Q2 2023 FormFactor Inc Earnings Call
Thank you and welcome everyone to form factors second quarter 'twenty to 'twenty three earnings conference call on.
On today's call are Chief Executive Officer, Mike's Lessor, and Chief Financial Officer Shai Shahar.
Before we begin Stan Finkelstein the company's V. P of Investor Relations, we'll remind you of some important information.
Thank you.
Today, the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials.
Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company Analyst Day Investor Relations section of our website.
This discussion contains forward looking statements.
Meaning of the federal Securities laws exam.
Examples of such forward looking statements include those with respect to the projections of financial and business performance.
Future macroeconomic and geopolitical conditions.
The benefits of 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 in our supply chain the impact of regulatory changes, including the recent U S. China trade restrictions the anticipated demand for products.
Our ability to develop produce and sell products and the assumptions upon which such statements are based.
These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call.
Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the S. E. C for the physical year ended December 31, 2022.
And in our other SEC filings, which are available on the SEC's website at Www Dot S E C Dot golf and in our press release issued today.
Forward looking statements are made as of today August <unk> 2023, and we assume no obligation to update them without but will now turn the call over to form factor seal Mike Lasser.
Thanks, everyone for joining us today.
Form factors second quarter revenue was below our outlook range due to shipment push outs, however, higher than expected gross margin and good operating expense control produced non-GAAP earnings per share at the top end of our outlook range.
We continue to operate in an overall demand environment that remains relatively stable. This is evident from our third quarter outlook.
As we navigate the current cyclical downturn, we continue to benefit from form factors diversification strategy, which differentiates us from our direct competitors with our broad lab to fab product portfolio across foundry and logic, DRAM and flash probe cards together with our systems segment products.
This unique portfolio enables us to compete for business across diverse demand pools at all major customers producing the relatively stable topline results. We demonstrated for the past several quarters and that we expect again in the third quarter as we exploit growing areas like high bandwidth memory and DRAM probe cards.
And co packaged silicon photonics and systems.
Helping to offset the impact of areas that are presently source like mobile handsets and Cpus in foundry and logic probe cards.
Well the demand softness that has persisted for several quarters continues and some of our most important higher unit volume and markets like client PC and mobile we're carefully balancing short term results and long term investments with disciplined cost control that maximizes quarterly profitability and protect.
Our strong balance sheet.
We continue to invest in R&D for new product innovation and competitive differentiation as.
As well as in the long lead time in facilities and equipment components of our capacity increase plans.
These investments are designed to produce market share gains and above industry revenue and profit growth when we emerge from the current cyclical trough.
<unk> form factor to achieve and then 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 experienced the expected moderation in demand in the second quarter as customers digested first quarter shipments for initial production ramps of five nanometer and three nanometer mobile application processors.
Oh boy tile based client microprocessors and high performance compute chips.
In the third quarter, we expect to deliver sequential growth in foundry and logic as we see modest strengthening in both mobile and client P. C markets, primarily driven by adoption of advanced packaging processes like favor us and three D fabric.
Advanced packaging and Shiplett innovations were prominently featured at the recent semicon west industry, Tradeshow, where a variety of major front and backend suppliers, along with leading customers highlighted the increasing role of advanced packaging and chip lots are playing in re accelerating industry innovation in the face.
With the slowing of front end driven Moore's law.
As we've noted in the past advanced packaging 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 on short lead times at a compelling cost of ownership.
In memory as expected, we experienced stronger second quarter demand for DRAM probe cards, while flash remained weak.
The sequential increase in DRAM was driven almost entirely by DDR five and third generation high bandwidth memory designs that are enabling the rapid growth in generative artificial intelligence.
DDR five an H b M together more than offset the softness from each of the memory manufacturers reductions in wafer starts that are helping consume the high inventory of older memory designs like DDR four.
H B M is yet. Another example of how advanced packaging is enabling the industry's innovation and long term growth since one H B M. Chip is a stack of 812 or even 16 individual DRAM die.
To ensure high yields of this stacked DRAM chip customers probe and test each component DRAM die prior to stacking and probe and test the multi die DRAM stack at various points during the stacking process, leading to an increase in the overall probe card intensity per good die out.
In addition, the technical requirements for H B M tester significantly more advanced than for standard Unstack DRAM products involving higher test speeds and more challenging thermal scaling specifications.
As one example of increased test complexity. The 100000 Mems probes on a single H B M probe card must remain within a few microns of their target position across an entire 300 millimeter wafer as the wafer temperature varies by almost 100 degrees.
For factors Mems based smart matrix DRAM probe card architecture meets these advanced requirements, providing significant value to our customers and differentiation for form factor.
We believe our superior performance capabilities will drive both market share and profitability gains as H B M grows from our current single digit percentage of DRAM wafer starts to 20% by 2026 is projected in a recent wall Street Journal article.
Shifting now to systems.
Our systems business continues to deliver strong results with revenue at near record levels again in the second quarter.
These levels warehouse ever less than we expected and in our outlook due to some delivery push outs caused by a combination of customer facilities readiness delays single point supplier issues and in turn off first pass yield shortfalls.
We expect these systems to be shipped in the current third quarter and we expect to again deliver strong system segment revenues in the quarter.
This strength is driven by our market, leading test and measurement products for early development of applications like co packaged silicon photonics quantum computing and advanced packaging metrology.
