Q2 2021 FormFactor Inc Earnings Call
[music].
Before we begin Jason Cohen, the company's General Counsel, Bill and 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.
Non-GAAP measures and other 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 regarding projections of financial and business performance.
Formats future macroeconomic conditions, the benefits of acquisitions and investments in and.
And capacity and a new technologies the impacts of COVID-19 pandemic the impact of regulatory changes the anticipated demand for products and our future ability to produce and sell products.
The development of future products and technologies and the assumptions 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.
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 FCC dot Gov, and and our press release issued today.
Forward looking statements are made as of today July 28.
And in 'twenty, 1 and we assume no obligation to update them.
With that we will now turn the call over to form factors CEO, Mike for lesser.
Thanks, Jason and thank you, everyone and for joining us today.
For factor delivered solid results and the second quarter, achieving the second highest revenue in company history.
We delivered gross margins comparable to the first quarter exceeding our outlook range for a combination of factors that were more positive than anticipated on our April 28 earnings call.
These together with continued operating expense control and share repurchases resulted in non-GAAP earnings per share at.
At the high end of our outlook range.
Solid demand for form factors diversified set of market, leading semiconductor test and measurement products is continuing and the current quarter and we are executing on our planned investments to increase capacity for our products.
Several factors for our second quarter gross margin.
For overall product mix was more favorable than originally anticipated with systems segment revenues, reaching all time record levels at near 50% gross margins.
And probe cards DRAM was as expected a significant portion of revenue nearly matched the decade high level of fourth.
Margin and 19.
DRAM probe cards are generally lower margin products and a substantial portion of our second quarter DRAM revenue was concentrated in 1 specific design with and unfavorable cost profile.
In response, our operations and engineering team focused on yield improvement for this design and.
<unk> delivered better than expected manufacturing costs, which improved gross margins significantly above the initial shipments for this design.
Our second quarter results provide a reminder, that shifts and form factors affect mix can have a significant impact on gross margins both quarter to quarter and with lead times typically less than a quarter.
And even intra quarter.
Shai will provide more details on our gross margin results and outlook later.
We continued to advance our environmental social and governance or ESG initiatives during the quarter.
Our successful efforts to aggressively reclaim and recycle our rhodium waste reduce.
Reduced our environmental footprint, while also producing a financial benefit as our higher recycling credits favorably impacted gross margins by partially offsetting higher input costs.
On the governance front and we welcome Jorge kidney for to our board of directors, adding a director with significant industry and executive experience.
And is also well recognized for his passionate commitment to diversity and inclusion.
Jorge is the most recent of 3 new directors that have joined our board over the last 2 years form factors board of directors has become and ethnic and gender diverse team have accomplished individuals with world class expertise and Erik <unk> from.
From cyber security to organizational development. In addition to the requisite experience and semiconductors.
Our ESG initiatives, including our progress against quantitative goals are discussed and the corporate citizenship section on our website.
Turning now to segment and market level detail.
<unk> and foundry and logic probe cards and the expected sequential decline in revenues materialize, even so the top 2 foundries and the largest IDM remain 10% customers and client PC data center and mobile designs each contributed significantly to the top line.
And the third quarter we.
Expect to see the typical seasonal reduction and mobile application processor demand, partially offset by an increase and microprocessor demand and continued strong growth.
Applications.
Foundry and logic customers, including all 3 of our second quarter, 10% customers are making significant.
Wafer fab equipment investments in 2021.
As the capacity comes online later this year and into early next year, we expect to see increased demand for leading edge foundry and logic probe cards.
Along with these capacity additions and our customers are adding innovative advanced packaging architectures like EMI.
<unk> and <unk> fabric to the Roadmaps to help offset the slowing upfront and driven Moore's law.
As we discussed in the past these shipment for tile based integration schemes drive both higher test intensity, which expands the number of probe cards required per wafer out.
And test complexity.
Which widens form factors competitive advantage.
And with lead times of less and the quarter short term visibility remains challenged and as always but the combination of significant customer capacity investments paired with their adoption of advanced packaging provide longer term secular demand drivers performed factors probe card.
Products.
Okay.
To ensure we are prepared to meet this increased broker demand as I mentioned earlier, we're continuing to execute our planned capacity increases with our new 100000 square foot manufacturing center and liver more on track to produce initial customer shipments and this year's fourth quarter.
<unk> isn't with a flexible manufacturing strategy that has allowed us to quickly and efficiently capitalize on customer demand and across our served markets. This facility will be capable of producing and probe cards for foundry and logic DRAM and flash.
The actual initial capacity addition will be modest as we add.
And plan to progressively add tools and labor to match customer demand.
