Q4 2020 FormFactor Inc Earnings Call
Thank you and welcome everyone to form factors fourth part of 2020 earnings Conference call on today's call are Chief Executive Officer, Mike Lessor, and Chief Financial Officer, Shai Shahar before we begin Jason Cohen, the company's General Counsel will remind you of some important information.
Thank you.
Today, the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the Investor Relations section of our website.
Today's discussion contains forward looking statements within the meaning of the federal Securities laws. Examples of such forward looking statements include those with respect to the projections of financial and business performance future macroeconomic conditions, the benefits of acquisitions and investments in capacity and information technology the impacts of the Covid.
19 pandemic the impact of regulatory changes the anticipated the band for products, our future ability to produce products the development of future products and technologies and the assumptions upon which such statements are based on.
These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call information on risk factors and uncertainties is contained in our most recent filing on form 10-K, with the SEC and our other SEC filings, which are available on the SEC's website at Www dot.
C C dot Gov and in our press release issued today for.
Looking statements are made as of today February for 'twenty 'twenty, one and we assume no obligation to update them also as an aside since this is an entirely remote earnings call for US. Please bear with us on any audio delays with that we will now turn the call over the form factor of CEO, Mike Schlesser.
Thanks, Jason and thank you everyone for joining us today.
For in fact of delivered strong results in the fourth quarter of 2020, setting all time quarterly and annual company Records for revenue non-GAAP operating profit and net profit.
I want to thank and congratulate the global form factor team, who demonstrated a combination of agility and tenacity to overcome the myriad of challenges and deliver these record results.
As we begin 'twenty 'twenty, one robust demand for our products continues and we're adding capacity to meet that demand.
However, even with the strength of produce these results the fourth quarter had its unique challenges as evident from gross margins below our October outlook range.
Shai will provide more details later, but I'd like to start our call by addressing this issue.
This gross margin reduction was caused by two primary factors of approximately equal impact.
First in our probe card segment, we reserved the warranty costs for some early life reliability failures on the new foundry and logic product release.
Since mid November our team has worked closely with the affected customer to resolve the issue and this customer is qualified or modified architecture that eliminates the problem.
This issue is now closed as we are shipping replacement units and volume and have implemented improvement actions and our product development release processes.
Second in our system segment, we executed against an unusually unfavorable product mix as we shipped several significant lower margin orders to end the quarter.
These orders contained fewer high value features and options than in our typical mix as customers configured systems to meet a variety of end of year budget lead time and volume purchase requirements.
Some unfavorable product mix continues in our system segment backlog, but less than in the fourth quarter.
As we described in the past the diversified nature of form factors design specific consumables and R&D driven product mix will produce quarterly fluctuations in gross margin.
Despite the short term fluctuations our long term trajectory towards the 47% gross margins of our target model remains intact.
And as you can see from our outlook, we expect the sequential increase in gross margin for the current quarter.
Turning to Mark of level details demand for foundry and logic probe cards was extremely strong in the fourth quarter the.
The strength is the result of new design releases in the Fabless foundry ecosystem, the ramped aggressively in both high performance compute and mobile applications with continued strong growth associated with five G handset launches.
In the first quarter. The specific ramps are mostly behind us and we do expect a slight sequential decrease in foundry and logic probe cards on the longer term basis, driven by five G and advanced packaging. This market is of major growth opportunity as customers utilize form factors differentiated market leading products to me.
They're highly complex test requirements for millimeter wave RF front ends next generation application processors and high power compute processors.
In DRAM, we delivered the highest quarterly revenue of 2020 as customers released and ramp new designs in a combination of technology node migrations 12, and 16 gigabit product ramps and the beginning of the H B M. Two to H B M three transition.
As a reminder of probe cards are of consumable with the specific each chip design and so demand is generated not just by node migrations, but also of the release of new chip designs, such as 16 gigabit L. P D. The euro five.
With the strong new design activity in place across our customer base, we expect first quarter and potentially first half DRAM probe card demand to continue at levels comparable to the fourth quarter.
The H P. M. Three transition is especially exciting for form factor. That's yet. Another example of industry adoption of advanced packaging with customer stacking up to 16 individuals' silicon die to meet memory bandwidth and power requirements in high performance compute applications.
In the stack die architectures, the value of testing increases as more die or added to the stack to avoid incorporating bad component of di into an otherwise good stack.
As the result is advanced packaging schemes like H B M. Three year adopted you're seeing of substantial growth in test intensity.
On top of that the technologies required to test. These devices are extremely complex and sophisticated the.
The dimensions of the individual Mems fabricated probe are comparable to the human hair the.
The carried power it over an amp of current and signals that tens of gigahertz will lasting millions of contact cycles.
Moreover of typical probe card contains tens of thousands if not hundreds of thousands of precisely assembled Mems probes.
The combination of increased test intensity, which expands the number of probe cards required per wafer out and test complexity, which widens form factors competitive advantage is characteristic of all types of advanced packaging as.
