Q3 2023 FormFactor Inc Earnings Call

Okay.

Thank you and welcome everyone to form factors third quarter 2023 earnings Conference call 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 VP of Investor Relations will provide you.

You of some important information.

Thank you.

Today, the company will be discussing GAAP P&L results and some important to non-GAAP results intended to supplement your understanding of the company's financials.

Reconciliations of GAAP to non-GAAP measures and other financial information.

Available in the press release issued today basic company and I'm, the Investor Relations section of our website.

Today's discussion contains forward looking statements within the 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.

So what's your macroeconomic and geopolitical conditions, the benefits of acquisitions and investments in capacity and new technologies.

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 and 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 was 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.

Www Dot S E C dot golf and in our press release issued today.

Forward looking statements are made as of today November 20th twenty-three.

We assume no obligation to update them.

I will now turn the call over to form factor C. All Microsoft.

Thanks, everyone for joining us for form factors third quarter earnings call.

Stronger than anticipated demand for foundry and logic probe cards, coupled with record revenue in our systems business produced third quarter revenue near the high end of our outlook range.

This together with higher than expected gross margin and leverage on our operating expenses produced non-GAAP earnings per share above the top end of our outlook range.

We continue to operate in the overall demand environment that remains relatively stable at the levels we've experienced throughout 2023.

The moderate sequential decrease in our fourth quarter revenue outlook range is due to the reduction in the system segment revenue from the sale of F. R. T C Chem Tech, which we completed today.

And weaker foundry and logic probe card demand due to a short term reduction in customer spending partially offset by stronger DRAM probe card demand.

Yes.

While we continue to operate in a cyclical downturn and see no near term acceleration of demand we're.

We're encouraged by broader signs of bottoming and our most high.

Most important high unit volume and markets like client PC and mobile.

In this environment, we continue to carefully balance short term results and long term investments with disciplined cost control, the prioritizes quarterly profitability and sustains our strong balance sheet.

We're maintaining our investment in R&D for new product innovation and competitive differentiation, especially in our product roadmap for advanced packaging applications like chip, let's entitles high bandwidth memory and co packaged optics.

As you'll hear from Chi we've completed the majority of the long lead time facilities and equipment capacity increases required to reach our target financial model and have slowed our capex to ensure a better balance between our capacity and anticipated long term demand.

Turning now to segment level details.

Foundry and logic probe cards, our largest business delivered higher than expected sequential growth in the third quarter as key customers ramped several major designs more aggressively than originally forecast.

This intra quarter acceleration provides insight into form factors demand profile.

Because probe cards are a device specific consumable customized for each individual chip design increased wafer starts for specific chip design can drive incremental demand for the corresponding probe cards.

Since our lead times are less than a quarter and demand is correlated to the specific mix of customers dynamic wafer start plans for their new chip designs, we can experience intra quarter changes in demand as we did in the third quarter.

In the foundry space, we experienced strong third quarter demand for probe cards testing two major high performance compute designs.

In these H P. C applications form factors differentiated vertical Mems probe card products meet demanding power and speed requirements with best in class test sell uptime and productivity delivering significant value to our customers.

We do expect a smaller contribution from foundry probe cards in the current quarter as our strong third quarter shipments are utilized to ramp fourth quarter foundry wafer production volume.

In the microprocessor space, we delivered on higher demand for probe cards testing a major tile based client PC design.

Like the high performance compute Foundry example, I just shared probe card demand for this design accelerated within the third quarter as our customer expanded their wafer start plans to meet increased and customer demand.

This client P. C microprocessor assembled from multiple titles, where chip lids into a single die using leading edge advanced packaging processes.

This is a great example of how advanced packaging is driving form factors business 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 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 stable overall demand for DRAM probe cards will flash remained weak.

As in the second quarter DRAM was driven by DDR five as well as third generation high bandwidth memory designs, which are enabling the rapid growth in generative artificial intelligence and we expect a similar H b M. Rich DRAM revenue profile in the current fourth quarter.

The positive impact of high bandwidth memory is evident in the product mix profile at one of our largest DRAM customers, where probe cards for testing H B M comprised more than half our revenue to that customer in the third quarter.

As in the tile based microprocessor example, I discussed earlier the need for sophisticated probe cards to test H B M illustrates how advanced packaging is driving form factors results.

As a reminder, each H b M. Chip is a stack of 812 or even 16 individual DRAM die assembled with advanced packaging processes, such as through silicon via <unk> and hybrid bonding.

To ensure high yields of this stack 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 assembly process, leading to a substantial increase in the overall probe card intensity per good die out.

In addition, the technical requires for H B M tester significantly more advanced than for standard Unstack DRAM products involving higher test speeds and more challenging thermal scaling specifications.

Form factors Mems based smart matrix probe card architecture meets these advance 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 continues to grow driven by the accelerating adoption of generative AI.

Shifting now to systems as.

As anticipated our systems business delivered record revenue in the third quarter as we shipped systems that were pushed out of the second quarter.

This business continues to be driven by strong demand for our market, leading test and measurement products for early development of applications like co packaged silicon photonics quantum computing and advanced packaging metrology.

Co package optics enabled by Silicon Photonics remains an important and exciting driver for form factors current and future business.

We're engaged with major customers in the transition of Silicon Photonics from early R&D to low volume production and in the fourth quarter. We plan to ship a C. M 300, silicon photonics system to a leading foundry to support low volume production.

As silicon Photonics production volumes increase over the next several years, our product roadmap delivers both systems and consumable probe cards to test these electro optical devices and improve yields enabling our customers to seamlessly transition from the lab to the VAT.

Moving forward, we do expect a short and medium term reduction in system segment revenues from the third quarter's record levels due to the sale of our F. R. T metrology business.

We grew F. R T substantially following our 2019 acquisition of the business and I want to thank all of the form factor team worldwide for their contributions to this growth and value creation.

Operationally the transaction enables the F. R T team to leverage Cam, Texas established scale and expertise in inspection and metrology to deliver the next stage of growth.

Financially the transaction maximizes form factor shareholder value by realizing a robust return on our investment while also allowing us to focus our resources on strategic initiatives in businesses, where we have market leadership and significant scale in enabling advanced packaging like the tile based microprocessor and co package off.

Fix examples I shared earlier.

Shai will update you with more details later, but our capital allocation priorities are focused reinvestment in R&D and capacity together with M&A and share repurchases to offset dilution are unchanged.

M&A remains one of the primary pillars of form factors growth and we continue to evaluate a broad funnel of targets that add complementary technologies and expand our served addressable markets.

In closing, we continue to operate efficiently and what we see is a relatively stable near term demand environment across our diversified product and technology portfolio.

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 exciting innovations like chip, let's high bandwidth memory 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 investments in R&D and capacity position form factor to emerge from the current cyclical downturn, a stronger and leaner competitor, enabling us to achieve our target model that delivers $202 of non-GAAP earnings per share on <unk>.

$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 Q3 revenues were near the high end of our outlook range and non-GAAP gross margin and non-GAAP EPS or above the high end of the range.

Third quarter revenues were 171 $6 million or 10%.

<unk> sequential increase and a year over year decrease of five 1%.

Q3 revenues were zero point $4 million below value end of our outlook range and benefited from strong revenues in both probe cards and systems segments revenue.

Probe card segment revenues were $128 $3 million in the third quarter, an increase of $30 million or 11, 3% from Q2.

The increase was driven by higher foundry and logic and smashed revenues, partially offset by a decrease in byram revenues.

System segment revenues were a record $43 $2 million in Q3 at $2 $6 million increase from the second quarter and comprised 25, 2% of total company revenues down slightly from 26% in Q2.

Within the probe card segment, Q3 foundry and logic revenues were $96 4 million or 17, 7% increase from Q2.

Foundry and logic revenues increased to 56, 2% of total company revenues compared to 52, 5% in the second quarter.

DRAM revenues were $27 $4 million in Q3 of $3 $1 million decrease or 10.2% lower than in the second quarter.

And decreased to 16% of total quarterly revenues as compared to 19, 6% in the second quarter.

Flash revenues of $4 $5 million in Q3 were one $6 million higher than in the second quarter and were two 6% of total revenues in Q3 as compared to one 9% in Q2.

GAAP gross margin for the third quarter was 44% as compared to 38, 7%.

You too.

Cost of revenues included $2 $5 billion 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 third quarter was 41, 8% 1.2 percentage points higher than the 46% of non-GAAP gross margin in Q2, and 0.3 percentage points above the high end of our outlook range.

The increase as compared to Q2 and the upside versus our outlook range were a result of higher probe card segment gross margin.

Our probe card segment gross margin was 38, 5% in the third quarter, an increase of two percentage points compared to 36, 5% in Q2.

The increase from Q2 is due to the net effect of three main factors.

First higher revenues contributed at 2.1 percentage points decrease.

Second improved factory utilization at higher production levels contributed to a <unk> three percentage points increase.

Partially offsetting these positive factors was 0.3 percentage points related to a slightly less favorable product mix.

Our Q3 system segment gross margin was 51, 8%.

Flat with a 52% gross margin in the second quarter.

Our GAAP operating operating expenses were $66 $6 million for the third quarter as compared to 61 $6 million in the second quarter.

The two main reasons for the increase or $1 $8 million higher stock based compensation related to timing of grants and the higher grant date fair value and transaction expenses of $2 $1 billion related to the sale of the <unk> business.

As previously disclosed we entered into a definitive agreement during the quarter to sell FRC to comtech for $100 million in cash subject to customary purchase price adjustments.

Section close today and the outlook and the results of operations for Q4 will include FERC for the month of October.

Net proceeds from the transaction after adjustments expenses and taxes I expect it to be approximately $95 million.

non-GAAP operating expenses for the third quarter were $54 $5 million as compared with $52 $1 million in Q2 declining to 31, 8% of revenues from 33, 4% in the prior quarter.

The $2.4 million increase relates mainly to higher performance based compensation.

