Jason Cohen - General Counsel Mike Slessor - Chief Executive Officer Mike Ludwig - Chief Financial Officer

Patrick Ho - Stifel Craig Ellis - B. Riley Edwin Mok - Needham Jagadish Iyer - Summit Redstone Tom Diffely - D.A. Davidson Ed Roesch - Sidoti David Duley - Stealhead

Thank you and welcome everyone to the FormFactor's First Quarter 2017 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Mike Ludwig. Before we begin, Jason Cohen, the company's General Counsel will remind you of some important information.

Thank you. Today, the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the Investor Relations' section of our website. Today's discussion contains forward-looking statements within the meaning of the Federal Securities Laws. Examples of such forward-looking statements include those with respect to the anticipated effects and benefits of the completed merger between FormFactor and Cascade Microtech, projections of financial and business performance, future macroeconomic conditions, business momentum, business seasonality, the anticipated demand for products, our future ability to produce and sell products, the development of future products and technologies, and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended 2016, and our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today May 3, 2017, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Thank you, Jason, and thank you everyone for joining us today. FormFactor delivered a strong first quarter to open 2017 setting an all-time revenue record and posting earnings above the high-end of our guidance range. Here in the second quarter as indicated by our guidance, we are efficiently executing against even stronger demand for our products. In addition, our visibility into the second half of the year has improved making us more positive on 2017 overall than we were at our early February conference call. Despite the limited nature of that visibility, along with the likelihood that we will experience some degree of typical probe card seasonality, we now expect revenues for the second half to approach the revenue levels we are delivering in the first half. As we have discussed previously, our acquisition of Cascade Microtech provides FormFactor with a broader customer and in market footprint, and the ability to capitalize on a set of diverse demand drivers. This diversification is paying off as we are experiencing positive momentum across the board and data centre, mobile, and automotive applications, and we expect these things to continue into the future. In recent weeks, you’ve heard both our customers and other suppliers discuss these end markets, and I’d like to describe how developments in each end market are favorably impacting both current results and future opportunities for FormFactor's broader product portfolio. During the first half of 2017, FormFactor is experiencing strong demand for both probe cards and engineering systems to test the microprocessors and memory chips that are the heart of today's data centers. Despite some recent industry debate on end-market growth rates, the underlying factors that’s our large microprocessor customer double their business with FormFactor in 2016 remains solidly in place. This is a major contributor to our record first quarter foundry and logic probe card revenue and we are adding capacity even as we operate at historically high shipment levels. During the first quarter, we also experienced significant sequential growth in probe cards for server DRAM, primarily for DDR4 designs at the 20 nanometer node. We also delivered strong shipments of 300 millimeter engineering systems for both 10 nanometer yield improvement as well the 7 nanometer and 5 nanometer development. Another source of current demand strength is the mobile sector, primarily with our foundry and logic and DRAM probe cards. Our volumes here are being driven by three factors; One, recent application processor design wins at all leading 10 nanometer foundries. Two, accelerating mid-year seasonal demand from the RF bar in software through manufacturers. And three, ramping 18 nanometer and 20 nanometer mobile DRAM production. The themes have increased complexity and more wafer test content we have described before are especially evident today in foundry and logic probe cards for a major 10 nanometer mobile application processor project. Consistent with recent comments by one of the leading ATE suppliers, we are shipping large numbers of probe cards to support the test flows associated with wafer level fan-out packaging used in these devices. This volume is the result of longer test times needed to ensure high quality individual devices prior to wafer level fan-out packaging to avoid killing good devices by packaging them with defective devices. We also continue to see growing demand for all our products and supporting the automotive end market. With stringent test quality requirements, and challenging test environments such as high temperature, automotive applications represent significant current business and a growth opportunity across our probe card and system's products. For example our engineering systems business is benefiting from a customer need to collect large volumes of ultra precise electrical performance data, while subjecting the devices to the extreme environments characteristics of drive trains, a complex combination of factors where we have a significant competitive advantage. In addition, we are excited about the opportunities for our foundry and logic RF probe card business given new millimeter wave sensing, and 5G communication requirements being contemplated to support autonomous driving. Turning to a broader view, VLSIresearch recently released its 2016 survey of the advanced probe card market, which reported continuing strong growth paired with FormFactor's sustained leadership. They expect this billion dollar market to grow at nearly 7% CAGR over the next five years. This growth is driven by increased wafer starts and new designs, as well as by adoption of advanced packages that require increased wafer test content and longer test times as we are experiencing in our foundry and logic business. These in turn require more probe cards. At the same time, the complexity and performance requirements for these probe cards continues to advance. This moves technical requirements towards FormFactor's differentiated strength such as the use of MEMs technology for probe fabrication. Listed lifted by these trends, in 2016 we increased our share to over 30% to the advanced probe card market. FormFactor now holds more than double the market share of our nearest competitor. We are very proud of our share gains, which came from both organic growth and existing products, as well as the addition of a half year of Cascade Microtech RF probe card revenues. The combination of our scale and technology leadership together with our strong multi-generation customer relationships will enable us to continue to outpace the market growth forecasted by VLSI, just as we have done in recent years. As evident from our strong first quarter results, operational execution continues to be a very high priority for our team. At present, we are increasing capacity to meet our increased customer demand. We are doing so in a flexible and cost-effective way as we anticipate some degree of historical calendar seasonality, which typically appears as fourth quarter demand softness for production probe cards. The combined FormFactor in Cascade Microtech teams are now focused on both efficiently delivering the record demand for our products, as well as executing on the joint R&D projects we described on the last call. These projects are planned to fuel future growth with corresponding gross margin and EPS expansion as we continue to leverage our investments in fixed cost, over a larger revenue base. I’ll now turn the call over to our CFO, Mike Ludwig for further details on our first quarter results and to provide insight into FormFactor's outlook.

