Earnings Call: Q2 2021

Jul 28, 2021

Thank you, and welcome everyone to FormFactor's Second Quarter 2021 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Schlesser and Chief Financial Officer, Shay Shahar. Before we begin, Jason Cohen, the company's General Counsel, Stump will remind you of some important information. Thank you. Today, the company will be discussing GAAP P and L results and some Scott's non GAAP results intended to supplement your understanding of the company's financials. Reconciliations of GAAP to non GAAP measures and other information St. Paul, are available in the press release issued today by the company and on the Investor Relations section of our website. Today's Stavros. In capacity and in new technologies, the impacts of COVID-nineteen pandemic, the impacts of regulatory changes, Stuewe, the anticipated demand for products, our future ability to produce and sell products, the development of future products and technologies and the assumptions expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing Spalter, on Form 10 ks with the SEC for the fiscal year ended 2020 and in our other SEC filings, which are available on the SEC's website St. Atwww.sec.gov and in our press release issued today. Forward looking statements are made as of today, Slessor, July 28, 2021, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor. Stifel. Thanks, Jason, and thank you, everyone, for joining us today. FormFactor delivered solid results in the 2nd quarter, Stifel, achieving the 2nd highest revenue in company history. We delivered gross margins comparable to the Q1, exceeding our outlook range Stifel, a combination of factors that were more positive than anticipated on our April 28 earnings call. Stifel. These, together with continued operating expense control and share repurchases, resulted in non GAAP earnings per share at the high end of our outlook range. Solid demand for FormFactor's diversified set of market leading semiconductor test and measurement products is continuing in the current quarter Stifel, and we are executing on our planned investments to increase capacity for our products. Several factors helped our 2nd quarter gross margins. Stifel. First, overall product mix was more favorable than originally anticipated with systems segment revenues reaching all time record levels Stifel, at near 50% gross margins. In probe cards, DRAM was, as expected, a significant portion of revenue, Stifel, Jr. Matching the decade high level of Q4 2019. DRAM probe cards are generally lower margin products And a substantial portion of our 2nd quarter DRAM revenue was concentrated in one specific design with an unfavorable cost profile. In response, our operations and engineering team focused on yield improvement for this design and delivered better than expected manufacturing costs, Stifel, which improved gross margins significantly above the initial shipments for this design. Our 2nd quarter results provide a reminder that shifts in form factors Scott. Can have a significant impact on gross margins, both quarter to quarter and with lead times typically less than a quarter, even intra quarter. Shai will provide more details on our gross margin results and outlook later. St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. Stifel. Our successful efforts to aggressively reclaim and recycle our rhodium waste reduced our environmental footprint, while also producing a financial benefit Stifel, as our higher recycling credits favorably impacted gross margins by partially offsetting higher input costs. Stifel. On the governance front, we welcome Jorge Tittner to our Board of Directors, adding a director with significant industry and executive experience Stifel, who is also well recognized for his passionate commitment to diversity and inclusion. Jorge is the most recent of 3 new directors that have joined our Board over the last 2 years. FormFactor's Board of Directors has become an ethnic and gender diverse team of accomplished individuals Stifel, with world class expertise in areas from cybersecurity to organizational development, in addition to the requisite experience in semiconductors. Stifel. Our ESG initiatives, including our progress against quantitative goals, are discussed in the Corporate Citizenship section of our website. Stifel. Turning now to segment and market level details. In Foundry and Logic Growth Cards, the expected sequential decline in revenues materialized. Stifel. Even so, the top 2 foundries and the largest IDM remain 10% customers and client PC, St. John's Schulz. We expect to see the typical seasonal reduction in mobile application processor demand, partially offset by an increase in microprocessor demand Stifel, and continued strong growth in the IVR applications. Foundry and Logic customers, including all three of our and our 2nd quarter 10% customers are making significant wafer fab equipment investments in 2021. As this capacity comes online later this year Stifel, and into early next year, we expect to see increased demand for leading edge foundry and logic probe guards. Along with these capacity additions, Stifel, our customers are adding innovative advanced packaging architectures like EMIB, Foveros and 3 d Fabric to their roadmaps Stifel, to help offset the slowing of front end driven Moore's Law. As we've discussed in the past, these chiplet or tile based integration schemes Stifel, drive both higher test intensity, which expands the number of probe cards required for wafer out and test complexity, which widens FormFactor's competitive