Q1 2024 FormFactor Inc Earnings Call

Operator: Thank you and welcome everyone to FormFactor's first quarter 2024 earnings conference call. On today's call, our Chief Executive Officer, Mike Slessor, and Chief Financial Officer, Shai Shahar. Before we begin, Stan Finkelstein, the company's VP of Investor Relations, will remind you of some important information.

Okay.

Thank you and welcome everyone to form factors first quarter 2024 earnings conference call on today's call are Chief Executive Officer, Mike Slusher, and Chief Financial Officer, Shai Shahar before we began saying.

The company's VP of Investor Relations will remind you of some important information.

Stan Finkelstein: 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 finances. 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.

Speaker Change: Thank you.

Speaker Change: Today, the company will be discussing GAAP P&L results and.

Speaker Change: And some important non-GAAP results intended to supplement your understanding of the company's financials.

Speaker Change: Insulation from GAAP to non-GAAP measures and other financial information.

Speaker Change: Available in the press release issued today by the company.

Speaker Change: I don't say Investor Relations section of our website.

Stan Finkelstein: 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, Future Macroeconomic and Geopolitical Conditions, The Benefits of Acquisitions and Investments in Capacity and New Technology, and the Impacts of Global, Regional, and National Health Crises, Including the COVID-19 Pandemic.

Speaker Change: Today's discussion contains forward looking statements.

Speaker Change: The median gobs of federal Securities laws.

Speaker Change: Examples of such forward looking statements include those with respect to the projections of financial and business performance to which her macroeconomic and geopolitical conditions.

Speaker Change: The benefits of acquisitions and investments in capacity and a new technologists.

The impacts of global regional and National Health crisis, including the COVID-19 pandemic.

Stan Finkelstein: Anticipated industry trends, potential disruptions in our supply chain, the impacts of regulatory changes, including the recent U.S.-China trade restrictions, the anticipated demand for products, our ability to develop, produce, and sell products, and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended December 30, 2023, and in our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, May 1st, 2024, and we assume no obligation to update them. With that, I will now turn the call over to FormFactor's CEO, Mike Slessor.

Speaker Change: Anticipated industry trends potential disruptions in our supply chain the impact of regulatory changes, including the recent U S. China trade restrictions.

Speaker Change: The anticipated demand for products, our ability to develop produce and sell products and the assumptions upon which such statements are based.

Speaker Change: Because these statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call.

Speaker Change: 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 sorry, 40 23.

And our other SEC filings, which are available on the Sec's website at Www Dot S E T Dot golf and in our press release issued today.

Speaker Change: Forward looking statements are made as of today may 1st 'twenty 'twenty, four and we assume no obligation to update them.

Speaker Change: With that we will now turn the call over to form factor CEO, Mike Lasser.

Michael D. Slessor: Thanks, everyone, for joining us today for FormFactor's First Quarter Earnings. Although FormFactor's first quarter revenue was near the top end of the Outlook range we provided in February, non-GAAP EPS fell short of the midpoint due to lower-than-expected gross margins, primarily from a weaker product mix in both segments, along with higher warranty costs in the ProbeCard segment. In the current second quarter, we're experiencing a significant sequential step-up in demand and expect a corresponding increase in gross margin and non-GAAP EPS. This is driven primarily by strength in both DRAM and foundry and logic probe cards as industry adoption of advanced packaging accelerates. To ensure FormFactor fully leverages and benefits from our strong position in enabling advanced packages.

Michael D. Slessor: Thank you everyone for joining us today for form factors first quarter earnings call.

Michael D. Slessor: Although foreign factors first quarter revenue was near the top end of the outlook range. We provided in February non-GAAP EPS fell short of the mid point due to lower than expected gross margins, primarily from a weaker product mix in both segments, along with higher warranty costs in the probe card segment.

Michael D. Slessor: In the current second quarter, we're experiencing a significant sequential step up in demand and expect a corresponding increase in gross margin and non-GAAP EPS.

Michael D. Slessor: This is driven primarily by strength in both DRAM and foundry and logic probe cards as industry adoption of advanced packaging accelerates.

Michael D. Slessor: To ensure form factor fully leverages and benefits from our strong position in enabling advanced packaging.

Michael D. Slessor: We recently completed an important series of coordinated organizational and talent initiatives. First, we've realigned our organizational structure to consolidate the company's global operations, including manufacturing, quality, supply chain, environmental health and safety, and facilities in a central group. This operational consolidation provides the critical mass and scalability to create commonality and efficiency as we continue to grow. With our operations now consolidated, our business unit's sole focus is on customer-facing innovation and competitive differentiation in FormFactor's product roadmap.

Michael D. Slessor: We recently completed an important series of coordinated organizational and talent changes.

Michael D. Slessor: Second, we deepened our bench, recruiting and onboarding two experienced executives to lead our operations and commercial functions and realigning responsibilities for other executives to ensure FormFactor has the required skills and experience in critical roles. Finally, we added Kevin Brewer to our Board of Directors, who is the former Executive VP of Operations and CFO of Accelis Technologies and brings significant operational experience and knowledge. Kevin replaces Lothar Meyer, who's retiring after nearly 18 years of service to FormFactor.

Michael D. Slessor: First we've realigned our organizational structure to consolidate the company's global operations, including manufacturing quality supply chain, environmental health and safety and facilities in a central group.

Michael D. Slessor: This operational consolidation provides the critical mass and scalability to create commonality inefficiency as we continue to grow.

With our operations now consolidated our business units sole focus is on customer facing innovation and competitive differentiation in form factor product roadmaps.

Michael D. Slessor: Second we deepened our bench recruiting and Onboarding two experienced executives to lead our operations and commercial functions and realigned responsibilities for other executives to ensure form factor has the required skills and experience in critical roles.

Michael D. Slessor: Finally, we added Kevin Brewer to our board of Directors, who is the former executive VP of operations and CFO of <unk> technologies brings significant operational experience and knowledge.

Michael D. Slessor: Kevin replaces Luther Meyer Who's retiring after nearly 18 years of service to form factor and on behalf of our shareholders employees and customers I'd like to take this opportunity to thank both are for his many contributions.

Michael D. Slessor: And on behalf of our shareholders, employees, and customers, I'd like to take this opportunity to thank Lothar for his many contributions. These coordinated changes are designed to position the company for our next phase of growth by enhancing our capability to develop and introduce highly differentiated products, while advancing our ability to manufacture these products at a world-class operational level. This will allow us to capture the secular growth in our service markets being driven by advanced packaging and gain market share, enabling us to outgrow these markets. While the full benefit of these changes will be realized over a multi-year time frame, we do expect short-term improvement in our gross margins, for example, by focusing on areas like quality to reduce unexpected costs.

Michael D. Slessor: Yeah.

Michael D. Slessor: These coordinated changes are designed to position the company for our next phase of growth by enhancing our capability to develop and introduce highly differentiated products, while advancing our ability to manufacture these products at world class operational levels.

Michael D. Slessor: This will allow us to capture the secular growth in our served markets being driven by advanced packaging and to gain market share, enabling us to outgrow these markets.

Michael D. Slessor: While the full benefit of these changes will be realized over a multiyear time frame. We do expect short term improvement in our gross margins for example by focusing on areas like quality.

To reduce unexpected costs.

Michael D. Slessor: Turning now to the market and segment levels, DRAM probe card demand continues to be robust. And as expected, first quarter DRAM revenue reached the peak levels last experienced in 2021, with strong growth in high bandwidth memory layered on top of steady DDR5 new design. In the first quarter, HBM was nearly half of FormFactor's DRAM revenue and was double the quarterly levels we delivered in the second half of 2023. We'd previously stated that we expected HBM revenue to reach these levels sometime in mid to late 2024.

Michael D. Slessor: Turning now to market and segment level details.

Michael D. Slessor: DRAM probe card demand continues to be robust and as expected first quarter DRAM revenue reached the peak levels last experienced in 2020, one with strong growth in high bandwidth memory layered on top of steady DDR five new design activity.

Michael D. Slessor: In the first quarter H B M was nearly half of form factors DRAM revenue.

Michael D. Slessor: And was double the quarterly levels, we delivered in the second half of 2023.

Michael D. Slessor: We previously stated that we expected H B M revenue to reach these levels sometime in mid to late 2024.

Michael D. Slessor: Achieving these doubled quarterly run rate HBM revenue levels in the first quarter of the year is a good indicator of how quickly HBM capacity and output are accelerating across our customers. We expect this trend to continue and are forecasting a similar incremental growth contribution from HBM in the second quarter.

Michael D. Slessor: Leaving these doubled quarterly run rate H B M revenue levels in the first quarter of the year is a good indicator of how quickly HBM capacity and output is accelerating across our customer base.

Michael D. Slessor: We expect this trend to continue and are forecasting a similar incremental growth contribution from H B M in the second quarter.

Michael D. Slessor: HBM chips, which are a stack of 8, 12, or even 16 individual DRAM dies, continue to offer a powerful example of how advanced packaging is driving our current results and foreshadows our long-term opportunities. 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 card.

Michael D. Slessor: H B M chips, which are a stack of 812 or even 16 individual DRAM die.

You need to offer a powerful example of how advanced packaging is driving our current results and foreshadows our long term opportunity.

Michael D. Slessor: As we mentioned in the past advanced packaging applications like H B M produced both higher test intensity, which expands the number of probe cards required for good die out and higher test complexity, which raises the performance requirements for each probe card.

Michael D. Slessor: To ensure high yields of this stacked HBM DRAM chip, customers probe and test each component DRAM die prior to stacking, and then probe and test the multi-die DRAM stack at various points during the assembly process, leading to a substantial increase in the overall probe card intensity per good die out. In addition, the technical requirements for HBM tests are significantly more advanced than for standard unstacked DRAM products, involving higher test speeds and more challenging thermal scaling specifications.

Michael D. Slessor: To ensure high yields of this stacked H b M DRAM chip customers probing test each component DRAM die prior to stacking.

Michael D. Slessor: And then probe and test the multi die DRAM stacks at various points during the assembly process, leading to a substantial increase in the overall probe card intensity per good die out.

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

Michael D. Slessor: We believe our superior performance capabilities in meeting these requirements will drive both market share and profitability gains as HBM continues to grow, driven by the accelerating adoption of generative AI. Even though HBM applications comprise a small portion of the total DRAM bits produced by our customers, because of the stacked die architecture, HBM represents a much larger portion of the total silicon area and wafers produced.

