Q4 2022 FormFactor Inc Earnings Call
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Great.
Okay.
Thank you and welcome everyone to form factors fourth quarter 2022 earnings Conference call on today's call are Chief Executive Officer, Mike Slusher, and Chief Financial Officer, Shai Shahar before we'd be getting Stan Finkelstein, the company's VP of Investor Relations will remind you of some important information.
Thank you.
Today, the company will be discussing GAAP P&L results.
And some important non-GAAP results intended to supplement your understanding of the company's financials.
Reconciliations of GAAP to non-GAAP measures and other financial information.
Our available in our press release issued today by the company.
I don't say investor relation section of our website.
Today's discussion contains forward looking statements.
Meaning of the federal Securities laws.
Examples of such forward looking statements includes also with respect to the projections of financial and business performance tools.
Macroeconomic and geopolitical conditions.
The benefits of acquisitions and investments in capacity and new technologies.
They bought the global regional and National Health crisis.
What is the corporate names.
Yeah.
Anticipated industry trends.
Disruptions in our supply chain.
The impact of regulated regulatory changes.
Including the recent U S China trade restrictions.
Dissipated demand for our 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 filing on Form 10-K with the SEC.
For the fiscal year ended 2021.
Our other SEC filings.
Are available on the SEC's website at Www SEC Gov.
And in our press release issued today.
Forward looking statements are made up of today February eight 2023.
And if I assume no obligation to update them.
With that I'll now turn the call over to form factor CFO Mike.
Thanks, everyone for joining us today.
As anticipated form factors fourth quarter revenue and profitability were down sequentially from the third quarter.
That said revenue exceeded the outlook range and non-GAAP earnings per share were above the mid point.
Gross margin was below the midpoint due to larger than expected end of your excess and obsolete inventory charges.
The revenue upside compared to our October outlook was primarily driven by our ability to ship products to certain domestic China customers in compliance with new export controls, which also drove stronger than expected DRAM probe card and systems revenues in the quarter.
As we start the first quarter of 2023, we're experiencing similar overall demand for the fourth quarter.
With moderately stronger demand for foundry and logic probe cards offset by weaker demand for both DRAM and flash memory probe cards.
At the same time, our systems business continues to run at record levels. We.
We expect a significant increase in profitability in the first quarter on revenue levels similar to the fourth quarter from gross margin improvement driven by two factors first the full quarter benefit of our October restructuring and second a return to typical excess and obsolete inventory costs.
With probe card lead times typically less than a quarter our visibility remains very limited, but we are encouraged by the first quarter stabilization of demand for our products as customers invest in innovations like new chip designs and advanced packaging.
These customer investments are producing steady demand even in the face of industry wide weakness.
Our unit volume and markets like mobile handsets and client Pcs.
Along with export restrictions and serving domestic China semiconductor customers.
As we are a U S based supplier with significant exposure to the leading edge foundry and memory technologies and customers affected by recent U S. China export controls. These regulations are a headwind in all of our businesses.
So in fact that continues to take all necessary steps to ensure full compliance with the new rules by holding shipments and support is required.
As additional information has emerged regarding the scope of these regulations are local China team has worked closely with customers and our trade compliance team to enable permitted shipments to certain customers.
I'd like to recognize this team for their outstanding work, which enabled us to ship more than we initially expected to domestic China customers in the fourth quarter.
We expect to continue this level of domestic China shipment activity in the first quarter.
Overall, we believe this U S. China trade headwinds will persist over time as we do not anticipate any relaxation of advanced semiconductor export controls.
This of course provides a strong incentive for domestic China customers to onshore their supply base and deemphasize foreign suppliers like form factor to ensure their business continuity.
Even as we navigate through this trade issue and the industry's current cyclical weakness we believe the core tenets of form factor strategy remains firmly in place.
These core strategic tenets are first sustained long term semiconductor content growth in both consumer and enterprise applications.
Second the industry's relentless investments in new technology and capacity.
And third the device specific consumable nature of advanced probe cards, which when combined with our customers' innovation driven investments in engineering systems.
Historically resulted in less volatile demand cycles and wafer fabrication equipment.
Consequently, we remain committed to achieving our target financial model and continue to invest in both R&D for new product innovation and competitive differentiation as well as in the long lead time facilities and equipment portions of our capacity increased plans.
These investments are designed to produce market share gains and above industry revenue and profit growth when we emerge from the current cyclical downturn positioning form factor to achieve and even surpassed the levels of our current target financial model.
Turning now to segment level details.
In foundry and logic probe cards, our largest business, we see moderate strengthening in the first quarter driven primarily by pilot production ramps for new mobile application processor designs together with stronger demand in our microprocessor business.
Although customers are still burning off the excess inventory of processors modems and RF chips in the channel. There are also investing in early production of innovative new chip designs that will ramp in volume once this inventory has consumed.
This provides insight into the unique characteristics of probe card demand since probe cards are a device specific consumable that is specific to each individual customer chip design. This early production activity for these new chip designs is driving demand for new probe cards, albeit a lower overall levels than we'd expect.
To see in a cyclical upturn.
As an example, we continue to ship probe cards to support pilot production of a major chip based client CPU product. Despite the well documented weakness in end market client PC demand.
As customers continue to innovate to differentiate their future product road maps.
