Good day everyone and welcome to this FormFactor fourth quarter 2008 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to FormFactor's Vice President of Investor Relations, Mr. Mike Magaro. Mr. Magaro?

Thank you, Martin, and welcome everyone to FormFactor's fourth quarter 2008 earnings conference call. Joining me on the call today is Chief Executive Officer, Mario Ruscev and Chief Financial Officer, Jean Vernet. Two quick items as we begin. First let me remind you that we'll be discussing our GAAP P&L results and some key non-GAAP results to supplement understanding of our financials. A schedule that provides GAAP to non-GAAP reconciliation is available on the investor portion of our website. Second, a reminder for everyone that today's discussion contains forward-looking statements and that FormFactor's actual results could differ materially from those projected in our forward-looking statements. For more information, please refer to the risk factor discussions in our Form 10-K and subsequent Forms 10-Q and in the press release today. With that, let me turn the call over to Mario.

Thank you, Mike. Our fourth quarter results reflect the unusual time our industry is going through. A sharp decline in demand due to economic climate followed a major crisis due to supply. The retrenchments we have seen by our customers is unprecedented in both its speed and depth. Market and economic conditions are exceptionally challenging. The semiconductor industry is experiencing its most serious downturn in history plagued by retrenchment in consumer demand impacting everything from personal computer to cell phone to flat panel displays. The impact of this slowdown has significantly reduced the demand for memory which added to overcapacity and a weakened state of our customers. In the near term, there is uncertainty on the financial stability of some of memory customers which has resulted in exceptionally low visibility for FormFactor. We can't really control all these external economic events, but we are working very hard to manage our internal operations, our technology innovation and our overall competitiveness. With that, I'll first briefly discuss the current state of our business segment starting with DRAM. Fundamentally, the DRAM market is very weak, but we're encouraged with the efforts within the DRAM industry to both consolidate and take capacity off line. We believe capacity cuts and consolidation will be a central theme in early 2009 and are hopeful that this will serve to bring supply back into balance with demand, something we have been awaiting for quite some time. Once consolidated, the run for efficiency should overcome the run for capacity which is good for us. In Flash, we currently have a cautious approach in the near term. Due to our customers' overcapacity issue, the NAND Probe market is soft, but when qualification process of the major (ph) NAND company which will significantly improve our position in that market. In NOR…

Thank you, Mario. Let me start with a summary of our fourth quarter results. Revenue was down due to weakness across the memory market. Total revenue was 39.9 million, down 24% sequentially. Fourth quarter revenue for DRAM was 29.2 million, down 17% from the third quarter and a decline of 67% versus the fourth quarter a year ago. Revenue in the Flash business was down due to weak NAND pricing and cash conservation from one of our primary customers resulting in a material delay in order activity. Flash revenues for the fourth quarter were 2.2 million, down 74% from the third quarter and 89% versus the fourth quarter a year ago. Revenue in the SoC business was down due to the weakness in the microprocessor and handset markets leading to a reduction in order activity. In addition, we saw other push-outs in the wire-bond segment that contributed to the decline. Logic revenue was 6.5 million, down 14% versus the third quarter and a decline of 37% year-over-year. Revenue in all geographies declined year-over-year with Japan being the only region up sequentially. GAAP gross margin of 1.5% was down 21 points from the third quarter and down approximately 50 points from the fourth quarter of 2007. On a non-GAAP basis, gross margin was 4.5% for the fourth quarter, down approximately 20 points from the third quarter and a decline of 48 points from the fourth quarter of 2007. The gross margin deterioration compared to last quarter and year-over-year is a direct result of both weak demand and high fixed costs. In addition, (inaudible) was impacted negatively due to cost associated with product shift, but without recognition of revenue. As we responded to reductions in demand, we scaled back costs across functional groups. On a GAAP basis, spending on R&D and SG&A…

Thank you very much, sir. The Question-and-Answer Session will be conducted electronically. (Operator instructions) And we take our first question from Patrick Ho with Stifel Nicolaus. Please go ahead, sir. Patrick Ho – Stifel Nicolaus: Thanks a lot. A couple of questions, first off, in terms of your 2009 CapEx, you mentioned it was going to be flat year-over-year. With a lot of your cost cutting and just some of the downsizing particularly in your Livermore facility, can you explain why CapEx isn't going down for you guys?