Michael D. Slessor: We believe our superior performance capabilities in meeting these requirements will drive both market share and profitability gains as H B M continues to grow driven by the accelerating adoption of generative AI.

Michael D. Slessor: Even though H b M applications comprise a small portion of the total DRAM bits produced by our customers because of the stack die architecture H B M represents a much larger portion of the total silicon area and wafers produced and because of the increased test intensity and test complexity and even larger part of the over.

Michael D. Slessor: And because of the increased test intensity and test complexity, an even larger part of the overall test and probe guard spending by our customers. This compounding power of advanced packaging is clear in our first quarter results and our second quarter outlook for HBM. Shifting to Foundry and Logic probe cards, as expected, we delivered first quarter revenue comparable to the fourth quarter as we shipped probe cards for a variety of PC, server, and mobile designs.

Michael D. Slessor: Raul test and probe card spending by our customers.

Michael D. Slessor: This compounding power of advanced packaging is clear in our first quarter results and our second quarter outlook for H B M.

Michael D. Slessor: Shifting to foundry and logic probe cards as expected, we delivered first quarter revenue comparable to the fourth quarter as we shipped probe cards for a variety of PC server and mobile designs.

Michael D. Slessor: As a reminder, since probe cards are a device-specific consumable that's customized to each individual customer chip design, production ramps of new chip designs generate demand for new probe cards, even when these new designs are produced on the same technology. This provides a more diverse and stable set of demand drivers than for capital equipment. We expect second quarter growth in our Foundry and Logic ProbeCard business, primarily driven by the mid-year ramp of new mobile application processor designs and stronger ProbeCard demand for client PC and server microprocessors. As in DRAM with HBM, an increasing number of these foundry and logic designs are architected using advanced packaging processes like Foveros and 3DFabric.

Michael D. Slessor: As a reminder, since probe cards are a device specific consumable that's customized to each individual customer chip design production ramps of new chip designs generate demand for new probe cards, even when these new designs are produced on the same technology node.

Michael D. Slessor: This provides a more diverse and stable set of demand drivers than for capital equipment.

Michael D. Slessor: We expect second quarter growth in our foundry and logic probe card business, primarily driven by the mid year ramp of new mobile application processor designs and stronger probe card demand for client PC and server microprocessor designs.

Michael D. Slessor: As in DRAM with H B M. An increasing number of these foundry and logic designs are architected using advanced packaging processes like favor us and three D fabric.

Michael D. Slessor: Similar to the dye stacking in HBM, these processes drive both higher test intensity and higher test complexity. This is driving increased customer spending on FormFactor's products to both improve yields and reduce costly scrap. In the system segment, the sale of FRT in the fourth quarter produced the anticipated sequential reduction in revenue in the first quarter.

Michael D. Slessor: Similar to the die stacking and H B M. These processes drive both higher test intensity and higher test complexity. This is driving increased customer spending on form factors products to both improve yields and reduce costly scrap.

Michael D. Slessor: In the systems segment, the sale of F. R T and the fourth quarter produced the anticipated sequential reduction in revenue in the first quarter. However product mix was weaker than expected with fewer high complexity thermal system ship.

Michael D. Slessor: However, the product mix was weaker than expected, with fewer high-complexity thermal systems. We believe this mix of lower complexity configurations is a short-term dynamic and not a structural change in this market. Our customers continue to engage us to solve the most complex challenges in test and measurement, utilizing our engineering provers, cryostats, and other system segment products to test, measure, and characterize new technologies, like co-packaged silicon photonics, infrared detectors, and quantum computers that are at the forefront of industry innovation.

Michael D. Slessor: We believe this mix of lower complexity configurations, as a short term dynamic and not a structural change in this market.

Michael D. Slessor: Our customers continue to engage us to solve the most complex talent challenges and test and measurement utilizing our engineering Probursa cryo stats and other system segment products to test measure and characterize new technologies like co packaged silicon photonics infrared detectors and quantum computers that are at.

Michael D. Slessor: The forefront of industry innovation.

Michael D. Slessor: System segment products are also an important element of our lab-to-fab diversification strategy. Our uniquely broad portfolio enables us to compete for business across diverse demand pools at all major customers, providing a measure of stability in downturns and inherent exposure to fast-growing areas of the industry, like high-bandwidth memory. Finally, I want to share an important customer highlight from the first quarter. FormFactor was one of 27 suppliers to receive the exclusive Intel EPIC Program Distinguished Supplier Award for 2024.

Michael D. Slessor: System segment products are also an important element of our lab to fab diversification strategy are uniquely broad portfolio enables us to compete for business across diverse demand pools that all major customers, providing a measure of stability in downturns and inherent exposure to fast growing areas of the industry like <unk>.

Michael D. Slessor: Bad with memory.

Michael D. Slessor: Finally, I want to share an important customer highlight from the first quarter form factor was one of 27 suppliers to receive the exclusive Intel Epic program Distinguished supplier Award for 2024.

Michael D. Slessor: This award marks the third consecutive year we've been recognized as a top performer in the Intel supply chain. I'm extremely proud of the Global Form Factor team for the dedication and performance that resulted in this recognition from Intel. And I'd like to take this opportunity to thank and congratulate our team.

Michael D. Slessor: This award marks the third consecutive year, we've been recognized as a top performer in the Intel supply chain I'm extremely proud of the global form factor team for the dedication and performance that resulted in this recognition from Intel and I'd like to take this opportunity to thank and congratulate our team.

Michael D. Slessor: In closing, we're excited about both the strength of our second quarter outlook and the accelerating adoption of advanced packaging underpinning that strength. Longer term, we're confident in the growth prospects for FormFactor in the industry overall, driven by the fundamental trends of semiconductor content growth and advanced packaging innovations like HBM, chiplets, and co-packaged silicon photonics. 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, along with the organization and talent changes we've made recently, position FormFactor as a stronger and leaner competitor. This will enable us to achieve and then surpass our target model that delivers $2 of non-GAAP earnings per share on $850 million of revenue.

Michael D. Slessor: Okay.

Michael D. Slessor: In closing we're excited about both the strength of our second quarter outlook and the accelerating adoption of advanced packaging underpinning that strength.

Michael D. Slessor: Longer term, we're confident in the growth prospects for form factor and the industry overall, driven by the fundamental trends of semiconductor content growth in advanced packaging innovations like H B M chip lifts and co packaged silicon photonics.

Michael D. Slessor: 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 along with the organization and talent changes. We've made recently physician form factor as a stronger and leaner competitor.

Michael D. Slessor: This will enable us to achieve and then surpass our target model that delivers $2 of non-GAAP earnings per share on $850 million of revenue.

Shai over to you.

Shai Shahar: Thank you, Mike, and good afternoon. As you saw in our press release, Q1 revenues were $3.7 million above the midpoint of our outlook. Nangab Gross Margin was 0.8 percentage points below the bottom end of the range, and Nangab EPS was 1 cent below the midpoint of the range. First quarter revenues were $168.7 million, a 0.3% sequential increase from our fourth quarter revenues, and a year-over-year increase of 0.8% from our Q1-23 revenues. The increase is due to stronger revenues in our ProPortfolio. PopCart segment revenues were $136.7M in the first quarter, an increase of $9.7M or $7.6M from Q4.

Shai Shahar: Thank you, Mike and good afternoon.

Shai Shahar: As you saw in our press release Q1 revenues were $3 $7 million above the midpoint of our outlook range non-GAAP gross margin was 0.8 percentage points below the bottom end of the range and non-GAAP EPS was one cent the midpoint of the range.

Shai Shahar: The increase was driven by a small increase in Foundry and Logic revenues and a significant increase in DIRM revenues, partially offset by a decrease in flash rates. System segment revenues were $32 million in Q1, and $9.2 million decreased from the fourth quarter, and comprised 19% of total company revenues, down from 24.5% in Q4. The main reason for the decrease is the sale of FRT and Q425. Within the ProCard segment, Q1 Foundry and Logic revenues were $86.8 million, a 3.6% increase from Q4.

Shai Shahar: First quarter revenues were $168 $7 million of Europe, 3% sequential increase from our fourth quarter revenues and a year over year increase of 0.8% from our Q1 'twenty three revenues.

Shai Shahar: The increase is due to stronger revenues in our probe card segment.

Shai Shahar: Probe card segment revenues were $136 $7 million in the first quarter, an increase of $9 7 million or seven 6% from Q4.

Shai Shahar: The increase was driven by a small increase in foundry and logic revenues and a significant increase in DRAM revenues, partially offset by a decrease in search revenue.

Shai Shahar: With system segment revenues were $32 million in Q1, and $9 $2 million decrease from the fourth quarter and COVID-19% of total company revenues down from 24, 5% in Q4.

Shai Shahar: The main reason for the decrease is deferred over 14 Q4 'twenty three.

Shai Shahar: Within the probe card segment, Q1 foundry and logic revenues were $86 8 million a three 6% increase from Q4.

Shai Shahar: Foundry and Logic revenues increased to 51.5% of total company revenues compared to 49.8% in the fourth quarter. DIRM revenues were a record $45.9 million in Q1, $10 million or 27.9% higher than in the fourth quarter, an increase to 27.2% of total quarterly revenues as compared to 21.3% in the fourth quarter.

Shai Shahar: Foundry and logic revenues increased to 51, 5% of total company revenues compared to 49, 8% in the fourth quarter.

Shai Shahar: DRAM revenues were a record $45 $9 million in Q1 $10 million or 27, 9% higher than in the fourth quarter and increased to 27, 2% of total quarterly revenues as compared to 21, 3% in the fourth quarter.

Shai Shahar: Flash revenues of $4 million in Q1 were $3.3 million lower than in the fourth quarter and were 2.4% of total revenues in Q1, as compared to 4.3% in Q4. Gap cost margin for the first quarter was 37.2% as compared to 40.4% in Q4. The cost of revenues included $2.6 million of GAAP to non-GAAP reconciling items, which we outline in our press release issued today and in the reconciliation table available in the Investor Relations section of our website.

Shai Shahar: Flash revenues of $4 million in Q1 were $3 $3 million lower during the fourth quarter and were 2.4% of total revenues in Q1 as compared to four 3% in Q4.

