Q3 2021 FormFactor Inc Earnings Call

October 27, 2021

Yeah.

Thank you and welcome everyone to form factors third quarter 2021 earnings conference call on today's call are Chief Executive Officer, Mike, So 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 relation.

<unk> 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 new technologies.

The impacts of the COVID-19 pandemic, our supply chain the impact of regulatory changes the anticipated demand for products, our ability to develop produce and sell products 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 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 SEC dot Gov and in our press release issued today.

Forward looking statements are made as of today October 27, 2021, and we assume no obligation to update them.

With that we will now turn the call over to form factors CEO, Mike Slusser.

Thanks, Jason and thank you everyone for joining us today.

Well in fact, we delivered solid results in the third quarter again recording the second highest revenue in company history with gross margins at the highest of our outlook range.

Together with sustained operating expense control. These factors resulted in non-GAAP earnings per share above the high end of our outlook range.

We continue to benefit from strong demand from form factors diversified set of market, leading semiconductor test and measurement products and with our added production capacity now coming online, we're well positioned in the current quarter to deliver sequential growth.

Like many companies in the semiconductor industry, we are facing a variety of supply chain and labor challenges.

Our long term investments in automation and vertical integration has helped reduce the effect of these headwinds and we thus far success navigated these issues with minimal impact.

We do expect this situation to persist into next year and our team remains focused on actively resolving these challenges.

Minimizing impact where supply chain is especially important as our capacity investments start coming online too.

Tool installations and qualifications are now underway in our new liver more manufacturing center, which remains on track to deliver initial customer shipments in the current quarter.

We're excited to be on the cusp of commissioning this new flagship facility, which will remove a growth constraint. We've operated under for almost two years, helping us to reach the $850 million revenue of our target financial model.

I'd like to provide some detail behind our sequential improvement in gross margins as it provides insight into the importance of the design specific product mix within each of our served markets.

As you can see from the supplemental materials posted on our website and as Shai will review later third quarter revenue by segment and market was very similar to the second quarter, we delivered 160 basis point improvement in gross margins.

The largest single factor in this improvement was a more favorable product mix within the specific market.

Okay.

As we've noted in the past probe cards are a consumable that is specific to each customer chip design and the custom nature of each probe card designed drives a different manufacturing costs and selling price.

For example, two DRAM probe cards configured to test two different customer chip designs can produce significantly different gross margins because of the details of the probe card and test or configuration.

The difference between a one touchdown configuration versus a two touchdown configuration.

Consequently, two quarters with similar revenues in each segments and market can and often do result in substantially different gross margins, depending on the specific probe cards shipped to produce that revenue.

This variability is inherent to form factors broadly diversified design specific consumables business since we serve major applications at all the leading customers in the semiconductor industry delivering probe cards to test hundreds of different chip designs. Each month, we expect to continue to see quarterly fluctuations of gross margin around the long.

Term trendline expanding to the 47% of our target financial model.

Turning now to segment and market level details.

Foundry and logic probe cards, our largest business performed at levels in the third quarter comparable to the second quarter with an expected seasonal reduction in mobile application processor demand offset by an increase in microprocessor demand and sustained strong growth and five G. R F applications.

With 2020 ones large foundry and logic wafer fab equipment investments now coming online with our customers, we're experiencing increasing demand for leading edge foundry and logic probe cards.

Along with their capacity additions are customers are adding innovative advanced packaging architectures like E. M. I, B, <unk> and <unk> fabric to their roadmaps to help offset the slowing of front end driven Moore's law.

As we've discussed in the past these shiplett, where 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.

With lead times of less than a quarter short term visibility remains challenging as always but the combination of significant customer capacity increases paired with their adoption of advanced packaging creates long term demand for form factors probe card products.

Yeah.

Demand for DRAM probe cards in the third quarter sustained near the high levels of the second quarter, and we expect comparable strength in the current quarter as in foundry and logic, we experienced demand shifts between different customers and different chip designs across multiple DDR four and DDR five designs in both mobile and PC server.

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<unk> ability to absorb these short term fluctuations in demand from any one customer as it rolls out of our long term initiatives to be a diversified market leader supplying all major DRAM manufacturers and remains a key tenant of our operational strategy in all of our served markets.

Our engineering systems business also delivered good results in the third quarter with gross margins at 50% for the first time since early 2020.

A highlight of the quarter was the shipment and installation of multiple F. R. T High performance multi sensor 300 millimeter optical metrology tools to a single foundry customer for <unk>.

Packaging obligations.

Advanced packaging is a key driver for all of form factors businesses as our customers begin to adopt shiflett style integration strategies to generate new test and measurement requirements.

The F R T tools ability to quickly accurately and non destructively measure and control critical dimensions film thicknesses and surface topologies on chip to chip with interfaces is key to improving and maintaining advanced packaging assembly yields.

Let me close by noting that with an accelerating demand outlook increased capacity to meet that demand and good execution on both short and long term gross margin improvements, we're well on the path to the target financial model, we unveiled last year that delivers $2 of non-GAAP earnings per share on 850.

Of revenue.

Test and measurement is clearly gaining importance in the semiconductor industry driven by powerful trends, including five G advanced packaging in memory content growth are.

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 mentioned third quarter revenues and non-GAAP gross margins were at the high end of our outlook range with revenues again, reaching the second highest level in company history, and non-GAAP EPS exceeded the high end of our Oxiclean.

Third quarter revenues were $190 million, a 1% sequential increase from Q2, and an increase of six 7% year over year.

Goldcorp segment's revenues were $155 million in the third quarter.

An increase of $4 2 million or 0.8% from Q2.

As Mike mentioned third quarter revenue by segment and market was very similar to the second quarter.

System segment revenues was $35 1 million in Q3, an increase of zero point $70 million or 2% from the second quarter, mainly as a result of higher sales of optical metrology and thermal systems, driven by advanced packaging and automotive applications.

Within the probe card segment.

And logic revenues increased by $1 billion from Q2 to $105 million in the third quarter, comprising 55% of total company revenues.

In the second quarter.

DRAM revenues were $40 million in Q3, a decrease of $2 million or five 5% from the second quarter and were 21% of total quarterly revenue as compared to 22% of revenue in the second quarter.

Flash revenues of 10 million barrels in Q3 were $2 5 billion Boes higher than the second quarter and were 6% of total revenues in Q3 up from 4% in Q2.

As we are sitting in the past, we expect flash revenues to be lumpy from quarter to quarter.

GAAP gross margin for the third quarter was 42, 2% of revenues.

246% in Q2.

Cost of revenues included $7 $2 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today and in the reconciliation table available in the Investor Relations section of our website.

On a non-GAAP basis gross margin for the third quarter was 46% and the I end of our outlook range and 160 basis points higher than the 44, 4% non-GAAP gross margin in Q2.

As mentioned third quarter revenue by segment and market was very similar to the second quarter and most of the improvement in gross margin approximately two thirds of it as a result of a more favorable product mix within the specific markets.

Our probe card segment gross margin was 45, 1% in the fourth quarter, an increase of 180 basis points compared to 43, 3% in Q2.

The increase was mainly due to a more favorable mix I just mentioned.

Our Q3 system segment gross margin was 50% 90 basis points higher than in the second quarter.

As we have said previously we expect our system segment gross margin to range between the high forties low pieces.

Gross margin remains an area of focus for us and we are encouraged by our progress towards our target financial model gross margin of 47%.

Remainder, we expect that margins will fluctuate from quarter to quarter, mainly as a result of changes in product mix.

Our GAAP operating expenses were $57 million for the third quarter $1 million higher than in the second quarter.

Non-GAAP operating expenses for the third quarter were $48 5 million or 25, 5% of revenues essentially flat with $48 $4 million or 25, 7% of revenues in Q2.

Company noncash expenses for the third quarter included $7 $9 million for stock based compensation $2 $5 billion for the amortization of acquisition related intangibles and depreciation of $6 $6 million.

Amortization for acquisition related intangibles decreased $7 $1 million in the second quarter as certain assets became fully amortized during Q2.

