Thank you, and welcome, everyone, to FormFactor’s First Quarter 2019 Earnings Conference Call. On today’s call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Shai Shahar. As a reminder, this call is being recorded. Before we begin, Jason Cohen, the Company’s General Counsel will remind you of some important information..

Thank you. Today, the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company’s financials.

Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the Investor Relations section of our website. Today’s discussion contains forward-looking statements within the meaning of the federal securities laws.

Examples of such forward-looking statements, include those with respect to the projections of financial and business performance; future macroeconomic conditions; foreign exchange rates; business momentum; business seasonality; the anticipated demand for products; customer requirements; our future ability to produce and sell products; the development of future products and technologies; and the assumptions upon which such statements are based.

These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call.

Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended 2018 and our other SEC filings, which are available on the SEC’s website at www.sec.gov and in our press release issued today.

Forward-looking statements are made as of today, May 1, 2019, 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 thanks everybody for joining us today. FormFactor again delivered solid financial performance in the first quarter of 2019 with revenue and non-GAAP earnings per share at the high-end of the outlook we provided three months ago.

This performance was driven by a combination of steady overall demand and good execution augmented by unusually strong mix related gross margins in our engineering system segment. As is evident from our current outlook we expect to deliver modest sequential growth in the second quarter as we continue to experience steady overall demand.

To put our recent results into context; over the last four quarters a period during which semiconductor capital equipment spending has fallen by 20% or more, FormFactor’s revenue has been largely stable varying within a range of only 6%.

Our diversified opportunities that provide us multiple demand drivers and revenue opportunities with each of our underlying customers, segments and markets experiencing individually fluctuating demand levels.

This of course produces variations in product mix and gross margins evident in each quarter's results, but the net effect is a more stable overall revenue stream through the cycle. In addition, as we’ve explained in the past probe cards are consumable that is specific to each new chip design.

As a result our underlying demand drivers are less cyclical than capital equipment because we benefit both from node transitions and the release of new designs on existing mature nodes.

While we do supply capital equipment through our engineering systems business; this segment is driven primarily by new capability requirements and customer's R&D budgets and less by production capacity additions.

Together with our leadership positions across the breadth of our served market these demand characteristics combined to give us the ability to deliver relatively consistent financial results allowing us to continue to invest in innovation, product roadmaps and our factory network strengthening our competitive advantage so that we can lead and gain share in exciting new areas like advanced packaging.

I’d like to touch on VLSI researchers annual survey of the probe card market published last month. The report reinforces our observation of probe cards as a design specific consumable possess a less volatile demand cycle than capital equipment.

In particular the advanced probe card market is expected to contract in 2019 by a relatively modest 5% to just under $1.4 billion. The report also revealed the FormFactor again led all suppliers in the advanced probe card market by a wide margin.

Our leadership position is built on strong relationships with the semiconductor industry leaders and our ability to serve them most challenging and relevant electrical test and measurement requirements such as those emerging in advanced packaging and chiplet applications.

Our top customers remain consistent and despite some natural variation in our disclose 10% customers continue to include the world's leading logic manufacturer, the world's foremost foundry and the world's top memory manufacturer.

Moving to market level details; our foundry and logic probe card business continues to be driven by multiple components of demand.

Our largest customer continues to release and ramp designs on its mature 14 nanometer node while at the same time increasing activity consistent with the expected time line required for its well-publicized 10 nanometer transition later this year.

In the first quarter this customer again exceeded the $100 million annual run rate level and we expect to ship at comparable if perhaps slightly higher levels in the second quarter.

At the world’s leading foundry we continue to broaden our footprint with wins on multiple designs from multiple fabless design houses serving both mobile and high-performance computing applications.

In RF, we are currently experiencing a midyear increase in RF front-end driven demand as bond soft filter manufacturers release and ramp their new products to meet plan second half handset launches.

