Earnings Call: Q2 2018

Aug 1, 2018

Thank you, and welcome everyone to form factor's 2nd Quarter 2018 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor and Chief Financial Officer, Shai Shahar. 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 and 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 2017 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, August 1, 2018, 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. The second quarter of 2018 again demonstrated the resilience of form factors position as a diversified leader in electrical test and measurement. As expected, we grew off the lows of the first quarter, delivering increased revenues across each of our major businesses. We benefited from a product mix bias towards form factors differentiated high end products, driven primarily by growth in advanced packaging applications. Coupled with solid executions by our operations teams, this favorable mix produced gross margins near the levels of our target financial model, and with good expense control produced earnings per share above the high end of our outlook range. Because many of these factors continue in the third quarter, We expect 3rd quarter revenue and profitability performance to be comparable to the second quarter. As many of you are aware, there have now been 2 major delays announced in our customers node transitions. The delay of the 10 nanometer node at our largest customer And more recently, the news that one of our major DRAM probe card customers is delaying its 1y nanometer node. Obviously, these events caused short term volatility in our demand profile. And with the DRAM delay now compounding our largest customer's 10 nanometer delay, We think it is unlikely that 2018 will be a growth year. Beyond this short term volatility, however, we continue to demonstrate the 4 nanometer node that require new fleets of probe cards to test these new designs. As we've described in the past, Since probe cards are a consumable that is specific to each customer IC design, each of these new designs drive demand for new probe cards. This reinvigorated 14 nanometer activity was one of the contributors to our 2nd quarter sequential revenue increase, and we expect further incremental demand, In our DRAM probe grid business, with one customer's delayed 1y nanometer transition, we are expecting to see a similar effect as designs that were originally planned for the 1Y node are being migrated back to the 1X node. This will have a short term impact in probe card demand, while those shifts occur, but in a very similar way to the founder and logic case, we expect probe card demand to materialize for new designs on the 1x nanometer node. In addition, this difficulty in scaling will continue to constrain bid supply growth which is likely to help node transitions become more challenging and unpredictable, the industry is increasingly relying on advanced packaging to innovate and progress. Advance Packaging continues to be a key driver for form factors probe card business. And in these applications, our MEMS probe technology is one of a handful of viable off call, VLSI Research's annual survey of probe card suppliers again reported form factors, the market share leader in advanced probe cards, with more than twice the revenue of the next largest supplier. That overall market leadership is reflected in a similar position as the top supplier of probe cards using MEMS technology. This leadership is a direct result of significant multi decade R and D investments we have made in inventing developing and continually refining our unique MEMS capability. We plan to continue to devote a significant fraction to advancing this key enabling technology as we provide customers with increasing performance and value, which will further expand our competitive advantage. Two great examples of our differentiated MEMS technologies enabling advanced packaging applications are evident in our 2nd quarter results. First, in Foundry And Logic, we shipped products to the world's largest foundry at levels comparable to our record first quarter shipments. In 2018, the majority of our business with this customer supports a 7 nanometer mobile applications processor project that relies on integrated fan out package We are pleased to report that we have now also shipped qualification units to this foundry for additional fabulous customers and designs as we work to broaden and grow this important opportunity. 2nd, in DRAM, the continued growth in wafer starts of high bandwidth memory or HBM contributed to revenue growth at our largest DRAM customer from already strong first quarter level. This advanced packaging application requires form factors technologies to match the unique electrical and thermo mechanical test requirements of the stack dye structures, and we are excited about growing this business as HBM volumes increase. I'd like to say a few words about the gains of our Flash probe card revenues to double digit levels. We continue to view this as an opportunistic business for Form and we do not rank it as a growth vector in the same class as our line of sight opportunities in advanced packaging, mobile data and automotive. However, the multi year expansion of our flash probe card business is indicative of a gradual move towards more demanding test requirements mostly associated with the densities and complexities market. We continue to expect volatility in this business, but are encouraged by the gradual long term