FormFactor, Inc Q3 2008 Earnings Call Transcript

Oct.28.08 | About: FormFactor, Inc. (FORM)

FormFactor, Inc. (NASDAQ:FORM)

Q3 2008 Earnings Call

October 28, 2008 4:30 pm

Executives

Mario Ruscev - Chief Executive Officer

Jean Vernet - Senior VP, Chief Financial Officer

Analysts

Timothy Arcuri - Citigroup

Christopher Blansett - J.P. Morgan

Patrick Ho - Stifel Nicolaus & Company, Inc.

Mehdi Hosseini -Friedman, Billings, Ramsey & Co.

Gary Hsueh -Oppenheimer & Co.

James Covello - Goldman Sachs

Kevin Vassily - Pacific Crest Securities

Christopher Muse - Barclays

Operator

Good afternoon and thank you for joining FormFactor’s third quarter 2008 earnings conference call.

On today’s call are Mario Ruscev, Chief Executive Officer and Jean Vernet, Chief Financial Officer. During the course of this conference the company will make forward-looking statements within the meaning of the Federal Securities Laws, including statements regarding the markets in which the Company competes, new product execution, demand for products, financial performance, and strategic and operational plans.

These statements are based on current information and expectations that are inherently subject to change and involves risks and uncertainties. Actual events or results may differ materially and adversely to those in the forward-looking statements due to various factors, including but not limited to continuing challenges in the markets in which the company competes, including the DRAM and flash memory markets. The company’s ability to develop and market on a timely basis, innovative testing technologies, to realize cost reductions and to deliver and qualify new products that meet its customers testing requirements on a timely and efficient basis.

The demand for certain semiconductor devices, the rate at which customers adopt the company’s newly released products, implement manufacturing capability changes, make transitions to smaller nanometer technology nodes, and implement tooling cycles. The company’s ability to implement and execute measures for enabling efficiencies and supporting growth in its design, applications and other operational activities, including execution of its cost-reduction plan, and the company's ability to obtain cost advantages as its operations become more global.

The company assumes no obligation to update the information in this presentation, to revise any forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in our forward-looking statements. Please refer to the Company's recent filings on Form 10-K for fiscal 2007 and subsequent SEC filings for additional information regarding the relevant risks and uncertainties.

Finally, a breakdown of revenues by market and geography, and the schedule reconciling our GAAP and certain non-GAAP financial information and guidance is available on our web site.

I would now like to turn the call over to Chief Financial Officer, Jean Vernet.

Jean Vernet

Thank you, Mark and hello everyone. Before I begin, let me remind you that I will be discussing our GAAP P&L results and some key non-GAAP results to supplement understanding of our financials. The schedule that provides GAAP to non-GAAP reconciliation is available on the investor portion of our web site.

With that, let me start with the summary of our third quarter results. Total revenues were 52.6 million, up slightly from the second quarter and down 58% versus the third quarter 2007. Revenues by business units were as follows. DRAM revenues rose during the third quarter by 16% over our second quarter. DRAM revenue accounted for 67% of total revenues in the third quarter, up from 59% in the second quarter. As Mario will explain later, the DRAM market appears to be stabilizing.

Flash revenue fell 26% sequentially during Q3 representing 16% of total revenue. And our SoC logic business declined 13% in the third quarter compared to the second quarter. Our GAAP gross margin was 22.8% while non-GAAP gross margin ended at 24.9%, an improvement quarter over quarter.

Operating expenses excluding stock base compensation and restructuring were up 3.5 million from the second quarter. The increase was primarily due to focus investment in research and development and an increase in legal expenses related to our ongoing ITC litigation. Our GAAP operating loss for the third quarter was 28.9 million or 55% of revenue. On a non-GAAP basis operating loss for the third quarter was 23.7 million.

Interest and other income for the third quarter was 3.1 million. These are conservative investment report for you, we expect our interest income will remain at lower levels in the foreseeable future. Our tax shield for the quarter was 45.6%, higher than our original guidance of 32%.

