Q1 2023 FormFactor Inc. Earnings Call
Before we begin.
Dan <unk>, 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.
If installations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company.
The Investor Relations section of our website.
Today's discussion contains forward looking statements within the meaning.
Think of the federal Securities laws.
Examples of such forward looking statements.
With respect to the projections of financial and business performance.
What's your macroeconomic and geopolitical conditions, the benefits of our acquisitions and investments in capacity and in huge acknowledges the impact of global regional and National Health crisis, including the COVID-19 pandemic.
Anticipated industry trends potential disruptions to our supply chain.
Impact of regulatory changes, including the recent U S. China trade restrictions than 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. There is consultancies that could cause actual results to differ materially from those expressed during this call.
The formation of the risk factors and uncertainties is contained in our most recent filing on Form 10-K with the S. E C for the fiscal year ended 2022.
In our other SEC filings, which are available on the SEC's website at Www Dot SEC Gov and in our press release issued today.
Forward looking statements are made as of today may <unk> 2023, and we assume no obligations to update them.
Is that mobile now it sounds the call over to form factor seal Mike Smith.
Thanks, everyone for joining us today for.
Factors first quarter revenue was comparable to the fourth quarters exceeding our outlook range due to shipments pulled in from the second quarter.
We also generated significant sequential improvement in gross margin and profitability achieving results at the top end of their ranges.
In the second quarter, we anticipate similar results as we executed against the demand environment that remains relatively stable at diminished levels.
While the cyclical downturn continues we're carefully balancing short term results and long term investments with disciplined cost control to preserve quarterly profitability and protect our strong balance sheet.
We continue to invest in R&D for new product innovation and competitive differentiation.
As well as in the long lead time facilities and equipment components of our capacity increase plants.
These investments are designed to produce market share gains and above industry revenue and profit growth when we emerge from the current cyclical trough.
Positioning form factor to achieve and then surpassed the levels of our chart current target financial model.
Turning now to segment level details in our largest business foundry and logic probe cards revenue increased significantly in the first quarter as we benefited from multiple technology driven wins at major foundry and IDM customers.
We expect some moderation in foundry and logic demand in the second quarter as customers Digest. These recent shipments in their initial production ramps of five nanometer and three nanometer mobile application processors.
Io based client microprocessors and high performance compute chips.
Advanced packaging processes like force in three D fabric are increasingly being adopted on these leading edge foundry and logic chips, providing an exciting opportunity for form factor.
As we've noted in the past these integration schemes drive both higher test intensity, which expands the number of probe cards required for good die out and higher test complexity, which raises the performance requirements for each probe card.
Probe card architectures like form factors Mems technology are essential to meeting these challenging performance requirements that a compelling cost of ownership. While also fulfilling the short delivery lead times that our customers' rapid and dynamic production ramps require.
In memory as expected, we experienced weak first quarter demand for both DRAM and flash probe cards is each of the major memory manufacturers reduced wafer starts to consume elevated inventory levels.
However, even at these lower production levels each of our major memory customers continues to advance the roadmaps with new design activity and innovations like DDR, five and third generation high bandwidth memory, which are driving a modest expected sequential increase in second quarter DRAM revenue.
This provides insight into the unique characteristics of probe card demand since probe cards are a consumable specific to each customer's individual chip designs early low volume production activity for new DDR five an H b M designs is generating demand for new probe cards, albeit at lower volume levels than we typically see.
Cyclical upturn.
This new design activity extends beyond DRAM and it's broad based across our customer base and served markets. As a result form factors design engineering teams are currently operating at full utilization as we work with customers test engineering teams to adapt our Mems probe card architectures to their upcoming new chip does.
Signs.
These diverse design projects span three nanometer processors RF bonds saw filters and H B M DRAM.
And foreshadow demand acceleration for form factor when the industry returns to growth and these new designs ramp in volume.
Similar to <unk> in three D fabric in foundry and logic the growth of H B M is an exciting opportunity in the DRAM market as well as the die stacking advanced packaging process increases both test intensity and test complexity of HBM products compared to standard single Die DRAM architecture.
This in turn increases both the number and complexity of probe cards required for good die out.
H B M is also a key enabler for generative artificial intelligence with one of our major DRAM customers recently, stating they expect their H b M sales to increase more than 50%. This year with expectations for further growth next year because of AI applications need for this higher speed memory.
With probe card lead times are typically less than a quarter. Our visibility remains very limited, but we continue to be encouraged by the relatively stable overall demand for our products along with the strong new design activity, we're supporting across the industry.
As is evident from the details of our outlook, we are experiencing underlying quarter to quarter shifts in spending between customers and markets, but our broadly diversified lab to fab product portfolio across foundry and logic DRAM and flash probe cards together with our system segment products enables us to compete for business.
Across these diverse demand pools at all major customers producing the relatively stable overall topline results. We've demonstrated for the past several quarters and expect again in the second quarter.
Shifting now to systems.
Our systems business continues to deliver strong results with revenue and gross margin at near record levels again in the first quarter and our second quarter outlook assumes record revenue.
