Earnings Call: Q1 2021

Apr 28, 2021

Thank you, and welcome everyone to FormFactor's First Quarter 2021 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor and Chief Financial Officer, Shay 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 and 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 conditions, the benefits of acquisitions and investments in capacity and in new technologies the impacts of the COVID-nineteen 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 ks with the SEC for the fiscal year ended 2020 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, April 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. Thanks, Jason, and thank you, everyone, for joining us today. FormFactor started the year with strong results, posting the 2nd highest quarterly revenue in company history. We successfully addressed and closed the 2 discrete issues described in our February earnings call that had impacted 4th quarter gross margins, producing a 1st quarter recovery. This revenue and gross margin performance paired with good operating expense control produced non GAAP earnings per share at the midpoint of our outlook range as we continued our investments in capacity, technology and people to serve long term broad based growth throughout the semiconductor industry. FormFactor's foundry and logic book card business was robust again in the Q1 as 2020's strong demand continued. Foundry and Logic strength was evident in our 2 10% customers in the quarter, the world's leading logic IDM and the world's leading foundry. The underlying components of Q1 demand were similar to 2020 with multiple new mobile and compute chip designs ramping for 5 gs, data center and client PC applications. We do expect a sequential reduction in Foundry and Logic demand in the Q2 due to specific timing of individual customer design releases. As we said in the past, Probe cards are a consumable. They're specific to each customer chip design and the timing of those design releases and their volume ramps can create fluctuations in probe guard demand. With the well publicized investments the top foundry and logic customers are making in wafer fab Equipment and Capacity. We expect continued strong secular growth in this market as their capacity comes online and they begin producing new technology nodes and new chip designs, each of which must be tested with advanced new probe cards. Accordingly, we are aggressively executing our planned capacity and technology investments to capitalize on these future opportunities. Turning to DRAM. 1st quarter demand for probe cards sustained at levels comparable to the Q4 as customers continued to execute node transitions and new design releases on existing nodes. We expect increased DRAM probe card shipments off these already high levels in the second quarter, driven primarily by new 16 gigabit DDR4 and DDR5 mobile and server designs ramping in volume. In addition, we're supporting substantial new design activity for high bandwidth memory or HBM as this enhanced performance advanced packaging application continues to gain end market adoption in applications such as artificial intelligence. This incremental demand has the potential to drive 2nd quarter DRAM revenues comparable to the decade high levels delivered in the Q4 of 2019. With lead times of less than a quarter, our visibility remains limited as always, but we are encouraged by the current momentum in DRAM. As Shay will discuss in more detail, this shift is expected to pressure gross margins as DRAM probe cards generally produce a less favorable product mix and Foundry and Logic Prop Guards. This anticipated 2nd quarter product mix swing from Foundry and Logic to DRAM highlights the resilience of FormFactor's operating model. Even with this dynamic shift in underlying demand, Our Q2 revenue outlook range is similar to reported Q1 revenue. This occurs because we serve major applications at all the leading customers in the semiconductor industry with manufacturing resources that can be flexibly deployed to serve probe card demand in either foundry and logic for DRAM. Although the past several quarters have been characterized by extremely strong foundry and logic demand, Experience has taught us that there is cyclicality and variability in our market and customer demand on a quarter by quarter basis. Consequently, ensuring that we're exposed to a broad set of opportunities that effectively utilizes our installed capacity is central to our operating strategy. I'd also like to highlight VLSI Research's annual survey of the probe card market, which showed form factor again at the top position for the 8th consecutive year. Our 19% overall advanced probe card revenue growth was fueled by an eye popping 40% in VLSI's non memory probe card category, which mirrors our foundry and logic classification. FormFactor's 40% growth significantly outpaced Foundry