FormFactor, Inc.

Thank you and welcome everyone to FormFactor's third quarter 2023 earnings conference call. On today's call are Chief Executive Officer Mike Schleser and Chief Financial Officer Shai Shahar. Before we begin, Stan Finkelstein, the company's VP of Investor Relations, will remind you of some important information.

Thank you. Today the company will be discussing GAAP panel 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 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 includes those with respect to the projections of financial and business performance future macroeconomic and geopolitical conditions the benefits of acquisitions and investments in capacity and in new technologies the impacts of global regional and national health crisis including the covet 19 pandemic anticipated industry trends potential disruptions in our supply chain the impact of regulatory changes, including the recent U.S.-China trade restrictions, the anticipated demand for products, our ability to develop, produce, and sell products, and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties and 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 December 31, 2022, 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, November 1, 2023, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor CEO, Mike Slessor.

Thanks, everyone, for joining us for FormFactor's third quarter earnings call. Stronger than anticipated demand for Foundry and Logic probe cards, coupled with record revenue in our systems business, produce third quarter revenue near the high end of our outlook range. This, together with higher than expected gross margin and leverage on our operating expenses, produce non-gap earnings per share above the top end of our outlook range. We continue to operate in an overall demand environment that remains relatively stable at the levels we've experienced throughout 2023. The moderate sequential decrease in our fourth quarter revenue outlook range is due to the reduction in system segment revenue from the sale of FRT to Camtech, which we completed today, and weaker founder and logic probe card demand due to a short-term reduction in customer spending, partially offset by stronger DRAM probe card demand. While we continue to operate in a cyclical downturn and see no near-term acceleration of demand, we're encouraged by broader signs of bottoming in our most important high unit volume end markets, like client PC and mobile. In this environment, we continue to carefully balance short-term results and long-term investments with disciplined cost control that prioritizes quarterly profitability and sustains our strong balance sheet. We're maintaining our investment in R&D for new product innovation and competitive differentiation, especially in our product roadmap for advanced packaging applications like chiplets and tiles, high bandwidth memory, and co-packaged optics. As you'll hear from Shai, we've completed the majority of the long lead time facilities and equipment capacity increases required to reach our target financial model and have slowed our capex to ensure a better balance between our capacity and anticipated long-term demand. Turning now to segment level details, Foundry Logic Probe Cards, our largest business, delivered higher than expected sequential growth in the third quarter. as key customers ramped several major designs more aggressively than originally forecast. This inter-quarter acceleration provides insight into form factor's demand profile. Because probe cards are a device-specific consumable customized for each individual chip design, increased wafer starts for a specific chip design can drive incremental demand for the corresponding probe cards. Since our lead times are less than a quarter and demand is correlated to the specific mix of customers' dynamic wafer start plans for their new chip designs, we can experience inter-quarter changes in demand as we did in the third quarter. In the foundry space, we experienced strong third quarter demand for probe cards testing two major high-performance compute designs. In these HPC applications, FormFactor's differentiated vertical MEMS probe card products meet demanding power and speed requirements with best-in-class test cell uptime and productivity, delivering significant value to our customers. We do expect a smaller contribution from foundry probe cards in the current quarter, as our strong third quarter shipments are utilized to ramp fourth quarter foundry wafer production volume. In the microprocessor space, we delivered on higher demand for probe cards testing a major tile-based client PC design. Like the high-performance compute foundry example I just shared, ProbeCard demand for this design accelerated within the third quarter as our customer expanded their wafer start plans to meet increased end customer demand. This client PC microprocessor is assembled from multiple tiles or chiplets into a single die using leading-edge advanced packaging processes. This is a great example of how advanced packaging is driving FormFactor's business. As we've noted in the past, Advanced packaging integration schemes drive both higher test intensity, which expands the number of probe cards required per good die out, and