As the industry's focus moves to post fab integration to offset the slowing of fronted Moore's law wafer test and probe cards or taking a prominent role in enabling a variety of advanced packaging schemes like H B M stacking of DRAM die and heterogeneous integration of chip lifts and or at least partially responsible.
For both for the double digit growth we've delivered in both 2019 in 'twenty one.
The secular growth trends support our investments in capacity with increased capital expenditures, including our Twenty-twenty purchase of a new 90000 square foot factory in Livermore, which is scheduled to begin revenue shipments in the second half of this year.
Yeah.
Turning to M&A.
Following two acquisitions in the second half of last year. Our team is focused on integrating our additions the.
The advantage probe card assets, we acquired in July are now fully integrated into our probe card operations and we have launched an internal program to incorporate several technology sub components into form factors probe card roadmap.
We are also making progress introducing the acquired mainstream NAND flash probe card products into the global form factor channel and are working closely with multiple customers on first half 'twenty 'twenty one qualification plans.
Our addition of H P D. In the fourth quarter is also proceeding according to plan, we've integrated S G&A functions, but the broader form factor organization.
The combination of form factors customer relationships and global footprint together with H P. DS World class cryogenic thermal control on test expertise has enabled us to engage companies and research institutes, leading in the nascent field of quantum computing in the U S, Japan and the EU.
Although we do not expect of significant financial contribution from these activities in 'twenty and 'twenty. One we are excited about the long term growth prospects, enabling quantum computing with our emerging leadership position and cryogenic tested measurement.
Finally with record fourth quarter results and a solid first quarter outlook, we are making progress towards the target financial model. We unveiled last year the delivers $2 of non-GAAP earnings per share on $850 million of revenue.
Test and measurement is becoming a more important and strategic place in the semiconductor industry driven by trends like five G and advanced packaging.
Our leadership position in these attractive markets paired with our differentiated strategy and disciplined execution will drive continued growth and share gains as we progress towards our target model.
Shai over to you.
Thank you, Mike and good afternoon.
As you saw in our press release and as Mike noted we concluded the year with all time record quarterly and annual revenue as well as non-GAAP operating profit and net profit driven by continued strong demand in both of probe cards and system segment.
Fourth quarter revenue and EPS were above the high end of our outlook ranges for <unk>.
Gross margin was below the low end of the outlook range.
Phone factors fourth quarter revenues were $197 million and 11% sequentially.
Sure.
Quarterly revenues increased 10% year over year and contributed to total fiscal 2020 revenues of 600 of $94 million, an 18% increase compared to the.
On Monday.
Probe card segment revenues were $162 $5 billion in the fourth quarter, an increase of $12 million of 7% from Q.
Free.
The increase was driven by higher foundry and logic and DRAM revenues, partially offset by a decline in search revenue.
Systems segment revenues were 45 million daus in Q4, an increase of $7.5 million for.
For 27% of the third quarter.
Within the probe card segment robust demand for foundry and logic continues with revenues growing $14 million from Q3 $123 million.
The 62% of total company revenues in Q4 of the slight increase compared to 61% in the third quarter.
The room revenues worth 35 million bonds in Q4 income.
<unk> of $3 million for the fourth quarter and were 18% of the total quarterly revenues same as in the third quarter.
The first communicated in the last earnings call.
The demand has returned to work through the leads to be a more normalized quarterly run rate.
Net revenues of $5 million in Q4 for $6 million lower than the third quarter.
On a three percentage of total revenues in Q4 savings in Q3.
As expected net revenues continue it can be lumpy from quarter per quarter.
GAAP gross margin for the fourth quarter was $78 million of.
For $39 four per cent of the revenues as compared to 43, 1% of Q3.
Cost of revenues included $7 $9 million of GAAP to non-GAAP free concerning items, which we all the time you know press release issued today and in the reconciliation table available on the Investor Relations section of the website.
The increase of $1 $5 million and the non-GAAP frequent spending items in Q4 as compared to Q3 was related to the acquisitions of Adventist vocal on assets during the third quarter and HP did during the fourth quarter.
On a non-GAAP basis gross margin for the fourth quarter was $86 million of $43 four per cent of revenues we.
330 basis points lower than the 46, 7% non-GAAP gross margin in Q3, and 60 basis points below the low end of our outlook range, mainly due to the warranty costs and less favorable mix as Mike mentioned.
Our probe card segment gross margin was 43, 9% in the fourth quarter. The decrease of 230 basis points compared to 46, 2% in Q3.
On the warranty charge accounted for 110 basis points of the decrease in the consolidated gross margin and the remaining decrease was due to anticipated less favorable mix.
Our Q4 system growth system segment gross margin was 41, 3% as compared to 49 eight percentage of the third quarter.
The decrease of 8.5 percentage points was driven mainly by an unusually unfavorable product mix with the.
The creation of the systems gross margin accounted for 1.5 per cent of the three 3% overall decrease in the gross margin.
We expect of the system segment gross margin to improve to <unk> 40 in the first quarter.
And as we've previously said, we expect it to range between the high forties Hello fifties.
