FormFactor Inc (FORM) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome everyone to FormFactor's Fourth 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, 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 the most recent filing on Form 10-K 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, February 8, 2017, 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 a solid fourth quarter to close 2016 with strong momentum. As you have seen from our press release earlier today, we posted fourth quarter financial results at the high end of our guidance range. For the year overall we grew revenues by 36% and non-GAAP earnings per share by 32% driven by our mid-year acquisition of Cascade Microtech and continued market share gains in our core businesses.

As we start 2017, our increased product and market diversification is enabling us to benefit from a broad-based strength in semiconductor industry demand. At the same time we are also capitalizing on some FormFactor specific market gains. Both of these factors are boosting our business over the seasonal softness we have historically experienced in the first quarter and are reflected in the go-forward guidance we are providing today. With this unseasonably strong start to the year but still very limited visibility into the second half, we expect to deliver between $480 million and $500 million of revenue in 2017 driven by a line of sight growth opportunities in each of our target markets.

As you know, during 2016 our largest foundry and logic probe card customer doubled their demand for FormFactor products to support both increased wafer test intensity and the continued release of multiple 14 and 10 nanometer designs. To meet this demand in less than one quarter we added the equivalent capacity of the number five probe card supplier in the industry, an achievement that can only be executed on a foundation of significant scale and resources. We expect these positive underlying trends to continue and plan to operate at these increased production levels for this key customer through 2017.

In addition to the structural demand increase in the microprocessor space, we are now shipping units to both major 10 nanometer foundries to test the next generation of mobile application processors and are currently increasing capacity to support an expected mid-year ramp cycle for these processors. These wins and growth at the leading edge of the mainstream foundry and logic space offer evidence of FormFactor's technology and product leadership, combined with our ability to support the rapid volume production ramps of the world's largest semiconductor manufacturers. This market differentiation is fueled by our ongoing industry leading investments in R&D and customer support coupled with the scale, processors and resources required to rapidly and cost effectively ramp our technologies in high volume production.

In the RF production probe card market, a sub-segment of the foundry and logic market, we grew revenues by 15% in 2016 over 2015, driven by the continued secular increase in the number of RF components per handset. At present, we are experiencing typical seasonal demand softness for BAW and SAW filter probe cards but are working with our key customers to prepare for mid-year handset-driven growth.

In addition, we are investing in new RF wafer test applications designed to further grow and diversify this business with a 2017 focus on enabling at-speed wafer test of millimeter wave radar devices, primarily for automotive applications. We have shipped qualification cards to multiple customers and are excited about the prospects for this business where we have substantial technical and product differentiation. As we discussed on our last earnings call, probe cards for automotive applications represent a large opportunity for FormFactor across not only RF but all of our products, given increasing automotive silicon content coupled with the stringent quality requirements of the auto industry.

In flash, we again delivered moderate quarterly revenue growth, primarily from wins in the emerging China memory market on top of our 2016 3D NAND design wins. As we have discussed, given our relatively low market share in flash, we expect continued lumpiness in this business. However, as the probe card market leader, we are committed to leveraging our technology, products and worldwide reach to grow long-term share in flash, primarily supporting the significant wafer and good growth trends driven by 3D NAND.

In DRAM after weathering 2016 market conditions that produced a 30% annual decline in our DRAM probe card revenues, we are now experiencing significantly stronger demand as our three major customers transition to the 1x nanometer node and ramp new designs on the 20 nanometer nodes. Even though our overall growth and diversification has reduced our dependence on DRAM to approximately 20% of revenue, this remains a significant and strategically important business for FormFactor and current market conditions are providing a substantial positive contribution to our overall results.

Over the longer term, as you heard from one of the major DRAM manufacturers in an analyst event last week, a more diversified set of end market demand drivers such as automotive applications are expected to smooth future DRAM demand cycles. This should result in demand smoothing for DRAM probe cards, which would have a positive stabilizing effect on our business. Our engineering systems business grew by 5% in 2016 driven by a significant increase in 300 millimeter system shipments. We continue to see strong demand for these systems as customers invest in yield improvement activities for all major device types. As we have discussed previously, the yield challenges of advanced silicon nodes coupled with the complexity and cost of new IC designs are requiring customers to perform more engineering test and debug early in their production ramps.

