Q2 2020 FormFactor Inc Earnings Call
[music].
Thank you and welcome everyone to form factors second quarter 2020 earnings conference call.
On today's call, our Chief Executive Officer, Mike, Slessor, and Chief Financial Officer shy Shahar.
Before we begin Jason Colin the company's General counsel, well mind, you have important information.
Thank you.
Today, the company will be discussing gap here in L., Brazil, and some important non-GAAP results intended to supplement your understanding of the Companys financial.
Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the Investor Relations section of our website.
Today's discussion contains forward looking statements within the meaning of the federal Securities laws.
Examples of such forward looking statements include those with respect to the projections of financial and business performance future macroeconomic conditions, the benefits of acquisitions and investments the impacts of the cope with 19 pandemic the impacts of regulatory changes you anticipated demand for products, our future ability to.
Produce and sell products.
The development of future products and technologies and the assumptions upon which these statements are based.
These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call.
Information on risk factors and uncertainties is contained in our most recent filings on form 10-K with the FCC for the fiscal year 2019, and our other FCC filings, which are available on the Fccs website at Www Dot FCC Dot Gov and in our press release issued today.
Forward looking statements are made as of today July 30, 2020, and we assume no obligation to update that also as an aside since this isn't entirely remote earnings call for US. Please bear with us on any audio delays or issues.
With that we will now turn the call over to form factor CEO, Mike Slessor.
Thanks, Jason and thank you everyone for joining us today.
Form factor delivered second quarter results. The were in your carbon copy of our first quarter again, validating our target financial model.
These results are a testament to the dedication resiliency commitment of our worldwide team and I'd like to start our call by recognizing in thinking or 2000 plus employees for their contributions to this impressive performance.
Although the top level financial results are similar the underlying path to achieving the second quarter was very different than the first quarter.
During the second quarter, we experienced no significant shutdowns or disruptions in our internal operations and external supply chain, allowing us to steadily increased factory output you know safety focused and social we distance manufacturing environment.
This enabled us to exceed the outlook, we provided on may six and deliver revenue of $158 million only $3 million less than the first quarter.
In our foundry and logic probe card business, we again experienced strong demand from multiple customers. The continues into the current quarter.
Just a man's trade is coming from several end market drivers, including acceleration of Fiveg handset pilot production as well as continued work from home infrastructure spending.
Our large microprocessor customer continues to ramp new designs and increase capacity for both clients and server chips on both the 14 and 10 nanometer nodes.
Despite a recent announcement of delays in eventual seven nanometer production. We're currently engaged with this customer in significant seven nanometer R&D activity and are excited about helping enable the adoption of advanced packaging technologies their plan to be a prominent part of this node.
Seven nanometer production was not planned in the near future and then the in term we expect new designs to continue to release on the 10 nanometer node.
As a reminder, probe cards are consumable the specific T. Each new chip design and so demand is generated from not just node transitions, but also from the release of new chip designs on existing notes.
Regardless of the manufacturing strategy. This customer employees, we expect to support their probe card demand wherever they choose to produce seven nanometer products.
We also continue to grow our business at the world's largest foundry and are now shipping several major design seen significant volume for each of mobile high performance compute and RF applications.
It's increasing activity demonstrates that form factors differentiated technologies provide compelling performance and cost advantages for wafer test on advanced logic nodes.
As more of this customer's designs in wafer starts start to move to 10 nanometer in below we expect to experience a corresponding increase in our business with them.
In addition, we also expect to grow with their adoption of advanced packaging since advanced packaging increases both test intensity, which expands the number of probe cards required per wafer route and test complexity, which widens form factors competitive advantage.
Whether its H.B.M. stacking by DRAM customers were die desegregation techniques by microprocessor in foundry customers advanced packaging isn't important long term growth driver of form factors business.
Commenting briefly on our third quarter outlook, while we anticipate continued strength with major foundry and logic customers. We also expect strengthening in DRAM as key customers begin to ramp new server and mobile designs on the one why and one dizzy nanometer nodes.
This DRAM cyclicality is inherent to that market and as expected, but because of the strength of our other businesses, primarily foundry and logic probe cards. This DRAM volatility has not had a significant impact on her recent financial results and there's an excellent example, the power of form factors diversification strategy.
Turning to two other important points in today's announcement since mid March we have been limited by capacity and output and not by customer demand for our products.
To capitalize on this strong demand, which we view as a secular long term trend we are utilizing our strong balance sheet to invest in form factors future growth.
