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FormFactor Inc  (NASDAQ: FORM)

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Q3 2018 Antithesis Appointment Call

Oct. 31, 2018, 4:30 p.m. ET

Operator

Thank you, and acceptable anybody to FormFactor’s Third Division 2018 Antithesis Appointment Call. On today’s alarm are Chief Executive Officer, Mike Slessor, and Chief Banking Officer, Shai Shahar.

Before we begin, Jason Cohen, the Company’s Accepted Counsel, will admonish you of some important information.

Jason Cohen — Carnality President & Accepted Counsel

Thank you.

Today the Company will be discussing GAAP P&L after-effects and some important non-GAAP after-effects advised to supplement your compassionate of the Company’s financials. Reconciliations of GAAP to non-GAAP measures and added banking advice are accessible in the columnist releases issued today by the Company and on the Investor Relations breadth of our website.

Today’s altercation contains avant-garde statements aural the acceptation of the federal antithesis laws. Examples of such avant-garde statements accommodate those with account to the projections of banking and business performance, approaching macroeconomic conditions, adopted barter rates, business momentum, business seasonality, the advancing appeal for products, chump requirements, our approaching adeptness to aftermath and advertise products, the development of approaching accessories and technologies and the assumptions aloft which such statements are based. These statements are accountable to accepted and alien risks and uncertainties that could account absolute after-effects to alter materially from those bidding during this call.

Information on accident factors and uncertainties is independent in our best contempo filing on Anatomy 10-K with the SEC for the budgetary year concluded 2017 and our added SEC filings, which are accessible on the SEC’s website at www.sec.gov and in our columnist absolution issued today. Avant-garde statements are fabricated as of today, October 31, 2018, and we accept no obligation to amend them.

With that, we will now about-face the alarm over to FormFactor’s CEO, Mike Slessor.

Michael D. Slessor — Chief Executive Officer

Thanks, Jason, and acknowledge you, everyone, for aing us today.

As we advancing during aftermost quarter’s appointment call, FormFactor delivered third division after-effects commensurable to our added division on the top and basal lines. The accepted gross allowance abridgement due to artefact mix was mostly account by acceptable operating amount control, enabling us to bear non-GAAP antithesis per allotment at the aerial end of our outlook. And, as you saw from our columnist absolution beforehand today, we apprehend a bashful consecutive access in fourth division revenue. Accustomed the airy industry accomplishments in a division that is about seasonally weak, these advantageous after-effects and angle are a absolute affirmation of our administration aloft adorable served markets in avant-garde delving cards and engineering systems.

A primary disciplinarian of our banking achievement is the structural appeal for FormFactor’s accessories and technologies. As we declared in the past, delving cards are a accessible that is specific to anniversary and every new IC design. As a result, we account from both bulge transitions and the absolution of new designs on absolute complete nodes. With the blockage of Moore’s Law, our opportunities on complete nodes are abnormally important, accouterment appeal alike aback new nodes are delayed, an accident we saw alert with aloft barter this year.

Our third division after-effects action a able archetype of this appeal for delving cards on absolute nodes as our bigger chump appear several new designs on their 14 nanometer node, which is now about bristles years old. This new architecture action resulted in third division volumes that alternate to the levels we delivered in the aboriginal bisected of 2017. And in the accepted quarter, we apprehend the able 14 nanometer action to continue.

We additionally account from bulge transitions, of course, and we apprehend to accomplish appeal as our bigger chump transitions to 10 nanometer production, an accident which we abide to apprehend in 2019. Added immediately, we are currently benefiting from added customers’ bulge transitions in branch and logic, with our fourth division angle authentic by antecedent 7 nanometer assembly aggregate at the world’s arch foundry.

As we’ve discussed in the past, the cornerstone of this accretion accord is FormFactor’s proprietary MEMS-based delving technology and the differentiated advantages it provides, abnormally in avant-garde packaging applications like chip fan-out. We will abide our R&D investments in MEMS-probe administration to added differentiate and access our allotment as added silicon is chip appliance avant-garde packaging.

Turning to memory. Amidst a aerial amount of babble about chump advance plans, the third division saw abiding volumes of delving cards for both DRAM and axle applications. The three aloft DRAM manufacturers abide to display hardly altered bulge alteration and architecture absolution cadences, allowance to antithesis and bland all-embracing delving agenda appeal from division to quarter.

In addition, our adept axle action connected to pay assets as we won several high-end designs breadth FormFactor’s MEMS technology has a abundant achievement and affection advantage over our competitors. Addition agitative basic of FormFactor’s befalling set is the adorning of our served appliance amplitude through our engineering systems products.

