FormFactor, Inc.

Thank you and welcome everyone to FormFactor's third quarter 2024 earnings conference call. On today's call are Chief Executive Officer Mike Schlesser 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 P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials. Reconciliations 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 include 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 crises, including the COVID-19 pandemic, anticipated industry trends, potential disruptions in our supply chain, the impacts 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 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 filings 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, October 30, 2024, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor CEO, Mike Fleser.

Thanks, everyone, for joining us today. Driven by growth in both of our segments, FormFactor's third quarter revenue exceeded the outlook range we provided in July and set an all-time record. In addition, DRAM probe card revenue set a third consecutive quarterly record, and non-gap earnings per share was at the top end of the outlook range. In the current fourth quarter, we continue to experience record demand for DRAM probe cards, with contributions from both DDR5 and High Bandwidth Memory, or HBM. This, together with moderate expected system segment growth, is helping partially offset a forecasted reduction in Foundry and Logic probe card demand. Entering this year, it would have been difficult to predict the magnitude of the strength in DRAM, and FormFactor's ability to capitalize on this DRAM strength has been a major highlight throughout 2024. It results from our leadership position and significant market share in DRAM, which is one of the core tenets of our diversification strategy, providing us broad exposure to industry growth trends like generative AI. FormFactor's diversification strategy features a broad lab-to-fab product portfolio across Foundry and Logic, DRAM, and Flash probe cards, together with our system segment products. This strategy differentiates us from our direct competitors and makes it possible for us to compete for business across diverse demand pools at all major customers, which in turn produced relatively stable results during last year's downturn and the overall top-line growth we're delivering this year. These record levels of DRAM revenue, however, do produce a challenging product mix, and it's this DRAM-rich mix that is largely responsible for the third and fourth quarter gross margins below our target model gross margin of 47% at $850 million of annual revenue. As we've demonstrated in the past, a more balanced product mix with stronger Foundry and Logic probe card demand produces gross margins approaching, and in some cases exceeding, the levels of our target model. We expect to deliver stronger gross margins when growth returns to the consumer-driven high unit volume end markets that drive Foundry and Logic probe card spending, like mobile handsets and client PCs. Turning now to market and segment level details, as I noted, the third quarter strength in DDR5, which we anticipated, produced another record-setting quarter of DRAM probe card revenue. HBM revenue declined from the all-time high levels of the second quarter, as we experienced the expected customer digestion following record shipments of probe cards for HBM3 and HBM3e production designs in the two previous quarters. In the current fourth quarter, we expect further growth in DRAM probe card revenue. We anticipate continued DDR5 strength along with sequential growth in HBM to roughly half of our DRAM shipments, with several initial HBM4 designs all across multiple DRAM customers. The beginning of HBM4 activity is significant as it puts us in a strong position as our customers start pilot production of this next major roadmap innovation in the high-performance memory that enables generative AI. As we've discussed in the past, the advanced packaging processes used to construct HBM chips are powering FormFactor's current results and future opportunity. Each HBM chip, whether it's HBM3, 3E, or 4, is a stack of individual DRAM die assembled with advanced packaging processes. The disaggregation of a chip into subcomponent chiplets or tiles increases both test intensity and test complexity compared to an equivalent monolithic chip. The increase in test intensity is driven by the need for our customers to probe and test each component chiplet prior to stacking, and then to probe and test the multi-chiplet stack at various points during the assembly process. The increase in test complexity is driven by HBM performance requirements that are significantly more advanced than for standard unstacked DRAM products, involving higher test speeds and more challenging thermal scaling specifications. As the industry moves from HBM3 to HBM4, both layer counts and performance requirements, such as operating frequencies and power densities, are increasing dramatically. For example, our customers' roadmaps feature HBM4 products with stacks up to 16 high, double that of HBM3. The increase in layer count to 16 high stacks increases the number of probe cards required for good chip out, since each component chip within the stack must be tested and verified prior to stacking. Similarly, the increase in clock speeds and power densities increases the performance requirements for the probe card, necessitating higher test frequencies, and more challenging thermal and power specifications. As we've seen with HBM3 and HBM3e in 2024, our differentiated ability to meet challenging performance requirements drives both market share and profitability gains, and we expect to benefit from the same dynamics as HBM4 reaches volume production next year. Shifting to the Foundry and Logic probe card market, here, As expected, the third quarter was similar to the second quarter, where the ramp of new mobile application processor designs, together with client PC and server microprocessor designs, produced steady overall revenue. In the current fourth quarter, we expect a reduction in foundry and logic demand from the levels of the second and third quarter, as high unit volume end markets, in which form factor has a strong competitive position, like mobile handsets and client PCs, remain weak. It's our strategic priority to expand and diversify FormFactor's market position in Foundry and Logic, both through new customer qualifications in client PC and server applications and through new products that will improve our competitive position in high performance compute GPU applications. This will reduce our dependence on mobile and client PC by growing high performance compute to achieve a more balanced opportunity profile with broader exposure, to hyperscale generative AI investment, similar to the strategy we're executing in DRAM for creating HBM-led exposure to AI. In the system segment, we delivered the expected sequential increase in third quarter revenue, as customers continue to engage us to solve the most complex electro-optical test and measurement challenges in areas like quantum computing and silicon photonics. Copackaged optics using silicon photonics is an exciting opportunity for FormFactor as we collaborate with leading customers in data center applications that utilize our turnkey measurement systems built on our CM300 and Summit 200 engineering probers together with our proprietary Pharos optical probes. We're also extending our unique electro-optical portfolio by partnering with other suppliers on the equipment needed for high volume production. These partnerships are designed to ensure that as co-package optics matures and moves to high volume production in the coming years, FormFactor's leadership positions in combined electrical and optical tests will provide a new growth vector for both our systems and probe card businesses. Finally, as validation of FormFactor's technological and market leadership, I will be delivering one of four invited keynote addresses, along with executive from Synopsys, Meta, and AMD, at next week's IEEE International Test Conference. In the presentation, titled From the Shadows to the Spotlight, Probes' Role in Enabling Electronics Industry Innovation, I'll explore how wafer test and probing are a key enabler of economically viable semiconductor manufacturing at the leading edge, especially for advanced packaging architectures, that rely on 2.5D and 3D stacking of chiplets. As we've discussed, these themes are moving FormFactor's markets and business today and underlie our long-term opportunity. In closing, we're proud of FormFactor's all-time revenue record set in the third quarter and are excited about the future as adoption of advanced packaging drives increased demand across FormFactor's entire Lab2Fab product portfolio. We continue to focus on investing in differentiated products and capabilities to drive market share and profitability gains and remain confident that when the Foundry and Logic market recovers, that we'll achieve and then surpass our target model that delivers $2 of Don Gap earnings per share on $850 million of revenue. Shai, over to you.