In the second quarter, we purchased a new 90000 square foot building on our Livermore campus, which will enable us to significantly increase our probe card manufacturing capacity.
We expect to gradually increase capacity starting in the first half of 2021, as we complete commissioning and begin to move in and qualification.
In addition, we earlier today announced the acquisition of the probe card assets of Advantest Corporation. This 35 million dollar acquisition brings several key enabling sub component technologies that reinforce form factors technology leadership.
It also adds an emerging NAND flash probe card architecture that is currently qualified at one of the world's leading memory manufacturers, providing us the potential to be in more strategic supplier in mainstream NAND flash wafer test.
Both this acquisition and our facility expansion position form factor for continued industry leadership.
Finally, having achieved our target financial model for three consecutive quarters, we plan to unveil a new target model on an August 18th analyst update call.
In reviewing the path to our new model, we will discuss growth drivers, including Fiveg in advance packaging that are driving faster than industry growth in our $2 billion have served markets.
Our leadership position in these attractive markets paired with our differentiated strategy a disciplined execution will drive continued growth and share gains, enabling us to achieve our next target model.
Shy over to you.
Thank you, Mike and good afternoon.
As you saw you know press routers, our second quarter revenue was within the revised outlook range, we announced on July Onest.
These are impressive results, especially in light of the impact of Koby, 19, which required a gradual reopening of for California for free reviews. During Q2 following a temporary shutdown during the last two weeks of March.
These results show Formfactors agility and ability to de lever to our customers was safe guarding employees and supporting our supply chain Park.
They are also compelling evidence of our ability to perform at our long term target financial model across nearly all lines of work in it.
Full factor second quarter results were similar to the fourth quarter revenues were $158 million, a 1.8% sequential decrease from our Q1 revenues and a 14% year over year increase.
Broadcast segment revenues were $134 million into second quarter, a decrease of $1 billion or less than 1% from Q1.
System segment revenues were $24 million in Q2, a decrease of $2 million or 8% from the first quarter, driven mainly by lower sales to universities and institutions that were impacted by covering 90.
Weve into pro growth segment.
Robust demand for foundry and logic continued we'd revenues increased 3% from Q1 to $109 million comprising 69% of both of company revenue in Q2 up from 66% into first quarter.
DRAM revenues were 90 million Boes in Q2, a decrease of $6 million from the first quarter and were 12% of both a quarterly revenues as compared to 50% being the first quarter.
DRAM demand continued to be down in large part due to customers absorbing purchases made in favor of 29 P. in high revenue quarters.
Flash revenues of $5.4 billion in Q2 were $1.1 billion higher than in the first quarter and were 3.4% of both the revenue in Q2 slightly higher than the 2.7% in Q1.
We continue to expect such revenue to be lumpy from quarter to quarter.
GAAP gross margin for the second quarter was $66 million or 41.9% of revenues same as in Q1.
Cost of revenues included $6.1 billion with GAAP to non-GAAP reconciling items, which we outlined in the press release issued today and be the reconciliation table available on the Investor Relations section of our website.
On a non-GAAP basis gross margin for the second quarter was $72 million or 45.8% of revenues 30 basis points lowered them to 46.1% non-GAAP gross margin in Q1, mainly as a result of slightly lower revenue and lower systems segment gross margin, partially offset by higher probe card segment gross margin.
Our probe card segment gross margin was 46% do the second quarter, an increase of 90 basis points compared to 45.1% in Q1.
The increase from Q1 was mainly a result of more favorable product mix.
Our Q2 system segment gross margin was 44.6% as compared to 51.2% in the first quarter.
The decrease of 660 basis points was driven mainly by lower sales.
A favorable product mix and higher warranty and you know costs.
Spectacle of system segment gross margin to return to the range of high Fortys too low Fiftys Duck, you've said previously is done one.
Our GAAP operating expenses were $43.7 million for the second quarter $5.3 million lower the need to first quarter.
The decrease in second quarter GAAP to non-GAAP reconciling items from 6.2 million barrels in Q1 to $2.6 million in Q2. He is mainly due to a $3.7 million benefit from contingent consideration adjustment we recorded in the quarter.
Non-GAAP opening expenses for the second quarter were $41.1 billion or 26% of revenue compared to $42.7 billion or 26.6% of revenues in Q1.
The decrease of $1.6 billion is mainly due to lower travel expenses and lower performance based compensation.
Company noncash expenses for the second quarter included $6.5 billion for them with division has been vegetable assets.
