FormFactor, Inc.

Thank you and welcome everyone to Form Factor's first quarter 2021 earnings conference call. On today's call are Chief Executive Officer Mike Schleser and Chief Financial Officer Shai Shahar. Before we begin, Jason Cohen, the company's general counsel, will remind you of some important information.

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 gap to non-gap measures and other financial information are available in the press release issued today by the company and on the investor relations section of our website. Today's discussion contains forward-looking statements within the meaning of the federal securities laws. Examples of such forward-looking statements include those with respect to the projections of financial and business performance, future macroeconomic conditions, the benefits of acquisitions and investments in capacity, and in new technologies, the impacts of the COVID-19 pandemic, the impacts of regulatory changes, the anticipated demand for products, our future ability to produce and sell products, the development of future products and technologies, and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended 2020 and in our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, April 28, 2021, and we assume no obligation to update them. With that, we will now turn the call over to Form Factor CEO, Mike Schlesser.

Thanks, Jason, and thank you, everyone, for joining us today. Form Factor started the year with strong results, posting the second highest quarterly revenue in company history. We successfully addressed and closed the two discrete issues described in our February earnings call that had impacted fourth quarter gross margins, producing a first quarter recovery. This revenue and gross margin performance, paired with good operating expense control, produced non-gap earnings per share at the midpoint of our outlook range as we continued our investments in capacity, technology, and people to serve long-term, broad-based growth throughout the semiconductor industry. FormFactor's foundry and logic probe card business was robust again in the first quarter as 2020's strong demand continued. Foundry and Logic's strength was evident in our two 10% customers in the quarter, the world's leading Logic IDM and the world's leading Foundry. The underlying components of first quarter demand were similar to 2020, with multiple new mobile and compute chip designs ramping for 5G, data center, and client PC applications. We do expect a sequential reduction in Foundry and Logic demand in the second quarter, due to specific timing of individual customer design releases. As we've said in the past, probe cards are consumable. They're specific to each customer chip design, and the timing of those design releases and their volume ramps can create fluctuations in probe card demand. With the well-publicized investments that top Foundry and Logic customers are making in wafer fab equipment and capacity, We expect continued strong secular growth in this market as their capacity comes online and they begin producing new technology nodes and new chip designs, each of which must be tested with advanced new pro cards. Accordingly, we are aggressively executing our planned capacity and technology investments to capitalize on these future opportunities. Turning to DRAM. First quarter demand for probe cards sustained at levels comparable to the fourth quarter, as customers continued to execute node transitions and new design releases on existing nodes. We expect increased DRAM probe card shipments off these already high levels in the second quarter, driven primarily by new 16-gigabit DDR4 and DDR5 mobile and server designs ramping in volume. In addition, we're supporting substantial new design activity for high bandwidth memory, or HBM, as this enhanced performance advanced packaging application continues to gain in market adoption in applications such as artificial intelligence. This incremental demand has the potential to drive second quarter DRAM revenues comparable to the decade-high levels delivered in the fourth quarter of 2019. With lead times of less than a quarter, our visibility remains limited as always, but we're encouraged by the current momentum in DRAM. As Shai will discuss in more detail, this shift is expected to pressure gross margins, as DRAM probe cards generally produce a less favorable product mix than Foundry and Logic probe cards. This anticipated second quarter product mix swing from Foundry and Logic to DRAM highlights the resilience of form factors operating models. Even with this dynamic shift in underlying demand, our second quarter revenue outlook range is similar to reported first quarter revenue. This occurs because we serve major applications at all the leading customers in the semiconductor industry, with manufacturing resources that can be flexibly deployed to serve probe card demand in either Foundry and Logic or DRAM. Although the past several quarters have been characterized by extremely strong Foundry and Logic demand, Experience has taught us that there is cyclicality and variability in our market and customer demand on a quarter-by-quarter basis. Consequently, ensuring that we're exposed to a broad set of opportunities that effectively utilizes our installed capacity is central to our operating strategy. I'd also like to highlight VLSI Research's annual survey of the probe guard market, which showed form factor again at the top position for the eighth consecutive year. Our 19% overall advanced probe card revenue growth was fueled by an eye-popping 40% in VLSI's non-memory probe card category, which mirrors our Foundry and Logic classification. FormFactor's 40% growth significantly outpaced Foundry and Logic market growth of 27% as we gained share in our number one position. This market growth was driven by the trends in 5G and advanced packaging that we've highlighted previously, And our above-market growth provides validation of form factor's differentiated products, meeting customers' highly complex test requirements for millimeter-wave RF front ends, next-generation application processors, and high-power compute processors. We expect this preferential share gain to continue for two reasons. First, significant R&D resources are required to develop probe cards that meet increasing test complexity. And second, A coordinated global infrastructure at scale is needed to support simultaneous rapid customer product ramps to high volume in multiple regions around the world. Turning to our system segment, we executed on a more favorable product mix in the first quarter, which helped gross margins return to target model levels. A key factor in this improvement was shipments of multiple systems to research labs for testing devices at cryogenic temperatures. Test and measurements at these ultra-low temperatures, often approaching absolute zero, are critical in enabling a variety of applications, from the emerging field of quantum computing to the more mature area of infrared detectors. Combining the capabilities we added in the fourth quarter acquisition of HPD with our legacy engineering systems electrical and optical test and measurement know-how offers us significant long-term potential to drive further growth. as we enable these technologically demanding R&D applications. As cryogenic applications like quantum computing mature and reach volume production over the next several years, our early engagement in the lab positions form factor well to serve the production test needs of the industry, as we continue to execute the lab-to-fab strategy that benefits both our customers and ourselves. Finally, with the tailwind from a continued strong demand outlook, we're on the path towards the target financial model we unveiled last year that delivers $2 of non-GAAP earnings per share on $850 million of revenue. Test and measurement is becoming a more important and strategic place in the semiconductor industry, driven by powerful trends, including 5G, advanced packaging, and memory content growth. Our leadership position in these attractive markets paired with our differentiated strategy and disciplined execution, will drive continued growth and share gains as we progress towards the target model. Shai, over to you.