Company noncash expenses for the third quarter included $10 $8 million for stock based compensation $1 $6 million higher than in the second quarter as I said earlier $1 $3 million for their motivation of acquisition related intangibles, which was $1 $1 million lower than in Q2 due to certain intangible.

Assets, reaching full amortization.

And depreciation of $7 $8 million similar to the second quarter.

GAAP operating income was $2 7 million for Q3, compared with GAAP operating loss of $1 $3 million in Q2.

non-GAAP operating income for the third quarter was $17 $3 million.

Compared with $11 $2 million into second quarter, an increase of $6 $1 million or 55%.

GAAP net income for the third quarter was $4 $4 million or six cents per fully diluted share compared with a GAAP net income of zero point $8 million one per fully diluted share in the previous quarter.

The non-GAAP effective tax rate for the third quarter was 12, 2% to 100 basis points lower than the 14, 2% in the second quarter, mainly due to discrete items arising from normal differences between estimated and actual U S taxes.

We continue to expect our annual non-GAAP effective tax rate to be between 13 and 17%.

Third quarter non-GAAP net income was $17 $3 million or 22 cents per fully diluted share compared to $11 2 million or <unk> 14 per fully diluted share in Q2.

Moving to the balance sheet and cash flows we generated free cash flow of $16 $9 million into third quarter compared to $2.1 million in Q2.

The main reason for the increase in free cash flow or the decrease of $14 6 million in capital expenditures.

We invested $5 $9 million in capital expenditures during the third quarter compared to $25 million in Q2.

Operator: Thank you and welcome everyone to FormFactors' third quarter, 2023 earnings conference call.

The decrease in Capex in Q3 is partially due to timing of payments, but it is also aligned with our intend to slow down capacity expansion to ensure capacity does not significantly outpaced demand as we have completed the majority of the long lead time in facilities and equipment investments required to reach our target financial model.

Stan Finkelstein: On today's call, our chief executive officer, Mike Slessor, and chief financial officer, Shai Shahar, before we begin, Stan Finkelstein, the company's VP of investor relations will remind you of some important information. Thank you. Today's company will be discussing gap panel results and some important non-gap results intended to supplement your understanding of the company's financials. The considerations of gap, known gap measures and other financial information are available in the press release issue today by the company and on the investor relations section of our website.

There is no change in our previously communicated expected capex range for 2023 of $55 million to $65 million.

Overall at quarter end total cash and investments were $249 4 million.

An increase of $9 million from Q2.

As of the end of the third quarter, we had one term loan outstanding with a balance of $15 million.

Stan Finkelstein: Today's discussion contains forward-looking statements within the meaning of the federal security laws. 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 new technologies, the impacts of global, regional and national health crisis, including the COVID-19 pandemic, anticipated industry trends, potential disruptions in our supply chain, the impacts of regulatory changes, including the recent U.S.-China trade restrictions, the anticipated demand for products are billed to develop, produce and sell products and the assumptions upon which such statements are based. These statements are subject to known and unknown recent uncertainties and could cause actual results to deform material from those expressed during this call.

Regarding stock buybacks.

During the third quarter, we did not purchase shares under our $75 million two year buyback program approved in Q2 of 2022.

On October 30, our board of directors approved a new two year $75 million share repurchase program, which is in addition to the $18 $6 million that remains available under the existing authorization.

As a reminder, the main purpose of the share repurchase program is to offset dilution from stock based compensation.

Turning to the fourth quarter non-GAAP outlook, we expect Q4 revenues of $165 million plus or minus $5 million.

At the midpoint of this outlook range Q4 revenues is expected to be approximately $7 million lower than in Q3, we'd half of the decrease related to the sale of effort hematology business at the end of October.

We also expect lower foundry and logic revenues in the fourth quarter, partially offset by an increase in DRAM revenues.

Fourth quarter non-GAAP gross margin is expected to be 41% plus or minus 160 basis points.

Stan Finkelstein: Information on risk factors and uncertainties is contained in our most recent filing on form 10K with the SEC for the physical year and December 31, 2022 and in our other SEC filings which are available on the SEC's website at www.scc.gov and in our press release issue today. Forward pluking statements are made out of today in November 1, 2023 and wish you no obligation to update them.

At the midpoint of this outlook ranges, we expect Q4 operating expenses to be $51 million, plus or minus $1 million.

non-GAAP earnings per fully diluted share for Q4 is expected to be 20, plus or minus four.

A reconciliation of our GAAP to non-GAAP Q4 outlook is available on the Investor Relations section of our website and in our press release issued today.

With that let's open the call for questions operator.

Certainly ladies and gentlemen, if you have a question at this time simply press star one on your telephone we ask that you. Please limit yourself to one question and one follow up.

Michael Slessor: With that, we will now turn the call over to form factor CO, Mike Fletcher. Thanks, everyone, for joining us for form factors third quarter earnings call. Stronger than anticipated demand for founder and logic probe cards, coupled with record revenue in our systems business, produced third quarter revenue near the high end of our outlook range. This, together with higher than expected gross margin and leverage on our operating expenses, produced non-gap earnings per share above the top end of our outlook range.

And as a reminder.

Our first question comes from the line of Chris Shankar from TD Cowen Your question. Please.

Yes, hi, Thanks for taking my question Michael Sorry, the first question is.

You said that the December quarter has more data on that.

But are you also for the HBM.

I was wondering pushing the HBM probe card gross margins are pretty strong. So I'm just wondering wouldnt doesn't help overall gross margin.

Still below foundry logic.

Michael Slessor: We continue to operate in an overall demand environment that remains relatively stable at the levels we've experienced throughout 2023. The moderate sequential decrease in our fourth quarter revenue outlook range is due to the reduction in system segment revenue from the sale of FRTC CamTech, which we completed today. And weaker founder and logic probe card demand due to a short-term reduction in customer spending, partially offset by stronger DRAM probe.

Well I'll take that.

Sort of in general HBM.

Gross margin or HBA DRAM gross margin is higher than the either DRAM designs or in the higher end of that.

Range, but it's still there.

In general lower or it could be lower than the foundry and logic gross margin and we do expect lower foundry and logic.

Revenue in Q in Q4, and we expect systems will be flat. So if you take all of these together.

Michael Slessor: Markard Demand. While we continue to operate in a cyclical downturn and see no near-term acceleration of demand, we're encouraged by broader signs of bottoming in our most high, most important high-unit volume end markets, like client PC and mobile. In this environment, we continue to carefully balance short-term results and long-term investments with discipline cost control, the prioritizes quarterly profitability and sustains our strong balance sheet. We're maintaining our investment in R&D for new product innovation and competitive differentiation, especially in our product roadmap for advanced packaging applications, like chiplets and tiles, high bandwidth memory, and co-packaged optics.

That's why and.

Some lower overall revenue levels.

That's why we are.

The outlook range for Q4 the.

Gross margin is 41% slightly below the 41 seven.

Accomplished in Q2.

Got it got it thanks, let shai and then a quick question for Mike.

Michael Slessor: As you'll hear from Shai, we've completed the majority of the long lead-time facilities and equipment capacity increases required to reach our target financial model and have slowed our capex to ensure a better balance between our capacity and anticipated long-term demand. Turning now to segment-level details, founder and logic procards are largest business delivered higher than expected sequential growth in the third quarter, as key customers ramped several major designs more aggressively than originally forecast.

Michael Slessor: This interquarter acceleration provides insight into form factors demand profile. Because procards are a device-specific consumable, customized for each individual chip design, increased wafer starts for a specific chip design can drive incremental demand for the corresponding probe cards. Since our lead times are less than a quarter, and demand is correlated to the specific mix of customers dynamic wafer start plans for their new chip designs, we can't experience interquarter changes in demand as we did in the third quarter.

Mmm.

Yeah, I I think you know it moves around quarter to quarter again, because probe cards are designed specific consumables achy design when in every any quarter can move it around I would say for most major customers. They have us in our primary competitor and founder and logic in about 60 40 window they need to have to supply.

Here's for supply chain continuity, a lesson that was hard learn through the the pandemic and beyond and so I think you know we're competing in this window and I think.

Michael Slessor: In the Foundry space, we experienced strong third quarter demand for procards testing two major high-performance compute designs. In these HPC applications, form factors differentiated vertical MEMS probe card products meet demanding power and speed requirements with best-in-class test cell uptime and productivity, delivering significant value to our customers. We do expect a smaller contribution from Foundry procards in the current quarter, as our strong third quarter shipments are utilized to ramp fourth quarter foundry wafer production volume.

In most of the major customers. There are a couple of exceptions that offer upside opportunity for us and most of these customers were in that window I think the the Q3 performance because of these two designs was was pretty strong based on the data. We currently have.

Alright. Thank you my very helpful.

[noise]. Thank you one moment for our next question.

And our next question comes from the line of Brian <unk> from Stifel. Your question. Please.

Michael Slessor: In the microprocessor space, we delivered on higher demand for procards testing a major tile-based client PC design. Like the high-performance compute Foundry example I just shared, procard demand for this design accelerated within the third quarter, as our customer expanded their wafer start plans to meet increased end customer demand. This client PC microprocessor is assembled from multiple tiles or chiplets into a single die using leading edge advanced packaging processes. This is a great example of how advanced packaging is driving form factors business.

Hi, there good good afternoon, thanks for letting us ask a few questions might be first just.

Thinking about the fourth quarter guidance.

And in terms of the order activity that you might normally see on the foundry logic side of the business.

Versus kind of what's implied in the guidance.

Is the breath of of the design activity pretty normal at this stage, but maybe the release of volume against these designs still living something to be desired does that is that a fair way to characterize yeah, you've you've hit it on the head Brian and you know this has been a theme throughout 20 twenty-three our design teams and design is a very important in kind of a unique.

Michael Slessor: As we noted in the past, advanced packaging integration schemes drive both higher test intensity, which expands the number of procards required for good die out and higher test complexity, which raises the performance 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 stable overall demand for DRAM probe cards, while flash remained weak.

