Thank you and welcome everyone to FormFactor's second quarter 2017 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 by the company and on the Investor Relations section of our website. 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 products, our future ability to produce and sell products, 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 2016 and our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, August 2, 2017, and we assume no obligation to update them. With that, I 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 a strong second quarter, setting a revenue record and sequentially improving all profitability metrics to levels above the high end of our guidance range. For perspective, the $0.40 of non-GAAP earnings per share we delivered in the second quarter exceeded the non-GAAP EPS we generated in the entire year of 2015. As indicated by the go-forward guidance in today's press release, we continue to see solid demand. In addition, now that we're well into the third quarter, our visibility into the second half naturally continues to improve and we are incrementally more positive for the year overall than we were in prior calls. Even with our reported first half revenue significantly above what was previously expected, we now anticipate revenues for the second half to approximate first half levels. As we discussed, our acquisition of Cascade Microtech provides FormFactor with a broader customer and end market footprint and the ability to capitalize on a wide set of diverse demand drivers. This diversification continues to pay off as we are experiencing positive momentum across the board from robust data center, mobile and automotive end markets. As we described on our June 28 analyst call, the line-of-sight growth opportunities from advanced packaging, mobile data and automotive ICs in these end markets are key drivers that will help us achieve our target financial model. As a reminder, our target model produces $1.50 of non-GAAP EPS from $650 million of revenue when our served markets reach $1.7 billion. Our second quarter performance offers an important initial proof point to FormFactor's opportunity from advanced packaging in the mobile space and the revenue and profitability growth it produces. As we discussed in the past, advanced packaging processes like the integrated wafer level fan-out…

Thank you, Mike, and good afternoon. As you saw from our press release and heard from Mike's comments, we had an outstanding second quarter, delivering another quarter of record revenue, achieving solid GAAP earnings per share and non-GAAP EPS that was significantly above our guidance. In addition, we delivered free cash flow of over $21 million in the quarter, thus ending the quarter and a net cash positive position. We recently crossed the one-year anniversary of the Cascade acquisition, so I thought it would be useful to also highlight our combined company performance. During the 12-month period ending July 1, we generated revenues of $520 million, non-GAAP diluted earnings per share of $1.06 and free cash flow totaling $68 million. These results clearly show the power of bringing the two companies together. Turning back to the second quarter results, FormFactor's revenues were $144 million, up 12% or $15.2 million sequentially. Probe Card segment revenues of $121.6 million increased 14% or $15.1 million compared to the first quarter, while our Systems segment revenues of $22.4 million were up slightly compared to Q1. Within the Probe Card segment, foundry and logic revenues of $88.7 million increased $14.4 million or 19% compared to our first quarter, resulting primarily from increased strength in advanced packaging demand at leading edge nodes and continued strength in data center, mobile and automotive applications. Foundry and logic revenues increased to 62% of total company revenues in the second quarter, up from 58% in the first quarter. DRAM revenues were $31.5 million in the second quarter, an increase of 9% sequentially as we continue to see a robust demand environment in the quarter. DRAM revenues comprise 22% of total company revenues in the quarter, consistent with Q1. Technology node transitions, the strong data center demand environment, and increased DRAM…

Thank you. [Operator Instructions] The first question comes from the line of Patrick Ho with Stifel. Your line is open.

Hi, thank you. And this is Brian Chin calling in for Patrick. Very nice results and thanks for letting me ask a few questions. I guess, first, North America provided some nice incremental lift in the quarter. Your big customer there has been operating at relatively high levels there already. So, I was curious if you could characterize what drove the additional upside here. And I think it's separate and probably rolls up into Taiwan perhaps, but were the pull-ins in the quarter related to the large second half mobile processor win?