Thank you, Mike and good afternoon. As you saw from our press release and heard from Mike's comments our year is off to a strong start as we delivered record quarterly revenues in the first quarter and the highest non-GAAP earnings per share in almost a decade. Our financial performance was well above the mid-point for all measures with our revenues, earnings per share, and free cash flow exceeding the high-end of the first quarter guidance we provided. For the first three quarters together, the combined business continued to stay focused on execution and integration delivering revenues of $377 million, non-GAAP earnings per share of $0.66 and free cash flow totaling $47 million. Turning back to the first quarter results, FormFactor's revenues were $128.8 million up $4.3 million sequentially. Probe card segment revenues of $106.5 million increased $7.9 million or 8%, compared to the fourth quarter, while system segment revenues decreased $3.6 million to $22.3 million in the quarter. Within the probe card segment, foundry and logic revenues of $74.3 million increased $5.9 million or 9% compared to our fourth quarter, resulting from continued strength in the data center, mobile, and automotive applications. Foundry and logic revenues comprised 58% of total company revenues in the first quarter. DRAM revenues were $29 million in the first quarter, an increase of 20% sequentially, as we saw the demand environment continue to strengthen throughout the first quarter. A continuation of the trend we experienced in the second half of 2016. Technology known transitions increased DRAM content for handset and a stronger data centre demand environment are all contributing to an increase in DRAM probe card revenues. DRAM revenues comprised 22% of total company revenues in the quarter. Flash revenues of $3.2 million for the first quarter decreased $2.8 million from the fourth quarter. As we have discussed previously, we expect flash revenues to continue to be lumpy as our exposure to the market remains relatively concentrated. The decrease in the system segment revenues was driven by our typical seasonality in this business where we saw system shipments decline relative to Q4. The mix of the systems revenues however was favorable with a higher percentage of revenues coming from the 300 millimeter platform. GAAP gross margin for the first quarter was $47.6 million or 36.9% of revenues, compared to 32.5% of revenues for the fourth quarter. In the quarter, there were $7.3 million of reconciling items outlined in our GAAP to non-GAAP reconciliation available on the investor relations segment of our website. On a non-GAAP basis gross margin for the first quarter was $54.9 million or 42.6% of revenues, a slight increase from the 42.4% of revenues for the prior quarter. In the probe card segment, Q1 non-GAAP gross margin was $42.9 million or 40.3% of revenues, slightly higher than the 39.8% of revenues in Q4. Solid execution in our factory and higher fixed cost absorption was able to overcome a challenging product mix to produce a slight increase in the margin for the first quarter. In the systems segment the non-GAAP gross margin was $12.1 million or 54% of revenues in the quarter, compared to 52.1% in Q4. The improved gross margin percentage in the first quarter was driven by the favorable product mix of 300 millimeter systems revenues. Our GAAP operating expenses were $40.5 million from the first quarter, compared to $54.8 million for the fourth quarter. The first quarter includes $5.2 million of GAAP to non-GAAP reconciling items. Non-GAAP operating expenses for the first quarter were $35.4 million or 27.4% of revenues, compared to Q4 expenses of $36.2 million or 29.1% of revenues. These results reflect our stated focus on leveraging our operating expense structure more effectively across the business. Non-GAAP operating expenses benefited from $1.8 million of realized synergies in sales, general and administrative expenses or $7.2 million annualized. We are on track to capture previously committed $10 million to $12 million of synergies in 18 months to 24 months, principally from sales, general and administrative expenses. The non-GAAP effective tax rate for the first quarter was 4.4%, compared to 7.3% for the fourth quarter, consistent with our expectations of a continued low effective tax rate, while we utilize our U.S.-based net operating losses and continue to carry evaluation allowance against our deferred tax assets. The lower effective tax rate in the first quarter reflects the anticipated higher mix of US generated pre-tax income in fiscal 2017. We expect our non-GAAP effective tax rate for 2017 to be between 4% and 6%. GAAP net income was $5.2 million or $0.07 per fully diluted share for the first quarter compared to a loss of $15.4 million or $0.22 per share for the fourth quarter. Given the strong revenue outlook for 2017 provided by Mike in his comments, we expect fiscal 2017 to be GAAP profitable as well. First quarter non-GAAP net income was $17.3 million or $0.24 per fully diluted share, compared to $14.4 million or $0.20 per fully diluted share for Q4, reflecting higher revenues good factory execution and disciplined OpEx spending in the first quarter. Company non-cash expenses for the first quarter included $8.5 million for the amortization of intangible assets, $3.3 million for stock-based compensation, and depreciation of $3.2 million. Moving on to the balance sheet, the company generated $15.5 million of free cash flow in the first quarter, another strong quarter of cash generation. In the first quarter, the company spent $7.9 million on principal and interest payments, including a $5 million accelerated principal payment. We purchased shares for $2.7 million and spent $3.5 million for capital expenditures. Consistent with our February earnings call, we expect 2017 annual CapEx expenditures to be in the range of $16 million to $20 million. In total, cash comprised of cash short term investments and restricted cash ended the first quarter at $123.1 million, $13 million higher than Q4. The balance of our bank term was $131.5 million at April 1, a decrease of $6.7 million from December 31. With another solid quarter of free cash flow expected in the second quarter, we anticipate being net cash positive at the end of Q1. Turning to the second quarter non-GAAP guidance, we continue to experience strong broad-based demand momentum in our probe segment both in our foundry and logic applications and in our DRAM applications. The demand in our systems segment remained strong in both the 200 millimeter and 300 millimeter systems. As such, we expect our revenues for the second quarter to grow sequentially and be in the range of $130 million to $138 million. We anticipate FormFactor's gross margin to expand from our Q1 margin, due to a slightly better product mix and improve factory efficiencies from higher production levels. Therefore we expect gross margin to be in the range of 42% to 45%. We expect to realize fully diluted earnings the range of $0.24 to $0.30 per share. Our Q2 non-GAAP guidance assumes consistent foreign currency rates. Having completed three quarters as a combined company we have a better view of the opportunity to grow the business and leverage technology investments, operational investments, and the SG&A operating structure across the combined company. As such we have made significant progress in developing a long-term financial model. We plan to hold a conference call to review our go forward strategic focus areas and review our financial model of June 28. We hope you will be able to participate in our conference call. With that, let’s open the call to questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Patrick Ho with Stifel.