$26 million for stock based compensation and depreciation of $4.7 million.
Amortization of intangibles zero point Eightmillion, those lower than in Q1 due to certain Bengal assets, reaching for a little more conviction.
GAAP net income for the second quarter was $20.5 billion or 26 cents per fully diluted share compared to GAAP net income of $15.9 billion or 20 cents per fully diluted share in Q1.
The non-GAAP effective tax rate for the second quarter 2020 was 17.4% similar to the 17.6% in Q1 and within the range of 15% to 20% estimated a great for the year as we communicated in previous earnings calls.
As a reminder, our cash tax rate is expected to remain at 6% to 8% over non-GAAP pre tax income I'm going to be fully utilize our remaining us based in oil and R&D credits.
Second quarter non-GAAP net income was $26 million over 33 cents per fully diluted share same as in Q1.
Moving onto the balance sheet and cash flows as.
As you would expect where especially focused on capital management of each time.
Cash flow from operations were $43 million into second quarter as compared to $39 million in Q1.
As Mike mentioned during the quarter, we completed the acquisition of a building, leaving more capitals for a total of $24 billion, which $19 billion were paid in Q2 and $5 million worth paying to the previous quarter.
We partially fine of is building purchase within $18 billion 15, your real estate loan.
This acquisition reduced Q2 free cash flow generation to $90 million compared to $28 million in Q1 and brings our free cash flow over the trailing 12 month to 100, its premium dollars a $127 billion, excluding the acquisition over <unk>.
Our total cash in investments were $264 million at the end of the quarter almost 90% of these R&D U.S.
We maintain substantial liquidity in our capital structure, even healthier unfolded as we use our cash balance combined we've taken advantage of the current low interest rates to optimize our cost of capital.
Here are some more details on our current debt.
As of the end of Q2, we had three term loans on our balance sheet totaling $50 million.
The first loan related the definition of Cascade Microtech in 2016 at a balance of $12.5 million at the end of Q2 and was fully repaid earlier in Q3.
Second loan is a three year 21 billion Euro denominated loan we took to funding for the acquisition in Q4 2019.
The remaining balance of D. Sloane as of the end of the second quarter was $17.5 billion going in Europe.
The third loan gives the new $18 billion real estate loan I mentioned earlier.
These loan bears an effective fixed interest rate of two point, 75% taking into consideration and interest rate swap we put in place.
At quarter end of total cash balance exceeded the debt balance by $214 million, an increase of $60 million, we continue to investing capital expenditures and M&A is important in parts of our strategy.
We invested $24.7 billion and capital expenditures during the second quarter compared to $12 million in Q1.
The increase in Capex in the first half of when it's ready as compared to our 2019 run rate is chiefly the result of the $24 million used to acquire the newly from a building and additional capacity expansion initiatives as part of our multiyear plan to support our anticipated medium to long term demand.
The acquisition of the building and needed investment as well as ongoing Capex is expected to bring our capital expenditure and 2020 to $50 million to $60 million.
We will elaborate on our 2020 M. beyond Capex plan, and then and then updated long term financial model as part of a webcast strategy update for the investment community, which we plan to hold on August 18.
I will provide more details closer to breakeven.
Turning to the third quarter non-GAAP outlook.
As we and our suppliers gain a vision on the experience operating at the safety focus and socially Houston's manufacturing environment. We are again able to provide outlook ranges for the quarter to quarter.
As Mike mentioned, we expect to be around revenue distracts them into the third quarter layered on top of continued solid demand for other products.
These factors result into Q3 revenue outlook in the range of 170 to 180 million $2 million I'll repeat that $170 million to $182 million.
The anticipated increase in DRAM revenue is expected to resulting in less favorable product mix.
Accordingly, non-GAAP gross margins outlook for the Q4 Q3, he's in the range of 44% to 47% and non-GAAP earnings per fully diluted share for Q3 is expected to be between 30 and 38 cents.
The acquisition of the probe card assets of advantage is not expected through other significant impact on our Q3 results.
A reconciliation of our GAAP to non-GAAP Q3 outlook is available on the restoration section of website and in the press release, you you release issued today.
With that let's open the call into question, we asked with when you ask your question. Please indicate the fuel direct your question to micro to me since as you can imagine we're not going to say room.
Operator.
Thank you ladies and gentlemen, if you have a question at this time. Please press star in the number one are you touched on telephone.
If your question has been answered well you wish to remove yourself from the Q. Please press the pound key.
