Welcome to FormFactor's third quarter 2009 earnings conference call. On today's call are Chief Executive Officer Mario Ruscev and Chief Financial Officer, Jean Vernet. Before we do begin let me remind you that the company will be discussing GAAP, P&L results and some key non-GAAP results to supplement understanding the company's financials. The schedule that provides GAAP to non-GAAP reconciliations is available in the press release issued today and also on the investor section of FormFactor's website. Also a reminder that today's discussion contains forward-looking statements and that FormFactor's actual results could differ materially from those projected in the forward-looking statements. For more information, please refer to the risk factors discussion in the company's Form-10K and subsequent Forms 10-Q and the press release issued today. With that, we’ll turn over to Mario. Please go ahead.

During our third quarter, we saw improvement across all business segments, resulting in revenues of $43.8 million, an increase of 40% from the second quarter. The improvement was driven by market share gain in DRAM, acceleration in DDR3, positive mobile DRAM activity and improved results in both Flash and SoC markets. We also continued our efforts to transition the back end of our manufacturing to Asia in our third quarter. As we go through our ramp up of our Asian manufacturing facilities and our new technology over the coming quarters, you'll see associated costs related to the ramp up on the move before we more fully see the benefits of lower manufacturing costs. Overall, so, we continue to manage cost tightly through our third quarter, resulting in improved gross margins and relatively flat operating expenses from our second quarter. Jean will expand up on this later in the call. But before that, I’ll provide some quick thought on what we saw in DRAM markets during the third quarter, then discuss our products and technology, and I will close with some thought of where we see the fourth quarter. Our DRAM business benefited during the third quarter from the continuation of a tooling cycle from DDR2 to DDR3. We have seen a steady improvement in business activity since the beginning of the year, but most of it has been driven by inventory replenishment and opportunistic buying on behalf of our customer to take advantage of higher memory prices. DDR3 orders represented the majority of DRAM activity in the quarter and also, we have already seen the crossover from DDR2 to DDR3 in our own order activity. We expect the broad industry crossover point to be in the fourth quarter. Specialty mobile RAM was also stronger during the quarter, reflecting positive activity…

Thank you, Mario. Let me start with the summary of our third quarter results. Revenue was up due to sequential improvements in all three areas of our business. Total revenue was $43.8 million, up 40% sequentially. The upside in revenue was driven by higher than expected order activity as customers took advantage of the higher memory prices and pulled in some activity from the fourth quarter. In addition, we expected $4 million to $5 million in the recognition of deferred revenue from past quarters, but due to some payment deferral in the fourth quarter, we only recognized $2.8 million of that amount in the third quarter. Third-quarter revenue for DRAM was $36.4 million, up 44% from our second quarter and flat versus the third quarter a year ago. The Flash business grew sequentially in the third quarter. The increase in revenue was due to a pickup in NOR probe card demand. Flash revenues for the quarter were $2.1 million, up 13% sequentially, but still down 75% from a year ago. Revenue in the SoC business was up 34% sequentially to $4.6 million due to a pickup in order activity in the microprocessor segment, and an increase in activity coming from the automotive industry. On a year-over-year basis, the SoC business declined 39%. For the third quarter, GAAP gross margin was 16.8%. On a non-GAAP basis, gross margin was 19%. The gross margin improvement compared to last quarter and compared to our guidance was mainly due to the higher than expected revenue level, cost control and a more favorable product mix. We continue to focus on cost control during the third quarter. On a GAAP basis, operating expense totaled $31.1 million. This GAAP operating expenses were lower by approximately $1.3 million from the second quarter. Lower GAAP operating expense were due…

Thank you very much. (Operator instructions). And first we go to Christopher Muse with Barclays. Christopher?

First question, in your prepared remarks you talked about market share gains and DRAM and I guess you also focused that its primarily at 6x. So, I was hoping you could expand on that. I'm assuming that you're talking Taiwan and Japan and North Korea?