Co packaged optics enabled by Silicon Photonics continues to be an important and exciting driver for form factors current and future business.
This technology is poised to Revolutionise chip to chip communication in the data center with significantly reduced power consumption that high speed driving industry forecast of 30 plus percent growth rates for silicon photonics devices over the next several years.
In the transition from early R&D to low volume production customers are deploying form factors turnkey electro optical measurement systems built on our C. M 300, and summit 200 engineering progress with sub systems from leading partners like key site technologies N P. I.
As production volumes increase over the next several years, our product roadmap delivers both systems and consumable probe cards to test and improve yields of electro optical silicon photonics chips, enabling our customers to seamlessly transition their co package optics devices from the lab to the fab ramping quickly to high.
Volumes to meet the demand for these revolutionary and innovative devices.
Finally, I want to share an important customer highlight from the second quarter form factor was one of only six suppliers to receive the exclusive Intel Epic program Outstanding supplier Award for 2023.
This award recognizes the absolute top performers in the Intel supply chain for their dedication to continuous quality improvement performance collaboration and inclusion over the past year.
I'm extremely proud of the global form factor team for the dedication and performance that resulted in this top tier recognition from Intel.
And I'd like to take this opportunity to thank and congratulate our world class team.
In closing, let me reiterate that in the short term we continue to be encouraged by the stabilization of demand across our diversified product and technology portfolio as we progressed through the cyclical challenges 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 chip lids and co packaged 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 delivers $2 of non-GAAP earnings per.
Sure on $850 million of revenue.
Shai over to you.
Thank you, Mike and good afternoon.
As you saw in our press release and as Mike mentioned Q2 revenues were slightly below the low end of our outlook range non-GAAP gross margin was above the high end of the range and non-GAAP EPS was at the high end of the range.
Second quarter revenues were $156 million.
A six 9% sequential decrease from our first quarter revenues and a year over year decrease of 23, 5% from our Q2 'twenty two a mere record quarterly revenues.
QTL revenues were $1 million below the low end of our outlook range due to push outs of shipments in our system segment.
Probe card segment revenues were $115.3 million in the second quarter, a decrease of $12 million or nine 4% from Q1.
The decrease was driven by lower foundry and logic and special revenues.
Partially offset by an increase in byram revenues.
The systems segment continues to operate at near record levels and revenues were $46 million in Q2 with zero point $5 million increase from the first quarter and comprised 26% of total company revenues slightly up from 24% in Q1.
Within the probe card segment, Q2 foundry and logic revenues were $81.9 million and 19% decrease from Q1 foundry.
Foundry and logic revenues decreased to 53% of total company revenues compared to 61% in the first quarter.
DRAM revenues were $35 million in Q2, $10.7 million or 54% higher than in the first quarter and increased to 20% of startup quarterly revenues as compared to 12% in the first quarter.
Flash revenues of $2.9 million in Q2 were $3 million lower than in the first quarter and were 2% of total revenues in Q2 as compared to 4% in Q1.
GAAP gross margin for the second quarter was 38, 7% as compared to 36, 5% in Q1.
Cost of revenues included $3 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today, Andy the reconciliation table available in the Investor Relations section of our website.
On a non-GAAP basis gross margin for the second quarter was 46% 2.2 percentage points higher than the 38, 4% non-GAAP gross margin in Q1, and the 110 basis points above their high end of our outlook range.
Both segments gross margins were higher than Q1 gross margin and higher than forecasted with a more significant upside in the probe card segment.
Our probe card segment gross margin was 36, 5% in the second quarter, an increase of two two percentage points compared to 34, 3% in Q1.
The increase from Q1 is due to the net effect of three main factors.
First 600 basis points of the increase relates to improved factory utilization and lower manufacturing spending being.
The improved factory utilization, even at lower revenue levels relates to higher manufacturing activity near the end of the quarter.
Second 90 basis points of the increase relates mainly to reduce excess and obsolete inventory reserves.
Partially offsetting these positive factors was 400 basis points related to lower revenue and a less favorable product mix with lower foundry and logic revenues and higher memory revenues.
Our Q2 system segment gross margin was 52% 30 basis points higher than the 51, 7% gross margin in the first quarter, reflecting reflecting slightly higher revenue and a more favorable product mix.
Our GAAP operating expenses were $61 $6 million for the second quarter as compared to $61 million in the first quarter.
non-GAAP operating expenses for the second quarter were $52 1 million or 33, 4% of revenues as compared with $51.2 million or 36% of revenues in Q1.
<unk> $9 million increase relates to G&A expenses specific to Q2, partially offset by lower performance based compensation.
Company noncash expenses for the second quarter and included $9 $2 million for stock based compensation two.
$2 $7 million for the amortization of acquisition related intangibles.
Depreciation of $7 5 million.
All at similar levels to the first quarter.
GAAP operating loss was $1 $3 million for Q2, compared with GAAP operating income of zero point $1 billion in Q1.
non-GAAP operating income for the second quarter was $11.2 million compared with $13 $2 million in the first quarter.
GAAP net income for the second quarter was zero point $8 million or one cents per fully diluted share compared with a GAAP net income was $1.3 million or two cents per fully diluted share in the previous quarter.
The non-GAAP effective tax rate for the second quarter was 14, 2% similar to the 13, 9% in the first quarter.