This strength is driven by our market, leading test and measurement products for early development of applications like Silicon Photonics quantum computing and advanced packaging metrology.
Silicon Photonics is an important and exciting driver in this segment are turnkey electro optical measurement systems built on our C. M. 300 Summit 200 engineering progress are tightly integrated with sub systems from leading partners like <unk> technologies and P. I.
Together with form factors electrical probe cards. These systems are enabling our customers to rapidly characterize analyze and debug new silicon photonics devices in early development and pilot production.
Independent market research forecast of 30 plus percent growth rate for silicon photonics devices over the next several years driven by the data center speed and power efficiency improvements that derived from co package optics and form factor is well situated to capitalize on this opportunity as silicon photonics undergoes the tree.
<unk> from the lab to fab.
Finally, we continue to manage export restrictions and serving domestic China semiconductor customers as 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 and all of our businesses.
We believe this U S. China trade hidden headwind will persist over time and 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.
I'd like to close by reiterating that in the short term, we're encouraged by the stabilization of demand across our diversified product and technology portfolio in the first half of 2023.
Over the longer term, we remain excited and 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 and silicon photonics.
These are trends were form factor as well positioned as an industry and technology leader and we're confident that our commitment to invest in R&D and capacity will position form factor to emerge from the current cyclical downturn, a 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 Q1 revenue was slightly exceeded the high end of our outlook range and non-GAAP gross margin and non-GAAP EPS were at the high end of the range.
First quarter revenues were 167 $4 million, 0.9% sequential increase from our fourth quarter revenues and a year over year decrease of 15, 1% from our Q1 'twenty two of it.
Q1 revenues were slightly above the high end of our outlook range, mainly due to shipments pulled in from the second quarter.
Probe card segment revenues were $127 $3 million in the first quarter, an increase of $3 million or two 4% from Q4.
The increase was driven by higher foundry and logic revenues, mostly offset by decreases in DRAM and flash revenues.
System segment revenues were $41 million in Q1 at $1.5 million increase from the record fourth quarter and comprised 24% of total company revenues slightly down from 25% in Q4.
Within the probe card segment, Q4 foundry and logic revenues of 101 6 million.
Significant 24% increase from Q4.
Foundry and logic revenues increased to 61% of total company revenues.
3rd% to 50% in the fourth quarter.
DRAM revenues were $19 $8 million in Q1, $7.4 million or 27% lower than in the fourth quarter and about 12% of total quarterly revenues as compared to 16% in the fourth quarter.
Flash revenues of $5 $9 million in Q1 were $9 $1 million lower than in the fourth quarter and were three 5% of total revenues in Q1 as compared to 9% in Q4.
GAAP gross margin for the first quarter was 36, 5% of revenues as compared to 27, 2% in Q4.
Cost of revenues included $3 $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 the Investor Relations section of our website.
On a non-GAAP basis gross margin for the first quarter was 38, 4% six seven percentage points higher than the 31, 7% non-GAAP gross margin in Q4.
We achieved significant improvements in gross margin and the growth in the probe card segment and also delivered a higher gross margin in the system segment.
Our probe card segment gross margin was 34, 3% in the first quarter, a significant increase of eight eight percentage points compared to 25, 5% in Q4.
The increase is due to the net effect of the following four factors.
First four percentage points of the increase relates to improved manufacturing expenses, such as lower wafer processing cost and better production needs.
Second three percentage points is due to a more favorable revenue mix with higher foundry and logic revenues and lower memory revenues.
And third three percentage points related to it relates to a lower excess and obsolete inventory reserves.
Partially offsetting these three positive factors ease of two percentage points decrease related to lower factory utilization.
In terms of labor costs, we achieved a full quarter of restructuring savings in the first quarter versus about a third of the savings in Q4.
In comparing Q1 to Q4. These additional savings were mostly offset by lower PTO taken in the first quarter and the typical beginning of the year impact of the annual benefits reset.
Our Q1 systems segment gross margin was 51, 7% 130 basis points higher than the 54% gross margin in the fourth quarter.
Reflecting slightly higher revenue and a more favorable mix.
Our GAAP operating expenses were $61 million for the first quarter similar to the fourth quarter.
non-GAAP operating expenses for the first quarter were $51 2 million or.
Or 36% of revenues as compared with $47 9 million or 28, 8% of revenues in Q4.
The $3 $3 million increase is primarily due to higher performance based compensation annual benefits reset and less PTO take it.
Company noncash expenses for the first quarter included $9.3 million for stock based compensation $2 $9 million for the amortization of acquisition related intangibles and depreciation of seven 6 million.
Oh at similar levels to the fourth quarter.
GAAP operating income was <unk> 1 million for Q1, compared with GAAP operating loss of $16 million in Q4.
non-GAAP operating income for the first quarter was $13 2 million compared to compared with $4 8 million in the fourth quarter.
GAAP net income for the first quarter was $1 $3 million or two cents per fully diluted share compared with a GAAP net loss of $13 $7 million or <unk> 18 per fully diluted share in the previous quarter.