Absolutely yes. We have also over the last couple of quarters, we have also get market share in Korea. But I would say obviously, I always said its a long road so we are pretty happy with our results. But we still have a way to go and we continue our path on [this one]. This is why we are still more sensitive to what’s happening to Japan and Taiwan where most of activity is still 6x.

And when you think about 4x, 5x, DDR3 designs, is your competitive advantage really at the 1.6 GHz and above level? Is that when we should start to increased share?

Really, in fact if you look at reality, we have seen market gains in all markets and now we have gained market share in Taiwan even on DDR2 products. Now we are also getting, remember that in DDR3 now most of it was engineering tooling and we have had nice wins, but now we are waiting to concrete that, to get that more concrete one, when the big ramp-up happen.

Last question from me. Based on the tax rate at or near zero, are you figuring your expectations for losing money throughout all in 2010?

No, this is not what we meant. It's really as we said last quarter it really has to do with an accounting adjustment. And as we return in to profitability it will take a few quarters in positive territories before we can build enough history to reverse that adjustments with it. So we didn't make any pronouncements on whether we were going to be positive or negative for 2010. Even whether, if we are in a positive situation we would still have to wait before we can reverse that adjustment.

Makes sense. Thank you.

Next we go to Gary Hsueh with Oppenheimer. Gary?

Great. Thank you for taking my question. You guys sound pretty positive in terms of order activity. I heard that mentioned a few times. I was wondering if you can kind of help us quantitatively with your visibility. Any way you can give us what your order intake was or at this point with revenue declining in the December quarter, how much backlog you have and be whether or not any orders were canceled at DDR3 given how strong DDR2 pricing is right now?

I would say that the biggest impact on the decline in Q4 has to do with some timing of some orders some that we are pulling in the third quarter. At this point, what we have seen parallel to this is a continuation of an uptrend in new designs that has to do with 5x and 4x, which is always good news for the future. What is hard to determine is when are these going to translate into ramps? And there's a couple of reasons to that. One is that the customer themselves might not know the exact timing. They are busily purchasing equipment and fitting out their production line as we speak. So it's going to depend on their timing as well as the fact that cycle time of our business has markedly reduced. So what we see is a market increase in quarter orders that we turn around within the quarter. So that is why it is a little hard for us to be very specific beyond Q4. But three months from now, we will certainly be able to give you more color on this.

And just a few quick follow-ups here. John, is there any assumption in that down 10% revenue guidance for deferred revenue recognition in Q4?

So what we expect is that if you take out some recognition of revenue from that what deferred in past quarters, the decline is more like 15% from Q3 levels. So in absolute terms, there is about a couple of million dollars of recognition of revenue falling in Q4.

Okay, and more of a strategic question. Since you mentioned better manufacturing efficiency, can you just help me understand what this new wafer probe card technology that TouchMatrix in NAND Flash and in DRAM at current pricing. I mean, what should we expect in terms of gross margin improvement? What that manufacturing efficiency translates to in terms of gross margin and in DRAM and NAND?

You know what I stated already a couple of quarters ago is that it will be specific products, we decided to use our technology to be able to design products which will allow us to compete in all parts of the markets where we operated on it. We had decent margins I would say. We never said a number, but this is basically what it has been designed for.

Okay, great. Thank you.

So Gary, I just had that, we reiterate what we say last quarter which is the combination of the transformation of manufacturing should result in a 15% gross margin increment at a level of revenue which is about $60 million. Right?

Okay. Got it. Thank you.

(Operator Instructions). Jim Covello with Goldman Sachs.

Just in terms of the limited visibility you have today what kinds of metrics should we be looking for, a signpost in the industry that would make you feel better about your visibility as we head into the first part of next year or in 2010? In other words, what kind of things that have to happen in the industry for your visibility to stretch out?

Well we know what will happen in the first half of 2010 is our customer will ramp up 5x and 4x. And I think this is what will have the most impact on our business in the first half of 2010. We know it's going to happen. Now again you know the exact timing will have a big influence on the way it happened exactly on a quarter-to-quarter. But we know it is going to happen and we do intend to take advantage of it.

