Earnings Call: Q3 2019

Oct 30, 2019

Thank you, and welcome everyone to FormFactor's 3rd Quarter 2019 Earnings Conference Call. On today's call, our Chief Executive Officer, Mike Slessor and Chief Financial Officer, Shay Shahar. Before we begin, Jason Cohen the company's general counsel will remind you of some important information. Thank you. Today, 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 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, October 30, 2019, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor. Thanks, Jason, and thank you everyone for joining us today. FormFactor again delivered strong results in the third quarter, with revenue and profitability consistent with our late July outlook. The outlook we provided today for the fourth quarter implies sequential revenue and profit growth as we capitalize on particularly strong year end demand for foundry and logic probe cards layered on top of steady demand for our other products. Together, these results and outlook continue to validate form factors broadly diversified leadership positions in attractive consumables and R and D driven semiconductor test and measurement mark These positions are further complemented packaging and MEMS applications. I'd like to spend a moment on FormFactor's 3rd quarter results to reinforce an important point about our business model. We again reap the benefits of our leadership position in advanced probe cards with strong demand in both DRAM and flash applications more than offsetting a moderate sequential reduction in foundry and logic. DRAM was a particular highlight with third quarter revenues at the highest levels in over a decade in contrast to the well documented weakness in DRAM equipment spending. As a device specific consumable, demand for advanced probe cards is driven by both customer node transitions and new design releases. As such, we benefit as each of the major DRAM manufacturers continue to execute not only on node migrations, such as transitions to 1Y and 1Z nanometer, but also architectural and product advances such as DDR5, in both server and mobile implementations. As expected, the memory heavy product mix of the 3rd quarter produced gross margins that were slightly lower than the second quarter, even at moderately higher revenue levels. As we've described in the past, While the customized nature of probe cards and engineering systems generates a relatively stable overall demand profile, the diverse mix of products and configurations also produces correspondingly dynamic gross margins. This mix dependent is an intrinsic element of our business. It has been evident in our recent results. It's an important factor in our fourth quarter outlook and is a characteristic that we expect will continue. Turning to the fourth quarter, we are experiencing robust demand for foundry and logic probe cards with memory probe cards and engineering systems operating at similar levels to the third quarter. This foundry and logic demand is broad based coming from both microprocessor as well as an assortment probe card demand for 14 nanometer designs continues at high levels at the same time as 10 nanometer designs ramped in significant volume. As moored law slows, this extended note overlap is another example of form factors broad and diversified demand drivers. Since probe cards are a consumable that is specific to each new chip design, we are benefiting from the 10 nanometer node transition and the ramp We are currently shipping probe cards to support the simultaneous ramp of multiple mobile application processor and high performance compute designs. These designs are being produced on the various flavors of the 7 nanometer node available from the 2 leading edge foundries. Many of these designs also incorporate advanced packaging like integrated fan out to both improve device performance and reduce device footprint. As we've noted before, the high interconnect densities and uncompromising electrical test performance requirements of advanced packaging techniques like fan out as well as HBM in memory drive general growth for probe cards and amplify form factor specific competitive advantages. Although not a major contributor to our 4th quarter outlook, we are also shifting initial units to support development and pilot production for both 5 GRF and 5 nanometer projects. To capitalize on this foundry and logic opportunity, We are adding incremental capacity since our memory probe card business is also operating at high demand and utilization levels. With both product lines now highly utilized, we cannot simply shift capacity between these products, a tactic we've employed several times in the past few years, when mix has changed. Because our visibility is limited, as always, our average lead times are less than a quarter, As we add this capacity, we are minimizing fixed cost additions while retaining the flexibility to reduce capacity if this elevated demand is not sustained. Turning to engineering systems. This business again produced solid results in the 3rd quarter. Looking ahead, the addition of FRT's leadership position in optical multi sensor surface metrology opens up an incremental $50,000,000 of addressable market, primarily serving advanced packaging and MEMS applications. This is resonant with 2 familiar themes for form factor: 1, the increased emphasis on optical technologies, such as Silicon photonics, VCSEL, microLED and image sensors. And 2, the secular growth