The higher tax credit was primarily due to a one-time reversal of 2.8 million of tax reserves and associated interest accruals. This reversal was the result of a resolution of an IRS review of our R&D credits. Net loss for the third quarter was 14 million. Our loss of $0.29 per fully diluted share on a GAAP basis better than our guidance range.

We continue to make positive improvements in our cost structure and manufacturing efficiency. And while we are obviously not satisfied with an operating loss, we do view these operating results as encouraging.

We are still in the early stages of driving our cost reduction plans. Many initiatives are on the way and some of the changes we are now implementing require more fundamental shift in how we operate. And it will take some more time to fully recognize the benefits.

As we concentrate those efforts we are enhancing the financial position of the company and this will lead to strong profitability when our business improves. We ended the third quarter with a head count of 939 down 12 from Q2.

Now turning to the balance sheet and cash flow statement, cash and marketable securities totaled 535 million in the third quarter, a decrease of 8.9 million from the second quarter. The decrease in cash burn by 4 million over the second quarter is due to aggressive cost controls, proactive collections, tighter inventory management leading to better working capital and prioritization of CapEx.

Cash from operations was negative 4 million. DSO improved 8 days in the third quarter to 57 as compared to Q2. Inventory turns were 6.5 in Q3.

With that, I will now provide guidance for the fourth quarter. We are forecasting revenues for the fourth quarter to be in a range of 48 to 55 million. We forecast fourth quarter both GAAP and non-GAAP gross margin are likely to be plus or minus a few percentage points from our third quarter.

We forecast our fourth quarter GAAP and non-GAAP operating expenses to be up slightly from our third quarter as our legal costs related ITC remain high. We estimate other income for the fourth income to be at around 1.5 million and our tax rate for the fourth quarter is expected to be 34%.

We expect to have a GAAP net loss in the fourth quarter. The net loss is projected to be between $0.38 and $0.47 per share.

The GAAP EPS includes about $0.07 of incremental stock compensation expense. On a non-GAAP basis, excluding stock comp expense, we expect earnings per share to be between a loss of $0.30 to $0.39 per share.

Although the environment continues to present its challenges, we believe FormFactor is making the right moves to enhance its business model and to be well-positioned for strong growth and profitability as conditions improve.

With that let me turn the call over to Mario.

Mario Ruscev - Chief Executive Officer

Thank you, Jean, and good afternoon everybody.

During our third quarter, our mantra remains the same, focus on the things in our control such as managing costs, prioritizing our investment and operating more efficiently. I’ll provide some comments on our reorganization efforts and I’ll include both short and long-term. But first let me quickly share some observations on our third quarter results.

First, the DRAM business appears to be stabilizing. The recent announcement of industry consolidation as well as reduction and capacity have positive long-term indicator for our business.

The recent sign that our customers are ready to give up size to be able to invest in efficiency is good for our business is assumed. On top of that we are gaining confidence in our program capabilities, differentiation and potential for market share gains.

Second, the environment for our flash business is weak especially in the NAND market. NAND has been impacted by both over capacity and broader microeconomics issues because so much of this demand is driven by consumer products.

That said with the demands for and capacity coming offline would also help the current situation and lead to a better environment in the second half of 2009. In some ways the NAND market today is looking like the DRAM market of six months ago. So we believe the next two quarters will remain soft before we see some stabilization.

Third, we are seeing two different dynamics plays out in our SoC business. First, our microprocessor segment is slowing. The reason for this is the timing between product qualification and the next (inaudible) with our top customer.

Second, our Wire Bond segment continues to gain momentum. As we showcase our capabilities to our customers, we are gaining NAND share and this will potentially lead to large orders over the next years. We should continue to see high growth in the Wire Bond market.

Finally, we continue to make positive improvements in our cost structure and efficiency. We are positioning ourselves into electrical and multi standard node. What I mean by this is that as we continue to grow our company and improve efficiency we can build for a difficult environment for a longer period of time if conditions dictate. This will not only improves our flexibility but we will also serve to enhance our profitability as we come out of the other side of this downturn.