and Logic market growth of 27% as we gain share in our number one position. This market growth was driven by the trends in 5 gs and advanced packaging that we've highlighted previously, and our above market growth provides validation of FormFactor's differentiated products meeting customers' highly complex test requirements for millimeter wave RF front ends, next generation application processors and high power compute processors. We expect this preferential share gain to continue for two reasons. First, significant R and D resources are required to develop probe cards that meet increasing test complexity and second, a coordinated global infrastructure at scale is needed to support simultaneous rapid customer product ramps to high volume in multiple regions around the world. Turning to our Systems segment. We executed on a more favorable product mix in the Q1, which helped gross margins return to target model levels. A key factor in this improvement was shipments of multiple systems to research labs for testing devices at cryogenic temperatures. Test and measurements at these ultra low temperatures, often approaching absolute 0, are critical in enabling a variety of applications from the emerging field of quantum computing to the more mature area of infrared detectors. Combining the capabilities we added in the Q4 acquisition of HPD with our legacy engineering systems, electrical and optical test and measurement know how offers us significant long term potential to drive further growth as we enable these technologically demanding R and D applications. As cryogenic applications like quantum computing mature and reach volume production over the next several years, our early engagement in the lab positions FormFactor well to serve the production test needs of the industry as we continue to execute the lab to fab strategy that benefits both our customers and ourselves. Finally, with the tailwind from a continued strong demand outlook, We're on the path towards the target financial model we unveiled last year that delivers $2 of non GAAP earnings per share on $850,000,000 of revenue. Test and measurement is becoming a more important and strategic place in the semiconductor industry, driven by powerful trends, including 5 gs, Advanced Packaging and Memory Content Growth. Our leadership position in these attractive markets, paired with our differentiated strategy and disciplined execution, will drive continued growth and share gains as we progress towards the target market. Shay, over to you. Thank you, Mike, and good afternoon. As you saw in our press release, 1st quarter revenues were at the high end of our outlook range, the 2nd highest in company history. Non GAAP gross margin recovered to slightly below the midpoint of our outlook range, and non GAAP EPS was at the midpoint of the range. FormFactor's 1st quarter revenue was $187,000,000 a 5.3% sequential decrease from our record Q4 revenues and an increase of 16% year over year. Broadkart segment revenues were $159,000,000 in the Q1, a decrease of $3,600,000 or 2.2 percent from Q4. The decrease was driven by lower Foundry and Logic and slightly lower DRAM revenues, partially offset by an increase in Flash revenues. Systems segment revenues were $28,000,000 in Q1, a decrease of $6,800,000 or 20% from the 4th quarter. Within the probe card segment, Foundry and Logic revenues decreased by $9,300,000 from Q4 to $113,400,000 in Q1, comprising 61% of total company revenues, a slight decrease compared to 62% in the 4th quarter. DRAM revenues were $34,000,000 in Q1, a decrease of $700,000 from the 4th quarter and were 18% of total quarterly revenues, same as in the 4th quarter. The strong demand for DRAM continues the trends we have seen during the last three quarters, and we expect this to continue in the current quarter. Flash revenues of $11,600,000 in Q1 were $6,400,000 higher than in the 4th quarter and were 6% of total revenues in Q1, up from 3% in Q4. As we've said in the past, we expect Flesh revenues to be lumpy from quarter to quarter. GAAP gross margin for the Q1 was 41.1 percent of revenue as compared to 39.4% in Q4. Cost of revenues included $7,200,000 of GAAP to non GAAP reconciling items, which we outlined in our press release issued today and in the reconciliation table available in the Investor Relations section of our website. On a non GAAP basis, Gross margin for the Q1 recovered as expected to 45% of revenues, 160 basis points higher the 43.4 percent non GAAP gross margin in Q4, mainly due to warranty costs for a foundry and logic new product release in Q4 that did not recur in Q1 and an anticipated improvement in the system segment gross margin related to a more favorable product mix. Also in Q1, we began to see rising costs for key men's raw materials like rhodium, which is expected to impact our manufacturing Our probe card segment gross margin was 44.3% in