Part of the probe card business, because we are customizing our architecture each individual customer chip design. Those design teams continue to be fully utilized where we're seeing that not translate into the peak revenues that we did say back in the first half of 2022.

Is.

Except for a couple of Counterexamples like H B M and the client base microprocessor, the tile based client microprocessor customers by and large or.

Michael Slessor: As in the second quarter, DRAM was driven by DDR5, as well as third generation high bandwidth memory designs, which are enabling the rapid growth in generative artificial intelligence, and we expect a similar HBM-rich DRAM revenue profile in the current fourth quarter. The positive impact of high bandwidth memory is evident in the product mixed profile at one of our largest DRAM customers, where probe cards for testing HBM comprised more than half our revenue to that customer in the third quarter.

The reorder volumes of these new designs is somewhat less than it would be in a cyclical up there and I think that behavior is pretty easy to understand as inventories are still pretty elevated throughout various parts of the industry and so customers, yes. They want to innovate yes, they wanted to drive their new designs out.

But they also want to minimize the obsolescence costs of driving them into a channel it still has pretty high pretty high inventory levels.

Michael Slessor: As in the tile-based microprocessor example I discussed earlier, the need for sophisticated probe cards to test HBM illustrates how advanced packaging is driving form factors results. As a reminder, each HBM chip is a stack of 812 or even 16 individual DRAM die assembled with advanced packaging processes, such as through silicon vías and hybrid bonding. To ensure high yields of the stack 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 assembly process, leading to a substantial increase in the overall probe card intensity for good die out.

Okay, Great. That's that's helpful and and then I guess kind of related that <unk>.

<unk> when you think about augmenting that that kind of environment for however, long it it sort of persist until things get better.

Yeah, H b as in AI related revenue opportunities certainly larger than you probably thought a coupla years ago. When you set that 850 million revenue target and so when you look at sort of co op package and.

The individual H B M N G P U components under tests there.

Do you have a sense of what the size of that served stressful market is for advanced probe cards now and what it could look like in two or three years yeah.

Yeah, I think I'll I'll get to that in a second but I think it's an important element of the different puts and takes.

Michael Slessor: In addition, the technical requires for HBM test are significantly more advanced than for standard unstack DRAM products, involving higher test speeds and more challenging thermal scaling specifications. Form factors MEMS-based smart matrix probe card architecture meet these advanced requirements, providing significant value to our customers and differentiation for form factor. We believe our superior performance capabilities will drive both market sharing profitability gains as HBM continues to grow, driven by the accelerating adoption of generative AI.

The reference our target model or anybody's target model, we're still committed to the 850 million target model, but you can imagine that when we put that in place there was pretty open trade with China for U S suppliers, but on the other hand, we didn't have a I and and high bandwidth memory and G. P. U's is for.

Right and center as we do now [laughter]. So we're always gonna have puts and takes on the way to a target financial model, specifically with H B M. A I for us and I think most other equipment and consumables supplier in the industry.

Although the G P U's kind of get all the glory H B M drives a tremendous increase in overall wafer volume again, because you're stacking individual DRAM die each of those comes from its own wafer.

Michael Slessor: Shifting out of systems, as anticipated, our systems business delivered record revenue in the third quarter as we shipped systems that were pushed out of the second quarter. This business continues to be driven by strong demand for our market leading test and measurement products for early development of applications like co-packaged silicon photonics, quantum computing, and advanced packaging metrology. Co-package optics enabled by silicon photonics remains an important and exciting driver for form factors current and future business.

But also just the memory you look at the Silicon area associated with the memory, it's much larger than the G. P. S.

So H B M looks like you know as I said <unk>.

For this quarter.

The currently compete the just completed third quarter, you know it was more than half our DRAM pro card revenue at one of our largest DRAM customers. That's a contribution that we hadn't contemplated and if you look at industry forecast, there's still quite a bit of bullishness associated with H B M. N S. A I in general.

Michael Slessor: We're engaged with major customers in the transition of silicon photonics from early R&D to low volume production, and in the fourth quarter, we plan to ship a CM 300 silicon photonics system to a leading foundry to support low volume production. As silicon photonics production volumes increase over the next several years, our product roadmap delivers both systems and consumable probe cards to test these electro optical devices and improve yields, enabling our customers to seamlessly transition from the lab to the lab.

Maybe we can get you and follow up we're working pretty hard on penetrating the G. P U market as well.

[noise] great. Thank you.

Thank you and as a reminder, ladies and gentlemen, please limit yourselves to one question and one follow up one moment for our next question.

And our next question comes from the line of Dr. Charles <unk> from needed My company. Your question. Please.

Michael Slessor: Moving forward, we do expect a short and medium-term reduction in system segment revenues from the third quarter's record levels due to the sale of our FRT metrology We grew FRT substantially following our 2019 acquisition of the business and I want to thank all of the FormFactor team worldwide for their contributions to this growth and value creation. Operationally, the transaction enables the FRT team to leverage Camtex established scale and expertise in inspection and metrology to deliver the next stage of growth.

Hi, Good afternoon, just Wanna ask about the queue for in terms of seasonality I, Hey, Mike Y really just add back or that the F. R. T revenue for Q4 make it back out to Apalachi rebels R Q3 looks like two three okay.

<unk> seems to be a little bit the low says analogy and I think you might have to touch upon this and your answers to the previous questions, but I really just wanted to get your thoughts on why things are still a little bit the low seasonality into two four is that the more cuss up a lower than.

Michael Slessor: Financially, the transaction maximizes FormFactor shareholder value by realizing a robust return on our investment while also allowing us to focus our resources on strategic initiatives and businesses where we have market leadership and significant scale in enabling advanced packaging, like the tile-based microprocessor and co-package optics examples I shared earlier. Shai will update you with more details later, but our capital allocation priorities of focused reinvestment and R&D capacity together with M&A and share repurchases to offset dilution are unchanged.

Lola cope cause spendings on the P C side or the smartphone side any additional color would be great. Thanks.

<unk> <unk>, so Charles I think as we've talked about in the past seasonality has become a little bit elusive in this business and I think that's that's true here in 2023 as well you know if you look at the way <unk>. The bridge from Q3 to queue for for Ya F.

F. R T at the mid point of our guide the absence of F. R. T is about half of that 7 million dollar Delta, where then seeing weaker foundry and logic demand, which we believe is short term really given the outsized contribution from <unk> in Q3 from a set of major designs, there's a bit of digestion going on.

Michael Slessor: M&A remains one of the primary pillars of FormFactor's growth and we continue to evaluate a broad funnel of targets that add complementary technologies and expand our served addressable markets. In closing, we continue to operate efficiently in what we see as a relatively stable near-term demand environment across our diversified product and technology portfolio. Longer term, we remain excited and confident in the growth prospects for FormFactor in the industry overall driven by the fundamental trends of semiconductor content growth and exciting innovations like chiplets, high bandwidth memory and co-package silicon photonics.

On of our customers as they use those pro cards for these major designs and major product offsetting that some yeah, some incremental strength in DRAM, which which was we highlighted really is driven by H b M and some D. D. R. Five but those are the different pieces to it again <unk>.

Michael Slessor: These are trends where FormFactor is well positioned as an industry and technology leader and we're confident that our investments in R&D and capacity position FormFactor to emerge from the current cyclical downturn, a stronger and leaner competitor, enabling us to achieve our target model that delivers $2 of non-gap earnings per share on $850 million the revenue.

Helander seasonality, although there are components to it something like the strength and H B M is super imposing what might be the superimposed on top of what might be the regular calendar seasonality and cyclicality in DRAM and as I said I think we're seeing some degree of digestion off the strong third quarter results in <unk>.

Three and logic.

Shai Shahar: Shai, over to you.

Thanks, Mike I was hoping you can provide the <unk> clarity how much H E. N revenue you got from include three and how much it really expecting Q4 cause you only sad to.

Shai Shahar: Thank you, Mike, and good afternoon. As you saw in our press release, and as Mike mentioned, Q3 revenues were near the high end of our outlook range and non-gap growth margin and non-gap EPS were above the end of the range. Third quarter revenues were $171.6 million, a 10% sequential increase and a year of a year decrease of 5.1%. Q3 revenues were $0.4 million below the high end of our outlook range and benefited from strong revenues in both prop cards and system segments revenue.

<unk>. Thank you for like more than half of the DRAM revenue off your largest directly customer step we actually don't know right. The the largest give that cosmo how much revenue is it in there within that the 28 to 30 million dollar revenue <unk> I mean, two three ish in queue for so.

Shai Shahar: Prop cards and revenues were $128.3 million in the third quarter and increase of $13 million or 11.3% from Q2. The increase was driven by higher foundry and logic and slash revenues, partially offset by a decrease in DR revenues. System segment revenues were a record $43.2 million in Q3, a $2.6 million increase from the second quarter, and comprised 25.2% of total company revenues down slightly from 26% in Q2. Within the prop cards segment, Q3 foundry and logic revenues were $96.4 million, a 17.7% increase from Q3.

Can you help us understand what has been a progression H T M revenue over the last two quarters that going into the next quarter cause injury and you did say, it's 10 million, yes, yup, Jim we just wanted to understand how how lumpy at a visit I said, that's showing any sequential growth over the last two or three quarters. Thanks, yeah.

There is gonna be volatility quarter to quarter I I <unk>.

Ballpark use it uhm the absolute magnitude of it in the third quarter of H B M. Inside DRAM was about the same in round numbers 10 million, we do expect that contribution to strengthen in the fourth quarter, but again, you know with rope cards being specific to each individual chip design.

Shai Shahar: YouTube. Foundry and logic revenues increased to 56.2% of total company revenues compared to 52.5% in the second quarter. Deer on revenues were 27.4 million dollars in Q3, a 3.1 million dollars decrease, or 10.2% lower than in the second quarter, and decreased to 16% of total quarterly revenues as compared to 19.6% in the second quarter. Flesh revenues of 4.5 million dollars in Q3 were 1.6 million dollars higher than in the second quarter, and were 2.6% of total revenues in Q3 as compared to 1.9% in Q2.