During the last nine months we have continued our efforts to have more resources in closer proximity to our customers. We are now in the position to have all the designs covering activities in Japan and Korea made locally.

During the fourth quarter we will be implementing assembly and test capabilities in both Japan and Korea. We believe that in the longer term these actions combined with a set of additional initiatives will allow us to be more responsive and have a better understanding of our customer’s future needs.

So over the short-term we expect market conditions to largely remain challenging. The DRAM environment for consumer electronics is weakening, which is having an impact on unique treatment and the timing of technology transitions. Customers are reluctant to increase spending on newly designed process nodes due to cash preservation concerns. And this is the very initiative like DDR3 and 60 nanometers transitions that are key drivers for our business.

On the positive side we believe capacity coming offline will put companies in a better position to focus on differentiation, which should result in new design and process node transition over time.

As we look out over long-term, we believe we are flanking up competitive position with a change in implementing both on the manufacturing front, as well as our investment in research and development. About 10 months ago FormFactor was in the midst of seeing its revenue cut in half.

In addition, we are addressing certain cost production issues. Our primary goal at that time was to quickly move to reduce our cost structure, stabilize the business and focus our investment to ensure delivery of highly differentiated products in a strong growth market.

Today, 10 months later, although the situation is far from perfect and a lot of work still remains. We have made significant strides in improving our cost structure. We are stabilizing the business. We have resolved prior production issue and made improvement in both the delivery and capability of our Harmony platform and are investing in future products. We are in a stronger position today despite the weak economic condition that were at the beginning of the year.

As we execute our reorganization strategy in Korea and Japan this quarter, we are positioning ourselves to be significant partners with customers in both areas. We believe it will, over time, provide us with revenue growth and market share opportunities.

There is no doubt that market conditions are challenging, but we can only control our efficiency in the way we operate our business. By focusing on improving delivery capacity capabilities, regionalization for stronger customer support, innovation to drive future growth and ensuring the financial model that delivers robust profitability when the market recovers, we are positioning FormFactor to come out of this field stronger than ever.

With that, let us open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you very much. (Operator instructions)

Let’s take our first question from Jim Covello, Goldman Sachs.

Jim Covello - Goldman Sachs

In the DRAM market for your business how are your customers positioned to pay for some of these advancements relative to their current liquidity positions? What are you they telling you about that?

Mario Ruscev

Well, you know what they say is that we are really in this position of the issue of demand and supply. And that is not addressed up to now and we will fill it in cash. So what we see now is our customers are starting to go down in capacity or at least not putting that as the first priority.

We also see some of our customers which are going quite further along with node and some which are stuck at some further nodes. So with all that we don’t suspend it a long-term. So they will work with more efficiently.

So I guess it is a choice of where the little remaining cash goes and we do believe that if you see the first movement, this has to be the consumer, there will be maybe a little more cash flow efficiency gains.

Jim Covello - Goldman Sachs

Okay, that is helpful. And then relative to your own cash position, you know we’ve asked this question a couple of times over the last year, as you mentioned FormFactor’s position is more stable today than it was 12 months ago. Given the relatively more stable position that the company is in, is there more of a thought to putting the very significant cash balance to work for shareholders at this point? Thank you.

Mario Ruscev

On the cash flow front, for the last couple of months I put cash in even more precious things. I would answer the same thing but also it is a little more on faces. We are certainly looking at how to use this cash in the most efficient way. And we are looking at all the possible options.

Jim Covello - Goldman Sachs

Any timeframe that you could help to be more specific on? Is it one quarter, two quarter?

Mario Ruscev

It is just too early. But certainly like I said the recent conditions certainly emphasize that looking for cash and how to use this cash has become quite important in our schedule.

Jim Covello - Goldman Sachs

Okay, thank you very much.

Operator

Our next question will come from Patrick Ho at Stifel Nicolaus.

Patrick Ho - Stifel Nicolaus

Thanks a lot. In terms of the traction you’re getting with Harmony following of late, how would you say you are doing with I guess new customer qualifications as you look forward over the next few quarters?

