Thanks you and welcome everyone to FormFactor’s Second Quarter 2019 Earnings Conference Call. On today’s call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Shai Shahar. Please note that today's call is being recorded. 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 projections of financial and business performance; future macroeconomic conditions; foreign exchange rates; business momentum; business seasonality; the anticipated demand for products; customer requirements; 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 2018 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, July 31, 2019, 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 thanks everyone for joining us today. FormFactor delivered sequential and year-over-year revenue growth during the second quarter, resulting in strong cash generation and robust profitability at the top-end of our outlook range. Our third quarter outlook continues this positive momentum. These results and outlook further validate our broadly diversified leadership positions in attractive consumables and R&D-driven markets, which are less volatile than capital equipment. Two factors that empowered FormFactor's recent performance continue to be prominent means, namely, strong Foundry & Logic and DRAM probe card demand driven by customer node transitions and design releases, and continued adoption of test-intensive advanced packaging. During the second quarter we also delivered growth in RF probe cards from a combination of 5G pilot production and new customer wins for 4G LTE handset refresh cycles. In addition, we also capitalized on steady demand for Engineering Systems in enabling exciting next generation applications like 5 nanometer CMOS, VCSEL and silicon photonics. Our largest business, Foundry & Logic probe cards continues to perform well on multiple fronts and I'd like to provide some detail in three specific areas. First, as I mentioned earlier, we are seeing strength in our RF probe card business as we delivered probe cards for testing of initial 5G handset RF front-ends in admission to serving the typical midyear BAW and SAW filter round to support second half 4G handset launches. Filter probe card demand grew from new customer adoption of our technology, where we are providing increased test parallelism with best-in-class electrical performance, enabling these customers to maximize their use and make more efficient use of their installed base of test equipment. Second, we continued the long-term build of our foundry business executing on multiple design wins at multiple customers. That program -- business is experiencing typical midyear…

Thank you, Mike, and good afternoon. As you saw in our press release and as Mike noted our second quarter of 2019 results were at the high-end of our revenue and EPS outlook ranges and our gross margin came in slightly ahead of our outlook. These results again show the benefits of our diversified leadership in probe cards and Engineering Systems, which ramps in cyclicality, as we benefit from industry spending on both new and mature nodes. FormFactor's revenues for the second quarter of 2019 were $138 million, a 4.4% sequential increase and a 1.9% increase over Q2 2018. Probe Card segment revenues of $113.6 million in the second quarter increased $5.5 million or 5.1% from Q1 2019. Systems segment revenues of $24.4 million in Q2 increased $0.3 million or 1.1% from the first quarter. Within the Probe Card segment, Foundry & Logic revenues increased 3% from Q1 to $73.4 million and were 53% of total company revenue in Q2, closer to 54% in the first quarter. DRAM revenues were $36 million in Q2, an increase of $7.1 million from the first quarter and were 26% of total quarterly revenue as compared to 22% in the first quarter. In contrast to generally weak industry results, this was our second highest quarterly revenue for DRAM during the last four quarters. Flash revenues of $4.2 million in Q2 were $3.4 million lower than in the first quarter, down from 6% of total revenue in Q1 to 3% in Q2, consistent with our opportunistic approach to these markets. Approximately $2.6 million of the flash revenue in Q2 were from NAND Flash applications. Going forward, we continue to expect Flash revenues to be lumpy. GAAP gross margin for the second quarter of 2017 was $55.4 million, or 40.1% of revenues, 40 basis points higher…

Thank you. [Operator Instructions]. Our first question comes from the line of Craig Ellis with B. Riley FBR. Your line is now open.

Okay. Thank you for taking my question and Mike, Shai congratulations on the very strong performance in the quarter. My first question is more of a near-term question. So, guidance is very clear. There is nice growth sequentially in the third quarter. But within that, are there any notable gives and takes in any of the product segments that we should be aware of as we kick off the back half of the year?