And things like D D R. Five.

Also showing some significant activity in different customers ramping different designs a different time.

You know we want to look at this on a multi multi quarter basis similar to the comments I made her around market share. So on an absolute level about stable. It was heavily concentrated in one customer as I said a.

Surprising perhaps that half of our DRAM revenue at this customer was was associated with H B M. But on you know we're looking at this as a longer term trend, where we continue to Wanna write this tailwind, but also build differentiation and chair.

Shai Shahar: Gap cost margin for the third quarter was 40.4% as compared to 38.7% in Q2. Cost of revenues included 2.5 million dollars of gap to non-gap reconcerned items, which we reconciliation table available to the investor relations section of our website. On a non-gap basis, gross margin for the third quarter was 41.8%, 1.2% which points higher than the 40.6% of non-gap gross margin in Q2, and 0.3% which points above the eye end of our outlook range.

Not just it whenever the one customer who's leading in D. H B M. DRAM right now, but each of the three major DRAM customers and we've got activity was all.

Thanks, Mike.

Thank you one moment for our next question.

And our next question comes from the lined up the <unk> from Jeffries Your question. Please.

Hi, This is D. Yes, I'm Jeffrey <unk> My question I guess <unk>.

Shai Shahar: The increase is compared to Q2, and the upside versus our outlook range were a result of higher prop-card segment gross margin. Our prop-card segment gross margin was 38.5% in the third quarter, and increase of 2% which points compared to 36.5% in Q2.

Now that you have <unk> and <unk> microprocessors ramping can you help me understand <unk> why H B M devices for like a <unk>.

Shai Shahar: The increase from Q2 is due to the net effect of three main factors. First, higher revenues contributed at 2.1% which points increased. Second, improved factor utilization at higher production levels contributed to a 0.3% which points increased. Partly offsetting these two positive factors was 0.3% which points related to a slightly less favorable product mix. Our Q3 system segment gross margin was 51.8%, basically flat with a 52% gross margin in the second quarter.

No I I think across the board, we see <unk>.

Similar increases in test intensity, and we've quantified that for you in the past it somewhere between 20% to 30% and I think that's a good rule of thumb for both H B M and some of the logic and foundry designs for that matter.

Some of them are quite a bit higher than that some of them are less than that because it's.

It's a function of what the customer yields are for the individual triplets.

Shai Shahar: Our gap operating expenses were $66.6 million for the third quarter, as compared to $61.6 million in the second quarter. The two main reasons for the increase were 1.8 million dollars higher store-risk compensation related to timing of grants and a higher grant date for a value and transaction expenses of $2.1 million related to the sale of the FRT business.

As well as the degree of complexity that they need to test each individual triplett with Hbm's interesting because you get it.

Another you'll get multiple test insertions each of the triplets as in the M. P. U cases tested but one of the interesting things, we're seeing an H b M is as the stack is being assembled there's some intermediate test insertions as well and some of them at very high speeds to make sure. The Guy is gonna work that all kinds of roles up.

Shai Shahar: As previously disclosed, we entered into a definitive agreement during the quarter to sell FRT to ComTech for $100 million in cash, subject to customary purchase price adjustments. The transaction closed today, and the outlook and the result of operations for Q4 will include FRT for the month of October. Net proceeds from the transaction, after adjustment, expenses and taxes, I expected to be approximately $95 million. Non-gap operating expenses for the third quarter were $54.5 million, as compared with $52.1 million in Q2, declining to 31.8% of revenues from 33.4% in the prior quarter.

Two of 20 to 30 per cent test increase, but there's a pretty good variance around that number two.

Okay got it and then for my second question. So it's been going on.

Take you provided to see <unk> <unk>, yeah, competing late another competitor for for each and every design.

You <unk> you know if you lie.

<unk> is that is that like do you understand it before the day. Thanks, that's DRAM or is it kind of thing after Mac no you understand it before the design starts to ramp because our customers don't really want to surprise us any of our lead times a relatively short so you do.

Shai Shahar: The 2.4 million dollars increase relates mainly to higher performance-based compensation. Company non-cash expenses for the third quarter included $10.8 million for store-risk compensation, $1.6 million higher than in the second quarter, as I said earlier, $1.3 million for the mortization of acquisition relating intangibles, which was $1.1 million lower than in Q2 due to certain intangible assets reaching full amortization, and depreciation of $7.8 million Gap Operating Income was $2.7 million for Q3 compared with Gap Operating Loss of $1.3 million in Q2.

You have visibility into what designs you one and what designs that you have gone to your competitor.

But that is not entirely predictive of the revenue because as we saw in the third quarter customers can accelerate or decelerate their wafer start plans on that particular design essentially in real time based on their customer demand and so you know you can you can have one a majority of designs but.

Shai Shahar: Non-Gap Operating Income for the 3rd quarter was $17.3 million compared with $11.2 million in the 2nd quarter, an increase of $6.1 million or $55%. Gap Net Income for the 3rd quarter was $4.4 million or $6.4 million per fully deducted chair compared with a Gap Net Income of $0.8 million or $1 per fully deducted chair in the previous quarter. The non-Gap Effective Tax Rate for the 3rd quarter was 12.2%, 200 basis points lower than the 14.2% in the 2nd quarter, mainly due to discrete items arising from normal differences between estimated and actual US taxes.

To put it simply if you don't get lucky with the ones that are ramping that might not result in in a majority of the revenue base Margaret chair, but that swings both ways. Our teams are very focused on working with our customers to make sure. We've got the maximum number of design wins, but as I said picking the winners is.

Something that's extremely difficult to do and probably impossible to do to be honest given the dynamics in the industry.

Bye. Thank you this is a a.

Oh.

Thank you one moment for our next question.

And our next question comes from a line of Tom definitely from T. A Davidson your question. Please.

Shai Shahar: We continue to expect our annual non-Gap Effective Tax Rate to be between 13 and 17%. 3rd quarter non-Gap Net Income was $17.1 million or $22 cents per fully deducted chair compared to $11.2 million or $14 cents per fully deducted chair in Q2. Moving to the balance sheet and cash loads, we generated 3 cash loads of $16.9 million in the 3rd quarter compared to $2.1 million in Q2. The main reason for the increase in free cash loads was a decrease of $14.6 million in capital expenditures.

Yeah. Good afternoon. Thanks for the question like just another question on the Photonics business. So obviously, it's been good for your system is business over the last several quarters, but what does that look like in a coupla years. When it goes from the lab to the fab what kind of opportunities that for Ya.

Yeah, I think you know we've mentioned on the past several calls and highlighted again today the progress in Silicon Photonics and co package optics, you know it has been a strong driver of our system segment revenues somewhere around you know 10 to 20 per cent of those system segment revenues as customers invest in early R&D.

Shai Shahar: We invested $5.9 million in capital expenditures during the 3rd quarter compared to $20.5 million in Q2. The decrease in CapEx in Q3 is partially due to timing of payments, but it is also aligned with our intent to slow down capacity expenditures to ensure capacity does not significantly outpace demand. As we have completed the majority of the long lead-time facilities and equipment investments required to reach our target financial model. There is no change in our previously communicated expected CapEx range for 2023 of $55.5 million.

One of the key points, we made in the prepared remarks is we're shipping really the first system for low volume production into one of the major foundries in the world. So that they can serve their fabulous customers with some of these co package optics applications.

When we look at that transition uhm, it sort of depends on who's market forecasts you believe in if silicon photonics really is going to take off as a data center application in the next several years and chip to chip communication because of the.

Shai Shahar: Overall at quarter end total cash and investments were $249.4 million and increase of $9 million from Q2. As of the end of the 3rd quarter, we had one term loan outstanding with a balance of $15 million.

The power efficiency of the offers the power reduction that offers uhm, we could see a sizable increase there now we've got some work to do right. Our our system is business primarily focused on the lab and as we bring this technology to the fab together with the consumable probe cards that performed the electrical tests together with the futon.

Shai Shahar: Regarding stock buyback, during the 3rd quarter we did not purchase shares under our $75 million two-year buyback program approved in Q2 2022.

<unk> test, there's a significant chunk of our R&D spin going forward to enable this but I think it's one of the key areas, where we see great engagement in early R&D the transition to low volume production.

Shai Shahar: On October 30, our board of directors approved a new two-year $75 million share repurchase program, which is in addition to the $18.6 million that remains available under the existing authorization. As a reminder, the main purpose of these share repurchase programs is to offset the illusion from stock base compensation.

And.

You know as we go from the 10% to 20% in R&D revenues, you could see if that scale substantially multiples of that if we get this right.

Shai Shahar: Turning to the 4th quarter non-gap outlook, we expect Q4 revenues of $165 million plus or minus $5 million. At the midpoint of this outlook range, Q4 revenues is expected to be approximately $7 million lower than in Q3, with half of the decrease related to the sale of FRT methodology business at the end of October. We also expect lower fund reallogic revenues in the 4th quarter, partially offset by an increase in the arm revenues.

Great. Thank you very much for that and then.

It might give you look at the.

Just the regular guidance for the fourth quarter, it's somewhat similar to what we had a year ago. Just wondering if you could step back from a big picture put it you just talk to that hope.

The industry today versus a year ago when revenues are projected to be the same.

Yeah, although the revenue levels are the same I think the the rate of change in the state of the industry is very very different you know that was our third quarter revenue I came down and then we gave if I recall fourth.

Shai Shahar: 4th quarter non-gap growth margin is expected to be 41 percent plus or minus 150 basis points. At the midpoint of these outlook ranges, we expect Q4 operation expenses to be $51 million plus or minus $1 million. Non-gap earnings per fully devoted chair for Q4 is expected to be 20 cents plus or minus 4 cents.

