. DRAM revenues declined during the quarter by 21% over the first quarter. DRAM revenue accounted for 61% of total revenue in the second quarter, similar to that of the first quarter.

The weakness in DRAM impacted all segments, including commodity DRAM, mobile DRAM and specialty DRAM. Customers remained in cash conservation mode, which limited activity around [shrinks] and new design during the quarters.

Looking at our Flash business, revenue fell 29% sequentially during Q2, representing 22% of our total revenue. Both NOR and NAND Flash were weak during the quarter. The weakness in NOR Flash can be attributed to cash preservation on the part of certain key customers, pushing our production ramp of 65 nanometers into the fourth quarter. The weakness in NAND Flash can be attributed to slower sub-50 nanometers ramp due to an oversupply of NAND Flash devices and the consequent falling prices of these devices.

Our SoC logic business declined 6% in the second quarter compared to the first quarter. The decline was largely due to a slowdown in the flip-chip business. On the positive side, the wire bond segment performed well with revenue up over 100% on a year-over-year basis. We have seen a significant pickup recently in the LAN activity, and we look to further penetrate the wire bond logic market.

The market continues to move forward (inaudible) due to lower costs, and we believe we are well-positioned in the high-end market versus other technologies.

I'd like now to discuss our progress on our Harmony architecture-based products and provide a competitive update. We continue to focus our attention on Harmony execution and product differentiation. I want to share with you the progresses we have made over the last few quarters. We have reorganized manufacturing to improve customer focus and speed time to market, and I believe our performance as we exited the quarter show real progress. We reduced (inaudible) leadtime by 20% for first articles. We've improved product performances to meet tightening customer requirement and increasing design complexity in terms of [package], [byte size] and temperature ranges, while we also improved capacity, lead time and global support.

We introduced a new technology called RapidSoak which reduced soak time significantly, adding productivity back to test [cycle]. This enhancement for Harmony probe cards is an example of FormFactor's commitment to develop innovative solutions that optimize productivity for our customers' next-generation devices.

We also introduced an industry-first two-touchdown DRAM Harmony card for soak, and the first one-touchdown card for wafer burning. We made considerable progress in the last six months on our second competitive position because of it. With the hard work and improvement we acknowledge will reposition us well when we advance (inaudible) market return to growth in the future.

As we said in the past, the advanced probe card business is fundamentally a design-based business. Therefore, every new design presents an opportunity to demonstrate our technological differentiation and capture customers' new design for full wafer contactor. Our focus continues to be on product differentiation and service to our customers, which we believe is positioning us well to capture market share as the full wafer market recovers.

We are making significant progress on our effort to realign our business to be better positioned for profitable growth. This effort includes improving product performance and delivery and driving product differentiation across all of our product lines. We're also continuing to invest innovation to drive future growth. We are fundamentally a technology company, and this investment is critical to us as a mission-critical supplier to our customer.

We also continue our effort to build FormFactor into an organization with greater [regionalization] for stronger customer support as we strengthen our local design capacity, (inaudible) application support, service and repair capabilities.

Looking at the second half of 2008, we expect DRAM market conditions to continue to be uncertain. A recovery is inevitable, but timing is unclear, and we expect the slope of recovery to be slow. Overall, bid growth remains strong. Between 55% and 65% for 2008 is a market forecast.

Also, our visibility is still not as strong as we would like. We are starting to see some traction from DDR3 memory. We believe market penetration of DDR3 will be limited to sub 10% as we exit 2008 with much broader adoption in 2009. We expect our customers to continue to ramp commodity DRAM at 65-68 nanometers in the second half of 2008, while considerations such as graphics, mobile and PSRAM are likely to [prove the next node] at [sub-60] nanometers in 2009.

During this downturn in our markets, we are focused first and foremost on controlling what we can control, which is improved product delivery capabilities, innovation to drive future growth, [regionalization] stronger customer support and ensuring a financial model that will deliver robust profitability when the market recovers. Our focus is to put FormFactor in a sustainable position, regardless of the timing of any recovery, and prepare the Company once again for high growth with high profitability.

With that, let us open the call for questions. Operator?

(OPERATOR INSTRUCTIONS) Patrick Ho, Stifel Nicolaus.

Mario, in terms of some of the progress you've made in Harmony, what are your customers saying in terms of the pricing of the product as you go forward? Are you still feeling some pricing pressures in terms of concessions, or as you go through new design wins, some of that pricing pressure abates?