Yes, Craig, it’s Mike. Thank you. I think schematically if you look at the third quarter, and we expected to look quite similar from a product mix and the theme perspective to the second quarter. We expect continued incremental growth in both Foundry & Logic and DRAM probe cards for a lot of the reasons we talked about in the prepared remarks, customer ramping, releasing new designs and undergoing node transitions are all creating some strength, different pockets in the customer base, different partners in the applications space. But overall, we do expect Foundry & Logic and DRAM to continue the positive trend they showed in the second quarter through the third quarter with the Engineering Systems business again being a pretty steady and slightly incremental growth. So, not much difference for the top level themes Q3 over Q2, but as you noted, a little bit of sequential growth.

Thank you for that. The follow-up question is more longer-term. As you run through the different businesses and it was helpful to get the three-part drill Foundry & Logic. You touched on a couple of areas, two of the SAM expansion opportunities that the company has, RF and in Foundry & Logic and then advanced packaging as you were talking about memory. The question is the company has made some very strong progress in both of those areas. If we fast forward to this time next year, where do you think, the company is positioned relative to those SAM expansion opportunities and how would we be looking at automotive at that time?

Yes. So just reiterating those three growth drivers, we highlighted the bridge to our target model really being driven by advanced packaging, mobile data, or RF, and automotive. I think, advanced packaging and mobile data continue to be short-term highlights. And as long as our served markets continue to hold up as well as they are, I think we can continue to show progress there. But we do have a ways to go to get to the target model on each of those. Automotive we’re making steady progress, although I don't think it's a surprise to anyone that our customers and their customers in the automotive supply chain are undergoing a little bit of demand contraction at the present. Longer term, though, that doesn't meet our opinion of the automotive opportunity. The content increase and the complexity really are a favorable tailwind for FormFactor in that automotive business. So I think, good short-term progress on both advanced packaging and RF, we see that continuing as we go through the 2020. We need a little bit of help from the markets on the automotive growth driver.

Thank you. Our next question comes from the line of Tom Diffely with D.A. Davidson. Your line is now open.

Following up on the last question, the strength you see on the RF side. You mentioned 5G, most of this is driven by new designs for the handsets of 5G or is the strength kind of driven by just the renewal cycle of another round of 4G components?

Yes, So Tom, going back to the prepared remarks, it's both, although I would characterize the 4G handset refresh as being a bigger components of the RF strength at this point. Part of that is we've continued to build out the customer base. And we probably are aware of the inside -- the handset supply markets, there have been some share shifts among the RF filter component suppliers, we’re doing better than we have historically. Some of the people who've had the short term wins are really providing the effectiveness and efficiency of the FormFactor high parallelism RF test solution. We're able to allow these people to reuse test equipment, still give great electrical performance on high yields, but really improve their overall costs of test structure by adopting our technology. So a little bit of 5G, some exciting indicators there. But the real material business growth was associated with the 4G refresh cycle that we're going through right now.

Okay. And when we move from 4G to 5G in earnest to the next couple years, is there a meaningful increase in complexity or the cost of a probe card to enter that new market?

I think there's two pieces that have us excited about the transition to 5G. As you know, this is going to take a while and by no means that I want to set the expectation that we're on the cusp of some explosion. This is going to be steady as she goes and increasing 5G content. The exciting part for us is both content driven and complexity driven. If you look at what our customers are saying about a 5G RF front-end in handset, and as a reminder, our business is really driven by and not so much infrastructure because of the unit. But if you look at the content in a 5G handset, there's a tremendous increase over 4G, you've got multiple input multiple output, you've got beamsteering, the ability to deal with all these -- need to deal with all these different new millimeter wave frequencies, sort of a big content increase. And on top of that, the higher frequencies and new requirements like MIMO and beamsteering drive the complexity increases, both of those play relatively well to our strengths. And so we would expect a SAM increase or an opportunity increase as we move more from 4G into 5G.

Okay. Are the individual probe cards more complicated? Or is it just more probe cards because of the complexity of the underlying chips themselves?

I’d say the filter probe cards are going to be kind of more or the same, maybe we increase parallelism, that next steps, where it’ll get a little more complex for testing more that at once, the same thing that’s driven our short-term results. But they are much more complex with some of these other components. Some of the different beamsteering elements are very complex RF chips but we will raise the cadence the probe cards and the test system has to do, and we would expect to be compensated for that. So I think it’s reasonable to expect an ASP increase.

Okay, great. Just clarification, early you talked about the foundry market, I mean multiple designs and multiple customers, is that multiple fabless customers working with the foundry or multiple foundry that you're working on?