opportunities driven by advanced package Shai will provide some more financial details in a moment, but we're excited about the potential to inject FRT's leading technologies and products into foreign factors' long standing partnerships with the top semiconductor customers worldwide. Finally, with average lead times of less than a quarter, our visibility remains limited as always, but as is reflected in our revenue outlook range, we're encouraged by the broad based strength in our diversified consumables and R and D driven demand profile. The strength is being demonstrated in 2019, where we are experiencing strong year end demand and expect to deliver annual growth in a year where where equipment spending is forecasted to be down double digits. By capitalizing on structural opportunities like advanced packaging and 5G, we are making progress towards our target financial model, growing the top line to $650,000,000, while delivering $1.25 of non GAAP EPS, and $110,000,000 of free cash flow. One more note before I turn the call over to Shay. During the quarter, we welcomed Rebecca Obergon Jimenez to our Board of Directors. With 25 years of engineering and executive experience in packaging and test, Rebecca brings a wealth of relevant technology and market knowledge to our boardroom that will help us navigate to our target financial model and beyond. Shay, over to you. Thank you, Mike, and good afternoon. As you saw in our press release and as Mike noted, our third quarter revenue and gross margin were at the midpoint of our outlook ranges and our EPS exceeded the midpoint of our outlook range. These results again show the benefits of our diversified leadership in probe cards and engineering systems, which dampens cyclicality enables us to participate in industry spending on both note transitions and new design releases. Phone factors revenues for the third quarter of 2019 were $140,600,000, a 1.9% sequential increase and a 4.2% increase over Q3 2018. ProbeCard segment revenues were $116,400,000 in the 3rd quarter, an increase of $2,800,000 or 2.5% from Q2 2019. Systems segment revenues of $24,200,000 in Q3 were basically flat with the 2nd quarter. Within the probe card segment, Foundry and Logic revenue decreased 6.8 percent from Q2 to $68,400,000, and was 49% of total company revenue in Q3, down from 53% in the 2nd quarter. DRAM revenues were $39,400,000 in Q3, an increase of $3,400,000 from the 2nd quarter and were 28% of total quarterly revenue as compared to 26% in the second quarter. Continuing the strength demonstrated over the past 2 years, and in contrast to generally weak industry results, this was our highest quarterly revenue from DRAM since Q1 2008. Slash revenues of $8,300,000 in Q3 were $4,100,000 higher than in the second quarter. And were 6% of total revenue in Q3, up from 3% in Q2. Approximately $5,600,000 of the Flash revenues in 3 or from NAND flash applications. Consistent with our opportunistic approach to this market, we continue to expect flash revenues to be lumpy. GAAP gross margin for the third quarter of 2019 was $55,300,000 or 39.3 percent of revenues. 80 basis points lower than 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 third quarter was $61,100,000 or 43.5 percent of revenues, 80 basis points lower than the 44.3 percent non GAAP gross margin in Q2. And at the midpoint of our outlook range. The decrease from Q2 was a result of less favorable product mix, partially offset by better factory utilization. Our probe card segment gross margin was 41.3 percent in the 3rd quarter, a decrease of 140 basis points compared to 42.7% in Q2. The decrease is due to the factors I described earlier. Our Q3 system segment gross margin was strong at 53.9 percent, as compared to 52% in second quarter. The increase of 190 basis points was driven by more favorable product As mentioned in prior earnings releases, we expect our Systems segment gross margin to be at the high 40s to low 50s range. Our GAAP operating expenses were $46,000,000 for the first quarter, $400,000 lower than in the second quarter. 3rd quarter operating expenses included $7,000,000 of GAAP to non GAAP reconciling items, similar to the $6,800,000 of reconciling items in Q2. Non GAAP operating expenses for the 3rd quarter were $39,000,000 or 27.7 percent of revenue compared to $39,600,000 or 28.7 percent of revenue in Q2. The decrease of $600,000 is mainly due to lower R and D spend related to timing of projects and lower sales and marketing expenses during the quarter. Partially offset by higher performance based compensation. Company non cash expenses for the third quarter included 6 $100,000 for the amortization of intangible assets, $6,500,000 for stock based compensation, and depreciation of $4,400,000 Amortization of intangible assets was $1,000,000 lower than in Q2 due to certain intangible assets reaching full amortization during the second quarter. Stock based compensation was $1,200,000 higher than in Q2 due to the timing of annual grants. GAAP net income for the 3rd quarter was $8,300,000 or $0.11 per fully diluted share compared to GAAP net income of $6,900,000 or $0.09 per fully diluted share in Q2. The non GAAP effective tax rate for the third quarter of 2019 was 23.8%. 250 basis points lower than the 26.3 percent in Q2 due to certain discrete items recorded in the quarter. And in line with our previously communicated estimate of approximately 25% for the year. As a reminder, our cash tax rate is expected to remain at our remaining $180,000,000 of U. S. Based NOLs and R and D credits. 