Q1 2025 FormFactor Inc Earnings Call
Thank you and welcome everyone to form factors first quarter 2025 earnings conference call on today's call are Chief Executive Officer, Mike Slusher, and Chief Financial Officer, Shai Shahar before we begin Stan Finkelstein the company's VP of Investor Relations will remind you of some important information.
Yeah.
Thank you today the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials.
Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company.
What I'm, saying about stimulation section of our website.
Today's discussion contains forward looking statements.
And many of the federal Securities laws.
Examples of such forward looking statements include those with respect to the projections of financial and business performance future.
Future macroeconomic and geopolitical conditions, the benefits up acquisitions and investments.
Dissipated industry trends potential disruptions in our supply chain.
Impact of regulatory changes, including tariffs and changes in export controls.
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 for the FCC for the fiscal year ended December 28, 2024, and in our other SEC filings, which are available on the Sec's website at Www Dot Dot golf.
Our press release issued today forward looking statements are made as of today April.
125 antibody assume no obligation to update them with that we'll now turn the call over to form factor C O Mike suffered.
Mike suffered: Thank you everyone for joining us.
Mike suffered: As expected foreign factors reported sequentially lower first quarter revenue and profitability due to anticipated reductions in demand for both DRAM probe cards and systems.
Mike suffered: In the current second quarter, we expect to deliver double digit sequential revenue growth with increases across all our major served markets and segments and corresponding increases in gross margin and earnings per share.
Mike suffered: As anticipated second quarter revenue growth is driven primarily by Hyperscale or continued investments in general with AI, which is producing increased demand for high bandwidth memory DRAM probe cards and co package optics test systems paired with moderate growth in foundry and logic probe cards for new chip design.
Mike suffered: An important high unit volume end markets, specifically Pcs and mobile handsets.
Mike suffered: We see no indication that these second quarter demand increases are driven by tariff related acceleration of orders.
Mike suffered: Anything our sequential growth outlook is tempered by the uncertainty created by the current tariff situation and Shai will provide estimates of both revenue and gross margin reductions from a specific tariffs.
As a reminder, we manufacture approximately 80% of our revenue in the United States and therefore face of direct cost impact from tariffs on goods, we import for non U S suppliers.
Mike suffered: In addition, when we ship our products to countries such as China that have tariffs applied to goods that originated in the U S. Our U S manufactured products now there are higher cost for our customers.
Mike suffered: This is causing some customers to work with us to reevaluate their supply chains and cross border logistics processes.
Mike suffered: Yeah.
Mike suffered: We're taking a wait and see approach as we evaluate various tariff scenarios before committing to any significant changes to our manufacturing footprint and supply chain.
The notable exception is China, where recent tariff increases on top of escalating U S. Export controls have driven a continued reduction in our revenue from that region.
Mike suffered: This further validates our proactive decision in 2023 to divest our China operations and to focus on other opportunities in regions.
Mike suffered: Now, let's turn to market and segment level details.
Mike suffered: In DRAM probe cards, we experienced the expected first quarter reduction in revenue from the record level of the fourth quarter. This was due primarily to lower non HBM demand caused by further tightening of export controls, which limited our ability to ship probe cards for advanced node DRAM designs to China.
Mike suffered: In the current second quarter, we expect DRAM probe card revenue to return to record levels with sequential growth in HBM applications layered on top of steady demand in DDR, five and LP DDR five applications.
Mike suffered: This strengthened our H B M probe card demand is driven by three factors. One continued shipments of probe cards for existing H B M. Three designs running in high volume.
Mike suffered: Two increasing shipments for new H B M four designs, which as <unk> heard recently from our customers are being sampled and are expected to begin ramping in volume in the second half of 2025 and.
Mike suffered: And three a growing contribution from our second HBM probe card customer as we further diversify and grow our leadership position in HBM applications.
Mike suffered: H B M still comprises a small but growing portion of the total DRAM bits produced by our customers.
Mike suffered: However, because of their stack die architecture, with 812, or even 16 individual DRAM die.
Mike suffered: B M represents a much larger portion of the total silicon area and wafers produced.
Mike suffered: Further because H B M has increased test intensity, which expands the number of probe cards required for good die out and higher test complexity, which raises the performance requirements of each probe card H B M represents a significant part of overall test and probe card spending by DRAM customers.
Mike suffered: A recent third party estimate placed HBM probe card intensity at almost 1%.
Mike suffered: That is customers are spending nearly 1% of their H b M revenues on probe cards, a probe card intensity double that of the broader semiconductor industry.
Mike suffered: We believe these increases in test intensity and test complexity will continue to produce both market share and profitability gains for form factor as H B M. In advanced packaging continue to grow driven by the accelerating adoption of generative AI.
Mike suffered: Yeah.
Mike suffered: Shifting to the foundry and logic probe card market.
Mike suffered: With our outlook first quarter demand in this market was essentially comparable to the fourth quarter in the current second quarter, we're forecasting stronger foundry and logic demand driven by typical seasonal ramps of major mobile application processor designs and our family of client microprocessor designs.
Mike suffered: As with H B M. In DRAM advanced packaging continues to drive both higher test intensity and test complexity in the foundry and logic market with a variety of new and challenging technical requirements for testing high performance compute chips.
