Q4 2023 FormFactor Inc Earnings Call

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Operator: Thank you and welcome everyone to FormFactor's fourth quarter 2023 earnings conference call. On today's call are 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.

Speaker Change: Thank you and welcome everyone to form factors fourth quarter 2023 earnings Conference call on today's call are Chief Executive Officer, Mike Slusher, and Chief Financial Officer, Shai Shahar before we begin Stan Finkelstein, the company's VP of Investor Relations.

Stan Finkelstein: Where might you of some important information.

Operator: Today the company will be discussing gap P&L results and some important non-gap measures intended to supplement your understanding of the company's financial results. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the investor relations section of our website. Today's discussion contains forward-looking statements within the meaning of the federal securities laws. Examples of such forward-looking statements include those with respect to the projections of financial and business performance, as well as future macroeconomic and geopolitical conditions.

Stan Finkelstein: Thank you today the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials.

Stan Finkelstein: Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today basic company and on the Investor Relations section of our website.

Stan Finkelstein: Today's discussion contains forward looking statements within the median gobs of federal Securities laws.

Stan Finkelstein: Examples of such forward looking statements include those with respect to the projections of financial and business performance future.

Stan Finkelstein: Future macroeconomic and geopolitical conditions, the benefits of acquisitions and investments in capacity and new technologists, the parts of global regional and National Health crisis, including the COVID-19, pandemic anticipated industry trends potential disruptions in our supply chain.

Operator: The benefits of acquisitions and investments in capacity and in new technologies. The impacts of global, regional, and national health crises, including the COVID-19 pandemic, anticipated industry trends, potential disruptions in our supply chain, and the impacts 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 risk and uncertainty that could cause actual results to differ materially from those expressed during this.

Stan Finkelstein: The impact of regulatory changes, including the recent U S China trade restrictions.

Stan Finkelstein: Dissipated demand for products, our ability to develop produce and sell products and the assumptions upon which starts such statements are based.

Stan Finkelstein: These statements are subject to known and unknown risks and uncertainties.

Stan Finkelstein: That could cause actual results to differ materially from those expressed during this call.

Michael D. Slessor: Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended December 31, 2022 and in our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued. Forward-looking statements are made as of today, February 7, 2024, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

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, 'twenty to 'twenty two.

Stan Finkelstein: And in our other SEC filings, which are available on the FTC's website at Www Dot S E T.

Stan Finkelstein: That golf and in our press release issued today.

Stan Finkelstein: Forward looking statements are made ourself today February seven 2024, and we assume no obligation to update them was that we will now turn the call over to form factor seal Mike Susser.

Michael D. Slessor: Thanks, everyone, for joining us today on FormFactor's fourth-quarter earnings. FormFactor's fourth-quarter results were in line with the outlook we provided last November. Compared to that outlook, moderately higher revenue and gross margins were offset by a higher tax rate, producing non-GAAP EPS at the midpoint of the range. As we enter 2024, we continue to operate in an overall demand environment that remains similar to the levels we experienced during the past year, and we expect first quarter results to be similar to those achieved in recent quarters. The relatively stable aggregate demand across our combined served markets is a benefit of FormFactor's diversification strategy and sets us apart from our direct competitors. FormFactor has a broad lab-to-fab product portfolio across Foundry Logic, VRAM, and Flash Probe cards, together with our system segment products.

Mike Susser: Thanks, everyone for joining us today on foreign portrait form factors fourth quarter earnings call.

Mike Susser: If one factors fourth quarter results were in line with the outlook, we provided last November.

Mike Susser: Compared to that outlook moderately higher revenue and gross margins were offset by a higher tax rate producing non-GAAP EPS, but the midpoint of the range.

Mike Susser: As we enter 2024, we continue to operate in an overall demand environment. There remains similar to the levels, we experienced during the past year and we expect first quarter results to be similar to those achieved in recent quarters.

Mike Susser: The relatively stable aggregate demand across our combined served markets is a benefit of form factors diversification strategy and sets us apart from our direct competitors.

Mike Susser: Form factor has a broad lab to fab product portfolio across foundry and logic, DRAM and flash probe cards together with our system segment products.

Michael D. Slessor: This unique portfolio enables us to compete for business across diverse demand pools at all major customers, producing relatively consistent top-line results, as we've demonstrated for the past four quarters and which we expect again in the current quarter. Customer investment in growing areas driven by generative AI, like high-bandwidth memory and co-packaged silicon photonics, is helping offset the impact of areas that are presently at cyclically low levels, like mobile handsets and PCs, and those entering cyclical downturns, like automotive and industrial. The stability also enables FormFactor to keep investing 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 options. It also enables us to invest in capacity and other strategic initiatives designed to produce market share gains and above-industry revenue and profit growth when the industry returns to growth, which will enable FormFactor to achieve and then surpass the levels of our current target financial targets. Because of the strength and stability of our balanced product portfolio, we can make these investments while maximizing quarterly profitability and protecting our strong balance sheet throughout prolonged periods of industry weakness. Turning now to segment level details.

Mike Susser: This unique portfolio enables us to compete for business across diverse demand pools that all major customers producing relatively consistent top line results as we've demonstrated for the past four quarters, and which we expect again in the current quarter.

Mike Susser: Customer investments in growing areas, driven by generative AI like high bandwidth memory and co packaged silicon photonics is helping offset the impact of areas that are presently at cyclically low levels like mobile handsets and P. CS and those entering cyclical downturns like automotive and industrial.

Mike Susser: This stability also enables form factor to keep investing in R&D for new product innovation and competitive differentiation, especially in our product roadmap for advanced packaging applications, like chip, which entitles high bandwidth memory and co packaged optics.

Mike Susser: It also enables us to invest in capacity and other strategic initiatives designed to produce market share gains and above industry revenue and profit growth when the industry returns to growth.

Mike Susser: Which will enable form factor to achieve and then surpass the levels of our current target financial model.

Mike Susser: Because of the strength and stability of our balanced product portfolio. We can make these investments, while maximizing quarterly profitability and protecting our strong balance sheet throughout prolonged periods of industry softness.

Turning now to segment level details.

Michael D. Slessor: DRAM probe cards are an area of current strength, and we expect first quarter DRAM revenue to approach the peak levels experienced in 2021. DRAM strength is being driven by two factors. First, and perhaps surprisingly, we're experiencing strong demand generated by new DDR5 DRAMs, as customers prepare for high-volume production when the eventual DRAM upturn arrives. This provides insight into the unique characteristics of probe card demand since probe cards are a device-specific consumable customized to each individual chip design.

Mike Susser: DRAM probe cards are an area of current strength and we expect first quarter DRAM revenue to approach the peak levels experienced in 2020 one.

Mike Susser: DRAM strength is being driven by two factors.

Mike Susser: First and perhaps surprisingly, we're experiencing strong demand generated by new DDR five DRAM designs as customers prepare for high volume production when the eventual DRAM upturn arrives.

Mike Susser: This provides insight into the unique characteristics of probe card demand since probe cards are a device specific consumable customized to each individual chip design early production activity for these new DDR five designs is driving demand for new probe cards, albeit at lower overall levels and was somewhat greater short term volatility.

Michael D. Slessor: Early production activity for these new DDR5 designs is driving demand for new probe cards, albeit at lower overall levels and with somewhat greater short-term volatility than we might expect to see in a full-scale cyclical uptake. The second factor behind our strong DRAM outlook is the continuing acceleration in demand from multiple customers for probe cards to test high bandwidth memory, or HBM. Together with the headline-grabbing GPUs, HBM is a key enabler for generative AI, and we are forecasting nearly 50% sequential growth in our HBM probe card business in the first quarter. HBM offers a great example of how advanced packaging is driving FormFactor's results. As we mentioned in the past, advanced packaging applications like HBM produce both higher test intensity, which expands the number of probe cards required per good die out, and higher test complexity, which raises the performance requirements for each probe.

Mike Susser: Then we might expect to see in a full scale cyclical upturn.

Mike Susser: The second factor behind our strong DRAM outlook is the continuing acceleration in demand from multiple customers for probe cards to test high bandwidth memory, where H B M T.

Mike Susser: Together with the headline grabbing Gpus H B M. As a key enabler for generative AI and we are forecasting nearly 50% sequential growth in our H B M probe card business in the first quarter.

H B M offers a great example of how advanced packaging is driving form factors results.

Mike Susser: As we mentioned in the past advanced packaging applications like HBM produced both higher test intensity, which expands the number of probe cards required for good die out.

Mike Susser: And higher test complexity, which raises the performance requirements for each probe card.

Michael D. Slessor: Each HBM chip is a stack of 8, 12, or even 16 individual DRAM die assembled with advanced packaging processes, such as through silicon vias and hybrid bonding. To ensure high yields of the stacked DRAM chip, customers probe and test each component DRAM die prior to stacking and probe and test the multi-die DRAM stack at various points during the assembly process, leading to a substantial increase in the overall probe card intensity for good die out. In addition, the technical requirements for HBM tests are significantly more advanced than for standard unstacked DRAM products, involving higher test speeds and more challenging thermal scaling specifications. FormFactor's MEMS-based smart matrix probe card architecture meets these advanced requirements, providing significant value to our customers and differentiation for FormFactor.

Mike Susser: Each H B M ship has a stack of 812 or even 16 individual DRAM die assembled with advanced packaging processes, such as through silicon via <unk> at hybrid bonding.

Mike Susser: To ensure high yields of the stacked DRAM chip customers probe and test each component DRAM die prior to stacking and probe and test the multi die DRAM stacked at various points during the assembly process, leading to a substantial increase in the overall probe card intensity per good die out.

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

Mike Susser: Form factors Mems based smart matrix probe card architecture meets these advanced requirements, providing significant value to our customers and differentiation for form factor.

Michael D. Slessor: We believe our superior performance capabilities will drive both market share and profitability gains as HBM continues to grow, driven by the accelerating adoption of generative AI. Shifting to Foundry and Logic Probe Guards, our largest business, we experienced the expected sequential reduction in the fourth quarter as key customers digested the significant third quarter shipments of probe cards for a major tile-based client PC design and two major high-performance compute designs in the foundry space. We expect similar demand levels for Foundry and Logic ProbeCards in the current quarter, as customers continue to closely manage their output now that inventories have stabilized at healthy levels in high unit volume end markets like client PC and mobile. Looking further ahead, the adoption of advanced packaging processes like chiplets and tiles by major Foundry and Logic customers continues to accelerate as they seek to advance their roadmaps in the face of a slowing Moore's Law. As in high bandwidth memory, advanced packaging in foundry and logic applications again demands both higher test intensity and higher test complexity.