growth trend we've delivered so far. Turning to our Engineering Systems business. The Systems segment again produced strong results in the 2nd quarter. Gradually improving on all financial metrics. In addition to this business's significant financial contribution, It also provides important visibility and engagement in supporting next generation applications and devices. To that end which will add to our worldwide installed base in this exciting future application. In this case, we are providing a complete turnkey probing system that includes the material handling capabilities of our Blu ray Prober, carefully matched with a specially developed advanced probe card and tester interface, that together meet the challenging and unique combination of mechanical, electrical and optical requirements in this application. In the quarter, we also released the Summit 200 and Tesla 200 engineering probe stations which bring the product activity and time to results benefits of automation to our flexible and accurate 200 millimeter platform in both RF and high power applications. With its unique combination of high power and high temperature automated test capability, the Tesla 200 is an example of our investments to support our line of sight automotive growth opportunity and we are receiving positive feedback from our initial customers. Before turning the call over to Shay, let me state that we remain committed to achieving our target financial model and expect we will achieve this performance on a run rate basis late next year. As the leader in our served markets, we will benefit from continued industry growth over that timeframe, but we also require some resolution we're excited about delivering $650,000,000 of revenue and $1.50 non GAAP earnings per share. With that, I'll hand the call over to Shay for further details on our second quarter results and to provide insight into FormFactor's 3rd quarter financial outlook. Thank you, Mike, and good afternoon. As you saw from our press release and heard from Mike's comments, our top line results for Q2 were above the midpoint of our outlook and significantly above the Q1 low. And our gross margin exceeded the high end of our outlook range. These results coupled with continued good operating cost control allowed us to deliver non GAAP EPS above the high end of our outlook range. From factors revenues for the second quarter of 2018 were $135,500,000, up 14.6% from the 1st quarter 2018. Probe card segment revenues of $111,600,000 increased by $16,700,000, or 17.6% compared to Q1 and systems segment revenues of $23,900,000 increased by $600,000 or 2.4% compared to Q1. Within the probe card segment, Foundry And Logic revenues of $62,100,000 increased by 6.3% compared to our first quarter. The increase was mainly attributable to the high revenue from our largest customer as expected and relates to additional 14 nanometer designs. During the second quarter, we continued to see significant shipments to the world's largest foundry, which utilizes our technology in advanced packaging applications leading edge nodes. Foundry and logic revenues were 46% of total company revenues in the 2nd quarter, down from 49% in the 1st quarter. While Foundry and Logic revenue increased in absolute dollars, the decrease as a percentage of total revenue was mainly due to the strong memory revenue in Q2. DRAM revenues were $38,100,000 in Q2, up 7.8000000 dollars or 26% sequentially. We continue to experience sustained DRAM demand as our customers released new designs for data center and mobile applications. DRAM revenues were 28% of total company revenues in the 2nd quarter, a slight increase from the 26% in the 1st quarter. Slash revenues of $11,400,000 were $5,200,000 higher than in the first quarter. We continue to see stronger demand for our technology due to $7,000,000 of the Flash revenues in Q2 were from NAND Flash applications. GAAP gross margin for the second quarter of 2018 was $56,200,000 Similar to Q1, Q2 cost of revenue included $6,000,000 of GAAP to non GAAP reconciling items which we outlined in the reconciliation table available on the Investor Relations section of our website and in our press release issued today. On a non GAAP basis, gross margin for the 2nd quarter was $62,200,000 or 44.9 percent of revenues. Up 2.6% from the 43.3% in the first quarter. And as I mentioned, above our outlook range. The increase was primarily due to a favorable product mix, the significant increase in revenue, better factory utilization and excellent operational execution during the second quarter. Our probe card segment gross margin was 45.3% in the 2nd quarter, a significant increase of 3.2% compared to Q1 due to the factors mentioned before. Our Systems segment gross margin continued to improve and was 48.6 percent in the 2nd quarter, 0.9% higher than Q1 on slightly higher revenue. As discussed in previous calls, we expect the systems business gross margin to continue to improve toward the target level of high 40s, low 50s, excluding potential impact of FX. Our GAAP operating expenses were $44,900,000 for the 2nd quarter. $3,400,000 higher than the first quarter. The 2nd quarter operating expenses included $5,300,000 of GAAP to non GAAP reconciling items. Non GAAP operating expenses for the second quarter, including ERP implementation costs, were $39,600,000 or 29 percent of revenues, up $3,000,000 compared to Q1. The increase is mainly due to employee related costs, including higher performance