FormFactor Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 15 speakers on the call.

Operator

Thank you, and welcome everyone to FormFactor's Third Quarter 2023 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor and Chief Financial Officer, Shay Shahar. Before we begin, Stan Finklestein, the company's VP of Investor Relations, will remind you of some important information.

Speaker 1

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 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 call within the meaning of the federal securities laws. Examples of such forward looking statements include those with respect to the projections call is now open

Speaker 2

to the call for questions.

Speaker 1

Thank you, acquisitions and investments in capacity and in new technologies the impacts of global, regional and national health crisis, call is now open. Including the COVID-nineteen pandemic, anticipated industry trends, potential disruptions in our supply chain, call is now open. The impact of regulatory changes, including the recent U. S.-China trade restrictions, the anticipated demand for products, call is being recorded to develop, produce and sell products and the assumptions upon which such statements are based. Call is being recorded.

Speaker 1

These statements are subject to known and unknown risks and uncertainties and could cause actual results to differ materially from those call expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing call is on Form 10 ks with the SEC for the fiscal year ended December 31, 2022, call is now 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, November 1, 2023, call is now open. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor. Call is

Speaker 3

now open. Thanks everyone for joining us for FormFactor's 3rd quarter earnings call. Stronger than anticipated demand for foundry and logic probe cards call is now open. Coupled with record revenue in our systems business produced 3rd quarter revenue near the high end of our outlook range. Call is now open.

Speaker 3

This together with higher than expected gross margin and leverage on our operating expenses produced non GAAP earnings per share above the top end of our outlook range. We continue to operate in an overall demand environment that remains relatively stable at the levels we've experienced throughout 2023. Call is being recorded. The moderate sequential decrease in our 4th quarter revenue outlook range is due to the reduction in system segment revenue from the sale of FRT to Camtek, call, which we completed today, and weaker foundry and logic probe card demand due to a short term reduction in customer spending, Partially offset by stronger DRAM probe card demand. While we continue to operate in a cyclical downturn and see no near term acceleration call.

Speaker 3

We're encouraged by broader signs of bottoming in our most important high unit volume end markets like client PC and mobile. Call is being recorded. In this environment, we continue to carefully balance short term results and long term investments with disciplined cost control call is being recorded and is being recorded and is being recorded. We are maintaining our investment in R and D call is for new product innovation and competitive differentiation, especially in our product roadmap for advanced packaging applications like chiplets and tiles, high bandwidth memory and co packaged optics. As you'll hear from Shai, we've completed the majority of the long lead time facilities and equipment capacity call is being recorded to reach our target financial model and have slowed our CapEx to ensure a better balance between our capacity and anticipated long term demand.

Speaker 3

Conference call. Turning now to segment level details. Foundry and Logic probe cards, our largest business, delivered higher than expected sequential growth in the 3rd quarter as key customers ramped several major designs more aggressively than originally forecast. This intra quarter acceleration provides insight into FormFactor's demand profile. Because probe cards are a device specific consumable customized for each individual chip design, increased wafer starts for a specific chip design can drive incremental demand for the corresponding probe cards.

Speaker 3

Call is being recorded. Since our lead times are less than a quarter and demand is correlated to the specific mix of customers' dynamic wafer start plans for their new chip designs, call is being recorded. We can experience intra quarter changes in demand as we did in the Q3. In the foundry space, we experienced strong Q3 demand for probe cards testing 2 major high performance compute designs. In these HPC applications, FormFactor's differentiated vertical MEMS probe card products meet demanding power and speed requirements with best in class test cell uptime and productivity, delivering significant value to our customers.

Speaker 3

We do expect a smaller contribution from foundry probe cards in the current quarter

Speaker 4

call is now open

Speaker 3

to our Q3 shipments are utilized to ramp 4th quarter foundry wafer production volume. Call is being recorded. In the microprocessor space, we delivered on higher demand for probe cards testing a major tile based client PC design. Call is being recorded. Like the high performance compute foundry example I just shared, probe card demand for this design accelerated within the 3rd quarter call is on the call as our customer expanded their wafer start plans to meet increased end customer demand.

Speaker 3

This client PC microprocessor is assembled from multiple titles or chiplets into a single die using leading edge advanced packaging processes. This is a great example of how advanced packaging is driving FormFactor's business. As we've noted in the past, advanced packaging integration schemes drive both higher test intensity,

Speaker 2

call is now

Speaker 3

open, which expands the number of probe cards required per good die out and higher test complexity, which raises the performance for each probe card. Probe card architectures like FormFactor's MEMS technology are essential to meeting these challenging performance requirements on short lead times at a compelling cost of ownership. In memory, as expected, we experienced stable overall demand for DRAM probe cards, while flash remained weak. Call is being recorded. As in the Q2, DRAM was driven by DDR5 as well as 3rd generation high bandwidth memory designs, call, which are enabling the rapid growth in generative artificial intelligence, and we expect a similar HBM rich DRAM revenue profile in the current 4th quarter.

Speaker 3

The positive impact of high bandwidth memory is evident in the product mix profile at one of our largest DRAM customers, Where probe cards for testing HBM comprised more than half our revenue to that customer in the Q3. As in the high base microprocessor example I discussed earlier, the need for sophisticated probe cards to test HBM illustrates how advanced packaging is driving FormFactor's results. As a reminder, each HBM chip is a stack of 8, 12 or even 16 individual DRAM die assembled with advanced packaging processes such as through silicon vias and hybrid bonding. To ensure high yields of the STACK DRAM chip, customers probe and test each component DRAM die prior to stacking and probe and test the multi die DRAM stack at various points during the assembly process, call leading to a substantial increase in the overall probe card intensity per good die out. Call is now available.

