FormFactor, Inc. (FORM) Q2 2007 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Second Quarter 2007 FormFactor Earnings Conference Call. My name is Jeremy and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of the conference. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the call over to your host, Ms. Brooke Deterline, Vice President of Investor Relations. You may proceed.

Good afternoon and thank you for joining FormFactor's second quarter 2007 earnings conference call. With me are Igor Khandros, Chief Executive Officer; and Ron Foster, our Chief Financial Officer. Igor will provide a summary of our second quarter performance, review our market segments and provide an update on outlook and long-term strategy. Ron will then take us through the financials, operational details and provide guidance. Please note, during the third quarter of 2007, the Company will be presenting at the Pacific Crest technology Leadership Forum in Vail, Colorado on August 7th. As other events and details become available we will make additional announcements. Finally, before I hand the call over to Igor, I will review our Safe Harbor statement. During the course of this conference call, we will make projections within the meaning under Federal Securities laws, including statements regarding FormFactor's growth and financial performance as well as our strategic and operational plans. These forward-looking statements are based on current information and expectations and are inherently subject to change. Actual results may differ materially and adversely to those in our forward-looking statements due to various factors, including but not limited to the rate at which the customers adopt to company's newly realized architectures, technologies and products, the rates at which customers implement manufacturing capability changes, make the transitions to smaller nanometer technology node and implement tooling cycles, the companies ability to effectively drive it's product development plans, introduce new products, that means its customers' testing requirements, the company's ability to continue to ramp design and manufacturing capacity and increase efficiencies in wafer fabrication and the company's ability to obtain tax and other cost advantages from it's engine of manufacturing operations in Singapore. Please refer to the company's recent filings on Form 10-K and 10-Q for more detailed information regarding development risk and uncertainties. FormFactor undertakes no obligation to review or update any forward-looking statements or update the reasons. Actual result can differ materially from those anticipated in forward-looking statements. Finally, a breakdown of revenues by market and geography and a GAAP to non-GAAP reconciling income statement are available on our website as its scheduled reconciling our GAAP and certain non-GAAP financial guidance with respect to FAS 123R, stock compensation expensing. I would now like to turn the call over to Igor Khandros.