based compensation and benefits. We also made some R and D investments in the 2nd quarter to further expand our differentiated competitive advantage. As a reminder, beginning the first quarter of 2018, We view ERP integration and implementation expenses as routine. And accordingly, these costs are not excluded from our non GAAP operating expenses. European integration and implementation expenses were approximately $1,100,000 in Q1 and Q2, respectively. And we expect similar quarterly expense levels during the remainder expenses for the second quarter included $7,200,000 of amortization of intangible assets, $4,100,000 for stock based compensation, and depreciation of $3,400,000 The non GAAP effective tax rate for the 2nd quarter was 7.5% compared to 5.3% for the 1st quarter. We entered 2018 with over $240,000,000 of remaining U. S. Based NOLs. As such, we expect to have a non GAAP effective tax rate of 5% to 8% while we utilize our U. S. NOL. The increase in the effective tax rate in the second quarter and the increase in the range from 4 percent previously communicated are due to higher percentage of profit in foreign tax jurisdictions versus the U. S. GAAP net income was $9,100,000 or $0.12 per share for fully diluted share for the 2nd quarter. Compared to net income of $2,100,000 2nd quarter non GAAP net income was $20,400,000 or $0.27 per fully diluted share compared to $12,700,000 or $0.17 per fully diluted share in Q1. Moving on to the balance sheet and cash flows. We generated $16,800,000 of free cash flow in the second quarter, significantly higher than the $6,300,000 generated in Q1 taking our total cash to $144,000,000 at the end of the quarter. The $10,500,000 increase in free cash flows in Q2 as compared to Q1 is mainly payments on our term loan during the quarter, including $5,000,000 of prepayment. Our total cash balance exceeded the balance of our debt by $59,000,000 at quarter end. In line with our annual capital spending plan of $16,000,000 to $20,000,000 we invested $4,700,000 Turning to the third quarter non GAAP outlook. We expect Q3 to be similar to Q2 and therefore, we expect revenues in Q3 to be in the range of $130,000,000 to $138,000,000, consistent with Q3 revenue being comparable to Q2 3rd quarter volumes and factory utilization are expected to be similar to the 2nd quarter, tempered slightly by less favorable product mix. As such, we currently expect 3rd quarter non GAAP gross margins to be in the range of 42% to 45%. We expect to realize non GAAP earnings per fully diluted share in the range of $0.20 to $0.26. A reconciliation of our GAAP to non GAAP Q3 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. Operator? Thank you. Our first question comes from Patrick Ho with Stifel. Line is now open. Hi there. Good afternoon. This is Brian calling in for Patrick. Thanks for letting us ask a few questions. Maybe first question for Mike. Q3 revenue guidance is pretty constant Q on Q is how the end market mix is expected to vary though Q3 relative to Q2? Yes. I think so the way we characterized it, Brian, was being comparable. And it's interesting, not just at the highest level for the overall company revenue, do we view, things to be comparable, but as we work our way through the different market mix and even customer mix, things are pretty similar as we go, from Q2 to Q3. There are some puts and takes in our different emerging businesses. Obviously, we've said some of these things are going to be volatile, like our engagement with the world's leading foundry. But overall, I would say, not just the top line, but the different product and customer mix is pretty similar as we move Q2 to Q3. Okay. That's helpful. Thank you. Also moving on to your major Advanced Logic customer. I'm kind of curious Relative to the prior watermark year, prior high watermark year in 2017, should 10 nanometer begin to take out into volume production next year, how would you expect the revenue contribution in 2019, to trend relative to the prior high watermark year in 2019. Should we expect would you expect it to be up at this point in time or any other sort of color you can provide would be helpful. Yeah. Well, I think the comparisons as we work our way through node transitions and supporting, our largest customer's activity, I think one of the interesting things that I want to highlight before we talk about too far in the future is we are experiencing some some nice incremental design activity in probe card business associated with them continuing to innovate at the 14 nanometer node. So We did see, an increase as we move from Q1 to Q2. The forecast we have for Q3, again, largely concentrated in 14 nanometer continues to support that growth through the year. If we look back to 2017, which was, I believe a little bit over $140,000,000 with that customer. I think to repeat that or exceed that, we're going to need a very strong 10 nanometer ramp in combination with the sustaining 14 nanometer activity. And there's quite a few different moving parts on getting all of those things moving together again. But certainly, if those conditions exist, if we get these node transition issues resolved with both our large foundry and logic customer and one of our larger DRAM customers, we're pretty confident we can touch on the high watermarks of those two customers again in 2019. Got it. That's helpful color. And just curious to add on to that. Based on prior experiences, would you feel that the ramp would be sort