Again, it's difficult to have just one answer for Harmony. Again, as I said, Harmony competes in a full wafer contractor. So we have some very complex designs with many springs, a lot of electronics to do test enhancement, et cetera, et cetera. On this one we obviously have no pricing pressure. There are some designs which are much simpler, which are -- there is more than one person that can afford, and then you see more pricing competition on this one. But I would say, overall, we are not seeing any dramatic pressure, price erosion, yet.

In terms of the overall business model, I know it's a work in progress and both of you are still relatively new to the Company. How long do you think it will take before you give us a long-term business model of the Company? I'm assuming that the mid-$60 million revenue breakeven rate that you just discussed on this call is not going to be your final one. When do you think you will be able to evolve, I guess, a new business model for the Company?

First, there is a few things. Like I say, we put the mid 60 breakeven. This is for what I would call the short-term. We will be discussing later under our actions and much longer term, which enables us to get much better. But our real effort for the long-term is to make sure that we do bring the Company into a model which I would call high growth, high profitability.

And for a technology company, this means with highly differentiated technology, return to the markets and the needs of our customers. This is really our long-term goal.

And once we've done that, I don't like to speak about business models because [actually close (inaudible) dogma]. But certainly, we are looking to have growth and profitability, which will be quite high, and comparable to historic factors.

Timothy Arcuri, Citigroup.

This is Brian Lee calling in for Tim. I had several things, actually. On the breakeven guidance, is this GAAP or non-GAAP? And, can you give us some idea of where you expect to be, with respect to the mid 60s level exiting 2008?

So the breakeven indication we gave is operating cash flow, which is before capital expenditure. So if you try to reconcile this with a non-GAAP operating income breakeven, that would put us probably in the mid 70s. In terms of timing, as Mario said, probably a few quarters. But for us it's a priority right now, so the sooner, the better.

It looks like inventory was down again here this quarter. Were there any reserves taken in the quarter similar to what you did in Q1?

And as a follow-up to that, I guess, what's the criteria to reverse any actions that you've taken recently on increasing those reserves?

On the first part of the question, inventory was down because one other thing is, we had less purchases. But in terms of reserves, we still have a fairly high reserve, in my opinion. It is about 20% less than we had in the first quarter, and we are -- part of our initiative in reducing the cost is to get very aggressive on this reserve management. So we expect this number to be much lower in the future.

Now, to the second part of your question, the reserve is calculated as a match of inventory versus demand. So when demand comes back, essentially this will technically reverse the effect of that reserve, when we actually sell this product.

We've been hearing about some improving levels of design activity, specifically at some of your larger DRAM customers. Can you remind us what the typical lag time is between when design activity starts to first pick up and when you guys actually start to see that turn into revenues?

It depends on the customer. Sometimes it's very urgent and it's only a few weeks, and sometimes it can take a few months. But it's usually -- it's average within a quarter, I would say, to see that. One quarter to two, maximum. It really depends on customer. Again, each design is particular. So sometimes you are in a mode where it should have been yesterday, and sometimes it's pretty in advance.

Play, so maybe a month to maybe up to two quarters, depending on the customer, great. Lastly, there has been some chatter recently about some product return issues for you guys, due to overheating. Can you provide any color on that issue?

To answer to this, I'll just go back a few quarters. Just to remind everybody, unfortunately, we had difficulty to manufacture this Harmony in 2007. There have been some very large activity done in late 2007 to solve it. This had been solved, and basically this resulted in Q1 us shipping a pretty large amount of Harmony to our customer. What happened then is what happened in every -- whenever you hit a market with a large number of a new product is that, in some specific cases the specification of a customer has evolved. In this specific case, [which] (inaudible) is at, because some of the specification where to be functional at dual temperature, typically minus 10 degrees or 90 or 100 degrees Celsius, would be hitting the part of some design maybe too close to the security margin for our customers. Which means that we are to work on it -- usually, in normal times, you have nine months to 12 months to solve that. Because we are second this time, we had three months to solve it.

Basically, by now, this technical issue has been solved. And from now on, all [renewed] designs which are going are fully dual temperature. So this is the only issue we have ever had related to temperature with any of our customers.

C.J. Muse, Lehman Brothers.

When you think about some of the successes you've had with Harmony and the outlook for different end markets, how do you think the different segments will look like mix-wise, call it two, three, four quarters out, however you want to quantify it, relative to where we are today, to try to give us an idea of where you expect growth to come from out there in the next 18 months?

Before I answer to your question, I just had one comment I forgot to say on the last question. We did not experience any large recall of probe cards due to the dual temperature effect.