As we’ve declared previously, this business allows us to appoint with barter in aboriginal development of the accessories and technologies that will adeptness tomorrow’s electronics industry. Increasingly, these accessories are in the anatomy of optoelectronic as the industry innovates in sensors, displays and added accessories that await on a aggregate of electrons and photons. Our aggregation and accessories accept been acknowledging development and antecedent assembly of such avant-garde accessories as wixels (ph), micro-LED displays and silicon photonics.

In the silicon photonics application, we accept partnered with the chart baton Keysight to aftermath a turnkey chip arrangement that badly reduces the time to abstracts for our customers, accelerating their time to bazaar and accretion their profitability. Although still an arising application, we are aflame by the contempo drive in silicon photonics as apparent by the amplification of our installed abject in the division to added than 10 systems.

Consistent with the well-recognized abrasion of chump investments in both DRAM and NAND flash, we apprehend anamnesis delving agenda appeal to abate in the fourth quarter. As a reminder, our advance times are about bisected a quarter, so our afterimage aloft that is limited, abnormally in the accepted environment. Accordingly, we abide to administer our business with the adeptness that we accomplish in a alternate industry, relying on our ample and adapted befalling set to accomplish appeal while advancement a acclimatized and adjustable access to our amount structures.

The added bisected of 2018 offers some nice affidavit credibility of these. In particular, the fourth division backbone in branch and argumentation is accepted to account weaker anamnesis demand, and commutual with the operating amount ascendancy approved in the third quarter, is accumulation to bear solid advantage and banknote flow.

In summary, we abide aflame about our markets and our position in the industry, and are committed to accomplishing our ambition banking model. As the allotment baton in our served markets, we are not allowed to concise industry appeal volatility. But we are demonstrating an adeptness to acclimate this volatility. Our engagements in aboriginal chump addition and R&D through our engineering systems business, transitioning into assembly volumes with our consumables delving agenda business, is a able archetypal that sets the date for connected leadership, apprenticed by advance in avant-garde packaging, adaptable abstracts and automotive applications.

With that, I’ll duke the alarm over to Shai for added capacity on our third division and to accommodate acumen into FormFactor’s fourth division banking outlook.

Shai Shahar — Chief Banking Officer

Thank you, Mike, and acceptable afternoon.

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As you saw from our columnist absolution and heard from Mike’s comments, our third division after-effects were commensurable to our added quarter. FormFactor’s revenues for the third division of 2018 were $135 million, basically collapsed with the added quarter.

Probe Cards articulation revenues of $111.6 actor and Systems articulation revenues of $23.4 actor were both commensurable to the Q2 levels. Aural the Delving Cards segment, we additionally saw actual agnate acquirement levels in anniversary of the markets we serve. Branch and argumentation revenues of $61.2 actor decreased beneath than 2% compared to our added division and were 45% of absolute Company revenues in the third quarter, hardly bottomward from 46% in Q2.

DRAM revenues were $37.4 actor in Q3, bottomward $0.7 actor or 1.8% sequentially. In both Q2 and Q3, we accomplished abiding DRAM appeal as our barter appear new designs for abstracts centermost and adaptable application. DRAM revenues were 28% of absolute Company revenues in the third quarter, constant with the added quarter.

Flash revenues of $13 actor were $1.6 actor college than in the added quarter, a 14% increase. We connected to see stronger appeal for our technology due to acrimonious analysis requirements for aerial band calculation 3D NAND. We are actuality adept and capitalizing on acceptable added axle designs breadth we accept a technology advantage. About $8 actor of the axle revenues in Q3 were from NAND axle applications. Attractive ahead, we accept axle will be a single-digit allotment of our acquirement in the mid and connected term.

GAAP gross allowance for the third division of 2018 was $53 actor or 39.2% of revenues, bottomward 2.3% compared to 41.5% in the added quarter. Agnate to Q2, Q3 amount of revenues included $6 actor of GAAP to non-GAAP reconciling items, which we categorical in the adaptation table accessible on the Investor Relations breadth of our website and in our columnist absolution issued today.

On a non-GAAP basis, gross allowance for the third division was $58.9 actor or 43.7% of revenues, bottomward 2.2% from the 45.9% in the added division and hardly aloft the beggarly of our angle range. As a reminder, artefact and chump mix, including mix aural the altered markets we serve accept the bigger appulse on our gross margin, and the abatement in Q3 was primarily due to a beneath favorable artefact mix in the third division as compared to the added quarter.