GAAP gross margin for the first quarter was 37, 2% as compared to 44% in Q4.

Shai Shahar: Cost of revenues included $2 $6 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today and in the reconciliation table available in the Investor Relations section of our website.

Shai Shahar: On a non-GAAP basis, gross margin for the first quarter was 38.7%, 3.4 percentage points lower than the 42.1% non-capitalized gross margin in Q4 and 0.8 percentage points below the low end of our output. The decrease compared to Q4 and to the midpoint of our outlook range was a result of lower gross margins in both the probe card segment and the systems. Our PromCard segment gross margin was 37.2% in the first quarter, a decrease of 2.4 percentage points compared to 39.6% in Q4.

On a non-GAAP basis gross margin for the first quarter was 38, 7% three four percentage points lower than the 42, 1% non-GAAP gross margin in Q4, and <unk> eight percentage points below the low end of our outlook range.

Shai Shahar: The decrease compared to Q4 and to the midpoint of our outlook range was a result of lower gross margins in both the probe card segment and the system segment.

Shai Shahar: Our probe card segment gross margin was 37, 2% in the first quarter a decrease of two four percentage points compared to 39, 6% in Q4.

Shai Shahar: Our Q1 system segment gross margin was 45.3%, a decrease of 4.3 percentage points from the 49.6% gross margin in the fourth quarter. The decrease in consolidated non-Galvagos margins from the midpoint of our outlook range is due to the net effect of three main factors. First, a less favorable product mix in both segments, which contributed to a 1.9 percentage point decline.

Shai Shahar: Our Q1 system segment gross margin was 45, 3% a decrease of four three percentage points from the 49, 6% gross margin in the fourth quarter.

The decrease in consolidated non-GAAP gross margins from the midpoint of our outlook range is due to the net effect of three main factors.

Shai Shahar: A less favorable product mix in both segments, which contributed to a one nine percentage points decrease.

Shai Shahar: Second, higher-than-expected warranty expense in Q1 contributed to a 0.4 percentage point decrease. Varsity offsetting these two factors with 0.5 percentage points related to higher-than-expected revenue. First quarter GAAP operating expenses were $61.7 million compared to $59.6 million in the fourth quarter. The two main reasons for the increase were higher stock-based compensation of $1.2 million related to the benefit from Profeatures in the previous quarter that did not recur in Q1, and transaction costs of $0.6 million related to the sale of our China operation.

Shai Shahar: Second higher than expected warranty expense in Q1 contributed to a 0.4 percentage points decrease.

Shai Shahar: Partially offsetting these two factors was <unk> five percentage points related to higher than expected revenues.

Shai Shahar: First quarter GAAP operating expenses were $61 7 million compared to $59 $6 million in the fourth quarter.

The two main reasons for the increase were higher stock based compensation of $1 $2 million related to the benefits from pro features in the previous quarter that did not recur in Q1.

Shai Shahar: And transaction cost of <unk> $6 million related to the sale of our China operations.

Shai Shahar: During the quarter, we entered into a definitive agreement to sell our China operations for $25 million, subject to customary working capital adjustments. The transaction closed on February 26, and Q1 includes results from our China operations for the first two months of the year.

Shai Shahar: During the quarter, we entered into a definitive agreement to sell our China operations for $25 million.

Shai Shahar: Subject to customary working capital adjustments.

Shai Shahar: The transaction closed on February 26 in Q1 includes results from our China operations for the first two months of the year.

Shai Shahar: Net proceeds from the transaction, after adjustment for expenses, were approximately $21.1 million. Non-GAP operating expenses for the first quarter were $52.3 million, or 31% of revenues, as compared with $51.6 million, or 30.7% of revenues in Q4. The $0.7 million increase relates mainly to the typical annual benefits receipts, partially offset by lower performance-based compensation and the reduction in costs related to the sale of FRT and our China operation. Company non-cash expenses for the first quarter included $10.4 million for stock risk compensation, $1.1 million higher than in the fourth quarter, as well as amortization of intangibles of $0.6 million and depreciation of $7.2 million, both slightly lower than in the fourth quarter.

Shai Shahar: Net proceeds from the transaction after adjustments and expenses were approximately $21 1 billion.

Shai Shahar: non-GAAP operating expenses for the first quarter were $52 3 million or 31% of revenues as compared with 51 $6 million or 37% of revenues in Q4.

Shai Shahar: The zero point $7 million increase relates mainly to a typical annual benefits reset.

Shai Shahar: Partially offset by lower performance based compensation and a reduction in costs related to the set of F. R T and our China operations.

Shai Shahar: Company noncash expenses for the first quarter included $10 $4 million for stock based compensation $1 $1 million higher than in the fourth quarter as well as amortization of intangibles of <unk> 6 million and depreciation of $7 $2 million both spaces.

Actually lower than in the fourth quarter.

Shai Shahar: Gap operating income was $21.3 million for Q1, compared with $81.3 million in Q4, which included a $73 million gain from the set of efforts. Q1 also included a $20 million gain from the sale of our China operation. Non-GAAP operating income for the first quarter was $13 million, compared with $19.1 million in the fourth quarter, a decrease of $6.2 million, or 32%, mostly due to the decrease in gross money. Gap net income for the first quarter was $21.8 million or $0.28 per fully diluted share compared with gap net income of $75.8 million or $0.97 per fully diluted share in the previous quarter; as discussed, the prior quarter included the The non-GAAP effective tax rate for the first quarter was 13.7%, 7 percentage points lower than the 21.2% in the fourth quarter. We continue to expect our annual NAMGAP effective tax rate to be between 14% and 18%.

GAAP operating income was $21 3 million for Q1, compared with $81 $3 million in Q4, which included the $73 million gain from the set of a hurricane.

Shai Shahar: Q1, it grew to $20 million gain from the sale of our China operations.

Shai Shahar: non-GAAP operating income for the first quarter was $13 million compared with $19 $1 million in the fourth quarter, a decrease of $6 2 million or 32%, mostly due to the decrease in gross margins.

GAAP net income for the first quarter was $21 $8 million or 28 cents per fully diluted share compared with GAAP net income of $75 $8 million or <unk> 97 per fully diluted share in the previous quarter.

Shai Shahar: As discussed the prior quarter included a gain from the sale of over 40.

Shai Shahar: The non-GAAP effective tax rate for the first quarter was 13, 7% seven percentage points lower than the 21, 2% in the fourth quarter.

Shai Shahar: We continue to expect our annual non-GAAP effective tax rate to be between 14 and 18%.

Shai Shahar: First quarter non-GAAP net income was $14.3 million, or $0.18 per fully diluted share, compared to $15.7 million, or $0.20 per fully diluted share in Q4. Q1 EPS was $0.02 lower sequentially due to lower gross margins and higher OPEX on flat revenue, partially offset by higher other income and lower effectiveness. Moving to the balance sheet and cash flows, we generated free cash flow of $19.7 million in the first quarter, compared to negative $0.3 million in Q4.

Shai Shahar: First quarter net sorry, first quarter non-GAAP net income was $14 $3 million or <unk> 18 per fully diluted share compared to $15 7 million or <unk> 20 per fully diluted share in Q4.

Shai Shahar: Q1, EPS was two cents lower sequentially due to lower gross margins and higher opex on flat revenue, partially offset by higher other income and lower effective tax rate.

Shai Shahar: The increase in free cash flows of $20 million is mainly due to higher operating cash flows, primarily driven by more efficient working capital of $19.4 million, partially offset by an increase of $3.5 million in capital expenditures. We invested $13.4 million in capital expenditures during the first quarter, compared to $9.9 million in Q4. There is no change in our previously communicated 2024 expected cap exchange of $35 to $45 million. At quarter end, total cash and investments were $357.2 million, an increase of $25 million from Q4.

Shai Shahar: Moving to the balance sheet and cash flows we generated free cash flow of $19 $7 million in the first quarter compared to a negative <unk> $3 million in Q4.

Shai Shahar: The increase in free cash flows of $20 million is mainly due to higher operating cash flows primarily driven by more efficient working capital of $19 $4 million, partially offset by an increase of $3 $5 million in capital expenditures.

Shai Shahar: We invested $13 $4 million in capital expenditures during the first quarter compared to $9 $9 million in Q4.

Shai Shahar: There is no change in our previously communicated 2020 for expected Capex range of $35 million to $45 million.

Shai Shahar: At quarter end total cash and investments were $367 2 million, an increase of $25 million from Q4.

Shai Shahar: The increase relates to cash provided by operating activities and net cash received from the sale of our China operations. First, you're fed by CapEx and stock repurchase. At the end of the first quarter, we had one term loan remaining with a balance totaling $14 million.

Shai Shahar: The increase relates to cash provided by operating activities and net cash received from the set of our China operations, partially offset by Capex and stock repurchases.

Shai Shahar: At the end of the first quarter, we had one term loan remaining with a balanced totaling $14 million.

Shai Shahar: Regarding the stock buyback, during the first quarter, we purchased $17.4 million worth of shares under our $75 million two-year buyback program that was approved in Q4 2020. As of quarter end, $56.4 million remains available under that authorization. As a reminder, the main purpose of this share repurchase program is to offset dilution from stock-based compensation.

Shai Shahar: Regarding stock buybacks during the first quarter, we purchased $17 $4 million worth of shares under our $75 million two year buyback program, which was approved in Q4 2023.

Shai Shahar: As of quarter end $56 $4 million remains available under that authorization.

Shai Shahar: As a reminder, the main purpose of.

Shai Shahar: This share repurchase program is to offset dilution from stock based compensation.

Shai Shahar: Turning to the second quarter's non-GAAP outcomes, we expect Q2 revenue of $195 million, plus or minus $5 million. At the midpoint of our outlook range, Q2 revenue is expected to be approximately $25 million higher than in Q1. We expect DRAM revenues in Q2 to be approximately $10 million higher than in Q1, and Foundry and Logic revenues to be approximately $15 million higher than in the first quarter. Second quarter non-GAAP gross margin is expected to be 45% plus or minus 150 basis points.

Shai Shahar: Turning to the second quarter non-GAAP outlook.

Shai Shahar: We expect Q2 revenue of $195 million, plus or minus $5 million.

Shai Shahar: At the midpoint of our outlook range Q2 revenue is expected to be approximately $25 million higher than in Q1.