3rd quarter non GAAP net income was 17 point $3,000,000 or $0.22 per fully diluted share compared to $16,100,000 or $0.21 per fully diluted share in Q2. Moving on to the balance sheet and cash flows. We generated $25,600,000 of free cash flow in the third quarter, compared to $29,800,000 in Q2, taking our total cash and investments to $202,000,000 at the end of the quarter. The decreases in free cash flow in the third quarter as compared to the second quarter was mainly a result of timing of payments and collections. We did not have scheduled principal payments on our term loan during the quarter, and the loan balance remained $46,200,000 at quarter end. A scheduled payment of $11,300,000 was made on September 30 at the beginning of our fourth quarter. Our total cash balance exceeded the debt balance by $155,600,000, an increase of $22,600,000. While paying down the term loan remains our first priority for using cash, M and A continues to be an important part of the strategy. And we intend to continue to deploy capital to acquire leadership positions and to expand our served markets as we did with acquisition of FRT earlier this month. We funded the FRT acquisition with 3 years 1,000,000 denominated loan utilizing the low euro based interest rates to optimize our cost of capital. We invested $2,800,000 in capital expenditures during the third quarter of 2019, bringing our year to date investments to $14,200,000. At the current rate of investments, we expect to be at the high end of our annual capital spending plan of $16,000,000 to $20,000,000 for fiscal 2019. Turning to the fourth quarter non GAAP outlook. As Mike mentioned, we expect a strong year end demand for Foundry and Logic probe cards laid on top of continued solid demand for our other products, which result in our Q4 revenue outlook to be in the range of 145 to $155,000,000. This includes a contribution of $2,000,000 to $3,000,000 from FRT, which was acquired at the beginning of the quarter. Although revenue is expected to be higher than in Q3, primarily from an increase in foundry and logic revenue, The specific design 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 Q4 in the range of 42% to 46%. Non GAAP earnings per fully diluted share for Q4 is expected to be in the range of $0.22 to $0.30. Although accretive, the addition of FRT is not expected to significantly change our Q4 gross margins or EPS. A reconciliation of our GAAP to non GAAP Q4 outlook is available on the Investor Relations section of our website and in our press release issued today. With that, let's open the call to questions. Your first question comes from the line of Craig Ellis of B. Riley. Your line is open. Thanks for taking the questions and Mike and Shai congratulations on the strong financial performance and the outlook. Mike, I couldn't help but noticing that with the December quarter guide, it's the 4th consecutive quarter of both sequential and year on year growth for the business. So I wanted to use that as a take off point for a longer term question. As you look out to calendar 'twenty, Can you just help us frame what you think are some of the more powerful growth drivers for the business? And to the extent that you see any headwinds Can you help us understand what those would be as we think about the coming year? Thanks. I think Q4 is an interesting data point for us. As you know, it represents, sequential growth, annual growth and a step up to a new operating level for us. In that context, we're hopeful but cautious. In a business that's a turns business with less than 1 quarter lead times, our visibility is limited. On the other hand, as we mentioned in the prepared remarks, we are adding capacity in a flexible way. So maybe maybe one way to approach this is to talk about the components of that step up really as we conveyed in the prepared remarks It's some increased foundry and logic demand coming from both an overlap in the 10 nanometer and 14 nanometer nodes with our largest customer. That strengths we probably think is reasonable to think about extending into the first half of twenty twenty. Beyond that, again, given the visibility limitations, we have very difficult to make any statements. But we would expect 14 nanometer to roll off sometime in 2020 and return that customer to kind of $100,000,000 annual run rate level. The second component present work in the fourth quarter is the 7 nanometer foundry activity. And I want to emphasize that this is at multiple foundries with multiple fabless customers on designs for both mobile application processors and high performance compute. So it represents again an increase in form factor's footprint in serving the foundry space at these advanced nodes 7 nanometer in particular. I think one of the things we're seeing there is, kind of a construction of multiple designs at the same time, which we might consider to be a little bit of a one time pop The other thing that we're keeping our eye on is, early in the 7 nanometer node, we would expect that test intensities are fairly high. Which will drive an outsized probe card spend. So having said all of that, I think we're cautiously optimistic about 2020. Retaining the flexibility to adapt our capacity and meet the demand levels that our customers are asking from. That's really helpful. And if I could, as a follow-up, I noticed in the geographic revenue