Congratulations on a nice quarter and outlook. Mike, first off in some of the strength that you are seeing on the DRAM probe card side, would you say it was pay several customers or was it concentrated primarily with maybe one customer?

Thanks Patrick. The question on the DRAM probe card customer concentration, it was certainly broader than a single customer we did see in the first quarter significant strength associated with the a node transition at a single customer, but even in the first quarter and through here in the second quarter, we are seeing broader customer in call it a DRAM recovery or a DRAM production ramp in just a single customer. So I'd characterize it may be not quite as DRAM industry-wide, but more than just a single customer driving our DRAM probe card demand.

Great that's helpful, and maybe looking at your systems business, I think one of the key things you talked about in terms of the Cascade Microtech deal itself was some of the leverage, some of the synergies you would be getting the cross selling opportunities, I know it is only a couple of quarters since you closed the deal, but have you seen any of that type of leverage year-to-date in terms of whether it has helped your probe card sales or whether it has helped your systems sales of the leverage between the two businesses?

I think the revenue synergies are the cross-selling opportunities between - our probe card business and our systems business, we have seen maybe some opportunities associated with that. They are certainly not material to our current financial results and maybe providing a little more color on the opportunities, they are outside of our mainstream semiconductor businesses. They are in things like silicon Photonics, maybe micro LED testing, it is in areas that are really new areas for us as a company, and markets and applications that are may be less well defined than mainstream semiconductor test. We have an opportunity to bring our products together offer a solution and we are optimistic that not going to be a 2017 event, but we are optimistic in future years that we are going to be able to show some revenue leverage associated with that.