Speaker 3

In addition, the technical requirements for HBM tests are significantly more advanced than for standard unstacked DRAM products, call is involving higher test speeds and more challenging thermal scaling specifications. FormFactor's MEMS based smart matrix probe card architecture meets conference call is providing significant value to our customers and differentiation for form factor. We believe our superior performance capabilities will drive both market share and profitability gains as HBM continues to grow, driven by the accelerating adoption of generative AI. Shifting now to systems. As anticipated, our systems business delivered record revenue in the 3rd quarter call as we shipped systems that were pushed out of the Q2.

Speaker 3

This business continues to be driven by strong demand for our market leading test and measurement products call is for early development of applications like co packaged silicon photonics, quantum computing and advanced packaging metrology. Co package optics enabled by silicon photonics remains an important and exciting driver for FormFactor's current and future business. Call is being recorded. We're engaged with major customers in the transition of silicon photonics from early R and D to low volume production. Call is available on our website.

Speaker 3

And in the Q4, we plan to ship a CM300 silicon photonics system to a leading foundry to support low volume production. Call is being recorded. As silicon photonics production volumes increase over the next several years, our product roadmap delivers both systems and consumable probe cards Moving forward, we do expect a short and medium term reduction in system segment revenues from the 3rd quarter's record levels call is due to the sale of our FRT Metrology business. We grew FRT substantially following our 2019 acquisition of the business, And I want to thank all of the FormFactor team worldwide for their contributions to this growth and value creation. Call

Speaker 2

is now open. Operationally, the

Speaker 3

transaction enables the FRT team to leverage Camtek's established scale and expertise in inspection and metrology call to deliver the next stage of growth. Financially, the transaction maximizes FormFactor shareholder value call is by realizing a robust return on our investment, while also allowing us to focus our resources on strategic initiatives and businesses call is on the call, where we have market leadership and significant scale in enabling advanced packaging, like the tile based microprocessor and co package optics examples I shared earlier. Call is now open. Shai will update you with more details later, but our capital allocation priorities of focused reinvestment in R and D and capacity, call is being recorded together with M and A and share repurchases to offset dilution are unchanged. M and A remains one of the primary pillars of FormFactor's growth call is now open.

Speaker 3

And we continue to evaluate a broad funnel of targets that add complementary technologies and expand our served addressable markets. Call is being recorded. In closing, we continue to operate efficiently in what we see as a relatively stable near term demand environment call. Across our diversified product and technology portfolio. Longer term, we remain excited and confident in the growth prospects for FormFactor in the industry overall, driven by the fundamental trends of semiconductor content growth and exciting innovations like chiplets, high bandwidth memory and co packaged silicon photonics.

Speaker 3

Conference call is well positioned as an industry and technology leader, and we're confident that our investments in R and D and capacity position FormFactor to emerge from the current cyclical downturn, a stronger and leaner competitor, enabling us to achieve our target model that delivers $2 of non GAAP earnings per share on $850,000,000 of revenue. Shay, over to you. Call is

Speaker 5

now open. Thank you, Mike, and good afternoon. As you saw in our press release and as Mike mentioned, Q3 revenues were near the high end of our outlook range call is now open to the call for questions. And non GAAP gross margin and non GAAP EPS were above the high end of the range. 3rd quarter revenues were $171,600,000 call is a 10% sequential increase and a year over year decrease of 5.1%.

Speaker 5

Q3 revenues were $400,000 below the high end of our outlook range call and benefited from strong revenues in both probe cards and systems segments revenue. Probe card segment revenues were 128 $300,000 in the 3rd quarter, an increase of $13,000,000 or 11.3 percent from Q2. Increase was driven by higher foundry and logic and flash revenues, partially offset by a decrease in DRAM revenues. Systems segment revenues were a record $43,200,000 in Q3, a $2,600,000 increase from the 2nd quarter conference call and comprised 25.2 percent of total company revenues, down slightly from 26% in Q2. Call is now open.

Speaker 5

Within the probe card segment, Q3 foundry and logic revenues were $96,400,000 a 17.7% increase from Q2. Foundry and logic revenues increased to 56.2 percent of total company revenues compared to 52.5% in the 2nd quarter. DRAM revenues were $27,400,000 in Q3, a $3,100,000 decrease or 10.2% lower than in the 2nd quarter call and decreased to 16% of total quarterly revenues as compared to 19.6% in the 2nd quarter. Flash revenues of $4,500,000 in Q3 were $1,600,000 higher than in the 2nd quarter conference call was recorded and were 2.6% of total revenues in Q3 as compared to 1.9% in Q2. GAAP gross margin for the 3rd quarter was 40.4% call as compared to 38.7 percent in Q2.

Speaker 5

Cost of revenues included $2,500,000 of GAAP to non GAAP reconciling items, call, which we outlined in our press release issued today and in a reconciliation table available in the Investor Relations section of our website. Call is on a non GAAP basis, gross margin for the 3rd quarter was 41.8%, 1.2 percentage points higher than the 40.6 percent of non GAAP gross margin in Q2 and 0.3 percentage points above the high end of our outlook range. Call is being recorded. The increase as compared to Q2 and the upside versus our outlook range were a result of higher probe card segment gross margin. Our probe cut segment gross margin was 38.5% in the 3rd quarter, an increase of 2 percentage points compared to 36.5% in Q2.

