Q3 2024 FormFactor Inc Earnings Call
Thank you and welcome everyone to form Factors 3rd Quarter 2024 earnings conference call.
On today's call, our chief executive officer, Mike Slesor, and chief financial officers, Shai Shahar. Before we begin, stand at the Fuku Stein, the company's VP of Investor Relations will remind you of some important information.
Stan Finkelstein: Thank you. Today the company will be discussing GAPNL results and some important non-GAP results intended to supplement your understanding of the company's financials.
Stan Finkelstein: The Consolations to Gap, to non-Gap measures and other financial information are available in the press release issue today by the company and on the Investory Relations Action of our website.
Stan Finkelstein: Today's discussion contains forward-looking statements within the meaning of the federal security and the media.
Stan Finkelstein: Examples of such horrible-looking statements.
Stan Finkelstein: Includes those with respect to the projections of financial and business performance.
Stan Finkelstein: Future Marker Economic and Geopolitical Conditions, the benefits of acquisitions and investments in capacity and in new technologies.
Stan Finkelstein: The impacts of global regional and national health crisis, including the COVID-19 pandemic, and dissipated industry trends, potential disruptions and also supply chain, the impacts of regulatory changes, including the recent US China Trade restrictions.
Stan Finkelstein: The anticipated demand for products are a bill to develop, produce and sell products and the assumptions upon which society statements are based.
Stan Finkelstein: This statements are subject to known and unknown reference or sentences that could cause actual results to deformaterially from source expressed during this call.
Stan Finkelstein: Information and Risk Factor Syncertonis is contained in our most recent filing on Form 10K with the SEC for the physical year and December story 2023.
Stan Finkelstein: and in our other SEC filings, which are available on the SEC website at www.sc.gov and in our press release issue today.
Speaker Change: Former Putin statements are made us of today October 2024 and will assume no obligation to update them. With that we will now turn the call over to form Factor CEO, Mike Flessor.
Mike Flessor: Thanks everyone for joining us today.
Mike Flessor: Driven by growth in both of our segments, form factors third quarter revenue exceeded the outlook range we provided in July and set an all-time record.
Mike Flessor: In addition, DRAM Probcarg revenue set a third consecutive quarterly record, and non-Gap earnings per share was at the top end of the outlook range.
Mike Flessor: In the current fourth quarter, we continue to experience record demand for DRAM Procards, with contributions from both DDR5 and high-banned with memory for HBM.
Mike Flessor: This, together with moderate expected system segment growth, is helping partially offset a forecasted reduction in foundering logic, probe guard demand.
Shahar Shahar: Shahar Shahar
Shahar Shahar: Entering this year would have been difficult to predict the magnitude of the strength and DRAM, and form factors ability to capitalize on this DRAM strength has been a major highlight throughout 2024.
Shahar Shahar: It results from our leadership position in significant market share in DRAM, which is one of the core tenets of our diversification strategy, providing us broad exposure to industry growth trends like January to the AI.
Shahar Shahar: Formfactor's diversification strategy features a broad lab to fab product portfolio across founder and logic, DRAM and flash probe cards together with our system segment products.
Shahar Shahar: The strategy differentiates us from our direct competitors and makes it possible for us to compete for business across diverse demand pools at all major customers.
Shahar Shahar: which in turn produced relatively stable results during last year's downturn and the overall top-line growth we're delivering this year.
Shahar Shahar: These record levels of DRAM revenue, however, do produce a challenging product mix, and it's this DRAM rich mix that is largely responsible for the 3rd and 4th-quarter gross margins below our target model gross margin, a 47% at $850 million of annual revenue.
Shahar Shahar: As we've demonstrated in the past, a more balanced product mix with stronger foundry and logic probe guard demand produces gross margins approaching and in some cases exceeding the levels of our target model.
Shahar Shahar: We expected to deliver stronger gross margins when growth returns to the consumer-driven high-unit volume in markets that drive-founder and logic-properts spending, like mobile handsets and client PCs.
Shahar Shahar: Turning now to market and segment-level details, as I noted, the third quarter strength in DDR5, which we anticipated produced another record-setting quarter of DRAM ProBguard revenue.
Shahar Shahar: HBM revenue declined from the all-time high levels of the second quarter, as we experience the expected customer digestion following record shipments of probe guards for HBM-3 and HBM-3E production designs in the two previous quarters.
Shahar Shahar: In the current fourth quarter, we expect further growth in DRAM Procuret revenue. We anticipate continued DDR5 strength, along with sequential growth in HBM to roughly half of our DRAM shipments, with several initial HBM-4 designs all across multiple DRAM customers.
Shahar Shahar: The beginning of HBM 4 Activity is significant as it puts us in a strong position as our customer start pilot production of this next major road map innovation in the high performance memory that enables General to VII.
Shahar Shahar: As we've discussed in the past, the advanced packaging processes used to construct HBM chips or powering form factors current results in future opportunity.