Fourth quarter guidance as you noted Thom it's pretty similar to what we're seeing this year, but that was off a very strong first half first quarter and second quarter of 2022.

Shai Shahar: Reconciliation of our gap to non-gap Q4 outlook is available on the Investor Relations section of our website and in our press release issue today.

Uhm, we've really been operating at those levels as we go through 2023, and although there's puts and takes you.

You know it H b M strengthening some ups and downs and the founder and logic business is or not a typical is different designs ramping.

Operator: With that, let's open the call for questions. Operator? Certainly, ladies and gentlemen, if you have a question at this time, simply press star 1-1 on your telephone. We ask that you please limit yourself to one question and one follow-up.

At different times, we see the industry in a much more.

Stable overall condition, we feel like we're in a bottoming phase if you listen to some of our key customers in the foundry space in the P. C space I think there's some mobile earnings out here over the next couple of days. It does seem like things are bottoming and and maybe even.

Krish Sankar: And as a reminder, our first question comes from the line of Krish Sankar from TV Cow, and your question, please. Yeah, hi, thanks for taking my question. Michael Shai, the first question is you said that the symbol quarter has more d-lamb and the mix, but he also said it's more HBM. I was under the impression that the HBM group got gross margins of pretty strong. So I'm just wondering, wouldn't it help overall gross margins or is it still below found the logic?

Strengthening a little bit.

So I think the industry is in much better shape, obviously, there's a wide variety is use on when things are gonna inflect and when the next upturn is but I think we're in pretty good shape given the capacity investments we've made to capitalize on that.

Michael Slessor: Well, I'll take that. It's true that in general, HBM gross margin or HBA DRAM, gross margin is higher than the other DRAM designs or on the higher end of that range. But it's still in general lower or could be lower than the foundry and logic gross margin. And we do expect lower foundry and logic revenue in Q4 and we expect systems to be flat. So if you take all of these together, that's why you end some lower overall revenue level. That's why we outlook range for Q4, gross margin is 41% slightly below the 41.7, we accomplish in Q2. Got it.

Alright, well I appreciate the extra color there thanks, Sir.

Thank you one moment for our next question.

And our next question comes from the line of Gus Richard from Northland. Your question. Please.

Yes, thanks for taking my question.

Been answered that I did want to ask you about the expansion of the system and package and.

Is that starting to reach T mobile customers are they starting to.

Look to put multiple tiles and in a package and increased testing tends to be there.

Michael Slessor: I'm going to a quick question for Mike, in the September quarter, you said foundry logic was strong. Is it better to do with more logic and be you bias and kind of curious with the largest foundry, what is your market share today? And is it a potential to increase market share to get the more of some of these AI applications?

Yeah, I think so we gave you a couple of examples of where triplets or tiles are are really driving our business. One the the client microprocessors. The other H B M, which has been a theme for awhile.

I think we're probably in very early evenings associated with there are some R&D projects going on but it's gonna be at least a few quarters, if not the better part of a year before we start to see triplets and tiles really infused into the mainstream mobile roadmaps having said.

Michael Slessor: Yeah, I think in the September quarter, we highlighted two pieces in the Foundry and Logic business is certainly the ramping of a chiplet based or tile based client microprocessor was a key highlight adding to the strength. But we also commented on some high performance compute designs in the foundry space that drove some strong results. You know, as we look at our market share across the industry, whether it be in foundry, foundry and logic, RF memory, one of the key strategic pillars of the company is market leadership. And I think in the foundry and logic market, there is some opportunity to gain some share based on the investments we're making. And the very strong customer relationships we have with those key customers.

That you know there are a variety of places you.

Hi, N five G mobile handset, where you do see advanced packaging and and system in a package kind of characteristics. One is the R. F front in where now we have multiple filters package together with an antenna and package uhm and those are areas that at least when mobile with ramping and five.

G adoption was strong where we saw great uptick in in the R. F business I think <unk>. It all goes to us wanting to continue to broaden our exposure to advance packaging. We view this as a secular shifted where value is created in the industry and then the supply chain and it's somewhere where continuing to <unk>.

Michael Slessor: Do I get a bit of quantify the market share number? Yeah, I think, you know, it moves around quarter to quarter. Again, because probe cards are design-specific consumables, a key design win in any quarter can move it around. I would say for most major customers, they have us and our primary competitor and foundry and logic in about a 6040 window. They need to have two suppliers for supply chain continuity, a lesson that was hard to learn through the pandemic and beyond.

Place bets both from our R&D spending, but also as we look to an M&A funnel.

Got it that's helpful. And then just touching going on I'm still looking for tonics.

Shipping both our system you know is that.

Michael Slessor: And so I think, you know, we're competing in this window and I think in most of the major customers, there are a couple of exceptions that offer upside opportunity for us. And most of these customers were in that window. I think the Q3 performance because of these two designs was pretty strong based on the data we currently.

Hey, you know fully automated at this point and you know can you talk a little bit about the mix going forward between system and.

Consumables, you know as you ramp in volume Yeah, what we're still pretty early in the the implementation into volume production and so the the system. We're shipping in the quarter that goes into low volume production still really an optical only test it's <unk> testing the the optical part of the.

Operator: Thank you.

Operator: One moment for our next question.

Now we do have separate engagements on this combined you know when your co package the platonic shipped together with the electrical chip.

Brian Chin: And our next question comes from the line of Brian Chin from Steve Full. Your question, please. Hi there, good afternoon. Thanks for letting us ask a few questions. Might maybe first just thinking about the fourth quarter guidance. And in terms of the order activity that you might normally see on the Foundry Logic side of the business versus kind of what's implied in the guidance is the breadth of the design activity, pretty normal at this stage, but maybe the release of volume against these designs still leaving something to be desired that a fair way to characterize.

Mmm at least to do functional test and ensure that diet works, it's gonna need to be a combined electrical optical task, but that's in fairly early co development with some of our key customers. So I'd expect you know, let's say through 2024, the mix to continue to be pretty heavily systems based.

Got it thanks Yep.

Thank you one moment for our next question.

Brian Chin: Yeah, you've hit it on the head, Brian. And you know, this has been a theme throughout 2023. Our design teams and design is a very important and kind of a unique part of probe card business because we are customizing our architectures to each individual customer chip design. Those design teams continue to be fully utilized. Where we're seeing that not translate into the peak revenues that we did say back in the first half of 2022 is except for a couple of counter examples like HBM and the client-based microprocessor, the tile-based client microprocessor, customers by and large are the reorder volumes of these new designs is somewhat less than it would be in a cyclical rupture.

And our next question comes from the line of Christian swap from Craig Hallum. Your question. Please.

Alright, great guys I just have a couple of quick questions.

Is there any update on the on the large new customer opportunity that you could share.

I think a couple of updates Christian so uhm just to Orient everyone. When we look at our share in the logic segment, and especially associated with microprocessor off with applications, it's pretty heavily biased towards one one customer and the shares shifts in the industry have not been all that favorable recently further.

Customers. So we said in the past you know our fundamental strategy is to be a leading supplier at every major customer in the industry and here's one of the gaps uhm, it's an area, where we continue to be very focused we've made some changes in.

Brian Chin: And I think that behavior's pretty easy to understand as inventories are still pretty elevated throughout various parts of the industry. And so customers, yes, they want to innovate. Yes, they want to drive their new designs out, but they also want to minimize the obsolescence costs of driving them into a channel that still has pretty high, pretty high inventory.

Both our technology, but also the technical team, that's interfacing with that customer because the primary gaps in qualifying really have been adapting our technology they've been technical in technical in nature you.

You know that customer needs a second supplier, there's really only two of us that can drive at the high end of foundry logic pro cards, especially with the requirements driven by advanced packaging and so you know.

Michael Slessor: Great, that's helpful. And I guess kind of related, but when you think about augmenting that kind of environment for however long it sort of persists until things get better, HBM and AI related revenue opportunities, certainly larger than you probably thought a couple years ago when you set that 850 million revenue target. And so when you look at sort of co-host package and the individual HBM and GPU component to under test there, you have a sense of what the size of that service-dressful market is for advanced probe cards and how and what it could look like in two or three years.

Longer than we would have liked we continue to make changes in work continuing we continue to be committed to building a share physician that this customer.

Mmk, So that's a fair update and then my other second question quick as you know the the high bandwidth memory industry. You know is looking to you know more than two works.

Michael Slessor: Yeah, I think I'll get to that in a second, but I think it's an important element of the different puts and takes, you know, the reference our target model or anybody's target model. We're still committed to the 850 million target model, but you can imagine that when we put that in place there was pretty open trade with China for US suppliers, but on the other hand, we didn't have AI and high bandwidth memory and GPUs as front and center as we do now.

No the capacity of high you know high bear with memory.

Samsung is finally, making it like crowd will get their act together probably shortly.

So is it safe to assume that is accurate.

Industry dialogue that.

Your high bandwidth memory business, you know should go from you know going from 10 million a quarter to easily 20 million plus a quarter.

Michael Slessor: So we're always going to have puts and takes on the way to a target financial model, specifically with HBM and AI. For us and I think most other equipment and consumable supplier in the industry, although the GPUs kind of get all the glory, HBM drives a tremendous increase in overall wafer volume. Again, because you're stacking individual DRAM die, each of those comes from its own wafer, but also just the memory you look at the silicon area associated with the memory.

<unk> <unk>.

Next year yeah.

Yeah, I think you know typically probe card intensity does scale with with wafer starts in output right. If you look it over time, there's a pretty good relationship between overall semiconductor revenue and probe card spending although the intensity has gone up over time I think the one potential caveat here not.

To pour pour cold water on it is as any technology matures like the T. S V die stacking in H B M will mature yields go up and so that's been a bit of a counter balancing force, but I think as all three DRAM manufacturers ramp and.