higher test complexity, which raises the performance for each probe card. Probe card architectures like FormFactor's MEMS technology are essential to meeting these challenging performance requirements on short lead times at a compelling cost of ownership. In memory, as expected, we experienced stable overall demand for DRAM probe cards, while flash remained weak. As in the second quarter, DRAM was driven by DDR5, as well as third-generation high bandwidth memory designs, which are enabling the rapid growth in generative artificial intelligence, and we expect a similar HBM-rich DRAM revenue profile in the current fourth quarter. The positive impact of high bandwidth memory is evident in the product mix profile at one of our largest DRAM customers, where probe cards for testing HBM comprised more than half our revenue to that customer in the third quarter. As in the tile-based microprocessor example I discussed earlier, the need for sophisticated probe cards to test HBM illustrates how advanced packaging is driving form factor's results. As a reminder, each HBM chip is a stack of 8, 12, or even 16 individual DRAM die assembled with advanced packaging processes such as through silicon vias and hybrid bonding. To ensure high yields of the stack DRAM chip, customers probe and test each component DRAM die prior to stacking and probe and test the multi-die DRAM stack at various points during the assembly process. leading to a substantial increase in the overall probe card intensity per good die out. In addition, the technical requirements for HBM tests are significantly more advanced than for standard unstacked DRAM products, involving higher test speeds and more challenging thermal scaling specifications. FormFactor's MEMS-based smart matrix probe card architecture meets these advanced requirements, providing significant value to our customers and differentiation for FormFactor. We believe our superior performance capabilities will drive both market share and profitability gains as HBM continues to grow, driven by the accelerating adoption of generative AI. Shifting now to systems, as anticipated, our systems business delivered record revenue in the third quarter as we shipped systems that were pushed out of the second quarter. This business continues to be driven by strong demand for our market-leading test and measurement products, for early development of applications like co-packaged silicon photonics, quantum computing, and advanced packaging metrology. Co-packaged optics enabled by silicon photonics remains an important and exciting driver for FormFactor's current and future business. We're engaged with major customers in the transition of silicon photonics from early R&D to low-volume production. And in the fourth quarter, we plan to ship a CM300 silicon photonics system to a leading foundry to support low volume production. As silicon photonics production volumes increase over the next several years, our product roadmap delivers both systems and consumable probe cards to test these electro-optical devices and improve yields, enabling our customers to seamlessly transition from the lab to the fab. Moving forward, we do expect a short and medium term reduction in system segment revenues from the third quarter's record levels due to the sale of our FRT metrology business. We grew FRT substantially following our 2019 acquisition of the business, and I want to thank all of the form factor team worldwide for their contributions to this growth and value creation. Operationally, the transaction enables the FRT team to leverage Camtech's established scale and expertise in inspection and metrology to deliver the next stage of growth. Financially, the transaction maximizes form factor shareholder value by realizing a robust return on our investment, while also allowing us to focus our resources on strategic initiatives and businesses where we have market leadership and significant scale in enabling advanced packaging, like the tile-based microprocessor and co-package optics examples I shared earlier. Shai will update you with more details later, but our capital allocation priorities of focused reinvestment in R&D and capacity, together with M&A and share repurchases to offset dilution, are unchanged. M&A remains one of the primary pillars of form factor growth, and we continue to evaluate a broad funnel of targets that add complementary technologies and expand our served addressable markets. In closing, we continue to operate efficiently in what we see as a relatively stable near-term demand environment across our diversified product and technology portfolio. Longer term, we remain excited and confident in the growth prospects for form factor in the industry overall, driven by the fundamental trends of semiconductor content growth and exciting innovations like chiplets, high bandwidth memory, and co-packaged silicon photonics. These are trends where form factor is well positioned as an industry and technology leader, and we're confident that our investments in R&D and capacity position form factor to emerge from the current cyclical downturn, a stronger and leaner competitor, enabling us to achieve our target model that delivers $2 of non-GAAP earnings per share on $850 million of revenue.