Thank you and welcome everyone to the FormFactor, Second Quarter 2018 Earnings Conference Call. On today’s call are Chief Executive Officer, Mike Slessor and Chief Financial Officer, Shai Shahar. 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 releases 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, 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 2017 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 1, 2018 and we assume no obligation to update them. With that, we will now turn the call over to FormFactor’s CEO, Mike Slessor.

Thanks Jason and thank you everyone for joining us today. The second quarter of 2018 again demonstrated the resilience of FormFactor’s position as a diversified leader in electrical tested measurement. As expected, we grew off the lows of the first quarter, delivering increased revenues across each of our major businesses. We benefited from a product mix biased towards FormFactor differentiated high end products, driven primarily by growth in advanced packaging applications. Coupled with solid executions by our operations teams, this favorable mix produced gross margins near the levels of our target financial model and with good expense control produced earnings per share above the high end of our outlook range. Because many of these factors continue in the third quarter, we expect third quarter revenue and profitability performance to be comparable to the second quarter. As many of you are aware, there have now been two major delays announced in our customers’ node transitions. The delay of the 10-nanometer node to our largest customer and more recently the news that one of our major DRAM probe card customers is delaying its 1 Y nanometer node. Obviously these events cause short term volatility in our demand profile and with the DRAM delay now compounding our largest customers 10-nanometer delay, we think it is unlikely the 2018 will be a growth here. Beyond this short term volatility however, we continue to demonstrate the longer term value and utility of our products and technologies. For example, as our largest customer releases new designs on their mature 14-nanometer node, they require new fleets of probe cards to test these new designs. As we described in the past, since probe cards are a consumable with a specific to each customer IC design, each of these new designs drive demand for new probe cards. This reinvigorated…

Thank you, Mike and good afternoon. As you saw from our press release and heard from Mike's comments, our top line results for Q2 were above the midpoint of our outlook and significantly above the Q1 level. And our gross margin exceeded the high end of our outlook range. These results, coupled with continued good operating cost control allowed us to deliver non-GAAP EPS above the high end of our outlook range. FormFactor‘s revenues for the second quarter of 2018 were $135.5 million up 14.6% from the first quarter of 2018. Probe card segment revenues of $111.6 million increased by $16.7 million or 17.6% compared to Q1. And system segment revenues of $23.9 million increased by $0.6 million or 2.4% compared to Q1. Within the probe card segment, Foundry and Logic revenues of $62.1 million increased by 6.3% compared to our first quarter. The increase was mainly attributable to the higher revenue from our largest customer as expected and relates to additional 14 nanometer designs. During the second quarter we continued to see significant shipments to the world’s largest foundry which utilizes our technology in advanced packaging applications for leading-edge nodes. Foundry and Logic revenues were 46% of total company revenues in the second quarter, down from 49% in the first quarter. While Foundry and Logic revenue increased in absolute dollars, the decrease of the percentage of total revenue was mainly due to the strong revenue in Q2. DRAM revenues were $38.1 million in Q2, up $7.8 million or 26% sequentially. We continue to experience sustained DRAM demand as our customers release new designs for data center and mobile applications. DRAM revenues were 28% of total company revenues in the second quarter, a slight increase from the 26% in the first quarter. Flash revenues of $11.4 million were $5.2 million…

Thank you. [Operator Instructions] Our first question comes from Patrick Ho with Stifel. Your line is now open.

Hi there, good afternoon. This is Brian calling in for Patrick; thanks for letting us ask a few questions. Maybe first question for Mike; Q3 revenue guidance is pretty confident Q-on-Q. Can you tell us how the end market mix is expected to vary though, Q3 relative to Q2?

Yeah, I’ll take it. So the way we characterized it Brian was being comparable and it’s interesting not just at the highest level for the overall company revenue do we view things to be comparable, but as we work our way through the different market mix and even customer mix, things are pretty similar as we go from Q2 to Q3. There are some puts and takes in our different emerging businesses. Obviously we just said some of these things are going to be volatile like our engagement with the world leading foundry, but overall I would say not just the top line, but the different product and customer mix is pretty similar as we move Q2 to Q3.

Okay, that's helpful. Thank you. So moving on to your major advanced logic customer, I'm kind of curious, relative to the prior watermark year, prior high water mark here in 2017, you know should 10-nanometer begin to tape out into volume production next year? How would you expect the revenue contribution in 2019 to trend relative to the prior high watermark here in 2019? Would you expect it to be up at this point in time or any other sort of color you can provide would be helpful?

