Thank you, and welcome everyone to the FormFactor's Third Quarter 2016 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Mike Ludwig. Before we begin, Jason Cohen, the company's General Counsel will remind you of some important information.

Thank you. Today the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today and on the Investor Relations' section of our Web site. Today's discussion contains forward-looking statements within the meaning of the Federal Securities Laws. Examples of such forward-looking statements include those with respect to the anticipated effects and benefits of the completed merger between FormFactor and Cascade Microtech, projections of financial and business performance, future macroeconomic conditions, business momentum, business seasonality, the anticipated demand for our products, our future ability to produce and sell products, and the development of future products and technologies, and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended 2015, and our other SEC filings, which are available on the SEC's Web site at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today October 27, 2016, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Thank you, Jason, and thank you everyone for joining us today. FormFactor delivered strong results in our initial quarter following the Cascade Microtech acquisition. Revenue of $123 million was the second highest in company history nearly reaching the all time highest attained in the third quarter of 2007. Non-GAAP gross margin of 43% and earnings per share of $0.22 were at their highest levels since the fourth quarter of 2007. These results are the product of continued strength in FormFactor core probe card business, combined with the growing probe card and engineering systems businesses from Cascade Microtech. As we have said previously, the FormFactor-Cascade Microtech combination provides us with scale and diversification, which accelerates our earnings growth. The results of our first quarter operating as a combined company support this thesis. Beginning with the third quarter, we will report our result into segments: the probe card segment and the system segment. Within the probe card segment, we will continue to provide a revenue breakdown for foundry and logic, DRAM and flash markets. In both segments and their constituent markets, we will provide commentary on the dynamics and opportunities driving our business. Foundry and logic, probe card is our largest business at over 60% of third quarter revenue and as a market we lead with approximately 40% market share. In the third quarter, we experienced solid demand in all of our major served foundry and logic application, namely microprocessors, RF, mobile, industrial and automotive. In the third quarter, we continued to operate at historically high output levels for our key microprocessor customer as we completed recovery from the production shortfall of the first quarter. In the fourth quarter, we have now normalized capacity at the $100 million annual output level, which is approximately double the 2015 demand from this customer so…

Thank you, Mike, and good afternoon. As you saw from our press release and heard from Mike Slessor, our third quarter results inaugural quarter for the combined companies were strong with solid non-GAAP profitability and robust free cash flow consistent with our expectations and putting these two companies together. As Mike commented earlier, FormFactor will report our results in two segments, the probe card segment and the system segment. In this initial quarter, we will specifically call out the revenue contribution in the form of Cascade Microtech probe card business within the probe card segment. Total FormFactor non-GAAP revenues for Q3 2016 of $123.6 million increased $40.5 million or 49% compared to our second quarter. Probe card segment revenues of $102.7 million increased $19.6 million or 24% primarily from the $18.4 million from Cascade Microtech revenues in the quarter. System segment revenues for the third quarter were $20.9 million, all contributed by the Cascade Microtech business. Within the probe card segment, the foundry and logic revenues of $75.1 million increased $17.2 million or 30% compared to our second quarter due entirely to the addition of the Cascade probe card revenues. Microprocessor and RF filter applications were the strongest revenue contributors in the quarter, but experienced expected declines from exceptionally strong second quarter. Mobile processor and automotive applications were also strong contributors in the third quarter. DRAM product revenues were $22.3 million, a decrease of 8% compared to the second quarter. The DRAM environment remains choppy as the largest DRAM device manufacturers worked with their respective technology node transitions. DRAM revenues comprised less than 20% of total company revenues in the quarter. Flash revenues of $5.3 million for the third quarter increased $4.3 million from the second quarter driven by several 3D NAND design wins on both Vector and makers architectures.…

Thank you. [Operator Instructions] And our first question comes from Edwin Mok with Needham & Company, your line is open. Edwin, please check your mute button.

