FormFactor, Inc.

includes those with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions, the benefits of acquisitions and investments, anticipated industry trends, potential disruptions in our supply chain, the impacts of regulatory changes, including tariffs and changes in export controls, the anticipated volatility demand of our 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 risk 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 fiscal year ended December 28, 2024, and in our other SEC filings, which are available on the SEC's website at www.sec.gov. Forward-looking statements are made as of today, February 4, 2026, and we assume no obligation to update them. With that, we will now turn the call over to Form Factor CEO, Mike Schleser.

Thanks, everyone, for joining us today.

FormFactor's fourth quarter revenue, gross margin, and earnings per share all exceeded both third quarter results and the high end of our outlook range, and we posted record revenue on both a quarterly and annual basis. Building on that momentum, we expect to again deliver sequentially higher revenue and non-gap gross margin in the current first quarter. As you've consistently heard from us, we're focused on and committed to improving our gross margins on a path to achieving our target model. We're making progress faster than expected by executing a program of rapid and immediate gross margin improvement actions that produce the 290 basis point sequential increase in the fourth quarter and are forecasted to add another 100 plus basis point improvement in the first quarter. Within our existing footprint, we expect to deliver both output increases and gross margin expansion throughout 2026, albeit at a more moderate pace than in the past few quarters. Later this year, we expect our farmers branch site to come online, providing increased capacity with structurally lower costs, creating the foundation for further revenue growth and gross margin expansion. Eric will discuss details of both our current operational performance and our future plans later in the call. Moving back up the income statement, rapid innovation and accelerating investment by our customers, principally at the intersection of advanced packaging and high performance compute, is driving increased test intensity and test complexity, creating strong demand in our served markets. In some of these areas, like HBM and DRAM and network switches in Foundry and Logic, we today have leading market positions. In others, like GPUs and custom ASICs, we're making steady progress on qualifications to produce market share gains and revenue growth. Driven by this revenue growth in our existing and building market positions, with gross margin expansion from operational improvements and earnings leverage from disciplined operating expense control, we're closing in on our target financial model. We expect these trends to continue and we'll host an analyst day on May 11th, where our executive team will share form factor's next target financial model, and discuss the market opportunities, strategic priorities, and operational focus areas underlying that new target model. Turning now to segment and market level details, in DRAM probe cards, we delivered the expected sequential growth in the fourth quarter to a new record, with the increase coming from non-HBM DRAM applications like DDR4 and DDR5. When we provided our outlook a quarter ago, we accurately forecasted DRAM growth would be driven by non-HBM strength, which is now understandable given the widely publicized in-market demand and pricing for non-HBM DRAM. In the first quarter, we again expect to post an all-time DRAM record, this time on HBM strength, with contributions from both sustained demand in HBM3E and the early stages of the HBM4 ramp. As I've discussed previously, the ramp-up of HBM4 offers some exciting opportunities for form factor in 2026, and the first quarter offers an early glimpse into these opportunities. First, the test intensity for each HBM stack further increases with the transition to HBM4's 16 high stacks of Cordyce chiplets, up from the 8 and 12 high stacks of HBM3 and 3E. This layer count increases a powerful driver of increased test intensity, resulting in higher probe card spending by our customers for HBM applications. As we've also seen in Foundry and Logic in recent years, this dynamic is not unique to HBM. All advanced packaging architectures require increased test intensity, as each of the component die chiplets must be comprehensively tested to ensure that a single defective chiplet does not cause a failure of the entire stack. In addition, both the PNIO speeds and overall stack bandwidth for HBM continue to increase at a relentless pace as the industry moves from HBM3 to HBM4 and then on to HBM5. The overall stack bandwidth of HBM4 more than doubles over HBM3 to an astounding 2 plus terabits per second. And HBM5 bandwidth is projected to double again over HBM4. These speed increases drive greater test complexity. which produces competitive advantage for form factor as our smart matrix architecture is the industry's only production proven probe card architecture