the 1st quarter, an increase of 40 basis points compared 43.9 percent in Q4. The increase is mainly due to Q4 warranty charge I just mentioned, partially offset by higher manufacturing spending and lower absorption on lower revenue. The favorable product mix in the Systems segment resulted in a significant recovery of 8 percentage points in gross margin from 41.3% in Q4 to 49.3% in Q1, leaving on lower revenue. In the quarter, Systems segment gross margin returned to the anticipated range of high 40s to low 50s. As we continue to make progress towards achieving our target financial model gross margin of 47%, we expect that margins will fluctuate from quarter to quarter. Our GAAP operating expenses were $54,000,000 for the Q1, dollars 2,700,000 lower than in the 4th quarter. Non GAAP operating expenses for the Q1 were $46,400,000 or 24.9 percent of revenues compared to $48,100,000 or 24.4 percent of revenues in Q4. The decrease of $1,600,000 quarter over quarter is mainly due to lower performance based compensation, partially offset by the impact of annual benefits and payroll tax is recent. Company non cash expenses for the Q1 included $7,100,000 for stock based compensation, $7,700,000 for the amortization of acquisition related amounts and depreciation of $6,100,000 1st quarter amortization of acquisition related amounts was $900,000 lower than in Q4 as a result of finalization of purchase price allocation related to our 2020 acquisition. Stock based compensation and depreciation were similar to Q4. Due to the gross margin recovery and a good expense control, we generated 1st quarter non GAAP operating income of $37,600,000 effectively flat compared to the Q4 despite $10,400,000 in lower revenue. GAAP net income for the Q1 was $19,600,000 or $0.25 per fully diluted share compared to $19,300,000 or $0.24 per fully diluted share in Q4. The non GAAP effective tax rate for the Q1 was 18.6% as compared to 7.5% in the Q4 of 2020. The lower rate in Q4 was a result of the onetime cumulative benefit in 2020 of application of regulations regarding global intangible low taxes income, also known as GILTI and an increase in export revenues, as we mentioned in the previous earnings call. The Q1 effective tax rate is within our communicated anticipated annual non GAAP effective tax rate for fiscal 2021 of 15% to 20%. As a reminder, our cash tax rate is expected to remain at 6% to 8% of non GAAP pretax income will give you fully utilize our remaining U. S.-based R and D credits. 1st quarter non GAAP net income was $31,000,000 or $0.38 per fully diluted share compared to $35,000,000 or $0.44 per fully diluted share in Q4. Moving to the balance sheet and cash flows. We generated $19,000,000 of free cash flow in the Q1 compared to $31,000,000 in Q4, taking our total cash and investments to $272,000,000 at the end of the quarter. The sequential decrease in free cash flow in the Q1 reflects changes in working capital, mainly an increase in inventories and a decrease in accrued liabilities. As of the end of the Q1, we had 2 term loans remaining on our balance sheet totaling $32,000,000 We invested $13,500,000 in capital expenditures during the Q1 compared to $14,000,000 in Q4. This investment chiefly relates to the capacity expansion in the new building in our Liv Mammal campus. We continue to expect a significant investment in capacity in 2021, and CapEx for the year is expected to be between $80,000,000 to $100,000,000 has communicated in our previous earnings call. As a reminder, we expect CapEx to return to 3.5% to 4 revenues in our target financial model after we conclude these capacity expansions. At quarter end, our total cash balance exceeded the debt balance $241,000,000 an increase of $18,000,000 from Q4 quarter end. The increase is mostly attributable to strong cash flows from operations, less the cash used for capital expenditures and $5,700,000 used for stock repurchases during the quarter. Turning to Q2 non GAAP outlook. As Mike mentioned, we expect generally strong demand for advanced probe cork to continue, with lower demand in foundry and logic and flash, offset by increases in DRAM and systems. These factors result in Q2 revenue outlook in the range of $180,000,000 to $192,000,000 Product mix is expected to be less favorable in Q2 with a decrease in foundry and logic and an increase in DRAM revenues, and we also expect higher raw materials costs, resulting in non GAAP gross margin outlook for the Q2 in the range of 41% to 44%. At the midpoint of these ranges, We expect Q2 operating expenses to be higher than Q1 by $1,000,000 to $2,000,000 due to increasing headcount and R and D spend, partially offset by lower performance based compensation. Accordingly, non GAAP earnings per fully diluted share for Q2 is expected to be between $0.28 and $0.36 A reconciliation of our GAAP to non GAAP Q2 outlook is available on the Investor