We are also seeing robust demand for 200 millimeter and even 150 millimeter systems, driven by non-silicon applications such as compound semiconductor power devices along with significant growth from the developing China semiconductor ecosystem.

With two solid quarters behind us and having achieved more than half our committed $10 million to $12 million of annual SG&A cost synergies, we are beginning to execute the next stage of integration of Cascade Microtech and FormFactor. We recently completed our first annual planning cycle as a combined team with two important outcomes. First, we rationalized our product roadmap in the foundry and logic market ending development of our product targeted for applications served by existing FormFactor products. Second, we identified and committed R&D funds to two market opportunities where a combination of the former Cascade Microtech and FormFactor technologies has the potential to provide compelling performance, lead time and cost benefits. These decisions are expected to result in a modest net increase in R&D spending, but more importantly, our plan to fuel future revenue growth and gross margin expansion.

I'll now turn the call over to our CFO, Mike Ludwig, for further details on our results and to provide insight into FormFactor's 2017 outlook.

Thank you, Mike and good afternoon. As you saw from our press release, our fourth quarter results were a second consecutive proof point of the financial strength of combining Cascade Microtech and FormFactor.

Total FormFactor non-GAAP revenues for Q4 2016 of $124.5 million increased $0.9 million compared to our third quarter. Probe card segment revenues of $98.6 million decreased $4.1 million in the fourth quarter or 4% while systems segment revenues increased $5 million or 24% to $25.9 million. Within the probe card segment, foundry and logic revenues of $68.4 million decreased $6.7 million or 9% compared to our third quarter due primarily to the expected demand normalization from our significant microprocessor customer. Mobile processor, automotive and engineering probe applications were strong contributors in the fourth quarter, while RF probes were proximity 10% lower than Q3 due to seasonal softness. Foundry and logic revenues comprised 55% of total Company revenues in the fourth quarter.

DRAM product revenues were $24.1 million, an increase of 8% compared to the third quarter as we saw the demand environment continue to strengthen throughout the fourth quarter. DRAM revenues comprised less than 20% of total Company revenues for the second consecutive quarter. Flash revenues of $6.1 million for the fourth quarter increased $0.8 million from the third quarter, driven by 3D NAND and NOR flash design wins.

Turning to our systems segment, non-GAAP revenues of $25.9 million in Q4 increased $5 million compared to Q3 as revenues were strong across all wafer size platforms showing meaningful increases in both the 150 and 200 millimeter platforms and maintaining a robust revenue level from the 300 millimeter platform.

Fourth quarter GAAP gross margin was $40.3 million or 32.5% of revenues compared to $27.2 million or 22.1% of revenues for the third quarter. GAAP cost of goods sold expenses in the fourth quarter included $0.8 million for stock-based compensation and $11 million of amortization of intangible assets. On a non-GAAP basis, gross margin for the fourth quarter was $52.7 million or 42.4% of revenues compared to $53 million or 42.9% of revenues for the third quarter.

In the probe card segment Q4 non-GAAP gross margin was $39.3 million or 39.8% of revenues compared to $41.7 million or 40.6% of revenues in Q3. The fourth quarter was impacted by a less favorable product mix and lower fixed cost absorption from reduced production levels.

In the systems segment Q4 non-GAAP gross margin was $13.5 million or 52.1% compared to $11.3 million or 54.1% of revenues in Q3. The reduction in Q4 is a result of a less favorable product mix.

Our GAAP operating expenses were $54.8 million in the fourth quarter, an increase of $14.5 million compared to Q3. The increase is due primarily to the $12.4 million impairment charge identified in Q4 for certain in-process research and development acquired in the Cascade Microtech acquisition that was targeted for market applications served by existing FormFactor products.

