FormFactor Inc (FORM) 2010 Q1 法說會逐字稿

Thank you and welcome, everyone, to FormFactor's first quarter and fiscal 2010 earnings conference call. On today's call are Chief Executive Officer, Mario Ruscev; and Chief Financial Officer, Jean Vernet.

Before we begin, let me remind you that the Company will be discussing GAAP P&L results and some key non-GAAP results to supplement understanding of the Company's financials. A schedule that provides GAAP to non-GAAP reconciliations is available in the press release issued today and also on the investor section of FormFactor's website.

Also, 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 the Company's Form 10-K and subsequent Forms 10-Q and in the press release issued today. I would now like to turn the conference over to your host today, Mario Ruscev.

Thank you and hello, everyone. Our first quarter results showed improvement on the many fronts. Also revenue for our first quarter was $39.7 million, at the mid point of what we expected. Bookings were $42.9 million, at the highest level since our first quarter of 2008.

The improvement was driven by further reduction of DDR3, (inaudible) mobile DRAM activity and an uptick in our new products in both DRAM and NAND. Overall, we made good progress during the quarter and expect to build on this throughout the remaining of the year.

Production of DDR3 continued into our first quarter. Approximately three quarters of our commodity DRAM activity was in DDR3 and it was the highest quarter in terms of revenue contribution. So finally, a very strong showing of DDR3 adoption.

Looking at the memory segment, in the first quarter we saw the beginning of a transition to 2 GHz based device on the 4X and 5X nanometer [immersion-based text mode]. We expect this conversion to last well into 2011.

In fact, approximately 60% of our bookings in our first quarter were made out of 4X and 5X nanometer nodes. While we still see some retooling for [1 GB media] at 6X nanometers, we expect the 4x and 5X nodes as a certain percentage of revenue to continue to grow rapidly throughout the second half of 2010 as our customers convert based on the timing of receiving (inaudible)

In order to meet demand for the (inaudible) growth driven by the growth of personal computer this year, node transitions will continue to drive probe card demand. Customers not only need to continue to shrink 1 GB for [custom] capacity but to also see the architecture change from 1 GB to 2 GB (inaudible) device.

As vendors transition to 4 nm, 2 GB becomes more effective, more cost effective. We expect 2 GB will become a major [density] by the fourth quarter of 2010 or first quarter 2011 timeframe.

As we look at future growth drivers in DRAM over the cycles, we see 38 nm and 4 GB density device as a major driver beginning in early to mid 2011. It's not really achievable with the same [immersion] tools being put in place for the 4X nanometer probe (inaudible) node. So there won't be the upfront investment necessary for memory customers to drive process node shrinks.

Once 3X nanometers is achieved, 4 GB (inaudible) become cost effective, thereby driving further growth in 2013 and 2014 timeframe. Therefore we remain excited about the potential growth in our market and our ability to capitalize on this growth over the next few years.

On the product side, we continue to see momentum in SmartMatrix interest and adoption during the first quarter. We shipped over 50 SmartMatrix cards in Q1 to five customers. Customer [pool] is based on the operation performance of SmartMatrix such as its cost performance and (inaudible) SoC performance which is already superior to the previous generation tools. We are planning on having all new customers qualified on SmartMatrix by June 2010 in which adoption should continue to accelerate.

Flash, moving onto Flash. Bookings showed quarter over quarter growth of 94% from $3.4 million to $6.6 million with 67% of bookings in NOR Flash while 32% was NAND. This quarter, booking profile is highlighted by significant growth from a major NAND customer who qualified on the TouchMatrix platform during the first quarter TouchMatrix platform during the third quarter first quarter and followed up with reorder.

We expect to have all major NAND (inaudible) qualified on TouchMatrix during the second quarter. We predict strong growth in the NAND probe card market for 2010 and also anticipate share gains by leveraging the renewed cycle time for the new product on [regional] global support infrastructure.

Our SOC business was down 35% from our fourth quarter but up 26% as compared to our first quarter a year ago. Also the [microprocessor] business was weak. We continued to see opportunity in the wire bond segment.

We have several efforts underway to expand our addressable markets in SoC and producing new products that will enhance our growth profile over the next several years. We plan to leverage our full wafer [contact for memory] architecture to address the [large area] embedded memory test application market.