Mike Susser: 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 to foundry and logic probe cards, our largest business we experienced the expected sequential reduction in the fourth quarter.

Mike Susser: As key customers digested the significant third quarter shipments of probe cards for a major tile based client P. C design and two major high performance compute designs in the foundry space.

Mike Susser: We expect similar demand levels for foundry and logic probe cards in the current quarter as customers continue to closely manage their output now that inventories have stabilized at healthy levels in high unit volume and markets like client PC and mobile.

Mike Susser: Looking further ahead the adoption of advanced packaging processes like chip lifts in tiles by major foundry and logic customers continues to accelerate as they seek to advance their roadmaps in the face of a slowing Moore's law.

Mike Susser: As in high bandwidth memory advanced packaging in foundry and logic applications again demands both higher test intensity and higher test complexity.

Michael D. Slessor: The positive impact of this trend, together with the potential for increased compute power in PCs and handsets to support AI at the edge, will drive significant growth in the Foundry and Logic Probe Garden. As anticipated, we experienced a sequential reduction in system segment revenue in the fourth quarter, mainly due to the sale of our FRT metrology business. The systems 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 and quantum computing. More broadly, systems is an important element of our diversification strategy, as spending in this segment is primarily driven by customer innovation and R&D budgets and is not directly correlated with semiconductor production. Copackaged optics enabled by silicon photonics remains an important and exciting driver for FormFactor's current systems and future probe cart business.

Mike Susser: The positive impact of this trend together with the potential for increased compute power and Pcs and handsets to support AI at the edge will drive significant growth in the foundry and logic probe card market.

Mike Susser: As anticipated we experienced a sequential reduction in systems segment revenue in the fourth quarter, mainly due to the sale of our F. R. T metrology business the.

Mike Susser: The systems 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 and quantum computing.

Mike Susser: More broadly systems is an important element of our diversification strategy is spending in this segment is primarily driven by customer innovation and R&D budgets and is not directly correlated with 70 airports semiconductor production activity.

Mike Susser: Co package optics enabled by Silicon Photonics remains an important and exciting driver for form factors current systems and future probe card businesses.

Michael D. Slessor: The transition of silicon photonics from early R&D to low-volume production continues, and we have now installed a CM300 silicon photonic system at the world's leading foundry to support low-volume production, as well as serve as a platform for the co-development of the enhancements needed for high-volume electrical and optical tests of co-packaged optics. As production volumes increased over the next several years, our product mode wrap 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 fab. Finally, earlier today, we announced an agreement to divest our subsidiaries in China to Grand Junction Semiconductor, together with a long-term exclusive distribution and partnership agreement. This transaction is designed to adjust our operational strategy in the region in light of export controls that have caused our China revenues to decline over the past several quarters.

Mike Susser: The transition of Silicon Photonics from early R&D to low volume production continues and we have now installed a C. M 300, silicon photonics system at the world's leading foundry to support low volume production as well as serve as a platform for the co development of the enhancements needed for high volume electrical and optical tests.

Mike Susser: Co package optics.

Mike Susser: As production volumes increased over the next several years, our product mode wrap 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 fab.

Mike Susser: Finally earlier today, we announced an agreement to divest our subsidiaries in China to Grand Junction semiconductor together with a long term exclusive distribution and partnership agreement.

Mike Susser: This transaction is designed to adjust our operational strategy in the region in light of export controls that have caused our China revenues to decline over the past several quarters.

Michael D. Slessor: In closing, we continue to operate efficiently and prudently in what we see as a relatively stable demand environment across our diversified product and technology portfolio. Longer term, we remain excited and confident in the growth prospects for FormFactor and the industry overall, driven by the fundamental trends of semiconductor content growth and exciting innovations like HBM, chiplets, and co-packaged silicon photons. 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 as a stronger and leaner competitor, enabling us to achieve our target model that delivers $2 of non-gap earnings per share on $850 million of revenue. Shai, over to you.

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

Mike Susser: 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 H B M chipsets and co packaged silicon photonics.

Mike Susser: 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 positioned form factor to emerge from the current cyclical downturn, a stronger and leaner competitor, enabling us to achieve our target model that delivers $2 of non-GAAP earnings per share on 850 million.

Mike Susser: Revenue.

Shai Shahar: Shai over to you.

Shai Shahar: Thank you, Mike, and good afternoon. As you saw in our press release, Q4 revenues and non-GAAP gross margin were at the high end of our outlook, and Nanga PPS was at the midpoint. Fourth quarter revenues were $168.2 million, a 2% sequential decrease from our third quarter revenues, and a year-over-year increase of 1.3% from our Q4 2022 revenues. PropCart segment revenues were $126.8 million in the fourth quarter, a decrease of $1.5 million, or 1.3%, from the third quarter revenues, and a year-over-year increase of 1.9%.

Shai Shahar: Thank you, Mike and good afternoon.

Shai Shahar: As you saw in our press release, Q4 revenues and non-GAAP gross margin, whereas the high end of our outlook range and non-GAAP EPS was at the midpoint of the range.

Shai Shahar: Fourth quarter revenues were $168 2, million% to 2% sequential decrease from our third quarter revenues and a year over year increase of one 3% from our Q4 2022 revenues.

Shai Shahar: Probe card segment revenues were $126 $8 million in the fourth quarter, a decrease of $1.5 million or one 3% from the third quarter revenues in.

Shai Shahar: And a year over year increase of one 9%.

Shai Shahar: The decrease from Q3 was driven by lower foundry and logic revenues, partially offset by an increase in DRAM and flash rates. System segment revenues were $41.2 million in Q4, a $2 million decrease from third quarter record revenues, and Essentially Flat Eurovision. The decrease from the third quarter is mainly due to the set of FRT, which closed on October 31st.

Shai Shahar: The decrease from Q3 was driven by lower foundry and logic revenues, partially offset by an increase in DRAM and flash revenues.

Shai Shahar: Systems segment revenues were $41.2 million in Q4 of $2 million decrease from third quarter of record revenues and essentially flat year over year.

Shai Shahar: The decrease from the third quarter is mainly due to deferred over for tea, which closed on October 31st.

Shai Shahar: System segment revenues comprise 24.5% of total company revenues, slightly down from 25.2% in the third quarter. Within the ProCard segment, Q4 Foundry and Logic revenues were $83.6 million, a 13.3% decrease from third quarter revenues. Foundry and Logic revenues decreased to 49.8% of total company revenues compared to 56.2% in the third quarter. DRAM revenues were $35.9 million in Q4, $8.5 million, or 31% higher than in the third quarter, an increase to 21.4% of total quarterly revenues as compared to 16% in the third quarter. Flash revenues of $7.3 million in Q4 were $2.8 million higher than in the third quarter and were 4.3% of total revenues in Q4 as compared to 2.6% in Q3. Gap gross margin for the fourth quarter was 40.4%, the same as in Q3. Cost of revenues included $2.8 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today and in a reconciliation table available in the Investor Relations section of our website. On a non-GAAP basis, gross margin for the fourth quarter was 42.1%.

Shai Shahar: System segment revenues comprised 24.5% of total company revenues slightly down from 25, 2% in the third quarter.

Shai Shahar: Within the probe card segment Q4 foundry and logic revenues were $83 $6 million is 13, 3% decrease from the third quarter revenues.

Shai Shahar: Foundry and logic revenues decreased to 49, 8% of total company revenues compared to 56, 2% in the third quarter.

Shai Shahar: DRAM revenues were $35 $9 million in Q4, $8 $5 million or 31% higher than in the third quarter and increased to 21, 4% of total quarterly revenues as compared to 16% in the third quarter.

Shai Shahar: Flash revenues of $7 $3 million in Q4 were $2 $8 million higher than in the third quarter and were four 3% of total revenues in Q4 as compared to two 6% in Q3.

Shai Shahar: Gross margin for the FERC, sorry, GAAP gross margin for the fourth quarter was 40.4% same as in Q3.

Shai Shahar: Cost of revenues included $2 $8 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today and the new Conciliation day will available in the Investor Relations section of our website.

Shai Shahar: On a non-GAAP basis gross margin for the fourth quarter was 42.1% <unk> three percentage points higher than the 41, 8% non-GAAP gross margin in Q3, and 1.1 percentage points above the midpoint of our outlook range.

Shai Shahar: 0.3 percentage points higher than the 41.8% non-gap gross margin in Q3 and 1.1 percentage points above the midpoint of our output. The increases compared to Q3 and the upside versus the midpoint of our outlook range were mostly a result of higher gross margin at the probe card segment, partially offset by lower system segment. Our PropCard segment gross margin was 39.6% in the fourth quarter, an increase of 1.1 percentage points compared to 38.5% in Q3. The increase from Q3 is mainly due to improved factory utilization and lower excess and obsolete inventory expenses, partially offset by a less favorable mix and lower volume. Our Q4 system segment gross margin was $49.6 billion, 220 basis points lower than the 51.8% gross margin in the third quarter. The decrease relates mainly to the sale of FRT during the quarter, which resulted in a less favorable mix and inventory adjustments related to the transaction close. Our GAAP operating expenses were $59.6 million for the fourth quarter, as compared to $66.6 million in the third quarter.

Shai Shahar: The increase as compared to Q3, and the upside versus the midpoint of our outlook range. We're mostly a result of higher gross margin of the probe card segment, partially offset by lower system segment gross margin.

Shai Shahar: Our probe card segment gross margin was 39, 6% in the fourth quarter, an increase of 1.1 percentage points compared to 38, 5% in Q3.

Shai Shahar: The increase from Q3, mainly due to improved factory utilization and lower excess and obsolete inventory expense.

Shai Shahar: The offset by a less favorable mix and lower volume.

Shai Shahar: Our Q4 systems segment gross margin was 49, 6% 220 basis points lower than the 51, 8% gross margin in the third quarter.

Shai Shahar: The decrease relates mainly to the set of F. R. T. During the quarter, which resulted in a less favorable mix and inventory adjustments related to the transaction close.

Shai Shahar: Our GAAP operating expenses were $59 $6 million for the fourth quarter as compared to $66 $6 million in the third quarter.

Shai Shahar: The main reasons for the decrease versus Q3 were non-recurring M&A expenses in the third quarter and only one month of FRT OPEX in the fourth quarter, partially offset by higher performance-based compensation in Q4. Non-GAAP operating expenses for the fourth quarter were $51.6 million, or 30.7% of revenues, as compared with $54.5 million, or 31.8% of revenues in Q3. The decrease relates to similar reasons I mentioned regarding gap operating. Company non-cash expenses for the fourth quarter included $9.3 million for stock risk compensation.

Shai Shahar: The main reasons for the decrease versus Q3 were nonrecurring M&A expenses in the third quarter and only one months of effort T opex in the fourth quarter.

