FormFactor Inc (FORM) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to this FormFactor Fourth Quarter 2008 Earnings Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to FormFactor's Vice President of Investor Relations, Mr. Mike Magaro. Mr. Magaro?

Thank you, Martin, and welcome, everyone, to FormFactor's Fourth Quarter 2008 Earnings Conference Call. Joining me on the call today is Chief Executive Officer, Mario Ruscev, and Chief Financial Officer, Jean Vernet.

Two quick items as we begin. First, let me remind you that we 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. Second, a reminder for everyone that today's discussion contains forward-looking statements and that FormFactor's actual results could differ materially from those projected in our forward-looking statements. For more information, please refer to the Risk Factor discussions in our Form 10-K and subsequent Forms 10-Q and in the press release today.

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

Thank you, Mike. Our fourth quarter results reflect the unusual time our industry is going through. A sharp decline in demand due to economy climate follows the [major] crisis due to supply. The retrenchments we have seen by our customers is unprecedented in both its speed and depth. Markets and economic conditions are exceptionally challenging. The semiconductor industry is experiencing its most severe downturn in history led by retrenchment in consumer demand, impacting everything from personal computers to cell phones to flat panel displays.

The impact of this slowdown has significantly reduced the demand for memory, which added to overcapacity and the weakened state of our customers. In the near term, there is uncertainty on the financial stability of some memory customers, which has resulted in exceptionally low visibility for FormFactor. We can't really control all of these external economic events, but we are working very hard to manage our internal operations, our technology innovation, and our overall competitiveness.

With that, I will first briefly discuss the current state of our business segments, starting with DRAM. Fundamentally, the DRAM market is very weak, but we are encouraged with the effort within the DRAM industry to both consolidate and take capacity offline. We believe capacity cuts and consolidation will be a central theme in early 2009 and are hopeful that this will serve to bring back--to bring supply back into balance with demand, something we have been waiting for for quite some time. Once consolidated, the run for efficiency should overcome the run for capacity, which is good for us.

In Flash, we currently have a cautious approach in the near term. Due to our customers' overcapacity issue, the NAND probe market is soft, but we are in qualification process at a major NAND company which could significantly improve our position in that market. In [all] Flash, we have a strong position in the market, but our primary customer is going through financial challenges, which has resulted in limited overcapacity--activity, thus impacting our results.

In SoC, we continue to be very excited about the wire bond and the (inaudible) flip chip business. Revenue in this area was up 45% over 2007, also from a low level. In the high end of the market our technology is uncontested. In the near term, we are [motivated] by (inaudible) market conditions and rate of market adoption. Spending reductions from our top micro processor customer impacted all of our revenues in SoC, which were down. But we still believe we are well positioned at this customer and future technology nodes.

Now, I'll make a brief comment on our products and technology. We believe that the best way to successfully emerge from recessionary periods is with innovation. We will continue our pace of investment in R&D. Efforts in 2008 resulted in the market-leading Harmony product. We believe that Harmony is gaining share at certain high growth accounts. In addition, we are being told in some applications Harmony is outperforming our competition in the full wafer conductor market, driving lower cost of tests and lower [test times]. New products, such as advanced TRE and RapidSoak, are experiencing significant interest from customers due to advanced capacities.

For example, advanced TRE enables more efficient use of tester channels and test equipment and allows to double the number of devices that can be tested simultaneously. As DRAM manufacturers move to tighter design configurations, the number of die per wafer continues to rise and in some cases approaching 1,500 or more. With this technology we can help our customers optimize their existing equipment investment today and we provide a clear roadmap for further parallelism improvements on new device designs and tester platforms. One other example is our ability to achieve two [tests done] in SoC for DRAM with older generation testers.

In 2009, we will have a slate of new products and technology coming to market that will offer superior value to our customers and will enhance our differentiation DRAM, but also increase dramatically our addressable market opportunity in Flash and SoC. And we are looking forward to speak to you more about these products over the coming quarters.

With that, let me briefly discuss our priority for managing during this environment and assuring we come out of this downturn stronger than ever. First, we understand the absolute need for physical discipline and have in place several initiatives focused on saving and motivating our investments. We have been undergoing a broad-based restructuring for the past year and have engrained efficiency as part of our daily activities. Our restructuring effort has been an ongoing process focused on operating more efficiently. This program has yielded significant improvement in our manufacturing and product delivery capabilities in 2008, leading to a much leaner, more nimble organization than we were for the last few years.

