FormFactor, Inc.

Thank you and welcome everyone to FormFactor's fourth quarter 2021 earnings conference call. On today's call are Chief Executive Officer Mike Slessor and Chief Financial Officer Shai Shahar. Before we begin, Stan Fickelstein, the company's VP of Investor Relations, will remind you of some important information.

Thank you. Today the company will be discussing their 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 and in the investor relations section of our website. Today's discussion contains forward-looking statements within the meanings 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, anticipated industry trends, the disruption in our supply chain, the impacts of regulatory changes, 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 with the SEC for 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, February 2nd, 2022, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Schleser. Mike?

Thanks, everybody, for joining us today. FormFactor posted record results in the fourth quarter, delivering revenue of over $200 million for the first time in company history with non-gap earnings per share at the high end of our outlook range. This caps a record 2021 that produced over three-quarters of a billion dollars in revenues and over $150 million of non-GAAP operating income. And I'd like to take this opportunity to thank the worldwide form factor team for their perseverance and dedication to produce these outstanding results. As we start 2022 in the year of the tiger, we continue to benefit from solid demand across all our served markets in probe cards and engineering systems, and we're excited about the important role we're playing in enabling innovation and growth in the semiconductor industry. In addition to our record financial results, we were recently recognized by Newsweek for our ESG leadership as one of America's most responsible companies. In addition to an environmental and social focus, FormFactor's overall ranking was supported by a high score in corporate governance. Driving FormFactor's ESG performance to a world-class level has become a major focus for our leadership team and board of directors in recent years. and we're very proud to have been recognized for these efforts. Like many manufacturing companies, we continue to face a variety of supply chain and labor challenges. Our long-term investments in automation and vertical integration have helped us mitigate the effect disease had on us, enabling us to deliver strong results throughout 2021. However, the recent spread of the Omicron variant has caused labor shortages in our U.S. factories in the early weeks of 2022, and is partially responsible for the sequential reduction in revenues in our first quarter outlook. We are also experiencing extended lead times for some of our products, primarily in the system segment, caused by delayed deliveries for specific subcomponents and subsystems from certain suppliers. Our team remains focused on actively managing and resolving these challenges, both by working closely with our current suppliers and rapidly qualifying and ramping new suppliers. Minimizing impacts to our supply chain and labor availability is especially important in view of our capital investments to meet growing customer demand. As we previewed in our October earnings call, we began customer shipments from our new Livermore Manufacturing Center in the fourth quarter, and these shipments contributed to our record quarterly revenue. We are gradually increasing capacity in Livermore to meet customer demand by adding both tools and labor. We're also expanding other facilities across our global manufacturing network, which will create the capacity to meet and then exceed the $850 million revenue of our current target financial model. Turning now to segment and market level details, Calendar and Logic Probe Cards, our largest business, was responsible for most of the sequential growth in the fourth quarter, tracking to a seasonal pattern that has been in place the past few years. Consistent with that seasonality, we expect to see a slight decrease in overall first quarter foundry and logic revenues, with a reduction in RF probe cards partially offset by strong foundry demand. This foundry shrink provides some real-time insight into the differences between the demand drivers for consumables, like probe cards, and for capital equipment, like automated test equipment. As we often note, probe cards are a consumable specific to each new chip design, and so we benefit from both node transitions and the release of new designs on existing nodes. In the first quarter, our foundry business is being driven by this second component, the release of new designs on existing nodes, as we enable reuse of our customers' installed base of testers to test new chip designs, primarily in high-performance compute applications. Our expectation for continued long-term growth in the Foundry and Logic probe card market is one of the primary drivers of our ongoing capacity expansions. Customers are investing in both leading-edge capacity, as evident from record levels of wafer fab equipment spending, and early-stage innovative advanced packaging architectures like EMIB, Foveros, and 3D Fabric 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 per wafer route, and test complexity, which widens form factor's competitive advantage. Together, both these dynamics create tailwinds for long-term foundry and logic probe card demand. Turning to DRAM, Demand for DRAM probe cards in the fourth quarter sustained near the high levels of the second and third quarters as customers continued to release and ramp multiple new designs in volume. We do expect a moderate sequential decrease in DRAM revenues in the first quarter after several quarters at these near record levels. New design activity with each of the major DRAM manufacturers continues to be strong with our diverse mix of new DDR4 and DDR5 designs in both mobile and PC server applications. And we expect this new design activity will continue to sustain healthy demand from each of our customers. FormFactor's ability to absorb these short-term fluctuations in demand from each of our customers, serve markets, and specific applications within these markets is a result of our long-term initiative to be a diversified market leader supplying all major semiconductor markets and manufacturers. and it remains a key tenet of our operational strategy. Our engineering systems business also delivered record results in the fourth quarter with revenue of nearly $40 million, and we continue to experience sustained demand in the first quarter. This demand is driven primarily by the adoption of FRT optical metrology tools in advanced packaging applications. along with continued customer investment in engineering probers to enable industry innovation in new CMOS architectures like gate all around and optical applications like silicon photonics. In addition, we recently launched an exciting new program to offer HPD state-of-the-art cryogenic test tools and capabilities as a service, enabling quantum computing developers to rapidly and cost-effectively characterize their qubits and resonators. Using form factors cryostats with innovative probe sockets adapted from our market-leading probe card business, customers can utilize this service to dramatically accelerate development cycles with no upfront capital investment. Let me close by noting that with a solid demand outlook and increased capacity to meet that demand, we are well along the path to achieve the target financial model that delivers $2 of non-GAAP earnings per share on $850 million of revenues. Our leadership position in our attractive served markets paired with our differentiated strategy and disciplined execution will drive continued growth and share gains as we progress towards our target model and beyond. Chai, over to you.