Shahar Shahar: Each HBM chip, whether it's HBM's 3, 3e or 4, is a stack of individual DRM die assembled with advanced packaging processes.
Shahar Shahar: The disaggregation of a chip into subcomponent chiplets or tiles increases both test intensity and test complexity compared to an equivalent monolithic chip.
Shahar Shahar: The increased intestine density is driven by the need for our customers to probe and test each component chip that prior to stacking, and then to probe and test the multi-chiplet stack at various points during the assembly process.
Shahar Shahar: The increase in test complexity is driven by HBM performance requirements that are significantly more advanced than for standard unstack DRAM products involving higher test speeds and more challenging thermal scaling specifications.
Shahar Shahar: As the industry moves from HBM-3, THBM-4, both layer counts and performance requirements, such as operating frequencies and power densities are increasing dramatically.
Shahar Shahar: For example, our customers' road maps feature HBM4 products with stacks up to 16 high, double that of HBM3.
Shahar Shahar: The increase in layer count to 16 high stacks increases the number of probe crudge required for good shift out, since each component chip within the stack must be tested and verified prior to stacking.
Shahar Shahar: Similarly, the increase in clock speeds and power densities increases the performance requirements for the probe card, necessitating higher test frequencies and more challenging thermal and power specifications.
Shahar Shahar: As we've seen with HBM-3 and HBM-3E in 2024, our differentiated ability to meet challenging performance requirements, drives both market share and profitability games.
Shahar Shahar: and we expect to benefit from the same dynamics as HBM4 which is volume production next year.
Shahar Shahar: Shifting to the Foundering Logic Probguard Market.
Shahar Shahar: Here is expected the third quarter with similar to the second quarter, where the ramp of new mobile application processor designs, together with client PC and server micro processor designs, produce steady overall revenue.
Shahar Shahar: In the current fourth quarter, we expect a reduction in foundering logic demand from the levels of the second and third quarter, as high unit volume and markets in which form factor has a strong competitive position, like mobile handsets and client PCs, remain weak.
Shahar Shahar: The
It's our strategic priority to expand and diversify foreign factors mark a position in Foundry and Logic.
Shahar Shahar: Both through new customer qualifications in client PC and server applications, and through new products that will improve our competitive position in high performance GPU applications.
This will reduce our dependence on mobile and client PC by growing high performance compute to achieve a more balanced opportunity profile with broader exposure to high-per-scale generative AI investment. Similar to the strategy we're executing in DRAM for creating HBM-led exposure to AI.
Speaker Change: In the system segment, we delivered the expected sequential increase in third-quarter revenue. This customer's continued to engage us to solve the most complex, electoral, optical, test and measurement challenges, in areas like quantum computing and silicon photonics.
Kopakaj optics using silicon photonics is an exciting opportunity for form factor, as we collaborate with leading customers in data center applications that utilize our turnkey measurement systems. Built on our CM300 and Summit 200 engineering probers together with our proprietary pharaohs optical
Speaker Change: We're also extending our unique electro optical portfolio by partnering with other suppliers on the equipment needed for high volume production.
Speaker Change: These partnerships are designed to ensure that his co-package optics matures and moves to high volume production in the coming years. For effect, there's leadership positions in combined electrical and optical tests, we'll provide a new growth vector for both our systems and pro-card businesses.
Shahar Shahar: [inaudible]
Finally, this validation of foreign factors technological and market leadership, I will be delivering one of four invited keynote addresses, along with executive from Synopsis, Meda and AMD, at next week's IEEE International Test Conference.
In the presentation titled,
Shahar Shahar: from the shadows to the spotlight probes role in enabling electronics industry innovation.
I'll explore how wafer test and probing are a key enabler of economically viable semiconductor manufacturing at the leading edge, especially for advanced packaging architectures to rely on 2.5D and 3D stacking of chiplis.
As we've discussed, these themes are moving form factors, markets and business today, and under a lot of time, we'll be back with a new video.
Speaker Change: In closing, we're proud of form factors all-time revenue records set in the third quarter, and excited about the future. As adoption of advanced packaging drives increased demand across form factors entire lab to fab product portfolio.
We continue to focus on investing in differentiated products and capabilities to drive market share and profitability gains and remain confident that when the founder and logic market recovers that will achieve and then surpass our target model that delivers $2 of Don Gaphernings per share on $850 million revenue.
Shahar Shahar: Over to you.
Thank you Michael and good afternoon.
As you saw in our press release and his mic mentioned, Q3 revenues were $207.9 million dollars, $2.9 million above the I-N-D-O-R outlook range.
Shahar Shahar: and then all time company records.
Shahar Shahar: Now, a gap goes margin of 42.2% was 0.8% at points below the midpoint of the range.
Shahar Shahar: These together with operating expenses slightly lowered in the midpoint of the outlook, resulted in non-gap EPS at the top end of the range.