One moment wildly compiled the culinary roster.
Our first question comes from the line of Craig Ellis with B. Riley FBR. Your line is open.
Yes, thanks for taking the question and congratulations on the nice execution team I'll start with a question for Mike Mike I think in your prepared remarks, you indicated that you expected DRAM revenues to improve and in the third quarter I I was interested in understanding the magnitude of improvement that companies.
Saying would we expect DRAM to get back to what I think some of US would have thought would be a normalized range around 30 million or or maybe not.
Not quite bat robustly as you start the back half of the year.
Yes. Thanks for the question Craig So just to calibrate everyone recall going back to the fourth quarter of 2019, we had an 11 year high on DRAM revenues within expected. Some digestion here in the first part of 2020, which weve indeed scene.
But as we move into the third quarter seeing some real strengthening off the the Q2 lows in DRAM.
Probably that in round numbers that 30 million dollar annualized or 30 million dollar normalized level is a decent expectation for the third quarter. Obviously you know this continues to be a turns business and so there's some uncertainty associated with that.
But as all of the major DRAM manufacturers.
Sort of begin design releases for both mobile and server on one why in one xen nodes, we're seeing quite a bit of increased activity as they begin to ramp those designs in the third quarter. So I think that normalized 30 million level.
A good estimate from where we sit in the quarter right now.
Great and then if I could.
One more on on your prepared remarks, you mentioned advance packaging, a little bit more than I recall in the last few calls in reference to things that you're doing with leading edge foundry and logic customers. The question is with that as one of the three areas of strategic.
<unk> focus are you starting to see an acceleration in activity with your customers there and how should we think about.
The rate of growth in that part of the business going forward relative to what you've seen in the past.
Yeah, I mean in general advanced packaging for us a long term multi years secular trend there really increases the opportunity for form factor it increases test intensity and increases test complexity, obviously, both trends good for us I'd characterize the activity is still very.
The early innings, we're seeing more in the foundry and logic space.
Recall that a lot of advanced packaging activities that we've benefited from previously has been in the DRAM space with high bandwidth memory or HBM.
We certainly have seen things like fan out and some die stacking in the foundry and logic space, but you know as I said in the prepared remarks.
Seven nanometer node five nanometer node in foundry and logic or are gonna prominently feature some of these advanced packaging techniques for a variety of integration schemes I still characterize it as being mostly really R&D and pilot production in the foundry and logic space with the arguable.
Exception of fan out.
But this is an exciting opportunity for formfactor moving forward.
Really going to drive growth as customers combine those Moore's law advances with the integration and performance advantages associated with advanced packaging.
That's helpful. And then if I could just asked shy of question on gross margin and congratulation to the team for a revenue guidance range that implies that record revenues are possible in the quarter.
The question is on that 44% to 47% range I think we typically just think about mix is being the primary determine that but with manufacturing being impacted by changes that are related to co, but how should we think about the puts and takes that determines the lower end of the range versus the higher in the range. Thank you.
Sure So the main domain.
Element that both gross margin continue to be mix and as I said the in the prepared remarks, since we expect DRAM and to increase in Q3, and Durham has lower margins than from foundry and logic and sort as a percentage of total revenue during the year I'm going to has a bigger and share which means you know drags the.
And the gross margin down and it will be them. That's why the ranges 44 to 747, even though we see an increase in revenue.
Thanks, guys. Good luck.
As there are nine barrels Seattle question at this time, thanks, Pat I and the number one on your touched on telecom.
Our next question comes from the lineup Brian Chin from Stifel. Your line is open.
Hi, good afternoon.
Nice job on the quarter and thanks for joining US ask your question is maybe first question.
Slash has been sort of the ancillary markets with the company.
And so my question I guess is what if any you know what do they manufacturing capacity as transferring over why the advent tests willing to exit the market and what gives you confidence you can reenter this tam at unacceptably high margin level.
Also do you expect any incremental sales from the acquisition in Threeq and is it immediately accretive.
Yeah.
So Brian it's Mike I'll take that one I think focused on this acquisition one of the very exciting pieces about it for US he is the elements of technology.
There's a couple of key enabling sub component technologies that advantest HUD invested in over the years. Both in terms of the Mems technology, which as you know is a key enabler for making the individual probes as well as the interconnect technologies that then connects those probes up through the printed circuit board to the tester. So one of the marks.
Citing parts for it is the general technology, which we feel is applicable across many of our served markets and product lines in the future.