Second, we will continue to evolve our capacity to (inaudible) and respond to our customer needs by moving more resources and decision capabilities to Asia. This is part of our regionalization strategy that will serve to enhance our customer relationships, improve our responsiveness, and increase product serviceability. Also, the reduction in costs associated with our regionalization efforts will have a positive impact for our financials over the long term. And we believe this is the right [prudent] response in the current environment. This increased responsiveness will also be very valuable when the market conditions improve.

Lastly, we believe that as was the case with IBM's foundries, there will be fewer suppliers in the future, which will benefit FormFactor, because of our strong balance sheet and superior technology leadership. We have great confidence in the cash generation ability of our business model and expect strong margin performance as supply/demand comes back into balance.

With that, let me turn the call over to Jean for more details on the financials.

Thank you, Mario. Let me start with a summary of our fourth quarter results. Revenue was down due to weakness across the memory market. Total revenue was 39.9 million, down 24% sequentially. Fourth quarter revenue for DRAM was 29.2 million, down 17% from the third quarter and a decline of 67% versus the fourth quarter a year ago. Revenue in the Flash business was down due to weak NAND pricing and cash conservation from one of our primary customers resulting in a material delay in order activity. Flash revenues for the fourth quarter were 2.2 million, down 74% from the third quarter and 89% versus the fourth quarter a year ago. Revenue in the SoC business was down due to the weakness in the microprocessor and handset markets, leading to a reduction in order activity.

In addition, we saw order push outs in the wire bond segment that contributed to the decline. Logic revenue was 6.5 million, down 14% versus the third quarter, and a decline of 37% year-over-year. Revenue in all geographies declined year over year with Japan being the only region up sequentially. GAAP gross margin of 1.5% was down 21 points from the third quarter and down approximately 50 points from the fourth quarter of 2007. On a non-GAAP basis, gross margin was 4.5% for the fourth quarter, down approximately 20 points from the third quarter and a decline of 48 points from the fourth quarter of 2007. The gross margin deterioration compared to last quarter and year over year is a direct result of both weak demand and high fixed costs. In addition, cost was impacted negatively due to costs associated with products shipped, but without recognition of revenue.

As we responded to reductions in demand, we scaled back costs across functional groups. On a GAAP basis, spending on R&D and SG&A was 42.4 million, 1.6 million higher than the third quarter. On a non-GAAP basis, spending on R&D and SG&A was 38.6 million, 1.9 million higher than the third quarter. However, on both a GAAP and non-GAAP basis, the higher operating expenses versus the third quarter was due to a reserve of 3.9 million against accounts receivable for potential losses related to bad debt reserve. Without this reserve, total operating expenses would have been 34.7 million on a non-GAAP basis, or 2 million lower than the third quarter based on targeted spending reductions.

In a separate category for impairment and restructuring charges, expenses were approximately 4.4 million and 500,000 respectively. The impairment charge of 4.4 million was related to a write-down of in-progress construction assets in Singapore and the 500,000 restructuring charge was related to a write-down in one of our Livermore buildings held for sale.

We ended the year with approximately 967 employees, down 19% from a year ago, but including the recently announced cost reduction actions, our current head count as of today is 752, down 37% from a year ago.

The provision for taxes in the fourth quarter was at 33.1% ETR.

Total cash investments comprised of cash and short-term investment ended the quarter at 523.6 million, which represents approximately 12.6 million of cash [reserves] during the third quarter. The quality of our investment portfolio is high, invested primarily in U.S. treasuries and federally guaranteed money market funds.

Cash flow from operations was negative 10.5 million. Capital spending was 3.8 million, bringing total capital spending for 2008 to 30.2 million. For the year, we lost approximately 24.4 million in cash flow from operations.

As we turn now to the outlook for the first quarter, the worldwide economic situation is creating a high degree of uncertainty around demand. Therefore, we believe there is a broader than normal range of possible outcome for the first quarter and the full year.

In light of the uncertainty in the current environment, FormFactor is not providing a revenue outlook at this time. For internal purposes, we are currently planning our business for first quarter to be in the low 30 millions. Based on our current view of the market, we expect non-GAAP gross margin for the first quarter to be plus or minus a few percentage points from the fourth quarter. As the quarter unfolds, changes in demand level and pricing of products could impact mix and unit costs and potentially create an additional several points of margin viability.