In addition, we continue to work with customers to enable test strategies for their longer-term 5G product roadmaps and are currently shipping RF probe cards in volumes consistent with 5G engineering sampling activity.

In automotive as you've heard recently from our customers serving this end market, overall demand is relatively weak and we’re experiencing similar dynamics in our automotive focus products.

During this time, we are advancing our roadmap and qualifying technologies that enable high parallelism, low-cost wafer test at a 175 degree celsius helping us address the stringent high temperature quality and reliability requirements of the automotive OEMs.

Turning to memory; we are presently seeing reduced demand for NAND flash probe cards consistent with reduced customer investment in the space and with our previous comments that are NAND flash results should be expected to be lumpy.

Overall DRAM probe card demand on the other hand remains comparable to the solid levels of the past few quarters despite the well-documented softness in our DRAM customers end markets.

Each major customer is pursuing slightly different node transition and design release roadmaps which provide some degree of smoothing to our DRAM probe card shipment timing and volumes.

Our engineering systems business provided a big highlight for 2019 today with first quarter deliveries of multiple high ASP systems for both MicroLED and cryogenic temperature testing.

Both of these applications like silicon photonics in advanced five and three nanometer CMOS development are proof point of our engagement early in the customer development cycle enabling characterization and yield improvement of novel new devices in the lab.

Devices that operate at and therefore need to be tested at cryogenic temperatures is an exciting new area whether it would be for ultra-low noise detectors, energy efficient data centers or even quantum computers.

The capabilities offered by our engineering systems enable these advances and give us early visibility to applications to build the foundation of future production applications in our lab to fab engagement strategy.

With average lead time of less than a quarter, our visibility remains very limited, but we continue to be encouraged by the broad-based strength in our demand profile.

As we navigate through the current industry conditions we continue to take advantage of our relatively stable revenue stream to make investments that solidify our roadmap capabilities and competitive advantage like the high temperature automotive and cryogenic testing example I shared earlier.

When market growth returns as the market share leader we can capitalize on that growth and execute further share gains from our line-of-sight opportunities in advanced packaging, mobile data and automotive applications.

These gains will enable us to achieve our target financial model growing the top line to $650 million while delivering a $1.25 of non-GAAP EPS and $110 million of free cash flow. Shai, over to you..

Thank you, Mike and good afternoon. As you saw in our press release and as Mike noted our first quarter of 2019 results exceeded the midpoint of our revenue and EPS outlook and gross margin came in slightly ahead of our outlook range. These results again show the benefits from successfully executing the diversification elements of our strategy.

FormFactor’s revenues for the first quarter of 2019 were $132.2 million, a 6.2% sequential decrease and an 11.8% increase over the first quarter of 2018. Probe card segment revenues of $108.1 million in the first quarter decreased $8 million or 6.9% from Q4 2018. System segment revenues is $24.1 million in Q1 decreased 2.5% from the fourth quarter.

Within the probe card segment foundry and logic revenues decreased to $71.6 million, a 6.6% decrease from the fourth quarter and with 54% of total company revenue in Q1, same as in Q4. DRAM revenues were $28.9 million in Q1 down slightly from $29.6 million in the fourth quarter and were 22% of total revenue as compared to 21% in the fourth quarter.

Flash revenues of $7.6 million in Q1 were $2.3 million lower than in the fourth quarter, down from 7% in the fourth quarter to 6% of total revenue in Q1 consistent with our opportunistic approach to this market and expectation that flash revenue will continue to be lumpy.

Approximately $4.4 million of the flash revenues in Q1 were from NAND flash application. GAAP gross margin for the first quarter of 2019 was $52.5 million or 39.7% of revenues, very close to 39.8% in the fourth quarter.

Cost of revenues included $5.8 million of GAAP to non-GAAP reconciling items which we outlined in our press release issued today and in the reconciliation table available on the investor relations section of our website.

