Thomas St. Dennis – Executive Chairman & Chief Executive Officer Michael M. Ludwig – Chief Financial Officer Mike Slessor – President & Director.

Srini Sundararajan – Summit Research Brett Piira – B. Riley & Co. LLC Tom R. Diffely – D. A. Davidson & Co. Patrick J. Ho – Stifel, Nicolaus & Co., Inc. .

Thank you and welcome everyone to FormFactor’s First Quarter 2014 Earnings Conference Call. On today’s call are Executive Chairman and Chief Executive Officer, Tom St. Dennis, President, Mike Slessor and Chief Financial Officer, Mike Ludwig. At this time all participant lines are in a listen-only mode.

Later we will be conducting a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder this conference is being recorded. Before we begin, let me remind you that the company will be discussing GAAP P&L results and some key non-GAAP results to supplement understanding of the company’s financials.

A schedule that provides GAAP to non-GAAP reconciliations is available in the press release issued today and also on the Investors section of FormFactor’s website. Also a reminder for everyone, that today’s discussion contains forward-looking statements within the meaning of the Federal Securities Laws.

Such forward-looking statements include, but are not limited to financial and business performance projections, statements regarding macroeconomic conditions and business momentum, statements regarding seasonal business trends, statements regarding our ability to resolve favorably supply chain and manufacturing issues, statements regarding the demand for our products and technologies, statements regarding our ability to design, develop, introduce and qualify new products and technologies with one or more to customers and to realize revenue from these new products, and statements that contains words like expects, anticipates, believes, possibly, should and the assumptions upon which such statements are based.

These forward-looking statements are based on current information and expectations that are inherently subject to change and involve a number of risks and uncertainties. FormFactor’s actual results could differ materially from those projected in our forward-looking statements.

The company assumes no obligation to update the information provided during today’s call, to revise any forward-looking statements or to update the reasons, actual results could differ materially from those anticipated in forward-looking statements.

For more information, please refer to the risk factor discussions in the company’s Form 10-K for the fiscal year of 2013 as filed with the SEC, subsequent SEC filings and in the press release issued today. With that, we will now turn the call over to CEO, Tom St. Dennis. You may go ahead..

Thank you and good afternoon. The first quarter was a quarter of continued progress for FormFactor in all of our key market segments. Overall the probe card market improved in Q1 relative to Q4 2013 within SoC and continued strength in DRAM driven by demands and mobile computing.

Our new product introductions continued to gain traction, and the SoC and NAND Flash probe card markets, while some promising new technology developed milestones were achieved, they can help to expand our addressable market. Our operating margins improved further in Q1, as a result of product mix, restructuring and continued product reductions.

These improvements in our operating performance have positioned FormFactor to have the first non-GAAP profitable quarter in Q2 since the fourth quarter of 2007. Our DRAM revenues grew significantly in Q1 relative to Q4 2013, as the market demand for mobile DRAM remained strong and we improved our overall execution.

During the quarter we continue to work closely with our Japanese DRAM customer, to overcome the supply chain and manufacturing shortfalls that we experience last summer. As a result of our progress, our market share with that customer has returned to levels that we have prior to those events.

SK Hynix is recovering from the fire that they experienced at their facility in Wuxi, China, and our business with them has returned to normal levels.

At our customer where, in Q4 2013, we completed a qualification of our matrix platform for their DRAM manufacturing, we continued to deploy significant engineering resources to optimize our platform to meet their manufacturing requirements.

But we recognized revenue for cards shipped to them in Q1 and will deliver additional units in the current quarter. We have further performance requirements to meet before we will see significant revenues from them.

We expect to demonstrate the required performance this quarter and believe we are still on track to achieve our year-end goals of increasing our quarterly DRAM revenues by 15% to 20%. The SoC probe card market growth today is driven by a mobile computing as well as automotive and industrial demand.

The trend towards increased use of copper pillar packaging continues with a growing rate of adoption for devices built at 28 nanometers and below. FormFactor’s MEMS-based probe card solutions enable our SoC customers to test many devices simultaneously, which significantly lowers their cost of test a critical factor for cost sensitive mobile devices.

As a result we’ve established an industry leading position in this important growing part of the market. The production qualification of our new NAND Flash probe card and our first customer is progressing on schedule having passed several significant milestones in Q1.

