FormFactor, Inc.

2024 Earnings Conference call. On today's call are Chief Executive Officer Mike Schleser and Chief Financial Officer Shai Shahar. Before we begin, Stan Finkelstedt, the company's VP of Investor Relations, 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 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 COVID-19 pandemic, anticipated industry trends, potential disruptions in our supply chain, the impacts of regulatory changes, including the recent US-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 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 physical year ended December 30, 2023, 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 May 1st, 2024, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor CEO, Mike Slather.

Thanks everyone for joining us today for FormFactor's first quarter earnings call. Although FormFactor's first quarter revenue was near the top end of the outlook range we provided in February, non-GAAP EPS fell short of the midpoint due to lower than expected gross margins primarily from a weaker product mix in both segments, along with higher warranty costs in the probe card segment. In the current second quarter, we're experiencing a significant sequential step up in demand and expect a corresponding increase in gross margin and non-gap EPS. This is driven primarily by strength in both DRAM and Foundry and Logic probe cards as industry adoption of advanced packaging accelerates. To ensure form factor fully leverages and benefits from our strong position in enabling advanced packaging, we recently completed an important series of coordinated organizational and talent changes. First, we've realigned our organizational structure to consolidate the company's global operations, including manufacturing, quality, supply chain, environmental health and safety, and facilities in a central group. This operational consolidation provides the critical mass and scalability to create commonality and efficiency as we continue to grow. With our operations now consolidated, our business unit's sole focus is on customer-facing innovation and competitive differentiation in form factor's product roadmaps. Second, we deepened our bench, recruiting and onboarding two experienced executives to lead our operations and commercial functions, and realigned responsibilities for other executives to ensure form factor has the required skills and experience in critical roles. Finally, we added Kevin Brewer to our board of directors, who is the former executive VP of operations and CFO of Accelus Technologies, brings significant operational experience and knowledge. Kevin replaces Lothar Meyer, who's retiring after nearly 18 years of service to form factor. And on behalf of our shareholders, employees, and customers, I'd like to take this opportunity to thank Lothar for his many contributions. These coordinated changes are designed to position the company for our next phase of growth by enhancing our capability to develop and introduce highly differentiated products, while advancing our ability to manufacture these products at world-class operational levels. This will allow us to capture the secular growth in our served markets being driven by advanced packaging and to gain market share, enabling us to outgrow these markets. While the full benefit of these changes will be realized over a multi-year timeframe, we do expect short-term improvement in our gross margins. For example, by focusing on areas like quality to reduce unexpected costs. Turning now to market and segment level details. DRAM probe card demand continues to be robust, and as expected, first quarter DRAM revenue reached the peak levels last experienced in 2021, with strong growth in high bandwidth memory layered on top of steady DDR5 new design activity. In the first quarter, HBM was nearly half of FormFactor's DRAM revenue and was double the quarterly levels we delivered in the second half of 2023. We'd previously stated that we expected HBM revenue to reach these levels sometime in mid to late 2024. Achieving these doubled quarterly run rate HBM revenue levels in the first quarter of the year is a good indicator of how quickly HBM capacity and output is accelerating across our customer base. We expect this trend to continue and are forecasting a similar incremental growth contribution from HBM in the second quarter. HBM chips, which are a stack of 8, 12, or even 16 individual DRAM die, continue to offer a powerful example of how advanced packaging is driving our current results and foreshadows our long-term opportunity. As we mentioned in the past, advanced packaging applications like HBM produce both higher test intensity, which expands the number of probe cards required per good die out, and higher test complexity, which raises the performance requirements for each probe card. To ensure high yields of this stacked HBM DRAM chip, customers probe and test each component DRAM die prior to stacking, and then 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 for 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. We believe our superior performance capabilities in meeting these requirements will drive both market share and profitability gains as HBM continues to grow, driven by the accelerating adoption of generative AI. Even though HBM applications comprise a small portion of the total DRAM bits produced by our customers, because of the stack die architecture, HBM represents a much larger portion of the total silicon area and wafers produced. And because of the increased test intensity and test complexity, an even larger part of the overall test and probe guard spending by our customers. This compounding power of advanced packaging is clear in our first quarter results and our second quarter outlook for HBM. Shifting to Foundry and Logic probe cards, as expected, we delivered first quarter revenue comparable to the fourth quarter as we shipped probe cards for a variety of PC, server, and mobile designs. As a reminder, since probe cards are a device-specific consumable that's customized to each individual customer chip design, production ramps of new chip designs generate demand for new probe cards, even when these new designs are produced on the same technology node. This provides a more diverse and stable set of demand drivers than for capital equipment. We expect second quarter growth in our Foundry and Logic probe card business, primarily driven by the mid-year ramp of new mobile application processor designs and stronger probe card demand for client PC and server microprocessor designs. As in DRAM with HBM, an increasing number of these foundry and logic designs are architected using advanced packaging processes like Foveros and 3D Fabric. Similar to the die stacking in HBM, these processes drive both higher test intensity and higher test complexity. This is driving increased customer spending on form factors products to both improve yields and reduce costly scrap. In the system segment, the sale of FRT in the fourth quarter produced the anticipated sequential reduction in revenue in the first quarter. However, product mix was weaker than expected with fewer high complexity thermal systems shipped. We believe this mix of lower complexity configurations is a short term dynamic and not a structural change in this market. Our customers continue to engage us to solve the most complex challenges in test and measurement. utilizing our engineering probers, cryostats, and other system segment products to test, measure, and characterize new technologies like co-packaged silicon photonics, infrared detectors, and quantum computers that are at the forefront of industry innovation. System segment products are also an important element of our lab-to-fab diversification strategy. Our uniquely broad portfolio enables us to compete for business across diverse demand pools at all major customers, providing a measure of stability in downturns and inherent exposure to fast-growing areas of the industry like high-bandwidth memory. Finally, I want to share an important customer highlight from the first quarter. FormFactor was one of 27 suppliers to receive the exclusive Intel EPIC Program Distinguished Supplier Award for 2024. This award marks the third consecutive year we've been recognized as a top performer in the Intel supply chain. I'm extremely proud of the Global Form Factor team for the dedication and performance that resulted in this recognition from Intel, and I'd like to take this opportunity to thank and congratulate our team. In closing, we're excited about both the strength of our second quarter outlook and the accelerating adoption of advanced packaging underpinning that strength. Longer term, we're confident in the growth prospects for form factor in the industry overall, driven by the fundamental trends of semiconductor content growth and advanced packaging innovations like HBM, chiplets, 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, along with the organization and talent changes we've made recently, position form factor as a stronger and leaner competitor. This will enable us to achieve and then surpass our target model that delivers $2 of non-GAAP earnings per share on $850 million of revenue.