As we noted in the past Shiplett based advanced packaging processes like <unk> and <unk> fabric are an exciting opportunity for form factor. These integration schemes drive both tire test intensity, which expands the number of probe cards required per wafer out and higher test complexity, which raises the performance.
<unk> 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.
While also meeting the short delivery lead times needed to support our customers' rapid and dynamic production ramps.
Yeah.
Turning to memory probe cards, we expect first quarter sequential weakness in both DRAM and flash probe card demand driven by extremely weak end market conditions for both DRAM and flash chips that are causing our customers to reduce the magnitude and speed of their new product ramps.
Despite this memory end market softness each of our customers continues to release and validate new chip designs like high density DDR five DRAM to drive their roadmap forward.
As in foundry and logic. This new design activity is driving demand for new probe cards specific to each one of these new memory chip designs, but at low levels aligned with the reduced output levels announced by each of our major memory customers.
In the systems business, we expect the first quarters to sustain the strong momentum, which produced record revenue in both the third and fourth quarters of 2022.
This strength, partially offset some of the downturn driven softness in the production probe card business highlighting the financial benefits of our lab to fab diversification strategy.
The strategic benefits of the systems business are also significant as we partner with leading customers in their R&D labs to advance the industry state of the art with innovations like gate, all around transistors advanced packaging silicon photonics and quantum computing.
We're also working with key customers on advancing high power applications like silicon carbide and gallium nitride as the semiconductor industry enables the widespread widespread electrification of the automotive industry.
Finally, Ray link one of our directors has notified us that he will not stand for reelection at this year's annual meeting of stockholders.
<unk> been a valuable member of our board and has provided many useful insights both to me personally and to our management team.
I'd like to thank Ray for his nearly seven years of service to form factor and wish him well in all his future endeavors.
I'd like to close by reiterating that in the short term, we're encouraged by the stabilization of demand for our products in the first quarter in.
In the longer term, we remain confident in the growth prospects for form factor and the industry overall, driven by the fundamental trends of semiconductor content growth and innovations like advanced packaging.
These are trends were form factor as well positioned as an industry and technology later, and we're confident that our resilience and commitment to invest in R&D and capacity will position form factor to emerge from the current downturn.
Stronger and leaner competitor, enabling us to achieve our target model that delivers $2 of non-GAAP earnings per share on $850 million of revenue.
Shai over to you.
Thank you, Mike and good afternoon as.
As you saw in our press release and as Mike mentioned Q4 revenues exceeded the high end of our outlook range non-GAAP gross margin was at the low end of the range and non-GAAP EPS was at the high end of the range.
Fourth quarter revenues were $166 million and eight 2% sequential decrease from our third quarter revenues and a year over year decrease of 19% from our Q4 'twenty one record revenues.
As Mike mentioned Q4 revenues were above the high end of our outlook range, mainly due to our ability to ship to certain domestic China customers.
Probe card segment revenues were $124 $4 million in the fourth quarter.
Greece, a $15 million or 10, 8% from Q3.
The decrease was driven mainly by lower foundry and logic and DRAM revenues.
System segment revenues were a record $41 $6 million in Q4.
Zero point $1 million increase from the record third quarter and comprised 25% of total company revenues up from 23% in Q3.
Within the probe card segment, Q4 foundry and logic revenues were $82 1 million.
And nine 4% decrease from Q3.
Foundry and logic revenues comprise 50% of total company revenues.
Through the third quarter.
Three four per cent in Q3.
Cost of revenues included $7.5 million of gap, two non-GAAP requests any items, which we outlining our press release issued today and need to reconciliation table available Indian Investor Relations section of our website.
Q for gross margin reconciling items included a $4.1 million charge related to the restructuring me announcing October 2022.
On a non-GAAP basis gross margin for the fourth quarter was 31.7 per cent 7.3 percentage points lower than the 79% non-GAAP gross margin in Q3 with Laura gross margin in both the probe cards and the system segment.
Are appropriate segment gross margin was 25.5% in the fourth quarter and decrease of 9.1 percentage points compared to $34 six per cent in Q3.
The decreases mainly due to two factors first lower overall segment revenues and lower factory utilization, which accounted for six percentage points and second higher than usual excess and obsolete inventories are which accounted for approximately two percentage points.
As a reminder of cost reduction measures were implemented at the end of October 22, So Q for only partially benefited from the overall expected savings.
R Q4 system segment gross margin was 50.4 per cent.
130 basis points lower than the 53.7% gross margin in the third quarter.
<unk> less favorable for that.
Our GAAP operating expenses were $61 million for the fourth quarter million.
Million dollars higher than any of the third quarter.
The increases attributable to the restructuring plan costs, we implemented in queue for higher stowaways compensation as a result of one more week of.
Sorry, one more working week in queue for first you upset by the savings from the cost reduction measures we took during the quarter.
non-GAAP operating expenses for the fourth quarter with $47.9 million or 28.8% of revenues as compared with $49.5 million or 27.4% of revenues in Q3.
The $1.7 million decrease relates mainly to the impact of the restructuring we implemented you in queue for lower performance based compensation and higher P. T O taken.
Company non-cash expenses for the fourth quarter included $9.5 million for strawberries compensation $1.5 million higher than in the third quarter due to one additional week investing during two four and the timing of annual grants.
$2.9 million for them or position of acquisition related intangibles similar to the third quarter.
Depreciation of $7.5 million zero point $4 million higher than in the circle.
