FormFactor Inc (FORM) 2013 Q3 法說會逐字稿

Thank you and welcome, everyone, to FormFactor's third quarter 2013 earnings conference call. On today's call are Executive Chairman and Chief Executive Officer, Tom St. Dennis; President, Mike Slessor; and Chief Financial Officer, Mike Ludwig.

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 Investors section of FormFactor's website.

Also, a reminder for everyone that today's discussion contains forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements include, but are not limited to, financial and business performance projections, statements regarding macroeconomic conditions and business momentum, statements regarding seasonal business trends, statements regarding our ability to favorably resolve component delivery delays and product issues, statements regarding the ability of semiconductor companies to restore damaged manufacturing facilities, the demand for our products and technologies and our ability to introduce new products, statements regarding operational synergies between the FormFactor and MicroProbe product groups, and statements containing words like expects, anticipates, believes, possibly, should, and the assumptions upon which such statements are based. These forward-looking statements are based on current information and expectations that are inherently subject to change and involve a number of risks and uncertainties.

FormFactor's actual results could differ materially from those projected in our forward-looking statements. The Company assumes no obligation to update the information provided during today's call, to revise any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in forward-looking statements. For more information, please refer to the risk factor discussions in the Company's Form 10-K for the fiscal year 2012 as filed with the SEC, subsequent SEC filings, and in the press releases issued today.

With that, we will now turn the call over to CEO, Tom St. Dennis. Please go ahead.

Good morning. We moved our Q3 earnings call to this morning from our previously scheduled time next Wednesday due to a miss in our guidance. While we are within guidance for revenue, operating expenses, and cash generation in Q3, we are below our guidance on gross margin. Additionally, we now see our fourth quarter revenue coming in below current analyst expectations. Mike Ludwig will provide an explanation of the items that impacted our Q3 gross margin in a few moments, but first I'd like to explain the main issues we had in Q3 and what's impacting our Q4 revenue.

During the third quarter, we experienced component delivery delays and product issues that impacted delivery to a key DRAM customer and to our revenue in the quarter. The delivery delays were related to one key supplier that missed critical component deliveries on several cards. We were unable to make up the lost time in the rest of the manufacturing process and, as a result, we were late to deliver on several probe cards during the quarter.

We also experienced delivery delays due to a manufacturing problem on two new designs. As a result of these delays, our customer withheld certain orders from us until we could provide sufficient data that our supplier issue and our manufacturing processes had been corrected.

Recently, we had a series of meetings with our customer to review our actions and progress to resolve these issues, and based on the progress we've made, they've released the next product design to us. We expect this will result in increased business in Q1 and a return to normal levels of business by Q2 of next year.

In early September, SK Hynix experienced a significant fire at their facility in Wuxi, China. This had a small impact on our Q3 revenue, but we now expect it to have a more significant impact on our Q4 revenue. We expect that our business will recover with them as they restore their manufacturing facilities.

Including the impact to revenue from these issues, we expect our Q4 revenues to be roughly flat with our Q4 2012 revenues. The fourth quarter has been a seasonally down quarter over the past three years, with revenues down 20% to 25% compared to Q3. Without the impact of these two issues, we would expect our Q4 revenue to be $6 million to $7 million higher than our Q4 guidance.

The gross margin miss to our guidance and the execution shortfall for our customer are disappointing, but I believe that they will only have a near-term impact to our margin and revenue limited to Q4, with results improving in Q1 and returning to normal beginning in Q2. I do believe that the learnings and actions from these events have already made our processes and product better.

There were several achievements in Q3 that position us well going into 2014, which shouldn't be overshadowed by my initial comments. Operationally, we generated positive cash flow for the second quarter in a row, with the addition of $1.8 million to cash balances. Operating expenses declined in the quarter, and we'll continue to drive further reductions going forward.

Our SoC probe card business has strengthened over the past few months, driven by the growth of mobile devices. The recent introduction of new models of smartphones and tablets, as well as the planned releases of new mobile products and gaming platforms for the holiday season, is also driving demand.