Thank you, Mike, and good afternoon. As you saw in our press release, and as Mike mentioned, Q4 represented a strong finish to a great year. We concluded the year with record quarterly and annual revenues and record quarterly non-GAAP operating profit and pre-tax income, achieved while opening our new manufacturing center during the quarter. Fourth quarter revenues were above our outlook range, and non-GAAP EPS was at the high end of the range, while non-GAAP gross margin was at the low end of the range. Fomfactor's fourth quarter revenues were $205 million, an 8% sequential increase from Q3, and an increase of 4% year over year. and contributed to a total fiscal 2021 revenues of $770 million, an 11% increase compared to 2020. Probe card segment revenues were $166 million in the fourth quarter, an increase of $11 million, or 7%, from Q3. The increase was driven by higher revenues in older markets we served, with the biggest increase in Foundry and Logic revenues. System segment revenues were a record $39 million in Q4, an increase of $4 million, or 11%, from the third quarter, mainly as a result of higher sales of 300-millimeter systems and cryogenic probers for quantum applications, partially offset by lower thermal systems revenues. Within the probe cart segment, Foundry and Logic revenues increased by $9 million from Q3 to $114 million in the fourth quarter, comprising 56% of total company revenues, slightly higher than the 55% in the third quarter. DLM revenues were $40.3 million in Q4, $0.4 million, or 1% higher than in the third quarter, and were 20% of total quarterly revenues as compared to 21% of revenues in the third quarter. Flash revenues of $11.6 million in Q4 were $1.2 million higher than in the third quarter and were 6% of total revenues in Q4, same as in Q3. Gap gross margin for the fourth quarter was 43.7% of revenues as compared to 42.2% in Q3. Cost of revenues included $1.3 million of gap to non-gap reconciling items, which we outlined in our press release issue today and in the reconciliation table available in the investor relations section of our website. On a non-gap basis, gross margin for the fourth quarter was 44.3% within our outlook range, reflecting lower gross margins in both segments, and 170 basis points lower than the 46% non-GAAP gross margin in Q3. Gross margin improvement remains an area of focus. As a reminder, we expect that margins will fluctuate from quarter to quarter, mainly as a result of changes in product mix. Our probe cut segment gross margin was 44.1% in the fourth quarter, a decrease of 100 basis points compared to 45.1% in Q3. The difference is mainly due to a less favorable product mix, and higher wafer processing expenses related to production flow timing, partially offset by lower indirect material spending. Our Q4 system segment gross margin was 45.5%, 460 basis points lower than the 50.1% gross margin in the third quarter. This decrease is due to a less favorable product mix and year-end inventory adjustments. As we've said previously, we expect our system segment gross margin to range between the high 40s to low 50s. Our gap operating expenses were $58 million for the fourth quarter, $1 million higher than in the third quarter. Non-gap operating expenses for the fourth quarter were $49.7 million, or 24.2% of revenues, as compared with $48.5 million, or 25.5% of revenues in Q3. The $1.2 million increase relates mainly to higher marketing, travel, and sales commission expenses, in line with the increase in revenues and business activities. Company non-cash expenses for the fourth quarter included $7.8 million for stock risk compensation, $2.4 million for the amortization of acquisition-related intangibles, and depreciation of $6.5 million, all levels similar to the third quarter. Non-GAAP operating income for the fourth quarter was $41 million, a company record, and $2.3 million higher than the third quarter. GAAP net income for the fourth quarter was $26 million, or 33 cents per fully diluted share compared to $20.5 billion or 26 cents per fully diluted share in Q3. The non-GAAP effective tax rate for the fourth quarter was 16.7%, 220 basis points lower than the 18.9% in Q3. This brings our 2021 full year non-GAAP effective tax rate to 18.2% within our anticipated non-GAAP effective tax rate of 15 to 20%. As a reminder, Our annual 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 credits. Fourth quarter non-GAAP net income was $34.7 million, or $0.44 per fully diluted share, compared to $31.6 million, or $0.40 per fully diluted share, in Q3. The fourth quarter's non-GAAP net income was second only to the fourth quarter of 2020. Moving to the balance sheet and cash flows. We generated $24 million of free cash flow in the fourth quarter compared to $14 million in Q3, bringing 2021 free cash flow to $74 million in a year that included a significant investment in capital expenditures of $67 million. We had total cash and investments of $280 million at the end of the quarter. The fourth quarter $10 million sequential increase in free cash flow reflects a decreased investment of $5 million in working capital and a $5 million decrease in capital expenditures. As of the end of the fourth quarter, we had two term loans remaining on our balance sheet, totaling $24 million. We invested $15 million in capital expenditures during the fourth quarter, compared to $20 million in Q3. This brings our year-to-date capex to $67 million, just below our previously communicated range of $70 to $80 million. This investment chiefly related to the capacity expansion in our Livermore Manufacturing Center, which went online during the fourth quarter, as expected. In 2022, we expect to continue to invest in increasing capacity to meet customer demand. Accordingly, 2022 CAPEX is planned to be between $60 and $80 million, As a reminder, we expect CapEx to return to the 3.5% to 4% of revenues in our target financial model after we conclude these capacity extensions. No significant share repurchases were made during the fourth quarter, and for year-end, we purchased just over 620,000 shares with an average purchase price of $48.62 under our two-year $50 million share repurchase plan. This brings our total share repurchases under this plan to about 0.8% of our outstanding shares. The main purpose of the plan is to offset dilution from stock-based compensation, and at year-end, $26 million remains available for future repurchases. Turning to 2022 first quarter non-GAAP outlook. As Mike mentioned, we expect a seasonal decline mainly in foundry and logic revenues and a moderate decrease in DRAM revenues. These factors result in a Q1 revenue outlook in the range of $188 to $200 million. Non-GAAP gross margin for the first quarter is expected to be in the range of 44 to 47%, on a more favorable product mix, partially offset by higher input costs and labor expenses. At the midpoint of these outlook ranges, we expect Q1 operating expenses to be higher than Q4 by approximately $1 million, mainly due to annual benefits reset and additional hiring. Accordingly, non-GAAP earnings per fully diluted share for Q1 is expected to be between $0.35 and $0.43. Reconsideration of our GAAP to non-GAAP Q1 outlook is available on the Investor Relations section of our website and in our press release issued today. With that, let's open the call for questions. Operator?