that combines high parallelism productivity with high speed test capability. This enables our customers to test hundreds of dyes simultaneously at the 10 gigabit plus IO data rate of HBM4. And to ensure we're ready for the future, our global R&D and engineering teams are partnering closely with customers to advance the smart matrix architecture to meet the challenging specifications for HBM5 and beyond, further extending our differentiation in HBM applications. This combination of high parallelism productivity and high speed performance, which is critical for several important test insertions in our customers' HBM process flow, is producing market share gains at all three major HBM manufacturers. We expect this trend to continue as we execute our long-term strategy to be a key supplier to all the leading customers in the industry, thereby growing and diversifying our HBM demand profile. That said, our first quarter HBM revenue continues to be skewed towards our largest customer, consistent with the current market share split between our customers. Shifting to the founder and logic probe card market, as expected, fourth quarter demand in this market was comparable to the third quarter. In the current first quarter, we expect increased Foundry logic demand levels. Notably, this growth is not anticipated to come from our historical drivers of client PC and mobile, but instead from a significant shift towards rapidly growing data center applications like network switches. Our evolving customer makeup offers important evidence of this diversification. As our top customer historically, a large microprocessor IDM was not a 10% customer in either the fourth quarter or for 2025 overall, even as we posted all time record revenues in both of those periods. We continue to partner closely with these customer, supporting turnaround initiatives in their core business, as well as their effort to become a leading foundry. Given our longstanding partnership and corresponding market share, FormFactor is well positioned to grow with this customer as they make progress in these areas. At the same time, like in HBM, we're successfully executing our strategy to be a top supplier to all the leading customers in the industry and continue to build the foundation for market share gains at a large fabless CPU manufacturer. We're also accelerating the pivot to fast growing high performance compute applications with our ongoing production qualification in leading edge GPU applications. We continue to expect to be in a position to compete for volume orders for GPU probe cards later this year. Finally, as an additional longer-term component of high-performance compute exposure, we're also growing our custom ASIC XPU business on the back of a multi-million dollar mid-2025 design win, and are expanding the future opportunity set in this space by deepening our engagements with the hyperscalers and their ASIC design partners. Turning to our system segment, we delivered the expected sequential revenue increase in the fourth quarter, driven by customer investment in co-package optics in quantum computing. In the first quarter, we're expecting the typical seasonal reduction in demand for systems. Co-package optics, or CPO, continues to be a primary area of focus for us, as it represents an exciting growth opportunity where we have a strong leadership position. To strengthen form factor's leadership in CPO tests, we recently made an important strategic addition to our optical test capabilities with the December acquisition of Keystone Photonics. Keystone's innovative and differentiated optical probe technology enables high efficiency optical coupling to our customers' photonic devices. In much the same way, our advanced MEMS probes provide best-in-class electrical connectivity to our customers' chips. These optical and electrical probe technologies enable the highest fidelity test and therefore yield whether the device runs on photons, electrons, or in some cases, like CPO, both photons and electrons. Together with our market-leading CM300xi and Triton test platforms, Keystone's optical probe technology expands FormFactor's leadership position as we help enable the adoption of energy-efficient optical data transmission in tomorrow's data center. Before I turn the call over to Eric, I want to reiterate our continued commitment to achieving our target model. As expected, we reached run rate target model revenue levels before reaching target model gross margin levels, but have made excellent progress in closing the gross margin gap. We plan to continue that progress with output increases and gross margin expansion across our existing manufacturing footprint. followed by further improvement as we bring our farmers branch expansion online at a structurally lower cost. We look forward to demonstrating continued progress in the first quarter of 2026 and are excited to share FormFactor's next target financial model in May at our analyst day, as we meet the challenges and opportunities of increased test intensity and higher test complexity at the intersection of advanced packaging and high performance computing. Eric, you're up.