Relations section on our website and we will press release issued today. With that, let's open the call for questions. Operator? Thank you. Please standby, we will be compiling the Q and A roster. Our first question comes from Tom Diffely with D. A. Davidson. Your line is now open. Yes. Good afternoon and thanks for the question. Shay, maybe starting with Hugh on the gross margins. Obviously, nice to see the step function back up. But when you look at the revenue at the high end of the guided range versus EPS below the midpoint, were the margins impacted during the quarter by any particular items? Well, as you know, Tom, we are a turns business, Right. Even when we ended the quarter, we have things in backlog, but with a 6 to 8 weeks lead time, things change even within the quarter. That's where we provide the range. And because of these changes even within the quarter, nothing in particular, just changes in the mix, We ended up with revenues close to the high end of that range, but gross margin slightly below the midpoint. Okay. I wasn't sure if the high material cost was a surprise during the quarter. No, that's a good question. This is something we started noticing in the quarter, but will mostly impact Going forward, things that are in our inventory for Q1, but will start impacting gross margin or will impact gross margin in Q2. Okay. That's helpful. Thanks. And then Mike, you kind of have a big picture question here. When you look at one of your customers or any Customer talked about $100,000,000 of spending over the next 3 years. How does that translate from both the timing and Dollar amount to the probe card market. Yes. I think there's been some pretty well publicized announcement from several particularly in foundry and logic, our largest market about capacity and technology investments over the next couple of years. Those are going to result obviously in more wafer starts, more design starts and all of those designs of wafers are going to need to be tested by advanced probe cards. So if you look at how WFE and capacity increases translate into probe card spend, typically lags by somewhere between 2.75. Some customers are faster if they're going into existing facilities and it's just incremental additions, but we would expect this significant build during 2021, especially of foundry and logic capacity To result in increased demand for advanced probe cards as that capacity comes online either late in the year or into 2022. And do you see a step function increase or do you see it kind of ramp up over a several quarter period as well? No, I think it will ramp up. There is Of that magnitude, those investments have been announced over several years. Obviously, we're starting to see WFE Accelerate here in 2021. But it takes a while logistically for all that equipment to get in, To get it qualified and to get it running. So I don't expect it to be a step function. I would expect it to be rather gradual. But again, We're going to trail the equipment installs and qualification by a few quarters. Great. Okay. Well, thank you. Thanks, Matt. Thank you. Our next question comes from Brian Chin with Stifel. Your line is now open. Hi there. Good afternoon and thanks for letting us ask a few questions. Maybe first to revisit the gross margin discussion A little bit. I think in the commentary, I heard you reference DRAM revenue run rate sort of back to the 2019 highs. And so that suggests DRAM, somewhere sort of a quarter of the business in Q2, maybe sustaining a high run rate Given sort of what an AT company said earlier today, they're seeing a lot of growth in the wafer test part of that business. And so I was hoping maybe you could talk about why the gross margins go down by 2 50 basis points At the midpoint, because I noticed that back in the 2019 timeframe, kind of sustained gross margins at the higher end of the range you're guiding In Q2, more kind of closer to the 44 plus percent. And so I guess that's the first question. Second question would just be sort of on trajectory. I know you're not guiding for second half sales, so maybe it's a little bit difficult. But in terms of getting back to sort of a 45%, 46% level, can you maybe provide some of the drivers that would kind of get you back in that range. Sure. Yes. So you rightly pointed out that We expect DRAM to grow to similar level to the records we had in last year. So let's call it low 40s, medium end. But you need to remember that even within the DRAM, there is a wide range of margins with different customers and different products. So what we see in Q2 is not only DRAM going up, but also foundry and logic going down. And foundry and logic historically has higher gross margin than DRAM. So we see the phenomenon in Q2 of this shifting mix is that where high Gross margin revenues are being replaced by low gross margin revenues. And because there is a specific mix