GAAP operating loss was $16 million for Q4, compared we'd got operating income of $4 million in Q3.
non-GAAP operating income for the fourth quarter was $4.8 million compared to be $21 million in the third quarter.
Got the net loss for the fourth quarter was $13.7 million or 18 cents per freedom to chair compared with a gap net income of $4.4 million or sick or <unk> chair and the previous court.
The non-GAAP effective tax rate for the fourth quarter was 21.3% 230 basis points higher than the 19% in Q3.
The annual non-GAAP effective tax rate for fiscal twenty-two was 15.4% and the low end of our estimate the <unk> tax rate of 15 to 20 per cent.
For 2023, we expect the benefits of the new advanced manufacturing investment credits or Amy to lower our non-GAAP effective tax rate to meet too high single digits approximately six to nine per cent similar to our annual cash tax rate.
Maintaining profitability at the current reduced demand levels is an important goal for us.
Actions, we took you in queue for to reduce our costs contribute to a fourth quarter not non-GAAP net income of $4.1 million or five cents per fully diluted share compared to $18.3 million.24 per <unk>.
Moving to the balance sheet and cash flows we had negative free cash flow of $5.4 million in the fourth quarter compared to positive free cash flow of $15.5 million in Q3.
The $21 million difference between.
Alright, you're related to a $4 million decrease in net cash provided by operations, mainly as a result of severance payments related to the restructuring made during two four and an increase of $17 million in capital expenditures.
It's quarter and sort of cash and investments with $242 million.
As of the end of the fourth quarter, we had one term loan remaining with the balance totaling $15.5 million.
We invest at $26.2 million in capital expenditures during the fourth quarter compared to $8.9 million in Q3.
With a car drivers underpinning our strategy still in place we continue to execute on increasing our long lead time facilities and equipment portions of our capacity increased plans.
Placing equipment in service at a slower rate to ensure capacity does not significantly outpaced the man.
Capital expenditures in 2022 total to $65.2 million at the meat the point of the estimated range with previously communicated.
For 2023, we expect capex to arrange between 50 and $60 million $10 million lower than in 2022 and to meet the point of this range.
Regarding stock buyback during the fourth quarter, we purchased approximately 365000 shares on there are $75 million to your buyback program for a total of $8.9 million.
Q for quarter and $18.6 million remain available for future repurchases.
Turning to the first quarter non-GAAP outlook.
Like mentioned, we expect Q1 revenues to be comparable to queue for we'd hire fondly allergic revenues offset by lower DRAM and flash revenues with system segment revenue similar to queue for.
This demand results in a Q1 revenue outlook of $162 million, plus or minus $5 million.
We have largely completed the restructuring, but we announced in queue for to reduce cost any improve the efficiency and effectiveness of our business and you want outlook reflects the full impact of the savings.
As a reminder, we estimated that these actions will reduce our cost structure by $25 million to $30 million on an annual basis.
Proximity two thirds of the savings benefiting cost of sale and one started benefiting of X.
In addition, we don't expect a similar to excess and obsolete inventory zurf charge in Q1.
Accordingly first quarter non-GAAP gross margin is expected to increase to 37 per cent plus or minus 150 basis points.
And the meat the point of these <unk>, we expect you want operating expenses to be $50 million, plus or minus $1 million with a $2 million increase as compared to you for mainly due to annual benefits reset and less P. T O taken in Q1.
<unk> cheerful <unk> expect it to be 13 cents plus or minus four cents.
Re conciliation of our gap to non <unk> you on outlook is available on the Investor Relations section of our website and in our press release issue today.
With that let's open the coastal questions.
<unk>.
Certainly ladies and gentlemen, if you have a question that this time. Please press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press star one one again as it is a toggle function.
And we'd like to ask that you. Please limit yourself to two questions. Each can they get back into cute as time allows our first question comes from the line of Brian <unk> from Stifel. Your question. Please.
Good afternoon. Thanks, Thanks for letting us ask a few questions.
Maybe it might <unk> and the team can you first sign the piece of the China domestic revenue that you sound like you initially excluded from guidance, but ultimately.
That you could ship it in the quarter can you maybe put some parameters first I'm on what would that represented.
Yeah, Brian when we when we talked about it in the October call in and set expectations for Q4, we talked about it being a 10 to 15 million dollar headwind in the quarter Uhm, we certainly didn't recover all of that but recovered probably more than half of it there were some other pieces of momentum in the <unk>.
Business outside of the China domestic customers that helped get us above the high end of the revenue range, but as I said in the prepared remarks, we did do a better job once we got some clarification on these regulations.
Making sure we had the appropriate documentation appropriate paperwork to get the shipments to the customers.
<unk>, a little bit more effective ways than we originally thought we were going to be able to.
Got it okay, that's helpful and.
<unk> I think that's the state one more question on that topic.
He'd been pretty clear about sort of.
How you see that business potentially some of that.
The domestic China business transitioning over time.
You would think it would be sort of more of a gradual phase out.
And I guess, there's nothing gradual about U S restrictions, maybe put that to the side, but.
Just in terms of the activity, you're saying and engagement did you feel there's there's any sort of pulling happening right now from.
From later in the year.
Now or even longer horizons based on just the uncertainties that maybe some of your local customers have right now.
Yeah, I I think there's several facets to to that question Uhm, we have tried to be as clear as we can with people about our our longterm assumptions that we're gonna be really challenged to serve the domestic China market as a non China U S supplier over time as you say and there is a question of what that trajectory looks like.