We're excited about the capability and flexibility of this new footprint will provide removing a growth constraint that we have operated under for the past 18 months and helping us to achieve the $850 million revenue of our target financial model.
Third quarter demand for DRAM probe cards continues to be strong, although we do expect a slight sequential reduction from highest second quarter levels.
New design activity continues at high levels across all DRAM customers with remarkable breadth across multiple nodes for DDR for and DDR 5 designs.
And both mobile and PC server application.
As a reminder, probe cards for a consumable for this specific to each new chip design and so demand is generated from not just node migrations, but also the release of ship designs on existing nodes and architectures.
And as.
<unk> alluded earlier, our engineering systems business delivered record revenues with contributions from the acquired <unk> and HPV businesses augment a steady legacy station business.
And if our tools provide unique metrology capabilities that enabled enhanced packaging applications and were currently capitalizing on strong demand.
And for <unk> high performance multi sensor 300 millimeter optical metrology tool, especially among leading foundry customers.
Advanced packaging is a key driver for all of our businesses as our customers begin to adopt chip for style integration strategies to generate new test and measurement requirements.
And our capability to quickly accurately and non destructively measurement and control of critical dimensions film thicknesses and surface topologies on chip to chip with interfaces is key to improving and maintaining assembly yields.
<unk> business targeted longer term growth by enabling.
And computing applications also had good momentum for the quarter.
Together with Northrop Grumman for key customer partner and the quantum computing and field, we announced a fully automated cryogenic wafer probe system, which will accelerate the development of superconducting compute applications.
Okay.
Let me close.
And in quantity and noting that with a continued solid demand outlook and good execution on both short and long term gross margin and capacity expansion on the path towards the target financial model, we unveiled last year that delivers $2 of non-GAAP earnings per share on $850 million of revenue.
Test and measurement is becoming a.
More important and strategic place and the semiconductor industry, driven by powerful trend, including 5.8 and advanced packaging and memory content growth.
Our leadership position and these attractive markets paired with our differentiated strategy and disciplined execution and drive continued growth and share gains as we progress towards.
Our target model.
Shai for Ya.
And.
Thank you, Mike and good afternoon and.
As you saw in our press release second quarter revenues and non-GAAP EPS for the eye and of our outlook range and revenue, reaching the second highest ever in company history.
And non-GAAP gross margin exceeded value and Alvaro.
Okay.
And with that for a second quarter revenues were $188 million, a 1% sequential increase from Q1, and an increase of 19% year over year.
Probe card segment revenues were $154 million into second quarter and decrease of $5.2 million or 3.3.
3% from Q1.
The decrease was driven by lower foundry and logic and such revenues.
We offset by an increase and DRAM revenue.
Systems segment revenues were 35 billion and Q2 and increase of $6.7 million from 24% from the first quarter, mainly as a result of higher.
For sales of optical metrology and thermal systems, driven by advanced packaging and automotive applications.
Within the probe card segment foundry and logic revenues decreased by $10 million from Q1, and $104 million and the second quarter on.
On pricing, 55% of total company revenue.
And as compared to 61% and the first quarter.
DRAM revenues were $42 million, and Q2, and a significant increase of <unk> 8 million or.
For 24% from the first quarter and.
And with 22 percentage of total quarterly revenues as compared to 18% of revenue and the first quarter.
Building on the strength.
Onstream and over the past year diesel for our second highest quarterly revenue from beer on since Q1.2000 and mix.
Flash revenues of $8 million, and Q2 or $3.7 million Boes lowered and in the first quarter and were for percent of total revenues in Q2 down from 6% and Q1.
As we've said in the past.
We expect flash revenues to be lumpy from quarter to quarter.
GAAP gross margin for the second quarter was <unk> 46 per cent of revenues as compared to 41, 1% from Q.
Q1.
Cost of revenues included $7.2 million of jab to non-GAAP reconciling items, which we outlined in our press release issued today.
And in the reconciliation table available on the Investor Relations section of our website.
On a non-GAAP basis gross margin for the second quarter was 44, 4% slightly above the eye and of our outlook range and 60 basis points lower than the 45% non-GAAP gross margin in Q1.
The decrease.
A day first quarter was mainly due to less favorable mix with lower foundry and logic and higher DRAM revenues.
Mike briefly discuss some other reasons gross margin into Q2 was above value and of our outlook range.
Including more favorable product mix better yields on our new ramping design and improved utilization and absorption.
Just wanted to inhibition precious metals usage with more efficient as we took measures to reduce the impact from higher material prices and were able to reclaim and recycle more road units.
Our probe card segment gross margin was 43.3 per cent for the second quarter and.
Lease of 90 basis points compared to 44, 2% and Q.
The decrease was mainly due to the change and mix between foundry and logic and DRAM revenues I just mentioned.