Firstly offset by higher performance based compensation in Q4.

Shai Shahar: non-GAAP operating expenses for the fourth quarter were $51 $6 billion or 37% of revenues as compared with $54 5 million or 31, 8% of revenues in Q3.

Shai Shahar: The decrease relates to similar reasons I mentioned regarding GAAP operating expenses.

Shai Shahar: Company noncash expenses for the fourth quarter included $9 3 million for stock based compensation.

Shai Shahar: $1.6 million lower than in the third quarter due to the timing of grants. $0.8 million for the amortization of acquisition-related intangibles, $0.5 million lower than in Q3, and depreciation of $7.7 million, similar to the third quarter. GAAP operating income was $81.3 million for Q4 and included a $73 million gain from the sale of FRT, compared with GAAP operating income of $2.7 million in Q3. The gain from the sale of FRT has been excluded from our fourth quarter non-gap results.

Shai Shahar: One $6 million lower than the third quarter due to timing of grants.

Shai Shahar: <unk> $8 million for the amortization of acquisition related intangibles.

Shai Shahar: <unk> $5 million lower than in Q3, and depreciation of $7 7 million similar to the third quarter.

Shai Shahar: GAAP operating income was $81.3 million for Q4 and includes a $73 million gain from the set of SRT compared with GAAP operating income of $2 $7 million in Q3.

Shai Shahar: The gain from deferred over for tea has been excluded from our fourth quarter and non-GAAP results.

Shai Shahar: Non-GAAP operating income for the fourth quarter was $19.1 million, compared with $17.3 million in the third quarter, an increase of $1.9 million, or 10.8 percent. Gap net income for the fourth quarter was $75.8 million, or $0.97 per fully diluted share, compared with a gap net income of $4.4 million, or $0.06 per fully diluted share, in the previous quarter. The main reason for the increase is the gain on the sale of SRT. The non-GAAP effective tax rate for the fourth quarter was 21.2%, as compared with 12.2% in the third quarter, mainly due to usual year-end adjustments and changes in the mix of foreign versus domestic taxable income.

Shai Shahar: non-GAAP operating income for the fourth quarter was $19 1 million compared with $73 million in the third quarter, an increase of $1 9 million or 10, 8%.

Shai Shahar: GAAP net income for the fourth quarter was $75 $8 million or 97 cents per fully diluted share compared with a GAAP net income of $4 $4 million or <unk> per fully diluted share in the previous quarter.

Shai Shahar: The main reason for the increase is the gain on the sale of FRP.

Shai Shahar: The non-GAAP effective tax rate for the fourth quarter was 21, 2% as compared with a 12, 2% in the third quarter, mainly due to usual yearend adjustments and changes in mix of foreign versus domestic taxable income.

Shai Shahar: For the full fiscal 2023, the non-GAAP effective tax rate was 15.6%, within the range of 13% to 17% previously communicated and similar to the 15.4% in 2022. We estimate that our annual non-GAAP effective tax rate for 2024 will be between 14 and 18%. Fourth quarter non-GAAP net income was $15.7 million, or $0.20 per fully diluted share, compared to $17.3 million, or $0.22 per fully diluted share, in Q3. Moving to the balance sheet and cash flows, we used 0.3 million dollars in free cash flow in the fourth quarter, compared to generating 16.9 million dollars in Q3. The main reasons for the change were timing of shipments to and collection from customers during the fourth quarter and higher capital expenditures. The company invested $9.9 million in capital expenditures during the fourth quarter compared to $5.9 million in Q3.

Shai Shahar: For the full fiscal 2023, the non-GAAP effective tax rate was 15, 6% within the range of 13% to 17% previously communicated and similar to the 15, 4% in 2022.

Shai Shahar: We estimate that our annual non-GAAP effective tax rate for 'twenty 'twenty four will be between 14 and 18%.

Shai Shahar: Fourth quarter non-GAAP net income was $15 7 million or 20 cents per fully diluted share compared to $17 3 million or <unk> 22 cents per fully diluted share in Q3.

Shai Shahar: Moving to the balance sheet and cash flows we use zero point $3 million in free cash flow in the fourth quarter compared to generating $16 9 million daus in Q3.

Shai Shahar: The main reasons for the change where timing of shipments to and collection from customers during the fourth quarter and higher capital expenditures.

Shai Shahar: We invested $9 $9 million in capital expenditures during the fourth quarter compared to $5 $9 million in Q3.

Shai Shahar: This brings our 2023 annual capital expenditures to $56 million, within the range previously communicated. The decrease in CAPEX in the second half of 2023 as compared to the first and as compared with the $65.3 million invested in 2022 is due to completing the majority of the long-lead time facilities and equipment investments required to reach our target financial model. Accordingly, we expect CapEx in 2024 to be between $35 and $45 million. At quarter-end, total cash-in investments were $332 million, an increase of $84 million from Q3. The increase was mainly a result of approximately $104 million received from the sale of FRT, partially offset by the $9.9 million of capital expenditure I just described, and by a stock buyback in the amount of $20 million. As of the end of the fourth quarter, we had one term loan remaining with a balance totaling $14 million.

Shai Shahar: This brings our 2023 annual capital expenditures to $56 million within the range previously communicated.

Shai Shahar: The decrease in Capex in the second half of 2023 as compared to the first half and as compared with $65 $3 million invested in 2022 is due to completing the majority of the long lead time facility and equipment investments required to reach our target financial model.

Shai Shahar: Accordingly, we expect Capex in 2024 to be between 35 and $45 million.

Shai Shahar: At quarter end total cash and investments were $332 million, an increase of $84 million from Q3.

Shai Shahar: The increase was mainly a result of approximately $104 million received from the fed over 40, partially offset by the $9 $9 million of capital expenditures just I, just described and buy stock buyback in the amount of $20 million.

Shai Shahar: As of the end of the fourth quarter, we had one term loan remaining within balance totaling $14 million.

Shai Shahar: Regarding the stock buyback, as I mentioned, during the fourth quarter, we purchased $20 million worth of shares to fully utilize our $75 million two-year buyback program that was approved in May 2022 and started utilizing the new $75 million two-year plan that was approved in October 2023. As of Q4 quarter end, $73.8 million dollars remain available for future repurchases under the. As a reminder, the main purpose of these share repurchase programs is to offset dilution from stock risk compensation. Turning to the first quarter, non-GAAP out. We expect Q1 revenues of $165 million, plus or minus $5 million. At the midpoint of our outlook range, Q1 revenues are expected to be approximately $3 million lower than in Q4. The expected decrease relates to lower system segment revenues, mainly due to the sale of FRT and Q4.

Shai Shahar: Regarding the stock buyback as I mentioned during the fourth quarter, we purchased $20 million worth of shares to fully utilize our $75 million two year buyback program that was approved in May 2022, and started utilizing the new $75 million to your plan that was approved in October 2023.

Shai Shahar: As of Q4 quarter and $73 $8 million remained available for future repurchases under this plan.

Shai Shahar: As a reminder, the main purpose of the share repurchase programs is to offset dilution from stock based compensation.

Shai Shahar: Turning to the first quarter non-GAAP outlook, we expect Q1 revenues of $165 million plus or minus $5 million.

Shai Shahar: At the midpoint of our outlook range Q1 revenues is expected to be approximately $3 million lower than in Q4.

Shai Shahar: The expected decrease relates to lower system segment revenues, mainly due to the sell over 14 Q4.

Shai Shahar: And in the PropCard segment, we expect flat Foundry and Logic revenues and lower Flash revenues in the first quarter, partially offset by an increase in DRAM revenue. The sale of our Chinese subsidiaries that we announced today is expected to close in the first half of 2024, and it is not expected to have a significant impact on our financial results. First quarter non-GAAP gross margin is expected to be 41% plus or minus 150 basis points.

Shai Shahar: And the probe card segment, we expect flat foundry and logic and lower flash revenues in the first quarter, partially offset by the increase in DRAM revenues.

Shai Shahar: The sale of our Chinese subsidiaries that we announced today is expected to close in the first half of 2024 and it is not expected to have a significant impact on our financial results.

Shai Shahar: First quarter non-GAAP gross margin is expected to be 41% plus or minus 150 basis points.

Shai Shahar: The expected decrease at the midpoint of this range as compared to Q4 'twenty. Three gross margin is a result of a less favorable product mix, mainly the expected decreasing system segment revenues and the increasing DRAM revenues.

Shai Shahar: The expected decrease at the midpoint of this range as compared to Q4'23 gross margin is the result of a less favorable product mix, mainly the expected decrease in system segment revenues and the increase in BRM revenue. Although we expect HBM revenues to grow in the first quarter, non-HBM DRM revenues, which has a lower gross margin profile, are also expected. At the midpoint of these outlook ranges, we expect Q1 operating expenses to be $53 million, plus or minus $1 million. The increase compared to Q4 is mainly as a result of the annual benefits. Non-GAAP earnings per fully diluted share for Q1 are expected to be $0.19 plus or minus $0.04.

Though we expect <unk> revenues to grow in the first quarter non HBM DRM revenues, which has a lower gross margin profile is also expected to grow.

Shai Shahar: At the midpoint of these outlook ranges, we expect Q1 operating expenses to be $53 million, plus or minus $1 million.

Shai Shahar: The increase as compared to Q4 is mainly as a result of the annual benefits reset.

Shai Shahar: non-GAAP earnings per fully diluted share for Q1 is expected to be 19, plus or minus <unk> <unk>.

Shai Shahar: A reconciliation of our GAAP to non-GAAP Q1 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, do you have a question at this time. Please press star one on your telephone. If your question has been answered and you'd like to remove yourself from the queue simply press star. One again, we ask that you. Please limit yourself to one question and one follow up you can may get back into queue as time allows our first.

Operator: A reconciliation of our Gap to Non-Gap Q1 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 to questions. Operator?

Shai Shahar: Question comes from the line of Brian Chin from Stifel. Your question. Please.

Brian Chin: Hi, there good afternoon, and thanks for letting us ask a few questions maybe first and I know you just said that.

Operator: Certainly. Ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again.

Brian Chin: I think you said that upon closure in first half the China investor kind of has no impact but.

Brian Chin: I mean, I imagine there are some financial implications either in terms of cost and margins.

Some expectations as it relates to revenue.

Brian Chin: We ask that you please limit yourselves to one question and one follow-up. You can make it back in the queue if time allows. Our first question comes from the line of Brian Chin from Stiefel. Your question, please. Hi there. Good afternoon.

Maybe some cash on the balance sheet can you maybe break that down a little bit more and also whatever regulatory hurdles or other hurdles needed declared to consummate the transaction.

