Mike Slessor - CEO Michael Ludwig - CFO.

Patrick Ho - Stifel Nicolaus Brett Piira - B. Riley & Company Edwin Mok - Needham & Company Tom Diffely - D.A. Davidson.

Thank you, and welcome everyone to FormFactor’s Fourth Quarter 2014 Earnings Conference Call. On today’s call are Chief Executive Officer, Michael Slessor and Chief Financial Officer, Michael Ludwig.

Before we begin, let me remind you that the company will be discussing GAAP and 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 Investor 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 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 customers and to realize revenues from those new products, and statements that contain 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 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, Michael Slessor. Please go ahead..

Good afternoon everyone and thank you for joining us today. In the fourth quarter of 2014 FormFactor continued to make progress toward our objectives. Perhaps most notably we completed the year in which three consecutive quarters and the year in total were both non-GAAP profitable and cash flow positive.

These results validate our business model and demonstrate the significant earnings and cash flow leverage FormFactor is able to generate from incremental revenue. For 2014 overall we delivered strong revenue growth compared with continued cost production.

When we compare 2014 to 2013 this combination resulted in more than 100% of the incremental annual revenue converting into both gross and operating profit. Because of the significant structural cost productions we have executed during the past two years, we did not expect to realize this degree of earnings leverage in the future.

However, as we have described previously we do expect to deliver approximately 60% of incremental revenues into operating profit. In the fourth quarter, although, our topline was reduced from the previous quarter, we did not experience a larger reduction as it seasonally typical.

We believe this to be the result of two factors, increased FormFactor market share resulting from improved execution and relatively muted semiconductor industry seasonality for 2014.

We continue to make progress along our growth initiatives in the SoC, DRAM and Flash probe card markets which we have indicated comprised of $65 million to $75 million opportunity over 2013 levels.

Although, our short term demand visibility remains limited, we now anticipate these themes are likely to encompass our multiyear growth opportunity to the extends beyond the $65 million to $75 million level.

In SoC, although, fourth quarter revenues were down moderately from a very strong third quarter we experienced solid demand across the market with continued adoption of fine-pitch copper pillar applications at 28-nanometer and below, primarily for mobile application processor and baseband chips.

Also our microprocessor, industrial and automotive businesses performed well throughout the latter part of the year and remain healthy as we begin 2015.

In DRAM, our ability to compete for production probe card demand at all three major DRAM manufacturers benefits FormFactor as customers continue to invest in measured bit and wafer start growth along with shrinks to the 20-nanometer node.

In addition, the initial ramp of DDR4 designs for both server and mobile applications was a positive trend for our DRAM business in what is typically seasonally weak quarter and we see solid demand for DRAM probe cards as we enter 2015.

In NAND Flash we earned qualification of our Vector product architecture at our second customer and have successfully installed the first unit to test production of silicon at that customer. At our lead Vector customer we continue to ship units for qualified production designs and to compete for new designs that will ramp through 2015.

Finally, on the cost and efficiency front, we are focusing in deploying our resources and investments more broadly across the SoC, DRAM and Flash probe card market. By doing this, we expect to both improve the fundamental competitive in the several of our products, while maintaining the existing operational cost structure.

This combination will allow us to continue to deliver high earnings leverage on incremental revenue growth as FormFactor grows both its share and addressable market footprint in the future. Mike Ludwig will now review details of our fourth quarter results and provide our first quarter guidance. .

Thank you, Mike and good afternoon. Revenues for Q4 were $71.3 million, a decrease of $2.6 million or 4% compared to Q3. While lower than Q3, the Q4 revenues were seasonally strong compared to past Q4 revenues and decrease relative to Q3 with measurably lower than historical decline as Mike highlighted in his comments.

SoC revenues in Q4 of $36.7 million decreased $2.7 million or 7% over a strong third quarter. Q4 SoC revenues demonstrated continued broad based demand for our SoC probe cards and was typically a softer demand quarter. SoC revenues represented 51% of the company's fourth quarter revenues, slightly lower than 53% of our revenues in Q3.