The non-GAAP effective tax rate for the first quarter was 13, 9% seven four percentage points lower than the 21, 3% in Q4.
In our previous earnings call, we discussed that we expected our non-GAAP effective tax rate in 2023 to decrease to 6% to 9% due to the expected benefits of the new advanced manufacturing investment credits or Amy.
We have updated our outlook for the annual non-GAAP effective tax rates to mid teens between 13 and 17%.
The benefits above the line two gross margins and operating expenses are not expected to be material in 2023 shows the reduction in depreciation will be recognized over the service life of the qualifying assets.
Maintaining profitability at the current reduced demand levels continues to be an important goal for us and the actions. We took during Q4 to reduce our costs at the full impact in Q1 contributing to our first quarter non-GAAP net income of $12 5 million or <unk> 16 per fully diluted share compared to $4 one.
<unk> or <unk> <unk> per fully diluted share in Q4.
Moving to the balance sheet and cash flows we had negative free cash flow of $7 $3 million into first quarter compared to negative free cash flow of $5 4 million.
And cure sorry, let me repeat that.
We had the negative free cash flow of $33 million in the first quarter compared to a negative free cash flow of $5 $4 million in Q4.
Cash provided by operating activities in Q1 was $12 3 million.
Lower than the $27 million in Q4.
The main reason for the decrease in cash provided by operating activities.
<unk> of both tax payments and payments from our customers.
We invested $19 $7 billion in capital expenditures during the first quarter compared to $26 2 million in Q4.
With a core drivers underpinning our strategy is still in place we continue to execute on increasing our long lead time facilities and equipment portions of our capacity increase spend.
Albeit placing equipment service at a lower rate at a slower rate.
To ensure capacity does not significantly outpaced demand.
We expect Capex for 2023 to range between 50 and $60 million.
During the quarter, we received an $18 million grant from the state of California, which we plan to record as a benefit to the P&L as we make progress in achieving the five years plan goals of head count increases in capital investment.
No P any of the benefit is expected in 2023.
Overall at quarter end total cash and investments were $240 million down $2 million from year end.
As of the end of the first quarter, we had one term loan remaining with a balanced totaling $15 2 million.
Regarding stock buybacks.
During the first quarter, we did not purchase additional shares under our $75 billion two year buyback program at.
<unk> Q1 quarter and $18 $6 million remained available for future repurchases.
Turning to the second quarter non-GAAP outlook.
As Mike mentioned, we expect Q2 revenues to be similar to Q1 with lower foundry and logic revenues, partially offset by higher DRAM revenues and expected record revenues from our system segment.
This demand resulted in a Q2 revenue outlook of $162 million plus.
Plus or minus $5 million.
Second quarter non-GAAP gross margin is expected to be 38% plus or minus 160 basis points.
The impact of slightly lower revenue and a less favorable product mix within the probe card segment, we forecast that to be offset by increased higher margin system segment revenues and lower projected <unk> reserve.
At the mid point of these outlook ranges, we expect Q2 operating expenses to be $52 million, plus or minus $1 million with the $1 million to $2 million increase as compared to Q1, mainly due to additional investments in R&D.
non-GAAP earnings per fully diluted share for Q2, you would expect it to be 12.
Plus or minus <unk>.
A reconciliation of our GAAP to non-GAAP Q2 outlook is available in the Investor Relations section of our website and in our press release issued today.
With that let's open the call for questions operator.
Yes.
Thank you to ask a question you will need to press star one one on your telephone again Thats Star one wanted to ask a question. We ask that you limit yourself to two questions and then re queue.
Please standby, while we compile the Q&A roster.
Our first question.
Comes from the line of Brian Chin of Stifel. Your.
Your question please Brian .
Thank you good afternoon, and I appreciate you letting us ask.
Ill ask a few questions.
Maybe maybe to start with.
Yes on gross margins I know that mix.
Plays a role certainly and how gross margins trend from here, but what quarterly revenue level do you need to bring gross margins to sort of a 40% or lets say low 40% level.
And I know again, the second part of that is that although all caveats typically apply in terms of limitations to your visibility.
It would be the more likely drivers that would drive a sequential pick up that's needed to get to those revenue levels or maybe even beyond in the second half of the year.
Sure, Brian I'll take that I think if I try to draw a trend line I would say that the current revenue levels $1 60, something 165 and <unk>.
On the quarter and we expect to be at the high <unk>, we saw a 38, 4%.
Talking about the midpoint of 38% in Q in Q2.
If you go back to Q3 of last year once we get back to these revenue levels of around 180, we expect gross margin to be around 42% and once we get to the 200 million level on a quarterly basis, we expect to see gross margins around our target model of 47% as.
We saw in the first half of 2023.
And we made that increase to come mainly from foundry and logic, which use our higher margin.
Market within the probe card business and to support these increases.
Increases over these trend line, because we're going to continue to fluctuate based on mix as you would note that but.
