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.