Mike suffered: Along with form factors proprietary Mems probes and high throughput automated assembly robots are key enabling component for advanced foundry and logic probe cards is complex multilayer organic substrates.
Mike suffered: In the first quarter together with Mek partners, we completed the acquisition of <unk> limited the worlds leading supplier of these multilayer organic substrates.
Mike suffered: This acquisition solidifies form factors access to this important enabling technology and does so in a more capital efficient lower risk and faster way than either an outright acquisition or internal development have some of our competitors have chosen to pursue.
Returning to tariffs for a moment as I mentioned earlier, we have no specific indications that this sequentially stronger foundry and logic outlook is due to tariff related pull ins and in fact since probe cards have short lead times and are a device specific consumable specific to each individual customer chip does.
Mike suffered: It's unlikely that customers would run the risk of having excess probe card inventory across numerous chip designs only to mitigate potential future tariffs.
Mike suffered: Turning to our system segment, the reduced first quarter revenue was consistent with our outlook and we now expect moderate sequential growth in the current quarter.
Mike suffered: System growth is driven by our customers' rapid innovation in areas like quantum computing and high performance compute with development programs that require leading edge measurement systems like our C. M 300 lab, Kroeber's and IQ3000 cryogenic brokers.
Mike suffered: Co package optics, where C. P O using silicon Photonics is one of the key drivers of the expected second quarter and longer term growth in the systems business.
Mike suffered: Several of our customers have recently announced the insertion of CPO into their product roadmaps to take advantage of its compelling power and speed advantages in data center applications.
Mike suffered: Our multi year collaboration with these customers has produced form factor systems software and optical probes that rapidly and accurately test the photonic IC or pic chips that are the heart of the co package optics engine.
Mike suffered: This in turn has strengthened our leadership position in the Silicon Photonics lab space, where we have an installed base of over 100 systems worldwide.
Mike suffered: Okay.
Mike suffered: We're now extending that leadership to the production arena and in the second quarter planned to ship multiple systems to a single customer to support pilot production of the world's first high volume co package optics photonic integrated circuit.
Mike suffered: Although market estimates vary widely at this early stage of production in adoption, we expect <unk> to be a significant mid term growth driver for form factor systems and probe card businesses.
Mike suffered: In closing, we continue to strengthen form factors industry and competitive position, both through development of innovative and differentiated products and through partnerships with leaders like F. ICT, even as we deal with tariff headwinds.
Mike suffered: These internal and external initiatives are especially important and exciting as we meet the challenges of increased test intensity at higher test complexity associated with the adoption of advanced packaging in applications like high bandwidth memory and co package optics.
Mike suffered: Successful execution of these and other initiatives will allow us to achieve and then surpass our target model that delivers $2 of non-GAAP earnings per share on $850 million of revenue.
Shai: Shai over to you.
Shai: Thank you, Mike and good afternoon.
Shai: As you saw in our press release Q1 revenues were 171 4 million one $4 million above the midpoint of our outlook range and non-GAAP gross margin of 39, 2% was near the high end of the range.
Shai: Together with Opex slightly lower than the midpoint of the outlook resulted in non-GAAP EPS of <unk> 23 cents at the high end of the outlook range.
First quarter revenues decreased nine 6% from the fourth quarter and increased one 6% year over year from our Q1 'twenty for revenues.
Shai: Probe card segment revenues were $136 $5 million in the first quarter, a decrease of $13 8 million or nine 2% from the fourth quarter.
Shai: The decrease was driven by lower DRAM and flash revenues, partially offset by higher foundry and logic revenues.
Shai: System segment revenues were $34 $8 million in Q1, and $4 $4 million decrease from the fourth quarter and comprised 23% of total company revenues down from 27% in the fourth quarter.
Shai: Within the probe card segment, Q1 foundry and logic revenues were $85 million at $2 million or two 4% increase from the fourth quarter.
Shai: Foundry and logic revenues increased to 49, 8% of total company revenues compared to 44% in the fourth quarter.
Shai: DRAM revenues were $48 $9 million in Q1, $14.4 million or 22, 8% lower than the record fourth quarter and decreased to 28, 5% of total quarterly revenues as compared to 33, 4% in the fourth quarter.
Shai: Within DRAM H B M revenues decreased $3 million from $32 million in Q4 to $29 million in the first quarter.
Shai: Less revenues of $2 $4 million in Q1 were down $1.3 million from the fourth quarter and were one 4% of total revenues in Q1 as compared to one 9% in Q4.
Shai: GAAP gross margin for the first quarter was 37, 7% as compared to 38, 8% in Q4.
Shai: 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 on the Investor Relations section of our website.
Shai: On a non-GAAP basis gross margin for the first quarter was 39, 2% one percentage points lower than the 42% non-GAAP gross margin in Q4, and one two percentage points above the midpoint of our outlook range.
Shai: The decrease as compared to Q4 is driven by lower non-GAAP gross margins in the probe card segment.
Shai: The increases compared to the midpoint of our outlook range is attributable mostly to a more favorable product mix.
Shai: Our probe card segment gross margin was 37, 8% in the first quarter a decrease of two two percentage points compared to 40% in Q4.
Shai: The decrease from Q4 was mainly a result of decrease in revenue.
Shai: Our Q1 systems segment gross margin was 44, 5% an increase of three seven percentage points compared to 48% gross margin in the fourth quarter.