GAAP operating expenses included $2.4 million for stock-based compensation, $2 million for amortization of intangibles and $0.7 million for acquisition expenses. Non-GAAP operating expenses for the fourth quarter were $36.2 million, an increase of $1.4 million compared to the third quarter. As expected the additional week in Q4 resulted in $1.1 million of additional OpEx expenses in the quarter. The fourth quarter non-GAAP operating expenses included $1.5 million of realized synergies in sales, general and administrative expenses or $6 million annualized. We are on track to capture previously committed $10 million to $12 million of synergies in 18 to 24 months, principally from sales, general and administrative expenses.

The non-GAAP effective tax rate for the fourth quarter was 7.3% compared to 5.6% for the third quarter, 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 assets.

GAAP net loss was $15.4 million or $0.22 per share for the fourth quarter compared to a loss of $14.2 million or $0.20 per share for the third quarter. Fourth quarter non-GAAP net income was $14.4 million or $0.20 per fully diluted share compared to $15.9 million or $0.22 per fully diluted share for Q3.

Moving onto the balance sheet, excluding cash payments attributable to the acquisition of Cascade Microtech, the Company generated $15.2 million of free cash flow in the fourth quarter, another strong quarter of free cash flow for the combined Company. In the fourth quarter, the Company spent $10.2 million on principal and interest payments including a $5 million accelerated principal payment, $2 million for acquisition-related payments and $3.3 million for capital expenditures. We expect 2017 annual CapEx expenditures to be in the range of $16 million to $20 million. In total, cash comprised of cash, short-term investments and restricted cash ended the fourth quarter at $110.1 million, $2.1 million higher than Q3. The balance of our bank term loan was $138.2 million at December 31, a decrease of $8.5 million from September 24.

Turning to the first quarter guidance, as Mike discussed, we are currently experiencing strong broad-based demand momentum in our probe segment, both in our foundry and logic applications and more so in our DRAM applications. The demand in our systems segment remains strong in the first quarter countering historical seasonal softness. As such, we expect our revenues for the first quarter to be consistent with our fourth-quarter revenues and in the range of $120 million to $128 million.

We expect FormFactor's non-GAAP gross margin to be similar to Q4's gross margin in the range of 41% to 44%. We expect to realize cost synergies in the first quarter of $1.5 million to $1.7 million from sales, general and administrative expenses and expect to realize non-GAAP fully diluted earnings in the range of $0.17 to $0.23 per share and generate $13 million to $15 million of free cash flow. Our Q1 guidance assumes consistent foreign currency rates.

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

Ladies and gentlemen the question-and-answer queue is now open. (Operator Instructions) Craig Ellis, B. Riley.

Thanks for taking the question and congratulations on the strong results and outlook guys. I wanted to ask, first, just a clarification question on gross margin in the fourth quarter. On the surface it looks like there are some segment positives with systems being up so much but is the issue that the intra segment dynamics in foundry and the rise in DRAM more than offset the rise in systems, Michael?

Yes, I think that's a good way to look at it. Again, the mix -- the mix was something that from our perspective was not as favorable in Q4 as it was in Q3.

Okay, that's helpful. And then a near-term and a longer-term question related to revenues. In the near term, can you just recap, as we look at the first quarter, some of the positives and negatives? We're at about $123 million to $124 million for the third consecutive quarter. But do you expect revenues to be somewhat similar across the four main segments or are there notable gives and takes? And then the longer-term question the full-year guidance, and it's very helpful to get that $480 million to $500 million view but at the midpoint it looks like that would average about $122.5 million per quarter, which is about where the business is running. So the question on the long-term side is, is the view that we're at really peak demand levels overall for the business in its entirety or is it more the lack of visibility in the back half of the year really precludes the Company from being more aggressive about revenues from where we stand today.

Craig, it's Mike Slessor, I'll take that question, and I'll actually answer it in reverse and talk to the full-year and then we'll focus in on the first quarter.

In our providing full-year guidance, we are hampered significantly by lack of visibility into the second half. Obviously, given the commentary we have the results we're providing and those of our peers, the semiconductor industry is entering 2017 running at pretty healthy demand levels. The flip side of that is, although we're confident about the first quarter, have some visibility into the second quarter, like many of our peers as we move into the second half we really have a lack of visibility. Assuming the momentum continues I think we're going to be in a position to continue to deliver significantly improved performance. But from where we stand in trying to create an expectation for the year and help people understand the business, as I said, we really are hampered by a lack of visibility into the second half. So that maybe answers the longer-term question, I hope, if not we can do a follow-up.