Shai Shahar: Expect DRAM revenues in Q2 to be approximately $10 million higher than in Q1 and.

Shai Shahar: In foundry and logic revenues to be approximately $50 million higher than in the first quarter.

Shai Shahar: Second quarter non-GAAP gross margin is expected to be 45% plus or minus 150 basis points.

Shai Shahar: The expected increase in non-GAAP gross margins in the second quarter is related to higher volumes and a more favorable mix. At the midpoint of these outlook ranges, we expect Q2 operating expenses to be $60 million, plus or minus $2 million. The expected increase is mainly due to higher performance-based compensation related to higher profitability. Non-GAAP earnings per fully diluted share for Q2 are expected to be $0.31, plus or minus $0.40. Reconciliation of our Gap to Non-Gap Q2 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.

Shai Shahar: Expected increase in non-GAAP gross margins in the second quarter is related to higher volumes and a more favorable mix.

Shai Shahar: At the midpoint of this outlook ranges, we expect Q2 operating expenses to be $60 million.

Shai Shahar: Plus or minus $2 million.

Shai Shahar: The expected increase is mainly due to higher performance based compensation related to higher profitability.

Shai Shahar: non-GAAP earnings per fully diluted share for Q2 is expected to be 31 <unk>.

Shai Shahar: Plus or minus <unk> <unk>.

Shai Shahar: A reconciliation of our GAAP to non-GAAP Q2 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, and ladies and gentlemen, we ask that you please limit yourselves to one question and one follow-up. You may get back in queue as time allows. And our first question comes from the line of Brian Chin from Steeple. Your question, please.

Shai Shahar: Operator.

Operator: Certainly and ladies and gentlemen.

Operator: Ask that you please limit yourselves to one question and one follow up you may get back in queue as time allows.

Operator: And our first question comes from the line of Brian Chin from Stifel. Your question. Please.

Brian Edward Chin: Hi there. Good afternoon. Congratulations on the results. Sorry, just first to get a clarification, because I don't know if I heard this correctly, but Shai, do you mind kind of going back over what the implied growth is for the three main areas, foundry, logic, DRAM, and..., systems in Q2 relative to the guide and also for Q1. With HBM being a bigger component of the mix, why was that also a less favorable mix, even on the memory side of that revenue in Q1?

Brian Edward Chin: Hi, there good afternoon, congratulations on the results.

Shai Shahar: Sure. So regarding your first question, we said that with 195 being the midpoint of the outlook range, that's about 25 million more quarter over quarter, of which 15 million are Foundry and Logic and 10 million are DRAM, and the rest is relatively flat. These are the big moves.

Brian Edward Chin: Let me just get a clarification because I don't know if I R.

Brian Edward Chin: This correctly, but can you.

Brian Edward Chin: Do you mind kind of going back over what the.

Brian Edward Chin: Sure.

Brian Edward Chin: The implied growth is for the three main areas foundry logic DRAM and systems in Q2 relative to the guide and also on Q1.

Brian Edward Chin: And with <unk> being a bigger component of the mix.

Brian Edward Chin: Was that also a less favorable mix even on the memory side of that revenue in Q1.

Speaker Change: Sure. So regarding your first questions. We said that we would 195 being the midpoint of the outlook range, we expect.

Speaker Change: About $25 million increase quarter over quarter of which $15 million in foundry and logic and $10 million is DRAM.

Speaker Change: And the rest is relatively flat these are the big movers.

Shai Shahar: And regarding your questions on gross margin and HBM, yes, so HBM is indeed a relatively higher gross margin product for us, but it's still a DRAM product. And DRAM, as we have said many times before, has a relatively low gross margin or lower gross margin than FoundryLogic. So we had a less favorable mix between the markets, even within the market. And also, the systems business had a lower gross margin than usual, at 45, 46 percent, while our target model for systems is to be around 50 or the low 50s.

Speaker Change: And regarding your questions on gross margin and HBM.

Speaker Change: Yes. So <unk> is in is indeed higher relatively higher gross margin product for us, but it's still a DRAM products.

Speaker Change: In DRAM as we said many times before has a relatively low gross margin or lower gross margin in foundry and logic.

Speaker Change: So we had less favorable mix.

Speaker Change: When the markets even when we are in the market and also the systems business had a lower gross margin than usual at 45, 46%.

Speaker Change: Our target more of a neutral systems has to be around 50 or luxury of shoes in your gross margin. So if you put all of this together.

Shai Shahar: So if you put all of this together and add the warranty expenses that were unusual in Q1, that's why we ended up with a gross margin lower than that. With Q2, at $195, we are very encouraged to see the gross margin going to 45 percent at the midpoint of the range, even with DRAM and HBM or a higher DRAM and HBM mix than before.

Speaker Change: And at the warranty expenses that were unusual in Q4 and Q1, that's why we ended up with gross margin.

Speaker Change: Lower than that.

Speaker Change: Q2 to 185, where we are very encouraged to see the gross margin growing to 45% at the midpoint of the range, even with DRAM in HBM more higher DRAM and HBM mix.

Michael D. Slessor: Okay, that's helpful. And then, I guess, for my follow-up, there might be two parts to this, but I guess firstly, it's not often that you have sort of a step up of this magnitude, cue on cue. The first part of this question is, are there constraints in some unfulfilled demand that maybe you have in the second quarter that gives you some of that visibility, I think that you referenced in the release, for Q3?

Speaker Change: Okay. That's helpful and then I guess.

Speaker Change: My follow up it.

Speaker Change: It might be two parts to this but.

Speaker Change: Firstly, it's not often that you have sort of a step up of this magnitude Q on Q I guess.

Speaker Change: The first part of this question is.

Are there constraints in some unfulfilled demand that maybe that you have in the second quarter that gives you some of that visibility I think that you referenced in the release on Q3 and the second part of that is.

Michael D. Slessor: And the second part of that is... Maybe, can we unpack a little bit about the sequential pickup and foundry logic? Obviously, not the best overall unit demand, but clearly you're seeing a premium on growth here tied to NICs and advanced packaging. Can you maybe, Mike, talk about sort of what you're seeing, boundary basis, logic basis, and just the breadth of that and kind of what it is. Maybe you could unpack that a little bit?

Speaker Change: Maybe can we unpack a little bit about the sequential pickup in foundry logic.

Speaker Change: Yes, obviously, not the best overall unit demand, but clearly youre seeing a premium on growth here tied to maybe the mix in advanced packaging can you, maybe Mike talk about sort of what youre seeing foundry basis logic basis in <unk>.

Michael D. Slessor: Thanks. Yeah, absolutely. Let me take a look.

Mike: <unk> of that kind of what maybe unpack that a little bit. Thanks, Yes, absolutely. Let me take the second part of the question first and then we can parse out some of the foundry and logic growth.

Michael D. Slessor: Yeah, absolutely. Let me take the second part of the question first, and then we can parse out some of the Foundry and Logic growth. We didn't leave anything on the table in Q1.

Mike: We didn't we didn't leave anything on the table in Q1. This has been a fairly rapid step up in demand and it's fairly concentrated among HBM microprocessor applications and the usual mid year mobile application processor ramps.

Michael D. Slessor: This has been a fairly rapid step-up in demand, and it's fairly concentrated among HBM, microprocessor applications, and the usual mid-year mobile application process. But if we take a look at the Foundry and Logic piece, it is interesting, you know; our customers at Foundry and Logic haven't had great earnings reports. But if you think about how they manufacture and their overall cycle times and flow, you know, as they release new designs, most of them on advanced packaging, advanced packaging platforms in these processes.

Speaker Change: But if we if we take a look at the foundry and logic piece it is interesting.

Speaker Change: <unk> in foundry and logic haven't had great earnings reports.

Speaker Change: But if you think about.

Speaker Change: How they manufacture and their overall cycle times and flow.

Speaker Change: As they release new designs.

Speaker Change: Most of them on advanced packaging.

Michael D. Slessor: They have to get the tooling and the probe cards in place several months, often even several quarters, in advance of them shipping and realizing revenue for the part. So we're going to, in any kind of new product ramp, lead our customers, be ahead of our customers in time for demand and revenue. And so I think that partially helps explain it. You also.

Packaging platforms in these process they have to get the tooling and the probe cards in place several months often even several quarters in advance of them shifting and realizing revenue for the part so we're going to in any kind of a new product ramp lead our customers be ahead of our customers.

Speaker Change: Time in the.

Speaker Change: The demand and revenue and so I think that partially helps explain.

Michael D. Slessor: You also alluded to another piece. A lot of the step-up in the second quarter is associated with new designs in HBM, in microprocessor applications, and in mobile applications that are all being architected on advanced packaging platforms, whether it's die stacking and TSVs in HBM, or Foveros in the microprocessor space. All of these things, as we said in the past and reiterated today, drive higher test intensity and higher test complexity. So the spending on tests for these new designs is going up to make sure that the yields are high in these advanced packaging processes.

Speaker Change: You also.

Speaker Change: You also alluded to another piece a lot of the step up in the second quarter is associated with new designs in HBM in microprocessor applications and in mobile applications that are all being architected on advanced packaging platforms, whether it's die stacking and TSV Z and HBM.

Speaker Change: Whether it's <unk> in the microprocessor space.

Speaker Change: All of these things as we said in the past and reiterated today drive higher test intensity and higher test complexity. So the spending on tests for these for these new designs is going up to make sure that the yields are high in these advanced packaging processes.

Operator: Thank you. One moment for our next question, and our next question comes from the line of Charles Shee from Needham and Company. Your question, please.

Speaker Change: Yes.

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

Speaker Change: And our next question comes from the line of Charles <unk> from Needham <unk> Company. Your question. Please.

Charles Shee: Good afternoon, Mike, and Shai. I mean, the guidance kind of reminds probably everybody of what happened in the fourth quarter of 2019. That was also a pretty significant step up at a similar time of the cycle. So maybe my question here is, last time in the fourth quarter of 2019, you were kind of a little bit cautious, right? You were saying that maybe some of the strength was a little bit transient. Well, it turns out, it was not.

Speaker Change: Yes.

Charles: Good afternoon, Mike.

Charles: I mean, the guidance kind of reminds.

Charles: Everybody.

Charles: COVID-19.

Charles: Also as previously communicated.

Charles: And a stimulant time.

Charles: Of the cycle.

Charles: No.