Three Q2 net into Q1 that led to revenue above the top end of the range really came from three places. One you know we have some very shortly time products or S. As a good example, where there's perishable demands to meet a specific customer wafer out schedule and if we can ship. It on time, we get the business.
Can't you at on time, we go and so those are ones, where we had a little bit more in Q1, then we thought we'd might we had a few specific customer request to accelerate delivery on specific designs, mostly associated with the ramps that you talked about there's some pretty prominent ramps and the industry you know flagship smartphone a piece of <unk>.
Client microprocessors, they're going on right now and some of those wait for our schedules accelerated a little bit and we had some recognition of deferred revenue in Q1 that we didn't think we'd get into a queue to you know as we look forward now to.
The second half as you noted we have very limited visibility given the lead times, we have but I think if we see in demand in some of these areas whether they be mobile handsets, whether they be client P. C's start to pick up a little bit and our customers start to more aggressively ramp those particular devices.
I think we could see some upset right now you know we're as we said reasonably pleased that we size the business for the current levels, which you know as we go through the middle part of the year appear to be kind of a baseline stable demand level that we're operating too, but you know the factors you talked about <unk>.
Lead to some upside we don't have any visibility that upside at this point, but it longer term. It's part of the reason why we're continuing to ingest and capacity and R&D.
Okay, Alright, that's helpful. Thank you <unk>.
Thank you.
Our next question comes from a line of Tom Diffley of D. A Davidson your line is open Tom.
Yeah. Good afternoon I appreciate the chance of some questions I guess first of all it sounds like you had some really strong design activity during the quarter.
And I'm curious.
Are these.
Are the new designer or design intensive on your part going forward and are your capacity constrained on design at this point.
Yeah, we did make the point that our design teams are very busy working with customer test engineering teams essentially on the next generation of devices things like high bandwidth memory D. D. R. Five and some of the three nanometer foundry parks.
You know this is essentially feeding the future for us as you know probe cards are specific to each customer chip design and although things are not ramping insignificant volume right now all of this design work that's going on I wouldn't cast it as you know being much more complex than we've had.
For the past couple of years.
But our design teams are very busy across the customer and markets essentially getting first articles ready, making sure. We're our technology will work for these future designs and shifting a handful of brokerage that then customers can validate so that once these new designs do ramp in volume when we get to.
And up to her and growth in the industry, we're able to produce them and produce them in at a high quality predictable way.
So how much of your activity is based on cause that into a nude versus does not need to very specific.
Chip itself.
It's all the ladder right <unk> you basically get qualified for a note or a set of requirements. Three nanometer foundry is a good example, and you need to have you know the the right mechanical and electrical characteristics to essentially accommodate the envelope of different specific chip designs, they're gonna.
To be produced on that note, but then our design team goes to work with the foundry with the fabulous customer to customize that architecture that men's probe architecture to each individual chip design. So that we're ready to go when those individual chip designs. For example, you know a three nanometer application.
N processor this ramping in the middle part of the year, we're able to produce that probe card as I said in high quality predictable way and the architecture's validated on it.
Alright, alright, very helpful. And then for the follow up moving to China, you'll how big was China for you and a quarter and it sounds like you expect that visits to kind of decline over time, what kind of tales you think there is there.
Yeah. It's an interesting question. So uhm, we do post or regional revenues in on our Investor Relations website. So you can go look at how the world broke down I think we were something like 27 million in China in the corner now that's we haven't been that low in quite a while.
That's composed as it always is of two components. One is shipments to the multinationals that operate in the region. We have some large customers large global customers, who operate both memory and foundry and logic operations in the region and so they'll have a ship to those factories, depending on where their production that.
Activity is you know.
The part I'm really referring to declining over time is supporting the domestic trying our customers and the timeline for that you know, we're still trying to figure out clearly with the export controls export restrictions with us as a U S supplier, we're limited in our ability to provide and so.
Support leading edge advanced semiconductor projects and really you know form factors leverage to advance nodes in the leading edge. If you think about our systems business, we're enabling new capabilities there <unk>.
The probe card business really has high test intensity on leading edge nodes, new designs complex designs, where customers don't have great yields and need to improve those yields and so you know <unk>.
[noise], where some of the W. F E manufacturers have been talking about trailing edge trailing edge opportunity in China were not exposed to a lot of that so I do think over the next couple of years, let's call. It we're going to see that business dropped a pretty de minimis levels.
Okay I appreciate your time thanks.
<unk>.
Thank you.
Our next question comes from the line of David duly of Steelhead. Please go ahead David.
Yes. Thanks for taking my question I have a couple technology questions as far as in your founding logic probe card business I know one of your big customers now is in production with Ah Ah.
A triplet module type product I was wondering now that you've seen that in production what sort of.
Increases in pro card intensity are you seeing from that triplet or module strategy, whatever you'd like to refer to.
[laughter]. This is one you know what we've talked about in the past and I think some of the a T manufacturers are talked about in the past as well typically on a like for like basis, we're seeing somewhere between 20 and 25 per cent increase in what we call test intensity. It loosely speaking that's the number of probe cards required for good.
Die out uhm.