breakdown that we had a particularly strong quarter in China in the third quarter. It seems that there's an upward trajectory to the longer term trends, though, although there's quite a bit of movement quarter to quarter, but can you give us some sense for how you see that business coming off of what was a very strong calendar third quarter? Yes. So, Craig, as you noted, China was a little bit over 20% of our revenue in Q3, higher than it has been. It's typically been in the high teens for the past couple of quarters. As a reminder, that's composed of both the multinationals that operate in the region and the domestic Chinese semiconductor manufacturers. If I characterize the here and now, I think form factors, winning on technology. Obviously, customers need our MEMS technology to ramp, need our engineering systems technology to improve their yields. And we're benefiting from more than decade presence in the region with a strong team of local support, local sales and local applications that we've invested in over years. So in the here and now, I think a pretty solid contribution. As a U. S. Supplier, we are subject to tariffs. And the trade war is something that customers bring up in conversations as not an advantage for form factor. Let's put it that way. So I view this longer term as something that we're going to have to look at in terms of our strategy, but for now doing pretty well in growing the business as one of the few alternatives they have, if they want to ramp this advanced semiconductor industry. Your next question comes from the line of Brian Chin of Stifel. Your line is open. Hi, thanks for letting us ask a few questions and congratulations on the strong Q3 and the very healthy outlook. Maybe the first question, kind of going back, I think we just talked a little bit about China. And it sounds like, Mike, you're saying that maybe 30,000,000 run rate is kind of a hard, hard place to stay at consistently as it look kind of above where the business has been operating. But I'm also curious on the DRAM side of the business, which isn't necessarily a complete discrete event from China, but obviously a very high intake. And I have a question also about the capacity that you referenced as well, but kind of curious what trend you expect into Q4 and to the extent that business levels seem like they're still going to be pretty healthy even moving to next year, how you kind of characterize sort of what visibility you do have maybe even kind of beyond sort of Q4? So I think maybe China in particular with DRAM and then transitioning to DRAM more broadly if I got the question right. There are components as some of the domestic China DRAM producers and the multinationals ramp more activity, in producing DRAM ships in China. There is a pretty healthy component of domestic China DRAM in our fourth quarter. And an encouraging sign where we are making inroads as that customer, starts to ramp. I think DRAM more broadly, as we said in the prepared remarks, we see kind of maintaining at the 3rd quarter levels, which was a decade high for us in terms of DRAM revenue. Some interesting dynamics at work where maybe customers aren't investing in capacity, but are continuing to do node transitions and release new design. And as we've seen in a whole bunch of different examples in our business in these new nodes and these complex new devices like DDR5 that operated higher speeds, we're seeing an increase spend on form factors probe technologies for DRAM, not just in China, but more broadly overall globally. We'll as those nodes ramp and as those designs ramp, as we've said in the past and you've seen from our results, customers will work hard to get their test intensities down as their yields improve. And so I don't want to create an expectation that we'll be continuing to ratchet up all time DRAM revenue records, but we do see this being a robust business driven by some pretty healthy fundamental drivers. Okay, great. And in terms of like what you referenced in terms of maybe adding capacity, it sounds like it will still be a heavy sort of materials labor component, not just fixed costs, but CapEx is running sort of 3%, 5% of sales of late. Can you give us a sense of where CapEx could go kind of in the very near term? How quickly you can get, add some revenue capacity? Sure. So when we're talking about the, I think, capacity think, Q4. At this point, we are mainly talking about direct labor. We did add some tools to support increased level of revenue notable in Q4. But at this point, mainly direct labor, very flexible. We continue to be agile with these resources And we're not expecting to increase our capital plan over the $20,000,000 or so that we talked about $16,000,000 to $20,000,000 a year. In 2019, this is still our range. No change there. Okay, great. And maybe just one last question to circle back now on FRT. Mike, can you give us a sense of sort of the relative positioning historically of FRT just relative to lab configurations, higher volumes or fab configuration tools, maybe kind of in this past year. And then even kind of moving forward, what you think that mix could more or less look like and also sort of what you think the sort of the steady state profitability on the business will be and kind of also maybe just to throw one more question within that one question, where you kind of view the key differentiation of the product and technology? So on FRT, I think when you look at, some of the