Speaker Change: Maybe my question here.

Speaker Change: <unk> timing.

Speaker Change: He will chime in I'll need to caution you on while maybe some of this win was a mood between me and Mark <unk>, who was ultimately sustaining this time you didn't mention anything about <unk> anything to women.

Charles Shee: It was actually quite sustaining. This time, you didn't mention anything about transients or anything. So I want to get your sense of how sustainable that close to $200 million per quarter level you're going to see in June. What's the line of sight for the second half of this year? And maybe more importantly, I think it does feel like you're thinking about the microprocessor in one of the strength areas you're going to see in Q2. And what's the sustainability of the protocol demand microprocessor going into Q3 and Q4?

Speaker Change: Okay.

Speaker Change: How sustainable.

Speaker Change: Close to $200 million quarterly level.

Speaker Change: You can see in June.

Speaker Change: What's the line of sight into the second half of this year.

Speaker Change: And maybe more importantly, I think it does.

Speaker Change: Thank you Mike.

Speaker Change: Yeah.

Speaker Change: <unk> micro processor.

Speaker Change: One this June.

Speaker Change: Williams Youre going to see in Q2, and what's the sustainability of the protocol.

Speaker Change: Demand micros processes going into Q3.

Michael D. Slessor: Yeah, thanks. Thanks, Charles. It's Mike. I'll take that.

Speaker Change: Sure.

Speaker Change: Yeah. Thanks. Thanks, Charles This is Mike I'll take that.

Mike: I think a couple of comments first of all remember that our business operates on very short lead times, well within a quarter and so visibility into the third quarter and beyond the second half in general really isn't there for us.

Michael D. Slessor: I think a couple of comments. First of all, remember that our business operates on very short lead times well within a quarter. And so visibility into the third quarter and beyond the second half, in general, really isn't there. The other comment I'd make about the second quarter strength is that it's fairly concentrated in a few applications in custom, with HBM obviously a highlight.

The other comment I'll make about the second quarter strength is it's fairly concentrated in a few applications and customers.

Mike: Obviously, a highlight we talked about the microprocessor strength and some strength in mobile, but if I think about <unk>.

Michael D. Slessor: We talked about microprocessor strength and some strength in mobile. But if I think about automotive, general DRAM, flash, some of the other parts of mobile like RF, they're pretty much flat. And so it's not like we're seeing a broad-based recovery here. We're seeing some real strength and momentum in some of the areas where we are over-indexed, and intentionally so because of our strategy. So I can't. I don't have any hard visibility into the second half.

Mike: Automotive general DRAM flash and some of the other parts of mobile like RF, they're pretty much flat and so it's not like we're seeing a broad based recovery here, we're seeing some real strength and momentum in some of the areas, where we are over indexed in intentionally so because of our strategy.

Mike: So I can't I don't have any hard visibility into the second half, but if you think about the position we're in.

Michael D. Slessor: But if you think about the position we're in in HBM, in microprocessors, especially driven by the move to advanced packaging in a lot of these areas, we feel pretty comfortable with continuing to grow secularly with the industry. The only other caution I'd add is that often when we've seen a quarter of heavy spending by one customer or two customers on specific designs that ramp, we can see a digestion period for a subsequent quarter.

Mike: In HBM in microprocessors, especially driven by the move to advanced packaging and a lot of these areas, we feel pretty comfortable with continue.

Mike: Continuing to grow secular Lee with the industry. The only other caution I would add is often when we have seen.

Mike: Quarter of heavy spending by.

Mike: One customer or two customers on specific designs that ramp we can see a digestion period for a subsequent quarter, but I think we're all expecting continued HBM growth. When you look at the recent comments from the hyper scaler on datacenter investments in AI, that's directly tied to that.

Michael D. Slessor: But I think we're all expecting continued HBM growth. When you look at the recent comments from the hyperscalers on data center investments in AI, that's directly tied to that. And at some point here, we are going to see some sort of PC refresh cycle. I think all of you on the call have different opinions of when that'll be, whether it's Windows 11 driven or just the age of the COVID buys driven. There's going to be a PC refresh cycle at some point, but we don't have the visibility to know whether we're seeing the start of that or whether this is really just some of the design release activity associated with our customers.

Mike: And at some point here, we are going to see some.

Mike: Some sort of a PC refresh cycle.

Mike: I think all of you on the call have different opinions of when that'll be whether its windows 11, driven or just age of the COVID-19 buys driven theres going to be a PC refresh cycle at some point.

Mike: But we don't have the visibility to know whether we're seeing the start of that or whether this is really just some of the the design release activity associated with our customers' roadmaps.

Charles Shee: Thanks, Mike. I really appreciate the usual conservatism, but maybe a follow-up.

Speaker Change: Thanks, Mike already appreciate that usual.

Speaker Change: Yes.

Speaker Change: Maybe a final one in terms of HCM.

Speaker Change: If I remember correctly.

Speaker Change: Probably second half last year is mainly driven by.

Michael D. Slessor: In terms of HBM, if I remember correctly, probably the second half last year, it's mainly driven by primary one customers. Do you see a broadening of the demand? Maybe you're seeing two levels of customer demand right now. And specifically, I want to ask you, we did hear chatter about the second one, not the leader, but the one of the followers having some real issues. And is that probably reflected in higher demand in the short term? Or do you not see that as an issue?

Speaker Change: Primarily one customer or do you see it broadening.

Speaker Change: EMEA and maybe.

Speaker Change: <unk> and <unk>.

Speaker Change: EMEA right now.

Speaker Change: And specifically I want to ask.

Speaker Change: We did he champions.

Speaker Change: One not the leader of the wound.

Speaker Change: Paula we're having some yield issues.

Speaker Change: Got you.

Speaker Change: We've connected the pumping.

Speaker Change: Demand in the short term you don't see that as an issue.

Michael D. Slessor: Yeah, our HBM business is still relatively concentrated with one customer, although there are contributions from the other two DRAM manufacturers as they quickly sample and start to ramp HBM3 and HBM3E here in 2024. And we would expect, you know, that market to broaden a little bit, but at present, and with the visibility we have, it really is going to be driven and pretty concentrated by the leader in HBM market share. I think it would be interesting to see as we go through the back half of the year and all three start to supply HBM3E in volume and then transition in 2025 to HBM4, we expect that business to broaden quite significantly and be a supplier to all three of them, but again, pretty concentrated with one customer.

Speaker Change: Yes.

Speaker Change: <unk> business is still relatively concentrated with one customer although there are contributions from the other two DRAM manufacturers as they can.

Speaker Change: Quickly sample and start to ramp the HBM three in <unk> here in 2024.

Speaker Change: And we would expect.

Speaker Change: That market to broaden a little bit but at present and with the visibility. We have it really has continued to be driven and.

Speaker Change: And pretty concentrated by the leader in HBM market share I think it would be interesting to see as we go through.

Speaker Change: The back half of the year in all three start to supply H B M. Three and volume and then transition in $2025 to HBM or.

Speaker Change: We expect that business abroad, and quite significantly and be a supplier to all three of them, but again.

Speaker Change: Pretty concentrated with one customer right now.

Charles Shee: Thanks, Mike. I really congrats on that very strong guy. Thanks. Thanks, Josh. Thank you.

Speaker Change: Thanks, Mike really congrats on that very strong back.

Operator: Thank you. One moment for our next question, and our next question comes from the line of David Duley from Steelhead Securities. Your question, please.

Speaker Change: Thanks Ross.

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

Speaker Change: Yeah.

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

David Duley: Congratulations on the great results. I just had a couple of follow-up questions on the high bandwidth memory market. You did a great job of talking about the number of insertions. I was just wondering if you could kind of just quickly review two things. If you could just tell us how much you think high-bandwidth memory is, how much more test and probe intensive it is over, let's say, a standard DDR5. And then, could you just review? It sounds like you have, if it's a six, if you have eight in the stack, you're going to have at least eight probe insertions for each individual one. How many more probes or tests are there when you build the stack? Thank you. Yeah,

David Duley: Congratulations on great results.

David Duley: I just had a couple of follow up questions on the high bandwidth memory market you did a great job of talking about.

David Duley: The number of insertion. So I was just wondering if you could kind of just quickly review two things. If you could just tell us how much you think high bandwidth memory, how much more test and probe intensive it is over let's say a standard DDR five.

David Duley: Memory, and then could you just review it sounds like you have with the six eight in the stack you are going to have at least eight probe insertions for each individual one how many more in search or how many more probe test things are they when you build the stack.

Michael D. Slessor: Yeah, thanks David. So, a couple of things.

Speaker Change: Yes, Thanks, David.

Speaker Change: So a couple of things your math is correct each individual die whether it's eight high stack of 12 high stack of <unk> each of those individual die gets probed and tested.

Michael D. Slessor: Your math is correct. Each individual die, whether it's a 8-high stack, a 12-high stack, a 16-high stack, each of those individual dies gets probed and tested before it goes into the stack. Because, as you can imagine, especially when you get high in the stack, if you're adding a bad die to it, that has the potential to essentially cause a scrap event for all the previous die that have been stacked. So the notion of known good dies for each of these input die is something we are seeing. There's also, for sure, a test once the thing is completely stacked, and that often happens at high speed.

Speaker Change: Before it goes into the stack because as you can imagine.

Speaker Change: Especially when you get high in the stack, if youre, adding a bad dye to it that has the potential to essentially causes scrap event for all of the previous died that have been stacked.

Speaker Change: The notion of known good die for each of these input di is something we are seeing.

Speaker Change: There is also <unk>.

Speaker Change: For sure a test once the thing is completely stacked and that often happens at high speeds and I referenced some of the challenging thermal specification.

Michael D. Slessor: I referenced some of the challenging thermal specifications. And at least for the initial parts of HBM ramps, we're also seeing intermediate test insertions as the stack is built. You can imagine there's, you know, suppose you get the four high; there can be a test insertion there depending on what yield loss modes the customers are seeing. There have been all kinds of challenges associated with HBM. It's driving results for some of the metrology and inspection suppliers in the back end as well, as customers try and uncover these new yield modes, yield loss modes, and improve them. But for right now, we're seeing all the input dies get tested, each of the component dies get tested, a test at the end, and often some intermediate tests as it's built.

Speaker Change: And at least for the initial.

Speaker Change: Parts of HBM ramps, we're also seeing intermediate test insertions.