Great. And final question from me for Mike Ludwig in terms of the cash flow generation, obviously you had a very strong quarter this year, I mean this quarter, and it looks like based on the revenue levels you will have a pretty good cash flow generation for the year, is it fair for me to characterize that a lot of it will be paying down the debt and maybe do some of these accelerated principal payments that you did in the first quarter?

Yes that’s our plan Patrick that what we would like to do is, I would say use about half of the excess free cash flow, so after we pay down our debt, our regularly scheduled debt payment we then take half of our free cash above that and pay down additional principal payments, but really sort of pay it down to the level where the unhedged level of the principal balance right. We actually have about $95 million, $96 million or our principal balances hedged, has interest rate hedge of net so it is a fixed rate at a pretty good fixed rate, but we still have some at floating and the floating part of that we definitely want to pay down on accelerated basis.

Great, thank you.

Thanks Patrick.

Our next question comes from Craig Ellis with B Reilly.

Thanks for taking the question and guys congratulations on the nice execution to start the year, it is good to see. I will start with one for Mike Slessor. Mike, just clarifying a couple of things one, more backward-looking, the revenues in the quarter were above the high-end of guidance, where on a segment basis did things turn out better than you had expected and even before the very strong print and guide, a statement that the second half could be as strong as the first half would have been quite significant, but now it is off a much higher base than we were looking for previously. Where across your end markets are you more confident in the second half and if there is a risk to the second half where would it be?

Yes, thanks Craig and I guess I want to clarify, we didn't see that the second of was going to be stronger than the first half. We did say that based on what we delivered in the first quarter and the revenue guidance range we provided for the second quarter, we see the second half approaching that. So, I just want to be clear that we don't currently see the second half higher, but that goes to some of the fundamental reasons why our view of 2017 has improved. The first of which is, we are three months closer to the second half, and we have a much better view of what some of our key customers and the demand dynamics that are going to drive our third quarter and fourth quarter revenue. I would say from an overall upside theme there is probably three elements to this. The first is our foundry and logic probe card business, it is continuing to show strong growth around both existing customers doing more wafer test and therefore requiring more probe cards for us. Obviously, this was a theme that drove our 2016 results, but we are also seeing strong accelerating demand from the RF market here as we go through the middle part of the year. We are also more optimistic about the sustainability of the DRAM investment cycle this time. Obviously, pretty solid first quarter DRAM probe card results, but we see that having some leg certainly into if not through the second half. And then finally, our systems business has a seasonality profile, which tends to increase throughout the year, which helps us obviously still at 20% piece of our business, but that seasonality dynamic helps us out with pulling up the back end of the year on a pure seasonal basis. So, I hope that answers the question. Yes that’s helpful.

Yes that is helpful and maybe as a follow-up to revenues before I move on to gross margin, as we look at the second quarter, can you talk about some of the gives and takes as you look at the business, headline is moving up nicely by about 5 million quarter-on-quarter, where do you see gains and are there any of the market segments where we should expect to see business declined quarter-on-quarter?

I think of our major businesses, we see the same themes I talked about in answering the questions about the whole year sort of building through the second quarter. Foundry and logic continues to - I will use the word surprise, but pleasantly surprise us to the upside around the themes we talked about, both customer wins and more wafer starts and more probe cards. We expect DRAM to be comparable in the second quarter, again a data point associated with the sustainability I talked about. We might see depending on different acceptance and revenue recognition, we might see systems down a little bit sequentially in the quarter, but the overall demand there continues to be quite strong associated with leading-edge no development and the yield improvement activities we talked about.

Thanks for that and then moving on to gross margin and perhaps more from Mike Ludwig, it is nice to see a gross margin guidance range that’s got 45% on the high-end. The question is, with the range that is 300 basis points from 42 to 45, can you walk us through some of the risk both on the positive and the negative side? For example comments is if the company is adding capacity, is there a risk that capacity could be added ahead of demand and dilute gross margins and alternatively as we look at the margin range if the company were to come in at the high end of the range 44% to 45%, what would be the factors that would lead to that.

I think when we look at the gross margin Craig, I think there are a couple of things that we want to think about. So one is, with the increasing revenues we generally have better factory utilization, better factory utilization generally leads to higher gross margins, right. But all of that, the caveat around all of that really is also the product mix. So, I think if we were going to have a - if there is a risk on the downside, I don't see it so much with respect to putting capacity in place prior to really getting orders from the customers. I think as Mike said, I think we learned a lot over the last 12 months to 18 months with respect to increasing capacity and customer demand and whatnot. So, I don't see that so much of the risk, but the risk again we do see could be along the lines of product mix and standard margins associated with that. So, again, I think in general there is upside to the margin with respect to increasing factory utilization gives us, again higher lift on margins, and if you can combine that with a more favorable product mix then sure, I see that, we could get towards the higher end of that range. The risk I think is more on the product mix on the downside, but again not so much on how we plan our capacity.

