FormFactor Inc (FORM) 2016 Q3 法說會逐字稿

Thank you and welcome, everyone, to the FormFactor's third-quarter 2016 earnings conference call. On today's call are Chief Executive Officer Mike Slessor and Chief Financial Officer Mike Ludwig.

Before we begin, Jason Cohen, the Company's General Counsel, will remind you of some important information.

Thank you. Today, the Company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the Company's financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the Company and on the investor relations section of our website.

Today's discussion contains forward-looking statements within the meaning of the federal securities laws. Examples of such forward-looking statements include those with respect to the anticipated effects and benefits of the completed merger between FormFactor and Cascade Microtech; projections of financial and business performance; future macroeconomic conditions; business momentum; business seasonality; the anticipated demand for products; our future ability to produce and sell products; and the development of future products and technologies and the assumptions upon which such statements are based.

These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-Q with the SEC for the fiscal year ended 2015 and our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, October 27, 2016, and we assume no obligation to update them.

With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Thank you, Jason. And thank you, everyone, for joining us today. FormFactor delivered strong results in our initial quarter following the Cascade Microtech acquisition. Revenue of $123 million was the second highest in Company history, nearly reaching the all-time high attained in the third quarter of 2007. Non-GAAP gross margin of 43% and earnings per share of $0.22 were at their highest levels since the fourth quarter of 2007.

These results are the product of continued strength in FormFactor's core probe card business, combined with the growing probe card and engineering systems businesses from Cascade Microtech. As we have said previously, the FormFactor-Cascade combination provides us with scale and diversification, which accelerates our earnings growth. The results of our first quarter operating as a combined company support this thesis.

Beginning with the third quarter, we will report our results in two segments: the probe card segment and the system segment. Within the probe card segment, we will continue to provide a revenue breakdown for foundry and logic, DRAM, and flash markets. In both segments and our constituent markets, we will provide commentary on the dynamics and opportunities driving our business.

Foundry and logic probe cards is our largest business, at over 60% of third-quarter revenue. And is a market we lead with approximately 40% market share. In the third quarter, we experienced solid demand in all of our major [search] foundry and logic applications, namely microprocessors, RF, mobile, industrial, and automotive.

In the third quarter, we continued to operate at historically high outflow levels for our key microprocessor customer as we completed recovery from the production shortfalls of the first quarter. In the fourth quarter, we have now normalized capacity at the $100 million annual output level, which is approximately double the 2015 demand from this customer, but lower than the peak production levels of the past six months. As we have discussed previously, we expect to continue to operate at this structurally doubled production level in 2017, producing probe cards for both 14-nanometer and 10-nanometer devices.

In the mobile RF space, the Cascade Microtech probe card business delivered another strong quarter, supporting BAW and SAW filter component ramps for major midyear handset releases. Driven by these release cycles, this business typically experiences weaker demand in the fourth and first quarters.

With the fundamental multi-year trend of more bands and therefore more filters per handset, we are now working with customers to expand capacity and reduce their cost by employing multi-die parallel tests. In markets such as DRAM and mobile application processors, migration to multi-die test is a theme that has historically driven both probe card market growth and FormFactor share gains.

A particular highlight in the third quarter was record demand from a foundry and logic customer serving automotive applications and is an interesting example of the opportunities resulting from FormFactor's leadership position. This demand stems from a combination of two well-known trends: rapidly increasing silicon content in each car, paired with the automotive industry's stringent test in quality requirements.

To successfully meet these trends, a probe card supplier must have leading technology delivered with consistent manufacturing and quality processes supported with a global service infrastructure, a combination of attributes provided by FormFactor. The growth in end-market diversification provided by these automotive applications is helpful in managing our overall business as we continue to expect short-term demand fluctuations in each of our markets and applications.

In DRAM probe cards, third-quarter revenues were down slightly from the second quarter, impacted by the specific timing of 20-nanometer design transitions at two major DRAM manufacturers. With the improvement in overall DRAM pricing and a corresponding improvement in our customer's profitability, we are beginning to see indications of increased investment with shrinks to the 1x nanometer node and new design releases in 2017.

