Q1 2021 FormFactor Inc Earnings Call
Thank you and welcome everyone to form factors first quarter of 2021 earnings conference call.
On today's call of Chief Executive Officer of my Buffet, 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 web site.
Right.
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.
The benefits of acquisitions and investments in capacity and the new technologies the impacts of the COVID-19 pandemic the impacts of regulatory changes the anticipated demand for products, our future ability to produce and sell products the development of future products and technologies and the assumption.
Upon which such 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 filing on form 10-K with the SEC for the fiscal year ended 2020 and in our other SEC.
Filings, which are available on the SEC's website at Www Dot F. C C dot Gov and in our press release issued today for.
Forward looking statements are made as of today April 'twenty eight 2021 and we assume no obligation to update them.
With that we will now turn the call over to form factor CEO Mike's lessor.
Thanks, Jason and thank you everyone for joining us today.
From factor started the year with strong results posting the second highest quarterly revenue in company history. We.
We successfully addressed and close the two discrete issues described in our February earnings call for that impacted fourth quarter gross margins producing our first quarter recovery.
This revenue and gross margin performance paired with good operating expense control.
Produce non-GAAP earnings per share at the midpoint of our outlook range as we continued our investments in capacity technology and people to sort of long term broad based growth throughout the semiconductor industry.
For factors foundry and logic probe card business was robust again in the first quarter as 'twenty 'twenty strong demand continues.
Foundry and logic strength was evident in our 210 per cent customers in the quarter, the world's leading logic IDM and the world's leading foundry.
The underlying components of first quarter demand were similar to 2020 with multiple new mobile and compute chip designs ramping for five G data center and client PC applications.
We do expect the sequential reduction in foundry and logic demand in the second quarter, you just specific timing of the individual customer design releases as we said in the past probe cards are of consumable.
The specific to each customer chip design and the timing of those design releases and their volume ramps can create fluctuations in probe card demand.
With the well publicized investments the top foundry and logic customers are making in wafer fab equipment and capacity. We expect continued strong secular growth in this market as the capacity comes online and they begin producing new technology nodes, the new chip designs, each of which must be tested with advanced new broke guards.
Accordingly, we are aggressively executing our planned capacity and technology investments to capitalize on these future opportunities.
Turning to DRAM first quarter demand for probe cards sustained at levels comparable to the fourth quarter as customers continued to execute node transitions and new design releases on existing as well.
We expect increased DRAM probe card shipments of these already high levels in the second quarter, driven primarily by new 16 gigabit DDR for and VDI, five mobile and server designs ramping in volume.
In addition, we're supporting substantial new design activity for high bandwidth memory for H B M is this enhanced performance advanced packaging application continues to gain in market adoption in applications such as artificial intelligence.
This incremental demand has the potential to drive second quarter DRAM revenues comparable to the decade high levels delivered in the fourth quarter of 2019.
With lead times of less than a quarter, our visibility remains limited as always but we're encouraged by the current momentum in DRAM.
As Shai will discuss in more detail. The shift is expected to pressure gross margins as DRAM probe cards generally produce a less favorable product mix in foundry and logic probe cards.
This anticipated second quarter product mix swing from foundry and logic DRAM highlights the resilience of form factors operating model.
Even with this dynamic shift in underlying demand our second quarter revenue outlook range. The similar to reported first quarter revenue.
This occurs because we serve major applications at all of the leading customers in the semiconductor industry with manufacturing resources that can be flexibly deployed to serve probe card demand in either of foundry and logic for DRAM.
Although the past several quarters of been characterized by extremely strong foundry and logic man experience has taught us that there is cyclicality in variability in our market and customer demand on a quarter by quarter basis.
Consequently, ensuring that we're exposed to a broad set of opportunities through the effectively utilizes our installed capacity the central to our operating strategy.
I'd also like the highlight VLSI Research's annual survey of the probe card market, which showed the form factor again at the top position for the eighth consecutive year.
Our 19% overall advanced probe card revenue growth was fueled by an eye popping, 40% in VLSI is non memory probe card category, which mirrors, our foundry and logic classification.