Additionally, we have continued to grow our installed base of probe cards for copper pillar applications. We supplied copper pillar cards to three different customers in Q3 and expect to see that number double in Q4. It's still in the early phases of this market, but the customer adoption is growing and we see more opportunities developing in 2014.

During the third quarter, we made significant progress in qualifying an advanced version of our matrix product at the one remaining DRAM customer that we don't today serve with volume production probe cards. They've now probed production wafers and are waiting for final package part confirmation before finalizing the qualification. We've received specifications for a new product to allow us to begin the design engineering process, and we expect that these new products will contribute to revenues in Q1 2014.

The NAND flash probe card market represents a $200 million-plus market opportunity for FormFactor that we currently have less than 10% market share in. In order to profitably grow our business in that market, it requires a product architecture that's substantially different from our DRAM products. As a result, we've been evaluating different concepts and have recently moved forward with an innovative new design. During the third quarter, we completed several critical milestones for technical feasibility, and we have begun to review the product capabilities with major NAND flash manufacturers. We expect to conclude an evaluation agreement with one of them this quarter.

Today we made an important organizational announcement for FormFactor. Mike Slessor has been promoted to be President of the Company and a member of the Board of Directors. It's been just over one year since we acquired MicroProbe, where Mike was the CEO. In the past year, Mike's done an outstanding job of continuing to drive the MicroProbe business forward while providing leadership to bring the two companies together.

It's clear to me that FormFactor's competitiveness and profitability will be improved with Mike leading all the product engineering, marketing, manufacturing, and supply chain activities for the Company. As a member of the Board of Directors, Mike brings significant semiconductor industry experience and over five years of probe card industry background.

We also announced this morning that Carl Everett will not be standing for reelection to the Board of Directors at the annual meeting next May. Carl's been a Board member for the past 12 years and Chairman for the past three years. Carl's played a key leadership role in turning FormFactor around in a very difficult market and has been actively engaged to drive for better performance each quarter. As part of our transition process, Carl will take the lead independent director role until he steps down at the Company's annual meeting.

Effective today, in addition to my role as Chief Executive Officer, I'll also become Executive Chairman of the Company.

At this point, I want to give Mike Slessor a chance to share some of his thoughts with you about his new role in the Company going forward. Mike?

Thanks, Tom, and good morning, everyone. When we brought FormFactor and MicroProbe together in late 2012, we communicated that one of our primary objectives was a disruption-free integration of the MicroProbe SoC business. This objective was designed to ensure continued delivery of a sustainable, profitable, and growing revenue contribution from MicroProbe's leading share position in the $400 million advanced SoC probe card market without subjecting that business to the risks of broad post-merger integration.

Despite significant headwinds in the PC-based part of our business, as you've heard in Tom's comments and will hear in Mike Ludwig's Q3 revenue breakdown, we have continued to grow this SoC business, and in whole, we believe we have accomplished our initial integration objective. Given this milestone, along with a clear recognition that the Q3 results and Q4 guidance of the combined FormFactor businesses do not meet our collective performance expectations, we believe it is now time to take the next step in bringing these businesses together.

Our advanced probe card market leadership position offers us scale and breadth that are unmatched in the industry. And as we have shown throughout our combined history, most recently in the SoC copper pillar adoption that Tom mentioned, that leadership position provides a strong platform for profitable growth.

Although I do not yet have a detailed prescription for how we will achieve consistent overall Company profitability from our combined SoC, DRAM, and flash businesses, that is our primary objective. With our team, products, technology, and customer base, I am confident this next milestone is within our reach.

Thanks, Mike. Before handing it over to Mike Ludwig, I want to emphasize that the impact to our margin and revenue will be short-term. Our product and supply chain are actually in better shape today than they were at the beginning of the third quarter. With the progress that we're making in the SoC and DRAM markets, as well as the opportunity to open up the NAND flash market, I'm very optimistic about the Company's outlook going into 2014.

With that, I'll turn it over to Mike Ludwig.

