Feb 6, 2008
Operator
Good afternoon ladies andgentlemen and welcome to fourth quarter 2007 FormFactor Incorporated EarningsCall. My name is Lisa and I will be your coordinator for today.
At this time,all participants are in a listen-only mode. We will be facilitating aquestion-and-answer session towards the end of this conference.
(OperatorInstructions) As a reminder, this conference is being recorded for replaypurposes. I would now like to turn thepresentation over to your host for today's call Ms.
Annie Leschin, InvestorRelations. Please proceed.
Annie Leschin
Good afternoon and thank you forjoining FormFactor's fourth quarter 2007 earnings conference call. With me ontoday's call are Igor Khandros, Chief Executive Officer; Ron Foster, ChiefFinancial Officer; and Mario Ruscev, President.
Igor will provide a summary ofour fourth quarter performance, review market segments and provide an update onoutlook and long-term strategy. Ron will then take us through the preliminaryfinancials, operational details and provide guidance.
Finally, before I hand the callover to Igor, I will review our safe-harbor statement. During the course ofthis conference call we will make forward-looking statements within the meaningof the Federal Securities Laws, including statements regarding markets in whichwe compete, our new production execution, demand for our products, ourfinancial performance and our strategic and operational plans.
These statementsare based on current information and expectations and are inherently subject tochange and involved risks and uncertainties. Actual events or results maydiffer materially and adversely to those in our forward-looking statements, dueto various factors including but not limited to, the continuing challenges anddeterioration of the markets in which company's product are used includingDRAM, the demand for certain semiconductor devices, the rate at which customersadopt the company's newly released products, implement manufacturing capabilitychanges, make transitions to smaller nanometer technology nodes and implementtooling cycles, the company's ability to develop end market innovative testingtechnologies on a timely basis, to address production issues and efficientlyscaled production of its harmony architectural product line, to deliver andqualify new products that meet customers' testing requirements on a timely and efficientbasis, to execute it's cost reduction plan and implement measures for enablingefficiencies and supporting growth in its design application and otheroperational activities, and the company's ability to obtain tax and other costsadvantages from its expansion of operations into Singapore.
The company assumes no obligationto update the information in this presentation, to revise any forward-lookingstatements or to update the reasons actual results could differ materially fromthose anticipated in our forward-looking statements. Please refer to thecompany's recent filings on Form 10-K for fiscal 2006 and 10-Q for Q3 2007 foradditional information regarding the relevant risks and uncertainties.
Finally, a breakdown of revenuesby market and geography and a scheduled reconciling our GAAP and certainnon-GAAP financial information and guidance is available on our website. I would now like to turn the callover to Igor Khandros.
Igor Khandros
Thank you, Annie. Hello, everyoneand thank you for joining us.
By this point, most of you have seen our pressrelease. We are entering 2008 at an especially challenging time for FormFactor.Our customers are seeing deteriorating conditions in their markets, especiallyin the past 60 days and particularly a tough pricing environment in the DRAMsegment.
We are also continuing to feelthe affect of the new product execution challenges we experienced in 2007,which have contributed to a more difficult competitive environment. Thecombination of this factor has significantly reduced the outlook for the firsthalf of this year.
We're reacting to this negative confluence of eventsproactively by adopting a cost reduction plan that will among other thingsreduce our worldwide headcount by about 14%. We are mobilizing the company todeal with the near term challenges efficiently.
But we'll continue our researchand development investments so that over the long-term, we can maintain andexpand our technology and market leadership. Now, let me quickly mention somekey highlights from 2007 before I discuss the market segments and the outlook.FormFactor ended 2007 with revenues at $462 million, a 25.2% annual growth,roughly in line with our estimated market growth advanced probe card.
DRAMremains the largest part of our business though all sectors grew in doubledigits. During the year, the Companyachieved a number of milestones including the expansion of its product linewith the introduction of its Fine Pitch Wire Bond larger product for mobileconsumers and automotive applications, A qualification and improvement in themanufacturing of the Harmony product for both DRAM and Flash applications, andthe strength in our management team was mostly our new President, Mario Ruscev.
The year ended on a challengingnote for FormFactor with fourth quarter revenues decreasing 4% sequentially to$120.5 million. The slower fourth quarter was largely due to the weakeningmarket conditions and earlier execution issues associated with Harmany DRAM.DRAM remains FormFactor's most significant contributor in 2007 responsible formore than half of the Company's growth.
In the fourth quarter, 70-nanometerDDR2 and 1-gigabit were the major drivers behind the increase in DRAM revenues.However, our new product RAM challenges versus Harmony resulted in a mist ofopportunities with a few customers causing the majority of the overall revenueshortfall in the quarter. We made significant progress in the manufacturingreadiness of our Harmony DRAM product during the quarter, having reduced leadtimes by 30% and shift volume orders of this product to several customers.
Looking at the first quarter of2008, DRAM market conditions had deteriorated dramatically in the past twomonths. Typically, the advanced probe card market is not subject to the samecyclical fluctuations as the semiconductor or capital equipment industry.However, when memory prices are either very high or very low, near cash course,the probe card market can be significantly impacted.