But over time, we would expect that business to go two zero, if not close to it.
Uhm.
As we look at what's happening right now I wouldn't say, there's much Poland now that's probably because again the bulk of our business, although the system's businesses performing nicely.
Probe cards, which are a design specific consumable so it unless customers have the mass at six the design six it's really impossible for them to pull that demand in out in front of any any other anticipated restrictions or headwinds. So we typically don't see full infrastructural kind of conditions like that.
We're not seeing one year.
Okay, Yeah that makes sense.
In terms of your last question I'm sort of like the the commentary around <unk>.
Seeing stabilization.
And logic foundry at least at this point.
What's your sense you know.
In terms of logic foundries as well as memory.
And when we tie this into the inventory reductions and obviously, there's some fab utilization reductions tied into that.
Do you see a situation with your discussions where there's optimism that.
Utilization rates come back up in the second half.
Maybe some of the inventory management is.
Add effect here in the first half and so.
Any way of Characterising, how how you you you your business into the second half those are some of the dynamics that are being discussed right now.
Yeah, I think first of all the dynamics are very different in different segments.
<unk> covers the memory segment, those DRAM and flash understands that there's significant inventory consumption that has to happen and different customers are approaching that in different ways.
Uhm foundry and logic does appear to be stronger, but there's areas like client P. C. That's still have a tremendous amount of inventory to burn through you know I'm pounded on top of that obviously with very short lead times.
In the pro card business we're.
We're gonna be we're gonna be seeing when customers turned back on wafer starts in production and almost real time with lead times well within a quarter to look into a second half utilization recovery is something that we just don't have the visibility the length of lead time in the backlog to really make any intelligent comments.
Okay, Yeah, that's fair enough I appreciate the color and thanks bye thanks for <unk>.
Thank you one moment for our next question.
And just as a reminder, please submit yourself to two questions you may get back in the queue. As time allows our next question comes from the line of Christian Schwab from.
Craig Hallum Your question please.
Hey, Thanks for taking my questions and and congrats on the execution in in a challenging environment.
And you're trying to exposure can you just tell us a mix of China.
China revenue I assume that it's not all 100% domestic Chinese manufacturers that other people manufacturing inside of of China. So when you talk about domestic China over time going to just zero <unk> can you bracket.
That revenue expectations.
Sure Christian <unk> and we've done this at different times in the past, but it is a good way to think about the past two quarters have been $50 million of revenue shipped into the region.
Shipped into China, but the majority of that between two thirds and three quarters is to the multinationals that operate in the region. You know we have big DRAM customers. There, we have a flash memory customers there and many people don't know this but there's a very large microprocessor assembly and test facility in <unk>.
China run by one of the multinationals as well so the bulk of that 50 million quarterly China revenue really use the multinationals are domestic China revenue. Obviously is then the remainder and that's been running somewhere between $10 million to $15 million a quarter.
It's a little bit lumpy you know, we've seen nice activity out of a DRAM customer in China. The system's business continues to perform well. So it does go up and down but if I were to size. It for Ya I think somewhere between 10 and $15 million a quarter isn't appropriate way to think about the domestic China business.
Great. Thank you for that for that clarity I almost systems business you guys talked about you know silicon carbide I wonder, if if which is.
You know a strong growth area obviously.
You kind of talk about your revenue opportunity, there and what it needs to the system's business and as a number of casino customers expand a the number of wait for started to expand how should we be thinking about that portion of the business.
Yeah. So the system's business overall is a pretty diverse mix of applications. You know as we've talked about in the past you running from mainstream Cmos right now working on gate all around two nanometer kind of things all the way through quantum computing silicon photonics.
And power applications like Silicon carbide, which is obviously on a great growth trajectory right now, but one of the things that is important to remember about the system's business as it really is R&D focused so you know as silicon carbide wafer start.
Continue to accelerate and ramp as they are expected to you know, we don't have a ton of leverage and exposure there because we're involved in the early development in the yield improvement associated with it there are areas of some of these applications probably silicon photonics as the most promising for US right now where we do have some production lever.
<unk>, but I caution people on you know sort of using us as a proxy for silicon carbide production activity were really enabling initial yield improvement customers moving from four inch to six inch to eight inch wafers things like that in their early R&D associated with silicon carbide.
Great. Thank you for the for the for the clarity there I have no. Other questions. Thank you guys. Thanks Christian.
Thank you one moment for our next question.
And our next question comes from the line of Dr. Charles <unk> from Needham Your question. Please.
Oh. Thank you for taking my question I had good afternoon, my can shy hey, Mike I I listened to your prepared remarks, and I I kind of get the sense that looks like your mobile side of the business, which includes both S O C and <unk>.
To be that that it's probably moderately strengthening DRAM I I think based on the commentary last quarter on the App coming quarter. It may be as bad as it gets that that things are probably in a stabilization processing time stuff of how the rate of decline.
Hi.
But I do want to ask you more on the microprocessor side I'm a streaming out any contribution let's say from the <unk>, Oh Mac O S space, the microprocessor dman mm mm.
Believe March quarter, you will see some of the stress on that particular customer about that about a X 86 side do you see a stabilization from the December quarter level, and I think that particular customer they probably have pretty much only caught <unk> quarters ago and.
But but that going forward do you see where things will bottom out around go number one customer comes off looking man. Thank you.