Shai: The increase from Q4, despite the decrease in revenue was mainly a result of a more favorable product mix and lower manufacturing expense.
Shai: Our GAAP operating expenses were 61 point here.
Shai: The first quarter as compared to $66 million in the fourth quarter.
Shai: non-GAAP operating expenses for the first quarter with $50 2 million or 29, 3% of revenues as compared with $55 2 million or 29, 1% of revenues in Q4.
Shai: The $5 million decrease relates mainly to lower performance based compensation and facility expenses.
Shai: We offset by higher costs from annual benefits at the beginning of the year.
Shai: Company noncash expenses for the first quarter included $9 8 million for <unk> compensation.
Shai: Zero point $7 million for the amortization of acquisition related intangibles and depreciation of $8 $2 million all similar to the fourth quarter.
Shai: GAAP operating income was $3 $3 million for Q1 as compared to the GAAP operating income of $7 $9 million in Q4.
Shai: non-GAAP operating income for the first quarter was $16 $9 million compared with 220.
Shai: $29 million in the fourth quarter, a decrease of $4 million or 19, 2%.
Shai: This reduction in operating income is due to lower revenues combined with lower gross margins, partially offset by the decrease in operating expenses.
Shai: GAAP net income for the first quarter was $6 4 million or eight per fully diluted share compared with a GAAP net income of $9 7 million or 12 cents per fully diluted share in the previous quarter.
Shai: The non-GAAP effective tax rate for the first quarter was 14, 7% similar to the fourth quarter and at the low end of the previously communicated range for the year of 14% to 18%.
Shai: First quarter non-GAAP net income was $18 million or 23 per fully diluted share down from $21 3 million or 27 cents per fully diluted share in Q4.
Shai: Moving to the balance sheet and cash flow with.
Shai: We generated free cash flow of $6 $3 million in the first quarter compared to $28 $8 million in Q4.
Shai: The main reasons for the decrease were operating cash flows that were $12 $4 million lower than in Q4, primarily driven by lower profitability in the greater outflows from working capital of $8 2 million.
Shai: And Capex was $10 $9 million higher than in Q4.
Shai: We invested $18 $6 million in capital expenditures during the first quarter compared to $7 $7 million in Q4.
Shai: We continue to expect Capex of $35 million to $45 million in 2025, and as Mike mentioned, we are evaluating our capital investment plans in light of the evolving geopolitical and tariff environment.
Shai: At quarter end cash and investments were $302 million.
Shai: A decrease of $64 million from Q4.
Shai: The main reasons for the decrease were the $67 million paid for the investment in <unk>.
Shai: Partially offset by free cash flows of $6 $3 million and cash received from the issuance of common stock in the amount of $21 $6 million, including the $15 million received from issuance of 335000 shares to advantest.
At the end of the first quarter, we had one term loan with a balance totaling $13 million.
Shai: Regarding stock buybacks during the first quarter, we used $22.1 million to repurchase shares utilizing the remaining funds under the existing buyback program.
Shai: We fully utilized this two year plan approximately seven months ahead of its exploration date.
Shai: Our board of Directors has approved a new two year $75 million share repurchase program.
Shai: The main purpose of our share repurchase program continues to be offset dilution from stock based compensation.
Shai: Turning to the second quarter non-GAAP outlook, we expect a significant increase in revenues in Q2 to $190 million plus or minus $5 million with an increase in all major markets. We serve most notably in HBM, DRAM and foundry and logic.
Shai: This increase in revenues is expected to result in a higher non-GAAP gross margin of 40% plus or minus 160 basis points.
Shai: At the midpoint of this outlook ranges, we expect Q2 operating expenses to be $52 million, plus or minus $2 million approximately $2 million higher than in Q1, mainly due to higher performance based compensation.
Shai: non-GAAP earnings per fully diluted share for Q2 is expected to be 30, plus or minus four.
Shai: This Q2 outlook includes an estimated mid single digit million dollar reduction in revenues and.
Shai: And a one percentage points reduction in gross margins due to the impact of Sars.
Shai: 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.
Shai: With that let's open the call for questions, operator, certainly and ladies and gentlemen, we ask that you. Please limit yourself to one question and one follow up if you'd like to get into the queue simply press star one on your telephone if you'd like to remove yourself from the queue simply press star one again.
Charles: And our first question for today comes from the line of Charles <unk> from Needham <unk> Company. Your question. Please.
Charles: Hey, good afternoon, Mike and Shire, Thanks for taking my questions.
Charles: I wanted to start with <unk> very topical.
Speaker Change: Shai if I hear you correctly I think that you are not just assuming some reduction on the gross margin because of tariff impacted by that.
Speaker Change: Did I hear you that you are also baking in some revenue reduction because of tariffs.
Speaker Change: If that's the case can you can you walk us through how you come up with a quantification I just provided.
Speaker Change: Of course, yes, I do confirm that what I said in our prepared remarks is that we estimate the mid single digit million dollar reduction in revenues.
Speaker Change: And it comes to how we come up with this number so it's obviously, a very dynamic and uncertain situation and estimated.
Speaker Change: Think estimating as a key award here at the estimated mid single million dollar reduction across the overall revenue outlook is not tied to specific customers.
Speaker Change: But a good example would be China, where most of the estimated reduction relates to multinational customers operating outside of the free trade zone and are subject to the current guidance.