Speaker 5

Call is being recorded. The increase from Q2 is due to the net effect of 3 main factors. 1st, higher revenues contributed a 2.1 percentage points decrease. Second, improved factory utilization at higher production levels contributed to a 0.3 percentage points increase. Call is being recorded.

Speaker 5

Partially offsetting these two positive factors was 0.3 percentage points related to a slightly less favorable product mix. Our Q3 Systems segment gross margin was 51.8%, basically flat with a 52% gross margin in the 2nd quarter. Our GAAP operating expenses were $66,600,000 for the 3rd quarter call is now open to $61,600,000 in the 2nd quarter. The two main reasons for the increase were $1,800,000 higher stock based compensation call is related to timing of grants and the higher grant date fair value and transaction expenses of $2,100,000 related to the sale of the FRT business. Call is now open.

Speaker 5

As previously disclosed, we entered into a definitive agreement during the quarter to sell FRT to Comtech for $100,000,000 in cash, call subject to customer repurchase price adjustments. The transaction closed today and the outlook and the results of operations for Q4 will include FRT for the month of October. Net proceeds from the transaction after adjustments, expenses and taxes are expected to be approximately $95,000,000 Non GAAP operating expenses for the Q3 were $54,500,000 as compared with $52,100,000 in Q2, call is now on track to be recorded.8 percent of revenues from 33.4% in the prior quarter. The $2,400,000 increase call is related to higher performance based compensation. Company non cash expenses for the 3rd quarter included $10,800,000 for stock based compensation, dollars 1,600,000 higher than in the 2nd quarter, as I said earlier, call is $1,300,000 for the amortization of acquisition related intangibles, which was $1,100,000 lower than in Q2 due to certain intangible assets reaching full presentation and depreciation of $7,800,000 similar to the 2nd quarter.

Speaker 5

GAAP operating income was $2,700,000 Q3 compared with GAAP operating loss of $1,300,000 in Q2. Non GAAP operating income for the Q3 was $17,300,000 call, compared with $11,200,000 in the 2nd quarter, an increase of $6,100,000 or 55%. GAAP net income for the 3rd quarter was $4,400,000 or $0.06 per fully diluted share, compared with a GAAP net income of $800,000 $0.01 per fully diluted share in the previous quarter. The non GAAP effective tax rate for the Q3 was 12.2%, quarter was 2 100 basis points lower than the 14.2% in the 2nd quarter, mainly due to discrete items arising from normal differences between estimated and actual U. S.

Speaker 5

Taxes. Call is now open. We continue to expect our annual non GAAP effective tax rate to be between 13% 17%. Call is now open. 3rd quarter non GAAP net income was $17,300,000 or $0.22 per fully diluted share call, compared to $11,200,000 or $0.14 per fully diluted share in Q2.

Speaker 5

Moving to the balance sheet and cash flows.

Speaker 2

Call is now open. We generated free cash flow of

Speaker 5

$16,900,000 in the 3rd quarter compared to $2,100,000 in Q2. Call is now open. The main reason for the increase in free cash flow was a decrease of $14,600,000 in capital expenditures. Call is now open. We invested $5,900,000 in capital expenditures during the Q3 compared to $20,500,000 in Q2.

Speaker 5

Call is now open. The decrease in CapEx in Q3 is partially due to timing of payments, but it is also aligned with our intent to slow down capacity expansion call is to ensure capacity does not significantly outpace demand as we have completed the majority of the long lead time facilities and equipment investments call is required to reach our target financial model. There is no change in our previously communicated expected CapEx range for 2023 of $55,000,000 to $65,000,000 call is now open. Overall at quarter end, total cash and investments were $249,400,000 an increase of $9,000,000 from Q2. Call is now open.

Speaker 5

As of the end of Q3, we had one term loan outstanding with a balance of $15,000,000 call is

Speaker 2

now open. Regarding stock buyback, during the Q3, we

Speaker 5

did not purchase shares under our $75,000,000 2 year buyback program approved in Q2, 2022. Call is now open. On October 30, our Board of Directors approved a new 2 year $75,000,000 share repurchase program, which is in addition call is now concluded $18,600,000 that remains available under the existing authorization. As a reminder, the main purpose of these share repurchase programs is to offset dilution from stock based compensation. Turning to the 4th quarter non GAAP outlook.

Speaker 5

Call is now open. We expect Q4 revenues of $165,000,000 plus or minus $5,000,000 At the midpoint of this outlook range, Q4 revenues is expected to be approximately $7,000,000 lower than in Q3, with half of the decrease related to the sale of FRT metrology business at the end of October. Call is now open. We also expect lower foundry and logic revenues in the 4th quarter, partially offset by an increase in DRAM revenues. Q4 non GAAP gross margin is expected to be 41%, plus or minus 150 basis points.

Speaker 5

Call is now open. At the midpoint of these outlook ranges, we expect Q4 operating expenses to be $51,000,000 plus or minus $1,000,000 non GAAP earnings per fully diluted share for Q4 is expected to be $0.20 plus or minus $0.04 call is open. A reconciliation of our GAAP to non GAAP Q4 outlook is available on the Investor Relations section of our website and in our press release issued today. Call is open.