Speaker Change: Sure. So as I said, we don't expect it to have a significant impact on our on our financial results. When it comes to the balance sheet. Once the deal closes we will make the appropriate disclosure with more details, but the details of the transaction were not disclosed you can.

Shai Shahar: Thanks for letting us ask a few questions. Maybe first, and I know, Shai, you just said that upon closure in the first half, the China divestiture kind of has no impact, but, I mean, I mentioned there are some financial implications, you know, either in terms of cost and margins, some expectations as it relates to revenue, even maybe some cash on the balance sheet. Can you maybe break that down a little bit more and also give an idea of whatever regulatory hurdles or other hurdles need to be cleared to consummate the transaction?

Speaker Change: Imagine that we concluded you see material when it comes to the P&L again not material impact since we maintain we continue to maintain the direct relationships with our multinational customers in the region.

Speaker Change: And with respect to the local China customers, we have the new distribution agreements and we expect and hope that this will continue to grow our China business as we move forward and that's the conclusion, we don't expect it to have a material impact.

Michael D. Slessor: Sure. So, as I said, we don't expect it to have a significant impact on our financial results. When it comes to the balance sheet, once the deal closes, we will make the appropriate disclosure with more details. But since the details of the transaction were not disclosed, you can imagine that we concluded it was immaterial.

Speaker Change: And Mike do you want to refer to the regulatory yes.

Mike: Brian This has been structured in a way where we don't believe there are significant regulatory approvals required.

Mike: <unk>, what we're doing is divesting.

Shai Shahar: When it comes to the P&L, again, not a material impact since we maintain, we continue to maintain direct relationships with multinational customers in the region. And with respect to the local Chinese customers, we have the new distribution agreement. And we expect and hope that this will continue to grow our Chinese business as we move forward. And that's the conclusion.

Mike: What's in China already and so there is no technology transfer no significant technology licensing it really is a focus and a shift to our operational and customer channel strategy in the region given some of the challenges we've had with the export controls you've seen our domestic China revenue.

Mike: Tracked over the past several quarters and this is a response to that we are hopeful that.

Michael D. Slessor: We don't expect it to have a material impact. And Mike, do you want to refer to the regulatory authority? Yeah, Brian, this has been structured in a way where we don't believe there are significant regulatory approvals required. Basically, what we're doing is divesting what's in China already. And so there's no technology transfer, no significant technology licensing. It really is a focus and a shift to our operational and customer channel strategy in the region. Given some of the challenges we've had with export controls, you've seen our domestic China revenue contract over the past several quarters.

Mike: Grand Junction can bring some more resources and focus to those business and through the distribution channel helped grow our domestic China business for us.

Speaker Change: Okay, Yeah, that's helpful and for maybe for my follow up.

Speaker Change: Can you quantify I guess, it's been operating maybe around $10 million a quarter, but what what the HBM contribution was to the $36 million DRAM in Q4, and then also kind of more broadly.

Speaker Change: Do you see wafer probe card test intensity continuing to increase alongside your customers' roadmaps based on more die stack of hybrid bonding etcetera.

Michael D. Slessor: And this is a response to that. We are hopeful that Grand Junction can bring some more resources and focus to those businesses and, through the distribution channel, help grow our domestic Chinese business for them. Okay, yeah, it's helpful.

D C test intensity leveling off at some point as customers yields and manufacturing efficiency improves.

Speaker Change: Yes, I think it is.

Speaker Change: It's a question of timing on the second one I think.

Speaker Change: For the medium term certainly through 2024 and into 2025 with HBM customers are still writing up pretty significant yield learning curve and so the increased test intensity that we've talked about associated with die stacking and advanced packaging of 20% to 30%.

Michael D. Slessor: And for maybe my follow-up, can you quantify, I guess, it's been operating maybe around $10 million a quarter, but what was the HBM contribution to this $36 million DRAM in Q4? And then also kind of more broadly, do you see wafer probe card test intensity continuing to increase alongside your customers' roadmaps based on, you know, more dive stack and hybrid bonding, et cetera? Or do you see test intensity leveling off at some point as customers' yield and manufacturing efficiency improves? Yeah, I think it's a question of timing on the second one.

Speaker Change: We're pretty confident is going to hold here as we go through the early part of the HBM three and into the HBM for ramp.

Speaker Change: Over time as with anything we see this in new nodes as well customers.

Speaker Change: Complex yield learning using products like ours.

Michael D. Slessor: I think for the medium term, certainly through 2024 and into 2025, with HBM, customers are still riding up a pretty significant yield learning curve. And so the increase in test intensity that we've talked about associated with die stacking and advanced packaging of 20 to 30%, I think we're pretty confident is going to hold here as we go through the early part of the HBM-3 and into the HBM-4 round. You know, over time, as with anything, we see this in new nodes as well.

Speaker Change: Using the overall test intensity improving their yields and so we would expect it to go down over time, but I think we're.

Speaker Change: I think we're pretty confident increased test intensity as all the different yields.

Speaker Change: Yield reduction modes associated with die stacking or work through it and HBM and in the logic space as well.

Speaker Change: On the numbers H B M. In the fourth quarter was approximately $10 million as you said, maybe a little bit more of the $36 million of DRAM revenue and as we said in the prepared remarks, we expect that to increase around 50% sequentially so up into the call it mid teens.

Michael D. Slessor: Customers accomplish yield learning using products like ours, reducing the overall test intensity, improving their yields, and so we would expect it to go down over time, but I think we're pretty confident in increased test intensity as all the different yield yield reduction modes associated with die stacking are worked through in HBM and in the logic space as well. On the numbers, HBM in the fourth quarter was approximately 10 million, as you said, maybe a little bit more of the 36 million DRAM revenue, and as we said in the prepared remarks, we expect that to increase around 50% sequentially, so up into the call it mid-teens in the Q1 outlook. Okay, great. Thank you. Thanks.

Speaker Change: In the Q1 outlook.

Speaker Change: Okay, great great. Thank you. Thanks.

Speaker Change: Thanks Brent.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And our next question comes from the line of David Duley from Steelhead. Your question. Please.

Speaker Change: Yes.

David Duley: David you might have your phone on mute, yes, youre right.

David Duley: I noticed the foundry and logic revenue was down.

David Duley: And it looks at similar decline that we saw in the revenue out of geographic regions. Taiwan I was just wondering if you could make some more elaborate comments about that that's my first question. My second question is.

David Duley: Could you remind us what percentage of the overall DRAM market uses Mems space probe cards.

Operator: Thank you. One moment for our next question, and our next question comes from the line of David Duley from Steelhead. Your question, please. David Duley, you might have your phone on mute.

David Duley: And.

David Duley: I think you mentioned that all the high bandwidth memory stuff, that's going to be on Mems.

David Duley: Yes.

David Duley: Does the growth in high bandwidth memory really kind of benefits you guys since here.

David Duley: Mems based provider.

David Duley: Yes.

Speaker Change: I'll take the second one first.

David Duley: Yeah, you're right. Thanks. I noticed the Founders Logic revenue was down. It's a similar decline that we saw in the revenue out of the geographic region of Taiwan. I was just wondering if you could make some more elaborate comments about that. That's my first question.

Speaker Change: The DRAM.

Speaker Change: Wafer probe market is almost entirely Mems based.

Speaker Change: It's in our primary Japanese competitor.

Speaker Change: In in high end DRAM really the only way to build these probe cards, which tests the entire wafer at once and have approximately 100 150000 individual contacts on them the only way to do that in a cost effective and high quality way and deliver the speed performance. The high power performance is with our Mems technology and.

Michael D. Slessor: My second question is, you know, could you remind us what percentage of the overall DRAM market uses MEMS-based probe cards? And I think you mentioned that all the high bandwidth memory stuff is going to be on. The growth in high bandwidth memory really kind of benefits you guys since you're a MEMS-based provider. Okay, I'll take the second one first.

Speaker Change: And so I don't view HBM in and of itself as a headwind or a tailwind for Mems adoption, considering we're already largely adopted with nims in DRAM.

Michael D. Slessor: The DRAM wafer probe market is almost entirely MEMS-based. For us and our primary Japanese competitor in high-end DRAM, really the only way to build these probe cards, which test the entire wafer at once and have approximately 100, 150,000 individual contacts on them, the only way to do that in a cost-effective and high-quality way and deliver the speed performance, the high power performance, is with MEMS technology.

Speaker Change: The requirements as we talked about in the prepared remarks are more stringent and so it increases one the value to our customers. It also increases our competitive differentiation on things like speed high speed performance.

Speaker Change: And thermal scaling and so it's not purely a men's adoption story, but really our raising of the bar of the existing Mems probe card for HBM Which's Shai commented helps our gross margins in the segment a little bit.

Michael D. Slessor: And so I don't view HBM in and of itself as a headwind or a tailwind for MEMS adoption, considering we're already largely adopted with MEMS and DRAM. But the requirements, as we talked about in the prepared remarks, are more stringent. And so it increases, one, the value to our customers. It also increases our competitive differentiation on things like high speed performance and thermal scaling. And so it's not purely a MEMS adoption story, but really a raising of the bar for the existing MEMS probe card for HBM, which, as Shai commented, helps our gross margins in the segment a little. On the Foundry and Logic observation, if you recall from our previous call, we had a very strong third quarter with some of our major Foundry and Logic customers. And in particular, in the foundry space, they delivered high volumes of two high-performance probe cards for high-performance compute projects, and those are in the digestion mode right now.

Speaker Change: On the foundry and logic observation, if you recall back on our previous call. We had a very strong third quarter with some of our major foundry and logic customers.

Speaker Change: And in particular in the foundry space delivered high volumes of two high performance probe cards for high performance compute projects and those are in the digestion mode right now so the inference you've drawn.

Speaker Change: Correct.

Speaker Change: It also ties to the expectations, we set on the previous call about some digestion in the foundry space as we go through Q4 and now Q1.

Speaker Change: And just as my follow on you talked about in your prepared comments I think someplace about you saw unusually strong demand in gist.

Speaker Change: In DDR five is that associated with a specific end market or could you. Just maybe you can just elaborate further on that particular comment. Thank you.

Speaker Change: Sure. The overall DRAM guidance as we said our outlook is that we're going to approach the levels that we approached it in the middle part of 2021, so somewhere in the low 40 millions of quarterly DRAM revenue and Thats composed you can do the math from the.

Michael D. Slessor: So the inference you've drawn is correct. It also ties to the expectations we said on the previous call about some digestion in the foundry space as we go through Q4 and now Q1. And just as my follow-on, you talked about in your prepared comments, I think somewhere about you saw unusually strong demand and just in DDR5. Is that associated with a specific market? Or could you maybe just elaborate further on that particular comment?