On a non-GAAP basis gross margin for the first quarter was $58.3 million or 44.1% of revenue, the same margin as in Q4 and slightly above our outlook range, mainly as a result of a more favorable product mix as well as increased factor utilization.

Our probe card segment gross margin was 41.9% in the first quarter, a decreased 40 basis points compared to 42.3% in Q4. Our Q1 systems segment gross margin was 54% as compared 52.4% in the fourth quarter. The increase of 160 basis points was driven by higher revenue and a favorable product mix.

As mentioned for the next is mention in prior earnings releases we expect our system segment gross margin to be at the high 40s to low 50s range. Q1 systems gross margin results were on the high end of that range. Our GAAP operating expenses were $44.9 million for the first quarter, $0.7 million higher than in the fourth quarter.

The first quarter operating expenses included $6.8 million of GAAP to non-GAAP reconciling items. Non-GAAP operating expenses for the first quarter were $38.1 million, or 28.8% of revenues compared to $37.2 million or 26.4% of revenues in Q4.

The increase of $0.9 million relates mainly to on all benefits which typically affect us – sorry, affects our OpEx at the first half of each year. As well as higher R&D investments should partially offset by lower SG&A expenses.

Company non-cash expenses for the first quarter included $7.1 million for the amortization of intangible assets, $5.3 million for stock-based compensation and appreciation of $4 million. Amortization of intangible assets was $0.4 million lower than Q4 and stock-based compensation was $0.1 million lower than in the fourth quarter.

GAAP net income for the first quarter was $5.5 or $0.07 per fully diluted share compared to net income of $85.1 million or $1.13 per fully diluted share in Q4. As discussed in our previous earnings call GAAP net income for Q4 included a non-cash deferred tax benefits related to valuation allowance release of $75.8 million.

The non-GAAP effective tax rate for the first quarter of 2019 was 24.4% in line with our previously communicated estimate of 25% for the year. I would like to remind you that beginning the first quarter of 2019 we recorded non-cash deferred tax expense in addition to the 6% current tax expenses.

As we said in our previous earnings call, we will not be excluding the effects of these non-cash charges from the non-GAAP outlook and earnings that we communicate. Our cash tax rate is expected to remain at the 5% to 8% of pretax income until we fully utilize the remaining $200 million of U.S. based NOLs.

First quarter non-GAAP net income was $15.2 million or $0.20 per fully diluted share compared to $23.5 million or $0.31 per full diluted share in Q4.

Moving on to the balance sheet and cash flow, we’ve generated $14.9 million of free cash flow in the first quarter compared to $15.8 million in Q4 taking out total cash and investments to $160 million at the end of the quarter. We paid $7.8 million on principal and interest payments on our term loan during the quarter.

Our total cash balance exceeded the balance of our debt by $102 million at quarter end and increase of $18 million. We invested $6 million in capital expenditures during the first quarter of 2019 as part of our annual capital spending plan of $16 million to $20 million.

Turing to the second quarter non-GAAP outlook, we expect Q2 revenues to be in the range of $131 million and $139 million, although revenues expected to be higher than in Q1 at the midpoint of our outlook range, product mix is expected to be less favorable.

These factors partially offset by continuous expense control and good operational execution lead us to estimate a non-GAAP gross margin for Q2 in the range of 41% to 44%.

Non-GAAP earnings per fully diluted share assuming their effective tax rate of 25%, which includes the non-cash deferred tax expenses I describe, is expected to be in the range of $0.15 to $0.21. The inclusion of these non-cash deferred tax expenses reduces our Q2 outlook for non-GAAP diluted EPS by approximately $0.03 at the midpoint of the outlook.

The reconciliation of our GAAP to non-GAAP Q2 outlook is available on the investor relation section of our website and in our press release issued today. With that, let’s open the call to questions.

Operator?.

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

Thanks for taking the question and congratulations on executing well on what's been a tough economic and spending environment in the quarter. Mike, I’ll start with the question for you.