Operator

Our first question comes from the line of Chris Shenk from T. B. Cowen. Your question please.

Speaker 6

Yes. Hi. Thanks for taking my question. Mike or Shay, the first question is, gross margins are pretty strong. So I'm just wondering, wouldn't that help overall gross margins?

Speaker 6

Or is it still below combiologic?

Speaker 5

Well, I'll take that. It's true that in general, HBM gross margin or HBA DRAM gross margin is higher than the other DRAM designs or in the higher end of range. But it's still in general lower or could be lower than the foundry and logic gross margin. And we do expect lower foundry and logic revenue in Q4 and we expect systems to be flat. So if you take all of this together, that's why and some lower overall revenue level, that's why we the outlook range for Q4 gross margin is 41%, slightly below the 41.7% we accomplished in Q2.

Speaker 6

Got it. Got it. Thanks a lot, Shay. And then a quick question for Mike. In the September quarter, you said foundrylogic was strong.

Speaker 6

Is it fair to assume it was more logic or NPU buyers? And kind of curious, with the largest foundry, what is your market share today and is there a potential to increase market share as we get into more or some of these AI applications?

Speaker 3

Yes. I think in the September quarter, call is open. We highlighted 2 pieces in the foundry and logic business. Certainly, the ramping of a chiplet based Or Tile based client microprocessor was a key highlight adding to the strength. But we also commented on some high performance compute designs in the foundry space that drove some strong results.

Speaker 3

As we look at our market share across the industry, whether it be in foundry, foundry and logic RF memory, one of the key strategic pillars of the company is market leadership. And I think in the foundry and logic market, There is some opportunity to gain some share based on the investments we're making, and the very strong customer relationships we have with those key customers.

Speaker 6

Mike, is there a way to quantify that market share number or?

Speaker 3

Yes. I think It moves around quarter to quarter, again, because probe cards are design specific consumables, a key design win in any quarter can move it around. I would say for most major customers, they have us and our primary competitor in foundry and logic in about a sixty-forty window. They need to have 2 suppliers for supply chain continuity, a lesson that was hard learned through the pandemic and beyond. And so I think we're competing in this window and I think in most of the major customers, there are a couple of exceptions that offer upside opportunity for us and most of these customers were in that window.

Speaker 3

I think the Q3 performance because of these two designs was pretty strong based on the data we

Speaker 2

call we

Speaker 6

have. Thank you, Mike. Very helpful. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Brian Chin from Stifel. Your question please.

Speaker 7

Hi there. Good afternoon. Thanks for letting us ask a few questions. Mike, maybe first just thinking about the 4th quarter guidance. Call is open.

Speaker 7

And in terms of the order activity that you might normally see on the foundrylogic side of the business versus kind of what's implied in the guidance, is the breadth The design activity pretty normal at this stage, but maybe the release of volume against these designs still leaving something to be desired. Is that a fair way to characterize?

Speaker 3

Yes, you've hit it on the head, Brian. And this has been a theme throughout 2023. Our design teams and design is a very important and kind of a unique part of the probe card business because we are customizing our architectures to each individual customer chip design. Those design teams continue to be fully utilized. Where we're seeing that not translate into the peak revenues that we did day back in the first half of twenty twenty two is except for a couple of counterexamples like HBM and the client based microprocessor, the tile based client microprocessor, customers by and large are the reorder volumes of these new designs call is somewhat less than it would be in a cyclical upsur.

Speaker 3

And I think that behavior is pretty easy to understand as inventories are still pretty elevated throughout various parts of the industry. And so customers, yes, they want to innovate. Yes, they want to drive their new designs out, But they also want to minimize the obsolescence costs of driving them into a channel that still has pretty high inventory levels.

Speaker 7

Call is open. Great. That's helpful. And then I guess kind of related, but when you think about augmenting that kind of environment for however long it sort of persists until things get better. HBM and AI related revenue opportunities, they're certainly larger than you probably thought a couple of years ago when you set that $850,000,000 revenue target.

Speaker 7

And so when you look at sort of COOS package and individual HBM and GPU components under test there. Do you have a sense of what the size of that served addressable market is for AdvancedProbeCards now and what it could look like in 2 or 3 years?

Speaker 3

Yes. I think I'll get to that in a second, but I think it's an important element of the different puts and takes, the reference our Targa model or anybody's Targa model, we're still committed to the $850,000,000 Targa model. So you can imagine that when we put that in place, there was pretty open trade with China for U. S. Suppliers.

Speaker 3

But on the other hand, we didn't have AI and high bandwidth memory and GPUs as front and center as we do now. So we're always going to have puts and takes on the way to a target financial model. Specifically with HBM and AI, For us and I think most other equipment and consumables supplier in the industry, although The GPUs kind of get all the glory. HBM drives a tremendous increase in overall wafer volume. Call is again because you're stacking individual DRAM die, each of those comes from its own wafer.

Speaker 3

But also just the memory, you look at silicon area associated with the memory, it's much larger than the GPUs. So HBM looks like, as I said, call is for this quarter, the currently compete the just completed Q3, it was more than half our DRAM probe card revenue at one of our largest DRAM customers, that's a contribution that we hadn't contemplated. And if you look at industry forecasts, there's still quite a bit of bullishness associated with HBM and AI in general. Maybe we can get to it in follow-up, but we're working pretty hard on penetrating the GPU market as well.

Operator

Question and one follow-up. One moment for our next question. And our next question comes from the line of Doctor. Charles Hsieh from Needham and Company. Your question please.