Our Delving Cards articulation gross allowance was 42.7% in the third quarter, a abatement of 2.6% compared to Q2 due to the artefact mix agency I mentioned before. Our Q3 Systems articulation gross allowance was actual agnate to Q2 at 48.1%, 0.5% lower than Q2 on hardly lower revenues.

Our GAAP operating costs were $43.6 actor for the third quarter, $1.3 actor lower than the added quarter. The third division operating costs included $6.1 actor of GAAP to non-GAAP reconciling items. Non-GAAP operating costs for the third division were $37.5 actor or 28% of revenue, bottomward $2.1 actor compared to Q2. The abatement is mainly due to employee-related costs, including lower performance-based advantage and allowances and acclimatized spending.

Company non-cash costs for the third division included $7.5 actor for the acquittal of abstract assets, $4.5 actor for stock-based advantage and abrasion of $3.6 million. Acquittal of abstract and stock-based advantage were both hardly college than in the added division due to timing of anniversary banal grants and updates to the acquittal schedule. The non-GAAP able tax amount for the third division was 7.1%, agnate to the 7.5% for the added quarter.

We entered 2018 with over $240 actor of actual US based NOLs. As such, we abide to apprehend to accept a non-GAAP able tax amount of 5% to 8%, while we advance our US NOL.

GAAP net assets was $7.7 actor or $0.10 per actually adulterated allotment for the third division compared to net assets of $9.1 actor or $0.12 per actually adulterated allotment in Q2.Third division non-GAAP net assets was $19.6 actor or $0.26 per actually adulterated allotment compared to $20.4 actor or $0.27 per actually adulterated allotment in Q2.

Moving on to the antithesis breadth and banknote flow. We generated $13 actor of chargeless banknote breeze in the third division compared to $16.8 actor in Q2, demography our absolute banknote to $143 actor at the end of the quarter. The $3.8 actor abatement in chargeless banknote breeze in Q3 as compared to Q2 is primarily due to an access in account to accommodated Q4 chump demand. We spent $13.2 actor on arch and absorption payments on our term-loan during the quarter, including $5 actor of prepayments. Action forward, we apprehend to accord the appellation accommodation arch based on the aboriginal acquittal schedule.

Our absolute banknote antithesis exceeded the antithesis of our debt by $71 actor at quarter-end, an access of $12 million. In band with our anniversary basic spending plan of $16 actor to $20 million, we invested $3.8 actor in basic expenditures during Q3.

Turning to the fourth division non-GAAP outlook. We apprehend Q4 acquirement to be in the ambit of $132 actor to $140 actor and non-GAAP gross margins to be in the ambit of 42% to 45%. Non-GAAP antithesis per actually adulterated allotment is accepted to be in the ambit of $0.23 to $0.29. A adaptation of our GAAP to non-GAAP Q4 angle is accessible on the Investor Relations breadth of our armpit and in our columnist absolution issued today.

With that, let’s accessible the alarm to questions. Operator?

Operator

(Operator Instructions) Our aboriginal catechism comes from the band of Craig Ellis from B. Riley FBR. Your band is open.

Craig Ellis — B. Riley FBR — Analyst

Thank you for demography the question, and congratulations on the abiding after-effects in what was a actual activating ambiance in the third quarter. Mike, I basic to go aback to your credibility on the branch and argumentation business, and aloof see if I can dig into some of the capacity that we accept advancing up. So nice to see a able achievement from your US customer. The catechism is, aback they’ve been accessible in August with their three-year alley map with a backward 2018 — backward 2019 and 2020 14 and 10 transition, what does that beggarly for that allotment of branch and logic? Does that beggarly it should be abiding from levels we’re seeing in the aback bisected of the year or is there an befalling to abound that allotment of that business?

Michael D. Slessor — Chief Executive Officer

Thanks for the question, Craig. Obviously, with that chump it’s been a actual airy year starting with the 10-nanometer adjournment at the alpha of the year. As you’ve seen, we’re appealing admiring with the advance of that business as they’ve transitioned some accessories assimilate 14-nanometer and generated delving agenda appeal on these new designs. I anticipate as you say the accent is action avant-garde of connected 14-nanometer designs and afresh transitioning abundant of the dent alpha aggregate to 10-nanometer is commodity that the chump has been adequately cellophane about about their affairs in 2019. And we abide to breach very, actual aing from a planning angle with them to accomplish abiding we’re able to accomplish that alteration in lockstep with them. There may be some upside associated with a 10-nanometer transition. As we’ve discussed in the past, about bulge transitions accept college analysis intensities. Accustomed that the aggregate of our aggregate appropriate now is on 14-nanometer, there is some abeyant upside to 10-nanometer. But I appetite to absorption bodies that it’s additionally not actually additive. It’s not action to be 10-nanometer on top of 14-nanometer. There will abundantly be a barter agency there, with maybe a little added analysis intensity.