It's elements of both. So as you probably know, our sale of a probe card and delivery of a probe cards into the foundry ecosystem involves both the fabless customer, the chip designers, as well as the foundries themselves. And we continue to build out our presence and share at multiple foundries, but also across the fabless space adding new fabless customers and increasing our share regardless of the foundry they decide to produce at with each of these fabless customer.

Okay, great. And finally, a follow-up on this the Flash market itself, obviously down part of the year-over-year. It sounds like that's more of you guys being opportunistic as to what products did you take versus just weakness in the marketplace?

Yes, again, compared to DRAM, we've got relatively small market share in Flash. We continue to view this as opportunistic, where there are Flash opportunities where customers find value in our technology, and will compensate us for that value, we’re going after those opportunities. But that's a pretty small subsegment of the overall Flash market. In the current environment obviously Flash spending is weaker. But I’d characterize our reduction in Flash revenue year-over-year more associated with the lumpiness and the volatility associated with our small share position being concentrated at a few customers on a relatively small number of high end designs.

Thank you. Our next question comes from the line of Christian Schwab with Craig-Hallum. Your line is now open.

Thanks for taking my question. Most of them have been answered. The only question I have is, as we continue into 2020, what type of trends would you need to see in DRAM for that to be a growth year?

For DRAM probe cards to be a growth year 2020 over 2019. Is that?

Yes.

Yes, okay. Well, I think as I said in the prepared remarks, DRAM is perhaps surprisingly strong at this point, given the overall backdrop. I think if we continue to see customers, transition nodes, adopt advanced packaging like HBM and continue to drive and increase design diversity, we could see a growth year in DRAM. But a reminder that our visibility is pretty limited. Our lead times average is much less than a quarter. And so our 2020 crystal ball is a little foggy at this point. We've got ourselves obviously in a good market position, given the current results. And as long as those node transitions, design releases, and customer packaging innovation continue, I think we're in a good shape to continue to have robust DRAM results going forward.

I think we have one more question. I know that probe cards obviously don't wear out that quickly. But new designs happen more rapidly. Can you tell us a rough estimate of what portion of your business you believe is consumable in nature?

By consumable you mean -- it actually wears out requires direct replacement. I think that's a relatively small fraction of our business at this point. It does depend on segments and application. The real consumable driver of our business is the fact that customers continue to accelerate design changes, which essentially obsoletes the probe card. So they're consumed by -- no longer able to work. The one exception probably is something like automotive where product life cycles are very long compared to something like mobile or data center. In those we do see a continued robust, refresh and reorder business where the individual probe cards wear multiple times over design life. That’s not the case in mobile where essentially the probe cards are being bought to service a very steeple hand. And in most cases never really wear out.

Thank you. Our next question comes from the line Quinn Bolton with Needham. Your line is now open.

I wanted to start with your sort of longer term model. When we look at that long-term model, I don't think you guys have forecast much growth from your largest customer or from the DRAM application, yet you look at the near term. I think your largest customer was back near the higher end of its historical range, DRAM again, near the high end of the historical range. And so I'm wondering whether those two parts of the business could actually be bigger contributors to that long-term plan and you might have thought six to 12 months ago? And then I've got a couple of follow ups?

Okay. Yes, I think you characterized the underlying assumptions in our long-term model correctly. And I do think although there may be some short-term strength from both of those components, I don't know that there's something we want to depend on as secular growth drivers. Certainly if our largest customer transitions from 14 nanometer to 10 nanometer and there's some overlap in design releases remaining on 14 but the ramp in 10, we may see some upside to the historical $100 million annual run rate there. But I think I'd want to set the expectation that that's probably transitory. We're not expecting that to be a persistent theme as 10 nanometer stabilizes and most of the roadmap goes on there. I think DRAM historically for us, we do see test content increasing associated with applications like HBM. Customers in DRAM are obviously very cost sensitive. And so are always working hard to get that test intensity back down. Having said that, right, there are reasons to believe that it could be a bit of a growth driver. If we look at the long term model there really the drivers continue to be advanced packaging, mobile data and automotive over that longer term. And so in any given period, we may see some acceleration towards the 650 annual run rate coming from different places. But in some sort of average sense, I don't think we expect too much fundamental growth from DRAM or our largest customer.