For factors, 40% growth significantly outpaced foundry and logic market growth of 27 per cent as we gained share in our number one position.
This market growth was driven by the trends in five G and advanced packaging that we highlighted previously in our above market growth provides validation of form factors differentiated products meeting customers highly complex test requirements for millimeter wave RF front ends next generation application processors and hyper.
Our compute processor.
We expect this preferential share gain to continue for two reasons first significant R&D resources are required to develop probe cards to meet increasing test complexity.
And second a coordinated global infrastructure at scale is needed to support simultaneous rapid customer product ramps to high volume in multiple regions around the world.
Turning to our system segment, we executed on a more favorable product mix in the first quarter, which helped gross margins returned to target model levels.
A key factor in this improvement with shipments of multiple systems to research labs for testing devices at cryogenic temperatures.
Test and measurement of these ultra low temperatures often approaching absolute zero are critical in the enabling a variety of applications from the emerging field of quantum computing to the more mature area of infrared detectors.
Combining the capabilities, we added in the fourth quarter acquisition of H D D with our legacy engineering systems, electrical and optical test and measurement Knowhow offers us significant long term potential to drive further growth as we enable these technologically demanding R&D applications.
As cryogenic applications like quantum computing mature and reach volume production of over the next several years our early engagements in the lab positions form factor well to serve the production test needs of the industry as we continue to execute the lab to fab strategy the benefits, both our customers and ourselves.
Finally, with the tailwind from a continued strong demand outlook, we're on the path towards the target financial model, we unveiled last year the delivered $2 of non-GAAP earnings per share on $850 million of revenue testing.
Test and measurement is becoming a more important the strategic place in the semiconductor industry driven by powerful trends, including five G advanced packaging in memory content growth.
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 the target model.
Shai over to you.
Thank you, Mike and good afternoon.
As you saw any of our press release first quarter revenues for the high end of our outlook range. The second highest in company history non.
Non-GAAP gross margin recovered to slightly below the midpoint of our outlook range and non-GAAP EPS was at the midpoint of the range.
Form factors first quarter revenue were $187 million.
A five point of 3% sequential decrease from a record Q4 revenue and an increase of 16% year over year.
Probe card segment revenues were $109 million in the first quarter of <unk>.
Greece of $3.6 million or two 2% from Q4.
The decrease was driven by lower foundry and logic and slightly lower DRAM revenues, partially offset by an increase from flash revenue.
System segment revenues were $28 million in Q1, a decrease of $6 8 million Boes for 20% from the fourth quarter.
Within the probe card segment foundry and logic revenue decreased by $9 million from Q4 to $113 $4 million in Q1, comprising 61% of total company revenues, a slight decrease compared to 62% in the fourth quarter.
DRAM revenues were $34 million in Q1, a decrease of zero point $7 million from the fourth quarter and were 18% of total quarterly revenues same as in the fourth quarter.
The strong demand for DRAM continues the trends we have seen during the last three quarters and we expect of us to continue the quote unquote.
Flash revenues of $11 $6 million in Q1 were $6 $4 million higher than in the fourth quarter and were 6% of total other revenues in Q1 up from 3% in Q4.
As we've said in the past, we expect cash revenues to be lumpy from quarter to quarter.
GAAP gross margin for the first quarter was 41, one percentage of revenue ex compared with $39 four per cent in Q4.
Cost of revenues included $7 $2 million of GAAP to non-GAAP preference of the items, which we outlined in our press release issued today and of the reconciliation table available in the Investor Relations section of the website.
On the non-GAAP basis gross margin for the first quarter recovered as expected the 45 per cent of revenues 160 basis points higher than before the three 4% non-GAAP gross margin from Q4.
Mainly due to warranty costs for foundry and logic of new product released in Q4 that did not recur in Q1.
And the anticipated improvement in the system segment gross margin related to a more favorable product mix.
Also in Q1, we began to see rising cost for Q Mems raw materials like volume, which is expected to impact our manufacturing costs.
Our probe card segment gross margin was 44, 3% in the first quarter, an increase of 40 basis points compared to 49 point I'm.