The CapEx we lined up for 2009 first of all is the number I gave is an indication which is not a fixed cost and we have the discretion to bring it down if appropriate, but it's going to be targeted on investment that relate to some new developments which hopefully will bring us some payback as well as some investment in Asia which are essential for deployment. But rest assured that this number will be closely monitored and will be adjusted appropriately if needed. We just give that indication as an anchor point for you guys to have a reference point. Patrick Ho – Stifel Nicolaus: Okay, fair enough. In terms of your R&D investments as you look forward to 2009 in this type of constrained capital environment, I guess how do you determine where you're going to allocate your dollars towards what type of product development (ph) whether it goes into Memory, whether it goes into Logic, how are you allocating dollars towards these different products?

Well, the way we allocate, we all realize that R&D, as the market goes this way that R&D becomes a pretty large burden. The way we choose our project (ph), what we did in fact we did cut our R&D by some and we did choose the projects that we felt were very important for our future in the really near to medium term. So we have a few priorities I would say. The first one is to accelerate our differentiation in DRAM. Next one is also to allow us to go and gain market share in markets like NAND Flash where we believe that our position is too weak and we need to be more present. And the other one is also to ensure us to grow much faster and grow faster in SoC business. And then we have some of new ideas for new projects which will come slightly after, but this is really the way we put our priorities. So really in a way we really try to optimize, but we don't manage it just a percentage of R&D. Patrick Ho – Stifel Nicolaus: Okay, thanks. Final question for me in terms Harmony, given the delays that you experienced in the past and the qualification process that you're going through right now, given your customers' capital constraints on their end, how far do you think that pushes some of the qualifications and valuation work that you're doing with them? When do you think you can get them qualified given their issues that they're going through right now?

Well, really our customer is not really, the big difference between us and capital equipment is that if you go to (inaudible 00:20:43) and come to new design, you will need to have a new probe card. Then each time the game is (ph) back to zero and if you come with a solution that will allow them to be more efficient, to do (inaudible) down, to minimize their CapEx investment in fact, then they'll make all the effort to qualify it. Like I said we had one example when you can do (inaudible) down on DRAM sold with older generation of tester and usually this is a very good investment for our customers and in this case they do qualify this probe card. Patrick Ho – Stifel Nicolaus: Right, thank you.

And we will take our next question from Gary Hsueh with Oppenheimer & Company. Please go ahead. Gary Hsueh – Oppenheimer & Company: Yes, hi, great. Thanks for taking my question. Just some clarification points here on your guidance, you're saying that on a non-GAAP earnings basis, you'd come pretty close within plus or minus a few percentage points with the fourth quarter, is that right? Is that what I heard?

Yes, I will first say that this is not a guidance, right. This is just an indication of our internal assumption for resource planning this quarter. Gary Hsueh – Oppenheimer & Company: Okay.

So our 30 million, low 30s, sorry, low 30 millions. We believe that we will maintain the margin we had in Q4. Gary Hsueh – Oppenheimer & Company: Okay.

Yes, that what we said now plus, minus some variability, but this is roughly the indication, yes. Gary Hsueh – Oppenheimer & Company: And on lower revenue levels kind of holding steady at the low teens in terms of your gross margin, you obviously have some visibility there. Can you share with us what that visibility is? I think you might have referenced positive or beneficial mix shift or is that actually you taking lower inventory reserves in Q1? What's really kind of buttressing your gross margin line there in Q1?

So one of the main thing is our tackling of our fixed costs. In Q4, one of the main impact to the margin was the fact that our revenue suddenly went down and that our fixed cost, although we have worked on our cost reduction, just are out of sync, so in Q1 through our (inaudible) action, forcefully taking on those fixed cost. That's the main impact. Gary Hsueh – Oppenheimer & Company: Oh, okay. And then kind of my second question is just about the 22% percent head count reduction. Exiting last year, correct me if I'm wrong, I don’t' think your employees really took any kind of voluntary shutdown weeks during the holidays, so it's a bit of a surprise you guys took a 22% head count reduction come the new year. What exactly drove that? Was there a sudden shift in terms of the winds in the industry and your forecast? Is that something you can share with us to kind of give us a flavor of how volatile the industry is right now?