Thank you, Mike, and good afternoon. Before we dive into the details of our fourth quarter financial results, I want to remind you of our strategic emphasis on improving gross margins. Over the past two quarters, we have made gross margins and our commitment to achieve our target model one of our top priorities as a company. We are pleased to have reached our revenue target and believe we are on track to demonstrate the target model gross margins adjusting for the impact of tariffs within 2026. As we expand gross margins, we are committed to achieving these improvements in a sustainable way by driving operational effectiveness and better financial discipline across the company. Over the past two quarters, we have taken several actions, including, first, reducing and reallocating our workforce and more effectively deploying those resources. even as we execute on record-level demand. Second, driving improvement in manufacturing yields in key process areas. Third, innovating to reduce manufacturing spending. And finally, reducing cycle times in our key manufacturing operations. We are seeing the benefits of these actions in the unit costs of our products, and we have made even better progress in Q4 against our multi-quarter gross margin improvement roadmap than we expected. Looking back just two quarters, Q2 25 gross margins were 38.5%. Through Q4 25, we have generated a cumulative improvement of 540 basis points in gross margins. And at the midpoint of our guidance, we expect to generate an additional 110 basis points of expansion in Q1 26. Operational effectiveness improvements like reduced cycle times and higher yields are structural in nature and will drive durable gross margin expansion. These fundamental improvements in underlying cost drivers have a system-wide benefit that will help us weather and partially offset the impact of inevitable shifts in product mix and volumes. Over the coming quarters, we will continue to drive a relentless focus on attacking these key cost drivers within our existing footprint. In addition to the improved operational effectiveness, we also believe that driving good financial discipline is critical to our long-term success. Accordingly, we continue to examine our overall portfolio of products, markets, and businesses, evaluating those elements of our operations through the lens of how each best supports our target model, and our key strategic priorities. The reduction in force and site consolidation announced early in January is a recent example of how we are executing on this front. While the trajectory of gross margin improvement and the path to the target model is now evident, our journey is not over. We will continue to drive incremental improvements throughout 2026, but at a more moderate pace given the speed at which we have worked through our roadmap to date. Even as we drive the unit costs of our products down, we are simultaneously enabling higher output from our current infrastructure. Our exposure to fast-growing markets that Mike described is generating demand that requires more output. As reflected in our record Q4-25 revenues and our outlook for Q1-26, we are demonstrating the ability to produce at a higher level and in a more efficient footprint. Improvements in cycle times yields, and how we deploy our workforce, in addition to reducing unit costs, have the secondary benefit of increasing the available output from the same resources in our existing manufacturing footprint. These improvements enable us to get more out of each tool, process, and site by ensuring more good product out and better fungibility of our workforce. As Mike mentioned, we expect our farmers branch site to begin to come online later this year. and to ramp over the course of 2027. This expansion is a good example of how we are taking advantage of our strong balance sheet to increase available capacity quickly at a structurally lower cost and create the foundation for further gross margin expansion and growth beyond the current target model, something we are excited to describe in further detail at our analyst day in May. As you saw in our press release, Our Q4-25 results were favorable to our outlook on revenues, gross margins, and EPS on both a GAAP and non-GAAP basis. Q4-25 revenues of $215.2 million came in at the high end of the Q4 outlook range of $205 to $215 million. GAAP gross margins for the fourth quarter were 42.2%, up 240 basis points from 39.8% in Q3. Cost of revenues included $3.6 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued earlier today, and in the reconciliation table available in the investor relations section of our website. On a non-GAAP basis, Gross margins for the fourth quarter were 43.9%, 290 basis points higher than the 41% in Q3, and above the high end of our range. This increase in non-GAAP gross margins was driven by improvement in gross margins for the probe card segment, which were up 364 basis points to 44.5%, partially offset by a decrease in system segment, which declined 50 basis points. Our GAAP operating expenses were $67.3 million for the fourth quarter and down 340 basis points from the same period in the prior year as a percent of revenue, demonstrating additional leverage and continued spending discipline across the P&L, even as we continue to invest in R&D to drive innovation and fund projects like Farmer's Branch for future growth. GAAP net income for the fourth quarter was $23.2 million, or 29 cents per fully diluted share, up from GAAP net income of $15.7 million, or 20 cents per fully diluted share in the previous quarter. Fourth quarter non-GAAP net income was $36.6 million, or 46 cents per fully diluted share, up from $25.7 million, or 33 cents per fully diluted share in Q3. The GAAP effective tax rate for the fourth quarter was 13.6% and the non-GAAP effective tax rate for the fourth quarter was 15.7%. Moving to the balance sheet and cash flows. We had free cash flows in the fourth quarter of $34.7 million compared to $19.7 million in Q3. The $15 million increase in free cash flows demonstrates the cash generating power of the company at improved margin levels and the value of good financial discipline in working capital and operating expenses. Operating cash flows were $46 million in the fourth quarter, $19 million higher than the $27 million in Q3-25, primarily driven by improved net income on higher revenues and gross margins and efficient use of working capital. As Mike described, we used about $20 million in cash to acquire Keystone Photonics, key element of our co-packaged optics product roadmap, and at quarter end, total cash and investments were up $9.1 million to $275 million. Since purchasing the Farmers Branch facility, we have made excellent progress in executing our planning and pre-startup activities. We continue to expect that the cash expenditures related to Farmers Branch capital will be between $140 million and $170 million over 2026. In addition to the capital spending, we expect to incur roughly $6 million in pre-production operating expenses in Q1-26, up from $1.7 million in Q4-25 and in line with our project roadmap. Over the course of 2026, we expect pre-production operating expenses related to the ramp of Farmer's Branch to be between $20 and $25 million. Once production begins at the end of 2026, The majority of these costs will be recorded as cost of goods sold, and upon completion of the ramp, we expect farmers' grants to be accreted to gross margins. During the fourth quarter, we did not repurchase any shares. At quarter end, authorization of $70.9 million remains available for future repurchases under the $75 million two-year buyback program that was approved and announced in April 2025. We remain committed to our share repurchase program as a tool to offset dilution from the stock-based compensation program over the two-year period of the program. However, in the short term, we are prioritizing our deployment of cash to accelerate the ramp of our new manufacturing site in Farmers Ranch. Turning to the first quarter non-GAAP outlook, we expect Q1 revenues of $225 million, plus or minus $5 million. This increase in revenues and the impact of continued gross margin improvement initiatives described earlier are expected to result in a higher non-GRAP gross margins of 45% plus or minus 150 basis points. As a reminder, we continue to see about a 200 basis point impact to gross margins from tariffs. We are continuing to take actions to mitigate the impact of these tariffs, but those efforts are ongoing. At the midpoint of these outlook ranges, we expect Q1 non-GAAP operating expenses to be $62 million, plus or minus $2 million, approximately $4.5 million higher than Q4, mainly due to expenses related to the startup costs for Farmer's Branch. Our Q1 non-GAAP effective tax rate is expected to be within the range of 15% to 19%, with a similar range expected for the fiscal year. Non-GAAP earnings per fully diluted share for Q1 is expected to be 45 cents, plus or minus 4 cents. A reconciliation 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. As demonstrated by our Q4 results and our Q1 outlook, we're making encouraging progress to our target model. We also believe that we have more room to run. underpinned by both our initiatives to improve structural costs and our expanding leadership position in the fast-growing markets that Mike described. We look forward to sharing our new target financial model and the key elements of our strategy at our planned analyst day in May. With that, let's open the call for questions. Operator? Thank you.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please limit yourself to one question and one follow-up. One moment for questions.