The current revenue, which was about $7 million in 2019 expected to grow a little bit in 2020 is primarily associated with flash they've got a decent cost structure on this emerging product, but it was going to take some significant investments to really scale that things like the design automation.
And that form factor it really has the worldwide support infrastructure as a form factor already has and so we worked with advanced test to.
Put together a business model for looking how we would help grow this business and the acquisition seem to make sense.
To set expectations, it's going to take US an assessment period to figure out what exactly those investments are what flash market share we can gain.
There is an exciting opportunity there to grow off the single digit millions that that product on did last year. So we'll keep you updated as we go through that assessment, but I think overall when I look at the technology portfolio, we've acquired some pretty exciting additions to the form factor roadmap.
Interest expense, some IP synergies, even beyond flash, but.
After the M&A that bucket 202, 50 million kind of Tam just for flash.
In itself.
That's right and I think.
Our primary focus here is to understand those technologies synergies early you're right. The the overall flash Tam is something like 250 million, where we hold relatively small share.
This will probably hell silica gained share there, but again some of the technology elements are very exciting for the broader form factor market space not just in flash.
Okay, great great. Thank you.
Maybe.
Turning back to logic for a moment.
In the past and delays in your end to your customers technology roadmap has increased volatility of your revenue really for that matter the entire supply chain.
You did provide some some puts and takes in your prepared remarks.
And it sounds like demand remains out into Threeq, you, but presently and I was just kind of hard Matt maybe kit to.
Put you on the spot whats here, but.
Can you tell you up sort of the increase 10 nanometer activity.
Yes, the increased incremental advanced packaging opportunity, maybe minus a push out of seven nanometer encounter 21 do you think this can be somewhat of a push from a revenue perspective any sorts of thoughts incrementally would be helpful.
Yeah.
It is certainly an interesting question because as you note there are a lot of puts and takes.
A couple of things that have really driven this business to strong levels in recent quarters and even recent years.
We've had this overlap of the 14 nanometer in the 10 nanometer node with this customer continuing to aggressively release designs on both of these nodes. We've also had what feels like a pretty fundamental increase in wafer test intensity trying to drive more test content to the wafer level closer to the fab.
That obviously drives up the overall wafer test and probe card spend then that's a theme we've seen across the foundry logic space, but at this customer in particular.
Seven nanometer in 21, I think for us by enlarge remained development activity. So in 21, probably not too much of a tailwind, but I do think.
You know as we look to longer term these elements of node overlap.
Bubbly some reduction in the test intensity is yields go out and the the nodes strategy stabilizes a little bit.
I don't know where there is a push but I do think you know reasonably comparable levels or are not a bad expectation at least as far as we can see through the rest of 20 into 21 I'll give you the usual caveat that with a turns business where lead times are well within a quarter.
Our visibility remains very limited, but some of those trends, we talked about as the puts and takes.
Remain mostly intact I think as we go through the longer term future.
Great appreciate the thoughts Mike Thanks again.
Thank you and our next question comes from the line of Amanda Scarnati with Citi. Your line is open.
Hi, Thanks for taking the question.
Mike just going back to sort of Intel conversation and you touched upon this a little bit in your prepared remarks, but if they can't wait to switch over to sort of an outsourced manufacturing.
And or something happening or the on how do you think that that would impact your business or do you think it sticky enough I'll, let you do with Intel that it would have limited impact on that.
Well I think it's sort of an interesting data point on our fundamental customer strategy right.
Back to form factor several years ago, we really didnt have a very strong foundry business. In fact, I think it's characterized it fair to characterize it is pretty weak we made a strategic initiative to become a key supplier at the world's leading foundry. So is that if any of these shifted manufacturing strategies from any of our customers where.
There are they be microprocessor idmc satellite customers fully fab list customers.
Those events in shifts we want those to be agnostic to us. So I think it's it's still early in sort of everybody figuring out what the impact of potential manufacturing strategies are for our largest customer we really feel like we have our bases covered now that were.
Significant share and a key qualified supplier for the advance nodes at the world leading foundry.
And then just on that capacity constraint can you it sounds a little bit more on the impact that had within a quarter.
And if its leading to any sort of significant backlog in the September quarter.
And when you expect that new capacity, but the come online.
Yes, maybe we'll deal with the second part of the question first so.
As we told people in the past inside our existing footprint, we are by and large capacity constrained right Weve produced.
Hi is near a 180 million in revenue in Q4 19, as we work through the first half of 2020 with different shutdowns and then social distancing, obviously reduced revenue levels.