Thank you, Mike, and good afternoon. As you saw in our press release, first quarter revenues were at the high end of our outlook range, the second highest in company history. Non-GAAP gross margin recovered to slightly below the midpoint of our outlook range, and non-GAAP EPS was at the midpoint of the range. Form factor's first quarter revenue were $187 million, a 5.3% sequential decrease from our record Q4 revenues, and an increase of 16% year-over-year. Probe cart segment revenues were $159 million in the first quarter, a decrease of $3.6 million, or 2.2% from Q4. The decrease was driven by lower Foundry and Logic and slightly lower DRAM revenues, partially offset by an increase in Flash revenues. System segment revenues were $28 million in Q1, a decrease of $6.8 million, or 20% from the fourth quarter. Within the ProbeCart segment, Foundry and Logic revenues decreased by $9.3 million from Q4 to $113.4 million in Q1, comprising 61% of total company revenues, a slight decrease compared to 62% in the fourth quarter. DRAM revenues were $34 million in Q1, a decrease of $0.7 million from the fourth quarter, and were 18% of total quarterly revenues, same as in the fourth quarter. The strong demand for DRAM continues the trends we have seen during the last three quarters, and we expect this to continue in the current quarter. Flash revenues of $11.6 million in Q1 were $6.4 million higher than in the fourth quarter, and were 6% of total revenues in Q1, up from 3% in Q4. As we've said in the past, we expect flash revenues to be lumpy from quarter to quarter. GAT gross margin for the first quarter was 41.1% of revenue, as compared to 39.4% in Q4. Cost of revenues included $7.2 million of GAAP to non-GAAP reconciling items, which we outline in our press release issue today and in the reconciliation table available in the investor relations section of our website. On a non-GAAP basis, gross margin for the first quarter recovered, as expected, to 45% of revenues, 160 basis points higher than the 43.4% non-GAAP gross margin in Q4, mainly due to warranty costs for a Foundry and Logic new product release in Q4 that did not record in Q1, and an anticipated improvement in the system segment gross margin related to a more favorable product mix. Also in Q1, we began to see rising costs for key MEMS raw materials, like rhodium, which is expected to impact our manufacturing costs. Our probe cart segment gross margin was 44.3% in the first quarter, an increase of 40 basis points compared to 43.9% in Q4. The increase is mainly due to Q4 warranty charge I just mentioned, partially offset by higher manufacturing spending and lower absorption on lower revenue. The favorable product mix in the system segment resulted in a significant recovery of 8 percentage points in gross margin from 41.3% in Q4 to 49.3% in Q1, even on low revenue. In the quarter, system segment gross margin returned to the anticipated range of high 40s to low 50s. As we continue to make progress towards achieving our target financial model gross margin of 47%, we expect that margins will fluctuate from quarter to quarter. Our gap operating expenses were $54 million for the first quarter, $2.7 million lower than in the fourth quarter. Non-GAAP operating expenses for the first quarter were $46.4 million, or 24.9% of revenues, compared to $48.1 million, or 24.4% of revenues in Q4. The decrease of $1.6 million quarter-over-quarter is mainly due to lower performance discompensation, partially offset by the impact of annual benefits and payroll taxes recent. Company non-cash expenses for the first quarter included $7.1 million for stock-based compensation, $7.7 million for the amortization of acquisition-related amounts, and depreciation of $6.1 million. First quarter amortization of acquisition-related amounts was $0.9 million lower than in Q4 as a result of finalization