Companies I invested in test the capability to enable large array embedded memory tests. Probe cards are behind. We believe with our new architecture, we can introduce a high-class product due to the higher [sync up] capability.

As we get further in the development of these products, we will discuss the growth potential and opportunity in more details. Although we are encouraged by the level of demand coming from customers, especially in the memory segment, we have been working hard within FormFactor to growth and it is encouraging to start seeing the fruits of that labor.

That said, improvement in our business is not without its challenges. Customers are responding to ever-changing memory market conditions at faster speeds to take advantage of higher memory [spreads] prices. That in turn is resulting in lower lead time for suppliers like FormFactor. This is happening right as we are ramping up new products and demand is picking up. Therefore, we are challenged to meet a reduced lead time which is putting pressure on both our design and manufacturing organizations.

Part of this challenge is relating to product transition as we are ramped to higher commercial volumes in our SmartMatrix and TouchMatrix new architecture products. We believe [we will result] its lead time over the next few quarters with continuous improvement in productivity and use but recognizing in the short term our lead time challenges will impact our ability to gain marketshare.

While we expect our new architecture to provide FormFactor with a positive gross margin profile, initial ramp-up costs for material are coming in higher than planned. Part of this issue is the continued high number of [first article] design which carry higher initial material costs. But we also need to be more efficient throughout our supply chain which will lower costs over time.

This is an area we are intensely focused and committed to ensure our return to profitability in the coming quarters. Before I turn the call over to Jean for more details on the financials, it is important to note that during our first quarter, we opened our new wafer probe card manufacturing facility and global business center in Singapore. We will leverage this new site to support our global operations and bolster our customer sales and support infrastructure in the region.

In closing, we are seeing improvement in our memory business. We believe we are in the early stage of a cyclical recovery in memory driven by the need for shrinks and retooling to accelerate the node transition cycle.

In the near term, we are working through ramp-up and cost challenges related to our new products. That ramp-up in these new products are critical long term to our ability to reduce lead time and enable the Company to expand into markets that we have not been able to fully addressed in the past like NAND and SoC. With that, let me turn the call over to Jean for more details on the financials.

Thank you, Mario. I will begin with a summary of first-quarter results. Total revenue was $39.7 million, up 20% sequentially and 45% on a year-over-year basis.

Total bookings in the first quarter were $42.9 million. First-quarter revenue from DRAM was $31.8 million at 35% from both our fourth quarter and versus the first quarter a year ago. Strength in DRAM was due to a [consideration] in the tools local for DDRIII at 5X and 4x nanometer nodes and density of a 1 GB and 2 GB devices.

Flash revenue grew 27% to $3.5 million in Q1 from $2.7 million in Q4 and up over 450% versus a year ago. We saw an increase in NAND revenue up 59% from the fourth quarter to $1.1 million. NOR Flash was strong in the first quarter at 17% sequentially to $2.4 million. Bookings for Flash grew 94% quarter over quarter to $6.6 million, a reflection of the momentum we're seeing with TouchMatrix and growth in the NOR business.

SoC revenue was $3.8 million in Q1, down 35% sequentially but up 26% when compared to the first quarter a year ago. The weakness in revenue versus the fourth quarter was due to a lessening of demand for the microprocessor business.

Revenue from our new product architecture, SmartMatrix and TouchMatrix, was $7.2 million driven by very strong customer interest. We expect our new products to continue to ramp in volume as the year progresses.

Moving down the income statement, for the first quarter, GAAP gross margin was negative 5.9%. On a non-GAAP basis, gross margin for the first quarter was negative 3.4%. The gross margin was impacted negatively due to higher than expected variable costs and a surge in new designs in preparation for a stronger second quarter.

On a GAAP basis, operating expenses totaled $36.5 million, including $3.6 million of restructuring charges. Excluding the restructuring charges, the GAAP operating expenses were higher by approximately $0.8 million from the fourth quarter.

Higher GAAP operating expenses were due to a $1.5 million improvement in G&A spending, primarily due to an increase in fringe benefits and year-end related expenses and fees. On a non-GAAP basis, operating expenses were $28.7 million, flat with our fourth quarter.