And then you talked about the foundry business. Sort of two questions there. One, you mentioned the 5 nanometer design near year end. And then also, I think [KSMC] has recently stated that they're seeing sort of better than expected demand for their 7 nanometer nodes here in the near term and building out some additional capacity to support that demand. Wondering if you're seeing any sort of flow through from that incremental demand on the 7 nanometre? And back to the 5 nanometer question. Do you feel like you've got pretty good market share for that initial 5 nanometer application?

Yes, maybe dealing with the 7 nanometer question first. We have talked about winning additional designs at this customer beyond just sort of the major leading edge mobile application processor, really dominates their 7 and 5 nanometer wafer starts. So we have seeing some of that flow through -- leading indicators of some of that flow through. I think that business continues to be pretty seasonal and driven around the major mobile application processor project. As we look forward to 5 nanometer and that ramp and our preparations for it, again, we expect to begin those sometime in the fourth quarter. Certainly our share capped that customer in 2019 of the addressable 10 and 7 nanometer opportunities has continued to increase. We feel like we've probably got somewhere around the 50% share position of that served part of the market at this point. We're obviously going to have to compete aggressively, continue to execute like we have in supporting the customer. But I think as we view in a reasonable position to show another strong results associated with share on that 5 nanometer processor ...

Thank you. [Operator instructions]. Our next question comes from the line of Brian Chin with Stifel. Your line is now open.

I guess first just to concur here on DRAM, I guess you are a little surprised pleasantly by the resilience and strength you are seeing in the DRAM probe cards sales, even in the midst of pricing down cycle and you did a really nice job outlining what's driving this. I guess, from a behavioural standpoint, if you had to put your finger out, why do you think your customers are staying more active and even more aggressive at this point in the down cycle relative to historical behavior? I guess to tag along there on the margin, do you also think you're gaining any market share in DRAM?

And as you might imagine, one that's a topic of internal discussion and internal debate. I think one of the key differences from historical behaviour or historical market conditions is although our customers’ DRAM prices have gone down significantly, their prices to their customers and the stock prices in the market, there's still a piece at this point reasonably profitable. And so continuing to invest in new designs and competitive differentiation in new architectures like HBM, are the kinds of things they're still funding, where maybe in previous downturns the entire state was cut off, and they really tried to cut back on everything, because the profitability was so much worse than it is today. Obviously, we look at that with a lot of interest in the trajectory of the end markets. We're hopeful that things will bottom-in including DRAM, certainly the last set of earnings calls from our customers. We do believe that we might be turning the corner. But I think that's the fundamental reason is they're still profitable, it's not really winter like it has been in the past. It's more like a late autumn and so they continue to invest for spring.

I was thinking also the diversity of end markets. It’s not one key market and then two, but kind of three, and then the expenses, they’re trying to fulfil various markets and kind of optimize. Wondering about how it will help as well. Also just curious -- even thinking from a seasonality standpoint, if you will, just you are offering a pretty robust levels on the DRAM, probe card business. If that was to stay slackened a little bit, beyond sort of the 3Q visibility, and say 4Q, you did talk to about the 5 nanometer sort of removal process to ramp. Do you think those two factors, one going up maybe one we're seeing a little bit, do you think they're kind of offsetting one another in Q4?

Maybe not addressing the magnitudes exactly. But you touched on one of the fundamental cornerstones of our strategy, and whether it would be the acquisitions we've done, or the organic growth that we've driven in acquiring new customers and releasing new products, having all of these different opportunities that you can go address it in any given time period, so you've got a relatively stable revenue stream of consumables and R&D-driven spend to go and fund your innovation roadmap is exactly what we're trying to achieve. So your example -- we don't have a lot of visibility into the fourth quarter at this point. But your example is the good one where you could have these offsets associated with one of our major businesses, perhaps taking a bit of a step back, another one taking up the slack and allowing us to continue to invest. I think that's the magic of our strategy to-date, and the direction will continue to drive FormFactor.

One last question, just to span this out, a little bit longer term. You alluded again to your $650 million revenue target for you to several years from now. Yes, I think it embedded around $60 million incremental sales from advanced packaging. You guys seem to be tracking pretty well against that. but I am curious how much of that TAM contemplated chiplet packaging and to what extent because this activity augments that TAM over say a two or three year horizon?