And our first question comes from Matthew Prisco with Cantor.

You may proceed.

Hey, guys. Thanks for taking the question. I mean, to kick things off, obviously very strong performance on the gross margin side. On track to hit that mid-40% level, three-quarters ahead of planned. So, what's the big change statement here over the past 90 days, and how should we think about the primary drivers and the magnitude of the continued expansion here ahead of the farmers' round?

Yeah, hi. Thanks for your question. Yeah, we're very pleased with the results that we have seen today, and the Q4 25 gross margins of 43.9% definitely represent a faster-than-expected improvement on our roadmap to improve gross margins. And we were a little surprised ourselves, but we're happy about that. We took actions. As a reminder, we took some actions to reduce our workforce early in Q4. We're starting to see the full benefit of those actions. And we continue to see improvements in our output in terms of cycle times and yields in our processes. And those are the primary drivers of improvements that we're seeing in our gross margin performance. Now we do expect that as we look forward into 2026 that we may not make progress at the same speed and perhaps in smaller increments than what we've seen to date, but we believe that we are still on track to hit our target model gross margins at the target model revenue levels within 2026.

Great, thanks. Moving to the memory side, as we think about forms revenue growth through the year within the backdrop of the HPM4 transition, accelerating supplier build plans, robust pricing tailwinds, tester market growth coming in ahead of expectations, give me the upper color on how you're thinking about these moving parts for form, and how should we be linking these industry dynamics to forms growth potential through the year for DRAM?

Yeah, man. It's Mike. I'll take that one. Certainly, they're all tailwinds and some very powerful tailwinds. It's one of the reasons why we're investing aggressively in both making sure that we're getting as much as we can out of the existing footprint and then ramping farmers' branches as fast as we can. We believe the overall demand environment is going to continue to be robust based on conversations with customers and Data points like both major ATE manufacturers having very robust forecasts and views of 2026 and looking at the overall industry and where we're at. So we definitely expect memory DRAM in particular to continue to grow. And it's an area where we're very focused on expanding our both competitive advantage, but also our capacity so that we can capture as much market share as we can.

Thank you.

Our next question comes from Charles Xu with Niedermann Company. You may proceed.

Hi. Good afternoon. Nice results. Maybe the first question, your Q1 guidance implies basically 900 million annual run rate already. And we knew that in the past you said your existing capacity excluding farmers branch was around, maybe it can be slightly above 850. So any chance for you to go higher on rate between now and when the farmers branch comes online? That's the first question.

Thank you. Yeah, thanks for your question, Charles. As you can see from our Q4 results and our outlook for Q1, we believe we now have the ability to execute at a run rate of 225 million a quarter. We believe that the expansion that we've been able to create there in our output is closely related to the improvement actions that we have been focused on over the past couple of quarters. As we focus on cycle times and yields, those improvements ultimately allow us to get more out of our existing footprint and get more good product out for every input that we put in. So we're effectively increasing the leverage on our existing infrastructure. And as I noted in the prepared remarks, we continue, we're going to be continuing our focus throughout 2026 on making further incremental improvements. And so we do expect to continue to squeeze capacity out of our existing footprint over the course of the year.

