FormFactor Inc (FORM) 2008 Q3 法說會逐字稿

Good afternoon and thank you for joining FormFactor's Third 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, the Company will make forward-looking statements within the meaning of the federal securities laws, including statements regarding the markets in which the Company competes, new product 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 risks 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 reductions and to deliver and qualify new products that meet the 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, application and other operational activities including execution of its cost reduction plan 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 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, Mark, and hello everyone. Before I begin, let me remind you that I will 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 website. With that, let me start with a summary of our third quarter results.

Total revenues were $52.6 million, up slightly from the second quarter but down 58% versus third quarter 2007. Revenues by business units were as follows - DRAM revenues rose during the third quarter by 16% over our second quarter. DRAM revenue accounted for 67% of total revenues in the third quarter, up from 59% in the second quarter. As Mario will explain later, the DRAM market appears to be stabilizing.

Flash revenues fell 26% sequentially during Q3 representing 16% of total revenue. And our SoC logic business declined 13% in the third quarter compared to the second quarter.

Our GAAP gross margin was 22.8% while non-GAAP gross margin ended at 24.9%, an improvement quarter-over-quarter.

Operating expenses excluding stock-based compensation and restructuring were up $3.5 million from the second quarter. The increase was primarily due to focused investment in research and development and an increase in legal expenses related to our ongoing ITC litigation.

Our GAAP operating loss for the third quarter was $28.9 million, or 55% of revenue. On a non-GAAP basis, operating loss for the third quarter was $23.7 million.

Interest and other income for the third quarter was $3.1 million. Given our conservative investment portfolio, we'd expect our interest income will remain at lower levels in the foreseeable future.

Our tax shield for the quarter was 45.6%, higher than our original guidance of 32%. The higher tax credit was primarily due to a one-time reversal of $2.8 million of tax reserves and associated interest accruals. This reversal was the result of a resolution of an IRS review of our R&D credits.

Net loss for the third quarter was $14 million or a loss of $0.29 per fully diluted share on a GAAP basis, better than our guidance range.

We continue to make positive improvements in our cost structure and manufacturing efficiency. And while we are obviously not satisfied with an operating loss, we do view these operating results as encouraging.

We are still in the early stages of driving our cost reduction plans. Many initiatives are under way and some of the changes we are now implementing now require more fundamental shifts in how we operate and it will take some more time to fully recognize the benefits.

As we come [through] through the efforts, we are enhancing the financial position of the Company and this will lead to strong profitability when our business improves.

We ended the third quarter with a headcount at 939, down 12 from Q2.

Now turning to the balance sheet and cash flow statement. Cash and marketable securities totaled $535 million in the third quarter, a decrease of $8.9 million from the second quarter. The decrease in cash burn by $4 million over the second quarter is due to aggressive cost controls, proactive collections, tighter inventory management leading to better working capital and prioritization of CapEx.

Cash from operations was negative $4 million. DSO improved eight days in the third quarter to 57 as compared to Q2. Inventory turns were 6.5 in Q3.

With that, I will now provide guidance for fourth the quarter. We are forecasting revenues for the fourth quarter to be in the range of $48 million to $55 million. We forecast fourth quarter both GAAP and non-GAAP gross margin are likely to be plus or minus a few percentage points from our third quarter. We forecast our fourth quarter GAAP and non-GAAP operating expenses to be up slightly from our third quarter as our legal costs related to ITC remain high. We estimate other income for the fourth quarter to be around $1.5 million and our tax rate for the fourth quarter is expected to be 34%.

We expect to have a GAAP net loss in the fourth quarter. The net loss is projected to be between $0.38 and $0.47 per share. The GAAP EPS includes about $0.07 of incremental stock compensation expense. On a non-GAAP basis, excluding stock-comp expense, we expect earnings per share to be between a loss of $0.30 to $0.39 per share.

Although the environment continues to present its challenges, we believe FormFactor is making the right moves to enhance its business model and to be well positioned for strong growth and profitability as conditions improve.

With that, let me turn the call over to Mario.

Thank you, Jean. And good afternoon, everybody. During our third quarter our mantra remains the same - focus on the thing in our control such as managing costs, prioritizing investment and operating more efficiently. I will provide some comments on our reorganization efforts on our outlook both short and long-term. But first, let me quickly share some observations on our third quarter results.