attributes of this business, a lot of commonalities and residences with our existing engineering systems business. A couple of them, you've heard us talk in the engineering systems segment about increasing optical content in both the applications and the sensors and instruments that we're putting on the tools. Either driven by things like Silicon Photonics applications, microLEDs, stuff like that. Obviously, those are optical applications, but they require optical instruments as well. So we saw nice resonance with FRT there. The business right now, primarily in the lab, in R and D application, in a very similar way to our engineering existing engineering systems business. And serving some interesting new advanced packaging and MEMS applications that are probably not all that well served by the big providers of metrology and inspection equipment. So we feel like there's a nice differentiated niche position in FRT's ability to bring multiple different sensors in a flexible way primarily geared for R And D and pilot production, to this environment of new applications being driven by advanced packaging. Is. Great. Thank you. Another question from the line of Quinn Bolton of Needham Your line is open. Hey guys, nice job on the results and the strong 4th quarter outlook. Wanted to start with the 7 nanometer demand, obviously, you're seeing that drive your 4th quarter outlook. But I guess if I look a lot of the and Talks folks in the industry, it sounds like it's the 5G basebands that are driving a lot of that 7 nanometer demand. And so I guess I'm curious if you're seeing any pull through for the 5G RF probe cards. It doesn't sound like coincident that it might be a quarter or 2 further out, but it certainly would sound that if they're building up a bunch of 5G baseband that the 5G filter opportunity for you shouldn't be far behind it. So I was just wondering if you could kind of comment on that opportunity. And then I've got a follow-up question Yes. I think it's a very good observation Quinn. Even if you look at regardless of whether it's 5G or previous 4G hand debt releases. We do see the sequencing as we go through time where, form factor has a pretty unique position in being able to serve both the processors, the baseband modems and the memory that end up in these handsets. That tends to be earlier in the cycle, call it, three quarters ahead of the handset launch where the RF front ends, the BAW saw filters. And for 5G, the additional content, things like beam steering and phas arrays that are going to drive our business probably the middle part of 2020 if the historical cadence is about right. So I think you've identified, sort of the correct sequencing or what we view as the historically consistent sequencing of RF probably being the last piece of our demand that comes to the show for a 5G handset. And if you assume that you're going to be, Q3, Q4 2020 handset releases. That should be, a nice business for us in the middle part 2020 from an RF perspective when we're beginning to work on the apps processors and the memory pieces right now. Got it. And then I guess just a longer term outlook with DRAM now at a decade year high and running almost about $10,000,000 above the quarterly level that I think you guys have sort of embedded into your $650,000,000 revenue plan I guess I'm just trying to wonder, do you think kind of that long term DRAM outlook has improved and we should be thinking now about a long term model that might not have DRAM at about a $30,000,000 a quarter, but could be something in the mid-thirty or upper 30s? Or is there something that you see happening in DRAM that will over time bring it back down to closer to that $30,000,000 level implied by your long term target? Yes. You've hit on a topic of current debate internally. I think we have seen several quarters here where DRAM, is it an elevated level compared to what we baked into the long term model and some of the maybe more recent results, call it, 2018, 2017. There's a couple of things going on. Some of them that probably are persistent, but maybe don't hold us at this level. The first one is the additional test intensity and complexity associated with advanced packaging. We've talked about HBM in the past being a an adder to our fundamental DRAM business. These are difficult chips to test, both electrically and mechanically and play pretty well to form factors competitive advantages. And so I think as long as HBM continues to accelerate and be a big part of our customers wafer start mix. I think there's probably some potential upside there. Having said that, DRAM historically over a multi decade period has been a bit of a fickle mistress. If you think about customers and their test intensities and how they really try and ratchet down their test costs. There have been times where we've seen them pull back on wafer test significantly. So some things that, certainly are positive at the present that we see continuing with things like HBM, but some things to keep our eye on as well as customers focus on cost optimization. Your next question comes from the line of David Duley of Steelhead Securities. Thank you very much for taking my questions and congratulations on nice results. I guess, my first question has to do with RF test and probe intensity in a 5G phone handset versus a 4G handset. I guess there's a lot of increased content on the RF front end here in places that you have a lot of exposure. So could you just talk