Non-GAAP spending for R&D and SG&A in the first quarter should be approximately 31 million, down 3.8 million from the fourth quarter, if you back out the 3.9 million charge against accounts receivable. Additionally, in a separate category for restructuring we expect expenses of approximately 7 million related to the recent cost reduction actions. With the current actions we've taken in January, the cash breakeven level has been reduced from 65 million at the end of the fourth quarter to slightly above 50 million at the start of the second quarter. We are pursuing the 45 to 50 million cash breakeven target range over the next few quarters. We will continue to drive costs lower over the near term to strengthen FormFactor's financial staying power in these challenging times.

Our expectation for capital spending is to be flat from 2008. Our capital spending for 2009 is related to investments in new products and regionalization. Depreciation for the year is forecasted to be approximately 34 million, plus or minus a few million, up slightly from 2008. The estimated tax rate for 2009 is in the low 30% range. Despite the unprecedented drop in demand we experienced in the fourth quarter, we entered the downturn well positioned, both competitively and financially. Our strong balance sheet and the focus we have on improving efficiency over the past year will allow us to withstand these downturns.

With that, let's open the call for Q&A. Martin?

Thank you very much, sir. (OPERATOR INSTRUCTIONS.) And we take our first question from Patrick Ho with Stifel Nicolaus. Please go ahead, sir.

Thanks a lot. A couple of questions. First off, in terms of your 2009 CapEx, you mentioned it was going to be flat year over year. With a lot of your cost cutting and just some of the downsizing, particularly in your Livermore facility, can you explain why CapEx isn't going down for you guys?

The CapEx we lined up for 2009 first of all is--the number I gave is an indication, which is not a fixed cost and we have--we have the discretion to bring it down, if appropriate. But it's going to be targeted on the investments that relate to some new developments, which hopefully will bring us some payback, as well as some investments in Asia, which are essential for deployment. But rest assured that this number will be closely monitored and will be adjusted appropriately, if needed. We just give that indication as an anchor point for you guys to have a reference point.

Okay, fair enough. In terms of your R&D investments, as you look forward to 2009, in this type of constrained capital environment, I guess how do you determine where you're going to allocate your dollars, towards what type of product development - whether it goes into memory, whether it goes into logic? How are you allocating dollars towards these different products?

Well, the way we allocate, we all realize that R&Ds are--as the market goes this way, that R&D becomes a pretty large burden. The way we choose our projects, which we did in fact--we did cut R&D by some and we choose the--we did choose the projects that we said were very important for our future in the near to--really, in the near to medium term. So with a few priorities I would say, the first one is to accelerate the differentiation in DRAM. Our next one is also to allow us to go and gain market share in markets like in NAND Flash, where we believe that our position is too weak, and we need to be more present. And the other one is also to ensure us to go much faster and grow faster in the SoC business. And then, we have some of--some new ideas for new projects, which will come slightly after. But this is really the way with our priorities. So really in a way we really try to optimize, but we don't manage it as just a percentage.

Thanks. Final question for me in terms of Harmony, given the delays that you experienced in the past and the qualification process that you're going through right now, given your customers capital constraints on their end, how far do you think that pushes some of the qualifications and valuation work that you're doing with them? When do you think you can get them qualified given their issues that they're going through right now?

Well, really, our customers--it's not really--a big difference between us and capital [improvement] is that if you go to a new node and come to a new design, you will need to have a new probe cards. Then each time the game is back to zero and, if you come with a solution that will allow them to gain more--to be more efficient, to do less [cash down], to minimize the CapEx investment in fact, then they'll make all the effort to qualify it. We had some customers--like I said, we had one example where you can do two tests done on DRAM SoC with older generation of tester. And usually, this is a very good investment for our customers and in this case they do qualify these probe cards.

Great, thank you.

And we will take our next question from Gary Hsueh with Oppenheimer and Company. Please go ahead.

Yes, hi, great. Thanks for taking my question. Just some clarification points here on your guidance. You're saying that on a non-GAAP earnings basis you'd come pretty close within plus or minus a few percentage points with the fourth quarter. Is that right? Is that what I heard?