Thank you, Brooke. FormFactor delivered another record quarter, with revenue, bookings and operating performance, all reaching historic highs. Advanced probe card demand grew yet again this quarter as multiple market drivers across segments propelled the market's growth. Revenues increased 12% sequentially to $114.1 million, non-GAAP gross margins were 54% and operating margins were 25.8%. We improved our production performance by reducing lead times and continuing to invest resources in new technology and product development. Market demand for DRAM remains strong in the second quarter, driven by DRAM bit growth, the ongoing transition to 70-nanometers and 1GB driven by Vista and seasonal strength in the mobile business. Having accelerated through the first half of year, we believe the transition to 70-nanometers is proceeding as expected. Typically, a 2-year event, this transition is still on the early stages, with the majority of the opportunities still ahead of us. We expect this increase in 70-nanometer design proliferation of 512 megabit DDR2, 1GB DDR2, DDR3, mobile and graphic DRAM. The growing memory requirements for Vista and Microsoft Office 2007 will also move the market towards 2gigabytes of DRAM content per PC throughout 2008, contributing to the strong DRAM bit growth of greater than 80% in 2007. As manufacturers accelerate their migration to 70-nanometer in the second half to support the DRAM bit growth and improve the profitability at persistently low DRAM prices, this should translate to continuing DRAM probe card growth for the rest of 2007. FormFactor will continue to lead the DRAM market as our latest product platforms PH150XP and s Harmony XP combine to address the current and future sales needs for mobile commodity and graphics DRAM. PH150XP serves the challenges of very high thin density of smaller devices and is the most cost effective solution for smaller devices with higher die count for wafer. With over 90% of the market currently in this range of 512 megabit density and below, our PH150XP provide a mixed base testing requirements and its four-touchdowns 300-millimeter capability to test 256 devices in parallel. Our latest Harmony XP product is a full wafer contactor focusing on larger device sizes. Harmony XP facilitate the optimal performance from customers entire test sales in two to three-touchdowns 300-millimeter testing of 1GB or higher density devices. It increases test throughput and test sales uptime, resulting in higher productivity and lower cost of test. With FormFactor's proprietarily TRE test resource extension technology, the Harmony XP platform can be expanded to test more devices in parallel and accelerate the move to one-touchdown in DRM wafer testing in the near future. Harmony XP will also enable customers' roadmaps by scaling through and supporting tighter path pitch, the smaller set size, highest probe density and highest probe counts in excess of 50,000 pins. We will face in Harmony XP as customers make the transition to 1 GB density over the next year and our product will enter the market in volume by year-end. Our known good die business performed very well this quarter, driven by seasonal strength in our mobile RAM and NOR businesses, service and consumer and mobile and applications. Adoption of mobile known good die applications droves strong high frequency tests at probe business, while the transition to 70-nanometer DDR2 resulted in an increased wafer level burning business. With FormFactor's known good die products, now in volume for their action at multiple memory supplies and our known good die revenues up over 60% year-over-year, we are seeing validation of our key macro pieces for the test market that more testing is moving from package to the wafer. We have been increasing packaging costs, more customers are searching for ways to cut costs especially with the current commodity DRAM pricing environment. But performing more validation at the wafer, package yields are improved and device performance has proven earlier making the benefits of wafer testing over package testing clear and further driving the migration to wafer test. We expect known good die product to perform well in the third quarter consistent with the seasonal consumer mobile cycle and continued strengths in the transition to 70-nanometers. Over the long-term, we anticipate continued adoption of FormFactor's known good die products to the major contributor to our growth. FormFactor is the only probe card supplier that offers a complete suite of known good die products providing unique benefits of higher parallelism, higher temperature testing and high speed testing to customer, we are uniquely capable of introducing new generations of known good die products for future higher performance devices, which will be increasingly sensitive to electrical signal integrity requiring our differentiating KGD solutions. Our Flash business had a strong second quarter, driven mostly by known good die for NOR and specialty NAND products. We continue to see strength in this segment as most customers moved towards higher parallelism to decrease their cost of test and towards high speed testing to enable known good die application. We made progress in the development and qualification of our NAND Harmony OneTouch product this quarter and recently demonstrated superior performance on our Harmony OneTouch probe cards in production at a customer. These cards reduce stand [ph] damage, improves electrical reliability and provided higher uptime versus other full wafer contactor technology. We have also received new design wins for this product. Our overall design capacity has been constrained due to an increase in new design demand and high design intensities associated with new product platforms. And our Harmony learning on various tests of platforms has continued. Though we do not expect to see a significant increase in NAND flash revenue in the third quarter, given customer device tooling cycles and design constrains, we plan to focus our efforts on improving design capacity every time and increasing our Harmony penetration in NAND market. Our logic SOC business continues to perform well, driven by the new technology node transitions for area flip chip microprocessor products. Development of our new products with a peripheral penned out wire bonded device market continued this quarter, as we introduced our fine pitch high parallelism product for automotive applications. We completed the successful qualification of this product at our first early adopter customer and anticipate multiple design wins over the next several quarters, with volume production in early 2008. This product allows the step function