As a reminder, to ask a question, please 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 the line of Brian Chin of Stiefel. Your line is open.

Hi, good afternoon. Nice 4Q results, and thanks for letting us ask a few questions. Maybe the first question, just housekeeping-wise, how large is the 1Q revenue impact from the labor and component constraints you referenced?

Yeah, Brian, it's Mike. If you look at the midpoint, it's down roughly $10 million. I'd split that basically in half between supply chain and labor constraints that we've experienced early in the quarter, and the other half being the seasonality we typically see Q4 to Q1 in Foundry and Logic. Now, we directionally have seen larger seasonality down ticks than that Q4 to Q1, There is some element of it, but as I said, the foundry piece of the business is quite strong. So, again, $10 million down at the midpoint. I'd split it about half between constraints and demand seasonality.

Okay. Yeah, that's really helpful. And then maybe an observation that ties into maybe the foundry logic part of the business, but In 4Q, the company is bringing a record quarterly revenue. Even as revenue to your largest customer, it looks like it's down 35%, 40% from its run rate maybe in 2020. That seems like a positive. I guess from a timing perspective, when would you anticipate that logic devices built with 7 nanometer process technology that rely on significant heterogeneous dye integration, when do you think that could become a more resurgent part of your revenue streams?

Yeah. So it's a great observation, Brian, and one that I do want to emphasize for people. You know, we talked about some of the 2020 run rates for that customer probably not being at sustainable levels, at least for their 10 nanometer manufacturing model. And indeed, you see in the second half of 21, we did come back to some more normalized levels. But if you look out a little bit further to heterogeneous integration, chiplet strategies or tile strategies, those definitely are raising test intensity, which is going to require more probe cards per wafer out. That for us right now is a very significant R&D activity, but I wouldn't expect it to significantly help with revenue until maybe late in this year or early into 2023. If you look at the usual delay or lag between customer product releases and the probe card demand, you can see there's a couple of quarters in there. And so, although, again, a very active part of our R&D engagement with that customer and all leading customers in the Foundry and Logic space, I do expect it to be a late-in-the-year, early-23 impact for revenue.

Got it. And then maybe just one step-back question, Mike, before I hop off. If you were to carve out the advanced foundry logic part of the probe card market, so that kind of isolate on that, Sam, what do you think the market CAGR might be for that over the next two-year horizon?