Speaker 8

Mike, if I really just add back that FRT revenue for Q4 or maybe back out FRT revenue from Q3 looks like Q3 or Q4 seems to be a little bit below seasonality. I think you might have touched upon this in your answers to the previous questions, but really just want to get your thoughts on why things are still a little bit below seasonality into Q4. Is it more because of a lower than I mean lower cost spending from the PC

Speaker 3

As we've talked about in the past, seasonality has become a little bit elusive in this business. And I think that's true here in 2023 as well. If you look at the way Shay parsed the bridge from Q3 to Q4 for you, FRT At the midpoint of our guide, the absence of FRT is about half of that $7,000,000 delta. We're then seeing weaker foundry and logic demand, which we believe is short term, really given the outsized contribution from foundry and logic in Q3 from a set of major designs, There's a bit of digestion going on of our customers as they use those probe cards for these major designs and major products. Offsetting that some is some incremental strength in DRAM, which as we highlighted really is driven by HBM and some DDR5, but those are the different pieces to it.

Speaker 3

Again, calendar seasonality, although there are components to it, Something like the strength in HBM is superimposing what might be the superimposed on top of what might be regular calendar seasonality and cyclicality in DRAM. And as I said, I think we're seeing some degree of digestion off the strong Q3 results in Foundry and Logic.

Speaker 8

Thanks, Mike. I was Hoping you can provide a little bit more clarity on how much HBM revenue you got call in Q3 and how much you were expecting in Q4, because you only said Q3, Q4 is like more than half of the DRAM revenue of your largest the DRAM customer stuff, but we actually don't know, right, the largest DRAM customer, how much revenue is in there within that $28,000,000 to $30,000,000 revenue for Q3 ish and Q4. So Can you kind of help us understand what has been the progression of HBM revenue over the last two quarters and going to the next quarter? Because In June, you did say it's $10,000,000 ish in June. We just want to understand how lumpy is it?

Speaker 8

Is it showing any sequential growth over the last 2, 3rd quarters? Thanks.

Speaker 3

Yes. There is going to be volatility quarter to quarter. I ballpark you that The absolute magnitude of it in the Q3 of HBM inside DRAM was about the same, in round numbers 10,000,000 We do expect that contribution to strengthen in the Q4. But again, with probe cards being specific to each individual chip design And things like DDR5, also showing some significant activity and different customers ramping different designs at different time. We want to look at this on a multi quarter basis, similar to the comments I made around market share.

Speaker 3

So, on an absolute level about stable, it was heavily concentrated in one customer. As I said, surprising Perhaps that half of our DRAM revenue at this customer was associated with HBM. But on we're looking at this as a longer term trend where we continue to want to ride this tailwind, but also build differentiation and share, not just at one of our the one customer who's leading in HBM DRAM right now, but each of the 3 major DRAM customers and we've got activity with all.

Operator

And our next question comes from the line of Vadarathi Chotra from Jefferies. Your question please.

Speaker 9

Hi, this is Lee here from Jefferies. Thanks for taking my question. I guess, conceptually, could you please have now that you have HBM and your triplet dial based PM devices versus a chiplet MPU.

Speaker 3

No, I think across the board, we see is similar increases in test intensity and we've quantified that for you in the past at somewhere between 20% to 30%. And I think that's a good rule of thumb for both HBM and some of the logic and foundry designs for that matter. Some of them are quite a bit higher than that, some of them are less than that, because it's a function of what the customer yields are for the individual chiplets, as well as the degree of complexity that they need to test each individual chiplets. HBM is interesting because you get another you get multiple test insertions. Each of the chiplets call is as in the MPU case is tested.

Speaker 3

But one of the interesting things we're seeing in HBM is as the stack is being assembled, there's some intermediate test insertions as well and some of them at very high speeds to make sure the dye is going to work. That all kind of rolls up to a 20% to 30% test increase, but there's a pretty good variance around that number too.

Speaker 9

Okay, got it. And then for my Second question, so it goes on to the earlier answers you provided. So in foundry logic, they're just You're competing with another competitor for each and every design. Do you when do you know if you are The market share leader on a particular design, is that like do you understand this before the design starts to ramp or is it kind of an aftermath?

Speaker 3

No, you understand it before the design starts to ramp, because our customers don't really want to surprise us. Our lead times are relatively short. So you do have visibility into what designs you won and what designs that you have gone to your competitor. But that is not entirely predictive of the revenue because as we saw in the Q3, customers can accelerate or decelerate their wafer start plans on that particular design essentially in real time based on their customer call is on the call. And so you can have won a majority of designs, but to put it simply, if you don't get lucky with the ones that are ramping, that might not result In a majority of the revenue based market share, but that swings both ways.

Speaker 3

Our teams are very focused on working with our customers

Speaker 2

call is to make sure

Speaker 3

we've got the maximum number of design wins. But as I said, picking the winners is something that's extremely difficult to do and probably impossible to do, to be honest, given the dynamics in the industry.

Operator

Call. And our next question comes from the line of Tom Diffely from D. A. Davidson. Your question please.

Speaker 10

Yes, good afternoon. Thanks for the question. Mike, just another question on the Photonics business. So obviously, it's been good for your systems business over the last several quarters. But what does that look like in a couple of years when it goes from the lab to the fab?

Speaker 10

What kind of opportunity is that for you?