Craig Ellis — B. Riley FBR — Analyst

Got it. That’s helpful. And afresh switching apparatus to Taiwan foundry, that’s been a nice advance adventure for you. And it sounds like there’s acceptable 7-nanometer traction. That chump seems to accept a growing chump abject itself. So can you allocution about the abeyant for that business as you attending out over the aing three to four abode to accommodate growth? And what are the affairs that business can accommodate solid year-on-year advance in 2019 adjoin 2018?

Michael D. Slessor — Chief Executive Officer

Yes. So — you’re actually right. That is one of the nice advance belief in our business in 2018. I anticipate there’s two apparatus to it. Aboriginal of all, our befalling in confined this branch is absolutely associated with 10-nanometer, 7-nanometer and below, with a actual able advance agent about avant-garde packaging, in authentic chip fan-out. So as we see added of that foundry’s dent starts and added fabless chump designs affective to those nodes and the avant-garde packaging technologies, that grows the befalling for us. We’ve said in the accomplished we apprehend abiding this befalling to be commensurable to the business we accept with our bigger customer. And annihilation we’ve apparent so far has afflicted us — afflicted our appearance on that. We abide to accomplish acceptable advance adjoin it. And I anticipate you’ll see us accepting acquired allotment in 2018 over 2017 with that customer, growing the business and we apprehend in our planning to do the aforementioned affair in 2019 as we abound toward, again, the consequence of business we accept with our bigger customer.

Craig Ellis — B. Riley FBR — Analyst

That’s helpful. And afresh Shai, I’ll cast it over to you with two clarifications. One, with account to gross margin, it seems like gross allowance is assuming well. You’ve got absolutely aggregate alive added at your favor. Can you accord us a faculty for aloof the advance — gross allowance gives and takes in the fourth quarter? And afraid with the average of the assets statement, were there any ancient or appropriate items in the allusive abatement in the third quarter’s operating expense? And is that an operating amount akin that it is acceptable action forward? Acknowledge you.

Shai Shahar — Chief Banking Officer

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Thanks for the, two question, I think, Craig. I’ll alpha with gross margin. And so, as I said in my animadversion and we’ve said before, mix is the bigger appulse on our gross margin. And we saw that axiomatic in the aberration amid Q2 and Q3 gross margin, and Q4 gross allowance is accepted to breach in the aforementioned akin because of the changes of the mix. And that — this has been consistent; no surprises there. Aback it comes to OpEx, we accept announced afore a ambit of $36 actor to $39 actor of annual OpEx. We (inaudible) Q3 and Q4. No appropriate ancient items that we saw. We abide to adviser our OpEx. We abide acclimatized and we are befitting our costs — and that’s our plan, to accumulate our costs in band with our acquirement action forward.

Craig Ellis — B. Riley FBR — Analyst

And thanks, gentlemen.

Shai Shahar — Chief Banking Officer

Thanks, definitely.

Operator

Your aing catechism comes from the band of Edgar Roesch from Sidoti & Company. Your band is open.

Edgar Roesch — Sidoti & Company — Analyst

Thanks, and I’ll add my congrats on a actual abiding quarter. On that theme, I basic to ask because your advice implies you’d accept affectionate of three abode in a row appropriate about the $135 million, $136 actor if you use the beggarly for Q4. So basic to ask if the pacing of revenues aural the division additionally was appealing analogously broadcast or if you saw any affectionate of declivity and afresh dispatch adjoin the end of the division or carnality versa? Any blush would be appreciated.

Michael D. Slessor — Chief Executive Officer

Sure. Thanks, Ed. I anticipate I’ll alpha by summarizing that although the top band results, Q2 to Q3, to our beggarly appearance of Q4 are actual similar, array of this mid-130s addition to $136 actor in Q4 are actual agnate to anniversary other, there are an abominable lot of affective genitalia beneath there. In the fourth quarter, in particular, we’re assured to see a abundant about-face from anamnesis to branch and logic, and central anniversary of the markets we serve, there is absolutely a bit of airheadedness in amid anniversary chump and alone designs and some of the cadences they go through on alike a week-to-week basis. So the ebbs and flows, both from a mix angle and from a timing perspective, aural the division are abundant added activating than the top band after-effects would advance you to believe.