While bit growth hasremained healthy, device prices for DDR2 512 megabit equivalent have stayedbelow manufacturing cost for several quarters. More recently prices have beenbelow cash course for some suppliers.
While customers are faced with suchchallenges in economics, they must immediately take action to improveproductivity and reduce cost by any and all means in order to preserve cash.This is causing customers to delay test capacity expansion in existing nodesand implement aggressive reduction in test times and in some cases in the degreeof testing. In the company's history, the only example of DRAM environmentresembling these current extraordinary conditions was in 2001 when the price ofDRAM reached to low of about $0.75.
Due primarily to the marketconditions, as well as the delay in the Harmony DRAM, FormFactor's DRAMbookings declined significantly. Our focus going forward was shifted to thedemand generation side of the equation as we work to regain our lost positionwith DRAM customers who could not wait for our Harmony products.
Although, wehave made significant progress in manufacturing our Harmony products, theprecise timing of the market recovery is still uncertain. The competitive pressure we'reexperiencing is into lower end wafer contactor applications, which is affectingpricing and margins in the near term.
For more complex high-end applications,we believe our products are differentiated; able to work in a wide temperaturerange in the smaller pad size and pitch with the highest pin-count in theindustry. As the market moves to sub70-nanometer in DDR3 in the second half of 2008, the requirements for fullwafer contactor will become even more stringent requiring the differentiatedcapabilities of our Harmony-based products.
Flash grew 53% for the year. NORFlash experienced a very robust year driven largely by the increasing demandfor Known Good Die.
During the quarter Flash revenue fell due to slowness inour NOR customers buying patterns and then Harmony ramp issues. Bookings rose in part through HarmonyOneTouch orders, while NOR slightly decreased driven again by the ramp from oneof customers tooling of 65-nanometer specific timing.
Our NAND Harmony one-touch cardsnow being used in high volume manufacturing, are showing excellent performance.As our manufacturing has improved, our lead times decreased. We now have theopportunity to grow in this area.
Additionally, we expect our Known Good Die productofferings to continue to differentiate us in the NOR and specialty NANDmarkets. SOC Logic business grew 15% in 2007,as we maintained our market share.
In the fourth quarter, total SOC revenuefell due to a seasonal decline in the key customer. However, we continued oursuccessful penetration of the Wire Bond logic market, rapidly increasingrevenues from a small base for the second quarter in a row.
We received new design wins inthe automotive segment and penetrated the consumer application segment with ourTrueScale product. We reached another technology milestone for the TrueScaleproduct family, for the Wire Bond logic market achieving 40 micron page.
Thisproduct was qualified by new customers during the quarter and is now ready forvolume shipments. We believe TrueScale will addressthe limitations of conventional probe card technology which cannot scale to low50 micron of high parallelism.
TrueScale is designed to increase manufacturersthroughput and lower test scores, while supporting their technology roadmap forsmaller path pages. We expect to make continuing progress with this productfamily into Wire Bond market.
Our Known Good Die products hadanother very strong year growing 95% over 2006. Wafer-Level Burn-In grew 44% in2007 as customers move more Burn-In of their devices to the Wafer-Level.
During the year, we shipped ourfirst 300 millimeter one touch down Harmony Wafer-Level Burn-In product,setting an industry record of 40,000 pins. Wafer-Level Burn-In ended the yearwith the strong quarter growing 38% due to the ramp of 1-gige DDR2.
HFTAP, a highfrequency test probe also had a very strong year near tripling over 2006. We continue to see increasedadoption of our HFTAP products for NOR, mobile RAM and PSRAM for at speedtesting.
Having doubled our customer base in 2007, we are now nearly 20semiconductor manufacturers using FormFactor HFTAP products their Known GoodDie applications. We are confident that Known Good Die will continue to be animportant contributor to FormFactor's 2008 and longer term growth as ourcomplete suite of Known Good Die product serves as a significantdifferentiator.
Now, I would like to turn to the2008 outlook. As I stated earlier, we've experienced a sudden slowdown in ourDRAM business due to customer's cash preservation behavior.
Though the overallgood growth remains positive, DRAM semiconductor revenue in particular iscurrently projected to decline significantly, nearly 20% in 2008 due to theprotracted oversupply. The recently communicated capacity investment pullbacksby DRAM manufacturers will hopefully be a step to advancing the market supplyand demand, and pricing conditions are expected to improve in the second halfof the year.
FormFactor operated best whenDRAM pricing stayed above customers' manufacturing costs, and certainly abovetheir cash course. In light of near-term market and certainties, we do not havea reliable basis, and we wish to project either market growth as a whole orFormFactors growth for 2008.
So let's talk about thevisibility we do have. The current quarter looks very difficult.
Ron will giveyou more details but we think that the overall market and FormFactor revenueswill both be down in the first quarter. We are hopeful that the second quarterwill improve our first, and then the second half of the year will besignificantly better than the first half, but the precise timing of therecovery is speculative.
Broadly speaking, we know thatthe technology transitions will continue such as RAM of 65 to 68 nanometertechnology and the introduction of DDS3 in the second half. And we as a marketleader will benefit.