Yeah, so it's an interesting question because there's components of some real structural tailwinds there. But some also unpredictable headwinds that we've obviously dealt with over the last couple of years, the most recent being, you know, the Omicron issues to start 2022. You look at the overall probe card market, you know, it's probably a high single-digit grower. That piece, the high-end foundry and logic, I think that's where the biggest tailwinds are. And although they're difficult to quantify with the different puts and takes associated with high-end WFE spend, some of the advanced packaging adoption, heterogeneous integration adoption that we just touched on, I do think there's the potential for that subsegment to outgrow the single-digit growth of the program market. And we've seen that in a couple of recent years. Fortunately, it's our biggest market and one in which we live.

Okay, great. That's helpful. Thanks so much.

Thank you. Once again, to ask a question, please press star 1 on your touch-tone telephone. Again, that's star 1 on your touch-tone telephone to ask a question. Our next question comes from the line of Krish Sankar of Cohen & Company. Your question, please.

Hi. Thanks for taking my question. I actually have three of them, too. Mike, in your prepared comment, you mentioned that The supply constraints impacted the systems business, but not the probe card. I want to make sure I heard that right. And if that is the case, and I understand probe card is a consumable, but if some of the front-end equipment folks are having issues with constraints and in shipping it to your customers, how does that, if at all, impact probe card demand?

It may impact part of the demand and the seasonal downtick we're seeing here in Q1. It's obviously hard to tell in the moment, but if the customers don't have the front-end capacity in place to produce wafers, qualify them, and ramp new designs, they're not going to need pro cards. As we've discussed in the past, We typically lag the WFE spending and install by somewhere between two and four quarters, depending on customer yield ramp and the details of that. So any delays in WFE are going to result in delays in the overall ProCard spend. Having said that, there was enough WFE spend and capacity added across the industry in 2021 that led to some strong demand in the back half of the year that led to the record results. and continued pretty good momentum here into 2022.

Super helpful. And then I do understand like most of your probe cards are in leading edge. Is there a way, you know, if you say lagging edge is like say a 14 or 16 nanometer and above, and I know I think one of your Foundry customers probably does in-house probe cards for lagging edge. What did you say your probe card revenue split is between leading and lagging edge or leading and mature nodes?

Gosh, that's a tough one that we'd probably have to get back, John. I don't want to guess on my feet, but you're right. The majority of our revenues are driven by leading-edge nodes and new designs ramping on those leading-edge nodes. The one significant exception is things like the automotive industry. We do a reasonable business for microcontrollers and special sheet chips in automotive that are obviously fabbed on trailing-edge nodes. But as a probe card manufacturer, sort of in between the front end and the back end, often we don't have a ton of visibility onto the specifics of the node unless it's a very significant design where there's a lot of visibility from the customer.

Got it. Fair enough. And then a final question for Shai. You know, I mean, the target model you laid out in 2020, at least $50 million, two bucks in earnings, clearly looked like, you know, you are, you know, almost there. And... you know, between then and now, obviously, the foundry logic WFC, or demand has meaningfully moved higher. So I'm just kind of curious, 850 million, two bucks per EPS, is this still the target, or do you feel good about exceeding that?

So we feel very comfortable with the target model we put in place and the progress we made so far. We are not there yet, right? We're making great progress. We're trying to find a million in Q4. As we get closer to the model, if we run a couple of quarters in a runway which is close to this runway, we'll provide an update on the model, similar to what we did a year ago when we got closer to achieving the previous model.

Fair enough. Thanks, Shai. Thanks, Mike.

Thank you. Thank you. Our next question comes from Charles Shi of Niedermann Company. Your line is open.

Good afternoon, and thank you for taking my question. So, Mike and Shai, maybe my first question, a little bit about your indirect customer, Apple, in terms of your seasonality pattern here. I think over the last couple of weeks, we did hear there are some people got hurt because of the no migration of Apple being delayed by one year, but we also heard that there are some other semiconductor device companies seeing pull-ins as Apple built early inventory. I did hear you said the Foundry seems to be strong, and you did highlight the HPC strength. I don't know if that's really coming from your indirect customer, this indirect customer or not. But on the mobile side, are you seeing some of the pulling effect as well, or do you see a slightly different seasonality pattern here? Thank you.

Yeah, I think it's an important piece to our business to understand, and that's why I took the time to make the point in the prepared remarks. You know, probe card demand is driven by new designs, and if they're on existing nodes, that drives probe card demand. If they're on new nodes, that obviously drives probe card demand. So you can often see these local dislocations between our consumables business and capital equipment businesses that are very closely related, for example, ATE. If I look at the foundry strength at present, as I said, it's primarily associated with HPC, high performance compute. There are mobile elements to it, no question about it. But I think if I were to draw a single dominant theme to it, it is high performance compute in the foundry segment. which, you know, is not too surprisingly given the rapid innovation and some of the very interesting chip designs you see ramping through that ecosystem.