of purchase price allocation related to our 2020 acquisition. stock-based compensation, and depreciation were similar to Q4. Due to the gross margin recovery and a good expense control, we generated first quarter non-GAAP operating income of $37.6 million, effectively flat compared to the fourth quarter, despite $10.4 million in lower revenue. GAAP net income for the first quarter was $19.6 million, or 25 cents per fully debited share, compared to $19.3 million, or $0.24 per foot of the retail share in Q4. The non-GAAP effective tax rate for the first quarter was 18.6%, as compared to 7.5% in the fourth quarter of 2020. The lower rate in Q4 was a result of the one-time cumulative benefit in 2020 of application of regulations regarding global intangible low taxes income, also known as GOP, and an increase in export revenues, as we mentioned in the previous earnings call. The first quarter effective tax rate is within our communicated anticipated annual non-GAAP effective tax rate for fiscal 2021 of 15 to 20%. As a reminder, our cash tax rate is expected to remain at 6 to 8% of non-GAAP pre-tax income until we fully utilize our remaining U.S.-based R&D credit. First quarter non-GAAP net income was $31 million, or $0.38 per fully diluted share, compared to $35 million, or $0.44 per fully diluted share in Q4. Moving to the balance sheet and cash flows. We generated $19 million of free cash flow in the first quarter, compared to $31 million in Q4, taking our total cash and investments to $272 million at the end of the quarter. The sequential decrease in free cash flow in the first quarter reflects changes in working capital, mainly an increase in inventories and a decrease in accrued liabilities. As of the end of the first quarter, we had two term loans remaining on our balance sheet, totaling $32 million. We invested $13.5 million in capital expenditures during the first quarter, compared to $14 million in Q4. This investment chiefly relates to the capacity expansion in the new building in our Livermore campus. We continue to expect a significant investment in capacity in 2021, and CAPEX for the year is expected to be between $80 to $100 million, as communicated in our previous earnings call. As a reminder, we expect CAPEX to return to 3.5 to 4% of revenues in our target financial model after we conclude these capacity extensions. At quarter end, our total cash balance exceeded the debt balance by $241 million, an increase of $18 million from Q4 quarter end. The increase is mostly attributable to strong cash flow from operations, less the cash used for capital expenditures, and $5.7 million used for stock repurchases during the quarter. Turning to second quarter non-GAAP outlook. As Mike mentioned, we expect generally strong demand for advanced probe cards to continue. with lower demand in flamboyant logic and flash, offset by increases in DRAM and systems. These factors result in a Q2 revenue outlook in the range of $180 to $192 million. Product mix is expected to be less favorable in Q2, with a decrease in flamboyant logic and an increase in DRAM revenues. And we also expect higher raw materials costs, resulting in non-GAAP gross margins outlook for the second quarter in the range of 41 to 44%. At the midpoint of these ranges, we expect Q2 operating expenses to be higher than Q1 by $1 to $2 million due to increasing headcount and RID spend, partially offset by lower performance-based compensation. Accordingly, non-GAAP earnings per fully-deleted share for Q2 is expected to be between $0.28 and $0.36. A reconciliation of our GAAP to non-GAAP Q2 outlook He's available in the investor relations section on our website and in our press release issue today. With that, let's open the call for questions. Operator?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Tom Diffley with DA Davidson. Your line is now open.