Due to the protractive Harmonyramp issues we experience in 2007, FormFactor was not the first full-wafercontactor probe card company qualified at some DRAM suppliers. This resulted inthe loss of business in the fourth quarter, which we believe the competitionpicked up at lower end DRAM applications.
With the recent improvement inour Harmony execution we demonstrated our ability to manufacture the industry'smost advanced full-wafer contactor for high volume production environment. Forexample, FormFactor has already delivered a 40,000 pin probe card.
With the fundamental advantage ofour 3D technology over 2D NAND technologies, we believe the FormFactor productis scalable for final geometrics and more complex such as DDR3, which willdrive the full-wafer contactor market to more than 60,000 pins by second halfof 2008. As the advanced probe cardbusiness is fundamentally a design-based business, every new design presents anopportunity for us to demonstrate our technological differentiation and capturecustomers' next designs.
We take our competition very seriously, but we willwork hard to translate technological and operational advantages to improve thefull-wafer contactor probe card market position as we have done in the past. In summary, we are witnessingextraordinary conditions in our business, but the long-term advanced probe cardmarket drivers continue to point to growing at the rate faster than the rest ofthe semiconductor industry.
Our products and technology are into leading edgeand though we have experienced significant difficulties with our Harmonyproduct ramps, we have learned invaluable lessons and will be a much strongercompany (inaudible). During difficult times strongcompanies make the right investors and technology.
They are 100% committed todoing the job there. We believe that FormFactor will continue to lead thismarket for many years to come.
As our full way of contactorHarmony based DRAM product enters the market in volume, we believe we willdemonstrate our advantages. Additionally, we are just beginning to penetrateSOC and NAND flash markets where we can significantly grow our market share inthe next few years.
We see 2008 as a transition year.As we work to resolve the issues we have had and introduce new products, investin R&D and accelerate our product cycles and improved our execution, all ofwhich will better the position FormFactor as a leader for the next decade. Before I hand the call over toRon, I would like to take a moment to introduce Mario Ruscev, our newPresident, who comes to us after many years at Schlumberger.
Mario Ruscev
Thank you, Igor, hello everyone.I feel privilege to be a part of the FormFactor management and I look forwardto speaking to all of you in the future calls. There obviously has been some significantchanges in the environment, my first month at the Company.
In order to weatherthese challenging times, we are taking a few of the following actions. First, we are reducing our coststructuring as announced and this includes the work for reduction that Igormentioned, in order to maintain our financial help.
We're also improving ourability to deliver custom products, who custom a worldwide on timely on costeffective basis by moving design on application activity closer to them andincreasing our presence in geographical areas where we operate. As an example,by the third quarter all designs needed for the Japanese market will be done inJapan and this will also betrue for Koreaby the fourth quarter.
We also continue our investmentin R&D, in order to maintain our technological leaderships. In 2007, we doestimate that our R&D investment was about twice as high as for all of ourcompetitors combined.
And last, we are conducting a solo review of how manyproduct introductions and how we'll implement the changes to our productintroduction process. Now I would like to turn the callover to Ron Foster.
Ron Foster
Thanks, Mario. I will focus mycomments on three areas.
First, I will provide a summary of fiscal 2007,second, I will review our Q4 results, and third, I will conclude with guidancefor Q1. Let's start with the briefsummary of 2007.
2007 was a solid year from both the operating and financialperformance perspective. Here are some of the key highlights.
Revenue grew 25%to $462 million. Gross margin improved from 50.1% in 2006 to 53.4%.
On acomparable non-GAAP basis excluding FAS 123R option expense, gross marginimproved from 51.3% in 2006 to 54.6%. GAAP operating margin was 20.2% in 2007compared to 18.1% a year ago.
Operating profit dollars on acomparable non-GAAP basis grew 37% year-over-year. We achieved our targetannual non-GAAP operating profit model of 25% for the year.
GAAP earnings forfully diluted share grew $0.26 over last year to $1.47. We added $84.8 millionin cash from operating activities and free cash flow was $36 million for theyear.
2007 ended with $572 million in cash and investments and increase of $78million compared to 2006. Looking at our various marketsegments in 2007, DRAM revenue increased 19% to $323 million, accounting for70% of our revenues in 2007.
We expanded in the Flash market increasing revenue53% to $89 million or 19% of total revenue. Known Good Die revenue consistingof our Wafer-Level Burn-In and HFTAP products was up 95% in 2007 to approximately$78 million as we saw increased adoption for mobile and PSRAM, at speedtesting.
And finally Logic revenue grew 16% to $45 million representing 10% oftotal revenue in 2007. I will now provide specificcomments on our Q4 results.
Revenues were $120.5 million down 4% over the thirdquarter and up 22% versus Q4 '06. Weaker than expected order flow in thequarter reduced the amount of business that we had expected to book in turn inthe quarter.
DRAM revenues which accounted for75% of revenues in the fourth quarter increased 10% sequentially to $90.2million. Flash revenues declined 38% sequentially to $19.9 million representing17% of revenues in the fourth quarter, coming of a strong tooling cycle for NORin Q3.
