Thank you, and welcome, everyone, to FormFactor's second-quarter 2024 earnings conference call. On today's call are Chief Executive Officer Mike Slessor, and Chief Financial Officer Shai Shahar. Before we begin Stan Finkelstein, the company's VP of Investor Relations, will remind you of some important information.

Thank you. Today the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials. Reconciliations 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, future macroeconomic and geopolitical conditions, the benefits of acquisitions and investments in capacity and new technologies. Th impact of global, regional and national health crisis, including the COVID-19 pandemic, anticipated industry trends, potential disruption in our supply chain, the impacts of regulatory changes, including the recent US China trade restrictions, the anticipated demand for product, 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 fiscal year ended December 30, 2023 and in our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today, forward-looking statements are made as of today, July 31, 2024, and we assume no obligation to update them without. We will now turn the call over to FormFactor's CEO Mike Slessor.

Thanks, everyone, for joining us today. FormFactor's second-quarter revenue, non-GAAP gross margin and non-GAAP EPS all exceeded the midpoint of the outlook range we provided in May. Expected strength in our probe card business drove second quarter results as we recorded sequential increases in all three probe card markets. DRAM probe-card revenue reached record levels with revenue from high-bandwidth memory or HBM doubling for the third consecutive quarter to nearly 75% of our DRAM revenue. In the current third quarter. We're experiencing steady overall demand for FormFactor's products as we continue to make progress towards our target financial model. Our second quarter results and third quarter outlook illustrate the unique value of FormFactor's diversification strategy, which differentiates us from our direct competitors with a broad lab to fab product portfolio across foundry and logic, DRAM and Flash probe-cards, together with our Systems segment products. This portfolio enables us to compete for business across diverse demand pools at all major customers producing relatively stable results during last year's downturn and the top line growth we're delivering this year. Our revenue growth is being driven by exposure to expanding areas like high-bandwidth memory and DRAM probe-cards and co-packaged silicon photonics and systems enabling FormFactor to grow even as we await refresh cycles in important high unit volume end markets that drive Foundry and Logic probe-card spending like mobile handsets, client PCs. FormFactor's third-quarter outlook also demonstrates several unique features of probe-card demand. As we often note, probe cards are a consumable that's specific to each new chip design, meaning we benefit from both technology node transitions and from the release of new designs on existing nodes, together with our broad market and customer exposure. This produces a more stable demand profile than the more volatile demand cycles that characterize capital equipment. This…

Thank you, Mike, and good afternoon. As you saw in our press release, Q2 revenues were $197.5 million, $2.5 million above the midpoint of our outlook range. And non-GAAP gross margin of 45.3% was 0.3-percentage-points above the midpoint of the range. These, together with OpEx slightly lower than the midpoint of the outlook, resulted in non-GAAP EPS at the top end of the range. Second quarter revenues increased 17% sequentially from the first quarter and increased 26.7% year-over-year from Q2 '23 revenues. The upside versus the midpoint of the outlook range was due to higher revenues in our probe-card segment. Probe-card segment revenues were $167 million in the second quarter, an increase of $30 million or 22% from the first quarter. The increase was driven mainly by higher Foundry and Logic and DRAM revenue Systems segment revenues were $30.7 million in Q2, the $1.3 million decrease from the first quarter and comprised 15.5% of total company revenues, down from 19% in the first quarter. Within the probe-card segment, Q2 foundry and logic revenues were $104 million, a 19.5% increase from the first quarter. Foundry and Logic revenues increased to 52.5% of total company revenues compared to 51.4% in the first quarter. DRAM revenues were a record $58 million in Q2, $12.1 million or 26.5% higher than in the first quarter and rose to 29.4% of total quarterly revenues as compared to 27.2% in the first quarter. Within HBM revenue almost doubled from $22 million in Q1 to over $43 million in the second quarter. Flash revenues of $5.1 million in Q2 were $1.1 million higher than in the first quarter, and we're at 2.6% of total revenues in Q2 as compared to 2.4% in Q1. GAAP gross margin for the second quarter was 44% as compared to 37.2% in Q1.…

[Operator Instructions]. Our first question comes from the line of Craig Ellis of B. Riley Securities.