Speaker 3

Yes. I think we'd mentioned on the past several calls and highlighted again today the progress in silicon photonics and co packaged optics. It has been a strong driver of our system segment revenues, somewhere around 10% to 20% of those system segment revenues as customers invest in early R and D. One of the key points we made in the prepared remarks is we're shipping really the first system for low volume production into one of the major foundries in the world, so that they can serve their fabless customers with some of these co package optics applications. Call is open.

Speaker 3

When we look at that transition, it sort of depends on whose market forecast you believe in. If silicon photonics Really is going to take off as a data center application in the next several years and chip to chip communication because of the power efficiency it offers, the power reduction it offers, we could see a sizable increase there. Now we've got some work to do, Right. Our systems business primarily focused on the lab. And as we bring this technology to the fab, call is on the line

Speaker 6

of David. Together with the

Speaker 4

consumable probe cards that perform

Speaker 3

the electrical test together with the photonics test, there's a significant chunk of our R and D spend going forward to enable this. But I think it's one of the key areas, where we see great engagement in Early R and D, the transition to low volume production. And as we go from the 10% to 20% in R and D revenues, you could see that scale substantially multiples of that, if we get this right.

Speaker 10

Great. Thank you very much for that. And then, Mike, if you look at the just the revenue guidance for the Q4, it's somewhat similar to what we had a year ago. Just wondering if you could step back from a big picture point of view and just talk about the health of the industry today versus a year ago when revenues were projected to be the same.

Speaker 3

Yes. Although the revenue levels are the same, I think the rate of change in the state of the industry is very, very different. That was our Q3 revenue came down and then we gave, if I recall, Q4 guidance, as you noted, Tom, is pretty similar to what we're seeing this year. But that was off a very strong first half, Q1 and Q2 of 2022. We've really been operating at those levels as we go through 2023.

Speaker 3

And although there's puts and takes, HBM strengthening, some ups and downs in the foundry and logic business that are not atypical of different designs ramping call is at different times. We see the industry in a much more stable overall condition. Call is open. We feel like we're in a bottoming phase. If you listen to some of our key customers in the foundry space, in the PC space, I think there's some mobile earnings out here over the next couple of days.

Speaker 3

It does seem like things are bottoming and maybe even strengthening a little bit. Call is being recorded. So I think the industry is in much better shape. Obviously, there's a wide variety of views on when things are going to inflect and when the next upturn is. I think we're in pretty good shape given the capacity investments we've made to capitalize on that.

Speaker 2

Great. Well, I

Speaker 10

appreciate the extra color there.

Speaker 3

Call, thanks,

Speaker 2

Phil.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Gus Richard from Northland. Your question please.

Speaker 4

Yes. Thanks for taking the question. A lot of them have been answered, but I did want to ask you about the expansion of the system and package. And is that starting to reach your mobile customers, are they starting to look to put multiple tiles in a package and increase test intensity there?

Speaker 3

Yes, I think so we gave you a couple of examples of where chiplets or tiles are really driving our business. 1, The client microprocessor, the other HBM, which has been a theme for a while. I think we're probably in very early innings associated There are some R and D projects going on, but it's going to be at least a few quarters, if not the better part of a year Before we start to see chiplets and tiles really infused into the mainstream mobile roadmaps. Having said that, there are a variety of places in a high end 5 gs mobile handset where you do see advanced packaging and system in a package kind of characteristics, one is the RF front end, where now we have multiple filters packaged together with an antenna in package. And those are areas that at least when mobile was ramping and 5 gs adoption was strong, where we saw a great uptick in the RF business.

Speaker 3

I think thematically, it all goes to us wanting to continue to broaden our exposure to Advanced Packaging. We view this as a secular shift in where value is created in the industry and in the supply chain and it's somewhere we're continuing to place bets, both from our R and D spending, call, but also as we look to an M and A funnel.

Speaker 4

Got it. That's helpful. And then Just touching again on silicon photonics, you're shipping both a system, is that Fully automated at this point and can you talk a little bit about the mix going forward between system and Consumables as you ramp in volume.

Speaker 3

Yes. We're still pretty early in the implementation into volume production. And so the system we're shipping in the quarter that goes into low volume production still really an optical only test. It's testing The optical part of the chip. Now we do have separate engagements on this combined when you co package the photonic chip together with the electrical chip, At least to do functional test and ensure that die works, it's going to need to be a combined electrical optical test.

Speaker 3

But that's in fairly early co development with some of our key customers. So I'd expect, let's say, through 2024, The mix to continue to be pretty heavily systems based.

Speaker 4

Got it. Thanks.

Speaker 2

Yep.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Christian Schwab from Craig Hallum. Your your question please.

Speaker 11

Great, guys. I just have a couple of quick questions. Is there any update on the large opportunity that you could share?

Speaker 3

I think a couple of updates, Christian. So just to orient everyone, call is open. When we look at our share in the Logic segment and especially associated with microprocessor applications, it's pretty heavily biased Towards 1 customer. And the share shifts in the industry have not been all that favorable recently for that customer. So we said in the past, Our fundamental strategy is to be a leading supplier at every major customer in the And here's one of the gaps.

Speaker 3

It's an area where we continue to be very focused. We've made some changes in call is both our technology, but also the technical team that's interfacing with that customer, because the primary gaps in qualifying really have been adapting our technology, they've been technical in nature. That customer needs a second supplier. There's really only 2 of us that can drive at the high end of foundry and logic probe cards, especially with the requirements driven by advanced packaging. And so, Longer than we would have liked, we continue to make changes and we're continuing we continue to be committed to building a share position at this customer.