Speaker Change: The previous question and answer session you can do the math on how much of that is H B M, which leaves you with some pretty solid growth associated with non HBM memory.

Michael D. Slessor: Thank you. Sure, the overall DRAM guidance, as we said, our outlook is that we're going to approach the levels that we reached in the middle part of 2021. So, you know, somewhere in the low 40 million per quarterly DRAM revenue. And that's composed, you can do the math from the previous question and answer session.

Speaker Change: Yes.

Speaker Change: We are seeing.

Speaker Change: DDR five for.

Speaker Change: For both mobile and server slash PC applications be pretty strong in the first quarter I want to be clear that we're not calling a DRAM upturn at this point, it's pretty concentrated on a couple of designs at mostly at one customer.

Michael D. Slessor: You can do the math on how much of that is HBM, which leaves you with some pretty solid growth associated with non-HBM members. But we're seeing. DR5 for both mobile and server-slash-PC applications will be pretty strong in the first quarter. But I want to be clear that we're not calling a DRAM upturn at this point. It's pretty concentrated on a couple of designs and mostly at one customer. But it is an interesting indication of our customers beginning to invest in new designs, because we know DRAM is cyclical, and we know it's going to turn at some point. So this represents some investments in them getting ready for the ramp when it does. Thank you. Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone.

Speaker Change: But it is an interesting.

Speaker Change: Indication of.

Speaker Change: Our customers beginning to invest in new designs, because we know DRAM is cyclical and we know it's going to turn at some point. So this represents some investments in them getting ready for the ramp when it does turn.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone one moment for our next question.

And our next question comes from the line of Chris Schenker from TD Cowen Your question. Please.

Chris Schenker: Yes, hi, Thanks for taking my question I have two of them first one if I look at your guidance I'm just kind of curious.

Operator: One moment for our next question. And our next question comes from the line of Chris Schenker from TD Cowan. Your question, please? Yeah, thanks for taking my question. I have two of them.

Chris Schenker: Well, Michael shy, you said foundry and logic revenues flat as volume growth.

Chris Schenker: The person.

Chris Schenker: Overall, DRAM revenues approaching peak levels in Q2 of 2140 $2 million.

Christian David Schwab: First one, if I look at your guidance, I'm just kind of curious, Michael, and Shai. You said boundary logic revenue is flat, HBM growth is 50%, and overall DRAM revenue is approaching peak levels in Q2 of 2021, which is 42 million units. And DDR5 is growing too. But if I do the math, it looks like HBM as a percentage of DRAM revenues is going to be higher in March versus the December quarter. So why is gross margin still lower? Shouldn't gross margin be better than December, then?

Chris Schenker: If I was going to but if I do the math it looks like HBM as opposed to big of DRAM revenues is going to be higher in March versus in the December quarter. So why is gross margin.

Speaker Change: No you Shouldnt gross margin be better than December then.

Speaker Change: Well, let's not forget the system segment Alright, we did talk about the code that systems segment is expected to go down in Q4 and as you'll recall our system segment gross margin historically is higher and so we're going to have less favorable mix.

Shai Shahar: Well, let's not forget the system segment, right? We talked about on the call that the system segment gross margin historically is higher. So we're going to have a less favorable mix between systems and probes, and that's another driver that pushes gross margin a little lower. Got it, got it. And then I just got two other quick questions.

Between systems and probes.

Speaker Change: And that's another driver of that.

Speaker Change: Yes.

Speaker Change: <unk> gross margin a little lower than Q4.

Speaker Change: Got it got it and then I just had two of them.

Speaker Change: Had a quick question Mike.

Speaker Change: But look at the SBS shed now you've clearly done a great job in MGMT <unk> GBM.

Speaker Change: We have one until I'm just kind of curious do you expect the momentum to continue next year or so when you get into <unk> and beyond.

Mike: Yes, Krish I think we see the same progression of <unk>.

Michael D. Slessor: Mike, look at your HBM share now. You clearly have done a great job in HBM 3 and 3E versus HBM 1 and 2. I'm just kind of curious, do you expect the momentum to continue next year or so when we get into HBM 4 and beyond? Yeah, Chris, I think we see the same progression of test complexity that really shifts competitive advantage towards us as we move from HBM 3 to 4. I think one of the obvious ones is it's higher, more dye being stacked, and that clearly, you know, as we look at customers' test strategies, as I said in the prepared remarks, they're not just probing each individual component dye, but they're probing the stack as they build it up, and so higher stacks probably mean less yield, but also probably mean higher test complexity, and higher test intensity as we move to HBM 4.

Mike: Test complexity, they're really shifts competitive advantage towards us as we move from HBM three to four.

Mike: One of the obvious ones is.

Mike: It's a higher more.

More die being stacked and that clearly as we look at customers test strategies.

Mike: As I said in the prepared remarks, there not just probing each individual component die, but they are probing the stack as they build it up and so higher stacks, probably mean less yield, but also probably mean higher test complexity higher test intensity as we move to HBM floor. In addition, obviously the clock speeds go up the densities go.

Mike: And so those are all good trends.

Mike: And I think it's one of the things, where we're spending a good fraction of our R&D budget on making sure. We can continue to drive that capability roadmap forward and serve the increased complexity of HBM forward and derive some competitive advantage from it.

Michael D. Slessor: In addition, obviously, the clock speeds go up, the densities go up, and so those are all good trends, and I think it's one of the things where, you know, we're spending a good fraction of our R&D budget on making sure we can continue to drive that capability roadmap forward and serve the increased complexity of HBM 4 and derive some competitive advantage. If I go back to your initial comment that Shai answered, actually, the mix between regular DRAM and HBM DRAM in the low 40s is nominally the same as it was in Q4. So that's one of the reasons why you're not seeing a margin uplift associated with it. Got it, got it.

If I go if I go back to your initial comment that shai answered actually the mix between regular DRAM and HBM DRAM in the low Forty's is nominally the same as it was in Q4. So that's one of the reasons why you're not seeing a margin uplift associated with DRAM.

Speaker Change: Got it got it and then a quick clarification I think Brian last week on the China of divestment.

Speaker Change: Good the multinationals in China is this still going to go through the Grand Junction semi.

Michael D. Slessor: And then a quick clarification, I think Brian asked you about the Chinese divestment. To the multinationals in China, is this still going to go to the Grand Junction semi, or is it going to be directly from Form? Yeah, no, because the multinationals that operate in the region are global customers for FormFactor, they are not part of this distribution agreement.

Speaker Change: Dedicated from Paul Yes, no because the multinationals that operate in the region are global customers for form factor. They are not part of this distribution agreement form factor will continue to support those customers in a global way and where we need local resources will contract those things out, but you can think of the.

Michael D. Slessor: FormFactor will continue to support those customers in a global way, and where we need local resources, we'll contract those things out. But you can think of the multinationals, which historically have been the vast majority of our China revenue, continue to be managed by FormFactor and are not part of the distribution.

Speaker Change: Multinationals, which historically has been the vast majority of our China revenue.

Speaker Change: I continue to be managed by form factor and are not part of the distribution arrangement.

Speaker Change: Got it. Thank you very much thank you.

Speaker Change: Thanks, Chris.

Speaker Change: Thank you one moment for our next question.

And our next question comes from the line of Tom <unk> from D. A Davidson your question. Please.

Michael D. Slessor: Thank you very much, Mark. Thank you. Thank you. One moment for our next question. And our next question comes from the line of Tom Diffely from D.A. Davidson.

Tom: Yes, Thank you and good afternoon.

Tom: I guess first of all when you look at the memory side. When you talked about some next generation DRAM chips are you seeing anything on the flash side any next generation flash chips that require new designs.

Tom R. Diffely: Your question, please. Yeah, thank you, and good afternoon. I guess, first of all, when you look at the memory thing, when you talk about the next generation DRAM chips, are you seeing anything on the flash side, any next generation flash chips that require a new design? Tom, as I think you know, our flash market share, and, consequently, our flash revenue, is pretty minimal compared to DRAM. You know, it's a market where the requirements are not that challenging from a speed or density perspective, which is really where we derive our competitive advantage and why we're strong in DRAM. Flash, because of die sizes, because of test speeds, because of things like built-in self-test of the chips, is really hard to drive a competitive advantage.

Tom: Tom as I think you know our flash market share and consequently, our flash revenue is.

Tom: Pretty minimal compared to DRAM.

Tom: Market, where the requirements are not that challenging from a speed or density perspective, which is really where we derive competitive advantage and why we're strong in DRAM flash because of die sizes because of test speeds because of things like built in self test of the chips.

Tom: Really hard to drive a competitive advantage. So we do have some share there.

But as you can tell from our historical financial results is not significant.

Tom: We do see some new designs, but given.

Michael D. Slessor: So we do have some share there, but as you can tell from our historical financial results, it's not significant. We do see some new designs. But given my statement about our market share, we don't have the broad view of the flash market that would allow us to make the same kind of observations we can in DREF. Having said that, I think the general view when we talk to customers and other suppliers is that flash is probably going to trail DRAM in terms of recovery, that inventories are still high, and pricing is not where it should be to drive an upturn. But we are continuing to be opportunistic in the flash market, and where we can differentiate with speed and or capability, we're taking it. Okay, would you expect your flash share to go up over Or is it kind of in this segment or in this range for a bit? Yeah, I think it's in this range for a bit.

Tom: My statement about our market share we don't have the broad view of the flash market that would allow us to make.

Tom: The same kind of same kind of observations we can in DRAM.

Tom: Having said that I think the general view.

Tom: When we talk to customers and other suppliers is that flash is probably going to trail DRAM in terms of recovery that inventories are still high and pricing is not where it should be to to drive an upturn, but we are continuing to be opportunistic in the flash market and where we can differentiate with with speed.

Tom: And our capability, we're taking advantage of that.

Speaker Change: Okay and would you expect your flash share to go up over time, given the acquisition you made a couple of years ago. Some technology, there or is it kind of in this segment or in this range for a bit.

Speaker Change: Yes, I think it is in this range for a bit.

Speaker Change: The acquisition you are talking about we acquired advantage <unk> probe card businesses, a few years ago or business a few years ago.

Michael D. Slessor: So the acquisition you're talking about, we acquired Advantest's ProbeCard businesses a few years ago or business a few years ago. And if you remember, we primarily did that, although it is a flash test platform, a flash ProbeCard platform. We primarily did it because it feeds elements of our DRAM roadmap that we're now in the final qualification stages of with a key customer. That'll help us from an overall market share perspective, at least with that customer. So we've, again, acquired more for the DRAM capability, although being engaged in flash does help you work out the bugs at a lower complexity level. Great, thanks. And as a follow-up, Shai, when you look at the target model, going from where we were in 2023 to the target model, like 700 basis points of margin improvement, is most of that just coming from overhead absorption? Or are there some cost reduction programs that need to take place? I would say three things.

