Tom St. Dennis - Executive Chairman and CEO Mike Ludwig - Chief Financial Officer Mike Slessor - President

Vernon Essi - Needham & Company Brett Piira - B. Riley & Company Patrick Ho - Stifel Nicolaus Srini Sundararajan - Summit Research

Thank you, and welcome everyone to FormFactor’s Fourth Quarter 2013 Earnings Conference Call. On today’s call are Executive Chairman and Chief Executive Officer, Tom St. Dennis; President, Mike Slessor and Chief Financial Officer, Mike Ludwig. Before we begin, let me remind you that the Company will be discussing GAAP P&L results and some key non-GAAP results to supplement understanding of the Company’s financials. A schedule that provides GAAP to non-GAAP reconciliations is available in the press release issued today and also on the Investors section of FormFactor’s website. Also, a reminder for everyone, that today’s discussion contains forward-looking statements within the meaning of the Federal Securities laws. Such forward-looking statements include but are not limited to financial and business performance projections, statements regarding macroeconomic conditions and business momentum, statements regarding seasonal business trends, statements regarding our ability to resolve favorably product issues, the demand for our products and technologies, and our ability to design, develop, introduce, and qualify new products with one or more customers and realize revenue from those products, statements regarding operational synergies between the FormFactor and MicroProbe products groups, and statements contain words like expects, anticipates, believes, possibly, should and the assumptions upon which such statements are based. These forward-looking statements are based on current information and expectations that are inherently subject to change and involve a number of risks and uncertainties. FormFactor’s actual results could differ materially from those projected in our forward-looking statements. The Company assumes no obligation to update the information provided during today’s call. To revise any forward-looking statements or to update the reasons actual results could differ materially from those anticipated in forward-looking statements. For more information, please refer to the Risk Factor discussions in the Company’s Form 10-K for the fiscal year 2012 as filed with the SEC, subsequent SEC filings and in the press releases issued today. With that, we will now turn the call over to CEO, Tom St. Dennis.

Thank you, and good afternoon. Our focus during the fourth quarter of 2013 was to address key issues that caused our shortfalls in Q3 and led for low revenue guidance in Q4. As we reported on our December 10th call, we’ve made progress on the key issues that interrupted our supply chain and manufacturing. Since then we made further progress to reestablish ourselves as a key supplier to our revenue customer. Evidence of this progress is seen in the multi-card order that they recently placed with us [indiscernible] volume production in mobile DRAM probe cards. These were the first orders that we have received from this customer for this application since the summer of 2013. We regret the shortfalls occurred but we believe we have taken appropriate and effective corrective actions and are on-track to have these issues behind us as we execute on. Elsewhere, we have continued to increase our shipments of the probe cards that support copper pillar packing. More customers are beginning to use this packaging technique. And in the fourth quarter, we saw three more customers start their first copper pillar designs with us. We expect the copper pillars to be an important group of area for the SoC portion of our probe card business in 2014 and beyond. We’re continuing to grow our business at a key Korean DRAM customer following our recent qualification. We expect to have full designs and volume production with this customer by the end of Q1. In the flash market, we’re continuing to make progress on the development of our new product. Recently, we successfully completed the first installation and test of an engineering prototype at our customer’s facility. The next step will be to deliver preproduction probe cards for this quarter for a full product evaluation; this should be…

Thank you, Tom and good afternoon. Revenues for Q4 were $48.5 million, a decrease of $19.1 million or 28% compared to Q3 2013. SoC revenues in Q4 of $29.9 million represented 62% of the Company revenues but were down $1.8 million or 6% from Q3. Revenues from probe cards, for mobile processors and PC applications increased slightly during Q4. Our Q4 revenues from wire bond applications, primarily industrial automotive decreased by $2.1 million compared to the third quarter. Fourth quarter revenues for DRAM products were $15.1 million, a decrease of $13.7 million or 48% from our third quarter. The decrease resulted primarily from lost orders from a key DRAM customer due to certain execution challenges we discussed previously as well as market seasonality. Mobile device revenues in the quarter decreased to $5.7 million or 38 % of our DRAM probe card revenues compared to $19.6 million or 68% of our DRAM probe card revenues in Q3. Flash revenues were $3.5 million for the fourth quarter, a decrease of $3.6 million or 51% from the third quarter. NOR Flash revenues increased by $0.6 million in the fourth quarter to $2.5 million, while NAND Flash revenues decreased by $4.2 million to $1 million in the quarter. The decline in NAND Flash revenues resulted from less high parallelism design opportunities and customers. Fourth quarter GAAP gross margin was $4.3 million or 8.8% of revenues compared to $12.5 million or 18.5% of revenues for the third quarter of 2013. GAAP expenses in Q4 included $0.7 million for stock-based compensation and $3.2 million for the amortization of intangibles. On a non-GAAP basis gross margin for the fourth quarter was $8.2 million or 16.9% of revenues compared to $16.3 million or 24.1% of revenues for the third quarter. The decline in the non-GAAP gross margin resulted…

and:

(Operator Instructions) Our first question comes from Vernon Essi of Needham & Company. Please go ahead.