Any thought, maybe a quick follow-up, then I do have a second question. So maybe how much more do you think you can squeeze out of the existing ones, like out of about that 225 million level?

Yeah, it remains to be seen. As we've noted, we've made substantial progress to date. We expect that our improvements going forward may not be of the same magnitude. We're happy with what we're seeing so far. But again, very closely linked to the same initiatives that are driving the gross margin improvement are how we're going to get additional output out of our customers.

Got it. Okay, maybe another question for Mike. Mike, you talked about HVM, you're deeply engaged. with all our customers already working on HBM-5, R&D. So, mind if you tell us a little bit, what are the key inflections at HBM-5, as you can see right now from the test or probe card perspective, and any thoughts on whether and how any of those inflections could further benefit a form factor? Thank you.

Yeah, I think there's several, Charles, and it's one of the reasons why this early engagement with our customers is required. I mean, HBM5 is a couple of years away from volume production, but you need to be ready with some complex R&D and capacity to deliver that complex R&D in volume to meet these ramps. I think same kind of dimensions that we've seen in the transition from HBM3 to 3 to 4 driving the inflections. increased layer heights which are driving increased test intensity one of them hbm4 gets to 16 high we'll see whether hbm5 continues to climb but sort of and you're well aware of this i think the the coupling with new packaging and stacking techniques like hybrid bonding are certainly a potential for hbm5 and that's an interesting one for form factor because we have tremendous know-how on probing on copper and without getting into all the details Copper is an important part of a hybrid bonding flow. I think the other thing is a dynamic, again, we've seen through the march of the HBM roadmap, and that's increased speeds. Both the individual IO speeds, where the end customers are continuing to push for individual pin rates to go up, most recently this 11 gigabits per second spec for HBM4, but also the overall stack throughput. And when you think about testing at these high speeds, with good productivity, and that means high parallelism, while dealing with all of the challenges associated with power and thermal. These are all, I'm not sure I'd call them inflections, but continued places where collaboration with customers is absolutely required to solve some very significant technical challenges.

Thanks, Mike. Thank you.

Our next question comes from Craig Ellis with B-Riley Securities. He may proceed.

Yeah, thanks for taking the question, guys, and congratulations on very strong execution, both with revenues and the underlying drivers to much better gross margin. Mike, I want to start with you, and I'll stick with the broader theme that Charles was on with DRAM. What I wanted to follow up on specifically, in your comments, you had indicated, I believe, that The company is gaining share at each of the top three DRAM OEMs. And so my question is, can you help us with how that's playing out in terms of the magnitude of gains that are possible across customers, the timing with which that will occur, and any of the other things that might help us as we think about what the financial impact of that could do over the coming quarters? Thank you.

Sure. Well, I think as most people know, we have a very strong share position as our number one customer. So right now, the HBM market's kind of a sweet spot for us. That's why it's been such an initiative to work closely with the other two HBM manufacturers, customers for us, to make sure we're taking the competitive advantages of the smart matrix technology, high parallelism and high speed, and really starting to use that as a a beachhead, if you will, to increase market share of both of those customers. Now, I don't, as I said, I think it's a sweet spot. We're never, maybe not never, it's unlikely that we have grow to share positions like we have at our number one customer. But there's really only two suppliers that can do anything close to this. And so I think there's the element of to really gain share at those two based on the technical differentiation that we have for HBMs. tough to put a magnitude on at this point, but given the growth of the HBM market and some relatively low incumbent share positions at those other two customers, it's a significant opportunity.

Interesting.

Thank you.

The second question really relates to how well the business is executing at its current manufacturing facility and and your proximity to what would have been previously considered an output ceiling. Can you just talk about your confidence in being able to meet customer demand if it in the near term grows above 225 million a quarter before you can get farmers branch up? And related to that, assuming that customer demand remains on a very strong trajectory, how quickly can you bring up farmer's branch and how material can it be in the next 12 to 24 months to production and revenue? Thank you.

Yeah, thanks for your question. As you've seen, we've continued to increase the output of our current footprint, and we're going to continue to make the improvements, maybe at a slower pace through 2026 to drive additional yield and drive, you know, additional improvements in cycle times that will also increase our output capacity, if you will. However, you know, farmers' branch will come online on schedule at the end of the year. There's been no changes to that timeline. That obviously provides us additional capacity beyond this year. We'll continue to do the best we can to enhance our throughput through this year. And we'll talk about the longer term in our analyst day in May. And that's where we'll really be able to see kind of the longer term. Our business continues to remain, you know, relatively short term visibility, right? We continue to operate an insurance business, you know, with visibility within a quarter. You know, we're doing what we can to react within timelines that we have. And I think we've done a pretty good job so far doing that.

