Thank you, and welcome, everyone, to FormFactor's Third Quarter 2020 Earnings Conference Call. On today's call are Chief Executive Officer; Mike Slessor and Chief Financial Officer, Shai Shahar. Before we begin, Jason Cohen, the company's General Counsel, 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 include those with respect to the projections of financial and business performance due to macroeconomic conditions, the benefits of acquisitions and investments, the impacts of the COVID-19 pandemic, the impacts of regulatory changes, the anticipated demand for products, our future ability to produce and sell products; the development of future products and technologies 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 fiscal year ended 2019 and 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 28, 2020, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Thanks, Jason, and thank you, everyone, for joining us today. FormFactor delivered third quarter results at the high end of our July outlook range, nearly matching our all-time record fourth quarter of 2019. Responding to continued robust demand for our products and despite the challenges posed by COVID-19, we steadily improved the efficiency of both our internal operations and external supply chain by adding capacity and increasing factory output in a safety focused and socially distanced manufacturing environment. This positive trajectory continues in the fourth quarter as we finish off 2020 and the launch of the new Year. In the third quarter, four semiconductor industry leaders comprised our 10% customers. As we explained in our August Analyst Day presentation, a foundational element of FormFactor strategy is long-term intimacy with a diverse group of top-tier companies, spanning IDMs and foundries, across logic, memory and specialty chips like RF. Revenue from these customers is one important indicator that demonstrates our engagement as we meet their near-term production needs. Longer term, we are also working with each of them to understand and meet their next-generation test and measurement challenges. This close dialogue helped shape our capacity investments in R&D spend and as a result, we stay synchronized with important customers who are at the forefront of our industry. As the first major 5G handsets ramp in volume, the growth of our foundry and logic probe card business is a great example of the value provided by these long-term customer collaborations and associated R&D programs. Our multiyear investments in both RF and high-performance digital tests are now yielding dividends as customers utilize FormFactor's differentiated market-leading products to meet their highly complex test requirements per millimeter wave RF front ends and next-generation application processors. As we have discussed in the past, there are substantial increases…

Thank you, Mike, and good afternoon. As you saw in our press release and as Mike noted, our third quarter revenue and gross margin were above the midpoint of our outlook range, and EPS exceeded our outlook range. These are impressive results, close to our record-high results of Q4 2019. FormFactor's third quarter revenues were $178 million, a 13% sequential increase from our Q2 revenue. Revenues increased 27% year-over-year, and were near our quarterly record high revenues of $178.6 million in Q4 2019. Probe card segment revenues were $161 million in the third quarter, an increase of $17 million or 13% from Q2. The increase was driven by higher DRAM and Flash revenues, partially offset by a small decline in foundry and logic revenues. Systems segment revenues were $27 million in Q3, an increase of $3 million or 13% from the second quarter. Within the probe card segment, robust demand for foundry and logic continued, with revenues decreasing less than $1 million from Q2 million to $108 million, comprising 61% of total company revenues in Q3, down from 69% in the second quarter. DRAM revenues were $31 million in Q3, an increase of $12 million from the second quarter and were 18% of the total quarterly revenue as compared to 12% in the second quarter. After a couple of quarters of customers digesting purchases made in 2019, DRAM demand returned to what we believe to be a more normalized quarterly run rate. Flash revenues of $11 million in Q3 were $5.6 million higher than in the second quarter and were 6% of total revenue in Q3 compared with 3% in Q2. Some of the increase is attributed to the acquisition of the advances probe card assets during the quarter. The integration of this business is going well, but this does…

Thank you so much. [Operator Instructions] Our first question will come from the line of Quinn Bolton from Needham. The line is now open.

Hey guys congratulations on the nice results and what appears to be a record quarterly outlook for the fourth quarter. I wanted to ask about the foundry logic strength, if you could give us a little bit more color. Is that fairly broad-based across your large logic and foundry customers? And then a second question, obviously, tighter trade restrictions have been announced during the third quarter. Wondering if you are seeing any impact on the tighter export controls around SMIC? And then I have got a follow-up question for Shai.