advantage. Stifel. With lead times of less than a quarter, short term visibility remains challenged as always, but the combination of significant customer capacity Simmonds, paired with their adoption of advanced packaging, provide longer term secular demand drivers for FormFactor's probe card products. Stifel. To ensure we are prepared to meet this increased probe card demand, as I mentioned earlier, we are continuing to execute our planned capacity increases Stifel, with our new 100,000 Square Foot Manufacturing Center in Livermore on track to produce initial customer shipments in this year's Q4. Stuewe. Consistent with the flexible manufacturing strategy that has allowed us to quickly and efficiently capitalize on customer demand across our served markets, Stifel. This facility will be capable of producing probe cards for foundry and logic, DRAM and Flash. The actual initial capacity addition will be modest St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. Stifel. The capability and flexibility this new footprint will provide, removing a growth constraint that we have operated under for the past 18 months Stifel, and helping us to achieve the $850,000,000 revenue of our target financial model. Stifel. 3rd quarter demand for DRAM cards continues to be strong, although we do expect a slight sequential reduction from high second quarter levels. Stifel. New design activity continues at high levels across all DRAM customers with remarkable breadth across multiple nodes Storozynski, for DDR4 and DDR5 designs in both mobile and PC server applications. As a reminder, Storozynski. Procards are a consumable that is specific to each new chip design and so demand has generated from not just node migrations, Stifel, but also the release of the ship designs on existing nodes and architectures. Stine. As also noted earlier, our Engineering Systems business delivered record revenues with contributions from the acquired FRT and HPD businesses Stifel, who is a leading legacy stations business. FRT tools provide unique metrology capabilities that enable advanced packaging applications And we're currently capitalizing on strong demand for FRT's high performance multi sensor 300 millimeter optical metrology tool, Stifel, especially among leading foundry customers. Advanced Packaging is a key driver for all of our businesses as our customers begin to adopt Shipfoot style integration strategies that generate new test and measurement requirements our capability to quickly, Stifel, accurately and non destructively measure and control critical dimensions, film thicknesses and surface topologies Stifel, on chiplet to chiplet interfaces is key to improving and maintaining assembly yields. HPD's business Stifel, targeted longer term growth by enabling quantum computing applications also had good momentum in the quarter. Together with Northrop Grumman, Stifel, a key customer partner in the quantum computing field, we announced a fully automated cryogenic wafer probe system, Stuewe, which will accelerate the development of superconducting compute applications. Let me close by noting that with a continued solid demand outlook Stifel, and good execution on both short and long term gross margin and capacity expansion on the path towards the target financial model we unveiled last year that delivers Spector Industry, driven by powerful trends, including 5 gs, advanced packaging and memory content growth. Stifel. Our leadership position in these attractive markets paired with our differentiated strategy and disciplined execution drive continued growth and share gains Stifel, as we progress towards our target model. Shai, to you. Thank you, Mike, and good afternoon. As you saw in our press release, Stuels. 2nd quarter revenues and non GAAP EPS were at the high end of our outlook range, with revenue reaching the 2nd highest ever in company history. Stifel, and non GAAP gross margin exceeded the high end of our outlook range. FormFactor's 2nd quarter revenues were $188,000,000 Storozynski, a 1% sequential increase in Q1 and an increase of 19% year over year. Probe Card segment revenues were 150 $4,000,000 in the 2nd quarter, a decrease of $5,200,000 or 3.3 percent from Q1. The decrease was driven by lower foundry and logic and flash revenues, partially offset by an increase in DRAM revenues. Systems segment revenues were $35,000,000 in Q2, an increase of $6,700,000 or 24% from the Q1, Staley, mainly as a result of higher sales of optical metrology and thermal systems, driven by advanced packaging and automotive applications. St. Within the probe card segment, Foundry and Logic revenues decreased by $10,000,000 from Q1 to $104,000,000 in the 2nd quarter, Stifel, comprising 55% of total company revenues as compared to 61% in the Q1. Stifel. DRAM revenues were $42,000,000 in Q2, a significant increase of $8,000,000 or 24% from the Q1 Stifel, and were 22% of total quarterly revenues as compared to 18% of revenue in the Q1. Stifel. Building on the strength demonstrated over the past year, this was our 2nd highest quarterly revenue from DRAM since Q1 2008. S. Fleche revenues of $8,000,000 in Q2 were $3,700,000 lower than in the Q1 and were 4% of total revenues in Q2, Stone, down from 6% in Q1. As we have said in the past, we expect Flesh revenues to be lumpy from quarter to quarter. GAAP gross margin for the Q2 was 40.6 percent of revenues as compared to 41.1% in Q1. Stifel. Cost of revenues included $7,200,000 of GAAP to non GAAP reconciling items, which we outlined in our press release issued today Stifel, and