Well, let's put it that way, also we have seen a dramatic change in the business during Q4. We had plans that we had put before and we're just waiting to try just working out the timing to do it in a way how to optimize our results, but also how can we make sure that we have also minimum impact on our customers. So really the decision to reduce the workforce was taken in trying to optimize both of these things. That's really the way it has happened. We did have a shutdown of one week in Q4 and we are planning to have another one in Q1 and if necessary we have other one. Gary Hsueh – Oppenheimer & Company: Okay, thank you very much.

And we will take our next question from Mehdi Hosseini with Friedman, Billings, Ramsey & Co. . Please go ahead. Mehdi Hosseini – Friedman, Billings, Ramsey & Co. : Thank you. One clarification and two questions, did you say that after Q1 you're cash breakeven point is going to reach low 40s?

What I said is that with head count reduction we made recently, this would bring our cash breakeven in slightly over 50 million. Mehdi Hosseini – Friedman, Billings, Ramsey & Co. : Right.

At 50, 51. Mehdi Hosseini – Friedman, Billings, Ramsey & Co. : By the end of Q1?

By the end of Q2. Mehdi Hosseini – Friedman, Billings, Ramsey & Co. : By the end of Q2, okay.

Yes, because in Q1 we have some transition we have to account for. Mehdi Hosseini – Friedman, Billings, Ramsey & Co. : Right. And then if the industry fundamentals get worse then you would revisit the breakeven point? Right now, there's no plans to lower below 50, correct?

So what I also mention is that beyond the head count reduction we have some plans to further address other costs such as our real estate foot print as Mario mentioned, we plan some shutdowns. We have had a company-wide effort to tackle manufacturing costs. This is still going to be aggressively pursued and we also looking at other variable costs across OpEx. I mean we have a target of an additional 2.5 to 3 million additional cost per quarter reduction and this would bring our cash breakeven in the 45 to 50 million range after Q2. Mehdi Hosseini – Friedman, Billings, Ramsey & Co. : Okay, after Q2. Okay, thanks for clarification. And then—

But sorry, sorry, but of course, we'll be very responsive to our environment, right? Mehdi Hosseini – Friedman, Billings, Ramsey & Co. : Right.

Because your question if you deteriorate further, as we said in prior calls, our main objective here is to be in a sustainable mode. Mehdi Hosseini – Friedman, Billings, Ramsey & Co. : Sure. And then in terms of just what is going to drive your business, other than the market share, do you still see some of the Legacy products being replaced by Advance Probe Card or going forward when the cycle turns around, is it just going to be purely replacement or share gain story?

Well, obviously in DRAM now, you have only advance probe card virtually. But certainly what we plan to grow is if you look at the NAND Flash, it is still a market which we have a footprint of advance probe card is low and we believe there is quite some room to be made out of it. In SoC also we do believe that we want to first restore our position in DRAM and enhance our differentiation and we are working very hard at it. In fact, we have been starting to make some good encroachment into that and at the same time as we go on, we will start growing our market share and growing our presence in both SoC and NAND Flash where we're not being present enough. Mehdi Hosseini – Friedman, Billings, Ramsey & Co. : Sure. The reason I ask you is that going back to 2007 your quarterly revenue hit 125, and when I look into future in the next couple of years, I just have a hard time imagining that your revenues could go back up to those levels. So why not be more proactive and more aggressive and lower breakeven point to lower than 50 in the first half of this year rather than take in more than one quarter to do so?

Again, it's slightly more complex than that. I know it seems very odd to discuss this timing when you see you are going down the drain, but one thing that we all know is that this crisis will stop, that the overcapacity which was first created a year ago continued by this sudden loss in demand which did not help obviously, this will come back to equilibrium. At that time, we will see that the accessible market will come back and will be much bigger. And what we want at this time, we just don't want to be one of the game. We want to come with products that will make a big difference, (inaudible) applications and this is our plan and we want at that time really to take that on and we believe that the game is much bigger on this term than just trying to cut it off. And another thing hat I want to add is our main differentiation as we are number one in this market is that not only do we have a differentiated technology, but we're also the only one that can serve any customer any time. And because our customer are becoming more and more global, because the consolidation is going to happen, I mean we believe that this also is one of the strong differentiator and we want as long as we can in a reasonable term to maintain this. These are really the two reason why we are not cutting even more now because we want really to come out of that in a much, much stronger position that we have been for a long time. Mehdi Hosseini – Friedman, Billings, Ramsey & Co. : Got it. Thank you.