And then just given everything that is going on with the model and kind of where we are today, do you think any change to the kind of long-term target model is warranted?

So, on this point, we will discuss more in detail probably by the year end about how we will see 2010 and beyond. What we said last quarter is that after our transition of manufacturing which should be completed in the second half of 2010, we see no reason of not reaching historical margin levels. What we would be looking at on top of that is a level of incremental margin to the growth and some notion of return on capital. So we will communicate more clearly on this probably by next quarter end.

We're next going to see Patrick Ho with Stifel Nicolaus.

Just a first few of housekeeping question. What was your operating cash burn this quarter and what is your current quarterly revenue breakeven level right now?

So the revenue break-even level on an operating cash basis before effective working is about $54 million. So it is slightly up from last quarter. And this is mainly driven by the speed of some of the ramps we've seen in Q3, which forced us to take a less forced [to deal]. So less [ratification] So on to your question, the cash burn and on the operating level so when you add back working capital was a usage of about $22 million negative.

Okay, great. That's helpful. Just in terms of a little bit of a disconnect on my end. I hear that you guys got (Inaudible) on the 6x nanometer, which obviously helped your revenues for this quarter. Now seeing the outlook in terms of the revenue decline in Q4, are you implying this I guess the memory customers' ramp is slowing down in Q4? Or why is there a decline when what we're hearing out in the channels of continued strength the DDR2 which is (Inaudible). But that’s obviously been a lot stronger than people have anticipated. Are you guys seeing a decline what it seems that, that segment is actually improving near-term?

What we are seeing in Q3 is a lot of what we call a tuning cycle. So we have a lot of orders for 5x and for 4x, in fact. When people drive engineering tools, et cetera, et cetera. Now the big money is coming when they start having a really big ramp-up in 5x and 4x. And this is not happening in Q4. This will happen slightly later in our first half of 2010. That's really the reason why we are having disconnection. We did ship a count for engineering reasons and all that. And I will be honest I never worked with it and depending on, remember now we don't have that many more customers so those changing one of them has quite some impact. But this is really what is happening for this specific quarter.

I would add to that that we really see the pipeline of requests for new designs. So we see the activity is there. It is going to come. It's just a question of timing.

Okay and then just follow it up with my final question on that is, in terms of these 5x and 4x ramps, which I acknowledge and I will admit that it's timing-related. Now is it a number of customers that are holding off on this or is it one customer that is primarily driving I guess this timing issue that we're talking about here?

I would say outside one very large customer in Korea. They are all in the process of doing it basically, and each one has a different timing. But I would not say they are holding up, but remember, many other customers also have their coffer, its pretty empty. So they are also take this opportunity with a good pricing to replenish only little more cash. So we have followed a lot of discussion with it internally and if the customer is, what is a bad timing for them? So this is what makes it and I would say each one is slightly different but, remember, you have a few consolation and each one has his own timing. But it is coming. We do see the designs. From our contacts, we do believe that it is coming and each one has a different timing. But again, because we have been surprised one time by the decision to extend 6x for one month or something like that. Our customers ask for a lot of internal debate them self.

(Operator Instructions). Kevin Vassily with Pacific Crest.

Can you tell me a little bit about what you guys see as the incremental opportunity from DDR3 as compared with DDR2? I know the DDR2 opportunity, relative to the first DDR RAM was about 2x the opportunity in terms of cards or actually expressed in terms of revenue. I'm curious what you guys think that opportunity is for DDR3?

Again we did estimate, but again remember; each time we did an estimate before we were wrong. So, I'll tell you what this is, but I want to say that before. Our estimate for DDR3, well, it would be quite long, we think that it will probably go on till 2015. And if you compare total sales of revenue, we think its 1.5 times the DDR 2 side.

Question on the new NAND product.