Speaker Change: We are working closely with our customers and actually with our vendors as well on different scenarios on a case by case basis, but as we said in our prepared remarks, we are taking at least for now or wait and see approach as we evaluate various starts scenarios before we commit to any significant changes to our manufacturing footprint or supply chain.
Speaker Change: Got it thanks.
Speaker Change: The other part.
Speaker Change: Both shy, both you and <unk>.
Speaker Change: Mike talked about.
Speaker Change: Margin impact because.
Speaker Change: There are they are.
Speaker Change: I mean input manufacturing input to actually coming outside of the U S. While Europe manufacturing is very very concentrated in the U S.
Speaker Change: So wonder can you provide a little more color or give us. Some examples of what are some important materials.
Speaker Change: <unk> today and maybe subject.
Speaker Change: <unk> and <unk>.
Speaker Change: And it gives us some SaaS because.
Speaker Change: Because we know that there is a 90 day pause as well right I mean, excluding China.
Speaker Change: We expect to see more cross docks and often in 90 days.
Speaker Change: Part of this up this questioner. Thank you alright on the Cogs side as most of our manufacturing is in the U S about 80% as Mike mentioned the importance of supplies things like sub components that we imports from Japan and from Germany visa will be subject to the import tariffs and that's.
Speaker Change: Why we estimated the impact on the gross margin in Q2 to be negative one percentage points.
Speaker Change: I think going forward as we said, it's wait and see it isn't a dynamic and uncertain situation and we monitor it closely.
Speaker Change: Okay.
Speaker Change: Alright. Thank you so much I take out limit myself to two questions.
Speaker Change: Thank you.
Moderator: Thank you and our next question comes from the line of Craig Ellis from B Riley Securities. Your question. Please.
Craig Ellis: Yeah. Thanks for taking my question and congratulations on the businesses growth sequentially Mike.
Craig Ellis: I wanted to start by just talking about some of the key customer dynamic. So your former number one customer now number to pop back up to 12% of sales from the quarter can you help us understand given their commentary around product mix moving back to N minus one and minus two.
Craig Ellis: With them pushing on <unk> been running some wafers on <unk>.
Craig Ellis: What's happening with that customer and and how confident you are.
Craig Ellis: And what is in the first quarter at least a bit of an uptick in their business.
Craig Ellis: Yes sure.
Craig Ellis: A good question Craig.
Craig Ellis: As you noted.
Craig Ellis: This customer did return to a 10% customer list in the first quarter after not being there in the fourth quarter for the first time in a very very long time.
Craig Ellis: I think a couple of things first of all we do see increased activity in the client PC space as they ramp a new set of designs really to try and regain their competitive position in one of their most important markets and I think thematic Lee.
Craig Ellis: Even as they go through a very significant turnaround one of their stated objective is to regain process and product leadership and Theyre served markets to do that they're going to have to invest right and investing in leading edge capital equipment, leading edge test equipment, and leading edge consumables like those provided by Forbes.
Craig Ellis: Factor I think it's got to be a key part of that and so we are sort of read between the lines of our commentary on the increase in Q2, we do expect some continued.
Craig Ellis: Continued strong activity Theyre coming off what was a nice recovery in Q1.
Craig Ellis: More broadly I think though if you look at where we've taken the company over the last several years.
Craig Ellis: One of the key drivers for our business now.
Craig Ellis: Is <unk> and the investments in generative AI things like co package optics.
Craig Ellis: And I think that represents a pretty significant transformation away from the very high indexing and concentration we had the client PC in the past. It's all part of the diversification strategy that we've been running for the past close to a decade.
Craig Ellis: But I think indicative again, we're going to compete as hard as we can for the client PC business across multiple customers, but we've also kind of transformed our revenue drivers to make sure we're exposed to trends like generative AI in HTM and Cps.
Craig Ellis: That's helpful. And then the follow up question is more on the DRAM business. So it seems quite.
Craig Ellis: Quite notable that despite the pis restrictions on China, and what that revenue sequentially. We're back records in the second quarter can you help us understand what the mix would be between HBM and non HBM revenue in <unk>.
Factored into guidance and then.
Craig Ellis: As we think about that.
Craig Ellis: The trend line for DRAM intermediate term.
Craig Ellis: It seems like the magnitude of growth might mean that you are now number one in customer could approach 30% of sales in <unk> or if not soon thereafter can you just talk about how we think about the path to low to mid 40% gross margins given how high DRAM mixes indexing.
Craig Ellis: Thank you.
Craig Ellis: I'll talk to the customer dynamic and then pass it over to Shai for the for the gross margin.
Craig Ellis: Analysis, but if you.
Speaker Change: Listen closely to the comments we made prior on this call.
Speaker Change: All of the growth in DRAM is coming from <unk>, we see the non HBM. So DDR five low power DDR five a little bit of residual DDR for continuing to be pretty steady, but flat at around $20 million a quarter, which he.
Speaker Change: Historically for form factor as a cyclical low for the commodity DRAM business, So really all the sequential growth.
Speaker Change: Q1 to Q2 that we're projecting is due to HBM growth and I enumerated a couple of factors for that one is continued strength in HBM. Three second is an acceleration of HBM for that I think you've heard from all of our customers quite recently and their customers as well and then us continuing to.