All right, Brian. Mike Slessor. A couple of different moving parts in both the North America and Taiwan bump ups. As we said in the prepared remarks, there was a lot of activity in general for us around supporting the overall supply chain for the mobile handset refresh cycle that's going on right now, and the major handset releases anticipated in the fall. Certainly, a part of that is the application processor win we had associated with advanced packaging. But if you look around, there was elements of DRAM as well, which are in both North America and Taiwan. And to throw another element on to the mix, certainly, our largest customer continues to utilize capacity and have demand above the double demand levels we achieved in 2016. So, we saw a variety of different elements of momentum. I would say the theme around the second quarter pull-ins, the second quarter acceleration were broader than just one customer, but certainly obviously helped out the overall results.

Great, thank you. Also, maybe on the DRAM side, you touched on the aggressive migration of some of the key players there in DRAM and how that should continue to benefit you maybe through the end of the year. Is it fair then to expect DRAM maybe to even be up a bit more sequentially and is that also factoring into your gross margin outlook for Q3, off the strong Q2 level?

Yeah. I think, in general, DRAM, obviously, remains pretty robust. The end markets, the supply/demand balance, as we mentioned, that our customers seem keen on maintaining, certainly the behavior is consistent with that. I don't know that I expect a lot of increased DRAM revenue from here. If you look at our forecast through Q3 and into Q4 and the discussions we're having with key customers on what capacity they need to be in place, I think to first order, we had set the expectation that DRAM revenues should be above where they were in the second quarter as we move through the back half of the year. Obviously, it's an industry where people continue to be very agile and flexible in adding capacity, and so that could change. And I think it's probably biased to the upside.

Thanks. And maybe one last quick question about CapEx. I heard the outlook –consistent outlook for this year. When I think about the $650 million target model, is there any sort of change in the trajectory of CapEx spending from here to that revenue level?

No, we really think that – again, that $16 million to $20 million, we think is sufficient in order to provide the capacity that we need to deliver the $650 million.

Okay, great. Thanks a lot.

[Operator Instructions]. Our next question comes from the line of Jagadish Iyer of Summit Redstone. Your line is open.

Yeah. Thanks for taking my questions. Two questions. My congrats for a strong execution. First, if you look at the second half in terms of the – of how we should be thinking about gross margins because if you have a really favorable mix, I was just wondering that 2Q gross margins was up near high-level watermark. So, how should we be thinking about second half gross margins? Are there some upsides post-Cascade that you might be able to benefit? Any color on that would be great? And then I have a follow-up.

Yea. There were a couple of different elements that I think characterizing, in the near-term, with the structure we're operating on with Q2's gross margins as maybe the high watermark is a pretty good characterization. Obviously, we see elements of gross margin expansion, again, as we execute on our line-of-sight opportunities and compete with more differentiated products. But Q2 represents a very favorable product mix, and as we mentioned, outstanding factory execution across our network.

Given that we were accelerating shipments at what we certainly call the high end of our capability and differentiation spectrum in serving this next-generation handset release, we see a bit of a normalization of product mix to more normal levels here in Q3 and to the extent we have visibility on the specific product mix into Q4 as well.

Just as a follow-up, Mike, in your prepared remarks, you talked about the packaging and this opportunity with the apps processor with this customer. Obviously, I was wondering whether – how should we think about proliferation to other customers? Do you think you have line of sight with at least other one or two customers possibly this year or is it mainly a 2018 event? Thank you.

I think with some of the elements of advanced packaging, as we described on the June 28 call, one of the major ones is certainly integrated fan-out. That's really, for 2017, I think fair to characterize as a single customer, even a single design project in the industry. And that's one of the key benefits we experienced in Q2 and continue to experience at some level in Q3 and through the back half of the year. If you look at the discussions we're having with key customers and some of the industry research and where we're focusing our R&D, really integrated fan-out through-silica via, things like the EMIB silicon bridge, all of these packaging techniques that are helping the industry innovate beyond Moore's law are really key drivers for our business. And so, advanced packaging, for us, Q2 and into Q3 here represents an initial proof point, as we said. I see this as a much longer-term trend where we're going to see continued progress and continued positive impact to our P&L as we move into 2018 and beyond.

Congrats again. Thank you.

Thank you.

Thank you. Our next question comes from the line of Edwin Mok of Needham & Company. Your line is open.