in the reconciliation table available in the Investor Relations section of our website. On a non GAAP basis, St. Gross margin for the Q2 was 44.4%, slightly above the high end of our outlook range and 60 basis Storozynski, which is lower than the 45% non GAAP gross margin in Q1. The decrease from the Q1 was mainly due to less favorable mix Stifel with lower Foundry and Logic and higher DRAM revenues. Mike briefly discussed some of the reasons gross margin in the Q2 was above the high end of our outlook range. Stifel, Inc. Included more favorable product mix, better yields on a new ramping design and improved utilization and absorption. Stifel. In addition, precious metal usage was more efficient as we took measures to reduce the impact of higher material prices Stifel, and we're able to reclaim and recycle more road units. Our Probe Card segment gross margin was 43.3% in the 2nd quarter, Stifel, a decrease of 90 basis points compared to 44.2% in Q1. The decrease is mainly due to the change in mix speaking, Foundry and Logic and DRAM revenues I just mentioned. Our Q2 Systems segment gross margin was 49.2%, Stifel. Essentially flat with Q1. As we've said previously, we expect our Systems segment gross margin to range between high 40s to low 50s. Stuewe. As a reminder, as we continue to make progress towards achieving our target financial model gross margin of 47%, St. Louis. We expect that margins will fluctuate from quarter to quarter, mainly as a result of changes in product mix. Stine. Our GAAP operating expenses were $56,000,000 for the 2nd quarter, dollars 2,000,000 higher than in the 1st quarter. Stifel. Non GAAP operating expenses for the Q2 were $48,000,000 or 25.7 percent of revenues compared to $46,000,000 Storoz, or 24.9 percent of revenues in Q1. The increase of $2,000,000 quarter over quarter is mainly due Stu, to increase in labor costs related to higher headcount and annual salary raises, partially offset by lower performance based compensation. Company non cash expenses for the Q2 included $6,600,000 for stock based compensation, dollars 7,100,000 Sealy, Inc. Was $500,000 lower than Q1 due to timing of grants and depreciation was $400,000 higher Stifel, with additional assets placed in service. Non GAAP operating income for the Q2 was $35,200,000 Storozynski, $2,400,000 lower than the Q1. GAAP net income for the Q2 was $17,900,000 Storozynski, or $0.23 per fully diluted share, compared to $19,600,000 or $0.25 per fully diluted share in Q1. Stifel. The non GAAP effective tax rate for the Q2 was 18.7%, practically the same as in Q1, Stifel, and we deem our anticipated non GAAP effective tax rate for fiscal 2021 of 15% to 20%. Stifel. As a reminder, our annual cash tax rate is expected to remain at 6% to 8% of non GAAP pre tax income until we fully utilize our remaining U. S. Based St. Louis. 2nd quarter non GAAP net income was $28,400,000 or $0.36 per fully diluted share Stine, compared to $30,800,000 or $0.38 per fully diluted share in Q1. Moving to the balance sheet and cash flows. St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. John St. $60,000,000 at the end of the quarter. The 2nd quarter sequential decrease in free cash flow reflects an increase in capital expenditures and changes in working capital, Storozynski, of which the largest portion is higher inventories related to timing of manufacturing and product shipments. As of the end of the second quarter, Stuewe have 2 term loans remaining on our balance sheet totaling $29,500,000 We invested $18,000,000 in capital expenditures during the 2nd quarter St. Clair, compared to $13,500,000 in Q1. This brings our year to date CapEx to $31,500,000 Stifel, and chiefly relates to the capacity expansion in our Liverman Manufacturing Center. We continue to expect a significant investment in capacity in 2021. Stifel. And with half of the year behind us, we are lowering the range for forecasted cash CapEx for the year to be $70,000,000 to $90,000,000 Stifel, from the $80,000,000 to $100,000,000 previously communicated. As a reminder, we expect CapEx to return to 3.5 Schnee, and we expect to be approximately $4,000,000 of revenues in our target financial model after we conclude these capacity expansions. At quarter end, our total cash and investments balance Sealy, exceeded the debt balance by $230,000,000 a decrease of $10,000,000 from Q1 quarter end. We had strong cash flow from operations in Q2, Stifel, offset by cash usage for capital expenditures and $18,200,000 used for share repurchases. Stuels. During the Q2, we purchased 484,000 shares. This brings our year to date share repurchases total Storozynski, drove by 0.8 percent of our outstanding shares, offsetting approximately 1 year's worth of dilution from stock based compensation. St. At quarter end, dollars 26,000,000 remained available for future repurchases under our $50,000,000 share repurchase plan. Stuels. Turning to Q3 non GAAP outlook. As Mike mentioned, we expect to generate strong demand to continue, Stifel with sequentially higher systems demand, offset by moderate decreases in ProQuartz, resulting in overall similar revenues to Q2 at the midpoint of our outlook range. Stifel. This talk to result in a Q3 revenue outlook in the range of $182,000,000 to $194,000,000 Storozynski. Non GAAP gross margins for the Q3 is expected to be in the range of 43% to 46%. At the midpoint of these outlook ranges, St. We expect Q3 operating expenses to be higher than Q2 by $1,000,000 to $2,000,000 mainly due to the Stifel, increased investment in R and D and