Yeah. So a couple of different things and that question, let let's start with the last one at first we are seeing uhm incrementally stronger X 86 microprocessor probe card demand here in the first quarter.
Again, you know, making a comment about anything beyond that is extremely difficult given the short lead times, we have in our business well within a quarter and we seen overall the market not just in the microprocessor brokerage space, but overall, an appropriate space be pretty volatile over the last couple of quarters. So I think right now.
Again, we are encouraged by which clearly a stabilization and our overall revenue and some strength in the foundry and logic space driven both by the X 86 microprocessor.
So as you note and the mobile business now shifting gears to the mobile business for a second it really is isolated to mobile application processors, we're not seeing any significant strengthening an R. F.
Some of that's due to the different product launch cycle times, but I think you can draw pretty straight line between the mobile application processor probe cards were shipping now and major mobile handset releases that that are scheduled for later in the year or expected for later in the year.
Got it got it thanks, Mike <unk> that that that that wasn't very clear I appreciate that maybe I Wanna ask you a little bit more on the <unk> side, maybe I should ask a from a historical perspective, I think back in 2019, <unk> supplier industry downturn.
DRAM business was bad in the first quarter by that we covered in starting from the second quarter I know, you'll you'll drivers for you a DRAM Pope cards arse not not exactly the same S. S that that'll be a fee folks but.
Do you think the same condition may exist this year actually going to the downturn 23 that with DRAM Pope Court business may start to recover it a little bit earlier than people thought or you think of this time may be a little bit different compared with a 2019.
Yeah.
You know <unk> my answer with the usual you know understanding of lead times being very short and this being a very dynamic environment across all of our businesses, including DRAM probe cards.
What I will say is the depth of this DRAM downturn. If you look at the DRAM spot market pricing, what our customers are doing it's very difficult to draw a parallel to 2019. This is a much more severe pull back.
Van 2019, and as a consequence, our customers, although they're behaving differently are certainly behaving differently. Then in 2019, they're behaving differently from each other and behaving differently from 2019. So I think that's a parallel you know es inventories get consumed in a relatively short term.
<unk> <unk> and a handful of quarters I think you could see our customers take some of these new devices things like high density D. D. R. Five for mobile and ramp those more aggressively but as long as this overhang of inventory and what's what's a pretty unhealthy N D Ram chip market persist.
We we don't.
Don't anticipate any significant recovery as we go through 2023 here.
Thank you very much and I think I have to use my cold I'll go back into line.
Extra.
Thank you one moment for our next question.
And our next question comes from the line of <unk>, Craig Alice from be Riley. Your question. Please.
Yeah. Thanks for taking the question and I wanted to start with just a few follow up so.
My <unk> very helpful to get the color on what's happening in foundry logic in in a better sense of what's going on with your largest customer.
On that front.
<unk> public and I. Thank you in the past I've talked about some early shipments to a tile based product which for them lunches in the second half of the year.
Can you just give us an update on how trends are looking bear and and the degree to which that's contributing to revenues in the current quarter could in the coming few quarters.
Yeah, I I talked about a little bit in the prepared remarks, because I think it's a very important trend for for form factor and for the industry overall and we are continuing to ship in volume for what what's really the first client base C. P U on a tile or chip with architecture and we <unk>.
Certainly along with other people I know view this as a significant events in the industry.
Because of the significant volumes to the client base GPU drives throughout the entire supply chain. So that that'll be if you like a really good high volume pipe cleaner for tile architectures for triplets structures and for advanced packaging in general.
Obviously, the magnitude of that opportunity, though is as we go through the year really gonna depend on the decisions our customer makes on how aggressively they ramp that product and presumably a lot of that'll have to do with the client P. C market the inventory.
Stabilization there the inventory consumption, there and then their willingness to drive the new product through the channel I I do think it's an interesting example, we're seeing in all of our customers and challenger and logic in DRAM. Although volumes are obviously down from the peak levels. We had in the first half of 2022 each of these customers.
Are continuing to invest in new designs, so that their roadmaps are differentiated they're not doing it at the volumes requiring the volume's a pro card they would in a cyclical upturn, but we are seeing very healthy new design activity. The leaves us pretty optimistic about growth when growth returned to the overall industry in this in.
Tori correction.
Gets done with.
Got it that's helpful. And then I wanted to follow up on DRAM, and just try and dig in a little bit. So I I think often times when we talk we we talk about the generations of DRAM that my opinion use are coming into production D. D. R. Four D. D R five or six et cetera, but I wanted to talk a little bit about DRAM from an app.
[noise] location basis, if if the team has optics there because it seems like what we're hearing from all our all our checks is that the mobile market is starting to find an inventory bottom and obviously P. C certain progression and the server correction was late to the party, which is why we're just starting to see server T Ram collapse in the first quarter, but.
The question to you is it <unk> your DRAM business are you seeing signs of.
Relative stability in some of the application area is it is it all acting the same how would you frame things up for us on those parameters you'd like at the market Marilyn and what's possible in the first half of their yeah uhm.
I'll go back to you know some of the some of the questions. We've answer entered earlier given how dynamic things are in the industry in our short lead times, it's pretty difficult for us to make any coherent remarks on on those subsegment levels and how the inventory corrections or go with what we are seeing.
So there's a sequential reduction in our projected DRAM revenue going from Q4 to Q1.
