Thank you, and welcome, everyone to FormFactor’s Fourth Quarter 2019 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 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, 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, February 5, 2020, 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. FormFactor delivered record revenue and profitability in the fourth quarter with financial performance surpassing the high end of the outlook range we revised upwards on December 11. The strong performance closed in exceptional 2019 in which we posted 11% top line growth against the semiconductor capital equipment market that shrunk by double digits. Our results again illustrate the robustness of FormFactor’s broadly diversified leadership positions in attractive consumables and R&D driven markets in semiconductor test and measurement. As we move through the early part of 2020 many of the same drivers of our 2019 results are contributing to a strong first quarter outlook. As we noted in December, our fourth quarter benefited from rapidly accelerating demand for foundry and logic probe cards layered on top a steady demand for our other products. The foundry and logic strength was notable in its breadth coming from both 10 and 14 nanometer microprocessor designs as well as an assortment of 5 and 7 nanometer designs ramping it each of the two leading-edge foundries. We also began volume shipments of probe cards to test millimeter wave RF devices which are planned to be a key component in the RF frontends of 5G handset launches anticipated later this year. On the memory front, we ended 2019 with sequential growth in DRAM probe card revenues building on the decade high revenues posted in the third quarter. At the risk of repetition our 2019 DRAM results offer an excellent example of how FormFactor’s demand drivers differ from capital equipment. Probe card demand is not generated primarily from baseline capacity additions, but instead from both customer node transitions and new design releases. Consequently, but instead from both customer know transitions and new design releases. Consequently FormFactor benefits as…

Thank you, Mike, and good afternoon. As you saw in our press release and as Mike noted our fourth quarter revenue exceeded our updated outlook range and our gross margin was at the high end of outlook range. The combination of these factors coupled with low effective tax rate in Q4 resulted in EPS that was significantly above the end of our updated outlook range. FormFactor's fourth quarter revenues were $178.6 million, a 27% sequential and year-over-year increase. These record quarterly revenues contributed to total fiscal 2019 revenue of $590 million an 11.3% increase compared to 2018. Probe card segment revenues were as quarterly record high of $153.2 million an increase of $36.7 million or 31.5% from Q3 2019. Systems segment revenue were $25.5 million in Q4, an increase of $1.3 million or 5.4% from Q3 2019. FRT revenue included in Q4 came in about $1 million higher than our preliminary estimate of $2 million to $3 million. Within the probe card segment in line with a robust incremental demand we discussed in our December 11 press release, Foundry & Logic revenue increased 53.7% from Q3 to $105.1 million and was 59% of total company revenue in Q4, up from 49% in the third quarter. DRAM revenues were $42.9 million in Q4, an increase of $3.5 million from the third quarter DRAM revenue were $42.9 million in Q4 an increase of $3.5 million from the third quarter and were 24% of total quarterly revenue as compared to 28% in the third quarter. Building of the strength demonstrated over the past two years, this was our highest quarterly revenue from DRAM since Q1 2008. Flash revenues of $5.2 million in Q4 were $3.4 million lower than in the third quarter and were 2.9% of total revenue in Q4 down from 6%…

Thank you, sir. [Operator Instructions] Our first question comes from Quinn Bolton from Needham & Company. Please go ahead.

Hey. Thanks for taking my question. This is Charles Shi on behalf of Quinn Bolton. I have a question on the capacity expansion part. So if we look at the Q4 you are – your probe card is already running at about $600 million per year and the very close to your $650 million target model. And I think you are – in the last quarter you spent a $6.6 million CapEx a little bit higher than the original $16 million to $20 million plan. So my question is when I think about next year, right, with the context of what you expect about a demand coming up and what – how should we think about your capacity expansion and associated CapEx?