Mario Ruscev

Well, you know we are in the process of qualification of all the customers. So we have already seen an improvement in our position over the last quarter, in fact really quick. And we believe that this will continue.

Patrick Ho - Stifel Nicolaus

Okay, and then in terms of your operating expenses, you mentioned that it was going to be going up slightly in the fourth quarter. Is that just related to I guess some of the legal costs you mentioned or is there other stuff in say R&D that is going to be going up that will trend into 2009 as well?

Jean Vernet

The slight uptake in Q4 is a combination of legal expenses, some year-end operating costs, which are always higher at the year-end, and then indeed some prioritization of a couple of R&D projects, which we believe is important to focus upon.

The reason we are able to do this is also because overall we are on a traction to reduce our overall costs. So I would say this upticking in operating expense in Q4 is a business decision that we are making.

Patrick Ho - Stifel Nicolaus

Okay and a final question. I think on the call today you mentioned in your remarks regarding your cost cutting initiatives and how you try to restructure the company. Mario, now that you’ve been at the helm for six to nine months, is this a major restructuring that you’re going to be doing on the operations front or more of kind of just tweaking what was there before?

Mario Ruscev

I would say by the time we’re finished you can see some major restructuring and also we do it in a continuous mode, if I can answer to that. What we are really looking at is each of the components that is part of running the business we are really looking at this and changing it quite dramatically.

But we try to do it in a non just big bang way but in a more continuous mode. That is why it does take a few months.

Patrick Ho - Stifel Nicolaus

Again I guess just as a follow-up to that, do you believe that you will be ready for whatever the next upturn is, you’ll have this cost structure in place?

Mario Ruscev

I would say yes.

Patrick Ho - Stifel Nicolaus

Okay, good. Thank you.

Operator

Next is Timothy Arcuri from Citigroup.

Timothy Arcuri - Citigroup

Hi. Several things. First of all, Jean, can you break out what the legal expenses were in SG&A? I guess I’m a little surprised that it’s as high as it’s ever been despite all the restructuring and things you’ve done. So I’m wondering, can you help us understand how much of that is core and how much of that is related to the legal expenses?

Jean Vernet

I would say that the legal uptick from Q2 to Q3 accounted for about 1.5 million. But overall I would say that the ongoing litigation we’re having is taking about 2.5 plus load on our cost page.

But on top of this I also want to add that we made that point that it is for us of prime important to keep our end investment at the appropriate level and part of that in creating operating expenses are also some R&D projects.

Timothy Arcuri - Citigroup

Okay, I guess I’m just trying to figure out why SG&A, itself, hasn’t really come down given some of the restructuring things you’ve done. And I’m wondering maybe have they not hit yet.

Is it something that we’ll see kind of in Q1, Q2 next year? I can see that you are spending more on R&D, but I guess I’m a little surprised that SG&A even when you strip out legal is this high. I’m wondering maybe we haven’t seen it yet.

Jean Vernet

You know at the end of the day what drives us right now is to reach our cash break even level at 65 million. And to reach that level we have several moving parts. And the secular trend is that we are going to reach this break even level as soon as we can.

So how to get there is a combination of cost reduction efforts and business decisions we’re making along the way.

Timothy Arcuri - Citigroup

Well okay, I guess may be just on that point, then can you give us an update as to where you are? I guess previously you said that you’d be operating break even in the mid-$60 million within a few quarters. Can you give us an update on where that plan is right now?

Jean Vernet

Yes, so what we communicated the last time around was that we would be break even cash at about mid-60s at the end of Q1, beginning of Q2. I believe that right now we have some traction to the quarter ahead of that and this is when you take out the one-time legal cost we’re going to have again in Q4.

Timothy Arcuri - Citigroup

Okay and this is the last thing for me. Can you give us any details on—I think you have some pretty interesting new manufacturing architectures coming out. And I’m wondering, can you give us some details may be not in terms of the specifics as to what they are but what they might do in terms of the model?

Are these new techniques more to boost the PNL or do you think that they’re more to boost your competitive position?