We continue to see momentum from PC, server, mobile and automotive applications. Fourth quarter revenues for DRAM products were $30.8 million, a decrease of $0.6 million or 2% from the third quarter.

The decrease is minimal compared to previous years and was mitigated by continued share increase in the quarter as the last significant DRAM customer to qualify our metrics platform. We continue to see strength in both commodity and mobile DRAM demand and continue transition to 2x nanometer node.

Mobile DRAM revenues in the quarter were 56% of our DRAM probe card revenues compared to 38% of our DRAM probe card revenues in Q3. Flash revenues were $3.8 million for the fourth quarter, an increase of $0.6 million from the third quarter.

NOR Flash revenues were $1.5 million in the fourth quarter and NAND Flash revenues including our Vector probe card were $2.3 million in the quarter. Revenues for fiscal 2014 of $268.5 million increased by $37 million or 16% over fiscal 2013.

The increase was driven by both SoC or consistent broad-based demand and then transition to copper pillar technology drove increased revenues and DRAM were improved execution, technology node transitions and market share penetration led the increased demand.

Fourth quarter GAAP gross margin was $20.9 million or 29.4% of revenues compared to $24.1 million or 32.7% of revenues for the third quarter. GAAP expenses in Q4 included $0.6 million for stock-based compensation and $2.9 million for amortization of intangibles.

On a non-GAAP basis, gross margin for the fourth quarter was $24.5 million or 34.4% of revenues compared to $29.1 million or 39.4% of revenues for the third quarter. The decrease in the fourth quarter non-GAAP gross margin resulted primary from product mix which was contemplated in our Q4 guidance.

The decline was mitigated however from increased absorption of fixed cost from factory utilization and reduced factory spending. For fiscal 2014 our GAAP gross margin was $77.4 million or 28.8% of revenues compared $42.3 million or 18.3% of revenues in 2013.

Non-GAAP gross margin for fiscal 2014 was $95.8 million or 35.7% of revenues compared to $58.6 million or 25.3% of revenues in fiscal 2013. The increase in both GAAP and non-GAAP gross margin for fiscal 2014 was due to increased revenues, favorable product mix, reduced factory spending and reduced excess inventory charges.

Our GAAP operating expenses were $24.3 million for the fourth quarter, a decrease of $0.3 million compared to Q3. GAAP operating expenses in the fourth quarter included $2.7 million for stock-based compensation and $0.7 million for amortization of intangible assets.

Non-GAAP operating expenses [indiscernible], $0.8 million lower than Q3 primarily from reduced employee incentive compensation cost based on company profitability. Excluding incentive compensation cost, fourth quarter expenses were $0.2 million lower than the third quarter expenses.

In the fourth quarter, the company recorded a tax benefit of $1.3 million compared to a tax provision of $0.1 million in the third quarter. The tax benefit in the fourth quarter resulted from the release of reserves for uncertain tax positions related to the completion of previous year tax audit in certain jurisdictions.

Basic GAAP loss per share was $0.03 in Q4 compared to approximately breakeven in Q3. Fully diluted non-GAAP earnings per share was $0.11 in Q4 compared to $0.16 in Q3. For the fiscal year 2014 basic GAAP loss per share was $0.34 compared to a loss of $1.06 for fiscal 2013.

On non-GAAP basis fully diluted earnings per share for fiscal 2014 was $0.32 compared to basic loss per share of $0.40 for fiscal 2013. Cash comprised of cash short-term investments and restricted cash ended the fourth quarter at $164.3 million, $9.5 million higher than Q3.

For fiscal 2014, the company generated a positive cash flow of $12.7 million, $27.3 million more than fiscal 2013. Here are some other financial details. Our depreciation and amortization in the fourth quarter was $6.3 million including $2.7 million for depreciation and $3.6 million for amortization of intangible and intangible assets.