As I look at the details of the business it looks like the Foundry and Logic business did noticeably better than we were expecting, so congratulations overall on the revenue performance on that.

But was there anything in particular that stood out in that business versus your expectations for the quarter?.

No.

I think in Foundry and Logic, obviously as you know a pretty volatile spending environment, but I think it goes back to one of the things we’re trying to communicate on the call is our market share and presence across the leaders in the industry but also many other customers, really helped give us a diversified revenue stream in the first quarter as it has at various times in the past.

We’re only to have quarter-to-quarter mix shifts among key projects and key customers, but I think the first quarter is a pretty good example where we had several of those kind of come together for us in and help the overall results.

I think we can say the same thing about DRAM, our presence across the leading DRAM customers led to a relatively strong DRAM result in what's overall a pretty weak DRAM spending environment..

And just following on that other points, if we look at updates DRAM manufacturers over the last month or so, it doesn’t seem like all are sticking with technology transition commitments.

So does that provide a backdrop where the DRAM business despite some customer specific volatility through the year can hang in the current levels, Mike, are there things that you should look to the year that will cause the business to deviate meaningfully in one way or the other.

It seems that at least with the largest manufacturer there is a market share gain opportunity that’s coming up may not this year but perhaps next year?.

I think a good question Craig, and I’ll start it by reminding everyone that with lead times inside of a quarter, our visibility is pretty limited. But a couple of the indicators that leave us pretty optimistic on RDRAM probe card business certainly as we move through the second quarter.

And things get a little foggy as we move to the second half, but if I look at design activity, new design activity driven by both those new transitions and then move out some significant customer products to some of these new notes, we see a pretty healthy backlog of new designs continuing to move through.

And so that leaves us optimistic, certainly that there's going to be continued investment in new designs in DRAM, in node shrinks in DRAM as each of the three major customers trying to innovate and compete with each other in maybe what’s more challenging end market for them than it was in the middle part of 2018?.

Thank you. And last one for Shai and then I’ll hop back in the queue.

Shai, just on the gross margin commentary for the quarter you called out the favorable end of the systems mix for gross margins, so I take it back some percentage of the upside that we saw versus our expectation, but were there other positive variances? And then as we look into the guidance for the second quarter it seems like there's a meaningful change quarter-on-quarter.

Is that just the first quarter system dynamics shifting the other way? Or what could cause such a meaningful decrease when volume seems to be helping the business?.

Thanks Craig. So yes, mix has by far the biggest impact on our gross margin and it was evidenced in Q1. We shipped some high margin systems during the quarter and it was evidenced by a systems margin reaching 54% high end of the range we've previously said, right, we talked about high 40s low 50s. So 54% is the high end of that range.

And there were some other small factors better warranty, better quality of our product and utilization of the factory was a little better revenue and so, this impact Q1. Looking into Q2 revenue at the midpoint are higher than in Q1, that has a small impact, but again the biggest impact is mix.

We don't expect the systems business to repeat this high gross margin because of the mix of products they're about to ship in the second quarter..

Got it. Thanks guys..

Thank you..

Thank you. And our next question comes from Brian Chin with Stifel. Your line is now open..

Hi. Good afternoon. Nice job to the team and thanks for letting us ask a few questions..

Thanks Brian..

My first question is looking at the midpoint of your 2Q revenue guide it's slightly up from the revenue level you did achieve in Q1.

Just curious what is your expected trend in terms of the SOC Logic as well as the memory segments in terms of the outlook?.

Yes. I think -- so several different moving parts. Foundry and Logic, we expect to be a little bit stronger again with my usual caveat that we're still booking business that we need to turn in the quarter.

Some different dynamics there, obviously the 10 nanometer ramp that we've all been awaiting is beginning some activity consistent with our largest customer’s publicized need to have product on the shelves at the end of the year. So as we've said, that's a mid-year event.

We're beginning to see the leading edge of that event, but it sort of bridges Q2 and Q3, so some of the upside there probably in Foundry and Logic. I think in memory it's the -- we see memory in the middle of the year is really the tale of two different markets.