Speaker Change: If you remember, we primarily did that although it is a flash test platform of flash probe card platform, we primarily did it because it feeds elements of our DRAM roadmap that we're now in the final qualification stages at with a key customer that will help us from a.

Speaker Change: Overall market share perspective at least at that customer. So we again acquired it more for the DRAM capability, although being engaged in flash does help you work out the bugs that are lower complexity level.

Speaker Change: Great Thanks, and as a follow up shy when you look at the target model.

Speaker Change: Going from where we were in 2023 to the target model 700 basis points of.

Speaker Change: Margin improvement is most of that just coming from overhead absorption or are there some cost reduction programs that need to take place.

Speaker Change: I would say three things one is volume yes. So as you pointed out we have been adding capacity. So we need volume to grow up to fully utilize this capacity.

Shai Shahar: One element is volume. Yes, as you pointed out, we have been adding capacity. So we need volume to go up to fully utilize this capacity and improve absorption and utilization. The second element is mix.

Speaker Change: Prove absorption and utilization the second element is the mix, we expect the growth from where we are today to our target model to come mostly from foundry and logic, which is an area that has a higher gross margin.

Shai Shahar: We expect the growth from where we are today to our target model to come mostly from foundry and logic, which is an area that has a higher gross margin. And the third component is cost reductions. We have a few initiatives across the company, some task forces to improve gross margins, focusing on costs, things like automation and vertical integration, and more efficient production. And these things are also expected to contribute on our way to reach the target model of 40%. Okay, but would you say that overhead absorption is the biggest factor?

Speaker Change: And the third component is the cost reductions we have few initiatives initiatives across the company.

Speaker Change: Some task forces to improve gross margins focusing on costs.

Speaker Change: Things like automation and vertical integration more efficient production and these things also we would expect to contribute on a way to reach the target model of 47%.

Speaker Change: Okay, but would you say that.

Speaker Change: Overhead absorption is the biggest factor.

Speaker Change:

Speaker Change: I would I would say, it's distributed kind of equally between the three components. Okay. That's helpful. I. Appreciate your time today. Thank you.

Shai Shahar: and I would say it's distributed kind of equally between the three components. OK, that's helpful. Appreciate your time today.

Speaker Change: Thanks, Tom.

Thank you one moment for our next question.

Michael D. Slessor: Thank you. Thanks, Tom. Thank you. One moment for our next question. And our next question comes from the line of Christian Schwab from Craig Hallam Capital. Your question, please.

Speaker Change: And our next question comes from the line of Christian Schwab from Craig Hallum Capital. Your question. Please.

Speaker Change: Great.

Christian David Schwab: Mike on the DRAM business in the 50% sequential revenue growth is that driven by your you are currently customer areas that expansion starting to ramp up the second customer.

Michael D. Slessor: Great. Mike, on the DRAM business and the 50%, you know, sequential revenue growth, is that driven by your current lead customer, or is that expansion starting to ramp with the second customer? Yeah, when you break down the increase, it really is driven by our lead HBM customer, who also leads the overall HBM market and share. So that's the primary driver. I did, probably a subtlety, but I did in the prepared remarks say that we expect revenue from all three major DRAM manufacturers in HBM. So there's commitments for those.

Christian David Schwab: When you break down the increase it really is driven by our lead.

Christian David Schwab: HBM customer.

Christian David Schwab: Who also leads the overall HBM market and share so.

Christian David Schwab: The primary driver I did probably a subtlety, but I did in the prepared remarks say that we expect revenue from all three major DRAM manufacturers in HBM, So theres engagements for those but when we think about the Q1 step up.

Michael D. Slessor: But when we think about the Q1 step up, it's very much driven by our lead customer. It's a key 2024 strategic objective for us to make sure that we capitalize on HBM growth at all major DRAM manufacturers. And I think we're making some pretty good progress. Once you have all three, how big could the high bandwidth memory portion of the business be? Yeah, it's a good question.

Christian David Schwab: It's very much driven by our lead customer. It's a key 2024 strategic objective for us to make sure that we capitalize on HBM growth that all major DRAM manufacturers and I think we're making some pretty good progress with that.

Christian David Schwab: Once you have all three.

Christian David Schwab: How big could the.

Christian David Schwab: The high bandwidth memory portion.

Christian David Schwab: The business be yes.

Christian David Schwab: Yes, yes.

Speaker Change: Yes, it's a good question.

Michael D. Slessor: And so I think we'll stick with the idea that our HBM revenue in 2024, on a quarterly basis, could double from the quarterly run rate that we had in 2020. And the reason for that is that it's a little difficult right now to sort out how much double counting is going on in terms of forecasting between the different suppliers of HBM DRAM to our customers. I think if you back out the forecast and add them all together, the growth assumptions are probably wrong. There's some double counting in there.

Speaker Change: And so.

Speaker Change: So I think we'll stick with the idea that our <unk> revenue in 2024 on a quarterly basis could double from the quarterly run rate that we had in 2023.

Speaker Change: And the reason for that is it's a little difficult right now to sort out how much double counting is going on in terms of forecasting between the different suppliers of HBM DRAM, our customers I think if you back out the forecast the growth and add them all together the growth assumptions are.

Speaker Change: Probably there are some double counting in there so I think our the expectation that we communicated on the last call and through some of the investor conferences as we gone through the back part of the year and to start 2024 of the HBM run rate doubling on a quarterly basis from where it was in 2023 the rate expectation and then you can see in Q1.

Michael D. Slessor: So I think the expectation that we communicated on the last call and through some of the investor conferences as we've gone through the back part of the year and to start 2024 with the HBM run rate doubling on a quarterly basis from where it was in 2023 is the right expectation. And you can see in Q1, we've made some good steps. Okay, that's great.

Speaker Change: We've made some good steps towards that.

Michael D. Slessor: On the foundry and logic business, you know, leading manufacturers of chips, whether it's Intel or AMD or TSM, are kind of pretty optimistic regarding aggregate unit growth. And the huge volume markets of PCs and smartphones, they're just not all that enthusiastic about it in March. But they are, as we go throughout the course of the year, you know, and given some of the new design, ramps, and new chips coming to market, you know, throughout the course of the year. I mean, is it logical that that business, you know, exits the year at 100 plus million run rate again? Yeah, I think you've identified the key drivers for it, certainly in the first part of the year, whether you look at our Q1 guidance, you know, kind of extrapolate what some of those customers in the high unit volume markets like PCs and handsets are conveying. There's some optimism associated with the second, given our visibility, right? Remember that probe cards have lead times well within a quarter, much less than a quarter. And so our direct visibility doesn't extend anywhere close to that.

Speaker Change: Okay, that's great on the foundry and logic business.

Speaker Change: Leading manufacturers of chips, whether it's intel or AMD or TSS.

Speaker Change: Or kind of pretty optimistic regarding aggregate unit growth.

Speaker Change: And the huge volume markets of Pcs and smartphones Theyre just not all the enthusiastic about it in March.

Speaker Change: But they are as we go throughout the course of the year.

And given some of the new design.

Speaker Change: Absent new chips coming to market.

Speaker Change: Throughout the course of the year.

Speaker Change: Logical that that business.

Speaker Change: <unk> the year at a 100 plus million run rate again.

Speaker Change: Yes, I think you've identified the key drivers for it certainly in the first part of the year, whether you look at our Q1 guidance.

Speaker Change: Extrapolate what some of those customers in the high unit volume markets like Pcs and handsets R.

Speaker Change: Our conveying.

Speaker Change: There is some optimism associated with the second half.

Speaker Change: Given our visibility right remember that probe cards have lead times, well within a quarter much less in the quarter and so our direct visibility doesn't extend anywhere close to that but I think the combination of <unk>.

Michael D. Slessor: But I think the combination of inventories being at much healthier levels and probably now a balance between output at these key customers and the actual sell-through, that's now been resolved, so that puts things in a better place. And I think if there's some demand pickup in these large unit volume markets like PCs and handsets in the second half, we should see some growth there, but it's beyond our visibility, beyond the headlamps. What I would say to close that topic is, you know, when I compare things to a year ago, and people were optimistic about a second half recovery in 2033, I feel like the industry is in much better shape from an inventory and Great. And then I'll just slip in one more question if I can.

Speaker Change: Inventories being at much healthier levels, and probably now a balance between output at these key customers and the actual sell through that's now been resolved so that puts things in a better place and I think if theres. Some dip in demand pick up in these large unit volume markets like Pcs and handsets in the second half we should see some growth.

Speaker Change: There, but it's.

Speaker Change: Beyond the beyond our visibility beyond the headlines what I would say to to close that topic is when I compare things to a year ago and people were optimistic about a second half recovery in 'twenty two 'twenty three I feel like the industry is in much better shape from an inventory and production capacity standpoint.

Speaker Change: Year later here in the first part of 2024.

Speaker Change: Great and then I'll just slip in one more question if I can't even working on the qualification with the potential large customer for some time I think a few quarters anyway I guess.

Michael D. Slessor: You've been working on a qualification with a potential large customer for some time, I think a few quarters anyway. Is there any update on where we stand with that? And do you feel better about that?

Speaker Change: Is there any update.

Speaker Change: On where we sit with that.

And do you feel better about that do you feel better about potential timing of that.

Michael D. Slessor: Do you feel better about the potential timing of that? Any update? Great. Yeah, we don't have a huge update for you, but we have talked about this in the past. Obviously, the large fabless microprocessor and GPU customer is a place where we do not have a significant share. And given our strategy of diversification, different customers, different markets, that's an important place for us to qualify for and hold a significant share, especially given, you know, their leadership in some of the NMARC. We have made some changes in how we're resourcing that. As you know, we've been at this for a while. The good news is the customer has a clear two supplier strategy, and there are really only two suppliers that can do this, and FormFactor is one of them. So it's really up to us to improve our execution and get there. I'm confident that we can qualify for at least in 2020.

Speaker Change: Any update great yes.

Speaker Change: Yes, we don't have a huge update for you, but we have.

Speaker Change: We have talked about this in the past obviously, the large fabless microprocessor and GPU customers a place where we do not have significant share and given our strategy of diversification different customers different markets.

Speaker Change: That's an important place for us to qualify and hold a significant share position, especially given their leadership in some of the end markets.

Speaker Change: We have made some as you know we've been at this for a while we have made some changes in how we're resourcing that the good news is the customer has a clear two supplier strategy and there's really only two suppliers that can do this and form factors one of them. So it's really up to us to improve our execution and get there I'm confident that.