Our capital expenditures in Q4 were $1.3 million, $0.2 million lower than the third quarter expenditures. For fiscal 2014, our capital expenditures were $5.9 million. Our stock-based compensation expense for the fourth quarter was $3.3 million, $0.6 million lower than the third quarter.

With respect to the first quarter, we continue to see solid demand as Mike referred to in his comments. We expect first quarter revenues to be in the range of $66 million to $71 million.

Our product mix is forecasted to be more favorable in Q1 compared to the fourth quarter therefore we expect the non-GAAP gross margin to be in the range of 34% to 38%. Non-GAAP operating expenses increased in the first quarter due primarily to increases in fringe benefit cost and will be in the $20 million to $21 million range.

We expect cash flow will be positive $4 million to $6 million. With that, let's open the call to questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Patrick Ho from Stifel Nicolaus..

Thank you very much and congratulations on a nice quarter and the year. Mike, maybe if you can look at the DRAM market both in the near term as well as 2015, you have seen a high percentage of mobile DRAM over the past a year or so.

Do you expect that percentage of your overall DRAM revenues to continue to grow in 2015, or do you see other areas say like server, you know, supporting the growth this year?.

Well, first of all, thank you Patrick. The DRAM market in terms of mobile versus commodity mix, there is some interesting underlying dynamics going on right now. Not the least of which is a set of new designs on the DDR4 platform which are being deployed for both mobile and server application.

So we are seeing a lot of activity there as well as a lot of activity around new designs targeted some other shrinks to 20-nanomter node that are currently taking place at most of our customers. I think on a quarter-by-quarter basis, we will see the ebbs and flows in our mobile versus commodity or server mix that you saw, for example, Q3 to Q4.

We saw a very significant increase in the mobile mix as we move Q3 to Q4. I think I think is a secular trend certainly the bit growth and wafer growth associated with mobile DRAM will continue to grow faster than that of server DRAM.

And so over the longer term, again, not on a quarter-to-quarter basis, but certainly as we work our way through 2015 in aggregate, we would expect to see more of our revenue on the average move towards mobile DRAM..

Right. That's helpful. And maybe a question on the business model side. Mike, in terms of the gross margins, you guys have made significant improvement.

You know, as you look at I guess both the March quarter and 2015 as a whole, what should we look at as the biggest influence or the biggest lever, is it absorption, is it product mix, customer mix? What should we be looking out for, I guess, overall trends for 2015, the biggest influence?.

Yeah, I think the biggest influences, Patrick, are going to still be customer mix and product mix. I think as Mike pointed out 2014 we had a lot of benefit from cost savings that we have implemented in 2013 and 2014, and we don’t see those same -- the same amount of those benefits going forward.

So from that perspective if you look at it really is going to be customer mix, product mix which also influences absorption in the factory as well. .

Right. Thank you very much. .

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

Great. Thanks for taking my question and congrats on the quarter.

Maybe if you could help us out with the guidance, which exact segments should have relative strength compared to the others?.

I think when you look at it, again, I think the same thing that probably drove some increases in 2014 or probably having similar impacts in 2015 and the first quarter, let's say, it’s going to be very strong DRAM environment and I think pretty healthy SoC environment as well.

And obviously, we will look for a little bit of benefit in Flash from our new Vector, but not as significant as what we are going to see in the DRAM and SoC..

Okay. And then, I guess, maybe a follow-up then on the NAND side. You seemed to have pretty good visibility when you're ramping with your final DRAM customer to put some targets out there.

Do you have a similar type of visibility with the first customer on the NAND side, or how is -- how is that share gain opportunity different?.

I think it’s different for us from a visibility perspective when we contrasted to the qualification of the third customer in DRAM. The NAND Flash market for us, we are essentially reentering in a significant way.

And so for us to understand design cycle, design release, aggregate demand and how that ebbs and flows throughout the quarter, is not something that we feel like we have as good a grasp on as we do in DRAM. Having said that, sort of tying back to comments we have made previously, NAND Flash probe cards are $200 million available market.

