Jason Cohen - General Counsel Mike Slessor - CEO Mike Ludwig - CFO.

Craig Ellis - B. Riley Patrick Ho - Stifel Nicolaus Jagadish Iyer - Summer Redstone Tom Diffely - D.A. Davidson Christopher Longiaru - Sidoti Arthur Su - Needham & Company.

Thank you, and welcome everyone to FormFactor's Second Quarter 2016 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 our press release issued today and on the Investor Relations' section of our Web site.

Today's discussion also contains forward-looking statements within the meaning of the Federal Securities Laws.

The examples of such forward-looking statements include those with respect to the anticipated effect and benefit 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 our 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 SEC filing on Form 10-K with the SEC for the fiscal year ended 2015, and our other SEC filings which are available on the SEC's Web site at www.sec.gov and in our press release issued today.

Forward-looking statements are made as of today August 2, 2016, 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. In the second quarter, FormFactor delivered improved results and achieved significant milestones on our path to become a broader test and measurement leader. Revenue of $83 million exceeded the high-end of our guidance and was the highest quarterly revenue since 2007.

We ramped capacity for our market-leading foundry and logic products, shipping to a key microprocessor customer at their structurally double-demand level and put our first quarter performance issues squarely in the rearview mirror.

We also invested in ongoing yield and efficiency improvements to increase our gross margins at these higher production levels. As we anticipated at the beginning of the quarter, DRAM market conditions improved resulting in a nearly 50% sequential increase in our DRAM product revenues. On June 24, we completed the acquisition of Cascade Microtech.

This solidified our leading position in the production in probe card markets and enabled our entry into the strategically important engineering test and measurement markets. We entered the third quarter with significantly increased scale and diversification.

By combining market-leading positions and products, we have created a more valuable company, both strategically and financially. The combination is immediately accretive as evidenced in the 50 plus percent sequential increase in our third quarter non-GAAP EPS at the midpoint of guidance.

We are now working as a combined company to capitalize on our increased scale and market opportunities, and we expect that our product and customer diversification will accelerate our earnings growth. We are confident that 2016 will be a solid growth year for the FormFactor and Cascade Microtech businesses individually and as a combined company.

We anticipate the momentum in our foundry and logic business, which we have previously referred to as our SoC business, will extend through year end. Our key microprocessor customer continues to introduce and ramp multiple new designs on both the 40-nanometer and 10-nanometer nodes with each new design requiring new sets of probe cards.

We are also experiencing typical midyear strength in mobile applications processor and modem probe card demand. DRAM probe card demand has improved across the industry as customers make measured investments, further advanced nodes and products.

Lastly, we are seeing signs of increasing demand for our Flash products as customers begin to utilize their newly installed 3D nan capacity.

With the addition of Cascade's market-leading products to FormFactor's number one position in the $1.1 billion advanced probe card market, we have added approximately $400 million of additional market opportunity in both RF probe cards and engineering systems.

In particular, RF probe card demand is being driven by the continued unit growth of [indiscernible] filters. We also expect longer term secular growth to be driven by emerging millimeter wave automotive radar applications, as well as the upcoming 5G infrastructure build-out.

In addition, demand for Cascade's high-end engineering systems is robust as leading customers employ our tool to sort the challenging new yield loss mechanism, settled in today's advance silicon NAND's.

We expect to improve gross margins in the second half of 2016, driven by the continued momentum across our broaden product portfolio and by ongoing operational and cost improvements.

The strong second quarter growth in our foundry and logic business underscores the significant and rapid shift in both our product mix and our individual product lines factory loadings.

We are focused on yield and labor efficiency improvements in the extended foundry and logic business, as well as optimizing our capacity utilization across all our manufacturing facilities.

Regarding integration, we are moving quickly to integrate areas that can accelerate growth, while not risking our ability to deliver short-term revenue and profitability. For example, at closing, we unified our sales and servicing, ensuring a single voice to our customers and a coordinated worldwide support teams.

In order to ensure continuity in businesses that are delivering to their commitments and plans, we are following the measures and conservative approach to the integration of operations and manufacturing. We remain confident that we can achieve annualized synergies of $10 million to $12 million within 18 to 24 months.