And we'll take our next question from C.J. Muse with Barclays Capital. Please go ahead. C.J. Muse – Barclays Capital: Yeah. Good afternoon and thank you for taking my question. I guess first one just to clarify. Did you say you took a $3.9 million receivable write down, is that correct?

Yeah, that's correct. C.J. Muse – Barclays Capital: Okay. And is that the full extent of your exposure. I am assuming expansion there, or is there additional money that could be owed?

Yeah, so let me give you a little bit of perspective. As the leader in the advanced probe card market, we are engaged with all customers in the memory space. And consequently, we are exposed to a wide spectrum of risk profile from the very solid, well-capitalized client to the clients who are experiencing financial difficulties. So we have a set of different terms and condition, depending to the situation of our clients going from normal terms to cash in advance, and everything in between. This is a process, which has been going on for some time now, where we review item-by-item, receivable-by-receivable, the payment plan, together with the customer and find a path to getting paid. So we actually got some good traction in Q2, and especially Q3. What has happened in second half of Q4 is sudden drop of credit spending of a few client and we took this reserve as a conservative step to reflect this bottom-up approach that had been going on all along. So to give you some perspective, the overall underlying nominal exposure we have with clients, which are facing liquidity issues is $15 million. And as an objective, I mean, it's more than an objective as a way of the guidelines and practices, we are going to bring that exposure down. One way to do it is to be very focused at getting those receivable paid one-by-one. And again, we are working together with our client to that effect. And then the other way is also to protect ourselves in any further business, so that this exposure doesn't go up. At the end of the day, as Mario said, going through this very severe crisis might lead to consolidation and capacity reduction, which overall is going to be a positive for the industry, so we have to work with all the clients and while we have our eyes on protecting the downside risk. C.J. Muse – Barclays Capital: Very helpful. And if I could just follow-up with the last question. Now that 2008 is done, can you give us your, I guess, first thoughts on market share as well as the overall size of the probe card market in 2008, and then I'll follow on to that. Can you give us an update of the status of that big Korean DRAM customer that you are talking with? Thank you.

Okay. So overall market share, you know it goes market-by-market. So we believe, if you look at our numbers, but our market share in DRAM is above 50% somehow. But again, all I want to add is, because the market has become so low lately, one of the -- again three markets in quarter by quite a few points. So what really to look now, is not just only the number, but also how we spend with the customers, because it is true that as you noticed unfortunately the number of probe card that we have to be shipping has been much less. And then you know one out of five probe cards, and they could be bent in one of them, and it goes obviously, that can vary from month-to-month. So really our position in DRAM is, we are kind of slightly above 50% in DRAM advanced probe card market. We are around, we believe, below 10% in the NAND, we are still at pretty high market share in NOR Flash. But again, the market has been difficult. This market has deteriorated fast. And SoC, as you know, we have one very strong customer. And then on the other one, we are just tossing really into the market than we are in console market share, but it's increasing very fast. Also it comes from low market share. On the DRAM specifically, if we look from basically a year ago, our market share in full-wafer contactor has been growing and stabilized lately, but we are becoming much more stable, much stronger on it. And also one of the difference that we are from a year ago is that now we are present and discussing and present with all of our customers. And as I said there is one, pretty big one on which we are actually on the qualification. And what we hear from our customer is that our results have been pretty good up till now. So altogether, I would say also as we -- many, many discussions on the Harmony last year that, we are counting Harmony being a robust product, and there is a few of new technology that too it can be put on Harmony like RapidSoak and advanced theory, which have had extremely good traction from our customers. C.J. Muse – Barclays Capital: Thank you.

And we will take our next question from Timothy Arcuri from Citi. Please go ahead. Timothy Arcuri – Citi: Hi, guys. Couple of things. First of all, Mario, can you just clarify qualification that's happening at the big Korean vendor? You said in the prepared remarks that it was on the NAND side, is that true?