Sure. And thanks for the question, Charles. So our capacity is a function of both flexible labor and some CapEx addition. We added mostly flexible capacity in Q4 and as you heard in the prepared remarks the Q4 CapEx and as you noted was a $6.6 million and slightly higher than in the previous quarter and that brought our total CapEx to $21 million for the year. And the higher level of investment is in line with our higher revenue and the added capacity and we expect to invest in a similar level during Q1.

Okay. Okay. Thanks. And regarding the – I think Mike, you've mentioned – I mean a one month ago at the Needham Growth Conference that to handle that like the search demand like what we saw in the last quarter you had to do deal with less efficient – I mean less efficient way like leveraging – I mean using higher utilization and paying a little higher of the labor. How should we think about that, I mean going into 2020? Do you expect the similar situation to repeat or whether we should think about that differently?

Yeah. Well, I think the comments I made at the conference earlier this year, we’re associated with that. Anytime you ramp up capacity that quickly, you're obviously bringing on new labor that needs to be trained. It's not at the peak efficiency. It's going to be over the long run. And we're also retaining the flexibility to bring this capacity back down. So paying temp wages quite a bit of overtime so that we're not substantially adding to our fixed costs in the event the demand moderates a little bit. So when I look at this, we're still in the first quarter probably not operating at peak efficiency levels. And that's consistent with if you noted our gross margin outlook range even at relatively high revenue levels, the top end of that range is 46%. So still operating with some efficiencies – inefficiencies sorry. But we believe those to be a reasonable trade for the flexibility that's going to give us as we move forward through 2020.

Okay. Thank you guys for answering my questions.

Thank you. Our next question comes from Craig Ellis from B Riley FBR. Please go ahead.

Yeah. Thanks for taking the question and congratulations on the strength in the quarter and in the outlook. Mike, I wanted to go back and just reconcile what I thought was a point in the announcement when the company raised the fourth quarter guidance with our outlook. I think at the time, the company's view was that it was being opportunistic around a number of opportunities and certainly there was very good execution there. But with the calendar first quarter's guidance down 7% at the midpoint, it seems like there might be some decent sustainability to what we're seeing so perhaps you can speak to that point maybe just talk about some of the gives and takes as you look at the first quarter, what's more opportunistic, what might be more sustainable?

Yeah. So a good observation, Craig, and it goes back maybe a little bit to the point about retaining flexibility. I'll remind everyone that we operate with very short lead times and limited visibility in this business well inside a quarter where most of our business has to turn in the quarter. So flexibility and agility both to the upside and the downside are important in our operating model. When I compare how we currently view the first quarter to the fourth quarter results as we said in the prepared remarks foundry and logic continues to be very strong both in the microprocessor part of the business as well as the foundry part of the business by and large around the same advanced node overlapping advanced node themes that we had at work in the fourth quarter. So those are probably the positive side of the ledger. We did also note that we expect a sequential decrease in DRAM probe card demand first quarter compared to the fourth quarter. But we really think that's mostly due to digestion. If you put this into context in the last half of 2019 we operated at record high shipment levels for DRAM probe cards. Certainly some of that is due to the trends we've talked about like advanced packaging and increased test intensity. But I think it's reasonable to expect that there does need to be a little bit of digestion as our customers use those probe cards and as they move through the middle part of the year probably refresh their new design roadmaps and return to more normalized levels. So in terms of puts and takes I think foundry and logic continues to be strong. We'll see how that last through 2020 DRAM in a bit of a digestion phase. Everything else kind of steady as how that last through 2020. DRAM in a bit of a digestion phase, everything else kind of study issue goes. But that gives us a relatively strong view for the first quarter of 2020.

That's helpful. I appreciate that. And then I'll just give a follow up to Shai. Can you just talk about operating expense clearly very well controlled despite the big revenue increase in the fourth quarter? How should we think about the arc of operating expenses we look through 2020? Are there particular initiatives or programs to be aware of in that line item? Thank you.