Yes. I would first say that this is not a guidance. Right? This is just an indication of our internal assumption for resource planning this quarter.

Okay.

So at 30 million--low 30s, sorry, low 30 millions, we believe that we will maintain the margin we had in Q4.

Okay.

Yes, that's what we say now, plus/minus some variability. But this is roughly the indication, yes.

And on lower revenue levels kind of holding steady at the low teens in terms of your gross margin, you obviously have some visibility there. What--can you share with us what that visibility is? I think you might have referenced positive or beneficial mix shift, or is that actually you taking lower inventory reserves in Q1? What's really kind of buttressing your gross margin line there in Q1?

So the--one of the main things is our tackling of our fixed costs. In Q4, one of the main impacts of the margin was the fact that our revenue suddenly went down and that our fixed costs, although we have worked on our cost reduction, just are out of sync. So in Q1, we are through our (inaudible) action forcefully taking on those fixed costs. That's the main impact.

Oh, okay. And then, kind of my second question is just about this 22% headcount reduction. Exiting last year--correct me if I'm wrong--I don't think your employees really took any kind of voluntary shutdown weeks during the holidays. So it's a bit of a surprise you guys took a 22% headcount reduction come the new year. What exactly drove that? Was there a sudden shift in terms of the winds in the industry and your forecast? Is that something you can share with us to kind of give us a flavor of how volatile the industry is right now?

Well, it's this way, that way. We have--also we have seen a dramatic change in the business during Q4. We had plans that we had put before and we are just waiting to try just to optimize the timing to do it in a way how to optimize our results, but also how can we make sure that we have also minimum impact on our customers. So really, the decision to go to reduce the workforce was taken in trying to optimize both of these things. That's really the way that happened. We did have a shutdown of one week in Q4 and we are planning to have another one in Q1, and, if necessary, we'll have other ones.

Okay, thank you very much.

And we will take our next question from Mehdi Hosseini with FBR. Please go ahead.

Thank you. One clarification and two questions. Did you say that after Q1 your breakeven point--cash breakeven point is going to reach low 40s?

What I said is that with headcount reduction we made recently this would bring our cash breakeven slightly over 50 million, right, 50-51.

By the end of Q1?

By the end of Q2.

But--of Q2, okay.

Yes, because in Q1 we have some transition we have to account for.

Right. And then, if the industry fundamentals get worse, then you would revisit the breakeven point? There is no--right now there is no plan to lower below 50, correct?

So what I'll also mention is that beyond the headcount reduction we have some plans to further address other costs, such as our real estate footprint. As Marty mentioned, we plan some shutdowns. We have had a companywide effort to tackle manufacturing costs. This is still going to be aggressively pursued. And we're also looking at other variable costs across OpEx to--I mean, we have a target of an additional 2.5 to 3 million additional costs for quarter reduction, and this would bring our cash breakeven in the 45 to 50 million range over--after Q2.

Okay, after Q2. Okay. Thanks for clarification. And then--.

--But, sorry--but of course, we'll be very responsive to our environment. Right?

Right.

But to your question, if (inaudible) [further], I mean, as we said in prior calls, our main objective here is to be in a sustainable mode.

Sure. And then, in terms of just what is going to drive your business, other than the market share, do you still see some of the legacy products being replaced by advanced probe card or going forward when the cycle turns around is it just going to be purely a replacement or share gain story?

Well, obviously, in DRAM now you have only advanced probe card basically. But certainly, what we plan to grow is a [nice look] at the NAND Flash [electrical] market, which is where the footprint of advanced probe cards is low and we believe there is quite some room to be made out of it, and on SoC, the same. So we do believe that we want to first restore our position in DRAM and enhance our differentiation and we are working very hard at it. In fact, we are coming to--we have been starting to make some good [encouragement] into that and at the same time as we go on we will start growing our market share and growing our presence in both SoC, and in Flash where we are not being present enough.

Sure. The reason why I ask you is that going back to 2007 your quarterly revenue hit 125. And when I look into the future, the next couple of years, I just have a hard time imagining that your revenues could go back up to those levels. So why not be more proactive and more aggressive and a lower breakeven point to lower than 50 in the first half of this year, rather than taking more than one quarter to do so?