Yes, good afternoon, and thanks for the question. Shai, maybe starting with you on the gross margins, obviously nice to see the step function back up, but when you look at the revenue at the high end of the guide range versus EPS below the midpoint, were the margins impacted during the quarter by any particular items?

Well, as you know, Tom, we are a turns business, right? Even when we enter the quarter, we have things in backlog, but with a six to eight weeks lead time, things change even within the quarter. That's how we provide the range, and because of these changes even within the quarter, not in particular, just changes in the mix, we ended up with revenues close to the high end of that range, but gross margin slightly below the midpoint.

Okay. I just wasn't sure if the high material cost was a surprise during the quarter.

No, that's a good question. This is something we started noticing in the quarter, but will mostly impact going forward. It's things that are in our inventory for Q1 but will start impacting gross margin or will impact gross margin in Q2.

Okay, that's helpful. Thanks. And then, Mike, you kind of have a big picture question here. When you look at one of your customers or a customer, talk about $100 million of spending over the next three years, how does that translate from both a timing and a dollar amount to the probe card market?

Yeah, I think there's been some pretty well-publicized announcements from several customers, particularly in Foundry and Logic, our largest market, about capacity and technology investments over the next couple of years. Those are going to result, obviously, in more wafer starts, more design starts, and all of those designs of wafers are going to need to be tested by advanced probe carts. So, you know, if you look at how WFE and capacity increases translate into probe cart spend, typically lags by somewhere between two and three quarters. Some customers are faster if they're going into existing facilities and it's just incremental additions. But we would expect this significant build during 2021, especially of foundry and logic capacity, to result in an increased demand for advanced probe cards as that capacity comes online either late in the year or into 2022.

And do you see a step function increase, or do you see it kind of ramp up over a several-quarter period as well?

No, I think it'll ramp up. Of that magnitude, you know, those investments have been announced over several years. Obviously, we're starting to see WFE accelerate here in 2021, but it takes a while logistically for all that equipment to get in, to get it qualified, and to get it running. So I don't expect it to be a step function. I would expect it to be rather gradual. But again... we're going to trail the equipment installs and qualification by a few quarters.

Great.

Okay.

Well, thank you.

Thanks, John.

Thank you. Our next question comes from Brian Chin with Steve Foley. Your line is now open.

Hi there. Good afternoon, and thanks for letting us ask a few questions. Maybe first to revisit the gross margin discussion. I think in the commentary I heard you reference DRAM revenue run rates sort of back to the 2019 highs, and so that suggests DRAM is somewhere sort of a quarter of the business in Q2, maybe sustaining a high run rate given sort of what an ATE company said earlier today. They're seeing a lot of growth in the wafer test part of that business. And so I was hoping maybe you could talk about why the gross margins go down by 250 basis points at the midpoint, because I noticed that back in the 2019 timeframe, kind of sustained gross margins at the higher end of the range you're guiding in Q2, more kind of closer to the 44-plus percent range. And so I guess that's the first question. The second question would just be sort of on trajectory. I know you're not guiding for second-half sales, so maybe it's a little bit difficult. But in terms of getting back to sort of a 45%, 46% level, can you maybe provide some of the drivers that would kind of get you back in that range?