If we move to the first quarter, I think by and large at a high level we expect the fundamental components of revenue as we're now a more diversified probe card and systems supplier, supplying more of the overall test and measurement space, there is little puts and takes in each of our segments. But I think you can think about Q1 as it currently is shaping up as pretty similar to Q4 from a mix perspective. There's a couple of caveats to that. Certainly, from our perspective as DRAM continues to strengthen with those 18-nanometer ramps and 20-nanometer new design releases as customers now utilize the equipment what was installed in the second half of 2016, our DRAM concentration is likely to go up a little bit in the first quarter, given the momentum we see that may be a trend that persists into the second quarter as well, but we'll have to see.

So from a short-term perspective, I think the first order I would call the mix pretty similar, fourth quarter to first quarter, with the caveat that DRAM is a little bit stronger.

That's very helpful, Mike. Thank you for that. And then my last question, then I'll let others jump in, is regarding some of the comments on foundry. Encouraging to see participation in 10 nanometer foundry around mid-year. Can you help us understand the materiality of that potential business perform and how that opportunity might ramp as we look either at the back half of the year or a time period that would be reasonable for the engagement that you have there?

To provide a little more color on this, as I said in the prepared remarks, we're now supplying to both major 10 nanometer foundries and in a pretty limited way to the foundry that we've now added here in the first quarter. 10 nanometer obviously a node that's pretty specific to one of the key fabless companies in the overall ecosystem. And so our exposure to their overall wafer and design demand is relatively limited and focused on 10 nanometer and essentially one design.

So with all that background, this represents a big milestone for us to be actually participating in production at now all the major foundries, but it's a little early for us to be sizing the impact of this business. We're on the very initial part of sort of planning for this business with what's a new customer for FormFactor, working our way through that demonstrating not just our technology which we've been demonstrating for the past several years, but demonstrating our ability to execute and ship quality products on time. And so as a consequence, again it's a little early for us to size the overall opportunity, except to say that over the long term we expect it to be significant and an important step forward for FormFactor.

That's very helpful. Thanks, Mike, and good luck.

Patrick Ho, Stifel.

This is Brian Chin calling in for Patrick. Thanks for letting me ask a few questions and congratulations on the results.

Thanks, Brian.

In terms of the revenue synergies, can you elaborate on where you're beginning to see some initial successes in leveraging the combined Company's strengths and whether that factors in at all into your full-year outlook?

So I'm assuming, Brian -- Mike Slessor again. I'm assuming you're asking about revenue synergies between the old Cascade and the old FormFactor products, is that --?

That's right.

The question, yes, okay. Just wanted to be sure we're talking about the same thing. In the short term, as you know one of the initial integration steps we took was to combine the sales teams and the field teams, our customer facing teams, both for efficiency but we also undertook some cross training to hope that we would be able to get some revenue synergies or at least cross selling efficiencies out of that. I wouldn't call any of those results material at this point. As you probably know the sales cycles for many of our products are relatively long even though the lead times are relatively short. And as a consequence, I wouldn't say in our either Q1 guidance or our view of the full year that we've contemplated significant or material revenue synergies. One of the longer-term things, however, that we did discuss in the prepared remarks, was the combination of technologies that we're going to apply some R&D dollars to here in 2017.

We see some technology elements that when put together offer some really compelling product opportunities, both from a capability standpoint, which will allow us to grow revenue, but also from a internal manufacturing efficiency standpoint, call it. So lead times, cycle times, cost, first pass yield, elements like that. So in the very short term the cross selling of the existing products, yes, there is a little bit going on. But the longer term opportunity really around bringing together some technology roadmaps and technology elements and we've made the commitment in our 2017 plan to invest some R&D in there so that we can improve revenue growth and gross margin over the standalone entity.

