Q1 2022 FormFactor Inc Earnings Call

Days call, our Chief Executive Officer, Mike Spicer, and Chief Financial Officer, Shai Shahar before we begin Stan <unk>, the company's Vice President of Investor Relations, where mind you of some important information.

Thank you.

Today, the company will be discussing GAAP P&L results.

And some important non-GAAP results intended to supplement your understanding of the company's financials.

Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company.

And on the Investor Relations section of our website.

Today's discussion contains forward looking statements within the meaning of the federal Securities laws.

Examples of such forward looking statements include those with respect to the projections of financial and business performance future.

Future macroeconomic and geopolitical conditions.

The benefits of acquisitions and investments in capacity and in your technologists.

The impacts of the COVID-19 pandemic.

Anticipated industry trends.

I guess the options in our supply chain the impact of regulatory changes the anticipated demand for products, our ability to develop produce and sell products.

The assumptions upon which such statements are based on this.

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 .

For fiscal year 2021 and other.

Our SEC filings.

Out of which are available on the SEC's website at Www Dot SEC without golf and in our press release issued today.

Looking statements are made as of today.

<unk> hundred 27, 2022, and we assume no obligation to update them.

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

Alright, Thanks, Dan and thanks, everyone for joining us today.

One factor again posted strong results in the first quarter delivering the second highest quarterly revenue in company history exceeding the non-GAAP gross and operating margin levels of our target financial model and producing the highest quarterly free cash flow in company history.

This momentum continues in the second quarter as we manage through a variety of challenges to utilize our added capacity in meeting growing customer demand for our products.

Like many manufacturing companies, we continue to face supply chain and labor headwinds both in terms of availability and cost.

We expect these issues to continue at least through the middle part of 2022, and our team remains focused on tactically resolving components and labor constraints as they emerge.

We're taking steps to moderate the impact of inflation in both manufacturing and operating expenses.

Our long term investments in automation in vertical integration have helped us partially mitigate the effects of these headwinds and have contributed to our strong results for the past several quarters.

Before we move to market level details I would like to share some exciting news on the customer front.

One factor was recently recognized by Intel.

22 distinguished supplier and their ethical award program for our dedication to excellence partnership inclusion and continuous quality improvement.

Only 26 of Intel thousands of suppliers worldwide earn this award this year and we're extremely proud that Intel recognized form factor to recent performance and commitment to supplier excellence with its second highest honor.

Turning now to segment and market level details.

In foundry and logic probe cards, our largest business demand sustained at an overall level comparable to the strong fourth quarter with the expected decline in RF offset by stronger foundry demand.

Both the top foundry and the largest logic.

We're 10% customers in the quarter.

Key drivers for the foundry business were seven and five nanometer designs and high performance compute along with mobile and RF and we expect a similar demand profile in the second quarter.

IDM microprocessor demand continues to be a diverse mix of client PC and server designs, primarily on the 10 nanometer node.

Foundry and logic customers are investing in both leading edge capacity is evident from record levels of wafer fab equipment spending and early stage innovative advanced packaging architectures like <unk> <unk> and <unk> fabric.

These chip lit tayo based integration schemes drive both higher test intensity, which expands the number of probe cards required per wafer out and test complexity, which raises the performance requirements for the appropriate.

Advanced probe card architectures like form factors Mems technology are essential to meet these challenging technical requirements at compelling cost of ownership with a short delivery lead times needed to support our customers' rapid and dynamic production ramps.

To maintain our competitive advantage, we are investing heavily in R&D, we're collaborating with our key foundry and logic and memory customers can meet these challenging technical and commercial requirements with our proprietary two D and three D Mems technologies.

At the same time, we're investing to ensure we have sufficiently vertically integrated nims production capacity to meet the growing demand for our innovative and differentiated Mems probe card technologies.

Turning now to DRAM.

As expected first quarter demand for DRAM probe cards produced from the near record levels. We delivered throughout much of 2021, and we expect second quarter DRAM probe card demand to be comparable to the first quarter.

New design activity from each of the major DRAM manufacturers remains healthy with a mix of new DDR four and DVR five designs in both mobile and PC server applications.

As we often note probe cards are a consumable specific to each new chip design and so we benefit both from node transitions and from the release of new designs on existing nodes.

The current DRAM activity has a diverse mix of designs across multiple technology nodes and memory architectures from each of the leading DRAM manufacturers.

Our systems business also delivered strong results in the first quarter with revenue near $40 million a level that we expect to achieve again in the second quarter.

Paired with its solid financial contribution and revenue diversification. The systems business provides significant strategic value, enabling us to engage with key customers and early characterization and yield improvement of novel New devices as part of our lab to fab strategy.

These engagements range from 300 millimeter wafer probe for mainstream two nanometer Cmos development.

To optical metrology and inspection tools for yield improvement in advanced packaging and chip with applications to wafer and chip scale cryogenic kroeber's for development with Tomorrow's quantum processors.

We continue to expand the served markets for our systems products as evidenced by our first quarter introduction of the Tesla 300 high power wafer probing system for automotive renewable energy and industrial applications.

Let me close by noting that our first quarter results and second quarter outlook demonstrate another step towards our target financial model to deliver $2 of non-GAAP earnings per share on $850 million of revenue.

There continue to be challenges to overcome for both form factor and the industry as a whole.

Including supply chain constraints.

<unk> cost pressures.

Our recent results and outlook have demonstrated the resilience and agility of our team and operational model and together with our leadership positions in our attractive served markets. This resilience and agility will drive continued growth and share gains as form factor progresses towards our target model and beyond.

Shai over to you.

Thank you, Mike and good afternoon.

As you saw in our press release and as Mike mentioned form factor posted strong first quarter results.

Revenues were at the high end of our outlook range and non-GAAP gross margin and EPS exceeded value in the world.

We also achieved record GAAP and non-GAAP operating income record non-GAAP net income and record free cash flow in the quarter.

First quarter revenues were $197 million a.

A 4% sequential decrease from our Q4, 'twenty, one record quarterly revenue and an increase of 6% year over year.

Probe card segment revenues were $160 million in the first quarter.

Increase of $6 million or 4% from Q4 'twenty one.

The decrease was driven by lower DRAM revenue.

System segment revenues were $37 million in Q1, a decrease of $2 million or 5% from the fourth quarter.

Within the appropriate segment Q1 foundry and logic revenues were flat with Q4 with $114 million comprising 58% of total company revenues slightly higher than the 56% in the fourth quarter.

DRAM revenues were $35 million in Q1.

$6 million or 14% lower than in the fourth quarter and over 70% of total company quarterly revenues.

20% of revenue in the fourth quarter.

Flash revenues of $11 $4 million in Q1 were essentially flat with the fourth quarter and were 6% of total revenues in Q1, saying is in Q4.

GAAP gross margin for the first quarter was 47, 8% of revenues compared with 43, 7% in Q4.

Cost of revenues included $2 4 million barrels of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today, Andy the reconciliation table available in the Investor Relations section of our website.

Our non-GAAP on a non-GAAP basis gross margin for the first quarter was 49% 200 basis points above the high end of our outlook range and 470 basis points higher than the $44, 3% non-GAAP gross margin in Q4.

With higher gross margins in both of our segments more significantly so the probe card segment.

The increase as compared to our outlook is mainly due to revenue at the high end of the range and more favorable product mix lower manufacturing costs and higher utilization.

Our probe card segment gross margin was 48, 3% in the first quarter, an increase of 420 basis points compared to 44, 1% in.

Q4.

The increase was mainly due to the factors I just mentioned.

Our Q, how Q1 systems segment gross margin was 52, 2% 670 basis points higher than the 45 four.

445, 5% gross margin in the fourth quarter.

This increase was due to a more favorable mix and lower expenses.

Merrily warranty and inventory reserves.

As we've said previously we expect our systems segment gross margin to range between the high Forty's too low.

We are encouraged by achieving a gross margin above our target model in the first quarter. However, we continue to expect gross margins will fluctuate from quarter to quarter.

Our GAAP operating expenses were $60 million for the first quarter $2 million higher than in the fourth quarter.

non-GAAP operating expenses for the first quarter was $51 9 million.

Or 26, 3% of revenues as compared with $49 $7 million or 24, 2% of revenues in Q4.

$2 2 million increase relates mainly to the annual benefits and tax reset higher.

Higher head count and higher travel expenses.

Company noncash expenses for the first quarter included $7 5 million for stock based compensation and $2 $4 million for the amortization of acquisition related intangibles, both of which are at similar levels to the fourth quarter.

And depreciation of $7 million.

<unk> $5 million higher than in the fourth quarter as a result of our capacity expansion.

GAAP operating income for Q1 was a record $34 2 million as compared with $31 $8 million in Q4.

non-GAAP operating income for the first quarter was $44 8 million breaking the record set last quarter by $3 $5 million.

GAAP net income for the first quarter was $30 million or <unk> 38 per fully diluted share compared to 26 million or <unk> <unk> per fully diluted share in Q4.

The non-GAAP effective tax rate for the first quarter was 13, 8% to 190 basis points lower than the 16, 7% in Q4 and below our estimated non-GAAP annual effective tax rate of 15% to 20%.

During the first quarter the required capitalization of R&D expenses changed resulting in a higher foreign derived intangible income benefits also known as FDI and thus a lower effective tax rate.

Expect to be on the lower end of the 15% to 20% range for the remainder of the year.

As a reminder, our annual cash tax rate is expected to remain around the mid to high single digits with non-GAAP pretax income until we fully utilize our remaining U S based R&D credit.

First quarter non-GAAP net income was a record $38 7 million or <unk> 49 per fully diluted share compared with $44 7 million or <unk> 44 per fully diluted share in Q4.