We see ourselves based on the qualification with our first customer, ramping in production is latter part of 2014 and into 2015.

The production qualification now with our second customer and working our way through addition customer qualifications in 2015, we see that growing into a $15 million to $20 million annual revenue opportunity when we compare it to our 2013 level.

So, again, the visibility for us since we are really just reengaging in this market, not as good as we had in DRAM, we are able to provide in DRAM. But in aggregate, that $15 million to $20 million run rate number exiting 2016, I think remains a pretty good milestone and sign post to think about where Vector should go..

All right. Thanks a lot guys..

Thank you. Our next question comes from the line of Edwin Mok from Needham & Company..

Hi. Thanks for taking my question. Just on -- a great quarter and guidance. So first one just on the quarter, I noticed that Korea -- sales in the Korea has dropped, but I thought your third customer is in Korea ramping, so just kind of help me reconcile that..

Well, I think there is several dynamics in Korea. Korea, when you look it at just on a pure regional basis, is a pretty significant consumer of probe cards, whether it’s the two major DRAM customers, two major NAND Flash as well as an emerging system LSI or foundry business in Korea as well.

So there are different elements underneath the regional Korea revenues that sort of all play into that aggregate regional number. So we do continue to focus on the region and on all aspects of the region as I talked about.

Again, I would -- given the different mix components and seasonalities, especially that we saw in the foundry business in the fourth quarter, I would expect to see those ebb and flow in any given quarter. .

Okay. That's fair actually. And then I guess, talk about the opportunity -- the numbers that you guys have laid out the $65 million to $75 million opportunity. I think in your prepared remarks you talked about how you believe it could be a multiyear growth opportunity. If you can give us some color on that.

Is your near-term, you have post that was $65 million to $75 million number, or you think it actually go above that and some timeframe on that will be helpful?.

Yeah, okay. So the $65 million to $75 million incremental revenue opportunity over 2013 that we have laid out about a year ago, we are continuing to execute along the different components of that.

If we sort of take a step back from that, our current view of the advance probe card market is in round numbers it’s about $1 billion, growing at about 5% annually. We believe along the same components of the initiatives we talked about the bill to $65 million to $75 million, we can continue to gain share.

Again, if we reference back to 2013, high single-digit share gain over our 2013 share position really by executing against the themes we have articulated the bill to $65 million to $75 million. So, I guess, put it different way, we don’t see those opportunities capping out or saturating at $65 million to $75 million.

We have got moderately although reasonably growing market driven by some pretty good underlying fundamentals in the customer base. And we believe as long as we continue to execute against these initiatives in SoC, DRAM and NAND Flash, that we have got legs beyond the $65 million to $75 million..

I see. Okay. Thanks for clarifying that commentary. And then on the SoC side, we all have seen some news about, I guess, your foundry customer seeing share shift among them. Would that -- how would those trends benefit you guys and you guys see that as driving some incremental change on the SoC for this year..

Well, I think broader than that, I think inside the foundry, fabless, SoC ecosystem, there is a tremendous amount of dynamics, especially at the high-end right now. When you look at -- there really significant fabless consumers of advanced silicon node wafer.

There is a lot of different projects that are moving between the leading edge foundries right now. And so we are competing certainly in the places where we have had historical share strength and strong relationships. We are benefiting from some of those movements.

In other cases we are working hard to get significant share positions at foundries where we have had weaker positions in the past. But I think certainly in SoC right now -- it is a fabless foundry SoC right now, especially in the mobile space, a tremendous amount of movement and action, especially at the leading edge node..

Okay. Helpful. Last question and then I will go away. OpEx increased to -- by around -- at midpoint what happen -- based on your guidance -- sorry, on the first quarter guidance you guide for OpEx increase by around those..