Quinn, it is Mike. I will handle that one. The foundry and logic strength is quite broad-based as it was in the third quarter as well. If you take a look at our 10% customer list, you can see some nice strength across multiple leaders in the foundry and logic space there. We are seeing the same thing continue here in the fourth quarter. So it is reasonably diversified, nicely broad-based. A lot of the drivers we talked about before, certainly, major 5G handset launches are behind that. Infrastructure data spending, data center spending, some really nice robust trends continuing here through the back part of the year. On the China situation, we tried to give you a little more detail in the prepared remarks. The domestic China business for us has been sort of a mid-single-digit percent of revenue for the past several quarters. Majority of our China business is serving the multinationals in the region. And as a consequence, you can imagine the major domestic foundry is not a really big business for us. Having said that, for sure, as a U.S. company, there have been some headwinds associated with serving them and other domestic China customers. And I think like everybody else, we are working our way through investigating the different ways we can mitigate that, whether they be through licenses or other compliance activities.

Great. And then the other question for Shai, just you talked about a less favorable mix in the quarter. I guess I just look at foundry logic strength with lower NAND and about flat DRAM. I would think that mix would generally be positive for you. So can you sort of walk us through within foundry and logic and perhaps the memory business? What in segment mix shift maybe going on that would sort of offset what I would have thought to be a tailwind with the mix shifting towards foundry logic?

Sure, Quinn. That is a good observation. We did say in the past that if you look at the different markets we serve, historically or maybe on average, systems has the highest gross margin followed by foundry and logic, then DRAM and then Flash. But a few things. First of all, there is some overlap there. There are cases that you can have the DRAM card with a higher gross margin than a foundry and logic card. And also the mix within these markets, the product mix within these markets, even within the same customer can change. So it is true that if you look at the trend for Q4, foundry and logic is expected to be higher, and Flash is expected to be down. But the mix within these markets also has an impact, and that is why at the midpoint of the outlook range we expect to see the gross margin lower in Q3, even though revenue is really higher.

Got it. And then, Shai, I may have missed it, but did you give a quarter-to-quarter sort of guidance for what the systems business would do in the fourth quarter?

We did not. When we spoke about the three maybe the market.

Okay, great. Thank you I will hop back in the queue.

Our next question will come from the line of Carlin Lynch from B. Riley. The line is now open.

This is Carlin on for Craig. Two quick questions. One, starting with you, Mike. You had talked, I think, previously about the Livermore plant asset purchase. If you could just give us an update on how that ramp is coming and what we can expect in terms of timing and production facility conversion, that would be great. And then I have a follow-up.

Yes. I think we are still in the fairly early stages of that. To remind everyone, we bought close to 100,000 square foot building, which is going to be utilized entirely for manufacturing capacity adjacent to our existing footprint in Livermore, California. We are still in the very early stages of outfitting that building. So in our current results, we are continuing to get more effective incrementally at manufacturing inside our existing footprint. Obviously, still a lot of social distancing, measures in place that are - make us less efficient inside that footprint than we would have been, say, a year ago, but we are getting better at it. And as you can see from the Q3 results and the guidance, managing to squeeze more out of that existing footprint. We expect the new capacity to start to come online in the middle part of 2021. But it is going to be a gradual and incremental start as we continue to match our capacity to the overall customer demand.

Got it. And then with regards to the Advantest, the $35 million Advantest technology integration, I guess if you could just provide a road map kind of integration update where we are in that process, that would be great. And then lastly, just really quick, did you guys see anything in terms of the SMIC buffer stocking in the quarter? Were there any signs that maybe people had started to pull - kind of pull orders in ahead of time. I know China was less so less intense in the quarter, but any signs of buffer stocking there?