In summary, EPS came in higher than our outlook range due to revenue being at the high end of the range.

Higher gross margin and lower effective tax rate, partially offset by higher operating expenses due to higher performance based compensation.

Moving to the balance sheet and cash flows.

We generated a record 29 million barrels of free cash flow in the first quarter compared to $24 million in Q4.

Total cash and investments to $300 million at the end of the quarter.

The $5 million sequential increase in free cash flow reflects the increase in profitability as capital expenditures were at a similar level to the previous quarter.

As of the end of the first quarter, we had two terminals remaining on our balance sheet totaling $22 million.

We invested $15 6 million Boes in capital expenditures during the first quarter compared to $15 1 million in Q4.

As mentioned in our previous earnings call in 2022, we expect to continue to invest in increasing capacity to meet customer demand, which full year capex spend to be between $60 million to $80 million as a reminder.

We expect Capex to return to the fleet.

Three 5% to 4% of the revenue in our target financial model. After we conclude these capacity expansions.

Regarding stock buybacks during the first quarter, we purchased 241000 shares under our existing $50 million two year repurchase plan.

This brings our repurchases through the end of Q1, two 863000 shares at quarter and $16 $6 million remained available for future repurchases.

Turning to the second quarter non-GAAP outlook as Mike mentioned, we expect the strong momentum to continue in the second quarter with sequential increase mainly in foundry and logic.

These factors resulted in a Q2 revenue outlook of $203 million plus.

Plus or minus $6 million.

non-GAAP gross margin for the second quarter is expected to be 47% plus or minus 150 basis points on a similar product mix to Q1 offset by higher manufacturing costs.

At the midpoint of this outlook ranges, we expect Q2 operating expenses to be higher than Q1.

By approximately $2 million to $3 million.

Mainly due to additional hiring and analog salary increases.

Accordingly, non-GAAP earnings per fully diluted share for Q2 is expected to be 43, plus or minus <unk> <unk>.

A reconciliation of our GAAP to non-GAAP Q2 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.

Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.

First question comes from the line of Krish Shankar from Cowen and company. Your question. Please.

Yes, hi, Thanks for taking my question I had a couple of them and congrats on the really strong ourselves Mike and Shai.

Mentioned that one of the reasons for the gross margin in June to be down relative to March is because of the higher manufacturing cost. So I'm just kind of curious.

Given the fact that.

DRAM is less of the mix in June relative to March.

The manufacturing cost is that a one time headwind how should we think about margins going forward given the fact that it's really good margins.

It looks like very good module from June due but I would have thought it would be much better given DRAM mix is lower.

Yeah. Thanks, Chris for the question I wanted to talk about two components when I talk about Q2 margin being lower than Q1.

As we said in the past it's important to note that even with the changes in revenues in the specific all the markets. We serve there can be changes in the product mix within these markets.

Even though we say and beyond is going to be.

Comparable but frankly, we're not going to go up it doesn't necessarily mean that.

The product mix will be better. So we expect a similar product mix when it comes to the impact on the gross margin in Q2.

One the other one.

<unk> in the quarter as well is that we expect higher manufacturing expenses in Q2 and as many of our peers. We see increases in raw material prices. We are seeing higher labor cost. There is also the impact of our capacity expansion coming online and also there is an impact of some timing of our production flow and we should expect it to result.

In the lower absorption and higher manufacturing expenses in Q2 now.

Q2 midpoint of our outlook range is 47% plus.

So plus or minus 150 basis points, which is our target model. So we're very encouraged by that.

Got it got it very helpful and then a follow up.

You guys did about 35 or $35 million in DRAM revenue.

Is there a way to think about.

The split between DDR foreign DDR, five and <unk>.

The DRAM weakness relative to maybe six months ago is that all driven by DDR five pushout.

Chris This is Mike I'll take that.

I think it's continued over the past six months to be.

A pretty even mix of DDR, four and DDR five I think when we think about our quarterly DRAM revenues, although through much of 2020, we were operating up around $40 million a quarter. We have talked about a more realistic median level being somewhere around the mid thirty's, which is right, where we expect it to be in.

In the second quarter.

So I don't know that I can point to DDR five push outs per se, we've got a broad mix of DDR four and DDR five designs running through the factory with all the major DRAM manufacturers in any quarter, we expect those to ebb and flow a little bit.

And if I could just squeeze in one along the path Mike is there any margin differential between PDL for DSI book Club.

Not systematically shy said, we do see gross margin differences from different designs, so different DRAM designs, regardless of whether they're <unk>, they're significantly different gross margins based on things like whether it's a single touchdown probe.

Card, whether that probe card test the whole way for one or two touchdown probe card requiring to Texas.

The one touchdown card higher value higher complexity probe card and our customers compensate us accordingly for that.

And so that drives the margin uplift so much less to do with the actual technology nodes your memory architectures and much more to do with the details of the configuration. That's true in DRAM, it's true in foundry and logic as well.

Tango up Mike Thanks, Sean.

Thanks, Craig.

Thank you. Our next question comes from the line of Brian Chin from Stifel. Your question. Please.

Hi, there good afternoon, and thanks for letting us ask a few questions and congratulations again on the execution in the quarter.

Maybe I would have to start with gross margins here again.

On the surface there doesn't seem to be any wild swings in mix.

But the one new variable it certainly was at your disposal in the quarter was incremental output from from Livermore.

And so we're thinking kind of about sustainability of margins more of these higher levels right maybe not.

Quarter out quarter in quarter out above the target model, but closer to the 47% level, which.

Which is definitely higher than we've been modeling.

Yes.

Is it fair to say that there was some kind of drags on your gross margin line as you were really constrained over the past few years, even I think at this point.

And that new capacity really unlock something that allows you to maybe put a bigger floor under your gross margins.

Well I would say gross margin has always been an area of focus for us.

We always invest at all levels of the company on making improvements to gross margins and operational.

Teams is doing an excellent job on being more efficient on hedging more efficient design.

Securing supply.

Are the right prices.

<unk>.

It's being such an important strategic.

Action for the company. This is something that I'm very happy to see.

So you see good results there and these excellent results in Q1.

It really validates.

Our ability to achieve our target financial model gross margin of 47%.

Revenue of $850 million.

For the year.

And maybe one more point about that.

Hmm.

We are approaching our target model and if you look at Q2 revenue outlook range, we are within 5% of the startup model and the growth really came from mostly foundry and logic as expected as we said it's going to happen. So gross margin is where we expected it to be.

It will continue to fluctuate as we said before.

This validates our ability to achieve it.

Okay got 49% is still big having a pretty big number.

But fair enough.

And I guess thinking about the Capex plan for this year and also thinking about just the constraints across the board in terms of getting equipment.

People certainly know about what are you doing some other safeguarding provisions to make sure you have the capacity in place to maybe flex up.

Towards the end of this year, maybe it's next year and also.

Yes, $60 million to $80 million Capex is there a way to sort of translate that into annual incremental revenue output.

I think so.

Yes.

Gordon.

Okay.

It's difficult to translate the capex number into a revenue number.

As you know since you've been following us for a while this has been a multiyear capacity expansion plan that started off with some large fixed assets like buildings transitioning into now this year being more tools, but still some infrastructure and underlying <unk>.

<unk> footprint to allow us to continue to increase capacity.

It's a challenging situation for I think everybody in the industry to add enough capacity for big customers talk about them being growth constrained.

By demand, but there by their ability to get tools I think that's the case for almost everybody in the industry. So safeguards are difficult to put in place, but we are trying to increase capacity as fast as we can both from an equipment perspective and from a people perspective, which obviously had mislabeled market has turned out to be an equal challenge to the.

So the equipment supply.

Got it and then maybe just sneak one last one Mike.

I feel like there is increasing confidence in various sort of foundry logic customers.

Three nanometer roadmap and output and next year.

IBM in terms of seven nanometer.

Output.

And I feel like this will coincide with the substantial increase attach rate in terms of advanced packaging.

Architected designs.

Is your confidence level, increasing sort of commensurate with those things.

Agriculture I'll stop it there.

Yes, I think it's a great point that these advanced.

Foundry and logic nodes that are maybe three nanometer or.

The.

Seven nanometer noted one of our other customers.

And really there is a strong coupling or attach rate as you put it now to these advanced packaging technologies things like die stacking chip whats different tile based strategies.

Talking about for a while really drive up the test intensity. So the number of probe cards required per wafer out.

And test complexity it drives up test intensity, because very simply if youre going to put four titles together into a chip you need to have relatively high confidence that each of those titles as good otherwise you couldnt have a situation where one tile can kill the other three which economically is obviously a very bad scenario.

Test complexity also going up.

As we get closer to.

2023, and the ramps associated with these next nodes with the increased attach rate of these advanced packaging technologies. We do think there is some potential tailwind there for the overall probe card intensity and the opportunity in front of us as we lead in the foundry and logic market.

Okay, great. Thanks, a lot.

Thank you. Our next question comes from the line of Charles <unk> from Needham <unk> Company. Your question. Please.

Hi, good afternoon, Mike and Shai.

For letting me ask a couple of questions.

Number one I wanted to.

Get your thoughts.

Your Capex plan.

To close as a competitor.

During the quarter went public and we got a chance to really dive into their financials, but one thing that jumped out to me.

Is that.

It seems like you we're outspent by your competitor in Capex over the past three years.

But the concern I heard as you might have lost some upside opportunities because you might be more capacity constrained dangled competitor.

I do understand that that overcapacity.

Quite a big issue in early 2000 tens around that time.

Right before you became the CEO of <unk>.

A form factor.

It may be that influenced a little bit your decision in terms of our capacity expansion. So.

Can you give us some thoughts.