Speaker 11

Okay. That's a fair update. And then my other second question quick is, is the high bandwidth memory industry is looking to more than 2x, the capacity of Hi, Ben with memory. Samsung is finally making it. Micron will get their act together probably shortly.

Speaker 11

So is it safe to assume if that is accurate in industry dialogue that Your high bandwidth memory business should go from going from $10,000,000 a quarter to easily $20,000,000 plus quarter at some point next year?

Speaker 3

Yes, I think typically probe card intensity does scale with wafer starts and call is right. If you look at over time, there's a pretty good relationship between overall semiconductor revenue Pour cold water on it is as any technology matures like the TSV die stacking in HBM will mature, yields go up and so that's then a bit of a counterbalancing force. But I think as all 3 DRAM manufacturers ramp and start to really supply for what the native demand for HVM is in enabling AI. I don't think that's an unreasonable expectation to have the business go from, let's call it in round numbers, dollars 10,000,000 a quarter to something like $20,000,000 a quarter. A lot of it will depend on when these other customers ramp.

Speaker 3

A lot of it will depend on the end pull through from the AI markets. But if you believe Those underlying assumptions, yes, I think it's reasonable that we'll be able to come close to doubling our HBM business as call will go through some point in 2024.

Speaker 11

Great. Good other questions. Thanks, guys.

Speaker 3

Thanks.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Craig Ellis from B. Riley Securities. Your question please.

Speaker 12

Yes. Thanks for sneaking me in guys. Mike, I wanted to start just by following up on some of the conversation around foundrylogic. It seemed like a lot of the strength in the quarter was compute related either call is on the client side or HPC side and some similar things going on in the outlook, but I didn't hear too much about mobile And things related to RF and foundrylogic. So how do you think that shapes us as we exit the year heading into next year?

Speaker 12

And Any notable changes on the mobile side in foundrylogic as we're looking at the business?

Speaker 3

Yes. I think our RF business, which we report inside of Founder and Logic really is indexed pretty heavily towards mobile handset growth. And I think anybody who follows that industry knows that that's been a pretty ugly 2023 for handsets and the mobile ecosystem in general. We do see things bottoming in the mobile space and There were some nice application processor wins and RF wins in the Q3, that did contribute is to the results. They just weren't as major as the compute designs.

Speaker 3

I still feel like if you look at inventories, whether they be filters Or even some of the apps processors across the overall channel, there's some digestion, some usage call for those chips before we really see the new chips that are driving our business to ramp in volume. But like most of the rest of our businesses, we've seen mobile and RF stabilize and as I said, maybe even get a little bit better. Now, one of the things to know about our RF business is some of the shortest lead times we operate in. So, where our average lead times are better part of a quarter, RF lead times are actually shorter than that. And so we can see some very significant changes in demand profile as customers change their wafer start plans.

Speaker 3

So not a lot of visibility, I guess, is one of the things I'm trying to say.

Speaker 12

That's helpful, Mike. And then the second question earlier in the Q and A, you noted that there have been pluses and minuses looking at the China country trends in the supplement that's released and noticed that China had ticked a few million lower every quarter over the last 4 or 5 quarters, how much of that is cyclical versus anything that might be related to More structural things with shipment restrictions, etcetera. And more importantly, from here, What should we expect going forward in that geography? Thank you.

Speaker 3

Yes. So it's a good point, right? Our China business, I think was again down sequentially and probably at half the levels it was at the peak back in late 2021 or early 2022. To answer your question directly, it's almost entirely structural. As a U.

Speaker 3

S. Supplier operating call is at Advanced Nodes that are the subject of the export controls from the Department of Commerce. We've been limited in our ability to supply customers. Call is open. And I think we've been quite clear in our expectations that we expect the domestic China business to continue to increase and at some point here probably go to 0 as they cultivate is probably not local China alternatives to us, but with our primary competitor in memory being based out of PAM, our primary foundry and logic competitor being based out of the EU, they do have geographic alternatives that aren't restricted as strongly as we are.

Speaker 3

The part holding that business up is still the multinationals that operate in the region and we've seen a recent relaxation of the work controls around them. They were granted extensions to the license and those businesses are holding up fairly well.

Operator

Call is open. And our next question comes from the line of David Tullig from Steelhead Securities. Your

Speaker 2

question please.

Speaker 13

Yes. Thanks for taking my question. My question has to do with Advanced Packaging. Clearly, on the conference calls over the last few quarters, we've seen a whole bunch more chatter from both the test and assembly guys and Intel and AMD and whatnot. I'm just curious as far as core probe card business goes, what percentage would you classify as advanced packaging?

Speaker 13

And what do you think the growth rate of that segment is? I'm assuming that includes both the tile and the high bandwidth memory stuff.

Speaker 3

Yes. Yes. And that's the way we'd classify it too, David, for clarity, right? Regular flip chip, although some people would call that advanced packaging. We're really targeting that classification at Chiplet multi die architectures assembled using techniques like hybrid bonding and TSV, because that's really where The increase in performance, the decrease in cost, the innovation acceleration comes from.