Got it. Maybe the next question on your supply chain. I think you did provide some quantitative color. Thank you for that. I want to ask if you can provide some direction of color in terms of the supply chain impact, what you're seeing right now. Is it more impacting on the probe car side of the business or the system side of the business?

Yeah, it's definitely more impacting the system segment. And it's pretty targeted things, pretty targeted subcomponents. from a handful of suppliers. And when you get to the fundamental root cause of what's causing those suppliers to push out their deliveries to us, somewhat ironically, it comes back to the semiconductor shortage or at least electronic component shortages. Our team's done a very good job of working with existing suppliers and qualifying new suppliers. But as with many other semiconductor companies, semiconductor supply chain companies, we're We're constrained in a couple of places, but is having an impact on lead time at present. Again, very focused in the system segment. We've managed to avoid any impact in the probe card segments and continue to be very focused on doing that. But, you know, it's such an active part of managing the business and managing any semiconductor supply chain business right now that it's a big part of management's attention.

Got it. Maybe my last question, a little bit switching to longer-term view. I want to ask you about the DRF. Obviously, DRFI is a big driver for your pro-car business. But assuming you have some visibility into what probe cards are really supporting DDR4 and what are really supporting DDR5, are you seeing the crossover in terms of either the volume or dollar value of the transition from DDR4 to DDR5 in terms of the probe card demand yet? If you haven't seen it, do you expect you see that this year? That's my last question. Thank you.

Yeah, I think we're pretty close to whether you want to call it a crossover or parity between DDR4 and DDR5. I've been quite surprised at the longevity of DDR4. Some of these previous architecture transitions our DRAM customers have gone through have been pretty discontinuous, almost like a node transition where we went from DDR3 to DDR4. there was a big shift in design activity and most new designs all of a sudden became DDR4. That's not the case here at present with the DDR5 transition. There's still a lot of designs on DDR4. I don't know whether that's associated with some of the related ecosystem pieces, processors, different other peripheral chips and that sort of thing. But it is an interesting observation that we're hovering right around parity from a new design perspective between DDR4 and DDR5.

Thank you, Mike. That's all from me. Thank you. All right. Thanks, Charles.

Thank you. Our next question comes from Craig Ellis of B. Reilly Securities. Your line is open.

Yeah, thanks for taking the questions. The first one is just a clarification and understanding some of the issues that are at play in the first quarter's outlook around supply chain and labor issues. I think, Mike, I heard you say that if we look at the change in revenue, about half of that is supply chain-related things, and I think I'm hearing from this call that supply chain is some issues on the system side and then some labor issues. The question is this. Do you feel like you have good visibility to getting better supply dynamics with some of the things that are impacting systems? And with respect to some of the things that are more labor-related, when do you think you'd have staffing back where you want it to be? Is this something that persists through the first quarter, or should you have it largely behind you by the time you get into the second quarter?

Yes. Let me address a couple aspects of that question. Let's parse it into supply chain and labor separately. On the supply chain side, yes, approximately half of half of the impact, a quarter of the impact is associated with subcomponent supply in the systems business. These are things that, as I said, our supply chain team continues to work to find alternatives, to work with existing suppliers to make sure that we mitigate the overall impact of those shortages and keep our commitments to customers and keep lead times down as best we can. The other component, and this is primarily in the ProCard side, is labor shortages in the early part of the quarter, primarily due to the quarantine requirements associated with Omicron. Obviously, a lot of people, you know, we have primarily a U.S. manufacturing West Coast footprint. A lot of people were either infected or had a close contact, and our safety policies require, even if you don't test positive, if you live with somebody or have been in close contact with somebody who tests positive, you're not allowed in the factory. And so that took a significant chunk of labor capacity out in the month of January. It does seem to, consistent with the communities around us, improved rather dramatically over the past week or so. But if I'm trying to play forecaster for COVID infection rates, I don't have a very good record, and I'm not sure I'd want to lean into that one too far. We're trying to keep our workforce as safe as we can. Assuming there's no new variant among us that takes out a significant fraction of the workforce, it feels like most of that's behind us. But the last two years have taught us anything. It's the predictions for the end of the pandemic can be a bit difficult to make.

Yep, absolutely, that's the case. The second question was just on the DRAM business. The company was opportunistic, picking up share in the third quarter, and clearly the business is strong, and you talked about the strength you're seeing in DDR3, excuse me, DDR4 and DDR5 with each manufacturer. The question is this, how do you feel about share at present? And as you look out over the course of 2022, are there opportunities for further share gain in the DRAM market?