As we make progress towards achieving our target financial model gross margin of 47% margins will fluctuate from quarter to quarter.
Our GAAP operating expenses were $56 8 million for the fourth quarter, two point of $1 million higher than any of the third quarter.
Non-GAAP operating expenses for the fourth quarter with $48 1 billion for.
For 24, four percentage of revenues compared to $48 $4 million of 27, 2% of revenue in Q3.
The decrease of zero point $3 million, mainly due to onetime items for Q2 remediation costs in the third quarter for.
Last year of said by higher Q4 performance based compensation and the addition of the business for the acquired in Q3 and Q4.
Company non cash expenses for the fourth quarter included seven $7 million for the amortization of intangible assets $7 $1 million for stock based compensation and depreciation of $6 $2 million.
Fourth quarter of amortization of intangible assets of $1 $2 million higher than Q3 is the result of the acquisitions completed in the third and fourth quarters.
Stock based compensation was one 5 million barrels of higher than the Q3 due to the timing of annual grants and the increase in depreciation of $1 million from the third quarter. As a result of recent investments made in capacity expansion and acquisition.
GAAP net income for the fourth quarter was $19 3 million or 24 cents per fully diluted share compared to 22 $9 million of 29 cents per fully diluted share in Q3.
The non-GAAP the safety stocks rate for the fourth quarter was seven 5% down from 12, 7% of Q3.
The slower rate is the result of the relative increasing export driven in Q4, which benefit from the regulation regarding global intangible low packs of income also known as guilty as we mentioned on the previous earnings call.
The application of these new regulations resulted in the onetime cumulative benefits of 2020.
Which caused the full year effective tax rate to be 13, 4% slightly below the lower end of the 15% to 20% range. We previously communicated.
We continue to estimate the the annual non-GAAP effective tax rate for fiscal year, 'twenty 'twenty, one will be 15% to 20%.
As a reminder, on a cash tax rate is expected to remain at 6% to 8% of non-GAAP pretax income until we fully utilize our remaining U S based R&D credit.
Fourth quarter non-GAAP net income was $35 million of 44 cents per fully diluted share compared to $31 million.39 per fully diluted share in Q3.
In summary, EPS was slightly above the high end of our outlook range due to the higher revenues and lower effective tax rate.
The offset by the impact of the lower gross margin.
Moving to the balance sheet of cash flows we.
We generated $31 million of free cash flow in the fourth quarter compared to $37 million in Q3.
Speaking of total cash and investments to 259 million barrels in the end of the quarter.
The sequential decrease in free cash flow in the fourth quarter, reflecting the anticipated increase in capital expenditures.
As of the gambles of the fourth quarter, we had two term loans remaining on our balance sheet total $34 5 million of bumps.
We invested $14 million in capital expenditures during the fourth quarter compared to $5 million in Q3, which brings total 2020 capex of $56 million as compared to $21 million in fiscal 2019.
This increase is in line with our previous communications and chiefly reflects capacity expansion and the new building on levo more capex.
We expect to continue the significant investment in capacity in 2021, and Capex for the expected it could be between $80 million to $100 million.
As a reminder, we ex.
The capex to returns of three 5% to 4% of revenues in our target financial model. After we conclude these capacity expansions.
I'm also glad to report that the during Q1, we went live with our ERP consolidation the significant project unify our ERP systems will improve our operational efficiency and help us achieve on target financial model and the go live even for the milestone.
At quarter end, our total cash balance exceeded the debt balance by $223 million, an increase of $50 million from Q3 quarter end.
The increase is mostly attributable to strong cash flow from operations less cash used for the HBV acquisition and capital expenditures during the quarter.
Turning to 'twenty 'twenty, one first quarter non-GAAP outlook.
Mike mentioned the expected generally strong demand for advanced probe cards with lower demand in foundry and logic Bureau in the system, partially offset by an increase in flash.
The soccer, the resulting of Q1 revenue outlook in the range of $176 million to $188 million.
Product mix, we would expect the expected to be more favorable in Q1 and more and most of the unusual factors that impacted Q4 gross margins are not expected to equal if you want the.
<unk> and non-GAAP gross margin outlook for the fourth quarter in the range of 44% to 47 per cent.
At the midpoint of these ranges, we expect Q1 operating expenses to be comparable to Q4 due to the usual annual benefits reset and the higher R&D spend offset by lower performance based compensation.
Accordingly, non-GAAP earnings per fully diluted share for Q1 is expected to be between 34 40 per cent.
Reconciliation of our GAAP to non-GAAP Q1 outlook is available on the Investor Relations section of our website and in our press release issued debt.
The vast let's open the call for questions. The Asquith when you asked your question. We've indicated a few of the rest of your question to Michael to me. He says you can imagine where still most of the favorable.
Operator.
As a reminder to ask the question you will need the press star one on your telephone.
For the J your question for the bound game. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Brian Chin from Stifel. Your line is now for them.
Hi, there good afternoon, and thanks for letting us ask a few questions net maybe just the first question.