Speaker Change: We can qualify at least in 2024 now it'll take a while to build into a significant share and revenue position.

Michael D. Slessor: It'll take a while to build into a significant share and revenue position, but we're setting the groundwork now and it's a very important objective for some key people at FormFactor in 2020. Great. No other questions. Thank you.

Speaker Change: But we are setting the groundwork now and it's a very important objectives for some key people a form factor in 2024.

Great no other questions. Thank you thanks Christian.

Operator: Thank you. And as a reminder, ladies and gentlemen, please limit yourselves to one question and one follow-up. You may get back in the queue as time allows.

Christian David Schwab: Thank you and as a reminder, ladies and gentlemen, please limit yourselves to one question and one follow up you may get back in the queue. As time allows our next question comes from the line of Craig Ellis from B Riley Securities. Your question. Please.

Craig Ellis: Our next question comes from Craig Ellis from B. Riley Securities. Your question, please? Yeah, thanks for taking the question. Mike, it's hard to believe there could be even more DRAM questions, but there was a new one I wanted to better understand.

Craig Ellis: Thanks for taking the question so.

Craig Ellis: Mike hard to believe there could be even more DRAM questions, but there wasn't they wanted to I wanted to better understand.

Michael D. Slessor: As we look at high bandwidth memory here in the first quarter, it's understandable that it's ramping given what's going on more broadly. But the question is this, as you look at the mix of your high bandwidth memory exposure in 1Q from high bandwidth memory 3 to potentially 3E, which I think really launches commercially on a system in 2Q and high bandwidth memory 4, which I think everybody expects to come out in early 2025, how much of the mix in 1Q is 3 versus 3E and 4. And to the extent that we're not really generating revenue on the latter two, when would you expect that to happen? Yeah, there actually is a little bit of revenue on 3E.

Craig Ellis: As we look at high bandwidth memory here in the first quarter understandable that it's.

Craig Ellis: Ramping given what's going on more broadly, but the question is this is as you look at the mix of your high bandwidth memory exposure on <unk> from high bandwidth memory, three to potentially three which I think really launches commercially on a on.

Craig Ellis: On our system in <unk> and high bandwidth memory for which I think everybody expects to come out in early 2020.

Craig Ellis: Five how much of the mix in <unk> three versus <unk>, four and to the extent, we're not really generating revenue on the order to when would you expect that to have yes.

Speaker Change: Yes, there actually is a little bit of revenue on three so most of the production volume as you'd note is on third generation or HBM, three but three the mini step.

Michael D. Slessor: So most of the production volume, as you'd note, is on third generation or HBM3. But 3E, the mini step, we are shipping probe cards in some significant volume. I don't have the mix off the top of my head, but I guess it's something like two-thirds HBM3, one-third HBM3, and then a sprinkling of HBM4 in early R&D.

Speaker Change: We are shipping probe cards, and some significant I don't have the mix off the top of my head, but I guess, it's something like.

Speaker Change: Two thirds HBM three one third HBM three and then a sprinkling of HBM four in early R&D shipments.

Michael D. Slessor: Yeah, and then part of that, just so I don't offend the moderator with too many questions. There's growing chatter that in PCs, we could see a format change from SO-DINs to LP-CANs. And I don't know if that has any impact on probe card intensity, but are you seeing anything on the personal computer side that would drive up probe card intensity that's there? I don't think so, Craig. I think those format changes, especially are two steps downstream from us in integration when they get integrated into the package and then into the module.

Speaker Change: And then part of that just so I don't offend the moderator with too many questions.

Speaker Change: There are spurring chatter than in Pcs, we could see a format change from <unk> to help you can send I don't know if that has any impact on probe card in Kansas City, but are you seeing anything on the personal computer side.

Speaker Change: Drive up probe card intensely with tab.

Speaker Change: I don't think so Craig I think those format changes, especially that's two steps downstream from us in integration when they get integrated into the package and then into the module.

Michael D. Slessor: I don't anticipate that having a, and we, of course, interact with the dye at the wafer level. I don't anticipate that it would have a significant impact. What we really need is a PC refresh cycle to drive unit volume increases in PCD. Yep, I hear you on that one.

I don't anticipate that having and we of course interact with the die at the wafer level.

Speaker Change: I don't anticipate that would have a significant impact what we really need is a PC refresh cycle to dock to drive unit volume increases of PC DRAM.

Speaker Change: Yes, I hear you on that one and then for the second question typically I think in the first half of the year the business within foundry and logic would start to benefit and can have a sine wave relative to an Apu program at a large foundry is everything on track there and do you still expect to have.

Michael D. Slessor: And then for the second question, typically, I think in the first half of the year, the business within Foundry and Logic would start to benefit and have a sine wave relative to an APU program at a large foundry. Is everything on track there? And do you still expect to hold the same share that you've historically had there? Yeah, I think so. I mean, you know, it's going to be an interesting year in the foundry business, a lot more high-performance compute than just application processors, although I think the application processor projects in the foundry space generally continue to be big middle-of-the-year drivers of revenue. You know, those are key customers and very important focus areas for us as we move through 2024. They're one element of the overall diversification strategy we talked about, right? DRAM's running pretty hot right now.

Speaker Change: The same share that you've historically had there.

Speaker Change: Yes, I think so I mean, it's going to be an interesting year with.

Speaker Change: In the foundry business a lot more high performance compute.

Speaker Change: Then just application processor, although I think the application processor projects in the foundry space generally continue to be big middle of the year drivers of revenue.

Speaker Change: Those are key customers in very important focus areas for us as we move through 2024.

Speaker Change: One element of the overall diversification strategy, we talked about right the drams running pretty hot right now HBM, not so surprisingly, but DDR five being.

Michael D. Slessor: HBM, not so surprisingly, but DDR5, which is, as I said in the prepared remarks, a bit surprising given where we are in the DRAM cycle. But it's exactly a case study of why we've put these different businesses together to try and produce a relatively stable top-line demand profile so that we can weather this sub-cyclicality and continue to invest in things like R&D for competitive differentiation and capacity. Got it. Thanks, Mike. I appreciate the help.

Speaker Change: As I said in the prepared remarks, a bit surprising given where we are in the DRAM cycle, but it's it's exactly a case study of why we've put these different businesses together to try and produce a relatively stable top line demand profile. So that we can weather this sub cyclicality and continue to invest in things like.

Speaker Change: R&D for competitive differentiation and capacity.

Speaker Change: Got it thanks, Mike appreciate it.

Michael D. Slessor: Thank you. One moment for our next question, and our next question comes from the line of David Silver from C.L. King & Associates.

Speaker Change: Thanks, Craig.

Speaker Change: Thank you one moment for our next question.

Speaker Change: And our next question comes from the line of David Silver from CL, King and associates.

David Duley: Yeah, hi, thank you. I'd like to ask maybe a strategic question regarding capital deployment at this point in time. So, Mike, you know, with the sale of the metrology business, you've kind of you kind of had to make a strategic decision not to invest in to, you know, grow that business. And I don't believe the Livermore capacity, you know, you have you have some extra capability at Livermore now.

David Duley: Yes, hi, thank you.

David Duley: I'd like to ask maybe a strategic question regarding <unk>.

David Duley: Capital deployment at this point in time.

David Duley: Mike with the sale of the metrology business I mean, you've kind of you've kind of had to make a strategic decision not to invest two two.

David Duley: To grow that business.

David Duley: And I don't believe the.

David Duley: Liver more capacity you have you have some extra capability at Livermore now.

Michael D. Slessor: So, you know, when I look at your balance sheet, I mean, it's certainly highly liquid. Could you just maybe discuss some of your thoughts about the highest and best use for that, what you would call, maybe, an "incremental or excess portion" of your cash? In other words, does vertical integration, either forward or back, make sense? Are there parts of your global footprint that, you know, you could profitably expand or? Would there be something from the equity investment that your large competitor received recently that maybe requires a counter move or some kind of, you know, some kind of step to retain or maintain your competitive balance? But, you know, sitting here with a highly liquid balance, she went. What goes through your mind in terms of, you know, optimizing the use of a lease portion?

Mike: So when I look at your balance sheet I mean, its certainly highly liquid.

Speaker Change: Could you just maybe discuss.

Speaker Change: Some of your thoughts about the highest and best use for that what you would call maybe.

Speaker Change: Incremental or excess portion of your cash in other words does vertical.

Speaker Change: <unk> integration either forward or back makes sense are there parts of your global footprint that.

Speaker Change: You could profitably expand or.

Speaker Change: Would there be something from the equity investment.

Speaker Change: That you are.

Speaker Change: Large competitor received recently that maybe requires.

Speaker Change: Our counter move or some kind of.

Speaker Change: Some kind of step two.

Speaker Change: Retain or maintain your competitive balance but.

Speaker Change: Sitting here with the.

Speaker Change: Highly liquid balance sheet.

Speaker Change: What goes through your mind in terms of.

Speaker Change: Optimizing the use of at least a portion of that yes.

Michael D. Slessor: Yeah, I'll let Shai talk through the details. But I think in an environment where we still expect consolidation in the space, we don't think holding on to some cash, especially with decent returns, is a bad strategic move. We're going to need dry powder for M&A. We continue to be believers in M&A consolidation, not necessarily inside our service segments, but to expand our served available market. And cash is a very useful asset to have.

Speaker Change: Yes ill, let shai talk through the details, but I think in.

Speaker Change: In an environment, where we still expect consolidation in the space.

Speaker Change: We don't think holding onto some cash, especially with decent returns is a bad strategic move we're going to need dry powder for M&A, we continue to be believers in M&A and consolidation not necessarily inside our serve segments, but to expand our served available market and cash is a very useful asset to have so with that.

Shai Shahar: So with that, I'll turn it over to Shai to talk a little bit about capital allocation priorities. Right. Yeah. As Mike mentioned, our priorities really didn't change compared to what we communicated before.

Speaker Change: I'll turn it over to Shai to talk a little bit about capital allocation priorities.

Shai Shahar: Alright, yes, sorry, as Mike mentioned, our priority is really didn't change.

Shai Shahar: Compared to what <unk> communicated before we're focusing on reinvesting in R&D.

Shai Shahar: We're focusing on reinvesting in R&D. We're still investing in capacity, although we slowed it down recently. Things like vertical integration that you mentioned and automation. And we have the share repurchase program that I talked about. We still have $75 million to invest in share repurchase. This is to offset dilution.

Shai Shahar: Still investing in capacity, although we started down the recently things like vertical integration that you mentioned and automation.

Shai Shahar: And we have the share repurchase program that I talked about we still have $75 million to invest in share repurchase this is to offset dilution and it's.