We expect our annual non-GAAP effective tax rate to be between 13 and 17%.
Second quarter non-GAAP net income was $11 2 million or <unk> 14 per fully diluted share compared to $12 $5 million or <unk> 16 per fully diluted share in Q1.
Moving to the balance sheet and cash flows we generated free cash flow of $2 $1 million in the second quarter compared to a negative free cash flow of $7 $3 million in Q1.
Cash provided by operating activities in Q2 was $22 5 billion.
$10.2 million higher than the $12 $3 million in Q1.
The main reason for the increase in cash provided by operating activities improved working capital management.
We invested $25 billion in capital expenditures during the second quarter compared to $19 7 million in Q1.
With the core drivers underpinning our strategy still in place we continue to execute on increasing our long lead time facilities and equipment portions of our capacity increase plant.
Placing equipment in service at the store rate to ensure capacity does not significantly outpaced demand.
Accordingly, we are updating our expected capex for 2023 to range between 55 and $65 million $5 million higher than the previously communicated range.
Overall at quarter end total cash and investments were $240 million similar to Q1.
As of the end of the second quarter, we had one terminal and remaining with our balance totaling $15 million.
Regarding stock buybacks during the second quarter, we did not purchase additional shares under our $75 million two year buyback program at.
At Q2 quarter, and $18 6 million barrels we remained available for future repurchases.
Turning to the third quarter non-GAAP outlook, we expect Q3 revenues to be higher than in Q2.
Our systems and foundry and logic revenues.
This results in a Q3 revenue outlook of $167 million.
Plus or minus $5 million.
Third quarter non-GAAP gross margin is expected to be 40% plus or minus 160 basis points.
At the midpoint of these outlook ranges, we expect Q3 operating expenses to be $53 million, plus or minus $1 million.
non-GAAP earnings per fully diluted share for Q3 is expected to be 17, plus or minus four.
A reconciliation of our GAAP to non-GAAP Q3 outlook is available on the Investor Relations section of our website and in our press release issued today.
With that let's open the call for questions.
Peter.
Thank you.
As a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone to ask a question.
To allow everyone the opportunity.
These limit yourself to two questions you may re queue with any additional questions if time permits.
Please standby, while we compile the Q&A roster.
Our first question.
Comes from the line of Krish Shankar of Cowen.
Yeah, Hi, Thanks for taking my question I told them first one for Shai.
It seems like the mix is skewing more towards foundry and logic in September quarter, but the gross margin.
Flattish.
On that because I.
Foundry logic has been a good bargain than DRAM and then I had a follow up for Mike.
Sure. Thanks Krish.
To start with we've talked before about expecting high <unk> gross margin at the current revenue levels. So we are obviously encouraged by the Q2 results and by the Q3 gross margin outlook over around 40% at the midpoint of that would be something that we expect gross margin to increase to low forty's. Once we achieved quarterly revenues of about 108.
<unk> million on our way to our target model of 47% of revenue levels around 200 $210 million as we demonstrated a year ago with their record revenue and we expect the gross margin to fluctuate along with that strategy. This trend line as we make progress are specifically for Q3.
Gross margin as compared to Q2, the mix impact you actually expected to be flat. Once you go down to one level below the segment revenue.
The impact of the higher revenue versus the second quarter is expected to be offset by a return to normal factory utilization after strong manufacturing activity during the second quarter.
Q2 for Q3 shipments and also we expect some higher material cost in Q3 as compared to Q2.
Got it thanks for that and then a bigger picture question for Mike.
For the color on SPM.
When I look at Gpus, historically, it looks like they use legacy probe card technology, but.
With AI and cobalt at lean seems like many deals man.
I'm just kind of curious is that true if so kind of I know you're expecting to see the benefit and how to kind of like quantify.
Our revenue opportunities.
A form factor are actually going to do.
And then space probe card technology for Colo. Thank you very much yeah. Thank you Christian good question and I agree with the underlying assumptions in that historically, the leading GPU manufacturer has used the legacy non advanced probe card technologies and hasn't needed a mems probe card from us or our major competitor.
As you know that's changing with the adoption of <unk> and advanced packaging.
And both of US are in the middle of qualifying Mems based technologies.
For these advanced packages for these co ops technologies.
It's a relatively modest number of wafer starts at this stage, which I think you know so hopefully this trend continues this growth and AI is certainly is expected to continue and we will be able to see that as a more significant part of our 2020 for revenue.
As the Mems adoption associated with the co ops technology for Gpus really takes hold and we see that ramp in more significant volumes.
Thanks, a lot Mike Thank you.
Thank you.
Our next question.
It comes from the line of dead body Schroeder of Jefferies.
Hi, Thanks for taking my question so I just.
My first question you guys last earnings call you had talked about a very strong design activity and their volumes.
And then can you can you just campaign contract out to 15.
In terms of design activity has increased significantly.
Last thing what you saw in either why Youre starting to come back now.
AMD and Intel.
The PC business.
Thank you.
Yes.
Go ahead.
I have a follow up after that yes, okay alright.
So design starts and design activity, we're seeing similar levels as we have for the past couple of quarters.
Remember that a probe card is specific to each customer chip design and so as customers release their new designs. They work closely with our design teams to customize the probe card architecture to meet the specific test requirements. They have for that chip design and as we've noted in the past couple of quarters, We've got very robust does.