We are seeing relative stability in the design activity. That's part of the reason why we're encourage you know overall Q for revenues for the company are are nominally the same as as we're seeing here in demand. It's gonna drive Q1 revenues uhm different puts and takes obviously as you note the different.
And markets applications for DRAM or all on a slightly different caden C. In terms of supply demand imbalance in inventory corrections uhm, but for somebody you know <unk> company, that's operating with lead times, well within a quarter, it's pretty difficult for us to say anything coherent about the health of those in the markets.
Got it got it Okay, and then if I could just sneak in Alaska before I hop back in shy you talked about the 55 million in Capex for calendar twenty-three can can you just give us the the top two or three buckets that that.
That we should expect that would deploy into and in any color round those would be appreciated. Thanks guys.
Sure. The majority of these $50 million to $60 million investments and carefree will be in in tools and equipment to continue investing in the long lead time items that are required to increase our capacity. We open in a matter of fact ring and you want infection center in Livermore.
More than a year ago, we started with the <unk> with the show where it seems the appropriate lighting retools. What we're doing is because these tools have long lead time, we don't want a slowdown the purchasing process, but we do slow down the process of putting them in services starting depreciation.
On a line as much as possible <unk>.
Capacity online with a demand coming into law customers.
Makes sense.
Okay.
Thank you one moment for our next question.
And our next question comes from the line <unk> chunk from D. A Davidson your question. Please.
Alright. Thank you for taking my question good afternoon. So.
First I don't want to follow up on the mobile commentary. So so can you give me idea that.
The.
The ZIP code revenue cycle for that.
Mobile customer.
Will float for a new <unk> and it seems that we we've got to see.
Okay and processing then.
I'm not that yet and then just.
Just give me a SEC.
19 or idea that maybe next one can you to to go to court.
Swelling with the insurance <unk> with that customer.
Yeah, Yeah, so <unk> the mobile application processor piece, although I think in earlier in the Q&A session.
I gave some pretty decent visibility about where that projects headed.
Historically that has been primarily Q1 Q2 activity G as in where the industry sits now I think we see perhaps it being a little more spread out.
But one of the other interested so maybe some contribution in Q3, but think of it mostly as a first half of the year kind of thing I think the other interesting thing is the mobile application processor activity, although it's dominated by the one big project in the industry.
We do see other customers also releasing new apps processors, new mobile application processors that they're gonna go into other handsets in the Android ecosystem. So some interesting multi faceted activity there. It all goes back to this theme of despite the demands.
Downturn overall in the industry, our customers continue to innovate and release new designs, so that they're ready for the upturn and ready to differentiate their product roadmaps when things were zoom zebra.
Got it and then <unk> coming later.
Okay and process or like by a quarter or so yeah. So R. S is typically later than the apps processor in the overall cycle.
Because it has shorter lead times it has shorter stabbed cycle times. It has shorter lead time for our probe cards. It has shorter assembly cycle times. So it's just more compressed and closer closer to the actual handset large then the more complicated silicon like the apps processor now the one thing we're keeping a very close.
<unk> is obviously Ian R. F. There's still a pretty good inventory build of things at the component level things like bonds off filters and you've heard from our customers that they're still has an inventory correction ongoing there so keeping our eye on that but again new design activity would be expected as we go.
Through.
Call it the middle part of the year to support the late year handset launches.
<unk>, it's very helpful.
So the next question is about <unk>.
And so it though it can affect me the info moment H, one mainly driven by the the inventories are back to normal enable and then.
Also the restructuring effort.
And.
Does does it probably makes how.
Four Q1 that we think that we have it sounds fancy hungry logic, and then and then we can <unk>.
Murray and and then I'll do anything about the rest of the year 19, and kind of self D.
Maybe that makes or.
Higgins.
Classes.
I think about it <unk>.
A lot of the 20th fee.
Yeah. So I think that you listed exactly the three main factors that impact the expected increase in gross margin from Q4 to Q1 like you mentioned and no special or <unk>, Yeah, No reserve the.
Restructuring benefits.
It'd be a full quarter benefits in Q1, and the more favorable mix foundry nausea can bureau, and these are the main factors that taking us back to 37 per cent plus minus 50 basis point.
For the rest of the year and you know, it's really depends on revenue and depends on mix and as Mike mentioned I think a few times during.
These Q&A, we still don't have it out of usability, but we are.
Encouraged by this organization.
The revenue B Q4, and Q1, and we are adding capacity.
To make sure that when our customers around we all ready.
To be there and and supply to them.
And it is historically you know we demonstrate our ability to perform at high forties and if you go back to what you want and Q2 of 2022 when revenues revenues were around 200 million, we weren't able to achieve our gross margins around with clothes or even exceeded our target model.
So is is the industry recover and I'll revenue increase.
We <unk>, we are still confident in our ability to achieve our target model gross margin as well and it's gonna fluctuate as we go up there a moment <unk>.
Okay. Thank you.
X S.
Thank you one moment for next question.
And our next question comes from the line of Christian Stinker from Cowan Your question. Please.
Hi, This is Steve I'm, calling I'm, calling on behalf of <unk>. Thanks for taking my questions Uhm.
I'd like to start had also one more question.
The family logic business I wanted to ask it necessarily differently as opposed to you know from my perspective do you have any perspective on from from bleeding edge vs. Trailing his perspective.