Our key for a system segment gross margin was 49, 2% essentially flat with Q1.
And as we've said previously we expect our systems segment gross margin to range between high <unk> to low <unk>.
As a reminder, as we continued to make progress toward achieving our target financial model gross margin of 47%, we expect that margins will fluctuate from quarter to quarter.
Mainly as a result of changes and product mix.
Our GAAP operating expenses were $56 million for the second quarter $2 million was higher than.
First quarter.
Non-GAAP operating expenses for the second quarter were $48 million or 25, 7 percentage of revenues compared to $46 million or 24.9 percentage of revenues in Q1.
The increase of $2 million quarter over quarter was mainly due to increasing labor costs related to higher head count.
And annual salary raises and <unk>.
The offset by lower performance based compensation.
Company non cash expenses for the second quarter included $6.6 million for stock based compensation and $7.1 million for the amortization of acquisition related amounts and depreciation of $6.6 for them.
Second.
And in the quarter stock based compensation was 0.5 million boeing's lowered and in Q1 due to timing of grants and depreciation was <unk> $4 million higher due to additional assets placed in service.
Non-GAAP operating income for the second quarter was $35.2 million.
2 for $2.4 million lower.
For the first quarter.
GAAP net income for the second quarter was $17.9 million.
Or <unk> 23 per fully diluted share compared to $19.6 million for 25 cents per fully diluted share in Q1.
The non-GAAP effective tax rate for the second quarter was 18, 7%.
Secondly, the same as in Q1 and within our anticipated non-GAAP effective tax rate for fiscal 2021 for 15 to 20 per cent.
As a reminder, our annual cash tax rate is expected to remain at 6% to 8% of non-GAAP pretax income until we fully utilize our remaining aerospace R&D credit.
Relative to second quarter non-GAAP net income was $28.4 million or <unk> 36 per fully diluted share compared to $38 million from 38 per fully diluted share in Q1.
Moving to the balance sheet and cash flows.
We generated $16 million of free cash flow and the second quarter compare.
$19 million and Q1 and.
And we had total cash and investments of $260 million at the end of the quarter.
The second quarter sequential decrease and free cash flow reflects an increase and capital expenditures and changes in working capital on which the largest portion of these higher inventories related to timing on manufacturing and product.
That channel.
As of the end of the second quarter, we had 2 term loans remaining on our balance sheet totaling $29.5 million.
We invested $18 million and capital expenditures during the second quarter compared to $13.5 million and Q1.
This brings our year to date capex to $31.5.
$5 million and chiefly it relates to the capacity expansion and are leaving on manufacturing center.
We continue to expect a significant investment and capacity in 2021, and we'd half of the year behind US we are lowering the range for forecast of cash capex for the year to be $70 million to $90 million.
And on the $80 million to $100 million previously.
Okay.
As a reminder, we expect capex to return for 3.5% to 4% of revenues and our target financial model. After we conclude these capacity expenses.
At quarter, and our total cash and investments balance exceeded the debt balance by $230 million.
And a decrease of $10 million from Q.
1 quarter and.
We had strong cash flow from operations and Q2 offset by cash usage for capital expenditures and $18.2 million and better use for share repurchases.
During the second quarter, we purchased 484000 shares.
This brings our year to date share repurchase total to about <unk>, 8%.
Of our outstanding shares offsetting approximately 1 year's worth of dilution from stock based compensation.
At quarter and $26 million remained available for future repurchases under our $50 million share repurchase.
Turning to third quarter non-GAAP outlook.
As Mike mentioned, we expect to generate.
Strong demand to continue.
With sequentially higher system for Ya man.
So by moderate decreases and probe card.
Resulting in overall similar revenues for Q2 at the midpoint of our other things.
These factors result in a Q3 revenue outlook and the range of 182 for $194 million.
Non.
Non-GAAP gross margins for the third quarter is expected to be and the range of 43% to 46%.
And the midpoint of these outlook ranges, we expect Q3 operating expenses to be higher than Q2 by $1 million to $2 million mainly.
Mainly due to the increases and the increased investment and R&D and higher travel expenses.
And start to.
And 1 of them.
Accordingly, non-GAAP earnings per share.
And there are fully diluted share for Q3 is expected to be between 31% and 2019.
A reconciliation of our GAAP and non-GAAP Q3 outlook is available on the Investor Relations section of our website and in our press release issued today.
With that let's open.
The call for questions.
Later.
Yes.
Thank you Sir.
As a reminder to ask a question and you will need for Westar 1 on your telephone.
On your question press the pound key.
And by and while we compile the Q&A roster.
Yeah.
Yeah.
Your first question is from the line of Craig Ellis from B Riley Securities. Your line is now open.