Specific customer and specific margin, it can fluctuate from quarter to quarter even if the DRAM revenue is at similar level. So if you look at the midpoint of our outlook range, yes, the 2.5% decrease from Q1 to the midpoint of Q2, I would say about 2% of it, maybe a little less than that, relates to this shift in the mix from Foundry and Logic to Gheeram. And the remaining about 1%, a little bit less in that relates to the higher cost The materials that I mentioned in the call, specifically the rhodium. In terms of going back to the highest The higher level. So we put a model in place last year, right? We talked about reaching 47% of Target's financial model. We had some good evidence of our ability to get to these levels. If you go back a few quarters to Q3 of 2020, Margin was almost at backmoder at 46.7%. So that was a good evidence that we can achieve these levels. And as we saw in the last couple Both quarters and in the upcoming quarter, margin can fluctuate on our way to achieving that model, but we are confident that we have in our ability to get there. Okay. I guess those the 50 basis points, maybe 100 basis points Of hit from the higher input costs. I can kind of carry perhaps in the second half. I guess you'd expect the mix to probably turn Not necessarily in DRAM going down, but thinking about how business kind of trends for foundry and logic, perhaps those Revenue streams could pick up a little bit towards the latter part of the year and so that will kind of help you on the gross margin. Yes, Brian. Go ahead. I think that's probably a reasonable scenario, right? We do see DRAM Strength here in the Q2. With lead times of less than a quarter, it's challenging to forecast much beyond But certainly the design activity that we are seeing portends some DRAM strength through the middle part of the year. And go back to Tom's question, with all of the capacity additions at the high end of foundry and logic, those almost have to turn into Increased advanced probe card demand in the foundry and logic space. So I think your scenario is a reasonable one to think about in the mix shift as we go through 'twenty one. Okay. And maybe one kind of last question, again, a little bit bigger picture or longer horizon here. But again, going back to sort of It seems to be positive developments just around over the past 6 plus months around next generation 3 d packaging adoption. Again, frankly, new fab build out in general. Thinking about your kind of 3 year targets that you gave last summer, I think it was 6% growth for probe cards for the market and your growth a little bit above that. Do you think those are now sounding too conservative, The 6% growth for the market, and I guess, again, that would bump up your growth potential as well. Yes. It's a fair question and one that we have been posing to ourselves as well. When we put the model together last summer, a little less than a year ago. This rapid increase in WFE and industry capacity really hadn't been contemplated. And so it's reasonable to And so, it's reasonable to assume that the assumptions associated with Advanced Broke Card Growth over the next Couple of years, maybe that sort of mid single digits. I think we had a little bit higher than 5, but mid single digits may be more conservative. Having said that, if we do see that happen, I agree with you, we should be able to outpace the market and grow faster. That will allow us to achieve the target model a little bit faster. We're not going to go reset the target model, but hopefully this increased capacity, increased WFE results in more wafer starts on leading edge nodes where obviously we're In more wafer starts on leading edge nodes where obviously we're you look at 2020's results, we lead that market. That should provide a nice uplift and allow us to achieve $850,000,000 in revenue and $2 in non GAAP earnings per share Before the 2023 timeframe we talked about. Okay, great. Thank you. Thanks. Thank you. Our next question comes from Charles Hsieh with Needham. Your line is now open. Hi, thanks for taking my question. I want to have a follow-up Question on the DRAM ProCard strength. Well, supposedly you're getting somewhere about $42,000,000 $43,000,000 in Q2. And given that as I understand, the lead time for DRAM probe card is probably a little bit Longer than your foundry logic probe card and you probably have a little bit better visibility into the 3rd quarter or even Q4 here, are you sort of expecting 3rd quarter can be run rating at a similar level at Q2 and Q4, I mean, after running hard a few quarters may Calm down a little bit and then maybe the momentum of foundrylogic PropCo can pick up the slack and get you to a Yes. I mean, the mix shifts You just articulated are certainly one of the possible scenarios. We have no visibility into 4th quarter right now, no direct visibility in the Q4. Obviously, our customers