Thanks for that and last one before I get back in the queue bouncing it back to Mike Slessor. Mike it was a quarter ago when you identified that you would be integrating R&D for the forum business and the recently acquired Cascade business, can you give us an update on how that’s going and what the milestones are that we should be focused on as we move through 2017 and into 2018? Thank you.

Sure, thanks Craig. So, we continue to operate in a business unit structure where the old cascade probes business is its own business unit with its own R&D, same for the old FormFactor business. What we have done is decided to fund two initiatives here in 2017 associated with technologies from each of those business units producing a new product or a new subcomponent for the FormFactor overall roadmap. One milestone or update I will give you on that is a product to address an area of the RF test base that we do not currently serve is progressing nicely being run by a joint old FormFactor and old Cascade teams and we expect to ship the first articles of that combined product to a customer in the third quarter.

Sounds good, thank you.

Our next question comes from Edwin Mok with Needham.

Great thanks for taking my question, congrats. First question, it is just a clarification, you mentioned the adding capacity, is that specifically for the microprocessor customer or is that generally adding capacity on MEMs?

I'm sorry, can you repeat that Edwin?

Sorry, so you tried to talk about adding capacity right, is that specifically for the microprocessor customer or are you talking about adding capacity for your MEMs platform, making [indiscernible].

We are adding capacity in a variety of places. I would say generally is around the theme of a stronger foundry and logic probe card business than we originally started the year with. I wouldn't classify it as being specific to any one customer in that foundry and logic space. I’d say that overall business is stronger than we plan to start the year with. The other piece of it though as we brought together product roadmaps and started to leverage our manufacturing assets, some of the additions we are making that may be are associated with foundry and logic demand, we are also able to flex over into memory and DRAM in particular. So the capacity additions are not quite as specifically as they might have been several years ago.

I see okay, that’s helpful. The effort from some people in the supply chain talk about how the Chinese Centre market is going for inventory reduction, but it looks like your RF business pretty. Do you think that has potential a risk for your RF business as you go through second quarter and beyond?

RF probe card business has typically seen seasonal growth that’s stronger in the second quarter and third quarter, mostly associated with newborn soft filters that are going into the late year and tech releases. We see that theme continuing to play out this year, and whether its demand signals from customers our current backlog or our view of RF business and its continued growth here in 2017. We don't, we hear the noise around a lot of the China handset demand, but to be quite honest we are not seeing it in any of the ways our customers are behaving, and the capacity and orders our customers are putting in place, so that they can produce to the expected demand for the next generation handsets.

Great, that's helpful. Lastly, just on the auto commentary, actually thanks for providing color around that, we obviously have got questions around that as well. Just curious, is there a way to come with break down and think about your business, how much of the exposure do you have on auto right now and in some case some of these new product you are developing is going to have high exposure for that market. So, do you see that mix increasing as we go through over let’s say the next few years?

I think we see automotive as an in driver increasing for a variety of reasons. First of all, anybodies semiconductor forecast for end units associated with automotive shows some pretty healthy growth rates associated with that. And given that probe cards and consumables, essentially are driven by wafer starts and design starts, we see some upward momentum there. As I mentioned in the prepared remarks that is also the complexity associated with automotive test. Obviously anything that goes into a car has a much higher quality bar than something that goes into your cell phone or your laptop. And that drives things towards FormFactor's historical strengths, our technology leadership, our ability to do a very accurate electrical test at extreme conditions, things like higher temperatures. So we are seeing more demand for automotive and we're seeing that demand be better matched to our differentiated strengths. That’s one of the reasons why we are optimistic. It’s one of the areas that we will, when we do our analyst call on June 28, we're going to try and tie together some of these end-market drivers for you and show how that translates into some of the opportunities for FormFactor's probe card and engineering systems businesses going forward.

Great. We are definitely looking forward to that, but just if you could touch on the engineering systems, do you see a scenario where you are - historically engineering systems is mostly for development and R&D lab, and not so much for production rate, but given the different requirement in auto, do you see that potentially creating opportunities for you to start selling some of these system into maybe a more production environment for this high requirement in auto?

Maybe not the entire system, but certainly some of the sub components associated with our engineering systems are already beginning to serve these requirements. One example again is temperature. Some of the sub components that we use in our engineering systems are also applicable to production test. Maybe not the whole system because as you say we’ve kind of optimized it for the flexibility in precision required for R&D, but some of the sub components do transfer over. So we are participating in some interesting ways in the those sub component supply chain for production automotive test.

