Q2 2022 FormFactor Inc Earnings Call
Okay.
Thank you and welcome everyone. So form factors second quarter 2022 earnings conference call.
On today's call are Chief Executive Officer, Mike Lessor, and Chief Financial Officer, Shai Shahar.
Before we begin Stan Finkelstein, the company's Vice President of Investor Relations will remind you of some important information.
Yeah.
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.
We're 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.
What's the meaning of the federal Securities laws.
Examples of such forward looking statements.
Includes also with respect to the projections of financial and business performance future.
Macroeconomic and geopolitical conditions.
The benefits of acquisitions or investments in capacity and new technologies.
The impact of the COVID-19 pandemic anticipated industry trends.
The disruption in our supply chain.
The impact of regulatory changes.
The anticipated demand for products, our ability to develop produce and sell products and the assumptions upon which such statements are based.
These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call.
Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the S. E C for physical year, and 2021 and in our other SEC filings, which are available on the SEC's website at www.
The adult S E T that golf and in our press release issued today.
Forward looking statements are made as of today.
July 27th 2022.
We assume no obligation to update them.
With that we'll now turn the call over to form factor CEO , Mike <unk>.
Thanks, everyone for joining us today.
Form factor again posted strong results in the second quarter delivering the second highest quarterly revenue in company history, and again exceeding the non-GAAP gross margin of our target financial model.
Together with good operating expense control in the current inflationary environment. That's produced earnings per share at the high end of our outlook range.
Our second quarter financial results and overall themes were similar to the first quarter's as major customers continued to release and ramp new designs to meet demand for their products driving strong results in our probe card business in both foundry and logic and DRAM.
Customers also invested in their technology Roadmaps with development of innovations like gate, all around transistors advanced packaging silicon photonics and quantum computing driving solid results in our systems business.
During the second quarter, we made a small but important acquisition to augment our capabilities as a key supplier in the emerging quantum computing market buying the dilution refrigerator product line of Janus U L T.
Dilution refrigerators are a key enabler for the operation of quantum computers being capable of tooling kubitz to be ultra low sub 10, Miller Kelvin temperatures required for operations of superconducting quantum computers.
This acquisition makes form factors, the largest commercial dilution refrigerator supplier in the United States strengthening and expanding our position with key customers as the leading supplier of not just test and measurement products, but also now enabling infrastructure for quantum computing.
Turning now to our third quarter outlook are sequentially weaker outlook is due primarily to reduced demand for foundry and logic probe cards from several major customers in both mobile and compute applications.
As these customers adapt to the changing conditions in their end markets driven by global macroeconomic uncertainty and inflation theyre changing their short term wafer start and design release Roadmaps by delaying selected new design releases and in some cases, reducing their volume ramp plans for specific chip designs already in <unk>.
<unk>.
As a reminder, probe cards are a consumable specific to each new chip design and so changes it changes to production volumes of individual chip designs also changed the number of probe cards required to manufacture that specific design.
Shai will discuss in detail this reduction in anticipated foundry and logic demand resulted in a significant reduction in forecasted third quarter gross margins and earnings.
We view this reduction in foundry and logic probe card demand is a short term response to our customers by our customers to changing conditions in their end markets and not a structural change in our business.
Lead times for probe cards remain less than a quarter and although the past several years have been characterized by universally robust and growing demand across all probe card segments and end markets changes like this are not uncommon in times of rapidly changing industry conditions as customers adapt their production plans to match short term fluctuations in.
Their product specific demand profile.
We continue to view foundry and logic as an exciting long term growth driver for form factor customers are investing in both leading edge capacity is evident from continued wafer fab equipment spending and early stage innovative advanced packaging architectures like E M I b over us and three D fabric.
As we've noted in the past is chip lit where tile based integration schemes drive both higher test intensity, which expands the number of probe cards required per wafer out.
And test complexity, which raises the performance requirements for the probe card.
Advanced probe card architectures like form factors Mems technology are essential to meet these challenging technical requirements at a compelling cost of ownership with.
With the short delivery lead time needed to support our customers' rapid and dynamic production ramps.
For these reasons, despite the anticipated third quarter pause in the steady and gradual progress we've made towards our target financial model, we're continuing our planned capital investments and remain committed to our target financial model and the strategy that underpins it.
The main tenant of this strategy is our expanding position as a diversified supplier to the broader semiconductor and electronics industry with defensible leadership position, serving multiple consumables and equipment market segments.
Over the past few years, while each of these segments is delivered robust demand and growth we've been consistent in our beliefs that our markets are cyclical with each market unlikely to deliver robust growth every quarter.