Michael Slessor: It's much larger than the GPs. So, HBM looks like, you know, as I said, for this quarter, the currently, the just completed third quarter, you know, it was more than half our DRAM probe card revenue at one of our largest DRAM customers. That's a contribution that we had in contemplated. And if you look at industry forecasts, there's still quite a bit of bullishness associated with HBM and AI in general. Maybe we can get to it in the follow-up, but we're working pretty hard on penetrating the GPU market as well.

Operator: Craig, thank you.

Start to really supply for what the native demand for H B M is in enabling a I I don't think that's an unreasonable expectation to have the business go from what's called in round numbers 10 million a quarter to something like 20 million of <unk> a lot of it will depend on when these other customers ramp a lot of it will depend on the.

<unk> and pull through from the AI markets, but if you believe.

The those underlying assumptions, yeah, I think it's reasonable that we'll be able to to come close to doubling our H B M business as we go through some points in 2024.

Operator: Thank you. And as a reminder, ladies and gentlemen, please limit yourself to one question and one follow-up, one moment for our next question.

Dr. Charles C.: And our next question comes from the line of Dr. Charles C. From Needham, the company, your question, please. Great. Good afternoon. I just want to ask about the Q4 in terms of the same analogy. Hey, Mike, if I really just add back or that the FR-T revenue for Q4, or maybe back to FR-T revenue from Q3, looks like Q3 or Q4 seems to be a little bit below same analogy.

Mmm, great what other questions. Thanks, guys.

<unk>.

Thank you one moment for our next question.

And.

Next question comes from the line of Craig Ellis from be Riley Securities. Your question. Please.

Yeah. Thanks for sneaking me and guys, Mike I wanted to start just by following up on some of the conversation around foundry lodwrick. It seemed like a lot of the strength in the quarter was can puke related either more on the client side or H P. C side can uhm and some similar things going on in the outlook, but I didn't hear too much about <unk>.

Michael Slessor: And I think you might have touched upon this in your answers to the previous questions, but I really just want to get your thoughts on why things are still a little bit below seasonality in Q4, is that the more because of the lower cost spending from the PC side or the smartphone side, any additional color would be great, thanks. Yeah. So, Charles, I think as we've talked about in the past, seasonality has become a little bit elusive in this business, and I think that's true here in 2023 as well.

<unk> and and things related to <unk>. So.

How do you think that shapes up as we exit the you're heading into next year and any notable changes on the mobile side and found <unk> cause for looking at the business.

Yeah, I think a R. R. R F business, which we report inside of founder and logic are really use index pretty heavily towards mobile handset growth and I think anybody who follows that industry knows that that's been a pretty ugly 20 twenty-three for for handsets and and the mobile ecosystem in general we do <unk>.

Michael Slessor: You know, if you look at the way Shy parsed the bridge from Q3 to Q4 for you, FR-T at the midpoint of our guide, the absence of FR-T, is about half of that $7 million delta. We're then seeing weaker founder and logic demand, which we believe is short-term, really given the outsized contribution from found logic in Q3 from a set of major designs, there's a bit of digestion going on of our customers as they use those procards for these major designs and major products.

Things bottoming in the mobile space and there were some nice application processor wins, an R F wins in the third quarter.

The did contribute to to the results. They just wanted his major is to compute designs.

I still feel like you know if you look at inventories, whether they be filters or even some of the apps processors across the overall channel. There's some some digestions and usage for those chips before we really see the new chips that are driving our business to ramping volume, but I.

Michael Slessor: Offsetting that thumb is some incremental strength in DRAM, which as we highlighted really is driven by HBM and some DDR5, but those are the different pieces to it. Again, calendar seasonality, although there are components to it, something like the strength in HBM is superimposing what might be the superimposed on top of what might be the regular calendar seasonality and cyclicality in DRAM. And as I said, I think we're seeing some degree of digestion off the strong third quarter results in founder logic.

Like most of the rest of our businesses, we've seen mobile and R. F stabilize it as I said, maybe even get a little bit better now.

One of the things to know about our F business. It's some of the shores lead times, we operate in so where you know our average lead times are better part of a quarter.

R. F lead times are actually shorter than that and so we can see some very significant.

Michael Slessor: Thanks, Mike. I was hoping you can provide a little bit more clarity on how much HBM revenue you got from Q3 and how much you were expecting Q4, because you only said Q3, Q4 is like more than half of the DRAM revenue of your largest DRAM customer step, but we actually don't know, right? The largest DRAM customer, how much revenue is in there, within that 20A to $30 million revenue for Q3, Q4?

Uhm changes in demand profile is customers changed their wafer start plans. So not a lot of visibility I guess is one of the one of the things I'm transfer.

That's helpful. My <unk>. The second question earlier in the Q&A, you noted that there've been pluses and minuses.

Visa visa target model, one of the pluses would be hey, I one of the minuses would be China and I was just looking at the China country trench in the supplement that that's for the east and noticed that China had picked a few million lower every quarter or for the last four or five quarters.

Michael Slessor: So can you kind of help us understand what has been the progression of HBM revenue over the last two quarters and going into the next quarter, because in June, you did say it's 10 million. Yes, we just want to understand how lumpy it is, is it showing any sequential growth over the last two three quarters? Thanks. Yeah, there is going to be volatility quarter quarter. I ballpark you that the absolute magnitude of it in the third quarter of HBM inside DRAM was about the same in round numbers, 10 million.

How much of that is cause cyclical vs anything that my fever related to more structural things with with shipment restrictions et cetera, and more importantly from here what should we expect going forward and can that charge. Okay. Thank you.

Yeah. So it's it's a good point right or China business.

Mm.

<unk> was again down sequentially and probably half the levels. It was at the peak back in late 21 or early 22.

Michael Slessor: We do expect that contribution to strengthen in the fourth quarter. But again, you know, with growth cards being specific to each individual chip design and things like DDR5, also showing some significant activity and different customers ramping different designs at different time, you know, we want to look at this on a multi-multicorder basis, similar to the comments I made around market share. So on an absolute level about stable, it was heavily concentrated in one customer.

To answer your question directly it's almost entirely structural as a U S supplier operating at advance nodes that are the subject of the export controls from the department of Commerce. We've been we've been limited in our ability to supply customers and I think we've been quite clear in our expectations that we.

Expect the domestic China business to continue to increase in at some point here probably go to zero as they cultivate.

Probably not local China alternatives to us, but with our primary competitor in memory being based off of Japan are primarily your foundry and logic competitor being based on you. They they do have geographic alternatives that aren't restricted as strongly as we are uhm the part holding that business up is still the multinationals.

Michael Slessor: As I said, surprising perhaps that half of our DRAM revenue at this customer was associated with HBM. But on, you know, we're looking at this as a longer term friend where we continue to want to ride this tailwind but also build differentiation and share, not just one of our, the one customer who's leading in in HBM DRAM right now, but each of the three major DRAM customers, and we've got activity with all of them.

Operator: Thanks, Mike.

Operate in the region and we've seen a recent relaxation of the export controls around them. They were granted extensions to the license and those businesses are holding up fairly well.

That's really helpful color thanks for <unk>.

Operator: Thank you one moment for our next question.

Yeah.

Thank you one moment for our next question.

And our next question comes from the line of David <unk> from Steelhead Securities. Your question. Please.

Operator: And our next question, come to the line of the Dara D. Shrotre from Jeffries, your question please. Hi, this is Lee, you're from Jeffries. Thanks for taking my question. I guess conceptually, you please have now that you have HBM and, you know, your triplet database microprocessors ramping. Can you help me understand if there's a difference in test intensity for HBM devices versus a triplet MPU? Now, I think across the board, we see similar increases in test intensity.

Yeah. Thanks for taking my question.

My question has to do with advance patching clearly on the conference calls over the last few quarters, we've seen a whole bunch more chatter from both the tests and assembly guys.

<unk> a M D and whatnot I'm.

I'm just curious as far as your probe card business goes what percentage would you classify as advanced packaging and what do you think the growth rate of that segment is and I'm assuming that includes both the tile the.

The high bandwidth memories, yeah, yeah, and that's the way we'd classify it to David for clarity right Uhm regular flip chip, although some people would call that advanced packaging, we're really targeting that classification at Shiplett multi die architectures assembled using techniques like hybrid bonding and T. S V.

Operator: And we've quantified that for you in the past somewhere between 20 to 30%. And I think that's a good rule of thumb for both HBM and some of the logic and foundry designs for that matter. Some of them are quite a bit higher than that. Some of them are less than that because it's a function of what the customer yields are for the individual chiplets, as well as the degree of complexity that they need to test each individual chiplet with.

Because that's really where the the increase in performance the decrease in cost the innovation acceleration comes from.

Uhm, it can sometimes be a little bit difficult to break out, but given what we highlighted in the third quarter. My guess is that somewhere around 2025, maybe even 30 per cent of our business.

Operator: HBM is interesting because you get another, you get multiple test insertions, each of the chiplets as in the MPU case is tested. But one of the interesting things we're seeing in HBM is as the stack is being assembled, there's some intermediate test insertions as well. And some of them at very high speeds to make sure the die is going to work. That all kind of rolls up to a 20 to 30% test increase. But there's a pretty good variance around that number two.

Present is associated with advanced packaging the combination of the client base microprocessor H B M at the various customers and a smattering of other designs. So we're still clearly and very early innings associated with this but if you look at the increase in test intensity associated with it.

It's also one of the things that is underlying the the strength in the third quarter results. The fact that some of the the.

Michael Slessor: Okay, got it. And then for my second question, so it goes on to the earlier answers you provided. So you know, foundry logic, they're just you're competing with another competitor for for each and every design. Do you when do you know if you are the market share leader on a particular design, is that is that like do you understand this before the design steps around or is it kind of an aftermath?

The revenue concentration was associated with things in advance packaging really does help out the overall top line and that's why we're so optimistic of our exposure and the eventual growth advanced packaging will drive fords.

And you know when you look at the both of you that volume growth that you see in advance packaging plus this increase intensity increased complexity.