The Logic revenue was $10.4million representing 9% of revenues, a decrease of 5% over the third quarterdue to the cyclical declines related to a key customer's product transition.However, we are well-positioned as our existing customers moved to highparallelism, high-speed testing. KGD revenue in Q4 was up 18% from Q3 at $25.6million and up 284% over a year ago.
Fourth quarter bookings wereexpectedly weak at $93.9 million, a decrease of 25% over the third quarter andan increase of only 3% over the same period last year. Although, Flash and SOCbookings were up sequentially, DRAM bookings dropped 36% as some customers havedelayed or cancelled the purchases of probe card to deal with severer marginproblems.
The weak bookings led to alighter than normal loading in our factory in the last month of the quarter andgenerated the lowest level of beginning backlog for the up coming quarter sinceQ4 2005. Good execution and shortening cycle time enabled us to turn 62% of thebookings in the fourth quarter.
Now, I will discuss our GAAPP&L results and some key non-GAAP results to supplement the understandingof our financials. Our schedule that provides GAAP to non-GAAP reconciliationsis available on the investor portion of our website.
Let me review some key financialinformation for Q4. GAAP gross margin for the quarter was 51.1% below the 53.2%for the third quarter, primarily due to the lower production levels in thequarter.
Non-GAAP gross margin was 52.2% also down from last quarter. GAAPoperating income for the quarter was $22.1 million or 18.4% of revenue comparedto $27.1 million and $21.6 million in the third quarter.
On a non-GAAP basis operatingincome for the fourth quarter was 23.3%. Interest and other income for thefourth quarter decreased slightly quarter-to-quarter to $6 million from $6.2million last quarter, the decrease was attributable to slightly lower interestrates.
The yield on our cash investments in the quarter was 4.3% with a mix oftaxes exempt and taxable investments. Even the current outlook for interest rates,we would expect our interest income to come down to a level of approximately $5million per quarter in Q1.
The effective tax rate for thefourth quarter was 37%, excluding the impact of the one-time Singapore intellectual propertybuying. As we mentioned in the last quarter, a cornerstone of our plan toexpand in Singaporeincludes transferring intellectual property rights there along withmanufacturing.
This quarter's tax rate includes a onetime royalty pre-paymentas a partial buying for the IP transfer to Singapore, this payment increasefor Q4 tax rate 12 percentage points to 49%. Given the market challenge as wesee in the very near-term, we've decided to revise the timing of our expansionplans in Singapore.We still expect to have customer support and sales and marketing activities upand running as planned in 2008, but we are delaying the production ramp byapproximately six months and expect to begin manufacturing in Singapore nosooner than late 2009.
The planned tax rates for 2008 and 2009 will be in themid 30% range with a ramp-up production, tax rates in 2010 and beyond shoulddecline significantly. Net income for the fourth quarterwas $14.3 million and $0.29 per fully diluted share on a GAAP basis, includingthe impact of the one-time buying of intellectual property by Singapore.
Excluding the buying,net income was $17.7 million and $0.35 per fully diluted share. This comparesto our guidance range of $0.32 to $0.36 per share, and $22.2 million or $0.45per fully diluted share for Q3.
Now, turning to the balance sheetand cash flow statement. Cash and marketable securities totaled $572.3 millionin the fourth quarter, an increase of $32.9 million from the third quarter.Cash from operations was $43 million.
We spent $19 million on capitalexpenditures compared to $14 million in the third quarter. DSOs declined to 45days in the fourth quarter compared to 48 days in the third quarter.
Netinventories decreased by $3.3 million during the quarter to $29.3 million.Inventory turns were 6.9 in Q4 down from Q3. Now, let me give you guidance forQ1.
Weak beginning backlog and some DRAM customers' decision to delay probecard purchases and to reduce expenses in the near-term has resulted in adeclining outlook in the first quarter. Consequently, we expect revenues to bein the range of $70 million to $80 million.
With the rapid revenue decline inQ1, we expect to have a GAAP net loss in Q1. Excluding one-time restructuringcosts that will be incurred in the quarter, the net loss is projected to bebetween $0.09 and $0.19 per share.
One-time restructuring costs, which consistprimarily of severance costs related to the workforce reduction will be $4million to $5 million, or $0.05 to $0.07 per share. A GAAP EPS includes about $0.09incremental stock comp expense.
On a non-GAAP basis excluding stock compexpense and one-time restructuring cost, we expect an operating loss of between6% and 19% and earnings per share to be between a loss of $0.10 per share andbreakeven. Headcount at the end of thefourth quarter was 1,187.
The cost reduction actions we announced today willresult in a workforce reduction of about 14% from the current level. Thiscombined with other costs cutting actions we are taking in the quarter willreduce our spending run rate by about $4 million per quarter beginning in Q2.
Now, let us open the call forquestions. Operator?
Operator
(Operator Instructions) Yourfirst question comes from the line of Jim Covello with Goldman Sachs. Pleaseproceed.
Jim Covello
Good afternoon, guys. Thanks somuch.
The first question -- I have two questions, the first question is justhow do you figure out with everything that's going on, what's a secular problemin your business versus what is a cyclical problem in the DRAM industry? So,when you are making the cuts, how do you decide how deep the cuts are fixed --some manufacturing problems and some potential share loss that you might notget back versus the cyclical DRAM issue that will eventually recover?