of a gradual or maybe kind of a sharp, even though you can't be precise on timing perhaps in 2019, but would it be more gradual or kind of a sharp pickup? Well, I think it's challenging to go back with historical experience, because some of these node transitions are getting so challenging from our customers that they don't really follow the historical patterns. If we do go back to the historical patterns, they've typically been pretty sharp. And if you look at, for example, our revenue with our largest customer, in 2017, it ramps up pretty quickly as 10 nanometer intensified before they tap the brakes on that ramp. And I think that's probably a reasonable trajectory, something like over a 2 quarter timeframe to imagine, revenue trajectory is going to be when 10 nanometer actually ramps. Okay. Very helpful. Maybe one more question on the the Flash business. Are you saying that there are opportunistic things that you can capitalize. It did become a pretty material number in this quarter. Kind of curious what do you think the normalized level is? How we should think about margin profile? That business? And maybe even if you could kind of flush it out and characterize what drove the incremental in the quarter? Yes. No, it's a great question because $11 odd $1,000,000, it is becoming a material and significant piece of the at least the second quarter business. I will reiterate that We do view it as volatile because the fundamental thing driving this is us, serving opportunities really very high end of 3 d NAND, high layer counts where there's high densities where customers really do need form factors MEMS technology to be able to probe and test these chips. And in the second quarter, there was more of that business to be had. I think from a profitability standpoint, If you look at our overall gross margins, even with that heavy flash concentration, you can see things were pretty healthy. And I think it goes to Yes, we're treating this as an opportunistic business, but the requirements do, demand FormFactor's MEMS technology. And as a result, we're being compensated for delivering that kind of technology into these high end three d NAND applications. Great. That's really helpful. Thanks so much. Thanks, Brent. Thank you. Our next question comes from Craig Ellis with B. Riley FBR. Line is now open. Yes, thank you for taking the question. And Mike, thanks for all the color as you look ahead. Shai, I just wanted to go back to your, your commentary as you were talking about the gross margin guidance. I was with you on on flat sales and flat utilization, but then you said gross margins would be essentially down by about 2.40 basis points quarter on quarter. So as we think about flat revenues and utilization, but gross margin moving off of the prior quarter level. Is it just that the operational execution was so stellar in the prior quarter or are there interest segment or intra customer dynamics? What is it that's causing there to be a material variation in gross margins when other factors look fairly similar? Thanks. It's a great question. And we saw strength across across the board of our product mix during the second quarter, which was the main driver for the higher gross margin in the second quarter. We saw it with advanced packaging in both Foundry and Logic, but also in HBM activity under the DRAM Memory segment market. So that was the biggest piece that contributed to the higher gross margin. Going forward, we forecast it to be And of course, the higher revenue the higher revenue as a total dollar also contributed. Going forward, we mentioned that we expect different less favorable product mix in Q3, which contributed to which will contribute to the update Q3 range of 42 to 45. So we are very glad with execution in Q2. Many things were moving in our favor. Q3 should be similar comparable as we describe it 42% to 45% is a good range for Q3. Would you expect a decrease in both the systems and the probe card margins or is it more one versus the other? I think system, we expect it to continue to improve, stay at similar levels. We are now at 48.6 our goal is to be at low high 40s low 50s. We continue to see improvement. So I expect it to be in a similar level. And the change will come mostly from the progress business because of the change in the mix. Okay. That's helpful. And then the next question I had, Mike, appreciating that, that form has looked at NAND as an opportunistic business historically and still has that view, but with the market coming towards forms, can you be a little bit more specific on where you're seeing the opportunities? Is it Is it really is, as manufacturers try and go in volume at 96 layer or are you seeing success at $64.72 or at even levels below that? Any color there would be helpful. No. Craig, it's really the high end of that layer count range. And it goes down to sort of the pretty simple advancement of requirements as densities go up. In some cases, the probing gets more challenging. Pads on the die get smaller. In some cases, the die themselves get smaller. And that's where customers really need our MEMS technology to probe these smaller pads, and do it in a cost effective and electrically accurate way. Thematically, it's really the same thing that caused us to be adopted last year at the world's largest foundry for integrated fan out applications in a similar story associated with HBM, where the densities are going up and people really need the scalability of form factors