<unk> activity, where but not shipping very many probe cards units on each new.
Each new NPI.
In an upturn, we might expect to ship tens or even hundreds.
To meet the production ramp now we're shipping a few and this is really a dynamic that most of our customers are adapting to as they try and consume the inventories that they have on their balance sheets that the channel has of their parts. Obviously, they don't want to obsolete this inventory by overwhelming it with new designs.
Is that kind of coming in.
<unk> the second quarter is a pretty good example of the strength and H B O as we said in the prepared remarks.
Most of the increase we saw was really attributable to H B M. Some to D. D. R. Five as well you know if you look at from Q2 to Q3 I'm sorry from Q1 to Q2, we grew the DRAM revenue by about 50 per cent.
And almost all of that growth comes from H B M. So you're seeing that already we do expect continued strength there as we go through 2023.
But there will be some digestion I wouldn't expect it to double again in the third quarter. For example from an H B M perspective, but it's a great great considering how commodity DRAM or non H B M. D. Ram is is still relatively weak and working through some significant inventories that are still on our customers now.
<unk> and then the channel H B M as an awfully nice growth vector to be exposed to right now.
Got it thank you.
Thank you.
Our next question.
Comes from the line of Charles sheet of Needham and company.
Yeah. Good afternoon, and thank you for allowing me to ask a couple of questions.
Ask about the gross margin glad to see <unk> back to the forties arrange for <unk> has has been for two two and it's gonna be 423 after <unk>.
We have a few quarters <unk> module and the third is range are you are comfortable to really call maybe that <unk>, it's gonna behind us and going forward, maybe we'll be able to maintain.
Ford is kind of gross margin. Thank you.
Yes. So the two main factors that influenced gross margin of <unk> revenue level and makes <unk>.
Sorry answer the previous question by repeating what we said before that in order to gross margin to increase to the low for the low forties code is 42 43 per.
Per cent, we need quarterly revenue to go up to around 180.
And in order to get back to the 47 per cent target model gross margin like we did a year ago, we need revenues to grow to 202 hundred 10 million and we also need this growth to come from a higher margin markets, which is mainly foundry illogic.
Along the Strand line that I just described for where we are now it is 40 40 per cent.
<unk> 47 per cent.
Revenue stays at these levels and mix remains similar we should be able to maintain the streamlined that was talking about but we do expect to continue an experienced fluctuations along with <unk>.
Thank you shock maybe the other question I'm glad to see someone some strength on DRAM Apple cart.
Well, certainly I was not expecting it to bounce back to 30 million parts per quarter. This soon maybe this is a question for Mike originally we were expecting maybe it's gonna take a locked down in the middle part of 2023 and now we're not quite seeing that although you did provide some.
More cautionary statement around okay, maybe it's not going to go 50 per cent higher next quarter, but.
Just wanted to stay on this 30 million plus per quarter.
Do you think that this is gonna be a sustainable quoting the wrong way for your DRAM business going forward or or maybe.
Maybe some fluctuation will get.
Got us back to the quantities range. Thank you.
Yeah. It's it's an interesting question, Charles and maybe to come at it from a different direction or DRAM Pro card business right. Now. It is really you know the tale of two Submarkets, one which is very strong that we talked about in the prepared remarks touched on hearing Q&A is H b M driven by generative AI right I think every.
But he understands the connection where H B M is one of the the key enabling semiconductor components, along with a G. P U for generate a <unk> and so we're seeing some very strong growth there.
The other part of the DRAM business sort of legacy DDR for low-power D. D. R. Four is really very weak right and if if I were to estimate it for Ya.
Second quarter revenue was composed for DRAM, almost a third and H B M. We've never seen that kind of contribution level from H B M. Before and you know an initial ramp like that H B M is still only probably five per cent of weight industry wide DRAM wafer starts projected to grow significantly over the next.
Coupla years, there's gonna be a little bit lumpy on the way there. If we can get both components of DRAM healthy inactive if you had H b M on top of the if you like commodity her legacy DRAM, then I think you've got the opportunity for DRAM Pro card revenues and DRAM probe card spending intensity to to drive up significantly, but I'd <unk>.
Some lumpiness on the way there.
Yeah May I ask a quick follow up <unk> sounds like him roughly 20 <unk>.
What's the problem the stand a DRAM, but it was kind of like in line with a Q1 number is do you think that's really probably the cyclical bottom level around right. There cause cause I did notice that was probably the case historical dayquil phone factors, a DRAM business yeah over there.
Yeah, I I I think as long as DRAM continues to get healthy from an an market perspective, you've heard all our customers talk about inventory starting to be consumed they've taken down wafer starts they're managing their way through this as long as that continues I think it's a reasonable assumption that the 20 million ish level is the sick.
<unk> Uhm, we should see it build from there and hopefully we'll see continued growth associated with H B M&A I that will put another leg up on the overall DRAM market with our strong market share I think you can extrapolate those into form factors grow some results.
Thank you Mike.
Thank you.
Our next question comes from the line of Craig Ellis of be Riley.
Yep. Thanks for taking my question as long as there's attention on high bandwidth memory given it search all I'll go in with a few more first Mike can you talk about your customer shipment diversity within high bandwidth memory clearly there's been one player that's my bet market.