Shai Shahar: And it's a two-year plan, and it's been one quarter since we announced it, so we still have one year and three quarters to do that. And M&A, right?

Speaker Change: So your plan in Q1 quarters since we announced it so we still have one year and three quarters to do that and M&A right and with the current.

Shai Shahar: And with the current interest rates and cost of capital, accumulating cash is aligned with our M&A strategy. If you look at our historical acquisitions, the Micropop acquisition in 2012, and the Cascade Microtech acquisition back in 2016, we've been pretty good at creating value through our M&A activity and have been good stewards of capital. Okay, that's great. I'll stop there.

Speaker Change: Interest rates and cost of capital and accumulating cash is aligned with our M&A strategy. If you look at our historical acquisitions. The microprobe acquisition in 2012, the Cascade Micro <unk> acquisition back in 2016, we've been pretty good and creating value through our M&A activity and being good stewards of capital.

Speaker Change: Okay, that's great.

David Duley: Thank you very much. Thanks, David. Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone. One moment for our next question. And our next question is a follow-up on the line from David Duley from Steelhead. Your question, please. Yeah, I was just kind of curious.

Speaker Change: Up there. Thank you very much thanks, David.

Speaker Change: Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone one moment for our next question.

Speaker Change: And our next question is a follow up from the line of David Duley from Steelhead. Your question. Please.

David Duley: Yeah, I was just kind of curious.

David Duley: Are you comfortable with IC unit volume growth in the 6-8% range for 2024 for Foundry logic? And if that's the case, do you guys think you can grow faster than that or slower than that as far as the market is concerned? Yeah, I think, you know, as we look, there's a lot of variance in different assumptions for specifically the second half of the year to drive growth. I think where we're more focused in our planning and forecasting and resourcing activities is on the first half, because I think there are enough different variables where, sure, you could see six to eight percent growth; you could see more, you could see less. And as I think most of you know, our visibility really doesn't extend into the second half.

David Duley: Are you comfortable with unit volume IC unit volume growth in the 6% to 8% range for 2024 for the foundry logic segments and if that's the case do you guys think you can grow faster than that or slower than that as far as the market growth.

David Duley: Yes.

David Duley: I think as we look theres a lot of variance in different assumptions for.

Specifically the second half of the year to drive growth I think where we're where we're more focused in our <unk>.

David Duley: Planning and forecasting and Resourcing activities is on the first half because I think there is enough different variables. We're sure you could see 6% to 8% growth you could see more you could see less.

David Duley: And as I think most of you know our visibility really doesn't extend into the second half.

The.

Michael D. Slessor: If you were to have that scenario, I do think there is a very good likelihood that we can outgrow the unit growth of the market, especially if the bulk of it is associated with advanced nodes and some of the high volume markets like PCs and mobile. And honestly, I don't see how you get to Foundry and Logic's high double-digit unit growth without PC and handset growth in the second half of the year. So in that scenario, yeah, I think it's reasonable, given the adoption of advanced packaging, given the increase in test intensity, that we can outgrow the market. But I'm not sure I'd adopt that yet as a baseline scenario as we work our way through the first half.

David Duley: If you were to have that scenario I do think there is a very good likelihood that we can outgrow the unit growth of the market, especially if the bulk of it is associated with advanced nodes in some of the high volume markets like Pcs and mobile and honestly I don't see how you get to foundry and <unk>.

David Duley: Logic high double digit unit growth without PC and handset.

David Duley: Handset growth in the second half of the year so in that scenario yes.

David Duley: It's reasonable given the adoption of advanced packaging given the increase of test intensity that we can outgrow the market, but I'm not sure I'd adopt that yet as a baseline scenario as we work our way through the first half.

Michael D. Slessor: Enough. Um, one final question is, um, I was just kind of curious from your point of view, where you sit, you know, you've talked a lot about increasing intensity from advanced packaging, and whatnot. And I'm wondering, you know, and that's generally been with Intel and TSMC, frankly. I'm wondering if you're seeing that start to spread out onto the OSATs, because there's certainly a lot more chatter on their conference calls. And, you know, ASE's CapEx is up more than 50% year over year this year, focused on advanced packaging. And so I'm just wondering, are you starting to see a ramp up in kind of the middle part of the market for advanced packaging? and Are You Well Positioned to Capture OSAT Business?

Speaker Change: Fair enough.

Speaker Change: One final question is.

Speaker Change: I was just kind of curious from from your point of view, where you sit.

Speaker Change: You've talked a lot about it.

Speaker Change: Increased intensity from advanced packaging, all sorts of form factors and whatnot.

Speaker Change: I'm wondering and that's generally been with.

Speaker Change: Intel and TSMC frankly.

Speaker Change: Im wondering if youre seeing that.

Speaker Change: Start to spread out onto the Osaka, because there's certainly a lot more chatter on their conference calls.

Speaker Change: I think ASE is capex is up more than 50% year over year this year.

Speaker Change: Focused on advanced packaging and so I'm. Just wondering are you starting to see a ramp up in kind of the middle part of the market for advanced packaging.

Speaker Change: Are you well positioned to capture <unk> business. Thanks.

Michael D. Slessor: Thanks. Typically, the way the probe card market works is that we have a very large installed base at the OSATs, but the OSATs are often not the purchasers of the probe cards. It's the fabless semiconductor manufacturers or the foundries themselves.

Speaker Change: Yes, so typically the way the probe card market works is.

Speaker Change: We have a very large installed base at the OS ads, but the OS that's often are not the purchasers of the probe cards, it's the fabless semiconductor manufacturers or the foundries themselves and so theres a lot of interaction with the old SaaS.

Michael D. Slessor: And so there's a lot of interaction with the OSATs, but they're often not issuing purchase orders to. So I think for us, you know, advanced packaging, if it happens at the OSAPs, if it happens at the foundries, if it happens at the IDMs, all a good trend because it's going to drive up test intensity. And, you know, if a Fabless customer has adopted advanced packaging and they're going to do it at the foundry or at the OSAP, that's going to drive higher test intensity at either of those places, no matter what. It's just a slightly different business model.

Speaker Change: But they are often not issuing purchase orders to us so I think for us advanced packaging.

Speaker Change: If it happens at the <unk> if it happens at the foundries if it happens at the Idms all the good trend because it is going to drive up test intensity and.

Speaker Change: If a fabless customer has adopted advanced packaging and theyre going to do it at the foundry or at the O set thats going to drive higher test intensity in either of those places no matter, what it's just a slightly different business model for us.

Michael D. Slessor: Okay, thanks. All right, thanks, David. Thank you. Please take a moment for our next question. Yeah. Our next question is a follow-up from the line of Chris Shanker from TD Cowan. Your question, please. Thanks for doing the follow-up. Mike, just a quick one. You know, it looks like the high-density GPU customers are finally evaluating MEMS-based probe cards. How to think about when that eval will be done, when to expect post-revenues from them, and, if you can prognosticate, what do you think the market share between you and TechnoPro would be in that specific category?

Speaker Change: Okay. Thanks, Alright, thanks, Dave.

Speaker Change: Thank you one moment for our next question.

Speaker Change: Okay.

Speaker Change: And.

Speaker Change: Our next question is a follow up from the line of Chris Shanker from TD Cowen Your question. Please.

Chris Shanker: Alright, thanks for taking the follow up Mike just a quick one it looks like the high density GPU customers are finally, evaluating Mems based probe cards.

Chris Shanker: Think about when that will be done.

Chris Shanker: When to expect posted revenues from then and if you can prognosticate what do you think the market share between you and technical would be in that that's the case.

Chris Shanker: Great.

Chris Shanker: Yes.

Michael D. Slessor: Yeah. Yeah, I think as the leading GPU manufacturer adopts advanced packaging, that's really the discontinuity where they adopt MEMS probes. And it's an interesting case because of their large die sizes. They haven't really needed to adopt MEMS probes. But as they move to COAS advanced packaging technology, MEMS probes are an absolute must. And so that's an opportunity, as you note, for us and our primary competitor, Foundry and Logic. Those qualifications are happening right now, I think, and pilot production, right? Um, you know, I'd expect, over time, that to be an application and a customer where, you know, shares in this two supplier kind of window. We typically talk about it as a two-thirds, one-third. Some, most customers like to balance it 50-50, but there are often places where either us or our competitors have some degree of differentiation, and so it never quite works out to be 50-50.

Mike: Yeah, I think as the leading GPU.

Mike: Manufacturer adopt advanced packaging, that's really the the discontinuity, where they adopt Mems probes and it's an interesting case because of their large die sizes. They haven't really needed to adopt mems probes, but as they move to the <unk> advanced packaging technology.

Mike: Mems probes are an absolute must and so that's an opportunity as you note for us and our primary competitor in foundry and logic. Those qualifications are happening right now I think.

Mike: And pilot production right now.

Mike: I would expect over time.

Mike: That to be an application in a customer where shares in this two supplier kind of window. We typically talk about is the two third one third.

So most customers like the balance at 50 50.

Mike: But theres, often places where either us or our competitor have some degree of differentiation and so it never quite works out to be 50, 50, So I think youre going to start to see that.

Michael D. Slessor: So I think you're gonna start to see that in a significant way here in 2024. But of course, the majority of silicon from that customer is still not gonna be on advanced packaging. That's a small but very lucrative part of their overall product portfolio. I still expect monolithic GPUs, at least for 2024, to continue to stay on the legacy ProGuard technology.

Mike: Significant way here in 2024, but of course still the majority of silicon from that customer is not going to be on advanced packaging. That's a small but very lucrative part of their overall product portfolio I still expect monolithic Gpus at least four.

Mike: 2024 to continue to stay on the legacy probe card technologies.

Michael D. Slessor: Got it. Got it. Thanks a lot, Mike. Thank you. All right.

Speaker Change: Got it got it thanks, a lot Mike. Thank you alright, thanks, Greg.

Chris Shanker: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mike Slessor for any further remarks. Thanks, everybody, for joining us today. And we'll talk to you again at some point in the spring, if not at our next earnings call. Take care. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. [inaudible]

Speaker Change: Thank you.

Speaker Change: This does conclude the question and answer session of today's program I'd like to hand, the program back to Mike's lessor for any further remarks.

Mike: Thanks, everybody for joining us today, and we'll talk to you again at some point in the spring if not.

Mike: At our next earnings call take care.

Michael D. Slessor: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Mike Lessor: Yes.

Mike Lessor: Yeah.

Mike Lessor: [music].

Mike Lessor: Okay.

Mike Lessor: Yeah.

Mike Lessor: Okay.

Mike Lessor: [music].

Mike Lessor: Okay.