No, no. This one is on DRAM. Timothy Arcuri – Citi: Yeah. That's what I thought, okay. Okay. That's the first thing. Second thing, I wanted to get an idea of how sustainable the gross margin improvement is in March. So is any of it from new products, or is it all from just legacy cost cutting, or is some of the due to your reserve such as SAN chambers in your inventory reserve.

In fact, I would say it's available at different timing. If you look in the margin things, one of the position that we are aware very strongly goes, we have a wide spread of products and wide spread of technology, which enable us to maintain margins for a while. Another part is also about cost cutting, and even in our legacy product, we still some room. We have been working very hard, but as we go we find out new things, and this is coming. And later, obviously, we'll have a set of new products, which will enable us to continue that. So you know why the answer is yes. Although timing is slightly different on each one of them, but this is what's going on. Timothy Arcuri – Citi: Okay. Then I guess two more things. It feels like even though your internal planning number is the low 30s, it feels like there is a pretty big backlog of new designs that's kind of welling up, that is just waiting for funding to kind of move into volume, so when this breaks, it's going to go pretty fast. So I'm wondering, what sort of band -- you were going to put a band on that low 30s number, what sort of band would you put around that? Could it be plus or minus $5 million, could it be plus or minus $10 million, what's your thought there?

I'll answer, and then I'll let Jean answer the second part. The first part is on activity, and it is true that if you look at it now, we are really going through. I really call it now -- if you look at the activity of customer, I really call it a nuclear winter. It's totally frozen. It's like somebody drop an atom bomb, you see machines, but human activity is really about how will we survive, what is the next alliance, what is the next technology, etcetera, etcetera, and I think that our customer has been extremely active internally. But these have certainly not resulted in design some things out yet. The decision I have not taken yet are being taken, but we have not seen the result yet. And this really shows extremely low number we have been discussing. On the other side of uncertainty why we are so careful as we see all these movements going around. And we have to retake it on a very prudent approach from ourselves. And what kind of revenue we can recognize and how further we can go on, or maybe other one.

I'll answer two ways. First of all on that last point, we are let's say very prudent in the business we are going to, and it's a work we are doing with our customers, which protect our exposure. So certainly, if we wanted to just grow the business, we could have a much higher number, that one thing. Secondly, you are exactly right. I mean there is potentially a big pull there, which is really to come to market, and this is why we are watching very closely our capacity, right? And our people capacity right now is about 60 million, and we are very cognizant that the dynamic would change very fast. So the reason we don't want to give guidance for Q1 is combination of what we would choose as business we take in Q1 on which we could recognize, or plus the fact that there is some uncertainty as when this flow of new business would come makes a ranch too wide. Timothy Arcuri – Citi: Okay. Thanks, guys.

And we will take our next question from Gus Richard with Piper Jaffray. Please go ahead. Gus Richard – Piper Jaffray: Yes. Thanks for taking my question. Just to follow-on that last question. When you look into your customers and they are moved to smaller geometries more DDR3, how has that activity been over the last couple of quarters? Are you seeing -- is it still decreasing, or is there more internal activity to your customers?

If you look at, again visibility is very cool. But if you look at the plan we have, we see DDR3 picking up steam. In fact, if I re-look at our plans, but again we have to change our plan so much lately, we have to take that with some in (inaudible) with same trend. In fact, we should ship more DDR3 than DDR2 by probably Q2 2009. So, we do expect to see a pickup. I know that the industry expect that, but basically the cross line will be sometime late Q2, or Q3 of 2009. We do see designs in the DDR3 coming, and we do see that our customer to find -- The really product that can still make money of the very fine pitch, the 50 plus technology nodes are one that they expect to make money. So, we do expect that there will be a push, and what I am waiting for is that people, our customers stop investing a lot of money in adding capacity, and start investing money into efficiency, which first will go into a NOR transition on NOR technology. Gus Richard – Piper Jaffray: And then just one follow-up, a clarification, I didn't quite catch the gross margin guidance for the first quarter. Could you just repeat that for me, please?

So, again this is not the guidance. This is what we did is share with you guys our internal revenue level for planning purposes. And at such a revenue level, which is low 30s, we expect the margin to be roughly in line with what we have in the first quarter. Gus Richard – Piper Jaffray: Okay. Got it, got it. And were there any charges in the gross margin in the fourth quarter?