In the answer to Craig's question I described how pleased we are with DRAM overall shipment activity, but also design activity which is obviously a leading indicator of future shipment activity. So, we feel like DRAM probably pretty steady going Q1 to Q2. I think NAND flash probably a bigger question mark for us.

Now obviously a much smaller part of our business, but as we've described before we operate pretty opportunistically in this segment and we don't see a lot of business there in Q2, and you saw it reduced in Q1 as well. So I think Foundry and Logic probably up a little, DRAM steady as she goes and flash maybe distracting a little bit.

We see engineering systems being roughly constant maybe a little bit of growth..

Okay. That's really helpful. Thanks Mike. Following up on two things first on in terms of DRAM, I think we have seen sort of concrete evidence that they have maybe reduced utilization rates, reduced wafer inputs, slightly earlier than they might typically in a sort of a down cycle from a pricing standpoint for them.

I'm curious if you've seen any effect on your revenue stream thus far and whether you think that could have some impact certainly counterbalance against robust design activity, but some impacts on your business moving in the second half in terms of DRAM market?.

Yes. I think we see a much larger effect from this move to some new designs and new architectures. One that we've talked about in the past but continues to be pretty strong is the manifestation of advanced packaging in memory which is HBM. And we see all of our leading customers now pushing towards that direction, obviously a trend that's good for us.

I think when they ramp down wafer starts on existing nodes and existing designs that's probably something we don't have a lot of visibility to because obviously they already have the tooling and probe cards they need to test the peak wafer loads.

And so our business typically again is driven by these transitions to new nodes or new designs on existing nodes. And that activity continues to be pretty robust even as older nodes in old designs ramp down..

Okay. That's helpful. It also makes some sense. One quick last one, going that one back in terms of the 10 nanometers CPU ramp that you're participating in and driving demand here Q2 and Q3. I think that customer on a recent call did talk about maybe things slightly better units in terms of CPUs for them by the end of the year.

And they also talked about a faster follow on ramp where their server CPU chips on that 10 nanometer process sometime next year and so early than follow on in terms of the server versus the client CPU ramp. It sounds like a positive.

Can you talk maybe through what that speaks to in terms of revenues continue remain robust and more sustainable into 2020?.

Yes. Well. I think in general any customer getting more aggressive with design transitions and node transitions is going to help drive our business.

So any of that kind of innovation whether it's the move to a new node or the move as we saw with that customer over the past couple years continuing to move designs onto 14 nanometer which has been a pretty successful mature node for them drives quite a bit of business. Obviously, we're very excited to see 10 nanometer continuing to progress.

And the more designs that make it onto that new node drive volume for our customer and then eventually us we're looking forward to that. So I think generally the trends you described would be a positive for us..

All right. Thanks so much..

Thank you. [Operator Instructions] Our next question comes in Christian Schwab from Craig-Hallum. Your line is now open..

Hey, guys. Mike can you walk us through what type of trends and business conditions would be needed in 2020 or 2021 for us to attain your target model and get to earnings of a $1.25.

Can you give us the kind of puts and takes as you see it that would allow you to get there?.

Sure. So, if we just revisit some of the fundamentalists assumptions of the target model to get us to 650 million at the top line and $1.50 of non-GAAP earnings per share, there's two pieces to it. Obviously, if somebody who leads in market share, we need our served markets to grow.

And when we put that model together the underlying assumption was our served market had to grow to something like 1.7, 1.75 billion a year. Last year they were probably a hair under 1.5 billion, and so, that gives you some sense of the market growth that's required.

I think if we look at the probe card market it's expected to contract as most semiconductor supply markets are here in 2019. So there would need to be a pretty good step up in 2020. But the underlying assumption there is the 1.7, 1.75 billion of served market. Those are markets we serve today and markets that we're executing in.