In Flash, we demonstrated significant quarter-over-quarter growth, as several 3D NAND design wins began to ramp in volume on both our new Vector product and the cost-reduced version of our legacy TouchMatrix architecture. Given our relatively small Flash market footprint, we expect continued lumpiness in quarterly Flash revenue. We are, however, encouraged by our initial progress in serving high-density 3D NAND application with FormFactor's differentiated MEMS probe technologies and products.

Our system segment delivered strong results, driven primarily by demand for high-end 300-millimeter systems. These tools are being adopted as the leading customers in the industry continue to invest in yield improvement across all device types.

The new materials, interfaces, and yield loss mechanisms of 10-nanometer FinFETs, 20-nanometer DRAM shrinks, and the complex 3D nonvolatile memory architectures are demanding tremendous volumes of electro-characterization data in shorter times. And our systems are helping customers meet those challenges.

A good example of this is our recently introduced Estrada electric migration tool, which enables customers to perform fully automated reliability measurements on the wafer prior to device packaging. This improves time to results, increases data volumes, and provides a higher-quality measurement compared to competing methods and tools.

In our first quarter operating as a combined FormFactor-Cascade team, we placed a great deal of emphasis on maintaining continuity and minimizing disruption. As we have previously described, this approach was designed to ensure each of our business executed to existing plans and commitments. And we are pleased to have successfully achieved this in our first quarter together.

We also achieved annualized cost synergies of $5 million in the quarter by executing quickly on low-risk G&A redundancies and integrating the sales and service teams. We also began the initial stages of assessing longer-term technology, product, and operational synergies.

We are now in the midst of Companywide planning for 2017 and beyond. Although our near-term emphasis remains on execution and continuity, we are increasingly excited about the growth prospects for the combined businesses as we leverage the technology and channel assets across our expanded opportunity set.

We believe that FormFactor's test and measurement solutions are well positioned to capitalize on overall market trend and will enable us to grow faster than the market. These trends include additional quality demanding applications of silicon, such as the automotive example I described earlier; more pervasive and demanding deployments of high-frequency RF sensing and communications, such as millimeterwave radar and 5G communications; and challenging device shrinks with new architectures and material sets, such as 3D NAND.

I will now turn the call over to our CFO Mike Ludwig for further details.

Thank you, Mike, and good afternoon. As you saw from our press release and heard from Mike Slessor, our third-quarter results in the inaugural quarter for the combined companies were strong, with solid non-GAAP profitability and robust free cash flow, consistent with our expectations of putting these two companies together.

As Mike commented earlier, FormFactor will report our results in two segments: the probe card segment and the system segment. In this initial quarter, we will specifically call out the revenue contribution of the former Cascade Microtech probe card business within the probe card segment.

Total FormFactor non-GAAP revenues for Q3 2016 of $123.6 million increased $40.5 million or 49% compared to our second quarter. Probe card segment revenues of $102.7 million increased $19.6 million or 24%, primarily from the $18.4 million in Cascade Microtech revenues in the quarter. System segment revenues for the third quarter were $20.9 million, all contributed by the Cascade Microtech business.

Within the probe card segment, foundry and logic revenues of $75.1 million increased $17.2 million or 30% compared to our second quarter due entirely to the addition of the Cascade probe card revenues. Microprocessor and RF filter applications were the strongest revenue contributors in the quarter, but experienced expected declines from the exceptionally strong second quarter. Mobile processor and automotive applications were also strong contributors in the third quarter.

Dealer and product revenues were $22.3 million, a decrease of 8% compared to the second quarter. The DRAM environment remains choppy as the largest DRAM device manufacturers work through their respective technology node transitions. DRAM revenues comprised less than 20% of total Company revenues in the quarter.

Flash revenues of $5.3 million for the third quarter increased $4.3 million from the second quarter, driven by several 3D NAND design wins on both Vector and TouchMatrix architectures. System segment non-GAAP revenues were $20.9 million in the third quarter, as we experienced solid increases in both 200- and 300-millimeter system purchases.

Third-quarter GAAP gross margin was $27.2 million or 22.1% of revenues compared to $25.4 million or 30.6% of revenues for the second quarter. GAAP cost of goods sold expenses in the third quarter included $0.7 million for stock-based compensation and $24.9 million of amortization of intangible assets, including $7 million for inventory step-up. $22.8 million of the amortization of intangible assets results from the Cascade acquisition.