The initial customer response to our detailed plans has been positive and they see FormFactor's increased scale and broadened footprint as advantages and helping them address their technical and operational challenges. I will now turn the call over to our CFO, Mike Ludwig for further details on the numbers..

Thank you, Mike, and good afternoon. As you saw from our press release and heard from Mike Slessor, our second quarter results were solid with strong revenue growth reporting. In addition, we improved gross margins and maintained good OpEx disciplines leading to a nice level of profitability.

We are excited about the second half financial prospects of the combined FormFactor and Cascade Microtech. With that introduction, let me discuss the details of FormFactor second quarter financial performance, as well as some information about Cascade Microtech second quarter results.

I will then take the opportunity to provide our third quarter guidance for the combined FormFactor in Cascade Microtech. As a reminder, the acquisition of Cascade Microtech was completed on June 24, 2016, one day before the end of the FormFactor second quarter.

Therefore, the operating results for Cascade Microtech second quarter are not included in the FormFactor second quarter non-GAAP results. Revenues for Q2 2016 of $83.1 million increased $29.5 million or 55% compared to our first quarter. Foundry and logic revenues of $57.9 million increased $21.8 million or 60% compared to our first quarter.

Foundry and logic revenues comprised 70% of our total revenues in the quarter. DRAM product revenues were $24.2 million, an increase of 48% compared to the first quarter. DRAM revenues comprised 29% of our revenues in the quarter.

As Mike mentioned, the DRAM demand environment improved in the second quarter and we also benefited from orders that pushed out late in Q1. Flash revenues were $1 million for the second quarter. Second quarter GAAP gross margin was $25.4 million or 30.6% of revenues compared to $9.8 million or 18.3% of revenues for the first quarter.

On a non-GAAP basis, gross margin for the second quarter was $27.9 million or 33.6% of revenues compared to $12.5 million or 23.3% of revenues for the first quarter. The increase in the second quarter non-GAAP gross margin was due primarily to significantly higher revenues at a slightly better product mix.

The gross margins was unfavorably impacted by low DRAM production resulting in lower absorbed fixed overhead, as well as inefficiencies and cost related to our foundry and logic product ramp which caused gross margin to be reduced by about 3%.

Our GAAP operating expenses were $32.1 million for the second quarter, an increase of $8.7 million compared to Q1. The increase is due to $10.7 million of acquisition related expenses including $6.9 million of restructure expenses for personal severance cost.

Non-GAAP operating expenses for the second quarter were $19.6 million, an increase of $1 million compared to the first quarter due to variable compensation cost earned and accrued in the quarter.

GAAP net income was $36.9 million or $0.61 per fully diluted share for the second quarter compared to a GAAP net loss of $13.8 million or $0.24 per share for Q1.

The second quarter included a net benefit of $33.2 million per acquisition related transaction or $0.55 per fully diluted share including a one-time tax benefit of $43.9 million from the partial release on the valuation allowance on our differed tax assets.

Non-GAAP net income was $8 million or $0.13 per fully diluted share for Q2 compared to a net loss of $6.3 million or $0.11 per share for Q1. Turning to the balance sheet, cash, comprised of cash short term investments and restricted cash, ended the second quarter at $118.8 million, $68.8 million lower than Q1.

Excluding cash attributable to the acquisition of Cascade Microtech, cash usage for the second quarter was $1.5 million. The usage was driven by the significant increase in accounts receivables. The company used $255.9 million of cash, plus issued 10.4 million shares to purchase Cascade Microtech. And we acquired $40.7 million in cash from Cascade.

The cash portion was funded by $107.4 million from our cash balances and $150 million of senior bank debt. The bank debt carries a floating interest rate of one month LIBOR plus 200 basis points. We entered into an interest rate swap to lock-in our interest rate on $95.6 million for four years at 2.94%.

The interest rate for the remainder of the bank debt is currently at 2.5%. The senior debt also has debt to EBITDA and fixed coverage ratio covenants.

When you look at condensed financial information for Cascade Microtech second quarter, it's important to note that we are recording only 12 weeks of performance rather than 13 weeks due to the timing of the acquisition. Cascade's revenues for the 12 weeks ended June 24 were $37 million.