So where do we expect growth? For the next few quarters, we expect growth to come from the same way as it always happens, is when a customer starts introducing new technology, going to new nodes, there is basically more designs which are generated, more need for probe cards. And this is where the market will recover. So now in the next few quarters, when the markets recover, it will be mostly due to be moving to basically the sub-60 nanometers modes and introduction DDR3, which both will provide for new designs and a new market for us.

The way we look at this is, as we evolve, the finer the pitch, the higher the number of probes you need on a probe card and the higher frequency each one of that provides us with an advantage for our technology which we believe is faster and better adaptable. So, I think these will be the main goals.

On the other side, like I said, also we started from very small. We had a very nice growth in SoC logic, and this is in fact extremely encouraging for us.

Trying to dig deeper into DDR3, what does the revenue opportunity look like there? Are you assuming that you will penetrate both core and interface, or just one of the segments? And how should we think about the timing there and what the revenues could look like?

Again, for us, DDR3 is just one more design. What we see in some cases is, we see some very interesting design where we believe we can have quite strong differentiation for DDR3. But again, you have to remember that DDR3 has been delayed. So 2008, the industry expects to exit 2008 with less than 10% DDR3. In fact, I've seen numbers from [5%-7%]. So DDR3 will be, really, in the year 2009.

Now, again, I become careful now to say exactly which quarter it will be. Certainly, it will happen.

I guess maybe I can try another way. It looks like, given the revenues for you guys, at least for the first half of the year and your implied guidance for Q3 that FormFactor is underperforming the overall advanced probe card market. Now I don't know if you agree with that assessment, but that's the starting point.

And I guess what I'm trying to understand is, where do you think you can recapture that share? What end markets will you be able to drive and retake share and get back to where you were in prior years?

First, I would not say that we are -- there is one thing on the advanced probe card market. Outside the full wafer contactor, we still dominate the market, if I can use this term. In the full way for contactor, we did lose market share late last year because we were just not present. Now that we are starting shipping it, we have recovered part of this market share and we plan to recover more and more market share as the quarters go. For us it's a continuous improvement.

And the way to do that for us is very simple. We have to show that using our probe card, our customer can be more efficient. And basically, for us, the way to prove that is being able to deliver less touchdowns at the same speed for each time we deliver. We have a couple of nice example designs where, in one new design that we have, we can -- with older generation tester, we can provide a full sort touchdown, two-touchdown probe card, where, if you use a standard probe card, you need at least four touchdowns. And this is using advanced theory, which is test the results enhancement electronics on top of it, putting specific design ASICs on it and improving the global efficiency of our customers.

So it's with actions like that. So it's not one silver bullet. It's with pushing all way on each to design, this is the way that we will gain market share.

Gary Hsueh, Oppenheimer.

Just going back to the number you reported in Q2 for gross margin, can you actually walk me through how gross margin is materially better than what I think was implicit in your guidance? I think, when I looked at your guidance originally, implicit in your guidance was negative percent gross margin, and now the gross margin is obviously not negative. So, between when you guided and what you're reporting today, what changed? I'm having a hard time understanding that.

So for the quarter we have aggressively looked at our cost structure and most of the effects that we have gotten so far and that we will keep getting is from the manufacturing structure. So this is really the result of an overall review and effort that had been initiated across all the lines, which touch both variable and fixed costs, direct and indirect costs. And we are on the way. All the efforts have not produced a result so far. We are in the middle of the bridge, and I think that is a result of those efforts. What can I say?

Specifically, you mentioned that basically you took a reserve level on inventory that was 40% lower q-on-q. How much lower as a percentage of revenue, and how much did that basically boost your percent gross margin that you reported?

So I believe that we said 20% less than last quarter. The inventory reserve is the result of several business process, combining supply chain and inventory obsolescence and how engineering interacts with manufacturing. So there is not one simple answer to reducing inventory reserve. It's a complex process, and it is one of our focus. So that's what I'm saying, that we expect these reserves to get much better in the future. This is one of these examples where, because you have several departments involved, it takes a little bit more time.

Are we just at a basically steady-state kind of inventory reserve level in terms of Q3, or are you taking lower reserves in Q3 over Q2?

At the end of the day I'm not providing this level of granularity. I think what matters is we progress on all the lines of our manufacturing, and our target is to keep improving on the gross margin.

Just a longer-term question, then, for me, last question. If you can help me with an overall sense of how the Harmony probe card is positioned for DDR3, I think a lot of people have tried to ask this question. I'm just wondering; it seems like, with the dual temp issue at this one customer, the perception is that you might be pushing Harmony towards the upper band of its limit for DDR3. Is that true?