As expected, our tax rates was a negative 0.6% for the first quarter, resulting in a $0.2 million impact to net income. Total cash investments comprised of cash and shot short-term investments ended the quarter at $432.8 million, approximately $16.4 million lower than the previous quarter.

The decline in cash was larger than expected due to shorter base table payable and an increase in the inventories in preparation for a surge in activity for the second quarter. Let's now turn to the outlook for the second quarter and fiscal 2010.

We remain on plan to achieve our revenue growth target of 60% plus or minus 10% for 2010. For internal planning purposes, we are planning revenue for the second quarter to be in the range of 52 to $56 million.

The midpoint of this range will be an increase of 36% from our first quarter. Non-GAAP gross margin in the second quarter is expected to be 6 to 8% plus or minus a few percentage points. Our gross margin is being negatively impacted by several factors which we believe are short-term in nature.

First, we continue to see a high number of first article designs. Although first article designs are a positive leading indicator of market recovery which would eventually lead to future orders, the sheer volume of new demand is driving up material and design related costs as we ramp additional capacity, resulting in an additional $3 million in cost per quarter from originally planned.

We have initiatives underway such as automation of design activities and improved supply chain efficiency to reduce overall costs in the future. But any improvement will be gradual over the next several quarters.

Second, the rate of incoming demand for our new products is higher than originally expected. The results of this is higher than planned cost of goods sold for our new product initial ramp-up costs as the Company focuses on addressing this initial demand ramp.

We believe the higher costs are transitory as we refocus our efforts this quarter on lowering new product manufacturing costs and increasing efficiency with our new architecture matrix platform. But nonetheless, this will affect gross margin over the next two quarters.

And third, as we bring up our back end manufacturing processes and assembly and test facility in Asia, this will continue to negatively impact our margin until we start realizing the corresponding reduction in our existing Livermore facilities. Earlier this month, we announced a manufacturing transition plan and will remain on target with this effort.

Non-GAAP spending for (inaudible) and SG&A in the second quarter will be up approximately $3 million compared to the first quarter. We expect an increase in operating expense due to an increase in design related costs and R&D and an uptick in G&A. For fiscal 2010, we remain committed that our non-GAAP operating expense will be in the quarterly range between $28 million to $32 million.

We expect to use approximately $40 million in cash during our second quarter. In summary, our business is recovering. We are ramping up manufacturing of our new products but that is not without its challenges.

Our cost of goods sold must be lowered aggressively and we have several projects underway which will influence the decline curve. As we are working on lowering our cost of goods sold, we remain committed to taking necessary action to ensure achieving our stated goal of non-GAAP operating breakeven at $60 million and revenue exceeding our third quarter of 2010.

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

(Operator Instructions) Tim Arcuri, Citigroup.

A couple things. First of all, I am kind of confused as to how -- it looks like if I take your old commentary as to what gross margin was at breakeven which was kind of around $60 million exiting September, that sort of implied that gross margin in June at sort of this kind of run rate would have been maybe about 25, 30%.

So you are like fully 12, 13, 14, $15 million lower gross margin dollars then what you thought you would have been at this revenue run rate three or so months ago. And I'm just wondering how things could have changed that quickly because if it's all relate to the new design, certainly you would have seen that there -- sort of out of the gate would've been a big surge of new design activity. So I'm wondering how that big of a gap could have developed in this short of a period of time.

If you look at the difference between now and four months ago when we put the plan together, now we are in the middle of a pretty steep ramp. To give you an idea on the Matrix family, we should (inaudible) in Q4 of last year. We shipped about 17 this quarter and we plan to ship at least double in Q2.

So as we are getting very steep introduction and in fact a very large number of designs, most of the resources have been put onto (inaudible) we are sure that we can ship it. Due to that basically we realize now that we start getting late on the [cost driving].

We received (inaudible) carries on throughout the end of the year. We have a few [percent shares] of difference with your gross margin where we want it to be which as a result of that, if as we are driving it back, if we cannot make that curve go down fast enough, that means that to achieve that, [we have just achieved] by different means which means applying more change in the structure of the Company. Does that answer your question?

Yes, how about this then? So knowing now what you know now given that maybe some of these costs are short-term in nature, can you maybe pick some revenue levels as you get into the back half of the year? And hopefully revenue keeps on ramping and these costs begin to roll off. How should gross margin ramp at various revenue levels as you move to the back half of the year and have you thought about reducing breakeven lower than that $60 million given this new development?