Michael Slessor: No, you understand it before the design starts to ramp because our customers don't really want to surprise us. You know, our lead times are relatively short, so you do have visibility into what designs you want and what designs that you have gone to your competitor. But that is not entirely predictive of the revenue, because as we saw in the third quarter, customers can accelerate or decelerate their way for start plans on that particular design, essentially in real time, based on their customer demand.

Or George that's packaging business you know over the next two years, what would you guess the growth rate is clearly, it's probably more than two extra industry growth, but I've just kind of curious if you have an idea of what it might be yeah. So.

So we're going through annual planning and strategic planning right now and that's it's one of the key things we're looking into so over a two two year timeframe, we do expect.

To outgrow the industry significantly.

<unk> two X, maybe a little bit aggressive, but again, it's one of the reasons given our competitive position given the value recreate for our customers in advance packaging applications with things like our men's broke technology with things like co package optics.

Michael Slessor: And so, you know, you can you can have won a majority of designs, but to put it simply if you don't get lucky with the ones that are ramping that might not result in in a majority of the revenue based market share, but that swings both ways. Our teams are very focused on working with our customers to make sure we've got the maximum number of design wins. But as I said, picking the winners is something that's extremely difficult to do and probably impossible to do to be honest, given the dynamics and the Thank you.

That's that I was size growth is somewhere where we got good exposure and we're gonna continue to prioritise and capitalize on.

Okay. Thank you and just one just one more clarification as far as <unk> seven nanometer and below foundry logic.

Business what.

Percentage of those wafer stars are men space probes versus other technology is it.

Operator: This is very helpful. Thank you one moment for our next question.

The vast majority at this point yeah. It's a vast majority of <unk>. There are counterexamples, where <unk> have not been adopted in areas like very large footprint single diuretic called G. P. Used for example, because the the interconnect identity doesn't require M M space probe, but it's a pretty <unk>.

Tom Diffely: And our next question comes from a line of Tom Diffely from D.A. Davidson. Your question please. Yeah, good afternoon. Thanks for the question. Like just another question on the photonics business. So obviously it's been good for your systems business over the last several quarters. But what does that look like in a couple years when it goes from the lab to the fab? What kind of opportunity is that for you? Yeah, I think we mentioned on the past several calls and highlighted again today the progress in silicon photonics and co-packaged optics.

Tom Diffely: It has been a strong driver of our system segment revenues somewhere around 10 to 20% of those system segment revenues as customers invest in early R&D. One of the key points we made in the prepared remarks is we're shipping really the first system for low volume production into one of the major foundries in the world so that they can serve their fabulous customers with some of these co-package optics applications. When we look at that transition, it sort of depends on whose market forecast you believe in.

Reasonable rule of thumb that the vast majority of sub seven nanometer foundry and logic devices do you need to be probed with amendments broker.

Thank you thanks.

Thank you one moment for our final question for today.

And our next question comes from the line of David Silver from C. L King and Associates. Your question. Please.

Yeah, Hi, thank you.

I had a couple of questions maybe about planning for next year, but this is typically the time of year when budgeting and everything takes place.

Just focusing on your your Capex budget, Yeah. There has been the livermore capacity expansion, but when you're thinking about next year's Capex, Ben could you may be call out.

Tom Diffely: If silicon photonics really is going to take off as a data center application in the next several years and chip to chip communication because of the power efficiency and offers the power reduction that offers. We could see a sizable increase there. Now we've got some work to do, right? Our systems business primarily focused on the lab. And as we bring this technology to the fab together with the consumable probe cards that perform the electrical test together with the photonics test, there's a significant chunk of our R&D spend going forward to enable this.

Where the biggest.

Ah ma'am the largest amount of discretionary capex is gonna be spending in other words, what efforts or applications are you gonna be committing discretionary resources too. Thanks.

Sure I'll take that David and so as you said, we are going through the planning process and given <unk>.

Big footprint in Livermore, California expect and most of the additional capex too hip and aimed at that facility.

In terms of magnitude I did talk about completing majority of our capacity expressions, which is required for choosing to target model.

Tom Diffely: So we're going to look at that transition to low volume production. And you know, as we go from the 10 to 20% in R&D revenues, you could see that scale substantially multiples of that if we get this right.

That's why we expect the Capex in 2024 to decrease <unk>, certainly compared to the 60 million <unk> Capex. We expect complaining 23, I don't expect you to go down significantly like to the to the 20.

Michael Slessor: Great. Thank you very much for that. And then Mike, if you look at the revenue guidance for the fourth quarter, it's somewhat similar to what we had a year ago. Just wonder if you could step back from a big picture point of view and just talked about the health of the industry today versus a year ago when revenues were projected to be the same. Yeah, although the revenue levels are the same, I think the rate of change in the state of the industry is very, very different.

20 million dollar a year levels that we had before starting this capacity expensive.

Because I'm worried that range is what we expect capex within 2024.

And most of <unk> brokerage business and most of <unk>.

[noise], Okay. Thanks, and then I kind of like to ask a similar question on your R&D spend so I think the the third quarter R&D spend was an all time high.

Michael Slessor: You know, that was our third quarter revenue came down and then we gave if I recall a fourth quarter guidance as you noted, Tom, that's pretty similar to what we're seeing this year. But that was off a very strong first half first quarter and second quarter of 2022. We've really been operating at those levels as we go through 2023. And although there's puts and takes, you know, HBM strengthening some ups and downs in the founder and logic business that are not a typical of different designs ramping at different times.

And again when you look out to next year, what are the new or significantly increased efforts.

In your R&D budget, if he could call out maybe the top one or two that would be very helpful. Thank you.

Yeah I'll.

I'll take this one it's Mike again really go back to the themes, we've talked about today advanced packaging triplets, making sure our product roadmap is aligned with the key customers, who are adopting advanced packaging and <unk> and making sure we're focusing our R&D spend to have.

Michael Slessor: We see the industry in a much more stable overall condition. We feel like we're in a bottoming phase if you listen to some of our key customers in the foundry space in the PC space, I think there's some mobile earnings out here over the next couple of days. It does seem like things are bottoming and maybe even strengthening, in a little bit. So I think the industry is in much better shape.

Differentiated products in those applications are really the focus areas. So you know in DRAM, making sure we're keeping our competitive league in H B M, but in foundry and logic, there's a variety of of new requirements of new products that we're releasing associated with higher speed.

Michael Slessor: Obviously there's a wide variety of views on when things are going to inflect and when the next upturn is, but I think we're in pretty good shape given the capacity investments we've made to capitalize on that.

Need higher power smaller pads and higher pin counts.

Operator: Great. Well, I appreciate the extra color there. Thanks so. Thank you one moment for our next question.

Really the focus of our envision R&D spend I won't call. It planned yet in 2024.

Operator: And our next question comes from the line of Gus Richard from Northland. Your question, please. Yes. Thanks for taking the question. A lot of them have been answered, but I did want to ask you about the expansion of the system and package. And, you know, is that starting to reach the mobile customers? Are they starting to look to put multiple tiles in a package and increase test intensity there? Yeah, I think.

Okay. That's great. Thank you very much thank you.

Thank you. This does conclude the question and answer session of today's program I'd like the hand, the program back to Mike's lesser for any further remarks.

Thanks, everybody for joining US again today, you know we have a couple of investor conferences on our docket to end the year I believe they've been posted on our website.

So we'll hope to see you there to wrap up an eventful 20 twenty-three and look forward to 2024 take care.

Operator: So we give you a couple of examples of where chiplets or tiles are really driving our business. One, the client microprocessor, the other HBM, which has been a theme for a while. I think we're probably in very early and things associated with. There are some R&D projects going on, but it's going to be at least a few quarters, if not the better part of a year before we start to see. Chiplets and tiles really infused into the mainstream mobile road maps.

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

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Operator: Having said that, you know, there are a variety of places, you know, high end 5G mobile handset where you do see advanced packaging and system in a package kind of characteristics. One is the RF front end, where now we have multiple filters packaged together with an antenna and package. And those are areas that at least when mobile was ramping and 5G adoption was strong, where we saw a great uptick in in the RF business.

Operator: I think thematically it all goes to us wanting to continue to broaden our exposure to advanced packaging. We view this as a secular shift in where values created in the industry and then the supply chain. And it's somewhere we're continuing to place bets both from our R&D spending, but also as we look to an M&A funnel. Got it.

Operator: That's helpful. And then just the cooking again on solar confitonics, you're shipping both a system, you know, is that, you know, fully automated at this point. And, you know, can you talk a little bit about the mix going forward between system and, you know, consumables, you know, as you ramp in volume. Yeah, we're still pretty early in the implementation into volume production. And so the system we're shipping in the quarter that goes into low volume production, still really an optical only test.

Operator: It's testing the optical part of the chip. Now we do have separate engagements on this combined, you know, when you co package the photonic chip together with the electrical chip, at least to do functional test and ensure that that works. It's going to need to be a combined electrical optical test, but that's in fairly early code development with some of our key customers. So I'd expect, you know, let's say through 2024, the mix to continue to be pretty heavily system, of Christian Space. Thanks. Thank you one moment for our next question.

Christian Schwab: And our next question comes from the line of Christian Schwab from Craig Hallum. Your question please. Great guys, I just have a couple of quick questions.

Michael Slessor: Is there any update on the large new customer opportunity that you could share? I think a couple of updates, Christian. So just to orient everyone, when we look at our share in the logic segment and especially associated with microprocessor applications, it's pretty heavily biased towards one customer. And the share shifts in the industry have not been all that favorable recently for that customer. So we said in the past, our fundamental strategy is to be a leading supplier at every major customer in the industry.

Michael Slessor: And here's one of the gaps. It's an area where we continue to be very focused. We've made some changes in both our technology, but also the technical team that's interfacing with that customer. Because the primary gaps in qualifying really have been adapting our technology. They've been technical in nature. You know, that customer needs a second supplier. There's really only two of us that can drive at the high end of founder and logic probe guards, especially with the requirements driven by advanced packaging. And so, you know, longer than we would have liked, we continue to make changes and we're continuing, we continue to be committed to building a share position at this customer.