increase in parallelism and addresses the many unique testing challenges associated with the automotive environment, including increased test times due to embedded memory, high temperatures and probe path pitch and size reduction. Similar to our answering to DRAM market years ago, we are well positioned with our advanced MEMS probing technology to redefine SOC market, which is currently testing only one or few devices at a time. As complexity and testing cost requirements increase, FormFactor will lead the logic SOC market to lower overall cost of tests through higher parallelism. We continue to see the wire bond market as mainly a 2008 opportunity, recognizing that this is very different from our existing markets in that both customers and devices are very diverse. That's why we anticipate customer acquisition qualification and volume ramp to occur over a longer timeframe. First was design wins and then increases in both our number of customers and probe card volume for design. Our overall outlook for 2007 market for advanced wafer probe cards remains unchanged from the view we provided in January. Advanced probe card market remains on track to grow at a robust 25% in 2007 compared to roughly flat growth expected for the entire semiconductor capsule equipment industry. FormFactor is well positioned based on the strength of the DRAM market and increasingly healthy NOR flash market, continued emergence of the NAND specialty market and the strength of our existing logic SOC business. Similar to the trend last year, we expect to see fourth quarter seasonality in the consumer segment potentially offset by the accelerated migration to 70-nanometers and new market penetration. Our deep portfolio of industry leading technologies and products, execution of the increases in design capacity and successful rollout of our new product should drive our near term success. Now I would like to take a moment to discuss the competitive landscape as we see it. Advanced wafer probing has been gaining importance for semiconductor manufacturers, leading to steady growth in the advanced probe card margin. This trend has obviously attracted an increasing number of companies to this market, some from the latest side of tungsten and vertical needle manual cards and from 2D and 3D MEMS. FormFactor's 3D MEMS probe cards was wafer processing-based with a graphic precision, provides superior probing accuracy, manufacturability and scalability. That scalability is crucial to enabling customers next generation technologies and performance requirements as well as to reducing their overall cost of test. We believe FormFactor's proven proprietary 3D MEMS technology invented and advertised by FormFactor will continue to lead the probe card market growth. While other technologies will co-exist, we believe they will have relatively limited growth opportunities. FormFactor is the number one player with over 50% of the overall advanced wafer probe card market and we generate nearly five times the revenue of our two nearest competitors. Additionally, we are the largest advance probe card supplier in every geographic region including Japan. Our close strategic relationship with our customers worldwide as evidenced by our recently announced agreement with Elpida will enable us to integrate and align long-term test strategies to ensure consistent test cost reduction year after year. The combined strength of our technology leadership, our comprehensive product portfolio, strategic customer relationships and global manufacturing capability including our expansion into Singapore, differentiates FormFactor from the rest of the industry. Historically, we've witnessed an increase in competitive activity with average shift in testing parallelism. We observed that in the previous shift of nine-touchdowns to four-touchdowns. And we expected again with the current shift from four-touchdowns to full wafer contactors in DRAM. We are confident than FormFactor is as uniquely positioned to enable and define the industry's condition to one-touchdown DRAM wafer probing as we were in defining the four-touchdown transition. To give an example of one set of the future challenges that we plan to solve, DDR3 will drive about 20% increase in the number of pins per die over DDR2. This will potentially translate into up to 100,000 pins for probe card one-touchdown wafer contactors and DDR3 is ramping in delay 2008. We also anticipate DDR2 contactors with over 70,000 pins during this timeframe. FormFactor 3D MEMS technology and our world class MEMS 7DNHVM factor are best positioned to meet the challenges versus any competitive approach. Another example of our technology leadership is our recent demonstration of a new breakthrough MEMS spring contact technology capable of full area array 20 micron path pitch. This contactor technology is well suited to address the future testing needs of all semiconductor devices. We will continue to create new markets and new growth and these new capabilities are and will be protected by our strong IP. Today FormFactor is one of several companies leading important market segments related to semiconductors. But what makes our position unique is today semiconductor field is that we are leading a growth market, during the times when profitable growth is hard to come by in our industry. This uniqueness present a complexity in interpreting FormFactor's competitive landscape from an investor standpoint. The important point is that the competitive dynamics in our probe card market are not as used on dollar gain, where one company's gain is automatically not a company's loss. In our growth market, all of the growth dollars cannot be consumed by one company due to the cost of nature of probe card products. But as in the past, we plan to continue to redefine wafer test economics and we will continue to amplify advance probe card market. Naturally, competitors will have their opportunity to participate in the growing market. But as the catalyst for transformation and the growth, FormFactor is well positioned to continue to be the long-term and primary beneficiary and to outgrow the market. In summary, the second quarter of 2007 was another strong quarter for FormFactor. We are very pleased with the company's achievement of record revenue and profitability, expanded factory capability and continued new product development. I would like to thank the entire FormFactor team for their hard work and efforts in making this another successful quarter. I will now turn the call over to our CFO, Ronald Foster who will elaborate an operations, operating results, financial performance for the second quarter and will provide guidance for the third quarter.