First, the DRAM business appears to be stabilizing. Recent announcements of industry consolidation as well as reduction in capacity are positive longer term indicator for our business. The recent sign that our customers are ready to give up size to be able to invest in efficiency is good for our business (inaudible - highly accented language).

On top of that, we are gaining confidence in our [productivity] capabilities, differentiation and potential for market share gains.

Second, the environment for our Flash business is weak especially in the NAND market. NAND has been impacted by both overcapacity and broader micro-economic issues because so much of the demand is driven by consumer products. That said, recent announcement on capacity coming offline could also help the current situation and lead to a better environment in the second half of 2009. In some ways, the NAND market today looks like the DRAM market of six months ago. So we believe the next few quarters will remain soft before we see some stabilization.

Third, we are seeing two different dynamics play out in our SoC business. First, our micro-processor segment is slowing. The reason for this is the timing between product qualification and the next technology node with our top customer.

Second, our wire bond segment continues to gain momentum. As we showcase our capabilities to our customers, we are gaining (inaudible - highly accented language) share and this will potentially lead to large orders over the next years. We should continue to see high growth in the wire bond market.

Finally, we continue to make positive improvements in our cost structure and efficiency. We are positioning ourselves into what I like to call a more sustainable node. What I mean by this is that as we continue to lower costs on improved efficiency we can persevere through a difficult environment for a longer period of time if conditions dictate. This not only improves our flexibility but we also serve to enhance our profitability as we come out of the other side of the downturn.

During the last nine months we have continued our efforts of more resources in close proximity to our customers. We are now in a position to have all the designs covering activities in Japan and Korea made locally. During the fourth quarter we will be implementing assembly and test capabilities in both Japan and Korea. We believe that in the longer term these actions combined with a set of additional initiatives will allow us to be more responsive and have a better understanding of our customers' future needs.

So over the short-term we expect market condition to largely remain challenging. The demand environment for consumer electronics is weakening which is having an impact on [unique] shipment of the timing of technology transitions. Customers are reluctant to increase spending on new design process nodes due to cash preservation content. This is delaying initiatives like DDR3 and sub-60 nanometer transition which are key drivers for our business.

On the positive side, we believe capacity coming offline will put companies in a better position to focus on differentiations which should result in new design and process node transition over time.

As we look out over the (inaudible - highly accented language) long-term, we believe we are striking a competitive position with a change we're implementing both on the manufacturing front as well as our investment in research and development.

About ten months ago FormFactor was in the midst of seeing its revenue cut in half. In addition, we are addressing certain Harmony production issues. Our primary goal at that time was to quickly move to reduce our cost structure, stimulate the business and focus our investment to ensure the delivery and execution of highly differentiated products in strong growth markets.

Today, ten months later, also [situationally] far from perfect and a lot of work still remains. We have made significant strides in improving our cost structure; we have stabilized the business. We have resolved prior Harmony production issues and make improvement in both of the (inaudible - highly accented language) and capabilities of the Harmony platform and are investing in future products.

We are in a stronger position today despite the weak economic conditions that were at the beginning of the year.

As we execute our reorganization strategy in Korea and Japan this quarter, we are positioning ourselves to be significant partners with customer in those areas. We believe it will over time provide us with revenue growth and market share opportunities.

There is no doubt that market conditions are challenging but we can only control how effectively and efficiently we operate our business. By focusing on improving the capabilities, reorganization for stronger customer support, innovation to drive some future growth and ensuring a financial model that (inaudible - highly accented language) profitability when the markets recover, we are positioning FormFactor to come out of this period stronger than ever.

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

Thank you very much. (Operator Instructions) Jim Covello, Goldman Sachs.

In the DRAM market for your business, how are your customers positioned to pay for some of these advancements relative to their current liquidity positions? What are they telling you about that?

Well, what I say is that we are (inaudible - highly accented language) in this position of -- the bad issue between demand and supply. And (inaudible - highly accented language) this was not addressed up to now and we're still eating cash. So what we say now is that our customers are starting to go down in capacity or at least not putting that as a first priority and we also see some of our customers, we try going quite further along with nodes and some which are stock at some further nodes. So with all that we don't sustain (inaudible - highly accented language) level over the long term so they really want more efficiency.

So I guess it's a choice of wherever little of cash remaining goes and we do believe as you see the first move of this has to become final there may be a little more cash flow efficiency gains.