Capacity expansion Capex strategy here, and especially I believe that the probe card demand is going to is likely going to accelerate from here. Your alcohol manufacturers, Brian change just mentioned vast packaging et cetera. Thank you.

Yes, I think it's a fair observation that.

If I look back to maybe 2019 and 2020.

We were too conservative in our capacity expansion plans and some of that is definitely a.

Hangover from the 2010 2011 timeframe.

Also tend to be a fairly conservative executive team and so that held us back so but as you can see from the capital spending in the past couple of years, we've gotten a lot more aggressive to allow us to address the opportunities there.

Brian talked about you just referenced if you look at the amount of.

WMC being spent by our customers on leading edge capacity that Wi Fi, although it takes a few quarters to get installed and qualified almost certainly has been a result in new designs more wafers that require more probe cards and so our confidence level with utilizing these big capital investments a big capacity.

Pensions.

Continues to increase we think these are good investments for the company to make to continue to grow our business to capture the market share that we need at the high end of the foundry and logic and DRAM business and continue to grow the company.

I think it is a fair assumption that we were caught a little bit flat footed from a capacity expansion perspective in the 2019 2020 timeframe.

Got it so maybe my second question.

To ask something more near term.

The Covid Lockdowns in China, I believe beginning end of March.

Now is still extending into a good part of April we don't know when thats going to end.

Seems to have been waived.

Or I mean, not exactly your peer, but the semi cap equipment companies.

Two sides, one is really on the supply chain side about the data is really the delivery side.

So they probably have seen a little bit impact reflected in some of their financials. So I Wonder obviously Q1, you did manage yours.

You will supply very well, but going into Q2, what's the thought there is your guidance kind of embed some of the risks there.

But one thing you do have something like high teens, some in some quarters and a path to more than 20% of revenue coming from China I understand that the domestic Chinese like that single digit part of that a lot of that is really shipping to the Intel facility in China. So I wanted to give us some thoughts.

Any of that risk factors are embedded in your guidance what do you how do you think about it. Thank you.

Yes, so I would say there is a variety of supply chain headwinds, we're dealing with right just like everybody else and as you mentioned, including the Lockdown in China. So obviously, it's a very dynamic situation continues to present, new challenges, especially every week or every basin side.

I think our team is doing a great job dealing with it is a concern to the overall industry.

For us as well so far I think it's too early to estimate the longer term duplex announced.

And as you mentioned most of our sales to China or to multinational companies not to local China and they have been.

Dealing with it pretty well, but moving things around.

Specifically I think it's too.

Too early for us to say well look to make for the long term or longer term.

Thank you.

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

Yes. Thanks, so much for taking the question and congratulations on the very strong execution guys.

I wanted to start with gross margin clarification, so and it's got two parts to it you said in your prepared remarks that there were four factors that lead to upside gross margin.

Revenues at the high end mix lower manufacturing costs and utilization. So what was the relative contribution of those four things to the upside about even or disproportionate to some versus others.

And then on the manufacturing cost point, it was lower than a benefit.

The first quarter, but it's a headwind in the second quarter. So what is it about what's happening with manufacturing cost quarter to quarter, but gives it that.

That inverse dynamic.

Thank you for the question. So on the first one I would say the majority of.

The upside about three quarters of it maybe even close to 80% of the upside came from a more favorable mix now as you know we are insurance business with lead times that can be as short as well.

<unk> four to six weeks so in the time it takes them to quote business. So in the time between our previous earnings call and quota close revenue came in at the high end of the outlook range and it also came in with a more favorable mix, which amplified the positive effects on the gross margin line.

That's the majority of it about three quarters of it.

And and the others were just contributed each one of them a little bit.

The balance when it comes through manufacturing expenses.

They moved to Q2 so.

As I said the mix is expected to be or the mixed impact on the on the gross margin in Q2 is expected to be similar to Q1 and most of the decrease in Q2 gross margin is expected to come.

From the manufacturing expenses, but expect it to be higher.

And we're talking about higher raw material prices, but we and our peers.

See higher labor cost as well our capacity expansion is online, but that has a small impact as well and there is an element of the timing of the production flow, which is expected to result in Q2, and lower absorption and higher manufacturing expenses.

If you look at our balance sheet, you'll see that we had some inventory in Q1 to support.

<unk> supported the increase in the demand so that there is an impact of the timing of expenses as well.

Got it and then just to put a bow on it with the mix issue in there.

First quarter was that primarily in the foundry logic statement or was that mix.

So something that benefited the DRAM segment, given that there wasn't a lot of change on.

Segment segment basis. So this is all intra segment mix shift that's happening.

So it's almost across the board not every design in every customer came in.

It's a higher margin but.

More more than more than one market I mean, even if you look at our systems business unit also came in higher than Q1 sort of higher than Q4 and higher than what we built into the outlook when we produce it.

In the previous earnings call.

Got it and then the <unk>.

Next question is really for Mike.

A question that goes back to the point that you made that others have inquired about witches probe card intensity.

Dynamics that are at play as the top three.

Oems move more towards heterogeneous tire or tile based product as you say Mike.

Question is this when we look at those three entities, one is pretty far along with advanced packaging they've been at it for a number of years and it's been a growing part of their capital spending budgets.

I think they are increasingly known for it there is two others that are just getting started down that path.

So what I was hoping you could do is help us with a sense for how much benefit do you think the business is getting today from the shift towards advanced packaging.

And if we look out to the end of this year and then maybe to the end of 2023, what would be a reasonable expectation for the contribution from that shift to two.

Advanced packaging from those big three manufacturers. Thank you.

Yes, it's an interesting question because clearly different.

<unk> different pieces of silicon, but they're going to end up in these advanced packages does drive up test intensity now it's important to remember that the whole industry is not going to move all of its wafer starts over to advanced packaging. So there is sort of a diffusion or an adoption effect that needs to be modeled here.

And as we do that we're still in very early units. If you think about where advanced packaging is impacting our business now.

It's a set of high end processors, it's HBM stack drams and things like that and if you look at the relative number of wafer starts and probe card demand to that.

It's not a very large fraction of the overall industry, but as you looked at these customer roadmaps as they go through.

Maybe we enter 2023.

There is some significant adoption add significant volume with these advanced packaging technologies and so.

That diffusion rate or attach rate of advanced packaging for wafer starts.

We're going to take many years for this to become the majority of high end foundry and logic.

We're very encouraged that major designs from our major customers have all been slated for advanced packaging on these leading edge foundry and logic nodes in 2023, So we do expect it to build.

From the very small contribution we're having right now.

Got it and then if I could just squeeze in one more Mike just qualitatively as you've got the new Livermore facility ramping up and after a period of being <unk>.

Very very tight there and really doing some creative things to keep production going at levels that you monitor.

Can you give us some of your impressions with how the early ramp up is going and what are some milestones we should look for.

We look through 2022, and your ability to ramp up that capacity.

Yes.

And it's it's not done right. If you look at our.

Projected capex for 2022. It continues at essentially the same high levels. We had in 2021 the efforts again in 2020.

And so it's an ongoing story where.

If I were to point the milestones certainly the first one and I don't know that we'll get there in 2022.

Quarterly run rate at the model level right shy noted were within a few percent does it so getting very close and clearly the additional capacity is contributing to that so maybe that's one milestone to look to.

The others are as you as you look at our current footprint and our ability to continue to deploy capital and add capacity inside that footprint as you look at our annual Capex on a quarter.

Our quarterly Capex.

Seeing that continue at high levels, probably a good indicator that we're continuing to add capacity.

Give us the legs beyond the footprint we have now.

Got it thanks guys.

Yes.

Thank you and ladies and gentlemen, we'd like to ask us to please limit yourselves to two questions you may get back in the queue. As time allows our next question comes from the line of David Duley from Steelhead Securities. Your question. Please.

Yes. My first question is and I hate to be the guy that asked us but.

Im wondering if youre seeing any sort of slowdown in any segments of your business or any inventory build.

Customer levels and what your customers are saying about the second half of the year because clearly investors are.

<unk> about both the equipment space.

The probe card space.

The stocks have done recently, so I'm just wondering if you've seen any.

Change in tone from your customers.

Really no change in tone sort of systematically across the customer base. If you look at our large markets are large served markets in places, where we have significant share.

Everybody has got constraints that are limiting growth, whether it's getting enough wafer fab equipment in.

For us some simple things like different sub components are constraining growth.

I don't see anything that would indicate a cyclical downturn in the second half.

But having said that theres different quarter to quarter puts and takes in our business and there always has been and we've talked about RF filling down sequentially. After a very strong 2021. Some of this is our RF probe card business, primarily serves the components to go into <unk>.

Handsets right now so things like ball in saw filters and <unk>.

And packaged parts some of the really interesting things associated with millimeter wave communication.

That's taken a bit of a pause, but I wouldn't call that a secular downturn as property digestion that occurs for a quarter or two fundamentally thats why were trying to run a broadly diversified model because there's always going to be puts and takes with individual customers and individual markets in any quarter.

But certainly we see no indications of a broad systematic slowdown in our customer base.

And just as a follow on to this particular point you just made.

Do your customers or your customers holding more inventory of either probe cards or of IC components.

We certainly don't see them today.

Again, one of the nuances of the probe card business is.

The probe cards are specific to individual customer chip designs and so they tend to be not a very useful thing to try and hold inventory on because as our customers' production mix changes that result.

Very high overhead expense to build that Optionality. So part of the reason why we run on such short lead times, because our customers production mix changes, we need to be ready to adapt to go support them and capture that upside.

Probe card again.

Really not a great.

A great item to have on the on the inventory shelf from a financial perspective.

Okay. My second question is as far as.

Sure.