Speaker Change: To round out our customer profile and revenue contributions we have revenue contributions from all three HBM manufacturers, but we're beginning to see it.
Speaker Change: At least our second HBM customers start to drive a more significant contribution.
Shai: Shai do you want to discuss gross margin.
Shai: Of course, so first I would like to emphasize that we are committed to the target model, including the 47% gross margin at $850 million of onboard revenue levels.
Shai: However, we are currently delivering revenues with a very different mix than we.
Shai: When we put our target model in place there are a few things that were doing and now we're working on together.
Shai: Things that need to happen in the market for us to achieve the target model gross margin when it comes to revenue we need the overall end markets to recover since we need a higher volume.
Shai: Three of our model and we're also targeting a higher market share in the higher margin foundry and logic market.
Shai: Improving the cost side, we are developing a lower cost to DRAM architecture. As an example, we also have a few internal initiatives like Oxford organization consolidation that we did last year.
Shai: Things like lean manufacturing automation.
Shai: All target gross margin improvements and all of these together will.
Shai: Get us to the target model gross margin of 47% actually if you go back a year ago and in order to get it seems like a long time now but on the second quarter of 2024 with revenues of approximately $200 million gross margin was higher than the 45% I was a good validation point for us on our ability to make progress towards the target model.
Shai: Thank you guys.
Shai: Thanks, Craig.
Shai: Thank you.
Speaker Change: And our next question comes from the line of Tom differently from D. A Davidson your question. Please.
Speaker Change: Yes. Good afternoon. Thank you for taking my questions.
Speaker Change: Mike curious when you look at the second half of the year.
Speaker Change: And we look at the high bandwidth memory growth can you prioritize or rank the.
Speaker Change: The continuation of high bandwidth memory, three versus the growth coming from moving to four versus the growth coming from a new customer there.
Yes.
Speaker Change: So as we move through 2025 and all.
Speaker Change: I'll preface this with the comment that even in normal times our visibility in this business is very limited remember, we have lead times well within a quarter.
Speaker Change: So we're operating with short lead times and limited visibility even in normal times and these are decided not normal times.
Speaker Change: What I would say about the mix of HBM, three which is primarily <unk> at this point for us.
Speaker Change: Transitioning to HBM four weeks.
Speaker Change: We expect that crossover to happen sometime probably late in the second half of 2025 based on the different elements that we're seeing from customer forecasts customer qualifications in our conversations with our key customers.
Speaker Change: I do think based on what we see in terms of volume and market positions of our customers and HBM.
Speaker Change: We continue to see a pretty strong contribution from the leader in HBM, even as the transition goes from three to four they seem to have a pretty strong position as HBM four begins to be sampled but we're also excited about adding significant revenue contributions from our second HBM customer end of <unk>.
Speaker Change: Of course, we've got smaller but significant revenue contributions from the third major manufacturer as well, but I'd say the real driver is going to be continued three volumes. It was a transition on a crossover to for sometime late in the year.
Speaker Change: And is there a revenue or margin difference between three and four for you.
Speaker Change: I wouldn't say a significant one HBM.
Speaker Change: Generally has better margins than standard commodity DRAM because of the increased test complexity things like higher speeds. There is a move to higher speed going from three to four that may drive a bit of an uplift, but I wouldn't consider it to be something that pushes HBM probe cards up into the foundry.
Speaker Change: Logic margin space for example.
Speaker Change: Okay.
Speaker Change: And then as a follow up shy when you look at revenues in the first quarter.
Speaker Change: They were at the.
Speaker Change: 212.
Speaker Change: Level would you have hit your $2 of earnings or do you need a different mix or more cost reduction programs to to get their.
Speaker Change: Similar to my answer that I guess to Craig few minutes ago, right, even at higher volumes, we need better mix.
Speaker Change: There are still a.
Speaker Change: Internal programs, we are still working on to get this improvement.
Speaker Change: Great. Thank you. Thanks.
Speaker Change: Thanks.
Speaker Change: Thank you and our next question comes from the line of Chris Schenker from TV Cowen Your question. Please.
Eddie: Hey, guys. This is Eddie for Krish <unk>.
Eddie: Just a clarification about the tariffs.
Eddie: Correct me, if I'm wrong, you mentioned one point.
Eddie: The margin impact on the cost side for Q2.
Eddie: How should we think about the worst case scenario for like September a margin impact from the tariffs.
Eddie: Assuming those things don't change and to September.
Eddie: I think it's too early to say that this is a very dynamic and uncertain situation.
Eddie: You can try to extrapolate that.
Eddie: 1% June two.
Eddie: Into the future, but at least volumes.
Eddie: Wait and see.
Eddie: We're making speculations.
Eddie: Okay and a question on the HCM side I mean, one of your main customers say they are opening up a big fab.
Eddie: And it will be operational later this year I wonder like historically when this.
Eddie: Please customers that open up new Fabs do you see like increase in HTM.
Eddie: Probe card demand or is it really unrelated because customers can move there.
Eddie: The components from one after the other.
I think we're.
Eddie: Our new fab is related to additional output and additional capacity that will drive new probe card demand. If it's replacement capacity and if it's the situation I am thinking about it is not replacement capacity as additional capacity that drives incremental demand for probe cards, because the existing fabs are still running the old <unk>.