I think the two main changes if we look at 2020 OpEx versus 2019 is first the addition of FRT, all right. We acquired the company in Q4. And in 2020, we're going to have them for the full year. They are adding about $1.5 million of OpEx per quarter. And if you think about let's call it structural annual increases in OpEx related to salary raises, benefit costs which increase year-over-year. So, I’m – if you look at the ranges for 2020, we are probably talking about $42 million to $45 million of OpEx per quarter with the first quarter being at the high end of that range because of the annual benefits we set.

Thank you. Our next question comes from Brian Chin from Stifel. Please go ahead.

Hi, good afternoon. Congratulations on the execution this past quarter and year end. Thanks for letting us ask a few questions. Maybe to hone in first, again this is kind of going back to some of the epicenter of the strength that you've seen in Q4 and into Q1 here. But honing in on sort of your largest customer, they're driving a very high level of spend in Q4. Can you talk about your visibility on the sustainability of this run rate moving across the year and that's taking into consideration comments maybe that have been made in recent comments maybe that they made in recent public forums about what they’re trying to do in terms of getting supply out and maybe again in front of that to some degree?

Yeah. I think it's a great observation, Brian and it's part of the reason again why we want to retain some flexibility and agility. I think as anybody who operates in the semiconductor supply chain knows today, things are very dynamic. Our fourth quarter showed the ability to really respond to the upside and execute well in capturing the demand. We see with our largest customer and some of the other customers in Foundry & Logic that strength continuing into the first quarter, but it does seem like there's a general consensus that Foundry & Logic spending an investment is probably first-half weighted in 2020. Having said that the constituents of the strength with our largest customer continue to be this sort of the result of Moore's Law slowing driving overlapping activity on both the 14 nanometer and 10 nanometer node, 10 nanometer being a new node that's ramping with relatively high test intensity also plays into the strength of demand for FormFactor’s products at the present time, but I think it's one of those situations where the usual caveats associated with visibility definitely apply here. A general consensus that maybe the overall spending will moderate as we move into the second-half resulting in the first-half weighted these. So I think Foundery & Logic are pretty strong at this point. We'll continue to execute, capture the demand as we can and take advantage of the opportunities as they present themselves.

Great. Got it. That's helpful. So if I heard correctly maybe some more revenue concentration in the first-half relative to the second for you guys – some moderation in the second-half if I'm not – if I'm hearing you correctly? And then…

I think that – yeah, I think that’s a fair working assumption that has pretty big error bars around it, right. I think everybody's visibility is awfully limited at this point not just us.

Okay. Yeah. Maybe go into something that again is difficult to sort of get a read out on, but Mike you did mention how there is some contemplation in your guidance for the March quarter relative to the coronavirus albeit difficult to quantify sort of the ranges around that. But just to be more clear, is that sort of reflected in the width of your revenue range or more kind of where you put the midpoint on that revenue guide or anything else you can kind of provide there would be and even what you're seeing from a just supply chain disruption standpoint would be helpful?

Right. I'll take that. And I will answer to two parts, I would say, I will talk about the demand impact and also about operational and the supply chain impact. So when it comes to the demand as you heard in the prepared remarks because of the additional uncertainty and the difficulty to accurately quantify the impact of the coronavirus at this time, we have lowered our range more than otherwise would have been, but we’re also widening our revenue outlook range. It's now $12 million. If you look at previous quarter, it was $8 million. And we assigned a higher risk to certain transaction, as we took into consideration our backlog what we shipped already to China and others. We closely continue to monitor the situation. And to your specific question we believe our outlook is adequately reflected the current situation we've been taking to the range. That's on the demand side. When it comes to the operational and the supply chain impact, we have significant footprint in China for over a decade now, but very minor manufacturing. And we believe there will be not significant impact on our operations and our supply chain when it comes there to the Corona virus.