One of your large customers, let's say goes from five nanometers to three nanometers I think we heard on another back end equipment Company's conference call. This morning that the number of transistors when that happens will probably go up by 30% or 40% and.

And that leads to obviously an increase.

Test intensity.

I was wondering if you might be able to quantify what.

Yes, if you do see a 30% to 40% increase in transistors.

How more how much more probe card or test intensity might be.

Yes, certainly directionally it goes up and I think.

The the ETE people see this pretty significantly right.

Installed base has to go up to.

Deal with the increased test times associated with it but it's not linear right at 20% increase in transistor count for di doesn't result in the 20% test an increase because customers are good at various elements of design for test.

Understanding where they can drive down their samplings and things like that.

But the Directionally there is definitely an uplift and I think you've seen that in the probe card market over time as transistor counts have gone up on leading edge parts, you've seen the intensity of probe card spend and <unk> spend in the foundry and logic market go up as well.

Thank you.

Thanks, Ed.

Thank you. Our next question comes from the line of Tyler Burmeister from Craig Hallum. Your question. Please.

Thanks, guys. This is Tyler on behalf of Christian Schwab, Thanks for that and if that's the question.

<unk>.

A lot of my questions have been answered I wanted to go back to kind of supply chain headwinds.

That you commented about.

But at the same time put up a very strong 49% gross margins.

Got it Q2 to a very strong level as well and I think you also said you.

You would expect these to begin to improve in the second half for we've heard from a lot of your peers.

Other companies in the industry that they're seeing these pressures next.

Next year. So I guess I was just wondering maybe what are some of the the.

The most significant headwinds.

Youre seeing and what gives you confidence that those could be improvement in the second half.

Yes, Tyler I'll, let shai answer the details, but it was my comment and I want to make sure I was not forecasting an improvement in the second half, but I was saying was our fog lamps and when we go through the middle part of the year and we see the constraints continuing through the middle part of the year. So I am not forecasting improvement in the second half that's just.

We continue to see these challenges emerging for about as far as we can see which is through the middle part of the year.

Yes. The answer is yes, so I think you've answered.

Most of the question there.

I'll repeat some of the things I said earlier as we see.

And.

The supply chain issues that we've seen in Q2 either include inflationary cost increases.

In components, we see higher labor costs.

Whether it's going to be stronger or weaker as Mike said, we still don't know we can say that so far we haven't seen any major disruptions to our business.

We see.

Assuming our logistical issues as we've seen in the past.

So if you look at Q2 versus Q1, when it comes to the impact of supply chain issues I think right.

Similar level of disruption this quarter.

Alright fair enough I appreciate the color that's all for me guys. Thanks.

Okay.

Thank you. Our next question comes from the line of David Silver from CL King Your question. Please.

Hi, Thank you very much.

I have kind of a more targeted question then maybe a bigger picture one.

First I wanted to just ask you about the workstation engineering system. This result.

I guess this quarter in the fourth quarter. The revenue totals I think are the highest in at least several years maybe longer.

I had a couple of questions about that but firstly, maybe if you could talk about the breakdown in the revenue increase maybe from volume versus mix perspective.

And then secondly, I was wondering if you could just maybe highlight how you view the cadence.

The growth in that business in other words is this a business that rises coincident with new fab development as it ahead, maybe six to 12 months or more.

Or.

How should we think about the growth trend.

In relation to fab development and wave WSB spend.

Modeling that going forward. Thank you.

Yes.

So the system segment really I'll answer the second part of the question for US is really focused on health.

Helping customers develop entirely new process technologies now as I have said in the past that can be things like gate all around.

Cmos structures, but its also where we've made some significant investments in helping the emerging quantum computing industry get on its feet and be able to test. These devices that improve that yield so it's a broad spectrum.

Really early development activities and as a result, it's not very well correlated with WSI.

Tends to be more correlated with.

Essentially the velocity of customer development Roadmaps.

We continue to develop new things and introduce new things, that's what really drives the activity in that segment for US now back to the first part of the question the composition of <unk>.

Why we're at these levels.

Can think of the engineering systems business of presences.

A few different components.

We got into this business with the 2016 acquisition of Cascade Micro Tech, which brought US first into the engineering progress business as well as the RF probe card business the engineering probe business inside the <unk>.

System segment really has been the foundation and we've done a nice job I think of growing that since the acquisition, but we've also added two significant acquisitions for this segment. The first being the acquisition of <unk>, which got us into metrology and inspection for advanced packaging applications again this theme of chip.

Tayo based strategies drives all kinds of new metrology and inspection requirements.

And this is a place where we want to be advanced packaging is being performed better. So thats an element of growth in revenue on top of.

If you like the legacy systems business and the second one is our.

Our acquisition of HBV, which got us into the quantum computing space. So really the revenues up year $40 million or as a result of the composition of these different businesses and then the growth is.

<unk>.

Some of the more exciting things, we're doing with each of these different businesses and enabling the next generation of semiconductor and electronics technology.

Okay. Thanks, and then.

Mike I heard you say a couple of times on this call you don't like to look too far over the horizon, but.

Im going to just give it a crack here.

Yes, there's been a number of announcements for new <unk>.

$10 billion, plus fab developments in the U S. A lot of your lot of your existing customers are included on those lists.

And.

To go by the announcements I mean, virtually all of them are due to be up and running by 2020 for maybe 2025 at the outside.

Excluding maybe some of the Ohio projects, but for the ones that have been announced a couple of things. Firstly do you believe the timetables and secondly, if you do then what does that mean for your company to capture at least your share.

Of the overall opportunity if not larger I mean, what what incremental capabilities or capacity do you envision.

Yes.

Being necessary to kind of like I say to kind of keep up with what your major customers who are doing in terms of new fab development over the next.

Three to five years. Thank you.

Yes.

And maybe to start it's not that we don't like to look too far downstream. It's just that our binoculars kind of run other resolution given the lead times that we operate on.

So definitely there is longer term discussions with these customers about how we support them in these very large capacity increases many of the fabs being here domestically in the U S that have been announced.

I think the timeframe.

2020 for 2025, when you look at the progress of the indicators associated with that.

As long as things continue on their existing trajectory that seems like a pretty solid assumption and as part of the reason for our continued capacity increases when I look at what we need to do to make sure that we continue to lead the industry and capture the probe card and systems volume associated with these large expansion to the IND.

History, It's twofold, it's one of the reasons why we spend.

In round numbers $100 million a year on R&D.

The innovation required to test chips on these advanced nodes to support advanced packaging. There is some significant innovation there and clearly our strategy is to continue to invest there to build competitive advantage at the same time, we do need to be ready with.

Continuing to increase capacity as these facilities come online maybe a few years from now but as we talked about earlier on the call we did get caught.

A little bit out of capacity in 2019, and 2020 and it takes a little while to make those investments. So we're continuing to plan.

At least giving ourselves the optionality for the longer lead time elements like buildings facilities and manufacturing footprint to make sure we're in a position to buy.

Just to have the technology, but also have the capacity to capture this demand.

Thank you very much I appreciate it.

Thank you. Our next question comes from the line of <unk> <unk> from Citi. Your question. Please.

Hi.

How this on sort of leading edge versus lagging edge and exposure that you have between the two.

Is there a difference between margin perspective, or a volume perspective between those two different.

Period that node.

Yes, so Dan for sure there is a volume difference.

Our exposure to.

Trailing edge nodes as less than leading edge node simply because the yields on the trailing edge nodes are much higher than they are in a leading edge nodes and if your yields are higher you don't have to do as much wafer test.

The the places where we do see significant exposure to trailing edge nodes are in very demanding applications like automotive where.

High temperatures are required at both high and low temperatures as required.

<unk> management is becoming a much bigger part of our business and so areas like automotive where very high quality standards.

And sort of some extreme requirements, maybe not on speed or some of the other things, we see on leading edge nodes drive our volume there.

But there's no question and you can see the way we talk about the expansions in Wi Fi and our investments in leading edge nodes and advanced packaging are businesses strongly driven by the leading edge expansion much less so.

The lagging edge nodes.

And as we look at DRAM for the balance of the year last year was obviously very strong year for Graham.

Does that set you up with kind of a bad year over year comps and expectations or.

Pretty significant decline in 'twenty two.

Or is there sort of.

Opportunities for upside as we move into the second half I know you are five Gladstone go that path casually.

But maybe there is something that youre seeing in terms of new product launches or things like that happening in second half in DRAM that can propel it up a little higher.

Yes, there's no question 2021 is a tough comp in DRAM.

<unk> operated at record and near record levels for much of the year based on some very strong design activity from major customers.

We do see good solid design activity had Krish noted there is a little bit of noise around DDR $5 5 million, which is some of the headwinds for us.

But I think.

This is fundamentally why we endeavor to build a diversified set of products customers and markets that we serve rather than just focus on a single market.

Whether it be DRAM foundry and logic systems, we believe the long term stability and earnings power associated with having a diversified set of markets and customers that we serve is a lot more valuable from a long term business.

Pure play in any one of them, we're all going to fluctuate quarter to quarter, even year to year and so what we're trying to do is build this broad exposure to the revenue opportunities in the industry.

So that we can run a more stable and consistent business over the different ups and downs.

Perfect. Thank you.

Thanks Amanda.

Operator.

Yes, thank you ladies and gentlemen.

Now I'll hand, the program back to Mike <unk> for any further remarks.

Alright, thanks, everyone for joining us today.

We're excited we have on our calendars actual in person appearances at several investor conferences here as we go through May and June .

And through the summer and we're really looking forward to see many of you again in person.

And talking about the prospects for form factor.

And the future ahead until then take care.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

[music].

[music].