Igor Khandros
Well, as you can imagine, this ishighly unusual time for us. The way we are look at it, as I mentioned if youlook, for example, at Q4 and you look at the $5 million shortfall betweenmid-range of the guidance and what we delivered, majority of that $5 million iswhere FormFactor did not compete for full-wafer contactors business, so thatwas lowest competition.
If you look at outlook for Q1,roughly, and it's very hard to be precise, but roughly we see it as two-thirdsis basically a market-conditions issue. It is extraordinary times wherebasically people wakeup one day, and their DRAM cost is below cash costs, andwhat you need to do immediately is to take actions the next day that -- whereyou bring it to or above cash costs, right.
And your costs you bring up to orabove pricing. So in order to do that you takewhatever actions you must take -- to take whatever risks actually you must takeand that has reflecting our business.
We believe that's two-third of theproblem. One-third of the problem is that, FormFactor, especially at onecustomer constellation but it's -- when the full-wafer contractor demand withthere, we did not compete well due to Harmony introduction problems.
And now,we have to sum up these issues behind us. We're ramping Harmony, and we have togo back and compete.
Jim Covello
Okay. And thanks for that.
Andthe other question, just as relative to the cash position -- if you look atwhere the stock is in the aftermarket. It's really not that far above that thenet cash position of the company, and obviously it sounds like you'll burnlittle cash in the first quarter, but it looks like as the company steps in andtake actions relative to buying back stock being aggressive in that regards, consideringthe cash position relative to the overall market cap of the Company.
Ron Foster
Jim, this is Ron. We're certainlyseriously considering stock repurchase scenarios and actively looking at thatrelatively to our total cash position.
By the way, looking at Q1 based upon theguidance I gave you, I think we'll still be on an operating-cash-flow-flat kindof scenario. And we're also looking at our cash balance, looking at repurchase,but also waiting against other potential future uses of cash as we continue toinvest in our business and expand for growth.
Igor Khandros
But Jim, really, I mean, what thecompany is going to do is what companies that aspire to be great do in suchcases, and that is, we're just going to go back to basic, we're going to learnlessons, learned on, as Mario mentioned, on this Harmony introduction, andwe'll make sure that we do things a lot better in the future? We will continueinvesting in R&D, and we'll make sure that technologically, we'll continuebuilding the gap between us and competitors and based on doing thingsfundamentally right.
We believe that we will regain our financial performance,and we will regain our market position, and we'll regain confidence ofinvestors. I mean, that's fundamentally what needs to happen.
Jim Covello
Thank you.
Igor Khandros
And that's what we are committedto do.
Ron Foster
Thank you, Jim.
Operator
Your next question comes from theline of Harlan Sur with Morgan Stanley. Please proceed.
Harlan Sur
Thank you, and good afternoon. Itstill seems like the team is losing opportunity to your competitors here in thefirst quarter because you are not satisfying the Harmony demand out there.
Ithink your previous target was to improve capacity by about 2X in Q1. Firstquestion is, did you hit that target, and the second question is: WillFormFactor be in a position to satisfy the pipeline of Harmony businessstarting in the June quarter?
Igor Khandros
Yeah. We actually are on tracknow with Harmony, and yes, we will increase capacity by factor of 2 or more.And yes, we believe that we'll be on track to ramp Harmony production.
We'llcompete very, very hard with both DRAM and Flash products.
Harlan Sur
So do you think you'll be in a positionto satisfy the pipeline of Harmony demand for the second quarter?
Igor Khandros
The answer is yes, and we workvery, very hard on demand generation right now.
Harlan Sur
Okay. Great.
And then you'vetalked a lot about weakness in the DRAM market space. What are the demandtrends you are seeing in the NAND flash business?
You know capacity out thereare still fairly robust, technology transition are still progressing as planed.I'm just curious as to what you are seeing in that segment of the business?
Igor Khandros
Actually, if you look at currentenvironment, I mean there is a confluence of several things here, and that iswhen your cost is at or below cash cost you immediately take actions in orderto not basically haemorrhage cash, I mean we'll know that. So what people dois, for example, 200 millimeter capacity went off the market, so that had animpact.
Second is, people will delay and of course, they communicate it. Thecapital investment -- they are lowering, most of the companies is lowering theoutlook.
You will probably see veryshort-term, say, Q1. You will see fewer bids produced and what happen is that65 to 68 technology transition is still very early, it's really not yielding.Companies are putting unusual amount of emphasis, and I must emphasize unusualon squeezing whatever extra percentages of yield in existing 70-nanometerproduct.
There is really most companiesrent 70-nanometer -- there is maybe one constellation that's ramping it rightnow. But what people will do is, they'll put their engineering not on runningnew things, they will put it on squeezing out the extra percentages of yield.That will not result an extra probe-card business.
And the last thing is, in thepast, we have always benefited from customers carrying suites of probe card inthe likelihood that you can sell two 512 megabit devices for more money than1-gigabit. It's just an example, but there have been many, many situations likethat when density is consistent in the market or architecture is consistent inthe market.