Yeah, well I think the comparisons as we work our way through you know no transitions in supporting our largest customers activity, I think one of the interesting things that I want to highlight before we talk about too far in the future is we are experiencing some nice incremental design activity in probe card business associated with, then continuing to innovate at the 14-nanometer node. So we did see any increase as we moved from Q1 to Q2. The forecast we have for Q3, again largely concentrated in 14-nanometer continues to support that growth through the year. If we look back to 2017, which was I believe a little bit over $140 million with that customer, I think to repeat that or exceed that we're going to need a very strong 10-nanoeter RAM, in combination with the sustaining 14-nanometer activity, and there's quite a few different moving parts on getting all of those things moving together again. But certainly if those conditions exist; if we get these node transition issues resolved with both our largest foundry and logic customer and one of our larger DRAM customers, we’re pretty confident we can touch on the high watermarks of those two customers again in 2019.

Got it, that’s helpful color. And just curious and just to add onto that; based on prior experiences would you say that the ramp would be sort of a gradual or maybe kind of a sharp, you know even though you can’t be precise on timing for apps in 2019, but will it be more gradual or kind of a sharp pick up?

Well, I think you know it’s challenging to go back with historical experience, because some of these node transitions are getting so challenging from our customers that they don't really follow the historical patterns. If we do go back to the historical patterns, they’ve typically been pretty sharp and if you look at for example our revenue with our largest customer in 2017. It ramped up pretty quickly as 10-nanometer intensified before they tap the brakes on that route and I think that's probably a reasonable trajectory, something like over a two quarter timeframe to imagine the revenue trajectory is going to be when 10-nanometer actually ramps.

Okay, very helpful. Maybe one more question on the flash business. I understand that you know there are opportunistic things that you can capitalize to become a pretty material number in this quarter. Kind of curious, you know what do you think the normalized level is? How we should think about marching profile in that business and maybe you know if you could kind of flush it out and characterize what drove the incremental in the corner.

No, it's a great question, because $11 odd million, it is becoming a material insignificant piece of at least the second quarter business. I will reiterate that we do view it as volatile because the fundamental thing driving this is us serving opportunities really at the very high end of 3D NAND, high layer accounts where there's high densities, where customers really do need FormFactor’s MEMS technology to be able to probe and test these chips, and in the second quarter there was more of that business to be had. I think from a profitability standpoint, if you look at our overall gross margins, even with that heavy flash concentrations you can see things were pretty healthy and I think it goes to yes, we're treating this as an opportunistic business, but you know the requirements do demand FormFactor’s MEMS technology, and as a result we're being compensated for delivering that kind of technology into these high end 3D NAND applications.

Okay, great, that is really helpful. Thanks Mike so much.

Thank Brian.

Thank you. Our next question comes from Craig Ellis with B. Riley FBR. Your line is now open.

Yeah, thank you for taking the question and Mike, thanks for all the color as you look ahead. So I just wanted to go back to your commentary issue. We're talking about the gross margin guidance. I was with you on flat sales and flat utilization, but then you said gross margins would be essentially down by about 240 basis points quarter-on-quarter. So as we think about flat revenues and utilization, but gross margin moving off of the prior quarter level, it would suggest that the operational execution was so stellar in the prior quarter or their interest segment or intra customer dynamics. What is it that’s causing there to be a material variation in gross margins when other factors look fairly similar?

Thank you. It's a great question and we saw strength across the board of our product mix in the second quarter, which was the main driver for the higher gross margin in the second quarter. We saw it with advanced packaging, in both Foundry and Logics, but also in HBM activity under the DRAM memory segment market. So that was the biggest piece that contributed to the higher gross margin. Going forward we forecast it to be, and of course the higher revenue and the total dollar also contributed. Going forward we mentioned that we expect a different less favorable product mix in Q3, which will contribute to the update Q3 range of 42 to 45. So we are very glad with the execution in Q2. Many things were moving in our favor. Q3 should be similar, comparable as we describe it. 42 to 45 is a good way in for Q3.

Would you expect a decrease in both, the systems and the credit card gross margins or is it more one versus the other?

I think the system as we’re expecting to continue to improve stay at similar levels. We’re now at 48.6. Our goal is to be at the low – you know high 40’s, low 50’s and we continue to see improvement. So I expect it to be at a similar level and the change will come mostly from the probe card’s weakness because of the change in the mix.