higher travel expenses as things start to get back to normal. Accordingly, non GAAP earnings per Storozynski, a fully diluted share for Q3 is expected to be between $0.31 $0.39 A reconciliation of our GAAP to non GAAP Q3 outlook Stifel, is available on the Investor Relations section of our website and in our press release issued today. With that, let's open the call for questions. Operator? Stifel. Stuelski. Stifel. Your first question is from the line of Craig Ellis from B. Riley Securities. Your line is now open. Stifel. Thanks for taking the question and congratulations on the good gross margin execution in the quarter. Mike and Shay, I just wanted to start Stecker and understand what's embedded in the outlook for the Q3, because I think 3 months ago, Schaller. We expected that in 2Q, we could see around 150 basis points of mix related headwinds, maybe 100 basis points of Of rhodium related headwinds, clearly the team executed very well on the utilization side and you Scott back some of the rhodium as well. But as we look to the Q3, which looks flattish, what's inside that Scott with gives and takes on the mix and the rhodium issues and for that efficiency gain that was achieved in manufacturing. Is that something That rolls forward or is that more of a one time benefit? Yes, Greg. So, when we look at Q3, the midpoint of our outlook range, Gross margin is expected to be similar to Q2. We see higher systems revenue Stifel, in Q3, which as you know, revenue gross margin for systems revenue is higher. Stifel, but we also see some offsets in the probe card Smith, which impacted gross margin. We still have the design that we're talking about. We still have it in Q3, the one with unfavorable cost. And And although we are getting better at it with improved yields and more certainty, it still has some impact on peers as well. So if you take all of these together, these are the main factors. We saw rhodium prices is up Stifel, starting in May, although they still fluctuate. So taking all of this together, basically, we're talking about flat gross margin quarter over quarter with Scott. Okay. And then with the point on revenue there, Sean. So nice to see 3 10% customers in the quarter with healthy activity from TS and C and Samsung. The question is more on Intel. It's been a while since Scintell was down closer to the mid teens percentage of mix. Of course, at these revenue levels, that's still a very material amount of sales. But the question is, Stifel. As you look at that opportunity and with the backdrop of the recent packaging and process webcast showing Schimmer. How quickly could that happen and what are the risks that we would actually stay here closer to the mid teens for some protracted period? Yes, Craig, it's Mike. I'll take that. So prior to the Q2 here, we had several quarters Stuewe that customer was around and above $50,000,000 or a $200,000,000 annual run rate, which we've said We expected it was kind of an elevated run rate due to a variety of factors. So in Q2, the pendulum probably swung a little bit Hart in the other direction. We do embedded in our Q3 outlook is some sequential strengthening with that customer, my Scott's comments about microprocessor strengthening in the quarter. But as you point out, longer term, there is some really exciting things going on with our customer. We have a long term relationship, decades long, where we've been a key supplier to them with strong market share. Schachan of Advanced Packaging Technologies that they highlighted earlier this week are really exciting opportunities for us that I do think Allow us a path back to kind of this $200,000,000 run rate. Now it's going to take a while to get there, right. They're not entering the Sandler, but we've got such a solid foundation with this customer and a nice competitive position with the technologies that we have Their strategic initiatives do offer us a longer term path back to that $200,000,000 annual run rate level. No, even as we work our way a little bit closer to there in the back half of the year. That's really helpful. And maybe just a follow-up on that, Mike. It's been Schaller. Couple of quarters since we had 3 customers that were 10% customers. Do you expect that as we look ahead to the Q3 that you would have An equal number of 10% customers, if you think that it looks ultimately more like Q1 where there was a couple? Stifel. Craig, as you know, our strategy really is to be partnered with the leaders in the industry and try and drive significant market share with those leaders. So we over the long term tend to have 5%, 10% customers. And by and large, we expect Each of those customers to kind of move off and on the 10% list in any given quarter. Some of them are quite close to the 10% threshold. Stifel. In the Q3, as I noted, we do expect some seasonal weakness that we've In the past few years associated with the mobile application processor business, just the ramp of those designs Stifel, and the concentration of those designs at the world leading foundry, we'd expect that to soften in Q3. But at the same time, we're making good But mobile is such a big part of that. You could see that customer not be a 10% customer in a few years. Yes. Stifel. We have our next question from the line of Brian Chin from Stifel. And kindly limit yourself with one question and one follow-up. Scztke, your line is open. Okay. We will do. Hi, thanks for letting us ask a couple of questions. Maybe first just to follow-up on that last one. Mike, I think you're talking about sort of the traditionally