In the environment like this, you're just not going to do that,you'll just take a risk and basically just carry one and they'll do it for1-gigabit DRAM so that you spend less on packaging. You need to package two 512devices and you don't need to package 1-gig device.
So all of these things in thevery short-term are impacting our business. As you said, as you look at mirrorlong-term, yeah, people will ramp 65- to 68-nanometer technology very, veryhard.
I mean, they have to. Those who by the mid-year are not really yieldingtheir technology will get a huge disadvantage, so they'll be ramping.
That'swhy we feel that the first half will be challenging. We believe second halfwill be stronger, and that's one of the main reason people will be ramping DDR3in the second half.
This is going to be a major event. So these things will happen, butwhen you're operating at above cash costs, it's almost like deep freeze -- andyou basically think of cash preservation, you do very few new things, right?And this is the confluence of kind of events that we're facing with now.
Harlan Sur
Okay. Last question for Ron.
Howmany and who are your 10% customers in the December quarter?
Ron Foster
Harlan, there were three same aslast quarter. So it's roughly the same breakdown of heat expansion and powerchip.
Harlan Sur
Okay. Thank you.
Operator
Your next question comes from theline of Timothy Arcuri with Citigroup. Please proceed.
Timothy Arcuri
Hi, guys. Obviously the issueswith Harmony seem like they weren't really capacity related, so it wasn't kindof a shortage of your capacity as I think you were suggesting last call.
Iguess it seems like the issue was more or is more kind of products specific,which maybe like an architectural or technical issue with the actual product. Can you go back and can youreally detail what the specific issue was, because I know last quarter you werekind of saying you didn't have enough capacity, but it sounds like it was aproduct-specific issue and maybe you can detail what exactly it was and maybethat will help us be convinced that it's behind you.
Thanks.
Ron Foster
So the problem we communicatedlast quarter was capacity related. In other words, we just -- where we were asI mentioned then or in the assembly and test part of the flow of the product.We clearly had a bottleneck, and we were doing a lot of learning and actuallyin Q4 we've made some a major progress there, and what we started doing in Q4is using automated tools for clarification on assembly of that product.
So there has been a lot of workdone in the factory. We reduced cycle times in Q4 by 30% on that product.
Soreducing cycle time also increases your basically capacity because you movemore through the factory. And we are now, I mean, for example; we'll ship now,I'd say, almost 22 touchdown probe cards.
Remember majority of full-wafercontactor market today is probably at four to three touchdowns. And we shippedI'd estimate 20 two-touchdown probe cards.
We have several one-touchdown probecards with 40,000 pins in production. So there has been a lot oflearning.
It is a complex product to produce. So this is not a situation whereyou'd say, I've solved all the problems of, you try to ship hundreds of thesecards per quarter, you have to streamline your manufacturing, you need toautomate more, you need put more tools, you need to train more people so it'sgoing to be work, it is a complex product, but it is a very capable product.It's a product that will afford us differentiation that at very high pincounts, at very fine features.
Company is working very hard, and that's one ofthe focuses from Mario and that is to understand what lessons we must learnrevenue to change our skill mixture structure, where do we need to automate andwe must, you'll see us doing better as we go.
Timothy Arcuri
Okay. Just one quick follow-up onthat, Igor.
Igor Khandros
The only way, Tim, I can convinceyou is when you see us performing, I can convince you by talking.
Timothy Arcuri
I agree. I guess on that pointcan you -- there has been a lot of concerns about the competitive gap betweenyour product and other folks product narrowing.
However, some of that sounds likeit was due to your own inability to actually build the product. So, I guess,are there any recent examples that you can maybe point to that the new card isin the marketplace competing against the competitions card and at leastrecently has one based upon your newly found ability to actually build thecard?
Igor Khandros
Well, remember, this is stillearly in this market, and getting this precise information at this stage, in full-wafercontactors rollout in the industry is difficult. I can tell you that we haveproducts out there.
That it is our belief today -- product we shipped in fourthquarter of last year, and we don't believe other companies could ship. Thatdoesn't mean that competitors are not learning and making progress.
So that's a dynamic situation,but we also are making further improvements, and as you know, we are alsoinvesting in R&D. So again, we believe that we shipped one touchdownproduct, that's 40,000 pins.
We believe that it was the most capable product inthe market. Now, clearly competition took up some demand, that some customersthat caused the swing for right so they are clearly capable.
And again, this is not asituation where you talk your way out of it. We will compete our way out of it.We believe as we start shipping Harmony in high and high volume, putting it oncustomer's floors that we will demonstrate basic fundamental advantages of ourtechnology.
That's what we believe and we need to prove it now.
Timothy Arcuri
Okay. Thanks.
Operator
Your next question comes from theline of Gary Hsueh with Oppenheimer and Company. Please proceed.
Gary Hsueh
Yeah. Hi, Igor.
My question isjust -- it seems like you basically opened Pandora's box in here in terms ofmarket loss, and I certainly think you guys have a technological ability tokind of gain it back with Harmony. But I just wonder how easy is it to kind ofrecoup what your original thought was in terms of pricing on Harmony?
And b),if you can't really recoup it -- introductory price that you had and vision forthis product -- how do you go about in '08 lowering materials costs, loweringyour overhead, and improving gross margins in a challenging market shareenvironment in '08?