The other element we talked about was some of the growth associated with three opportunities; one being advanced packaging, two being mobile data, three being automotive. I think advanced packaging I think we're ahead of where we said we'd be from an incremental share gain perspective.

Whether you look at the high bandwidth memory example I talked about before, largest customer talking about chiplets, some of the other examples like integrated fan-out. Advanced packaging has been a nice growth in share gain area for us over the last couple of years.

I think mobile data as we talked about on the call we're seeing some signs of life in the RF bonds soft filter business and obviously 5G is a very exciting opportunity for us. We need that to accelerate, get some share gains there. And then we need to return to some of the growth in the automotive segment.

We're laying the groundwork like the example I gave for high temperature test, but those three things sort of have to hit on all three cylinders and we need the overall market growth for us to get there. So whether that's 2020 or 2021 those are the basic ingredients for us to get to the target model..

Great. And then my last question if I may. It has to do with potential M&N after successfully putting in Cascade Microtech into the company and leveraging some of those opportunities and kind of setting up your lab to fab strategy.

Is there are any areas out there that you think or technologies or if you could just give us an update on how you're thinking I guess about M&A, obviously you're not going to name a company but thank you?.

Yes. No. I can give you some update and remind you of the general things. So what we've said is that M&A will continue to be a part of the strategy. The Cascade Microtech deal was a very good combination for both companies and we hope to do the same kind of thing again.

But we want to use our capital to buy leadership positions in new pieces of serve market. We don't think there's a lot of shareholder value in trying to roll up our existing service markets. So then you get into a question of the adjacencies.

Certainly anything in and around electrical test and measurement, instrumentation, arguably metrology we're looking at areas that are resonant with our business where we can really get good leverage out of our sales force, out of our fixed costs, out of our G&A and then look to long term revenue synergies and product synergies as we have in the Cascade Microtech deal to drive an interesting compelling roadmap in places like advanced packaging that are becoming a new part of the overall industry roadmap..

That's great. Thank you..

Thanks..

Thank you. Our next question comes from David Duley with Steelhead Securities. Your line is now open..

Thanks for taking my question. I was wondering as far as your largest Foundry customer goes they've certainly been talking about a big recovery in their business in the second half of the year. I think it's up like 30% or 35% versus the first half of the year.

If they're able to achieve that kind of first half -- second half performance over the first half and a lot of that's ramping seven nanometers how would that impact your business?.

That's a good question.

So if we think about any customer a lot of what we're delivering today and probably even in the latter part of last year is for designs that are going to be ramping in the middle part of the year sort of six months after we deliver probe cards, so to some extent on that narrative part of our strength with that customer in Q4 was the tooling and probe cards they're going to be using to produce sort of Q2, Q3 maybe even Q4 revenue.

I think the exciting part of it for us is the expansion with that customer into multiple new fabulous customers and multiple new designs not just in the mobile space but in the high performance compute space.

So as we've talked about before business with that customer has been pretty concentrated with a single fabulous customer in a mobile application processor obviously driven by integrated fan-out packaging. But we see that opportunity now expanding to other customers and other end applications beyond mobile.

And so as we look to the second half I think if the foundry business is going to get that strong and if people are adopting those seven nanometer – seven nanometer plus in advanced packaging I think there's some opportunity for us there..

So, it would be more associated with not what the overall revenue growth half over half but more than seven nanometer ramp?.

I think so. We're really exposed there on advance nodes 10, seven and below..

Okay, great. And then I just wanted your perspective on 5G. I understand that the bond, soft filters and the antennas and a lot of the RF parts are going to be discreetly packaged in advanced packages.

And I'm just wondering what your perspective is that is, is that the right way to think about it that 5G is going to be much more advanced packaging intensive for some of the front end RF parts?.

Yes. I think the jury's still out on a lot of this. It's still from our perspective pretty early days on 5G. We are shipping probe cards multiple units of probe cards for different designs inside the 5G semiconductor ecosystem.