Yeah, I think it's like the high-end founder and logic market. It's essentially a market where there's two primary suppliers, us and in DRAM, a Japanese company. And You know, we did manage to gain some share over the past year on our key competitor. And I think there's the opportunity at least to hold that share, if not gain some more. Some of those share gains are specific to the kind of devices and the test strategies that our customers are releasing and ramping. You know, we've talked a lot in the past about mix in DRAM and two touchdown versus one touchdown configurations. There's a lot of subtleties in where form factor has competitive advantage. But I think the share gains we've been able to achieve and execute on in 2021, I am optimistic that over the long term, we're going to be able to hold those and hopefully even push them forward a little.

Yep, makes sense. And then lastly for me, before I hop back in the queue, this is at least the second call that you've mentioned previously. quantum computing and some opportunities in the systems business. Can you just talk about how material that opportunity is now and what you think might be possible over the next couple of years? Yeah.

Quantum for us, really a long-term play. And by long-term, I mean outside the $850 million target model and achievement to that. But it was fundamental to the acquisition we made of HPD out of Colorado a little over a year ago. The reason we did that was because we had major customers coming to us, really asking us to help them figure out strategies, build tools, build capability to test these quantum computing devices. The subtlety here, the difficulty here is that most of these quantum computing devices have to operate at very, very low temperatures in very well controlled environments. So close to absolute zero and things like essentially no magnetic field. So that drives some very specialized test requirements. A pretty natural fit to our engineering systems business and an exciting long-term opportunity for us to enable this nascent industry. But it's a few years off, no question about it. I would not expect to see significant impact on our financials over the next couple of years. But again, it's one of the longer-term bets we're making to continue to drive growth and SAM expansion for form factor. And just to finish the point, it's part of the reason why we introduced this test as a service that we announced earlier this week. We're really helping this nascent industry get their characterization and tests done quickly while learning side-by-side with them and monetizing both the acquisition that we made and the capabilities that we have internally.

Yep. And then if I could just ask a follow-up to that that's systems-related. $39 million in the quarter is the best number that I can see going back six to eight quarters, and I think the best ever. I didn't catch from the prepared comments what contributed to such a high level and And I think we're seeing things ease off a little bit in the first quarter from guidance, but what's the potential for us to be moving maybe to a new higher level of system sales that's closer to the $40 million range per quarter versus a low to mid-30s?

Yeah, I touched on it a little bit in the prepared remarks, but it's worth expanding on. You know, that level of the system segment being up around $40 million is It really has three primary factors. One is a lot of strength in the core engineering program business, augmented by some strength in the thermal piece of that business. Our Foundry and Logic customers are dealing with trying to test devices with very high power densities, hundreds of watts, and dissipate the power out of that. So there's some real technical need there that we're solving the problem. But the other piece on top of that is the benefit of the acquisitions we've made. HPD to a lesser extent, as I just told you, but there is a positive impact there. We've seen some nice growth out of the FRT optical metrology business as their tools get adopted for advanced packaging applications. So the systems business operating up around the $40 million level as a consequence of legacy systems being nice and strong because of the industry innovation and yield improvement, along with some good benefit from the acquisitions that we've made over the past couple of years.

Got it. Thanks, Mike.

Thank you. Thank you. Our next question comes from Christian Schwab of Craig Harlem Capital. Your question, please.

Hey guys, just a quick follow-up on DRAM. What should we think about DRAM growth, you know, in calendar 22, you know, given we will have new designs on DDR5 and, you know, probably a continuation of new designs on existing nodes. But DRAM was especially strong this year. Can you give us a framework of kind of growth expectations there?

Yeah, I would, you know, go back and think about, you know, we talked about potential growth at the high-end Foundry Logic probe card market. You know, if you look at the overall probe card market and kind of a mid-to-high single-digit kegger, you know, we don't expect DRAM to outgrow that significantly. And there's several reasons for that. One is our customers tend to do a pretty good job of constraining their overall spend and and driving their costs of tests using things like form factor's ability to test the whole way for once to drive test costs down. So we don't expect to see a lot of market growth there. Really, the place, as we've talked about both on this call and on previous calls and associated with our model, the real growth is coming from Foundry and Logic Pro cards. A lot of investment there and a lot of complexity and intensity increases that are driving up our customer spend as they try and make sure that they're yielding good parts, especially as they go into these chiplet style products. That's great.

That's a great segue into your, you know, historically, at least this year, your third largest customer. Do we have a path or a visibility for them to be a more consistent 10% customer throughout calendar 22. Can you give us some direction of how we should be thinking about that? I know we've talked about that customer in the past previously, you know, maybe being able to scale materially higher. Can you just give us an update on that?