So, in the fourth quarter, we had predominantly the effect of the highest fixed cost base at those level of revenues. And then we had some costs associated with some revenue we did not recognize. And including in that we also had some inventory reserve, which were really driven by push outs in demand. Gus Richard – Piper Jaffray: Got it. And if you back that all, does it impact your gross margin was in the 10% range?

Yes, roughly. Gus Richard – Piper Jaffray: Perfect, okay. Thank you, sorry to make you (inaudible).

No problem.

(Operator Instructions). And we take our next question from James Covello with Goldman Sachs. Please go ahead. Sir, your line is open, Mr. Covello? And we are hearing no response. Our next question comes from Kevin Vassily with Pacific Crest Securities. Please go ahead, sir. Kevin Vassily – Pacific Crest Securities: Yes, hi, thanks for taking my question. So, you've written down a portion, or I guess I will assume that it's not the full amount of Singapore. You've given some of the commentary about locating resources closer to customers, and Asia being a part of that strategy. Is there going to be any role that Singapore can't play, down the road that make sense here relative to its original intentions?

Yes, so the write off, we took in Q4 really reflects our decision, do not build a building ground up to host the plant there. That's said, Singapore remain a very important part of our regionalization strategy. We keep still in mind the fact that it's the great place to have some manufacturing, but the decision will be driven by demand in the market. On the other hand, what we are working at right now for the first few quarters is a shift of resources from Livermore to Asia and in particular in Singapore to do some -- ship more functions to our business, because Singapore is closer to our customer base, it's very friendly jurisdiction for business and it makes a lot of financial sense. So, yes, we keep Singapore as an important part of our development in Asia and we believe we can do this on shoestring, so, this is why we think, we don't need that building. Kevin Vassily – Pacific Crest Securities: When you say support capability you are about card repair, or card upgrade, or are you talking about incoming kind of non-technical support functionality? What you are referring to?

It's both in fact, on one thing you have a many support administrative, et, cetera, where you don't need to be located in one place. And in fact being into same time zone, the 80% of the activity is always a good thing. And there is also a technical support. As much as we have good design possibility in the country, we also know that you need to be able to share them to central and north to do that and this is being done in Singapore. We usually prefer to do repair directly on the spot when it's possible, but is a reason even to be one central major repair center, then again it's good to have ones like that. So, it is really mix. There is no one thing, we try each time to increase our responsiveness, and in some cases it better to be -- and it make sense to be in small pieces very close to a customer, in some places it's better more central. And whenever it make sense to be more central, then Singapore is beautiful place to be in Asia. Kevin Vassily – Pacific Crest Securities: Are you able to quantify yet kind of the financial impact from moving those resources from Livermore to Singapore relative to the income statement? Are we are talking about measurable decrease in cost associated with that move?

So, yes. The purpose is to be more cost-efficient. And in terms of investment, this would be really very small in terms of investment in fixed assets, or real estate, right? So, that's the point. I mean it's cheaper and it's also as Mario said, which is by the way our main driver closer to the customer base, hence make us more responsive. Kevin Vassily – Pacific Crest Securities: Okay. Thank you.

Operator, we will take one last question.

And we take our final question from Patrick Ho with Stifel Nicolaus. Please go ahead, sir. Mary Lee – Stifel Nicolaus: Hi, this is Mary Lee for Patrick Ho. It is a one last question, can you discuss little about your plans regarding your cash position? And can we expect that the company will burn cash at the same rate as the current quarter?

So, in the current quarter, we had 12.60 billion cash usages. And going into 2009, I would say our main direction is over the course of the year to stay at or above $500 million. So, there is going to be some timing. By the way this is our own commitment internally. We are going to have more outlay in Q1, because of all the actions taken. So, in Q1, the rates is probably going to be in high 20s time wise. However, going into the year we have some expectation of some refund of tax paid in prior years, which will offset that. And also a much lower cash burn starting in Q2, so, overall, we plan for the year to stay at, or above $500 million. Mary Lee – Stifel Nicolaus: Thank you.

Okay. We'd now like to conclude the call. Thank you again for joining us today. We look forward to speaking to you soon.

That does conclude today's conference call. At this time, you may now disconnect. Have a great day.