Thank you and welcome everyone to form factors first quarter 2022 earnings conference call on today's call are Chief Executive Officer of Mike's Lessor, and Chief Financial Officer, Shai Shahar before with getting stand people, saying the company's vice President of Investor Relations for mind do you have some import.

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 I'm say investor relation 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.

Future macroeconomic and geopolitical conditions.

The benefits of acquisitions and investments in capacity and in new technologists.

The impacts of the COVID-19 pandemic.

Anticipated industry trends the disruptions in our supply chain the impact of regulatory changes the anticipated demand for products, our ability to develop produce and sell products.

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 filings on Form 10-K was the S. E T force physical year 2021, and other SEC filings.

Out of which are available on the SEC's website at Www Dot F E C without golf and in our press release issued today.

But looking statements are made ourselves per day.

27th 2022, and we assume no obligation to update them.

With that we'll now turn the call over to form factors seal Mike.

Mike Thanks, Dan and thanks, everyone for joining us today.

One factor again posted strong results in the first quarter delivering the second highest quarterly revenue in company history exceeding the non-GAAP gross and operating margin levels of our target financial model and producing the highest quarterly free cash flow in company history.

This momentum continues in the second quarter as we manage through a variety of challenges to utilize our added capacity and meeting growing customer demand for our products.

Like many manufacturing companies, we continue to face supply chain and labor headwinds both in terms of availability and cost.

We expect these issues to continue at least through the middle part of 2022, and our team remains focused on tactically resolving components and labor constraints as they emerge we're.

We're taking steps to moderate the impact of inflation in both manufacturing and operating expenses.

Our long term investments in automation in vertical integration have helped us partially mitigate the effect of these headwinds and have contributed to our strong results for the past several quarters.

Before we move to market level details I'd like to share some exciting news on the customer front.

One factor was recently recognized by Intel as a 2022 distinguished supplier and their ethical award program for our dedication to excellence partnership inclusion and continuous quality improvement.

Only 26 of the Intel thousands of suppliers worldwide earn this award this year and we're extremely proud that Intel recognized form factor, our recent performance and commitment to supplier excellence with its second highest honor.

Turning now to segment and market level details.

In foundry and logic probe cards, our largest business demand sustained at an overall level comparable to the strong fourth quarter would you expect a decline in RF offset by stronger foundry demand.

Both the top foundry and the largest logic.

We're 10% customers in the quarter.

Key drivers for the foundry business were seven and five nanometer designs and high performance compute along with mobile and RF and we expect a similar demand profile in the second quarter.

IDM microprocessor demand continues to be a diverse mix of client PC and server designs, primarily on the 10 nanometer node.

Foundry and logic customers are investing in both leading edge capacity is evident from record levels of wafer fab equipment spending and early stage innovative advanced packaging architectures like yes, it might be <unk> and <unk> fabric.

These chip lit tayo based integration schemes drive both higher test intensity, which expands the number of probe cards required per wafer out and test complexity, which raises the performance requirements for the appropriate.

Advanced probe card architectures like form factors Mems technology are essential to meet these challenging technical requirements at compelling cost of ownership with a short delivery lead times needed to support our customers' rapid and dynamic production ramps.

To maintain our competitive advantage, we are investing heavily in R&D, we're collaborating with our key foundry and logic and memory customers to meet these challenging technical and commercial requirements with our proprietary <unk> <unk> Mems technologies.

At the same time, we're investing to ensure we have sufficiently vertically integrated <unk> production capacity to meet the growing demand for our innovative and differentiated Mems probe card technologies.

Turning now to DRAM.

As expected first quarter demand for DRAM probe cards produced from the near record levels. We delivered throughout much of 2021, and we expect second quarter DRAM probe card demand to be comparable to the first quarter.

New design activity from each of the major DRAM manufacturers remains healthy with a mix of new DDR four and DVR five designs in both mobile and PC server applications.

As we often note probe cards are a consumable specific to each new chip design and so we benefit both from node transitions and from the release of new designs on existing nodes.

The current DRAM activity has a diverse mix of designs across multiple technology nodes and memory architectures from each of the leading DRAM manufacturers.

Our systems business also delivered strong results in the first quarter with revenue near $40 million a level that we expect to achieve again in the second quarter.

Paired with its solid financial contribution and revenue diversification. The systems business provides significant strategic value, enabling us to engage with key customers and early characterization and yield improvement of novel New devices as part of our lab to fab strategy.

These engagements range from 300 millimeter wafer <unk> for mainstream two nanometer Cmos development.

So optical metrology and inspection tools for yield improvements in advanced packaging and chip with applications to wafer and chip scale cryogenic kroeber's for development with Tomorrow's quantum processors.

We continue to expand the served markets for our systems products as evidenced by our first quarter introduction of the Tesla 300 high power wafer probing system for automotive renewable energy and industrial applications.

Let me close by noting that our first quarter results and second quarter outlook demonstrate another step towards our target financial model to deliver $2 of non-GAAP earnings per share on $850 million of revenue.

There continue to be challenges to overcome for both form factor and the industry as a whole.

Including supply chain constraints and inflationary cost pressures.

Our recent results and outlook have demonstrated the resilience and agility of our team and operational model and together with our leadership positions in our attractive served markets. This resilience and agility will drive continued growth and share gains this form factor progresses towards our target model and beyond.

Shai over to you.

Thank you, Mike and good afternoon.

As you saw in our press release and as Mike mentioned <unk> posted strong first quarter results revenues were at the high end of our outlook range and non-GAAP gross margin and EPS exceeded value end of our outlook when.

We also achieved record GAAP and non-GAAP operating income record non-GAAP net income and record free cash flow in the quarter.

First quarter revenues were $197 million.

A 4% sequential decrease from our Q4 'twenty one record quarterly revenue.

And an increase of 6% year over year.

Probe card segment revenues were $160 million in the first quarter, a decrease of <unk> 6 million or 4% from Q4 'twenty one.

The decrease was driven by lower DRAM revenue.

System segment revenues were $37 million in Q1, a decrease of $2 million or 5% from the fourth quarter.

Within the appropriate segment Q1 foundry and logic revenues were flat with Q4, it's $114 million.

Comprising 58% of total company revenues slightly higher than the 56% in the fourth quarter.

DRAM revenues were 35 million barrels in Q1 $6 million or 14% lower than in the fourth quarter and there were 70% of total company quarterly revenues as compared to 20% of revenue in the fourth quarter.

Flash revenues of $11 $4 million in Q1 were essentially flat with the fourth quarter.

6% of total revenues in Q1 thing is in Q4.

GAAP gross margin for the first quarter was 47, 8% of revenues as compared with 43, 7% in Q4.

Cost of revenues included $2 4 million barrels of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today and the reconciliation table available in the Investor Relations section of our website.

Our non-GAAP on a non-GAAP basis gross margin for the first quarter was 49% 200 basis points above the high end of our outlook range and 470 basis points higher than the $44, 3% non-GAAP gross margin in Q4.

With higher gross margins in both of our segments more significantly so the probe card segment.

The increase as compared to our outlook is mainly due to revenue at the high end of the range and more favorable product mix lower manufacturing costs and higher utilization.

Our probe card segment gross margin was 48, 3% for the first quarter, an increase of 420 basis points compared to 44, 1% in Q.

Q4.

The increase was mainly due to the factors I just mentioned.

Our Q1 systems segment gross margin was 52, 2% 670 basis points higher than the $45 four.

Sorry, 45, 5% gross margin in the fourth quarter.

This increase was due to a more favorable mix and lower expenses, primarily warranty and inventory reserves.

We've said previously we expect our systems segment gross margin to range between the high <unk> to low <unk>.

We are encouraged by achieving a gross margin above our target model in the first quarter. However, we continue to expect the margin will fluctuate from quarter to quarter.

Our GAAP operating expenses were $60 million for the first quarter $2 million higher than in the fourth quarter.

non-GAAP operating expenses for the first quarter was $51 9 million.

Or 26, 3% of revenues as compared with $49 $7 million or 24, 2% of revenues in Q4.

$2 $2 million increase relates mainly to the annual benefits and tax reset higher head count and higher travel expenses.

Company noncash expenses for the first quarter included $7 $5 billion for stock based compensation and $2 $4 million for the amortization of acquisition related intangibles.

Some of which are at similar levels to the fourth quarter and depreciation of $70 million <unk>.

<unk> $5 million higher than in the fourth quarter as a result of our capacity expansion.

GAAP operating income for Q1 was a record $34 2 million as compared with $31 $8 million in Q4.

non-GAAP operating income for the first quarter was $44 8 million.

Breaking the record set last quarter by $3 5 million.

GAAP net income for the first quarter was $30 million or <unk> 38 cents per fully diluted share compared to $26 million or <unk> <unk> per fully diluted share in Q4.

The non-GAAP effective tax rate for the first quarter was 13, 8% to 190 basis points lower than the 16, 7% in Q4 and below our estimated non-GAAP annual effective tax rate of 15% to 20%.

During the first quarter the required capitalization of R&D expenses changed resulting in a higher foreign derived intangible income benefits also known as FTIR gas a lower effective tax rate.

We expect to be on the lower end of the 15% to 20% range for the remainder of the year.

As a reminder.

Our annual cash tax rate is expected to remain around the mid to high single digits with non-GAAP pretax income until we fully utilize our remaining U S based on different.

First quarter non-GAAP net income was a record $38 7 million or <unk> 49 per fully diluted share compared with $34 7 million.

Or <unk> 44 per fully diluted share in Q4.

In summary, EPS came in higher than our outlook range due to revenue being at the high end of the range higher.

Higher gross margin and lower effective tax rate, partially offset by higher operating expenses due to higher performance based compensation.