Operating in multiple segments with a diversified set of demand drivers allows us to better amortize, our fixed cost structure, including manufacturing overhead facilities and global customer support infrastructure.
This segment's van also provides the broadest set of technology and manufacturing capabilities in our served markets offering significant value to our customers and competitive advantage for form factor.
Our third quarter outlook offers a proof point to the value of serving multiple market segments. As we anticipate that the expected reduction in foundry and logic demand will be partially offset by growth in the system segment with steady demand for DRAM and flash probe cards.
We remain committed to gross margin improvement in all of our product lines. So that this diversification strategy is fully effective in mitigating the impact of these product mix shifts on both revenue and profitability.
I'd like to close by affirming that we remain confident in the long term growth prospects for the industry overall, driven by the fundamental trends of semiconductor content growth in advanced packaging. These are trends were form factor as well positioned as an industry and technology leader.
We're confident that our resilience and agility will drive continued growth and share gains as form factor progressing towards our target model that delivers $2 of non-GAAP earnings per share on $850 million of revenue.
And beyond.
Shai over to you.
Thank you, Mike and good afternoon.
One factor again posted strong second quarter results delivering the second highest quarterly revenue in company history with revenues and gross margin above the midpoint of our outlook ranges.
Yes at the high end of the range and non-GAAP gross margin again exceeding our target financial model.
Second quarter revenues were $204 million, it's 3.4% sequential increase from our first quarter revenues and an increase of eight 4% year over year.
Probe card segment revenues were a record $167.7 million in the second quarter.
An increase of $7.7 million.
Or four 8% from Q1.
The increase was driven mainly by higher foundry and logic revenues.
System segment revenues were $36 million in Q2, a decrease of $1 million or two 7% from the first quarter.
Within the probe card segment, Q2 foundry and logic revenues were a record $122 million at seven 3% increase from Q1.
On pricing, 60% of total company revenues slightly higher than the 58% in the first quarter.
DRAM revenues were $37 million in Q2, $2 million or 7% higher than the first quarter and were 18% of total quarterly revenues as compared to 70% of revenues in the first quarter.
Flash revenues of $8 $5 million in Q2 were $3 million lower than in the first quarter and were 4% of total revenues in Q2 lower than the 6% in Q1.
GAAP gross margin for the second quarter was 46, 3% of revenues as compared to 47, 8% in Q1.
Cost of revenues included $2 $3 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today and in the reconciliation table available in Investor Relations section of our website.
On a non-GAAP basis gross margin for the second quarter was 47, 4% 160 basis points lower than the 49% non-GAAP gross margin in Q1 with lower gross margin in both our markets.
Our probe card segment gross margin was 46, 8% in the second quarter, a decrease of 150 basis points compared to 48, 3% in Q1.
The decrease was mainly due to a less favorable mix higher manufacturing head count and spending.
Our Q2 system segment gross margin was 55% 170 basis points lower than the 52, 2% gross margin in the first quarter.
The decrease was due to lower revenue and a less favorable product mix.
Our GAAP operating expenses were $62 million for the second quarter $2 million higher than in the first quarter.
non-GAAP operating expenses for the second quarter were $54.5 million.
Or 26, 7% of revenues as compared with $51 9 million or.
Or 26, 3% of revenues in Q1.
The $2.6 million increase relates mainly to an annual salary increase higher head count and higher R&D project spend.
Company noncash expenses for the second quarter included $6 $4 million for stock based compensation $1 $1 million lower than in the first quarter two.
$2.7 million for the amortization of acquisition related intangibles.
Point $3 million higher than in the first quarter.
And depreciation of $7 $2 million zero point $2 million higher than in the first quarter.
GAAP operating income for Q2 was $32 6 million as compared with a record $34 $2 million in Q1.
non-GAAP operating income for the second quarter was $42 $3 million lower than the last quarter's record by $2 $5 billion.
GAAP net income for the second quarter was $30 million or <unk> 38 cents per fully diluted share same as in the previous quarter.
The non-GAAP effective tax rate for the second quarter was 14.4% 60 basis points higher than the 13, 8% in Q1.
And slightly below our estimated non-GAAP annual effective tax rate of 15% to 20%.
As a reminder, during the first quarter the required capitalization of R&D expenses change, resulting in higher foreign derived intangible income benefits also known as SDI.
That's 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 previously communicated our annual cash tax rate is expected to remain around mid to high single digits of non-GAAP pretax income until we fully utilize our remaining U S based R&D credits.