Hey, apologize guys. So first question I have is just on the cost synergy side, I think you mentioned on the prepared remarks that you have some savings this quarter and you expect $1.3 million to $1.5 million of cost synergy. Is that a quality run rate and then I think you mentioned on your prepared remarks that you guys are looking, reviewing your company wide strategy, is that just for a strategic reason or you also looking at cost when you do the report.

Yes, let me handle the first part of that Edward. So the $1.3 million to $1.5 million is actually a quarterly synergy number. As Mike communicated in Q3, we have $1.3 million of synergies which annualizes out to $5 million and you recall we had committed to $10 million to $12 million of annual synergies in 18 to 24 months post close. So we are on our way. We are consistent with where we thought we would be at this point in time maybe even slightly ahead but the number is a quarterly number.

Edward, it’s Mike Slessor. Let me address the longer term planning, exercise (21:57). We are doing it for several reasons. First of all, both companies have a disciplined annual planning process where we put together an annual operating plan that guide stand initiatives and strategic objectives as do many of our peers. So part of the process we are undertaking is to put together combined 2017 annual plan, however we’ve also taken the opportunity to look a little further downstream at potential technology and product synergies, both from a growth perspective but also from a cost and efficiency perspective. So I think in summary, we are looking at all of these things as we go through both our 2017 planning process looking to see how we can further accelerate our growth from the combined technology and market footprint that the company now has as well as looking how we can extract additional cost synergies out of the combination and the scale.

Great. That was very helpful. Just talk about fourth quarter directionally. I remember historically cost have a strong 4Q for the system business that sounds like you guys are guiding it flat. I was just wondering why, you’re not expecting the stronger 4Q. And then on the flash side, you guys have a big jump in the third quarter and you mentioned there was some ramp up late to 3D NAND. I was wondering if that lumpish order that you satisfy in 3Q and you expect that to drawback little bit on fourth quarter or you expect to see in this $500 range.

Edward, Mike Slessor again. I’ll provide some color although I want to make it clear that we are not going to provide segment based guidance or market based guidance. We will provide revenue guidance for the whole company. On the system side, you’re absolutely correct, the x Cascade systems business, what we now refer to as our system segment, has historically had strong calendar Q4 strength and we see that happening again. In the prepared remarks, we referred to it as strong order flow. We continue to see that business meaning relatively strong, building off Q3 into Q4. It’s a buinsess that however is relatively significant but not all of our business given the overall mix that we have in building up to the 120 million midpoint revenue guidance. On the flash front, as I said in the prepared remarks, we have significantly increased our market share and our revenue in flash in the third quarter. We do expect that to continue based on current order activity and current commitments at least through the fourth quarter. But I would also like to caution people that we are still in a relatively small market share flip printing in flash, and this market share increases composed and concentrated in a relatively small number of designs, so we would expect it to be lumpy for a little while but so far so good on moving from third quarter to fourth quarter with our flash business.

Definitely doing well on that front. Last question I have (25:33) in your prepared remarks you talk a lot about the auto market potentially create a good opportunity to drive your business. How do you address the market? Does it mostly just come from the SoC or foundry logic for business or do you see other opportunities either from the system or the memory test. Can you give us some color in terms of how you address that opportunity maybe for longer term.

Yes, we thought it would be useful to share the automotive example because it is an interesting example for us where FormFactor’s technology leadership and worldwide footprint is really allowing us to address an additional growth opportunity and some additional diversification for the overall business. The primary driver of that opportunity is inside our foundry and logic segment or foundry and logic segment products. However, there are some given the increased content of silicon, there are some memory applications as well. And those are manifesting themselves in pushing our product specifications for example to higher temperatures. So we view it as an interesting opportunity and opportunity perhaps where we have some advantages given our scale, given our quality processes, given our business continuity footprint compared to some of our competitors. And it is an area primarily concentrated in the foundry and logic today but has some potential to move certainly into the DRAM production probe card business as well as the systems business.

Great. That’s all I have. Thank you.

Thank you. And our next question comes from Craig Ellis with B. Riley. Your line is open.