Thank you, Igor. Revenues for the second quarter increased for the 10th consecutive time and reached record levels at $114 million, up 12% over the first quarter of 2007 and 24% over the second quarter of 2006. DRAM revenues increased 6% sequentially to $80.1 million and accounted for 70% of total revenues in the second quarter. Flash revenues were healthy and increased 21% from the first quarter to $20.2 million and 15% over the second quarter of 2006, representing 18% of total revenues in the second quarter. Our strong performance in Flash this quarter resulted from healthy growth in NOR, due to a significant customer's high volume ramp. While we did receive some revenues on NAND Harmony OneTouch product in the quarter, overall NAND revenue declined. Production shipments and qualifications and additional size continue with one customer, while qualification efforts with additional customers have been slower than expected. The differentiating capability of our Harmony platform has been demonstrated in production and qualification trials and we remain confident that we can penetrate additional customers as we progress in our qualification activities. Logic SOC revenues was $13.8 million in the second quarter, comprising 12% of revenues. This represented an increase of 37% sequentially and 82% over the same period last year. The flip chip logic business was very strong in the second quarter driven by the ongoing transition of one key customer's MPUs and chipsets to advance technology nodes. Revenues from known good die products consisting of wafer level burn-in and HF Cap were strong at $17.6 million, an increase of 41% over the first quarter and 62% over the same period last year. This growth mirrored the strength in our NOR and mobile RAM businesses resulting from the seasonal increase and demand for consumer devices and from increasing adoption of known good die and new applications. The break down of revenues by markets and geographies is available on our website. Bookings for the second quarter grew to $130.3 million, with increases in all segments. Increase in adoption of our new advanced product platforms and improved market visibility by our customers drove strong bookings as well as turns reduction from 60% in Q1 to 50% in Q2. The order file continues to contain an unprecedented level of new design demand as it has throughout the first half. This is the positive indictor of future business opportunity but is stretching our design resources even with the additional hiring we've executed this year. Now I would like to highlight some of the key GAAP results. Non-GAAP results will be called out where it provides additional value. As scheduled, the price GAAP to non-GAAP reconciliations is available on the Investor portion of our website. Gross margin for the quarter was 53%, a 500 basis point increase from Q1. Stock comp expense declined 700 basis points quarter-over-quarter. Non-GAAP gross margins of 54.0% was down slightly from 54.2% last quarter and in line with our target range of 53% to 55% for the fifth consecutive quarter. This is noteworthy as we started production of key technologies in the factory during the quarter and began investing in Singapore manufacturing resources as well. Operating expenses for the quarter were $37.4 million or 32.8% of revenue compared to $37 million or 36.2% of revenue in the first quarter. We continue to make investments in labor and materials in support of R&D activities and incurred higher G&A expenses related to the Singapore startup and the legal action to protect our intellectual property portfolio. Offsetting thus increase was lower stock-based compensation as Q1 executive severance costs were partially offset by a new annual option grant. Operating income for the second quarter was $23 million or 20.2% of revenue, compared to $16.7 million and 16.3% in the first quarter. On a non-GAAP basis, operating income for the second quarter exceeded our targeted level at 25.8%, up from 23.8% in the first quarter. Volume leverage, factory execution and good product positioning, all contributed to the improved performance. As anticipated the tax rate was higher in Q2 to 32.6%, principally due to plant startup investments in Singapore and fewer stock exercises. Net income for the second quarter was $18.6 million or $0.38 per fully diluted shares versus $14.8 million or $0.30 per fully diluted share in Q1. Stock compensation charges were $6.4 million, or $0.08 per fully diluted share for the second quarter compared to $7.7 million or $0.11 per fully diluted share in the first quarter, which included $1.4 million related to separation agreement. Our Singapore expansion continues, having signed a 30-year prepaid land lease offer and moved into the design phase of building construction. In preparation for the next stage of anticipated growth, we are accelerating our plans by designing a combined clean room for the backend assembly and test operations and front end wafer fab and in the first phase of construction. We will bring the wafer fab online and install equipment as required potentially beginning 9 to 12 months after the backend operations have begun at the end of 2008. We are also planning clean room space for advanced R&D lab for product and process development. We are enthusiastic about our expansion into Singapore and believe that it offers an ideal side for both backend and a second wafer fab perform factor in the late 2009 early 2010 time frame. As previously indicated, we expect to fund expansion into Singapore with anticipated revenue growth within the ranges of our target P&L model on an annual basis. In the second we will begin funding part of our R&D investments out of Singapore. This early investment sharing between our Singapore and U.S. operations will position the company to benefit sooner from lower tax rates in Singapore associated with our intellectual property assets. Now typically these startup investments could be carried forward and credited against future Singapore taxable profits, thus reducing the adverse impact on FormFactor's near term tax rate. However, the favorable tax exempt status we have been granted in Singapore will likely make these loss carry forwards unusable. As a result, our tax rate will increase to around 39% for the second half of 2007. A similar impact is expected to occur in 2008 as well. With the ramp of Singapore revenues in 2009, we will begin to benefit from the cost advantages of operating there, most notably decreasing our corporate tax rate, initially below 2006 levels, probably in the high 20% range. As volume continuous to ramp in Singapore, the company's tax rate will drop significantly. We see these step as essential in planning for the next phase of FormFactor's growth and are confident that this project will give us even greater tax and other cost advantages over the long term. Now to the balance sheet, cash and marketable securities totaled $528 million in the second quarter, an increase of $20 million from the first quarter. Operating activities generated $34 million of cash in the quarter. DSO decreased to 41 days in the second quarter compared to 43 days in the first quarter, as a result of improved shipment linearity. Net inventories increased by $5 million during the quarter to $32 million to accommodate increased customer demand for Q3. During the second quarter, $14 million was spent on capital expenditures for Livermore and regional facility upgrades and expansions. As I mentioned in Q4 '06 earnings release, planned investments for Livermore and Singapore capacity expansion will likely result in capital spending higher than our 12% of sales target range. Given the current Singapore schedule including acceleration of the wafer fab clean room, we expect capital spending to be in the range of 13% to 14% of revenue for 2007 and potentially somewhat higher in 2008, depending upon revenue growth. Headcount remained flat for the quarter at 1108 people. Direct labor and contractor reductions offset increases in sales, marketing and R&D headcount. In summary, Q2 performance exceeded our expectations. Advanced probe card market growth and FormFactor's growth prospects remain solid and on track with our projections. Our technology position and depth has never been stronger. Although design resource limitations and Harmony ramp challenges have put us behind in our plans to expand into NAND flash, as Igor mentioned, our overall technology and product differentiation remains unsurpassed and is progressing at a rapid pace with customers on several fronts, as evidenced in recent press releases. Now for our guidance for the third quarter of 2007, we expect Q3 to be another healthy growth quarter, with revenue between $122 million and $127 million. We project non-GAAP operating income in the range of 25.5% to 26% and about 5 points of incremental stock comp expense. GAAP EPS should be in the range of $0.38 to $0.40 with non-GAAP EPS of $0.45 to $0.47. With that, we will open the call for questions. Operator? Question And Answer