In terms of the the gross margins in for Q, where those are lower gross margin products.
Nah is and also expect to recognize all of the <unk> or are they probe systems, because I know you obviously have the.
Portfolio now of products in the system revenue component.
One of those probes systems on I guess were they not in your prior forecast in the they also represent a good chunk of the revenue upside that you reported in <unk>.
Hey, Brian the two short. Thank you. Thank you for the question and yes. The the the majority of the lower margin and profit came from the systems segment.
And some of these some of these sales were not for forecaster, but in a way that we always have a different mix of product in this quarter the <unk>.
Mix was makes durable in a very unusual way.
As we said we see less of these remaining in our backlog for Q1, investor and we expect the gross margin too.
Yes.
The better than Q1, and also what I want to remind everybody that our margins will continue to fluctuate. We saw in Q4 of 17 of the low system gross margin.
And putting us in each of the the Q3 of 2020 of the debt margin went up to $46 seven and so this quarter it on Figaro.
The unusual unfavorable mix, but we are confident debt, but we are on our way to achieve of 47 gross margin with all of our targets for much at all.
Got it for.
For my follow up just the.
It may be exclusive or it may not be mutually exclusive but I also note China sequential revenue was up pretty high magnitude is there any sort of overlap there with with sort of the systems or is that more tied to any of the probe card business.
Yeah, Brian It's Mike I'll take that one of good observation the China revenue was again up pretty significantly.
The bulk of that continues to be consistent with the insight we provided last quarter. Its probe card shipments to multinationals, who are directing us to ship into their assembly and test facilities in China.
And so the bulk of the revenue uptick for China really has nothing to do with the systems business, having said that there were some lower margin configurations.
In the the probe systems business that did contribute the the winning to China. The did contribute to the the shortfall in gross margins in that segment.
Thanks, Mike maybe last question the follow up.
The address your production capacity expansion.
I guess.
By the <unk> and maybe for <unk> can you increment up your capacity in Livermore say 510 per cent is that kind of a.
Abandoned makes sense in terms of what you might be able the incremented up.
So maybe back to shy in terms of gross margins can.
Can you quantify any drag you might expect of some of that new capacity. It does ramp up and how that might be allocated across the year.
Yeah the Allstate.
Brian It's Mike I'll start with the trajectory.
As you've seen through 2020, even with all the different restrictions, we've had manufacturing in California, and Oregon, We managed to steadily increase capacity and we expect to be able to do that in the front part of 2021, he and the advance of bringing on the large capacity expansion associated with our new 90000.
On square foot facility now that'll ramp purely gradually as I said, we expect to make revenue shipments starting in the second half there, but I think it's reasonable to also assume that.
Inside of our existing footprint, we're getting more efficient and something like a you know high single digit capacity increase percentage is probably not unreasonable from the existing footprint, obviously, adding the new factory gives us the legs beyond that then take us to the $850 million.
The level of our target model.
Yeah in terms of on the impact on on the gross margin I think the best way to describe the piece that we took hold back into consideration when we put out a model and sort of the 47% of gross margin with our target model and I'd hate uninsured communal revenue as Mike described pik debt capacity extension into.
<unk>.
Got it.
It kind of at the front end of that you don't necessarily expect.
The 50 basis point or some kind of drag on the second half of the year as some of that new capacity comes up.
They're not necessarily and we need to remember that the mix do you have the biggest impact on all of them one on gross margin. So the other factors in addition to.
Just go live and as Mike said, we're going to do it gradually.
And the training on the tools and adding capacity on top of the building and.
For the rest of the day.
What kind of stuff.
Great I'll hop back in the queue. Thanks, so much.
Thanks, Brian.
Thank you. Our next question comes from the line of Charles <unk> from Needham <unk> Company. Your line is now open.
Hey, Charles she here. Thank you for taking my question.
Mike on shy I have a question regarding your quarterly run rate here.
Currently of fourth quarter run rate is almost the if we annualize that you are getting almost close to 800 million per year, which is.
Properties on 10% away from the $850 million.
Motto.
Just wonder, especially on the system revenue side of it looks like of this was a record high for you on are we looking at the new normal here or the weeks of expect some of the modulation of the system's revenue going forward.
Uh huh.
Charles I'd expect to see modulation in all of the different segments, if if I back up on look at.
The constituent drivers of revenue for form factor, we've put together a pretty diversified portfolio of drivers both through organic growth and the M&A we've done over the years.
And in any given quarter, there's going to be different puts and takes associated with those in the fourth quarter.
As you noted we saw strength basic.
Basically across the board.
We had very high foundry and logic revenues driven by the Fabless foundry ecosystem and by the Idms, we had the highest DRAM probe card revenue in 2020 and as you note systems revenue was up both organically and due to some of the acquisitions, we've made over the past year or so.
On that segment. So your observation associated with the $800 million run rate certainly is a reasonable one.
Our outlook for Q1.
It comes down a little bit as some of those things.
Okay come back to lower perhaps more normal levels, but.