And that comes from a couple of different reasons, one fundamentally you're breaking what used to be one ship up into multiple chip lights.
And so that requires an individual probe card for each of the triplets now if that was done perfectly efficiently there wouldn't be an uplift there, but you know you need buffer probe cards and different elements like that that do cause an increase the more significant part of the increase really is associated with the move toward something close to what people call.
All known good die you can imagine if you're gonna stack eight triplets together you Wanna have very high confidence that each of those triplets is good before you commit it to the stack because it turns out there's not a lot of rework or redundancy in these in these chip with architecture.
So customers are testing these chip, let's much more comprehensively than they might test a single die package and that's really what's responsible for the increase in intensity something like 20 to 25 per cent of the worsening.
Okay. That's my follow up along the same lines I think you referred to it in your prepared remarks, while you're seeing kind of Ah.
Large increase in probe intensity in the high bandwidth memory, specifically for AI type applications, I think micron Might've said five or seven times increase in the number of memory devices and one of the servers for an AI server or application.
Could you just talk to her and elaborate a little bit more about that.
Sure well H P M has been.
Pretty interesting opportunity for us over the years, we're now working on new designs for the third generation of H B M and we E. As you know we've had a couple of our customers talk about the the demand for high bandwidth memory in a I modules. So it it's gonna be a driver as we move through this <unk>.
<unk> cycle of AI, the interesting part for us as a provider of tests consumables and probe cards is that H B M. As bill essentially on a trip with architecture you have multiple DRAM die up to 16, DRAM die that are stacked up to build this and H B M product.
And each of those die needs to be individually tested again, the same theme associated with something close to known good die being required for each of them and you have extra insertions, just because customers want to check the stack as it gets built up over you know is it goes from four died of eight died of 16 die and so you've seen or.
DRAM in previous quarters in past years are DRAM revenues get up.
Close to an exceed $40 million a lot of that has been driven by adoption and and ramps associated with H B M with high bandwidth memory. So another interesting opportunity where advanced packaging driving probe guard intensity.
And I'm sorry. This is a follow up to that do you think that.
Your high bandwidth memory portion of your memory business is going to see a big uptick from a is that there's so much more per server.
It's hard to say at this point right, where early and then adoption curve. There's no question Directionally you know that <unk> AI requires more high bandwidth memory, we talked about one of our customers talking about a 50 per cent gross right in their H B M business.
But you know how much that is in relation to our overall DRAM prepared business and what that adoption curve looks like over time I think are still open questions that we're gonna see but there's no question that the direction is positive for us.
Thank you.
Okay.
Thank you.
Our next question.
Come from the line of Christian Schwab of Craig Harlem.
Your question please Christian.
Hey, Great <unk>. Thanks, guys, just a quick follow up on on that might cause a in the high bandwidth memory. So.
If your largest memory customer continues to dominate that market.
You know and and you know obviously were taken off 20 per cent of production and then you know after they get supply.
Demand imbalance in the memory market. You know then they're gonna increase utilization rates and they're gonna tweak the equipment before they buy a ton more capacity so.
Probably.
A longer cycle right, so but on the high bandwidth memory side. Your commentary you know you know should a I accelerate is is that some people assume it does I mean, you know could that leading customer.
Drive your DRAM business back into the 30 million category, even if we're still at a lull and memory capex spending for adding new <unk>.
Coming up in Q1 to Q2 and that's another interesting example, where.
Probe cards as a design specific piece of tooling a design specific consumable can be decoupled from from WSB.
Everything goes right and we do see a strong ramp associated with H B M and it becomes a major part of DRAM wafer starts sure even in a cyclical memory downturn that could provide enough up with to get us up into the thirties per quarter.
But again, it's it's not something we're not calling a turn in DRAM here. We're just highlighting one of the interesting opportunities that we have here in the second quarter and in front of US there really is helping our overall procured revenue.
Alright, and the other thing that's kind of helping you correct me if I'm wrong in DRAM. <unk> is is the fact that you know we finally have working silicon from everybody out there for D. D. R. Five right, yes, yeah.
ER five for a.
A long time, but.
But now we finally have the working till it came out there you know we should certainly will accelerate the movement to there because the memory prices for the manufacturers will be materially higher the D. D. R. Four so would you.
Alright, that's more wind at the back is that more important than H b M or is H b I'm more important I feel like H B m's more important because of the test intensity associated with the advanced packaging structure that hbm's built on you know if we can see that become a significant part of wafer start to driven.
By a I <unk>.
There's a lot more up with their you know D. D. R. Five that transition as good as you know you know the Isps are higher but it has been probably the slowest data rate transition DRAM architecture transition in my career, we're still doing a reasonable amount of D. D. R. Four in both mobile server in mobile search.
<unk> T C D D R. Four.
Mmk and then my last question you know talking about slow migration. Your your largest customer appears to possibly have fixed their ales and it was on the in the process of rolling out five new generation should.
Chips.
And four years versus trying to have a 14 nanometer chip compete with a seven nanometer chip it lose market share everywhere. So.