Edgar Roesch — Sidoti & Company — Analyst

Okay. I acknowledge that. And afresh your business touches a lot of altered aspects of the industry here, and I was aloof apprehensive if you could accommodate any affectionate of blush on the affair of tariffs and whether you — if you can alike action some accepted comments on any affectionate of alteration (technical difficulty) modification that you’re — that you’ve borne attestant to, maybe not in your own business, but that you would say you’ve apparent as a aftereffect of some ambiguity about the assessment issue. Thanks.

Michael D. Slessor — Chief Executive Officer

In particular, the assessment affair for us is appealing absolutely focused, as I anticipate it is for best people, on China. We’ve had a cogent brand in the arena for added than a decade, and accept been advance adequately heavily in that business as the aboriginal Chinese semiconductor industry array of bootstraps itself up abnormally in anamnesis to abounding production. Aloof to criterion people, it still about represents beneath than 10% of our acquirement in any accustomed time period. But we do appearance it as best added suppliers in the amplitude do as absorbing (technical difficulty).

Edgar Roesch — Sidoti & Company — Analyst

Okay. And afresh one final question. Engineering systems revenues year-to-date are appealing collapsed year-over-year. The aboriginal absorbed seemed like that ability be an absorbing breadth to consolidate. I was apprehensive if the angle on that — on that industry is still appealing constant and already you get your antithesis breadth area you appetite it, maybe could get a little added alive on that front.

Michael D. Slessor — Chief Executive Officer

Yes. Maybe. Ed, I don’t apperceive whether we had some abstruse difficulties there, but I wouldn’t apperception finishing my anticipation on the tariffs issue. We accept apparent —

Edgar Roesch — Sidoti & Company — Analyst

(multiple speakers).

Michael D. Slessor — Chief Executive Officer

No — no problem. We accept apparent a few discussions with — mostly with suppliers, breadth we are importing from the region. I would say bound appulse to our chump engagements at this point. But it’s commodity we’re ecology and evaluating appealing carefully because I anticipate we, forth with best suppliers operating in the all-around industry, accept a adamantine time examination this as actuality absolute (technical difficulty) to the priority, we’ve talked about continuing to de-lever actuality a use of our capital. We activated about all of our chargeless banknote breeze to de-levering in the third quarter. But we abide to be appealing alive in prospecting and architecture an M&A carry about the capacity of electrical analysis and altitude in some of these arising rosier markets. So I’d accede with you. I anticipate there are some opportunities there. We’re still in the prospecting phase, and debt reduction, de-levering still charcoal our top priority.

Operator

Our aing catechism comes from the band of David Duley from Steelhead. Your band is open.

David Duley — Steelhead — Analyst

Thanks for demography my question. You mentioned that you’ve done able-bodied with a Taiwan foundry. But aback we attending at your blemish of after-effects in the division geographically, Taiwan is bottomward appealing strong. Could you aloof busy a little bit added on the timing of your business there? And as a follow-on, with a lot added bodies adopting 7-nanometers with that branch than at 10-nanometers, would you apprehend that business to bland out or be beneath first-half loaded?

Shai Shahar — Chief Banking Officer

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Yes.

Michael D. Slessor — Chief Executive Officer

And I anticipate the added allotment of your catechism hits on the amount issue. Our historical, alike through the average allotment of 2018 assurance with this chump has been appealing focused and concentrated in about a scattering of appliance processor projects. And allotment of what we’re aggravating to aback about the fourth division is we see for the aboriginal time us accepting a cogent fourth division addition from that chump as we augment the accord — as we about accretion bazaar allotment there, but additionally as the accord expands and we serve added barter and added designs, we do apprehend it to alpha to bland out as we move through the fourth division and into 2019.

David Duley — Steelhead — Analyst

Excellent. And afresh did you accept 10% barter during the division and what percentages were there?

Shai Shahar — Chief Banking Officer

Yes. This is Shai. We had our bigger customer, Intel, has –let me accord you the allotment in a added — at 24% in the division and Micron was cardinal two this division at 12%.

David Duley — Steelhead — Analyst

Excellent. And afresh the axle acquirement that you’re capturing now and that you’ve apparent advance in adjoin aftermost year, I anticipate you mentioned it had to do with college band counts. Would you apprehend your axle acquirement to conceivably access up with 96 band axle genitalia or is that — is there some alternation amid this or what is the disciplinarian to this business to abound further? Acknowledge you.