(inaudible)

Yes. The prior attempt at penetrating the NAND product, NAND market was a little less than desired. I think you guys would agree. As you look out into 2010, you referenced a considerable growth opportunity associated with that. Do you size the NAND market any differently in terms of opportunity and at what kind of multiple would it be normalized growth for the DRAM market would you see NAND as you ramp this product?

So our estimate for the NAND market in 2010 which is recovering is about $100 million. As we go through the year, I would say that this one (inaudible) it. It will take some time. It won't happen overnight. We do not plan to hand over the year at only 10% of market share. We expect something much better than that.

But just give an idea of what that market is this year?

This year it was below I would say more like $70 million - $75 million this year. And it is expected to grow. So I mean, in 2010 we are expected to be above $100 million, someday, $110 million, $120 million, and then by 2012 probably to grow at least to $200 million.

We'll take a follow-up question now from Christopher Muse.

Just a quick housekeeping. I was hoping you could shed light on what stock-based comps will be?

So the stock-based is basically was 4.5 this quarter and I don't think we get specific numbers, but I would expect these numbers to be fairly stable, slightly down for the next quarter.

You're next now to Timothy Arcuri with Citi.

This is Brian calling in for Tim. I'm sorry if this has already been asked, but seems like there is obviously a lot of new order activity here around DDR3. So, I'm wondering why has the ramp there not been more impactful yet? Pricing compression, (inaudible) issue. Is anything there that maybe you can talk to that, kind of help me reconcile what you're seeing, real time in terms of new design orders and the ramp that is going on there?

In reality, if you look at the results that were in Q3 were mostly due to DDR3. And if you look at the other nice increase from last quarter, so we did ship 80% of our shipment in DRAM in Q3 versus DDR3 in commodity. So we did have this impact and now people are just running them. But a lot of new design industry are going to happen in 5x and 4x and we said this is where waiting to see the nicer impact on our business. Remember that our business drivers is not a quantity of wafer, it is also pretty proliferation of designs or more new design which is very important factor for our activity.

Well I guess given your limited visibility into Q4 can you maybe help us understand a little bit about what are the main moving pieces here in Q4 that could ultimately provide some upside strength there or maybe even further weakness into the quarter, that basically a recent design wins in Taiwan and Korea ramped to volume? Can you maybe just talk around what some of those moving pieces are?

So just before I go to that, I also want to remind, one other thing that happens in I would say 18 month is that our lead time are now well within the quarter. We treated our customer now and our tendency to place order at the last minute because it makes them more efficient. Which means that we really see this movement in our bookings, much later than we would see them before. So that's one of the reason why we have less visibility than before. So the big movement that [you will] have is, when our customers start ramping up the 5x, on 4x for some other customer. This is when we really will see the thing starting to move. And we expect that to happen in between Q1 and Q2 next year.

In the quarter when you look at bookings, did you have any due 10% customers this quarter?

I would add to what Mario says, what we have seen in this current market where you must admit that there is not a broadband end market recovery. You see that some of our customers are reacting very, very fast to certain opportunities, and actually sometimes competing for the same business. So, we have a very dynamic situation. We saw that in the past couple of quarters and this add to the lack of visibility.

Last thing from me. I might have missed it, but was there a specific gross margin guide for the Q4 Jean?

No, the margin would be down from this quarter due to volume. So, I can give you a little bit of color. As Mario said in his prepared comments, we are ramping up the move to our facility in Singapore. So we are going to have some cost related to this transition and that starts to come up in the fourth quarter. We estimate those costs to be about $2.1 million. So, if I dug that out from the gross margin, we should be at about 10% roughly 10% gross margin.

Okay. After stripping that out?

Yes.

We have no further questions this afternoon, Mike, I'd like to turn the conference back to you.

Great, thanks. We would now like to conclude the call. Thanks again for joining us everyone and we look forward to speaking to you again next quarter.

Again, ladies and gentlemen, that will conclude our conference call. I would like to take the opportunity to wish you all a great afternoon. Goodbye.