Speaker Change: As the stack is built.

Speaker Change: You can imagine there's suppose you get the four high.

Speaker Change: There can be a test insertion there depending on what yield low yield loss modes. The customers are seeing there's been all kinds of challenges associated with HBM, It's driven results for some of the metrology and inspection suppliers in the back end as well as customers try and uncover these new yield modes yield loss modes and.

Speaker Change: Improve them and drive but for right now we're seeing all the input die get tested each of the component I get tested a test at the end then often some intermediate tests as it stacked up.

Michael D. Slessor: And then just the test intensity of an HBM dye versus a standard dye. Yeah, and we've estimated this in the past on a like-for-like basis is something like 20 to 30 percent, and I think that's a reasonable rule of thumb and continues to be a reasonable rule of thumb. There are situations where the test intensity is higher than 20 to 30 percent. Often, if it's a new product or when you're moving from 12 high to 16 high, new defect modes appear that need to be maybe over tested compared to that 20 to 30 percent, but I think that remains a pretty good rule of thumb for the uplift associated with advanced packaging chips on a like-for-like basis. Okay, if I could just look at a follow-up here as far as your foundry and logic go.

Speaker Change: And then just the test intensity.

Speaker Change: Di versus a standard TDI five yes.

Speaker Change: And we've we've estimated this in the past.

Speaker Change: On a like for like basis is something like 20% to 30% and I think that's a reasonable rule of thumb and continues to be a reasonable rule of thumb. There are situations, where the test intensity is higher than 20% to 30% often if it's a new product or when you're moving from 12 <unk> to 16 high new.

Speaker Change: New defect modes appear that need to be maybe over tested compared to that 20% to 30%, but I think that remains a pretty good rule of thumb for the uplift associated with advanced packaging chips on a like for like basis.

Speaker Change: Okay, and if I could just slip in a follow up here is as far as the your foundry and logic business, it's great to see a nice buildup.

David Duley: Great to see a nice build-up. Do you think you've increased your market share? Or is that just what your big running customers inside think? Yeah, kind of.

Speaker Change: Thank you.

Speaker Change: Increased your market share or is that just what your big running customers inside these two big customers are kind of.

Michael D. Slessor: Yeah, so a couple of points on share. You know, we and I think most of the people who follow the industry rely on the tech insights, the former VLSI research report that should be out any day now for 2023. So that'll be the definitive word on market share. Having said that, as you can imagine, we do do some pretty high-frequency internal benchmarking and data collection. And based on that, we do believe we'll have grown share through 2023, not just in Foundry and Logic but in our other served markets as well. As we've talked about with you in the past, share gains and market leadership are a real core tenet of our long-term strategy, and we need to continue to drive share gains.

Speaker Change: Yeah.

Speaker Change: So a couple of a couple of points on share.

Speaker Change: We and I think most of.

Speaker Change: The people who follow the industry rely on the tech insights the formerly VLSI Research report.

Speaker Change: That should be out any day now for 2023.

Speaker Change: So that'll be the definitive word on market share, having said that as you can imagine we do do some pretty high frequency internal benchmarking and data collection and then based on that we do believe we've grown share.

Speaker Change: Through 2023, not just in foundry and logic, but in our other served markets as well as we talked about with you in the past share gains and market leadership is a real core tenant of our long term strategy and we need to continue to drive share gains.

Speaker Change: Thank you thanks, David.

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

Operator: Thank you. One moment for our next question, and our next question comes from the line of Craig Ellis from B Reilly Securities. Your question, please.

Speaker Change: And our next question comes from the line of Craig Ellis from B Riley Securities. Your question. Please.

Craig Andrew Ellis: Yeah, thanks for taking the question and congratulations on the very good execution. So Mike, I'll just join the party and ask one on high bandwidth memory, and maybe I'll position it this way. So it looks like in 2Q, we should be at around $30 million in quarterly revenues. And as I listen to some of your commentary and look at the different times that we're probing die, add input, intermediate steps, final stack, et cetera, is there anything that you see as we look out from high bandwidth memory 3 to 3E to 4 that would cause probe intensity to go down? And if so, what would that be? And what would be either the yield improvement or the other process improvements that a manufacturer might make to achieve it?

Craig Andrew Ellis: Yes, Thanks for taking my question and congratulations on the very good execution. So.

Craig Andrew Ellis: I'll just join the party and Pam.

Craig Andrew Ellis: Last one on high bandwidth memory, and maybe I'll position. It this way so it looks like in <unk>, we should be at around 30 million in quarterly revenues.

Craig Andrew Ellis: As I listened to some of your commentary.

Craig Andrew Ellis: And look at.

Craig Andrew Ellis: Look at the different times, where propane guy at input intermediate stabs final stock et cetera is there anything that you see as we look out from high bandwidth memory three to three to four that would.

Craig Andrew Ellis: Cause.

Craig Andrew Ellis: <unk> tends to be to go down.

Craig Andrew Ellis: And if so what would that be and what would be the.

Craig Andrew Ellis: Either the yield improvement or the other process improvements that are match manufacturer might make to achieve that.

Michael D. Slessor: Yeah, yeah, it's an interesting question, Craig. So as you go from three to three to four, especially the three-generation to four, there are a couple of things that are really increasing the probe card intensity and complexity. One is generally that transitions involve more dye stacked. And so, as we talked about, each of the component dies gets probed. And so you can imagine more component dies in a higher stack is going to drive higher test intensity for the finished part.

Speaker Change: Yes, it's an interesting question Craig So as you go from three to three to four.

Craig Andrew Ellis: Specially the three generation two to four.

Speaker Change: There's a couple of things that are really increasing the probe card intensity and complexity. One is generally the transitions involved more die stacked.

Speaker Change: And so as we talked about each of the component I guess probed and so you can imagine more component die in a higher stack is going to drive.

Speaker Change: Higher higher test intensity for the finished park I think the other piece certainly going from three to four there is a significant step up in speed.

Michael D. Slessor: I think the other piece, certainly going from three to four, there's a significant step up in speed. And that's one of the areas where FormFactor has a very differentiated set of DRAM products in delivering high-speed tests to screen out die that don't meet the speed standard to participate in the whole stack at the spec speed for something like an HBM4 16 high stack. On the other hand, on the other side of the ledger, I do anticipate that customers are going to be able to continue to drive yields higher.

Speaker Change: And that's one of the areas where form factor has a very differentiated set of DRAM products in delivering high speed test to screen out di.

Speaker Change: They don't meet the speed standard to participate in the whole stack at the spec speed for something like an HBM for 16 high stack.

Speaker Change: On the other hand, the other side of the Ledger I do anticipate that customers are going to be able to continue to drive yields up and as they do that they're going to drive test times down now, they're not going to sample right. We're still going to have 100% test to screen out these die, but I'd imagine they'd be able to eliminate.

Michael D. Slessor: And as they do that, they're going to drive test times down. Now, they're not going to sample, right? We're still going to have 100% tests to screen out these dyes, but I imagine they would be able to eliminate some of the test vectors once they get the preponderance of those specific defect modes down.

Craig Andrew Ellis: Got it. That's really helpful.

Speaker Change: Some of this test vectors once they get those the preponderance of those specific defect boats down.

Michael D. Slessor: Thank you. And then the question on foundry logic would be, it seems like when you framed up QQ dynamics, and I know that lead times are short, so I'm not asking what lead times you're doing and telling, but it seems like there's a very seasonal factor on the APU side, but it seems like the other factors that were at play, the move to 2.5D, Poveros, et cetera, on more product platforms, So is that fair? And how do you feel about the business's ability to see more sustained, steady Foundry logic revenue gains from here on in, with these inflections now starting to become more material?

Speaker Change: Got it that's really helpful. Thank you and then the question on foundry logic foundry logic would be it seems like when you framed up Q2 dynamics and I know that lead times are shorts are not asking what lead times are doing and telling but it seems like there is a very seasonal fat.

Speaker Change: On the Apu side, but it seems like the other factors that were at play.

Speaker Change: The move to two and a half day Cobra et cetera on more product platforms, and frankly, a good pace on those movements.

Speaker Change: It seems those are more structural so is that fair and how do you feel about the businesses ability to see more sustained steady.

Speaker Change: Foundry logic revenue gains from here with decent inflections now starting to become more material. Thank you.

Michael D. Slessor: Thank you. Yeah. So,

Michael D. Slessor: So if you go back to when we presented our long-term target model, we expected the growth to come from Foundry Logic because of some of the dynamics you talked about. Advanced packaging, a very, very strong driver of that business long-term. Now some of our caution and conservatism is, as I mentioned in the response to a previous question, we have seen quarter-to-quarter digestion. However, the long-term secular trend associated with advanced packaging adoption in microprocessors and more broadly in Foundry and Logic, whether it's GPUs or application processors, is quite clear.

Speaker Change: So.

Speaker Change: If you go back to.

Speaker Change: Even when we presented our long term target model, we expected the growth to come from foundry and logic because of some of the dynamics you talked about advanced packaging, a very very strong driver of that business long term now some of our caution and conservatism is as I mentioned in the response to <unk>.

Speaker Change: Previous question, we have seen quarter to quarter digestion periods. The long term secular trend associated with advanced packaging adoption in microprocessors and more broadly in foundry and logic, whether it's gpus or apps processors is quite clear what I would caution against is drawing.

Michael D. Slessor: What I would caution against is drawing, you know, a straight line that goes up and to the right quarter after quarter after quarter. There are going to be some lumpy spots in this as customers ramp up, as customers digest. But the secular long-term trend associated with Foundry and Logic growth will vary.

Speaker Change: Straight line that goes up into the right quarter after quarter after quarter, there are going to be some some lumpy spots in this as customers ramp as customers Digest the.

Speaker Change: The secular long term trend associated with foundry and logic growth, we're very confident.

Craig Andrew Ellis: That's great. Thank you. Thank you. One moment.

Speaker Change: That's great. Thank you.

Operator: Thank you. One moment for our next question, and our next question comes from the line of Vedvati Shrotre from Evercore. Your question, please.

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

Speaker Change: Okay.

Speaker Change: And our next question comes from the line of <unk> <unk> from Evercore. Your question. Please.