Thank you, sir. [Operator Instructions]. And I will note that we are allowing one question per person with one follow-up with time permitting. Your first question comes from the line of Jim Covello with Goldman Sachs.

Great, good afternoon guys. Thanks so much. Congratulations on the good results. Question first: can you order the drivers of growth for FormFactor for the second half of 2007 and for 2008. If you are starting with the drivers that are going to drive the most growth down to least growth for the second half of '07 and '08?

Yes, so as I mentioned in the script 70-nanometer transition is just beginning really and that is going to drive significant revenue growth in DRAM and it will basically you'll have proliferation of designs, on 70-nanometer, you will have 1gigabit devices ramping because that is going to be the sweet spot of satisfying Vista requirements and Microsoft Office 2007 requirement. You will have continuing growth in known good die revenue as its relates both to mobile RAM and stock package execution and as its related to increasing adoption of known good die testing on some aspects of known good die testing in commodity DRAM. You will have FormFactor penetrating new markets as you know, we are working hard to gain market share both in Flash and in SOC, no markets will continue to the healthy in this potentially sound growth, so of all of these elements we believe will continue drive our real growth in the second half and going into 2008 logic and SOC will be some of our biggest story.

So my follow-up would then be, NAND Flash kicking in 2007 is not required to hit the kind of targets that you are talking about for the rest of this year and the other part in next year?

We... I would believe that, again we will work very hard to continue working so. NAND Flash, Harmony introduction and some of NAND flash from my own remarks some of it has to do with really unprecedented design activity and we again constraint in our design resources. Now that's something we are addressing of course, we are not sitting still. But in those cases it does compel us to prioritize design resources to its customers and applications were phone factor is mission critical where we can, customers can without us, and in some cases we have to not take certain NAND Flash, but so all in all, your comment is correct, we do not anticipate in the second half very significantly NAND flash growth, but we are working hard to grow in NAND Flash markets over the long term.

And we are saying real strength Jim in our core markets, both our DRAM markets and our existing logic market, NOR flash, all showing very strong through the year.

One more thing on NAND flash is that NAND flash is beginning... there are new trends, right? There are now specialty NAND Flash. I think that they are revolving and beginning to compete for share in the cell phone markets, right and trying to address even executive product of the start packages. And for example, there is a fuller NAND out there, other modifications of flash, that's get higher read and write speed. And those... here high approved container for bid, in the way similar to high value and Known Good eye or mobile rent about, where we can significantly higher probe card per bid. So those markets are very interesting to us and we are focused on those as well.

Okay, thanks so much, Congratulations again.

Thanks Jim.

And your next question is from the line of Gary Hsueh of CIBC World Markets. You may proceed.

Yes. Hey, thanks for taking my question. My question here is based on margin performance and leverage that you can pull there. I mean obviously it is little disappointing that we've seen lot of margin, I am sorry multiple compression due to unclear sort of directionality here in terms of margins. I am just wondering if you could kind of elucidate what are some leverage you could pull here not only in operating margin but specifically on gross margin that significantly or perhaps improve moderately the drop through on income and revenue growth that I think are all on board with --.

I just wanted to start of course Ron will give you more color. But all in all, we are pretty comfortable with the financial model the company is running within right now. And that is as we've communicated in multiple occasions, its in the range of 53% to 55% gross margins, its in the range of 25% operating margins with significant investments in R&D. And so that's in general the model, how we would like to grow this company, remember this is a growth company.

Then Gary, we are in our model range and as I mentioned for a numbers of quarters now, have been doing well. In fact, we had predicted that although Q1 was off our operating model range, we would bring it back in within the year and year-to-date we are already at 24.9% non- GAAP operating income. So sooner than that we had originally profiled and we certainly see strength continuing through the year. As Igor mentioned, we are going to exchange our operating our model parameters and we are continuing to invest in growth for the future including the big move to Singapore, which has been already been reflected in our cost structure and will be through 2007 and 2008, but as I commented we will on an annualized basis plan on staying within that target operating model construct and still fund all that expansion.

Alright great, thank you.

As a remainder ladies and gentlemen, please limit to 1 question and then queue up again if we have time for a follow up. Your next question is from the line of Edward White with Lehman Brothers.

Thanks. I was wondering if you can talk about some of things you can do to get around some of the constraints in design resources, and sort of the timeframe over which you think you can get to a plan where you've got more design capacity.