That's helpful. And then relative to your own cash position, I've asked this question a couple times over the last year. As you mention FormFactor's position is more stable today than it was 12 months ago. Given the relatively more stable position that the Company is in, is there more of a thought to putting the cash -- the very significant cash balance to work for shareholders at this point? Thank you.

On the cash flow -- the events over the last couple of months I've put cash in a even more precious sense and I would answer the same thing but also it's with a little more (inaudible - highly accented language). We are certainly looking at how to use this cash in a most efficient way and we're looking at all the possible options.

Any timeframe that you could help to be more specific on? Is it one quarter, two quarter --?

It's just too early to be but, certainly, like I said the recent condition -- (inaudible - highly accented language) certainly emphasize the looking for cash and how to use this cash has become quite (inaudible - highly accented language) in our schedule.

Thank you very much.

Patrick Ho, Stifel Nicolaus.

In terms of the traction you're getting with Harmony following delays, how would you say you're doing with new customer qualifications as you look forward over the next few quarters?

Well, we are now getting -- we are qualified or in the process of qualifications with all the customers. So we do expect -- we have already seen an improvement in our position over the last quarter and, in fact, really quite -- and we believe that this will continue.

Then in terms of your operating expenses you mentioned it was going to be going up slightly in the fourth quarter. Is that just related to, I guess, some of the legal costs you mentioned or is there other stuff, let's say R&D, that's going to be going up that will trend into 2009 as well?

The slight up-tick in Q4 is a combination of legal expenses, some year-end operating costs which are always higher at the year-end and then, indeed, some prioritization of a couple of R&D projects which we believe it's important to focus upon.

The reason we are able to do this is also because overall we are on a traction to reduce our overall costs, right? So I would say this up-ticking in operating expense in Q4 is a business decision we are making.

And the final question, I think on the call you mentioned in your prepared remarks regarding your cost cutting initiatives and how you try to restructure your Company. Mario, now that you've been at the helm for six to nine months, is this a major restructuring that you're going to be doing on the operations front or more of kind of just tweaking what was there before?

I would say by the time we're finished you can see some major restructuring. Also, we do it in a continuous mode if I can answer to that which we are really looking at is each of the component that is part of the running of the business, we are really looking at changing it quite dramatically. But we try to do it in a non-just-big-bang way but in a more continuous mode, that's why it does take a few [months].

And just as a follow-up to that, do you believe that you'll be ready for whatever the next up-turn is? You'll have this cost structure in place?

I would say yes.

Great. Thank you.

Timothy Arcuri, Citigroup.

Several things first of all, Jean, can you break out what the legal expenses were and SG&A? I guess I'm a little surprised that it's as high as it's ever been despite all the restructuring things you've done. So I'm wondering, can you help us understand how much of that is core and how much of that is related to the legal expenses?

I would say that the legal up-tick from Q3 to Q4, sorry, from Q2 to Q3, accounted for about $1.5 million. But overall, we'd say that the ongoing litigation we're having is taking about a 2.5 plus load on our cost base.

But on top of this, I also want to add that we made that point that it is for us of prime importance to keep our R&D investment at the appropriate level and part of that increasing operating expenses are also some R&D projects.

I'm guess I'm just trying to figure out why SG&A itself hasn't really come down given some of the restructuring things you've done. And I'm wondering, maybe, have they not hit yet? Is it something we'll see kind of in Q1, Q2 next year? I can see that you're spending more on R&D but I guess I'm a little surprised that SG&A, even when you strip out legal, is this high. And I'm wondering, maybe we haven't seen it yet?

At the end of the day, what drives us right now is to reach our cash breakeven level at $65 million. And to reach that level we have several moving parts and the cyclical trend is that we're going to reach this breakeven level as soon as we can, right?

So how to get there is a combination of cost reduction efforts and these are decisions we're making along the way.

Well, I guess, maybe just on that point, then can you give us an update as kind of where you are? I guess previously you've said you would be operating breakeven kind of in the mid-$60 million within a few quarters. Can you give us an update on kind of where that plan is right now?

Yes. So what we communicated last time around was that we would be breakeven cash about mid-60s by the end of Q1, beginning of Q2 where, I believe, that's right now we have some traction to be a quarter ahead of that. And this is when you take out the one-time legal costs we're going to have again in Q4.

And then just last thing for me, can you give us any details on -- I think you have some pretty interesting new manufacturing architectures coming out and I'm wondering, can you give us some details? Maybe not in terms of the specifics as to what they are but what they might do in terms of the model? Are these new techniques more to boost the P&L or do you think that they are more to boost your competitive position?