Second quarter non-GAAP net income was $36 8 million or <unk> 46 per fully diluted share second to the record set in the first quarter was $38 7 million or.
49 cents per fully diluted share.
Moving to the balance sheet and cash flows we generated $28 $3 million of free cash flow in the second quarter similar to a record $28 $7 million in Q1.
Net cash provided by operations and capital expenditures were at a similar level to the previous quarter.
Total cash and investments were $270 million at the end of the quarter.
As of the end of the second quarter, we had two term loans remaining on our balance sheet totaling $20 million.
We invested $14 $5 million in capital expenditures during the second quarter compared to $15 $6 million in Q1.
As Mike mentioned, we are executing on our capacity expansion and continue to expect full year capex to be between 60 and $80 million.
As a reminder, we expect capex to return to the 3.5% to 4% of revenues in our target financial model. After we conclude these capacity expansion.
Regarding stock buybacks during the second quarter, we fully utilized our existing $50 million stock repurchase program and our board of directors approved an additional two year $75 million program.
Purchased one 2 million shares under these two buyback programs during the second quarter for a total of $45 million and this brings our repurchases under these two programs through the end of Q2 to $2 3 million shares.
At quarter end $46 $6 million remained available for future repurchases.
Turning to the third word sorry, turning to a third quarter non-GAAP outlook.
As Mike mentioned, we expect a decrease in foundry and logic revenues, partially offset by growth in the system segment with a steady demand for DRAM and flash probe cards.
These factors result in a Q3 revenue outlook of $183 million, plus or minus $6 million.
non-GAAP gross margin for the third quarter is expected to be 39% plus or minus 150 basis points at.
At the midpoint of our outlook range and about one third of the expected decrease in non-GAAP gross margins relates to a less favorable product mix, reflecting the expected decline in foundry and logic revenues as well as a less favorable mix in the other markets we serve.
Another third of the expected decrease relates to the overall lower revenue levels on similar fixed cost and the last third is attributable to higher manufacturing costs.
At the midpoint of these outlook ranges, we expect operating expenses to be lower than Q2 by approximately $2 million to $3 million.
Mainly due to lower performance based compensation and other employee related benefit expenses.
Partially offset by the impact of new hires.
Accordingly, non-GAAP earnings per fully diluted share for Q3 is expected to be 21, plus or minus <unk> <unk>.
A reconciliation of our GAAP to non-GAAP Q3 outlook is available on the Investor Relations section of our website and in the press release issued today.
With that let's open the call for questions operator.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone.
Please standby, while we compile the Q&A roster.
And our first question comes from the line of Craig Ellis.
With.
Yeah. Thanks for taking the questions and appreciate all the color on the dynamics in the business team Mike I wanted to go back to some of your comments on what's happening in foundry logic. As you look ahead to the third quarter. I think you identified compute and mobility issues were at play can you give us some sense of the degree to which this.
As a mobility issue or a compute issue and as you work with your customers just theyre managing product cycles, what's your sense for when we actually work through what we're seeing in the in the third quarter and potentially rebound back to those 200 million plus revenue levels for the company.
Yes, Thanks, Craig.
As I said in the prepared remarks, we are seeing multiple sources of reduced sequential demand in foundry and logic probe cards coming from multiple customers in both mobile and compute and Theres a theres a lot of different puts and takes in that I would say that.
One into each are similar in nature.
And the result of the customers changing their wafer start plans on specific designs as they adapt their product release roadmaps to their changing end market conditions and since probe cards are specific to each design.
Lead times as you well know are well within a quarter. There is some short term volatility there we're dealing with in our demand profile.
I do want to draw parallel, it's a while ago, but back to the fourth quarter of 2019, where we saw exactly the same dynamic that in reverse if you remember we guided up inside the fourth quarter as foundry and logic customers. Many of them similar foundry and logic customers as we're seeing now responded to stronger demand and drove our business up on me.
Short lead time, so we have seen these dynamics at work before we remain excited about foundry and logic as I said on the call advanced node Wf investments advanced packaging.
Driving up test intensity and spending on probe cards, and I think it's still an exciting growth opportunity for form factor. Despite the short term volatility we see here.
Got it that's really helpful. Mike So shy I'll ask a follow up to you and then Quebec Mchugh. So appreciate that the gross margin color and breakdown of third a third a third across mix volume and higher manufacturing costs. The question. If that's okay.
Some point.
I suspect in the not too distant future, we're going to move through these transitions can be back to <unk>.