Yes. Let me deal with that one first because we did try and lay things out for people a little more clearly in the prepared remarks. So I would refer you back to those as well. Our domestic China revenue is a relatively small percentage, kind of mid-single digits of total company revenue. So the signal-to-noise on any inventory pull ahead and things like that are not going to be great for us. So a limited exposure, probably in a few places, we did see some risk reduction. That is difficult to parse out from general strategies of inventory buys associated with things like COVID that some of our customers are doing as well. So I wouldn't say we got a real clean signal there. And in any event, it is not a really significant part of our revenue, given the exposure footprint to the domestic China business, the FormFactor has. On the Advantest acquisition, so we are about a quarter in. I think as Shai mentioned in the prepared remarks, things are going really, really well. We are very pleased with both the technology assets and the team that have come in to be a part of a FormFactor. You can imagine in the technology integration, those are fairly long-term projects. And so we are in the early stages of characterization, rationalizing road maps, where we can use some of these technology elements in FormFactor's, DRAM, in foundry and logic probe card road map. As we talked about, that is one of the key pieces, the interconnect technology and the MEMS probe technology that this acquisition brought us. Also brings us a better competitive position in flash, and there was a contribution. Although not huge, a contribution in the third quarter, continuing to make some progress in increasing market share there, doing some operational and manufacturing integration to see whether we can extract a little bit more share in the $250 million served market is NAND Flash.

Got it. Alright thanks so much guys.

Thanks.

Our next question will come from the line of Brian Chin from Stifel. The line is now open.

Hi, good afternoon. Nice results and thanks for letting us ask few questions. Maybe first question for you, Mike. Revenues from your largest customer does appear to be normalizing in 3Q off a very strong first half level. So I guess, I was wondering if your strong fourth quarter outlook reflects any further normalization from this customer as the rate of 10-nanometer capacity growth moderates?

Yes. It is a good observation, Brian. So in the first half of 2020 and probably in the fourth quarter of 2019 as well, our largest customer was at revenue levels that we viewed as above kind of a normalized run rate. And you do see in the third quarter results, those coming back down to as you call it a more normalized level, which should be expected from this customer. I think as I look at our fourth quarter outlook and more generally, the mix of the business in the third quarter, you see a nice balance between some of these leading customers. Again, we had 4 10% customers in the third quarter, comprising some real leaders in the industry. And so I think that is indicative whether they are 10% customers in the specific quarter or not, it is indicative of the footprint of the customer relationships that we have and the overall diversification that we have managed to build in this business. In any given quarter, I would certainly expect any one of these customers, whether our largest customer or working through the list of other major customers, they are going to fluctuate around according to their design release roadmaps and their need for specific probe cards, whether they be for node migrations or new design relations.

That is helpful. Maybe to switch gears, and this is either for you, Mike or for Shai, but more from a supply perspective, I'm definitely impressed you are capable of shipping towards the upper end potentially of your 4Q guidance range, again, given the timing of your new capacity next year. I was wondering if you could elaborate more on some of the levers that you are able to exercise right now to increment up your revenue output in the near term? And maybe suffice to say, can you maybe touch the ceiling in terms of your capacity at the upper end of that revenue guide?

Yes, it is Mike again. Maybe I will take that at a high level. Again, as I said in a response to one of the previous questions, I think we are just getting better at operating in this environment. Obviously, as we went through the first part of the year, it was a complete reinvention of a lot of our on-site manufacturing and safety processes. Some of the things that we have done, for example, have been annexing engineering lab space as production space, incremental production space and then having conference rooms turn into engineering labs, right. You can imagine, there is not a lot of need for conference rooms among the G&A population these days. And so you have sort of pivoted and repositioned inside the existing footprint. I think as we get towards the high end of the fourth quarter outlook range, there is not much more beyond that in our existing footprint. Obviously, mix does play a role. There are more favorable mixes that bear more revenue per if you like, square foot of manufacturing space, but we are getting pretty close to straining the existing footprint. Having said that, you have got yield improvement, the ongoing CIP that really has been a foundational piece of how form factors continue to lead in the industry and improve gross margins and financial results. And those are things we will be depending on as well. And we get to the middle of 2021 and start loosen those reins and bring on some significant new capacity capability in the new building.