Second of all, in terms of core clock speeds, it looks like DDR3 is going to start pushing the 300 Mbps or 300 MHz core clock speed. And I think your Harmony probe card is only rated for 300 MHz. Is that just a nominal kind of limitation, or is there much more expended moving to Harmony than, obviously, what the specs are on paper today?

First, the dual temperature was one issue that we encountered, which is solved now. I want to reiterate that. Again, it's very design dependent and testing dependent. So it's really, each customer has his own recipient and in some cases, in fact and a couple of cases, we had this issue.

Again, this issue of temperature is really much more due to pad size and pad pitch than actual design. Overall, what we believe for DDR3 -- there is no secret [frequency]. If you increase frequency, we have a very good -- our probe card is extremely good at high frequency. In fact, we believe it's better than our competition. So, as we increase frequency slowly, it will be better for us. We don't believe -- nobody ever believes that their competition will not be able to do it. So it is not something that will break the market, but certainly it provides us with one more piece of differentiation.

So again, for me, I see DDR3 as one more technology ability. And like I say, one of our first design in DDR3 from one of our customers was one when we were able with our probe card to cut them out of (inaudible) [by a factor of two]. So if we can do that more, we can maybe not do that type of design, because it's obviously a design on customer specific. But, if we can improve, do that as much as we can, this is the way we will win on -- at the end, because our job is to make our customer efficient.

Christopher Blansett, JP Morgan.

When you look out to your third-core guidance, what do you think pushes you up to the high end and to the low end of your ranges?

After the turmoil we have gone in, we were in the last quarters, I think people should not remember, it has been -- I would say the market is more quiet, but we have seen, if you just look into the market, the way we were looking at constellations six months ago is being changed dramatically. And we see many of our customers -- you know, we are analyzing their strategy, finalizing their plans, et cetera, et cetera. So you know, there is still some uncertainty. And this is really what will make a difference for me.

One thing I didn't hear you provide, which I think is a reference, is your bookings during the quarter. That gives you an idea of the strength, maybe, and how much carryover there could be that wasn't turns business in the second quarter.

Yes, the booking in Q2 was $51 million.

Okay, so it's pretty relatively stable. When you look forward toward -- like the ramp of Harmony, you guys have talked about it very qualitatively. I wasn't sure if there's any kind of metric you could provide or at least provide maybe in the short-term to give us a better idea of how it's ramping either on a volume basis or as a percentage of revenue.

We're actually completely demand constrained. We could manufacture much more Harmony than we do now.

Any ideas, like above 10% of revenue, below 10% of revenue, give us some ballpark right now?

We never provide this.

In general, then, there's two areas that you had spoke about previously. One is these -- transition of these customer-facing design-related activities to Asia. I want to get an update on how that's progressing. And I think, Mario, the last time we spoke, you indicated the company needed to sit back down and discuss what you were going to do for Singapore manufacturing. Give us an update on that as well?

Okay. So, on the design activity, we have been planning to basically have all our designs in Japan and Korea before the end of the year, and this is still on plan. As for Singapore, again, like I'm saying, we are seeing a lot of what we call regionalization, which means putting much more of our activity into the region. Singapore -- the plant is now on hold, and it's part of all of that. And I will be able to provide you much more details in our next calls.

Jim Covello, Goldman Sachs.

On the buyback or on a potential buyback, could you talk about use of cash? And the stock is at lower levels, the balance sheet is in very, very good shape. Any potential or updated thoughts there?

As I said before, our real focus as a management team now is to get the Company back in shape financially and back in a fighting shape to recover the market we know and getting ready when the market bounces back with our products and really getting all of that behind us.

Now, the buyback specifically, [it is said that] this is really a Board matter, and I can assure you that we do discuss that with the Board on each one of our meetings. And when the Board takes a decision, we will certainly tell you. But it's certainly something that we are looking at. (multiple speakers) but there is no decision yet to be taken.

How much cash do you think you need to run the business?

We certainly don't need all the cash we have to run the business, that's for sure.

I'm sorry if I missed it, but did you give any more granularity on OpEx, other than up quarter over quarter? If I didn't miss it, could you give us a little more granularity?

I don't think we gave more granularity on that.

The OpEx is coming up sequentially, probably between $2 million to $4 million.

Kevin Vassily, Pacific Crest.

I hate to go back to DDR3, but just to the extent you can maybe frame the opportunity there, you go back to the transition from DDR to DDR2, I believe the available market for cards looked to be roughly double at DDR2 from DDR. As you look out to DDR3, what kind of available market are you guys looking at? What are the drivers behind any increase or lack of increase relative to the opportunity at DDR2?

Well, I think the market for -- available market is two factors. It is the amount of wafer that people process, and then the amount of design. These are the two factors. I don't think there is going to be a huge increase in wafer manufacture in 2009, but there will be much more designs.