Higher volume and more normalized mix, but how should we think about the higher manufacturing cost element that you talked about when does that become a neutral or a tailwind to the business is there a revenue level that's needed or what should investors think about four for that to become less of a headwind.
Yeah. Thanks, Greg So most of these additions our manufacturing expenses in Q3 actually relates to capitalized variances that we were capitalizing toy inventory as part of the Q1 and Q2 inventory build.
They're going to be amortized in Q3, and so that big change I don't expect it to be.
To happen again, there is some element of higher labor cost and higher cost of materials, we talked about it in previous calls as well.
But these are built into the forecast and are built into our longer term target model of 47% gross margin, which we are still committed to it.
Got it thanks team.
Thank you.
And our next question comes from the line of Charles <unk> with Needham <unk> Company.
Hi, Good afternoon. Thank you for taking my question Mike.
I Wanna.
Dig into.
Weakness you are seeing in a mobile for a minute.
I believe you within the mobile you have both the SLC probe card and RF probe card can you kind of.
Tell us, which one may be the bigger factor here.
In terms of the weakness in smartphones you are saying here.
Yeah.
Yes, Charles this is Mike.
It's mostly related to SFC applications processors modems things like that as we've told you as we've moved through the first half of the year coming off a very strong 2021.
The RF business. It has moderated some in the first half of the year, but as you saw from the SFC results. The general foundry and logic results in our narrative around that in the first part of the year, we're seeing some real strength there in.
In the third quarter, we're seeing that sequentially down again associated.
In mobile with design release roadmap changes customers pushing out and in some cases, reducing volume for certain chip designs and that has an impact on the overall.
Probe card demand for those individual designs, so going Q2 to Q3, I would say the delta primarily associated with reduced mobile Soc demand if I carve it up between the mobile and <unk> sections.
Got it got it.
Compute.
Is that more related to one specific customer that's one part of the question. The other part is it more.
More likely to change up the release schedule or it's.
More related to the Jack spend up to volume.
Customers thinking about ramping.
Yes.
I said in the prepared remarks, it is multiple customers right now, although we're dealing with this.
Nearly real time.
It really does feel like.
Mostly changes in design release schedules, you can imagine that with lead times much less than a quarter.
The movement of a few weeks in and out to wafer ramp schedules can have a significant impact on our quarterly revenue and again in my response to Craig's question.
I drew your attention back to Q4 19, where this worked in the opposite direction. There have been times, where we can see this volatility.
Of design release, Roadmaps design release plans and wafer start plans impact things in a pretty cyclical way in any given period.
Got it got it maybe let me allow me very quick for the last question.
You want to proceed Youll Capex investment this year, despite that Q3 seems to be a little bit of downtick in terms of our business.
I Wonder whether you consider maybe you should.
Lay a little bit of a capex.
Or you think the current weakness as maybe probably very very short term in nature, you probably see more like a V shaped kind of recovery in terms of demand. So you wanted to proceed with a capex. Thank you.
Yeah I'll take that so we believe these headwinds are temporary in nature and we remain confident in both our strategy and their market position and we are continuing to plan capital investment as we truck towards the long term target model. These.
These investments that we started a couple of years ago, they're required to maintain our industry leadership.
That's why we didn't change the capex plans for the year and continue to expect to be between $60 million to $80 million for 2022.
These are mainly in expanding capacity.
The D is important to understand our customers are adding capacity, which means they will need more probe cards and they will need.
We need to be ready to capture the growth in the market share game here.
Thank you all.
Thank you.
And our next question comes from the line of Brian Chin with Stifel.
Hi, there good afternoon, thanks for letting us ask a few questions maybe what happened there.
Gross margin for a little bit here.
I appreciate sort of the buckets and the attribution but.
To be blunt I understand there's some effect thats why I kind of want to unpack a little bit here, but yes.
Yes.
Revenue level, we're talking about even let's say like a 20% decline in foundry logic Q on Q it sort of implied in <unk> that's right.
I would expect still sort of mid 40% gross margins not necessarily.
The 800 basis points decline Q on Q from.
The revenue level in the second quarter.
And so.
Yes, I mean, if my math in terms of segmentation kind of right and then I guess, if we just did sort of like yes, I notice is that guidance revenues were just flat.
In Q4, and sometimes even get a bit of a late kick from your customers in Q4 in terms of foundry, but if revenues are flat what sort of.
Are some of these some of these intangibles on gross margins going away.
And what would your gross margins kind of normalize out.
This flat revenue.
Our guidance with just sort of a scenario for Q4.