Shahar Shahar: Third quarter revenues increased to 5.3% from the second quarter and increased to 21.2% year earlier.
The upside versus the meat point over outlook range was due to higher revenues in both of probe court segment as well as the system segment.
Probcarts segment revenues were $172.2 million in the third quarter and increase of $5.4 million or 3.2% from the second quarter.
Shahar Shahar: The increase was driven by both higher foundaealogics and DRAM revenue.
Shahar Shahar: The system segment revenues were $35.7 million in Q3, a $5.1 million increase from the second quarter, and comprise 17.2% of total company revenues, up from 15.5% in the second quarter.
Within the Procure segment, Q3 found the allergic revenues were $107 million, as 3.7% increase from the second quarter.
So, on the analogy, revenues decreased to 51.7% of total company revenues, compared to 52.5% in the second quarter.
Shahar Shahar: Dear Ram revenues were record $60.2 million in Q3, $2.1 million or $3.7 per cent higher than the previous quarter, sorry, higher than the previous record cent in the second quarter.
Shahar Shahar: and decreased to 28.9% of total court-revenues as compared to 29.4% in the second quarter.
Within DRAM, HBM revenue declined as expected from the record for this $3 million in Q2 to $29 million in Q3.
Slash Reveny is a 4.5 million dollars in Q3 where down 0.5 million dollars from the second quarter and we're 2.2% of total revenues in Q3 as compared to 2.6% in Q2.
Gapgo smarting for the third quarter was 40.7% as compared to 44% in Q2
Cost of revenues included $3 million of jab to non-gaprican selling items, which we outland in our press release issue today, and the critical situation table available in the investor relations such as our website.
On a non-gab basis, Cosmarging for the third quarter was 42.2%, 3.1% at 0.5%, then the 45.3% non-gab course margin in Q2. In 0.8% at 0.0, the meat point of our outlook range.
The decreases compared to Q2 at higher revenue levels was as Mike indicated, mostly the result of a less favorable support that makes both segments.
As compared to the midpoint of our outlook range, was smart enough to lower mostly due to unexpected quality related costs of system segments.
Shahar Shahar: Our ProBcard segment goes from 5.1% into 2.3% in the third quarter, and the increase of 2.8% at the end of the year is 45.1% into 2.1%.
Shahar Shahar: Our Q3 system segment goes margin was 41.5%. And decrease of 4.7 percentage points compared to 46.2% goes margin in the second quarter.
Our Gap opening expenses were $66.9 million for the third quarter, as compared to $69.4 million in the second quarter.
Shahar Shahar: Now I'm going to be opening expenses for the third quarter or $59.3 million or $28.5% of revenues. Let's compare it with $60.9 million or $30.8% of revenues in Q2.
The $1.5 million decrease relates mainly to lower performance based compensation.
Shahar Shahar: Company non-cash expenses for the third quarter included $8.9 million for stock-based compensation, $1.3 million lower than in Q2 due to grant for features.
0.6 million dollars for the mutization of acquisition related bin changeables, similar to Q2 and depreciation of 7.6 million dollars slightly higher than in the second quarter.
Shahar Shahar: Gap operating income was a $17.9 million for Q3, similar to the Gap operating income of $17.8 million in Q2.
Shahar Shahar: Nangap opening income for the third quarter was 28.3 million dollars, compared with 28.5 million dollars in the second quarter, at decrease of 0.2 million dollars or 0.7%.
The increasing revenue and lower operating expenses were offset by the decrease in goods margins.
Gapnet income for the third quarter was $18.7 million or 24 cents per fully built the chair. Compared with a Gapnet income of $19.4 million, or 25 cents per fully built the chair in the previous quarter.
Shahar Shahar: The Namgap Effective Stocks Rate for the third quarter was 13.4% to percentage points lower than 15.4% in the second quarter.
We continue to expect our annual non-gap effective flux rate to be between 14 and 18 percent.
3rd quarter non-gap net income was $27.2 million, with 35 cents per suly that was a chair, similar to Q2 and at the top end of our outlook range.
As Mike said, we remain committed to achieving our target model, which produces $2 of non-gap earnings per share at $850 million of revenue, with 47% gross margin and 22% operating margin.
While we expect situations quarter or quarter, chiefly due to product mixed changes, achieving the 47% goes from margin to requires a more favorable product mix, mainly a larger contribution from our higher margin the found-way and logic markets.
Moving to the balance sheet in Keshlo, at Quarter-End, Total Cash and Investments with $360 million, and decrease of $5 million in Q2.
Shahar Shahar: We generated 3 cash flows 20 million dollars in the third quarter, compared to 14.2 million dollars in Q2.
The main reason for the increase in free cash flow was higher operating cash flows, primarily driven by greater non-cash of expensive 2.4 million dollars, and lower outflows for working capital of 3.1 million dollars.
Partly of said by higher capital expenditures of 0.5 million dollars.
We invested $8.9 million in capital expenditures during the third quarter, compared to $8.4 million in Q2.