Let me give you some indication of what we have as we go through the quarters. First of all for Q1, the margin and the impacts of those variable costs on the new platform is about slightly over 10%, impact on margin.

And we see as we go through the quarters, that gap versus our initial plan to reduce about 5% in the fourth quarter because in a way, the good news is that the product tends to be qualified much faster and the demand for this product has a similar expectation in the first quarter. So we are starting [late] efficiency, continuous improvement on that product. So we have to catch up and it is the focus that we have right now.

The second effect is on those new designs, again in itself it's great news for the quarters to come in terms of revenue upside. But on the other end, the sheer magnitude of what we see in excess of our plan means that we have to find a better balance and we have several ways of doing this, but it all comes down to getting some volume revenues or some type of breakeven levels on those upfront costs all year round.

And these effects in the quarter was an additional, close to 10%. We see that excess, that surge in new design demand above our initial plan, keeping growing through the year and we expect them to bridge that gap of that 10%. And then we have a third factory which is the transitionary costs to Singapore and to Asia and these were planned and these are on plan.

But if you want to compare with the $60 million breakeven, you have to take this out. And you know in the next couple of quarters, these transitory costs also are roughly about 7 to 10% of the margin.

I'm sorry, so okay, so you'd said before that breakeven would be at the end of September, will be $60 million non-GAAP P&L breakeven. Now it sounds like that is 70 plus given these new factors? So what exactly is the new breakeven at the end of September or the end of December?

So what we are saying is that we are still committed to reach that $60 million at the end of September. By then, the transitionary costs will be mostly behind us but they will still affect the quarter on average.

So on a run rate basis, we take them out. The other gaps on the variable costs, we intend to reduce them as well as offset them with taking down our fixed costs. We're cutting our fixed costs. So that at the end of the day, we will achieve the same results on a run rate basis by the end of Q3, just through a different means.

Mehdi Hosseini, FBR.

One follow-up and one question. Don't want to beat on a dead horse, but going back to the previous question, I was under the impression last year that the $60 million breakeven point could not be reduced because you want to be ready for the ramp-up and the ramp-up is here and now we're facing with the transitional or ramp-up costs. Why wasn't this foreseen before? Why did this additional cost events happen -- surface recently? Why wasn't this forecasted as you were planning to introduce a new product?

I'll give you one simple example that can give people more pictures into that. I'll take one example.

We have a pretty large run-up in the memory business. It's one of our very early designs and we have resources to make this (inaudible) started running up. And the plan has always been that in the middle of it as we learn about the technology, we probably need to pass (inaudible) so we can optimize it.

As we were taken over by many design (inaudible) did other things, we just (inaudible) design now but three months later than we planned and by redesigning this big runner, we realize that we can cover costs by about 40%. So you know, yes, only a certain amount of limited resources and (inaudible) this ramp-up is a very large amount of new designs (inaudible).

Each time we have to bring a new platform and a new set of testers or a new couple of (inaudible) these require quite like quite a lot of work. Basically we have not -- we have grown this plan with the amount of resources that it would take to take this ramp-up.

Because remember, as I want to say (inaudible) the good news is as ramp-up is happeneing, we are shipping probe cards, we are getting good results from our customers. (inaudible) means that we are basically a quarter late on all these cost optimizations and we have to take that into account.

So to come back with your first part of your question, because I didn't remember the first now. When we did our plans, we had a whole set of things that we have been planning and also growing for the longer-term future.

The way we can offset that is making sure that we focus on our Company, what needs to be done in the next 18 months or 24 months and delaying some of the part of the actions that we wanted for the long-term future. Which remember (inaudible) offset during this transition period because again, like I said, for us where it is, this cost drive is delayed by about a quarter and we have to offset that by some other actions. So that's the way we will do it.

And then regarding the revenue mix by geography, would you be willing to break out the Southeast Asia by Taiwan versus Korea?

You mean in Q1?

Yes.

So, Taiwan was strong.

The one in Korea were quite strong.

Stronger than we initially anticipated. Maybe I can get back to you later on on the detail of this.

(multiple speakers) we had a pretty strong showing in Korea. Taiwan is coming back to strong life as it comes. (multiple speakers) following, Japan is following the predicted cycles that we have.