System revenues were $17.6 million and probe revenues were $19.4 million, an all-time high. Systems revenue benefited from 300 millimeter systems. In the Cascade's probes business, strong sales of probes to RF filter manufacturers is typical in the second quarter as customers build devices for the Q4 seasonal sales.

Cascade Microtech second quarter GAAP gross margin was 61.4%, and their non-GAAP gross margin was 61.5%. The record gross margin in the second quarter was driven by a favorable product mix and increased margins for both the probes and systems businesses.

Probes benefited from increased factory absorption, while systems gross margin benefited from product mix. Cascade GAAP operating income was breakeven for the second quarter, and non-GAAP operating income was $7.9 million, 21% of revenues.

GAAP operating expenses included $6.3 million of acquisition-related expenses, $1.2 million of stock-based compensation, and $0.5 million of amortization of intangibles. In all, Cascade Microtech had a very strong quarter in revenue, margins, and operating income. And we are excited about the prospects for the combined company.

Turning to FormFactor's outlook for the third quarter, we see continued strength of probe card revenues from our significant microprocessor customer, the beginning of a typical midyear mobile application processors and release cycles, and improving DRAM demand environment, mitigated by some seasonal softness and the handset filter demand.

Engineering systems demand is expected to remain steady and benefit from the strong order flow generated in the first half of 2016. As such, we expect revenues for the third quarter to be $118 million to $126 million. Our gross margin will be impacted by less favorable product mix in the third quarter.

We expect to achieve greater manufacturing efficiencies as we maintain our double-capacity for significant foundry and logic customer, and additional of DRAM demand will help our fixed cost absorption. Therefore, we expect FormFactor's non-GAAP gross margin to be in the range of 40% to 44%.

As Mike mentioned, we are committed to delivering the communicated annual synergies of $10 million to $12 million in 18 to 24 months, with $1 million of synergy is expected to be realized in the third quarter, or $4 million annualized. We will also incur $1 million of interest cost in the third quarter.

We expect to realize non-GAAP fully diluted earnings in the range to $0.17 to $0.23 per share and generate $10 million to $12 million of free cash flow, excluding the impact of acquisition-related expenditures.

With that, let's open the call to questions, operator?.

Thank you. [Operator Instructions] Our first question comes from Craig Ellis of B. Riley. Your line is open..

Thanks for taking the question and congratulations on an encouraging start to the new business model with Cascade.

My first question is a follow-up, Mike, to the comment you made about gross margin and 300 basis point impact in the reported quarter, I wasn't sure if you were talking about the impact to the -- just the SSC business or the FormFactor business overall with that comment..

Yes. So the comment addressed that the three percentage points is the impact on the overall gross margin of the FormFactor business. So that's -- but related to the comment is specifically related to the inefficiencies and the cost associated with the ramp of our foundry and logic business..

And as you work on improving efficiencies for that part of that business, how much of that -- how much progress is made in the third quarter, and how much upside is left to be realized in the fourth quarter, and with that captured all, or is there some that would continue into 2017?.

Yes. Craig, when we look at it, you know, while we continue to improve our execution efficiency and the capacity ramp, as we talked about, we still experienced more than unusual materials usage and variances in direct labor costs in the second quarter.

We do expect to reduce our inefficiencies and have a -- and spend about $1 million less on that in the third quarter. So that still puts us well and probably somewhere in the ballpark of about $1.50 million relative to our usual number.

I expect it as we move forward into Q4 that we will then capture the majority of that remaining $1.50 million, but some of that could go over into 2017 as well..

Thanks for that, and then switching over to Michael Slessor; Michael, looking at some of the broader trends in the business, can you characterize the environment that you are now seeing in your DRAM business relative to -- I don't know that we can frame it as normal, because there is perhaps no normal these days, but relative to a reasonable level of PC, server, and mobile DRAM demand, where are we right now with the business environment that we have midyear?.

Sure, Craig. Thanks for the question. In DRAM, if I have to pick a reference point because as you say, normal is probably a bit of an illusive notion these days and for the foreseeable future.

If I look back about a year ago, we are certainly still not to the demand levels across all the major DRAM customers that we were in middle part of 2015, early part of 2015.

What we have seen obviously, and I think this is consistent with most other people in the DRAM supply chain, is a gradual turn on of advanced production nodes, whether they be 20 nanometers or some customers beginning to push into the 1x nanometer, call it, nodes, and the continued release of new designs for DDR4 and low-power DD4.

