FormFactor, Inc.

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 in 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, including acquisition of manufacturing facility, anticipated industry trends, potential disruptions in our supply chain, the impacts of regulatory changes, including tariffs and changes in export controls. the anticipated volatility in 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 28, 2024, 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 30, 2025, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor CEO, Mike Schleser.

Thanks everyone for joining us today. FormFactor reported sequentially stronger second quarter revenue that exceeded the high end of our outlook range due to higher than anticipated growth in our probe card business. Despite this revenue strength, non-gap gross margin and overall profitability fell short of our outlook, mainly caused by an unfavorable shift in product mix and unforecasted ramp-up costs for a second HBM DRAM customer. In the current third quarter, we expect to deliver revenue comparable to the second quarter and slightly higher gross margin and operating profit. Before we dive into segment and market level details, I'd like to spend a few moments reviewing the year to date. FormFactor's business continues to be driven by two dominant themes, advanced packaging and generative AI. As front-end-driven Moore's Law slows, the innovation and performance offered by advanced packaging and chiplets allows our customers to accelerate their roadmaps and deliver spectacular performance improvements in compute and memory. These innovations, like the stacking of DRAM chiplets to produce HBMs that are then integrated with GPUs in multi-radical co-os packages, co-package optics, and even chiplet-based processors deployed at the edge, are enabling the transformative capabilities of generative AI, fueling forecasts of semiconductor industry growth to a trillion dollars early in the next decade. As the leading supplier of probe cards and systems that ensure the quality and performance of each individual chiplet and the stacks of chiplets in the advanced package, FormFactor is uniquely positioned in enabling these innovations. We continue to be excited by our growth prospects as advanced packaging drives increased test intensity and test complexity, creating increased demand for our products. At the same time, we acknowledge that our recent financial results, and especially gross margins, have not reflected our unique market leadership position. There are multiple reasons for this gross margin underperformance, including a product mix shift towards historically lower margin markets like DRAM, operational cost increases, and the recent headwinds presented by tariffs. As we said in previous quarters, we're taking steps to address each of these root causes, including developing and commercializing differentiated new products to drive market share and pricing, while at the same time improving our operational performance and manufacturing costs under the new global operations organization and leadership we put in place last year. In the first half of 2025, we've also utilized form factor strong balance sheet to make two strategic investments designed to improve longer-term competitiveness and profitability. One, a minority equity investment in FICT, the leading global supplier of multi-layer organic substrates, which are a critical enabling probe card subcomponent for us and our competitors. And two, the purchase of a fit-for-purpose brownfield manufacturing facility, in Farmers Branch, Texas. The Farmers Branch facility acquisition allows us to rapidly and cost-effectively expand our process capability and capacity beyond our current manufacturing footprint. It also provides a clear path to lower our ongoing manufacturing costs, as it's located in a region with lower operating costs and a variety of financial and regulatory incentives. Our team has made excellent progress in executing our planning and pre-startup activities since the June 2nd purchase announcement, and we've recently obtained the certificate of occupancy for the site. We're currently finalizing schedules for tool installation and specific product ramps with the detailed timing and magnitude of the ramp governed by process tool lead times, CAPEX requirements, and the specific financial incentives committed by the state and local governments. Turning now to segment and market level details. In DRAM probe cards, HBM drove the expected sequential growth in the second quarter. And in the current third quarter, we expect continued growth in both HBM and DRAM overall. FormFactor's top customer remains the market share leader in this market. In addition, we are also now shipping in volume to all three major HBM manufacturers as we execute our strategy to be a key supplier to all the leading