Moving to the balance sheet and cash flows.

We generated a record 29 million barrels of free cash flow in the first quarter compared to $24 million in Q4.

Total cash and investments of $300 million at the end of the quarter.

The $5 million sequential increase in free cash flow reflects the increase in profitability as capital expenditures were at a similar level to the previous quarter.

As of the end of the first quarter, we had two terminals remaining on our balance sheet totaling $22 million.

We invested $15 $6 million in capital expenditures during the first quarter compared to $15 1 million in Q4.

As mentioned in our previous earnings call in 2022, we expect to continue to invest in increasing capacity to meet customer demand with full year capex planned to be between $60 million to $80 million.

As a reminder, we expect capex to return to the fleet.

The three 5% to 4% of revenue in our target financial model. After we conclude these capacity expansions.

Regarding stock buybacks during the first quarter, we purchased 241000 shares under our existing $50 million two year repurchase plan.

This brings our repurchases through the end of Q1 with 863000 shares at quarter and $16 $6 million remained available for future repurchases.

Turning to the second quarter non-GAAP outlook as Mike mentioned, we expect the strong momentum to continue in the second quarter with sequential increase mainly in foundry and logic.

These factors resulted in a Q2 revenue outlook of $203 million plus.

Plus or minus $6 million.

non-GAAP gross margin for the second quarter is expected to be 47% plus or minus 160 basis points on a similar product mix to Q1 offset by higher manufacturing cost.

At the midpoint of this outlook ranges, we expect Q2 operating expenses to be higher than Q1 <unk>.

By approximately $2 million.

Due to additional hiring and analog salary increases.

Accordingly, non-GAAP earnings per fully diluted share for Q2 is expected to be 43, plus or minus <unk> <unk>.

A reconciliation of our GAAP to non-GAAP Q2 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.

Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.

First question comes from the line of Krish Shankar from Cowen and company. Your question. Please.

Yeah, Hi, Thanks for taking my question I had a couple of them and congrats on the really strong ourselves Mike and shot.

You kind of mentioned that one of the reasons for the gross margin in June to be down relative to March is because of the higher manufacturing costs I'm just kind of curious.

Given the fact that.

DRAM is less of the mix in June relative to March.

The manufacturing cost is that a one time headwind how should we think about margins going forward given the fact that it's really good margins.

It looks like very good module from June due but I would've thought it would be much better given DRAM mix is lower.

Yes, Thanks, Chris for the question I wanted to talk about two components when I talk about Q2 margin being lower than Q1.

As we said in the past it's important to note that even with the changes in revenues in the specific all the markets. We serve there can be changes in the product mix within these market right. So even though we say and.

Byram is going to be.

Kind of a comparable but frankly, it's going to go up it doesn't necessarily mean.

The product mix will be better. So we expect a similar product mix when it comes to the impact on the gross margin in Q2.

That's one point the other one.

Mentioned in the quarter as well.

Higher manufacturing expenses in Q2.

As many of our peers, we see increases in raw material prices, we're seeing higher labor costs and there is also the impact of our capacity expansion coming online and also there is an impact of some timing of our production flow and we should expect it to result in a lower absorption and higher manufacturing expenses in Q2 now.

Due to a midpoint of our outlook range is 47% Russell.

Plus or minus 150 basis point, which is our target model. So we're very encouraged by that.

Got it got it very helpful and then a follow up.

You guys did about 35 or $35 million in data revenue.

Is there a way to think about.

The split between DDR foreign DDR five and.

The DRAM weakness relative to maybe six months ago is that all driven by DDR five pushout.

Chris It's Mike I'll take that.

I think it's continued over the past six months to be.

A pretty even mix of DDR, four and DDR five I think when we think about our quarterly DRAM revenues, although through much of 2020, we were operating up around $40 million a quarter that we have talked about a more realistic median level being somewhere around the mid thirty's, which is right, where we expect it to be.

In the second quarter.

So I don't know that I can point to DDR five push outs per se, we've got a broad mix of DDR four and DDR five designs running through the factory with all the major DRAM manufacturers in any quarter, we expect those to ebb and flow a little bit.

And if I could just squeeze in one along the path Mike is there any margin differential between PDL for NGL pipe World Cup.

Not systematically as Shai said, we do see gross margin differences from different designs. So different DRAM designs, regardless of whether they are <unk> five and they're significantly different gross margins based on things like whether it's a single touchdown.

<unk> card, whether that probe card tests, the whole way for one or two touchdown probe card requiring to Texas.

The one touchdown card higher value higher complexity probe card and our customers compensate us accordingly for that.

And so that drives the margin uplift so much less to do with the actual technology nodes your memory architectures and much more to do with the details of the configuration. That's true in DRAM, it's true in foundry and logic as well.

Thanks, a lot Mike Thanks, Sean.

Thanks, Craig.

Thank you. Our next question comes from line of Brian Chin from Stifel. Your question. Please.

Hi, there good afternoon, and thanks for letting us ask a few questions and congratulations again on the execution in the quarter.

Maybe to start with the gross margins here again.

On the surface there doesn't seem to be any wild swings in mix.

But the one new variable that certainly it was at your disposal in the quarter was incremental output from from Livermore.

And so we're thinking kind of about sustainability of margins more at these higher levels right maybe not.

Quarter out quarter in quarter out above the target model, but closer to the 47% level, which.

Which is definitely higher than we've been modeling.

Yes.

Is it fair to say that there was some kind of drags on your gross margin line as you were really constrained over the past few years, even I think at this point.

And that new capacity really unlock something that allows you to maybe put a bigger floor onto your gross margins.

Well I would say gross margin has always been an area of focus for us.

We always invest at all levels of the company on making improvements to gross margins and operational.

Teams is.

Doing an excellent job on being more efficient on the hedging more efficient design.

On securing supply.

At the right prices and.

It's being such an important strategic.

Action for the company, which is something that I'm very happy to see.

<unk> seen good results there and these excellent results in Q1.

Really validates what.

Our ability to achieve our target financial model gross margin of 47% and.

Revenue of 800 contributed half of the year.

And maybe one more point about that.

Hmm.

We are approaching our target model and if you look at Q2 revenue outlook range, we are within 5% of the starting tomorrow and the growth really came from mostly in foundry and logic as expected as we said it's going to happen. So gross margin is where we expected it to do it.

We'll continue to fluctuate as we can.

<unk> said before but these validates our ability to achieve it.

Okay got it.

49% is still big having a pretty big number.

But.

Fair enough.

And I guess thinking about the Capex plan for this year and also thinking about just the constraints across the board in terms of getting equipment.

The people certainly know about what are you doing some other safeguarding provisions to make sure you have the capacity in place to maybe flex up if need be towards the end of this year, maybe it's next year and also.

$60 million to $80 million Capex is there a way to sort of translate that into annual incremental revenue output.

I think you talked about.

Alright. Thanks.

Okay.

It's difficult to translate the capex number into a revenue number.

As you know since you've been following us for a while.

This has been a multiyear capacity expansion plan that started off with some large fixed assets like buildings transitioning into now this year being more tools, but still some infrastructure and underlying plot.

Platform footprint to allow us to continue to increase capacity.

It's a challenging situation for I think everybody in the industry to add enough capacity, we've heard big customers talk about them being growth constrained.

Not by demand Thats, there by their ability to get tools I think that's the case for almost everybody in the industry. So safeguards are difficult to put in place, but we are trying to increase capacity as fast as we can both from an equipment perspective and from a people perspective, which obviously would mislead the market has turned out to be an equal challenge.

The city of equipment supply.

Got it and then maybe just sneak one last one Mike.

I feel like there is increasing confidence in various sort of foundry logic customers.

Three nanometer roadmap and output next year.

And in terms of seven nanometer.

Output.

And I feel like this will coincide with the substantial increase attach rate in terms of advanced packaging.

Architected designs.

Is your confidence level, increasing sort of commensurate with those things.

I'll stop it there.

Yes, I think it's a <unk>.

Great point that these advanced.

Foundry and logic nodes, maybe three nanometer or.

On the <unk>.

Seven nanometer node at one of our other customers.

And really there is a strong coupling or attach rate as you put it now to these advanced packaging technologies things like die stacking chip whats different tayo based strategies that we've talked about for a while really drive up the test intensity. So the number of probe cards required per wafer out.

And test complexity it drives up test intensity, because very simply if youre going to put four titles together into a chip you need to have relatively high confidence that each of those titles as good otherwise you couldn't have a situation where one tile can kill the other three which economically is obviously a very bad scenario.

As complexity also going up.

Again associated with making sure each of these titles are chip, which is good and so I think.

As we get closer to two.

2023, and the ramps associated with these next nodes with the increased attach rate of these advanced packaging technologies.

We do think there's some potential tailwind there for the overall probe card intensity and the opportunity in front of us as we lead in the foundry and logic market.

Okay, great. Thanks, a lot.

Thanks, Greg.

Thank you. Our next question comes from the line of Charles <unk> from Needham <unk> Company. Your question. Please.

Hi, good afternoon, Mike and Shai.

You for letting me ask a couple of questions.

Number one I wanted to.

To get your thoughts on your Capex plan.

Your clothes as a competitor.

During the quarter went public and we got a chance to really dive into their financials. So one thing that jumped out to me.

Is that.

It seems like you we're outspent by your competitor in Capex over the past three years.

But the concern I heard as you might have lost some upside opportunities because you might be more capacity constrained dangle competitor.

I do understand that that overcapacity was.

Quite a big issue in the early plenty of tenants around that time.

Right before you became the CEO of.

<unk> form factor.

Maybe that influenced a little bit your decision in terms of capacity expansion. So.

Can you give us some thoughts.