Thank you very much guys. I just for clarification here, your line was sort of garbled and I apologize. I want to kind of go over some of the items that you described in terms of your guide, can you both hear me alright? : : Needham & Company:

Yes we can Vernon, I am sorry, we understand that the quality of this is poor but let’s, we will try to shout through I guess.

Yes, it’s all right. I mean but just to revisit the guidance itself, it’s 53 million to 57 million and gross margin is 23% to 27%, was that correct? : : Needham & Company:

That’s correct.

And what was the second quarter, I lost you on the second quarter guide, you are expecting growth and I missed the range. : : Needham & Company:

The range was $59 million to $65 million.

Okay. 59 to 65, okay. And then and just to go back to the mechanics in housekeeping point for the actual quarter itself, what did you say was the level of mobile DRAM? : : Needham & Company:

So, the level of mobile DRAM was $5.7 million which was 38% of our DRAM probe card revenues.

Okay. And then the split between NAND and NOR was garbled as well, I am sorry to ask this but what was that again? : : Needham & Company:

That’s okay, NOR revenues were $2.5 million and NAND revenues was a $1 million.

Okay, thanks. So then just to go into the question with that out of the way. Can you just discuss the sort of an update on the copper pillar adoption rates, you had said you made some mention about a Korean customer. Just sort of give us a 30,000 foot view of what things look like from a pipeline basis for 2014 that would be helpful? : : Needham & Company:

Yes Vernon, this is Mike Slessor, I’ll take that one. We’re seeing a pretty good penetration trajectory associated with copper pillar. As Tom mentioned we took designs in from three additional customers who had not been on copper pillar packaging platforms in the past and are working through those designs for shipment and installation here in the first quarter. Of the customers some of the leading edge fabless and foundry customers we’ve been working with on copper pillar. We’ve seen some really strong follow-through adoption, and for example with one of the major designs we’ve now shipped over 40 units of an advanced probe card for probing those copper pillar packaged devices. I would say, the adoption overall on an industry-wide basis seems to probably be a little bit more muted than some of the industry research firms had predicted early in 2013. But certainly the facilities are being built-out, the capacity is being put in place and we’re seeing as I said increased momentum around design activity and full scale production adoption by the guys on the leading edge using that packaging technology.

And what would you say would be the disconnect other than just consulting optimism on those market studies. I mean is that really it, or is there anything that seems to be slipping in terms of what would be I guess mitigating the adoption rate if there's anything? : : Needham & Company:

I think you probably hit it on the head, I think it was an overly optimistic view by some of the market research firms on how fast this would take off. As is often was the case with any new semiconductor technology whether it’s packaging or not. But I think we see again the capacity being put in place, customers committing to these designs and the fact that we’ve had one customer that we have shipped over 40 cards for this one device would indicate that there is no real fundamental hiccups to the volume production given that that level of volume corresponds to some pretty heavy unit chip sales for that customer.

Okay. And then just to follow-up here on the I guess the manufacturing side of things, and I think I did hear this correctly. But Mike Ludwig just to confirm you said a $1.3 million savings in the COGS line or the gross margin with these cost reduction efforts going forward, is that correct? : : Needham & Company:

That’s correct.

And you've been tracking really well always on the -- given your revenue levels on that, and I've always asked if you can squeeze anything more out of the operation and here you are introducing a little bit more traction there. Are there any other things that we might be looking for, for milestones in 2014 that could help the gross margin other than just revenue lift or is there any sort of purchasing situation, or any suppliers that you may be changing that might give you a little more boost, or should we just look at it where it is right now with the usual dropdown math that we use, that’s where the gross margin is probably going to be? : : Needham & Company:

Vernon it’s Mike Slessor again. I think for 2014 the significant gross margin cost reductions really are encapsulated in what Mike talked about earlier on the call. I think we’ll see some more incremental improvements as we optimize a little bit on the new organizational structure. I think the more longer term view of this is in combining the engineering product development and technology organizations, we’re sort of setting ourselves up and we won’t get there in 2014 but certainly for parts of 2015 we will. On consolidating around key technology sub-components, key enabling technologies where we can then gain manufacturing efficiencies when we’ve sort of leveraged these common technologies, common sub-components across SoC, DRAM and NAND. So that’s not really a 2014 P&L impact, but we've taken the steps in 2014 so that we do realize the impact in future years.