The final phase of qualification will be in high volume manufacturing which will begin in mid May with an expected completion in early Q3. The second customer to qualify our new NAND Flash platform will begin their qualification process in early Q3 and we expect that it will take four to six months to complete.

As we’ve said before, we expect the NAND Flash product platform to contribute to revenues beginning in the second half of this year. While still in an early phase of development, our technology development team has created a differentiated technology that has the potential to expand FormFactor’s addressable market.

As more and more devices in the world are connected wirelessly, the need for radio frequency or RF devices has been increasing rapidly. And testing RF devices and wafers is a complex and costly process. Our team has developed some unique technologies for doing RF testing by leveraging our MEMS technology and systems capability.

Beginning last year, we’ve been working with a leading supplier of mobile communication devices to deliver a high performance cost effective solution for RF testing of their devices. Recently, they placed an order for the first of these unique MEMS enabled devices. This development highlights two key points.

One is that despite the significant restructuring that the company’s gone through. We still have the ability to bring forward innovative technologies for our customers such as this one and our NAND Flash platform. The second is the broad applicability that our MEMS technology have for semiconductor test.

I believe that both of these facts point to a promising future for FormFactor, as a continued leader in the probe card and test markets. Mike Ludwig will review our Q1 performance and provide guidance for Q2..

Thank you, Tom and good afternoon. Revenues for Q1 were $56 million an increase of $7.5 million or 15% compared to Q4 2013. SoC revenues in Q1 of $29.8 million represented 53% of the company revenues and were comparable to Q4 levels. Revenues from wire bond applications, primarily industrial, automotive applications.

And mobile application processors, increased significantly in the quarter offsetting seasonally weak PC related revenues. First quarter revenues for DRAM products were $22.2 million an increase of $7.1 million or 47% from the fourth quarter.

The increase resulted primarily from recoveries of business from our improved execution, recoveries at SK Hynix both of which Tom mentioned in his remarks. The DRAM pricing environment continued to be favorable in the first quarter.

Mobile device revenues in the quarter increased to a $11.1 million or 50% of our DRAM probe card revenues compared to 38% of our DRAM probe card revenues in Q4. Flash revenues were $4 million for the first quarter an increase of $0.5 million or 14% from the fourth quarter.

NOR Flash revenues increased by $0.9 million in the first quarter to $3.4 million, while NAND Flash revenues decreased by $0.4 million to $6 million in the quarter, the continued decline in NAND flash revenues resulted from less high parallelism design opportunities at customers.

With the successful qualification of our new NAND flash probe card, we anticipate generating profitable growth of our NAND revenues in the second half of 2014. First quarter GAAP gross margin was $12.3 million or 22% of revenues compared to $4.3 million or 8.8% of revenues for the fourth quarter of 2013.

GAAP expenses in Q1 include $0.5 million for stock-based compensation and $4.3 million for the amortization of intangibles. Amortization of intangibles increased by $1 million compared to Q4 resulting from an increase in the amortization of commercialized in process R&D from the MicroProbe acquisition.

On a non-GAAP basis gross margin for the first quarter was $17.1 million or 30.5% of revenues compared to $8.2 million or 16.9% of revenues for the fourth quarter. As communicated in our last call, the fall-through to gross margin of the increased revenues relative to Q4 exceeded the 60% in our financial model.

The increase in the non-GAAP gross margin resulted from a favorable product mix, higher absorption of fixed cost from factory utilization compared to Q4, lower expenses resulting from the first quarter restructuring activities and lower warranty charges.

Our GAAP operating expenses were $24.7 million for the first quart, an increase of $1.5 million compare to Q4. GAAP operating expenses in the first quarter included $2 million for the restructuring actions; $2.1 million were stock-based compensation, $0.7 million for the amortization of intangible assets, and $0.7 million for impaired assets.

Non-GAAP operating expenses for the first quarter were $19.1 million consistent with the expense level in Q4. The decrease in non-GAAP operating expenses in the first quarter from the restructuring actions was offset by the customary increase in payroll taxes at the beginning of the year.

Basic weighted average shares outstanding for the first quarter increased to 55 million shares, compare to 54.6 million shares in Q4. Basic GAAP loss per share was $0.23 in Q1 compare to a loss of $0.34 per share in Q4. Non-GAAP loss per share was $0.04 in Q1, compared to a loss of $0.20 per share in Q4.