Mario Ruscev

We find it just a little too early to discuss this. What I would like to say is that we have been saying probably that we need to organize an investor day sometime in Q2 of next year where we'll go in quite much more detail about all of that.

But let’s wait, our goal into R&D, I would say, is twofold. The first is to make us more competitive in where we are. The second is also to allow us to expand our competition in markets where we’re not very present actually just because of product offering.

I would say that we do have two goals into our R&D. And I understand that it might be difficult to attain because we’re spending quite some money on it but you understand, it’s just too early. But we will certainly discuss that much more in detail as time comes.

Timothy Arcuri - Citigroup

Okay, thanks.

Operator

Our next question comes from Christopher Blansett, J.P. Morgan.

Christopher Blansett - J.P. Morgan

Hi guys. Mario, I think I asked you last quarter and to get an update, how would you characterize the mood of your memory customers now versus last quarter and in general, I think you had previously said that they have gone from shock to more of a waiting mentality. Are we still there or has it –

Mario Ruscev

Well no. I would say that they are starting making plans now again. Again, it’s always very hard to talk for customers but I would say that I realize that the upturn is not immediate so we have to take action and I assume that this is why we see capacity costs.

And I think overall, we see our customers starting moving again and getting action. So I would say that now we know that we have to solve the demand upset, badly. We have to solve that and we have to go back to efficiency again. So I think that my read at that is that we are starting acting towards that.

Christopher Blansett - J.P. Morgan

And then, just a quick followup on all these questions about OpEx and costs, is it fair to say that you do have slightly higher costs on the OpEx side, which are driving down your longer-term costs and will fall off at some point in time in the first or second quarter.

Jean Vernet

Well we have a couple of things going on. The first one is we have some temporary costing there which we expect them to drop the early part of next year. And then indeed, we are—the investment we do in our NDBs is for us positioning for the rebound in the market, right?

It’s for ourselves to position as a strong growth company when the market rebounds so these are specific projects on which we made business decision to invest for the future. These are business decisions, right?

Christopher Blansett - J.P. Morgan

I have two simple questions. One is if we do have an extended or protracted weak business environment, at what point in time do you need to make a decision may be to make further cuts?

Jean Vernet

So right now, the target of 65 million break even cash is corresponding to our rate of the market. If the market was to deteriorate, we would, of course, adjust accordingly.

Christopher Blansett –J.P. Morgan

Okay and then the last question is, have you come around to rethinking the manufacturing move to Singapore or is that still waiting?

Mario Ruscev

For that, we have to go back in the past. We have to realize that the move of manufacturing in Singapore was made when we were looking at adding capacity and a lot of capacity. Like we said last time, actual position, we did decide to freeze all of that until we can read better on the long term.

If it is one thing again that happened in the last two months is that, also everybody sees what is going to happen. Timing is very important that’s why we are feeling badly in the same position to wait until it’s a better predictability because the last thing you want is do things and being a quarter too early.

Christopher Blansett - J.P. Morgan

All right, thank you guys. I appreciate it.

Operator

And next we’ll hear from Gary Hsueh, Oppenheimer & Co.

Gary Hsueh - Oppenheimer & Co.

Hi guys, thanks for taking my question. You might have gone over this and I apologize if I missed it but what was the explanation for the 150 basis point improvement in gross margin sequentially on flattish revenue?

Jean Vernet

The main reason behind this is within our cost-cutting exercise means lowering our fixed cost. This is really the main reason behind it.

Gary Hsueh - Oppenheimer & Co.

Okay, so quarter-over-quarter there wasn’t any change in terms of the Inventory Charge Ops that you normally account for.

Jean Vernet

Actually there was but overall on the variable costs, you have several moving parts. I must say that our reserve number in Q3 was much better than in the prior two quarters.

Gary Hsueh - Oppenheimer & Co.

Okay, so you actually did reserve less in Q3 and that also helped gross margin in addition to—

Jean Vernet

Absolutely.

Gary Hsueh - Oppenheimer & Co.

—reducing your fixed cost base.

Jean Vernet

Absolutely.