Speaker 3

Call is open. It can sometimes be a little bit difficult to break out, but given what we highlighted in the Q3, my guess is that somewhere around 20, 25%, maybe even 30% of our business at present is associated with advanced packaging. The combination of So we're still clearly in very early innings associated with this. But if you look at the increase in test intensity associated with it, it's also one of the things that call is underlying the strength in the 3rd quarter results. The fact that some of the revenue concentration was associated with things in advanced packaging really does help out the overall top line and it's why we're so optimistic of our exposure and the eventual growth advanced packaging will drive for us.

Speaker 13

And when you look at the both the unit volume growth that you see in Advanced Packaging plus this increased intensity and increased complexity for your Advanced Packaging business over the next 2 years, what would you guess the growth rate is? Clearly it's probably more than 2x the industry growth, but I'm just kind of curious if you have an idea of what it might be?

Speaker 3

Yes. So we're going through annual planning and strategic planning right now and that's, it's one of the key things we're looking into. So over a 2 year timeframe, we do expect It's outgrow the industry significantly. I think 2x maybe a little bit aggressive, but again, it's one of the reasons Given our competitive position, given the value we create for our customers in advanced packaging applications with things like our MEMS probe technology, With things like co packaged optics, that outsized growth is somewhere where we got good exposure and we're going to continue to prioritize and capitalize on.

Speaker 13

Okay. Thank you. And just one more clarification. As far as sub-seven nanometer and below foundrylogic business, what percentage of those wafer starts are MEMS based probes versus other technology? Is it is a vast majority at this point?

Speaker 3

Yes, it's a vast majority of MEMS probes. There are counter examples where MEMS probes have not been adopted In areas like very large footprint, single diuretical GPUs, for example, because the interconnect density doesn't require a MEMS based probe. But it's a pretty reasonable rule of thumb that the vast majority of sub-seven nanometer foundry and logic devices do need to be probed with a MEMS probe card.

Speaker 4

Thank you.

Speaker 3

Thanks.

Operator

Thank you. One moment for our final question for today. On the line of David Silver from C. L. King and Associates.

Operator

Your question please.

Speaker 14

Yes. Hi. Thank you. I had a couple of questions maybe about planning for next year, but this is typically the time of year when budgeting and everything takes place. Just focusing on your CapEx budget, call, there has been the Livermore capacity expansion.

Speaker 14

But when you're thinking about next year's CapEx spend, could you maybe call out is where the biggest amount the largest amount of discretionary CapEx is going to be spending. In other words, what efforts or applications, are you going to be committing discretionary resources to? Thanks.

Speaker 5

Sure. I'll take that, David. So as you said, we are going through the planning process. And given our Big footprint in Livermore in California, I expect most of the additional CapEx to happen in that facility. In terms of magnitude, I did talk about completing majority of our capacity expansions that is required for achieving the target model.

Speaker 5

Call is that's where we expect CapEx in 2024 to decrease, certainly compared to the 60,000,000 midpoint CapEx, we expect in 2023. I don't expect it to go down significantly like To the $20,000,000 a year levels that we had before starting this capacity expansion. But somewhere in that range is where we CapEx to be in 2024 and most of it in the probe card business and most of it in Livomont.

Speaker 14

Okay, thanks. And then I'd kind of like to ask a similar question on your R and D spend. So I think the Q3 R and D spend was an all time high. Call is open. And again, when you look out to next year, what are the new or significantly increased efforts in your R and D budget, if you could call out maybe the top 1 or 2, that would be very helpful.

Speaker 14

Thank you.

Speaker 3

Yes. I'll take this one. It's Mike again. Really go back to the themes we've talked about today. Advanced packaging chiplets, making sure our product roadmap is aligned with the key customers who are adopting advanced packaging and chiplets in volume and making sure we're focusing our R and D spend to have differentiated products in those applications are really the focus areas.

Speaker 3

So, in DRAM, making sure we're keeping our competitive lead in HBM, But in foundry and logic, there's a variety of new requirements and new products that we're releasing associated with higher speed, higher power, smaller pads and higher pin counts that are really the focus of our envisioned R and D spend. I won't call it planned yet call in 2024.

Speaker 14

Okay, that's great. Thank you very much.

Speaker 2

Call is open.

Operator

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mike Slessor for any further remarks.

Speaker 2

Call is

Speaker 3

open. Thanks everybody for joining us again today. We have a couple of investor conferences on our docket to end the year. Call, I believe they've been posted on our website. So we'll hope to see you there to wrap up an eventful 2023 and look forward to 2024.

Speaker 3

Take care.

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Key Takeaways

  • FormFactor reported Q3 revenue of $171.6 million, near the high end of its outlook, driven by stronger-than-expected foundry & logic probe card sales and record systems revenue, resulting in non-GAAP EPS above guidance.
  • Q4 guidance of $165 million ± $5 million reflects a sequential decline due to the sale of its FRT Metrology business and softer foundry & logic demand, partly offset by stronger DRAM probe card shipments.
  • The company is sustaining R&D investments in advanced packaging applications—including chiplets, high-bandwidth memory and co-packaged optics—while slowing CapEx now that major capacity expansions are complete.
  • Advanced packaging, led by HBM probe cards which generated about $10 million in Q3 at a key DRAM customer, is driving higher test intensity and is expected to strengthen further in Q4 amid AI-driven demand.
  • FormFactor will ship a CM300 silicon photonics system in Q4 for low-volume foundry production, positioning it to capitalize on growing co-packaged optics opportunities as volumes scale up.
AI Generated. May Contain Errors.
Earnings Conference Call
FormFactor Q3 2023
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