On a non-GAAP basis, gross margin for the third quarter was $53 million or 42.9% of revenues compared to $27.9 million or 33.6% of revenues for the second quarter. In the probe card segment, Q3 GAAP -- non-GAAP gross margin was $41.7 million or 40.6% of revenues compared to $27.9 million or 33.6% of revenues in Q2.

The increase in the third-quarter gross margin was due primarily to a favorable product mix with the addition of the higher-margin Cascade RF production and engineering probes and increased revenue from mobile processor and automotive probe cards. The Q3 gross margin also benefited from increased efficiencies and reduced costs related to our foundry and logic product ramp.

In the system segment, Q3 non-GAAP gross margin was $11.3 million or 54.1%. This is a record gross margin for the system segment and was driven by a favorable mix of 300-millimeter systems and good fixed cost absorption from higher production levels.

Our GAAP operating expenses were $40.3 million for the third quarter, an increase of $8.2 million compared to Q2. The increase is due primarily to the addition of Cascade operating expenses. GAAP operating expenses included $2.5 million for stock-based compensation, $2.1 million for amortization of intangibles, and $1 million for acquisition expenses.

Non-GAAP operating expenses for the third quarter were $34.7 million, an increase of $15.1 million compared to the second quarter, again due to the addition of the Cascade business. The third-quarter non-GAAP operating expenses included $1.3 million of realized synergies in sales, general, and administrative expenses, slightly ahead of the $1 million Q3 expectation communicated in our last earnings call.

The Company recorded $1.1 million of interest expense in the third quarter on the term loan, which had a balance of $146.7 million at the end of the quarter. The non-GAAP effective tax rate for the third quarter was 5.6%, consistent with our expectations of a continued low effective tax rate while we utilize our $300 million of US-based net operating losses and continue to carry a valuation allowance against our deferred tax and assets.

GAAP net loss was $14.2 million or $0.20 per share for the third quarter compared to GAAP net income of $36.9 million or $0.61 per fully diluted share for Q2. As a reminder, the second quarter included a net benefit of $33.2 million for acquisition-related transactions or $0.55 per fully diluted share, including a one-time tax benefit of $43.9 million for the partial release of the valuation allowance on our deferred tax assets.

Third-quarter non-GAAP net income was $15.9 million or $0.22 per fully diluted share compared to $8 million or $0.13 per fully diluted share for Q2. Fully diluted weighted average shares outstanding increased 11.3 million shares to 71.3 million shares in Q3 due primarily to the shares issued for the purchase of Cascade Microtech.

Turning to the balance sheet, excluding cash payments attributable to the acquisition of Cascade Microtech, the Company generated $16 million of free cash flow in the third quarter compared to cash usage of $1.5 million in Q2. The free cash flow generation resulted from stronger operating results of the combined companies and good collections of accounts receivable.

The Company spent $26.2 million for acquisition-related payments in the third quarter and used $4.9 million for capital expenditures in Q3. We expect annual CapEx expenditures to be in the range of $16 million to $20 million going forward. In total, cash comprised of cash, short-term investments, and restricted cash ended the third quarter at $107.9 million, $10.8 million lower than Q2.

As Mike mentioned, we are in the midst of Companywide planning for 2017 and beyond, including the assessment of our longer-term synergies for our technologies and operations. At the conclusion of this process, in early 2017, we will communicate our financial model.

As our fiscal year ends on the last Saturday in December, the fourth quarter of this year will have 14 weeks as opposed to our usual 13 weeks. Given the timing of the additional week, we expect it will have a limited impact on revenues for the quarter but may result in up to $2.4 million of incremental expenses in the quarter.

In the fourth quarter, we expect the probe card segment will experience demand normalization to a lower level compared to Q3 from our significant microprocessor customer. And a demand environment consistent with our third quarter for all other markets within the probe card segment. The system segment demand is expected to remain steady and benefit from the continued strong order flow generated in the third quarter.

As such, we expect revenues for the fourth quarter to be slightly down from the third-quarter levels, with our guidance in the range of $116 million to $124 million. We are forecasting the fourth-quarter product mix and factory absorption be similar to the third quarter. Therefore, we expect FormFactor's non-GAAP gross margin to be stable in the range of 41% to 45%.