The increase of depreciation from $6 6 million of those in Q2 reflects additional assets placed in service as part of our capacity expenses.

As disclosed in an 8-K filed last month, we adopted restructuring plans during the third quarter to streamline and improve the efficiency and business effectiveness of our operations.

Consolidated certain manufacturing facility, including moving operations into our new even more manufacturing center.

We will begin production in the current quarter.

We expect these actions will be largely completed by the end of 2020.

We estimate that these actions will reduce our cost structure by approximately $3 million to $4 million on an annualized basis. Once the actions are fully implemented.

Non-GAAP operating income for the fourth quarter was 49 million $3 $8 million higher than the second quarter.

GAAP net income for the third quarter was $25 million or 26 cents per fully diluted share.

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423 cents per fully diluted share in Q2.

The non-GAAP effective tax rate for the third quarter was 18, 9% practically the same as it is the 18, 7% in Q2 and with no anticipated non-GAAP effective tax rate for fiscal 2021, 15% to 20%.

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 U S based on decline.

Third quarter non-GAAP net income was 31 $6 million or <unk> 40 per fully diluted share compared to $28 4 million or <unk> 36 per fully diluted share in Q2.

Moving to the balance sheet and professionals, we generated $14 million of free cash flow in the third quarter compared to $16 million in Q2 and.

And we have had total cash and investments of $268 million at the end of the quarter.

Third quarter $2 million sequential decrease in free cash flow reflects an increase in capital expenditures.

As of the end of the third quarter, we had two term loans remaining on the on our balance sheet totaling $27 million.

We invested $20 million in capital expenditures during the third quarter compared to $18 million in Q2.

This brings our year to date capex to $51 million.

Chiefly related to the capacity expansion or leaving more manufacturing center.

We continued to make significant investments in capacity in 2021, and with most of the year behind US we're fine tuning the range for forecasted cash capex for the full year to 70 million to $80 million from the 70 million to $90 million previously communicated.

As a reminder, we expect capex to return to three 5% to 4% of revenues in our target financial model. After we conclude these capacity expansions.

At quarter end, our total cash and investments balance exceeded the debt balance by $241 million, an increase of $11 million from Q2 quarter end.

No significant share repurchases were made during the third quarter and year to date, we purchased 620000 shares under a two year $50 million share repurchase plan.

He brings our year to date share repurchases totaled to about 0.8% of our outstanding shares.

The purpose of the plan is to offset dilution from stock based compensation.

And at quarter end $26 million remained available for future repurchases.

Turning to fourth quarter non-GAAP outlook.

As Mike mentioned, we expect a generally strong demand to continue with sequentially higher foundry and logic and systems revenue.

These factors result in a Q4 revenue outlook in the range of $192 million to $204 million.

Non-GAAP gross margins for the fourth quarter is expected to be in the range of 44% to 47%.

At the midpoint of this outlook. Thank you.

Q4, operating expenses to be higher than Q3 by $1 million to $2 million.

Mainly due to increased investments in R&D and higher travel expenses.

Things start to get back to normal.

Accordingly, non-GAAP earnings per fully diluted share for Q4 is expected to be between 37% and 45%.

A reconciliation of our GAAP to non-GAAP Q4 outlook is available on the Investor Relations section of our website and in our press release issued today.

With that let's open the call for questions.

Peter.

Thank you to ask a question you will need to press star one on your telephone to withdraw your question press the pound key again Thats star one on your Touchtone telephone to ask a question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of Tom Diffley of D. A.

Davidson.

Your line is open. Thank you good afternoon, and nice results Mike.

Mike just a couple of quick questions about the industry and how it relates to probe cards. If we spend you know 80 $590 billion on Capex. This year, what is the timing over the next year or over the next years and that's fully integrated into probe card business for you.

Yeah. It's an interesting question time, and one that we've tried to highlight for people, obviously 2021 is going to be an extremely strong.

A record for wafer fab equipment.

And what we've seen over the years is.

As those of equipment gets delivered installed qualified and then begins to produce designs theres a two to three quarter lag between those equipment shipments and us seeing probe card demand you can imagine it does take customers. Some degree of time to get the tools he isn't running qualified and beef producers.

The specific designs that require probe cards and obviously, we continue to operate at very short lead times are well within a quarter. So we are just part of the reason for our large capacity investments here in 2021, so that we're ready as all of this ws He comes online and begins producing.

Leading edge designs, we're ready to meet that probe card demand in 2022 and beyond.

And then as a follow up to that Mike When you look at the move from say five nanometers to three nanometers or the move from Finfet gate all around what is the incremental opportunity for probe cards.

I don't know that there's a really big impact there Tom I mean, if we go back in history in foundry and logic as we went from planer to thin that it drove up test intensity somewhat at the beginning of that transition just because there is new defect modes that customers have to understand and drive that.

Yield down and so theyre going to test more and drive more data through the test change that's going to require more testers and more probe cards, but you know in the end of the SaaS until they get pretty good at driving things.

Back down to the the standard test levels I think the more interesting thing that's happening is we're seeing.

Our push towards more wafer test probably associated with advanced packaging, where people are trying to get something closer to known good die before they stick the individual die into these advanced die stacking packages. So.

Maybe less associated with transistor architecture and more associated with the move towards advanced packaging, we do see a bit of a tailwind there.

Okay, Great. That's helpful and then Shai the final question here when you look at the labor market. How is that impacting you today I guess, both in light of expanding your facility in Livermore and also.

Restructuring and a few other facilities.

Yes, it's true that we see some delays in hiring and vacancy is a little longer you can see that by looking at our Opex for Q3, right. We expect it to be a little higher than it came in.

But we do.

We keep an eye on them.

Inc.

We can manage it.

We see this labor shortages coming.

To better results as we.

Turning to Q4, where we already have more people on board one month into the quarter and so that's encouraging and we are on schedule to open.

Our production.

So for this quarter.

Great and thank you for your time today.

Thanks, Sean.

Sure.

Thank you again Thats star one on your Touchtone telephone and we ask that you. Please restrict yourself to two questions before returning to the queue.

Question comes from the line of Brian Chin of Stifel. Your line is open.

Hi, there good afternoon, nice results and thanks for letting us ask a few questions.

After a nice gross margin print here in <unk> and comparable I guess guidance for <unk>.

I understand that theres cost and labor headwinds that might persist into next year, but also assuming that revenue maintains a progresses.

From <unk> levels, and then maybe the mix kind of even enrich in terms of logic foundry won't hamper you from continuing to operate in sort of the upper half of the 44% to 47% gross margin range not not in every quarter basis, but at least averaging out to that over a full year.

So as we said in few earnings calls the biggest.

Factor reflective of Eplex. The most our gross margin is product mix.

We are running along this trend line as Mike mentioned mean nichole towards our 47% gross margin target model, but as we make progress towards the goal. We can say things fluctuate along that line we saw it.

Q3 was 46% when you look at Q4 outlook revenues.

At least at the midpoint or higher then.

Q3 gross margin at this point is lower.

The actual gross margin for Q3, and because of that mix so that phenomenon I think.

As we continue to make progress towards the 47.

Okay, Thanks and.

Early this morning, Teradyne referenced I think a 25% increase in test intensity.

For heterogeneous chipboard style packaging relative to a comparable monolithic IC, Mike Mike I think that's within the range, maybe even towards the high side of what you've talked about previously so I was wondering how big of a tailwind could this activity represent next year do you see broader activity across a handful of key leaders in this space.

And does that add any basis points of growth on top of the revenue CAGR you've talked about at last year's analyst meeting.

Yes, so maybe start with the second part of the question first if you look back at some of the underlying assumptions that went into the <unk>.

Target model that gets us to $850 million in about 2023.

Vance packaging and die stacking heterogeneous integration or a very prominent driver to get us to that model. So.

When we think about the growth rates that get us there in 2023, they largely are incorporated.

As you note.