I'm, sorry, 43, 9% in Q4.
The increase was mainly due to queue for warranty charge I, just mentioned, partially offset by higher manufacturing spending and lower absorption on lower revenue.
The favorable product mix in the system segment result of any significant recovery of eight percentage points in gross margin from 41, 3% from Q4 from 49, 3% in Q1, even the low rhythm.
In the quarter system segment gross margin returned to that piece of paper the range of high of 42 locations.
As we continue to make progress towards achieving our target financial model gross margin of 47% the.
The margins will fluctuate from quarter from quarter per quarter.
Our GAAP operating expenses of $54 million for the first quarter 2.7 million barrels lower than for the fourth quarter.
Non-GAAP operating expenses for the first quarter were $46 4 million or 24, 9% of revenues compared to $48 $1 million or $24 four per cent of revenues in Q4.
The decrease of $1.6 million quarter over quarter is mainly due to lower performance based compensation, partially offset by the impact of annual benefits and payroll taxes reset.
Company non cash expenses for the first quarter included $7 $1 billion for stock based compensation.
Seven $7 million for the amortization of acquisition related for the months and.
The Asian of $6 $1 million.
First quarter amortization of acquisition related announcements Europe of $9 million lower than Q4.
Result of for amortization of purchase price the location related towards the acquisition.
Stock based compensation and depreciation were similar to Q4.
Due to the gross margin recovery and the good expense control, we generally to the first quarter non-GAAP operating income of 37.6 million effectively flat compared to the fourth quarter. Despite pinpoint for a million barrels of lower revenue.
GAAP net income for the first quarter was $19 $6 million or 25 cents per fully diluted share.
<unk> to $19 million.
The four cents per fully diluted share in Q4.
The non-GAAP effective tax rate for the first quarter was 18, 6% as compared to seven 5% from the fourth quarter of 2020.
The lower rate from Q4 was the result of the of the onetime cumulated benefit from 'twenty 'twenty of application of regulations regarding global intangible low tax season.
Also known as beauty and an increase of export revenues as we mentioned in the previous earnings call.
The first quarter of effective tax rate is within our communicated anticipated annual non-GAAP effective tax rate for fiscal 2021 of 15% to 20%.
As a reminder, our 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.
First quarter non-GAAP net income was $31 million for 38 cents per fully diluted share compared to $35 billion of 44 cents per fully diluted share from Q4.
Moving to the balance sheet and cash flows we generated 19 million barrels of free cash flow in the first quarter compared to 31 million barrels in Q4, Big New York total cash and investments to $272 million at the end of the quarter.
The sequential decrease in free cash flow in the first quarter reflects changes in working capital.
The increase in inventories and the decrease in accrued liabilities.
As of the end of the first quarter, we had two term loans remaining on our balance sheet totaling $32 million.
We invested $13 $5 million of capital expenditures during the first quarter compared to $14 million in Q4.
You should investment chiefly relates to the capacity expansion and the new Big you know leave them of Kansas. We continue to expect the significant investment in capacity in 2021 and Capex for the ease of expect there could be between $80 million to $100 million as communicated in the previous earnings call.
As a reminder, we expect capex to return to three 5% to 4% of revenues target financial model. After we conclude these capacity expansions.
At quarter end of total cash burn of succeeded the debt balance by $241 million, an increase of 18 million birds from Q4 quarter right.
Increase is mostly attributable to strong cash flow from operations.
The cash used for capital expenditures and $5.7 million was used for stock repurchases during the quarter.
Turning to second quarter non-GAAP outlook.
As Mike mentioned, we expect generally strong demand for the <unk> book looks to continue with lower demand from the logical slash of Super increases in DRAM and system.
These factors resulted in the Q2 revenue out of the range of $180 million to $192 million.
For the mix is expected to be less favorable in Q2, the decrease in foundry and logic and an increasing DRAM revenue and we also expect higher raw materials costs, resulting in non-GAAP gross margin outlook for the second quarter in the room.
Two of 41 to 44 per cent.