softer 3Q from foundry. I guess applying that similar logic, wouldn't 4Q typically be seasonally stronger And I guess, do you think that is that part of the rationale in terms of having some of the new capacity online? Stifel. So, we have seen for the past couple of years, the 4th quarter be very strong from a seasonal perspective is the foundry and logic business. If you go back and look both 2019 2020 are 4th quarters, very strong foundry and logic business driven by the foundries and And mobile applications. I have to temper that with the usual caveats that we're sitting here at the end July, and that's a long way out compared to our lead times. So the historical pattern, certainly we would expect to see that strength, So we don't have anything like a forecast or a backlog yet emerging that would support that. As you note Stifel. Each of those customers is building significant capacity through their WFE spends. And so whether it's a 4Q event or a first quarter, Second Quarter 2022 event. This is part of the reason why we're continuing to invest pretty heavily in Stifel, in our Livermore Manufacturing Center and in other areas around the world to increase our capacity. Okay, thanks. And maybe for my follow-up, maybe to Shay. Stifel. I'm just kind of going back to the gross margins. Can you just roughly quantify what the drag in 3Q is From first the DRAM mix issue piece of business, is it something like 100 basis points still? Because I would imagine that this Could probably be non repeating when you get into 4Q, so maybe it's still there in 3Q, maybe not speaking in 4Q and then also rhodium prices, who knows where it goes from here, but if it kind of stays at these more lower levels, Do you think you could get additional benefit in 4Q relative to what you're seeing in 3Q? On volume prices, I think it's Stifel. Very hard, of course, to model or predict the prices of precious metals. We took benefit in Q2 in purchasing Inventory that will be used in Q3. And it's too early to say what's going to be the impact on Q4. But Stifel. We have the material that we need and we're keeping an eye on it. Hopefully, it will stay at these lower levels than the peaks. They are still elevated if you compare it to Sealy, previous last year, but still not at the peak that we saw during the Q1. In terms of mix, I'll drag you Stifel, but we see systems going up and we have a better margin. Foundry and Logic expects to go down a little bit in Q3. Biram, as Mike mentioned, expect to go down a little bit, but we see improved margins there Stifel, because of the things we learned and experienced during this quarter's manufacturing and flash is expected to go up a little bit as well. Stifel. So all these moving parts, each one of them has a kind of a small impact, but overall we that's where we end up executing the same Stifel, gross margin is in Q2 on similar revenue. On Q4, I think it's too early. As I said, gold volume prices Stone. Too soon? And all the other factors are still a lot depend on mix, which will still too early for us. Okay, got it. Thanks. Next is Krish Sankar from Cowen and Company. Your line is open. Hi. This is Stephen Chin calling on behalf of Krish. Thanks for taking my questions. Stuewe. First one, if I may, on your revised CapEx range for the full year. I think you mentioned it's currently lower to $70,000,000 to $90,000,000 for the full year. Stuels. Is that a reflection of capital efficiency and how you're able to utilize So, we've made significant progress in completing the manufacturing Spencer, year to date. And we expect to start shipping, as Mike mentioned, shipping products in Q4. So we have 6 months of actuals behind us. Stifel, who are coming in a little bit below budget, that's why we decided to update the estimate. But there is no significant change to our plans or to our target financial model gross margin Stifel, of 47%. Some of the update just simply relates to timing as things push a little bit to early 2022 All to the timing of cash payments for these fixed assets, but no significant changes to our plans or to the gross margin target. Okay, understood. And one product related question, just given how DRAM ProCard demand has been fairly strong and seems like it's going to be gradually ebbing a little bit into the back half, but still fairly healthy. Question on the DDR4 versus the DDR5 technology. As mentioned earlier, every design has quite a different probe card. So as far as DDR4 and M5, are any of these products kind of given customer? Are those potentially shared probe card designs or would Different technologies require different cards there. Yes. Well, DDR4 or DDR5 mobile server, Any change in the chip design drives a change in the probe card. And so something as major as being Stifel. Going from DDR4 to DDR5 almost always changes the layout of the chip and how the customer is going to test it, which means new probe Skardens. That's why we try and emphasize so people understand some of the demand drivers of our business that this Stifel. Diversity of designs, not just in DRAM, but in foundry and logic as well, being accelerated by advanced packaging Really is an interesting growth driver for us. So when I talk about design activity, we have got a lot of first articles for Scrum, 1 alpha, 1 beta, 1z nodes in DRAM, DDR4, DDR5 in both mobile and server. And each of those is unique and drives a refresh of the probe card fleet. Great. Thank you so much. Yes. Stifel. Your next question is from the line of Tom Diffely from D. A. Davidson. Your line is now