There's no change in our expected capex range for 2024 of 35 to 45 million dollars And with three quarters behind us, we now estimate to be close to the meat point of this range.
Shahar Shahar: At the end of the third quarter, with one term loan remaining, with a balanced totaling $14 million.
Shahar Shahar: We're guarding Stockbyback. During the third quarter, we used $16.9 million dollars to buy back shares under the $75 million two year buyback program that was approved in Q4 2023.
At Quarter End, 36.6 million dollars remain available under data civilization.
As a reminder, the main purpose of the Share Repurchase Program is to offset the illusion from stop risk compensation.
Turning to the fourth quarter Nangap outlook, we expect Q4 revenues of $199 million, plus or minus $5 million. With a slight increase in DRAM and systems revenues, more than offset by a decrease in sonrion logic.
Shahar Shahar: The lower revenues are compared to Q3 are expected to result in a non-gab growth margin of 41% plus to minus 150 basis points.
At the midpoint of these outlook ranges, we expect Q4 operating expenses to decrease to $56 million, plus or minus $2 million, $3 million lower than Q3, mainly due to lower performance-based compensation.
Shahar Shahar: Namgap earnings per fully diluted share for Q4 is expected to be 29 cents, plus or minus 4 cents.
Reconciliation of our gap to non-gap Q4 outlook is available on the Investor Relations section of our website, and in our press release issue today.
With that, let's open the course of questions. Operator?
To ask a question, you will need to press star 1-1 on your telephone.
To remove yourself in the queue, you may press star 1-1 again. Please limit yourself to one question and one follow-up to allow everyone the opportunity to participate.
Please stand by while we compile the Q&A roster.
Speaker Change: Our first question.
comes on the line of Chris Sankar.
Chris Sankar: of TV Co-Ed.
The question please, Chris.
I'm a person of revenues in September.
Chris Sankar: It's well telegraph about your weakness. Some kind of curious, have you started seeing weakness there?
In your December guide, or do you think it's a calendar 25 event and how to reconcile their weakness to what you would expect from them in calendar 25 in terms of revenues?
Speaker Change: Yeah, having calendar 25, remember our lead times are pretty short, well within a quarter, and certainly for the high volume, foundry and logic businesses, well within a quarter. So our visibility doesn't really extend into 25.
and having said that the overall Foundry and Logic Market, we are seeing weakness across.
and I'm a very sasspecks of it as I said.
Chris Sankar: in the Prepared remarks. Client PC, Mobile Handset are all when I compare our fourth quarter outlook to our third quarter.
Chris Sankar: Actual Results, we're seeing...
Shahar Shahar: You know, softness in those two end markets. That's what are the reasons why it's so important for us to qualify in some of these other AI driven applications like GPUs.
Shahar Shahar: to make sure that we're diversifying our Foundry and Logic business, which is our largest business, and I expect it to grow significantly. We're going to make sure we got the right market footprint there. But right now, Foundry and Logic out look for 25.
Don't have significant visibility there, but in the fourth quarter seeing pockets of sequential reduction in both mobile and PC.
God, God, that's very helpful. And then I just ordered a touch-based on the HBM site.
Shahar Shahar: Looks like HVM is probably going to grow again after one quarter of digestion in September.
A is the true and B.
What caused the digestion and obviously there is a lot of optimism on HBM revenue growth for the industry in the next year.
Shahar Shahar: is a very important part of the story.
and what cost it in September and what is it like who it will not happen again next year.
Shahar Shahar: So if we track HBM through the quarters of 2024
Second Quarter very strong results. We did convey to you that we expected a little digestion in the third quarter. That happened. That can often be the case. Remember our HBM revenue and overall market share really concentrated with the leading provider of HBM to the industry.
Shahar Shahar: is we move into the fourth quarter. Excuse me. The growth is driven by a couple of components. The sequential growth off of Q3. And yes, there is sequential growth expected in HVM off of Q3.
Shahar Shahar: Thanks for watching!
Speaker Change: Thank you. And a question that comes from the line of Charles, She, a Neatman Company. Your question, please, Charles.
and Michael, I want to ask a little bit higher level of question about HBM because a few days ago,
is mentioned about the text or a term, is flat or down next year.
Shahar Shahar: But since you're not...
Shahar Shahar: You're products are complementary testaries.
But it's not the same capital goods as the testers. How do we reconcile, let's say a tester can go to flat to down next year and how do we think what, why would we think, maybe pro-corcorcorcorcor still grow next year?
Maybe related to this, I think this is a, you said some time, talk about the technical details about HVM-33E and the Ford Attransition, how that does to probe card.
Can you kind of help us understand whether HVM transition to HVM 4 does that help with the overall a pub car MKM growth because it looks like it may not really help testers because testers are quite agnostic.
Hopefully you can have at least point, Sessor.
Yep, so you alluded to it in the way you asked the question, Charles. Remember, probe cards are a consumable.