We are seeing some pretty prominent leaders in the industry shifts their roadmaps towards these heterogeneous integration techniques, our largest customer has been very clear that they've got a major client processor coming out because there is going to feature of this architecture.

And as that drives up test intensity at least initially.

You are going to see some potential tailwind, but I think at the top level. We had contemplated. These these factors in our revenue growth assumptions that get us to $8 50 in 2023.

Okay, great Great that's helpful and.

And maybe just I was wondering could you take a stab maybe at.

If you double or even triple the transistor count on one of today sort of leading <unk>, what kind of proportional or not increase in test times do you think we're talking about.

Yeah, I mean test time doesn't scale as you might imagine linearly with transistor count there is all kinds of interesting test technologies that allow customers to make sure theres not a one to one correspond to that.

But.

Going back maybe to Tom's question.

The bigger thing rather than transistor architecture transistor count is people trying to drive more and more test content to the wafer level and the die level. So that when they put the die in these advanced packages. They have a pretty high probability of making sure. They are good you can imagine a scenario and an eight die stack.

Where if one of those eight die is bad and you don't have to rework or redundancy available that's a pretty good yield and so that's the fundamental economics that are driving up test intensity associated with heterogeneous integration and advanced packages.

Great makes sense thanks, Mike.

Yep.

Thank you. Our next question comes from Craig Ellis of B Riley Securities. Your line is open.

Okay, great and congratulations on the nice execution in the nice outlook.

Mike I wanted to start just by getting some clarification on the liver more facility. So.

One.

I believe the press release and your comments indicated that it would be ramping in the fourth quarter, but is it ramping revenues and is the revenue.

Saved with that ramp the growth that were seeing sequentially in the business or just a part of that growth I guess it would be a part because you also said that.

Our systems, it's going to be a quarter on quarter.

Yes, yes.

It's a pretty modest contributor to the overall.

Midpoint revenue outlook, but I think it is significant that we are bringing it online on schedule relaxing what's been a pretty significant for removing what's been a pretty significant constraint for us we think about this in three components.

The footprint, we have the installed tool capacities that we have and then finally, the labor in our factories and.

For those of you that have been following us for a while you know we've been footprint constraints. So bringing this facility online powering it up getting tools installed as we're doing now really relaxes that major long lead time of constraint that we've been operating under.

There's other capacity expansions going on worldwide.

One of them in our RF line, where we continue to see increasing business associated with the five G ramp. So there's other components too you.

I'd say, a modest still a little bit of the uplift in the sequential growth Q3 to Q4 is associated with the new facility, but the potential is a much more exciting opportunity for us.

Got it and on that RF point, you mentioned, the RF was particularly robust is that.

RF front end for.

<unk> smart pumps and that is that the.

The move from more high end smartphones over the first year one in your COO of shipments to next year's move more into the mid range and I know, we've got a number of.

Android releases that are coming in the first quarter and there's quite a bit of excitement about some new baseband product for those is that what you're saying or are you seeing things related to <unk> that might be Wi Fi related customer premise equipment that type of thing.

Wi Fi six et cetera.

No I think it's there is some.

Wifi six elements to it but I really think the strength is being driven by <unk> handsets.

Both.

The growth associated with <unk> handsets, but probably more importantly from a test perspective, the content growth in RF front end in a <unk> handset.

Really pretty significant if you look at the components and functionality in a <unk> handset. The RF front end of a <unk> handset, you've got a whole bunch of new components.

Third to our <unk> handset and of course, you're operating in many cases significantly higher frequencies up to millimeter wave frequencies, which drives up the test complexity. So.

To answer your question I don't think a lot of it Wi Fi six some of it really is a handset dynamic that's driving our growth.

Lastly for me and at the risk of Admonishment purchase the two question guideline.

Could you just talk a little bit more about the systems business side.

No thought that $35 million a quarter was a very robust quarter for the business, but it looks like it's growing above that so.

As we look at the different pieces of that business, you mentioned <unk>, but there are others can you talk a little bit more about what's happening there Mike.

Yes.

So the system segment, you can really think of it in our current state is broken down into three pieces one is the <unk>.

Legacy systems business that we acquired as part of the Cascade Micro Tech acquisition and that was a business that both under Cascades umbrella and ours kind of a low single digit grower.

Serving R&D labs characterization failure analysis things like that.

But we've added two of our recent acquisitions to the system segment, one being F. R T and I mentioned.

The robust adoption, we're beginning to see especially in the foundry ecosystem associated with the advance packaging metrology applications that <unk> serves that's been a really nice growth driver for that segment.

And the other piece is our acquisition almost exactly a year ago of HPE to get us into the quantum computing test space. So this is test and infrastructure for enabling all of the providers of quantum computers and Theres a long list of companies beginning to.

Commercialize useful quantum computers for some really interesting applications, we're helping them with the test and measurement applications associated with that as that industry begins to grow.

So as you look at the system segment, which a couple of years ago was $25 million a quarter.

Adding on these two other components as far as G and H P D, which are both growing faster, but also adding the revenue to it is the primary reason for us getting up to the mid thirties and hopefully the high <unk> in the near term.

Makes sense thanks, Mike.

Yep.

That's correct.

Thank you. Our next question comes from David Duley of Steelhead. Your question. Please.

Yeah, Thanks for taking my questions.

Yeah.

You mentioned that you had a nice improvement sequentially in gross margins.

Just curious I'm sure there was still some.

Supply constrained margin impact.

And higher freight costs could you, perhaps help us understand.

How much is still dragging there.

With freight and.

Supply issues.

Actually the supply go ahead Mike.

No go ahead sorry.

So actually we didn't see a big impact from.

We've seen shipments.

Costs and things like that for gross margin.

But it's been nature of our of our products the way we ship them. The terms with our customers. This doesn't have a big impact and if you didn't have the beginning but it's on a gross margin in Q3, and we don't think it's going to be significant in Q4 as well.

And.

I know.

Probably wasn't very meaningful but was there some revenue impact.

No not at all pretty small.

Sometimes you can have a big pool guard probe card waiting for it to be sure because missing a small component, but it was really minor.

So far okay, really Joe Biocorrosion too.

Yeah.

And then as far as.

Our tea business could you.

Could you help us understand how big a segment of business or how big this market is and what exactly are you measuring the advanced packages that you gave some description if you could just dig in a little bit deeper that would be great.

Yes, why don't we start with the application space I mean, there's a variety of new measurements that need to be made on these chip looks primarily at the interfaces between the adjacent chip. So you can imagine if you're taking two of these chips and stacking them together you want to make sure that the.

Connections typically solder bumps or copper pillars.

Our reasonably planer flap that theres, no defects things like that and so the measurement a rapid and instrument a planarity of those surfaces.

And things like BOE and wharf very important for maintaining assembly yields in these brand new chip led applications. So a lot of our measurements were associated with that the interfaces between shipments before they are assembled together now.

Because this is an emerging application it's difficult to size of the market.

We've looked at it is overall probably from a Tam perspective, a total available market of a couple of hundred million because that's a fairly wide swath across all possible advanced packaging apps and theres a variety of different competitors and alternatives that are probably.

And.

Divide up the different sub segments and sub applications.

As.

Standard semiconductor and semiconductor applications have been so.

I think $150 million to $200 million, probably a reasonable placeholder for a total available market. It'll obviously from these levels take us a while to grow into that but we're really excited about the progress from the fr team so far.

Thank you.

Thank you. Our next question comes from Chris <unk> of Cowen and company. Please go ahead.

Hi, yes, thanks for taking my questions. This is Steven calling on behalf of Krish.

First question maybe for Shai.

Just thinking a little bit more on the gross margin during the quarter.

Part of the guidance.

Full probe card.

Flat.

By quarter end.

And then I saw.

The expansion there.

Was that more of a function of a bomb.

Better product mix with.

Within the foundry customers.

Did you also see some material.

Margin expansion.

The memory customers taking mobile.

And you were not very clear on the just a quality over the line.

Can you repeat that.

Yes part of it.

Alright, guys can you hear me better now.