You know I saw that you guys saw some sequential growth, there and and and you're prepared comments you you suggested that.
Certain trends in the industry you know you could surpass the your previous model expectations.
It's it's just kind of math, if they're successful mmm, that's <unk> materially good news for you correct.
Sure of course, you know we have worked hard to diversify our customer base in in business by growing elsewhere and growing in different segments. The system's business. A good example, now up.
You know in the neighborhood and above $40 million a quarter, but <unk>.
How our largest customer goes right is obviously a key driver form factor success. I'd also argue it's pretty important for the industry right. There always been a technology pioneer a technology leader N as they work on things like tile based architectures, you know I think the whole industry will benefit.
If they're able to accelerate and really execute on pushing that the foundry and logic technology platform forward.
Great perfect <unk> questions. Thanks, Thanks Christian.
Thank you.
Our next question.
Comes from the lineup Craig Ellis B Riley.
Your question please Craig.
Yeah. Thanks for taking my question and thanks for all that color. So far guys Uhm I'm wanting to start off just picking up on on the last question with the largest customer service great to see the.
Oh that makes inquiries about 350 basis points quarter on quarter. The question might because of that 350 basis points and knowing that you were trying to win back sure at that customer this year, how much of the increase in mixers that customer.
Just executing better on their own roadmaps more consistently.
To the prior point more consistent with her notes and how much of that would've been share again for form and programs that you may not have had last year, maybe new programs for sure.
Yeah, I think our market share across the board has become a very important initiative for US right. It is no secret certainly to the people on this call that we lost Sharon founder and logic, our biggest business in 2022 to our primary competitor.
But it's also we've been pretty transparent with you that we've recommitted ourselves to share gains made some organizational changes some people changes some compensation changes to really focus the team on market share.
As you note in Q1, we did see.
A good improvement there, but it's been our experience over the years that you know market share is not a one quarter is that right. Yeah. You can have different designs that you won different designs. Your competitor one that can shift chair at any given quarter, depending on who spending and who's the incumbent so.
<unk> you know this is gonna continue to be an area of focus reform factor both of our largest customer but across the customer base as we continue to compete with our major customers are.
Our major competitors in Saturday, and logic and memory and and his systems.
So is it fair to say my <unk> to the extent the registrar gaining one Q that you think there's still.
A considerable ways to go till you're happy with Fisher you pre captured of that customer absolutely right. I think you know the way the way we think about it is you need to make small steps forward seems like there was some progress forward in Q1, but in no way would I call us satisfied with what we've accomplished this is very <unk>.
Much a work in progress.
Okay Claire message and then the second question I know, there's been a lot of inquiry on DRAM I'd better try and frame it up a different way and just see how you might.
Mmm reply so at.
At least in my modeling and the model could be off DRAM revenues from the first quarter were at seven year lows and.
And frankly fundamental send the DRAM industry are probably at 20 year lows, so <unk> performing industry, but we're at historically low levels.
The question is this is it should look at the potential of getting back to more normalized hi, Twentyish timid 30th level can you. Just can you just talk a little bit more about how you build the layer cake, yeah high bandwidth memory I think is a pretty small part of total sugar <unk>.
Memory, but obviously very <unk>, how much is that how much is just getting a lot more a D. D. R. Five volume on on P, CS and and into smartphones and how much it's gonna be other things, just and and not looking for a particular time <unk> getting back to a normalized shipment of all how does.
Piece of circa.
Yeah, I think if you build a layer cake because you said that it's going to require a couple of things.
Obviously, you know DRAM and markets are very weak and I think it's clear that all of our customers are under shipping in demand to try and consume some of the persistently high inventory that's still out there. So the first thing that has to happen is that drams.
Supply and demand and get back into balance and essentially our customers start to ship to the actual demand that's out there.
They all seem to have a slightly different view of when that's gonna happen, but that very much is probably the first piece of the layer cake and getting back to the mid thirties.
The second piece you know some of the stuff the Christian talked about in his question.
D D R five will drive new memory designs.
New memory designs require new fleets of pro cards, and certainly there's D. D. D. R. Five in the mix a significant amount of D. D. R. Five in the mix right now, but I think more D. D. R. Five is probably a piece to that if we see adoption of that take off a little bit and then the third pieces, we stack up the layer cake and the part that you you.
Probably inferred from my comments I'm. Most excited about is H b M Uhm and.
And it's it's exciting because it is yet another example of the industry moving to back and integration and advanced packaging to drive it's innovation roadmap forward, it's cool to be helping enable a I, which is you know a fundamentally game changing <unk> technology for the worse.
World in semiconductors or underpinning it <unk> and then finally, you know when you think about our advanced packaging and as you noted the high probe card intensity associated with advanced packaging, it's an outsized opportunity for us on a per wafer start basis. So I think it's probably the icing on the cake right.
Now, but probably becomes a bigger part of the cake. If all these things line up for it.
Got it and then the last question just looking at the supplemental materials I noticed Samsung wasn't listed as one of 10 per cent revenue customers does that simply because they haven't been touched her for the last five quarters or.