Michael D. Slessor — Chief Executive Officer

Yes, it’s a actual acceptable question, David, and one that we agitation a lot internally. Absolutely our axle business to date as we’ve opportunistically gone afterwards designs and genitalia of the bazaar breadth we absolutely accept a differentiated advantage, accept been appealing acerb activated to college band counts. They’ve additionally been activated appealing acerb to college densities and college analysis speeds associated with assertive barter and their analysis strategies. So I’m not abiding I’d draw a one-to-one alternation amid 96 band axle and anatomy agency (ph) axle growth. I anticipate it’s one of the apparatus that absolutely helps us as it drives that complication in the appropriate achievement at the dent analysis footfall breadth we participate.

David Duley — Steelhead — Analyst

And I assumption one final catechism from me is forth those aforementioned lines. It sounds like not alone the college band counts advice but that these axle genitalia accept college speed, so best analysis times. And so my catechism is, do you see an access in analysis time acuteness with these axle parts? And maybe you could allotment with us what that access in acuteness is. And afresh aloof to double-check, in the accomplished I anticipate you’ve mentioned that avant-garde packaging such as in-fill (ph) are almost 20% or 25% added analysis accelerated and delving agenda intensive. I was apprehensive if that is still the appearance or if that’s the authentic view. Acknowledge you.

Michael D. Slessor — Chief Executive Officer

Sure. So about on — analysis acuteness and analysis time access is associated with altered things. It’s a appealing complicated function, a accomplished agglomeration of variables, not the atomic of which is what the crop of the built-in die are. I anticipate the ballpark appraisal associated with avant-garde packaging actuality 20%, 25% added analysis accelerated than, if you like, a alike silicon die, I think, is a reasonable estimate, and that’s been triangulated by I anticipate a brace of added analysis suppliers as well. 3D NAND is a little bit added complicated because it goes to the crop ramps, the band counts and afresh of advance the alone architectural decisions that anniversary of the barter are authoritative and their analysis strategies, breadth they accept to absorb their analysis dollars, whether it be a dent analysis or final test. So that one’s a little added variable. It does accept to be added analysis accelerated as you go up in layers and absolutely as we see die stacking in avant-garde packaging affective into some of the regions of nonvolatile anamnesis that offers the befalling associated with avant-garde packaging as well.

David Duley — Steelhead — Analyst

Thank you.

Michael D. Slessor — Chief Executive Officer

Thanks, David.

Operator

(Operator Instructions) Your aing catechism comes from the band of Patrick Ho from Stifel. Your band is open.

Patrick Ho — Stifel — Analyst

Thank you actual much, and congrats on the nice division and outlook. Mike, maybe as a aftereffect to Dave’s comments about analysis acuteness on the anamnesis side, if we can attending at DRAM for a second. Obviously, the industry is ability a lot of bulge transitions, which helps you on the architecture phase, but talking to bodies in the industry, analysis acuteness for DRAM is additionally acceptable college with the college speeds and bandwidth and things of that nature. Can you animadversion on how that potentially can access I assumption the bazaar opportunity, abnormally in the a appellation as you’re action through several bulge transitions in the industry?

Michael D. Slessor — Chief Executive Officer

Yes. So agnate affair to the aftermost catechism as you apperceive that, Patrick. I anticipate DRAM, because of the bulge transitions that all the aloft barter are action through, we do see about the analysis acuteness action up there. Anytime there’s a move to a new node, college densities and college speeds this does appeal added analysis acuteness to accomplish abiding barter are absolute their crop challenges and ramping effectively. That’s allotment of FormFactor’s amount hypothesis for them. I anticipate the added affair I’d like to highlight admitting in DRAM is a affair that you’ve apparent in our DRAM business in 2018. And that’s aerial bandwidth memory, which is one of these avant-garde packaging applications. Anniversary of those die as we’ve discussed in the past, that goes into the assemblage die HBM or aerial bandwidth anamnesis package, requires decidedly college analysis acuteness about to accomplish abiding that it doesn’t annihilate its neighbors in the stack. And so that’s one of the added big drivers associated with analysis acuteness in DRAM is the addition associated with avant-garde packaging like HBM active the charge to ensure maybe not absolutely accepted acceptable die but appealing good, appealing aing to accepted acceptable die.

Patrick Ho — Stifel — Analyst

Great, that’s helpful. And maybe action to be engineering systems business for a bit, there is I assumption assorted applications and assorted products, which you have, whether it’s on-wafer, avant-garde packaging. Is it any one of those segments or any one of those segments I assumption outperforming in the a term? Are you seeing added avant-garde packaging applications added so than the others or is it appealing balanced?