And on that note, Eric, if I could just ask a follow-up to it. Clearly, your team executed just incredibly well in the fourth quarter, given the big surge in risk margin. Was there anything that you would consider to be a one-off in that execution, or are the levers that you're pulling things that you can continue to pull if the demand remains very strong?

Yeah, good question. I think that if I were to look at the increase from Q2 25 through the end of the year and the 540 basis point improvement that we generate over that period of time, we estimate that about two-thirds of that improvement is related to the initiatives that we've been driving on the cost side. You know, things like increasing our cycle time, actually decreasing our cycle time and increasing our yields. And the remainder is things like volume. And in Q4, we did benefit from volume, right? So we still have some additional work that we're wanting to do there. But as we've said in our last call and again in this call, we're really focused on changing the underlying cost drivers of the business so that at all operating levels and mixed scenarios that we see, we are improving our performance and our leverage on our capacity, on our sites, and on our cost structure.

Very good. Thanks, Mike. Thanks, Art.

Thank you. Thank you. Our next question comes from Brian Chin with Spiegel. You may proceed.

Hi there. Good afternoon. Thanks for letting us ask a few questions. Maybe first, just to square the Q1 revenue guide, I did notice that system and flash Probe card revenue were both pretty strong sequentially in Q4, but systems can be seasonally softer in Q1. So when I look at the $10 million revenue growth, Q1 versus Q4 at the midpoint, is probe card revenue maybe up more than the $10 million sequential? And how much of that sequential revenue increases DRAM versus FoundryLogic?

Yeah, Brian, you're right. And I parsed it a little bit in the prepared remarks. We do expect systems to be down in the first quarter as it often seasonally is. We're also undergoing a bit of a transition as we start to ramp up CPO and focusing resources on that because it's an exciting opportunity. But obviously the implication there, given the midpoint of the guide sequentially up 10 million, is the probe guard business is going to grow by more than 10 million. It's roughly equal parts of Foundry and Logic and DRAM. And as I said in the prepared remarks, we're seeing some real strength in Foundry and Logic in areas that have not typically driven the business historically for form factor. Not PC and not mobile, but instead things like data center network switches. In DRAM, the step up to a new record that we anticipate in the first quarter is due to HBM growth. I hope that gives you enough detail for some of the moving pieces, but yeah, we expect probe cards to outgrow systems, right, and be responsible for the majority of the step-up, in fact, more than the step-up in Q1, given the sequential decrease in systems.

Okay, great. Maybe two follow-up questions. One, on sort of the constraint in the next few quarters that you referenced, what is your sense of how constrained some of your advanced ProbeCard peers are either in DRAM or Foundry Logic. And do you expect peer capacity to come online in a similar timeframe?

Yeah, I think if you follow our major competitors closely, I mean, you know, 70% of ProbeCard market shares owned by three of us. We have a primary competitor in Foundry Logic and a primary competitor in DRAM. And they, like us, have all been transparent about the need and the initiatives to add capacity. You can imagine that we've got our head down here and they're trying to add our capacity as fast as we can. This is an area, sure, we like to keep our competitive antenna up. But this is one where what our competitors do doesn't really make a difference to what we're going to do. Eric talked about the faster than expected pace on both output and gross margins. We're applying the same urgency with getting farmers branch up and running.

And so we're going to run as fast as we can and try and capture some incremental market share if we can, just with the ability to deliver. Great. That's helpful. Maybe just the last question.

Can you size the AI GPU plus XPU ASIC plus, I guess, data center networking system? probe card TAM in 2025, kind of where your share shook out last year. And then when you think about the growth of the TAM in 2026, should it be similar to kind of that growth rate and year-over-year growth rate in AI accelerators? I think TSMC talked about a multi-year TAM, but it was sort of in the 50% plus range.

Yeah. I think If you look at, and I'm going to broad brush kind of the AI opportunity. If you look at the growth rate associated with things like GPU, custom ASIC, networking in the server rack, both scale up and scale out, these are areas of the industry that are growing much faster than the overall industry growth rate, which is growing pretty fast by itself. I don't know that I'd sign up for 50% growth, but it's clearly growing quicker than the rest of the industry. And as we've talked about, we have some share gain opportunities inside that as well, both with the merchant GPU and the custom ASIC business. We've got strong positions in the networking piece, but are working to build out these other pieces. And it's an area where there's tremendous focus internally and with our customers on making sure that we're driving significant market share positions with those. I had to estimate it. We're talking about hundreds of millions of dollars of SAM for all of those different things in 2025, and we expect them to grow in 2026 and beyond.