MEMS technology to be able to probe and test in a cost effective way. That's helpful. And then the last question, appreciate the, the longer term color regarding being able to get to target model run rate levels. The second half of next year. As you look ahead, can you just list the 3 or 4 things that really give you confidence that that that path is within reach for form factor? Thanks so much, Mike. Sure. Thanks, Greg. So as we look at the target model that produces $650,000,000 in revenue and $1.50 of non GAAP earnings per share. A few things that we need to get there but things where we've demonstrated or can rely on some pretty significant momentum. I mean, the first one as a market share leader in about 1,500,000,000 serve market. We need that market to continue to grow, but I think all the signals that we see are that the semiconductor market and the probe card consumables and systems markets are pretty healthy and continuing to grow on that trajectory. So we're pretty confident there. In our Analyst Day last year, we articulated the line of sight growth opportunities that really bridge and drive our revenue cut, advanced packaging, mobile data and automotive. And without going through the details of each of them, I think we've shown pretty good progress in each of them. Advanced packaging, clearly a highlight where we're well ahead of where we thought we'd be, in capturing that opportunity. And site opportunities, but advanced packaging, in particular, carrying a lot of momentum as we described in the prepared remarks. The one that's maybe a little bit more uncertain is these node transitions. And as I described, I think it was Brian's question, There are certainly some puts and takes associated with our largest customer's 10 nanometer transition, timing uncertainties there. The different DRAM node transitions and design changes that we need to support that revenue base, we need those things to happen as well. But all indications are that those things are going to begin to resolve themselves here as we move through 2019. And that's why we're confident in trying to convey that confidence to people that we'll exit 2019 on a run rate that's consistent with target financial model. Thank you. Our next question comes from Edwin Mock with Needham And Company. Your line is now open. Thank you guys. Good job for the quarter. Thanks for taking my question. First question, I'm kind of follow-up with the line of question on the 10 nanometer as your largest customer. I think on the quarter talk about targeting the holiday season of 2019 for products to hit the shelf companies in a prior experience if that's the ramp up time that they expect. When do you expect your demand to start ramp? Is it 2Q, 1Q or 3Q? Just kind of a rough idea on that. And consistent with what I talked about before, some of the historical, data points on ramp timing and ramp duration or maybe not so reliable to rely on in the current situation. But, I would expect if that end market product timing is going to be the case, that we'd be somewhere in mid-twenty 19 and beginning to support, the initial parts of the ramp in probe car. To test the wafers that are going to end up in the channel to feed the holiday season. I realize there's a lot of ifs there. And to be honest, there's a lot of ifs in all of the different, market signals associated with the 10 nanometer ramp. But again, with the assumption that end products are going to hit in late 2019, 2019 holiday season, I'd expect us to be seeing the demand sort of mid year 2019. Okay, that's helpful. On the Flash, the $11,400,000 of revenue you see this quarter, you mowing the same level of revenue in the third quarter? I just kind of get a rough idea. Are you comp do you talk about this being more volatile? Do you expect to normalize in the coming quarter? Yes. With the reminder of the caveat that we're running on average lead times that are approximately half a core, So we're operating with a significant element today of turnables in our third quarter forecast. We do expect to see the flash mix be comparable in Q3 to that, which we delivered in Q2, the sort of $11,000,000 in change. And that's true sort of across the different businesses. We see a similar mix profile. Some of the customer specific designs are not so favorable from a cost perspective for us. And that's why we're guiding gross margin down a little bit from the 46% we saw in the 2nd quarter. But at the highest levels at the markets we report flash DRAM foundry and logic and systems, I'd expect to see a pretty similar breakdown of revenues across that next. Okay, great. Thanks for clarifying that. At the largest pharmacy customer, you mentioned on the February March you start to ship a number of sample probe cards for newer designs, right? And we've obviously heard a lot of new design around the 7 nanometer of note. I'm just curious, is there a way to kind of think about opportunity there? I understand you are calculating market share of a competitor there. Can you give us some color in terms of where you stand on market share and if there's a way you can kind of help us think about the opportunity there, not even maybe not this year, but more like 2019 or even beyond kind of any color would be helpful. Yes. And I think the opportunity there, again, consistent with us, progressing towards our target financial model is a substantial one and it's primarily driven by advanced packaging. Where those customers, where the fabless