Vedvati Anant Shrotre: Hi, thanks for taking my question and congratulations. So maybe starting with the HBM side of things, can you help me understand what the competitive positioning looks like on the HBM side? Are you sort of the market share leader just for HBM specifically versus the traditional DRAM? Is that a good way to think about it?

Evercore: Hi, Thanks for taking my question and congratulations.

Evercore: Maybe starting with the HCM side of things can you help me understand what the competitive positioning looks like on the HCM side.

Speaker Change: Are you started the <unk> gas plant is being specifically.

Speaker Change: The traditional APM got a good way to think about it.

Michael D. Slessor: Yeah, I think that is a good way to think about it. Part of it's because we have a very strong historical relationship with the DRAM manufacturer as a customer who's leading in HBM marketing. So, you end up, as in all of these situations, your native share at a customer, if they're successful in some of these submarkets, can drive share gains where, to be quite candid, you're getting fortunate with the situation that the company's in.

Speaker Change: Yes, I think that is a good way to think about it.

Speaker Change: It's because we have a very strong historical relationship with DRAM manufacturer as a customer who's who's leading in HBM market share.

Speaker Change: So you end up as in all of these situations Youre native share at a customer.

Speaker Change: We're successful in some of these submarkets can drive share gains where to be quite candid youre getting fortunate with the situation that the company is in.

Michael D. Slessor: I do think, you know, when we look at our differentiation and why we're leading in HBM, it goes back to two points I made in the prepared remarks. One is, HBM, and I think this is fairly obvious to most people, involves higher test speeds as customers screen out those die. We've got a very differentiated DRAM offering for high speed, and so that drives share. The other piece to it, and different customers have different approaches to how they handle this, is that the thermal scaling behavior of an HBM stacked wafer is much, much different than a monolithic silicon DRAM wafer.

Speaker Change: I do think when we look at our differentiation and why we are leading in HBM. It goes back to two points I made in the.

Speaker Change: In the prepared remarks, one is HBM and I think this is fairly obvious to most people involves higher test speeds as customer screen out those we've got a very differentiated DRAM offering for high speed and so that drive share.

Speaker Change: The other piece to it and different customers have different approaches to how they handle this the thermal scaling behavior of an HBM stacked wafer is much much different than a monolithic silicon DRAM wafer and it turns out that our technology is able to deal with that variability is the customer.

Michael D. Slessor: And it turns out that our technology is able to deal with that variability. As the customer tests at high temperatures, low temperatures, room temperature, we're able to deal with that variability in a pretty elegant and efficient way. So that's another element of the differentiation that's driving market share leadership.

Speaker Change: Costs at high temperature low temperature room temperature.

Speaker Change: To deal with that variability.

Speaker Change: Elegant and efficient way. So that's another element of the differentiation that's driving the market share leadership.

Michael D. Slessor: So are you, are you, is it fair to say you're seeing market share gains at the other two HBM manufacturers?

Speaker Change: Thank you for your seeing market tanking.

Speaker Change: Hi, Thank you.

Vedvati Anant Shrotre: I'm not sure we have enough exposure there yet, given the relative volume of their HBM volume, to see any kind of movement of the needle on share at those other customers. But as we engage, that's certainly an aspiration and a goal we have as they get more engaged in HBM.

Speaker Change: Thanks, Glenn manufacturers.

Speaker Change: I'm not sure we have enough exposure there yet given the relative volume of their HBM volume to see any kind of movement of the needle on share at those other customers, but as we engage that certainly an aspirational goal. We have is they get more engaged in the HBM market.

Michael D. Slessor: Thank you. And maybe on the FoundryLogix side, could you provide us an update on where you are in the qualification process when it comes to the MPU Fabless customer or the leading GPU customer?

Speaker Change: Thank you.

Speaker Change: And maybe on the foundry logic side could you provide us an update on <unk>.

Speaker Change: The qualification process.

Speaker Change: Good.

Speaker Change: MDU fabless customer leading GPU customer.

Michael D. Slessor: Yeah, so let's deal with them differently because they're slightly different situations and remind everybody that it is our strategy to be a leading supplier to all leading customers. So, you know, we want to make sure we're qualified and a key part of the supply chain for both of these customers. And, of course, they want multiple, probably two qualified suppliers.

Speaker Change: Yeah.

Speaker Change: Yes.

Speaker Change: So let's deal with them differently, because they are slightly different situations.

Speaker Change: And remind everybody that it is our strategy to be a leading supplier at all leading customers. So we want to make sure. We're qualified and a key part of the supply chain for both of these customers and of course, they want multiple probably to qualified suppliers.

Michael D. Slessor: And there are really only two companies that supply high-end Foundry and Logic probe cards at this performance level. So, the first one, we continue to make progress with the fabulous MPU manufacturer. As we told you, I believe, on the last earnings call, we changed out our customer-facing team and have been engaging and seeing some progress there. We don't have any qualification or material revenue to announce, but it really is a key initiative for the company, and we are making some progress.

Speaker Change: There's really only two companies that supply high end foundry and logic probe cards at this performance level. So the first one we continue to make progress with the Fabless MCU manufacturer.

Speaker Change: As we told you I believe on the last earnings call, we changed out our customer facing team.

Speaker Change: And has been engaging and seeing some progress there we don't have qualification or material revenue to announce but it really is a key initiative for the company and we are making some progress.

Michael D. Slessor: On the fabulous GPU manufacturer, there's some interesting dynamics there. You know, we're working with them, with their foundry, as they adopt some of the advanced packaging technologies to put GPUs together with HBM on new probe technologies. We're in the qualification stage associated with that, but one of the interesting things we've seen from that customer is some nice contribution in the first half of 2024 associated with their switch business, that's a business that they acquired a while ago, rounds out their data center offerings. And that's been a strong area of growth for us as we go through the first half.

Speaker Change: On the Fabless GPU manufacturer Theres, some interesting dynamics there.

Vedvati Anant Shrotre: Okay, all right. I think that's fair. Thank you.

Speaker Change: We're working.

Speaker Change: With them with their foundry as they adopt some of the advanced packaging technologies to put Gpus together with HBM on new probe technologies, where in a qualification stage associated with that but one of the interesting things we've seen from that customer is nice contribution in the first half.

Speaker Change: 2024 associated with their switch business.

Speaker Change: That's a business that they acquired a while ago.

Speaker Change: Rounds out their data center offerings.

Speaker Change: And thats been a strong area of growth for us as we.

Speaker Change: As we go through the first half year.

Speaker Change: Alright. Thank you. Thank you.

Operator: Thank you. One moment for our next question, and our next question comes from the line of Christian Schwab from Craig Hallam. Your question, please.

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

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

Christian David Schwab: Yeah, Mike, I'm just wondering when you're going to feel comfortable given the next phase of growth and, you know, our previous target of $850 million and $2 in earnings power, which I don't think probably took into account. Considering the significant revenue and high bandwidth memory, when do you think you'll be ready to maybe readdress that with investors?

Christian David Schwab: Yes, Mike I'm just wondering.

Christian David Schwab: When when youre going to feel comfortable given the next phase of growth.

Christian David Schwab: Our previous target of $850 million and $2 in earnings power.

Christian David Schwab: Thank probably took into.

Christian David Schwab: Consideration of significant revenue and high bandwidth memory. When do you think you'll be ready to maybe readdress that with investors.

Michael D. Slessor: Yeah, well, it didn't take into account HBM, but there were also some other puts and takes as there are in any target model. We've had some headwinds associated with China. That's one of the reasons why we divested the business. So there are some things that are positive, and there are some things that are negative.

Speaker Change: Yes, well it didn't take into account HBM, but there were also some other puts and takes as there are in any target model. We've had some headwinds associated with China. That's one of the reasons why we divested the business. So there are some things that are positive. There are some things that are negative and we're still tracking as you can see from the second quarter guide it.

Michael D. Slessor: And we're still tracking, as you can see from the second quarter guide and our comments on the call. We're still committed to the $850 million model. As we did last time around, we want to put the numbers up on the board, at least from a quarterly standpoint. So a quarterly run rate of 212, a gross margin of 47 percent, and EPS of 50 cents in a quarter before we publish a new model.

Christian David Schwab: Our comments on the call, we're still committed to the $850 million model.

Christian David Schwab: As we did last time around we want to put the numbers up on the board at least from a quarterly standpoint, so our quarterly run rate of $2 12, a gross margin of 47% EPS of <unk> 50 in a quarter.

Christian David Schwab: Before we before we publish a new model for now given our limited visibility, we'd certainly hope that happens sometime in the second half year, but we don't have the visibility to commit to that and the discussions around HBM digestion and some of the other pieces.

Michael D. Slessor: Now, given our limited visibility, we'd certainly hope that happens sometime in the second half here, but we don't have the visibility to commit to that. And the discussions around HBM, digestion, and some of the other pieces, you know, yes, I would like to be able to do it in the third quarter or the fourth quarter, but we just don't have the visibility to be able to foreshadow that yet. OK.

Christian David Schwab: Yes, I would like to be able to do it in the third quarter or the fourth quarter, but we just don't have the visibility to be able to foreshadow that yet.

Christian David Schwab: Okay, and then, could the digestion period be maybe a little bit later than... Then you may think given, you know, Samsung just said that high bandwidth memory is going to be up threefold this year and then it's going to double again the following year. And we should have a third customer ramping up with you.

Christian David Schwab: Okay.

Christian David Schwab: And.

Christian David Schwab: Could the digestion period, maybe a little bit later than that.

Christian David Schwab: Than you May think given.

Christian David Schwab: Samsung just said that.

Christian David Schwab: High bandwidth memory is going to be up three fold. This year and then it's going to double again the following year.

Christian David Schwab: And we should have a third customer.

Christian David Schwab: Ramping with you.

Christian David Schwab: Shortly.

Michael D. Slessor: Is that fair? Yeah, there's no question the digestion could be better at a different time. It doesn't need to be in sequential quarters, right? But again, based on the strength and the step-up in the second quarter, we wanna make sure that we're producing the products that have been ordered for us, delivering a quality product on time to these customers, and supporting whatever ramp they're then gonna drive in the second half. But we just don't have the visibility there to be able to make a definitive statement.

Speaker Change: Is that fair yes.

Christian David Schwab: There's no question the digestion could be later at a different time, it doesn't need to be in sequential quarters, but again.

Christian David Schwab: Based on the strength in the step up in the second quarter.