Okay, that’s helpful. And then the next question I had, Mike appreciating that the form has looked at different opportunistic business historically and still has that view, but with the market coming towards form, can you be a little bit more specific on where you're seeing the opportunities? Is it really as manufactures try and go in volume at 96 per year or you're seeing success at 64 and 72 or at even levels below that. Any color there would be helpful.

No Craig, it’s really the high end of that layer count range and it goes down to sort of the pretty simple advancement of requirements as densities go up. In some cases you know the probing gets more challenging. Pads on the dye get smaller; in some cases the dye themselves get smaller and that's where customers really need our MEMS technology to probe these smaller pads and do it in a cost effective and electrically accurate away. Semantically it's really the same thing that caused us to be adopted last year at the world's largest foundry for integrated fan out applications and a similar story associated with HBM, where the densities are going up and people really need the scalability of Form Factors MEMS technology to be able to probe and test in a cost effective way.

That’s helpful, and then the last question, I appreciate the longer term color regarding being able to get to target model run rate levels in the second half of next year. As you look ahead, can you just list the three or four things that really give you confidence that that path is within reach for Form Factor? Thanks so much Mike.

Sure, thanks Greg. So as we look at the target model that produces $650 million in revenue and $1.50 of non GAAP earnings per share, a few things that we need to get there, but things where we demonstrated or can rely on some pretty significant momentum. I mean the first one as the market share leader in about $1.5 billion of served markets, we need that market to continue to grow, but I think all the signals that we see are you know that the semiconductor market and the probe card consumables and systems markets are pretty healthy and continuing to grow on that trajectory, so we're pretty confident there. In our Analyst Day last year we articulated the line-of-sight growth opportunities that really bridging drive our revenue growth inside that market. Advanced packaging, mobile data and automotive and without going through the details of each of them, I think we've shown pretty good progress in each of them. Advanced packaging clearly a highlight where we’re well ahead of where we thought we'd be in capturing that opportunity and I think that gives us confidence that we can execute on all three of these line-of-sight opportunities, but advanced packaging in particular carrying a lot of momentum as we described in the prepared remarks. The one that's maybe a little bit more uncertain is the no transitions and as I described, I think it was Brian's question, there are certainly some puts and takes associated with our largest customers 10-nanometer transition timing uncertainties there. You know the different DRAM node transitions and design changes that we need to support that revenue base, we need those things to happen as well, but you know all indications are that those things are going to begin to resolve themselves here as we move to 2019 and that's why we're confident and trying to convey that confidence to people, that we’ll exit 2019 on a run rate that's consistent with our target financial model.

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

Hey guys, good job for the quarter. Thanks for hearing my question. First question, how far was the line of question on the 10-nanometer as your largest customer. I think they clearly talk about targeting the holiday season of 2019 for products to hit the shelf companies and the prior experience if that’s the ramp of time that they expect. When do you expect the demand to start ramp; is it 2Q, 1Q or 3W, just if you can give a rough idea on that.

Yeah, and you know consistent with what I talked about before, some of the historical data points on ramp timing and ramp duration are maybe not so reliable to rely on in the current situation. But I would expect if that end market product timing is going to be the case, that we'd be somewhere in mid-2019 in beginning to support the initial parts in the ramp in probe cards to test the wafers, whether they are going to end up in the channel to feed the holiday season. I realize there's a lot of ‘if’s’ there and to be honest, there's a lot of ‘if’s’ in all of the different market signals associated with the 10-nanometer ramp. But again, with the assumption the end products are going to hit in late 2019, 2019 holiday season. I'd expect us to be seeing the demand sort of mid-year 2090.

Okay, helpful on. On the flash, the $11.4 million of revenue you see this quarter, are you moving the same level of revenue into the quarter? I just thought we’ll get a rough idea of your comp. You talk about this being more volatile. Do you expect to normalize in the coming quarter?

With the remainder of the caveat that we’re running on, average lead times that are approximately half a quarter, so you know we're operating with as a significant element today of turnables in our third quarter forecast. We do you expect to see the flash mix be comparable in Q3 to that which we delivered in Q2, the sort of $11 million in change. And that's true, you know sort of across the different businesses. We see a similar mix profile. Some of the customer specific designs are not so favorable from a cost perspective for us and that's why we’re guiding gross margin down a little bit from the 46% we saw in the second quarter. That at the highest levels at the markets we report flash, DRAM, Foundry and Logic and Systems, I'd expect to see a pretty similar breakdown of revenues across that mix.