Okay. Great, thanks a lot guys. : : Needham & Company:

Hey Vernon just one last thing, on the copper pillar part of it, you might triangulate on that with what Lam applied on what they're selling out there for tools to support the copper pillar packaging line and at least when I checked on it were pretty strong going into 2013 [indiscernible].

Okay, I appreciate it. Thank you. : : Needham & Company:

Yes.

Our next question comes from Brett Piira of B. Riley & Company. Please go ahead.

Hey, thanks for taking my questions guys, just a clarification on your Japanese DRAM customer. When you say issues will be behind you, I think you said heading into 2Q, is that really just a finishing up of the new additional engineering programs, or will that be actually back to your original market share also? : : B. Riley & Company:

I don’t know whether that would be back at the original market share but certainly in the Q2 timeframe we would expect to get back to some historical range any way that we’ve had with that customer. So we expect to have it all completed in Q1 and to be growing our position there as we go into Q2 or Q3.

Okay great. That's helpful. And then maybe just finally, can you give us a little update on your RAM that you are. The newly qualified DRAM customer, your final one, you gave a little bit of a number of design wins. Do you still think that that can be the $3 million to $5 million after a couple quarters is the same ramp trajectory fair to assume? : : B. Riley & Company:

Yes Brett, Mike Slessor again. So for the qualification as we had, we got qualified late last year. We’ll be shipping and have shipped four production designs here in Q1. I think when we look up through the year certainly that $3 million to $5 million quarterly opportunity remains unchanged. Part of the trajectory in getting there, whether it’s in Q2 or Q3, will depend on how some of those devices ramped in volume of the customer, how many chips they are producing on those platforms. And it’s still fairly early in this reengagement with this customer. Their recent demanding required a lot of engineering and support effort, which we’re providing, so that we can realize this $3 million to $5 million opportunity later in the year.

Great, okay thanks guys. : : B. Riley & Company:

Our next question comes from Patrick Ho of Stifel Nicolaus. Please go ahead.

Thank you very much. If you could just give a little bit of color in terms of some of the transitions going on in the DRAM industry, particularly as it goes to 20 nanometers. We’re talking about higher speeds and the manufacturing processes changing somewhat. How does that potentially impact probe card demand and does it potentially increase, I guess, more probe card demand given these newer devices and the higher speeds that are required? : :

Well, I think we’re having sound quality problems and I apologize for that I hope you can hear okay, Patrick. As the shrinks go on these days with these [indiscernible] position and these new nodes it’s driving more value for wafer, more direct wafer drives parallelism up and that raises the complexity and the challenges [indiscernible]. So we think at least to our strength as they move into that. What is a pretty fair transition on mobile is this move to go to the low power DDR3 and the lower power DDR4 type architectures. And in doing that customers and some of the end-customers that are building cell phones, tablets and other things, seem to be pushing for different level of testing at a full function of device speeds and all. And that’s opened up an opportunity for us. So it’s a smaller one but it’s a growth opportunity for us on the DRAM side and it also plays to our strength. So, as complexity goes up and as the speeds are up, it does, I think fair better for FormFactor on a going forward basis.

Great, that’s helpful. And maybe just going to the NAND Flash side of things for a second, I know you’ve mentioned in the past about your probe cards being more advanced than what NAND Flash or planar NAND Flash devices need today. As the industry begins to transition to 3D NAND can you refresh us of what potential opportunities there could be for you on the NAND Flash side? : :

Well, from the 3D NAND transition, I think, is being done in a way to be pretty transparent to the end-user. The fact that whether it’s a floating gate or if it’s a 3D design, those parts are, in principle, intended to be interchangeable for different applications whether it’s mobile devices or enterprise storage or what have you. So, as a result from the probing standpoint, they’re pretty similar as near as we can tell so far anyway. So, there is really not a significant difference as they make that transition at the wafer test level.