The second quarter, we were fortunate to not have any significant shutdowns, but we got off to a pretty slow start to right. We were just re ramping and bringing people in and learning how to manufacture in this environment as where some of our suppliers I think exiting the quarter.
It's hard to use the word normal in this environment, but I'd say operationally were by and large back to normal and on a run rate basis operating at.
Essentially the the out the outputs the throughputs the cycle times that we want to with a couple of exceptions here in there.
So if we look longer term.
We're not pushing much of a backlog.
Significant backlog into Q3, it's more than normal demand profile, but that's what's motivated us to go purchase an extra shell for building start to outfit it spend the capex to slowly build capacity. So that we don't find ourselves constrain we're obviously.
Quite bullish about some of these trends like Fiveg in advanced packaging and we want to have the very least the optionality to have the capacity in place to go capitalize on those opportunities and grow our revenue.
Great.
And then the last question for side.
Operating expenses and how quickly does that sort of ramp back up and maybe what you're talking about the analyst day and a couple of weeks, but yes.
Now, let me come down or the Opex came down quite a bit this quarter on sort of one off target potentially when does that kind of Robert Bakken and should we see a step up as we kind of go through the back half of the air.
Yeah, I think it's a good observation and if you look at our outlook for Q3 and you do the math format. The gross margin gone to the yes, you will notice that we expect higher opex in Q3.
Probably in the range of 46 to 48 and maybe on the versus the 41 in Q2 and busy increases.
You can contribute a few things first of all we have the acquisition that we announced today.
I think door or to our opex.
We the higher revenue and performance in Q3, we expect higher performance based compensation. We also had our annual salary raises in the beginning of the quarter would need to begin over the quarter travelers are expected to pick up in Q3 after almost completely shadowing Q2.
Some of our R&D things are going to be should to working remotely are going back to the offers or to the labs. So we expect to do some and ramp up of R&D projects and materials.
And we are also have a significant investment in information technology, and maybe hardening security, but also related to our ERP consolidation project, which we've talked about before so some of these elements are onetime in nature like the investment and some are variable and structurally like the performance based compensation and some have anymore.
Permanent nature like the salary raises and as you noted, we'll we'll get into more details of the rest of the year longer term, what sort of writing down at least the opportunities we're going to doing later in August.
Thank you.
Thanks.
Thank you. Our next question is from David duly with Steelhead Securities. Your line is open.
Yeah. Thanks for taking my question, Mike piece, it probably for you.
As far as.
Test intensity goes I think teradyne made a big deal on their most recent conference call about increased test intensity across the board not only with the Aipu chip, but with many other parts I was just wondering what you're seeing as far as test intensity goes and does the increase tester tester intensity translate directly to poke.
Hard intensity as well, a plus or minus or how should we think about that.
Yes, so all I'll amplify what you just said obviously given that were the interface between the 80 equipment built by teradyne in the drawn test and the customer chips on the wafer there is a pretty direct correlation between the test intensity, they see and the.
The volume of required probe cards.
There's a variety of things driving this.
Fiveg is a really good example, when you look at the complexity of testing some of these fiveg shifts.
The the frequency is involved the brand new yield fallout modes that are involved.
The use of advance nodes, which by themselves are.
Probably not yielding where customers would like them to be you end up having a variety of factors that are driving the need for more and more test. The other nice thing obviously about testing at the wafer level for our customers is to get the answer faster they avoid putting.
More manufacturing time more dollars into a chip that's not going to yield once he gets to the the final package state. We're in the advanced package with with some other ships. So I think there's some fundamental advantages to driving test intensity up at the wafer level, we along with people like teradyne, an advantage through our performance are able to.
Enable more of that.
But some of its just driven by the complexity of the silicon that's that's running through new applications like Fiveg in advanced packaging.
And along those same lines do you think when you think of the overall growth rate of the probe card market you know with would.
This these trends help increase the overall growth rate in do you have an idea about the incremental growth caused by.
The move to advance packaging.
Yeah.
There are many things driving the advanced probe card growth rate and certainly what we've seen historically.
And what various forecasts either by us or by various market Prognosticators indicate is that the advanced probe card market is growing faster than the semiconductor market overall, primarily for those reserves right test complexity advanced packaging.
Really driving more and more test, especially at the wafer level, which means more probe cards. This is going to be a fairly prominent topic.
At our August 18th call, we're going to take a step back and look at our served markets again with everyone.