It’s B. Riley. Thanks for taking the questions. I wanted to just start congratulations on the flash progress, nice to see. Going back to some of the third quarter performance, I had expected DRAM would be flat and looks like it’s down about 8% sequentially. So can you just help me with some of the puts and takes in that part of the business. And as we think about that business longer term with signs of improved DRAM pricing out there and DRAM fundamentals, it’s the business one that can get back to historical levels, the high 20s, low 30s or should we have a different intermediate term expectation for this business.

Yes, Craig, Mike Slessor here again. On DRAM we were down slightly Q3 over Q2. When you look at the overall puts and takes associated with that, primarily it really was associated with the timing of particular designs transitioning to 20 nanometer at two of the 3DRAM manufacturers. If I back up and take a broader view, we expect the DRAM to be stronger in the second half of 2016 than it was in the first of 2016. And I think that will be true in the numbers, but it’s certainly not going to be particularly stronger. Part of the reason for that is the continued unpredictability of the 20 nanometer node transition at two of the three 3DRAM manufacturers and sort of the holding back of the other DRAM manufacturer in moving to the 1X nanometer node. In our discussions with all three of these customers, that lumpiness appears to be smoothing out and with the improvement as you know in the overall and DRAM pricing market and our customer profitability, they look to be a little more I call it aggressive or moving forward with some of the node and design transitions, especially as we push into 2017. I think that probably consistent with the read through you get from some of the equipment manufacturers both on the state of 2016 capital DRAM spending and the view towards 2017.

Thanks for that. And then the follow-up is on the SoC business now foundry and logic with your largest customer, as you look at that business now, are we at a level in the guidance where that’s the ratable level going forward or should we expect to see some variability around there, shirk timing as they move to 10, 10+ and 10++ longer term?

I think a great question. So just to maybe reiterate and get everybody in the same, we are now as we said in the prepared remarks operating for our key microprocessor customer at double the 2015 demand levels. Earlier in the year as we went through this ramp that’s where we told you it would be long term, even though the second and the third quarter were significantly stronger in that doubled level. As we look out in the future that’s going to be what we are forecasting and what was sizing that business to be. However, there is certainly going to be puts and takes in any quarter associated with, again, individual design releases, but probably more importantly in the short term on the number of wafer starts associated with the 10 nanometer node. That’s obviously a significant growth opportunity for us that will ramp because that node has been a little bit on again, off again and it’s timing is one of the key variables obviously for a probe card spend for any customer, most notably our key microprocessor customer. So I’d put sort of the average demand level at this double 2015 level, we’ve constructed the Q4 guidance around that level, we’ve sized our operations around that level, however, I would caution you to expect some variability around that level as different node transitions and design transitions work their way through the system.

That’s great. Very helpful color. I will switch over to a couple for Mike. One, on the synergies, it looks like modestly ahead of plan, is that a result of just better execution pulling in some synergies that were planned for future quarter, are you actually tracking above the targeted synergies that you had laid out when you announced the deal?

Yeah, so as we said, we had $1.3 million in the third quarter versus I think what we had communicated at the last call at $1 million. I think we got – we had some, I would say, unplanned synergies that we received with respect to some structural changes that occurred probably in sales and sales organization, so we had maybe a little bit more benefit there. But again I think we are pretty running on track with what we thought – where we thought we would be. And so if I give you again – remind people of the timing that we talked about with respect to the $10 million to $12 million, so we’ve said probably as we get through with the second quarter after close, we should be running somewhere around $1 million, once we get through the fourth quarter post-close, we should be running somewhere around $2 million a quarter and as we exit around the sixth quarter post close, we should be running around $3 million or about $12 million annualized. And so even though we're running maybe slightly ahead of what we communicated at our last call, I don't think we've seen enough to suggest that we're going to accelerate the timing of our expectation of the synergies.

Thank you. And then the last one for me before I hop back in. Helpful to get the repayment schedule on the deal that – in the supplements on the website, the question is to what extent should we look at that as kind of a hard and fast pay down schedule or something just more guideline for which you would have flexibility to go much faster or slower than what shown?