customers in that foundry really need form factors in MEMS technology. I think we've made good progress. We've grown share here in the first half of twenty eighteen over that which we achieved in 2017. And we wanted to highlight for you what we view as a really significant development in that we have now provided qualification units for more than just a large mobile application processor project. We're now branching out and diversifying that business a little bit. The timing of that turning into material revenue and really sizing the opportunity is a little bit challenging to for us to size right now. But I would say longer term, and it's probably even past 2020, as that customer migrates more of their wafer arts to advanced nodes and advanced packages, the opportunity for our technology grows. We sort of the available market serve market for us if that foundry grows. And when we reach a steady state of that, again, it's probably post-twenty 20, but we view that as an opportunity comparable to the size of our largest customer. Significant number of wafer starts high test intensity and large design mix, all good factors for us. And we view it as a significant long term opportunity on the way to our target financial model. I see. One last question I have. On DRAM, you mentioned that you saw some XPM design on the 2nd quarter. Is that volume coming down, I guess, offset by other DRAM demand, but that's part of the mix that affect the gross margin in the third quarter? Well, there's lots of puts and takes on the mix. I would say HBM continues to be relatively strong as we move through the third quarter Again, reminding you that probe cards are designed specific consumable. And so the details of that design are pretty important for what our cost structures and ASPs look like. HBM continues to be a pretty strong component of our overall DRAM mix. Here through the middle part of the year. And we're pretty excited about the continued adoption of that. Because as we've discussed in the past, it's a real advantage for form factor and we'll draw customers towards our technology. Okay, great. Thanks for clarifying. Thank you. Our next question comes from Tom Diffely with D. A. Davidson. Your line is now open. Yes, good afternoon. Maybe one more question on the flash side or the non volatile side. What was the balance of that category, was it NOR Flash? It was $7,000,000 out of the out of the 11.6 was North. NAND. NAND. Sorry. It was NAND. And so, nor was the remaining? Yes. That's correct. Was there something in the NOR? Because that was a that's a pretty big number for NOR 2 then, isn't it? It is. I think both components grew significantly. Obviously NAND if I back up a couple of years, was very, very low for us. But the NOR Flash component had grown as well. We view that as probably a little less volatile than the NAND part of that flash business. And a lot of it's driven by the end markets in automotive. We see that being part of our overall automotive growth opportunity, obviously not all of that nor goes into the automotive sector, but a good chunk of that growth is being driven by end market automotive. Okay. And I'm kind of curious what trends you're seeing on the RF mobile side of the business right now. There's obviously the year started out pretty weak for most players, but it's starting to pick up at this point. Are you seeing much in the way of additional capacity needs for this year? I think RF, our RF probe card business, I'll talk about the RF systems business in a minute. But the RF probe card business, I'd characterize, is pretty close to steady state over 2017. We are seeing some design of year, but the fundamental dynamics of handset unit growth essentially being flat, and some of the different market share and takes among the filter manufacturers, we don't see a lot of year on year growth in that business 2018 over 2017. What we do see is some pretty interesting developments as we start to move towards the initial deployments of 5G. And that's going to drive a lot of performance test requirements that bring things towards form factor strength and we're anticipating some pretty strong growth as that kicks in. On the system side, obviously, the analysis and engineering work that's going on for a lot of either the new filter designs or the new RF front ends at the higher frequencies of 5G have us pretty well exposed to those trends and working with the customers as they develop their test programs, devices and test methodologies going forward. So I think the production probe business to 1st order close flat year on year, Tom, but we do see some interesting opportunities as the leading edge of 5G kicks in. Okay, great. And then, you talked about a broadening of the customer base at the high end. What is the relative opportunity for you having a single large run product versus, call it, 10 small products, if the volume is the same, ultimately? If the so if everything else is the same, right? If all other things wafer starts and all that sort of thing are the same, The opportunity for us is roughly the same, right, between 10 different designs on the same number of wafer starts versus one different design. Now there are inefficiencies in customer production buffers and that sort of thing that will drive a little bit more volume in the more in the 10 design scenario, but there's other factors in any specific opportunities probably are more dominant. Okay. So really the opportunity for you was just