<unk> another aspires to gain sure another <unk> interested in getting product out, but where are we now with respect to customer shipments and how should we think about the coming two to four quarters <unk> and what will happen there from an oem's scam, pointing pin related to high bandwidth memory.
Given how tight we are on supply.
Whereas form on being able to deliver probe cards, you know when and where customers need them right now.
Yeah, [laughter] so on the the customer H B M side of the equation.
I think for those of you who follow this market you do understand that there's one pretty significant leader in terms of current market share of of H B M and it turns out that that's our customers. It has a very strong historical relationship with form factor and one where we have relatively high market.
Sure Uhm, so that's helping US right now if you if you think about our engagements with the other two major DRAM manufacturers I think they line up reasonably well with the shared dynamics were active with each of them were engaged with each of them, but if I think about the current shipman profile. It's it is heavily biased towards the leading <unk>.
Provide or have H b M memories right now.
Do you think about constraints as far as we set we're in pretty good shape and I don't feel like we're a constraint on the overall H B M ramp, there's probably other areas of process tools, some yields which secondarily help us right at a lower yield art needs more pro cards to get a certain number of die out and tested.
<unk> He's gonna go up in that situation. We're currently enjoying that in helping resolve those yield problem.
So I don't think we're the current constraint on H B M production and the ramp associated with those things and you can imagine that given the capacity investments we've made and the Capex. We've deployed we need to turn on a few elements of that to meet this H B M demand, we're at the ready to do that.
It's gotta be a nice problem to have thanks that might come then following up and I'll just spin it over to a foundry and lodwrick when I look at supplement that shows revenue Max by customer, we do <unk> drop into the lowest percent of sales and I believe it would be lowest dollar sales in the lab.
Last four quarters.
Charles ask about yeah Webb a trough in DRAM do you feel like your largest customer is a trough levels or how do we think about the Gibson takes us we look into the back half of this sharing 2024 there.
Yeah, I I think it your your observations a good one I think there's there's two components to this one is you know our largest customer generally foundry and logic. There's some important leading edge designs that are beginning to ramp on advanced packaging technologies three D packaging triplets, though.
Kind of enabling technologies and we're just in the middle of that transition and ramp with that customer I think layered on top of that you know you've seen some pretty significant weakness in the client P. C business analogous to what's happened in memory it looks to be now rational.
Wising and recovering, but it's also gonna take and market growth consumer P. C refresh cycles to really start to pull the inventory and some of these new products through where customers are gonna ramp wafer start significantly by probe cards for those wafer started so I think as long as things stay in this.
Relatively stable situation that we currently have and start to consume inventory new products coming into the channel that need new pro cards to to test and get to the back end.
I think we'll probably see things turn up from here and I made a comment in the prepared remarks that one of the areas of strength sequentially and founder and logic. We do see his client P. C and I think that's consistent with our customers in their narratives over the past couple of weeks associated with that market.
That's really helpful. And then if I could just sneak in one more.
<unk> U N Chi noted that systems was scenario, where there was a push up in the business, but if we address for that push out if not for that systems would've been a significant bracher's levels in the quarter and so the question is given given where natural demand Joseph not for that.
Shift can you talk about how you're feeling about trajectory of the systems business in our restarting to move into new higher level of revenue generative capacity given some of the trends that you've talked better earlier in your remarks. Thank you.
Yeah. We're we're very excited about the system's business, where we're disappointed in the push out you know if you. If you extrapolate you know five to 6 million dollar gap to our mid point in the outlook.
Yen reiterating that we are planning to ship those systems in here in Q3, so it's not perishable to man.
But relatively high a S. P's as you might infer <unk> and you know tools that are really enabling the next generation of semiconductor innovation I highlighted co package optics in silicon photonics and the repairing remarks, that's a real driver, but there are some other ones you know where we have.
Unique capabilities, whether the cryogenic systems for test and measurement and quantum computing Uhm metrology, an inspection for advanced packaging, it's in the area where customers continue to invest.
Semiconductor R&D spending by our customers continues to be at record levels as they continue to innovate and all these exciting areas and our tools in the system segment.
Ah really enabling that and customers continuing to spend aggressively on that and so.
A good example of form factors diversified strategy, where we've got some strengthen the system's business good momentum and the system's business, it's helping at least partially offset some of the softness overall in the production brokerage business because of the cyclical downturn.
Thanks, Mike.
<unk>.
Thank you.
Our next question.
Comes from the line of David Delhi, Oh Steelhead Securities.
Hello, Thanks for taking my question I have a couple Mike I've asked this question in the past, but you know I'd just like a little bit further elaboration, you've talked about how high bandwidth memory is more probe and test intensive you know for two reasons. One is it's packaged in and there's more steps.
And that's in the stack of packages and then also because the ships themselves are more complex. So we add those these two things up how much more probe intensive do you think high bandwidth memory is versus.
Yeah on a like for like basis, you know, let's call. It <unk> out the door at H B M. As with most advanced packaging technologies somewhere between 20, and 30% more test intensive as we see it now.
Now <unk> early in any of these technology ramps, you're gonna get an intensity bumped because yields are low customers are working through all of the yield improvement challenges associated with things like stacking die and that's one of the areas where form factor provide unique value right. There at the high fidelity test the <unk>.