Gary Hsueh, Oppenheimer.

First question is just again relative to gross margin. We have been hearing that you saw maybe perhaps a little bit of pricing pressure, especially with retooling on 6x nm. Is that fair to say that at least some of the margin pressure at least near-term is on ASP pressures for 6 nm retooling? And as you look into Q2, Q3, Q4 as you kind of move into more of a dominant 4X, 5X nanometer retooling cycle that you start to move away from these pricing pressures?

I will tell you, the general statement on price is that we just come out from basically two years where everybody (inaudible) the capacity (inaudible) and maybe another capacity in testers and test capability. I have a customer ramping up now and gearing up. The good thing is that the tester capacity is not related to wafer (inaudible) but related to the amount of bits and that is what you do.

We will be seeing our customers becoming more sensitive relative to efficiency gains that they have. So we believe that as the year goes on, the whole -- I would say the whole environment of -- on pricing will slightly change and basically the ability to provide a more efficient way will become more and more important as we go through that.

Okay.

I think overall, there's always pricing pressure. I will not say -- but I think it will really change into (inaudible) and what we can see now that the ability of the product and ability to deliver product at the right time is becoming more and more important.

And also as people are planning and looking at new investment (inaudible) most of investments (inaudible) as people start gearing up and they look back to why they need to invest in the testers part on the back end. We think that the overall game of pricing will start to change.

Okay great, I got that. Just a follow-up question here. You talked about an unexpected surge in terms of new designs, particularly on new products or new platforms.

What does that drive in terms of your expectation level about bookings in Q2? I know you normally don't talk about bookings in the out quarter, but are we in an environment where lead times, particularly since new products are starting to take a big role, are lead times starting to stretch a little bit or are you maintaining that? Just kind of trying to get a sense of what your bookings visibility here, expectation might be in Q2?

I would say that overall, we can see that. I mean we obviously and we have studied it, we have (inaudible) ramp-up. And I also tell you that in some cases, we had some market share growth that we negated until we sold that completely.

So although I think that in the industry, we can say that we do see a stress on lead times from everybody. I would say -- how can I put it on the business side? For the first time since I have been around, I don't have an impression on the business side to be in quick sand, but I can put my feet (inaudible) real stones (inaudible). So no matter where I look at it, it's really up to us to do our job and make sure we can take care of this opportunity.

Okay, just a final question for me. Could you kind of outline greater than 10% customers if any in Q1 and maybe what your expectation level is in Q2 and whether or not there are any new 10% customers in Q1 or Q2?

In Q1 we had three customers above 10% and a fourth one not far. And to your second question, you can see that in our Q, those three were actually new customers.

New 10% customers.

Sorry, new 10% customers.

In Q1.

In Q1.

C.J. Muse, Barclays Capital.

I guess first question, can you comment on what trends you're seeing out of Japan and what kind of impact, potential impact you see from the recent IPO from [Rex Chip] on those trends into the second half for you guys?

Well you know, we never really comment very specific on a customer. All I can say in a general way is that in Japan, I think our customer has a plan and each plan has its own cycle and I think everything is within the cycle. So we see we no surprise.

On the second part, like I said, we certainly see Taiwan coming back to stronger and stronger activity as we go up. And we believe that this activity will continue to grow stronger and stronger as our customers receive their (inaudible) and planned tooling. We can see that -- very good position.

I think it's now -- the big hurdle of our investing, pretty heavy investment to get this equipment. The nice thing is that this equipment now will take our customers through at least three nodes which means that only if anything dramatic happens and very big change in the business would actually probably show a very different business for us for the last at least two years I would say.

Okay, that's helpful. And then on gross margin and breakeven, so are you saying today you think you will get back to a non-GAAP breakeven of $60 million topline by the December quarter?

Yes, that's what we're seeing and let me clarify -- building on another question from (inaudible). Essentially in our earlier model and what we have communicated in various (inaudible) is that at the $60 million, we would be at about 40, 45% gross margin.

Versus that target, if I look at the numbers today and if I take out the transitory costs which were not part of this equation and which would be behind us by the end of Q3, we have a 20% gap. And what we're doing right now is over the next couple of quarters, working hard at reducing that gap through accelerating our LIBOR cost reduction.