Gary Hsueh - Oppenheimer & Co.

Okay and from here on out, you still talked about cost restructuring, From here on out, are there going to be any more step function changes and your cost of goods sold structure or is there going to be a more predictable drop through in terms of revenue down to gross margin?

Jean Vernet

We are on the path of achieving our target. We are not at our target yet and I, indeed, expect our cost of goods sold as a percentage of revenue to decrease. I gave some data point at the last call. I would say that at 65 million, I would expect a gross margin in the 40 percentage, right?

Gary Hsueh - Oppenheimer & Co.

Right. Okay.

Jean Vernet

That’s the data point.

Gary Hsueh - Oppenheimer & Co.

Okay, great, thanks. Since we’re nearing the end of the year and looking forward to 2009, if I did a postmortem of this year, bit growth in DRAM was chopped in half. And I guess it makes sort of sense that your revenues were chopped in half off as well.

But if I look in 2009, bit growth is supposed to come down again by roughly 20% to 30% in DRAM in 2009. How should we model top line in 2009? And plus in your guidance and having gone through the worst in terms of DRAM pricing declines in the month of September.

It doesn’t sound like things are getting that incrementally worse according to your guidance. So I expect you to outperform it 20% to 30% bit growth decline next year in DRAM. How much do you think you could outperform that kind of bit growth decline next year?

Mario Ruscev

I would say that if you look at the prediction for bit growth for next year, they’re probably in the 45% to 50% which also is slower than we had in the last few years. Historically, it’s not something really absolutely fact. So what I hope is that may be if the market comes to a more reasonable way of evolving. And again, like I said before, we will still have, even if it has been delayed, DDR3 will be coming.

It will be obviously before people were planning that the cross between DDR3 and DDR2 will happen in Q2. Now it will most likely happen a quarter or two later.

But for the long term, it would still be a large event and a long event. If you look at our prediction before what people did in DDR2, we underestimated everything and I would say probably on the mid to long-term, we are probably doing the same again.

Again, like I say, what is driving our business is technology changes, evolution on efficiency gains from our customer and this is how we can help them also. Again, like I say, it’s not about big loss. Remember in 2008, we did have some bit growth but it did not really reflect because quite a few of our customers decide to skip some technology node.

Gary Hsueh - Oppenheimer & Co.

Okay, Mario. Just let me ask this question another way and then I’ll leave. But do you feel like your DRAM revenue run rate, currently in Q3 and Q4, is in sync with single-digit quarter-over-quarter bit growth numbers right now in the DRAM industry?

Mario Ruscev

Again, it’s too early to say what will happen, but I certainly expect 2009 to be on DRAM to be better than 2008.

Gary Hsueh - Oppenheimer & Co.

Okay, fair enough. Thank you so much.

Operator

The next question will come from Christopher Muse from Barclays.

Christopher Muse - Barclays

Good afternoon, thank you for taking my call. First question, in terms of the DRAM strength, was that one customer or was that more broader-based?

Mario Ruscev

If you look at DRAM, there is some reorganizations. In fact, we see both impacts. Some of our customers that have been long-term customers have almost—when you are completely reorganizing, you don’t order much stuff so we have seen this impact. And we have seen other customers ordering more.

So I would say it’s a mixed bag for now. There is certainly not one trend because again, each customer is at a different stage of their kind of plans and organizations, et cetera, et cetera.

Christopher Muse - Barclays

Okay, I guess the 5 plus million, did that growth, did that come mainly from one customer or was that more broad-based to a handful of customers.

Mario Ruscev

It has been broad-based, in fact, if you look at it.

Christopher Muse - Barclays

Okay, great. And then in terms of your guide, I kind of take the mid-point across the board, it looks like OpEx is growing by about 4 million. Is that the right math that I am doing? And if that’s the case, what’s growing besides that 1.5 million extra in litigation?

Jean Vernet

The 1.5 was from Q2 to Q3, the 1.5 increase. I would say that if you take the mid-point, what we factor in there is about a four-cent increase in OpEx.