Christian David Schwab: We wanted to make sure that we're producing the products that have been ordered for us delivering a quality product on time to discuss durbin and supporting whatever ramp there then going to drive in the second half, but we just don't have the visibility there to be able to make a definitive statement.

Christian David Schwab: Great, no other questions. Thank you. Thanks, Christian.

Speaker Change: Great no other questions. Thank you.

Operator: Thank you. One moment for our next question, and our next question comes from the line of Krish Sankar from TD Cowan. Your question, please.

Speaker Change: Thanks Christian.

Speaker Change: Yes.

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

Speaker Change: Okay.

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

Krish Sankar: Hi, this is Robert Mertens on behalf of Krish. Thanks for taking my questions.

Speaker Change: Hi, This is Robert Mertens on for Chris Thanks for taking my questions.

Robert Bruce Mertens: The first one, just jumping back to the high bandwidth memory, it was roughly, say, $10 million or so during the December quarter and doubling this quarter, and then it should also be up another $10 million or so. And the June outlook, assuming maybe like a 20% to upwards of like 40% sequential growth for the high bandwidth memory portion. Did I hear you correctly? For the second half of the year, you would expect memory to be up half over half, or was that a comment on the overall business and sort of what are the major potential upsides to the second half of the year?

Robert Bruce Mertens: The first one just jumping back to the high bandwidth memory, it was roughly $10 million or so during the December quarter.

Robert Bruce Mertens: In this quarter.

Robert Bruce Mertens: And then should also be up another $10 million or so.

Robert Bruce Mertens: And the June outlook.

Robert Bruce Mertens: Assuming maybe 20% to upwards of like 40% sequential growth.

Robert Bruce Mertens: For the high bandwidth memory portion.

Speaker Change: Did I hear you correct for the second half of the year that you would expect memory to be up half over half or was that a comment to the overall business and sort of what are the major potential upsides to the second half of the year.

Michael D. Slessor: Yeah, yeah, we certainly didn't make any definitive comments about the second half of the year. You know, my answer to Christian's question a moment ago, given our lead times are well within a quarter, we just don't have the visibility to make a statement about the second quarter. Now, I do think for HBM, there are some interesting dynamics at work, given the strong investment plans that the hyperscalers have that are going to drive data center spending; they're going to drive more HBM shipments.

Speaker Change: Yes, we certainly didnt make any definitive comments about the second half of the year you know my answer to Christian's question, a moment ago.

Speaker Change: Given our lead times are well within a quarter. We just don't have the visibility to make a statement on the second quarter now I do think for HBM Theres. Some interesting dynamics at work given the strong investment plans that the Hyperscale is have that are going to drive data center spending that you're going to drive more HBM shipments and.

Michael D. Slessor: And, you know, as somebody noted on this call, our customers are all communicating strong growth for HBM through the second half of the year. So I think potentially, sure, we can see that, but I just don't have the direct visibility right now, given the short lead times, to really commit to that or make any statements that set expectations for the second half.

Speaker Change: If somebody noted on this call our customers are all conveying strong growth for HBM through the second half of the year. So I think.

Speaker Change: Potentially sure we can see that but I just don't have the direct visibility right now given the shorter lead times to to really commit to that or make any statements that set expectations for the second half.

Robert Bruce Mertens: Got it. That's helpful. And then just quickly, in terms of Intel and their ramping foundry business, I didn't know if you could provide any commentary in terms of if you're starting to see any sort of business there or expectations as their foundry starts to ramp. Would you expect that to be a similar percent market share as your current market share with Intel or how that might shake out? Yeah.

Speaker Change: Got it that's helpful. And then just quickly in terms of.

Speaker Change: Talent, there ramping foundry business I Didnt nephew.

Speaker Change: Could you provide any commentary in terms of if youre, starting to see any sort of business their expectations as they.

Speaker Change: Their foundry starts to ramp would you expect that to be a similar percent market shares in your current market share with with Intel or how that might shake out.

Michael D. Slessor: Yeah, I think with any Foundry customer, there are a couple of different business models. And certainly, when the Foundry has a contract to not just produce the wafers but then test and assemble the wafers, we compete for that business at the Foundry. Now, sometimes the Fabless customer manages their test and assembly and just buys the wafers from the Foundry. But in the scenario, in the first scenario where the foundry is managing not just wafer production but test, wafer sort, assembly, and final test, those are areas where we'd expect to have, if you like, our natural share position, irrespective of the foundry.

Speaker Change: I think with any foundry customer there's a couple of different business models and certainly when the foundry has a contract to not just produce the wafers, but then test and assemble the wafers.

Speaker Change: We compete for that business at the foundries now sometimes the Fabless customer manages their test and assembly in and just buys the wafers from the foundry, but in the scenario in the first scenario, where the foundries managing not just wafer production, but test wafer sort assembly and final test.

Speaker Change: Those are areas, where we would expect to have if you like our natural share position irrespective of the foundry.

Robert Bruce Mertens: Okay, Grata. That's helpful. Thanks.

Speaker Change: Okay got it that's helpful. Thanks, Okay.

Operator: Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. And our next question comes from the line of Tom Diffely from DA Davidson. Your question, please.

Speaker Change: Thanks, Rob.

Speaker Change: Yes.

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.

Speaker Change: And our next question comes from the line of Tom differently from D. A Davidson your question. Please.

Thomas Robert Diffely: Yes, good afternoon. Thank you.

Tom: Yes. Good afternoon. Thank you.

Tom: Maybe a question for Shai.

Thomas Robert Diffely: So, I have a question for Shai on the margin structure on the model. So, when I look at the guidance for the next quarter and compare it to a couple of years ago when we were at the same revenue level, margins are a few hundred basis points lower, and earnings are quite a bit lower. Curious, what is the biggest difference between then and now? Is it just increasing capacity? Is that the mix of what you're selling today? Maybe just a little more color on that if you could.

Tom: On the margin structure on the model so when I look at the guidance for the out quarter and compare it to a couple of years ago. We were at the same revenue level.

Tom: <unk> are a few hundred basis points lower earnings quite a bit lower curious what is the biggest difference between then and now is it just increasing capacity is it the mix of what youre selling today, maybe just a little more color on that if you could.

Shai Shahar: Yeah, Tom, that's a good observation. I mean, if we go back, as far as I can recall, Q1 of 2022 with similar levels of revenue to the midpoint of the range, I think it was $197 million, and gross margin was $49 million. But the mix was very different. Two years ago, the system's revenue was higher, and the gross margin was higher. It was about 50%. Foundry and Logic was more than $110 million. And at the midpoint of the guidance, we are talking about $100 million for Foundry and Logic, and DRAM was about $35 million two years ago. And now we're talking about $55 million. So you can see the difference in the mix.

Speaker Change: Yes, Tom that's a good observation I mean, if you go back as far as I recall Q1 of 2022 with similar levels of revenue to the midpoint of the range I think it was $197 million gross margin was 49%.

Speaker Change: But the mix was very different.

Speaker Change: Three years ago.

Speaker Change: Systems revenue was higher than the gross margin was higher it was about 50%.

Speaker Change: <unk> logic was above $110 million at the midpoint of the guidance, we are talking about the $100 million of foundry and logic.

Speaker Change: And DRAM was about $35 million two years ago and now we're talking about 55. So you can see the difference in the mix higher now we are talking about lower foundry and logic versus three years ago higher DRAM.

Thomas Robert Diffely: Now we are talking about lower Foundry and Logic versus two years ago. Higher DRAM, that negatively impacts the margin. And that's why it's, let's call it, only 45% versus the 49% we saw two years ago. But it's a great step on our way to achieve our 47% gross margin at $850 million of revenue.

Speaker Change: Negatively impacts the margin and Thats why its lets call it only 45% versus the 40 Microcenter yourself two years ago, but it is a great step up.

Speaker Change: On our way to achieve our 47% gross margin at age $50 million of revenue.

Shai Shahar: So maybe this is the follow-on to that then, if you look at your target model, was that based on a mix that was more favorable for you, or is the increase in the amount of memory going to impact your target model? Yeah, Mike talked to

Speaker Change: So maybe just a follow on to that then if you look at your target model was that based on a mix that was more favorable for you or is the increase in the amount of memory going to impact your target model.

Thomas Robert Diffely: Mike talked a little bit about it, that since we published our target model, there have been many puts and takes, some of them positive, some of them negative. We're encouraged to see the Q2 outlook with a significant step up in both revenue and gross margin. It is true that DRAM, having a lower gross margin than Foundry and Logic, that the increase in DRAM put some pressure on our target model. But, as we said, there were a few other positive and negative puts and takes.

Speaker Change: Yes, Mike talked a little bit about that since we published our target model there've been many puts and takes some of them positive some with some of the negatives were and of course to see the Q2 outlook.

Speaker Change: The significant step up in both revenue and gross margin. It is true that the DRAM, having a lower gross margin in foundry and logic, the increasing DRAM put some pressure on our target model.

Speaker Change: But as we said we were there were a few others positive or negative.

Thomas Robert Diffely: We do have a few internal ongoing initiatives to improve gross margin, things like automation, manufacturing efficiency, and the increased focus on quality that we talked about today, which is part of the reasons for consolidating our operations. So, these are all things that will help us to achieve a 47% gross margin.

Speaker Change: Puts and takes we do have few internal ongoing initiatives to improve gross margin.

Speaker Change: Things like automation manufacture efficiency the increased focus on quality as we talked about today.

Speaker Change: Which is part of the reasons for consolidating operations. So these are all <unk>.

Speaker Change: Things that will help us to achieve the 47.

Speaker Change: Gross margin was two communities.

Speaker Change: I appreciate the color.

Shai Shahar: Thank you. This does conclude the question and answer session for today's program. I'd like to hand the program back to Mike Slessor for any further remarks.

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

Michael D. Slessor: Thank you everybody for joining us today. Over the next month and a half, we're gonna be presenting and attending a variety of conferences and would welcome the chance to speak with any of you and provide more color on FormFactor, our current growth, and our future growth prospects. Until then, take care.

Michael D. Slessor: Thanks, everybody for joining us today over the next month month, and a half we're going to be presenting and attending a variety of conferences.

Michael D. Slessor: And would welcome the chance to speak with any of you and provide more color on on form factor, our current growth and our future growth prospects.

Speaker Change: Until then take care.

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

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

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: Yes.