We're going to see fluctuations quarter to quarter. That's why we've tried to build a diversified set of revenue drivers. So that we can manage those fluctuations inside each of our customers in the inside each of our different segments.
Got it got it thank you.
Mike If I may.
Just to dig a little bit more integral of probe card side of the business of definitely you you did how us that you expect some.
Modulation in the first quarter for the foundry logic signing of given that the design release activity cannot probably off.
Slow down a little bit.
As I stated with the five T handset just wonder.
And the lines of model Youre sort of expecting 8% plus or minus kind of the advanced probe on the probe card.
<unk> revenue growth.
Given that the last year more probe card was having a double digit growth do you also expect the that growth rate in content on you want to be slightly below the long term growth rate or you think 8% is still a good number for this year on going forward.
Well the the 8% was as you note on a longer term growth rate, obviously, the semiconductor industry, although collectively we've been pretty fortunate over the past couple of years to have much less cyclicality.
You're still going to have some fluctuations in demand.
For the advanced probe card business in which we lead.
We have had very strong growth for the past couple of years, and so I think perhaps a little bit of moderation in digestion into 'twenty 'twenty. One is not a bad scenario to thinking about having said that you know you look at some of the drivers like five G. In advanced packaging and they continue to drive strong customer.
Asthma in a wafer test and measurement and so you know it's still obviously.
Obviously very early in the year, but a lot of the conditions that did drive that strong growth in the past couple of years continue to be in place.
We're working hard to put the capacity in place to execute on those.
But you know certainly high single digits is a reasonable long term growth rate to think about our probe card business fluctuations will happen quarter to quarter for share.
Got it got it. Thank you maybe my lots of questions I wanted to ask a little bit more about China on knowing that the domestic Chinese customers do not really have a major contribution of lot of nowadays with the multinationals.
Do you over the past the quarter do you see any change of behavior any stockpiling by with some of the Chinese domestic Chinese customers ongoing.
Our Madden economy would be great.
Yeah, I mean, we.
We're working pretty closely with a couple of those key customers key China domestic customers, especially in the memory space. You know form factor, obviously has a nice technology differentiation the in memory of especially of DRAM.
And so we've been quite closely partnered with some of those customers.
They're ramping fairly aggressively so I don't think there's the opportunity for a lot of stockpiling.
It would be difficult for us to tell in the in any way.
But I think we continue to work closely with those customers to monitor the regulatory environment.
And make sure that we can extract whatever opportunity that we can out of the domestic China customers. In addition to serving the region with the large multinationals that were we're supporting them.
Thank you.
Thanks Ross.
Thank you. Our next question comes from the line of Craig Ellis from B Riley. Your line is now open.
Yeah. Thanks for taking the question and congratulations on the nice revenues in the quarter.
Mike I wanted to start with a question for you so.
The systems business was particularly strong in the quarter I don't recall the at least I don't see on my model of ever getting about $30 million, we were rounding of $35 million.
At times in the past you've helped us see some of the different you know.
Technology drivers that are contributing to system shrink so book.
Was it in particular the contributed to the system strength, then and we're there.
Was there or were there a singular or multiple tech themes that you're seeing as you see that kind of demand pull on the corner.
Yeah, I think as a reminder for people the the systems business really serves.
The leading edge R&D and development for the key customers in the industry.
The you know Theres a couple of drivers to that first of all of there's the organic piece of essentially the engineering probe business, we acquired as part of the Cascade Micro Tech deal, but as a reminder, we also report F. R. T. Our advanced packaging metrology and inspection business that we acquired in late 2019 and.
Now H P D. The cryogenic test and measurement business, we acquired in Q4, so there's organic growth components associated with some of the.
Exciting things happening in the semiconductor industry, whether it's Cmos advancements some of the auto electronics pieces that are served by that engineering probe business. The legacy Cascade business, but we've also got some nice additions in acceleration through our M&A strategy that are being reported in the system segment.
That's helpful. So so would it be fair to think that should be really of kind of low to mid thirties business going forward or or for whatever reason.
Could it could it get back more towards the mid 20th square it was corpus tracking over a multiyear basis.
Yes, I think with the with the M&A editions, although you know H P D for us a little bit more futuristic in serving quantum computing. There is of contribution there, but I'm not sure. It would shift the way you model much the.
The F. Our tea business continues to grow nicely again, driven by the unique metrology and inspection requirements of advanced packaging. That's the theme for for vector across our businesses, whether they be probe cards are for engineering systems.
And so you know going back to the mid 20 levels I think would be of disappointment for us because it implies some contraction among all of those businesses.
As you know we get adoption with the F. Our tea business is we get a little bit of momentum around the cryogenic test and measurement space with H P D and see some of the the slower but steady growth associated with the classical systems business.
I think it's reasonable to expect that segment to report.
Certainly in the low thirties.
That's very helpful. I also wanted to ask a question about customers and that's really of two part question I'll keep it with you. The first part of the question is given.
Given Intel's historic.
Significance as the customer to the company.
And and following some recent commentary from an incoming CEO that seems to point towards a retained significant manufacturing operation.