Yes, no, that... this is Igor Ed. I... as I mentioned, we are working on that. Basically there are 2 ways; you hire more people and you automate to a design tool and we are doing both and the design demand is very, very high, but we are both doing continues improvement actions but we also trying to think outside the box, how to grow our design capacity over short and long-term. So its really adding people adding them worldwide in different time zones and it's automating design tools.

So if you look at the timeframe over which you plan at sort of get around that is it something that you can fix say, within the next few quarters or is it a gradual process... what kind of process is bad and what sort of the time frame you would look at?

well the plan is fix it in shorter timeframe than they had --

Okay

Within... I don't want to be a within the few quarters being design constrained heaven to heaven sent that. We are gearing into new markets whether it will be higher demand than design capacity. So in general we will need to work both on continuous improvement actions and step function increases in our design capacity in this company but, we are working very hard to put it quickly, first half have been capacity constrained.

Finally related to that, will Singapore be able to help from a design constraint stand point?

Yes. There will be significant designer stores that's already been added in Singapore.

We have already added a few people Ed. One of the point I just add to what Igor said is that when we are brining on new products, not only do we have a ramp that goes in our factory, which we execute. But we also have to bring on the design capabilities which just start with is more of the manual process. And as Igor mentioned, you get automated and you come up that RAM and then you have more efficiency. So when we are rolling out so many new products and technologies, we have that dynamic going on in the company.

And one more regarding design, the new products, when you introduce a new product platform, it always been the case. That at the introduction time, it does drove significantly more per probe card design, on design capacity and then as the product comes stable and introduced into the market, it goes away. So, there is a confluence of very high demand and confluence of having to introduce several new products at the same time. That's where we are now working through.

Okay.

I believe we are working through it well.

Great, thank you.

Thank you Ed. Operator: Your next question is from the line Harlan Sur of Morgan Stanley. You may proceed.

Hey, thank you. Good afternoon and great job on the execution in the quarter. Igor, lots of new products, lots of innovation announced by the company in the quarter and I know you formerly introduced the Takumi, we saw your CMOS image sensor chords at SEMICON West, introduced the fine pitch logic technology yesterday and a few others in the quarter. If you take all this into account, I am just wondering how much does this increase your dollar market opportunity over the next several years?

Well it's a... these are all some of the new market segments that we are entering. For example, logic SOC where in our break down of different markets in the company say, image sensor would be in logic SOC part of the business. That is a very large opportunity. That's a very, very large market. So not only we are going to plan to gain the market share and derive transition for this advanced technologies and logic SOC but we are also by introducing this higher parallelism product such as image sensor and the Takumi is at the first step in parametric, you will see there has been pretty exciting things in that side of the business where companies use our probe cards for yield learning and engineering and potential inline measurements. Some of those things amplify the markets, we really create markets, where you transform markets. So yes, all of these should bode well for our future growth.

Okay great. And then in the near term, in your core DRAM segment, your DRAM customers continue to focus on reducing test cost of the packages and I think you might have touched on this and they are really focusing on outputting ETT and UTT DRAM and my sense is that this is pretty more important at the wafer level probe. I guess, the question is would you agree with this and is this helping to drive some of the demand trends in the second half of the year?

Yes, what's happening in DRAM, for example, when you do wafer level burning, very early not only you would use the package roll out at final test, and package is 20% of DRAM costs. But also you can re-capture some of the devices through laser repair, right as opposed to doing it at the end and not being able to do that. So, doing more and more test to the wafer, doing more and more test closer to front end not only allows you to manage your supply chain downstream, which means, you manage packaging, and you manage this package yields, but also it allows you to up staying very quickly very valuable information during the times where people transition to new technologies at an alarming frequencies. So the speed of learning basically separating people who potentially can do well in this markets and people who won't. So we have a full suite of these products to allow companies to do entire validation of DRAM devices. And wait, I will give one really exciting possibility. You look at DRAM industry and you look at huge portion of DRAM shipped as the D-modules. And if you open a D-module under the heap saying you will find packaged DRAM devices that are put on a little circuit board, and that's the D-module. Well, if you validate your chips at the wafer level, you don't need those packages, right. You look at the company that spends $5 billion a year in DRAM cost and they spend billion dollars of packages. So you could deliver... so when I was talking here kind of small opportunities or border line opportunities, we are talking in an industry that is struggling to make money, right. We are talking of huge opportunities, so I believe that's the potential of moving more and more wafer test, more and more test from what's the final package is to the wafer and its beginning and its taking time, but when it's happening we will be a very strong beneficiary of that.

Thank you. That was very helpful.

Thanks Harlan.

Your next question is from the line of Mark Bachman with Pacific Crest Securities, go ahead.

