FormFactor, Inc.

Thank you, and welcome, everyone, to FormFactor's second quarter 2021 earnings conference call. On today's call are Chief Executive Officer Mike Schlesser 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 GAAP to non-GAAP measures and other 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 regarding projections of financial and business performance, future macroeconomic conditions, the benefits of acquisitions and investments in capacity and in new technologies, the impacts of 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, July 28, 2021, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Schleser.

Thanks, Jason, and thank you, everyone, for joining us today. FormFactor delivered solid results in the second quarter, achieving the second highest revenue in company history. We delivered gross margins comparable to the first quarter, exceeding our outlook range through a combination of factors that were more positive than anticipated on our April 28th earnings call. These, together with continued operating expense control and share repurchases, resulted in non-GAAP earnings per share at the high end of our outlook range. Solid demand for FormFactor's diversified set of market-leading semiconductor tested measurement products is continuing in the current quarter. and we are executing on our planned investments to increase capacity for our products. Several factors helped our second gross margins. First, overall product mix was more favorable than originally anticipated, with system segment revenues reaching all-time record levels at near 50% gross margins. In probe cards, DRAM was, as expected, a significant portion of revenues, nearly matching the decade-high level of fourth quarter 2019. DRAM probe cards are generally lower margin products, and a substantial portion of our second quarter DRAM revenue was concentrated in one specific design with an unfavorable cost profile. In response, our operations and engineering team focused on yield improvement for this design and delivered better than expected manufacturing costs, which improved gross margins significantly above the initial shipments for this design. Our second quarter results provide a reminder that shifts in form factor product mix can have a significant impact on gross margins, both quarter to quarter, and with lead times typically less than a quarter, even inter-quarter. Shai will provide more details on our gross margin results and outlook later. We continue to advance our environmental, social, and governance, or ESG, initiatives during the quarter. Our successful efforts to aggressively reclaim and recycle our rhodium waste reduced our environmental footprint while also producing a financial benefit as our higher recycling credits favorably impacted gross margins by partially offsetting higher input costs. On the governance front, we welcome Jorge Tittender to our board of directors, adding a director with significant industry and executive experience who is also well recognized for his passionate commitment to diversity and inclusion. Jorge is the most recent of three new directors that have joined our board over the last two years. FormFactor's board of directors has become an ethnic and gender-diverse team of accomplished individuals with world-class expertise in areas from cybersecurity to organizational development, in addition to the requisite experience in semiconductors. Our ESG initiatives, including our progress against quantitative goals, are discussed in the corporate citizenship section of our website. Turning now to segment and market-level details. In Foundry and Logic ProCards, the expected sequential decline in revenues materialized. Even so, the top two foundries and the largest IDM remain 10% customers, and client PC, data center, and mobile designs each contributed significantly to the top line. In the third quarter, we expect to see the typical seasonal reduction in mobile application processor demand, partially offset by an increase in microprocessor demand, and continued strong growth by GRS applications. Foundry and Logic customers, including all three of our second quarter 10% customers, are making significant wafer fab equipment investments in 2021. As capacity comes online later this year and into early next year, we expect to see increased demand for leading-edge Foundry and Logic probe cards. Along with these capacity additions, our customers are adding innovative advanced packaging architectures like EMIB, Foveros, and 3D Fabric to their roadmaps. to help offset the slowing of front-end-driven Moore's Law. As we've discussed in the past, these chiplet or tile-based integration schemes drive both higher test intensity, which expands the number of probe cards required to wafer out, and test complexity, which widens form factor's competitive advantage. With lead times of less than a quarter, short-term visibility remains challenged as always, but the combination of significant customer capacity investments paired with their adoption of advanced packaging, provide longer-term secular demand drivers for form factors probe card products. To ensure we're prepared to meet this increased probe card demand, as I mentioned earlier, we're continuing to execute our planned capacity increases with our new 100,000 square foot manufacturing center in Livermore on track to produce initial customer shipment in this year's fourth quarter. Consistent with the flexible manufacturing strategy that has allowed us to quickly and efficiently capitalize on customer demand across our served markets, this facility will be capable of producing probe cards for Foundry and Logic, DRAM, and Flash. The actual initial capacity addition will be modest as we plan to progressively add tools and labor to match customer demand. We're excited about the capability and flexibility this new footprint will provide removing a growth constraint that we have operated under for the past 18 months and helping us to achieve the $850 million revenue of our target financial model. Third quarter demand for DRAM cards continues to be strong, although we do expect a slight sequential reduction from high second quarter levels. New design activity continues at high levels across all DRAM customers, with remarkable breadth across multiple nodes for DDR4 and DDR5 designs in both mobile and PC server applications. As a reminder, probe cards are a consumable that is specific to each new chip design, and so demand is generated from not just node migrations, but also the release of chip designs on existing nodes and architectures. As also noted earlier, our engineering systems business delivered record revenues with contributions from the acquired FRT and HPD businesses augmenting the steady legacy stations business. FRT tools provide unique metrology capabilities that enable advanced packaging applications, and we're currently capitalizing on strong demand for FRT's high-performance, multi-sensor, 300-millimeter optical metrology tool, especially among leading foundry customers. Advanced packaging is a key driver for all of our businesses as our customers begin to adopt chiplet-style integration strategies that generate new test and measurement requirements. Our capability to quickly, accurately, and non-destructively measure and control critical dimensions, film thicknesses, and surface topologies on chiplet-to-chiplet interfaces is key to improving and maintaining assembly yields. HPD's business, targeted at longer-term growth by enabling quantum computing applications, also had good momentum in the quarter. Together with Northrop Grumman, a key customer partner in the quantum computing field, we announced a fully automated cryogenic wafer probe system, which will accelerate the development of superconducting compute applications. Let me close by noting that with a continued solid demand outlook and good execution on both short and long-term gross margin and capacity expansion, 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 5B, advanced packaging, and memory content growth. Our leadership position in these attractive markets, paired with our differentiated strategy and disciplined execution, drive continued growth and share gains as we progress towards our target model. Shai, to you.