We expect to realize cost synergies in the fourth quarter of $1.3 million to $1.5 million from sales, general, and administrative expenses. We will incur $1.1 million of interest costs on our debt and expect our non-GAAP effective tax rate to be 6% to 10%.

We expect to realize non-GAAP fully diluted earnings in the range of $0.15 to $0.21 per share and generate $11 million to $13 million of free cash flow, excluding the impact of acquisition-related expenditures. Our Q4 guidance assumes consistent foreign currency rates.

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

(Operator Instructions) Edwin Mok, Needham & Company.

First question I have is just on the cost synergy side. I think you mentioned on your prepared remarks that you have some saving this quarter and you expect $1.3 million to $1.5 million of cost synergy. Is that a quarterly run rate?

And then I think you mentioned on your prepared remarks that you guys were looking -- reviewing your Companywide strategy. Is that just for strategic reason or are you also looking at costs when you do that readout?

Let me handle the first part of that, Edwin. So the $1.3 million to $1.5 million is actually a quarterly synergy number. As Mike indicated, in Q3, we had $1.3 million of synergies, which annualizes out to $5 million.

And as you recall, we had committed to $10 million to $12 million of annual synergies in 18 to 24 months post close. So we're on our way. We are consistent with where we thought we would be at this point in time. Maybe even slightly ahead, but the number is a quarterly number.

Edwin, it is Mike Slessor. Let me address the longer-term planning exercise and the scope of it. We are doing it for several reasons. First of all, both companies have had a disciplined annual planning process where we put together an annual operating plan that guides spend initiatives and strategic objectives, as do many of our peers.

So part of the process we are undertaking is to put together a combined 2017 annual plan. However, we have also taken the opportunity to look a little further downstream at potential technology and product synergies, both from a growth perspective, but also from a cost and efficiency perspective.

So I think in summary, we are looking at all of these things as we go through both our 2017 planning process, looking to see how we can further accelerate our growth from the combined technology and market footprint that the Company now has, as well as looking how we can extract additional cost synergies out of the combination and the scale.

Great. That was very helpful. And then just talk about fourth quarter directionally. I remember historically, Cascade tends to have a strong Q4 for the system business, but it sounds like you guys are guiding more flat. Just wondering why you're not expecting a stronger Q4.

And then on the Flash side, you guys had a big jump in the third quarter, and you mentioned there was some ramp-up relate to 3D NAND. I was wondering is that one pretty big order that you satisfied in 3Q and you expect that to dial back a little bit in fourth quarter? Or you expect to stay in this $5-million-plus range?

Edwin, I will provide some color, although I want to make it clear that we are not going to provide segment-based guidance or market-based guidance. We will provide revenue guidance for the whole Company.

On the system side, you're absolutely correct. The ex-Cascade systems business, what we now refer to as our system segment, has historically had strong calendar Q4 strength. And we see that happening again.

In the prepared remarks, we referred to it as strong order flow. We continue to see that business being relatively strong, building off Q3 into Q4. It is a business that, however, is a relatively significant but not all of our business, given the overall mix that we have in building up to the $120 million midpoint of revenue guidance.

On the Flash front, as I said in the prepared remarks, we have significantly increased our market share and our revenue in Flash in the third quarter. We do expect that to continue based on current order activity and current commitments at least through the fourth quarter.

But I would also like to caution people that we are still in a relatively small market share footprint in Flash. And this market share increase is composed and concentrated in a relatively small number of designs. So we would expect it to be lumpy for a little while. But so far, so good on moving from third quarter to fourth quarter with our Flash business.

Definitely doing well on that front. Last question I have, and I will let the other guys on. I think on your prepared remarks, you talk a lot about the auto market potentially being greater -- a good option and a driver for your business.

How do you address that market? Is it mostly just come from the SoC or foundry logic probe card business? Or do you see other opportunity either from the system or the memory test? Can you give us some color in terms of how you address that opportunity maybe for longer term?

Yes. We thought it would be useful to share the automotive example because it is an interesting example for us, where FormFactor's technology leadership and worldwide footprint is really allowing us to address an additional growth opportunity and some additional diversification for the overall business. The primary driver of that opportunity is inside our foundry and logic segment or foundry and logic products.