Maybe one last really quick one. But if you think of foundries, for example, they seem to be running fairly tight capacity themselves and other folks, yourselves included, maybe in kind of a similar camp. Do you think that is giving folks, yourselves, other folks in the supply chain, maybe a little bit better visibility even into early parts of next year?

If I look at lead times, certainly, I would say, on average, they have gotten a little bit longer, but not dramatically though, right? We are still fundamentally running a turns business, where to start a quarter, we have a significant amount of designs to win and work to do to fill in the rest of the shipments and revenue for the quarter. But there are certainly cases because of the customer capacity situation where there are wide wafer cycle times and design lead times are a little bit longer, and that is offering some measure of increased visibility, but it hasn't fundamentally changed the nature of the business. Still a turns business and our headlands only go so far into the fog.

Fair enough. Thank you.

Thanks.

[Operator Instructions] Our next question will come from the line of Tom Diffely from D.A. Davidson. The line is now open.

So Mike, obviously, very good to see four 10% customers, all the diversification in the quarter. On a go-forward basis, would you expect the logic foundry customers, the two large guys to be consistently in the 10% customer range, while the memory players kind of come and go depending on their quarter?

I think in any given quarter, and I tried to allude to this in one of the answers to Brian's question. I think you are still going to see some lumpiness in the 10% customer list both in the memory or DRAM providers. Of course, one of those customers is both a foundry customer and a DRAM customer. But even as we build out our business and grow our business at the world's leading foundry, it is still going to be a little bit lumpy, much less so than it was even a year ago as we are shipping multiple designs in high-volume across both mobile, high-performance compute and RF. But I would still expect some fluctuations around the 10% level that might cause them to move in and out of that list. Over the long-term, we certainly expect them to be a 10% customer, a perpetual 10% customer for FormFactor. But over the short-term, I think you could see them move on and off the list.

Okay. That is helpful. And then going back to your answer earlier on the Flash demand business. At this point, are you using the acquired technology on a go-forward basis that might improve the margins in that space? Are you still opportunistically using your old traditional technology?

Yes, it is a mix of both, Tom. So the product we acquired as part of the Advantest acquisition nicely positioned for mainstream Flash. As we said, when we announced the acquisition, qualified at one major NAND flash manufacturer, we are working to expand that customer base across the worldwide FormFactor footprint, an example of maybe the revenue synergies that we can bring to some of these acquisitions. But there are areas of the high end of NAND flash, where we are still being opportunistic with our legacy technology. So a product strategy that has a lot of sub segmentation in it, that is pretty usual given the design specific nature of the space. A very dense, high-performance piece of NAND Flash is going to need some of the legacy form factor technology, maybe more mainstream commodity NAND flash, the Advantest product much better position?

Okay. And then finally, Shai, when you look at the 500 basis point improvement in the probe card margin year-over-year, is that strictly just because of revenue or volume? Or has the mix towards more RF benefited that as well?

I think when we talk about product mix, then the RF is part of our foundry and logic, which historically has a higher margin. And so that helps the increase in - foundry and logic help with the margin going up. And we are glad to show that we make progress toward our margin of 47%. Higher revenue overall also help the margin is the spread across the higher base, of course. So both of them.

Okay. Alright, thank you.

Thanks Tom.

The next question will come from the line of Amanda Scarnati from Citi. The line is now open.

On the first question I have is on TSMC. It is nice to see them finally crossing that 10% threshold. Can you talk a little bit about how large that customer can become? And looking at it in a different way, is there a limit to how much business TSMC is willing to sort of outsource the form? Or how do you look at that going forward?