share forecast with us. We understand their design release cadences. It's part of the reason why we're putting significant capacity in place, but PO visibility and PO lead times don't go anywhere close to the Q4 at this point. Your statement about the Q3, sure, we've got a little bit of visibility into there when you look at the lead times that we're currently running. And if you look at past years, both 2019 2020, history would lead you to believe there's going to be some strong mobile Foundry and Logic activity in the Q4. So the scenario you painted is not an unreasonable one. Having said that, We just don't have the direct visibility to be able to sort of confirm that in any really affirmative way. It has been the pattern in the last couple of years. It's part of the reason why we are continuing to aggressively make investments. But I don't want to also create the expectation that that profile is in the bag. Okay. Thanks, Mike. Maybe a Follow-up also on the gross margin, because you've kind of talked about mix shift into 2nd quarter foundrylogic And Flash probe cards are down, but you expect DRAM and the systems will come up And the system business is higher gross margin. That should offset some of the unfavorable product mix. However, I think Shai did mention a few factors, but I still feel like that your DRAM ProCard gross margin is Kind of running at a relatively lower level going into next quarter. I wonder relative to your historical average, is Q2 Slightly lower or is it on par or what's going on here for the gross margin for DRAM? So similar to what I answered to Tom, it's true that historically, Foundry and Logic has a higher gross margin than DRAM And Slesser is lower than DRAM. But even within the DRAM, there is, of course, overlap With the high end DRAM design can have higher than Family and Logic gross margin and The low end DRAM design can have lower gross margin than the high end flash design. So within that range, And what we see in Q2 is the shift in the mix is into a way that we have some high volume Design of a low gross margin in the DRAM that and we are seeing lower foundry and logic designs that get off In Q2 with high gross margin. And the combination of these 2 is what creates the lower Gross margin that we expect in the Q2 in addition to the impact of the higher material costs. Thanks. Maybe my last question, if I may. Zooming out a little bit to switching to a little bit longer term, your Our largest customer, they want to enter the foundry business. And we just I just want to Ask Mike if you have any thoughts on whether that could carry some of your strength, market share strength at the existing, I mean, let's call it IDM1. Into this foundry side of the business of this particular customer or that could potentially open up some Competition to your competitors. Of course, I know you always expect competition when the market is growing strong, but Just any thought whether at a high level this is a positive or negative for you guys Or it's a risk increasing risk or a lowering risk for you? Yes. I think we view their aspirations to enter the Foundry Business is an exciting opportunity for us. Obviously, that customer, the partnership and relationship there goes back well over a decade, both between the companies and with the individuals involved. So there's a very close And as we've begun discussions about how we can best support their plan to enter the foundry business, It's a pretty exciting opportunity. They've got some compelling assembly and test technologies that they can offer as part of that foundry business. It's not clear that they're going to be a major part of the foundry business, at least initially. But I think net net, this really represents a positive for We have obviously a strong position in the foundry market right now. Their entry into it, I think we can help add value to their initiative and hopefully mutually grow our businesses. Thank you, Mike. Thank you. That's all my questions. Hi, Strauss. Thank you. Our next question comes from Craig Ellis with B. Riley Securities. Your line is now open. And the questions, guys, I'll start acknowledging that I'm leading with something that's at risk Beating a dead horse, but Shay, I get the intra, intersegment mix dynamics that are going on in the guidance. The company has been very clear On those mechanics over time, the question though was really on the rhodium issue. Do you have the ability to do any hedging? Or is there anything else you can do To mitigate the volatility of pricing there? Or is it just going to be a matter of you being a price taker for whatever happens with Good spot or whatever contract pricing plays out. Yes. So what we see in the quarter is the prices of rhodium went up from 16 ks For an ounce, 28,000,000 for an ounce, right? It's almost double. And I'm not a commodity Bert, and we're not in that market. We look