However, there are some -- given the increased content of silicon in cars, there are some memory applications as well. And those are manifesting themselves in pushing our product specifications, for example, to higher temperatures.

So we view it as an interesting opportunity. An opportunity, perhaps, we have some advantages, given our scale, given our quality processes, given our business continuity footprint compared to some of our competitors. And it is an area primarily concentrated in foundry and logic today. But has some potential to move certainly into the DRAM production probe card business as well as the systems business.

Great. That's all I have. Thank you.

Craig Ellis, Steve Riley (sic).

It's B. Riley. Thanks for taking the questions. Wanted to just start congratulations on the Flash progress. Nice to see.

Going back to some of the third-quarter performance, I had expected DRAM would be flat, and it looks like it is down about 8% sequentially. So can you just help me with some of the puts and takes in that part of the business?

And as we think about that business longer term, with signs of improved DRAM pricing out there and DRAM fundamentals, is the business one that can get back to historic levels that's high $20s million, low $30s million, or should we have a different intermediate-term expectation for this business?

Craig, it's Mike Slessor here again. On DRAM, we were down slightly Q3 over Q2. When you look at the overall puts and takes associated with that, primarily it really was associated with some timing of particular designs transitioning to 20 nanometers at 2 of the 3 DRAM manufacturers.

If I back up and take a broader view, we expected DRAM to be stronger in the second half of 2016 than it was in the first half of 2016. And I think that will be true in the numbers, but it is certainly not going to be spectacularly stronger.

Part of the reason for that is the continued unpredictability of the 20-nanometer node transition at 2 of the 3 DRAM manufacturers. And sort of the holding back of the other DRAM manufacturer in moving to the 1x nanometer node.

In our discussions with all three of these customers, that lumpiness appears to be smoothing out. And with the improvement, as you note, in the overall end-DRAM pricing market and our customers' profitability, they look to be a little more, I'll call it, aggressive or moving forward with some of these node and design transitions, especially as we pushed into 2017. I think that is probably consistent with the readthrough you get from some of the equipment manufacturers, both on the state of 2016 capital DRAM spending and the view towards 2017.

Thanks for that. And then the follow-up is on the what used to be called SoC business, now foundry and logic, with your largest customer. As you look at that business now, are we at a level in the guidance where that is the ratable level going forward? Or should we expect to see some variability around their shrink timing as they move to 10, 10-plus, and 10-plus-plus longer term.

I think a great question. So to maybe reiterate and get everybody on the same page, we are now, as we said in the prepared remarks, operating for our key microprocessor customer at double the 2015 demand levels. Further in the year as we went through this ramp-up, that is where we told you it would be long term, even though the second quarter and the third quarter were significantly stronger in that doubled level.

As we look out in the future, that is going to be what we're forecasting and where we are sizing that business to be. However, there is certainly going to be puts and takes in any quarter associated with, again, individual design releases.

But probably more importantly in the short term on the number of wafer starts assisted with the 10-nanometer node. That is obviously a significant growth opportunity for us. That the ramp of that node has been a little bit on again, off again. And its timing is one of the key variables, obviously, for a probe card spend for any customer, most notably our key microprocessor customer.

So I would put sort of the average demand level at this double 2015 level. We have constructed the Q4 guidance around that level. We've sized our operations around that level. However, I would caution you to expect some variability around that level as different node transitions and design transitions work their way through the system.

That's very helpful color. I will switch over to a couple for Mike. One, on the synergies, it looks like modestly ahead of plan. Is that a result of just better execution pulling in some synergies that were planned for future quarters? Or are you actually tracking above the targeted synergies that you had laid out when you announced the deal?

Yes. So as we said, we had $1.3 million in the third quarter versus -- I think what we had communicated at the last call at $1 million. I think we had some, I would say, unplanned synergies that we received with respect to some structural changes that occurred probably in sales organizations. So we had maybe a little bit more benefit there.

But again, I think we are pretty much running on track with what we thought -- where we thought we would be. And so if I give you, again, remind people of the timing that we talked about with respect to the $10 million to $12 million, so we have said probably as we get through with the second quarter after close, we should be running somewhere around $1 million. Once we get through the fourth quarter post close, we should be running somewhere around $2 million a quarter. And as we exit around the sixth quarter post close, we should be running around $3 million or about $12 million annualized.