At the meet the point of these ranges, we expect Q2 operating expenses to be higher than Q1 by $1 million to $2 million due to increasing head count in R&D spend partially offset by lower performance based compensation.
Accordingly, non-GAAP earnings per fully diluted share for Q2 is expected to be between 28 and 36 months.
A reconciliation of our GAAP to non-GAAP Q2 outlook is available on the Investor Relations section on the website and in our press release issued today.
With that let's open the call for questions operator.
Thank you as a reminder to ask a question you will need the press star one on your telephone.
The question press the pound key.
<unk> will become part of the 10 day roster.
Our first question comes from Tom definitely with D. A Davidson your line is now open.
Yes, good afternoon, and thanks for the question shy, maybe starting with you on the gross margins, obviously nice to see the step function backup, but when you look at the revenue at the high end of the guide range versus EPS below the midpoint will where the margins are impacted during the quarter particular items.
Well as you know two of them. We are a turns business even when we entered the quarter we of things in backlog book.
Six to eight weeks lead time things change, even within the quarter and that's where we provide the range and the.
Because of these changes even within the quarter I think in particular just changes in the mix. We ended up with revenues close to the other end of the range, but the gross margin slightly below the midpoint.
Okay I just wasn't sure if the high material costs was a surprise during the quarter.
That's the good question, because something we started noticing in the quarter, but where most of the impact going forward.
Then you've got the argument in our inventory for Q1, but will start in the booking gross margin or will impact the gross margin in Q2.
Okay. That's helpful. Thanks, and then Mike you kind of of.
Big Picture question here when you look at it.
One of your customers or a customer talking about $100 million of debt.
Spending over the next three years, how does that translate from both the timing and a dollar amount two of the probe card market.
Yeah, I think there's been some pretty well publicized announcements from several customers, particularly in foundry and logic, our largest market about capacity and technology investments over the next couple of years.
Those are going to result, obviously in more wafer starts more design starts and all of those designs of wafers are going to need to be tested by advanced probe cards. So if you'll look at how W. S E and capacity increases translate into probe card spend typically lags by somewhere between two and three core.
Orders.
Some customers are faster if they are going into existing facilities and it's just the incremental additions, but we would expect the significant build during 2021, especially of foundry and logic capacity to result in an.
The increased demand for advanced probe cards out of that capacity comes online either late in the year or into 2022.
Do you see a step function increase or do you see it kind of ramp up over a several quarter period as well.
No I think it'll ramp up there's there's of that magnitude you know those investments have been announced over several years, obviously, where we're starting to see W. F E accelerate here in 2020 one.
But it takes a while logistically for all of that equipment to get in to get it qualified and to get it running so I don't expect it to be a step function I would expect it to be rather gradual that again.
We're going to trail the equipment installs and qualification by a few quarters.
Great Okay, well thank you.
Thanks, Sean.
Thank you. Our next question comes from Brian Chin with Stifel. Your line is now open.
Hi, good afternoon, and thanks for letting us ask a few questions maybe first to revisit the gross margin discussion.
But I think of the commentary I heard you referenced.
DRAM revenue run rates sort of back to the 2019 highs and so that suggests DRAM.
Some of our sort of a quarter of the business in Q2, maybe sustaining a high run rate given the sort of what an a T. H E. A company said earlier today. They are seeing a lot of growth in the the wafer cash part.
That business.
I was hoping maybe you could.
Talk about why the gross margins go down by 250 basis points at the midpoint, because I noticed that back in the 2019 timeframe kind of sustain gross margins at the higher end of the range you're guiding in Q2 more kind of closer to the 44 plus percent.
So I guess, that's the first price second question would just the sort of on trajectory I know you're not guiding for second half sales. So maybe it's a little bit difficult, but in terms of getting back to sort of of 45, 46% level can you maybe provide some of the.
The drivers that would kind of get you back in that range.
Sure Yeah. So as you rightly pointed out that we expect the around to grow to similar levels for the records. We had last year, so let's call it low forty's.
The medium and but we need to remember that even with the bureau of the the wide range of the margins with different customers of different products for what we see in Q2 is not the only beer I'm going out, but also foundry and logic going down.