Okay, great, thanks for clarifying that. At the largest Foundry customer you mentioned on the prepared remarks stack, you start to ship a number of sample probe cards for newer designs, right and you know we've always had a lot of new design around the 7-nanometer node. Just curious, is there a way to kind of think about opportunity there? You know I understand you are consolidating market share of a competitor there. Can you just give us some color in terms of where you stand in market share and if there is a way you can kind of help us think about the opportunity there, you know maybe not this year but more like ’19 or even beyond? Any color would be helpful.

Yes, I think the opportunity there, again consistent with us progressing towards our target financial model is a substantial one and it's primarily driven by advanced packaging, where those customers, where the fabulous customers in that Foundry would really need FormFactor’s MEMS technology. I think we made good progress. We've grown share here in the first half of ‘18 over that which we achieved in ‘17 and we wanted to highlight for you what we view as a really significant development and that we have now provided qualification units for more than just a large mobile application processor project. We’re now branching out and diversifying that business a little bit. The timing of that turning into material revenue and really sizing the opportunity is a little bit challenging for us to size right now, but I would say longer term and it's probably even past 2020. As that customer migrates more to wafer starts to advance nodes and advance packages, the opportunity for our technology grows. We sort of – the available market, the severed market for us of that Foundry grows, and when we reach a steady state of that, again it’s probably post 2020 but we view that as an opportunity comparable to the size of our largest customer. Significant number of wafer starts, high test intensity and large design mix, all good factors for us and we view it as a significant long term opportunity on the way to our target financial model.

One last question I have. On DRAM you mentioned you saw some HBM design on the second quarter. Is that volume coming down, I guess offset by other DRAM demand, but that’s part of the mix that affect gross margin in the third quarter?

Well, there’s lots of put and takes on the mix. I would say HBM continues to be relatively strong as we move through the third quarter here. There is some more subtle issues associated with test configurations and different ways customers deploy our technology, again reminding you that a probe card is a design specific consumable and so the details of that design are pretty important for what our cost structures in ASPs look like. HBM continues to be a pretty strong component of our overall DRAM mix here through the middle part of the year and we're pretty excited about the continued adoption of that, because as we’ve discussed in the past it's a real advantage for FormFactor and will draw customers towards our technology.

Okay, great. Thanks for covering.

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

Yeah good afternoon. Maybe one more question on the Flash side or the non-bolter [ph] side. What was the balance of that category; was it NOR Flash?

It was $7 million out of the $11.34 NAND.

It was NAND and so NOR was the remaining.

That’s correct.

Was there something in the NOR because that’s a pretty big number for NOR too then, isn’t it?

It is. I think both components grew significantly. Obviously NAND, if I back up a couple years was very, very low for us. But the NOR Flash component has grown as well. We view that as probably a little less volatile than the NAND part of that Flash business and a lot of its driven by the end markets in automotive. We see that being part of our overall automotive growth opportunity, obviously not all of that NOR goes into the automotive sector, but a good chunk of that growth is being driven by end market automotive.

Okay, and kind of curious what the trends you are seeing on the RF mobile side of the business right now. You know obviously the years turned out pretty weak for most players, but are starting to pick up at this point. Are you seeing much in the way of additional capacity needs for this year?

I think our RF probe card business, you know I'll talk about the RF systems business in a minute but the RF probe card business, I characterized as pretty close to steady state over 2017. We are seeing some design pick up as we enter into the back part of the year, but the fundamental dynamic of handset unit growth essentially being flat, and some of the different markets share puts and takes among the filter manufacturers, we don't see a lot of year-on-year growth in that business ’18 over ’17. What we do see is some pretty interesting developments as we start to move towards the initial deployments of 5G, and that's going to drive a lot of performance test requirements that bring things towards FormFactor strength and we are anticipating some pretty strong growth as that kicks in. On the systems side obviously, you know the analysis and engineering work that's going on for a lot of either the new filter designs or the new RF front ends at the higher frequencies of 5G have us pretty well exposed to those trends and working with the customers as they develop their test programs, devices and test methodologies going forward. So I think the production probe business, the first order is close to flat year-on-year Tom, but we do see some interesting opportunities as the leading edge of 5G kicks in.

Okay, great, and then you talked about the broadening of the customer base at the high end. What is the relative opportunity for you having a single large run product, versus you know call it 10 small products; the volume is the same ultimately?

So if everything else in the same, right, if all other things, wafer starts and all that sort of thing are the same, the opportunity for us is roughly the same, right, between 10 different designs on the same number of wafer starts versus one different design. Now there are inefficiencies in customer you know production buffers and that sort of thing that will drive a little bit more volume in the more -- in that the 10 design scenario. But there’s other factors in any specific opportunity that probably are more dominant.