Great, thank you very much. : :

(Operator Instructions) Our next question comes from Srini Sundararajan of Summit Research. Please go ahead.

Hi. Can you hear me okay? : :

Yes.

Yes.

Yes. I think my first question is, what do you think is going to be the incremental CapEx difference for DRAM and NAND for this year compared to 2013? I know you have many -- I'm just trying to use that to guess as to how things might proceed for you guys later on the DRAM and NAND CapEx? : :

Sorry, Srini, are you asking about what FormFactor’s capital investments will be or what we think the industry will do?

No, industry would be. : :

I don’t have it we don’t really have any better information I think than you do. The recent comments by Lam, I think, indicated that they thought that it was another kind of $32 billion year plus or minus on wafer fabrication. But I don’t -- we don’t have any more I would say insight to that. I would make a comment that there has been some public announcements about the investments that SK Hynix will make in a new DRAM facility and Icheon and also the fact that Elpida, Micron Japan now is looking at making a $700 million or $800 million investment, mostly for technology transition, but it’s certainly for technology capacity, if you will, I have their Hiroshima facility. And when I look at that it certainly a more investment positive environment there on the DRAM side and NAND Flash obliviously Samsung’s Xi'an facility is probably the biggest one there but I think you’d have to look at Toshiba, Samsung, Micron and SK Hynix hasn’t been quite as visible but all of them have been pretty strong about their capacity investments albeit I think they’ll manage the timing against the market demand but they all seemed pretty positive on that going into 2014.

Thanks. I have one more question. Are you guys going to, in terms of the SoC-based revenues for specifically dedicated towards smartphones and tablets, how do you see FormFactor doing the rest of the year and the next year on the SoC revenues dedicated towards smartphones and tablets? : :

Yes Srini Mike Slessor, again. I think if you look at our SoC revenues in the fourth quarter and I think this is consistent with the themes that we see throughout the rest of 2014. There is two major overall trends that are going in different directions although we see the SoC probe card market continuing to be a high single growth CAGR opportunity. The PC market continue -- the PC driven part of that market continues to decline. While some of the mobility type applications whether they’re application processors, PayPal processors, or some of the modems, continue to grow pretty rapidly. You’re seeing our SoC revenues kind of hold flat as those two things compete against each other, we continue to see strong market adoption, strong overall growth in that mobile part of our SoC segment again, essentially compensating for the continued downward trend in the PC market, although that looks like it may be at least stabilizing here in 2014.

Okay. But you think that is going to be either stable or growing in this year and next year, the mobile portion of the market? : :

I am sorry. We didn’t really get that. Can you repeat it please?

Yes. The mobile portion of your revenues, are they going to be stable or rising in 2014 and 2015 if I were to assume… : :

Yes go ahead.

The mobile part of our SoC revenues given the trend we have had in the past are associated with advanced packaging, the market share repurchase we’re making and obviously we see those widening through 2014 and through 2015?

Okay. And last question. Do you foresee somebody like PSMC should have their own SoC probe card capability? Do you see them to be one of your customers in the near-term or in the far term? : :

Yes I think again, where we’ve made some of the advanced technology investments in introducing MEMs probes into the SoC probe card market. We have seen customers and various users of probe cards who historically have been able to use some commodity buyer technologies or needle technologies. Really get sort of compelled in this drive to smaller [indiscernible] structures to adopt MEMs technology. Clearly, we lead the technology raise and sort of no matter who it is we seem to be doing a pretty good job of solving the customer problems associated with advanced copper pillar packaging and other advanced packaging. So, I think that any of these customers, fabless, foundries, moved toward these advanced packaging [indiscernible].

Okay. : :

I have been [indiscernible] as adaptors of our technology.

Thanks a lot. Thanks for taking the questions. I was just trying to see how far this [indiscernible] business capes with Samsung or not so that was the motivation for my questions or to what degree it’s going to shift efficiency or [indiscernible] NAND so. Thank you very much. : :

Thanks.

And we have a follow-up question from Brett Piira of B. Riley & Company. Please go ahead.

Hey thanks guys, just one other clarification, a repeat number that kind of faded out. Could you provide your new breakeven numbers, I think I faded out during the OpEx? : : B. Riley & Company:

Yes. The new breakeven numbers are $61 million to $63 million of revenue that should provide a gross margin of non-GAAP gross margin of 30% to 33%.

Okay, perfect, thank you. : : B. Riley & Company:

Ladies and gentlemen, this concludes the FormFactor fourth quarter conference all. Thank you for your participation.