Again, it's slightly more complex than that. I know it seems very odd to discuss this timing when you say--when you are going down the drain. But one thing that we all know is that this crisis will stop, that the overcapacity which was first created a year ago, continued by this loss in demand--sudden loss in demand, which did not help, obviously, this will be--will come back to (inaudible). At that time, we will see that accessible markets will come back and we'll get much bigger. And what we want at this time, we just don't want to be one of the game. We want to come with products that will make a big difference in all (inaudible) applications and this is our plan. And we want at that time really to take that on. And we believe that, again, it's much bigger on (inaudible) than just trying to cut it off.

And another thing that I want to do add is that our main differentiation, as we are number one in this market, is that not only do we have a differentiated technology, but we're also the only one that can serve any customer anytime. And because our customers are becoming more and more global, because the consolidation is going to happen, I mean, we believe that this also is one of our strong differentiators. And we want as long as we can in the reasonable term to maintain this. These are really the two reasons why we are not cutting even more now, because we want really to come out of that in a much, much stronger position than we have been for a long time.

Got it. Thank you.

And we'll take our next question from C. J. Muse with Barclays Capital. Please go ahead.

Yes. Good afternoon and thank you for taking my question. I guess the first one just to clarify. Did you say you took a $3.9 million receivable write-down? Is that correct?

Yes, that's correct.

Okay. And is that the full extent of your exposure? I'm assuming (inaudible) [expansion] there or is there additional money that could be owed?

Yes. So let me give you a little bit of perspective. As the leader in the advanced probe card market, we are engaged with all customers in the memory space. And consequently, we are exposed to a wide spectrum of risk profile, from the very solid well capitalized client to the clients who are experiencing financial difficulties. So we have a set of different terms and conditions depending to the situation of our clients going from normal terms to cash in advance and everything in between. This is a process which has been going on for some time now where we review item by item, receivable by receivable, the payment plan together with the customer and find a path to getting paid. So we actually got some good traction in Q2 and especially Q3. What has happened in the second half of Q4 is a sudden drop of credit standing of a few clients. And we took this reserve as a conservative step to reflect this bottom-up approach that has been going on all along.

So what we--I mean, to give you some perspective, the overall underlying nominal exposure we have with clients which are facing liquidity issues is 15 million, 1-5. And as an objective--I mean, it's not an objective. As a way of guidelines and practices we are going to bring that exposure down. One way to do it is to be very focused at getting those receivables paid one by one. And again, we are working together with our clients to that effect. And then, the other way is also to protect ourselves in any further business, so that this exposure doesn't go up. At the end of the day, as Mario said, going through this we really see the crisis might lead to consolidation and capacity reduction, which overall is going to be a positive for the industry. So we have to work with all the clients and while we have our eyes on protecting the downside risk.

Very helpful. And if I could just follow up with one last question. Can--now that 2008 is done, can you give us your I guess first thoughts on market share as well as the overall size of the probe card market in 2008? And then, to follow on to that, can you give us an update of the status of that big Korean DRAM customer that you're talking with? Thank you.

Okay. So overall market share--it goes market by market. So we believe if you look at our numbers that our market share in DRAM is about 50% somehow. But again, all I want to add is because the market has become so low lately, one order can swing market share in one quarter by quite a few points. So what to really look now is not just the number, but also how we stand with the customers. Because it is true that, as you noticed, unfortunately, the number of probe cards that we have been shipping has been much less. And then, one order of five probe cards can make a big dent in one of them. And it goes--obviously, that can vary from month to month.

So really, what we--our position in DRAM is we are kind of slightly above 50% in the DRAM advanced probe card market. We are we believe below 10% in NAND. We still have pretty high market share in all Flash, but again, the market has been--this market has deteriorated fast. And SoC, as you know, we have one very strong customer. And then, on the other one we are just [passing] really into the market and we are--it's a slow market share, but it's increasing very fast. Also, it comes from low market share.

On the DRAM specifically, if we look from basically a year ago, our market share in full wafer conductor has been [growing] and [stabilized] lately, but we are becoming much more stable and much stronger in it. And also, one other difference that we are from a year ago is that now we are present--discussing and present with all of our customers. And as I just said, there is one pretty big one on which we have--we are actually on the qualification and from what we hear from our customer is that our results have been pretty good up to now.

So altogether, I would say also as we had many, many discussions on the Harmony last year, is that we count on our Harmony being a robust product. And there's a few of new technologies that can put on the Harmony, like RapidSoak and advanced TRE, which are [experiencing] good traction from our customers.