customers in the industry, thereby growing and diversifying our HBM demand profile. Even with this more diversified demand profile, we expect the quarter-to-quarter volatility in HBM demand we've seen over the past several quarters to continue as all three of our customers' output is concentrated in a relatively small number of designs that are ramping up on short lead times. More broadly, we're continuing to strengthen our leadership position in HBM probe cards as bit growth accelerates and are excited about growing this business with form factors differentiated smart matrix and IntelliFusion DRAM probe card architectures. Shifting to the founder and logic probe card market, consistent with our outlook, second quarter demand in this market was sequentially stronger as we delivered seasonal ramps of major mobile application processor designs and a family of client PC microprocessor designs. Given the seasonal nature of this strength, we expect a moderate reduction in third quarter demand in this market. These segment results provide a proof point of FormFactor's industry leadership and strong customer partnerships, as two Foundry and Logic customers topped the 10% threshold in the second quarter. In addition, we were recognized by our customers worldwide in the annual Tech Insights 2025 Global Customer Satisfaction Survey as the number one global supplier in both test subsystems and focused chipmaking equipment categories, where we received high rankings for quality and technology leadership, far outpacing our direct competitors. I'd like to thank our customers for their partnership and commend their worldwide team for their commitment to our core form value of focus on the customer as we strive to continuously improve our customer collaboration and support. Turning to our system segment, we experienced a slight sequential reduction in second quarter revenue due to a variety of pushouts. These systems have now been shipped and we expect this to result in sequential growth and an improved overall product mix in the third quarter. Our systems business continues to be driven by customer development and adoption of advanced technologies like co-package optics, or CPO, as well as the significant advancements being made in quantum computing. In CPO, we now have multiple CM300Xi systems running pilot production for our primary customer and are working closely with them, their foundry, and partners like Advantest to ready this technology for high-volume production in the first half of 2026. In quantum computing, the first half of 2025 has seen significant advancements in the commercialization of this revolutionary computational technology, with an acceleration of technical achievements like Google's progress in error correction with their Willow platform, and statements from industry icons like NVIDIA's Jensen Wang that quantum computing is reaching an inflection point. FormFactor's IQ2000 and IQ3000 cryogenic probers are an important part of this advancement, with the system helping customers characterize, test, and improve their quantum processors and the associated logic and communication circuits. Although high volume production remains a few years out, testing of quantum computing chips is yet another area where form factor is ideally positioned. In closing, we remain committed to our target financial model, which delivers 47% gross margin on $850 million of annual revenue. At the same time, we acknowledge that our recent performance has not demonstrated a clear path to that level of profitability, which is why we're taking the steps I mentioned earlier to improve margins over the medium term both organically and through strategic investments like FICT and Farmer's Branch. These multi-pronged initiatives will improve our competitiveness and add capacity at lower cost, enabling us to grow form factor as we meet the challenges of increased test intensity and higher test complexity associated with the adoption of advanced packaging in applications like high bandwidth memory, co-package optics, and quantum computing. Shai, over to you.

Thank you, Mike, and good afternoon. As you saw in our press release, Q2 revenues were $195.8 million, $0.8 million above the high end of our outlook range, and non-GAAP gross margin of 38.5% was at the low end of the range. These, together with OPEX slightly higher than the midpoint of the outlook, resulted in a non-GAAP EPS of $0.27, one cent above the low end of the outlook range. Second quarter revenues increased 14.3% from the first quarter and decreased 0.8% year-over-year from our Q2 24 revenues. ProbCard segment revenues were $162.1 million in the second quarter, an increase of $25.6 million or 18.7% from the first quarter. The increase was driven by higher revenues in all the markets we serve, most notably in Foundry and Logic and DRAM. Within the ProbCard segment, Q2 Foundry