Yes, I think when we first put together the model and talked about advanced packaging, there were really two applications that we had line of sighting, one was HBM and you see that certainly manifests in our DRAM results in the second quarter and in our third quarter outlook. The other piece was integrated fan-out which is partially responsible for our share gains at world leading foundry. I think chiplets and some of the other things that have come to the floor, some of them talked about now notably from our largest customer, I think over the longer term we probably consider those to be additive to the $60 million opportunity. Now that’s probably not additive over the same timeframe. So, you can take the $650 million and turn it into the $700 million but I think advance packaging has got much longer legs than maybe we originally thought of when we put the long-term model together.

Thank you. Our next question comes from the line of Gus Richard with Northland. Your line is now open.

Thanks for taking the question. Just a follow-on on advanced packaging in the current quarter, could you talk about the relative strength between HBM integrated fan-out and chiplets, which of those drove the strength in the quarter or which was strongest?

Yes. So, it would have been HBM head and shoulder above the other two for a couple of reasons. First of all, as we've said in the prepared remarks, HBM really now in volume production at all three major manufacturers and we’ve talked about -- significant each of them -- talked about significant part of their innovation roadmap. So, there is not tons away for volume but it is significant and it is material and obviously material to our results. Integrated fan-out, I think continue to have secular growth but is pretty lumpy because the adoption is still mostly noble at least from a wafer start perspective. And so they’re growing through sort of the mid-year usual softness associated with mobile with delivering probe cards for mobile application processors. So, a quarter and half from now that could easily flip around just based on the granularity of individual time. I think chiplets were in very early innings at least with our engagements with our key customers. Again an exciting opportunity going back to Brian's question to give more legs to the advanced packaging story. But right now, really the volume is being driven by HBM and the integrated fan-out.

And on the integrated fan-out, is that primarily just one customer or has that broadened out some multiple customers? And I'm talking about device guys.

Yes. So there are designs from multiple customers but the volume again is really, really being driven by one customer.

Got it. And then just in terms of your target of 40% market share, can you just give a little bit of color on: A, how big you think the probe card market will be this year and that would sort of answer the question that how much market share you think you're gaining?

I think given that it’s not a broadly covered market, we’re going to have to do a little bit of triangulation on it. But I believe it was -- the enhanced probe card market was about $1.3 billion last year with expectations that it will contract sort of 3% to 5% this year, so a much more -- much less of a reduction than say some of more volatile capital equipment but a reduction nonetheless. Obviously if you take our first half results and take the midpoint of our third quarter guidance, that would imply we are gaining share and making progress on this 40% share.

Okay. The fundamental in your presentation says what market was 1.6. I'm assuming the rest of is engineering systems?

That's right. So you asked me about probe card, with clarification. The other part of our served market is engineering systems, which is separate and distinct from probe cards, obviously two work together nicely but that's about another 300 million of served market that gets you to 1.6.

Right. And I'm assuming, is that engineering market flat, steady, or increasing or decreasing?

I think it's probably a fair assumption that it's something close to flat this year. We've seen some nice growth in the market and in our business over the past couple of years. And given that it's primarily driven by customer R&D budgets, which continue to be strong, I think it's a reasonable assumption that it probably doesn't contract, but probably flat year-on-year.

And then I guess the last one from me on the engineering systems is, last quarter I think you shipped an engineering system for MicroLED. Is there any incremental activity in that market? Are you beginning to see some pickup in interest for commercialization in technology?

So our engineering system exposure, as a reminder, it is very early in customer product development cycles. And the work we've done on MicroLED, and continue to do on MicroLED, still it's pretty early. We have not got any indications that there's a imminent production ramp of this, I think it is the compelling technology. It has some cost issues that people need to work through. But from a performance standpoint, it's clear that it's going to be adopted somewhere. And we like the position we're in. The activity continues. A big highlight of this quarter because in the quarter certainly silicon photonics and VCSELs were a bigger part of our optoelectronic mix. The MicroLED activity continues, and I think we're well positioned when it finally does reach commercialization.

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Mike Slessor for closing remarks.

Alright. Thank you very much for joining us today and we'll talk to you again in a quarter.

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