Eddie: Zines still using utilizing those probe cards now one of the key factors in this is timing and typically it takes a few quarters for a new fab to become operational and ramp and that's a desk case, that's with some of the most operationally aggressive and efficient.
Eddie: <unk> in the world.
Eddie: Just because it <unk> have opened new doors and start taking delivery of equipment. It's usually two to three quarters before you see significant probe card demand associated with the wafers being output from that fab.
Mike suffered: Okay, well, thank you Mike Alright, thank you.
Eddie: Yes.
Speaker Change: Thank you and our next question comes from the line of Christian Schwab from Craig Hallum Capital. Your question. Please.
Christian Schwab: Great. Thanks for taking to taking my questions I know, it's very early and visibility is limited but is cut.
We're dialogue.
Christian Schwab: As it relates to your foundry and logic business, assuming that we do see an uptake in demand for Pcs in the second half.
Christian Schwab: Given end of life of Windows 10.
Christian Schwab: Nobody talks about it anymore with all the tariff discussion but.
Christian Schwab: Would we expect foundry and logic to return to.
Christian Schwab: 100, plus million type of revenue in the back half of the year is that fair.
Christian Schwab: Well.
Christian Schwab: I think if you factor everything together on the last call I reminded you I'll remind you that we did say we expected 2025 to be a growth year and some of that was going to have to be driven by.
Christian Schwab: Mid year second half foundry and logic growth through some of these large consumer markets I think the whole tariff and geopolitical situation has obviously thrown at least a shadow of doubt on top of that but I think if you take that aside and assume there has been at the <unk>.
Christian Schwab: Some sort of rational outcome to whats going on with tariffs right now and that the consumer continues to spend and there is this PC refresh cycle I think your assumption is very very valid theres just a lot of ifs in that scenario as we look right now at some of the headwinds mostly due to tariffs and you.
Christian Schwab: S trade policy and a variety of reactions to U S trade policy as we operate in this business.
Christian Schwab: Alright, great. Thank you and then my second question.
Christian Schwab: Given the recent.
Speaker Change: Investment with Advantest is there any update on.
Christian Schwab: Anything on.
Christian Schwab: And working together or thinking about markets together.
Christian Schwab: Thank you.
Christian Schwab: More positive about the future short medium or long term.
Christian Schwab: Yes, well I think the.
Christian Schwab: The advanced <unk> investment in form factor.
Christian Schwab: And to be completely transparent with simultaneous with some investment in one of our competitors.
Christian Schwab: This is really a statement of at least advantaged commitment to the open ecosystem, where any probe card at least any leading probe card works with any tester.
Christian Schwab: Teradyne the other major <unk> manufacturer, although they have not made an investment in that theres very close collaboration with them as well and I think as we move forward here.
Christian Schwab: Part of the things that have us optimistic.
Christian Schwab: About the growth of the business things like advanced packaging and the adoption in both places like HBM, but also in the GPU space, it's driving a tremendous increase in complexity and the need for all of US as collaborators in building test systems to work closely together to make sure we're.
Christian Schwab: Meeting this accelerated the high performance compute roadmap. So I think it's a rational response that we're all working closely together collaborating closely and making sure that our R&D teams are very well aligned and interlock and what we have to deliver to support each other's roadmaps.
Christian Schwab: Exciting part of it is when you lead in businesses like this.
Christian Schwab: The technical complexity and speed is getting higher speed of innovation is getting higher and that really does create a significant competitive advantage and barriers for anybody else to answer.
Speaker Change: Great no other questions congrats on a good quarter and guide.
Speaker Change: Thanks Christian Thank you.
Speaker Change: Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press <unk> one I think telephone. Our next question comes from the line of David Duley from Steelhead Securities. Your question. Please.
David Duley: Yes. Good afternoon, thanks for taking my questions.
Speaker Change: I was wondering.
Speaker Change: Far as.
Speaker Change: The major GPU manufacturer I think they've started to use advanced probe cards, where are we on the qualification with that customer and then you keep mentioning co packaged optics. I'm wondering is is that the insertion point for you guys with this customer or is that a separate kind of.
Speaker Change: Opportunity. Thanks.
Speaker Change: Yeah, So David that customer has.
Speaker Change: Multiple opportunities, both current and future for us.
Speaker Change: Updating people in the past that we have a strong position in their switch business.
Speaker Change: The co package optics opportunity has largely been in the lab space, but as we devoted some significant time on this call to updating you. We see this transitioning very rapidly into the production space.
Speaker Change: If you go look at what these customers have said what this customer in particular has said about CPO co package optics insertion in the roadmap I think it's pretty easy to connect those dots on.
Speaker Change: Advanced probe cards for Gpus, we're addressing that opportunity through a qualification primarily at their at their foundry.
Speaker Change: And that qualification is going well, we've got cards. There that are being evaluated we think we've got a compelling.
Speaker Change: Technical solution. This is a new technology, a new product for us we've got compelling technical solution to go compete for that business and I hope, we'll be able to update you positively in the second half of the year, but we already have a pretty significant relationship.
Speaker Change: With that customer in both the switch and co package optics space and are now, making some progress in pushing into the core GPU space.
Speaker Change: So it's kind of a 300 opportunity there yes.
Speaker Change: As with many of these customers.