And you will see that some of these drivers that are upping, both complexity and intensity are producing above market growth rates for the high end of advance probe cards, where where we lead.
Okay final one from me I'll pass it on to someone else can you taking that take a gas as too as far as sub 10 nanometer processes coming out of the foundries.
What percentage of parts do you think are going into a true advanced package at this point.
HM yes, well some of that's a bit of a nomenclature question too 'cause advanced packaging means different things to different people.
We've tried to be.
Little bit more conservative in our in our definitions.
Things like fan out things like H.B.M. not regular flip chip we view.
The former is advanced packages, so something like fan out.
Great.
My guess is we're somewhere around 50% of the overall wafer out with the advance nodes are.
Again integrated with some of these some flavor of advanced package like that obviously, you look at our key customers, they're pushing more and more of the tech LNG burden at seven and then five and below that onto some of these advanced packages. So we would expect that attach rate to increase overtime.
Thank you.
Thanks.
Thank you all in our next question is from the line of Tom gets leave the D.A. Davidson. Your line is open.
Okay. Thank you thanks for taking my call So I guess.
Carrying on the capital intensity question when you see a second or third generation chip on the same node say 10 nanometers are you actually seen a decreasing test intensity at this point or is it still fairly high level.
Certainly our experience has been it's still it fairly high levels, you would expect a decrease over time as the fundamental yield of the node increases.
The first designs out on a node typically are relatively low yielding and so we're going to require.
More test just to get it given number of good die out, but also to debug and reduce those those failure modes.
But we've seen test intensity hold up pretty well as we've gone through for example, the 10 nanometer node because you know each new design has its own subtleties associated with this yield failure. So over multiple years node like 14 nanometer, which is now I don't know says an eight.
Years old certainly the test intensity was much higher at the start of the node than it is now but in general as some of these advanced nodes, we do see the intensity.
Diminishing, but not diminishing in are really significant way kind of holding in there.
Okay. So Mike when you look back at the the delay of the 10 nanometer went up initially a few years ago that caused a couple of quarters of pain for you.
With that just driven because it was the last month delay in there werent. Other design, that's 14 I missed it tickets plates and there was just a waiting period, what was there something more to it that cause.
The dip in business for you.
Yeah, and I did Tom I think I think you're talking about sort of the early part of 2018, if I recall.
Yes.
That was really problematic because of the last minute nature of it sort of.
Designs that were planned for the 10 nanometer node once the 10 nanometer node were delayed had to be response on the 14 nanometer node and that caused between a one and two quarter delay in our business as that reshuffling of our customer roadmap took place.
If you look at the current seven nanometer situation. Obviously, we were not on the verge of seven nanometer production here and so.
Quite a bit different situation than 10 nanometer, which we're where we experienced the change right on the verge as the planned production ramp up that note.
Okay. That's helpful. Thanks, and then finally, we look at the ramp that you've seen on the foundry business with more.
That was customers go into leading edge.
I guess I'm surprised we haven't seen a foundry become a 10% customer yet maybe just a quick update on how that ramp is going for you.
Yes.
I guess I qualitatively characterize it is we've been within striking distance of a 10% level over the past couple of quarters.
So this is a significant business for US there continues to grow obviously at these kind of levels.
Aggregate revenue levels for the company the bar gets higher to become a 10% customer as we continue to diversify the business and when business around so.
I guess I'd say stay tuned given.
Where is this businesses and the concentration as this business and how would you growing on multiple designs for multiple applications.
I would expect associated that 10% list in the relatively near future.
Okay. Thanks for your time.
Thanks.
Thank you and our next question comes in the line of Robert Mertens with Cowen Your line is open.
Hi, This is Rob Burton asking on behalf of Krish Sankar. Thanks for taking my question.
Maybe first question for you, Mike and then I have one follow up.
Just to expand on that earlier capacity question when thinking about supply constraints earlier in the year net capacity has come back online you said.
Common throughout the whole industry.
As Andy do you think Theres an opportunity once you start building out capacity in the future that form could take some share gains from any supply constrained.
Editors.
Yeah, I think all of us.
I'll speak about sort of the market segments, we operate in but I think.
Most suppliers in these segments had to deal with some sort of disruption and reduced capacity in the first half of 2020 came at different times around the different in around the world and in in different ways, but I think I'd characterize our served markets. There is all being capacity constrained right now.
Things like advanced probe cards in engineering systems are not easy to build and so there is only a handful of suppliers, including form factors that can really produce into those spaces.