open. Stifel. Yes, good afternoon. First question on the systems business that was strong in the quarter and growing in the next quarter. Is that strictly just the addition of Some of the acquisitions or is there something in the core business that is growing faster than season over share? Stifel. Yes. I think when you look at the systems results, you can think about it as a couple of different components as you broke them down. Schwan is the legacy systems business we acquired as part of the Cascade Microtech acquisition in 2016. That business has been pretty steady. Stifel. If you look at our target financial model and the underlying assumptions, low single digit percent grower and has been executing to that. Stifel. So the step up here to the mid to high 30s in revenue really associated with the acquisitions we have made. Stifel, our first FRT to get us into metrology for advanced packaging, back in 2019. Stifel. That business beginning to accelerate nicely as especially the foundry ecosystem adopts our tools to Stu process control for their advanced packaging lines and then the HPD business showing some nice momentum in the early part of Characterization, nowhere near production for quantum computing. So probably the way to think about the systems growth He is that the acquisitions are delivering growth on top of the stable legacy systems business. Stifel. Okay. Thanks. That's helpful. And then as a follow-up, I'd like to go back to Craig's question. You talked about how yields were better on the DRAM business and that helped Get back to a higher margin level. Are those yield improvements items that can progress on in the future? Are those one time items? Little more around that would be great. Yes. So remember, our DRAM revenue is pretty concentrated in a single design. Stifel. It's not often we have a high runner that is this larger portion of the design. And as we told you on the last earnings call, Stifel had a pretty unfavorable cost structure on the initial shipments of those designs. So I want to give kudos to our operations and engineering team who really went to work on Smith. Given that these are design specific parts, this probe card and its layout and the yield idiosyncrasies Schaller, are really associated with this one design. It is kind of isolated to the one design. However, we have learned some things about designs of this level of complexity and some of the things here that could translate into other designs. So probably think about it as being pretty design specific. That one design in DRAM is still a large portion of our Q3 DRAM revenue, so helpful there. But I wouldn't sort of say it's a general uplift across all our DRAM designs. Okay. And maybe some nice learning in case you have another volume order. That's right. That's right. Great. Thank you. Thanks, John. Next is Charles Shi from Needham and Company. Your line is now open. Thank you for taking my question. Mike and Shi, Congrats on the strong recovery of your gross margin. I want to ask a couple of questions around the foundry logic probe St. Hart. I think you talked about design, you talked about packaging, but no conversion, no upgrade is still a powerful Stifel. So I want to ask something around 3 nanometer, really outside the Intel. I wonder what's I mean without getting into anything too customer specific, what is your outlook for 3 nanometer probe Staud. I mean, we are in July 2021. It's probably a year away from production. But are you seeing any leading indicator like Design activities at the 3 nanometer and is it going to ramp by the end of this year or Do you see more of the ramp at a 3 nanometer on the mobile side or on HPC side? So there's a multi faceted question, but I hope you can give us some color about that. Sure, sure. Well, I think Charles, you are absolutely right, right. One of the demand drivers is node transitions for us, because A node transition automatically results in new designs, right. If you're going to convert the node, they become new chip designs that Both fabless customers and IDMs take advantage of that new node capability to drive new products and new designs and that means new probe cards. Stifel. On 3 nanometer in particular, as you also indicated, it's pretty early. Some activity, but I think Probably the exciting part of it is it's very likely to be one of the nodes where, Advanployed, Probably high performance compute tiles will be built on the 3 nanometer node, but then stacked together with other parts of the eventual product that maybe are built on 7 nanometer or even 10 nanometer. So as with speaking. Leading customers were engaged in R and D, but it's pretty early and I certainly wouldn't expect to see 3 nanometer be a significant part of our near term Stifel. Got it. Got it. So, I mean, still around 3 nanometer. I Stant, you said it's still pretty early, but your leading foundry customer did say that Scott. They are seeing the 3 nanometer tape out being a lot higher than the number of tape out at 5 nanometer when it was Stifel, about 2 years ago. I wonder what does that mean to your business? Do you sort of Spak that you can gain more of the revenue from the 3 nanometer maybe next year, I mean, compared to what you got Scotiabank from 5 nanometer in 2020 or maybe 2019. I'm not sure whether that's a fair comparison or not, but any good color It will be great. Yes. Yes. Well, and I think generally, if you look at some of these node Progressions' test intensity is definitely going up. So there's lots of different dynamics at work. But Stifel. These new