Speaker Change: The opportunities are multifaceted. These are big companies with broad product lines. It goes to the fundamental strategy that form factor is driven of trying to lead in these related markets, where we have fundamental technology competencies and product competencies and can offer a broad suite of products to help these cuts.
Speaker Change: <unk> with their test and measurement needs.
Speaker Change: Okay and then.
Speaker Change: One of the major <unk> reported last night and has talked about making a huge investment in test.
Speaker Change: And I think talked about similar to the things that you've talked about higher intensity for both probe and test, but they went out of their way to highlight how they think there's going to be more test insertions and I'm just kind of wondering.
Speaker Change: And this is evolving that's packages, both gpus and high bandwidth memory I'm, just kind of wondering from your perspective, you've talked about an intensity level for these advanced packages I think it's 25% to 35% higher would you expect that percentage to get higher going forward or.
Speaker Change: If there were more test insertion would that equate to more probe cards sold.
Speaker Change: Yes, yes, certainly there is a good linkage or correlation between the number of tests insurances and probe cards sold.
Speaker Change: And I'll take you back to the HBM example, because it's one I think that.
Speaker Change: Most people have a pretty good understanding as you.
Speaker Change: As you are building in HBM product its a stack of 812, even 16 die.
Speaker Change: Compared to a commodity DRAM, that's a single die each one of those 16 die that stacked up needs to be tested so you've got in theory, six time 16 times the test and surgeons that you otherwise would that now there's offsets to that right, there's not a bit counts in each and therefore the test time in each.
Speaker Change: The stacked DRAM, but it gives you an indication of the increasing test intensity driven by this die disaggregation or chipboard architecture, each of the chip, let's or die going into these advanced packaging stacks, whether it be HBM, whether it would be gpus, whether it'd be climb.
Speaker Change: <unk> processors, they all need to be very close to known good otherwise you end up with a scenario where a single die Ken.
Speaker Change: Essentially causes scrap event for all of the other die in the stack and that there is no question Thats driving increased test intensity.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you and our next question is a follow up from the line of Craig Ellis from B Riley Securities. Your question. Please.
Craig Ellis: Hey, Thanks for taking the follow up question, Mike I wanted to go back to some of the commentary <unk> had on CPO when and it's benefiting the systems business now you've indicated it has the potential to benefit the probe card business I don't recall you mentioning that before the question is.
Craig Ellis: Is relative to an application that's very probe card intensive like HBM. Examples you just provided to David and others that are much less probe card intensive whether it's more of a commodity DRAM other memory types et cetera, where do you expect.
CPO to fallout.
Craig Ellis: How broad is sure engagement and CPO. Thank you, yes, yes.
Craig Ellis: Let me start with the second question first I mean, our engagement in CPO, we run the same strategy there or have run the same strategy. There that we've run across most of our businesses, where we partner very closely with a handful of customers.
Craig Ellis: And make sure that we're serving their needs and then we found out to the rest of the industry and we see that broadening right now I think it's fair to say, we're a recognized leader in the lab space in.
Craig Ellis: Silicon Photonics and co package optics.
Craig Ellis: That's now extending to this early production.
Craig Ellis: If we go back to the impact on probe cards, we have brought it up a couple of times before and but we're early enough in the production ramp and optimization of this where the different test insertions in the requirements for those test insertions are still really being <unk>.
Craig Ellis: Optimize between us and our customers I think would definitely be an electrical component and an optical component and one of the reasons why we're so excited about CPO is that it brings these two things together, where we have fundamental expertise.
Craig Ellis: Our leadership position in the lab space as well as in the production space with production probe card. So the fusing of electrical and optical test is something where we think theres a big opportunity in front of us a little hard to size an estimate right now in these early days.
Craig Ellis: But I think you can stitch together sort of the fundamental strengths of form factor with the customer needs theyre going to have as they try and ramp these devices.
Speaker Change: That's helpful. Thanks, Mike.
Craig Ellis: Great.
Speaker Change: Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one one.
Craig Ellis: Our next question comes from the line of.
Brian Chin from Stifel. Your question. Please.
Brian Chin: Good afternoon, thanks for letting us ask a few questions.
Speaker Change: I don't foresee this might bring.
Brian Chin: Altier trends.
Brian Chin: Surprising resurgence and shipments of an older platform and Raptor Lake.
Brian Chin: And there is a higher concentration of mono Cpus versus sort of chip lit Cpus built for Pcs. This year does that have a little bit of a dampening effect on the company's maybe revenue potential or trajectory this year.
Brian Chin: Well.
Brian Chin: Let me address it maybe more generally an older design like that it would be my expectation that any customer would have already bought all the probe cards. They need to test that device probe card spending usually very very intensive in the early part of our ramp when yields are low and Dio put.
Brian Chin: Our peaking and so.
Brian Chin: My anticipation or.
Brian Chin: Our estimation in a situation like that would be.
Brian Chin: Our customer probably pulls the probe cards, they need off the shelf to test those older devices.
Brian Chin: There may be a little bit of a follow on but you can see from that dynamic. If there was a giant mix shift away from new designs in the leading edge back towards ones that where customers are reusing the tooling and probe cards that would have a significant impact on <unk>.
Brian Chin: On our business and the overall probe card spend.
Brian Chin: Okay.
Brian Chin: That's helpful.