Tests, we offer really allows customers to detect and then fix these these yield problems associated with new technologies. So that they can then ramp them aggressively and volume at higher yields so rule of thumb I think.
We see in an H B M. We see it in most chip with technologies somewhere around 20% to 30% more test intensive on a like for like out spaces.
Okay Uhm as my second question you know the founder you locked your business was declined I think you mentioned 19 or 20 per cent or so sequentially can you just talk to elaborate a little bit about what the key weakness was behind that drop and then just kind of similar.
Similar.
Question, what percentage do you think of three five and seven nanometer nodes are using Mems technology now for pro the other other big segments that don't use ma'am such as the G. P. U segment, that's switching over at this point.
That's it for me.
Yeah, Uhm, so foundry and logic was down in the quarter. If you go back to what we said on the Q1 call that wasn't expected decline, we had quite a strong Q1 in founder and logic and we had our expectation for some digestion. There that's exactly what we saw <unk>.
We now in our third quarter outlook C foundry and logic rebounding. Some some strength driven by both modest increases in in mobile and client P. C. But you know as our largest business. This is an important one that we we continue to compete hard in and continue to make sure. We're engaged with all the top customer.
If we think about uhm areas of that market that are still unserved or underserved by Mems probes, we've talked already on this call about the the G P U's and that's really because.
They are very large footprint and don't need the density that a men's probe has uhm. So customers can still utilize the older technologies older technologies with probably quite a bit lower cost and so that's a rational decision for them as they move to some of these advanced technologies light co.
Loss at three nanometer and five nanometer you really have to use the men's probe in so that's an opportunity that's in front of us in in front of you know the two primary Mems probes suppliers and founder and logic, that's probably the last real hole in the Janse note adoption of members Rose we see why.
Spread adoption across most of M. P use application processors.
Any kind of high performance compute Gpus is really the whole at this point.
Alright, thank you.
Thank you.
Our next question.
Comes from the line.
Of Christian Schwab of Craig Harlem.
[noise], it's Christian how are Ya.
So following up on the the G. P U members movement and the last advance note adoption.
How big of a business good that'd be in two to three years, you know bigger than it is currently.
Yeah, I think the one thing to be somewhat cautious about it as is and I think most people who've understood that the G. P. U dynamics in generate of AI adoption is the units are relatively low right. These are very large and complex products that bear extremely high a S p's for that customer and so when you think of.
But in terms of test intensity, you know dollar spent on probe guards more specifically, there's probably not a huge needle move or there at least in the initial adoption.
The boundaries are talking about adding a few thousand wafer starts associated with <unk>. If you contrast that to you know mobile and some of the big projects at the industry. You know there's high unit volumes associated with mobile completely dwarfed right. The the increases were talking about with Cola.
So while it's an exciting opportunity and we're seeing.
Its impact in DRAM was H B M. You know, it's an area, where we wanna be somewhat cautious in creating expectations and adding capacity and planning around it I I think we'll see exactly the same dynamics as we've seen in other parts of the business with the adoption of Mems probes, where.
You know you see increased value increased test intensity associated with both the probe card sale, but also the the test intensity as these customers trying to adapt their integration strategies to the advanced packaging techniques like <unk>.
Okay, Great and then my last questions have to you know <unk> you don't have to do with foundry and logic. You know first of all you know how do you guys view your market share position Meteor Lake by your largest customer our check suggests there'll be greater than the previous generation Sapphire rap.
<unk> just want to confirm that you know and this is a chip that you know until is massively excited about you know thinks it's the biggest ship. Your introduction you know since bringing Wifi. The laptops in in 2000 is they're gonna bring you know a I to the edge into the personal computer so.
If they're remotely directionally accurate about that that should be.
Deal with your with your physician well there from a market share perspective, that's part one other question part two of the question is it's my understanding that you guys are close to potentially.
You know selling too until just call. It didn't tell those larges C. P. U competitor a person you previously have an AD material market share with that could ramp to be Ah material business. So if you could give us a quick update on both of those that'd be great.
Sure sure I I think a couple of things you know with our largest customer.
You know I design like media like has us all excited for a couple of reasons, one I think the value it delivers to their customers is significant and there's some fantastic innovation and what it does to the client P. C experience.
The other reason as exciting as it is the first major high unit volume consumer product, that's going to utilize advanced packaging <unk> and so it's exciting from a couple of different perspectives.
Compared to some of the server chip's like Sapphire Rapids, we we do have a better chair physician in the client products like media like.
And so it's an area, where we're excited about that ramp.
I think you still need to be a little bit circumspect, given the weakness in the client P. C market. It does appear to be stabilizing and improving but we're definitely not off to the races. Like we were in the midst of the pandemic when everybody was refreshing their P. C's the.
The other point I'd make before shifting to the second part of the question.
Is you know we were one of six suppliers, who who received the highest supplier award from Intel and we were the only test and measurement supplier. So I think that's an indicator of the strength of that relationship the robustness and health of that relationship, which presumably translated into market share as well.
Well.
On qualifying at the other M P U customer <unk>.
We it continues to be an extremely high priority for form factor clearly to be only qualified at one of them. You're then exposed to whatever share shifts occur in that market and those share shifts I think everybody understands have not been friendly to our largest customer.
Having said that you know we're still.