about how much more probe or test intensity there is in a 5G handset versus a 4G handset? Yes. An interesting question, David. And one that we don't have a crisp quantitative answer to, but certainly directionally as implicit in your question, there is more wafer test content at RF frequencies in a 5g Handset. For a couple of reasons, first of all, operating at the higher frequencies of 5 maybe not all the way to the millimeter wave frequencies, but things sub 10 gigahertz, are a pretty demanding application. And so for things like the BAWN saw filters, the need of our RF business at 4G, we see those being a more complex test and therefore driving more intensity. If you put on top of that, some of the increased functional content multiple input, multiple output, phased array beam steering to deal with the higher frequencies. There's some fundamentally new types of chips in an RF front end. These are some of the things where I've talked about us working closely with the leading customers in the world we see that driving some increased content as well. It's so early in the cycle that again, we don't have a good quantitative but there's going to be more chips and they're going to be harder to test. So we do view this as a favorable trend for our RF test business. Okay, great. And one of your largest customers, the foundry in Taiwan, had a pretty interesting disclosure on the conference call about suggesting next year now that 15% to 17% of handsets are going to be 5gK full versus a quarter ago, only 5% or 7%. And I guess that would suggest that you should see a really strong uptick in that business there on the handset side. And I'm just wondering what sort of visibility you have into that besides just them declaring that on the conference calls or any other evidence that some of the customers there are gearing up for that kind of rollout in 5G, which is seems to be better than expected. Yes, I think in terms of tangible visibility, I'd have to answer no, right? Again, with lead times much less than a quarter, We're not going to see those demand signals until pretty close to when they need to actually be starting the wafers and shipping the chips to to meet those expectations. I will say the activity that we're going through in both engineering and pilot production with the customers that are going to drive the component growth in those handsets are indicative of 2020 production activity, whether it's 5% to 7% a handset or 15% to 17% of handsets, we don't really have a clear path to and our forecasts that we get from customers wouldn't really be showing that yet, but obviously something we'd look forward to trying to serve. Okay. Final question for me. You mentioned a bunch of detail about your foundry logic business kind of at 7 nanometers and you had multiple application processors and customers and Could you just elaborate a little bit more about your previous comments there? It sounds like you've made progress signing up new customers. So if you could just kind of give us some greater detail, that would be great. Sure. Well, I'll restate it and then try and layer on a bit of detail. What we said was the 7 nanometer 4th quarter demand was being driven in the foundry space by both leading edge foundries at 7 nanometer. As well as multiple designs from their customers, the fabless semiconductor manufacturers. Historically, at least over the last couple of years, our business with the world's largest foundry has been dominated by a single mobile application processor design. And one of the business at 7 nanometer broad note behind more than just a single application processor from a single fabless customer. So in the fourth quarter, we're shipping multiple designs to multiple fabless customers at both foundries. And we view that as a nice proof point of further diversifying that leading edge foundry business as we continue to grow our relationship with the 2 leading found in the world Your next question comes from the line of Tyler Bormaster of Craig Hallum. And congrats on the solid results and guidance. So you already touched on a lot of things, but kind of a bigger picture longer term question, I guess. It sounds like the DRAM business is robust and expected to kind of maintain that robustness, but probably not drive a lot of the delta growth between here and your long term model. So it sounds like on the foundry and logic side is where that gross coming from. And with your largest customer 14 nanometer kind of rolling off or expected roll sometime next year, I guess, if you could highlight what you're maybe most excited about as far as being the pieces for that Delta, the top line Delta between today and your long term model? Yes. And Tyler, good question. I think we've talked about a couple of them in the, in the questions we've had so far. But I want to highlight The general theme of advanced packaging is being one of them. I think one of the reasons for the higher test intensity at the 7 nanometer node, at least for some foundry projects use advanced packaging and fan out in particular. To test those devices requires a more complex probe card, any more capable probe card, which drives the spend and how our customers compensate us for that tooling up a little bit. So advanced packaging continues to be a key component of the bridge from here to the long term target financial model. I think the other piece inside of Foundry And Logic is one we just touched on with David and that's RF