That's specific to each customer chip design, or each customer master set. So if we take the HVM example,
Shahar Shahar: As a customer moves.
Shahar Shahar: Not just from HVM3 to 3E to 4, that certainly drives demand for new probe guards.
But even inside those generations of HBM, there are multiple flavors of HBM. And so, you can think about...
Shahar Shahar: 3-4 major HBM 3 designs all requiring different probe cards. Now all of those chips are going to end up being tested by the same tester. The purpose of a probe card is to customize the tester so it can test these different chips.
and so that's how you reconcile the different growth cycles between probe cards and ATE or testers.
We've seen this before in the past, right? In Foundry and Logic, there's been large stugs of tester investment that then cool off and we see some strong pro-card activity as customers release new chip designs to be able to utilize those testers.
So, often through history in both foundering logic and memory, we've seen that decouple.
Shahar Shahar: As to the transition from HBM3 to 3 to 4, we do this view this is being helpful to form factor, not just because of an increase in the available market. Remember.
Almost certainly when we go from HBM3 to 4, the number of die increases in the stack. I mentioned in the prepared remarks going from 8 to 16. That's all other things being equal. We'll be going to require more probe cards.
But I think the other thing that's interesting is that's what we generally refer to as test intensity.
I think the other thing is when you look at customer road maps as they go from three to four, there are some significant increases in things like...
Shahar Shahar: Speed and Powered Insity.
which drive a more capable probe guard which typically were able to get a higher value a higher ASP for.
So I hope that addresses the two elements of the question, but remember, probe cards are at device specific consumable, different by cycles than capital equipment like AT.
and I would like to ask you another question. A little bit of clarification. I look at your graphic hope break down for the quarter.
looks like the revenue from.
Speaker Change: China, Tiktok, a little in Q3, money should provide some insights into what's behind that number because we do understand that your China revenue can split between multinational and the domestic China, what will you see there at this?
Yes, so it's an interesting question. Obviously China is on lots of people in the industry's minds right now.
Speaker Change: We've been pretty clear that we think that our domestic China revenue, which still represents a significant fraction, is going to go to zero over time, sometime frame, because of the geopolitical issues, because of our presence as a U.S. supplier governed by export controls from the Department of Commerce.
Speaker Change: and the United States. Having said that, we did see a tick-up in domestic China revenue, as you noted.
in the third quarter.
Speaker Change: It's in DRAM, and I think I'd characterize it, probably, is almost the last time by with one of our leading DRAM customers in China.
Speaker Change: We don't view it as sustainable largely because of the geopolitical environment.
Speaker Change: to remind you that's one of the reasons why we divested our China operations earlier this year. We're still able to do business there, but doing it through the company that bought our China operations as a distributor. So I'd classify as being opportunistic.
Here we had an opportunity in the third quarter to go win some business but I wouldn't model that through 2025.
Thanks for watching my episode of Color.
Speaker Change: Thank you. Our next question comes from the line of Craig Ellis of Beiriley's Securities.
Speaker Change: Please go ahead, Craig.
Thanks for taking the question and guys congratulations on some of the records at MacCorder.
Mike, I wanted to start just by following up.
The points that I thought you made well in responding to Charles is question around.
really intensity and complexity that are going up and just see if I could get you to reflect a little bit and comment on calendar 25 for high band with memory. And the question is really this, does you look at the drivers that are feeling high band with memory strength?
The increased number of chips that are required for every GPU that chipminess we go to more stacks and higher stacks. Are you seeing any signs that customers are able to get?
Speaker Change: Yield Dynamics to a level where probe card intensity would decrease. Are we just running too fast from 3 to E to 4, etc to get that kind of yield improvement?
It's a great question Craig, because obviously one of the things that's driving the very high test intensity.
with HVM is fairly low yields.
The Chippla Di themselves are pretty standard DRM di. So they're not the yield issue. It's the complexity of the advanced packaging and assembly and stacking of those di that's causing the issues. And no question that's driving up test intensity.
I think to your point, the industry is moving so quickly to both move from 3 to 3 to 4, but also to build capacity.
Speaker Change: That I don't think there's going to be a really significant yield improvement trajectory.
Yes, it'll get better, but when you look at the complexity, especially as you increase the number of die in the stack, it's simple arithmetic, right? 16 die is going to have lower yield than 8 die, even if you've got something close to known good die going into that stack.
So I think yields will improve for sure, but I think the overpowering increase overdriving increase in test intensity really is associated with the dynamic of the industry moving so quickly to try and build.
So capability through the three to three to four transition transitions, but also building capacity as fast as it can to support the GPU demand which of course is all being pulled through by hyperscaler investments in generative AI.
Yeah, that's helpful. The top mouth of many chips and many tech transition. That's happening. Moving on and then touching on the found logic items.