Christopher Muse - Barclays

Right, okay.

Jean Vernet

As I said, it is driven by three factors. One of them is legal, another one is R&D and another one is some transient year-end expense.

Christopher Muse - Barclays

Okay and then could you also share with us what your orders were in Q3?

Jean Vernet

The bookings?

Christopher Muse - Barclays

Yes.

Jean Vernet

It was about 48 million.

Christopher Muse - Barclays

Okay and then final question, when do you expect to revenue first DDR3 revenues?

Mario Ruscev

Well we’re already shipping (inaudible) for DDR3.

Christopher Muse - Barclays

Okay. I guess the very question is when does it become more meaningful?

Mario Ruscev

You know I would tell your guess is that—we will see it ramping up as we go during the year so I would say—it’s difficult for me to say when it becomes meaningful. In a position we are, any (inaudible) is meaningful I could say.

But we do see the ramp up coming now slowly as it comes. We start seeing movement in DDR3 lately.

Christopher Muse - Barclays

Okay, great. Thank you.

Operator

And next is Mehdi Hosseini with FBR.

Mehdi Hossein - FBR

Yes, thank you. In our prepared remark, you mentioned moving some manufacturing to Korea and Japan. Did I hear right?

Mario Ruscev

Yes you did hear right.

Mehdi Hossein - FBR

Okay, has that already been factored into the 65 million cash break even?

Jean Vernet

Yes it has. I would say that the investments are actually incrementally fairly minimal because what we are doing is using a lot of our assets that we have in the U.S. and transfer them over there, right? So when you factor in the incremental revenue we expect from this investment, actually it turns up being pretty neutral and it’s factored in the 65 million.

Mehdi Hossein - FBR

Sure. So in other words, you’ve already made some plans on how to utilize capacity out of Singapore because you are getting closer to your customer and setting up some manufacturing there?

Jean Vernet

No, what we’re doing here in Korea and Japan, we’re talking assembly and test. So these are the back end of our manufacturing which we believe is better positioned to be next to our customer and we’ve not made any statement about Singapore yet.

Mehdi Hossein - FBR

Okay, great and one last question. Going back to the break even 65, does that include further activity in the larger market? You have the bond wire revenue stream and I’m just curious to what extent, didn’t you break even point taking into account more activity in other areas of the larger market?

Mario Ruscev

When we said cash break even at 65 that usually means that our cost structure will be such that we will not need any cash at $65 million revenue.

Mehdi Hossein - FBR

Alright.

Mario Ruscev

That's how we describe—yes. This includes the kind of usual mix up which we have. We had growth in Royal Bank obviously.

Mehdi Hossein - FBR

Right. But any more activity, anymore investment in other areas of the Logic?

Mario Ruscev

Well, we have—we are present in both areas. We’re obviously present with our major customer. We’re (inaudible) and we continue to invest with them. And then yes we have added investment to cover the Wire Bond which typically I would say two years ago we didn’t have any product to cover that.

Now we do have a product that covers it. We have a spring which is, I would say, pretty well adapted to that, and this is what we are pushing in the market. And up to now we have had pretty good success with our customers.

Mehdi Hossein - FBR

Got you. Thank you.

Operator

Next we’ll take a question from Kevin Vassily with Pacific Crest Securities.

Kevin Vassily – Pacific Crest Securities

I'll state a couple of questions. Just one back to the whole break even level, I just want to make sure my assumptions are correct.

So if we’re assuming a break even operating cash level of 65 million, my assumptions are about 35 million in OpEx and depreciation running at about 8 million. Are those at least in the ball park with the way you guys are thinking about that level?

Jean Vernet

Yes, in the ball park. We’d take the OpEx a little bit higher than this, but yes, you are in the ball park.

Kevin Vassily – Pacific Crest Securities

Okay. So a little higher than the 35 could still get you to the operating break even? Okay.

Jean Vernet

Yes.

Kevin Vassily – Pacific Crest Securities

Second question is to some of the comments you made about the progress in the SoC market related to Wire Bond more applications.