You asked a little bit about the breakdown between PC, server, and mobile, I would characterize our new design and demand mix as there being very heavily biased towards server and mobile with not a lot of PC DRAM activities.

And really we see customers using these advanced nodes to propagating to the significant mobile handset demand and the significant data center and server demand, primarily with DDR4 and low-power DDR4..

That's helpful, and then the last question from me, and switching over to the deal integration side.

As you look at the target for 10 million to 12 million in longer term synergies, what are the key milestones between here and the next 18 months that need to be hit for the company to be on track and realizing those synergies?.

Well, Craig, it's Mike Slessor. I will start with maybe the high-level goals of integration and some of the constraints in where we see the activity shifting over time. As we talked about in the past, our primarily goal is to bring the two businesses together and ensure that they continue to execute operationally.

Obviously, from the second quarter results, those businesses are operating at significant volume levels with FormFactor's second quarter revenue being the highest levels in 2007 and Cascade setting Sigma records in their businesses, we want to make sure we are being measured on the operational side.

Having said that, as Mike Ludwig communicated, we achieved a plan to achieve in the third quarter a $1 million or $4 million annualized initial cost synergies. Those are things primarily related to G&A.

As we move forward, we are increasingly focused as we combine the sales force on achieving some infrastructure synergy there obviously we got the field team now under combine leadership looking at facility consolidation and efficiencies in our pretty significant worldwide service network and I think that second set of milestones will happen with the sales force as we move into the early to middle part of 2017, certainly a little bit earlier than year from now, but well into 2017, where we see the non-G&A parts of the synergies coming to fruition..

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

Thank you very much, and also congratulations.

Maybe just following up on that integration question, that Craig asked, can you give a little color on I guess the percentage break down between on the OpEx line versus costs to goods, you gave just a little bit of color how some of the initial savings will come on the G&A side of things, where I guess where and what type of tactics can you do to get the cost savings -- to get the savings on the cost to goods line, is that going to be manufacturing, supply chain, what are some of the tactics there?.

Yes, so Patrick right now, we talked about 10 to 12 million that is specifically on the OpEx line, as we talked about in the past, we want to be very measured about anything that we do from a factory perspective and so the 10 to 12 is really just identified solely on the OpEx line, I think one opportunity that we will have or opportunities that we will have as we go forward will be to look at, how we can leverage investments across different factories, different business units but I think that is going to be later in the process, if we look at the MicroProbe and FormFactor integration those are just now starting to happen between the two companies and that's two to three years into the acquisition.

So I would think, in order to get any meaningful synergies from a COGS standpoint, that's probably a similar type timing on those potential savings..

Great, that's helpful.

Maybe just looking at your traditional, your core Probe Card business, you noted some of the strength in DRAM but also mentioned that there was a pick-up in Flash, is this now just a phenomena of where the customers who would qualify before are now starting to order volume or are you getting additional customer wins that are now starting to come in as well..

Patrick, it's Mike Slessor.

So on the Flash front, obviously the uptick I mentioned was not manifested into the revenue results because our Flash revenue, we are still only a $1 million in the second quarter, so obviously I am referring to the pipeline and our view of second half demand, it really comes around the customers where we already qualified and some pretty significant wafer and design ramps that are coincident with designs that we won, primarily in the 3D NAND space I think that's consistent with the activity here from most of our customers, really investing in 3D NAND and trying to shift there mix towards 3D NAND.

One of the other interesting things we have seen is that several of our customers, the manufacturers have chosen to go smaller dye sizes and higher densities which is move the technology requirement a little bit back towards some of FomFactor's classical strength and is playing well to the competitive strength associated with our MEMS technology but to answer your question it really is around the two customers where we have been engaged and where Vector has been qualified in the past..

Great, and a final question for me, I know you guys have obviously acquired Cascade, but they had another strong quarter especially you mentioned 300 millimeters engineering Probe systems from a market perspective and not specifically to you guys but from the market, how fast do you see the engineering probe system market growing particular on that 300 millimeter front, given that the industry is kind of shifting to a lot more wafer level probing type of application..