In a few of the recent calls you've noted that
There was a particular customer strength from the US-based customer new caution.
that there might be some digestion or breather coming and it sounds like some of that may actually be a play in the fourth quarter or a sad impact in the case and have your views changed there and if so, what's caused that view to change. Thank you.
If I look more broadly any given customer is going to have quarter to quarter ups and downs.
Investing in ramping in individual designs or sets of designs, you know, we saw this in Q3 with HBM with our major customer there. So you're going to have quarter to quarter fluctuations with any customer.
That's one of the reasons why we're so committed to this diversification strategy and doing things like making sure.
for qualified at all leading customers. In this case, the qualification of the large fabulous CPU and GPU customer remains a very high priority for us.
So, regardless of customer, I would expect to have quarter to quarter fluctuations is really the nature of the business.
And if I could sneak him on last one, he did mention the opportunity with GPUs. Can you talk about new customer penetration opportunities and progress made in the third quarter and potential for things to close as you get into 2020.
Yeah, so a couple of key customer qualifications that we've kept you at least at a high level update on. One is making sure we're qualified at the large, uh, Fabulous.
Speaker Change: CPU GPU manufacturer.
We've continued to make good progress there, have worked with that customer to focus our qualification on an area where we're showing.
Speaker Change: a differentiated capability, a smaller piece of the business, you know, a specific application, but gets us the toe hold in and we do expect to be qualified there here in the fourth quarter.
For the major GPU manufacturer, who's already a pretty significant customer for us, based on the networking business and the Silicon Photonics partnership with COPAC
Speaker Change: The focus there is really on getting qualified and tentatating their advanced packaging business as they start to package GPUs together with HBM on the co-oss advanced packaging technology.
And that's something we continue to execute on largely through the world-flaher just foundry because they're doing all of the packaging and tests, but it's something we'll continue to keep you updated on as we continue to make progress.
Speaker Change: The National Security Service.
Thank you, Mike.
Speaker Change: Thanks for watching.
Thank you. Our next question comes from the line of David Dooley of Steelhead Securities. Please go ahead, David.
Thank you for taking my questions. I had a couple questions. You've answered part of them, but as far as...
Your Pause in the third quarter, do you think that had something to do with your largest customer migrating from three to three E and then to four or eight from eight to two, from eight stacks to 12 stacks or eight?
You know, just kind of curious if that had something to do with what's your pause.
Well, remember, I think you're talking about HBM specifically, but I want to remind people, for form factor overall, there was no pause in the third quarter. We said, in all time, company revenue record. So we do want to keep that in context.
There was a reduction in HBM revenue that we expected, again through digestion. And as I answered Craig's question, this happens all the time, right? Customers will take large shipments for the designs we're going to ramp and then have these periods of digestion.
So I don't know these can tie it to any particular transition.
But it's again one of the reasons why...
Distiverse Focations Strategy that we've run for a decade plus is so important. If you look at any customer's revenue, it's going to be lumpy quarter to quarter as they take shipments and then use those shipments to produce way for outs on the given design.
You know, those happen for a quarter or two quarters and then that customer resumes their buying as they transition to the next design.
Speaker Change: So when you look at our revenue, there's a whole bunch of lumpiness with each customer. You can chalk it up to some of the node transitions to some of the positives, some of the changes, but that's why we're committed to this broad-based diversification strategy across all the leading customers and all the important markets in the end.
and Display.
Okay, and then, you know, clearly your largest customer on their conference calls, talking up, you know.
Significant DRAM Bit Growth, particularly in HPM. You have the moving from, you know, eight high stacks, 12 high stacks, perhaps 16 high stacks. You'll be definitely going down with that. You have the black well transition with a number of dying going up for GPUs, significant.
You know, can you, with all of these things, wouldn't you think your HBM revenue next year would grow significantly because it's not just unit volume driven, it's a bunch of different design.
Speaker Change: also.
Speaker Change: and Fontagovic.
So there's a good observation. One of the things in laying out those points, there's a lot of moving parts as well. You'll design changes, way for us, and obviously, you know, does the HBM, or at what level does the HBM output get driven by continued hyperscaler AI spending? Because that's the direct driver of it.
I think with all those factors our baseline assumption is that our HBM business is going to grow.
Partially because, you know, if you think about how our customers are approaching the market, they're essentially saying they're all sold out through 2025, and they're adding capacity to a pretty good clip, and doing things like move from 3 to 3e to 4, which are all different sets of probe guards.
So I think it's a reasonable assumption that, you know, if yields don't dramatically improve, as long as we're driven by those market dynamics, it's a reasonable assumption that our HBM business can grow.
Speaker Change: Thank you.
Thank you.
Next question comes from the line of Dennis Piyatinah of Steve O'L.
Your question please, Dennis.
Dennis: Thank you, this is Dennis On for Brian Chin, given that you've alluded to the HBM spending reduction at the leading megap being over.
Dennis: Directing the Hell Concentment.