Thanks for taking my call. Ron, can you discus this tax rate a little bit better. Can you give us guidance as if you didn't... I am assuming that you are using the 39% tax rate for Q3. What would your guidance have been without that tax, I am guessing about $0.04 higher. And just kind of a bigger question, was this a surprise that just came about in other words, why the guidance now on this tax, how come we couldn't heard about this sooner?

Mark, the tax rate is... if you look at the rate we had this quarter of about 34.6%, would have been roughly what would have carried through the year. What we have done is actually accelerated our investments supporting the transfer of our co-funding, if you will, of intellectual property assets out of Singapore. What that enables us to do is to get the benefits of the tax exempt status in Singapore on our intellectual property contributions sooner than we otherwise would have. So the way to think about it is that you pay a little more upfront here in a few points of tax rate, but as we ramp up volume in Singapore in 2009 and beyond, the tax rate will come down more substantially than it otherwise would have because we've got the intellectual property value in Singapore. Now the other point I made in my comments is that okay, the upfront investments like funding R&D at Singapore normally you could put up on your balance sheet at deferred tax asset and then and that wouldn't effect your near term tax rate and you take that against your profit when you start making profit in Singapore. The problem that you have is when your tax rate itself is zero, you don't have an asset that you can put up against taxable profit in the future, so that's a good problem to have but it does raise our tax rate in the short run.

And then the guidance without this tax would have been what, roughly $0.04 higher?

In that range.

Okay. And then just my follow-up here, Ron, can you discuss the revenues by geography here. There was a huge ramp in Japan and I am just wondering, is this all from your largest customer or are you accounting for your JV in Taiwan through Japan or by chances as a brand new customer?

In terms away we report our revenue in our reporting, we do report some of our U.S. or some foreign companies through the U.S. subs but that's mainly in Korea where we report on the U.S. numbers that we provide on the website sales in U.S. that are actually to Korean companies through their U.S. subsidies. We don't have that same construct with Japan, so the Japan numbers are fairly clean in terms of the volume and we are actually shipping into Japan.

And is that from your largest customer?

Of course that involves our largest customer.

Does it involve more than your largest customer?

Yes it can.

Thank you. Operator: The next question is from the line of Doug Reid with Thomas Weisel Partners. You may proceed.

Thanks for taking my questions and congratulations on the execution. Question about known good die, and I am trying to settle a little better the ramp for both wafer level burn-in and HF cap. Could you help me understand, just how lumpy that business appears to be as you look out two quarters and then if you could may be characterize '08 to the extend possible in terms of recurring business there?

So known good die is driven now by mobile RAM, NOR flash and increasingly as I mentioned before, you get DDR2 known good die business, mainly wafer level burn-in business. As I mentioned, Q4 is seasonally has been historically for us a quarter where consumer demand... we are a quarter ahead of the end markets kind of something like that, so Q4 has been a softer quarter for us in mobile RAM and in a consumer market bound devices that are tested without probe cards, but longer tem outlook 2008 and beyond for KGD is very bright.

Just as a follow-up to that, it is minor [ph] if you look back to '06 that seasonal decline in Q4 in part related to the high concentration of revenue at a single customer. How is the... how is revenue branched out, what is the concentration rather? What are the top two customers in percent total?

Well, we are now shipping known good die to multiple customers, so my remarks as to Q4 potentially been so again for consumer market bound device tested without probe cards, is it has to do with the industry and seasonality trend not single customer remark. We are shipping known good die probe cards for high frequency tests and wafer level burn-in to mobile RAM, we are shipping high frequency test probe cards to NOR Flash customers and it's a pretty large business for us. And we are shipping wafer level burn-in probe cards to commodity DRAM customers and we are talking multiple customers, so this is now spread on many customer.

Okay that's helpful. Thank you.

Your next question is from the line of Tim Arcuri of Citigroup. Please proceed.

Hi guys. Igor, you have been talking about the industry growing about 25% this year and I think you before said that you would grow list 25% this year. if I take just take the midpoint of your revenue guidance and if I certainly you are going to grow that 25% this year, that implies that revenue in Q4 is flat to down. So with respect to what you think you will grow this year relative to the market what would your comment be there?

This year we plan to grow 25 or over 25%.

Okay. So with respect to the fourth quarter, it... at this point it looks kind of down maybe flattish.

Tim, as you know I am not trying to avoid your question, but wrongly next quarter.

Of course okay, alright, thanks.

And your next question is from the line of Mark FitzGerald with Banc of America Securities.

Thanks. You got it around, I understand the kind of the design issues on the NAND side of the business, but on the manufacturing side what are the challenges you got to solve here to get this product up and ramping and expected out there?