Yes, that's better.

Okay, great Yeah. So the question was on.

Gross margin expansion within the probe card.

Q3, and Caribbean applications about Q4 margin.

Margin expansion as well.

Your your foundry and memory customers were relatively flat.

Sequentially between two things.

I was just curious if you've looked at the gross margin expansion.

Within the probe card business in Q3, if that was primarily from foundry.

Yeah, and meaningful amount of margin expansion from memory customers as well.

Yeah. So in Q3, it was both of our segments.

<unk> had a better margin if you look into Q4, so actually at the midpoint of the outlook range for gross margin in Q4 is below.

46% 45, and a half and the main contributor goes back to what we said in our prepared remarks about product mix within the specific market. So extruded traditionally systems, and then foundry and logic, because higher margins than DRAM and flash, but first of all there is overlap between them you can have.

I N DRAM design, but there is a better margin than foundry logic design and you can certainly have.

We'd be in the DRAM market two designs, we completely different market.

Margin.

So as we look into Q4, what you see.

This favorable product mix within the markets.

Hum.

Within foundry and logic, we would then be around et cetera, and not necessarily between the markets.

Got you thank you for that.

For my follow up.

Question on <unk>.

We're a large crew.

In our customer in the quarter.

So I imagine most of the.

Our business there is.

Cards on the memory side, but can you talk about any potential opportunities longer term within the foundry business as well.

Yes, they were as you know the 10% customer in Q3, and I believe they were 10% customer in the second quarter as well.

In Q3.

There was a pretty strong contribution from their foundry business as well and Thats, probably the only customer worldwide, where we have.

A significant DRAM business any significant foundry and logic business not to mention the systems business as well.

So you know they've been a customer of us on the probe card side in foundry and logic for many years.

There is I think as they.

Rose their capability and capacity in in competing for Fabless customers I do think there's an opportunity there probably not much of a share gain opportunity because we feel like we do have reasonably high native share.

With that customer and a strong relationship across both the DRAM and foundry and logic businesses.

But as we talked about some of the other customers, making big capacity investments. This year. There are certainly in that group and so as they expand their foundry and logic business, we would expect to grow with that.

Great very helpful. Mike. Thank you.

Thanks.

Thank you. Our next question comes from Charles <unk> Needham <unk> Company. Please go ahead.

Hi, Good afternoon, Mike and thanks for taking my questions first I wanted to really congratulate form factor team for strong execution gross margin looks like not only you will.

Q3, overall margins back half without the pro side, it's really taking the 45% really congratulations on that.

So I wanted to ask a little bit longer term questions.

I wanted to talk about ask you about market share.

Obviously you.

We know where you are strong.

Do you have a very strong without the leading IBM on the microprocessor side, you'll have very strong position in the foundry side with a good exposure to the mobile SLC side maybe.

Maybe let me start with the microprocessor.

Obviously, the leading IDM.

With that aggressive turnaround <unk> is becoming very interesting for us to really watch the competitive dynamics between them and the other microprocessor provider. Obviously, that's a companys customary but that you may have some indirect exposure there I wanted to really ask you.

In that space with the marquee Shish puts and takes.

What is your high level view on the potential tailwind to either <unk> or headwinds in the context of that.

The competition between those two microprocessor providers and how would that potentially changing market shift with a factual.

Microprocessor probe card business, either favorably or unfavorably then I have a follow up.

Okay.

Yeah.

As you know, we obviously have strong share at the leading microprocessor manufacturer, but the Fabless microprocessor manufacturer is obviously posted some very impressive growth numbers over the last little while which hasn't gone unnoticed by us are native share is lower there.

Our market share is lower there for a variety of reasons, but because it's lower and because they are gaining share. We've got a pretty strong initiative to go raise that share at the fabulous microprocessor customer so right now.

Being candid with you if the share were to shift one to one.

That would be.

Net headwind for us that would be a net loss for us, but it's been an area, where we've been focusing on and we got good traction and I think consistent with our long term strategy of being a leading supplier at all the leading customers around the world I think we're in a reasonable position to rectify that Sydney interesting subtleties with that business, where they won't.

Necessarily use the foundries test services, but actually manage themselves. So.

In that case, they are actually a fabulous direct customer, which not to complicate things too much is one of the interesting subtleties of this business.

Thanks for that great color, Mike, maybe I wanted to turn to.

To the.

Mobile <unk> processor side.

It's been quite topical that what the Chinese smartphone maker reportedly as is working through brain.

Apps processor design back in house, maybe starting from three nanometer I think this is the move kind of reflects the continued evolution of blackout windows.

And companies coming in take designs in house and.

Maybe there is a headwind for one off indirect a foundry customer in the mobile space.

A U S company there.

I wonder what form factor. Thanks in terms of the potential landscape shifting also in the mobile SLC space in particular.

When the system companies they tend to favor.

One leading foundry over the other where you may have a little bit stronger position there.

Could you give us a little bit more color on that thank you.

Yes.

This trend in sourcing and in more vertical integration with our customers is an interesting one and it's not new rack at the hyperscale or have been taking design in house, obviously the large.

The large handset manufacturer continues to take more inside an almost becoming their own silicon company their own Fabulous company.

This again goes back to similar comments I made about the microprocessor situation, where because one of the reasons why we want to make sure we have strong share positions and strong relationships at all of the leading foundries and with all the leading fabless customers because many of these fabless customers actually man.

<unk> their design and test operations themselves adulthood outsourcing foundries.

Creates a more complicated account management structure, but again I point back to really making sure that we as a company are engaged and I think we're pretty well engaged with all of the leading fabless and foundry customers. So that the shifts in their manufacturing strategies and sourcing.

<unk> ended up being net neutral for us.

Thank you.

My questions. Thank you.

Thanks Charles.

Thank you. Our next question comes from Christian Schwab of Craig Hallum. Please go ahead.

Hey, this is Tyler on for Christian Thanks for let US that's a couple of questions and congrats on the solid quarter I wanted to ask about your DRAM probe card business, including your kind of implied Q4 guidance of flat 2021 is gonna be a pretty strong growth year. So I'm. Just wondering if there is there really any reason we should be.

Be suspect about this strength continue into 2022, you're serving all customers and theres going to be continued design and node transitions next year. So I'm just wondering if there's.

Any reason that the shrink shouldn't continue.

Yes. Good question as you might imagine a topic of pretty significant internal debate.

Thank you know one of the things to remember as history has taught us that DRAM probe cards like all DRAM supply chain elements are a cyclical business.

For the past couple of quarters, and we expect here in the current fourth quarter.

Kind of to be at the historical high end high $30 million low $40 million.

Quarterly DRAM probe card revenue, which is above sort of the mid thirty's that we've talked about being the the average normalized level.

The fundamental drivers for that as you note our continued node transitions and design releases and as long as those continue and the customer base.

Quarter, I think at 42, and a half or $43 million. So we're we're operating pretty close to all time record levels in DRAM.

Given the historic cyclicality that might be a little surprising.

But.

The fundamental constituents to drive that demand are still there and I think we're executing pretty well in DRAM I think we probably gained share here in 2021.

That's great I appreciate that color and then second.

Second question kind of on the supply chain. It sounds like you guys are executing well and I'm not not not seen any material impact to yourself, but I think you made the comment that you do expect the environment to persist into next year and presumably that's.

That's coming from conversations Youre, having with customers I'm, just wondering if there might actually be a benefit to this environment.

Further conversations with your customers.

At least benefited you from a visibility standpoint, any any comments there on the supply chain impacts would be would be great.

Yeah, I mean, the supply chain.

Issues.

In.

Really kind of interesting and ironically many of them have their root cause back into semiconductor shortage. So where we've had challenges with subsystems are sub components that are not vertically integrated they really havent been associated with some isolated chip shortage.

I don't think it's improving visibility all that much I mean, we're still running lead times well within a quarter.

But we would hope that as the capacity comes online associated with all of the different increases in capacity across the industry, especially at the leading edge node to satisfy the shortage.

