Earnings Call: Q2 2020

Jul 30, 2020

Thank you, and welcome everyone to FormFactor's 2nd quarter 2020 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 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 Mason 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 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 these statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual factors and uncertainties is contained in our most recent filing on Form 10 K with the SEC for the fiscal year 2019 and our other SEC filings which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward looking statements are made as of today, July 30, 2020, and we assume no obligation to update them. Also as an aside, since this is an entirely remote earnings call for us, please bear with us on any audio delays or issues. With that, we will now Thanks, Jason, and thank you, everyone, for joining us today. FormFactor delivered 2nd quarter results that were a near carbon copy of our first quarter. Again validating our target financial model. These results are a testament to the dedication, resilience, and commitment of our worldwide team and I'd like to start our call by recognizing and thanking our 2000 plus employees for their contributions to this impressive performance. Although the top level financial results are similar, the underlying During the second quarter, we experienced no significant shutdowns or disruptions in our internal operations and external supply chain, allowing us to steadily increase factory output in a safety focused and socially distance manufacturing environment. This enabled us to exceed the outlook we provided only $3,000,000 less than the first quarter. In our Foundry And Logic probe card business, we again experienced strong demand from multiple customers that continues into the current quarter. This demand strength is coming from several end market drivers, including acceleration of 5 Our large microprocessor customer continues to ramp new designs and increase capacity for both client and server chips on both the 14 and 10 nanometer nodes. Despite a recent announcement of delays in eventual 7 nanometer production, We are currently engaged with this customer in significant 7 nanometer R and D activity and are excited about helping enable the adoption of advanced packaging technologies there are planned to be a prominent part of this node. 7 nanometer production was not planned in the near future, in the interim, we expect new designs to continue to release on the 10 nanometer node. As a reminder, probe cards are a consumable that is specific to each new chip design. And so demand is generated from not just node transitions, but also from the release of new chip designs on existing nodes. Regardless of the manufacturing strategy this customer employs, we expect We also continue to grow our high performance compute and RS applications. This increasing activity demonstrates that form factors differentiated technologies provide compelling performance and cost advantages for wafer test on advanced logic nodes. As more of this customer's designs and wafer starts, start to move to 10 nanometer and below, we expect to experience a corresponding increase in our business with them. In addition, we also expect to which expands the number of probe cards required per wafer out and test complexity, which widens form factors competitive advantage. Whether it's HBM stacking by DRAM customers or die disaggregation techniques by microprocessor and foundry customers, Advance Packaging is an important long term growth driver of form factors business. Commenting briefly on our 3rd quarter outlook. While we anticipate continued strength with major foundry and logic customers, We also expect strengthening in DRAM as key customers begin to ramp new server and mobile designs on the 1Y and 1Z nanometer nodes. This DRAM cyclicality is inherent to that market and is expected, but because of the strength of our other businesses, primarily foundry and logic probe cards, this DRAM volatility has not had a significant impact on our recent financial results, and is an excellent example of the power of form factors diversification strategy. Turning to 2 other important points in today's announcement. Since mid March, we have been limited by capacity and output and not by customer demand for our products. To capitalize on this strong demand, which we view as a secular long term trend, we are utilizing our strong balance sheet to invest in form factor's future growth. In the second quarter, we purchased a new ninety thousand square foot building on our Livermore campus, which will enable us to significantly increase our probe card manufacturing capacity. We expect to gradually increase capacity starting in the first half of twenty twenty one as we complete commissioning and begin to announced the acquisition of the probe card assets of Advantest Corporation. This $35,000,000 acquisition brings several key enabling subcomponent technologies that reinforce FormFactor's technology leadership. It also adds an emerging NAND flash probe card architecture that is currently qualified at 1 of the world's leading memory manufacturers, providing us the potential to form factor for continued industry leadership. Finally, having achieved our target financial model for 3 consecutive quarters, we plan to unveil we will discuss growth drivers, including 5G and advanced packaging that are driving faster than industry growth in our $2,000,000,000 of served markets. Our leadership position in these attractive markets paired with our differentiated strategy and disciplined execution will drive continued growth and share gains, enabling us to achieve our As you saw in our press release, our 2nd quarter revenue was within the revised outlook range we announced on July 1st. These are impressive results, especially in light of the impact of COVID-nineteen, which require the gradual reopening of our California facilities during Q2. Following a temporary shutdown during the last 2 weeks of March. These results show form factors agility and ability to deliver to our customers while safeguarding employees and supporting our supply chain