Yes, as we've been pretty public with the fact that we are behind Harmony in Harmony introduction as compared to say, a year ago when we said. We want it to be of course further ahead then we are today. We have made very significant progress in the last industry, we had a mighty amount of resources, and by mighty, I mean by the standards of probe card industry. We have significant focus in, significant very brilliant resources on this and we are making progress. And the main issues making this Harmony platform working for multiple testers and it has to do with test sale integration and it has to do with fitting into a legacy interface design. That was not designed for such a probe [ph]. So and, and that's what we are working through. We believe we will work through this, we believe that we will be very, very well positioned for new tester platforms that will enter the market. For example, if you want to do two-touchdowns or one-touch down in DRAM, it will be our Suguri [ph] platform. So, and we just believe that what we are learning right now has to do with integration into legacy tester platforms.

And just a follow-on there, any issue in some of these newer markets like the logic SOC or any of the other markets you are addressing in terms of how many go back considered intralegacy that you faced today in Flash?

That was a very different probe card and in SOC, we are introducing probe card that can do a 32 or 64 devices in parallel testing, which is completely revolutionary for SOC and will do just complete marvels to delay for test economics in SOC. But this is only one-fourth or one-eighth of the parallelism in the testing areas, right that we do in DRAM. So now our challenge is with Harmony and now should not be indicative of what we might experience in SOC platforms. Having said that it will require... now you have many more tester platforms, so you need engineering and you need designer resources to get those things on the SOC side and that's we are focused on. We formed separate business units, we have separate focus teams now both from business standpoint, engineering and execution standpoint focusing on these different market segments and customers and we are making progress in SOC.

Thank you.

Your next question is from the line of Patrick Ho of Stifel Nicolaus; you may proceed.

Thanks a lot, and congratulations on nice quarter I think following Mark's question about the NAND flash harmony product, how much would you say is the combination of both your own, like the design capacity shortages that you are experiencing versus the customer interest. It sounds like it's manufacturing the biggest issue that you are facing or is it the other factors as well?

We are working through Harmony, new Harmony platform introduction. Those issues again, we are making progress on those, its happening slower but we are making progress and we made good progress during Q2. In one case, the product is running in high volume production and it was benchmark against alternative and it is very well in several areas, it is a better product. We have overall design constraint right now due to very, very high design demand in general. And as you can see we are growing our business, at the healthy churn and that puts significant pressure on design resources. On the slide situation, when we are faced with a choice of where to prioritize our design resources, believe me, we will always prioritize it for cases when customers absolutely depend for NOR, to run their fab, as opposed to cases when we are working hard to gain market share in the end market. So that was the nature of my remarks. And as we have more design capacity, we believe we will be gaining more

Okay great. A final question on the KGD market, where do you... you know, it's obviously grown pretty fast over the year so far, where do you see it by the end of 2008, how much of a percentage of revenues do you think you will get on the KGD market?

Well we... again, we see this as a significant growing markets for FormFactor, so you should see... if I had to guess between 30% and 40%. But this is not the number that we are tracking regular basis. I mean looking at year, year and half ahead, its not something that we are looking at all the time, but if I had to guess, it's 30% to 40% of revenue.

And your final question comes form the line of Colin Mcardle with Needham & Co. Colin Mcardle - Needham & Co.: Hi guys. I believe on the last quarterly call, you stated that the manufacturing capability in Livermore could sustain $125 million in quarterly revenue. And based on the high end of your current guidance, obviously you have increased that and I wonder what that number was currently and where you hope to see it by year-end?

Hey Colin, this is Ron. We talked about the current capacity last quarter of our fab at about $130 million of capacity. We are able to increment that capacity step wise by adding machines in bottleneck areas step wise as we grow here through 2007 and 2008 prior to bringing up Singapore. So we got plenty of room to expand into next year, but the current capacity as I mentioned last was $130 million, we are a little bit above that now and we will keep scaling that as we need.

Actually the scaling of capacity is one of the areas, enormous amount of work and planning has been put into that and we believe we can scale capacity successfully over the next... manufacturing capacity over the next many years ahead of market demand. We will... the way it is designed actually a lot of brilliant work went into that and for us, the lead time to increase capacity, also something to industry and much better and we can react to market conditions. So we are very confident we can grow our capacity with demand, we are ahead of demand. Colin Mcardle - Needham & Co.: So is it fair to say as a good quarter unfolds, you could have $5 million in capacity just by tweaking Livermore?

Our manufacturing guy will probably choke me, but down for 5 million yes, tweaking yes, emphasis on tweaking. Colin Mcardle - Needham & Co.: Alright, thanks guys.

Thank you.

And at this time, I would like to turn the call back to Mr. Ron Foster for his final remarks.

I want to thank you all for joining us today, and we certainly enjoyed it and we look forward to seeing you at our future conferences and on our next earnings call. Thank you very much.

Ladies and gentlemen, thank you for participation in today's conference. This does conclude the presentation and you may now disconnect. Have a wonderful day.