Yes, so on revenues at level similar to Q2, 200, and something million dollars on a similar revenue profile and product mix to Q2, we estimate our gross margins would have been our target model gross margin of 47%.
So if you take the three components I was talking about.
Some of them.
The mix I think we understand.
The fixed cost over lower lower level of revenue our congrats dress that now when I talked about.
Similar level revenue level and similar gross margins for Q2, and the addition of manufacturing expenses and I answered that before as well.
These some of it is.
Our labor cost and higher cost of materials.
But a big part of it in Q3s, it's timing of manufacturing cost.
We capitalized in the first half of the year or mainly in Q2, and we're going to amortize in Q3, So we don't expect that to repeat.
So taking all that into consideration and as I said earlier. We are we are committed and feel confident we've got a huge all 47% gross margin.
Okay.
Okay.
That capitalized costs, then does still stay with.
And the cost of goods sold and <unk> as well.
Well it depends on the inventory building in Q4, I'm not going to drag you into all of that.
Accounting, but.
Most of it will be amortized if not all of it will be amortized in Q3, and how much is going to go into Q4, it depends on how much inventory you're going to have the QA SKU.
Q3 end.
But I'll go back to my first remark on a similar revenue level of 200 million plus.
Similar revenue profile and product mix, we estimated gross margin of 47%.
Okay. Okay.
Yes in terms of understanding.
I'm not surprised by this adjustment phase for some of your customers kind of make sense relative to my understanding of the business.
What sort of duration or how long do you think this adjustment period will take based on history based on your discussions.
It.
It could be a quarter it could be too but.
Is your understanding here that net.
They'll release.
Release probe cards against future products and wafer starts.
Once they are through this adjustment period.
Yes, Brian it's Mike I'll take that.
Timing as always in this business and the visibility a little bit uncertain, given that lead times are well within a quarter, but as you might imagine we're having some very detailed conversations with these customers to make sure we understand what their demand profile is going to be what some of these are rescheduling scenarios look like.
And.
Right now it does seem like a pretty short term events I am not sure I want to create expectations right now that theres a snap back in early Q4.
But right now.
Things like us continuing with our capacity expansions continuing to invest in R&D.
I think are pretty good indicators that we don't view this as a structural long term change in the foundry and logic market. We remain excited about the growth prospects for foundry and logic.
Okay.
Maybe if I can just ask one more and this is.
Sort of intertwined I guess.
Mike when you talked about but.
Would you say your key customers have.
Determine their wafer test strategy needs for.
For their upcoming heterogeneous integration ramp ups.
Yes.
It's modeled all of that in terms of some of the the readjustments that are happening right now, but I know that was something that was.
It's still being decided.
And I guess based on based on Europe .
I guess response do you envision this when do you envision that being a meaningful contributor to the business.
Could it happen in Q4.
Maybe more like a first half of next year.
Yes, I think the different heterogeneous integration or chip litter tayo based strategies.
Mostly still in the development phase with different customers we are delivering.
Probe cards in pilot volumes, two major customers for those products.
And I think it's probably as we said in the past in early 2023 event. There are contributions to our revenue right now associated with those pilot ramps, but again as those customers.
Gapped their product release, Roadmaps and ramp plans to their end market conditions, we might expect to see some changes there as well, but certainly everything is setting up for 2023 to be a pretty major adoption year in terms of advanced packaging triplets and heterogeneous integration.
Okay. Thank you.
Thank you and our next question comes from the line of David Duley with Steelhead Securities.
Yes, thanks for taking my questions I guess I have a couple.
Just to clarify things.
I think one of your big customers are going to rest of the three nanometer sometime next year when would that start to impact demand.
Moving from five or seven nanometer three nanometer as one where you start to see an increase in three nanometer probe card demand.
Yes, David It's Mike again, given the lead time characteristics of the foundry and logic probe card business you are pretty close to the the wafer start ramps.
Associated with those so it's not like it's a two to three quarter in front of the wafer ramp maybe one quarter. If I were to estimate it for you again that goes to some of the dynamics, we've talked about in the past that lead to our confidence in the foundry and logic market as customers continue to invest in wafer fab equipment added these <unk>.
Nodes, whether they'd be three nanometer or others.
We're pretty confident we're going to utilize those for new designs and ramp those new designs, but that's still in front of us and again probably out of one quarter.
<unk> will lead it by one quarter in terms of wafer starts and then wafer outs for Fred noted like three again.
So just to be clear if wafer starts ramp up at three nanometer in Q3 of next year, you would start to see it in Q2.