And so even though we are running slightly ahead of what we communicated at our last call, I don't think we have seen enough to suggest that we are going to accelerate the timing of our expectation of the synergies.

Thank you. And then the last one for me before I hop back in. Helpful to get the repayment schedule on the deal debt in the supplements on the website. The question is to what extent should we look at that as kind of a hard-and-fast paydown scheduled? Or something that it is more of a guideline for which you would have flexibility to either go much faster or slower than what is shown?

Yes. Those are the contractual terms. I think from our perspective, we see that we will be generating good cash flow. And as we do that, we will accelerate the paydown of that debt I think pretty quickly. So I think we will use the majority of free cash flows that we generate to pay down that debt.

Thanks, guys.

Patrick Ho, Stifel Nicolaus.

First question, in terms about seasonality. I know in the past, you have talked about the probe card business having -- being seasonably softer in both Q4 and Q1. Can you just give a little bit of color on the probe systems side that you acquired from Cascade Microtech? Is there any seasonality to that or is that just more timing of development projects with the chip makers themselves?

Good question, Patrick. So part of the rationale for the Cascade Microtech acquisition and us continuing to grow the FormFactor business was to diversify some of the calendar seasonal elements we had in the business previously.

If I go way back, where our businesses were primarily driven by a PC refresh cycle, there was tremendous seasonality, where Q4 and Q1 would be very weak and Q2 and Q3 would be very strong. As we have grown and diversified the business, that has been damped out a little bit.

And overall, our calendar profile still has different seasonality elements in it, but the exposure to different end markets, certainly PC and server is still a piece of it. But we are now also driven by mobile product launches. I mentioned in the automotive piece, which is much less seasonal.

In particular, the systems business and the probes business we acquired from Cascade have quite seasonal different behaviors. As was noted a little bit earlier, the systems business tends to be strong in the back half of the year, typically Q4 strength, with a build through the years. So Q1 seasonally the weakest; Q4 seasonally the strongest. With the probes business, as I mentioned in the prepared remarks, being a Q2-Q3 strength business, although that is primarily correlated to key handset device timing, which happens in Q3, Q4.

So in some total, I think we've continued to try and add businesses both organically and inorganically that allow us to damp some of this calendar seasonality. Obviously, some of those fundamentals are still in place, and you will see if you a few puts and takes, as I think our revenues and our Q4 guidance, as we move throughout the quarters and the year.

Great. That's helpful. And maybe as a follow-up on the engineering probe system business itself, as the industry begins to move to the development of the 7-nanometer logic node, do you see incremental opportunities in that industry shift, given the complexities and the challenges manufacturing those devices are likely to have? Is there a potential incremental step-up for that technology node transition?

There is. And there is a similar step-up opportunity associated with elements like new nonvolatile memory architectures like XPoint 3D NAND. And some of that is driving the strength we see in the systems business today. And in particular, the strength we see in the high-end 300-millimeter part of our systems business.

So yes, 7 nanometer and the challenges that are going to be associated with 7-nanometer yield improvement and yield lamps are a opportunity for the systems business. And an opportunity, more generally, for our presence in this early engineering space to complement the classical FormFactor production probe card business.

Great. And a final question from me. With the DRAM industry also going through a couple of node transitions currently for both 20 and the 1x nanometer now, does the Company feel comfortable with its capacity on the DRAM side of things? Or how will you need to allocate it if the DRAM industry continues to gain momentum as we enter into 2017?

Yes. So DRAM -- and I agree with the fundamental directional hypothesis that the DRAM industry is going to gain some momentum as we move into and through 2017. Certainly, all our customers are behaving like this and I think there is a general consensus that that movement will occur.

If you look at DRAM today for FormFactor, for example, in the third quarter, as Mike Ludwig mentioned, it is 20% of our revenues. It is an important part of our revenue and it is an important part of our technology and manufacturing footprint.

But as we have grown other businesses around it and as we have grown the manufacturing -- the complementary manufacturing capability, for example, in our foundry and logic business, we are able to move capacity around at least to a certain extent between each segment. You saw us do this in the first quarter as we had to ramp and double capacity for our significant microprocessor customer. We can pull those same knobs associated with the DRAM.