That again should be driving pretty solid demand across our different businesses.

Part of what we benefited from as I mentioned in the prepared remarks is pretty vertically integrated.

For a tech manufacturing company in the semiconductor ecosystem and that was not a very fashionable to make several years ago, but we did it for a couple of good reasons, one of them being continuity and it has paid off here a little bit.

That's great appreciate that that's all for me thanks, guys. Thanks.

Thank you at this time I would like to turn the call back over to Mike's lessor for closing remarks.

Great. Thanks, everyone for joining us again.

We're hopeful to attend a couple of conferences ended the year I don't know the in person or virtual but hope to see you there and thanks for your continued interest in form factor Bye bye.

And this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

Yeah.

Okay.

Yeah.

Okay.

[music].

Yes.

Okay.

[music].

Okay.

Yes.

Okay.

[music].

Thank you and welcome everyone to form factors third quarter 2021 earnings conference call on today's call are Chief Executive Officer, Mike.

So lesser 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.

The impact of the COVID-19 pandemic, our supply chain the impact of regulatory changes the anticipated demand for products, our ability to develop produce and sell products and the assumptions upon which such statements are based.

Which are available on the SEC's website at Www Dot <unk> dot Gov and in our press release issued today.

Forward looking statements are made as of today October 27, 2021, and we assume no obligation to update them.

With that we will now turn the call over to form factors CEO Mike's lessor.

Thanks, Jason and thank you everyone for joining us today.

And in fact, we delivered solid results in the third quarter again recording the second highest revenue in company history with gross margins at the high end of our outlook range.

Together with sustained operating expense control. These factors resulted in non-GAAP earnings per share above the high end of our outlook range.

We continue to benefit from strong demand from form factors diversified set of market, leading semiconductor test and measurement products and with our added production capacity now coming online we are well positioned in the current quarter to deliver sequential growth.

Like many companies in the semiconductor industry, we're facing a variety of supply chain and labor challenges.

Our long term investments in automation and vertical integration has helped reduce the effect of these headwinds and we thus far has successfully navigated these issues with minimal impact.

We do expect this situation to persist into next year and our team remains focused on actively resolving these challenges.

Minimizing impact where supply chain is especially important as our capacity investments start coming online too.

Tool installations and qualifications are now underway in our new live or more manufacturing center, which remains on track to deliver initial customer shipments in the current quarter.

We're excited to be on the cusp of commissioning this new flagship facility, which will remove a growth constraint. We've operated there for almost two years, helping us to reach the $850 million revenue.

Our financial model.

I'd like to provide some detail behind our sequential improvement in gross margins as it provides insight into the importance of the design specific product mix within each of our served markets.

As you can see from the supplemental materials posted on our website and as Shai will review later third quarter revenue by segment and market was very similar to the second quarter, yet we delivered 160 basis points improvement in gross margins.

The largest single factor in this improvement was a more favorable product mix within specific markets.

Okay.

As we've noted in the past probe cards are a consumable that is specific to each customer chip design and the custom nature of each probe card design drives a different manufacturing cost and selling price.

The difference between a one touchdown configuration versus a two touchdown configuration.

This variability is inherent to form factors broadly diversified design specific consumables business since we serve major applications at all the leading customers in the semiconductor industry delivering probe cards to test hundreds of different ship designs. Each month, we expect to continue to see quarterly fluctuations of gross margin around the long.

Term trend line expanding to the 47% of our target financial model.

Turning now to segment and market level details.

With 2021, large foundry and logic wafer fab equipment investments now coming online and our customers were experiencing increasing demand for leading edge foundry and logic probe cards.

Along with their capacity additions are customers are adding innovative advanced packaging architectures like E might be over us and three D fabric to their roadmaps to help offset the slowing of front end driven Moore's law.

As we've discussed in the past these shiplett, where 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.

Okay.

Demand for DRAM probe cards in the third quarter sustained near the high levels of the second quarter, and we expect comparable strength in the current quarter.

In foundry and logic, we experienced demand shifts between different customers and different chip designs across multiple DDR four and DDR five designs in both mobile and PC server applications.

Form factors ability to absorb these short term fluctuations in demand from any one customer as the Roosevelt of our long term initiatives to be a diversified market leader supplying all major DRAM manufacturers and remains a key tenant of our operational strategy in all of our served markets.

Our engineering systems business also delivered good results in the third quarter with gross margins at 50% for the first time since early 2020.

A highlight of the quarter was the shipment and installation of multiple F. R. T High performance multi sensor 300 millimeter optical metrology tools to a single foundry customer great packaging obligations.

Advanced packaging is a key driver for all of your businesses as our customers begin to adopt chip, let style integration strategies to generate new test and measurement requirements.

The F. R T tools, the ability to quickly accurately and non destructively measure and control critical dimensions film thicknesses and surface topologies on chip to chip with interfaces is key to improving and maintaining advanced packaging assembly yields.

Let me close by noting that with an accelerating demand outlook increased capacity to meet that demand and good execution on both short and long term gross margin improvements were well on the path to the target financial model, we unveiled last year. They delivered $2 of non-GAAP earnings per share on 850.

Millions of dollars of revenue.

Test and measurement is clearly gaining importance in the semiconductor industry driven by powerful trends, including five G advanced packaging in memory content growth.

<unk> over to you.

Thank you, Mike and good afternoon.

As you saw in our press release, and as Mike mentioned third quarter revenues and non-GAAP gross margin, whereas the high end of our outlook range with revenues again, reaching the second highest level in company history, and non-GAAP EPS exceeded the high end of our outlook range.

Well in fact, it was third quarter revenues were $190 million, a 1% sequential increase from Q2, and an increase of six 7% year over year.

Corporate segment revenues were $155 million into third quarter.

The increase of $1.2 million or 0.8% from Puget.

As Mike mentioned third quarter revenue by segment and market was very similar to the second quarter.

System segment revenues were $35 1 million Boes in Q3, an increase of zero point $7 million or 2% from the second quarter.

As a result of higher sales of optical metrology and thermal systems, driven by advanced packaging and automotive applications.

Within the probe card segment foundry and logic revenues increased by $1 billion from Q2 to $105 million in the third quarter, comprising 55% of total company revenues.

Second quarter.

DRAM revenues were $40 million in Q3, a decrease of $2 million or five 5% from the second quarter and were 21% with total quarterly revenue as compared to 22% of revenue in the second quarter.

Flash revenues of $10 million in Q3 were $2 5 billion Boes higher than the second quarter and were 6% of total revenues in Q3 up from 4% in Q2.

If you're sitting in the past, we expect revenues to be lumpy from quarter to quarter.

GAAP gross margin for the third quarter was 42, 2% of revenues as compared to 46% in Q2.

Cost of revenues included $7 2 million barrels of GAAP to non-GAAP reconciling items, which we all kind of in the press release issued today and in the reconciliation table available in the Investor Relations section of our website.

On a non-GAAP basis gross margin for the third quarter was 46% at the high end of our outlook range and 160 basis points higher than the 44.4% non-GAAP gross margin in Q2.

Our probe card segment gross margin was 45, 1% in the fourth quarter, an increase of 180 basis points compared to 43, 2% in Q2.

The increase was mainly due to a more favorable mix I just mentioned.

Our Q3 system segment gross margin was 50% 90 basis points higher than in the second quarter.

As we have said previously we expect our system segment gross margin to range between the high forties low fees.

Gross margin remains an area of focus for us and we are encouraged by our progress towards our target financial model gross margin of 47%.

Reminder, we expect margins will fluctuate from quarter over quarter, mainly as a result of changes in product mix.

Our GAAP operating expenses were $57 million for the third quarter $1 million higher than in the second quarter.

Non-GAAP operating expenses for the third quarter were $48 $5 million or 25, 5% of revenues essentially flat with $48 $4 million or 25, 7% of revenues in Q2.

Amortization of acquisition related intangibles decreased $7 $1 million in the second quarter as certain assets became fully amortized during Q2.