Igor Khandros
So it's always easier to be thefirst one in than coming in and trying to recruit something, It's not easy; itwill not be easy. The question is, do we feel we are capable of doing it?
Thegood news is that our business is design driven business. Every time there is anew design up for business, we have a chance to compete.
It's a new game forevery design. So therefore, there will be ample opportunities for us to go backand to regain our position where we lost it.
We didn't lose it everywhere, allright, but in cases where we have to [hide], there was a chance with everydesign to perform. In the second half, you will havenew DDR3 architecture ramping, and if you look at the DDR3, it will drive pincounts.
For example, there will be demand for 60,000 pin-probe cards. Webelieve we can make one round.
And, again, we don't have precise informationabout competitive capabilities, and clearly competition was capable to pickupthe business, but we believe we'll have significant advantages as we head tomore and more complex architectures as we head towards 65, 68 nanometertechnologies with finer pitches potentially, finer dimensions. So that's whereit will get laid out, but I do not assume it will be easy.
It's going to be alot of hard work for the company.
Gary Hsueh
No, that's fair enough. Igor youmentioned basically reduction in terms of cycle times.
Certainly, that's goingto be favorable in terms of gross margin going forward on a Harmony product.Anything else, any other kind of low-hanging fruit in terms of material costreduction on Harmony that you can guys basically implement to sort of buoygross margin there in their product?
Igor Khandros
There are ongoing-costreductions, cycle-time reductions and productivity-improving efforts that aregoing on. So, yes, you should expect us to be continuing making progress.
And,again, that's one of the things where Mario in his first month here has beenvery much focused with the team on.
Gary Hsueh
Okay.
Operator
Your next question comes from theline of Chris Blansett with JP Morgan. Please proceed.
Chris Blansett
Hi, guys. When you think aboutthe personnel cuts throughout the company, are they job-specific, or you howshould we look at these?
And then Ron, I guess you said earlier what it would-- how it would impact your operational costs, could you repeat that?
Ron Foster
Yeah. I'll take the first part ofthe question, Chris.
In terms of that personnel cuts, we cut in most all theareas with a notable exception of R&D, where we continue to invest, as Igoralready mentioned, the heaviest cuts where in operations obviously given thelighter capacity loading and some of those were temp employees et cetera, thatwe have in our factory. In terms of the operating-costsreduction, it will cause us in restructuring cost $4 million to $5 million.
Andwe believe that we will get about $4 million cost-run rate improvement startingin the second quarter $4 million expense reduction out of those headcountreductions and other cost reductions.
Chris Blansett
Should we see most of that showup in the SG&A side?
Ron Foster
Both manufacturing and inSG&A.
Chris Blansett
All right. And then when youthink about the weakness you saw in DRAM, was this concentrated in your topDRAM customers, or was it pretty broad base for all of your DRAM customers?
Ron Foster
I think it's -- the weakness inDRAM is broad base.
Chris Blansett
Okay.
Ron Foster
It basically is an issue that theprice for the product sending on the company, but its hovering somewhere aroundcash cost. And so it's not -- it just can not possibly be a long-term conditionfor the industry.
So, clearly something is going to give here.
Chris Blansett
I had two quick ones here. Oneis, Igor you mentioned low-end applications for OneTouch probe cards, and I'm alittle confused because I would have assumed that any OneTouch application iskind of considered -- you get a better premium for that probe card?
Igor Khandros
I understand the question. Themarket is for full-wafer contact, and where competition came in is not for onetouchdown testing, basically you may contacted its contacts, most of the area,almost all of the wafer, but then you step it four times.
And we already also made acontactor that just touches it in one and tests in one touchdown. So the marketfor full-wafer contactor typically is one-to-four touchdowns.
Today, most of itis four and three touchdowns. We've shipped significant amount of two touchdowncards, actually.
And you'll see -- at the end of this year and certainly in'09, you will see more one touchdown – one- to two-touchdown applications.
Chris Blansett
All right. Last one on thetransition to Singapore:Even though the near-term conditions are a bit weak, why would you want todelay that transition and not just shove it out there sooner to get the costsaving sooner?
Ron Foster
Chris, this is Ron. We arecontinuing our plans with Singapore.We've simply delayed it six months.
As I commented earlier, we are going to berolling out in 2008 our sales activities and marketing activities in Singapore,which are steps in that direction. We are making the investments in the IPtransfers, which is a step in the direction of Singapore.
So all we're dealingwith here is a slight out of about six months in terms of our planned schedule.
Chris Blansett
All right. Thanks Ron.
Mario Ruscev
I just have one comment on that.When you do this move, it's very time-consuming for the management, and now wehave some -- we want our management to be very focused on a few other areas asyou expect but three different main reasons to delay it now.
Chris Blansett
Thank you, guys. I appreciate it.
Ron Foster
Thank you, Chris.
Operator
The next question comes from theline of Mehdi Hosseini with FBR. Please proceed.
Mehdi Hosseini
Yes, thank you for taking myquestions. Most of my questions regarding current business have been answered.But Igor I was wondering if you could talk about Logic.