Was there any other reason why they dropped off and and can you just comment on how you're feeling about sure both on the DRAM and then on the the <unk> <unk> customers.
Yeah, We had we had a few customers that has been on the 10 per cent list that were awfully close right in Q1, and then just the way the numbers worked out.
They didn't make the 10 per cent list, so I wouldn't interpret it as anything significant.
Getting back to the share topic, you know the comments I made about Sharon founder and logic apply across the board, we've refocused ourselves refocused our processes are incentives on making sure that we're delivering technology that drive share gains right These're segments, where you only have really.
Two suppliers that are able to deliver into the advanced requirements and you know those are so what we're investing in R&D. So we have compelling products that we can charge a premium for drive gross margins up deliver value to our customers and gain share at the same time.
Alright clear message. Thanks for the help me <unk>.
Thank you.
Again to ask a question. Please press star one one on your telephone again, that's star one one on your telephone to ask a question.
Thank you our next question.
Your line is open Chris.
Hi, This is Barbara <unk> on for Chris. Thank you for taking my questions and.
Rats on navigating through a difficult industry environment, I guess just to start off I know, we've talked a bit about it but on the garage margin side of things it looks like you're expecting 40 basis point contraction to the margins and the June quarter with sales slightly down in the mix shift more DRAM unless.
That that'd be a logic compared to the first quarter could you just give some of that puts and takes into the <unk> gross margin guide are there any incremental margin drivers expected from the cost reduction plan or manufacturing efficiencies that are baked in there.
So you you listed in most of the of the item of the restructuring cost reduction is already baked into Q1.
So continue to to eat breakfast and cute too we're talking about similar production levels. So no changes there the things that to move the 38.4 and you wanted to meet the point of 30th in queue toys is the fuckers you talked about I can repeat them, we're talking about the overall.
<unk>, a slightly lower Avenue and 163 wisdom each point over the range versus 167, so that doesn't make a big impact the lower foundry on logic and higher memory also have a negative impact and these are partially offset by the fact that we expect the record systems revenue, which means.
Higher margin.
Because system. The system segment has the highest gross margin for us and we also expect less piano and Q2.
<unk>, Hi, N O as in queue into your four last year and still elevated in Q1, but it kind of normalized and cute too.
Great got it and then just one more if I can in terms of the the systems business. Obviously, it's been performing really well and capitalizing on the lab to fads strategy I was just trying to see if there's any way to parse out the current demand strength from a handful of technologies or specific are deep.
Projects or is it sort of more broad based and a lot of different components in that side of the business. Thanks <unk>.
The system is business does tend to be pretty broad based you know you're you're dealing thematic Lee with new technologies. We've talked you know on this call about silicon Photonics last call I think we talked about silicon carbide, a little bit our investments in cryogenics for quantum computing test or in that bucket metrology an inspection.
N for advanced packaging in there as well so it's a pretty broad spectrum of applications that the common theme to them is you're working with customers in their very early development things that would come to production you know for several years from now.
And you know that gives us I think some strategic value added the system's business because we get foresight into some of these applications, which are gonna go to production and get us better equipped to deal with them when they get to the fab you know things like Cmos image sensors <unk> the nice examples of that.
Wherever we've taken.
Systems business engagement from the system's business and turn them into production probe card products.
You know the other piece, obviously as shy noted, it's a pretty good financial contributor and we've seen some the nice growth out of it but nice growth with good profitability, especially on the gross margin line help buffer the cyclical downturn in the overall semiconductor industry and the broker business, which is heavily levered too.
New design activity and ramping that new design activity.
Which you know given the current downturn in.
Across the industry customers have pulled back pretty significantly on ramping new products.
Got it. Thank you that's very helpful. Thanks.
Thank you.
Our next question comes from the line.
<unk> of Needham.
Your question please Charles.
Oh. Thank you. Thank you for taking my question I hate and Mike and shall I think you went to several bear detailed questions about quite a few corners off your business without arris analysts asking questions I had for me I'm Gonna ask a little bit higher level question I think that in the second half lost.
Here on the way down in terms of the business you mentioned about design starts design projects getting optimize somewhat reduced and that that existing to surviving the lifestyle actually the volume got that adjusted downward. So just wanted to ask you ask where we stand in early.
The make what are you seeing comes up those two factors that design starts and that that that the volume specific to each device.
<unk> are designed starts coming back obviously volume may not come back yet, but I just wanted to get some thoughts on that <unk> yeah. Thank you yeah.
Do ramp their new designs and volume now you know the things that are ramping in volume you can count on well, there's there's not a lot of them and they're not ramping at high volume as you can see from overall industry levels from our customers narratives from our revenue, but you know we we wanted to point out to people that we.
Have seen a return of this new design activity, even though these things aren't ramping in volume the physician as well for when the the industry does return to growth to really be ready to ramp these new designs and volume uhm.
You know the the quantitative piece of it our design teams, which we really didn't downsize at all in our restructuring in Q3 are operating at full capacity and so that's a very different situation than it was in the second half as you stay on the way down.