Cash comprise of cash short-term investments and restricted cash ended the first quarter at a $144.4 million, $7.1 million lower than in Q4. Cash flow in the first quarter was negatively impacted by the cost of restructuring and the lower customer collections due to the timing of shipments in the quarter. Here are some other financial details.

Our depreciation and amortization in the first quarter was $8.1 million including $3 million for depreciation and $5.1 million for amortization of intangible and tangible assets. Our capital additions in Q4 were $1.6 million, $0.5 million higher than the fourth quarter addition.

Our stock-based compensation expense for the first quarter was $2.6 million, $0.4 million lower than Q4. To reiterate our financial model commencing in Q2, our cash flow breakeven revenue levels is $61 million to $63 million. At $61 million to $63 million of revenue non-GAAP gross margins would be in the range of 30% to 33%.

Non-GAAP R&D expenses will be 14% to 16% of revenues, and incremental revenues are modeled to fall through to the gross margin line at 60%. With respect to the second quarter, we expect to see seasonally improved market conditions compared to the first quarter with healthy demand across all of our markets.

We expect second quarter revenues to be in the range of $62 million to $66 million. We expect the non-GAAP gross margin to be in the range of 31% to 34% and non-GAAP operating expenses to remain in the $19 million to $20 million range for the second quarter. Cash flow will be break even to positive $3 million.

Consistent with last quarters earning call, we are providing revenue insights into a six-month demand horizon.

As we have communicated that historical seasonality of our memory business is such that demand is higher in the second and third quarters and lower in the first and fourth quarters as you move into the second quarter the demand picture for the third quarter is still developing with limited visibility.

As such we see demand in the third quarter at $61 million to $69 million.

With that let’s open the call for Q&A, operator?.

Thank you. (Operator Instructions) and we’re ready for our first question from the line of Srini Sundararajan from Summit Research. Your line is open..

Hi, I've been looking at your revenue by region. If you look at Japan, your revenues have come up nicely compared to what it was in Q4. And even in South Korea, it has climbed up nicely.

Do you have any additional color on that?.

Well, as we said we had some of the challenges in Japan with DRAM and as that improved and recovered then we recovered revenues from that region. So that was I think kind of a one-for-one thing there.

And similarly with SK Hynix as they have recovered from their fires in Wuxi, they have kind of realigned their overall manufacturing and we benefited from some increased revenues there..

Okay.

And as a follow-up, why the wide range for the Q3 of 2014?.

Well at this point in time it just, it’s a visibility looking out that far.

We don’t feel like we see it necessarily as well as we did the second quarter when we gave guidance for the first quarter back in the late January, February timeframe and its just there has been a number of different comments in the industry about really what the second half of the year is going to look like.

And so at this point in time it’s really the best insight that we can provide. .

Okay. One last question from me.

When do you guys hope to see DDR4-related spending by your customers?.

Srini its Mike Slessor. I think we continue to be engaged with each of the leading customers on their roadmaps but certainly DDR4 from a manufacturing perspective still feels like its more than a little bit ways out there.

The bulk of what we’re doing today, clearly in terms of those revenue in incremental development is still DDR3, both low power for mobile and commodity. DDR4 I don’t think you’re going to see in the very short-term significantly impact our revenue or P&L. .

Okay, thank you. That's all I have..

Thank you. Our next question comes from the line of Brett Piira from B. Riley & Company. Your line is open..

Great. Thanks for taking my questions. You guys kind of mentioned, gone through your progressions with the NAND, with your new NAND platform and talked about second half, you think that revenues will start.

Should we think about that as meaningful, or is that still kind of in the ramping phase when you characterize revenues in the second half from those NAND projects?.

Given that we’re in sort of the fundamental architecture qualification right now with the lead customer and beginning to build cards for the second customer, we would expect the second half revenue associated with both of those activities to be meaningful, but is not going to be hugely significant.

This is a project and a process that’s going to ramp as we get the technology qualified, and then as we start to win designs inside our customers, and as those design start to ramp. So I wouldn’t look for it to be overly significant to our top line in the second half.

Obviously, we said there will be some revenue reorganization associated with the new NAND Flash product in the second half, but we look for it to become a significant contributor as we move through 2015 and those design wins following qualification start to take hold..

Okay, great. And then, in your SoC business, obviously, PCs have been a headwind, and it's well known.