Yeah, the OpEx -- Edwin, the OpEx increase is really driven by a couple of things, right? And primarily it is in the -- what we will call fringe benefit cost which really include healthcare cost and what not, although that's just part of it.

The other part is really in the first part of the year our payroll taxes go up pretty significantly particularly around FICA and those sorts of things where until employees hit a certain level and the company hit the certain level, we have increased tax payments associated with that in the first half of the year.

So those are the two things that are really driving that. .

I see. Okay. Great. Thank you. .

[Operator Instructions] We also have a question from the line of Tom Diffely from D.A. Davidson..

Yeah. Good afternoon. So, I guess, first to follow-up on a few of the previous questions.

Mike, when you look at the growth last year, 16% growth or so, how do you split that between the market growth and share gains?.

That's a topic of pretty significant debate internally as well Tom. We think we grew faster than the market in 2014, although the market analysts will come out with their precise estimate to the whole thing as we work our way through the front part of the year.

We believe the market again was probably, may be a 5% to 7% grower and then the growth on top of that that we provided was market gains, primarily along the SoC and DRAM components that we had articulated before..

Okay.

And then when you look at your ability to grow beyond the 65 million to 75 million you laid out previously, which are the areas provide the most of incremental upside beyond that?.

So, if by areas you mean sort of the SoC, DRAM, NAND breakdown?.

Correct, yeah..

Yeah. Okay. We see pretty significant opportunities in each on them. Now, they have very, very different underlying dynamics. In DRAM, it's about continued share gains as we build into significant share positions across all three DRAM customers. In NAND, it clearly revolves around adoption of vector inside this $200 million TAM.

And SoC wafer test continues to move towards more complex structures, whether they be copper filler or customers driving the trend of high probe counts, higher parallelism to reduce their test cost.

So, we see, I would say, at this level sort of approximately equal opportunities in each of them, all building towards the high single-digit share gain positions we talked in the long run. But very different underlying drivers and dynamics in each of them that we're executing towards..

Okay.

So, essentially the same drivers you had previously -- just you think they are bigger than you previously thought?.

Fair enough. That's probably a more concise way to put it than I did..

And then when you look at 2015, do you expect kind of a normal seasonal trend this year? Or are we starting at a higher level which skew that somewhat?.

I think it’s a very good question. We -- as you can see from our Q1 guidance, we do continue to see nearly sort of the seasonal downtick that we have in the past associated with Q1, especially if you reference it to the previous Q3.

I think we do see activity through the middle of the year that would lead us to believe there is some seasonal component of things.

And as -- by the time we get as furrowed as sort of the fourth quarter, I'd hazard to say that sort of its anybody's guess what the seasonal trends will be, but I think again, depending on sort of what the market, what the industry does, the things under our control where we're executing against these initiatives are certainly partially responsible for damping the seasonality of 2014 as it expose to FormFactor and we'd hope to be able to continue that in 2015..

Okay.

And then finally, when you look at the operating expenses this year, after you get the bump for the first one to two quarters because of some of the payroll stuff, expect just slight increases over last year based on higher revenues?.

I think it will be maybe just slightly higher, but we basically have talked about in the past even ranges of 20 to 21 and I would expect that will probably stay in that range throughout most of the year. I think as we get into the second half of the year, the payroll taxes will be a little less.

If we're performing well, then maybe there will be a little more incentive compensation, but other than that, I would say those will be the only things that we see as thriving differences in OpEx expense..

Great, okay. It’s a nice leverage to come then. Thanks..

Thank you. And our next question comes from the line of Christopher Longiaru from Sidoti. Sir, your line is open. Could you check your mute button please? Again, Christopher Longiaru, your line is open. And it seems like he may felt his computer. [Operator Instructions] And I have no further questions.

I would like to turn the conference back to management for any closing comments..

Thanks very much for joining us on our Q4 2014 call where we summarize the quarter and the year and we look forward to joining you on our next conference call and at several of the Investor Conferences we're participating in at the front part of the year. Thanks very much..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day..