Great, that's really helpful. One other question for me. In a healthy 2017 environment where indications are that memory test capacity could increase 15% to 20%-plus and given your outlook that you just provide, is there any reason to think that your DRAM sales could not retest prior peak levels in sort of the mid $30 million range?

So there is a bunch of different elements running around through that. I think the mid $30 million for DRAM revenue I think is a stretch from where we currently sit and where we understand the demand profile for some of our key customers. I think you're going to test my memory a little bit, but I think if we go back to some of those peak levels there were more DRAM customers, more DRAM manufacturers and even though we've gone through a DRAM cycle here back then there were significantly more volatile cycles. And so the highs were higher and the lows were lower.

I think mid $30 million is probably a stretch to answer your question directly, but certainly growing off the -- I believe we did $24 million in revenue of 2014, somewhere in between there, I think, is the right way to think about the peak revenues for DRAM, assuming all of the bit growth, test capacity, wafer start growth trends you alluded to stay intact and the industry stays healthy and behaves itself in 2017.

Edwin Mok, Needham & Company.

Thanks for taking my question. So, first one, just go back to your full-year guidance and your commentary around some of your growth driver. Just curious, just to be very clear, the new incremental 10-nanometer opportunity and also the opportunity around auto market. I assume very little contribution from that to get to your $480 million to $500 million and if they materialize a lot faster then that could be upside, they don't then would that drive downside to that range?

Edwin, Mike Slessor again, there is a lot of puts and takes underneath the assumptions associated with us trying to help you see our full-year $480 million to $500 million revenue expectation. There are some assumptions associated with the 10-nanometer opportunity in that, there are some assumptions similar to what we talked about on the last conference call of some automotive growth. There also equivalent assumptions about us growing some of the other areas of our business like the engineering systems business. So simply put, I think there's a lot of puts and takes and assumptions in there. Again, we're a little bit hampered by -- in fact a lot hampered by limited visibility into the second half. And so I'm not sure I casted there is a set of assumptions that consist of a bunch of level wind things and then adding the 10-nanometer foundry and some of the other opportunities on top of it. I think confident about the current period, pretty good visibility through the first half, but again hampered by a lack of second half visibility, which I think is true throughout the industry.

Okay. Actually that's helpful color there. Going back to your commentary around annual planning cycle, you mentioned that you expect to increase R&D spending for developing these new products. With that increase in R&D spending, do you still expect to hit the same kind of cost synergy targets or does that actually impact your cost synergy target?

Yes, Edwin, this is Mike Ludwig. So we are absolutely committed to achieving the $10 million to $12 million of synergies in the 18 to 24 months, again, primarily focused on the SG&A expenses. We do believe that there are compelling R&D investments that Mike talked about that can accelerate future revenue growth and reduce our cost, improve our margins and we'll need to increase our R&D spending as he said, a little bit to achieve those benefits. But again we're committed to leveraging the OpEx structure as we have demonstrated in the past and we believe that we'll be able to manage our quarterly non-GAAP OpEx costs to $35 million to $37 million range at current revenue levels that we communicated today and throughout 2017.

Okay. Great. Actually that's very helpful. Lastly just last year you have a large microprocessor customer ramp a lot for you guys. And just kind of I guess the near term and longer-term questions, right, I think on the prepared remarks you said that that business seems sustainable. Just curious are you seeing any seasonality going to 1Q, is that baked into your guidance? And for the full-year, should we expect that customer to have a similar card level of business and that's assuming in your full-year target?

Well, just to clarify or repeat the prepared remarks, again, our largest foundry and logic customer, we did see a significant increase in demand from them that after some bumps in the first quarter a year ago, we managed to get to that level and produce fairly efficiently at that level. Based on our discussions with that customer and obviously there is many interactions and close coupling between us as a supplier and that customer, we expect to continue to operate at what we've been calling this double demand level. So if I go back to 2015, we doubled demand for that customer, doubled output for that customer going into 2016. We expect 2017, at least on an annual basis, to be by and large equivalent from a revenue basis to 2016. The mix underneath that changes a little bit and starting to sound like a broken record, but I will apply the same caveat on our collective lack of visibility in the second half, whether it's our customers, ourselves or our peers, but that's the assumptions we're operating with and that's what we're planning and has committed to do.