Yeah, those are the contractual terms. I think from our perspective, we see that we will be generating good cash flow and as we do that we will accelerate the pay down that debt, I think, pretty quickly, right. So I think we will use the majority of free cash flows that we generate to pay down that debt.

Thanks, guys.

Thank you.

Thank you. Our next question comes from Patrick Ho with Stifel Nicolaus. Your line is open.

Thank you very much. First question in terms about seasonality, I know in the past you've talked about the probe card business having you being seasonally softer in both 4Q and 1Q, can you just give a little bit of color on the probe system that you acquire from Cascade Microtech? Is there any seasonality to that or is that just more timing of I guess development projects with the chipmaker itself?

Good question, Patrick. So part of the rationale for the Cascade Microtech acquisition and that's continuing to grow the FormFactor business was to diversify some of the calendar season elements we had in the business previously. If I go way back where our businesses were primarily driven by a PC refresh cycles, there was tremendous seasonality where Q4 and Q1 would be very weak and Q2 and Q3 would be very strong. As we've grown and diversified the business, that's been damped out a little bit and overall our calendar profile still has different seasonality elements in it, but the exposure to different end-market certainly PC and server is still a piece of that, well, were now also driven by mobile product launches. I mentioned the automotive piece, which is much less seasonal. In particular the systems business and the probes business we acquired from Cascade have quite different seasonal behaviors. As was note a little bit earlier, the systems business tends to be strong in the back half of the year typically Q4 strength with build through the year, so Q1 seasonally the weakest, Q4 seasonally the strongest. With the probes business as I mentioned in the prepared remarks being a Q2, Q3 strength business, although that’s primarily correlated to the key handset device timing, which happens in Q3, Q4. So in some total, I think, we’ve continued to try and add businesses both organically and inorganically that will allow us to damp some of this calendar seasonality, obviously, some of those fundamentals are still in place and you'll see a few puts and takes as I think are evidenced in Q4 guidance as we move throughout the quarters of the year.

Great. That's helpful. Maybe as a follow -up on the engineering probe systems business itself, as the industry begins to move to the development of the 7 nanometer logic node, do you see incremental opportunities in that industry shift given the complexities and challenges manufacturing those devices are likely to have, is there a potential incremental step up for that technology node transition?

There's and there is a similar step-up opportunity associated with elements like new non-volatile memory architectures like crosspoint, 3D NAND and some of that is driving the strength we see in the systems business today and, in particular, the strength we see in the high-end 300 millimeter part of our systems business. So, yes, 7 nanometer and the challenges that are going to be associated with 7 nanometer yield improvements in yield ramps are a opportunity for the systems business and an opportunity more generally for our presence in this early engineering space to complement the classical FormFactor production probe card business.

Great. And final question for me. With the DRAM industries also going through a couple of no transitions currently for both 20 nanometer and 1x nanometer now, does the company feel comfortable with its capacity on the DRAM side of things or how will you need to allocate it if the DRAM industry continues to gain momentum as we enter into 2017?

Yeah, DRAM and I agree with the fundamental directional hypothesis that the DRAM industry is going to gain some momentum as we move into and through 2017. Certainly, all our customers are behaving like this and I think there's a general consensus that that movement will occur. If you look at DRAM today for FormFactor, for example, in the third quarter as Mike Ludwig mentioned, it's 20% of our revenues. It’s an important part of our revenue and it's an important part of our technology and manufacturing footprint. But as we've grown other businesses around it and as we've grown the complementary manufacturing capability, for example, in our foundry and logic business, we’re able to move capacity around at least to a certain extent between these segment. You saw us do this in the first quarter as we had to ramp and double capacity for our significant microprocessor customer, we can pull those same knobs associated with DRAM. And so we're fairly comfortable from a capacity perspective, we’re in good shape to be able to absorb any kind of 2017 demands like we see from these levels and do it in a way that perhaps doesn't structurally add a significant amount to our fixed cost structure.

Great. Thank you very much.

Thank you. [Operator Instructions] And our next question comes from Christian Schwab with Craig-Hallum Capital. Your line is open.