Capacity expansion Capex strategy here, and especially I believe that the probe card demand is going to is likely going to accelerate from here. Your alcohol manufacturers, Brian Chin, just mentioned vast packaging et cetera. Thank you.

Yes, I think it's a fair observation that.

If I look back to maybe 2019 and 2020.

We were too conservative in our capacity expansion plans and some of that is definitely a.

Hangover from the 2010 2011 timeframe.

Also tend to be a fairly conservative executive team and so that held us back stuff, but as you can see from the capital spending in the past couple of years, we've gotten a lot more aggressive to allow us to address the opportunities.

Brian talked about that you just referenced if you look at the amount of <unk>.

<unk> spend by our customers on leading edge capacity that Wi Fi, although it takes a few quarters to get installed and qualified almost certainly has been a result in new designs more wafers that require more probe cards and so our confidence level of utilizing these big capital investments a big capacity.

<unk>.

Continues to increase we think these are good investments for the company to make to continue to grow our business to capture the market share that we need at the high end of the foundry and logic and DRAM business and continue to grow the company, but I.

I think it is a fair assumption that we were caught a little bit flat footed from a capacity expansion perspective, and the 2019 2020 timeframe.

Got it so maybe my second question.

I wanted to ask something more near term.

The Covid Lockdowns in China, I believe beginning end of March now is still extending into a good part of April we don't know when thats going to end.

Seems to have been waived.

Or I mean, not exactly your peer, but the semi cap equipment companies.

On two sides. One is that it really is on the supply chain side about the data is really the delivery side.

So they probably have seen a little bit impact reflected in some of their financials. So I wonder.

Obviously Q1, you did manage your.

Youll supply very well, but going into Q2, what's the thought there.

So our guidance kind of embed some of the risks there.

But one thing you do have something like high teens.

In some quarters in the past more than 20% of revenue coming from China, I understand that the domestic Chinese I'd like to have single digit part of that a lot of that is really shipping to the Intel facility in China. So I wanted to give us some thoughts on any of that risk factors are embedded in your guidance. What do you. How do you think about it. Thank you.

Yes, so I would say there is a variety of supply chain headwinds, we're dealing with very good just like everybody else as you mentioned, including the lockdown in China. So obviously, it's a very dynamic situation continues to present, new challenges, especially every week or rebates on size.

I think our team is doing a great job being with it is a concern to date.

Broad industry.

It is for us as well so far I think it's too early to estimate the longer term your thoughts on that and as you mentioned most of our sales to China or to multinational companies not to local China and they have been.

Dealing with it pretty well by moving things around but specifically I think it's.

Too early for us to say.

To make for the long term or longer term.

Thank you.

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

Yes. Thanks, so much for taking the question and congratulations on the very strong execution guys.

I wanted to start with gross margin clarification. So.

And it's got two parts to it you said in your prepared remarks that there were four factors that lead to upside gross margin.

Revenues at the high end mix lower manufacturing costs and utilization.

What was the relative contribution of those four things to the upside about even or disproportionate to some versus others.

And then on the manufacturing cost point, it was lower than a benefit.

First quarter, but it's a headwind in the second quarter. So what is it about what's happening with manufacturing cost quarter to quarter, but gives it.

<unk>.

That inverse dynamic.

Okay. Thank you for the question. So on the first one I would say the majority.

The upside about three quarters of it maybe even close to 80% of the upside came from a more favorable mix.

We are a turns business with lead times that is going to be a shortage.

Sometimes four to six weeks so in the time it takes them to quote business. So in the time between our previous earnings call and quota close revenue came in at the high end of the outlook range and it also came in with a more favorable mix, which amplified the positive effects on the gross margin line.

That's the majority of it about three quarters of it.

And the others were just contributed to each one of them a little bit.

For the balance when it comes from manufacturing expenses.

As they moved to Q2 so.

As I said the mix is expected to be or the mixed impact on the on the gross margin in Q2 is expected to be similar to Q1 and most of the decrease from Q2 gross margin is expected to come.

From the manufacturing expenses that are expected to be higher.

And we're talking about higher raw material prices, but we and our peers.

See higher labor cost as well our capacity expansion is online, but there's a small impact as well and there is an element of the timing of the production flow, which is expected to result in Q2 in lower absorption and higher manufacturing expenses.

If you look at our balance sheet, you'll see that we built some inventory in Q1 to support.

To support the increase in the demand so that doesn't impact of the timing of expenses as well.

Got it and then just to put a bow on it with the mix issue in there.

First quarter was that primarily in the foundry logic statement or was that mix also something that benefited the DRAM segment given that there wasn't a lot of change on on a segment to segment basis. So this is all intra segment mix shift that's happening.

So it's almost across the board not every design in every customer came in.

The higher margin, but.

More more than more more than one market I mean, even if you look at our systems business unit also came in higher than Q1 sort of higher than Q4 and higher than what we built into the outlook when we produce it.

In the previous earnings call.

Got it and then the <unk>.

Question is really for Mike.

A question that goes back to the point that you made that others have inquired about witches probe card intensity and.

Dynamics that are at play as the top three.

Oems move more towards heterogeneous tire or tile based product as you say Mike.

Is this when we look at those three entities, one is pretty far along with advanced packaging they've been at it for a number of years and that's been a growing part of their capital spending budgets.

They are increasingly known for it there is two others that are just getting started down that path. So what I was hoping you could do is help us with a sense for how much benefit do you think the business is getting today from the shift towards advanced packaging and if we look out to the end of this year and then maybe to the end of <unk>.

<unk> thousand 23, what would be a reasonable expectation for the contribution from that shift too.

Two advanced packaging from those big three manufacturers. Thank you.

Yes, it's an interesting question because clearly.

<unk> different pieces of silicon that theyre going to end up in these advanced packages does drive up test intensity now it's important to remember that the whole industry is not going to move all of its wafer starts over to advanced packaging. So there is sort of a diffusion or an adoption effect that needs to be modeled here.

And as we do that we're still in very early units. If you think about where advanced packaging is impacting our business now.

It's a set of high end processors, it's HBM stacked DRAM, some things like that and if you look at the relative number of wafer starts and probe card demand to that.

It's not a very large fraction of the overall industry, but as you look at these customer roadmaps as they go through.

Mainly into 2023.

There is some significant adoption add significant volume with these advanced packaging technologies and so.

That diffusion rate or attach rate of advanced packaging for wafer starts.

Youre going to take many years for this to become the majority of high end foundry and logic.

We're very encouraged that major designs from our major customers have all been slated for advanced packaging on these leading edge foundry and logic nodes in 2023, So we do expect it to build.

From the very small contribution we're having right now.

Got it and then if I could just squeeze in one more Mike just qualitatively as you've got the new Livermore facility ramping up and after a period of being <unk>.

Very very tight there and really doing some creative things to keep production going at levels that you monitor.

Can you give us some of your impressions with how the early ramp up is going and what are some milestones we should look for.

We look through 2022, and your ability to ramp up that capacity.

Yes.

And it's it's not done right. If you look at our.

Projected capex for 2022. It continues at essentially the same high levels. We had in 2021 the efforts right again in 2020.

And so it's an ongoing story where.

If I were to point the milestones certainly the first one and I don't know that we will get there in 2022.

Quarterly run rate at the model right is shining noted were within a few percent does it so getting very close and clearly the additional capacity is contributing to that so maybe that's one milestone to look to.

The others are as you as you look at our current footprint and our ability to continue to deploy capital and add capacity inside that footprint as you look at our annual Capex on a quarter.

Quarterly Capex seeing that continue at high levels, probably a good indicator that we're continuing to add capacity.

To give us a legs beyond the footprint we have now.

Got it thanks guys.

Thank you and ladies and gentlemen, we'd like to ask us to Lee. Please limit yourselves to two questions you may get back in the queue. As time allows our next question comes from the line of David Duley from Steelhead Securities. Your question. Please.

Yes. My first question is and I hate to be the Guy that asked this but im wondering if youre seeing any sort of slowdown in any segments of your business or any inventory build at your customer levels and what your customers are saying.

About the second half of the year, because clearly investors are spooked about both the equipment space.

The probe card space given what's the stocks have done recently, so I'm just wondering if you've seen any change.

Change in tone from your customers.

Really no change in tone sort of systematically across the customer base. If you look at our large markets are large served markets in places, where we have significant share.

Everybody's got constraints thats limiting growth, whether it's getting enough wafer fab equipment in.

For us some simple things like different sub components are constraining growth.

I don't see anything that would indicate a cyclical downturn in the second half.

But having said that theres different quarter to quarter puts and takes in our business and there always has been and we talked about RF going down sequentially. After a very strong 2021. Some of this is our RF probe card business, primarily serves the components to go into <unk>.

Handsets right now so things like ball in saw filters.

And packaged parts some of the really interesting things associated with millimeter wave communication.

It's taken a bit of a pause, but I wouldn't call that a secular downturn as problems digestion that occurs for a quarter or two fundamentally thats why were trying to run a broadly diversified model because there's always going to be puts and takes with individual customers and individual markets in any quarter, but certainly we see no indications of a broad.

<unk> systematic slowdown.

Customer base.

And just as a follow on to this particular point you just made.

Do your customers or your customers holding more inventory of either probe cards or of IC components.

We certainly don't see them today.

Again, one of the nuances of the probe card business is.

The probe cards are specific to individual customer chip designs and so they tend to be not a very useful thing to try and hold inventory on because as our customers' production mix changes that result.

Very high overhead expense to build that Optionality. So part of the reason why we run on such short lead times, because our customers production mix changes, we need to be ready to adapt to support them and capture that upside.

Probe card again.

Really not a great.

A great item to have on the on the inventory shelf from a financial perspective.