The increase of depreciation from $6 6 million Daus in Q2 reflects additional assets placed in service as part of our capacity expenses.

As disclosed in an 8-K filed last month, we adopted restructuring plans during the third quarter to streamline and improve the efficiency and business effectiveness of our operations.

We are consolidating certain manufacturing facility, including moving operations into our new even more manufacturing center.

We will begin production in the current quarter.

We expect these actions will be largely completed by the end of 2022.

We estimate that these actions will reduce our cost structure by approximately $3 million to $4 million on an annualized basis.

Actions are fully implemented.

Non-GAAP operating income for the fourth quarter was $49 million $8 $8 million higher than the second quarter.

GAAP net income for the third quarter was $25 million or 26 cents per fully diluted share compared to $17 9 million or 23 cents per fully diluted share in Q2.

The non-GAAP effective tax rate for the third quarter was 18, 9% practically the same as it is the 18, 7% in Q2 and with no anticipated non-GAAP effective tax rate for fiscal 2021, 15% to 20%.

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 U S based I'll be quick.

Third quarter non-GAAP net income was $31 $6 million or <unk> 40 per fully diluted share compared to $28 $4 million or <unk> 36 per fully diluted share in Q2.

Moving to the balance sheet.

We generated $14 million of free cash flow in the third quarter compared with $16 million in Q2 and.

And we have had total cash and investments of 268 million barrels at the end of the quarter.

Third quarter $2 million sequential decrease in free cash flow reflects an increase in capital expenditures.

As of the end of the fourth quarter, we had two term loans remaining on the on our balance sheet totaling $27 million.

We invested $20 million in capital expenditures during the third quarter compared to $18 million in Q2.

This brings our year to date Capex was $51 million chiefly related to the capacity expansion at our leisure mold manufacturing center.

We continued to make significant investments in capacity in 2021 and will most of the year behind US we're fine tuning the range for forecasted cash capex for the full year to 70 million to $80 million of the 70 million to $90 million previously communicated.

As a reminder.

Capex to return to three 5% to 4% of revenues in our target financial model. After we conclude this capacity expansion.

At quarter end, our total cash and investments balance exceeded the debt balance by $241 million, an increase of $11 million from Q2 quarter end.

No significant share repurchases were made during the third quarter and year to date, we purchased 620000 shares under a two year $50 million share repurchase plan.

This brings our year to date share repurchases totaled to about 0.8% of our outstanding shares.

The main purpose of the plant used to offset dilution from stock based compensation and.

In this quarter and $26 million remained available for future repurchases.

Turning to fourth quarter non-GAAP outlook.

As Mike mentioned, we expect a generally strong demand to continue with sequentially higher foundry and logic and systems revenue.

These factors result in a Q4 revenue outlook in the range of $192 million to $204 million.

Non-GAAP gross margins for the fourth quarter is expected to be in the range of 44% to 47%.

At the midpoint of this outlook, we expect Q4 operating expenses to be higher than Q3 by $1 million to $2 million, mainly due to increased investments in R&D and higher travel expenses as things start to get back to normal.

Accordingly, non-GAAP earnings per fully diluted share for Q4.

It could be between 37 and 45%.

A reconciliation of our GAAP to non-GAAP Q4 outlook is available on the Investor Relations section of our website and in our press release issued today.

With that let's open the call for questions operator.

Our first question comes from the line of Tom Diffley.

Davidson.

Your line is open. Thank you good afternoon, and nice results like just a couple of quick questions about the industry and how it relates to probe cards. If we spend you know 80 $590 billion on Capex. This year, what is the timing over the next year or over the next years that that's fully integrated into probe card.

Business for you.

Yeah. It's an interesting question time, and one that we've tried to highlight for people. Obviously 2021 is going to be an extremely strong a record for wafer fab equipment.

And what we've seen over the years is as those that equipment gets delivered installed and qualified and then begins to produce designs theres a two to three quarter lag between those equipment shipments and us seeing probe card demand you could imagine it does take customers some degree of time to get.

The tools he isn't running qualified in and be producing the specific designs that require probe cards and obviously we continue to.

Operate on very short lead times are well within a quarter. So we are just part of the reason for our large capacity investments here in 2021, so that we're ready as all of this wf. He comes online and begins producing leading edge designs, we're ready to meet that probe card demand in 2022 and beyond.

Great and then as a follow up to that Mike When you look at the move from say five nanometers to three nanometers are the move from Finfet gate all around what is the incremental opportunity for probe cards.

I don't know that there's a really big impact there Tom I mean, if we go back in history in foundry and logic, because we went from planer to thin that it drove up test intensity somewhat at the beginning is that transition just because there's new defect knows that the customers have to understand and dry.

Give the yield down and so theyre going to test more and drive more data through the test change that's going to require more testers and more probe cards.

You know in the end of the das until they get pretty good at driving things back.

Back down to the the standard test levels I think the more interesting thing that's happening is were seeing.

A push towards more wafer test probably associated with advanced packaging, where people are trying to get something closer to known good die before they stick the individual die into these advanced die stacking packages. So we maybe less associated with transistor architecture and more associated with the move toward.

Advanced packaging, we do see a bit of a tailwind there.

Great. That's helpful and then Shai the final question here when you look at the labor market. How is that impacting you today I guess, both in light of expanding your facility in Livermore and also restructure and a few other facilities.

Yes, it's true that we see some delays in hiring and the vacancy is really longer you can see that by looking at the Opex for Q3, right. We expect it to be a little higher than it came in.

But we do.

Something we keep an eye on and we think we can manage it we see these labor shortages coming.

To better results as we get into Q4.

You already have you know more people onboard one month into the quarter. So that's encouraging and we are on schedule to open our start production.

For this quarter.

Great and thank you for your time today.

Thanks.

Thank you again Thats star one on your Touchtone telephone and we ask that you. Please restrict yourself to two questions before returning to the queue. Our next question comes from the line of Brian Chin of Stifel. Your line is open.

Hi, there good afternoon, nice results and thanks for letting us ask a few questions.

Yeah.

Nice gross margin print here in three Q and comparable I guess guidance for <unk>.

No I understand that there's cost and labor headwinds that might persist into next year, but but also assuming that revenue maintains a progresses from.

From <unk> levels, and then maybe the next kind of interactions in terms of logic foundry won't hamper you from continuing to operate in sort of the upper half of the 44% to 47% gross margin range not every quarter basis, but at least averaging out to that over a full year.

So as we said in few earnings calls that the biggest.

Factors that may affect with the influx of the most our gross margin is product mix.

We are running along this trend line as Mike mentioned in the call towards our 47% gross margin target model, but as we make progress towards the goal we can save things fluctuate along that line we saw it.

Q3, but gross margin amidst point is lower.

And the actual gross margin for Q3 and because of that mix. So that phenomenon I can tell you stay with us as we continue to make progress towards the 47.

Okay, Thanks and yeah.

Early this morning, Teradyne referenced I think a 25% increase in test intensity.

For heterogeneous chipboard style packaging relative to a comparable monolithic I see Mike Mike I think that's within the range, maybe even toward the high side of what you've talked about previously so I was wondering how big of a tailwind could this activity represent next year do you see broader activity across a handful of key leaders in this space.

And does that add any basis points of growth on top of the revenue CAGR you've talked about at last year's analyst meeting.

Yeah, So maybe I'll start with the second part of the question first if you look back at some of the underlying assumptions that went into the the target model that gets us to $850 million in about 2023 advanced packaging and and die stacking heterogeneous integration.

A prominent driver to get us to that model. So you know when we think about the growth rates they get us there in 2023, they largely are incorporated but as you note.

We are seeing some pretty prominent leaders in the industry shift their roadmaps towards these heterogeneous integration techniques, our largest customer has been very clear that they've got a major client processor coming out because there's gonna feature of this architecture.

And you know as that drives up test intensity at least initially.

You know you are going to see some potential tailwind, but I think at the top level, we had contemplated.

These are these factors in our revenue growth assumptions that get us to 850 in 2023.

Yeah.