Michael Slessor: Okay, that's a fair update. And then my other second question quick is, you know, the high bandwidth memory industry, you know, is looking to, you know, more than two acts, you know, the capacitive high, you know, high bandwidth memory. Sam, so I was finally making it. My cron will get an actor together probably shortly. So is it safe to assume if that is accurate in industry dialogue that your high bandwidth memory business, you know, should go from, you know, going from 10 million a quarter to easily 20 million plus a quarter at some point next year?

Michael Slessor: Yeah, I think, you know, typically probe card intensity does scale with with wafer starts and output, right? If you look at over time, there's a pretty good relationship between overall semiconductor revenue and probe card spending, although the intensity has gone up over time. I think the one potential caveat here, not to pull or cold water on it, is as any technology matures like the TSV die stacking in HBM will mature yields go up.

Michael Slessor: And so that's then a bit of a counterbalancing force. But I think as all 3D RAM manufacturers ramp and start to really supply for what the native demand for HBM is in enabling AI, I don't think that's an unreasonable expectation to have the business go from let's call it in round numbers 10 million a quarter to something like 20 million a quarter. A lot of it will depend on when these other customers ramp.

Michael Slessor: A lot of it will depend on the end pull through from the AI markets. But if you believe those underlying assumptions, yeah, I think it's reasonable that we'll be able to come close to doubling our HBM business as we go through some point in 2020, for you.

Operator: Great. Good other questions. Thanks, guys. Thanks. Thank you.

Operator: One moment for our next question.

David Tuley: And our next question comes from the line of Craig Ellis from Be Riley Securities. Your question, please. Yeah, thanks for sneaking me in, guys. Mike, I want to start just by following up on some of the conversations around Foundry Logic. It seemed like a lot of the strength in the quarter was compute-related either more on the client side or HPC side. And some similar things going on in the outlook, but I didn't hear too much about mobile and things related to RF and Foundry Logic.

David Tuley: So how do you think that shapes us as we exit the year heading into next year and any notable changes on the mobile side in Foundry Logic as we're looking at the business? Yeah, I think our RF business, which we report inside of Foundry Logic, really is indexed pretty heavily towards mobile handset growth. And I think anybody who follows that industry knows that that's been a pretty ugly 2023 for handsets and the mobile ecosystem in general.

David Tuley: We do see things bottoming in the mobile space. And there were some nice application processor wins and RF wins in the third quarter that did contribute to the results. They just weren't as major as the compute design. I still feel like, you know, if you look at inventories, whether they be filters or even some of the apps processors across the overall channel, there's some digestions and usage for those chips before we really see the new chips that are driving our business to ramp in volume.

David Tuley: But like most of the rest of our businesses, we've seen mobile and RF stabilize. And as I said, maybe even get a little bit better. Now, one of the things to know about our RF business is some of the shortest lead times we operate in. So where our average lead times are better part of a quarter, RF lead times are actually shorter than that. And so we can see some very significant changes in demand profile as customers change their way for start plans. So not a lot of visibility, I guess is one of the things I'm trying to say. That's up on my comment.

Michael Slessor: The second question earlier in the Q&A, you noted that there have been pluses and minuses, vis-a-vis the target model, one of the pluses would be AI, one of the minuses would be China. And I was just looking at the China country trends and the supplement that's released and noticed that China had ticked a few million lower every quarter over the last four or five quarters. How much of that is cyclical versus anything that might be related to more structural things with with shipment restrictions, etc.

Michael Slessor: And more importantly, from here, what should we expect going forward in that geography? Thank you. Yeah, so it's a good point, right? Our China business I think was again down sequentially. And probably at half the levels it was at the peak back in late 21 or early 22. To answer your question directly, it's almost entirely structural. As a U.S, supplier operating at advanced nodes that are the subject of the export controls from the Department of Commerce, we've been limited in our ability to supply customers.

Michael Slessor: And I think we've been quite clear in our expectations that we expect the domestic China business to continue to increase. And at some point here, probably go to zero as they cultivate. Probably not local China alternatives to us, but with our primary competitor in memory, being based out of Japan, our primary founder and logic competitor being based out of the EU, they do have geographical alternatives that aren't restricted as strong, as we are.

Michael Slessor: The part holding that business up is still the multinationals that operate in the region, and we've seen a recent relaxation of the export controls around them. They were granted extensions to the license, and those businesses are holding up fairly well. That's really helpful, Caller. Thanks, Mike. Thank you. One moment for our next question.

David Silver: And our next question comes to the line of David Tuley. It's from Steelhead Securities. Your question, please. Yeah, thanks for taking my question. My question has to do with advanced packaging. Clearly on the conference calls over a last few quarters, we've seen a whole bunch more chatter from both the test and assembly guys and, you know, Intel and AMD and whatnot. I'm just curious as far as more probe card business goes, what percentage would you classify as advanced packaging?

David Silver: And what do you think the growth rate of that segment is? And I'm assuming that includes both the tile from the high bandwidth memory stuff. Yeah, yeah. And that's the way we classify it to David for clarity, right? Regular flip chip, although some people would call that advanced packaging, what we're really targeting that classification at Chiplet multi-diarchitectures, assembled using techniques like hybrid bonding and TSV. Because that's really where the increase in performance, the decrease in cost.

David Silver: The innovation acceleration comes from. It can sometimes be a little bit difficult to break out, but given what we highlighted in the third quarter, my guess is that somewhere around 2025, maybe even 30% of our business at present is associated with advanced packaging, the combination of the client base microprocessor, HBM at the various customers and a smattering of other designs. So we're still clearly in very early innings associated with this, but if you look at the increase in test intensity associated with it, it's also one of the things that is underlying the strength in the third quarter results, the fact that some of the revenue concentration was associated with things in advanced packaging really does help out the overall top line.

David Silver: And it's why we're so optimistic of our exposure and the eventual growth advanced packaging will thrive for us. And now when you look at the both the unit volume growth that you see in advanced packaging, plus this increase in intensity and increase complexity, or your advanced packaging business, you know, over the next two years, what would you guess the growth rate is? Clearly, it's probably more than 2x the industry growth, but I'm just kind of curious if you have an idea what it might be.

David Silver: Yeah, we're going through annual planning and strategic planning right now, and that's it's one of the key things we're looking into. So over a two, two year timeframe, we do expect it to outgrow the industry significantly. I think 2x maybe a little bit aggressive, but again, it's one of the reasons given our competitive position, given the value we create for our customers in advanced packaging applications with things like our men's pro technology with things like co package optics. That's that outside growth is somewhere where we got good exposure and we're going to continue to prioritize and capitalize on.

Michael Slessor: Okay, thank you. And just what formal clarification, as far as sub seven nanometer and below foundry logic, business, what percentage of those waper starts are men's based probes versus other technology? Is it, you know, a vast majority at this point? Yeah, it's a vast majority. There are counter examples where men's probes have not been adopted in areas like very large footprint single diuretical GPUs, for example, because the the interconnect density doesn't require a men's base probe, but it's a pretty reasonable rule of thumb that the vast majority of sub seven nanometer foundry logic devices do need to be probed with a men's probe card. Thank you. Thanks. Thank you. One moment for our final question for today.

David Silver: And our next question comes from the line of David Silver from CL King and Associates. Your question please. Yeah, hi. Thank you. I had a couple questions maybe about planning for next year, but this is typically the time of year. And budgeting and everything takes place. Just focusing on your your capex budget, you know, and there has been the liver more capacity expansion. But when you're thinking about next year's capex, then could you maybe call out where the biggest amount, the largest amount of discretionary capex is going to be spending. In other words, what efforts or applications? Are you going to be committing discretionary resources to thanks?

Shai Shahar: Sure, I'll take that David. And so as you said, we are going through the planning process and given our big footprint in Livermore in California, I expect most of the additional capex to happen in that in that facility. In terms of magnitude, I did talk about completing majority of our capacity expansions that is required for achieving the target model. And that's what we expect the capex in 2024 to decrease, compare, certainly compared to the 60 million midpoint capex we expect in 2023.

Shai Shahar: I don't expect you to go down significantly like to the 20 million dollar a year levels that we had before starting this capacity expansion. But somewhere in that range is what we expect capex to be in 2024 and most of it in the probed card business and most of it in Livermore. Okay, thanks.

Michael Slessor: And then I'd kind of like to ask a similar question on your R&D spend. So I think the third quarter R&D spend was an all-time high. And again, when you look out to next year, what are the new or significantly increased efforts in your R&D budget? If you could call out maybe the top one or two, that would be very helpful. Thank you.

Michael Slessor: Yeah, I'll take this one. It's Mike again. Really, go back to the themes we've talked about today. Advanced packaging, PIPLITS, making sure our product roadmap is aligned with the key customers who are adopting advanced packaging and PIPLITS in volume and making sure we're focusing our R&D spend to have differentiated products in those applications are really the focus areas. So, you know, in DRAM, making sure we're keeping our competitive lead in HBM, but in Foundry and Logic, there's a variety of new requirements and new products that we're releasing associated with higher speed, higher power, smaller pads, and higher pin counts, but they're really the focus of our envisioned R&D spend. I won't call it planned yet in 2024. Okay, that's great. Thank you very much. Thank you.

Operator: This does conclude the question and answer session of today's program.

Michael Slessor: I'd like to hand the program back to Mike Flesser, for any further remarks. Thank you everybody for joining us again today. You know, we have a couple of investor conferences on our docket to end the year. I believe they've been posting on our website. So, we'll hope to see you there to wrap up an eventful 2023 and look forward to 2024.

Operator: Take care.

Operator: Thank you, ladies and gentlemen, for participation in today's conference. This does conclude the program. You may now disconnect.

Operator: Good day.