Okay, so really the opportunity was just an expanding of that customer base for more wafer starts ultimately?

Yeah. More wafer starts, more customers, more different probe cards for us to expand our opportunity inside that customer. But fundamentally you can think of it as their leading edge nodes, 10-nanometer and 7-nanometer driving the sheer scale of that opportunity for us.

Okay. Great. And then finally you said that the – you weren’t counting on the 10-millimeter ramp to happen until next year. Is it a similar view for the 1Y node on the DRAM side?

I think that's a good question and one that we’re obviously trying to stay very close to. I'm not sure I have any significant data to add to what's been sort of disclosed over the last couple of weeks, except to say that probe cards typically trail the capital equipment installed, the process equipment installed by something like a quarter to two quarters. So as you see the process to a manufacturer starting to install or ramp up on 1Y expect to see us one to two quarters later.

Okay, so I assume at this point you've done some pilot line 1Y work and it's just, are you talking about the volume now?

We have and one of the more interesting things that’s happened in our pilot line 1Y work is that through the multiyear reengagement with this large customer we think we're in a pretty solid competitive position for 1Y. So we are a little bit disappointed that it's not ramping aggressively, because we think there's going to be some additional market share gains for us when that customer transitions from one 1X to 1Y.

Just sets up a good 2019. Thanks for your time.

Thanks Tom.

Thanks Tom.

Thank you. [Operator Instructions]. Our next question comes from Edgar Roesch with Sidoti & Company. Your line is now open.

Quick one for Shai. The inventories ticked up a little bit in the past two quarters. Is that some timing issues or there is some more expensive raw materials playing a factor in there. Could you speak to that a bit?

Sure, hi Ed. Mostly the reason for the increase in inventory in the last couple of quarters was the anticipation of the increase in revenue we saw in Q2. We need to start purchasing things and build some inventory ahead of these – to this ramp up. And if we talk about Q3 outlook being incomparable to Q2, then I do expect revenue levels to go down a little bit in the third quarter.

Inventory levels.

Inventory, I’m sorry yes. Inventory levels go down in the third quarter.

Alright, I appreciate that. And then Mike really nice color on the long term financial plan and where we stand relative to that. If we look back and just take stock of Q1 a little bit, is it fair to say that the expectation of shipping the 10-nanometer and that sort of being delayed seemingly last minute was really disruptor and could maybe a normalized Q1 sort of split the difference between your 118 that you reported and what you had for the second quarter.

Yeah, I’m not sure I entirely understand the question Ed, but certainly Q1 represents what we view as the low in our current operating model and the current industry situation and really was indicative of one particular customer not ramping the 10-nanometer node and really not in a position to start migrating designs to the 14-nanometer note. Here in the second quarter and through the third quarter we see business with that customer strengthening, because there's pretty robust design activity on 14-nanometer. Even as 10-nanometer sits on hold, we expect that as we exit the year we’ll be back at nominally that 100 million annual run rate or $25 million a quarter business with that customer, really just in supporting the 14-nanometer design activity.

Okay, I appreciate that. And then one last one, just sort of – a lot of my questions have been asked already, but major supplier of testers. You recently spoke about parallel testing in the mobility device arena. Having reached some practical limits for a few years now and leveled out, and I was just kind of wondering if you could speak a little bit about where parallelism is still playing a part in your business. I know RF was one where you're hoping to produce some gains for your customers. If you have any thoughts on that to share, that would be great.

Yeah and I think it’s very, very device and application specific. I would say I agree with the notion that in high end mobile the applications processor, parallelism probably has reached a natural limits and all though those are exciting opportunities, you know flashy businesses, there's also a whole bunch more probe card demand where parallelism increases continue to be the fundamental value driver and haven't reached any limits. You know RF was one of them. We are working with – you know there is this pause in the RF filter market. We are working with several customers to try to advance their parallelism. So if things pick back up associated with presumably the 5G ramp, we've brought to them a higher level of efficiency, improved their cost of test and of course been compensated for that. So that's one area. The other area I'd like to highlight is DRAM continues to increase parallelism as node shrinks dye sizes get smaller and there's more dye per wafer and so we're now shipping cards that are, you know close to 3000 dye tested in parallel in testing a single wafer, and so I would expect that trend to continue in DRAM, so that overall costs of test is continued to be driven down.

Thank you.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Mike Slessor for closing remarks.

Thank you all for joining us today and we'll talk to you at conferences throughout this summer or on our Q3 earnings call. Thanks again.

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