Okay. That’s helpful. Thanks, Jay. Maybe one last question. From a capital allocation standpoint, clearly you are putting a lot of free cash. And it’s clear the bias is with an eye towards M&A as you alluded to in the prepared remarks. Is there any update in terms of – to the extent you can talk in terms of timing and or the characteristics the company is looking for in terms of any potential deal?

Sure. I mean as we’ve said, M&A has been and will continue to be a key part of our strategy. We also have as a equally important part of our strategy executing in the serve markets we have leadership positions in now as you can see in the fourth quarter and first quarter outlook. On the M&A front, there is two pieces to it. One, we’re executing a funnel of smaller tuck-in deals, FRT in the fourth quarter an excellent example of a case study of this. Smaller companies may be lacking the channel, the customer relationships and support infrastructure to really take their compelling technologies and drive them to share positions inside with a pretty risk verge customer base. So, we think we’re bringing a lot of value to those kind of companies. FRT again being a nice example that we are beginning to make some progress on. We’re also investigation and where possible trying to execute and pursue deals of scale. A good example of that would have been the Cascade Microtech deal we did back in 2016 that really adds significant revenue, cost synergy and fundamental strategic value to the company changing the character of our EPS. As you might imagine, those are little more challenging to get done, part of the reason why we’re executing on a tuck-in funnel. But we’re not given up hope on being able to continue to do deals of scale that expand our serve market and put the cash we're generating to work for shareholder.

Okay. Thank you.

Thank you. Our next question comes from Tom Diffely from D. A. Davidson. Please go ahead.

Yes. Good afternoon. So Mike I want to ask a little bit about the 14 nanometer business that you're seeing, obviously it's a fairly mature node at this point and the fact that it's still a robust driver for you. Does that change your long-term view of capital intensity for testing and/or tested intensity and how these nodes could be bigger and longer last than previously thought?

Yeah. I think a good observation Tom, I mean, the 14 nanometer node, excuse me, at our largest customers been around for I think push in seven or eight years by now from the first probe cards we shipped. And obviously at some point especially as 10 nanometer really reaches entitlement yields and maturity we'd expect 40 nanometer activity to tail off, having said that, I probably made that comment three years ago. So its longevity and robustness over time has been obviously a very pleasant surprise for our demand drivers. The test intensity for a node that mature does go down over time. The yields go up. Customers work hard to test less and make sure they're really being most efficient with their intensity of spend on capital. But there's any time because of the way wafer test works and probe cards work any time they release a new design even on these mature nodes it creates incremental demand for us. And that's part of what you're seeing not just in the 14 nanometer microprocessor space but when we talk about opportunities like automotive those are back up at 28 nanometer and even 45 nanometer in some cases, but as customers release new designs they need new probe cards driving demand for us.

Okay. Thanks. And then, maybe just quickly touch on what you're seeing as far as the broadening of your customer base in the foundry side. I mean, it sounds like that was going to be a big opportunity over the next few years at the leading edge nodes?

Yeah. And I think a lot of that still in front of us, we're pleased to be able to report and this was in our prepared remarks that our business at the Apple largest foundry is beginning to diversify, it's still really concentrated on the advanced nodes primarily today big applications processor project at 5 nanometer and then a couple of other projects at 7 nanometer. But the interesting part is the 7 nanometer projects are both mobile and high performance compute and begin to diversify and broaden us out of just having that one application processor project every year. Obviously a big effort for us, we think this customer can grow into the scale and scope of the contribution our largest customer currently makes it's still going to take us several years to do that as more wafer starts move to these advanced nodes where we're relevant and have a competitive advantage, and as we continue to grow our stature as a supplier to this customer.

Okay. Great. And then, Shai, I guess looking at the coronavirus the lowering and widening of the range. Was that a specific sector that you’re serving or was it DRAM, logic, foundry or was it just a general taken a haircut across all Chinese or Chinese related customers?

I would say it's specific to China, but it’s general over the markets we serve.

Okay. And then finally when you look at the OpEx I was surprised when you talked about the increase in the quarter, you did mention increased headcount as a driver of that. Is that just not as meaningful as the two items you mentioned?