Strong design activity, we're gonna be ready when these designs ramp, but they are not ramping now and as we said we feel like we're in a trough through the middle part of the year when growth does return to the industry. If it's late this year or next year.
I'm pretty optimistic that we've won some designs that are gonna help drive our revenue forward towards the <unk>.
Thanks, My God I wanted to ask a specific <unk> about the part of the revenue exposed to mobile obviously I wanted to exclude a discussion around uhm microprocessor add high performers compute here I'll pull it back on the mobile side I I think I <unk>.
You <unk> for an.
<unk> sign up your business, but any any other green shoots are you seeing right now in the <unk> side of the mobile business for you maybe electrics crew that that that the I O S side of the business for a pet because there seems to be some seasonality in queue.
Four Q1, but that going into Q2 do you see some moderate recovery in the mobile business you know on the <unk>. Thank you.
Yeah, So mobile for US is pretty broad Bay stand you know if you look at form factor over the past several years mobile handset growth and five G adoption has been a big driver for US obviously, that's pretty weak right. Now you know both from a component standpoint, but also from and and the handset market stand.
<unk>.
You know one of the the things we're working on pretty aggressively here in the first part of the year is making sure that we've got the technology in place to ramp on some of the major mobile application processor designs in the industry you know as they move to three nanometer foundry platforms. There's some new requirements there that we.
Had to deliver some of that was a contributor to Q1, we said we expect it a little bit of digestion hearing Q2, given the volumes, we ship, but I think more broadly we need to see.
Got it made the lastly, you if I may like the the DRAM business I I thought you were expecting another leg down in the middle of the year when a quota go but it looks like it got locked down is already here looking at that that the <unk> revenue numbers.
Just wanted to ask are you still expecting another locked out or you think maybe Q1 would be the low watermark upload a DRAM business, maybe the modest the grill into Q2, there was the more like to go into the second half of the year.
Yeah, we're we're not to be clear, we're not calling a turning DRAM you know this really the the move the sequential move up Q1 off a very weak Q1 into Q2 is really associated with some of the specific D. D. R. Five and H B M activity that we talked about you know with the lead times that we have and with.
The the trajectory of inventory consumption of new product releases and ramps and the DRAM industry I think the jury's still out on whether this is now a return to growth at the desk cases gradual growth feels to me more like we're gonna be kind of moving along the bottom of the trough here until the.
Inventory situation gets in better shape with our customers.
Thanks, Michael Oh S always put a hold on great color. Thank you.
Sure.
Thank you once again to ask a question. Please press star one one on your telephone again, that's star one one on your telephone to ask a question.
Our next question comes from the line of Gus Richard up North Lynne Hello Capital markets. Your question. Please Gus.
Yeah. Thanks for taking our questions you talked a little bit about the transition to three nanometer and I'm. Just wondering you know your designers are they sort of intersecting is that transition broadening out beyond X processors to a a six or Gpus Cpus can you just talk about.
The medicine does.
X processors have more or less <unk> 10-C than than some of the other types of still open.
Yeah, <unk>, you're right now for us is pretty apps processor focus on.
On the intensity question it really depends on the details of how the customers testing and what their overall.
Overall test strategy is a great example of that I'll go back in time to advance packaging right. If you know three nanometers used for a set of triplets. That's gonna have relatively higher test intensity, whether there's an H P C part or a mobile park compared to a monolithic die because of the the trend.
Towards known Goodbye that we talked about familiar and the Q&A session. So.
You know, there's I I wouldn't say, if there's a broad base rule of thumb for H P. C being more intensive the naps processors or vice versa, but I would say that you know if any of those triplets ended up in advance packages to drive <unk> product, we are seeing a significant increase in testing.
Got it and then and your systems business I think you highlighted <unk> panics and you're prepared Thomas and I'm just wondering you know.
How close is that moving to commercialization you know, there's a handful of customers or is it just light vendor and you know any any color around you know how you see that you know unfolding over the next.
Fix it 18 months.
Yeah, Yeah, well that's a.
Probably reaching you know there are a couple of customers that are already in production now they're pretty niche applications.
Particularly exciting part for US is we're seeing more and more potential customers in this market as people pursue the value of co package optics and.
Integrating them into data center architectures, the power benefits the speed benefits are awfully compelling, but you know if you want to look at it you know when's it gonna materially affect our customers P and LS and probably our p&l's, that's going to be closer to 18 months and that is six months in the time frame you can.
Okay, Okay and it's.
A handful of customers that better doing this at this point.
Yeah.
Alright, very good. Thank you so much thanks.
Thanks, guys.
Thank you I would now like to turn the conference back to Mike's lesser for closing remarks.
Great. Thanks, everybody for joining us today, thanks for some of the questions. It allows us to.
Uhm describe our view of the industry in its current state were signed up to do several sell side conferences in the months of May and June . So we hope to see you at one of those and be able to answer more questions and update you on for Infectors progress as we work through the cyclical downturn.
Great day and take care.
This concludes today's conference call. Thank you for participating you may now disconnect.
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