Sure. Yeah, and I think reiterating our expectations for that customer, we do believe we can get them up to something like $100 million a year annually. One of the challenges with them appearing as a 10% customer is we continue to grow the business quite substantially, and so the bar to get on our 10% list continues to grow. Their business continues to be pretty seasonal. We do expect first quarter strength, as I mentioned in the prepared remarks, and I think it's indicative of higher test intensity on some of these advanced high-performance compute designs that really drive a higher probe card spend. But I would also expect seasonality to continue as they prepare for second-half ramps for some of these things by buying probe cards in the first half and qualifying everything and making sure they're ready.

Okay. So typical seasonality kind of to last year, kind of, you know, as a customer kind of Stronger in the first half and not quite as strong in the second half. Did I hear that right?

Yeah, and sort of within striking distance of being 10% in most quarters. Sometimes on the list, sometimes not. Okay, perfect.

Thanks, guys. No other questions.

Thanks, Christian. Thank you. Our next question comes from Amanda Scanati of Citi. Please go ahead.

Thanks. Can you talk a little bit about the competitive environment that you're seeing in Logic and Foundry, and have there been any shifts over the last 12 months, either at Intel or at TSMC, as the dynamics change a little bit in those businesses?

Yeah, so we talked about the competitive dynamics, I think, with Craig's question in DRAM. Foundry and Logic, a similar market. You've got two very strong lead suppliers. us and a privately held Italian company. And they've shown some good growth. I think they've done a good job in continuing to execute and achieve a strong second supplier position at a lot of these key customers. But I wouldn't characterize it as a fundamental change in the competitive dynamics. I think there are going to be ebbs and flows in market share as things go through different transitions. But fundamentally, the probe card market is no different than some of the other markets like etch and dep, probably not lithography, where two credible suppliers are going to be competing design to design and node to node for different opportunities, different share gains. And I think it's a relatively healthy competitive environment, not just in DRAM, but in Foundry and Logic as well.

Can you just talk a little bit about – you know, the M&A strategy going forward. It seems like you have quite a nice portfolio built out, a lot of growth happening from recent acquisitions and should propel growth through 2020, starting in 2023, really. Is there additional appetite for M&A near term, or do you think the portfolio is pretty well suited right now?

No, there's definitely an appetite for more M&A. It's a key component of our strategy. primarily focused in extending our served markets. We think we can, in our existing served markets, continue to execute, drive leadership position, and drive share gains. We don't think we want to spend M&A dollars there, partially because of the dual supplier dynamics I talked about previously. But if you look in the system segment and some of the related consumables segments, I think there's some attractive pieces of served market where we do want to be taking the dollars that we're generating from operations in things like the probe card business and deploying them and buying leadership positions in new pieces of served market. I think the recent acquisitions we've done, I talked about FRT's growth for optical metrology and advanced packaging applications, a great example of us taking some of that capital deploying it to buying some strong technologies and good products, and then driving them through the form factor customer relationships and overall industry stance to get good growth out of those acquisitions. That's a theme that we're going to continue to execute.

Perfect. Thank you.

Thanks, Min. Thank you. Again, to ask a question, please press star 1 in your touchtone telephone. Again, that's star 1. on your touch-tone telephone to ask a question. Our next question comes from the line of Tom Diffley of DA Davidson. Your line is open.

Yeah, good afternoon. Thanks for the question. So, Mike, one more question on the DRAM market. When you look at potential growth going forward, is it more impacted by capacity as new wafer starts or by new transitions or, you know, the changing from the models, you know, DDR4 to DDR5? What's the biggest driver of gains going forward?

I think it's wafer starts. If you look at the way DRAM now works, the node transitions or shrinks don't offer our customers very much bit growth. And so the way they're driving bit growth is essentially through new wafer starts. You put more wafers through a DRAM FAB, you're going to need more probe cards. And so I think that's the fundamental driver of demand. Having said that, as we talked about a little bit earlier in this session, we don't see a lot of growth in the DRAM ProCard market. Our customers are pretty good at squeezing costs at a DRAM test on a per wafer, per bit basis. So there will be some growth there, mostly driven by wafer starts, but we don't expect it to be anything like the growth associated with Foundry and Logic and the move to chiplet-style architectures.

Okay, that makes sense. So I guess looking at the Foundry Logic market, It seems like every week we hear about several more $10 billion fabs going up all over the world. Is there a rule of thumb that a $10 billion fab or a 20,000 wafer start fab would drive X amount of probe card business on an annual basis?

Yeah, not really because it is different. Customers have different test strategies. And you see this in our revenue makeup, obviously. But if there were a simple rule of thumb you know, you wouldn't see such a large variance between customers that are driving large amounts of wafer start demand through things. So I think, you know, depends on customer, depends on that customer's test strategy. But, you know, to your point, all of this foundry and logic, high-end foundry and logic fab capacity coming online, they're going to have to test those wafers irrespective of what their test strategy is, whether it's a you know, a high wafer test intensity or a moderate wafer test intensity strategy. And so I think as these fabs continue to build out, this is a long-term positive for the overall industry and for us, certainly.