I was hoping to get your updated views on Intel and then.
With that as the takeoff point, if you could talk about some of the opportunities that the company has to expand its customer base over time, it's been a big part of the growth story over the last.
For a shearson and what are the opportunity for you see out there today. Thank you sure.
Our largest customer represents an anchoring our relationship for the company for long term engagement well over a decade long and we spend a lot of our resources and management bandwidth, making sure. We're in lockstep with that customer having said that you know it's a little early to understand the <unk>.
Implications of their CEO transition I do think you know is the spectrum of manufacturing strategies that are available to them.
From IDM on one into fewer fabless on the other certainly the recent comments would indicate that the things of swung back a little bit closer to the idea of the strategy, but I think.
If we look further beyond to the rest of the industry.
This is <unk>.
Basically why form factor has made it such a priority to serve all of the leading customers in the industry, whether they be IV EMS or foundries.
In all of the different segments.
Because we want to make sure that we're able to support these customers and have the opportunity to win business no matter what their manufacturing strategy is obviously, a very dynamic time in the semiconductor industry and we want to have our bases covered so that we could have do have a good opportunity space. There are a couple of key customers both in the microprocessor space and in the mobile and automotive.
Space, where there are some objectives that we have to go gain share.
And expand and continue to diversify our our overall customer base, even from the leadership position that we have.
That's helpful. Thank you and then lastly, if I can sneak in one more for dropping back into the queue shy helpful to get the color on the Opex intensity for the March quarter the.
Question is what would the contour of Opex look like beyond that are there things that are happening either with the R&D for.
Or are other programs may be related to just new facilities that would.
Cause us too broad.
To have to think about some incremental expense or would it potentially even drift down. Thank you shar.
Sure. So if you look at Opex for 2020 for the overall year it was 26% of revenue.
And given the growth in 2020 and the required capacity expansion.
We put some some programs are on hold in 2020, just because of COVID-19, the restrictions and stuff like that in 'twenty and 'twenty. One we do expect opex to catch up.
A lot of investments in R&D.
But also the smaller things like travel of the T O.
The open beneath where it wouldn't.
Restart the at some point, so we will continue to invest in R&D.
Expect to see more leverage in SG&A, and making progress on that in 2021 on our way through the the target model of R&D of 3% in SG&A of 12% with growth.
So I don't think of it might be there in 2021 book.
On a weighted for Veeva.
Thank you.
Thank you. Our next question comes from the line of Christian Schwab from Craig Hallum. Your line is now open.
Hi, This is Tyler on on behalf of Christian Thanks for letting US ask a couple of questions first question for Mike probably.
Kind of revisiting of previous question, maybe asked another way.
Your foundry and logic probe card business was very strong in Q4 here.
You said that you expect it to be down maybe.
Down modestly sequentially in Q1, so the question is.
Would we still expect after the strong 2020 for the foundry logic to grow in 'twenty 'twenty, one and if so what would be kind of the major drivers. There I know you mentioned five G ramps there.
We're kind of old record Q force. If you do expect growth kind of what what are the major drivers of that you point to thanks.
Yeah. So first of all I certainly wouldn't characterize the five G ramp is over but there was remember probe cards are specific to individual customer chip designs and so if you have customers all ramping of particular design at once that's going to create strength in that time period, where you deliver.
During and recognizing revenue on those cards and this is a business. That's very time sensitive right you have to deliver the probe cards in time for those customers to test the wafers.
So we don't have a lot of flexibility on delivery timing.
So you know you had the coincidence of both our largest customer returning to almost historically high levels in the fourth quarter in.
In the Fabless foundry ecosystem, a couple of mobile and a couple of high performance compute designs of the mobile designs for sure of associated with five G that ramps hard.
We just see those the specific concentration of designs not necessarily happening in the first quarter I mean, our guidance is obviously not down by a huge amount and so you can see theres still significant strength of that.
Longer term as we look through 2021.
And next couple of years towards the target model growth in foundry and logic probe cards is one of the fundamental underlying drivers of our path towards that model and five G is a huge part of it. So by no means is the five G ramp over we just had a bunch of design stack up the we had to deliver in the fourth quarter. The led to the all time.
Record quarterly revenues.
It makes us perfect understood and thank you for clarifying.
The second question, then moving out of the DRAM probe card side.
The strong end of the eight year. After after a couple of quarters of more of digestion in the beginning of 'twenty 'twenty.
So do you expect that kind of flat Q1 may be even the.
First half growth wondering if loans.
That kind of 35 40 level.
Sort of baseline for that business or.
Over time couldn't get back the.
All of about $40 million of quarter license on a couple of years ago.
Yeah, the way, we think about DRAM, and obviously being a supplier in the DRAM.
Fly chain value chain, you have to be prepared to deal with cyclicality of lease on a quarterly basis. We saw that as you noted in 2020 right we win.
From what was the multi year high in Q4 of 19 at about $40 million on DRAM revenue down to $20 million of next quarter, that's a pretty extreme swing, but I think does represent the bands in which that business should be expected to operate in any given quarter.