Yes, I think it's important to sort of understand, where this engineering system business operate, it really is very early in the yield around and its historical growth rate has been kind of around the industry growth rate, customers use these system to solve electrical yield problems early in their node characterization and device characterization activity and really although the historical growth has been, as I said as about the industry level, we are pretty optimistic that this is a strategic place to be in the industry going forward.

So to put any number on it, I think it's a little premature for that, but fundamentally if you look at the second quarter result and what we are seeing for the second half of the year in the engineering systems business, we definitely see key customers both semiconductor and in related areas, things like silicon photonics, investing in the engineering systems to go do their yield analysis and we are pretty optimistic about this being our future growth platform for FormFactor..

Great, thank you very much..

Our next question comes from Jagadish Iyer of Summer Redstone. Your line is open.

Yes, thanks for taking my question, two questions I have first. How should we be thinking about the RF business in the second half and have you made any decision with regards to overlapping products with Cascade and then I have a follow-up..

So the RF business as Mike Ludwig indicated in his prepared remarks, we tend to have a seasonality, certainly where the second quarter is the strongest at least in the filters part of the business, that's been the real growth driver and third quarter tends to be seasonally nominally a little bit weaker, I think we are seeing that pattern again this year, fourth quarter is probably a little bit too far out for us to comment on demand, but I look at the forecast we are getting from customers, the design activity all of the leading indicators associated with the RF business, I think we are pretty comfortable that for on a year-over-year basis and on a secular basis, that continues to be a growth business for us, there is also additional legs to the RF story that we are excited about, I mentioned specifically millimeter wave radar and 5G but obviously as more and more devices in the world have to communicate with each other, RF becomes a big part of that and Cascade holds a very strong position in helping key customers solve those test and measurement problems..

Okay..

The overlap on products as -- I think we discussed in the past, there was very little overlap for products and engagement, where they have been overlaps we have put the teams together and had them assess differences and potential complementary fits of technology subcomponent.

And I think the sum total of that is that we have found that even where things looked to be the high level, where there was potential overlaps, we found complimentary fits and as we gone out and talked with key customers and helped engage them in the evaluation and the decision of where different products and technology sub components fit, we have been really encouraged that even at the detailed sub component level a lot of the companies R&D spends and product offering fit together very nicely without really any disruption in delivering our current product suite to customer..

Okay, that's very helpful. And how should we think about your sustainability of your SoC business in the second half particularly in the context of your largest microprocessor customer? Thank you..

Right. So the sustainability, and I will remind you that we changed norm and criteria a little bit we have gone from SoC to foundry and logic because really bringing the Cascade RF business into it, it needed a little bit of a broader label than just SoC which tends to convey a very narrow slice of the overall industry.

So I will refer to it as our foundry and logic business going forward as we did in the conference call.

The sustainability of that is pretty strong, if you remember from our comments going back to the first quarter and into the second quarter, one of the reasons we were delayed on this ramp is because we had to really understand the fundamental driving mechanism behind why our largest customer was doubling its demand from us and to stay out of the really nitty-gritty details, it's associated with a fundamental shift in wafer test strategy, as Patrick noted in his question, more and more of our customers specifically in the foundry and logic space are trying to move more and more test content to the wafer level and the result the demand from our largest customer is quite indicative of that, obviously it's a dramatic shift that was enabled by several other things.

But the sum total of that is the sustainability of that increased demand is rather robust and we continue to invest in now, not just producing this double demand level, this doubled up level but also as Mike Ludwig indicated continuing to invest and making sure, we optimize our cost structure around that double demand level and deliver the gross margin we need to run that business..

Thank you so much..

[Operator Instructions] Our next question comes from Tom Diffely of D.A. Davidson. Your line is open..

Yes, good afternoon.

So obviously a very strong quarter on the RF side, I am curious where is the most exposure there, are you more exposed to the bar filter or the soft filter, is there any sub segment that's particularly strong for you?.

Tom, I think in any given period, I think there is puts and takes in each of them, obviously Cascade fundamental strategy in RF is similar and quite consistent with FormFactor's fundamental strategy overall and that we are trying to get ourselves exposed and diversify to a wide variety of market drivers and forces.

So I characterize that in any given quarterly time period and maybe even a longer that, there is going to be puts and takes between the different filter producers and the different technologies they used, but I don't think anything sort of foundational or secular in those shifts..