And then as I said, that will come towards (inaudible) that 20% gap and the balance will be offset by reducing fixed costs. So at the end of the day, and I'm thinking both fixed costs and gross margin as well as fixed cost and OpEx. So that at the end of the day on an operating income basis, we have $60 million breakeven at the exit of Q3.

So, (inaudible) the way I look at it, I'm very happy with our ability to have followed this ramp-up extremely, extremely aggressive. The disappointment is that as we did choose this ramp-up, we got late on the cost control -- I would say the cost evolution of our platform and (inaudible) the quarter.

So we will make sure that we get it back into line and basically -- but as we had also put commitments because we believe each company has to run in a profitable way. We most likely will have to compensate towards the end of the year. In other words we cannot lag the (inaudible) driving to the gross margin by some of the (inaudible) in our fixed cost which again are only for a transitionary period but (inaudible)

Okay, just two housekeeping questions. What was the guidance again on OpEx? Is that up $3 million sequentially?

For Q2 only.

So for Q2, we have a [bond] which is as I said driven by higher than expected activity in design. So it's activity related. And then a transitory effect of a duplication of resources as we transition some functions from Livermore to Singapore. (multiple speakers) that will come back down in Q3.

What were orders in Q1?

Q1's non-GAAP OpEx was (multiple speakers)

What were orders in Q1?

You mean revenue?

No, orders.

Bookings? 42.9.

Patrick Ho, Stifel Nicolaus.

Just want to -- first a quick clarification. When you said the cash burn for the June quarter, did I hear correctly 40 as in 4-0?

Yes, you did.

Okay, I guess I'll join the club and beat a dead horse. In terms of the pressures you are seeing on the variable cost line, and I do understand the design costs initially have the higher costs at the beginning. But when you mean short-term costs, is this something that can linger two to three quarters, given that the NAND trends are pretty strong right now and because of the short lead times? You're not going to be able to catch up right away. What do you mean by short-term?

What we mean is -- when we said we have a plan to get all these costs in line and basically all the costs should have been falling in line by the end of Q3. What we realize now because we have been in this big ramp-up all this time, but really delayed by about a quarter.

So all these costs will fall in line where we want it towards the end of Q4. And this is not something -- this puts us in a different prospect saying how we had put some -- so we have to achieve the initial results by slightly different way if we cannot get it back in line fast enough.

So what we do plan is obviously we're starting working pretty aggressive on that for quite a few weeks. And as we discussed today, we will keep you -- and give you much more details (inaudible)

Okay. You also mentioned I think in your prepared remarks regarding that lead times are short and your customer demand is high but that's also going to mitigate some of your market share gains. Now by that statement, are you implying that your customers are going to competitors in the near term to fulfill some of the demand or what exactly do you mean by that statement?

We were planning to grow our market share very aggressively, going after some customers. (inaudible) if you cannot achieve all the time, if you cannot give the proper quality and lead time, you know that this will [get] your ability to dislodge your competitors.

I guess then if they still are qualified with you and you can't meet their demand at least near term, shouldn't they still come to you in future quarters?

Yes, they will. There's no issue to that. We have numbers of discussions with all our customers and know that we have a very good relation with all of them and we try to do it very professionally. So we know that as we improve a lead the time, our ability to get market share is coming back. There is no doubt about it.

What I would add to this is actually a market share -- you know for (multiple speakers) has increased and what we experienced right now in terms of lead time and pressure, we've experienced as well by the whole industry. So we essentially are going to be -- we're doing it deal by deal and I would expect that as the supply chain is [ramping] the delivery time will have to adjust.

I don't want to use the fact that it happens to others, as a good excuse for myself. So we have to work it out, we know we have to solve it and by the time we have solved it and improved it, we know a lot of gates will be even more open.

Okay final and kind of just a big picture question based on obviously you could see the tone of the questions are focused on the margin pressures and the costs and the ability to react to these different variables that you are seeing right now. I guess the question from my end is why can't you make bigger structural changes to the overall cost structure that could mitigate some of these variable changes that you are seeing?

Obviously I think -- correct me if I'm wrong. You say you're seeing a 20% gap right now versus your expectations of that $60 million, 40 to 45% gross margin level. Why can't you make these structural changes now so you don't get these types of I guess magnitudes of variability you're seeing right now?