Yes, I think Thats, a fair kind of ballpark estimate.
Okay.
Are you currently contemplating lowering expense levels because of the.
Near term reductions in demand.
Given as you've mentioned you have short lead time so.
You have some idea of when demand is going to improve but are you contemplating lowering operating expenses in the near term.
Yeah I'll take that.
So regarding expenses in both cost of sales and Opex. Some of our cost are designed to be variable performance based compensation and overtime and it is reflected in the Q3 outlook. We provided today right. We're seeing Opex for example, going down from 54, 5% to around $52 million in Q3, but our overall.
We are maintaining our cost structure and capacity to support higher revenue quarters and stronger demand.
We'd make progress towards the target financial model.
So no structural.
Significant structural changes to Opex at this point.
We will continue to look into that.
Make adjustments if needed in the future.
Okay final one for me is I think you described vas.
Vast majority of the reduction in revenue sequentially from two four to 183 was coming from the foundry and logic business.
I guess that suggests that the memory business is going to be flat in Q3.
Would you expect there to be weakness in that market as well given all the.
Kind of difficulties, we have seen some players in that space weakness in Pcs.
For our other markets for DRAM absorbing that.
You feel like you can make it over the next few quarters without a reduction in DRAM demand.
At this stage of the game, David I think it's more of the latter.
It's something we're obviously keeping a very close eye on given some of the capex announcements from our customers. Most recently SK Hynix last night.
But we are seeing DRAM probe card demand and flash probe card demand hold up reasonably well here.
Part of that I think as customers are continuing to.
Release, New designs DDR four end DDR five both mobile and server, they're definitely shifting mix around as our foundry and logic customers are between the different end market segments.
But so far is that memory business seems to be holding up as well.
The one caveat again that I'll remind you of is our lead times are relatively short so memory probe cards lead times, well within a quarter as well, but for now we do see decent design activity continued strong demand at approximately the levels. We've seen in the first half of the year.
Thank you.
Thank you.
And our next question comes from the line of Robert Mertens with Cowen.
Hi, This is Robert Mertens on behalf of Chris Cowan, just looking into the September quarter guidance, you had mentioned.
<unk> in the foundry logic demand both from the compute and mobile markets are you able to break down a bit more if this is a function of the in unit sort of pushed out some designs just trying to get a better sense of.
When the slowdown.
<unk>.
Are you able to see demand start to slow down and then maybe what the duration of the current costs would be and then I have one.
Follow up.
Yes, Robert it's Mike.
This is a pretty rapidly changing situation.
We've seen customers again reacting to their end market conditions.
And changing design releases ramps on different products.
And different I'll call it volatility in the foundry and logic.
It's obviously difficult for us with our industry vantage point to pinpoint exactly what the root cause of this is but I think it's at least plausible that it's tied to some of the reduction in consumer spending we've seen on things like handsets in Pcs.
So in terms of duration.
Difficult to say right now, but again I'll point back to our continued.
Plan to increase our capacity our continued commitment to the.
The $2 non-GAAP earnings per share model at $850 million in revenue, we don't see a structural change here, we see some short term volatility and especially in foundry and logic.
We remain awfully bullish about the growth prospects given all of the advanced node wf investments and the shift to advanced packaging at those advanced nodes.
Great. Thanks.
Definitely helpful. And then just real quick on <unk>.
<unk> guidance from other Bakken peers are seeing a similar weakness.
Second half of the year, but does it seem like the same.
I think from the front end manufacturers there hasnt been any sort of major cuts with WSI is there sort of a way to think about the discrepancy.
Between the front end and back end, whether it's like a disconnect.
And demand or just a function of very lead times between the two.
Wanted to see if you had any opinion on that.
Yes, just maybe a longer conversation.
But we have we have seen historically, a backend test and assembly investments.
Be shorter lead times and be more responsive to customer demand, obviously closer to the end of the line and I think the other dynamic year, although to be clear. This is just my opinion, the very long lead times associated with the bulk of front end equipment mean that customers are going to have to.
Not necessarily cancelled but.
Lose their priority in terms of deliveries and so I think given the circumstances in the industry over the past couple of years, where everybody has been trying to.
Claw their capacity up.
Customers with the longer lead times associated with WMC are probably pretty reluctant to change those investment plans.
Okay, great. Thank you that's all for me.
Thank you and our next question comes from the line of Christian Schwab with Craig Hallum.
Okay.
Hey, good afternoon guys.
I was wondering what your thoughts are.
Just kind of a kind of bigger picture Edwin the foundry and logic demand could kind of come back right.