Thanks for taking the question and congratulations on the execution, guys. And Mike, I wanted to start just by following up on a point you made with regard to high-bandwidth memory, I think you indicated the company expected that after some digestion and the third quarter growth could reaccelerate there. I was hoping you could just share some of that either customer interaction or things that you're seeing that lend confidence to the reacceleration? And any color on timing would be helpful. Thank you.

Yeah. So Craig, good question. Just to level set, everybody. We again, in the second quarter, doubled HBM revenue to 75% of our DRAM revenue. So really significant contribution from that, as I think most of you know, is pretty concentrated with a single customer, although each of the three major DRAM manufacturers, you have contributions in there and it's not unusual when we ship at that scale for a customer to have a period of digestion where they then use the probe-cards for a quarter. You can see this historically through our major customers as they're in their cadence quarter to quarter that we report for a 10% customer. And so what gives us confidence that this is that digestion, I think a couple of things. If I look at it from a macro level, continued hyperscaler investment in generative AI, which in turn is driving our customers, our DRAM customers to increase their capacity and output of HBM3 and three currently and beginning to do development on HBM4 and HBM5 production. And really in conversations with those customers. There's no there's no pause in that. They really are continuing to invest very heavily in this pretty lucrative part of the DRAM market, again, driven by hyperscaler investments. In our direct visibility, as most of you know, is pretty limited. We operate with lead times of less than a quarter. And so in terms of POs and backlog, we can't see much past the end of the third quarter here. But when we look at the conversations we're having with these customers, when we look at the investments, the hyperscalers are making it does seem like that's pretty reasonable to attribute this Q3 are still HBM still at pretty healthy levels. It's a digestion period.

That's really helpful, Mike, thanks. And then the follow-up question is somewhat similar three months ago. You noted that a foundry logic customer, formerly the largest customer for this last quarter where it's now DRAM and would at times in the past are go through a period of digestion after a really strong quarter? Are you seeing signs? And is that baked in the guidance that we will see that digestion in the third quarter? Or how are you thinking about the risk that that could happen at this point?

Yeah, foundry and logic overall, we see in the third quarter pretty comparable to the second quarter, both from overall levels and customer and product mix. And I think this is really another proof points associated with how advanced packaging is driving our business. You see major customers, certainly in compute, but also to some extent in mobile beginning to adopt advanced packaging tech more beginning to adopt advanced packaging. And we see that with across the compute sector technologies like Foveros and co-los, even as the PC market remains, PC end market remains somewhat muted. We're seeing pretty solid demand for probe cards because of the increase in test intensity and complexity driven by advanced packaging in the sector. So Q3, pretty similar to second quarter in foundry and logic from an overall customer and product mix perspective, again, driven by advanced packaging.

That's really helpful. And then just the observation on that, Mike, would be sense. Those are heterogeneous die based products are such a small part of mix now but over time will become a majority of mix that would seem to be a real nice long-term secular tailwind for the business?

Yeah, I think across the industry, it's a really interesting and compelling secular opportunity for those of us exposed to advanced packaging.

Thanks, Mike. Good luck in 3Q.

Thank you.

Our next question comes from the line of Charles Shi of Needham & Company

Hi, Mike, so good afternoon and thanks for letting me ask two questions. The first one, it's about DDR5 versus HBM. I think prior to this quarter, the way you characterize the DRAM probe-card market was if you back out HBN., the standard DRAM or DDR probe-card were still run rating around that. I would say $20 million-ish, that downturn level. Basically, it looks like next quarter, the September quarter, you're expecting a somewhat similar, maybe a DRAM total revenue, but up since you're talking about mix shift from away from HBM more to DDR5 Would you characterize maybe this is the beginning of the standard year end recovery or this is maybe just a one-off quarter? I just wanted to know the sustainability of the DDR5 probe-card growth from here?