Great. Thanks, Mike.

Thank you. Our next question comes from Robert Mertens with TD Cowan. You may proceed.

Hi. This is Robert Mertens for Krish Sankar.

Thanks for taking my question. I know you guys have spoken to great lengths about what you're seeing in the DRAM market and the traction across all the high bandwidth memory manufacturers. Could you provide a dollar amount for high bandwidth memory pro card sales this quarter and just any color you could give us on this calendar year, the shakeout maybe between what you're expecting between traditional DDR and DDR5 designs and those from high bandwidth memory? Thank you.

Yeah, it's just an interesting question, Robert. Let me start with our HBM revenue in the first quarter. Again, connecting the dots on the guide that we provided, we expect DRAM to step up to another record in the first quarter with that growth being driven by HBM. And so... know if uh in q4 was kind of mid 40s think of it as a low 50s kind of number for q1 based on where we currently sit now remember this is a terms business and lead times still are well within a quarter but our visibility for certainly the more complex dram cards is now extending out to the end of the quarter uh if we then kind of think about commodity DRAM and the mix between HBM and DDR, this is a very dynamic and active situation. Not surprisingly, right? Our customers are wafer start constrained and they're making choices every day of whether they start HBM wafers, HBM cordi wafers, or a DDR5 or a DDR4 part. And so for me to speculate beyond kind of our, you know, six, seven, eight week visibility. I don't have a view and I'm not sure our customers have a view of how they're going to respond to the relative profitability they can generate, the relative share gains they can generate given how dynamic the DRAM, both HBM and DDR4, DDR5 markets are right now. What I will say is we're positioned to serve both and we'll continue to stay in close contact with our customers

to make sure we are serving those effectively. Great. Thank you. That's helpful.

Thank you. Our next question comes from Elizabeth Sun with Citi. You may proceed.

Hi. Thanks for taking my question. I guess the first question is, How should we think about the function logic market this year? So, you know, I understand there's a lot of moving pieces. There's upside from, you know, networking and potential GPU qualification. But there's also some softness on your traditional, like, bigger market, bigger market on smartphones and PCs. So I understand kind of early, but I want to get your thoughts on how should we think about function logic growth this year?

Yeah, well, we do expect it to grow for us and as a market overall. And one of our key initiatives is to gain share. And so if the market's growing and we're gaining share, clearly we're going to have a growth year. Now, there's a lot of work to do in that, right? We've talked about the GPU qual we're on track for and some of these other share gain initiatives, let's call it. One of the, I think, important pieces I do want to highlight is the shift we've driven to make sure that we're participating in the sort of spectacular growth associated with high performance compute. You see that in some of the first quarter results, again, primarily networking switches and some other pieces. But the other point I made on the call, the fact that we delivered a fourth quarter and full year revenue record without our large microprocessor IDM being a 10% customer, I think is a testament to the shift we've driven and the exposure we've now generated in the high performance compute sector. So overall, lots of different pieces, but we expect it to grow and we expect to gain share in 2026. Great.

Thanks, Mike. And then Eric, on growth margin, I think you'll talk about you are still on track to achieve the target model growth margin. I think that's 47. Is that, including the 200 bps tariffs impact and also for that 200 bps, what's the mitigation method you are implementing and how should we think about, you know, some upside from the mitigation?

Yeah, the target model is 47% gross margins at $850 million a year run rate for revenue. And that did not include tariffs as a potential impact. And so what we've said is that we expect to hit target model gross margins adjusted for our tariff headwind, which is 200 basis points. So, 45% is what we're targeting as long as we have a 200 basis point tariff headwind. Now, that said, we really want to stop spending money on tariffs. So, we're doing everything we can to mitigate what's going on there. And the primary path that we're pursuing right now is something called drawbacks, where we work with the customs department to reclaim tariffs that we have paid for items that we have re-exported. That's a very detailed, time-intensive process. We're working through it. You know, we would love for that to go faster if at all possible, but it could be several quarters before we see any benefit in our P&L from recoveries there.

Thanks, Eric.

Thank you. And as a reminder, to ask a question, please press star 1-1 on your telephone. Our next question comes from Vidvati Shrotar with Evercore ISI. You may proceed.

Hi, thanks for taking my question. So the first one I had is if you could quickly give us an update on where you are and the qualification process for GPUs and then for the custom ASICs. And it sounds like you kind of have it down and you're expecting revenues in the second half from both of those opportunities. Is that right?