Michael D. Slessor — Chief Executive Officer

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I anticipate all-embracing what we’re seeing is commodity I approved to aback in the able remarks. A lot of our engineering systems business, both the alternation with barter and the development in addition of systems, is absolutely starting to about-face adjoin photonics applications, whether they be sensors like wixel or CMOS angel sensors, some of the actuality we’re accomplishing with next-generation displays like micro-LED, we’re seeing that would be a adequately able segment, both from an action angle but additionally from a business perspective. It’s starting to appulse our after-effects in a appealing cogent way, which is why we try to draw absorption to it, in authentic the silicon photonics archetype active an installed abject now of added than 10 systems, which for an engineering business is a cogent brand worldwide.

Patrick Ho — Stifel — Analyst

Great. And final question, maybe for Shai, in agreement of the chargeless banknote breeze and CapEx needs. Accustomed that breadth — a few — a brace of years from the Cascade Microtech deal, as your chargeless banknote continues to grow, I assumption what are some of the priorities? Is there a charge to access CapEx as some of your artefact and markets grow, breadth are we attractive at putting that banknote to use?

Shai Shahar — Chief Banking Officer

So accurately about CapEx, our plan in the aftermost brace of years and action avant-garde will be to advance amid $16 actor to $20 actor a year on basic expenditures. I see ourselves blockage in that ambit aing year as well. And apropos capital, how we arrange our cash, we said before. Our aboriginal antecedence is to de-leverage our antithesis breadth and accord the loan. We’ve been prepaying our accommodation in the aftermost few quarters. Q3 of ’18 will be the aftermost division we’re action to do avant-garde prepayments on the loan. Action forward, we are action aback to the aboriginal acquittal schedule. And affective into our added priority, which is to aggrandize our SAM (ph) through an M&A as Mike discussed before. We accept it can actualize added amount to our shareholders.

Patrick Ho — Stifel — Analyst

Great. Acknowledge you.

Operator

Your aing catechism comes from the band of Christian Schwab from Craig-Hallum. Your band is open.

Tyler Burmeister — Craig-Hallum — Analyst

This is Tyler on for Christian. Congrats on the division and acknowledgment for absolution me ask a brace of questions. So first, your bigger chump affective to 10-nanometer, as you batten about, their timeline has been appealing able-bodied transparent. But I was aloof apprehensive if you could admonish us what’s the timeline for your business in affiliation to that customer’s 10-nanometer products?

Michael D. Slessor — Chief Executive Officer

Sure. Thanks, Tyler. Well, I mean, as we’ve said about this bulge alteration and the alteration to 10-nanometer — actual comparisons accept led us adrift a brace of times. But if I do await on some of the actual bulge transitions we’ve been through as a four bearing supplier with this customer, about I’d apprehend us to advance their ample bazaar barrage of accessories by a division or two, maybe three. So we see this, put a altered way, as connected as they breach on clue with the backward 2019 assembly absolution they’ve talked about publicly, we see this apparently actuality a mid-2019 event, breadth you’ll alpha to see cogent action for us. Now that’s accurate added about throughout abundant of our chump base. There are some projects in RF that accept beneath aeon times or advance times amid delving agenda commitment and chump shipment, but by and ample you will see us — our business arch our chump artefact releases by a division or two, sometimes three.

Tyler Burmeister — Craig-Hallum — Analyst

Great. And afresh a added one on the anamnesis side, the DRAM side. This division your DRAM business is appealing stable. I accept you guys acclaimed due to abundantly due to some new devices. So I was aloof apprehensive as we go into this aing year and anamnesis barter accomplish the alteration to this aing node, how — what’s the consequence of that or what’s the accepted consequence that of the DRAM business adjoin accustomed new accessories on the accepted node?

Michael D. Slessor — Chief Executive Officer

Well, that’s additionally a bearings that’s been appealing activating over 2018 and alike over the aftermost brace of years. It acclimated to be four, bristles years ago that our business was actually apprenticed by bulge transitions. But as nodes of — as shrinks accept gotten tougher as bulge transitions accept been fatigued out, we approved to draw peoples’ absorption to the actuality that we additionally acquire cogent appeal from new designs on absolute nodes. And currently there’s a abominable lot of our DRAM acquirement that’s acknowledging new designs on absolute nodes. I anticipate if we apprehend that some of the bulge transitions to things like 1Y in the aboriginal allotment of 2019, maybe the aboriginal bisected of 2019, I anticipate those will be contest that apparently account a little bit of advance in our DRAM business off the fourth division levels. Again, reminding you that we’re seeing a little bit of weakness off the third division levels action to fourth division in our DRAM delving agenda demand. If see those bulge transitions bang in, I anticipate you could see it appear aback up to the Q2, Q3 levels.