Yeah. It's an interesting question is, as you might imagine, we're having similar discussions internally and with our customers. I think if you look at the overall non-HBM DRAM market, we're characterizing it as DDR5, but that's a pretty broad brush that low-power server and compute, and you're seeing a significant step-up here in the third quarter to levels that are comparable to the previous cyclical highs. Now when we see and where HBM is we said there's a bit of a one quarter digestion period, and that's not unusual. Remember, probe-cards are specific to each customer chip design. And so as customers move their wafer starts in back and forth between technologies and different products for them to optimize their output for their market. We can see these pretty significant swings between designs and market segments and submarkets and whether this is the start of a DRAM upturn, I think is still to be seen, but it is encouraging if you've seen DRAM spot pricing, if you've heard as the narrative from our customers on the overall DRAM market improving certainly may be the beginning of an upturn for now. We just don't have the visibility to say so whether it is or not, but nice to be again operating our DRAM business, a very important business for us up at record levels.

Thanks, Mike. I have a follow-up on the foundry logic side of the business, it's up in Q2 was up foundry logic probe card was up in Q2 by quite a lot about, but your largest microprocessor customers, the revenue you do disclose on a quarterly basis generally. So up mean as much I mean, it doesn't explain all the incremental you're seeing in the foundry logic side and so this kind of a mid-year stress money. If you clarify a little bit of what's driving that outside of this microprocessor company and more importantly, going into next quarter, who is driving that incremental growth in foundry logic probe-card?

Yeah, we often see this midyear strength in mobile application processors. If you look at phone release, cadences and work back to the timing where customers are going to need probe cards for those. That's exactly what we're seeing right now. And we talked about it on the last call with the anticipated second quarter strength, which materialized being associated both with microprocessors, but also at midyear, our releases of these mobile application processors. That's a theme that we see carrying through the second quarter. Again, we see foundry and logic having a similar level and profile in the third-quarter as in the second-quarter and so beyond that, again, visibility pretty limited, but we're pretty happy with how we're executing in the broader foundry and logic market. Always some improvements, always some share to gain, but that's both of those factors driving our Foundry Logic strength in the middle part of the year.

And maybe a quick follow-up to that. Do you see a little bit of a mix shift in foundry logic probe-cards from Q2 to Q3? Thanks.

No, it's very similar Charles.

Thank you.

Our next question comes from the line of Tom Diffely of D.A. Davidson.

Yes, good afternoon, thank you, Mike. I was curious when you look at the high-bandwidth memory ramp that you've had this year, how much of that was driven by just increasing volumes of high-bandwidth memory versus a design change? And then if there is a big shift to the next generation design, what does that do to your business?

Yeah, as we've said, probe cards are a design specific consumable and so there's these two pieces. There's the release of a new design, but there's also the number of wafer starts at number of test cells and therefore, probe cards that need to run on this design. I'd characterize the growth in the second quarter of the HBM business being concentrated across, let's call it in round numbers, 10 designs that are really the high runners driving the growth. And so that could be one ship remember, HBM and a stack of mostly eight high DRAM, but there's a base die. There's test insertions for the eight core die and then there's also a test insertion when the customers done stacking. Each of those three sets of probe-cards is a unique fleet of probe cards and so that's part of the test intensity increase associated with HBM in particular and advanced packaging in general. But it more than a handful of designs really driving the strength.

And then when you look at the business next year in '25, do you think it's pretty well split between the three main suppliers? Are you still going to be very leveraged to one of the players.

No, I think you know, as they said, we currently see contributions from all three manufacturers, although we're over-indexed to the leader in HBM market share and a fundamental tenet of our strategy is to make sure that we're a key supplier at the leading edge to all major customer. And so qualification work is ongoing and both of them were in a position positioned to compete for that business as HBM3 and HBM4 out. Those are opportunities for our customer share development and for us to go compete for new business as well.

And then final question, Shai. When you look at the margin guidance for the next quarter, is it simply the decrease of high-bandwidth memory as a percentage of product mix issue?

While, it's a combination of DRAM revenue overall as a higher percentage revenue and within DRAM, the shift from HBM to DDR5, so this is both of them.

Okay, great. Thank you.

Thank you, Tom.

Our next question comes from the line of Christian Schwab of Craig-Hallum.

Great. Thanks for taking my questions. So just again on high-bandwidth memory, we can kind of back into the math, pretty modest revenue from the other two big guys as we get into 2025, do you think you have no three meaningful customers in that space, or do you think that there's the potential for as the other two guys get up to speed and they begin to take share. I'm just trying to size what your expectations and '25 and '26 are for high-bandwidth memory as the other two guys come to market that I've talked about being sold out for next year.