nodes, especially when they intersect with the advanced packaging technologies, Stifel, are requiring higher test intensity, which means more testers and more probe cards for wafer. And I think you're seeing that from some of the manufacturers as well. Each of those APE systems requires multiple cards over its life. So Excuse me, a pretty good indicator there. So I do think that the progression, for 5 to 3 And other customers from 10 to 7 or whatever we are calling it now, are tailwinds for FormFactor's business Because test intensity and test complexity are going up. Got it. Thanks, Mike. Scott. I think I'm limited to 2 questions. I thank you very much. I'll jump back to that queue. Thanks, Charles. Stifel. We have our next question from the line of Christian Schwab from Craig Hallum Capital. Your line is now open. Hey, good quarter guys. What should we be thinking about for the range of Yes. I think, obviously, we've Stifel. Put together a few quarters here in the mid-30s to high-30s and up around sorry, I'm getting a lot of feedback on noise. Can you mute, Chris? Yes. Yes. Thanks. And obviously, this past Schaller, the Q2 came awfully close to a 10 year high that we posted in 2019. So I think there's an implicit question, Sort of an average, although it's a cyclical business, an average of kind of the mid-thirty million of revenue per quarter. Stifel. We continue to see this level of design activity, things again, the advanced packaging theme at work in DRAM with things like Schumacher. I think it's possible that we could see that average move up to maybe the high 30s, the mid to high 30s. But historically, if you look at DRAM customers, they've done a pretty good job of constraining their overall spend, whether it be on probe cards or equipment And then driving efficiency to drive their bit growth. So I wouldn't expect a spectacular increase in the spend, but You may see the mean tick up a little bit into the high 30s. Great. And then if the recovery Within Intel gets us back over time back into the $200,000,000 range plus. And DRAM is kind of in the mid-30s. Is there an opportunity for TSM to become A much more material customer on a go forward basis than they have been kind of over the last 6 quarters? Stifel. Yes. I think we've talked about it as being something like $100,000,000 annual run rate opportunity. I think the past Couple of quarters you've seen them be a little bit short of that, but in that neighborhood. And I think go back to Charles' question, as they drive their node Sealy, the progressions as more wafer starts occur on the advanced nodes and in particular the really advanced nodes like 53, Stifel. Our addressable market there grows. Reminding you that we're really only relevant for 10 nanometer and below. Stifel. And although that's a big chunk of that foundry's revenue, it's still a pretty moderate chunk of their Small, wafer starts, unit wafer starts. And that's one of the things that drive ProGuard spend. So I think as their business grows, as their node migrations Schuchmore wafer starts to these advanced nodes and we continue to work with them on some of the innovation in enabling advanced packaging. I think there is the opportunity for that to grow significantly. Great. Thank you. Sernate. Next is Amanda Sernate from Citi. Your line is now open. Hi, good afternoon. Schaller. Question on implications from the DDR5 push out, right? Does that impact how you're looking at overall growth In that DRAM business, right, you mentioned that it could potentially grow to the mid to high 30s on an average basis. But does that have any sort of near term implication? Stifel. It doesn't seem to have had much of an implication. I think again because of the broad diverse Designs that our customers are running, even if certain parts of DDR5 are going to be a little bit slower than anticipated, There is a big chunk of DDR4 designs that are taking up the slack and obviously still some pretty aggressive bit growth forecasts Being driven by the combination of the DRAM manufacturers. So I don't think a significant impact associated with DDR5 Simon for us. And then the other question is a clarification question on the CapEx coming down a little bit. It seems like it's more of a function Schall, better expense management, better cost dynamics in that rather than reduction in overall CapEx. Stifel. Are we still at a point where you are capacity constrained versus what the demand environment is or are you in a better Slasnow. And do you have enough room to expand capacity even further as that TSMC business continues to grow? I think in some areas, we are still capacity constrained, right? It really depends on the product mix. We have multiple factories with different dynamics around the world. But in large, at these levels of operation, we are still capacity constrained and that's why we are putting This capacity expansion in place to answer the growing demand. And so the reduction in CapEx is not a function of reducing your overall capacity plans, it's just better cost? No, not at all. It's It's only really about fine tuning the budget. We put that in place at the end of last year and now we are 6 months behind us. We have some action in place Stifel, we know better what to expect, what's coming in. Some of it is just pushed out to the second Stifel, the beginning of 2022, some of which is just when the cash payout is going to fall, is it going to fall in 2021 or 2022, No changes in that time. Great. Thank you. Next question is from the line of David Silver from CLK. Your line is now