In foundry and logic historically had the has higher gross margin from DRAM.
So we see the phenomenon in Q2 of the shift of mixes that were alright, hi.
Gross margin revenues are being replaced by low gross margin revenue.
Because of the specific mix to a specific customer.
Since we took margin it can fluctuate from quarter to quarter, even if the DRAM revenue range.
Similar level.
So if you look at the midpoint of the outlook range for the 2.5 per cent.
Increase from Q1 for the midpoint of Q2 I would say.
About 2% of it maybe a little less than the debt relates to the.
Shifts in the mix from foundry and logic.
The euro.
And the.
The remaining about 1% of little bit the best and debt relates to the higher cost of the materials that I mentioned.
The calls with each of the Worldview.
In terms of going back to the highest the higher level, but we put a model in place last year from.
Talked about reaching 47 per silver of target financial model and we had some good evidence of our ability to get the these levels. If you go back a few quarters to Q3 of 2020.
Margin was almost day back motor at $46 seven and so that was a good evidence that we can achieve this level.
And as we saw in the last couple of quarters and in the upcoming quarter margin can fluctuate on a way to for achieving that model, but the vehicle for them.
The ability to get there.
Oh, okay.
The.
The 50 basis points, maybe 100 basis points of of hit from the the higher input costs that can kind of carry perhaps in the second half.
I guess you'd expect for the next probably turn not necessarily the DRAM going down but.
Thinking about how how our business kind of trends for foundry and logic, perhaps those revenue streams could could pick up a little bit towards the latter part of the year and so that kind of help you on the gross margin.
Yes, Brian.
Go ahead.
I think that's probably a reasonable scenario right when we do see DRAM strength here in the second quarter.
With lead times of less in the quarter, it's challenging to.
The forecast much beyond that but certainly the design activity that we're seeing portends some DRAM shrink through the middle part of the year and you know go back to Tom's question with all of the capacity additions at the high end of foundry and logic does almost half the turn into the increased advanced probe card demand.
And in the foundry and logic space. So I think your scenarios of reasonable one to think about in the mixed shift as we go through 'twenty one.
Okay, and maybe one of kind of last question again, a little bit.
Bigger picture of longer horizon here, but.
Again going back to sort of what seemed to be positive developments just around for the past.
The six plus months around next generation through the packaging adoption.
Again, frankly of new fab build out in general thinking about your.
You are kind of three year targets that you gave last summer.
I think it was 6% growth for probe cards for the market.
And your growth of a little bit about that do you think those are now sounding too conservative.
The 6% growth for the market.
And I guess.
Again that would bump up your growth potential as well.
Yeah, It's a fair question and one that we've been posing for ourselves as well you know when we put the model together.
The last summer a little less of the year ago. The this rapid increase in Wf E injury Street capacity, you really hadn't been contemplated and so.
It's reasonable to assume that the assumptions associated with advanced probe card growth over the next couple of years.
Maybe that sort of mid single digits.
We had a little bit higher than five but the mid.
The mid single digits may be more conservative having.
Having said that you know if we if we do see that happen I agree with you we should be able to outpace the market and grow faster that will allow us to achieve the target model little bit of fast we're not going to go reset the target model, but hopefully this increase capacity increase Wi Fi resulted more wafer starts on leading edge.
The nodes, where obviously, where you look at 2000 Twenty's results, we lead that market.
That should provide a nice uplift and allow us to achieve $850 million in revenue and to get $2 of non-GAAP earnings per share before the 'twenty to 'twenty three time frame we talked about.
Okay, great. Thank you.
Thanks.
Thank you. Our next question comes from Charles <unk> with Needham. Your line is now open.
Hi, Thanks for taking my question.
We have a follow up question on the DRAM probe card strengths.
Supposedly you're getting somewhere about 40 to 43 million in Q2 and given that.
I understand with the lead time for DRAM probe card is probably a little bit longer than the foundry and logic probe cards, and you probably have a little bit better visibility into the third quarter or even the fourth quarter here.