Okay, great Great. That's helpful and maybe just I was wondering could you take a stab maybe at.

You know if you have you done.

Or even triple the transistor count on one of today sort of leading S. O sees what kind of proportional or not increase in test times do you think we're talking about.

Yeah, I mean chess time doesn't scale as you might imagine linearly with transistor count there. There's all kinds of interesting test technologies that allow customers to make sure there's not a one to one corresponds into that but.

Going back maybe to Tom's question the.

The bigger thing rather than transistor architecture transistor count is people trying to drive more and more test content to the wafer level and the die level. So that when they put the die in these advanced packages they have a pretty high probability of making sure. They're good you can imagine a scenario in an eight die stack.

Great makes sense thanks, Mike.

Yep.

Thank you. Our next question comes from Craig Ellis of B Riley Securities. Your line is open.

Okay, great and congratulations on the nice execution in the nice outlook, Mike I wanted to start just by getting some clarification on the liver more facility. So.

One I believe the press release and in your comments indicated that that it would be ramping in the fourth quarter, but is it ramping for revenues and is the revenue associated with that ramp the growth that were seeing sequentially in the business or or just a part of that growth I guess it would be a part because you also said that.

Our systems, it's going to be up quarter on quarter.

Yeah, Yeah, it's a pretty modest contributor to the overall NIM.

<unk> revenue outlook, but I think it is significant that we are bringing it online on schedule relaxing, what's been a pretty significant or removing what's been a pretty significant constraint for US you know we think about this in three components.

Foot print, we have installed two O capacities that we have and then finally the labor in our factories.

And for those of you following us for a while you know we've been footprint constraints. So bringing this facility online powering it up getting tools installed as we're doing now really relaxes that major long lead time of constraint that we've been operating under.

You know, there's other capacity expansions going on worldwide. One of them are in our RF line, where we continue to see increasing business associated with the five G ramp. So theres other component to them you know I'd say, a modest still a little bit of the uplift in the sequential growth Q3.

Q4 is associated with the new facility, but the potential is a much more exciting opportunity for us.

Got it and on that RF point, you mentioned, the RF was particularly robust is that.

RF front end for.

<unk> smart pumps and that is that the the move from more high end smartphones over the first year one in your COO of shipments to next year's move more into the mid range and I know, we've got a number of Android.

Android releases that are coming in the first quarter and theres quite a bit of excitement about some new baseband product for those is that what you're saying or are you seeing things related to five XI that might be Wi Fi related customer premise equipment and that type of thing right.

Wifi six etc.

No I think it's it's there is a wifi six elements to it but I really think the strength is being driven by <unk> handsets.

Both.

The growth associated with <unk> handsets, but probably more importantly from a test perspective, the content growth in RF front end in a <unk> handset really pretty significant if you look at the components and functionality in our five G handset the RF front end of a <unk> handset.

You've got a whole bunch of new components compared to a <unk> handset and of course, you're operating in many cases significantly higher frequencies up to millimeter wave frequencies, which drives up the test complexity.

So.

To answer your question I don't think a lot of it's Wi Fi six some of it really is a handset dynamic that's driving our growth.

Lastly for me and that's the risk of Admonishment purchased the two question guideline.

Could you just talk a little bit more about the systems business I.

Thought that $35 million a quarter was a very robust quarter for the business, but it looks like it's growing above that so it is as we look at the different pieces of that business you mentioned F. R. T. But there are others can you talk a little bit more about what's happening there Mike.

Yes.

So so the system segment, you can really think of it in our current state is broken down into three pieces one is the legs.

Legacy systems business that we acquired as part of the Cascade Micro Tech acquisition and that was a business that both under Cascades umbrella and ours kind of a low single digit grower.

Serving R&D labs characterization failure analysis things like that.

But we've added two of our recent acquisitions to the system segment, one being F. R T and I mentioned.

The robust adoption, we're beginning to see especially in the foundry ecosystem associated with the advance packaging metrology applications. The F. R. T serves that's been a really nice growth driver for that segment.

And the other piece is our acquisition almost exactly a year ago of H P. D E to get us into the quantum computing test space. So this is test an infrastructure for our enabling all of the providers of quantum computers and Theres a long list of companies beginning to.

Commercialize useful quantum computers for some really interesting applications, we're helping them with the test and measurement applications associated with that as that industry begins to grow.

So as you look at the systems segment, which a couple of years ago was $25 million a quarter.

Adding on these two other components as far as <unk> H P D, which are both growing faster, but also adding the revenue to it is the primary reason for us getting up to the mid thirties and hopefully the high <unk> in the near term.

Makes sense thanks, Mike.

Yeah, that's correct.

Thank you. Our next question comes from David Duley of Steelhead. Your question. Please.

Yeah, Thanks for taking my questions.

You mentioned that you had a nice improvement sequentially in gross margins I was just curious I'm sure. There was still some supply constraint margin impact.

And higher freight costs could you, perhaps help us understand.

How much is still dragging their heels.

With freight and supply.

Supply issues.

Actually it's the supply go ahead Mike.

No go ahead yeah.

So actually we didn't see a big impact from the increase in shipments our COO.

Cost and things like that so our gross margin rates.

But by the nature of our Oh, our products the way, we ship them, but terms with our customers. This doesn't have a big impact them and if you didn't have a big impact on our gross margin in Q3, and we don't think it's going to be significant in Q4 as well.

And.

I know what it.

Probably wasn't very meaningful but was there some revenue impact.

Yeah, no not at all pretty small.

And sometimes you can have a big probe guard probe card waiting for it to be sure because using a small component, but it was really minor.

So far okay really Joe by operation too.

Yeah.

And then as far as the FRC business could you.

Yeah, well why don't we start with the application space I mean, there's a variety of new measurements that need to be made on these chip lids, primarily at the interfaces between the adjacent chip. So you can imagine if you're taking two of these chips and stacking them together you wanted to make sure that the.

Connections typically solder bumps or copper pillars.

Reasonably planer flap that theres, no defects things like that and so the measurement a rapid and instrument a planarity of those services.

And things like BOE and wharf very.

Jordan for maintaining assembly yields in these brand new chip led applications. So a lot of our measurements were associated with that that is the interfaces between chip list before they are assembled together now.

Because this is an emerging application it's difficult to size the market I think you know we've looked at it is overall probably from a Tam perspective that total available market of a couple of hundred million because that's a fairly wide swath across all possible advanced packaging apps and.

You know theres, a variety of different competitors and alternatives that are probably going to.

Divide up the different sub segments and sub applications.

As you know.

Standard semiconductors and semiconductor applications have been so.

I think you know $150 million to $200 million, probably a reasonable placeholder for a total available market. It'll obviously from these levels take us a while to grow into that but we're really excited about the progress from the fr team so far.

Thank you.

Thank you. Our next question comes from Chris <unk> of Cowen and company. Please go ahead.

Hi, yes, thanks for taking my questions that this is Steven calling on behalf of Krish.

First question maybe for Shai.

Just thinking a little bit more on the gross margin during the quarter.

Part of the guidance.

Well, we'll probe card.

But a couple of months.

Five quarters, you guys had pretty nice margin expansion there.

Was that more of a function of Oh.

A better product mix.

Within there boundaries.

Or did you also see some material.

Margin expansion with them.

The memory customers and mobile.

Yeah.

And you were not very clear on the just the quality of the line.

Can you repeat that.

Yes part of it.

Apologize for that I can you hear me better now.

Yes, that's better.

Okay great.

Question was on.

Gross margin expansion within the probe card and Q3 and Caribbean implications about Q4 margin.

Margin expansion was law.

Your your foundry and memory customer mix were relatively flat.

A question between keeping busy.

I was just curious if we look at the gross margin expansion.

Within the probe card business in Q3, if that was primarily from foundry was as we see.

And then the full amount of margin expansion from memory customers as well.

Yeah. So in Q3, it was both of our segments.