open. Yes. Hi, good morning Good afternoon. Sorry. In the VLSI research reports that I scanned, Stifel. Your company was mentioned a number of times in their customer satisfaction surveys. And I'd like to maybe just focus on the broadest one, I think the semi equipment group category. But you achieved a very high score overall and in particular your scores increased kind of across the board Stifel, versus just 1 year ago, which I thought was interesting. But could you maybe talk about the strategies or the Process improvements, Mike, that you would mainly credit for the broad based improvement in your scores in that survey. Stifel. And then maybe to take it one step further, I guess in your experience, how does that customer satisfaction Schulz. Survey results translate into either new customer acquisition or maybe increased Yes. It's an interesting St. Louis, we did make a good showing in this year's VLSI customer satisfaction survey, which is A pool of all of our key customers and are proud of a higher ranking and higher raw scores. Some of the details are interesting. Stifel. If I recall, we scored very high in technical leadership and customer and I think those are interesting validation points of our stated customer strategy. We are trying to be very close to the leaders in the industry Stifel. As you see from our 10% customers, both in the Q2 and over the last couple of years, we want to be partnered with those customers driving Stifel. Their roadmap and our roadmap forward in deploying what's by far the biggest R and D spend in the space on solving their problems and then Generating competitive advantage from it. I think rather than maybe being a driver of market share, I think it probably ends up being Schaller, if those customers and all the customers that answer the survey are not happy with you, they are not going to order Stifel. And so I think the 2 go hand in hand. And I think both having compelling differentiated products, Stifel, but also having strong customer satisfaction is central to our strategy and central to the history of market share gains we've executed to. Okay, great. And then maybe just one last question. This is kind of maybe So when I look at the breakdown of your revenues Spieck, Logic and Foundry versus DRAM versus Flash, etcetera. I mean, there's an element there where you can only sell Scrum cards for things that your customers desire them for. In other words, you track, I guess, the product development cycles. But I think on the other hand, over a longer period of time, there are different profit or competitive, Sustainable competitive dynamics in the individual product lines. And I'm just wondering over a longer period of time, Skibb. Do you have kind of a normalized, I don't know, share breakdown between, let's say, logic and foundry on the one hand and The memory categories on the other or is it literally the case where you want to Align yourselves with the customers and just track the development cycles in the industry. Thank you. Yes. Well, if you back up over the very long timeframe, we had Stifel, some customers, where we really didn't have a significant market share position. If I back up 10 years, 2 of the 10% Stifel, in the Q2 were not really form factor customers. And so part of and this again consistent with the strategy I talked about, We are working very hard to make sure we have strong incumbent market share positions at all the leaders in the industry. And so Regardless of those development cycles, regardless of where large fabless customers, what foundry they decide to go to, Stifel. We want to make sure we're in a position that's essentially neutral to that. And as long as we have strong market share with all the leaders in the industry has good customer SAT scores with them. We think we'll do okay in the long run. Okay. Thank you very much. Appreciate it. Schlesser. No further questions at this time. I turn the call back over to Mr. Mike Schlesser. Stumpf. All right. Thanks very much again for joining us today and we hope to see you at some of the investor conferences in the second half and Maybe even see you in person. Take care. I'm sorry. We have our next question from Charles Hsieh from Needham and Company. Your line is now open. Really, my apologies. Thanks for Great. So Mike, really just a question around DRAM. I think you might have alluded to this, but I really want to get a clear comment on this. So your DRAM strength going into second half this year, are you sort of seeing a broadening out in In terms of the buyback customer, is that because my understanding is your Q2, possibly a little bit at the first part of the Q3, your demand is I mean primarily driven by one of your DRAM customers. Thanks. That's my last question. Yes. That's correct. Although that is not unusual historically. We have seen our DRAM customers, Schaller. We have seen our DRAM customers be each have different intensities in different In a subsequent quarter. Again, go back to the customer strategy, that's one of the reasons why it's important to be a key supplier to all the leaders, So that we are able to run our factories at high utilization and be able to Stifel, make sure that we are on the leading edge of the industry no matter which one of these DRAM manufacturers is winning market share with their big customers. Stifel. So not unusual to see customer concentration in any given quarter. Thank you, Mike. Once again, my apologies for squeezing in the question S. Thank you, sir. This concludes today's conference call. You may now disconnect.