We're seeing.
Pretty pronounced normalization of smartphone and PC demand, but.
Pre COVID-19 PC demand was down five seven years.
Smartphones shrank.
Strength for four years going into it on a year over year basis does replacement cycle is extended.
The two.
Most important market as far as units are concerned semiconductors.
Are you at all fearful that this could kind of be.
<unk>.
Level.
We know of of less volume than maybe we've seen in the last few years.
Yes, Christian its Mike I don't think fearful right the way I'd like to describe it but were certainly watching that and I think as I said on one of the previous questions. I think this all comes back to consumer and macro drivers.
If demand for Tcs for handsets does materially slow down for a long period of time. This has to result in lower.
Lower chip demand and therefore, lower probe card demand one of the things we have seen.
Historically, though is in times like that many of our customers accelerate their innovation roadmaps and start to release more new designs to try and differentiate their positions in tough market conditions for them. So again watching the situation as I'm sure everyone. On this call is.
But for now things still seem to be structurally pretty strong in the industry again, that's why we're continuing to invest in capacity in to.
To make sure that we can meet continued growth in demand in foundry and logic and in our other segments as well.
Great.
And then a follow up on the investment in additional capacity.
When you guys decided to do that was there an assumption on <unk>.
No.
Wafer starts or 1 million square inches of silicon or number of chips that you.
Determined.
That you needed to to make these future investments.
Or is there anything behind the scenes where you believe.
Any of your three largest customers that you've talked about previously.
There was an opportunity for us.
Market share gains versus other players in the space.
Yes, there is a set of different variables that led us to commit to the significant capacity additions and capital expenditures, we have been making and are continuing to make.
Some of it is wafer starts on advanced nodes in the industry in millions of square inches of silica and tends to be not a bad proxy for that.
But the other is and we brought this up before.
The increasing test intensity associated with it both advanced nodes and advanced packaging simply put each wafer start needs more probe cards, because customers are investing more in wafer test.
Both to improve yields and to reduce their overall cost so.
When you put all those things together.
Along with some very detailed and specific conversations with our key customers about their long term capacity needs. That's what led us to.
Embark on the capacity increases a couple of years ago. So that they are shy said, we can retain our leadership position and even increase our leadership position in the markets we serve.
Great and if I could just squeak in one more last question.
The slowdown that's happening kind of in the backend echoed by.
Teradyne earlier today as well.
Okay.
Do you think we are in an opportunity now where.
Where things kind of normalizing to some degree do you think there is an opportunity for increased M&A activity to create scale in the backend or where do you think there is still isn't that significant interest in that.
Well I can tell you we remain very interested in that.
Hi.
I guess I'm I'm hopeful that things stabilize a little bit here that everybody understands.
Where their businesses are headed we resume on a bit of a growth path and this becomes perhaps a catalyst for those conversations to start but right now.
Very focused on making sure we're executing against the demand we do have.
Strength in the systems business continued solid memory results and staying close to our customers' customers to make sure we're able to adapt to their changing wafer wafer start schedules and deliver the probe cards when we need them.
Great. Thank you no other questions.
Thank you.
And our next question comes from the line of David Silver with CL King.
Yes, hi, thank you.
I think I'd just like to first question would just be to kind of clarify things a little bit but.
Beyond kind of the medium term decision, making by the your major customers regarding.
Design releases and ramp up schedules.
Yes.
The longer term.
Effort by those same customers to add significant new wafer fab capacity in the U S. My timetable. So there's a lot of it is for the 2024 to 2026 timeframe.
Can I assume that your discussion of maintaining capex and things like that.
For new capacity as that.
We're trying to align with those longer term major.
Capacity additions.
Additions by your customers and hence it's kind of a sign that that that next wave of new fab development and a lot of it in this country as it remains on track. So what we're talking about today and what we might be looking at in the 2024 to 2026 timeframe.
Are.
Different right, because the short or medium term issue, but then the longer term in your view remains intact.
I think thats, a good way to summarize it and then shai sort of alluded to that when he talked about our capacity increases.
Keeping pace with our customers whether they are domestically based or other places around the world. We are a global supplier.
These capacity investments are going to be needed for us to continue to lead the industry forward and capture the demand associated with all of these new Fabs. These new fabs producing at advanced nodes. So yes. They are almost always in this business is this timing decoupling of.
Adapting to the short term, but continuing to invest and strengthen the company for the long term.
Got it thank you for clarifying that.
I did have a question I guess about.
Tech insights or VLSI published some survey results that once again had form factor at the very high end of the the rating scale customer ratings.