Great. Last question, just squeeze in, you mentioned you are rationalizing a product development roadmap. This has any impact on yourselves?

No. Essentially as we went through some of the detailed product planning and looking at the road map that identified some of these opportunities that we have to essentially put the technologies of the former Cascade Microtech and former FormFactor together, we also identified some redundancies in places where R&D dollars were being applied, an effort was being applied to essentially address the same chunk of market. And so those were things that were terminated. They were not bearing any -- producing any significant revenue. In fact, I don't think they were producing any revenue at this point.

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

Tom Diffley, DA.

Good afternoon. First, getting back to the new products that you alluded to are those essentially redesigned products that are lower cost, higher margin? Are they completely new products that serve new end markets?

The two examples that we're aggressively moving forward on are a common example of each. One is an area where by combining some of FormFactor MEMs technologies with some of the Cascade RF technologies, we're able to address a slice of the market that we really weren't competitive in before. And so that opens up a new chunk of served available market still within the production probe card space, but an area where we didn't really compete. So that's increasing our opportunity, our available market and the ability for us to go after a chunk that we really weren't competitive in before. The second -- (multiple speakers).

Similar to the vector that you created few years ago there?

Yes, similar to (multiple speakers) -- yes, from an increasing our opportunity in our truly served market inside the billion-dollar probe card market, I think that's true.

Okay.

The second one is an example where we found some technology that allows us to both simplify and increase the performance while reducing the cost of some of our mainstream foundry and logic products, not all of our mainstream foundry and logic product but some pieces of technology that will allow us to do a better job of serving in market we serve today, a market in which we compete today. And so we expect that some of these improvements will allow us to be more competitive and either gain a little bit of share but certainly improve our cost structure and gross margins. So examples of both in the decisions we've made.

Okay. Great. And then now that you have the increased portfolio of products and end markets, what is your view of seasonality at this point?

Well, obviously, a relevant question given Q4 and our current view of Q1. I think there's a couple of ways to look at it. When we look inside isolated businesses and I'll use RF production probe as an example where we're really tied to demand for probe cards to test BAW and SAW filters, that's very much a mid-year event and has a great deal of calendar seasonality in it and we see that in that business right now as we talked about in the prepared remarks.

DRAM historically has had some calendar seasonality to it. Obviously, the industry is operating completely out of phase with that today. I think some of those things are being driven by a more mature industry that has some more diverse demand drivers. And when we map that onto our revenue, certainly that helps damp some of the isolated seasonality we have in businesses like RF production probe. But we still see some of the seasonality elements in each of the individual businesses.

Having said that part of the strategy we continue to run in each of our businesses, and I talked about this in the prepared remarks for our production probe, is that we want to continue to diversify even these individual businesses to help smooth out whether it's calendar seasonality or in end-market device release-driven cyclicality, all of those things we want to become a bigger and more diversified supplier and to some extent have each of them damp each other out so that we have a more consistent business [to run].

Okay. And then finally, when you look at the transition of both your foundry and logic customers going from 14 to 10 nanometers, is there a difference in revenue opportunity for you or is it strictly just driven by wafer starts?

Assuming the number of designs per wafer start [phase today] then it's truly driven by wafer starts. We've talked about this dynamic a little bit in the past, but there is kind of a second order effect associated with yields that anytime customers move to a new node, the yields are typically lower. And as a consequence, for a given number of good [diode] they need more wafers and therefore need to test more diode and more probe cards. So there's a little bit of a buoyancy effect associated with the move to new nodes but it tends to be one that's not persistent, it's just associated with the lower yields and the yield ramp of a new node.

Christian Schwab, Craig-Hallum Capital.

Great quarter guys. So can you quantify for us the potential revenue opportunity on a yearly basis that over time driven by DRAM and millimeter wave in the automotive sector that you talked about?