We find it's too early to discuss it but let's wait -- what I like to say is that we are thinking probably that we need to organize an investor day sometime in Q2 of next year where we will go into quite much more details about all of that.

But let's put it this way, our goal into the (inaudible - highly accented language) is to -- I would say is two-fold. First is to make us more competitive in where we are. The second is also to allow us to expand -- to expand our competition in markets where we are not very present actually just because of product offering. I would say that we do have two goals into R&D.

So I understand it might be frustrating because we are spending quite some money on it but you understand it's just too early. But we will certainly discuss it much more in detail as time comes.

Thanks.

Christopher Blansett, JPMorgan Chase & Company.

Mario, I think I asked you last quarter, and to kind of get an update, how you would characterization the mood of your memory customers now versus last quarter and in general I think you had previously said that they had kind of gone from shocked to more of a waiting mentality. Are we still there or --?

Well, no, I would say that they are starting making plans again. I think -- again, it's always very hard to talk for customers but I would say that I realize that the upturn is not immediate so we have to take action and I assume that this is why we see CapEx costs. And I think overall we see our customers starting moving again and getting action. So I would say that now they know it, we have to (inaudible - highly accented language) the demand of (inaudible - highly accented language) basically. We have to solve that and we have to go back to efficiency gains. So I think my (inaudible - highly accented language) is that we are starting acting towards that.

And then just a quick follow-up on all these questions about OpEx and costs, is it fair to say that you do have slightly higher costs on the OpEx side which are driving down your longer term costs and will fall off at some point in time in the first or second quarter?

Well, we have a couple of things going on. The first one is we have some temporary costs in there which we expect them to drop the early part of next year and then, indeed, we are -- the investments we are doing is for us positioning for the rebound in the market, right, each for ourselves to position as a strong growth company when the market rebounds. So these are specific projects on which the business has begun to invest for the future and it's -- these are business decisions.

And then I have two simple questions. One is, if we do have a extended or protracted weak business environment, at what point in time do you need to make a decision, maybe, to make further cuts?

So right now the target of $65 million breakeven cash is corresponding to our read of the markets. If the market was to deteriorate, we would of course adjust accordingly.

And the last question is, have you come around to rethinking the manufacturing move to Singapore or is that still kind of waiting?

For that we have to go back in the past, you know. You have to realize that the move of manufacturing to Singapore was made when we were all looking at adding capacity and (inaudible - highly accented language) capacity. In the actual, like we said last time, in an actual position we did decide to freeze all of that until we can read better on the long-term.

There is one thing, again, that happened in the last two months is that also everybody sees what is going to happen, timing is very important. That's why we are still in the same position to wait until we have better predictability because the last thing you want is (inaudible - highly accented language) on being a quarter too early.

Thank you, guys. Appreciate it.

Gary Hsueh, Oppenheimer & Company.

Thanks for taking my question. You might have gone over this and I apologize if I missed it but what was the explanation for the 150 basis point improvement in gross margin sequentially on flat-ish revenue?

The main reason behind this is within our cost cutting exercise is the lowering our fixed costs. This is really the main reason behind it.

So there, quarter-over-quarter, there wasn't any change in terms of the inventory charge-off that you normally account for?

Actually, there was. But overall on the variable costs we -- you have several moving parts. I must say that our reserve number in Q3 was much better than in the prior two quarters.

So you did actually reserve less in Q3 and that also helped gross margin in addition to reducing your fixed cost base?

Absolutely.

And from here on out, I mean, you still talked about cost restructuring, from here on out are there going to be any more kind of step function changes in your costs to goods sold structure or is there going to be a more predictable sort of drop through in terms of revenue down to growth margin?

Well, we are on the path of achieving our target. We are not at our target yet and I indeed expect our cost of goods sold as a percentage of revenue to decrease. I gave some data point on the last call, I would say that that $65 million I would expect a gross margin in the 40%-ish, right? That's a data point.

Great. Thanks. And just since we're nearing the end of the year and kind of looking for 2009, if I kind of did a post-mortem of this year, big growth in DRAM was chopped in half and then, I guess, it makes sort of sense that your revenues were chopped in half as well. But if I look in 2009, big growth is supposed to come down again by roughly 20% to 30% in DRAM in 2009. How should we model top line in 2009?