into what are the options when it comes to hedging forward contracts and things like that. But if you read the papers and look at what caused that, it looks like there were some productions, mining issues in South Africa that impacted last year Because of COVID, I think it's too early or we don't know yet if that's a long term phenomenon or That should be resolved soon or over the last the next few months, but we'll certainly look into what are the options In dealing with such fluctuations. Okay. That's helpful. Mike, I wanted to turn it to you for a couple of questions. So The first question is regarding one of your prepared remarks statements, and it was about aggressive technology and Capacity execution. And I just wanted to see if you could follow-up and provide a little bit more color on the things that company is focused on this year with technology and exactly what we should think about with respect to capacity, if there's any color beyond just the CapEx number that sounds like it's reiterated from where we were to start the year. Yes. I think I'll start with capacity because I think if you go back to Our analyst presentation from last August and then subsequent earning calls, I think it's Pretty clear. Our capacity increase is associated with Advanced Probe Cards, putting A new fab in place, gradually building out the capacity. But right now, we're basically footprint limited and continue to be footprint limited until That new building comes online in the second half here. So no real changes there. We continue to On the plan we've talked about in prior calls. On the technology piece, it's really about serving some of the Accelerating requirements, especially in foundry and logic associated with advanced packaging and 5 gs. If you look at our customers' advanced packaging roadmaps, things like die stacking, modular die, heterogeneous integration really drive up probe card complexity quite substantially. The pitches or the densities we have to contact are much, much higher. The pitches are mean the probes are much, much closer together. And we have to test at higher frequencies with higher currents And do all of this in a way that continues to scale with the basics of cost and quality. And so the vast majority of our technology investments are really targeted towards doing that, continuing to keep pace and even stay ahead of our key foundry and logic customers' requirements to enable their advanced packaging roadmaps. It's pretty clear that 7 nanometer of 1 customer, 5 plus at another are going to have Advanced Packaging is a really central part of their technology roadmap and our investments today are pointed at making sure we can properly enable those. And just to be clear on some of the things that you're seeing there, Mike, Are the investments today and being an enabler something that shows up in revenues in the back half of this year, first half of next Sure. Through next year, is it really something that comes on more in the second half of 'twenty two and 'twenty three, 'twenty four? Yes. It will be there will be contributions later this year as some of those things ramp in pilot production, but They're going to be hard to discern from the mainstream business that we have in especially in foundry and logic and DRAM. I'd expect more and you can go look at our key customers' product roadmaps and where they're talking about Driving some of these advanced packaging architectures into volume, it's really a 'twenty two, 'twenty three kind of event. But to be ready for that, we need to be investing in R and D now. Makes sense. And then lastly for me, if I could. From time to time when you've characterized the foundry market, you've talked about the breadth of customers in foundry and logic. And certainly, we had 2 10% plus customers this quarter. But as you look ahead, do you expect the breadth of Some of the larger customers to broaden out in the back half of the year and next year? Or as we think about some Strengthening in the back half in Foundry and Logic, would we expect it to be some of the same customers that were strong in 1Q? I think you will see, we've got a set of customers, if you look back historically, that often sort of pop in and out of the 10% list. I think we expect those same customers in both the foundry business and in the memory business to continue to be staples of our 10% list. The breadth though in our business is interesting because sometimes The foundry itself is the customer, but sometimes it's the fabless design house that's the customer. And so the breadth of The number of fabless customers that we're serving, whether directly with the fabless customer and their design and test team Or indirectly through the foundry, that breadth continues to expand and increase. And I think that's Central to our continued diversification and trying to continue to drive a broad set of demand opportunities