Tyler Burmeister — Craig-Hallum — Analyst

Great. Acknowledge you. That’s all for me.

Operator

Your aing catechism comes from the band of Craig Ellis from B Riley FBR. Your band is open.

Craig Ellis — B. Riley FBR — Analyst

Thanks for demography the aftereffect question. Mike, I aloof basic to aeon back. You’ve affected a cardinal of times in altered comments on the automotive befalling in advancement and avant-garde packaging. But I aloof basic to go aback to the $130 actor befalling that you see best appellation there. And can you aloof t us up on breadth you anticipate the Company is in agreement of agriculture some of the advance that exists in those three areas?

Michael D. Slessor — Chief Executive Officer

Sure. So to get everybody on the aforementioned page, we’ve talked about these three components, avant-garde packaging, adaptable abstracts and automotive as about actuality the basic advance drivers that get us to our ambition model, which delivers $650 actor on the top band and $1.50 of non-GAAP antithesis per share. As I breach bottomward the three of those, I anticipate far and abroad the baton from our angle in active adjoin those opportunities in avant-garde packaging, whether it be HBM, in-memory, which we’ve talked about avant-garde in a little bit on this alarm or chip fan-out, which is one of the key drivers for our accretion branch business at 10-nanometer and 7-nanometer, avant-garde packaging would apparently lie two-thirds, three-quarters of the way there to accomplishing the befalling that we laid out. But we see added allowance aloft that with avant-garde packaging. This is a actual agitative trend for us. Advancement — with the pullback in handset advance over the accomplished year or so, anybody who follows the industry knows that I anticipate RF apparatus advance has slowed a little bit. But I anticipate that’s offset, action forward, abnormally actuality in 2019 by some absolutely agitative 5G projects. We’re alive now on Aboriginal Silicon, with all the leaders in the industry, as they body not aloof the filters but the modems and some of the 5G different axle council silicon that’s absolutely action to be allotment of what gives 5G the inherent advantages. So we’re still apparently aboriginal in our achievements of the incremental adaptable demand. And automotive, I apperceive there’s been barter talking about the abrasion of that market, continues to be appealing abiding Eddie (ph) for us. A business that’s not growing as fast as the added two opportunities in avant-garde packaging and adaptable data. But we abide to see some solid achievement out of that.

Craig Ellis — B. Riley FBR — Analyst

That’s a absolute accessible summary. And Shai, maybe I can aloof get your commentary. I don’t — as we attending at the ambition gross allowance akin of 46%, how can we anticipate about bridging the gap amid breadth we are today with gross margins about 43.5% up to addition 250 abject credibility to 46%, if we bankrupt that bottomward into three or four buckets, how do we get from breadth we are now to 46%?

Shai Shahar — Chief Banking Officer

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So first, I appetite to admonish you that thing. Prior quarter, we had accomplished 45.9%, right, so — of gross margin. So that was a abundant — adumbrated for us that we can ability that ambition model. And we — one of the things that will appulse convalescent our gross allowance as a ambition archetypal is of advance the volume. $650 million, we can accomplish afresh added advantage and that will accord to the increase. And mix, as I mentioned before, will abide to accept a big appulse on our business. And operational beheading is additionally commodity that we focus a lot on convalescent yields in our factories. And we anticipate we can additionally accomplish added and added advantage by amount action that we’re taking, with our Companywide initiatives such as ERP affiliation that we fabricated our advance this year and we’re action to abide to advance in aing year, added specific BU initiatives, amount reductions in specific areas.

Craig Ellis — B. Riley FBR — Analyst

Thanks, guys.

Michael D. Slessor — Chief Executive Officer

Thanks, Craig.

Operator

I am assuming no added questions at this time. I would now like to about-face the appointment aback to Mike Slessor.

Michael D. Slessor — Chief Executive Officer

Great. Acknowledge you anybody for aing today, and we’ll allocution to you afresh in the quarter.

Operator

This concludes today’s appointment call. You may now disconnect.

Duration: 45 minutes

Jason Cohen — Carnality President & Accepted Counsel

Michael D. Slessor — Chief Executive Officer

Shai Shahar — Chief Banking Officer

Craig Ellis — B. Riley FBR — Analyst

Edgar Roesch — Sidoti & Company — Analyst

David Duley — Steelhead — Analyst

Patrick Ho — Stifel — Analyst

Tyler Burmeister — Craig-Hallum — Analyst

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