Okay, so the RFKs [ph] have been doing quite well on unit basis of late. However, they have been under a little bit of margin pressure which are unresolved has that moved down or has that pressure hit the Cascade business or they still such in a dominant position, where they don't have a lot of margin pressure..

Well, as you know, given the ecosystem that these RF customers -- our customers operate in, there is continued cost pressure and that cost pressure not just in RF but this is fact of daily life in the semiconductor industry, what we have been doing is -- working with these customers to help them reduce their overall cost of tests, so one of the themes obviously familiar to those of you who follow the FormFactor business for years, is our ability to help customer test more chips at once it's essentially the same capital test equipment by giving them probe cards with more capability that's the theme that's emerging in the RF space and as those costs pressures continue to push through the RF space, obviously they are familiar to us from our DRAM and microprocessor businesses.

We have the ability to help customers reduce their costs of tests without necessarily reducing our ASP..

Okay, great. And then moving on to the Flash market obviously after a bit of a slow start there last couple of years with the new product it sounds like things are starting to pick up a bit.

You mentioned that the market is changing a little bit with some of the sizes of a dime, what have you, has the view of the market itself or the size of the market changed for you or the view of your served available market?.

In Flash, I don't think our view of the overall market -- and at the highest level where you are really making product and resource decisions, I don't think has changed very much. It's about $200 million spent by our customers in a year. Our served part of that with our qualification and engagements is probably around half of that 200 million today.

Obviously, we are going to work to expand our served part of the market to really encompass the total market as the years go on, but initially we probably served in round numbers about 100 million of it. I don't think the requirements in the size have fundamentally changed.

However, obviously there are two themes associated with 3D NAND that they are continued monitoring. One is, the number of wafer starts moving to 3D NAND continues to increase and perhaps outpace some of the projections, different industry people of that and obviously more wafer starts is good because it drives more probe card demand.

But the other piece is, we certainly continue to see the theme of 3D NAND tests being longer than the equivalent plane or NAND testing and that's going to drive more test demand and more probe care demand as well.

But for now, I don't think we've made a quantitative shift in our thinking of NAND being about $200 million market but governed by some positive trends both on wafer starts and test funds..

Okay, great. And finally you talked about having a $1 million of cost synergies already.

Is that number reflected in the guidance or is that by the end of the quarter you'll have that, $4 million run rate across savings?.

That number Tom is reflected in the guidance as well..

Okay, great. All right. Thank you for your time..

Next up..

Our next question comes from Christopher Longiaru of Sidoti & Company. Your line is open..

Hi guys, thanks for taking my questions.

My first question just has to do with just - there has been some talk of ex-point and is that a opportunity for you and will that have an impact in your business going forward?.

So the Cross Point memory architecture, probably a little early to make any definitive statement as it represents a real potential disruption in our customers' business and the industry's business.

Obviously the product associated with one of our larger customers, and as such given our relationships there, we are happy that more innovations being done at one of our larger customers where we have a strong relationship, but I think the promise of dealing a replacement for DRAM or a poor placement for NAND are probably still a little early to try and comment on.

I will say that where we have been exposed to it from a test perspective, it doesn't look a lot different than a middle of the road DRAM or NAND, maybe looks a lot like high-speed NAND or a little bit slower DRAM from a test or probe card perspective, but we certainly like to see it become a significant part of the overall wafer memory starts because we view that as a generally positive development for FormFactor but too early to make any real definitive statement on it..

That makes sense.

And then just in terms of, you're seeing this change in the way that large customers approaching your contribution, are you seeing anything from anybody else that might indicate that that thought process is expanding even from a design perspective?.

I think the trend you're referring to, that's driving this double demand in our - from our key foundry and logic customer. Certainly customers anywhere if they have a fixed test budget we'd like to spend more of that budget on wafer test.

And that's for the simple reason that the earlier they get the answer and the earlier they can screen out that dive before investing more cost and cycle time into those potentially bad dive is good for them. So the thought process I think is there across the industry and probably to be fair has always been there across the industry.

There are a couple of things though that has been enabled in the foundry and logic supply chain that have allowed people to economically give more test to PDUFA level. Some of them are associated with us for example testing more dive at once, to trend I referred to in Tom's question about RF and cost pressure.