Can you talk a little bit about kind of some of the end market applications for the ICs that are going to be using your Wire Bond-oriented cards? Is it graphics? Is it video? Can you be any more specific on that?

And then secondly, could you talk a little bit about what the value prop in Wire Bond is right know? Are you taking tests from two devices under test up to 8 or 16 given some metric to compare to the value profit you’ve had in the DRAM market?

Mario Ruscev

Well, as you know, all value is usually—it’s always two things. It's better contact and a more (inaudible). Like I said, remember that we are very small presence. So also we are very satisfied but still a very small player in this Wire Bond. And we are really addressing what I would call the high tier market.

So really yes, it is usually very much higher (inaudible) that’s really what is driving our customer. And usually also it's pretty nice to see (inaudible) we are pretty satisfied with the connection. And so with the quality of the data and also very high (inaudible). So this is really our value proposition from now on. It's the one we are advancing for now.

Kevin Vassily - Pacific Crest Securities

And then what about kind of the application you’re seeing the initial attraction in?

Mario Ruscev

Well we see quite a lot of application in the mobile market. All of the guys that provide the cell phone providers et cetera, et cetera. This is one of the one way we see quite a lot of a nice advance, I would say.

Kevin Vassily - Pacific Crest Securities

Okay. Thank you.

Jean Vernet

I just want to add on the OpEx breakeven which looking about the non-GAAP OpEx number. Yes.

Kevin Vassily - Pacific Crest Securities

Great. Okay. Thank you.

Operator

(Operators Instructions). We shall take a follow up from Timothy Arcuri with Citi.

Timothy Arcuri - Citigroup

How much of your cash is domiciled in the US?

Mario Ruscev

How much?

Jean Vernet

I don’t have the number in front of me, I will have to get back to you but I would say the overall majority of our cash is in the US. The only cash which is not in the US is cash in transit, basically.

Timothy Arcuri - Citigroup

Okay, so the risk of you having to repatriate and pay taxes on that is pretty low?

Jean Vernet

Yes.

Mario Ruscev

That’s right.

Timothy Arcuri - Citigroup

And then can you give us some indication as I’m kind of focused on this OpEx issue but can you give some indication as to what happens as you roll into next year? And the kind of, what might happen particularly on the SG&A line.

I know you’re pretty committed to keeping R&D fairly high. But do some of the incremental expenses that you’re seeing in Q4, do they go away in Q1 so you could sneak another couple million dollar decline in Q1?

Jean Vernet

Yes, that’s the way I see things, yes. But again I’ll remind you that what’s driving us primarily is reach break even cash as soon as we can. And we are working on a bigger picture than just the particular line in SG&A. Alright?

Timothy Arcuri - Citigroup

Of course, yes. But from your comment before, you seem to imply that you think that you could be at that kind of low $70 million PNL break even in Q1 versus your prior plan of Q2?

Jean Vernet

Yes, I think so.

Timothy Arcuri - Citigroup

Okay, thanks a lot.

Jean Vernet

Operator, we’ll take one more question.

Operator

Thank you very much and that final question will come as a followup from Christopher Blansett with J.P. Morgan. Mr. Blansett, your line is open, please go ahead.

Christopher Blansett - J.P. Morgan

I have just a quick clarification on your non-GAAP 35 million. Are you including your legal expenses into that or is that excluded from that number?

Mario Ruscev

It is excluded and yes, I forgot to add that, because we don’t see this high legal expense as an ongoing one, alright?

Christopher Blansett - J.P. Morgan

Is there a simple, I guess, quarterly estimate we can throw in that would be more of a standard burn rate for those legal expenses then or do you like them to go away?

Mario Ruscev

I’d rather not be too granular on it. The only thing you need to know is that they’re going to drop back in early mid Q1.

Christopher Blansett - J.P. Morgan

Okay, thank you.

Jean Vernet

Thank you.

Mario Ruscev

Okay, we now like to conclude the call. To all of you, thank you again for joining us today and we look forward to speak to you very soon.

Operator

And that does conclude our conference call. Thank you for joining us today.

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