Yeah, we'll remember if we back out a little bit, we're a key supplier to all three major DRAM manufacturers in DDR4, DDR5 and we hope to be for HBM as well. Currently, one of them owns the lion's share of HBM shipments. And so that's why we're over-indexed to that customer. But again, as Tom asked, we do expect and as vague as the other two DRAM manufacturers gain share in the transition from HBM3 to HBM4 work their way through some pretty significant technical and yield challenges in ramping this up. We do expect that share to balance out a little bit. So, you know, as we look into '25, the transition to HBM4 certainly exciting for us. It raises the speed requirements for the probe-card. So again, a notch up in complexity and as customers go to stacking 12 and even 16 high die. That obviously is going to increase the overall test intensity and complexity and testing that overall stack. So we feel like we're in a pretty strong competitive position even as the share starts to balance among all three DRAM manufacturers.

In the follow-up to that, on the high-bandwidth memory for transition, you know, given as you said, the speed and increase stacking capabilities, I would assume that there should be some pricing power on those probe-cards, not all the way, obviously to foundry and logic levels, but potentially higher than where we sit today. Is that fair?

Yeah, that's fair. And one of the reasons right, we touched on it in a question a couple of minutes ago, but the mix shift away from HBM towards DDR5 inside DRAM at these high levels, certainly as a gross margin hit. And so you can connect the dots there, our ability to build probe cards that are highly differentiated and provide a lot of value to our customers in testing it speed and across multiple temperatures in a very complex mechanical situation. You're testing a whole 300 millimeters wafer of the stack die across a temperature range of over 100 degrees Celsius. And you can imagine the thermal scaling challenges associated with that are significant. And that's why HBM probe-cards worth more.

Great. And then my second question is now we've got two quarters of call it at roughly $200 million, which is kind of the target model. Do you guys have a set expectations when you plan on updating your target model?

Sure. I'll take this one, Christian. So we are two quarters at $200 million, but the target model is a little higher than that, right. If you take the $850 million, it's about . So what we want to do is what we have done in the past once we have a quarter or two at this model run rate. And I agree we're getting closer to it, but we're not there yet. Then we'll set up a date schedule, a new analyst day and then work on publishing the new target model. So we're not there yet but stay tuned.

Got it, sounds great. Thank you guys.

Thanks, Christian.

[Operator Instructions]. Our next question comes from the line of Brian Chin of Stifel.

Thanks for letting us ask a few questions on Mike, can you comment whether you expect sort of that the mix shift you're seeing in the DRAM business to persist into Q4? And I guess that's kind of the first question, because I guess maybe it's like I heard 50 basis points to 80 basis points headwind or something relative to what it was in 2Q. And so and that's, I guess the first question.

Yeah, Brian, it's Mike. I'll take that. I think in terms of timing, I'll again caveat this with our visibility, our direct visibility, it doesn't really go much past the end of 3Q here, we're operating with short lead times. We certainly have forecasts from our customers. But the dramatic shift in DRAM towards production capacity for DDR5 is something that's a relatively dynamic situation, whether it persists or not is something that probably we need a few more weeks or months to really get a read on from our direct backlog, having said that, you know, if you do look at the and you know that the underlying DRAM market DDR4 and DDR5, low-power server and PC, they do seem to be strengthening and so it wouldn't be all that surprising if there was a shift of some capacity and towards those markets and we saw a bit growth in the non HBM parts of the market a little bit early to tell. And again, our visibility doesn't go that far into the future, but some of the fundamental factors are in place for a DRAM recovery agenda.

Yeah, I was even thinking, yes, Samsung seem pretty confident last night that their HBM3 shipments, if they are the dominant player, but they would accelerate substantially in the back half of the year. So maybe that 3Q, but I imagine that could factor in your outlook for HBM at some point in the second half?

That's right.

Okay, and I don't know if anyone asked, but in terms of the I missed this part, but the China increased Q-on-Q, was that mainly just multinational of any kind of additional color on, what drove that?