and Logic revenues were $100 million, a $14 million or 16.7% increase from the first quarter. Foundry and Logic revenues increased to 50.8% of total company revenues compared to 49.8% in the first quarter. DRAM revenues were $57.1 million in Q2, $8.2 million or 16.8% higher than the first quarter. and increased to 29.1% of total quarterly revenues as compared to 28.5% in the first quarter. Within DRAM, HBM revenues increased $7.4 million from $29.5 million in Q1 to $37 million in the second quarter. Slash revenues of $5.5 million in Q2 were up $3.1 million from the first quarter and were 2.8% of total revenues in Q2 as compared to 1.4% in Q1. System segment revenues were $33.7 million in Q2, a $1.1 million decrease from the first quarter, and comprised 17.2% of total company revenues, down from 20.3% in the first quarter. GAAP gross margin for the second quarter was 37.3%, as compared to 37.7% in Q1. Cost of revenues included $2.4 million of GAAP to non-GAAP 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-GAAP basis, gross margin for the second quarter was 38.5%, 0.7 percentage points lower than the 39.2% non-GAAP gross margin in Q1, and at the low end of our outlook range. The decrease as compared to Q1 is driven mainly by lower non-GAAP gross margins in the system segment. The decreases compared to the midpoint of our outlook range is attributable mostly to a decrease in systems revenues, which have higher margins, as well as higher manufacturing spend and higher ramp-up costs related to shipments to an HBM DRAM customer. We incurred these additional ramp-up costs to meet some unique performance requirements for an HBM4 design specific to this customer. Our engineering team has partnered closely with this customer's technical team to identify and validate resolution of the issue. and we expect to have fully incorporated the necessary modifications to this specific design during the current third quarter. Our probe cart segment growth margin was 38.3% in the second quarter, an increase of 0.5 percentage points compared to 37.8% in Q1. The increase from Q1 was driven by several factors, including favorable absorption and higher revenues, that were partially offset by higher manufacturing spend, which include higher costs from tariffs, and the ramp-up cost I just mentioned. Our Q2 system segment gross margin was 39.4%, a decrease of 5.1 percentage points compared to 44.5% gross margin in the first quarter. The decrease from Q1 was mainly a result of lower revenues, an unfavorable product mix, and higher manufacturing spending, which includes costs from tariffs. Our gap operating expenses were $60.6 million for the second quarter as compared to $61.3 million in the first quarter. Non-gap operating expenses for the second quarter were $52.5 million or 26.8% of revenues as compared with $50.2 million or 29.3% of revenues in Q1. The $2.3 million increase relates mainly to higher performance-based compensation, increased labor costs from higher headcount and annual salary adjustments, and increased operating expenses from the new Farmers Branch manufacturing facility we purchased late in the second quarter. Non-GAAP expenses for the second quarter included amortization of acquisition-related intangibles and depreciation of $9.6 million, $0.7 million higher than the first quarter, and $9.4 million for stock-based compensation, $0.4 million lower than the first quarter. GAAP operating income was $12.3 million for Q2, as compared to the GAAP operating income of $3.3 million in Q1. Non-GAAP operating income for the second quarter was $22.8 million, compared with $16.9 million in the first quarter, an increase of $6 million, or 35.2%. This increase in operating income is due to higher revenues, partially offset by lower gross margins and an increase in operating expenses. Gap net income for the second quarter was $9.1 million, or 12 cents per fully diluted share, compared with a gap net income of $6.4 million, or 8 cents per fully diluted share in the previous quarter. The non-gap effective tax rate for the second quarter was 16.5%, 1.8 percentage points higher than the 14.7% rate for the first quarter. The recent passage of the One Big Beautiful Bill, or OBBB, provided a permanent repeal of capitalization of R&D expenditures while also lowering foreign-derived intangible income, or FDII, tax benefits. As a result, we now expect an increase in our effective tax rate for the full year to the range of 19% to 23% from the previously communicated range of 14% to 18%. While increasing our effective tax rate and income tax expenses by approximately $2.6 million for the first three quarters of 2025, This bill reduces our cash taxes for the year by approximately $5 million. I will say more about the impact of this new legislation on our Q3 effective tax rate and EPS later in the Q3 outlook section of my remarks. Second