I had a better margin if you look into Q4, so actually at the midpoint of the outlook range for gross margin in Q4 is below the 46 45, and a half and the main contributor goes back to what we said in our prepared remarks about product mix within the specific markets. So extruder.

Traditionally our systems, and then foundry and logic has higher margins.

And then and then DRAM and flash, but first of all there is overlap between them you can have a I N E. R. M design, but there is a better margin.

Foundry and logic design and you can certainly have.

We'd be in the DRAM market two designs with completely different market with different margin.

So as we look into Q4, what you see.

This favorable product mix within the markets.

Right.

Within foundry and logic, we would then be around et cetera, and not necessarily between the markets.

Got you thank you for that.

For my follow up.

Question on <unk>.

On your large.

Korean customer in the quarter.

So I imagine most of the.

The business areas.

Cards on the memory side.

Can you talk about any potential opportunities longer term I went into a coffee business as well.

Yeah. They were as you know the 10% customer in Q3, and I believe there were 10% customer in the second quarter as well.

In Q3.

There was a pretty strong contribution from their foundry business as well and that's probably the only customer worldwide, where we have.

A significant DRAM business any significant foundry and logic business not to mention the systems business as well.

So you know they've been a customer of us on the probe card side in foundry and logic for many years.

There is I think as they.

Grows their capability and capacity in in competing for Fabless customers I do think there's an opportunity there probably not much of a share gain opportunity because we feel like we do have reasonably high native share with that customer and a strong relationship across both the DRAM and foundry and logic businesses, but.

As we talked about some of the other customers, making big capacity investments. This year. There are certainly in that group and so as they <unk>.

Expand the foundry and logic business, we would expect to grow with that.

Okay very helpful. Mike. Thank you.

Thanks.

Thank you. Our next question comes from Charles <unk> Needham <unk> Company. Please go ahead.

Hi, Good afternoon, Mike and thanks for taking my questions first I wanted to really congratulate the form factor team for strong execution on gross margin it looks like in not only Q3 overall margins back half without the protocol side is really taking a 45% I really congratulations on that.

So I wanted to ask a little bit longer term questions.

I wanted to talk about ask you about market share.

Obviously.

We know where you are strong.

Do you have a very strong without a leading IDM on the microprocessor side, you'll have very strong position in on the foundry side with a good exposure to the mobile SLC side maybe.

Maybe let me start with a microprocessor avia.

Obviously, the leading IDM.

With our aggressive turnaround after it is becoming very interesting for us to really watch the competitive dynamics between them and the other microprocessor provider. Obviously, that's a fabulous customer about that you may have some indirect exposure there I wanted to really ask you.

In that space with the marquee chefs puts and takes.

What is your high level view on the potential tailwind or either or headwinds in the context of that.

The competition between those two microprocessor providers and how would that that potentially changing market share could affect your.

Microprocessor probe card business, either favorably or unfavorably then I have a follow up.

Okay.

As you know, we obviously have strong share at the leading microprocessor manufacturer, but the Fabless microprocessor manufacturer has obviously posted some very impressive growth numbers over the last little while which hasn't gone unnoticed paas.

Our native share is lower there are our market share is lower there for a variety of reasons, but because it's lower and because they are gaining share. We've got a pretty strong initiatives to go raise that share at the fabulous microprocessor customer so right now.

Being candid with you if the share were to shift one to one.

That would be.

Net headwind for us that would be a net loss for us, but it's been an area, where we've been focusing on and we got good traction and I think consistent with our long term strategy of being a leading supplier at all the leading customers around the world I think we're in a reasonable position to rectify that some interesting subtleties with that business, where they won't.

This early use the foundries test services, but actually manage themselves. So.

In that case, they are actually establish direct customer, which not to complicate things too much is one of the interesting subtleties of this business.

Thanks for that great color, Mike maybe I wanted to turn.

To the.

Mobile <unk> processing side.

It's been quite topical that what the Chinese smartphone maker reportedly as is working to brain.

Apps processor design back in house, maybe starting from 40 nanometer I think this is the move kind of reflects the continued evolution of like all of those.

Different companies coming in take designs in house and maybe there is a headwind for one of your indirect a foundry customer in the mobile space.

A U S company there.

I wonder what form factor. Thanks in terms of the potential landscape shifting also in the mobile SLC space in particular, I mean, when the system companies they tend to favor.

One leading foundry over the other where you may have a little bit stronger position there.

Could you give us a little bit more color on that thank you.

Yes.

This trend in sourcing and in more vertical integration with our customers is an interesting one and it's it's not new rack at the Hyperscale or has it been taking design in house, obviously the large.

The large handset manufacturer continues to take more inside an almost becoming their own silicon company their own Fabless company.

This again goes back to similar comments I made about the microprocessor situation where it.

It's one of the reasons why we wanted to make sure we have strong share positions and strong relationships at all of the leading foundries and with all the leading fabless customers because many of these fabless customers actually manage their design and test operations themselves and don't or outsource them to the foundry itself create.

A more complicated account management structure, but again I point back to really making sure that we as a company are engaged and I think we're pretty well engaged with all of the leading fabless and foundry customers. So that the shifts in their manufacturing strategies and sourcing strategy.

<unk> ended up being net neutral for us.

Thank you.

That's all my questions. Thank you.

Thanks Charles.

Thank you. Our next question comes from Christian Schwab of Craig Hallum. Please go ahead.

Hey, this is Tyler on for Christian Thanks for letting US ask couple of questions and congrats on the solid quarter I wanted to ask about your DRAM probe card business, including your kind of implied Q4 guide to flat 2021 is going to be a pretty strong growth year. So I'm. Just wondering if there is there really any reason we should you know be subtle.

Back to both the strength continue into 2022, you're serving all customers and you know there's going to be continued design and no transitions next year. So I'm just wondering if there's.

Any reason that the shrink shouldn't continue.

Yeah, a good question as you might imagine a topic of pretty significant internal debate.

Thank you know one of the things to remember is history has taught us that DRAM probe cards like all DRAM supply chain elements are a cyclical business.

You know for the past couple of quarters, and we expect here in the current fourth quarter.

You know kind of to be at the historical high end high 30 million low $40 million.

Quarterly DRAM probe card revenue, which is above sort of the mid thirties that we've talked about being the the average normalized level.

The fundamental drivers for that as you note our continued node transitions and design releases and as long as those continue and the customer base.

You know I don't I don't see any reason why at least the mid Thirty's assumption does not a reasonable one we are a little bit surprised that we've got now two quarters in a row in the books and one quarter looking at the current one sort of hovering around that $40 million level, which represents the the all time record.

Quarter, I think at 42, and a half or $43 million, So where we're operating pretty close to all time record levels in DRAM.

Given the historic cyclicality that might be a little surprising.

But you know the.

The fundamental constituents to drive that demands are still there and I think we're executing pretty well in DRAM I think we probably gained share here in 2021.

That's great I appreciate that color and then set.

There might actually be a benefit to this environment.

The conversations with your customers at least benefited you from a visibility standpoint, any any comments there on the supply chain impacts would be would be great.

Yeah, I mean, the supply chain.

<unk> has been.

Really kind of interesting and ironically many of them have their root cause back in the semiconductor shortage. So you know where we've had challenges with sub systems or sub components that are not vertically integrated there really hasn't been associated with some isolated chip shortage.

I don't think it's improving visibility all that much I mean, we're still running lead times well within a quarter.

But we would hope that you know as the capacity comes online associated with all of the different increases in capacity across the industry, especially at the leading edge node to satisfy the shortage.

That again should be driving pretty solid demand.

Across our different businesses.

Part of what we benefited from as I mentioned in the prepared remarks is pretty vertically integrated.

That's great appreciate that that's all for me thanks, guys. Thanks.

Thank you at this time I would like to turn the call back over to Mike Lessor for closing remarks.

Great. Thanks, everyone for joining us again.

We're hopeful to attend a couple of conferences and ended the year I don't know they'll be in person or virtual but hope to see you there and thanks for your continued interest in form factor Bye bye.

And this concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2021 FormFactor Inc Earnings Call

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