'twenty 'twenty, one, though does seem to be.
A pretty decent year for the overall DRAM supply chain.
Is gonna be investments in capacity as we told you we see strong design pipelines for from our customers that are feeding.
Our business.
So that a reasonable expectation.
Any given quarter.
Is probably a $30 million, maybe low 30 million kind of run rate for DRAM.
With some unusual swings up and down as different design release cadences either.
Our additive force attractive with each of them so.
Think about it in 35 is probably the high end of what I want to give you for.
And average level, but certainly starts for the three.
That's great very helpful. Thanks, guys.
Thanks.
Thank you.
As a reminder, ladies and gentlemen, if you have a question. Please press Star then the number one key on your Touchtone telephone.
Our next question comes from the line of Tom Diffley from D. A Davidson your line is now open.
Hi, Yes. Good afternoon, thanks for taking the question Mike.
Mike maybe another geographic question for you when you look at Taiwan. It was about 25% of of the business, but I was surprised to see the TSMC was not of 10% customer. So maybe just talk a little bit about the dynamics in Taiwan.
Sure well, there's a lot of action in Taiwan, we have one of our large memory customers has a large production and test facility there.
A lot of the outsource assembly and test capacity of the World is in there. So Taiwan revenue is not necessarily the world's largest foundry.
But you know with them they were of 10% customer in the third quarter. They were close to a 10% customer again that the record revenue levels of the fourth quarter.
And given the continued momentum we have in delivering into the air advance nodes.
As a reminder of this as you know for US the 10 nanometer seven nanometer five nanometer kind of business, but we're doing a nice job I think of broadening that business, we've got multiple mobile and high performance compute designs. We're shipping here in the first quarter and that wouldn't be too surprised to see them back on the 10% list.
Sporadically up and down in the in the near future.
Okay. So in general how often do the assembly and test guys buy the probes from you versus the foundry.
On the wafers went out the door.
It really depends on individual customer and even individual projects will have some customers who.
Who like to hand, all of that over to either the foundry or of the outsourced Assembly and test house will have some customers that want to manage it very carefully so.
It's one of the unique aspects of this business is you have a very broad.
The engagement with all kinds of different elements of the semiconductor manufacturing chain.
Okay great.
Moving over to the flash business, obviously, its very lumpy, but.
But I was surprised the dropped as much as it did especially since the acquisition of the sand tests of technology I thought maybe it would be of a little bit more of a sustained business going forward.
Certainly that's that's one of our aspirations as we talked about that acquisition there were two fundamental tenants to it.
On the first one was there were some very interesting technology that resided there that we felt was useful on the form factor of DRAM and foundry and logic Roadmaps for the second one was we felt like we may be able to make some progress in using a cost competitive flash technologies of that team has developed and push it into the broader.
Foreign factor customer base places, where they really hadn't access before.
The second one I talked about both of these in the prepared remarks, but that second element those things take a while to come to fruition. We are in active discussions with multiple customers on qualifications for the first part of 2021.
You know the given.
That business with single digit millions revenues historically I wouldn't expect annually right I wouldn't expect it to make a big impact on our flash business until we're able to gain some traction with these additional customers.
That makes sense and then finally shy when you look at the gross margins in your target model does that require a different product mix our mix has a big impact.
The impact on margins on a quarterly basis, but if you look over the next year or two to get to the target model do you need to see certain parts of your business grow faster than others.
And so as a reminder, even though we have not really reflected in the queue for gross margin historically the systems business has the highest gross margin photo of our foundry and logic than DRAM and flash and of course, there is some overlap.
When you move from one market to another of its not like the chicken chicken.
Houston Xyrem everything flashes.
Flash is lower and so as we grow the business. When we presented the 850 model we've talked about most of the growth coming from the foundry and logic.
So the.
This will help of cheering the 47% growth mode.
But together with.
The operational are excellent that we're working on the <unk>.
ERP implementation project is one of them and the addition.
On the capacity.
And the help of course.
These are the main drivers.
Yeah.
Okay. Thanks, Mike Thanks, Jay.
Thanks, Jeff.
Yes.
Thank you. Our next question comes from the line of Brian Chin from Stifel. Your line is now open.
Either again, just maybe a quick follow up.
The way for Mike.
H band of three Soi see.
Growth when you when you kind of look at the Vanguard of advanced packaging technologies.
You think that will really begin to favorably impact your revenue CAGR and probe cards.
I think you've seen some of it already if you look at the the probe card market in 2020. It almost certainly grew faster I mean, we'll find out in a couple of months when VLSI rules of their survey.
But on the almost certainly grew faster than the historical correlations of the semiconductor industry that we've observed.
That also was the case in 2019.
I think youre seeing the leading edge of some of these things, but each of the projects you talked about still pretty early innings. If you look at those as a fraction of wafer starts for any of our customers. They are still relatively small having said that they consume the good traction of the test capacity because of the need for high test intensity and high test.
Complexity to make sure you've got something close to known good die as we've talked about in various well most recently the analyst day, we did last year. So.