You know that there was announced a good topic to touched, reminder. So in Q2, a little over 10% China as a percentage of revenue and inside the Q3 look, we are forecasting a moderate increase. It will still be in the 10s, nowhere near the 40% to 50%. Some of the WFE suppliers have for China. You remember, we've been pretty proactive in managing the situation. We divested our China operations. And then I formed an exclusive distributor ship with the with the purchaser of that business. And we're opportunistically serving the domestic China business as best we can in the face of some pretty significant geopolitical headwinds both from direct export controls and the China industry semiconductor response to stand up its own domestic semiconductor industry. So we see a moderate increase. I don't see it as a theme where we're going to get significant contribution from the China business, again because of these almost structural geopolitical headwinds.

And let me just kind of get off topic here for one last question. On your energy efficiency usage bandwidth. These are obviously key themes in data center. I understand that silicon photonics is an area the company has invested and where are we on the adoption curve for co-packaged optics and how significant of a market opportunity could that be in maybe a couple of years?

Yeah, we are very early, as I said, just inching out of the lab where we've been engaged with customers for years and co-developing the fundamental measurement technologies like our Pharos optical probe, that allows customers faster test times and better overall yield because of its better signal-to-noise and coupling efficiency. But we've got a handful of tools inside production site that are in the very early stages of pilot production as you know. So this is one of the ways to help solve. It's not been entirely solved, but it helps solve a pretty significant problem associated with data centers. And that's energy consumption going to silicon photonics on chip-to-chip communication and the data center has the potential to impact the energy usage energy budgets for these data centers. And that's something the broader compute industry is going to have to confront as data centers become bigger and bigger users of electricity worldwide. So we view silicon photonics as something that's a I will not and yes, I think the timing probably at the earliest, late '25 into '26, where we start to see moving into the year, the curve of adoption and running significant volumes inside the foundries worldwide.

Thanks, Mike.

Our next question comes from the line of Robert Mertens of TD Cowen.

Hi, this is Rob Mertens for Chris. Thanks for taking my questions. You mentioned the better than expected gross margins in the probe-card business, largely due to higher volumes and may be around 200 basis points or so attributed to the mix. Was the positive mix, largely the high-bandwidth memory increase or more of a general mix throughout both the Foundry Logic and memory end market?

So if you refer to Q2 we were right on spot, right. Gross margin was 45.3% versus midpoint of the outlook of 45%. I'm not sure what to.

Just in terms of the gross margins, I thought I heard two-thirds driven by volumes in the third driven by mix?

That's been increased from Q1, so Q1 gross margin, if you recall, was in the high 30s, 38.7%. So the increase from Q1 to Q2 from the 38.7% to the 45.3%, about two-thirds of it relates to volume and about a third to mix. And that change in mix is more HBM, more Foundry Logic, due to

And then could you just provide a little more color on the progress with qualifications of men based probe-cards for GPU tests and maybe what the size of the market opportunity could look like?

Yeah, I think in sizing it is interesting maybe to get everybody on the same page as the largest GPU manufacturer transitions to advanced packaging, you're primarily co-los at the world's largest foundry that requires mems brokers, right? The legacy probe cards, they use for monolithic GPUs, no longer work. And so and we are in a qualification process there. 'd say our major competitor is has been ahead of us and has got the initial business kind of what we've been more focused on HBM and that opportunity. But it's a strategic imperative us for to qualify there here in 2024 and make some progress. And you think, again, relatively difficult to seize the opportunity. But as you heard from and as you heard from some of the memory manufacturers, there's an interesting asymmetry associated with some of these AI products where the amount of memory in the package is almost 10 times that of the GPUs. And so for unit-driven businesses like ours and HBM becomes a much more compelling opportunity. That's not to diminish the importance of qualifying during this important transition of GPUs to needing mems based technologies for probe. But we like obviously the exposure to HBM.

Got it. Thank you.

I would now like to turn the conference back to Mike Slessor for closing remarks. Sir.

All right. Thanks, everybody, for joining us today. We've got a couple of conferences in late August and in early September. That we hope to see you at, until then take care.

So this concludes today's conference call and thank you for participating. You may now disconnect.