Has the mix in your SoC business, has that shifted at all as we've seen this PC decline a little bit? Or is it still kind of the same as you’ve seen in recent past?.

No, I think the mix in the SoC business has from an overall perspective shifted quite a bit, you heard us talk in the past certainly about the growth trends associated with application processors and some of the advanced packaging technologies, like copper pillar being using in those non-PC application, and that’s really starting to contribute to a pretty significant shift in the mix.

As Mike also mentioned, we saw some relative strength and continue to see relative strength in the industrial and automotive segments, which are part of our SoC business as well, and we are good contributors in Q1 and look to be here through Q2 as well.

So, yeah, although the SoC revenues have grown slightly, were unchanged Q4 over Q1, there is a lot of moving parts inside the segment mix underlying that SoC revenue..

Okay, great. That’s what I figured. Thanks a lot for the color..

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

Yes, good afternoon. I guess first question for Mike.

When you look at the margins and the nice margins for the quarter, is there some way to quantify how much of the margin upside was from ongoing efforts, cost reduction versus just maybe a temporary mix issue?.

Yes, if you look at the spending, the spending probably contributed somewhere between half a million dollars or three quarters of the million dollars in terms of positive impact to the margin level in Q1..

Okay, great.

And there would be some follow-on..

And as we talked about the last time the restructuring is going to save us $2 million a quarter, overall about a $1.3 million to $1.4 million of that is in the gross margin line. So even in the second quarter we expect to see incremental savings compared to what we saw in the first quarter..

Okay, so you think the guidance for the second quarter reflects a normal or average margin range for that type of revenue, that level of revenue?.

Yes, so actually it’s pretty much in lined with the business model that we had communicated as well..

Okay, great. And then, Tom, when you are looking the industry right now, you’re starting to see an uptick from the equipment guys for DRAM customers.

Historically, how long does it take for that equipment to get in line, or in place to either do conversions or capacity additions to enable you to see the business?.

What I don’t know is that people see an uptick, but it seems like DRAM is holding up while maybe some of the other CapEx is declining. But the kind of investment that people are doing now is supporting shrinks to either 25 nanometers or 20 nanometers.

So its kind of 90 days later equipment gets up and gets qualified, gets put in the overall manufacturing plan some customers faster than 90 days and then it just is a matter of what yields are like at that particular node and how fast they move wafer starts across.

So I think that the CapEx going on in DRAM right now is probably kind of wafer start per month neutral frankly just because these new nodes have so many more process steps that it can kind of effectively shrink the capacity. So I think it has more to do with just enabling the new technology nodes.

For us that means new designs that are spun on those for the new nodes and that means new probe cards. So in principle we’re probably lagging 90 days behind if they’re ready to ramp and the yields are good and all the rest..

Okay, great. And then on the SoC side, more of a technology question.

When we move between 28 and 20 and 14 nanometers, eventually, does your technology change as far as your probe card goes? And does it matter if it's pillar versus bumps? I mean, is it the same technology?.

We see, certainly, changes in the packaging technology as you move both from 32 nanometer to 28 nanometer, that’s been sort of at least in the broad-based foundry market seems to be sort of the key adoption point for the copper pillar technologies.

From 28 to 20 and then 14, I think we see continued evolution and continued shrinks associated with that copper pillar technology. But it’s the same fundamental MEMS based technology platform for FormFactor.

So we’ve established a technology which is now sort of in widespread production at 28 nanometer and we anticipate that scaling pretty nicely through 20 nanometer and 14 nanometer, where customers are still choosing to use bumps those are still served by some of our legacy technologies.

And we don’t really need if you like the technical and performance advantages associated with MEMS technologies.

And so there is kind of a split there between the – then why you hear us talking about advanced packaging and copper pillar driving the opportunity for us since it really is the key adoption point and were customers are choosing FormFactor's MEMS technology because it offers them significant cost and performance benefits..

Okay.

So bottom line, you're comfortable with your technology through the 14 nanometer node at this point?.

Not a lot so. In the mainstream foundry market so non-PC, non-microprocessor, we don't have a lot of visibility to 14 nanometer and what it’s really going to be right now. Obviously, the PC market is largely there and we currently serve that.

The mainstream foundry market, just kind of moving into 20 nanometer we’re very comfortable with where we’re from a technology perspective..