I put some of your guidance in -- having gone through the worst in terms of DRAM pricing declines in the month of September, it doesn't sound like things are getting that incrementally worse according to your guidance. So I'd expect you to sort of out perform a 20%, 30% big growth decline next year in DRAM. How much do you think you could outperform that kind of big growth decline next year?

I would say that if you look at the prediction for big growth for next year, probably in the kind of 45%, 50%, it's also lower than we had with the last few years. Historically, it's not something really absolute in fact. So what I hope is that maybe the market comes to a more reasonable way of evolving. And again, like I said before, we will still have, even if it has been delayed, DDR3 will be coming. (inaudible - highly accented language) obviously people were planning that the cross between VDR3 and VDR2 would end up in Q2 now it's most likely up in the quarter or two later.

But for the long term it will still be a large event on a long event, you know. If you look at our prediction before what people did in DDR2, we underestimated everything and I would probably -- from mid to long-term we are probably doing the same again.

So what is driving our business is the technology changes, evolution on efficiency gains from our customer and this is how we can help them, also. So we are, again like I say, it's not about big growth. Remember in 2008 we had a decent big growth but it did not really reflect because quite a few of our customers decide to keep some technology node.

Mario, just let me ask this question another way and then I'll leave. But do you feel like your DRAM revenue run rate currently in Q3 and Q4 is in sync with kind of single digit quarter-over-quarter big growth numbers right now in the DRAM industry?

It's, again, it's too early to say what will happen but I certainly expect 2009 on DRAM to be better than 2008.

Fair enough. Thank you so much.

Christopher Muse, (inaudible).

First question, in terms of the DRAM strength, was that one customer or was that more broader based?

Again, if you look at DRAM, there is some reorganizations so -- in fact, we see both impact. Some of our customers have been long-term customers of almost -- when you are completely reorganizing you don't build in much [staff] so we are seeing this impact and we are seeing other customers ordering more. So I would say it's a mixed bag for now because there is certainly not one trend because, again, each customer is at a different stage of their kind of plans, reorganizations, etc., etc.

I guess you have a $5 million plus, that growth, did that come mainly from one customer or was that more broad-based to a handful of customers?

That was broad-based, in fact, if you look at it.

And then in terms of your guide, if I kind of take the mid-point across the board, it looks like OpEx is growing by about $4 million. Is that the right math that I'm doing? And if that's the case, what's growing besides that, that $1.5 million extra in litigation?

No, the $1.5 million was from Q2 to Q3, the 1.7 increase. I would say that if you take the mid point, what you're factoring there is about a $0.04 increase in OpEx.

And as I said, it's driven by three factors. One of them is legal, another one is R&D and another one is some transient year-end expense.

And then could you also share with us what your orders were in Q3?

The bookings?

Yes.

It was about $48 million.

And then final question, when do you expect to revenue first DDR3 revenues?

We are already shipping (inaudible - highly accented language) for DDR3.

I guess the better question is, when does it become more meaningful?

I would say your guess is as -- we will see it ramping up as we go during the year so I would say it's difficult for me to say when it becomes meaningful. In the position we are, any forecast is meaningful I could say. But we do see the ramp-up coming now slowly as it comes. We start seeing more movement on DDR3 lately.

Thank you.

Mehdi Hosseini, FBR.

In your prepared remark you mention moving some manufacturing to Korea and Japan. Did I hear right?

Yes. You did hear right.

Has there already been factored into the $65 million cash breakeven?

Yes. It has. I would say that those investments are actually incrementally selling many more because what we're doing is using a lot of our assets that we have in the US and transfer them over there, right? And so when you factor in the incremental revenue we expect from this investments, actually, in terms of being pretty neutral and it factored in the $65 million.

Sure. So in order words you already made some plans on how to utilize capacity out of Singapore because you are getting closer to your customer and are setting up some manufacturing there.

No. What we're doing here in Korea and Japan, we're talking about assembly and test. So these are the back hand of our manufacturing which we believe is better positioned to be next to our customer. We've done nothing significant about Singapore yet.

And one last question, going back to the breakeven in $65 million, does that include further activity in the logic market? You have the bond wire revenue streams and I'm just curious to what extent then your break even point takes into account, more activity in other areas for the logic market?

When we refer to cash breakeven at $65 million, that usually means that our cost structure will be such that we will not leave any cash at $65 million revenue. Right now we (inaudible - highly accented language).