Sure, yeah. So you rightly pointed out that we expect Deer Army to grow to a similar level to the record we had last year, so let's call it low 40s. But we need to remember that even within the DRAM, there is a wide range of margins with different customers and different products. So what we see in Q2 is not only DRAM going up, but also Foundry and Logic going down. And Foundry and Logic historically has higher gross margin than DRAM. So we see the phenomenon in Q2 of this shifting mix is that where high gross margin products revenues are being replaced by low gross margin revenues. And because there is a specific mix to a specific customer and a specific margin, it can fluctuate from quarter to quarter, even if the DRAM revenue is at similar levels. So if you look at the midpoint of our outlook range, the 2.5% decrease from Q1 to the midpoint of Q2, I would say, you know, About 2% of it, maybe a little less than that, relates to this shift in the mix from foundry and logic to DRAM. And the remaining about 1%, a little bit less than that, relates to the higher cost of materials that I mentioned in the call, specifically the rhodium. Now, in terms of going back to the higher level, So we put a model in place last year. We talked about reaching 47% of target financial model. We had some good evidence of our ability to get to these levels. If you go back a few quarters to Q3 of 2020, margin was almost at that model at 46.7. So that was a good evidence that we can achieve these levels. And as we saw in the last couple of quarters and in the upcoming quarter, Margin can fluctuate on a way to achieving that model, but we are confident that we have the ability to get there.

Okay. I guess those 50 basis points, maybe 100 basis points of hit from the higher input cost, I can kind of carry perhaps in the second half. I guess you'd expect the mix to probably turn, not necessarily in DRAM going down, but, you know, thinking about how business kind of trends for Foundry and Logic, perhaps those revenue streams could pick up a little bit towards the latter part of the year, and so that will kind of help you on the gross margin.

Yeah, Brian, I think that's probably a reasonable scenario, right? We do see DRAM strength here in the second quarter. You know, with lead times of less than a quarter, it's challenging to forecast much beyond that. But certainly the design activity that we're seeing portends some DRAM strength through the middle part of the year. And, you know, go back to Tom's question, with all of the capacity additions at the high end of Foundry and Logix, those almost have to turn into increased advanced probe card demand in the Foundry and logic space. So I think your scenarios are a reasonable one to think about in the mix shift as we go through 21. Okay.

And maybe one kind of last question, again, a little bit bigger picture or longer horizon here, but Again, going back to sort of what seem to be positive developments just around over the past six-plus months around next-generation 3D packaging adoption, again, frankly, new fad build-out in general. Thinking about your kind of three-year targets that you gave last summer, I think it was 6% growth for probe cards for the market and your growth a little bit above that. Do you think those are now sounding too conservative? the 6% growth for the market, and I guess, you know, again, that would bump up your growth potential as well.

Yeah, it's a fair question and one that we've been posing to ourselves as well. You know, when we put the model together, you know, last summer, a little less than a year ago, this rapid increase in WFE and injury street capacity really hadn't been contemplated. And so it's reasonable to assume that, the assumptions associated with advanced probe card growth over the next couple of years, maybe that sort of mid-single digits. I think we had a little bit higher than five, but mid-single digits may be more conservative. Having said that, if we do see that happen, I agree with you. We should be able to outpace the market and grow faster. That will allow us to achieve the target model a little bit faster. We're not going to go reset the target model, but hopefully this increased capacity, increased WFE results in more wafer starts on leading edge nodes where obviously you look at 2020's results. We need that market. That should provide a nice uplift and allow us to achieve $850 million in revenue and $2 in non-GAAP earnings per share before the 2023 timeframe we talked about. Okay, great. Thank you.

Thank you. Our next question comes from Charles G. with Needham. Your line is now open.