Yeah, well, let me start with custom ASICs because as we updated you earlier, In mid-2025, we actually already have some design wins that have generated multi-millions in revenue in the custom ASIC space and are now seeing the second leg of that for some recently announced custom ASIC. We've got a long way to go in that space to make sure we've got the broad customer coverage and broad customer engagement to make sure that we're a key supplier on all the large custom ASIC projects in the industry. But we're clearly relevant, we're generating multi-million dollars of revenue, and we see it as a growth area. On the GPU qual, continue to make excellent progress. We're in a reliability test part of the qualification where our cards are being run with hundreds of wafers, multiple touchdowns, just making sure we've got the quality and reliability required to operate in a very, very demanding test application. And we continue to expect to generate revenue from this merchant GPU fall in the second half of the year.

Understood. And have you quantified how much that opportunity could be?

We've kind of waved our hands at it. You know, if you look, this is probably the merchant GPU opportunity. You know, it's probably was a $50-ish million spend, primarily with our competitor in Foundry and Logic in 2025, that may be conservative. So as test intensity continues to climb, as spend continues to climb, there's a significant opportunity there, obviously, as we're running something like $225 million a quarter. The custom ASIC one's a little harder to size, but we see significant growth there. And the continued investment in these programs and projects make it a place worth really focusing our resources and making sure we've got strong market share and good coverage there.

Understood. And then the second question I had was on the gross margin side, you talked about cost strategies that bring up the gross margins. manufacturing footprint. Does pricing play, at some point, does pricing become a piece where you could drive cross-margin expansion, just given how much the test complexity is increasing in Foundry Logic and in HBMD RAM?

Yeah, let me take that. I know it was a margin question, but pricing is certainly an area of customer and product focus. So I'll take that one. Look, any time in this industry where you deliver incremental value you often are able to share if you've done your job and share in that value you're providing for a customer. Often for form factor and for many other peers in the test and even WFE space, that comes from providing some sort of product attribute, higher throughput, better yield, a higher performance, a better spec. But there's an interesting situation right now where if there's a specific program that's super important for a customer and valuable for their time to market, we're able to share in that value as well, share in that compensation. Now, it's not across the board, but it is an interesting time in the industry where the elements to share in the increased value the industry is creating are more than they have been in the past.

Interesting. And maybe I'll just add to that really quick that You know, our main path for gross margin improvement is not pricing, but rather more long-term controllable items on the cost front. That's why you hear us emphasize that so much. Of course, if there's opportunities on the pricing front where we can deliver value, as Mike said, we love to see that. But that's not what we're relying on in order to drive long-term gross margin improvement.

Understood. Thank you.

Thank you. Our next question comes from David Dooley with Steelhead Securities. You may proceed.

Thanks for taking my questions and congratulations on the awesome execution on the gross margins. My question's kind of a two-part question on HBM. You talked about the increased intensity as we go from HBM3 to HBM4 to HBM5. I was just wondering if you could take a guess as to what the increased intensity was or probe intensity is between HBM3 and HBM4 and Would it be a similar type of increase in intensity as we move to HBM5?

Yeah, so one of the real drivers of test intensity is the stack height, right? If I'm going to put, you know, if our customers are going to put 16 cordi in the stack instead of 8 cordi in the stack, as for HBM3, that's going to increase the test intensity. Now, there's other puts and takes in this. Their yields are going up. They're figuring out how to get rid of different defect modes. But I think a good rule of thumb is one that we've articulated in the past that maybe 20, 25% on a like for like same stack out basis is not a bad way to think about the test intensity as we go from HBM generation to HBM generation.

Okay. And then as far as you know, I think we understand you have very high market share at the market leader in HBM. I was just kind of curious so I can understand what the potential opportunity is. What do you guess your market share is on a combined basis with the other two HBM players?

I don't, we haven't quantified that for people and cause it's, it's tough to parse through all the different HBM applications, excuse me, at each customer. Um, What I'll say is, and I think I already said it, is we have low enough incumbent share that there's a real opportunity there as we deliver into places where we have differentiation, like the high parallelism, high speed test insertion I talked, where we're driving very strong share at all three manufacturers in that particular application.

Well, maybe another way to ask it is, so you're the number two source at the other two guys, essentially.

Correct. From an overall DRAM standpoint.

All righty. Thank you.

Thank you. I would now like to turn the call back over to Mike Schlesser for any closing remarks.

Thanks, everybody, for joining us. As I said, as I close my remarks, we're looking forward to continuing to demonstrate progress in growing revenue and expanding gross margin and profitability in our existing footprint. And then updating you on our May analyst day. on the longer term prospects for form factor as we bring the farmers branch site online as well and drive more growth, more gross margin expansion. Thanks again for joining us and take care.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.