Thank you, Tom, and good morning. Revenues for Q3 were $67.6 million, an increase of $4.9 million, or 8%, compared to Q2 2013. Revenues in the third quarter increased in DRAM and SoC markets, but decreased in the flash market.

SoC revenues in Q3 were $31.7 million, an increase of $4.2 million, or 15% from Q2. Revenues from probe cards for mobile processors and PC applications increased in Q3, as did revenues from industrial and automotive applications.

Third quarter revenues for DRAM products were $28.8 million, an increase of 8%, or $2.1 million from our second quarter. The increase resulted primarily from stronger mobile DRAM demand.

Q3 revenues from mobile device probe cards increased to $19.6 million, or 68% of our DRAM probe card revenues compared to $15 million, or 56% of our DRAM probe card revenues in Q2. Despite a continued strong DRAM pricing environment throughout the third quarter, demand for our commodity DRAM probe cards contracted by $2.5 million compared to the second quarter.

Flash revenues were $7.1 million for the third quarter, a decrease of $1.4 million, or 17%, from the second quarter. NOR flash revenues decreased by $3.3 million in the third quarter to $1.9 million, while NAND flash revenues increased by $1.9 million to $5.2 million in the quarter.

Third quarter GAAP gross margin was $12.5 million, or 18.5% of revenues, compared to $16.4 million, or 26% of revenues, for the second quarter of 2013. GAAP expenses in Q3 included $0.5 million for stock-based compensation and $3.2 million for the amortization of intangibles.

On a non-GAAP basis, gross margin for the third quarter was $16.3 million, or 24% of revenues, compared to $20.5 million, or 32.6% of revenues, for the second quarter. While we outperformed the communicated financial model in Q2 for non-GAAP gross margin, we fell short of the model in the third quarter. The disappointing non-GAAP gross margin resulted from lower-than-forecasted manufacturing utilization in September as a result of a significant drop in demand that will carry forward into the fourth quarter. Low margins on a specific high-volume DRAM design, increased warranty and service expenses caused by execution challenges at a specific customer mentioned by Tom in his comments, and increased excess inventory charges in the quarter.

Our GAAP operating expenses were $23.4 million for Q3, a decrease of $1.5 million compared to Q2. GAAP operating expenses in the third quarter included $2.4 million for stock-based compensation and $0.8 million for amortization of intangible assets.

Non-GAAP operating expenses for the third quarter were $20 million, a decrease of $0.8 million compared to the second quarter. The decrease in non-GAAP operating expenses in the third quarter was due to lower project spending in R&D.

In the third quarter, the Company recorded a tax benefit of $0.1 million compared to a tax expense of $0.2 million in Q2. Basic weighted average shares outstanding for the third quarter increased to 54.4 million shares compared to 54.1 million shares in Q2. Basic GAAP loss per share was $0.20 in Q3 compared to a loss of $0.16 per share in Q2. Non-GAAP loss per share was $0.06 in Q3 compared to a loss of $0.01 per share in Q2.

Cash, comprised of cash, short-term investments, and restricted cash, ended the third quarter at $156.8 million, $1.8 million higher than Q2. This is the second consecutive quarter of positive cash flow.

Here are some other financial details. Our depreciation and amortization in the third quarter was $7.3 million, including $3.1 million for depreciation and $4.2 million for amortization of intangible and tangible assets resulting from the MicroProbe acquisition. Our capital additions in Q3 were $2.3 million, consistent with Q2 additions. Our stock-based compensation expense for the third quarter was $3 million compared to $3.1 million in the second quarter.

With respect to our financial model, while we are disappointed with our Q3 operational execution and the resulting deviation from our model, we believe the financial model is still intact. Attainment of the model will depend on improved, consistent execution, continued focus on cost reductions and manufacturing efficiencies, and more consistent quarterly demand.

With respect to Q4, we expect to see several challenges for our DRAM probe card demand, including execution challenges that have resulted in withheld orders at one customer, the fire at SK Hynix's Wuxi, China, facility, and the historical DRAM probe card seasonality. We expect a continuation of the positive revenue trends in the advanced SoC probe card market, primarily from mobile applications. As such, we expect fourth quarter revenues to be in the range of $46 million to $50 million.