Do you see test times going up? Are there things that might drive the need potentially for more of an installed base for you guys to attach cards to? Or, are there any other things that might be in play here to focus on as we look out to model you guys out into the next couple of years?

Well, we have shown that our cards are used in a very efficient way, in fact, that our cards have a very long lifetime. So I think it is, in fact, a very reliable product. So I really believe that we -- and we are trying to cut this time. We put a lot of effort into bringing new technology, new electronics, just to be able to cut this test time. So it is really a race. Like I said, for us, the biggest increase in 2009 will be the amount of design and the shift to new nodes and, again, new design new to DDR3. This will be the main factor that we are looking at.

A quick question on the RapidSoak announcement. In the press release it was positioned as an option for customers. Maybe you can explain, in what circumstances might a customer not want to reduce soak times relative to test? Was it something you charge for that might not be appropriate for a certain application? Just help me through that.

Well, I think many of our customers want to have a kind of flexibility, but certainly we'll be very happy when an option becomes a standard practice.

But to the question of -- what are the circumstances where they wouldn't want this, is it testing a low-end product? I'm trying to understand what the downside of having a reduced soak time might be.

Well, the only thing we want to do is leave them to freedom of choosing.

But presumably, you are charging a premium for this?

I usually don't comment on specific pricing.

Gus Richard, Piper Jaffray.

Just back to the restructuring, could you talk a little bit about, given that OpEx is going to be up sequentially, where you're going to drive the costs out to bring down your cost breakeven to at $65 million? Is it mostly out of cost of goods? Or, is some going to come out of R&D and SG&A?

So, going forward, the plan that we have initiated is going to keep focusing on manufacturing costs. We have a very granular roadmap with a monitoring of those progress on a monthly basis. That said, we also keep focusing on OpEx costs, nonessential OpEx costs. The reason OpEx is going up next month, next quarter, is mainly driven by our investment in R&D plus some variable comp. So this is high-quality cost, I may say.

At the end of the day, for us to reach our $65 million breakeven it's going to be a balance between appropriate gross margin and a run rate of OpEx which balance out to our model.

If I take a look at your cost of goods, could you break down fixed and people and material?

No, we don't provide this level of detail there.

Any color whatsoever?

I would just say that we work on all these aspects. Some of them are addressing the fixed, some others that variable. Some are quick wins. Some are more fundamental measures we are looking at which will take longer time that could bring us a very long way in reducing the breakeven level.

Operator, we'll take one more question.

Raj Seth, Cowen.

Most of mine have been answered, but I wonder if I can go back to the breakeven discussion for a second. You cast breakeven in terms of operating cash breakeven, which means there's some working capital assumptions, et cetera. I'm wondering if you can translate what that looks like on the P&L maybe a little bit more. So, say the breakeven is 65. What kind of assumption are you making? I know it's highly mix dependent, but what sort of assumption are you making on gross margin? And then, back to the OpEx discussion, would you expect OpEx, assuming a flattish environment through the end of the year, to go down from the slight increase it takes in Q3, or should we model that flat? I'm not sure have that translates [at] breakeven to the P&L.

So, first of all, on the working capital, we assume this level on what we would call a steady state, which is, we exclude the effect of working capital. That said, rest assured that our plan is also very aggressive on working capital management. We just don't want that to pollute the model, due to the dynamic from quarter to quarter.

In terms of OpEx, yes. As I said, it's a balance between an appropriate level of gross margin and OpEx. Right? OpEx is mainly driven by our strategic decision to invest in R&D because that's what we are about, a Company of innovation. And I guess what you mean is, if the market was to deteriorate, of course, we would be very reactive.

So, at your $65 million revenue level, what are you presuming for gross margin?

So, if I could give you some line of thought there, and you understand this is -- these are moving parts, but I would say that our gross margin should be in the 40% range, 40%, 4-0 plus. And then the OpEx, slightly above $35 million on GAAP.

$35 million OpEx. (multiple speakers)

$35 million plus.

That's very helpful. And last question, I think somebody asked before, how much business do you turn in a quarter?

Do you mean in terms of backlog?

Yes, yes, yes. So a certain portion comes off of backlog, a certain portion you turn in the quarter. (multiple speakers) look like?

Its 55%, roughly. This varies, of course, but it's in the 55% range.

Okay, Thank you very much, appreciate it.

We'd now like to conclude the call. Thanks again, everyone, for joining us, and we look forward to speaking to you soon.

This does conclude today's conference. We thank you for your participation, and you may now disconnect.