Working with that customer to modify our technology to adapt our technology to their specific test requirements, which like many customers are unique you know their test engineering teams is built up a strategy that they believe offers them unique value and we continue to modify our technology develop our.
<unk>, so that we can be qualified and grow our business. There. So it continues to represent growth opportunity for us continues to represent a high priority for us we understand the strategic imperatives of getting qualified there.
And just to follow up on add that as I can you know when when <unk>. When would we you know verify your validate you know the fact that you would get there and then how long if you did would it take you to get you know Ah meaningful you know market leader.
<unk> position at that customer I assume it would take two to three years, but it could be faster depending on how your competitors doing but my guess is you know they may.
Spend at least $100 million out of each products a year. So it's kind of a substantial opportunity for you buy in the ballpark or is that not right I think you're a little high but let's call you're close to the ballpark maybe in the parking lot. They are of significance vendor. When you think about the timing that you just articulated that's about.
What it takes right to get qualified and then when a few designs and ramp. So this is an opportunity that's very much still in front of us I want to reiterate that it is a strategic imperative for form factor to get ourselves qualified and realize that that significant amount of share of that significant spend on <unk>.
<unk>.
Great no other questions. Thank God.
Mmm.
Thank you as a reminder, please limit yourself to one question and one follow up.
Our next question.
Comes from the line of Linda <unk> of da Davidson.
Hi, Tom definitely.
Hello <unk>.
Okay. So previously earlier you referenced yeah, some inventory issues that your clients that was still kind of getting your ability to ships new product. What do you think the industry is or your clients are is the burn of their image excess inventory levels. At this point are there are still a few quarters left of that.
I think it's different in different segments and and markets. You know if you look at something like Slash Slash has a long way to go at least <unk> Slash has a long way to go DRAM, probably in a little bit better shape, but you heard narrative from some of the big DRAM manufacturers in the last several weeks where.
They feel like that's turning but there's still a significant amount of inventory to get get through you know mobile probably a few quarters to go as well some of the areas, where we don't have as much exposure things like automotive trailing edge nodes analog things like that where there's still a pretty <unk>.
Healthy supply demand balance and relatively little inventory those are pretty cleaned up so I think you've got the whole gamut across the semiconductor industry, but the areas. The drive significant volumes of new pro guards for us at New unit volumes higher unit volumes of pro cards on new designs, there's still some in majority to get through.
Yeah.
Okay. That's helpful. Thank you and Mike I was curious or wondering if you could give us just a little more information on the silicon Photonics opportunity for you you know maybe how big it is today, how you think the ramp happens in that space over the next few years and how big it could be yeah.
Silicon Photonics and co package optics, we talked about the prepared remarks as are really exciting area for us one because you know we've got a strong position with our tools and the partnerships, we have with with companies like Keysight and P. I in providing a turnkey elektra optical measurement system and what customer.
I need to do is is test these chips, both optically an electrically and we're one of a handful of suppliers, maybe the only supplier in the world who can bring those technologies together to provide that kind of hybrid electro optical test system.
Yeah. This is still in late R&D early pilot production. So one of the things. We're now focused on is how do we take those hybrid electro optical technologies and really capitalized on them as silicon Photonics grows you know, it's it's got 30 odd per cent growth rates from most.
External third party market research firms.
Co package optics in the data center, a wonderfully compelling trend just because of the the power efficiency improvement. So what we're trying to do right now is position of business, that's maybe 10% to 20% of system segment revenues and really position ourselves to take advantage of the growth of that in our <unk>.
Auction business in the probe card business and probably this is one of the places where we extend the system's business into a more production like environment over the next couple of years. So I'd expect one of the reasons why we keep talking about it. It's one of the areas, where we're investing a lot already were coupled with the leading customers in the industry and it's an area, where we would expect to <unk>.
Practice 30 odd per cent growth rate of the industry when were successful and execute.
So if it's <unk> R and D. At this point, we coupla years away from meaningful production or could it be faster than that it could be faster than that were with a couple of customers have timelines that or they're still into you know late 2024, but I think that's a reasonable expectation for some of these production ramps.
Sorry.
Alright I appreciate it thank you.
Thank you.
Our next question.
Comes from the lineup Gus Richard up North Miami capital markets.
Yes, Thanks for squeezing me and I have my first questions was seven part question just kidding.
<unk>, if you think about silicon fulltime ice can you give us an idea of how many people you're engaged with.
Yeah, <unk>. So we've sold tools to many many customers numbering in the dozens but I think this is one area, where you have new technology, where do you really want a partner with the people who you feel are gonna be the leaders and so we focused a lot of our R&D engagements on a handful of <unk>.
Summers, making sure we're working closely with them in developing the systems and modifying the system and making sure we understand their roadmaps to go into production. So well, it's a fairly broad based broad installed base of silicon photonics tools that we have.
Numbering in the dozens.
Really focused on a couple of drive our customers and that's a strategy that's consistent with the way we drive most of our R&D across all of our business.
Great. Thanks, that's that's helpful and then I'm thinking about your foundry and logic business, if you kind of cut.
That statement I say you know how much of it is is.
Mobile and P C client and how much of it as a <unk> I know there are two different categories, but if you can kind of give us a sense of.
You know, how big checkbooks are and and sort of how big the the client piece of it is that'd be helpful.