Would you be the HVM Revenue is higher than 2025 vs 2024? And on a related note, over what timeframe could we see the other two HVM customers add a more significant revenue to your top line?
So I think I answered the first part of that question for David. You know, it depends on a lot of the underlying assumptions, but as long as...
Hi, Priskeller, AI, spending continues that drives GPU growth that drives continued to touch and growth of HBM.
So I think there's a reasonable chain there. And of course, if you think about the underlying transitions next year and going to HBM3 and then HBM4, which all require different probe guards, I think there's a reasonable case to be made for growth there.
You know, if you think about the customer base and we pointed this out in the prepared remarks and I think in one of the answers to the questions, we are seeing the customer base broad in a little bit.
Dennis: Now if you look at HBM Market Chair, not pro-Cart Market Chair, but who's producing the HBM Dits in the industry, it is very heavily indexed to a single one of our customers. So I think it's appropriate that our revenue also be indexed to that customer.
In the fourth quarter, because we're seeing, well, not because the fourth quarter, some of the growth sequence of growth in HBM we're seeing is driven by a second DRAM customer coming online and becoming a more significant part of the revenue. But I would expect...
As long as those market share dynamics for our customers supplying HBM continue, we're going to continue to see some pretty heavy customer concentration in it.
I think the only other point I'll make is, you know, you talked about the difference spending is being over.
Dennis: I'll again remind people that any one customer moves up and down quarter to quarter. And so I would expect quarterly fluctuations in digestion. Again, at the risk of being repetitive, that's why it's so important for us to broaden our customer and application base as part of executing our diversification strategy.
That's a really great detail. Thank you. And for my follow up, can you provide some additional color related to your GM guide for Q4 being a little bit lower versus Q3, you know, the mix, what segment markets are doing, etc.
Yala Shahar.
Yes, I'll take that. So if you look at a revenue outlook, the midpoint of the outlook for Q4 is one idea which is below the record of 208, we did in Q3.
And this is the main contributor to the decrease in growth margin. We see Q3 to Q4. It's a 1.3 percentage point slower at the midpoint of the outlook.
It's really about volume, if we look at the mix
There is no major difference on the impact of the mix, on the graph margin. Although we see a found logic down and we expect theorem to go up a little bit, but we don't see it and major impacts on the mix.
and the first part of it. It's really not a doggy.
I appreciate it that's it from me. Thank you.
Dennis: Thank you.
Speaker Change: Next question comes from the line of Christian Shuaab of Craig Halom. Please go ahead, Christian.
Thanks. I know you mentioned high band with memory 4, but...
Hi, Ben with three-E, should still be about 80% of the bits shipped next year, right?
So three is definitely going to dominate the bitch ship again.
in 25 next year. But remember, you know, we're going to lead the bitch ship because our business, you know, the pro-cards have to be in place. The testers have to be in place.
For those ships to then be produced ramp and be shipped. So we're going to lead output and the transitions are happening so fast from 3 to 3 to 4.
that late 25 into 26, we'd expect HBM4 to start to take over and that's why we're seeing the activity now so that everything's ready on, which a pretty complex process.
Speaker Change: Great, I can thank you because it's known.
My work says about 80% of the BIPs will be 3ES when it could firm that.
Will we ship to all three high bandwidth memory guys in 25?
Well, we have shipped and I said this in the prepared remarks.
We are shipping HBM cards to all three major DRAM manufacturers.
Speaker Change: Now, it's again heavily indexed towards one because one customer is producing the lion's share of the HBM bits in the industry. But I think a bright spot in Q4 is we are starting to see a significant contribution in our revenue from a second DRAM customer for HBM.
Speaker Change: and the other one.
Okay. And then my last question was blackwell meeting pro cards and the other ones, nod.
You know, could that customer whether it be a location Taiwan, however you're going to label that customer?
Is that somebody you would anticipate, you know, becoming a 10% plus customer sometime in 25?
It's sort of an interesting case because it depends how it works, right? Fabulous customers have different procurement models.
Speaker Change: for ProBcards. Sometimes they outsource it to particularly the foundry, and so the foundry is actually the customer that will report in our revenue.
Speaker Change: Sometimes it's the fabulous customer themselves.
That one, I suspect is going to be, is going to be revenue attributed to the foundry given their ownership of the overall assembly, the co-oss assembly and test process.
And you know, they haven't been a 10% customer for a while. They've been awfully close, sort of high single digits. I would expect some of these new advanced packaging opportunities.
Speaker Change: Light Coloss, to drive them up into double digits and have them become a 10% customer at least some time in 2025.
Great. All right. No other questions. Thanks. Thanks Chris.
Thank you. Our next question comes from the line of Tom Diffley of DA Davidson. Please go ahead Tom.
Good afternoon. Thank you for the question. We just have follow up another high bandwidth memory question on the backup Christian's question.
Given your unique capabilities across doing different types of...
Forms and Formeth, would you expect this share to be fairly strong at all three makers of HBM over time or there's certain factors that go into perhaps not making that so.