With the low fourth quarter probe card demand, we expect to have factory underutilization in the fourth quarter. While we will take steps to reduce our costs in the fourth quarter, we will not be able to absorb all of our manufacturing costs. We expect the non-GAAP gross margin to be in the range of 10% to 15% in the fourth quarter, non-GAAP operating expenses to be approximately $19 million to $20 million, and Q4 cash usage of $12 million to $16 million.

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

(Operator Instructions.) Vern Essi, Needham and Company.

Yes, it's sort of a disappointing situation. I wanted to start off, though, by congratulating you, Mike, on your promotion. But switching gears, I suppose, into the other Mike, I wanted to dive in a little bit more on the gross margin situation. And I guess I'm trying to reconcile the fact that, obviously, you had the DRAM revenue come in quite nicely, actually, for the quarter. I realize it seems like things are going downward, but I'm trying to reconcile the magnitude of the warranty and service issues coupled with what sounds like some residual E&O on these delivery issues in the quarter. And can you give us an understanding of the timing and what piece of that's falling into the third quarter versus the fourth quarter? And then I've got a follow-up question on that.

Yes. So let me give you maybe a little more color on the gross margin picture. Because as we talked about, there were probably four or so key events there. Probably the most significant was the rate of decline with respect to the demand, particularly as we ended the quarter in September. And the fact is that, obviously, it's carrying into Q4. And I would suggest that that probably has maybe the most significant impact relative to how we guided. And certainly, as demand falls off that precipitously, we just can't absorb all of the manufacturing costs.

So I'd say that was probably the most significant, then followed by the fact that we did have good DRAM revenues, but we did have a high-volume specific design that came in at a very low margin for one particular customer. And the customer mix there in the DRAM was not as favorable as it has been in the past quarters.

And then we get into the issues, Vern, that you had specifically asked about, which was the execution issues causing warranty and service expenses, and that increased our costs by slightly over $1 million in Q3 versus Q2. And then the excess obsolete inventory and initial inventory write-off cost us another approximately $1.5 million versus Q2.

So those are probably the four most significant areas that were impacted from gross margin.

Okay. And then shifting into the next quarter guide, are we looking at more warranty and E&O charges on top of that, or is this just a function of utilization? Obviously, revenue's going down here, but I'm wondering, too, if you're also taking on poorer mix or lower mix DRAM as well in that calculus.

Yes, I would say that the low margin guidance is really predicated primarily on the fact that the factory, given that the factory will have underutilization, given the decline in demand. And that's probably the biggest component of the decline in the margin guide.

As it relates to warranty, I would say no, we don't expect that, certainly as we prepare our warranty expense and reserve. We should have covered all these known issues, so I think we have done that. So we're not expecting to see another quarter like the one we just experienced. As Tom said, I think we've got some of those execution issues taken care of or are in the process of getting those resolved. So I would not expect to see similar warranty and service costs in Q4.

E&O, again, always the challenges as the demand strengths, because our calculation is based on a looking-out expected demand over six months. So as that declines, it certainly puts a little more pressure on the E&O. But I don't expect that we'll have any more pressure on the E&O in the fourth quarter versus the third quarter at this point in time.

Okay. And then, just my final question here, and I'll move on and let someone else ask. But the DRAM front, you talked about the Elpida fire. It didn't seem like it was such a big order of magnitude perhaps a month or so ago. What's changed on that going into the fourth quarter? And then also, obviously, DRAM seems to be -- I know it's going through a seasonal soft spot -- but at least as it relates to your guide, it seems like it's going to be down quite dramatically on a sequential basis. Can you just discuss the puts and takes there on that guidance?

Vern, the SK Hynix fire as opposed to the Elpida fire, correct?

Oh, I'm sorry about that. My mistake.