All right. Thanks. That's helpful. And then, Shai, when I look at the – it looks to be something like $50 to $100 million of incremental spending, CapEx going on over the next year, you know, 2021, 2022 – for the new facility. What's the impact on COGS or on OPEX from that increased spending?

Yeah, so you might recall that we actually purchased the building in the new manufacturing center in Livermore. This really helps with amortizing most of the expense over a longer period of time. So we don't expect that amortization and going online was going to be a significant impact. And it is built into the 47% target model. So it's not going to be big, and we take that into consideration.

And you said it's on schedule. Can you give us a sense for what percentage filled it is or how much more capacity there is to expand that over the next several years?

I think the way to look at it, so we purchased the entire building. It's about 100,000 square foot. For now, we build the clean room and some offices around it, et cetera, for only half of the building. In Q4, we had tools in the building, started manufacturing and producing revenue. It started in December, so some contributions to Q4 revenue, but not a lot. This building, what we have now, will help us achieve the $850 million and beyond, as Mike mentioned in the first remarks. And we are in the process of formalizing our plans for the next level. the second half of the building, additional capacity extension, which we need in other parts of the world, they're still in process of formalizing.

Great. Well, thank you both for your time today.

Thank you.

Thanks, John.

Thank you. Our next question comes from David Dooley of Steelhead Securities. Your line is open.

Thanks for taking my question. A couple, as far as If the wafer fab equipment business, let's say, grows around 15% in 2022, what do you think the growth rate of your probe card business will be, or what do you think your form factors growth rate will be with that kind of WFE number?

Yeah, it can be, you know, as we've talked about in the past, it's difficult to tie specific WFE spends to probe card spends because customers do have different test strategies. But you've seen over the years that WFE increases do result directionally in increases in probe card spend. Not too surprisingly, as we talked about with Tom's question, more wafers out means more probe cards, and so more spend there. You know, there's different correlations you can look at over time, and it's different for different segments, very different for DRAM than it is for high-end foundry and logic. But I do think that the market growing at kind of this overall high single-digit growth rate is not a bad blended growth rate for the pro-credit market. It tends to be less volatile than capital equipment, both on the upside, which is obviously the situation we're in now, and the downside, as we've seen in the past.

So what I was really trying to get at is what you think your growth rate is going to be, and the answer is high single digits is the best guess at this point.

Yeah, I think so. For those of you that have followed us for a long time, you know that Visibility is a challenging part of this business. We continue to drive lead times and cycle times down so that we're able to meet customer demand, essentially racing wafers through the fab. And so beyond even the current quarter visibility can be a challenging thing. But you look at all of the spending and investment that's going on and increasing leading edge capacity, And obviously directionally, whether it's 2022 or 2023 for our business, more probe cards are going to be required.

Okay. You touched on this earlier, but I'm just curious, you know, with delay of three nanometers at TSMC from 2022 to 2023, I would imagine that would have been a nice bump in revenue for you guys if it had happened this year. Is there some sort of way we can quantify the impact of of that delay. I realize that there's going to be a lot more designs on 5 nanometers or 4 nanometers. But maybe just when you look at the overall impact, how do you look at it for form factor?

Yeah, I don't think it has that big an impact for us. If you look at these well-orchestrated, well-planned node transitions, customers are still releasing new designs on the existing nodes, as you say, 5 or 4. And that's a good part of the strength here in Q1. One of the things that does happen when you go to a new node, especially a new node with substantially lower yields, is the probe card intensity does go up. The test intensity does go up, at least initially, because customers, one, if they're operating at lower yields, they need to start more wafers to get more good dye out and test those dye and screen them out. but also they're testing a lot of different aspects of the chip to try and improve their yield. And so a new node, you know, it's not a huge difference, maybe call it 10 to 20% in overall test intensity, but there is a slight uplift there. I think the far more interesting thing to look at for us is the fact that designs continue to release on nodes like five nanometer and four nanometer, continuing to drive a pretty healthy business, at least in the first part of 2022.

One final clarification from me is, if you kind of think about high single digits as the overall growth rate for form factor, I'm assuming, is it a good assumption to think that the Foundry logic business would be low double digits and the DRAM business and the other stuff would be below that high single digit rate?

Yeah, I think if you go back and read between the lines of some of the questions we've talked through in this session, it's clear that we have higher expectations for founder logic. Now, you can sub-segment it a whole bunch of different ways, but I think at its core, that segment or that market as we report it is very likely to grow faster than the overall program market. Thank you. Thank you.

Thank you. At this time, I'd like to turn the call back over to Mike Schlesser for closing remarks. Great.

Thanks, everyone, for joining us today. We're looking forward to a strong 2022 and hopefully seeing you again in person at some point during the year.

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