Thank you.

And we will take our next question from Timothy Arcuri from Citi. Please go ahead.

Hi, guys. A couple of things. First of all, Mario, can you just clarify the qualification that's happening at the big Korean vendor? You said in the prepared remarks that it was on the NAND side. Is that true?

No, no. This one is on DRAM.

Yes, that's what I thought. Okay. Okay, that's the first thing. Second thing, I wanted to get an idea of how sustainable the gross margin improvement is in March. So is it--is any of it from new products or is it all from just legacy cost cutting, or is some of it due to your reserves, such as changes in your inventory reserve?

So in fact, I would say it's all of the above at different timing. If you look in the margin [things], one of the positions that we are very strong because we have a widespread of products and widespread of technology, which enable us to maintain margins for a while. Another part is also about cost cutting. And even in our legacy product we still have some room. We have been working very hard, but as we go we find out new things, and this is coming. And later, obviously, we'll have a set of new products, which will enable us to continue that. So in a way, the answer is yes, all of the above. The timing is slightly different for each one of them, but this is what's going on.

Okay. Then I guess two more things. Can you--it seems like even though your internal planning number is in the low 30s, it seems like there's a pretty big backlog of new designs that's kind of welling up that is just waiting for funding to kind of move into volume. So when this breaks it's going to go pretty fast. So I'm wondering what sort of band--if you were going to put a band on that low 30s number, what sort of band would you put around that? Could it be plus or minus 5 million? Could it be plus or minus 10 million? What's your thought there?

There is--I'll answer, and then I'll let Jean answer the second part. The first part is inactivity. And it is true that if you look at it now, we are really going through--I really call it now--if you look at activity of customers, I really call it a nuclear winter. It's totally frozen. It's like somebody dropped a nuclear bomb. You see machines, but--human activity is really about how will we survive, what is our next alliance, what is the next technology, et cetera, et cetera. And I think that our customers have been extremely active internally, but this has certainly not resulted in designs and things out yet. The decisions are not taken yet or are being taken, but we have not seen the result yet. And this really shows the extremely low number we have been discussing.

On the other side of (inaudible) why we are so--like I say, why we are so careful is we see all of these movements going around and we have to really take it on a very prudent approach from ourselves on what kind of revenue we can recognize and how further we can go on. Jean, maybe you have a word to say on that.

I'll answer two ways. First of all, on that last point. We are let's say very prudent in the business we're going to and it's the work we are doing with our customers to protect our exposure. So certainly, if you wanted to just grow the business, we could have a much higher number. That's one thing. The second is we--you are exactly right. I mean, there is potentially a big pool there, which is ready to come to market. And this is why we are watching very closely our capacity. Right? And you have--our capacity--our [people] capacity right now is about 60 million and we are very cognizant that dynamic could change very fast. So we are--the reason we don't want to give guidance for Q1 is the combination of what we would choose as business to take in Q1 on which we could recognize revenue, plus the fact that there is some uncertainty as to when this flow of new business would come makes the [risk] too wide.

Okay. Thanks, guys.

And we will take our next question from Gus Richard with Piper Jaffray. Please go ahead.

Yes. Thanks for taking my questions. Just to follow on that last question, when you look into your customers and their move to smaller geometries or DDR3, how has that activity been over the last couple of quarters? Are you seeing--is it still decreasing or is there more internal activity at your customers?

If you look at--again, visibility is very poor. But if you look at the plan we have, we see that they are actually picking up steam. In fact, if I really look at our plans--but again, we have to change our plans so much lately you have to take that with some--a grain of salt, we say in France. We should have--in fact, we should ship more DDR3 than DDR2 by probably Q2 2009. So we do expect to see a pickup. I know that the industry expects that basically the [cross line] will be sometime late Q2 or Q3 of 2009. We do see designs in DDR3 coming. And we do see that our customers find that they are really proud that they can still make money out of a very fine [piece]. The [50-plus] technology nodes are the one that they expect to make money. So we do expect that there will be a push. And what I'm waiting for is that people--our customers stop investing a lot of money in earning capacity and start investing money into efficiency, which for us will go into node transition and node technology.

And then, just one follow up, a clarification. I didn't quite catch the gross margin guidance for the first quarter. Could you just repeat that for me, please?