Thanks for taking the question and congratulations on the good gross margin execution and the quarter.
Mike and Chad I, just wanted to start there and under.
I understand.
And what's embedded in the outlook for the third quarter, because I think 3 months ago, we expected that and <unk>, we could see around.
150 basis points of mix related headwinds, maybe 100 basis points of rhodium related headwinds clearly the team executed very well.
On the utilization side, and and opinion got back some of the the rhodium as well, but as we look to the third quarter, which looks flattish what's inside that flattish guide with Gibson and takes on on the mix and the rhodium issues and and for that efficiency gain was achieved and.
And is that something that debt.
Rolls forward or is that more of a onetime benefit.
Yeah, and Greg So when we look at Q3, the midpoint of Morocco, and your gross margin is expected to be similar for Q2 and.
We see a.
Higher systems revenue and in Q3, which.
Sure as you know revenue and gross margin for systems revenue is higher so these growth.
But we also see some offsets in and.
And the probe card business.
But the gross margin, but we still have the design that we're talking about.
And we still have it in Q3 that day, 1 with unfavorable costs and although we are getting better at it.
Improved yields and more certainty, which still has some and some people talking to you for years as.
And as well so if you think all of these.
Together these are the main and.
And the main factors, we sold rhodium prices ease up.
Starting in May and although there.
And still fluctuate so taking all of these together and basically we're talking about flat gross margin quarter over quarter with flat revenue.
At the midpoint of the ranges.
Okay, and then what's the point on revenue Theres trial, I'll use that as a segue into a revenue related.
Related question, so nice to see 310% customers on the quarter with healthy activity from TSMC and Samsung. The question is more on Intel its been a while since Intel was down closer to the mid teens percentage of mix of course at these revenue levels. That's still a very material amount of sales, but the question is this.
And as you look at that opportunity and with the backdrop of the recent packaging and process webcast showing annual product cycle. So over the next 4 or 5 years, how do we think about the path back to kind of a normalized mid twenty's to mid thirties percentage sales for that customer.
How quickly could that happen and and what are the risks that we would actually stay here closer to the mid teens for some protracted period.
Yes, Craig and Mike I'll take that.
Prior to the second quarter here, we had orders for that customer was around and above $50 million or a.
$200 million annual run rate, which we said we expected was kind of and elevated run rate due to a variety of factors, so and Q2, the pendulum and probably swung a little bit hard and the other direction. We do embedded in our Q3 outlook is some sequential strengthening with that.
Customer my comments about microprocessors strengthening and the quarter, but as you point out longer term there are some really exciting things going on with our customer.
We have a long term relationship decades long.
There, we did a key supplier to them with strong market share and.
And both their strategic initiative.
That cost in entering the foundry business as well as their adoption of advanced packaging technologies that they highlighted earlier this week.
And a really exciting opportunities for us that I do think you know allow us a path back to kind of this $200 million run rate now its going to take a while to get there.
Right. They are not entering the foundry business and a material way tomorrow, but we've got such a solid foundation with this customer and a nice competitive position with the technologies that we have.
Their strategic initiatives do offer us a longer term path back to that $200 million and.
Annual run rate level.
It is even as we work our way a little bit closer to there in the back half of the year.
And that's really helpful and and maybe just a follow up on that Mike. It's been a couple of quarters since we had.
3 customers that were 10% customers do you expect to say it is as we look ahead to the third quarter that you would have.
And equal number of 10% customers or do you think that it looks ultimately more like like.
Like Q1 for there was a couple.
Yeah.
Craig as you know our strategy really is to be partnered with the leaders and the industry and try and drive significant market share with those leaders. So we.
Over the long term tend to have 510% customers and by and large we expect each of those customers to kind of move off and on the 10% lift in any given quarter. Some of them are quite close to the 10% threshold.
And the in the third quarter as I noted.
We do expect some seasonal weakness that we've seen and.
And the past few years associated with the mobile application processor business just the.
The ramp of those designs and the concentration of those designs at the world's leading foundry, we'd expect that to soften in Q3, but at the same.
Time, we're making good progress and expanding that business to more fabless customers more design and moving into high performance compute but mobile is such a big part of that you could see that customer and not be a 10% customer and Q3.
Yep Yep.
That's very helpful guys really appreciate the help.
Thank you okay. Thanks, Rick.
We have our next question from the line of Brian Chin from Stifel and kind of a limit yourself with 1 question and 1 follow up your line is open.
Okay will do.
Hi, Thanks.
And just ask a couple of questions maybe first just to follow up on that last 1.
And Mike I think you're talking about sort of the traditionally softer <unk> from foundry I guess applying that similar logic went and <unk> typically be seasonally stronger for you and I guess.
Do you think that.
Is that part of the rationale in terms.