Yes. Obviously, the effort to first get qualified several years ago and then grow our business at the world's largest foundry is a key strategic element of where we are trying to take the company. That business really were competitive and used only to advance and we talked about that being 10 millimeter and below. Obviously, with a bit of an amplifier if there is advanced packaging involved because of the fundamental value FormFactor’s technology asset. As with most of our customers, it is a competitive business where we are competing against other probe card providers. And so that caps it in some sense. But when you look at that foundry business in contrast everywhere else, there is probably still some upward momentum available because it is a leading-edge node business. As more of that foundry's wafer starts move to advanced nodes, if you like, that piece of available market to us is going to continue to increase. We have talked about it in the past being comparably sized to the business with our leading customer. And I think that is a reasonable way to continue to think about it long-term. You are not going to get there next quarter. And as I said, in response to some of the previous questions, expect them to move up and down a little bit around the 10% level. But long-term, I think the growth trajectory that we have shown so far, essentially going from 0, three or four years ago, up to a 10% customer, there is still some legs left in that story.

Great. And moving on to sort of the cryo test business, both via the acquisition you announced today and then also the announcement that you made back in September in terms of new technology capabilities. When could we expect to see any sort of revenue from cryo? Is this sort of more of a longer-term technology trend? Or are there some near term opportunities?

I think in terms of significant revenue that would change your model or something like that, it is out there a ways, right? That is we are making at the right-hand end of our road map, guided by some of our key customers who are driving applications like Quantum computing, they require very, very low temperatures, essentially approaching absolute zero. And so from a significant revenue perspective, it is probably even outside the scope of our long-term model that gets to $850 million in 2023. Having said that, these businesses are bearing revenue right now. It is part of the reason why we have the confidence to invest in an acquisition like HPD and continue to invest R&D in it. Customers are engaged with us and clearly pulling for more capable development platforms, which eventually will move into production. But as I said, it represents probably a growth component for our next long-term target model once we get past the $850 million.

Great. Thank you.

[Operator Instructions] Our next question will come from the line of Robert Mertens from Cowen. The line is now open.

This is Rob Mertens on behalf of Christian at Cowen. Just one along the lines of probe cards for advanced packaging. Maybe you could give a little bit more clarity on puts and takes and how you see that business growing over the next year or so in terms of sort of the customer concentration and margin profile of that business, how you see that over the next year? Thank you.

Yes. A good question and one that maybe so everybody's baseline. I would encourage you to go back and look at our August Analyst Day presentation because we tried to frame it in some sense there. But if I look at things going forward, clearly, the leaders in the industry are going to rely more and more on advanced packaging to fuel their innovation road maps, whether it is chiplet strategies, HBM in memory, there is some pretty compelling product differentiation that our customers can achieve by employing advanced packaging. We are still pretty early in that. But because it is relatively early, you are going to see it concentrated, I think, among the leaders. So people like the 10% customers that we have had in the third quarter are obviously going to be the people driving and innovating at the leading edge of those advanced packaging road maps. And part of the reason why we are working so hard to stay engaged with those customers, we believe they are going to be the drivers of advanced packaging, which as we have seen in a variety of other applications will then fan-out to the rest of the industry, pardon the pun. So from a concentration perspective, again, it is going to continue to be with the leaders. I think from a margin profile, there is always competition, so I would not expect a huge uplift in margins. Having said that, there are some elements of value that we provide in the advanced packaging applications, whether they be much tighter densities or higher speeds, enabling things approaching known good die test that do bear a higher gross margin, a higher price than, say, a commodity probe card in a monolithically packaged part.

Great. Thank you that is very helpful.

I’m showing no further questions at this time. I would now like to turn the conference back to Mike Slessor.

Great. Thank you, everybody, for joining us today. We have got a couple of IR events coming up to close the year. But if we don't talk to you during those, stay safe, stay healthy, and we will talk to you again soon. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.