So again, this is not a guidance. This is--what we did is share with you guys our internal revenue level for planning purposes. And at such a revenue level, which is low 30s, we expect the margin to be roughly in line with what we had in the fourth quarter.

Okay. Got it, got it. And was there any charges in the gross margin in the fourth quarter?

So in the fourth quarter we had predominantly the effect of the high fixed cost base, at those level of revenues, and then we had some costs associated with some revenue we did not recognize. And included in that, we also had some bad debt--some inventory reserve, which were really driven by push outs in demand.

Got it. And if you backed out (inaudible) impact, your gross margin was in the 10% range?

Yes, roughly.

Perfect. Okay, thank you. Sorry to make you repeat it.

No problem.

(OPERATOR INSTRUCTIONS.) And we'll take our next question from Jim Covello with Goldman Sachs. Please go ahead. Sir, your line is open? Mr. Covello?

And hearing no response, our next question comes from Kevin Vassily with Pacific Crest Securities. Please go ahead, sir.

Yes, hi. Thanks for taking my question. So you've written down a portion--or I guess I will assume that it's not the full amount of Singapore. You've given some of the commentary about locating resources closer to customers and Asia being a part of that strategy. Is there going to be any role that Singapore can play down the road that makes sense here relative to its original intentions?

Yes. So the write-off we took in Q4 really reflects our decision not--to not build a building ground-up to host a plant there. That said, Singapore remains a really important part of our regionalization strategy. We keep still in mind the fact that it's a great place to have some manufacturing, but this decision will be driven by demand in the market. On the other hand, what we are working at right now for the first few quarters is a shift of resources from Livermore to Asia, and in particular in Singapore, to do some support functions to our business, because Singapore is very--is closer to our customer base. It's a very friendly jurisdiction for business. And it makes a lot of financial sense. So, yes, we keep Singapore as an important part of our development in Asia and we believe we can do this on a shoestring. So this is why we think we don't need that building.

When you say support capability, are you talking about card repair or card upgrade or are you talking about incoming kind of non-technical support functionality? What are you referring to?

It's both, in fact. On one thing you have many support--administrative, et cetera--where you don't need to be located in one place, and in fact being in the same time zone as 80% of the activity is always a good thing. As a result of our technical support, as much as we have put design possibility in the country, we also know that you need to be able to (inaudible) to do that, and this is being done in Singapore. We usually prefer to do repairs directly on the spot when it's possible, but if there is only then to be one central repair center, then again, it's good to have one like that. So it is really a mix. There is no one thing. We try each time to increase our responsiveness. And in some cases it's better to be--it makes sense to be in small places very close to a customer and in some places it's better to be more central. And whenever it makes sense to be more central, then Singapore is pretty good place to be in Asia.

Are you able to quantify yet kind of the financial impact from moving those resources from Livermore to Singapore relative to the income statement? Are we talking about a measurable decrease in costs associated with that move?

So--yes. The purpose is to be more cost efficient. And in terms of investment, this would be really very small--in terms of investment in fixed assets or real estate. Right? So that's the point. I mean, it's cheaper and it's also, as Mario said, which is by the way our main driver, closer to the customer base, hence makes us more responsive.

Okay, thank you.

Operator, we'll take one last question.

And we take our final question from Patrick Ho with Stifel Nicolaus. Please go ahead, sir.

Hi. This is [Mary Li] for Patrick Ho. We just have one last question. Can you discuss a little bit about your plans regarding your cash position? And do--can we expect that the company will burn cash at the same rate as the current quarter?

So in the current quarter we had the 12.6 million cash [reserve] and going into 2009 I would say our main direction is over the course of the year to stay at or above $500 million. So there is going to be some timing. By the way, this is our own commitment internally. We're going to have more outlay in Q1, because of all the action taken. So in Q1 the rates--it's probably going to be in the high 20s time-wise. However, going into the year, we have some expectation of some refund of tax paid in prior years, which will offset that, and also a much lower cash burn starting in Q2. So overall, we expect for the year to--I mean, we plan for the year to stay at or above 500 million.

Thank you.

Okay, we'd now like to conclude the call. Thank you, again, for joining us today. We look forward to speaking to you soon.

And that does conclude today's conference call. At this time, you may now disconnect. Have a great day.