In the past, you havetalked about all opportunities and everything. How come those opportunitieshaven't materialized given the weakness you've seen in the memory market, Ithought maybe by now you would have made up for the miss, but what are thechallenges there that you are facing in the Logic market?
Igor Khandros
So in Logic, actually where wefit right now as we look at 2008 and beyond, you will see Logic being thepotentially fastest-growing business at FormFactor. As a matter of fact, weprojected to our goal all other segments of our business.
So what was veryimportant last year is to introduce this new what we call TrueScale product,which addresses high-parallelism, fine-pitch and wire-bonded, marketapplications, and it's actually performing well --we actually have additionaldesign wins, and it bodes well for 2008 Logic growth. In the past, we described firstKnown Good Die as an engine for growth, and as I mentioned previously, wealmost doubled last year, and Known Good Die longer-term will still be very,very important engine of growth for FormFactor.
And Logic, SOC is also going tobe a significant area for growth for us. So I do not necessarily see it as -- Isee it as a good storage.
Mehdi Hosseini
Does your technology ormethodology require any changes to the test platform or testing technology?
Igor Khandros
No, we design our new productsfor all market segments, whether it's a flash, DRAM or SOC to fit existingtested platforms.
Mehdi Hosseini
So this is more like a plug andplay?
Igor Khandros
When we roll out our products, wemake sure that vast majority of installed base of testers out there can use ourprobe cards, yes and there was quite a bit of work that goes in to making sure.
Mehdi Hosseini
As a follow-up, help usunderstand what needs to happen for your customers to adopt your highparallelism in the largest non-microprocessor market, what is the currentchallenge or what is the milestone that you have ahead?
Igor Khandros
It's just a change, in most casesthe change from traditional probe cards, the people have had 10, 20 years ofexperience of using, and they had their organizations designed and focused onhow to use these needle cards, and now you are using NAND base-probe cards. Soit's basically, you need to qualify people who have to be confident that oncethey let you in the way, that they now run every following designs.
So you needto synchronize the design rules, you need to synchronize how the metallizationis contacted by these probe cards to do quite a bit of work before you say lookfrom here on you can just use it and it takes an effort, but again we're makinggood progress there.
Mehdi Hosseini
Okay. Thank you.
Ron Foster
Thank you.
Operator
Your next question comes from theline of Patrick Ho with Stifel Nicolaus. Please proceed.
Patrick Ho
Thanks a lot. Can you justprovide some clarity on, I guess, the issues with Harmony.
And I think Ron youmentioned the R&D will continue to be the focus for the company. Are thesestill R&D and engineering issues that you are still trying to work upbecause I guess going back into -- just looking back at some of the previousquarters, you mentioned that there were production capacity constraints.
Ithink one quarter before that there were customer integration issues. I meanhave all the engineering issues been resolved, or is this something that couldstill linger over the next couple of quarters?
Igor Khandros
Harmony is no longer in R&D.Harmony is getting ramped in manufacturing. So the issues with Harmony, is nowautomation.
The transfer from engineering to manufacturing is largely finished.There is still quite a bit of engineering involvement, but you basically havenow automation and manufacturing engineering and assembly and testorganization, building and shipping this product. When we talk about our futureR&D investments, and FormFactor spends in R&D twice as much as the restof five largest competitors combined, we are investing in multiple newproducts.
So the comment that made was that in this environment what FormFactoris going to do is continue investing heavily in R&D. So both in probe cardmarket but also a new market that FormFactor, new businesses FormFactor willbuild that we will be the leader [for the one third].
So the R&D in '08 isnot Harmony, this is a little bit new product.
Patrick Ho
Okay, fair enough. And I know youdon't want to give specific guidance on the June quarter, but given the steepdecline from Q4 to Q1, is there any possibility of a snapback in Q2 based onthe market conditions improving or is Q2 dictated more by the market or yourramp up Harmony?
Igor Khandros
So the short answer is that as Imentioned in my script, we expect today we hope that Q2 is stronger, clearlystronger than Q1, and we certainly believe that second half of the year will besignificantly stronger than the first half. Now having said that, you can seethat we are in the environment right now where we just need to stay very, veryfocused on short-term execution.
Now, this is not an easy time to predictexactly the timing of this improvement.
Patrick Ho
Okay, I guess, yeah, I understandthat part. But I guess I am just trying to figure out, is the incremental gaingoing to come from the market turnaround or your execution on the Harmony?
Igor Khandros
It will be both. We believe thatthe market for our products, especially in the second half, will besignificantly stronger.
We believe that FormFactor will compete a lot strongeralso in the second half and we'll also -- if anything else, we believe that thelessons we've learned last year is new product introduction will make us a muchbetter company and you will see us over the long-term introducing multiple newproducts a lot better than we have done it last year. So, all of that will bodewell for our growth.
Patrick Ho
Okay. Thank you.
Igor Khandros
And with that, we thank you allfor joining us today. That concludes our question-and-answer period, and wecertainly look forward to seeing you at the upcoming conferences and on ournext quarterly earnings conference call.
Thank you all very much.
Operator
Thank you for your participationin today's conference. This concludes the presentation.
You may now disconnect.Good day.