This include -- usually makes up what you have with growth in wire bond, obviously.

Anymore investment in other areas of the logic?

Well, we are present in both area. We are obviously present with our major customer. We (inaudible - highly accented language) and we continue to invest with them and then, yes, we have added investment to cover the wire bond which typically I would say two years ago we did not have any product to cover that. Now we do have a product that covers it. We have a spring which is, I would say, is pretty well adapted to that. And this is what we're pushing in the market. And up to now, we have had pretty good success with our customers.

Thank you.

Kevin Vassily, Pacific Crest Securities.

Couple questions, just one back to the whole breakeven level. I just want to make sure my assumptions are correct. So if we're assuming a breakeven operating cash level of $65 million, my assumptions are about $35 million in OpEx and depreciation running at about $8 million. Are those, at least, in the ballpark with the way you guys are thinking about that level?

Yes. It's in the ballpark. We'd take the OpEx a little bit higher than this but, yes, you're in the ballpark.

So a little bit higher than the $35 million but still get you to the operating breakeven.

Yes.

Second question is to some of the comments you made about the progress in the SoC market really to wire bond applications. Can you talk a little bit about kind of some of the end market applications for the ICs that are going to be using your wire bond oriented cards? Is it graphics? Is it video? Can you be anymore specific on that?

And then secondly, can you talk a little bit about what the value prop in wire bond is right now? Are you taking tests from two devices under tests up to 8 or 16? Give us some metric to compare to the value prop that you've had in the DRAM market.

Well, our value is usually -- it's always the two things. It's better contact and more (inaudible - highly accented language). We are, like I said, remember that we are barely not present so also we are very satisfied with still a very small play on this wire bond and we are really addressing what I would call the high tier market.

So really, yes, it's usually much higher (inaudible - highly accented language). That's really what is driving our customer and usually also a pretty nice (inaudible - highly accented language) each time they make (inaudible - highly accented language). We are pretty satisfied with the connection and some of the quality of the data and also very high (inaudible - highly accented language). So this is really the value proposition from now on. This is the one we are advancing from now.

And then what about kind of the application you are seeing initial traction in?

Well, we see quite a lot of application in mobile markets. All of the guys that provide -- cell phone providers, etc., etc. This is one where we see quite a lot of nice events, I would say.

Thank you.

I just want to add on the OpEx for breakeven, we're talking about a non-GAAP OpEx number.

Right. Okay. Thank you.

(Operator Instructions) Timothy Arcuri, Citigroup.

How much of your cash is domiciled in the US?

Most -- I would say that I don't have the number in front of me. I'll have to get back to you but I would say the overall majority of our cash is in the US. The only cash which is not in the US is in cash in transit, basically.

So the risk of you having to repatriate and pay taxes on that is pretty low?

Yes. That's right.

And then can you give us some indication as -- I'm kind of focused on this OpEx issue but can you give some indication as to what happens as you roll into next year and kind of what might happen particularly on the SG&A line? I know you are pretty committed to keeping R&D fairly high but do some of the incremental expenses that you're seeing in Q4, do they go away in Q1 so you could see kind of a couple million dollar decline in Q1?

Yes. That's the way I see things. Yes. But, gain, I remind you that what's driving us primarily is to reach breakeven cash as soon as we can and we are working on a bigger picture than just the (inaudible - highly accented language) line in SG&A. Right?

Of course. Yes. But from your comment before you seem to imply that you think that you could be at that low $70 million P&L breakeven in Q1 versus your prior plan of Q2.

Yes. I think so.

Thanks a lot.

Operator, we'll take one more question.

Thank you very much. Christopher Blansett, JPMorgan Chase & Company. Mr. Blansett, your line is open, please go ahead.

I had just a quick clarification on your non-GAAP $35 million. Are you including your legal expense into that or is that excluded from that number?

It is excluded and, yes, I forgot to add that because we don't see this high legal expense as an ongoing one, right?

Is there a simple, I guess, quarterly estimate we could throw in that would be more of a standard burn rate for those legal expenses then or do you do you expect them to go away?

I'd rather not be too granular on it. The only thing you need to know is they are going to drop back in early, mid-Q1.

Thank you.

We'd now like to complete the call. To all of you, thank you again for joining us today and we look forward to speak to you very soon.

And that does conclude our conference call. Thank you for joining us today.