For elections, and the new capacity online.
Yeah.
So we have seen for the past couple of years, the fourth quarter be very strong from a seasonal perspective foundry and logic business. If you go back and look for those 19 and 20 are fourth quarter's very strong foundry and logic business driven.
And I have your foundries and and mobile applications.
You know I have to temper that with the usual caveats that we're <unk>.
Sitting here at the end of July and that's a long way out compared to where lead times. So the historical pattern and certainly we would expect to see that strength, but we don't have anything like our forecast or our backlog.
And yet emerging that would support that.
As you would note though.
Each of those customers is building significant capacity through their WSB, he spends and so whether it's a <unk> event or a first quarter second quarter 2022 event.
This is part of the reason why we're continuing to invest.
First pretty heavily and our liver more manufacturing center and and other areas around the world to increase our capacity.
Okay, Thanks, and maybe for my follow up maybe shy.
Just kind of going back to the gross margins can you just roughly quantify what the drag and <unk>.
From a first the DRAM mix issue piece of the business is it something like a 100 basis points, though because I would imagine that it could probably be non repeating when you get into <unk>. So maybe it is still there and.
And <unk> and maybe not repeating and <unk> and then also rhodium prices.
And who knows.
From here, but if it stays at these more more lower levels.
Do you think you could get additional benefit and <unk> relative to what youre seeing and and <unk>.
And on radio and practices I think it's a very.
Very hard of course to more digital for Duke.
The prices on purchase versus nickels, we took benefit in Q2 and purchasing.
Where are the inventory that will be used in Q3 and.
It's too early to see what's going to be the on Q.
Q4 and.
But we have we have the material that we need and.
And then keeping an eye on April for it will stay at these lower levels and the fixed they are still elevated if you're comparing to previous.
Last year, but still not at the peak and if you saw during the first quarter net.
In terms of mix in terms of mix, though.
I don't want to go into all these details and <unk>.
Drug you too for the weeds here, but we.
We see systems growing up and we had.
EBITDA margin on grain.
Logic and expect to go.
And it just seems to be from Q3 your AUM.
Mentioned expect to go down and you'd see improved margins there.
Because of the things, we learned and experienced this quarter and 1 factory and.
And flash and we expect to go up a little bit as well. So all these moving parts. Each 1 of them is a kind of a small impact overall.
That's where we end up and you do the same.
Gross margin from Q and Q2 on similar revenue and.
On Q4, I think it's too early and as I said for rhodium prices.
So soon.
And on the other factors of steel and love depends on mix and true student too early for us.
Okay got it thanks.
Next question is on car from Cowen and company. Your line is open.
Hi, This is Steven Chin, calling on behalf of Krish. Thanks for taking my questions.
First of all and if I may on your volume.
It's the Capex range for the full year and I think you mentioned, that's currently going on to $70 million to $90 million and full year.
That's a reflection of our capital efficiency and how are you.
And how youre able to utilize.
On the spending for <unk> for the capacity later this year or is there any push out and spending as well.
So we've made significant progress and completing the manufacturing center and our year to date and we expect to start shipping as Mike mentioned and shipping products and Q4. So we have 6 months of actuals are behind us and people who are coming in and it would be below budget and that's what we decided to drop the day estimate, but there is no significant change to our plans or to our targets.
And I say module gross margin.
And at 47 per cent for some of the updates you just simply relates to timing as things push a little bit too early 2020 to alter the timing of cash payments for these fixed assets and no significant changes to Orlando for the gross margin targets.
Okay understood and.
For 1 product related question.
Just given how DRAM.
Probe card demand and so strong and it seems like it's going to be.
And gradually adding a little bit into the back half the total are fairly healthy.
Question on the deal.
For versus the other.
<unk> technology.
And as mentioned earlier and.
Targets for Guy and had quite a bit different probe card.
And as far as we are for.
For him and 5 of our or any other products.
And the customer are those potentially share per car designs or is.
Is it different technologies required different cards there.
Yeah, well DDR for or DDR.
For 5 mobile server any change and the chip design and drives the change and the probe card and so something as major as being.
So going from DDR for to DDR 5 on.
Most always changes the layout of the chip and how the customer is going to test it which means new probe cards and that's.
Why we try and emphasize so people understand some of the demand drivers of our business.
This diversity of designs not just in DRAM and foundry and logic as well.
Being accelerated by advanced packaging really is an interesting growth driver for us so when I talk about designs.
Design activity, we've got a lot of first articles for free.
<unk>, 1 alpha 1 data onesie.
Nodes and DRAM, Dr for the year, 5 and both mobile and server and in each of those is unique and drives a refresh of the probe card. Please.
Great. Thank.
Thank you so much.
Yes.