But there is a whole bunch of different ecosystem pieces that need to fall into place that haven't fallen into place across the entire foundry and logic segment as desirable as they might be for those customers to perceive more and more of their test content at wafer test.

So we like it to happen, and I don't know that I see strong indications of it happening everywhere in the short-term, but over time, customers are going to push more and more test content to the wafer level, especially as you move towards things like free packaging, system in a package where you are taking individual die and packaging them together, you want to know those die are good and really -- to first order would be the only way to find that others at the wafer level..

Great, thank you for that.

And then just lastly, is there any change to your outlook on taxes with the release of the evaluation allowance?.

No. You know, what, the release of the evaluation allowance is pretty technical with respect to what created that, had to do with the -- intangible assets that we acquired and the deferred tax liabilities associated with that, so pretty technical.

Bottom line is there is no change through the outlook of our tax rate and cash -- particularly, cash tax rate as we move forward..

Okay. Great, I will jump back, thanks guys..

Our next question comes from Edwin Mok of Needham & Company. Your line is open..

Hi guys, this is Arthur on for Edwin.

First question is on copper pillar, can you comment on what you are seeing in terms of the adoption of copper pillar advanced packaging, and if you have any thoughts on when you think that should most significantly ramp?.

I am sorry, Arthur, I didn't catch the last part; when that would most….

When you think it could significantly ramp?.

Yes, I think if we look at the high-end of foundry and logic, whether it be microprocessors, apps processors coming out of major fabless customers, I think the realistic assessment is we have had a lot of that ramp already. There is still some in front of us.

So if we look at maybe the application process or manufacturers going into the second tier of mobile phones, some of the China supply chain, elements like that, based on copper pillar adoption in front of them and one of the interesting things that's happened is the overall supply chain, given some of the leading fabless customer's adoption of copper pillar have invested pretty heavily in that capacity and capability.

So, as copper pillar continues to be adopted as a packaging technology, I think we've seen some significant business and significant silicon overall be packaged on copper pillar, but I do think there is some additional opportunity and additional market penetration still in front of us..

Great, thanks.

And in terms of OpEx, how should we think about OpEx going forward after the combination with Cascade?.

So I think again, if you kind of look at what their sort of run rate has been, what our run rate has been, the FormFactor run rate, when you look at those two and you factor in the synergies that we have talked about, that probably is the best way to look at it.

Obviously we didn't guide to a third quarter OpEx expense, but you can probably, with the numbers, you can probably back into it and you know, on a go-forward basis that's not a bad way to look at it with increased synergies coming in as we get into the fourth, fifth quarter post acquisition..

Great, thanks..

[Operator Instructions] Our next question comes from Craig Ellis of B. Riley. Your line is open..

they've had very, very strong trailing three-year trends in both businesses and there has been significant improvement in systems towards that of probe cards, just any reason why we wouldn't continue to see system's margins improving over the medium to long-term in that business?.

Yes, I think you know, if you look at kind of where they operated both in the first quarter and even in the second quarter here, I think they are operating pretty much at optimum levels that they've been able to achieve the benefits of the integration of the acquisitions that they made previously, they have got good product mix.

So I would think that going forward -- well, I would think something like right around what they've historically been at in the high-40s as probably something that makes a lot of sense for that type of business going forward. I know in the last couple of quarters, they have been at 50% plus, but I think that's pretty optimum.

So I don't see them expanding their gross margins in that area..

And were there any one-time items that benefited gross margins and helped them to raise 200 basis points sequentially in that business in the reported quarter?.

I think there were a couple of things that helped them; one, the increased probe volume helped them with their factory absorption, they also had a pretty significant system that they sold to a customer that really helped from a margin standpoint this time as well, but there is no -- I don't know that I've called them any one-time unusual items that really benefited them..

Okay, thank you..

If there are no further questions, I would like to turn the call back over to Mike Slessor for any closing remarks..

Thank you again for joining us today. With our increased scale and diversification, we positioned FormFactor for new growth opportunities in a larger addressable market. We are striving to continue to outpace industry average growth rates by gaining share in our targeted markets and by efficiently executing on our enhanced opportunities.

Thank you, again..

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