Brian Chin: And then maybe just shifting to the memory just firstly I apologize if I missed this accounting of it but.
Brian Chin: Within sort of the evolution of your product mix from <unk>, and then towards four and maybe in the latter part of the year.
Brian Chin: It's still your expectation that <unk> revenue is up year to year.
Brian Chin: Then secondly, kind of more under what you can control.
Brian Chin: And maybe for Shai are you still on track to ship.
Brian Chin: And sample some of those more cost competitive non H band DDR five probe cards this year.
Brian Chin: How is that sort of adoption and potential going for for next year.
Brian Chin: Yes.
Brian Chin: We do expect on the current trajectory.
Brian Chin: HBM to grow year on year, and I think consistent with our customers.
Brian Chin: Our customers' expectations for their HBM growth and the transition to new designs like HBM, four and higher stacks of HBM three so.
Brian Chin: So we do expect it to grow.
Brian Chin: I'll continue on with the new DRAM architecture, we shared with you last time that we're developing and releasing a new lower cost DRAM architecture for the non HBM commodity market and we've shipped.
Brian Chin: I'll call it pilot volumes to our beta customer associated with that program is going well.
Speaker Change: Okay, great. Thanks, Thanks, Mike.
Brian Chin: Yes.
Speaker Change: Thank you and our next question comes from the line of David Silver from CL King <unk> Associates. Your question. Please.
David Silver: Yes, hi, thank you.
David Silver: I had a question maybe about your systems sales.
Speaker Change: Mike in the past you've talked about how.
Speaker Change: Well on the one hand, you say you have very low visibility.
Speaker Change: For the timing of near term orders I guess.
Speaker Change: The system sales to kind of tell a different tale I guess looking out.
Speaker Change: A little bit further beyond that.
Speaker Change: So I guess from a lab to fab perspective, but what do the what the demand for your systems.
Speaker Change: The products right now tell you both I guess in quantity, but also maybe the types of machines that seem to be most in demand.
Speaker Change: Yes.
Speaker Change: Well in your comments on visibility there is varying degrees of visibility right because a lot of our products certainly for probe cards are highly customized and specific to an individual customer chip design.
Speaker Change: They are.
Speaker Change: Set of probe cards only works for a single chip design.
Speaker Change: Im.
Speaker Change: The visibility associated with that essentially tracks, our customers' prediction of what wafers theyre going to start win.
Speaker Change: And typically that foreshadowing that forecasting is not very good.
Speaker Change: And.
Speaker Change: When we think about longer term visibility as to perhaps not volumes associated with individual designs, but broader trends in the industry, which is what I think youre kind of alluding to in the systems business. The visibility gets quite a bit better now that doesn't mean, we know shifting to the systems business that we're going to ship.
Speaker Change: 20 systems or 10 systems associated with co package optics, but we know we're going to ship some systems associated with co package optics, because we've been working very closely with these driver customers and we understand their ramp timing.
Speaker Change: One of these and therefore, the business volume that drives fundamental production visibility for US is the part that continues to be pretty elusive and I would expect it to.
Speaker Change: To stay elusive in an environment, where.
Speaker Change: The industry continues to innovate extremely rapidly and go through.
Speaker Change: Very very very quick ramps of new products.
Okay, Great and then I apologize in advance I did have unfortunately, I was dropped off the call for a little bit.
Speaker Change: Apologize, if I'm, making you repeat yourself.
Speaker Change: But in your prepared remarks, you did talk about.
Speaker Change: The ICT relationship and it's.
Speaker Change: Potent the effects of tariffs potentially on on the products that you purchase there.
Speaker Change: Could you just.
Speaker Change: Remind me or tell me does <unk> have any alternate.
Speaker Change: Production points or are they solely based in Japan as far as the tariff relationships go is there any flexibility from utilizing.
Speaker Change: Assets are production sites in other geographies. Thank you.
Speaker Change: Well I think.
Speaker Change: Ill answer that question, a little bit differently. So shies commentary on some of the gross margin pressure associated with imports from Japan is much more general than just ICT.
Speaker Change: We have a lot of suppliers a rate worldwide and although there has been a 90 day pause on the big headline tariffs. If you followed closely you know there were some small incremental ones that were put in place and thats behind the one point gross margin headwind that we talked about in our Q2 outlook.
Speaker Change: I would say the more exciting thing about the ICT partnership and the closing is the access it gives us to a pretty unique technology.
Speaker Change: They are their manufacturing footprint is in Japan.
Speaker Change: But a very specialized technology that years ago was.
Speaker Change: But now that Fujitsu and we're very happy to be partnered with Mek partners as a shareholder.
Speaker Change: I'm a board member at <unk>.
Speaker Change: Closer couple Lake now between form factor in ICT.
Speaker Change: I guess associate that a little bit from tariffs, we were talking more broadly about supplies, we import from Japan, which go far beyond the business with S. ICD.
Speaker Change: Sure.
David: Great. Thank you very much thanks, David.
David: Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Mike <unk> for any further remarks.
Speaker Change: Thanks, everybody over the next month to six weeks or so we've got <unk>.
David: Several conference appearances, where we are.
David: I hope to be able to continue to update you on the business hopefully, we'll have more clarity on tariffs and how we're responding.
David: So.
David: We'll hope to see you then if we don't see it then we'll see you when we announce second quarter results take care.
David: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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