Hi. Thanks for taking my question. I want to have a follow-up question on the DRAM Probe Card strength. Well, supposedly you're getting somewhere about $42 million, $43 million in Q2. And given that, as I understand, the lead time for DRAM Probe Card is probably a little bit longer than your foundry logic probe card and you probably have a little bit better visibility into the third quarter or even fourth quarter here um are you sort of expecting third quarter can be run rating at a similar level at q2 and fourth quarter i mean after running hot a few quarters may come down a little bit, and then maybe the moment of foundry logic can pick up the slack and get you to a sequential growth kind of situation towards the year end.

Yeah, I mean, the mixed shifts that you just articulated are certainly one of the possible scenarios. You know, we have no visibility into the fourth quarter right now, no direct visibility in the fourth quarter. Obviously, our customers share forecasts with us. We understand their design release cadences. It's part of the reason why we're putting significant capacity in place. But PO visibility and PO lead times don't go anywhere close to the fourth quarter at this point. Your statement about the third quarter, sure, we've got a little bit of visibility into there when you look at the lead times that we're currently running. And if you look at past years, both 2019 and 2020, you know, history would lead you to believe there's going to be some strong mobile foundry and logic activity in the fourth quarter. So, you know, the scenario you painted is not an unreasonable one. Having said that, you know, we just don't have the direct visibility to be able to sort of confirm that in any really affirmative way. It has been the pattern the last couple of years. It's part of the reason why we are continuing to aggressively make investments, but I don't want to also create the expectation that that profile is in the bag.

Okay, thanks, Mike. Maybe a follow-up also on the gross margin, because you kind of talked about makeshift into second quarter, Foundry Logic and Flash, probe cards are down. but you expect DRAM and the systems will come up. And the system businesses hire those margins. That should offset some of the unfavorable product mix. However, I think Shai did mention a few factors, but I still feel like your DRAM probe card growth margins kind of running at a relatively lower level going into next quarter. I wonder relative to your historical average, is Q2 slightly lower or is it on a par? What's going on here for the gross margin for DRAM?

So similar to what I answered to Tom, it's true that historically, Foundry and Logic has a higher gross margin than DRAM and Flash has lower than DRAM. But even within the DRAM, there is, of course, overlap with the high-end DRAM design can have a higher than found in logic gross margin. And a low-end DRAM design can have a lower gross margin than a high-end flash design. So within that range, what we see in Q2 is the shift in the mix is to a way that we have some high-volume design of a low gross margin in the DRAM that And we are seeing lower farming and logic designs that get off in Q2 with a high gross margin. And the combination of these two is what creates the lower gross margin that we expect in the second quarter, in addition to the impact of the higher material costs.

Thanks. Maybe my last question, if I may, zooming out a little bit to switching to a little bit longer term. Your largest customer, they want to enter the Foundry business, and I just want to ask Mike if you have any thoughts on whether that could carry some of your market share strength at the existing market I mean, let's call it IDM 1.0 into this Foundry side of the business of this particular customer or that could potentially open up some competition to your competitors. Of course, I know you always expect competition when the market is growing strong, but just any thought whether at a high level of this, is a positive or negative for you guys, or it's a, it's a risk, increasing risk or lowering risk for you?

Yeah, I think we view their aspirations to enter the foundry business as an exciting opportunity for us. Obviously that customer, the partnership and relationship there goes back well over a decade, both between the companies and with, you know, the individuals involved. So there's a, a very close partnership. And as we've begun discussions about how we can best support their plan to enter the foundry business, it's a pretty exciting opportunity. They've got some compelling assembly and test technologies that they can offer as part of that foundry business. It's not clear that they're going to be a major part of the foundry business, at least initially. But I think net-net, this really represents a positive for us. We have obviously a strong position in the foundry market right now. Their entry into it, I think we can help add value to their initiative and hopefully mutually grow our businesses.

Thank you, Mike. Thank you. That's all my questions. Thanks, Russell.

Thank you. Our next question comes from Craig Ellis with B Riley Securities. Your line is now open.