an expanding of that customer base for more wafer starts ultimately? Yes, more wafer starts, more customers, more, more different probe cards for us to expand our opportunity inside that customer. But fundamentally, you can think of it as their leading edge nodes, 10 nanometer and 7 nanometer driving the sheer scale of that opportunity for us. Okay, great. And then finally, you said that we're counting on the 10 nanometer ramp to happen until next year. Is it a similar view for the 1Y node on the DRAM side? I think that's a good question and one that we're obviously trying to stay very close to. I'm not sure I have any significant data to add to what's been, sort of disclosed over the last couple of weeks, except to say that Probe Cards typically trail the, capital equipment installs, the process equipment installs by something like a quarter to 2 quarters. So as you see, the process tool manufacturers starting to install or ramp up on 1Y expect to see us 1 to 2 quarters later. Okay. So I assume at this point, you've done some pilot line 1Y work and it's just that you're talking about volume now? We have. And one of the more interesting things that happened in our pilot line 1Y work is that through the multi year re engagement, with this large customer, we think we're in a pretty solid competitive position for 1y. So we're a little bit disappointed that it's not ramping aggressively as we think there's going to be some additional market share gains for us when that customer transitions from 1x to 1y. Just sets up a good 2019. Thanks for your time. Question. Our next question comes from Edgar Roche with Sidoti And Company. Your line is now open. A quick one for Shai to lead off. Inventories picked up a little bit in the past 2 quarters. Is that some timing issues or there's some more expensive raw materials, playing a factor in there. Could you speak to that a bit? Sure, I had. Mostly the reason for the increase in inventory in the last couple of quarters was in anticipation of the increase in revenue we saw in Q2. Right? We need to start purchasing things and build some inventory ahead of this ramp up. If we talk about Q3 outlook being comparable to Q2, then I do expect revenue levels to go down a little bit with meaning the first quarter? Inventory levels. Inventory, I'm sorry, yes. Inventory level go down in the third quarter. All right. Appreciate that. And then, Mike, really nice color on the long term financial plan and where we stand relative to that. If we look back and just take stock at Q1 a little bit. Is it fair to say that, the expectation of shipping the 10 nanometer and then, and that's sort of being delayed seemingly last minute was really a disruptor and could maybe a normalized Q1 sort of split the difference between your 118 that you reported and what you had for the second quarter? Yes. I'm not sure I entirely understand the question, Ed, but certainly Q1 represents what we view as the the low in our current operating model and the current industry situation. And really was indicative of one particular customer, not ramping the 10 nanometer node and really not in a position to start migrating designs to the 14 nanometer node. Here in the second quarter and through 3rd quarter, we see business with that customer strengthening because there's pretty robust design activity on 14 nanometer. Even as 10 nanometer sits on hold, we expect that as we exit the year, we'll be back at, nominally that $100,000,000 annual run rate or $25,000,000 a quarter business with that customer really just in supporting the 14 nanometer design activity. Okay. I appreciate that. And then one last one, just sort of allow my questions have been asked already, but, major supplier of testers recently spoke about parallel testing in the mobility device arena. Having reached some practical limits for a few years now and leveled out, And I was just kind of wondering if you could speak a little bit about where parallelism is still playing I know RF was one where you're hoping to, produce some gains for your customers. If you have any thoughts on that to share, that'd be great. Yeah. And I think it's very, very device and application specific. I would say I agree with the notion that in high end mobile, the applications processor, parallelism probably has reached some natural limits. And although those are exciting opportunities, flashy businesses, there's also a whole bunch more probe card demand where parallelism increases continue to be the fundamental value driver and haven't reached any limits. RF was one of them. We're working with as there's this pause in the RF filter market, we're working with several customers to try and advance their parallelism So as things pick back up associated with presumably the 5G ramp, we've brought to them a higher level efficiency improve their cost of test and, of course, can compensate it for that. So that's one area. The other area, I'd like to highlight is DRAM continues to increase parallelism as node shrinks, die sizes get smaller and there's more die per wafer. And so we're now shipping cards that are, close to 3000 die tested in parallel in testing a single wafer. And so I would expect that trend to continue in DRAM Thank you. Thank you. Schlessner for closing remarks. Great. Thank you all for joining us today and we'll talk to you at conferences throughout the summer or on our Q3 earnings call. Thanks again. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a great day.