Hey, great. I only have one question. When you guys look at the DRAM business and you look at customer migration at 18, 20, would you anticipate that the first half of 2017 revenue is greater than the second half of 2016?

So, Christian, Mike Slessor, again. I think given the discussion we just had with Patrick and some of the themes that we see occurring, certainly node transitions are more complete and aggressive node transition to 20 nanometer and 1x nanometer nodes that our customers are talking about right now would lead to higher DRAM probe card spend and therefore revenue for FormFactor in the first half of 2017 as compared to the second half of 2016. So I think the simple answer to your question is, yes, however, it is predicated with a bunch, yes, that those node transition need to proceed with a speed and conviction that we haven't really seen yet.

Right, right. I just -- I thought that's what you are implying earlier and I just wanted to make sure that that was the answer and understand things can always change, but perfect. I don’t have any other questions. Good quarter. Thank you.

Thank you.

Thank you. And our next question comes from Jagadish Iyer with Summit Redstone. Your line is open.

Yeah, thanks for taking my question. Two questions. This is for Mike Slessor. So if you look at how 2017 is shaping up, how would you characterize where could be – which segment could have a big surprise at least on the probe card side between the DRAM and the foundry and logic segment or the NAND segment and where could there be some down side that we could be missing potentially? And then I have a follow up.

Well, if we look at the overall industry, again, we look at it in terms of three segments: foundry and logic, DRAM and flash. I think we have had obviously a couple of questions and a bit of a discussion around DRAM and the potential dynamics there. I think on a year-over-year basis DRAM offers some potential for some upside, but there's a good deal of volatility around those assumptions as well. From a structural or secular standpoint, foundry and logic continues to be a business that we are investing in growing our technology portfolio, in continuing to work with the customers where we don't have a strong share position to increase our share in that business. From a surprise perspective or a downside perspective, I think given our market footprints in both foundry and logic in DRAM, we expect to be able to grow our share a little bit, but we are really going to be tracking pretty closely the overall industry spend in those two segments. Flash as we’ve discussed before, a bit of a different story, given our small share position, the initial progress that we've made here in Q3 as you saw from the results maybe that represents growth or the biggest element of volatility in our overall business. So I think when you look across the production probe card portfolio and I want to also include RF filter business that we acquired from Cascade Microtech, which we include in the foundry and logical results, the fundamental growth there continues and band proliferation and more filters pre phone is as seen that we see continuing and our planning with our customers. So I think across all of these, there's potential for a few surprises on the upside, there’s potential for some downside, but given our share footprints and our position, we feel reasonably confident that we're going to be able to continue to gain share.

Okay. That's great. And there’s a question for Mike Ludwig. Given how you're able to get these synergies of $1 million to $1.5 million, so I was wondering is there going to be any help on the gross margin side looking at it over the next, say, 12 months or so? Thanks.

Yes, so what we have – the $10 million to $12 million and also then -- $10 million and $12 million annually and then the $1.3 million that we saw in the third quarter as well as the $1.3 million to $1.5 million and going forward, those numbers really are around SG&A synergies. As we’ve talked about in the past, we are going to be very careful about how we approach the operational side of this. As Mike said, we are just starting to look seriously at that, we are in the midst of that. I would say over the next 12 months, we may gain a little bit on the operation side and maybe a little bit of help in gross margin, but for the most part we're looking at the synergies really to be in OpEx and primarily focused on sales, general and administrative expenses.

That’s good. Excellent quarter. Thank you.

Thanks.

Thank you. [Operator Instructions] And I'm showing no further questions. At the time, I’d like to turn the conference back to Mike Slessor for any closing remark.

Thanks again for joining us today. We're very pleased to have delivered strong results in our first quarter together as the combined FormFactor-Cascade Microtech team. As we plan and execute as one team, we are confident that our increased scale and diversification will enable us to continue to outpace industry average growth rates by efficiently executing against our expanded opportunity set. Thanks again for joining. Bye.

Ladies and gentleman, thank you for participating in today's conference. This conclude today's program. You may all disconnect. Everyone have a great day.