for FormFactor. Makes sense. Thanks guys. Thank you. Thank you. Our next question comes from Krish Sankar with Cowen. Your line is now open. Hi, this is Robert Mertens on behalf of Krish. First, how should we think about the margin profile of the Engineering Systems business? I know you mentioned Product mix headwinds from late last year have been worked through, but would you expect any similar buying patterns this year or seasonality? And then just a quick follow-up. In terms of seasonality, if you look back in the last 2, 3 years, I think we see Q1 usually is lower than Q4. It usually relates to the fact that many of our customers in that market are Universities and education institutions that have budgets to consume and closer to year end, we see A little pickup in orders and then in Q1, it's a little lower. In terms of the margin, We are saying, at least in the last 3 years, that the margin for the system business will fluctuate between the High 40s to low 50s. That's our target. That's where we that's also what we took into consideration when we built our long term model of Overall, 47% gross margin. On the way there, things will fluctuate, but within that range is what we expect. Great. Thank you. And then just a quick one around the NAND probe card business and new products. And just thinking about On qualification through the 1st part of the year, when should we think about timing of any sort of new recognition of the business? Yes. Our NAND business really is has 2 components at this stage in the company history. The first is that the legacy form factor NAND business, which continues to be opportunistic for us. We are, for most of mainstream NAND, not cost And so that business you've seen historically has been pretty lumpy. We talked last quarter about starting to leveraged the products and technology we got as part of the acquisition of the AdvanteS probe card assets to try and go after a little bit more of the mainstream NAND flash market. That product is a lot more cost competitive. And so we're beginning to work on exercising that option. We're still in very early innings, discussing with customers qualification plans, Trying to extend that business a little bit beyond the single digit millions revenue it had at the time of acquisition. So any qualification time line for a new architecture in the industry takes several quarters. So probably getting us into the back half of 'twenty one. And then you got to go compete for designs and win and ramp. So that's going to take you into For the middle part of 2022. But as we go through that, we'll certainly keep you updated as we make progress on trying to exercise that option in NetSlack. Great. Thank you. That's all for me. Okay. Thank you. Our next question comes from Amanda Scarnati with Citi. Your line is now open. Hi, good evening. Just on to TSMC, can you just talk a little bit about what the total opportunity can look like there, both from a perspective of what the opportunities for TSMC to outsource would look like as a percentage of their total probe card business and what that looks like in terms of what Form can achieve in terms of market share there? Yes. I think so at that customer, we're really focused and really only relevant and Qualified for the advanced nodes, say, 10 nanometer, 7 nanometer, 5 nanometer and all on. But those nodes represent The entire opportunity for FormFactor. There's very little in sourcing that goes on for those advanced nodes because of the complexity. And so go back to the question earlier about the significant WFE CapEx And investments in these advanced nodes, we expect that opportunity is going to continue to grow from where it is. If you look at where the revenue was in the Q1, It's starting to nudge up against that $100,000,000 annual run rate. And is going to we are going to see quarter to quarter fluctuations. But as we address more designs on those Advanced Nodes and more of that customer's wafer starts move to that Advanced Nodes. We're optimistic that we can continue to grow that business long term. Great. And can you talk about capacity and if you're still capacity constrained at these if he's been able to open up new capacity through the extension that we talked about a couple of quarters ago. I think, Amanda, in some areas, we are still capacity constrained. And it depends on the specific product mix because we have multiple factories with different dynamics. But by and large, in these levels of revenue, we are still capacity. Thank you. Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Mike Slessor, for closing remarks. Thanks, everyone, for joining us again this quarter. We're going to be at a bunch of conferences as we go through the late spring and early part and hope to see you there. Take care and stay safe. This concludes today's conference call. Thank you for participating. You may now disconnect.