It's just a little too early to discuss it. But we will make the changes necessary to achieve our goals. And we will give more details as we see you in the next -- as we come in in the next following weeks and months. But we agree. Yes, we will make more changes in the structure to make sure that we achieve our stated goals.

Jim Covello, Goldman Sachs.

This is Kate Kotlarsky for Jim Covello. Wanted to ask you actually a question on the top line. It sounds like demand has been more robust than you had expected and you are rushing in a sense I think to meet some of your customer demand.

I just wanted to ask why the full-year guidance is unchanged. It sounds like it in part is related to just your ability to ramp. And sort of relative to the max capacity that you guys have, are you at max capacity today and how should we expect it to change in the coming quarters and into 2011?

Well, what I would say is that we've not been surprised really by the top line. What we're being surprised is at the amount of design that took us -- that in fact took more engineering resources.

And these engineering resources worked on basically -- you remember hat we have a very custom product. Which is that when a new customer comes with a different tester, or a different problem or a different termination, there is engineering work to be done on it.

To customize basically our products to this set. This usually happens as we go. We call that privatization.

So what we have been surprised in fact in a way is the rate of acceptance of this new platform. So the amount of engineering jobs that we had to do on that to make sure that we can start shipping this quarter.

This is one of the reasons why these results are not being used (inaudible). Planned part of these resources were supposed to be used on going back after the (inaudible). This is why we're delayed by basically a quarter on our cost (inaudible) it's kind of a big reason.

On the long-term I would say our top line, we are pretty confident, as much as we can be and our (inaudible) that. I would say for the first time, we can see that our customers (inaudible) different pricing.

They are getting equipped with the right technologies so they work where they compete for efficiency and build up capacity by shrink, a new node, etc., etc. It's most likely to happen in the next 18 months. So this is really the situation. So it's not a question of -- we are not being surprised by the revenue. It's (inaudible) the revenue and the detail of the revenue that has surprised us.

So in the long term (multiple speakers)

(multiple speakers) give a little bit more detail about kind of the cost side of things, maybe when you implemented some additional restructuring actions. But in terms of sort of what you just described, this phenomenon of it being difficult to plan because of how customized the product is and sometimes we get these periods where there's a lot of -- maybe of design activity you can't plan for, is there something you can do with respect to your processes to maybe be able to manage this type of situation better going forward?

Yes, you know it's disappointing. We should have managed this one better and we are looking at how we can make sure that this doesn't happen again.

Now just to come back on your first question which is capacity. We always take it that we have a certain capacity in equipment and some capacity in manpower.

Basically, we are following up. We have put a plan on this and we are basically adding capacity on manpower, training people. We are hiring quite a few people in Singapore.

We brought back some people in the front end of our manufacturing in Livermore. And we believe we will be able to follow and cash on this capacity. The issue that we have on lead times typically was not that much on internal capacity. You remember, we also have a whole supply chain which comes from two years of quite dramatic and also. So it was really restarting the whole machine at this very fast rate.

Okay, that makes a lot of sense. And maybe just my final question. In your conversations with customers, it sounds like the design activity is very positive and you're getting a lot of orders. Are customers concerned with your ability to be able to meet demand? Has there been any concern with respect to your own financial difficulties today that you are hearing from customers? And that's it for me. Thank you.

I think customers are -- they are not really trying to get after each opportunity. We can see that for example in mobile DRAM etc., etc. They are all being extremely effective in releasing level lead times. So they really expect us to just follow. So I think the big content of all our customers now has been the variability of products.

Okay, thank you.

Kevin Vassily, Pacific Crest Securities.

I've got several. First on the manufacturing transition. When you're complete with this transition, what is going to be left in Livermore?

We always said that in Livermore, we will have the front end manufacturing which remember is (inaudible) three steps in manufacturing our probe cards. One is basically (inaudible) which we can pull on the front end basically in Livermore, this is staying in Livermore.

Then you have a middle ground which is -- we are putting this spring on a substrate and if you are (inaudible) shipping them, this is being done in Singapore. And then you have the last one which is assembly and test which is you put all that together, you get your (inaudible), you get your parts, you get your (inaudible). And this is done in a couple of sites now in Asia. So that's what would be left. That's the way of manufacturing we're looking at -- we will be looking by the time we are done in Q4.