Great. That's all I have. Thank you. That's very helpful.

Thanks Edwin.

Our next question comes from Jagadish Iyer with Summit Redstone.

Yes, thanks for taking my question. Couple of questions. This is for Mike Slessor, so in the apps processor you talked about the fan-out packaging, I was just wondering what kind of market share do you have with this particular customer, and can it help you with other customers who want to embrace this packaging technology?

Yes, Jagadish good question. So we are exposed to this 10 nanometer application processor project at this foundry really for the first time in FormFactor history. And as a result, it is really some share of a single design at 10 nanometer at this customer. So, if I were to characterize our share overall, at this customer it is going to be single digits. As you probably know, we’ve made it a strategic effort to work with all of the leading customers in the world and finally breaking down the door and supplying significant production volumes even if only for one design on one node, represents a big step forward for us. I’d anticipate that we would be able to again show our value, show the value of FormFactor's technology leadership, our performance, and our customer support and be able to grow our share at this customer into the kind of share positions we have across the broader market. That will be a multiyear effort however.

Fair enough. Then the second question is, what is your level of engagement with customers in China who are planning to start up memory business next year? Are there any competitive threats that?

Yes, I think China for us represents a really interesting opportunity. As you may know, FormFactor's had a pretty strong China footprint for the better part of a decade. We started their service in local manufacturing. We also last year if you recall opened up quite a large facility in the Suzhou Science Park and have been investing in the region pretty broadly. As we see some of the memory fabs start to produce first silicon, and articulate their plans for ramping in 2018, we see a really robust opportunity for FormFactor. As the world leader in memory wafer test, I think we are recognized given our China footprint - historical China footprint and having the technology that is supported by a very strong local team there. We see the ability to compete pretty effectively as significant wafer starts, start to flow through these facilities. Now it is still - right now with we're assessing things it is still early days. A lot of these things are just shells, initial equipment deliveries have obviously started, but there is a lot of cards to be played before we see significant probe card volume associated with China. I think we are in a good position and we view it as a large opportunity, which will happen sooner or later.

Great. Thanks for that. And my last question is for Mike Ludwig. How should we think about the OpEx as you focus on investment priorities while balancing synergies from your Cascade acquisition? Thanks.

Yes, so obtaining leverage on our operating structure continues to be a focus of our integration and execution and of course we are pleased to have achieved an OpEx spending of 27.4 in Q1, but when we balance our growth requirements with our remaining synergies to capture, we anticipate that we will be managing our OpEx expenses to the previously committed range of $35 million to $37 million per quarter, certainly in 2017. So I think that’s where we expect to end up that translates to about 27% of revenues, and I think that’s - from our perspective, I think that’s really sort of our goal as we go further in the 2017 as to really kind of keep an eye on that, but again I think the number 35 to 37 is really what we expect, how we expect to manage that, and by the way we think that does allow us to achieve our growth requirements.

Okay, great. Congrats on a great quarter.

Thank you.

Our next question comes from Tom Diffely with D.A. Davidson.

Hi, good afternoon. Just following up on the last question then, is some of the COGS at $35 million to $37 million, does that include any additions for this capacity out or is most of that in the COGS line?

Most of that Tom is going to be in the COGS line. In terms of when we were referencing capacity we were really talking about our manufacturing structure.

Okay great. And then when you look at the new 10 nanometer apps processor customer, is that for full probe cards this quarter or is it just probe components?

Tom great question. As we have said historically, the business model for some customers and that customer in particular is a little bit different. We are selling sub components to them that they integrate together into a probe card for a variety of both historical and operational reasons. So, it is sub components.

Okay. And I assume that’s probably pretty good margin business for you?

Yes. I think we are being competitive for the technology and value that we are providing.

Okay. Moving over to the automotive section, just one more question there, are you using your standard probes inside of these burn in systems or is it a specially designed probe just for that?

Well it is not entirely burn in. So, obviously higher temperatures are often associated with burn-in, but we have customers who are trying to test and characterize their devices for short periods of time at high temperatures as well. So, we see some applications where our standard probes where just fine, there are other applications where we've had to do some development and we continue to do development because we see this as a trend that will continue as automotive standards move to slightly higher temperatures, but become more and more stringent with the quality requirement as cars become maybe not fully autonomous, but more autonomous and the sensors that have to be much more rigorously tested.

Okay. That makes sense. And then moving over to some of your earlier comments, you did mention that maybe it is just a little too soon to know exactly what the fourth quarter looks like and there is some often a seasonal down tick, is it a biggest risk to the fourth quarter on the DRAM side?