If you read the news reports on it, people have sized the impact that it took down about 12% or 13% of the total DRAM wafer starts in the industry. So it was their larger factory, and they seem to be working through it and, I think, intend to have it back online by the end of the quarter. But that in itself took out quite a bit of overall capacity. And if you look at our 10-Qs and all, you can see that SK Hynix was certainly an important customer for us.

With regards to the overall DRAM environment, the pricing has been up, particularly spot pricing and, I think, contract pricing for the commodity DRAM. But a lot of that -- of course, I think demand for commodity DRAM has been declining as the PC market has been going through it's year-over-year declines, which looks like, according to Gartner now, I guess it's over 10% is what they're forecasting for this year. So the prices are being held up because the supply has been constrained. So the customers have really, or the DRAM manufacturers, our customers, have really cut back on their supply to make sure that the pricing environment holds up, which it has. And then, of course, this fire has only helped that.

You can see, on quarter-over-quarter basis, the mobile DRAM business has grown. I think that's a positive sign for what's happening. And as I said, we're working to finalize the qualification at the one remaining customer we haven't been supplying. So I think that aspect of it is positive.

And as I said, I think it's a short-term impact, and that pretty much all of the articles that you read would expect that SK Hynix will be back in the Q1 timeframe, be back in that factory and going forward. So I think, as they get their manufacturing facilities back in place, that will be positive for us and eliminate that hole that it created.

Okay, all right, thanks a lot.

Srini Sundararajan, Summit Research.

Hi, Mike. Congratulations on your promotion, and also there's a question for everybody. What are the kind of distribution of DRAM to NAND to SoC revenues do you expect in Q4? That's my first question.

Yes, I think we'll expect SoC to be, I would say, greater than 50% of the revenues in Q4. We would expect DRAM to then be probably maybe 2X of what we think NAND's going to be. But SoC will be higher than 50% of the mix in Q4.

Okay. And then following up, if you look at Q1 and later, assuming your manufacturing issues get fixed and Hynix returns to a normal production scenario, what kind of revenues could be possible? I mean, I'm not asking for guidance, but something around $73 million to $75 million should theoretically be possible, correct?

We're not going to give Q1 guidance at this point, Srini. If you take a look at the impact for this quarter, as I said, was $6 million to $7 million, we expect that in the Q1 timeframe, we'd have some incremental DRAM revenues from our qualification activity. So I think that would be positive to it. Q1 is a seasonally down quarter relative to Q2 and Q3, which seem to be seasonally up quarters. And it depends on different years. The Q1 to Q4 revenues are, I'd say, similar. They vary somewhat, with Q1 being up, perhaps a little bit more of the time, over Q4. But I guess, for all intents and purposes, it should be considered somewhat flat relative to Q4.

So we expect that as the factories come back online, and as I said, we've resolved the manufacturing issues at this point. And so on a going-forward basis, we've got that taken care of within the supply chain as well as in our own product area. So if those come back, then you should expect to see the revenues pick up incrementally relative to this quarter by the $6 million or $7 million, plus some other incremental DRAM, plus whatever the seasonal aspect of it is.

Okay. Thank you very much.

(Operator Instructions.) Tom Diffely, D.A. Davidson.

First, I guess one more question on the manufacturing delays or issues. Was there something new or unusual about the probe cards you were designing at that plant, or was it simply just designs that you've done many times before and just ran into some other issues?

There were some unique aspects on the two designs that really ended up being in a design space for the overall card that made it particularly troublesome to get through manufacturing. So we had delays that ran five to 10 days to deal with that. So that's the kind of order of magnitude of delays, but those are significant in the timeframe that people were ramping for product launch support and everything else in the late August to September timeframe.

Okay. So is it really just normal learning curve type situations, where when you start to tweak designs or decide to start going in another direction, it always takes a little bit longer? And just you had a smaller window this time?

Yes, it was a design that was a little bit in the corner, I think, of our performance space, if you will. And when we got there and did it, we realized that there were some interactions through the whole architecture of the probe card that caused it to be particularly difficult to assemble. So we worked our way through it. It's a good lesson learned. We needed to do some follow-up for the customer, so we had some higher warranty expense in that. But learned from it and now know how to avoid that problem going forward.