In the questions, guys, I'll start acknowledging that I'm leading with something that's at risk of beating a dead horse, but I get the intra-segment mixed dynamics that are going on and the guidance the company's been very clear on those mechanics over time. The question, though, was really on the rhodium issue. Do you have the ability to do any hedging or is there anything else you can do to mitigate the volatility of pricing there? Or is it just going to be a matter of you being a price taker for whatever happens with Spot or whatever contract pricing plays out?

Yeah, so what we see in the quarter is, you know, the prices of Rodium went up from $16K to $28K. It's almost doubled. And I'm not a commodity expert, and we're not in that market. We look into what are the options when it comes to hedging, forward contracts, and things like that. But if you read the papers and look at what caused that, it looks like there were some productions, mining issues in South Africa that impacted last year because of COVID. I think it's too early, or we don't know yet if that's a long-term phenomenon or not. that should be resolved soon or over the next few months. But we'll certainly look into what are the options in dealing with such fluctuations. Okay, that's helpful.

Mike, I wanted to turn it to you for a couple questions. So the first question is regarding one of your prepared remarks statements, and it was about aggressive technology and capacity execution and I just wanted to see if you could follow up and provide a little bit more color on the things that the company's focused on this year with technology and exactly what we should think about with respect to capacity, if there's any color beyond just the CapEx number that sounds like it's reiterated from where we were to start the year.

Yeah, I think I'll start with capacity because I think, you know, if you go back to, our analyst presentation from last August and then subsequent turning calls, I think it's pretty clear our capacity increase is associated with advanced probe cards, putting a new FAB in place, gradually building out the capacity. But right now we're basically footprint limited and continue to be footprint limited until that new building comes online in the second half here. So no real changes there. We continue to execute on the plan we've talked about in prior calls. On the technology piece, it's really about serving some of the accelerating requirements, especially in Foundry and Logic, associated with advanced packaging and 5G. If you look at our customers' advanced packaging roadmaps, things like die stacking, modular die, heterogeneous integration – really drive up probe card complexity quite substantially. You know, the pitches or the densities we have to contact are much, much higher. The pitches mean the probes are much, much closer together. And we have to test at higher frequencies with higher currents and do all of this in a way that continues to scale with the basics of cost and quality. And so the vast majority of our technology investments are really targeted towards doing that, continuing to keep pace and even stay ahead of our key Foundry and Logic customers' requirements to enable their advanced packaging roadmaps. It's pretty clear that, you know, seven nanometer of one customer, five plus of another are going to have advanced packaging as a really central part of their technology roadmap. And our investments today are pointed at making sure we can properly enable those.

And just to be clear on some of the things that you're saying there, Mike, are the investments today and being an enabler something that shows up in revenues in the back half of this year, first half of next year, through next year? Or is it really something that comes on more in the second half of 22 and 23-24? Yeah, there will be –

contributions later this year as some of those things ramp in pilot production, but they're going to be hard to discern from the mainstream business that we have, especially in Foundry and Logic and DRAM. I'd expect more, and you can go look at our key customers' product roadmaps and where they're talking about driving some of these advanced packaging architectures into volume. It's really a 22-23 kind of event. But to be ready for that, we need to be investing in R&D now.

Makes sense. And then lastly for me, if I could, from time to time when you've characterized the foundry market, you've talked about the breadth of customers in foundry and logic. And certainly we had two 10% plus customers this quarter. But as you look ahead, do you expect that the breadth of some of the larger customers to broaden out in the back half of the year and next year or Or as we think about some strengthening in the back half in Foundry and Logic, would we expect it to be some of the same customers that were strong in 1Q?

I think you will see, you know, we've got a set of customers, if you look back historically, that often sort of pop in and out of the 10% list. I think we expect those same customers in both the Foundry business and in the memory business. to continue to be staples of our 10% list. The breadth, though, in our business is interesting because sometimes the foundry itself is the customer, but sometimes it's the fabulous design house that's the customer. And so the breadth of the number of fabulous customers that we're serving, whether directly with the fabulous customer and their design and test team or directly indirectly through the foundry, that breadth continues to expand and increase. And I think that's central to our continued diversification and trying to continue to drive a broad set of demand opportunities for form factor.