So some of us or some or even most of the increase in headcount went to COGs, right that’s the direct labor, the flexible capacity we talked about. And for 2020 the increase I talked about answering Craig’s question was some more investments in R&D, some headcount but mostly the inclusion of FRT and the structural annual increases.

Okay. Thanks for your time.

Thanks.

Thank you. Our next question comes from David Dooley from Steelhead Security. Please go ahead.

Thanks for taking my questions and congratulations on nice results. Just a couple of macro questions here. Regarding the virus there's at least I think two memory fabs in that Wuhan on or right in the epicenter of the virus. Are you able to get product into there, are you able to ship stuff in and out of the area at this point?

Well, we’ve got a couple of things going on, very right now. Obviously the team in China and most of the country has been on a lunar New Year all day. And kind of still is on an extended at least work at home holiday through what we understand to be next Monday. With the Wuhan based customers in particular, I'll remind you that they are primarily flash producers. And as you might remember and could see from our results, we're not a big player in the flash. We do, do reasonably well at the high end of the flash memory market. But we don't have a lot of revenue concentration in that segment or as you might have imagined with those customers in particular. So we haven’t had exercised particular shipment in and out of that region because honestly, we just don’t have a lot of backlog in their mainstream Flash production.

Okay. Excellent. And as far as again on the guidance range for the current quarter, a lot of companies that I've talked to have talked about just kind of extending the Lunar New Year by another week beyond what they would normally see or two weeks and that's how they came up with their lower revenue projections. Is that essentially the logic behind your lower revenue projection, one less week of production in the quarter or maybe just a little bit more color on that?

Not necessarily because we don’t have significant production in China. It’s mostly general impact of business overall and more uncertainty, more unknown at this point than specific manufacturing risk.

Okay. And then, final question for me is TSMC has been talking a lot about at the advance nodes, not just at 5-nanometers and 7-nanometers, but maybe include the node before that that they're seeing a higher percentage of parts move into advance packaging or advanced package type package. I'm wondering what you're seeing in the industry at this point? Are you seeing a higher percentage of parts move into the advanced packaging realm?

I think the simple answer is, yes. We obviously don't have perfect visibility into all the parts in the industry because our business does tend to be concentrated more at least in the Foundry & Logic side mostly around flip chip and advanced packages, but clearly with the growth we've shown in Foundry & Logic and as we've described before the competitive differentiation we have in testing parts that at packaged with advanced packages. There are almost must be an increased adoption of this. I still think there is a significant amount of it in the front of us. As I talked about in the prepared remarks, the road map reviews we have between our executive team, our R&D team and our key customers. More and more of those discussions are pointed towards the requirements associated with advanced packages whether they be chiplets or fan-out or HBM and memory. And those are driving a set of test requirements that are very, very difficult to meet. FormFactor is probably one of a handful of suppliers who can meet them and keep pace with these really aggressive roadmaps. And so we'll probably seeing some of that contribution today. But I feel like this is one of the big longer term secular opportunities for us as the industry moves forward off not just a front end driven innovation roadmap but using advanced packaging to create the products that are going to differentiate them in the marketplace.

Final question from me. I just had one more, I want to slip in. Do you expect to grow in calendar 2020?

A good question and one that we're debating. I think given the comments I made before in response to one of the earlier questions on sort of the house view. Well, the general view maybe not the house view. The general industry view being maybe that's foundry and logic spending is first half weighted. I think you're going to need DRAM to continue its recovery and move forward into a more aggressive growth posture in the second half of the year. And I think we'll need 5G to accelerate. But if we see some of those things happen I don't think it's unreasonable that we could see 2020 be a growth year. The usual caveats associated with less than one quarter visibility don’t allow us to make a definitive statement, but there is some ingredients that if they move ROA in the industry’s way in general, I think we're in pretty good shape to capitalize on it and deliver growth here.