Are you sort of expecting third quarter can be run rating at a similar level at Q2 and fourth quarter. After running hot of a few quarters may come down a little bit and then maybe the momentum of foundry logic of probe can pick up the slack.
I would get you to of sequential growth kind of situations for towards the year end.
Yes, I mean, the the mix shifts you. The you just articulated are certainly one of the the possible scenarios.
You know we have no visibility into the fourth quarter right now no direct visibility in the fourth quarter, obviously, our customer share of forecast with us we understand their design release cadences. It's part of the reason why we're putting significant capacity in place, but P. O visibility in P. O lead times don't go anywhere close to the fourth quarter at this point.
Payment of about the third quarter share, we've got a little bit of visibility into there. When you look at the lead times that we're currently running.
And if you look at past years, both 2019 and 2020, you know history would lead you to believe theres going to be some strong mobile foundry and logic activity in the fourth quarter. So you know the scenario you painted is not an unreasonable one having said that we just don't have the direct visibility to it.
Are you able to sort of confirm that and any really affirmative way it has been the.
It has been the pattern of the last couple of years. It's part of the reason why we are continuing to aggressively make investments.
But I don't want to also create the expectation that that's the profiles in the bag.
Okay. Thanks, Michael.
Maybe a follow up also on the gross margin because you kind of talk about mix shift into our second quarter foundry logic and flash probe cards are down.
You expect the DRAM and flash of the.
Systems will come off.
And the system business has higher gross margins that should offset some of the unfavorable product mix of however.
I think of Shire did mentioned a few factors, but I still feel like the.
DRAM per.
The car the gross margins kind of running at the relatively lower level going into next quarter I wonder relative to the historical average is Q2 slightly lower or is on the par or.
Whats going off here for them for the gross margin of about DRAM.
So similar to what I answered for Tom.
Through the historical historically, the foundry and logic because of the higher gross margins in DRAM.
And flash is lower.
The DRAM, but even though we deemed the DRAM there is of course overlap.
I as the DRAM design can have the.
Higher than foundry and logic.
The gross margin.
And the low end DRAM design too can have lower gross margins in the high end flash.
So within that range and what we see in Q2's, the chiefs shift in the.
The the mixes in two of way, but we have some high volume design over the low gross margin in the beer on debt and we are.
Seeing the lower.
And the logic designs of that.
Get off from Q2 with the IV.
Gross margin in the combination of these two.
The creates the the lower gross margin you expect for the second quarter inhibition to the impact of.
The higher.
The cost.
Thanks, Michael.
My last question.
May the zooming out a little bit two of which into a little bit longer term do largest customer the.
The wanted to enter the foundry the business.
And we just I just wanted to.
Ask Mike if you have any thoughts on weather.
That.
Could.
Carry some of your strength market share strength at the existing.
I mean, that's kind of idea of IBM one oh.
Into this the foundry side of the business of this particular customer or that could potentially open up some of them are comping.
Petition to your competitors of course, I know you always expect from competition when the market is growing strong, but just any thought of weather and the high level. This is the positive on net negative for you guys or is it the risks are increasing the risk or the lower risk of for you.
Yeah, I think we view their aspiration centered the foundry business is an exciting opportunity for us obviously that customer the partnership and relationship there goes back well over a decade.
Both between the companies and with the.
The individuals involved so theres, a very close partnership and you know as we've begun discussions about how we can best support.
Their plan to enter the foundry business, it's a pretty exciting opportunity they've got some compelling assembly and test technologies that they can offer as part of that foundry business.
Not clear that they're.
Going to be a major part of the foundry business at least initially but I think net net this really represents a positive for us we have obviously a strong position in the foundry market right now their entry into it I think we can help add value to their initiative and hopefully mutually grow our businesses.
Thank you Mike. Thank you that's all my questions.
Thanks Ross.
Thank you. Our next question comes from Craig Ellis with B Riley Securities. Your line is now open.
And the questions are.
Guys I'll start you know acknowledging that I'm, leading with something that said risk of beating a dead horse, but shy of I'd get the intra inter segment mix dynamics that are going on in the guidance. The company has been very clear on on those mechanics overtime.