Okay. And then the progress you're making with your large NAND customer, is that technology driven, or it is really just them wanting to diversify into another supplier?

I think it's probably just to let them answer that one, but we're certainly getting qualified as an additional supplier to them on it, I think, first and foremost. But we're also working on their leading-edge production designs, so it's for their most advanced products.

Okay. And then just in general, have you seen any changes in the competitive environment? Has pricing become more of an issue of late?

No. In some parts of Taiwan, I would say it's been a little bit more aggressive there. But in the rest of the market, I would say that it's followed the trends that we've seen over the last couple of years without a significant difference to it.

Okay. And then you mentioned that you had come up with, or had started on a NAND design, a low-cost NAND design. What was the timeframe for potential first articles or revenue?

We haven't given any guidance on that. I think we'll stand by until we get through some real customer experience on it. The important thing is, is that I think we've got an architecture that's substantially different than what we have in the DRAM space that is designed in such a way that it meets all of the NAND flash requirements, including what the intrinsic cost is. That part of the market has high-volume probe cards, but they're very simple in their nature, if you will, so they don't require a particularly high-end technology. They do require a real keen focus on what the total cost is to make sure you can drive a good, profitable business out of it.

And that's really where, I think, the innovation has come for us, is how to combine some MEMS capability with architecture that's very, very cost effective. So we've got to get it out to a customer and have them probe some production products with it and validate that everything that we think it is, is what they would agree with.

So as I said, we've been talking to the major NAND manufacturers and have generated a good deal of interest, and it looks like we should be able to conclude an evaluation agreement with them this quarter. And subsequent to that, then, we'll provide them with some cards to evaluate. Once they get that done -- and I think that that takes, typically, is going to take them 90 to 120 days to go through an evaluation of things there -- and then if that is successful, then we would look to put that kind of a product into production and start to move forward with it.

So it will be a second half of 2014 timeframe when we would start to see revenues, if we get through a successful evaluation.

Okay. And then finally, when you look at the SoC market, if there's a situation where the PC market is just flat, or even just down a little bit next year, would you expect a full-out probe card refresh cycle as the chips move to the smaller nodes?

Yes. As we've discussed in the past, it's true in all our markets, but especially drives the SoC markets, a design refresh essentially demands a refresh of the probe card fleet. So we have seen significant design activity in the PC market this year. It's just the follow-on demand driven by wafer starts has been a little bit muted, obviously because the end market PC demand is down significantly. We still expect the significant design refresh cycle to continue to drive our business as our key PC customers shrink nodes on their stated roadmaps and plans.

Okay, thank you.

Srini Sundararajan, Summit.

I just wanted to know, what is the size of the NAND probe card market that you hope to penetrate, number one? And number two, is there going to be a make-versus-buy decision on that if your probe card that you're making does not end up being successful? Thank you.

The NAND flash market size estimates are on order of $250 million a year. We do serve a portion of the market today. That includes both NAND flash and NOR flash into that. The predominant portion of the market comes from NAND flash.

Today we have about a 13% share of that total market, with a roughly even split between the market, or the revenue being between NAND flash and NOR flash. But a large portion of that market really isn't available to us because of the intrinsic costs in the product that we have that's essentially a stripped-down DRAM probe card.

So going about this, then, and looking at it from what the market requires in terms of performance, which is substantially less than DRAM, and then also what the cost requirements are, is what put us into a new product architecture.

And we intend to see this through to a successful conclusion. All of the preliminary data on it, from a technical parametrics basis, as best as we can test it in-house, look promising. But we've really got to put it into a customer environment and see all that come out of it. And I think we'll stay focused on that as the best opportunity going forward.

Okay, thank you.

(Operator Instructions.) Patrick Ho, Stifel Nicolaus.