Thank you so much.

Thanks, Dave.

Thank you. [Operator Instructions] Our next question comes from Christian Schwab from Craig-Hallum Capital Group. Please go ahead.

Yeah. Congratulations on a great quarter. I guess most of my questions have been asked. I just have one quick one. On market share, can you give us an update of where you think you ended the year in market share in foundry and logic and DRAM and maybe in particular in foundry and logic what the multi-year opportunity for share gains is if things grow with the Taiwanese customer?

Yeah. I'm going to have to be a little bit lawfully on that because some of the key data we need to really understand that comes out over the next several weeks both in terms of industry benchmarking reports and some of our competitors reporting publicly. So having said that, I do believe we made structural share gains in our two biggest businesses in probe cards both DRAM in foundry and logic over the year. If you look at DRAM there were some nice designs in the advanced packaging arena like HBM that we executed pretty well on and I think led to some share gains. In foundry and logic, if I just look at the fourth quarter results it does seem reasonable to assume that there must be some implicit share gain in there unless the entire Foundry & Logic space spends at sort of tripled the historical rate that they ever have. And so not being too glib about it, we do need to wait for some of the data. But I feel like qualitatively as we look at our 2019 performance and in particular at the second half 2019 performance that there are some share gains in there.

Great, no other questions. Thanks.

Thanks, Chris.

Thank you. And our last question in the queue comes from Tianyan Goellner from Sidoti. Please go ahead.

Hi. Congratulations on the strong quarter and also solid outlook. And Mike I just have a clarify first and then maybe a follow-up afterwards. So you mentioned about a DRAM probably in the fourth quarter volume, you experienced sequential decline because it will be in the digestion phase. And that may be in the second half either will resume to growth. I assume you mean resume to growth like probably comparable to current level.

Yeah so a fair observation. If you put things into a broader context the Q3 and Q4 of 2019 were decade high levels for our DRAM probe card revenue. And so I think it's reasonable to expect that there is some digestion that's going to go on here.

Okay.

…structural fundamental change in long term DRAM probe card spend. And so the levels we delivered in Q3 and Q4 are probably a reasonable expectation for a near term high watermark. If conditions were right maybe we get back to there in the second half of 2020.

Okay. That's clear. So then still follow-up on the DRAM and how long do you think because now we're really at a very high level. As you pointed out, over decade high, record high level. So how long do you think the DRAM will maintain at the current level [indiscernible] years or at least one year.

Well. Again, I think you have to look at these levels probably through a cycle, right. The customers…

Yeah.

…design releases and note shrinks. Ebb and flow as you go through the cycle. And so I think if you look at 2018 DRAM revenue was in the call it $135 million range. 2019 closer to $145 million. So stepped up a little bit. I think there is a reasonable levels to think about long-term DRAM probe card spend. One potential component of upside we talked of a little bit about in the Q&A is the adoption of advanced packaging. DRAM structures like HBM or high bandwidth memory as we've explained in the past driving much higher test intensity. And so that could be something if we get more and more HBM wafer start, you could see an increase in the overall DRAM probe card spend. But that I think this sort of $130 million to $140 million level is about right for an annual DRAM probe card contribution.

Okay. That's great. And then my last question would be you know do you – can you give any color on what FRT did in the fourth quarter, and any color also in 2020 regarding FRT?

FRT, initially we talked about $2 million to $3 million of contribution to Q4. They came in about $1 million better than that. So, that's about $4 million in Q4. If we analyze that, we're talking about $16 million for next year or for this year.

Okay. That’s all from myself. Okay. That’s very helpful. Thank you and good luck.

Thank you.

Thank you. I show no further questions in the queue and at this time, I would like to turn the call over to Mike Slessor, CEO for closing remarks.

All right. Thanks everyone for joining us today. We'll keep you updated on our progress as we navigate through the first part of 2020. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.