quarter non-GAAP net income was $21.2 million, or $0.27 per fully diluted share, up from $18 million, or $0.23 per fully diluted share in Q1. Moving to the balance sheet and cash flows. we had a negative free cash flow of $47.1 million in the second quarter compared to a positive $6.3 million in Q1. The main reasons for the decrease in free cash flows were capex $47.7 million higher than in Q1 due to the $55 million purchase of the farmer's branch manufacturing facility and operating cash flows that were $4.6 million lower than in Q1, primarily driven by greater outflows for working capital of $9.3 million If we exclude the $55 million investment in the Farmers Branch manufacturing facility, free cash flow would have been $8 million or $1.6 million higher than in Q1. We invested $66.3 million in capital expenditures during the second quarter, compared to $18.6 million in Q1. As mentioned, the increase was due chiefly to the purchase of the Farmers Branch manufacturing facility. As Mike mentioned, since we purchased the facility last month, we have made excellent progress in executing our planning and pre-startup activities. We are currently finalizing our plans and we will provide updates as we continue to make progress. With this purchase and additional related investments we expect to make in the facility, we increase our expected annual capex for 2025 from the range of $35 to $45 million to $110 to $130 million. At quarter end, total cash and investments were $253 million. a decrease of $50 million from Q1. The main reason for the decrease was the purchase of the Farmers Branch facility. At the end of the second quarter, we had one term loan, with a balance totaling $13 million. I also would like to report that yesterday we entered into a new $150 million revolving credit facility agreement. This facility, together with more than $250 million on our balance sheets, enhances our financial flexibility and provides us with additional liquidity to support our strategic initiatives, working capital needs, and general corporate purposes. During the second quarter, we used $2.4 million to repurchase shares. At quarter end, $72.6 million remained available for future purchases under the $75 million two-year buyback program that was approved and announced in April 2025. Our capital allocation strategy has not changed. and our share repurchase program goal is to offset dilution from stock-based compensation. Turning to the third quarter non-GAAP outlook, we expect Q3 revenues of $200 million, plus or minus $5 million, with increases in systems and DRAM, including in HBM, and a decrease in foundry and logics. This increase in revenues and a more favorable product mix are expected to result in a higher non-GAAP gross margin of 40%, plus or minus 150 basis points. This Q3 outlook range includes a 1 to 1.5 percentage points reduction in gross margins due to the impact of tariffs, assuming tariffs remain at their current level. If the tariffs on goods imported to the U.S. do increase, a possibility that was indicated by the administration, the impact of the tariffs on our gross margins could increase to 1.5 to 2 percentage points at the midpoint of our outlook range. As Mike mentioned, we remain committed to our target financial model. which delivers 47% gross margin on $850 million of annual revenue. At the same time, we acknowledge that our recent results and our Q3 outlook are not showing a clear path to achieving the model in the near term. And so we are taking steps to improve margins and make progress towards achieving our target financial model. At the midpoint of these outlook ranges, we expect Q3 operating expenses to be $55 million, plus or minus $2 million. approximately $2.5 million higher than Q2, mainly due to additional headcount and a full quarter of expenses related to operating our new manufacturing facility in the Farmers Branch. Regarding income taxes, as I mentioned earlier, the passage of OBVB, effective retroactively from January 1, 2025, results in an increase in our annual effective tax rate. Our Q3 income tax provision will include a one-time catch-up for income taxes for the first and second quarters, which will result in an effective tax rate of approximately 31% in Q3. If we exclude the impact of the new tax legislation on the third quarter effective tax rate, it would have been in the previously communicated range. Q4 effective tax rate, which will not have the one-time catch-up effect of the new tax legislation, is expected to be within the new annual range of 19% to 23%. Non-GAAP earnings for fully diluted share for Q3 is expected to be 25 cents, plus or minus 4 cents. If we exclude the impact of the new tax legislation, the midpoint of the EPS Q3 outlook range would have been 32 cents. A reconciliation of our GAAP to non-GAAP Q3 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?