How the Q1 sequential improvement in demand flashed improve demand had this breaking out across the <unk> 69, an even smaller geometry furniture says luggage <unk> first of all.
Yeah, It's an interesting question for us because most of our exposure is on leading edge notes. If you think about the pro card business and even the system's business really what we're doing is enabling customers to improve their yields on these advanced nodes and then the pro card business <unk>.
<unk> before they go downstream to what are becoming more expensive assembly processes. So you know if you think about where that's gonna be deployed most for sure. It's on leading edge nodes in on brand new nodes, where customers are very focused on yield improvement and trying to get some type of yields up to entitlement levels.
Our exposure on trailing edge nodes is quite a bit more limited it's restricted to things like microcontrollers in the automotive segment, where there's requirements like high temperature high parallelism.
You.
So we're not a great read through on the mix of leading edge vs. Trailing edge. So I think you can Conversely look at the stabilization of at least R. L look as we go Q4 to Q1 as a commentary on some of the stabilization that leading edge notes, we really are.
Much more exposed to leading edge knows and we are trailing edge.
Great. Thanks for that Uhm and then one quick one on our system just given the I just drink that business in India, I guess, the most a multitude of sort of R&D application better at driving that currently.
Okay.
Sweeney.
You know pull out your pockets in demand from given the strength from all the different applications had been driving.
Well one of the nice things about that business as it is rather diverse right across semiconductor opt to electronics broader sets of applications and as we talked about the past in the past you know a wide variety of customers and applications.
As long as customers are continuing to drive their R&D budgets their innovation roadmaps forward, we're pretty feel pretty comfortable about the strength of that business, primarily because of its diversification uhm. So I don't see anything that's flashing any warning signs in the space across all of those customers.
Zahn and applications. The one place that gives a headwind and it has been a headwind is obviously our ability to supply into the domestic China market, but I think that's as we said you know in queue for in here and our queue one guidance largely reflected in that overall view.
Okay, Megan maybe one last one for shy and I'll also on gross margins.
For the for the non Jaquish merchandise person per cent and what what is the embedded uhm.
Unreal audition charge Internet and what would be the yes, we're ready level you need to get back to you.
<unk>.
Charges to them to be <unk>.
Yeah. So in terms of realisation any transition over factories. If you think about the three main components that are contributing to <unk> you of labor tools and facility.
With Labour with a restructuring we head in queue for we are basically 100 per cent you Tonight, sorry, we took down the workforce to labor to deliver required to support you slept with the revenue and we gonna Rahm Pizza is needed in the future. We do have enough tools any not for facilities a footprint.
It's a support larger revenue is <unk> first off of 2022 and enough to support our target mobile right down the $50 million of revenue.
And can you repeat the second part of the question.
Yeah, well I guess.
What would be the yeah W level that's needed.
And not have any.
One 181, <unk> 180 million, we expect gross margin to go back to the low forties.
And then an order for gross margin to reach the target mobile mid mid forties high forties, we need revenue to go to grow back to the 200 million plus on a quarterly.
<unk> and we need the growth to come from <unk>.
Perfect. Thank you so much.
[noise]. Thank you one moment for our next question.
And our next question comes to the line of Gus Richard.
From.
Northland capital markets. Your question please.
Yeah. Thanks for taking the question.
<unk>.
There's gonna be a microprocessor using kibbutz, which I believe is about an order of magnitude larger than any other chip with product in the past and I'm. Just wondering if you could talk about sort of how that changes the incremental opportunity you know per million or 10 million.
Units for you all.
Alright, thanks cause we we touched on this a little bit prior Q&A and I I told you. We were active in this project in the prepared remarks I think this is a great example, why we're excited about the trip with opportunity. If you think about the test intensity and test complex.
The required for <unk> test intensity, because you want to make sure that each of the chip, which is good before you assemble them in the stock before you tie all them together, but also the complexity you know things like speeds are going up the temperature ranges with which the cheapest tests are are are broadening so the technical requirements for.
For what we need to deliver to our customers <unk> designs are substantially more capable probe guards. Then you have to do for a single die you roll all that together and we've looked at it and some of the a T manufacturers have come to a similar conclusion it looks like about a 20 to 25 per cent uplift.
On a like for like basis. So the N. Good die out you're gonna get 20 to 25 per cent more opportunity associated with the probe card spin when moving to a trip with architecture now overtime. That's gonna decrease customers are gonna get better at yield improvement better at their test methodologies, but nonetheless.
Shiplett processes tile processes are are much more test intensive process that has good ROI for our customers right packaging badge triplets together with good <unk>, good triplets really not very economically viable and so we view ourselves as a key enabler and the pro card business and another business.
Is to helping the industry innovate and drive advanced packaging strategies like triplets forward.
And we view it as a great financial opportunity to.
Got it that was Super helpful. And then my follow on his on your system business Photonics and your prepared remarks, you mentioned you were sort of on the cusp of photonics opportunity that was moving into production wonder.
I'm wondering if either a you could quantify it or give a little color on what exactly in photonics. The application is.
Yeah Uhm, so most of the activity, we're seeing in silicon photonics and the system's business falls into two categories. Some of it you know detectors things like components for Lidar, but probably the more exciting one is co package optics, where data center applications are taking an optical chip.
Packaging them together with an electrical chip. These are the predominant applications that we're working on now again the system's business is we've been engaged in silicon photonics for several years and the system's business in R&D labs now moving to pilot production, we're still engaged.