Well I think it it also depends on what time frame you're talking about if you go back to 2021 when client P. C's were on fire. It was a very large piece of the business and we also have mobile and five G. Layered on top of that so you can probably back into what the percentages are based on some of the historical I don't have that off.
The top of my head in wood.
Would not really want to speculate on the segmentation it can often be difficult to tell especially in mobile exactly where it shifted suggestion for it. So we want to be careful with some of those but I could definitely they are very large components of the founder and logic business well north of 50 per cent.
If you and then if you didn't take about the customers. If you didn't think about the cut through triplets, it's relatively smaller and the founder and logic because we're just in the early innings of adoption. We talked about media Lake is somebody else's question. You know that's an example of really the first high volume client Oh.
Or consumer driven or whether it's client P. C. Your mobile that's adopting these chips with architectures and so if I were to hazard, a guess, where we're still in foundry logic probably <unk>.
Mid single digits high single digits relatively low percentage is one of the reasons why it's such an exciting opportunity the increases in test intensity and test complexity associated with advanced packaging and shiftless as chip was become a bigger part of the overall foundry and logic industry, that's an exciting.
Rosa opportunity for us.
Got it thanks, so much thanks guys.
Thank you.
Our next question.
It comes from the line of Brian Chin Stifel.
Either excellent May I ask you a few questions.
Maybe just to clarify something so the the pushed out it.
It sounds like it's you know kind of five 6 million dollar.
And you expect to recapture that <unk> was that entirely the systems.
For those sort of nine <unk> reasons that you laid out or was there any any delay in terms of of the probe card revenue as well.
Well in the probe card segment because it operates on shut short lead times.
You know, we often have differences from the assumptions we've made in our outlook right. You know right now we still got essentially two months to go in the corner.
And so what we do see changes you're an appropriate business as the quarter evolves and as we book and shipped things we still have a good chunk of <unk> to go here in the third quarter in the same situation existed in the second quarter. So we're a little more difficult to make those comparisons in the brokerage business, but if you look.
You know, what we said on the on the call. The the system's business. The lead times are longer and so we do have backlog level of visibility for what we should be shipping in the corner and in the second quarter. You can look at the Delta to the mid point of guidance that we gave them. It's about a 6 million dollar Dell.
Okay, and we had about a 6 million dollar delta of shipments that we expected the systems that we expected to ship that we didn't.
Okay.
Okay. Thank you and then maybe it might be kind of a bigger picture question. It kind of ties in the things that have been discussed already but.
Technically things are clearly a bit more depressed currently and I think everyone expects in time that there will be some better improvement off the bottom.
With that being said or over the midterm essay two to three years are you upbeat and I see you grow similar to the past five to 10 years.
Moving forward do you think the complexly might have to do a little bit more of the heavy lifting to drive strong growth in the industry.
Yeah. It's a it's a really interesting question I think over a two to three year timeframe. We are optimistic about overall I I see growth icy revenue growth you know if you look at the industry. Historically, it's always gone through the cyclical ups and downs, but imposed on that <unk>.
Very strong longterm grocery decorate and so over.
Two to three year timeframe, we're confident that the industry is going to emerge from this cyclical downturn and that will begin to see I C unit growth and dollar growth layered on top of that though you know the the degree of complexity and value in each of these icy units is pretty significant right if.
If you think about some of the projects will talk about on the call, whether they're H b M whether they're.
Projects like media like you know the complexity in those in the value. They provide is certainly going to be part of the revenue growth Super imposed on top of the I C U.
Thank you.
Excellent.
Thank you.
Our next question.
It comes from the body Schroeder of Jefferies.
Question again, I guess, just finally long-term perspective, so yeah, you're on your on your prepaid M. I T. A doctor about H B M. You know, adding complexity to your full phone number that's M T.
But like.
<unk> <unk> <unk> <unk> <unk>.
Three or four years down the line.
H B M stacking <unk> <unk>.
<unk> <unk> <unk> <unk> <unk> <unk>.
Given that the complexity <unk> <unk> <unk> <unk> <unk> <unk>.
Yeah, Yeah. It's a good question it it drives to some of the underlying gross margin fluctuations that shy talked about whether it's increasing the value of what we do in a market like DRAM by making sure that we have compelling differentiated products for new things like H B M uhm that certain.
<unk> helps gross margins out in a segment that has been gross margin challenged over the past several years. We're also investing in R&D to improve our competitiveness and profitability with some of these platform so over that kind of time frame.
I think he said three or four years.
That kind of time frame you can see both of those things at work. It's one of the reasons you know that we're confident in the progression back towards the 47 per cent of the target model and if you've seen form factors longterm gross margin.
Gross margin improvement gross margin evolution, you can see that that's a very important metric forest tough to overcome the volume reductions were having in the current cyclical downturn, but in the area of both increasing value because of things like H B M and increased complexity, but also what's driving are in.
Internal efficiency and gross margin improvement to deliver a better cog structure in the gross margin line.
Yep that's helpful. Thank you. Thanks.
I would now like to turn the conference back to Mike's lesser for closing remarks, Sir.
Thanks, everybody for joining us today, we've got as we usually do at this time of the year several investor conferences lined up here as we go through the late part of the summer and hope to see you with some of those until then take care.
This concludes today's conference call. Thank you for participating you may now disconnect.
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