I think given the historical volatility we’ve seen in DRAM, I think that is a fair assessment. It is certainly beyond the visibility, the fourth quarter in total is beyond the visibility we have right now and I would argue beyond the visibility our customers have right now. So, I think that is probably the key risk associated with the fourth quarter and when you add on top of that because seasonal swings we've seen associated with four quarter softness have been coupled to DRAM, I think it is fair to access that of the biggest laid in the year risk to the top line.

Okay. And then finally when you look at the flash business is the, obviously it is very lumpy, but is the 6 million last quarter or the 3 million this quarter more of a representative run rate for that business.

Well I think given the lumpiness because of our concentration at the few customers with a few designs, it is hard to say what the run rate is at this point. I think given our current loading in the situation and where we are engaged in supporting both foundry and logic and DRAM, we want to make sure that we are judicious about the flash designs we're competing for, obviously long term given 3-D NAND wafer starts we view this as a secular growth trend we want to grow into, but we are also managing in the short-term to make sure our mix and our factory loading is where we wanted to be in the very short-term. So, if you made me answer, I’d probably tell you some more in between your 3 and 6 is the right run rate.

Alright. Then I guess following up on that, is there a difference in probes going from Gen II, III and IV for the 3-D NAND products?

So that is one of the interesting places where we have carved out as a bit of niche is, as big entities go up because of the stacking at least for the smaller capacity chips things like a 128 gig, you have a smaller dye size which then results in things being pad size limited, which moves things back to FormFactor’s strengths from MEMS probe. Those are the places really where we are participating. And how that evolves as layer counts continue to increase is something that we are looking at pretty closely and something that could represent a big opportunity for things to move back towards FormFactor strength.

Okay, and actually just one more here, some of the tester guys are saying that there has been a slowing down of increased parallelism of other testing? Whether you are testing the other growth of parallel testing is slowing over time? Does that impact your business either way?

Well, so that one is an interesting one because it’s very segment specific. I think in memory, in particular we are seeing no abatement associated with parallelism, right. Essentially customers wanted to every dye on the chip at once and as the density goes up and dye counts increase that trend continues to parallelism going up. There is some interesting dynamics in the foundry and logic business, certainly for high-end processors you could imagine on leading edge nodes where yields are relatively low. The testing with high parallelism maybe isn’t the best economic choice. And so without getting into all the details, there are pockets in the market at least at this point in time in yield and device ramps where we are seeing parallelism back off a little bit, primarily at the high-end of foundry and logic.

Okay, but does that have an impact on your business, whether or not it continues to unparallel [indiscernible]?

I don’t think, I mean to first order, you know we sell more probe cards to test the same number of devices, and so we are not really seeing an impact associated with those puts and takes.

Great. Alright thanks for your time today.

Thanks Tom.

Our next question comes from Ed Roesch with Sidoti.

Good afternoon and congrats on a great quarter.

Thanks Ed.

A lot of good information already, but I did want to ask a few questions, first, did capacity constrain you at all on your Q1 shipments?

I think if we look at how our demand and then shipment commitment cycle works, I don’t think we were fundamentally constrained by capacity in the first quarter. Our comments associated with adding incremental capacity in a somewhat guarded way here are associated with the increased demand, and I think that’s consistent with how you see our revenue stepping up from what was delivered in Q1 to the range we’ve guided to in Q2. We are seeing some nominal increase in strength in a few businesses and so we are adding capacity there.

Thank you. And then when I look at your revenues by geography, the Asia-Pac region was really stellar for you in Q1 moving from Q4, I was wondering if you could talk about some of the dynamics there, I know you do have a new customer relationship, but if you could speak to some of the drivers that will be great.

Yes. And obviously Asia-Pacific is an awfully big region with an awful lot of different puts and takes in it. I do think maybe a couple of themes, obviously the foundry business has its epicenter in Taiwan and that is an area that we’ve obviously had a nice initial customer win, but we also see that business being strong compared to historical levels. The other piece is that some of our memory customers one in particular has significant operations in Taiwan as well. And so that’s helping results as well at least on a sequential quarter basis.

Terrific, thanks. And then last one may be a bit of a stretch, but listened to one of your customers discuss kind of a new way of stitching together different dye, multiple dye and connect interconnects via bridge, I was just wondering if that's a challenge in design from probe cards that’s landed on FormFactor’s plate or is in your radar at this point?