So, Christian, Mike Slessor again, a really good question and one that we are still getting our arms around internally. Obviously automotive as a end market, so our customers' customers, is really driving significant use of silicon and as a consequence, gathering more and more attention of our customers and driving some interesting opportunities for us. We're still -- given that it's one step removed from our customers, we're still actively trying to understand the size of the opportunity and how it impacts us. But it's one that looks to be pretty significant and one that fits pretty well with FormFactor's strength. If you think about the quality requirements that the automotive industry has, that plays well to our electrical test capabilities, the accuracy of what FormFactor does. There's also some interesting subtleties associated with things like temperature ranges that play well to FormFactor's fundamental technology strengths associated with MEMs and the way we do design. So, simple answer to your question is we don't yet quite have a size for the individual markets we drive in -- sorry play is the words there, we participate in, but we know it to be significant based on what our customers are telling us and we view it as a pretty good fit to some of our core strengths.

Okay. Have you -- I'm sure you probably have on some testing boxes of the old Cascade, but there is a lot of hope that as we get to 4.5G and on our way to 4.9G and eventually to 5G, there are lot of those applications and next-generation networks could be millimeter wave based, have you guys had any opportunity to think about that or is that something that we need to get a little bit closer to or is that something that I'm wrong on and really is never going to benefit you?

No, I think it's a much longer-term opportunity than say millimeter wave in automotive. But it's something that we're having very active discussions with leading customers on right now. What I will say is 5G -- proper sort of 5G in the 60 gigahertz kind of band is really a 2020, 2021 kind of event. But there is a lot of preparation going on in the customer base.

Anytime our customers move to those kind of frequencies that's going to be a big opportunity for us, given the RF capabilities that we have in production probe. You've seen the growth of our RF production probe business driven by the BAW and SAW filters in handsets. As those frequencies went up and as those, I'll call it, performance requirements went up that drove customers to start to utilize our technology. We see a very similar trend in 5G, but it's a ways out there.

Okay, that's fair. And then my last question has to do with 2018 because right now you gave 2017 guidance. A, all things being consistent in the world if there is such a thing, would you expect that to be a growth year and if so, what would be the three most important things for us to monitor that would cause that to occur?

Okay. 2018 or sort of a -- I will talk about it from a year to two years from now that kind of timeframe. Given the caveats you provided or the boundary conditions you provided on all things being equal I think one of the fundamental assumptions needs to be that the industry continues to grow and the industry stays healthy. Remember as the leading supplier of probe cards and the leading supplier of engineering systems with high native share in those two markets, our growth is definitely tied to the overall industry growth. We've demonstrated the ability to outgrow the industry, but we need a healthy industry and for 2018 to be a growth year we probably need memory overall, both DRAM and NAND, to continue to be the healthy environments they are today where customers are investing and customers are making money. I think -- so industry needs to stay healthy, memory in general needs to continue on the trajectory it's on.

I think the other pieces for us associated with 2018 being a growth year are some of the opportunities that we've outlined in previous calls and in today's call. Certainly breaking into and serving the world's largest 10 nanometer foundry is a significant step forward for us. We have to execute on that. We have to turn that into more than just a single node single product kind of opportunity.

And then finally, I think some of the trends you talked about in the last question, associated with 5G in and around millimeter wave would be starting to bear fruit in the 2018 timeframe, in particular the millimeter wave automotive radar application. So again, given our diversification and footprint across the industry, it could be a lot of different things, but where I see things today those are probably the things to keep your eye on.

(Operator Instructions) I'm seeing no other questioners in the queue at this time, so I'd like to turn the call back over to management for closing comments.

Thank you for joining us today. And to our shareholders, thank you for your support through 2016 and in the future. I'd also like to take this opportunity to publicly thank the worldwide employees of FormFactor for the hard work that has fundamentally transformed our Company and launched our evolution from a probe card supplier into a test and measurement leader. Today, having successfully combined FormFactor and Cascade Microtech, we are in a significantly stronger position than we were one year ago with the benefits of increased scale, more diversified market drivers and leading products paving a way for additional improvements in growth and profitability. Thanks again.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may now disconnect at this time. Everyone have a great day.