Okay.

And then final question, what do you see as the size of the NAND market that your new products address?.

Well, the estimates on the market size for the overall flash market, generally are $200 million to $240 million, of that there is two components NAND and NOR Flash. NOR Flash is generally less than $40 million in the estimates. So that puts kind of the NAND Flash opportunity out there at about $200 million.

Historically, we’ve supplied to the NAND Flash market much less today frankly then we did even a year or so ago. And – but we’re really only serving a very narrow portion of that market that high parallelism part of it.

So in a broad sense it’s about a $200 million opportunity out there, and while there is good established competition and a lot of well established relationships amongst suppliers and customers there.

The new product has some innovative features to it, some new approaches to doing NAND Flash wafer sort, and so we are optimistic that we’ll be able to get 10% market share kind of position on that over the course of 12 to 24 months..

Okay. Thanks for your time today..

Yes. Thanks, Tom..

Thank you. Our next question comes from the line of Patrick Ho from Stifel Nicolaus. Your line is open..

Thank you, very much.

Guys, with the DRAM market being pretty healthy right now, particularly in the mobile DRAM side, what percentage do you see mobile DRAM being a percentage of your revenues for the June quarter, and at least at this point of the game, how do you see it being a percentage at the end of 2014 for you guys?.

The DRAM manufactures make adjustments kind of real time frankly, as their market shift around. If you would have asked and I did ask several of them during the first quarter, are you building more mobile DRAMs and commodity DRAM, they would laugh and say, yes more mobile for sure.

If you look at what’s kind of come out maybe in the last week or so with regards to some discussion around supply constrains, or commodity DRAM, or DDR3 type products.

You can see that perhaps there is going to be an opportunity there and I can tell you we’ve already seen customers that are doing some node shrinks, and they are not doing those exclusively for mobile. They are buying product to probe DDR3 for PC servers for that kind of applications.

So at the end of 2014 when you do all the scoring for the year, if you will, it’s going to be somewhere 40% to 50% probably is going to be mobile and in any given month or quarter that could shift around and – might be 60 in one quarter and 35 or something in another..

Great. That’s helpful. Maybe a question for Mike on the finance side of things. You guys have done a really good job on gross margins this past quarter, and you're within your targeted model.

As you have these new products and some of these new customer penetrations that you've talked about, how do you manage I guess some of those, which typically have a lower-margin initial startup phase versus maintaining and managing your target model gross margin rate? What are some of the checks and balances that you need to keep it within that target model?.

Well I think as we look at any particular transactions, that we’re looking at we really kind of scrutinize and have good conversations internally with respect to what are the margins of any particular transaction and that’s worked with operations and the finance organization.

And really kind of as we look at introducing new technology into commercializing that we have a very good idea of what are margins will be on that, as the product get’s introduced and as it matures and so certainly manage those margins and manage that through the development as well as the commercialization phase and from our perspective as long as we believe that long-term we are going to get the right economics from the introduction of the new technology we may be willing to take some lower margins at introduction but in general if we look at the NAND Flash product that its going out there I think we are going to have higher margins on that than we have on our current NAND Flash product.

So I think from that perspective that’s a pretty good sign right off to the bat..

You know Patrick, the challenges that FormFactor has had for several years with regards to gross margin and our basic cost structure is really intimately related to the overall product architecture, the way that we have chosen to go about serving and solving the advanced probing requirements, and it’s been a burden for us, it’s been a challenge, it’s been a low part of everything we’ve been trying to work through here.

And as we’re going forward and for example with the new NAND Flash product and there’s been a – as much focus on making sure that we got a cost effective manufacturing solution for the market requirement.

So that we could change the kind of hard wired part of our overall cost structure in a way that it’s a more profitable business for us and more sustainable business for us if you will going forward. So we are trying to rearchitect our way out of this with each new product introduction also.

So there may be some early introduction things that will go through but we’re strategically and long-term we are targeted it at changing that cost burden that we carry from the product architecture..

Great. Thank you very much..

Thank you. (Operator Instructions) and I am seeing no further questions at this time, I would now like to end the question-and-answer session and turn the call back over to the speakers for closing remarks..

Thanks everyone for joining today, we’ll talk to you at the Q2 call..

Ladies and gentlemen this now concludes the FormFactor first quarter conference call. Thank you for your participation. And have a great day..