The question, though was really on the rhodium issue do you have the ability to do any hedging or is there anything else you can do to mitigate the volatility of the pricing there or is it just going to be a matter of thought you being a price taker for whatever happens with the quick spot or whatever contract pricing plays out.
Yeah, So what we've seen of the quarter as you know the price of avoiding went up from 16 carrier on to our for an answer to a 28 gain and loss.
For us it's almost double.
I'm not a commodity experts and we are not in the market, we will look into and what are the options. When it comes to hedging forward contracts and things like that but if you read the papers and look at what cost of debt. It looks like there was something else from productions mining issues in South Africa, and the flex last year because the.
Because of COVID-19.
Thank you.
Yeah.
Too early or you don't know yet if that's the long term phenomenon all of that thing should.
Should be resolved soon or over the last for the next.
Hugh months, but we'll certainly look into one of the options.
Do you mean with such fluctuations.
Okay. That's helpful. Mike I wanted to turn it to you for a couple of questions. So.
The first question is regarding one of your prepared remarks, the remark statements and it was about aggressive technology and capacity execution and I just wanted to see if you could follow up in private little bit more color on the things that the company is focused on the share with technology and exactly what we should think.
About with respect to capacity if there's any color beyond just the capex number that sounds like it's reiterated from a reward of start the year.
Yeah, I think I'll start with capacity because I think you know if you go back to our analyst presentation from last August and then the subsequent earning calls.
I think it's.
Pretty clear our capacity increases associated with advanced probe cards.
Pudding.
New fab in place are gradually building out the capacity, but right now we're basically footprint Ltd and continue to be footprint limited until that new building comes online in the second half here.
So no real changes there we continue to execute on the plan we've talked about in prior calls.
On the technology piece, it's really about serving some of the accelerator and requirements, especially in foundry and logic associated with advanced packaging and five G. If you look at our customers' advanced packaging Roadmaps things like die stacking modular die.
The heterogeneous integration really drive up probe card and the complexity quite substantially.
You know the the pitches or the the densities we have the contacts are much much higher the pitches are mean, the probes are much much closer together and we have the test at higher frequencies with higher current and do all of this in a way that continues to scale with the basics of cost and quality and so the vast.
Majority of our technology investments are really targeted towards doing that continuing to keep pace and even stay ahead of our key foundry and logic customers requirements to enable their advanced packaging roadmaps, it's pretty clear that you.
Seven nanometer of one customer five plus of another gonna have.
The advanced packaging as a really central part of their technology roadmap and our investments today are pointed at making sure we could properly of naval those.
And just to be clear on some of the things that you're seeing there Mike.
Of the investments today, and and being in an April or something that shows up in revenues in the back half of this year first half of next year through next year or is it really something that comes on board in the second half of 'twenty, two and 'twenty three 'twenty for yeah.
It'll be there will be a contributions later this year as some of those things ramped in pilot production, but they're going to be hard to discern from the mainstream business that we have in especially the foundry and logic and DRAM I'd expect more than you know you can go look at AR.
Our key customers product, roadmaps, and where they're talking about driving some of these advanced packaging architectures into volume.
It's really of 'twenty, two 'twenty three kind of event, but to be ready for that we need to be investing in R&D now.
Makes sense and then lastly for me if I could from time to time when you characterize the foundry market you've talked about the breadth of the customers and in foundry and logic.
And certainly we had 210% plus customers this quarter, but our issue of like ahead do you expect that the breadth of the some of the the larger customers to broaden out in the back half of the year of next year for US we think about.
Some.
The strengthening in the back half in foundry and logic, we expect it to be some of the same customers that we're strong in <unk>.
I think you will see you know we've got a set of customers. If you look back historically that often sort of pop in and out of the 10% list I think we'd expect those same customers in both the foundry business and in the memory business.
To continue to be staples of our 10% less you know the.
The breads, though in our business is interesting because sometimes the foundry itself as the customer, but sometimes it's the the Fabless design house, that's the customer and so.
The breadth of the number of Fabless customers that we're serving whether directly with the fabless customer and their design and test team or indirectly through the foundry that breads continues to expand and increase and I think that's central to our continued diverse.