Your next question is from the line of Tom definitely from D. A Davidson your line is now open.
Yes. Good afternoon first a quick question on the systems business that was strong and the quarter and growing and the next quarter.
Net.
Youre strictly just the addition of some of the acquisitions or is there something and the core business that is growing faster than seasonal this year.
Yeah, I think when you look at the systems results.
And you can think about it as a couple of different components as you broke them down and 1 is the legacy systems business.
Acquired as part of the Cascade Micro Tech acquisition, and 2016 habits, and it's been pretty steady if you look at our target financial model and the underlying assumptions.
And with single digit percent grower and has been executing to that so that the step up here to the mid to high <unk> and revenue.
Really associated.
And this week with the acquisitions, we've made first FRP to get us into metrology for advanced packaging.
Back in 2019.
That business, beginning to accelerate nicely as especially as the foundry ecosystem adopts our tools to do process control for their advanced.
And wing lines, and CH PD business, showing some nice momentum in the early part of characterization nowhere near production for quantum computing.
And so probably the way to think about the systems growth is that the acquisitions are delivering growth on top of the.
On the stable legacy systems business.
Okay. Thanks, that's helpful and then as a follow up I'd like to go back to Craig's question.
Talk about how the yields were better on the DRAM business and that helps you get back to a higher margin level are those improvements yield improvements are items that can progress.
Packaging and the future of those onetime items and little more around that would be great.
Yes, so remember our DRAM revenue is pretty concentrated in a single design.
It's not often we have a high runners that that is this larger portion of the design and as we told.
On last earnings call had a pretty unfavorable cost structure on the initial shipments of those designs and so.
Want to give kudos to our operations and engineering team, we really went to work on improving this yield.
Given that these are design specific parts this probe card and its layout and the yield.
You're on the Leo Syncrisis are really associated with this 1 design it.
It is kind of isolated to the 1 design. However, we have learned some things.
<unk> designs of this level of complexity and some other things here that could translate into each other designs. So probably think about it as being pretty design specific that 1.
And in DRAM is still a large portion of our Q3 a.
DRAM revenue so helpful. There.
But I wouldnt sort of say, it's a general uplift across all our DRAM designs.
Okay, and then there was some nice learning and in case, you have another volume orders yet.
That's right that's right.
Great. Thank you.
Thanks, Rob.
Next and Charles he from Needham and company. Your line is now open.
Thank you for taking my question, Mike on shied congrats on the on the.
Strong recovery no gross margin I wanted to.
Ask a couple of questions around.
Foundry and logic probe cards.
Thank you you talked about design and you're talking about packaging backed up and know the conversion note opera is still a powerful team managed driver. So I wanted to ask for something around the 3 nanometer.
Really outside of empower.
I wonder whats I mean without getting into anything.
The customer specific what is for outlet for 3 nanometer.
Cause I mean, and we are into.
In July 'twenty, and 'twenty, 1 and that's probably a year away from adoption for that.
Are you seeing on the leading indicator.
And with all opportunities.
40 nanometer.
And what's.
Going to run.
For the end of this year or.
Do you see more on the ROM other 3 nanometer.
<unk> side or on HBC solved.
So that's a multifaceted question, but I hope you can give us some color about that.
Sure sure.
I think.
You're absolutely right right 1 of the demand drivers is node transitions for us because a node transition automatically resulted new designs right if youre going to convert the note they become new chip designs debt.
Both fabless customers and idms and take advantage of that new node capability to drive new products and new.
Signs and that means new probe cards.
On 3 nanometer and particular as you also indicated its pretty early.
Some activity.
But I think probably the exciting part of it is it's very likely to be 1 of the nodes where.
Advanced packaging is a really key.
Sort of how the node gets deployed.
Probably high performance compute tiles will be built on the 3 nanometer node, but then stack together with other parts of the eventual product and maybe are built on 7 nanometer or even 10 nanometer.
So you know.
As with.
Leading customers, we are engaged and R&D.
But it's pretty early and I certainly wouldn't expect to see 3 nanometer would be a significant part of our near term results.
Got it got it.
So I mean still around 3 nanometer I understand you said.
And said, it's still pretty early but.
Your leading foundry customer did say that.
They are seeing the 40 nanometer tape out being a lot higher than the number of tape outs at 5 nanometer when it was about 2 years ago I Wonder.
With us.
Coming to your business.
Do you sort of expect that you can gain more for revenue from.
The 3 nanometer and maybe next year I mean compared to what you got from 5 nanometer again in 2020 or maybe 2019.
Not sure whether that's a fair comparison on that.
And that make a color uzi.
Great.
Yeah.
And I think generally if you look at some of these node progressions test intensity is definitely going up. So there is lots of different dynamics at work, but.
These new nodes, especially when they.