But a lot of this people are sampling and still really sorting out what their architectures and chipsets and therefore packaging strategies are going to be.

I think there is an interesting opportunity as people build RF modules to take advantage of some of the RF or some of the advanced packaging and its spectacular RF performance, but I don't know that that's really been fixed on most customers roadmap yet. So certainly an opportunity for us and one that we're helping enable in early development.

If we get there with 5G that would be fantastic opportunity for one factor..

Yes.

Maybe let me ask it a slightly different way because if a lot of these top antenna parts and front-end phone parts in the 5G phones are packaged to advanced packaging is not going to be better for you because the advanced packaging is more cap probe and test intensive?.

It is. It's more probe and test intensity is just as high-bandwidth memory was in DRAM just as integrated fan-out was in Logic.

The point I was trying to make is I think the jury's still out on whether a lot of advanced packaging is going to be employed for some of those modules not to dampen everybody's enthusiasm, but it still feels awfully early days in 5G to us..

Final question for me, you've had one big customer, largest founded customer kind of leading the way in advanced packaging with their integrated fan-out. But you start to read a lot about other customers such as Intel in their programs in this area.

I'm just wondering do you expect more of your large customers to ramp some sort of advanced packaging programs in the next year or so?.

I don't think there's any question that they will. If you look at the way the industry overall and therefore the major customers are dealing with the slowing of Moore's Law.

I mean it's clear that advanced packaging offers another way to innovate to get the performance, the footprint and the cost attributes that they've always gotten from just shrinking transistors. Obviously shrinking transistors is no longer quite as easy and cost effective as it used to be.

And so advanced packaging whether it would be integrated fan-out, whether it be the full [ph] application whether it be HBM are all things that leading customers are adopting in the next year, and our great drivers of foreign factories business that we talked about in the past..

Thank you..

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

Hi. Good afternoon. This is Frank for Tom. Thanks for letting us ask questions. I guess I'll start on the Logic side.

What is currently the mix between the 14 and 10 nanometer nodes right now? Are they the same?.

Well, I think it in any given time period it's fluctuated pretty significant.

I think it's a fair statement to say that 14 nanometer and 10 nanometer are coexisting and we'll co-exist for a long time in any given period, the mix shifts one way or the other but they are both significant parts of our business at present and we expect them to both be significant pieces going forward..

And so I guess I'm picking back up for that. So when the 10 nanometer launched and how it – how long do you expect the 14 nanometer to stay.

Or do you expect new designs at that node?.

Yes. I mean I think if you look at any of our major customers narratives some of these would have been thought of this trailing edge in almost obsolete nodes in the past are going to stick around for a long long time.

Whether it's 28 nanometer in the Foundry space or 14 nanometer in the CPU space, there's very useful designs that are going to be placed on those nodes and continue to drive volume for both our customers and us.

So I'd expect 14 nanometer to be around for an awfully long time almost independent of how fast 10 nanometer rounds at this stage of the game..

Okay. Thank you.

And then jumping to RF, what are your expectations for the demand I guess for the year? And then did your expectations changed during the quarter?.

As I said in the prepared remarks we are seeing some midyear strength in RF. Now that's not an unusual time to see that strength because if you think about the typical cadence of handsets hitting the market the filter manufacturers and antenna and power amplifier manufacturers really need to be ramping right about now.

It's been such a lumpy market for the last couple of years that our visibility is not great, but certainly we are seeing some strength herein now and are excited about the longer term prospects of the RF business given the 5G elements that we just talked about..

All right. And then lastly, I just saw some nice mix related and gross margin benefit from engineering systems in the quarter. I noticed it’s like a sort of steady grower.

But can you talk a little bit about the long term opportunities and what's the biggest driver there in the future?.

Yes. I think engineering systems remember is a business where we're engaging with customers in some cases universities, in some cases labs on the very early end of development. And so, there's no there's no one application that drives that business.