I think you're already seeing the leading edge of this if you look at our results and the probe card market results over the past couple of years.
Obviously as the semiconductor industries continues to accelerate adoption of these I think various customers has made a pretty firm comments that for seven nanometer and five nanometer. They view advanced packaging with these various architectures as being a big part of their innovation roadmap.
GAAP I think youll see that probe card intensity continues to increase.
Okay, It makes sense and maybe.
The other quick follow up.
In terms of going back to sort of the commentary around modulation of of revenues in the segments.
At a high level across the semi industry, it's harder in some areas than others, but yes. There is some of the ability to sort of meet wafer demand.
Some areas of maybe advanced sort of way some areas of mature nodes.
You guys play more of the advanced area, but based on that those sorts of wafer constraints further upstream for you guys.
Do you see that playing into it in any way playing on the modulation of your revenue as we kind of work through this year.
That's a tricky one I think if you think about it from a bottoms up perspective for sure there are individual designs with individual customers the get.
Pulled in or pushed out depending on the priority calls they make with respect to the overall.
Capacity, they're able to secure.
And so you know at a.
In the individual design level, you see that at work every day as our mix shifts around in the factory.
But you know part of our strategy again has been to try and be exposed to so many of those different drivers that the essentially all average themselves out true the diversification of our business across all of the different puts and takes in the industry.
Okay, great. Thanks Robby.
The answers for the questions.
Thanks for.
Thank you. Our next question comes from the line of David Dudley from Steelhead. Your line is now open.
Yeah can you hear me.
Yep, we can hear you.
Sorry of had some technical issues.
I think in your prepared remarks, you talked about.
Qualifications in the first half of of this year and ramping up in the second half of the of the calendar year could you just elaborate a little bit more on on that and do you have targets for growing this business now that you seem to be engaged with the broader set of customers.
Yeah. So I think I'd characterize the first part of 'twenty 'twenty, one is planting some seeds the acquired on.
Our legacy NAND Flash business, our legacy Flash probe card business remember, we need to be fairly opportunistic essentially skimming. The high end of the opportunities that are available to us because it really is the higher cost platform and we can't be cost competitive in the real sort of majority of the <unk>.
NAV.
The advantage acquisition gives us what I characterize as an option to go participate there and so we've begun discussions with the couple of existing form factor customers on beginning of qualification in the first half of the year.
Remember the qualifying a new architecture with a major customer usually takes a while and so I wouldnt want to create the expectation that we'll check the qualification box in the first half and then see skyrocketing NAND revenues because we also wanted the careful that we're meeting.
All of the capacity and delivery requirements. Once we do get qualified with these customers. So it's a little early for us prequalification to be setting growth rate targets, but there is an aspiration for us to grow our NAND flash market share on the back is having a much more cost competitive NAND flash probe.
Well, maybe you could just characterize it as in do you have a target for market share.
On a growth rate for your business.
Well, so the NAND flash probe card market in round numbers between 202 hundred and $250 million a year spent by our customers.
Some of that you can probably considered to be captive to some Korean suppliers, so probably not really cervical market by us.
But if you think over the long term.
I don't think it's unreasonable that we could take our share position from.
What do we do 2000 $25 million of year, so 10%.
And over the next couple of years on the weight of the target model, maybe get that up into the teens again market share gains, where you're introducing a new product to.
The new set of customers not new to form factor, but needed that product, it's a long slow slog.
And one the we're committed to.
The sika, if we can make happen, but again, it's a little early to the to be making topline for the medicine.
Okay, and then one technical question for me.
Spoke about DRAM and Hal.
It's becoming more test intensive as you stack the DRAM parts of these type of bandwidth configurations.
What percentage of the DRAM now do you think is stacked in that configuration and what percentage do you think the market will move towards over time, I'm, just trying to figure out because it seems like the key driver to demand for both cards. So the more information here I can get the better.
Yeah, So H b M structures in general.
Maybe implicit in your question of are a pretty small.
Portion of overall industry DRAM wafer starts right the vast majority of DRAM.
Is not the stack die of high bandwidth memory configurations. These high bandwidth memory configurations, whether at the H B M. Two are now moving to H B M. Three are really targeted at the specific requirements of high performance compute very high bus speeds decent power management.
And so it's you know if you want to come out from a revenue perspective, its probably I don't know the single digit percentage of DRAM overall revenue for our customers.
Wafer starts probably a little bit higher than that because you're assembling you have to build a lot of wafers to assemble of 16 high stack of die.
So still understanding it's a subsegment of overall DRAM.
I don't think it's reasonable to expect that all DRAM will become the stacked.
But we do see some growth there and any growth there is good because of the high test intensity and high test complexity.
Thank you.
Thanks Jay.
Thank you at this time I am showing no further questions I would like to turn the call back over to Mike Lessors for closing remarks.
Thank you everyone for joining us on this first call of 2021, and we'll talk to you if not at some conferences between now and then on our next conference call. After completing the first quarter.
Take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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