and 5G. The content increases and the complexity increases, are something that we're not seeing in our business right now in a major way. But if I look at our R and D budget and our engagement with leading customers and the topics of our engineering review meetings, is very focused on high frequency RF test and their need to increase that capability as it comes to production in 2020 and beyond. And so I think those are probably the two pieces we're most excited about from where we sit now on the way to the Targa Financial model. All right, great. I appreciate the extra color. That's all from you guys. Your next question comes from the line of Tom Diffely of D. A. Davidson. Your line is open. Yes, good afternoon. So apparently you guys think it's the memo that we're in a downturn right now. I guess getting back on the DRAM side, I just don't want to address it from a different angle. How much of the slug of business you're getting right now is due to the fact that We added a lot of capacity a year ago and the timing of that versus just kind of the natural design cycles. Yeah. I think so the capacity that was added a year, maybe 18 months ago, I think tooling associated with that, the probe cards associated with that, I think was probably part of what you saw in our mid year DRAM results. The designs were, we're shipping now and plan to ship in the fourth quarter. Are really more associated with new designs, new architectures on that existing capacity that our customers have already put in place. I think there's a very good analogy here to what's going on in DRAM. Now as to what went on, at 14 nanometer with our largest customer, maybe a year and a half ago, where they began to shift designs onto an existing capacity footprint at 14 nanometer. And you saw our business step up significantly. Whether that continues or not, certainly an open question, but things like DDR5 and mobile DDR5 our nice pieces of design innovation from our customers to continue to drive new probe card demand. So we're hopeful, as I said before, hopeful that this continues, but a little bit cautious in the capacity we're adding. Since we don't have a lot of visibility into those longer term design roadmaps past the fourth quarter. Okay. And I also noticed that over the last few quarters, there's been a new 10% customer on the memory side. So really nice diversification there. Do you think that makes that market less volatile over time? Yes. I think just first, maybe on the 10% customer front, we've got five customers that typically are either 10% customers or very close to 10% customers, at least in 2019. As you know, we've seen now all three major DRAM manufacturers be 10% customers in recent quarters. And one of the things we're seeing is their roadmaps and design release cadences are a little bit off cycle from each other. So it used to be they all shrank at once and release designs at once into a commodity market I think with some of the diversification of the DRAM end markets, that's no longer the case. And so we're seeing a little bit of smoothing across each of the customers. And as you note, if you look at our 10% customer list as it's wandered through 2019, you see each of the DRAM manufacturers popping on and popping off as their investments, sort of change quarter to quarter. Okay. That's helpful. And then on the foundry side, when the designs go from 10 nanometers to 7 to 5 nanometers, does that give you, do you have a technology advantage that's greater at the lower nodes in that spectrum? That might give you larger share over time? I think there's a couple of factors. A lot of them really are dependent on the details of the design. But in general, I think you can say as a probe card goes from 14 to 10 to 7 to 5. It becomes a more complex thing. Typically, our customers are trying to drive higher densities and more functionalities into their chips, which means higher test complexity and a more complicated probe card. So generally, we do see an ASP uplift. Whether we're competing in founder and logic or in memory against our major competitors, Each of us have relative advantages compared to the individual design. But I think as you look to the consolidation of market share towards the leaders who can actually serve these requirements, there's no question there's a trend where share is shifting to the, call it, the top 3 probe card manufacturers as things get more complicated with node transitions. Okay, great. And then, Shai, on the model, when you add the extra capacity, what kind of impact will that have on the operating expenses on a go forward basis? So the capacity we added is mainly in the cost of sales line. It is directly related to the increased revenue in Q4. And so no significant impact or not impact at all on the OpEx. Okay. If we think about our Q4 OpEx, we the range that we used to model the EPS between $39,000,000 to $41,000,000 And that includes FRT. And so that's kind of that's the run rate for Q4. Okay, great. And then finally, I missed it. You mentioned the NOLs, but I didn't catch the number. 180. That's both NOLs and R and D credits. Great. Okay. Thank you. There are no further questions at this time. I would now like to turn the call back over to Mike Slessor for closing remarks. All right. Thank you everybody for joining us today. And we'll talk to you in a quarter. Bye bye. Ladies and gentlemen, This concludes today's conference. Thank you for participating. You may now disconnect.