I apologize if this has been asked, because I got on the call a little bit late. But Tom, can you give me a little bit of color? Because it looked like a perfect storm happened during the quarter, with all these issues that weakened your margins. Can you give a little color of, I guess, the timing and when you guys recognized it? Was it too late in the quarter to make the changes, or were these changes going to be a couple of quarters where they were to be resolved? If you could just give a little bit of color of, I guess, the various pieces and the events that led to this.

Yes, maybe let me speak to that, Patrick, a little bit. So if you were to look at what happened in the production cycle for the Company, it was certainly very strong in the June, July and August timeframe and then really fell off pretty precipitously in September. So I would say it was pretty late in the quarter before we really had those signals from that perspective.

And then, again, as I look at the warranty and service cost issue, again, related to -- primarily, not completely, related to the one customer where we actually had some execution challenges and what-not, because those cards were delivered relatively, I'd say mid-quarter, what-not. We kind of understood that we were going to have some warranty and service issues around those pretty late in the quarter as well. And to some extent, even as we got into our close process in early October, we discovered that. So a lot of it was discovered late. So there wasn't really time to give really much more of a heads-up on that.

Some of the excess and obsoletes, we probably knew some of that, again, maybe mid to late in the quarter as well. So that would be my sense. I don't know, Tom, if you have any other comments you want to make with respect to when we understood execution challenges or what-not.

I think Mike's recounted the timing there on it. But the other impact of the fire, as we said, for SK Hynix was it really didn't have a big impact on revenue in the quarter. It occurred in the September timeframe. But it certainly changed the look going into Q4, which slowed down manufacturing activity, also late in the month, which would have been building for the October and November deliveries. So that also impacted on the margin side, just how much of that overhead and all that we absorbed.

That's helpful. Just going back to the withheld orders from the customer you cited in your prepared remarks, this was just something that -- are these orders coming back at some future point? Or are they potentially lost because of the execution issue you had? And if they are lost, how do you gain that customer trust back and get back into their order queue?

As I said, we've had a series of meetings and discussions, and we've even done a joint supplier review of the one supplier that was so problematic. And as I said, that has been corrected and resolved. And frankly, the kind of lessons learned in that from the supply chain standpoint, and at the supplier, is actually in a stronger and better position. So I think from that standpoint, things have actually improved on that.

We also went through a number of other reviews on the issues around the product that caused the delay and what had impacted that. And after all of that activity, as I said, the customer released the next design to us and committed that we get back to our normal business engagement, if you will. But all that activity has happened over the last three or four weeks, so from that time, it was a period of September and October where we were working through all those things and getting it to a successful conclusion. So I'd say at this point in time, we're kind of back in the game again. It's a matter of ramping that back up.

In terms of regaining the trust, which is a key part of it, an event like this certainly concerns a customer. Interestingly enough, or maybe an important element of it, is it was isolated to them. Our on-time delivery and performance elsewhere, and even in many parts of what other products that we delivered to them, was very good. But it was around a couple of specific designs that were problematic. And then that, coupled with the supply chain problem that we had, was a bit of a perfect storm, as you said. It certainly was a perfect storm within that one customer.

At this point in time, I think we've satisfied them that we've taken corrective action, but also preventive action going forward and have begun to engage now on the next-generation product design, and we'll build from there.

Great. Final question from me in terms of some of the commentary you mentioned about the NAND flash and some of the new, low-cost designs that you have out there. You guys did really well on the OpEx line for the quarter. Mike, maybe you can give a little bit of color. On a going-forward basis, are some of these new designs and development on the NAND side of things, is that built into your R&D already?

Yes.

Okay, so there's no incremental changes of us seeing it go up because of some of these new product designs?

No, we don't anticipate increased R&D expenses. I'd say we don't anticipate increased OpEx expenses. There could always be a slight change, one quarter to the next, with respect to R&D versus SG&A, but generally speaking, we don't see an increase, and the mix would be pretty much in a pretty tight range.

Right. Thank you very much.

Thank you, and I'm not showing any further questions. Ladies and gentlemen, this concludes the FormFactor third quarter conference call. Thank you for your participation. Everyone have a great day.