Well, I think a couple of things, right? Customers can always make choices on where they put their test dollars, right?
and there's times we've seen this in Standard D-RAM where some customers have chosen to emphasize other areas of performance, maybe where we're not as strong and that's caused share to go to our competitor.
I think for HBM we're pretty focused on some of the core enabling technologies. Things like high speed, you know, this is an area that over the years we've invested in, part of that was the acquisition of Cascade Microtek in 2016 to get a Samar F. know how, and although that was really focused on the RF business, some of that know how has come over to our DRAM roadmap as well, and is driving some of the competitive advantage for high frequency tests in enabling HBM.
I think...
Speaker Change: Realistically, our share with our current leading customer is pretty strong. And I would not expect to be able to drive.
Speaker Change: That degree of share concentration.
But I would expect, you know, you got two suppliers worldwide who can do this, both of us understand, were capable.
and are going to behave rationally as we serve the overall growth of the DRAM market driven by HBM. But I'm not sure I'd expect the degree of share at the other two that we have at the leading HBM customer right now.
Speaker Change: Okay, now that's fair. So, Michael curious, what do you see in the kind of traditional DRAM market today? You see signs of recovery there?
Speaker Change: I don't know what I say. Recovery, we are surprised at the strength indeed, our five, right?
If you look at Q3 for example, we had HBM step down.
But sequentially, but we still set a DRAM record above 60 million in quarterly revenue.
Speaker Change: and we expect DDR5 to be a significant part of the growth off of that record.
Hearing Q4. So, you know, whether you attribute that to a cyclical recovery in DRM, whether it's, you know, customers just managing their mix, I don't know, but the strength in DDR5.
Given and market DRAM things like spot pricing and inventory is a little bit surprising.
Speaker Change: You talked about the system's business, having some cost issues, if you could maybe just elaborate on that and have a great.
Speaker Change: Please.
Speaker Change: Sure, yes, so...
I talked about unexpected quality related costs in Q3. These are things like warranty and inventory scrap inventory, right off. So that was the main reason for the additional expenses we saw in Q3. But there's no change in our...
Our goal and target for the systems business to achieve high 40s, low 50s, growth margin for that segment.
Okay, maybe just to clarify that was just a one-quarter issue, or do you see it dragging up for a few more quarters?
Speaker Change: This specific issues are things we identified and are limited to that quarter.
But we need to remember that there could be some mixed shifts within the system segment as well. And we did sell the FRT business that was a higher margin within the system business. But there's no structural change there. And then we think we're going to get back to the high 40s of systems.
Speaker Change: Okay, great, thank you both for your time today. Thanks, John.
Thank you.
On Exquestion comes from the line of Gus Richard of Northland Capital Markets. Please go ahead, Gus.
Yes, thanks for letting me ask the question.
Looking at the ghost marching in the quarters down 180 bits, the quenchil, the logic versus DRM mixes about the same as was slashed.
and what change was HVM versus DVR.
5, and I'm just wondering, can you talk a little bit about the decline in gross margin? Is that just purely a function of mixed change in DRAM? Is there a premium for pro cards for HBM?
Speaker Change: Indeed, it was from the change of mix.
and hire volume that's obvious that it's because of mix. And the HBM Probcard is a differentiated product. We invested a lot in our Indian 80s. It's differentiated and that's why we've seen that band of DRAMs who are smart in HBMs on the IND or that frame.
Speaker Change: and Jas.
Okay, all right, that makes sense. And then just any predictions on when you expect.
Speaker Change: Co-package optics to sort of hit volume production or get out more out into the field.
Yeah, I don't think our timing view has changed on that much, right? It's probably late next year early into 2026, but
Speaker Change: Given all of the work that has to be done between now and then to make this production, there's a lot of activity right now, and that's one of the reasons why...
We keep updating people on our progress. We have more than 100 systems in labs and pilot lines around the world, but those are really low-volume applications.
Where our focus is now partnering with both leading customers in the industry and other equipment suppliers who have pieces of the high volume ready.
Things like testers and handlers and probers.
We're continuing, that's a huge focus for our systems business right now. And we've got plenty to do because it's very complex and combines both electrical tests and optical tests. You know, it's going to take us until the end of 25 and into 26 to really together make this production worthy.
Speaker Change: David, thanks so much.
Thank you. Once again to ask a question, please press star 11 on your telephone. Again, press star 11 on your telephone to ask a question.
And as there appear to be no further questions in queue, I would now like to turn the conference back to Mike Slessor for closing remarks. Sir?
Great, thanks everybody for joining us today. You know, obviously an interesting time in the industry is we continue to execute on the great position we're in with HBM.
Speaker Change: You know, looking forward to seeing you at some of the end of the year conferences if you're able to attend, and if not as we move into 2020 but stay safe and healthy and talk to you soon. Bye bye. This concludes today's conference call. Thank you for participating. You may now disconnect.