It's most definitely in our radar and is one of the more specific drivers that need us to talk about advanced packaging driving our business. For us that kind of thing where you're taking multiple constituent dye and then putting them together on some sort of bridge offers as a couple of different kicks at the can. Obviously the quality requirements associated with the individual consistent dye go up, because you want to make sure as I said in the prepared remarks that you're not killing good dye with bad dye. And so you want to make sure that each of the components is good. It also offers us an opportunity somewhat interestingly to test the bridge itself, because you don't want the bridge taking down the known good constituent dye. So definitely on our radar screen an area of development and R&D spend for us, not really material to our Q1 revenues at least in testing the bridge part, but some of those dynamics I think associated with both the industry moving closer towards a known good dye and offering us another test insertion are opportunities for us and opportunities that we're focused on and investing R&D dollars in.

Great. Thank you very much.

Our next question comes from David Duley with Stealhead.

Thanks for taking my question, just a couple of follow-ups on things that people have been asking about. As far as your sequential improvement in the DRAM market in the March quarter, was that mainly driven by 18 nanometer or 20 nanometer conversions?

There is a certainly a strong component of 18 nanometer designs in the first quarter result. However, there was also a good chunk of 20 nanometer especially server DRAM as I talked about in my prepared remarks. So DRAM overall quite a bit stronger for us, a healthy chunk of 18 nanometer for the first time, but a reasonable mix of 20 nanometer as well obviously the whole industry is not moving to 20 or sorry, the whole industry is not moving to 18 nanometer all in the first quarter. There's different customers placing different technology node transitions at different timings and priorities.

And as far as the June quarter goes did you mention the DRAM business is going to be flat sequentially. And I was just wondering what the mixture of business would look like at 18 and 20 nanometer in that quarter. Where you have another 18 nanometer customer or just be a single customer at that node?

Yes, I think the answer to a previous question, I may have said that DRAM would be well comparable Q1 to Q2, we will have some pretty strong levels in Q1. I think we see 18 nanometer is still being largely a single customer event in the second quarter and perhaps even longer as well. Having said that the other two major DRAM manufacturers are still making significant manufacturing investments and releasing new designs even on the 20 nanometer node. And as you well know, new designs mean new probe cards and so honestly it’s six or one half dozen for us if they're sitting on the 20 nanometer node producing new designs or shrinking to the 18 nanometer node.

Okay. And then switch gears, this 10 nanometer foundry business, it sounds like there could be quite of exciting piece of business. Did you actually have revenue with the foundry customer at 10 nanometers in the March quarter, or is that going to be more June in the second-half oriented?

We did have revenues associated with that customer in the first quarter, in the March quarter. We are planning significantly more revenues in the second quarter and into the third quarter. Given again that is a relatively concentrated opportunity at this point for us, one node one design, we have some work to do for it to really continue to propagate into the late second half.

Well good thing about one node one design is it is an awful big design.

Yes, you are right.

That’s the biggest out there. Anyway, do you have an idea about how you are splitting that business with your other advanced probe card competitor?

Yes. I think it is probably a fair estimate that we are in the second place. They had been in there before us. They’ve historical relationship that went back maybe one node on a couple of other designs and as I think you know in these businesses your customer relationship and incumbency is an important factor given the lead time pressures, given the various service and support elements of the business it’s important to be the incumbent. And so although it is nice business for us, we’re fortunate that it is a big design and there is plenty to go around for all of us.

Final thing from me. Again, I get back to the 10 nanometer foundry win, you’ve mentioned that that’s I think produced with a fan-out packaging scheme?

Yes.

And that requires longer test times, I was wondering if you might be able to characterize how much that would increase probe card demand? If the touch times are longer and you consume more probe cards, is it like 10% or 15% kind of more probe intensive or is there some sort of metric you can help us understand how fan-out impacts the probe cards?

That is great question, but a bit of a moving target unfortunately because if you can imagine one of the key inputs is yield. So if the reason fan-out requires longer test times is because you want to make sure that or our customers want to make sure that they’re not taking bad dye and packaging them together with good dye. That drives more test content and at the wafer level and with 10 nanometer yields relatively low right now that’s driving a really big increase in test times and therefore the number of probe cards. I have to assume that over time yield improved and that incremental test time goes down a little bit, but for right now it is significant. It is much more than 10% of 15%.

Okay thank you.

And I’m not showing any further questions at this time. I’d like to turn the call back over to management for closing remarks.

Great. Thank you for joining us today and thank you to the worldwide FormFactor team for delivering strong results to start 2017 with positive momentum building for a strong year. We are looking forward to meeting with you at several upcoming investor conferences and hope that you will join us on June 28 for our Analyst Call.

Ladies and gentlemen that concludes today's presentation. You may now disconnect and have a wonderful day.