And so we are fairly comfortable that from a capacity perspective, we are in good shape to be able to absorb any kind of 2017 demand spike we see from these levels. And do it in a way that perhaps doesn't structurally add a significant amount to our fixed cost structure.

Great. Thank you very much.

(Operator Instructions) Christian Schwab, Craig-Hallum Capital.

Great. I really have one question. When you guys look at the DRAM business and you look at custom migration at 18 and 20, would you anticipate that the first half of 2017 revenue is greater than the second half of 2016?

I think given the discussion we just had with Patrick and some of the themes that we see occurring, certainly as a node transition is a more complete and aggressive node transition to 20 nanometer and the 1x nanometer nodes that our customers are talking about right now would lead to higher DRAM probe card spend and therefore revenue for FormFactor in the first half of 2017 as compared to the second half of 2016.

So I think the simple answer your question is yes. However, it is predicated with a bunch of ifs that those node transitions need to proceed with a speed and conviction that we haven't really seen yet.

Right. Right. I thought that is what you were implying earlier and I just wanted to make sure that that was the answer. And understand things can always change. But perfect. I don't have any other questions. Good quarter. Thank you.

Jagadish Iyer, Summit Redstone.

Thanks for taking my question. Two questions. This is for Mike Slusser. If you look at how 2017 is shaping up, how would you characterize where could be the -- which segment could have a big surprise at least on the probe card side between the DRAM and the foundry logic segment or the NAND segment? And where could there be some downside that we could be missing potentially? And then I have a follow-up.

Well, if we look at the overall industry, again, we look at it in terms of three segments: foundry and logic, DRAM, and Flash. I think we have had obviously a couple of questions and a bit of a discussion around DRAM and the potential dynamics there. I think on a year-over-year basis, DRAM offers some potential for some upside, but there is a good deal of volatility around those assumptions as well.

From a structural or secular standpoint, foundry and logic continues to be a business that we are investing in in growing our technology portfolio. And continuing to work with the customers where we don't have a strong share position to increase our share in that business.

From a surprise perspective or a downside perspective, I think given our market footprints in both foundry and logic and DRAM, we expect to be able to grow our share a little bit, but we are really going to be tracking pretty closely the overall industry spend in those two segments.

Flash, as we have discussed before, a bit of a different story. Given our small share position, the initial progress that we have made here in Q3, as you saw from the results, maybe that represents both -- or the biggest elements of volatility in our overall business.

So I think when you look across the production probe card portfolio, and I want to also include the RF filter business that we acquired from Cascade Microtech, which we include in the foundry and logic results, the fundamental growth there continues as band proliferation and more filters per phone is a theme that we see continuing and are planning with our customers.

So I think across all these, there is potential for a few surprises on the upside. There's potential for some downside. But given our share footprint and our position, we feel reasonably confident that we are going to be able to continue to gain share.

Okay. That's great. And here is a question for Mike Ludwig. Given how we are able to get these synergies of $1 million to $1.5 million, so I was wondering is there going to be any help on the gross margin side looking at it over the next, say, 12 months or so? Thanks.

Yes. So what we had -- the $10 million to $12 million and also then -- the $10 million to $12 million annually and then the $1.3 million that we saw in the third quarter as well as the $1.3 million to $1.5 million and going forward, those numbers really are around SG&A synergies.

As we have talked about in the past, we are going to be very careful about how we approach the operational side of this. As Mike said, we are just starting to look seriously at that. We are in the midst of that.

I would say over the next 12 months, we may gain a little bit on the operations side and maybe a little bit of help in gross margin. But for the most part, we are looking at the synergies really to be in OpEx and primarily focused on sales, general, and administrative expenses.

That's good. Excellent quarter. Thank you.

(Operator Instructions) And I am showing no further questions at this time. I would like to turn the conference back to Mike Slessor for any closing remarks.

Thanks again for joining us today. We are very pleased to have delivered strong results in our first quarter together as the combined FormFactor-Cascade Microtech team. As we plan and execute as one team, we are confident that our increased scale and diversification will enable us to continue to outpace industry average growth rates by efficiently executing against our expanded opportunity set. Thanks again for joining. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.