It's a myriad of different applications where people are having to do brand new kinds of tests and brand new kinds of characterization.

So if I run down sort of the list of applications obviously this time around we talked about some cryogenic test systems testing at temperatures ranging from 77 Kelvin or liquid nitrogen all the way down to liquid helium and below those are enabling a whole bunch of new applications.

But that doesn't mean we're going get a whole bunch of cryogenic production test business.

MicroLED another example like that where we're selling multiple systems into early development that's going to help in the long run our probe card business in production, but engineering systems business is a collection of all those different applications where we're engaged with customers in their very early learning and path funding.

This quarter obviously we had a mix of those applications in up those systems that was very favorable. We think over a reasonable amount of time over several quarters that that high 40s to low 50s gross margin is the right place to think about our engineering systems and the composite of all the different early applications that serves..

All right. Thank you very much..

Thanks..

Thank you. [Operator Instructions] Our next question comes from Craig Ellis with B. Riley FBR. Your line is now open..

Thanks for taking the follow up questions. I'll start with some items that relate to comments thus far. Mike on the on the mobile business for RF probes you've talked about the near term strength. But my question was a little bit longer term as we look towards 5G ramping in very small volumes this year a bit more meaningful next year.

What does that mean for the growth rate of the RF business? I think there is a view that that filter content can rise by 20% to 30% on a multi-year basis in 5G systems.

Is there a coefficient to RF probe growth related to that? Or how do we think about the structural benefit that you'll get from 5G?.

Yes.

I think it if we just look at that example I think almost certainly there will be content growth in 5G and if we just look at the filters in the front end -- if you look at what happens when people went to 4G and you look at some of the content increases over the past several years there's been a pretty strong correlation between filter units and our RF probe card revenue.

The move to 5G in addition, so we do see some unit growth there just driven by the increased number of filter units that are going to be required to manage all the different bands. I think the other exciting part for 5G is it's a tougher test problem.

The higher frequencies much much more stringent single noise and so it plays pretty well towards our historic technology strengths. We're pretty strong through the Cascade Microtech acquisition at RF, at RF know-how to design the probe card so the customers get the test results they want.

And so I see this being a little bit like advanced packaging thematically where it becomes a tougher test problem and the amount of testing needs to go up. And so no question 5G and nice opportunity for us. And I think you could expect to see us track pretty closely to RF filter units in the near-term..

That's very helpful. And the follow-up relates to comments regarding your large U.S. customers manufacturing and technology strategy the move towards chiplets.

It's certainly early innings in that regard, but does that raise probe card intensity for them and do you have a sense for the impact of that if it does so?.

Yes. Well it's yet another example where customers are adopting advanced packaging to solve a problem that they used to be able to solve using Moore's Law in transistors strengths.

And so the notion that -- now essentially all the leading manufacturers have some level of advanced packaging on the roadmap whether it be chiplets, high-bandwidth memory, integrated fan-out, I think are really exciting opportunities for us in the larger test community.

If we look at some examples from the past high-bandwidth memory is probably the simplest one to look at.

It raise test intensity significantly because as you could imagine as you stack these chips or chiplets together you better have pretty high confidence that each of them is going to work so that the collection is not killed by one of the component chip. And so that historically in advanced packaging application has raised the test intensity.

The other thing that happens is customers are pretty aggressive with the design rules on how they package these chips together. And so that makes for a much density probe card, something that plays really well to our MEMS technology. We’re able to scale that quite effectively, produce quality probe cards that allow them to drive their test cost down.

So I think the more major customers we see moving to advanced packaging whether it would HBM, chiplets, integrated fan-out the better for FormFactor..

Thank you very much, Mike..

Thank Craig..

Thank you. And I’m showing no further questions in the queue. At this time I’d like to turn the call back to Mike Slessor for any closing remarks..

Thank you everyone for joining us today and we’ll see you at a variety of conferences as we move through this spring. Have a great day..

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