What about (multiple speakers)

He is in California. California is a good place for engineering because (inaudible) come to work in California, they do come.

So from that kind of structure, we could assume that it's your belief that having kind of three separate manufacturing sites provides you better cost efficiencies than one centralized?

You know, it's -- the whole issue in the long-term is that our customers for the most of them are in Asia.

Correct.

(inaudible) if you can have all your manufacturing in Asia, it's probably a good situation. Now you have to start from a place. The cost and the risk of moving everything -- because normally what we do is -- we're not adding capacity. We are moving capacity from one place to another. Moving everything just like that would have been much too costly and much too risky.

Is there a plan ultimately to have front end and in Singapore?

This is -- now we are really focused on -- remember we have a Company to get back to profitability very fast. This is what we're really focused on (multiple speakers)

Part of a longer-term plan, is that potentially in the cards?

We also believe that when this is done, we will be in a very nice position to take advantage of the cycles which we believe will continue at least for the next two years. And by the time we have that, we will have to make sure that -- all you guys have been very patient with us, so we have to make sure that we make the best out of all these effects and make sure we concentrate on being able to get back, build up cash, get [net] back into the Company and make it a very successful and profitable Company.

So this is -- I would say this is really our focus now. Our first focus is getting back our Company to profitability and then our focus will be making the maximum of all this opportunity.

Second question related to the transition is on tax rate. Initially I think the team that was in place before you guys came along identified Singapore as a place and one of the driving reasons to move some portion of manufacturing there was a significant tax holidays associated with production there. As we think about that being complete as of sometime near the end of this year, what are the implications from a tax perspective on you guys once you are back in the black and profitable?

So I would start by saying that the reason we've selected Singapore is business reasons. The jurisdiction of Singapore is very stable, is very efficient. It's well positioned geographically and has very highly skilled workforce. This is really why we chose Singapore.

Now there are parallel or secondary consequences to that. Taxes are one of them and I don't think I'll be ready to communicate on this today. But we will communicate in time about how the tax rate will be after we [consume] our NOL. But I would say that what was communicated to you in past year years still hold. It's just we need to refresh that communication when it's time.

One last question. Back on the dead horse commentary. If I look at our model and potentially what kind of consensus models look like, it seems that the December quarter was going to be the quarter where one, you'd be at breakeven; two, you would be at a rate kind of approaching that prior model gross margin.

And it sounds like we're a little behind here. But if some of the plans you have in place to try and address that GAAP, if you're successful there, that you could still be looking at that December quarter as one where you do get back to breakeven.

So assuming that the revenues kind of come through (inaudible) you think, is that a misreading kind of (inaudible) relative to some of the plans you have to put in place on the cost side? Or were -- our model is already kind of not lined up correctly.

So waht we have communicated in the past was objective number one is to be breakeven at 60 at the exit of Q3 and thereafter, have a (inaudible) of $0.60 on the $1.00 for any subsequent growth. So what we are seeing today is that we are committing to achieve the breakeven on a record basis of 60 at the exit of Q3.

What we have to work through is beyond that and it impacts Q4 and beyond. How fast can we bridge that by the cost gap to ensure the 60% [drop through]? I don't think we will be very far off that.

It takes -- what we're working on essentially probably we will have still some gaps in Q4, but the magnitude of 5% on the variable cost, that we still have to work through on how to bridge that. So the fundamental economics of our new model and how the new platform is going to drive the growth still remains.

Tim Arcuri, Citigroup.

Revenue seems to be the thing that is most unpredictable here versus cost. It would be helpful maybe to understand what bookings are going to be in June.

I know you don't like to talk about bookings, but maybe that would give us some hair of confidence as things head into the back half of the year. So do you have any view as to what bookings will be? Certainly I would think book to bill would be above one, but what do you think bookings will be in June?

I don't think I'll give you the number but what I can say is that the trend that we've seen in Q1 and the revenue indication that we gave you for Q2 is reflected in the bookings. And if you do the math, you can expect that the second half, we will keep seeing a pretty high second half.

Thank you, everyone. We will conclude the call now. Thanks for joining us and we look forward to speaking to you soon.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference and you may now disconnect. Good day.