Okay. My second question is as far as.

One of your large customers, let's say goes from five nanometer to three nanometers I think we heard on another back end equipment Company's conference call. This morning that the number of transistors when that happens will probably go up by 30% or 40%.

And that leads to obviously an increase.

Test intensity.

I was wondering if you might be able to quantify what.

If you do see a 30% to 40% increase in transistors.

How more how much more probe card or test intensity might be.

Yes, certainly directionally it goes up and I think.

The the AP people see this pretty significantly right.

<unk> installed base has to go up.

To deal with the increased test times associated with it but it's not linear right at 20% increase in transistor count for died doesn't result in the 20% test an increase because customers are good at various elements of design for test.

Understanding where they can drive down their samplings and things like that.

But they're directionally there is definitely an uplift and I think you've seen that in the probe card market over time as transistor counts have gone up on leading edge parts, you've seen the intensity of probe card spend and <unk> spend in the foundry and logic market go up as well.

Thank you.

Thanks, Ed.

Thank you. Our next question comes from the line of Tyler Burmeister from Craig Hallum. Your question. Please.

Thanks, guys. This is Tyler on behalf of Christian Schwab, Thanks, a lot and if that's the question.

<unk>.

A lot of my questions have been answered I wanted to go back to kind of supply chain headwinds.

That you commented about.

But at the same time put up a very strong 49% gross margins got it Q2 to a very strong level as well and I think you also said you.

You would expect these to begin to improve in the second half or we've heard from a lot of your peers.

Other companies in the industry that they're seeing these pressures out into next year. So I guess I was just wondering maybe what.

What are some of.

The most significant headwinds.

Youre seeing and what gives you confidence that those could be improvement in the second half.

Yes, Tyler I'll, let shai answer the details, but it was my comment and I want to make sure I was not forecasting an improvement in the second half, but I was saying was our fog lamps and when we go through the middle part of the year and we see the constraints continuing through the middle part of the year. So I am not forecasting improvement in the second half that's just.

We continue to see these challenges emerging for about as far as we can see which is through the middle part of the year.

Yes, the answer is yes.

So I think you've answered.

Most of the question there.

I'll repeat some of the things I said earlier as we see.

And the supply chain issues that we've seen in Q2, we they include inflationary cost increases.

In components, we see higher labor costs.

Whether it's going to be stronger or weaker as Mike said, we still don't know we can say that so far we haven't seen any major disruptions to our business.

We see.

Assuming our logistical issues as we've seen in the past.

So if you look at Q2 versus Q1, when it comes to the impact of supply chain issues I think right.

Similar level of disruption this quarter.

Alright fair enough I appreciate the color that's all for me guys. Thanks.

Okay.

Thank you. Our next question comes from the line of David Silver from CL King Your question. Please.

Yes, hi, thank you very much.

I have kind of a more targeted question then maybe a bigger picture one.

First I wanted to just ask you about the workstation engineering systems results.

I guess this quarter in the fourth quarter. The revenue totals I think are the highest in at least several years maybe longer.

I had a couple of questions about that but firstly, maybe if you could talk about the breakdown in the revenue increase maybe from volume versus mix perspective.

And then secondly, I was wondering if you could just maybe highlight how you view the cadence.

The growth in that business in other words is this a business that rises coincident with new fab development as it ahead, maybe six to 12 months or more.

Or.

How should we think about the growth trend.

In relation to fab development and weight WSB spend.

Modeling that going forward.

Yes.

Yes.

So the system segment really I'll answer the second part of the question for US is really focused on health.

Helping customers develop entirely new process technologies now as I've said in the past that can be things like gate all around.

Cmos structures, but its also where we've made some significant investments in helping the emerging quantum computing industry get on its feet and be able to test. These devices that improve that yield so it's a broad spectrum.

It's really early development activities and as a result, it is not very well correlated with WSI.

Tends to be more correlated with.

Essentially the velocity of customer development Roadmaps.

We continue to develop new things and introduce new things, that's what really drives the activity in that segment for US now that's the first part of the question the composition of <unk>.

Why we're at these levels.

Think of the engineering systems business of presences.

A few different components.

We got into this business with the 2016 acquisition of Cascade Micro Tech, which brought US first into the engineering progress business as well as the RF probe card business the engineering probe business inside the.

System segment really has been the foundation and we've done a nice job I think of growing that since the acquisition, but we've also added two significant acquisitions for this segment. The first being the acquisition of <unk>, which got us into metrology and inspection for advanced packaging applications again this theme of chip.

Whats Tayo based strategies drives all kinds of new metrology and inspection requirements.

And this is a place where we want to be advanced packaging is being performed better. So thats an element of growth in revenue on top of the if.

I feel like the legacy systems business and the second one is our.

Our acquisition of HBV, which got us into the quantum computing space. So really the revenues up year $40 million or as a result of the composition of these different businesses and then the growth is.

<unk>.

Some of the more exciting things, we're doing with each of these different businesses and enabling the next generation of semiconductor and electronics technology.

Okay. Thanks, and then.

Mike I heard you say a couple of times on this call you don't like to look too far over the horizon, but.

Im going to just give it a crack here.

Yes, there's been a number of announcements for new.

$10 billion, plus fab developments in the U S. A lot of your lot of your existing customers are included on those lists.

And.

To go by the announcements I mean, virtually all of them are due to be up and running by 2020 for maybe 2025 at the outside.

Excluding maybe some ohio projects, but for the ones that have been announced a couple of things. Firstly do you believe the timetables and secondly, if you do then what does that mean for your company to capture at least your share.

Of the overall opportunity if not larger I mean, what.

What incremental capabilities or capacity.

Do you envision.

Being necessary to kind of like I say to kind of keep up with.

Your major customers Youre doing in terms of new fab development over the next.

Three to five years. Thank you.

Yes.

And maybe to start it's not that we don't like to look too far downstream. It's just that our binoculars kind of run out of resolution given the lead times that we operate on.

So definitely there is longer term discussions with these customers about how we support them in these very large capacity increases many of the fabs being here domestically in the U S that had been announced.

I think the timeframe.

For 2020 for 2025, when you look at the progress of the indicators associated with that.

As long as things continue on their existing trajectory that seems like a pretty solid assumption and as part of the reason for our continued capacity increases when I look at what we need to do to make sure that we continue to lead the industry and capture the probe card and systems volume associated with these large expansions at the IND.

History, It's twofold, it's one of the reasons why we spend.

In round numbers $100 million a year on R&D.

The innovation required to test chips on these advanced nodes to support advanced packaging. There is some significant innovation there and clearly our strategy is to continue to invest there to build competitive advantage at the same time, we do need to be ready with.

Continuing to increase capacity as these facilities come online maybe a few years from now but as we talked about earlier on the call we did get caught.

A little bit out of capacity in 2019, and 2020 and it takes a little while to make those investments. So we're continuing to plan.

At least giving ourselves the optionality for the longer lead time elements like buildings facilities and manufacturing footprint to make sure we're in a position to.

I just have the technology, but also have the capacity to capture this demand.

Thank you very much I appreciate it.

Thank you. Our next question comes from the line of mandatory 90 from Citi. Your question. Please.

Hi Krishna.

This leading edge versus lagging edge of any exposure that you have between the two.

Is there a difference between margin perspective, or a volume perspective between those two different.

Period that node.

Yes, so Dan for sure there is a volume difference.

Our exposure to <unk>.

Trailing edge nodes as less than leading edge node simply because the yields on the trading edge nodes are much higher than they are in a leading edge nodes and if your yields are higher you don't have to do as much wafer test.

The the places where we do see significant exposure to trailing edge nodes are in very demanding applications like automotive where.

High temperatures are required at both high and low temperatures as required.

Thermal management is becoming a much bigger part of our business and so areas like automotive where very high quality standards.

And sort of some extreme requirements, maybe not on speed or some of the other things, we see on leading edge nodes drive our volume there.

But there's no question and you can see the way we talk about this.

Expansions in Wi Fi and our investments in leading edge nodes and advanced packaging are businesses strongly driven by the leading edge expansion much less so.

The lagging edge nodes.

And as we look at the DRAM for the balance of the year last year was obviously, a very strong year for Graham.

Does that set you up with kind of a bad year over year comps and expectations for.

Pretty significant decline in 'twenty two.

Or is there sort of.

Opportunities for upside as we move into the second half I know you are <unk>.

Gladstone go that path casually.

But maybe this is something that youre seeing in terms of new product launches or things like that happening in second half in DRAM.

Propel it up a little higher.

Yes, there is.

No question 2021 is a tough comp in DRAM.

We operated at record and near record levels for much of the year based on some very strong design activity from major customers.

We do see good solid design activity had Krish noted there is a little bit of noise around DDR $5 5 million, which is some of the headwinds for us.

But I think.

This is fundamentally why we endeavor to build a diversified set of products customers and markets that we serve rather than just focus on a single market.

Whether it be DRAM foundry and logic systems, we believe the long term stability and earnings power associated with having a diversified set of markets and customers that we serve is a lot more valuable in the long term.

A replay of any one of them, we're all going to fluctuate quarter to quarter review the year to year.

So what we're trying to do is build this broad exposure to the revenue opportunities in the industry.

So that we can run a more stable and consistent business over the different ups and downs.

Perfect. Thank you.

Thanks Amanda.

Operator.

Yes, thank you ladies and gentlemen.

I'd like to now hand, the program back to Mike Celesio for any further remarks.

Alright, thanks, everyone for joining us today.

We're excited we have on our calendars actual in person appearances at several investor conferences here as we go through May and June .

And through the summer and we're really looking forward to see many of you again in person.

And talking about the prospects for form factor.

And the future ahead until then take care.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.