Whether we have a play in full high volume production is something that we're working with customers to evaluate right now probably requires a few changes in a roadmap, but a really interesting area, where the combination of our electrical tested optical test products and technologies appeared.
I have some pretty significant value for customers as the rampaging ramping these co package optics applications.
And just.
Clarification for me and I'll I'll stop <unk> is that <unk> optical linksys, what folks are working on it they might get in that correct, yes, yes.
Yes.
Got it got it and you expect or you're seeing visibility into that going into production within the next few years, Yeah. <unk> early pilot right now and a lot of bugs to work out but it is an exciting area, where you know we're working with customers on this fusion of optical and electrical technology.
To help push the industry forward.
Got it again Super helpful. Thank you so much.
Thank you and as a reminder, ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone and our next question comes from the line of <unk> <unk> from Jeffries. Your question. Please.
Hi, Yeah, I actually wanted to attack upon some of the questions you had yeah regarding to keep their <unk> I understand you're talking about 20 to 25.
<unk> city. Thanks for me when a simplified way and I was looking at this way you know if you have four <unk>.
You would need for it <unk> <unk> why why is it 20 to 25 per cent increase with a snake.
A four times increase.
<unk> I I guess, if you could help me understand that yeah, <unk> <unk> <unk> <unk> <unk> <unk>.
So the reason is not four times, yes, you need for different probe cards, but if you think about how customers are petitioning the end product, which used to be a single die into individual triplets you can imagine that the the test coverage the test complexity or the you know.
The number of tests you need to do for each of those triplets is substantially less than you need to do for the composite die right. If I'm gonna test an entire microprocessor. The S. Ram the inputs outputs all of the buses you could imagine that's a fairly long test time, because you have to go through a broad suite of.
Electrical test to get all those things you break it up into triplets and now you're also breaking up the tests coverage into the individual triplets. So yes, I need four times the number of probe cards, but simply put I'm also testing a quarter of the transistors on each of these shiploads. So the test times are shorter that's why it's not a four times uplift it's a <unk>.
Any to 25 per cent up with.
Alright. Thank you. This is very helpful and for my final up out.
<unk> 2022, if you had <unk> <unk> <unk>, how can you be pink <unk> going into Tony Tony T I day Amy.
No hanging foods that that helped you kind of feels like <unk> <unk>.
My kitchen.
Yeah, I think so you've hit on an area. That's a key area of focus for form factor right now you're right. We did lose market share to are primarily primary foundry and lodge a competitor for different reasons at different customers, but you know if I take a holistic look at it. It involves a couple of different things that were now.
Very focused on one is making sure that we're aggressively delivering new technologies for those customers and engaging them very early on I think in some cases, we lost market share because our competitor was faster to deliver their technology.
I think one of the other things <unk> you know if you look at some of the customers were on an industry wide basis, we have lower than benchmark are lower than entitlement marketshare working pretty hard on gaining share with those as well. So you know this is a very good competitor a very viable competitor and we're going.
<unk>, we're in an industry, where you need to suppliers. So I think us executing better us being more aggressive on getting our leading technology in the customer's hands are a key focus area for US now we've made some organizational changes we've made some incentive changes and are very focused on making sure that we're a sharper and stronger.
Heather against these guys and founder and logic.
Thank you <unk> I'm, sorry, <unk> <unk> does that taste the market checking is that.
Not really one of the things I think all of US understand in this business is the really are to supply your markets and you're not going to be able to price your way to market share gains uhm.
Customers depend on us for critical product ramps, we've talked about lead times being short that means there's a real premium on execution right our customers can't ramp that they don't have the probe Burton.
The value of the technology that all of us provide us our competitors is pretty compelling and so you know you're not gonna win on price and we as a set of suppliers sure you gotta be cost competitive, but it's it's not about the lowest price winning.
Mmk, that's helpful and <unk> breathing one boy. So I know you talked about China being yeah, domestic hang up being <unk> <unk> <unk> <unk> and I think Ah both of <unk> have you could you give some color and how might a second.
<unk> alright.
<unk> and <unk>.
Able to <unk> <unk> Kang domestic customers <unk>.
Yeah, it's actually I wouldn't say the domestic China revenue is dominated by DRAM drams, a good chunk of it and you know given that the major trying a DRAM manufacturer domestic China DRAM.
Is really just ramping up that can pretty b, a pretty lumpy revenues quarter to quarter Uhm, we do have pretty significant systems exposure and systems opportunity in China again, we've by and large found a way to at least what we're booking understand whether it's.
Going to be we're gonna be able to ship that we understand the trade compliance implications. So at least in the short term again, these headwinds or baked into our systems business over.
I'm, sorry into our outlook for the systems business Uhm over.
Over the longer term again, we do expect that business to continue to decline and eventually go to zero. The question is a question of when and when a local China's supply chain is able to support its industry, that's probably a multi year event.
Got it. Thank you alright, thank you.
Thank you. This does conclude the question and answer session of today's program I'd like to have the program back to Mike Slusher for any further remarks, I think we're out about at the time. So thank you everybody for your participation. Thanks for the questions and we'll C.
See you either have some upcoming conferences or on our late April early may earnings call take.
Take care and stay safe.
Thank you ladies and gentlemen for your participation is today's conference. This does conclude the program you may now disconnect good day.
The conference will begin to T to raise and lower Johan <unk>, you can dial star one one.
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