And except with the advanced packaging technologies are requiring higher test intensity, which means more testers and more probe cards per weighted and I think you're seeing that from some of the key manufacturers as well.
Each of those 8 T systems requires multiple for cards over its life. So.
Uh huh.
Interest me and pretty good indicator there.
So I do think that the progression.
For 5 to 3 and at other customers from 10 to 7 or whatever we're calling it now.
Our tail wins for form factors business, because test intensity and test complexity are going.
Excuse me.
Got it thanks, Mike I think I'm limited to 2 questions I. Thank you very much I'll jump back on here.
Thanks Charles.
We have on our next question from the line of Christian Schwab from Craig Hallum Capital. Your line is now open.
Good quarter guys.
What should we be thinking about.
For the range of of a quarterly revenue rate for the DRAM business out.
Yeah I think.
Obviously, we've put together a few quarters here.
And in the mid 30 to high thirties and up around.
Sorry, I'm getting a lot of feedback on owners can you mute Kristen.
Yep. Thanks.
And obviously this path for the second quarter came awfully close to a 10 year high that we posted in 2019.
So I think.
You know Theres, a implicit question use DRAM probe card.
Should our DRAM probe card revenues be going up.
What we've talked about previously is sort of an average although it's a cyclical business and average of kind of the mid 30 millions of revenue per quarter.
We continue to see this level.
All of design activity.
Things again, the advanced packaging theme at work and DRAM with things like HBM 3.
I think it's possible that we could see that average move up to maybe the high thirties, the mid to high Thirty's, but historically, if you look at DRAM customers they've done a pretty good job.
<unk> of constraining their overall spend whether it be on probe cards or equipment, and then driving efficiency to drive their bit growth. So.
Wouldn't expect a spectacular increase and the spin, but you may see the mean tick up a little bit into the high thirties.
Great.
And then the recovery within Intel getting this back.
Over time back into the $200 billion range plus.
And DRAM is kind of and the mid Thirty's is there and that you know is there an opportunity for TSM could become.
And I'm much more material customer on a go forward basis.
And they have been kind of over the last 6 quarters.
Yes.
We've talked about it as being.
Something like $100 million annual run rate opportunity I think the past couple of quarters, you've seen them.
Be a little bit short of that but in that neighborhood and.
Thank you know go back to Charles' question as they drive their node progressions as more wafer starts occur on the advanced nodes and in particular with a really advanced nodes like 5 and 3 our addressable market there growth.
Sure.
And finding you that we're really only relevant for 10 nanometer and below.
And although that's a big chunk of that foundries revenue, it's still a pretty moderate chunk of their overall wafer starts unit wafer starts and that's 1 of the things that drive probe card spend so I think as their business grows is there.
Node migrations and push more wafer starts to these advanced nodes and we continue to work with them on some of the innovation and enabling advanced packaging I think there is the opportunity for that to grow significantly.
Great. Thank you.
Next is Amanda.
And from Citi. Your line is now open.
Hi, Good afternoon question on.
And then implications from the DDR 5 push out does that impact how you're looking at you know overall growth and net.
And that DRAM business, right, you mentioned and it could potentially grow to the mid to high Thirty's at an average basis.
But does that have any sort of near term implications.
And it doesn't seem to have had much of an implication and I think again because of the debt.
And the broad divert designs that are customer and are running.
Even if certain parts of DDR 5 are going to be a little bit slower than anticipated.
There's a big chunk of DDR for designs that are taking up the slack and obviously still some pretty aggressive growth forecast.
Being driven by the combination of the DRAM manufacturers so.
I don't think a significant impact associated with DVR or 5 time and for us.
Yeah.
And on the other question just a clarification question on the debt.
Capex coming down a little bit it seems like it's more of a function of.
And better expense management, better cost dynamics and not rather than you know.
The reduction and overall capex.
Or are we still at a point, where you are capacity constrained versus what the demand environment.
And days or you and a better place now and do you have enough room to expand capacity, even further on that TSMC business continues to grow.
And I think and in some areas we are seeing capacity from St. Jude depends on reported.
We have multiple factories with different dynamics.
Around the world, but in large at these levels of operation with free capacity constrained and that's why we are moving.
This capacity expansion and place to answer the growing demand.
And so the reduction in Capex and it's not a function of reducing your overall capacity practice better costs.
No not at all if it's wrong and it's only really about fine tuning the budget.
We put that in place at the end of last year and now we have 6 months behind US we have some oxford and place actuals and place.
Better and what to expect what's coming and some of it is just push out for the second.
For 2022.
From the beginning of 2022 some of it could just when the cash payout because when it for a uniform and.
And 2021.2020 2.
No changes to our plan.
Thank you.