Hi, guys. Thanks for taking my questions. Sorry, I jumped on the call a little late. So, if I missed it, I apologize. On the foundry logic growth sequentially from 19% based on my math, how much of that is driven by this new win, the new customer penetration versus just growth on the other mobile? As you mentioned on the call, you mentioned mobile is a big part of it.

Edwin, Mike Slessor again. It's a mix of both. Obviously, 10 nm, for us, in foundry and logic, as customers ramp up both in the foundry area and in the microprocessor area, we saw significant contributions from both of those drivers in the second quarter. And although we see the foundry piece tailing off a little bit in the third quarter, we see continued strength in the microprocessor element of it. So, I would say, as we've talked about in previous questions here on this call, there were several different drivers and moving parts that all helped the increased revenue in Q2 and the momentum we see continuing here into Q3 and into the second half.

Okay, great. That's helpful. You guys are ramping R&D expense, as you talked about new product coming. Is there a way to kind of think about R&D expense either as a percentage of OpEx or percentage of sales? And then kind of maybe – we always want to discuss, see what [indiscernible] going, right? I think, firstly, you guys talk about the new RF probe product, when should we expect that product to start contributing revenue?

I’ll address the product piece and then Mike Ludwig will jump in with the R&D spend and some of the ways we're articulating the model. We did mention in the prepared remarks that the first product that's a joint effort between the former Cascade former and former FormFactor is going to beta here in the third quarter on the schedule we've shared with you guys in the past. It's really a combination that tries to take the operational efficiency and productivity that FormFactor technology offers and fuse it together with the RF performance that the Cascade roadmap offered. As I said, that's going to beta here in the third quarter. I would expect sort of some level of revenue contribution in possibly the third quarter, but more probably the fourth quarter. And at the levels the whole company is operating at – I don't know how you want to define material, but we do expect to see an impact that we'll be able to see on the P&L as we move through the second half of 2018 and go through the design win cycles and adoption cycles associated with a new product.

Hey, Edwin. This is Mike. And talking about R&D spending level, so in our model, we have communicated that we believe that number will be in the 14% range. Obviously, with this quarter, with the acceleration of revenues and whatnot, we were down closer to 12% range, but not because we're limiting spending. We're spending on plan against the projects that Mike has articulated, and that spending again just happened to result in 12% in this particular quarter. But we think in most quarters and on an annual basis, we still believe that somewhere between 13% and 14% is the right way to think about our spending levels on R&D.

Okay, great. Last question I have, I know you guys have [indiscernible] visibility. But I think on prepared remarks, Mike, robust second half year growth, right? Maybe a good way to think about that is – can you talk about typical seasonality you see from foundry, DRAM and the system business and how this year could be different or same as that?

Yeah, sure. That is a good question, Edwin. So, in the call and the press release, essentially, what we've said is the second half is going to look an awful lot like the first half from a top line revenue perspective, even though the first half is essentially above the expectations we had at the last call – at the last earnings call. If we think about the seasonality profiles inside that, certainly, most of our businesses have a typical seasonal profile or calendar seasonal profile that looks a lot like strong second quarter, strong third-quarter, little bit weaker fourth quarter and first quarter. I think by and large, given the strength we've seen and continue to see in supplying some of these major mobile handset releases, some of that calendar seasonality is going to continue in place. But as we've continued to diversify our business, doing things like acquiring systems business from Cascade Microtech, getting more exposed to automotive which has a different seasonal profile, we see those seasonal ups and downs being damped a little bit. I think it's still a reasonable expectation that you'll see some imprint of the typical Q2, Q3 strengthening Q4, Q1 weakness, but at a much less extreme level than maybe we've seen in some past years.

Okay, great. That's very helpful color. That's all I have.

[Operator Instructions]. I'm showing no further questions. I'd like to turn the conference back over to Mike Slessor for any closing comments.

Great. Thanks for joining us today. And thank you especially to the worldwide FormFactor team for delivering record results in the second quarter. Our positive momentum continues. We remain focused on delivering a strong second half to the year. Thanks again.

Ladies and gentlemen, that concludes today's call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.