Suffocation and trying to continue to drive a broad set of demand opportunities for form factor.
Makes sense, thanks, guys. Thanks.
Thank you for it.
Thank you.
Under the ask a question you will need the press star one on your telephone.
Our next question comes from Chris <unk> with Cowen. Your line is now open.
Hi, This is Robert Mertens on behalf of Krish. Thank you for taking my question.
First how should we think about the margin profile of the engineering.
From this business I know you'd mentioned product mix headwinds from late last year been worked through but would you expect any similar buying patterns. This year of seasonality and then.
Just a quick follow up.
Or in terms of seasonality if you look back in the last two or three years I think we see it.
Q1, usually are the lowest in Q4, it's usually relates to the fact that many of our customers in both markets are.
Universities in the education institutions that have budgets to consume and most of the real.
And we see it.
The pickup in orders and then in Q1 for the lower.
In terms of the margin.
We are saying the.
At least in the last three years that the margin for the system business will fluctuate between the Uh huh.
For these two low fifty's.
So our target true, that's where we and that's all for what we took the business in the region. When we built our long term model of overall of 47% gross margin and on the way they are things will fluctuate.
But within the range and what the.
Sure.
Great. Thank you and then just a quick one around the NAND probe card business and new products and just thinking about.
The qualification.
The first part of the year when should we think about timing of any sort of rep and the recognition of the business.
Yeah, our NAND business really is has two components at this stage in the company history. The first is that of the legacy form factor NAND business, which continues to be opportunistic for us.
We are for most of mainstream NAND not cost competitive bidding so.
That business you have seen historically has been pretty lumpy.
We talked last quarter of out starting to leverage the products and technology, we got as part of the acquisition of the advantage of probe card assets.
To try and go after a little bit more of the mainstream NAND flash market.
That product is a lot more cost competitive.
And so we're beginning to work on exercising that option, we're still in very early innings.
Discussing with customers qualification plans trying to extend that business a little bit beyond the single digit millions revenue would have at the at the time of the acquisition.
So you know any qualification timeline for a new architecture in the industry takes several quarters, so probably getting us into the back half of 'twenty. One and then you Gotta go compete for designs and win and ramp so that.
That's going to take you into sort of the middle part of 'twenty, two but as we go through that we'll certainly keep you updated as.
As we make progress on trying to exercise that option of Nashville.
Great. Thank you that's all for me.
Okay.
Thank you. Our next question comes from Amanda <unk> with Citi. Your line is now open.
Hi, good evening.
On to TSMC.
About what the total opportunity can look like both from a perspective of what that the.
Opportunity for TSMC to outsource the book like as a percentage of their total probe card business.
And what that looks like in terms of what form can achieve in terms of market share there.
Yeah, I think so.
At the at that customer, we're really focused and really only relevant and qualified for the advanced nodes say 10 nanometer seven nanometer five nanometer and N on but.
Those nodes represent the entire opportunity for form factor.
There's very little in sourcing that goes on for those advanced nodes because of the complexity and so.
You know go back to the the question earlier about the significant W. F E Capex and investments in these advanced nodes. We expect that opportunity is going to continue to grow from from where it is if you look of where the revenue was in the first quarter, it's starting to nudge up against that hundred million dollar annual run.
Right.
It's still reasonably concentrated than is good we are going to see quarter to quarter fluctuations, but as we address more designs on those advanced nodes and more of that customer's wafer starts to move to that of advance nodes.
<unk>. The we can continue to grow that business long term.
And then can you talk about that capacity and if you're still capacity constrained at these levels are for being able to open up new capacity for the exceptional we talked about a couple of quarters ago.
I think of anything in some areas, we're still capacity constrained and it would be.
Trends on the specific for the mix, we have multiple factories with different dynamics, but by and large in these levels of revenue. We are three of the capacity.
Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Michael Lasser for closing remarks.
Thanks, everyone for joining US again this quarter of we're gonna be it a bunch of conferences as we go through the late spring and early part of the summer and hope to see you there.
Take care and stay safe.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Hi.
Yes.
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