And when I look through the results in particular I think what stood out was your performance in China.
From China based customers.
And I was just wondering if you could make a couple comments on that.
The.
Was the increase or the improvement kind of across the board in your ratings was that due to a particular effort.
<unk> form factors part maybe building out your footprint in that area.
Then maybe just a tiny bit of background, but in China.
Would this reflect mostly.
The.
Chinese operations of the multinationals or is this.
There are a significant portion of the survey results coming from Chinese headquartered companies.
Yes, I'll talk first generally about customer relationship actually David can you mute I'm getting a lot of background noise.
I'll talk first about customer satisfaction and customer relationships in general it's been one of the cornerstones of our strategy and our culture to really invest in these relationships with key customers.
And I think our survey results are a reflection of that this is a small concentrated industry. There are only so many suppliers and so many customers and so we work very closely together, but that customer intimacy is really important in driving market share and in making sure that we.
Deliver to customer expectations and adapt along with them in all of the various fluctuations in their business models I think that the.
The improvement in the score results probably several different factors, we don't know exactly which customers respond there.
But if you look at the way, we communicated through the pandemic through supply chain.
Issues through different delivery challenges through different logistical challenges.
I think those are areas, where we really paid attention on nurturing and cultivating these customer relationships and that's probably reflected generally in the result.
Again, I don't know exactly who responded to the survey, but speaking to our China business. It is still mostly the multinationals who operate in the region.
Driving our revenue there. So if you make the assumption that this is.
Surely an assumption that the survey results are aligned with the business, we do you'd have to assume it's multiyear.
Mostly multinationals, but we have had some success.
In gaining market share with some of.
The key memory manufacturers, there and some of the Fabless companies there and so that's probably reflected in the results as well.
Thank you very much.
Thank you.
As a reminder, ladies and gentlemen, if you have a question. Please press star one on your telephone.
Yes.
Okay comes from the line of Hans Chung with D. A Davidson.
Hi, Thank you for taking my question.
So first.
Regarding the.
Your commentary around.
<unk> mobile.
Thank you.
Period.
Is that is the weakness across the board or.
It's more like low end mobile and die and then that'd be PC on the <unk> side.
Any changes in high end smartphone.
Performance company and team.
No I think as we tried to convey both in the prepared remarks and in the.
And in the questions. We've had so far we have seen reduced demand.
Pre broadly in both mobile and compute now it's difficult for us oftentimes to tell exactly whether a certain chip is going to be destined for a high end handset or a mid range handset.
That's also true of the RF components, we obviously have insight into the specific designs, but to be able to partition and segment exactly where this chip is going to end up.
In terms of its end markets can be difficult from where we sit so.
It feels to me again, I don't want to call. It broad based but there is multiple customers across multiple segments.
That are changing their design release Roadmaps in short term wafer start plans.
Got it.
And then second question regarding the gross margin.
So.
We enter in Q2 thousand 23, then I think we have the three nanometer.
At <unk>, we have DDR five and then we have the.
Genius integration lead.
No.
It's fair to say.
This could be a tailwind.
Margin from product mix perspective.
So, let's say if the quarterly revenue.
<unk> to 200 million next year then.
Can we see the gross margin above 47% level.
So mix.
Sure I'll take this one mix has always had a major <unk>.
Impact on our on our gross margins right. We saw it in previous quarter. We started in this quarter too when we talk about our target.
Our target model of $860 million of revenue and 47% gross margin.
Most of the growth should come from foundry and logic and foundry and logic historically has a higher gross margin and.
So it's kind of in line at least with some of the things you said that the growth in foundry and logic will drive higher gross margin and will help us get to the 47% gross margin target model.
Kind of in line.
As for revenue bouncing back to 200 million plus and I mentioned it earlier in the call.
And the simple answer is yes revenue levels similar to Q2 of 204 million for example, with a similar revenue profile and product mix. We estimate the gross margin would have been our target model of 47%.
Right so.
Target model overall $850 million, and 47% were making progress towards intermodal.
But margin will fluctuate, we said it before and we see it in this quarter as well.
I mean in Q3.
Okay. Okay got it thank you.
Thank you I'm showing no further questions so with that I'll hand, the call back over to CEO , Mike Lessor for any closing remarks.
Thanks, everybody for joining us today, we're scheduled to attend several of the late summer Investor conferences, where we're eager to update you on our continued progress towards the target model.
So I hope to see you then if we don't stay safe and we'll talk to you on our Q3 results call take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Okay.
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