You know we've made the decision to make some investments to both add capacity.
Over the longer term clearly a 90000 square foot building is going to offer a significant manufacturing capacity increase but we're also not going to do it all at once we're going to be fairly gradual.
How we outfit this building and the number of tools, we add to it to make sure that we keep our supply and demand and reasonable balance but over the long term you know that some of the secular growth trends, we've talked about we're pretty bullish that the advanced probe card market is going to continue to deliver market growth outside the semiconductor industry and we want.
I have.
Sort of the flexibility and optionality to be adding capacity inside a larger footprint and go when that demand.
Great. Thank you and then just one on the DRAM market.
Thank you know the constraint.
Over the next few quarters is the main driver still just the technology transitions or have you seen any early signs of capacity growth within the market.
Yeah, I mean a.
Probe card demand remember is is driven by new designs right. So new chip designs, whether they be on existing nodes or new nodes. So you know a node transition then I think there's a fairly decent understanding is among the supply chain that there are some node transitions taking place in DRAM right now that he's going to drive.
Probe card demand, let's say for us fewer capacity tends to be less of a driver. Obviously, if a customer is going to produce more wafers as an existing design, they're probably going to need more probe cards, but where we see the big.
Spikes in demand for DRAM probe cards is on node transitions and new design releases.
And that's part of what we're seeing right now that's helping the relative strength in the third quarter.
Great. Thank you.
Thanks.
Thank you and as a reminder, if you have a question at this time, Please press star and the number one.
Our next question goes to the line Charles shy with Needham and company. Your line is open.
Hi, Thank you for taking my question. This is Charles she on behalf of Quinn Bolton.
I'm not sure. This question can be bounce drafted by Mike or shy, but.
If I look at what point up your guidance for third quarter. Upon the it's about roughly 17 million up.
Sequentially and if you want us to model like DRAM revenue.
Roughly 30 million level about a million up so I have to think that.
The foundry logic part of that business is property holding up very well and or you even like grow sequentially by about another $10 million, So I really wonder.
Where did the strength.
Our or even the girl is really coming from the foundry partners.
Business or not.
Okay coming from your largest that logic customer and on top of that I think we you guys talked about.
May be somewhat.
The man on the largest logic customer I could be transitory as we've talked to in Q4 last year.
Are you still thinking about that or you have really changed your view on that and whether that customers really going to set a new normal standup at $30 million, maybe now kind of $16 million.
Charles as Mike I'll take that one a lot it different elements to that question. Let me see if I can try and distill. It so sequentially Q to Q3, you're right in big round numbers at the midpoint were up a little less than 20 million. We already discussed I think it was Craig.
Question, the DRAM was probably going to be.
Around the 30 million dollar level, which would represent again in big round numbers up about 10 million sequentially.
So the foundry and logic business as well as some of the other businesses. The systems business continues to do pretty well all contributing to some level of sequential increase as we go Q2 Q3.
I think where we see particular strength in that mix really is in the foundry business. If you think about the seasonality or design release cadence of those businesses, we're coming up on a time when a lot of the fabless customers are aggressively releasing on ramping designs primarily to meet a late year.
Handset release cycles, so lots of activity there.
You know.
So lots of different puts and takes that get us from Q2, Q3, but DRAM and then a little stronger in the foundry business are probably to the big elements.
Returning to the microprocessor business.
You know we touched on this a little bit earlier in the queue in a session I think.
Some of the elements that.
Caused us to be a little bit conservative when we gave when we talked about Q4 and the strength to that customer I think are probably a little more robust things like test intensity. This multiple node overlap probably continues for a long time, even as seven nanometer gets thrown into the overall factoring.
Next we would still expect 10 nanometer to be around so I think there's some elements of it the get us above the sort of previous expectation of 100 million dollar annual run rate I don't think the run rate. We've delivered in the first part of 2020 are sustainable at that level, but probably think about it is somewhere in the middle of the 100.
Million dollar annual run rate and then the run rate we've been operating out of the past couple of quarters.
Thank you.
Thank you and I'm not showing any further questions I'll now turn the call back over your this discussion for closing remarks.
Thanks, everyone for joining us today, we're looking forward to touching base in a little under a month, where we're going to provide you with a new model update and as I said take a step back and look at some of our markets and the growth opportunities that are driving form factors business toward that next target model. Thanks.
Again for joining us and stay safe.
Ladies and gentlemen, this does conclude the program. Thank you for participating you may now disconnect.
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