Makes sense. Thanks, guys. Thank you.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Our next question comes from Krish Venkar with Cowan. Your line is now open.

Hi, this is Robert Mertens on behalf of Krish. Thank you for taking my question. First, how should we think about the margin profile of the engineering systems business? I know you mentioned product mix headwinds from late last year have been worked through, but would you expect any similar buying patterns this year or seasonality? And then just a quick follow-up.

In terms of seasonality, if you look back in the last two or three years, I think we see Q1 usually a little lower than Q4. It usually relates to the fact that many of our customers in that market are universities and educational institutions that have budget to consume, and close to the year end, we see a little pickup in orders, and then in Q1, it's a little lower. In terms of the margin... We are saying, at least in the last three years, that the margin for the system business will fluctuate between the high 40s to low 50s. That's our target. That's also what we took into consideration when we built our long-term model of overall 47% gross margin. On the way there, things will fluctuate, but within that range is what we expect.

Great. Thank you. Just a quick one around the NAN pro card business and new products and just thinking about qualification through the first part of the year. When should we think about timing of any sort of new recognition of the business?

Yeah, our NAN business really has two components at this stage in the company history. The first is the legacy form factor NAN business, which continues to be opportunistic for us, you know, we are, for most of mainstream NAND, not cost competitive. And so that business you've seen historically has been pretty lumpy. We talked last quarter about starting to leverage the products and technology we got as part of the acquisition of the Advantest probe card assets to try and go after a little bit more of the mainstream NAND flash markets. That product is a lot more cost-competitive, and so we're beginning to work on exercising that option. We're still in very early innings, discussing with customers qualification plans, trying to extend that business a little bit beyond the single-digit millions revenue it had at the time of acquisition. So, you know, any qualification timeline for a new architecture in the industry takes several quarters, so probably getting us into the back half of 21. And then you've got to go compete for designs and win and ramp. So that's going to take you into sort of the middle part of 22. But as we go through that, we'll certainly keep you updated as we make progress on trying to exercise that option in NetFlash.

Great. Thank you. That's all for me. Okay.

Thank you. Our next question comes from Amanda Scarnati with Citi. Your line is now open. Hi, good evening.

Just on to TSMC, can you just talk a little bit about what the total opportunity can look like there, both from a perspective of what the opportunities for TSMC to outsource would look like as a percentage of their total probe card business and what that looks like in terms of what form can achieve in terms of market share there?

Yeah, I think so. At that customer, we're really focused and really only relevant and qualified for the advanced nodes, say 10 nanometer, 7 nanometer, 5 nanometer and on. But those nodes represent the entire opportunity for form factor. You know, there's very little insourcing that goes on for those advanced nodes because of the complexity. And so you know, go back to the question earlier about the significant WFE CapEx and investments in these advanced nodes, we expect that opportunity is going to continue to grow from where it is. If you look at where the revenue was in the first quarter, it's starting to nudge up against that $100 million annual run rate. It's still reasonably concentrated and we are going to see quarter-to-quarter fluctuations, but as we address more designs on those advanced nodes and more of that customer's wafer start to move to that advanced nodes, we're optimistic that we can continue to grow that business long term.

Great. Can you talk about capacity and if you're still capacity constrained at these levels or if you've been able to open up new capacity through the expense that we talked about a couple of quarters ago?

I think, Amanda, in some areas we are still capacity constrained, and it depends on the specific product mix. We have multiple factories with different dynamics, but by and large, in these levels of revenue, we are still capacity constrained.

Thank you. Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Mike Slesser for closing remarks.

Thanks, everyone, for joining us again this quarter. We're going to be at a bunch of conferences as we go through the late spring and early part of summer and hope to see you there. Take care and stay safe.

This concludes today's conference call. Thank you for participating. You may now disconnect.