Next question is from the line of David Silver from CL King Your line is now open.
Yeah, Hi, good morning, or good afternoon, sorry.
You know and the VLSI research reports that I that I scan.
Your company was mentioned a number of times and their customer satisfaction surveys and I'd like to maybe.
And just focus on the broadest 1 I think the semi equipment group category, but you achieved a very high score overall and and in particular your scores increase kind of across the board.
Versus just 1 year ago.
Which I thought was interesting.
But.
Could you maybe talk about the strategies or the process improvements Mike the debt you would mainly credit for the broad based and.
Improvement and your scores and that survey and then maybe to take it 1 step further I guess and your experience how does.
Does that.
Customer satisfaction survey results translate into either new customer acquisition or maybe increased business with your existing customer base. Thank you.
Yes, and interesting point, we are.
And we did make.
A good showing in this year's VLSI customer satisfaction survey, which is.
Our pool of all of our key customers and are proud of our higher ranking and higher raw scores and some of the details are interesting.
If I recall.
We scored very high and technical leadership.
And customers.
<unk> support and I think those are interesting validation points of.
Our stated customer strategy, we're trying to be very close to the leaders and the industry as you see from our 10% customers both in the second quarter and over the last couple of years, we wanted to be partnered with those customers driving their roadmap and.
And that forward and deploying what's by far the biggest R&D spend and the space on solving their problems and then generating competitive advantage from it.
You know I think rather than maybe being a driver of market share I think it probably ends up being.
Reflection of market share if those cuts.
Customers and all of the customers and answer the survey are not happy with you, they're not going to order from you and so I think the 2 go hand in hand, and I think both.
We have a compelling differentiated products, but also having strong customer satisfaction is central to our strategy and central to the history of market share gains.
And our road executed.
Okay, Great and then maybe just 1 last question and this is kind of maybe.
Perspective over a longer period of time, so when I look at.
The breakdown of your revenues by logic and foundry versus.
DRAM versus flash et cetera.
I mean, there's an element there where you can only sell probe cards for things that your customers does.
Desire them for in other words, you track I guess the product development cycles.
And I think on the other hand over a longer period of time.
There are different profit or competitive.
And the sustainable competitive dynamics and the individuals.
Product lines and I'm, just wondering over a longer period of time do you do you have kind of a normalized.
I don't know share breakdown between let's say logic and foundry.
On the 1 hand and.
The memory categories on the other or or is it literally the case, where you want to align yourselves with their customers and.
Just just track the development cycles and the industry. Thank you.
Yeah.
If you.
And you back up over the very long timeframe, we had.
Some customers where.
And where we really didn't have a significant market share position if I back up 10 years 2 of the 10% tumors in the second quarter were not really form factor customers and so part of it and this again consistent with the strategy I talked about.
<unk> on.
And we're working very hard to make sure we have strong incumbent market share positions at all of the leaders and the industry and so regardless of those development cycles, regardless of where large fabless customers what foundry they decided to go to.
And we want to make sure we're in a position.
And that's essentially neutral to that and.
And as long as we have strong market share with all the lead for us in the industry and have <unk>.
Good customer sat scores with them, we think we'll do okay and the woman.
Okay. Thank you very much I appreciate it thanks.
No further questions at this time I'll turn the call back over to Mr. Lax lessor.
Alright, thanks, very much again for joining us today, and we hope to see you.
Mr conferences, and the second half and maybe even see you in person and take care and.
We have our next question from.
She from Needham and company. Your line is now open.
Alright.
And my my and my apologies for that thanks for squeezing me in and so some.
Really just a question on around DRAM.
Thank you might have alluded to Rio.
<unk> got a quick comment on this.
So and you'll DRAM strength going into second half. This year are you sort of seeing a broadening out in terms of debt by customer.
Because my understanding is your Q2, possibly a little bit debt. The first part of the Q3, you're going to them and as I mean.
Primarily driven by 1 off good.
For DRAM customers. Thanks, That's my last question.
Yes, that's correct, although that is not unusual historically, we've seen our DRAM customers.
B each have different intensities and different quarters, and so it's not unusual for 1 of them to be very strong in a given.
And quarter and then another 1 and be strong in.
And a subsequent forward again go back to the customer strategy. That's 1 of the reasons why it's important to be a key supplier to all of the leaders. So that we're able to run our factories at high utilization.
And be able to make sure.
And that we're on the leading edge of the industry no matter, which 1 of these DRAM manufacturers is winning market share with their big customers.
So not unusual to see customer concentration in any given quarter.
Thank you Michael I'll once again and my apologies for for squares media and the question and not spend and thank you.
No problem.
Alright.
Operator and city.
Thank you Sir This concludes today's conference call you may now disconnect.
Yes.
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