partners. There are also compelling evidence of our ability to perform at our long term target financial model across nearly all lines of our P and L. FormFactor's 2nd quarter results were similar to the first quarter. Revenues were $158,000,000, a 1.8% sequential decrease from our Q1 revenues and a 14% year over year increase. RobCard segment revenues were $134,000,000 in the 2nd quarter, a decrease of $1,000,000 or less than 1% from Q1. System segment revenues were $24,000,000 in Q2, a decrease of $2,000,000 or 8% from the 1st quarter driven mainly by lower sales to universities and institutions that were impacted by COVID-nineteen. Within the Clubguard segment, Robust demand for foundry and logic continued, with revenues increased 3% from Q1 to $109,000,000 comprising 69% of total company revenue in Q2, up from 66% in the first quarter. DRAM revenues were $19,000,000 in Q2, a decrease of $6,000,000 from the first quarter and were 12% of total quarterly revenues as compared to 15% in the first quarter. DRAM demand continued to be down in large part due to customers absorbing purchases made in several 2019 high revenue quarters. Flash revenues of $5,400,000 in Q2 were $1,100,000 higher than in the first quarter. And were 3.4% of total revenue in Q2, slightly higher than the 2.7% in Q1. We continue to expect such revenue to be lumpy from quarter to quarter. GAAP gross margin for the 2nd quarter was $66,000,000 or 41.9 percent of revenues, same as in Q1. Cost of revenues included $6,100,000 of GAAP to non GAAP reconciling items, which we outlined in the press release issued today, and in the reconciliation table available on the Investor Relations section of our website. On a non GAAP basis, Gross margin for the second quarter was $72,000,000 or 45.8 percent of revenues, 30 basis points lower than the 46.1% non GAAP gross margin Q1, mainly as a result of slightly lower revenue and lower systems segment gross margin, partially offset by higher probe card segment gross margin. Our probe card segment gross margin was 46% in the 2nd quarter, an increase of 90 basis points compared to 45.1% in Q1. The increase from Q1 was mainly a result of more favorable product mix. Our Q2 Systems segment gross margin was 44.6%, as compared to 51.2 percent in the first quarter. The decrease of 660 basis points was driven mainly by lower sales, unfavorable product mix, and higher warranty and E and O costs. We expect our Systems segment gross margin to return to the range of high 40s to low 50s that we've said previously is the norm. Our GAAP operating expenses were $43,700,000 for the second quarter, $5,300,000 lower than in the first quarter. The decrease in 2nd quarter GAAP to non GAAP reconciling items from $6,200,000 in Q1 to $2,600,000 in Q2 is mainly due to a $3,700,000 benefit from contingent consideration adjustment we recorded in the quarter. Non GAAP operating expenses for the 2nd quarter were $41,100,000 or 26 percent of revenue, compared to $42,700,000 or 26.6 percent of revenues in Q1. The decrease of expenses and lower performance based compensation. Company non cash expenses for the 2nd quarter $6,500,000 for the amortization of intangible assets, $5,600,000 for stock based compensation, and depreciation of $4,700,000. Amortization of intangibles was $800,000 lower than in Q1 due to certain intangible assets reaching full amortization. GAAP net income for the 2nd quarter was $20,500,000 or $0.26 per fully diluted share, compared to GAAP net income of $15,900,000 or The non GAAP effective tax rate for the second quarter of 2020 was 17.4%, similar to the 17.6% in Q1, and within the range of 15% to 20% estimated rate for the year as we communicated in our previous earnings calls. As a reminder, our cash tax remaining U. S.-based NOLs and R and D credits. 2nd quarter non GAAP net income was or $0.33 per fully diluted share, same as in Q1. Moving on to the balance sheet and cash flows. As you would expect, we are especially focused on cash flow management at this time. Cash flows from operations were $43,000,000 in the 2nd quarter, as compared to $39,000,000 in Q1. As Mike mentioned, during the quarter, we completed the acquisition of a building in our Livermore campus for a total of $24,000,000, of which $19,000,000 were paid in Q2 and $5,000,000 were paid in the previous quarter. We partially financed this building purchase with an $18,000,000 15 year real estate loan. This acquisition reduced Q2 free cash flow generation to $19,000,000 compared to $28,000,000 in Q1, and brings our free cash flow over the trailing 12 months to $103,000,000 or $127,000,000, excluding the acquisition of the building. Our total cash and investments were $264,000,000 at the end of the quarter. Almost 90% of these are in the U. S. We maintain substantial liquidity and our capital structure is healthy and solid as we use our cash balance combined with taking advantage of the current low interest rate optimize our cost of capital. Here are some more details on our current debt. As of the end of Q2, we had 3 term loans on our balance sheet. Totaling $50,000,000. The first loan related to the acquisition of Cascade Microtech in 2016 had a balance of $12,500,000 at the end of Q2 and was fully repaid earlier in Q3. The second loan is a 3 year 1,000,000 denominated loan we took to fund the SRT acquisition in Q4 2019. The remaining balance of this loan as of the end of the second quarter was 1,000,000 The 3rd loan is the new $18,000,000 real estate loan I mentioned earlier. This loan bears an effective fixed interest rate of 2.75%, taking into consideration an interest rate swap we put in place. At quarter end, our total cash balance exceeded the debt balance by $214,000,000, an increase of $16,000,000. We continue to invest in capital expenditures and M and A as important parts of our strategy. We invested $24,700,000 in capital expenditures during the second quarter compared to $12,000,000 in Q1. The increase in CapEx in the first half of twenty twenty as compared to our 2019 run rate is chiefly the result of $24,000,000 used to acquire the new Livermore Building, an additional capacity expansion initiatives as part of our multiyear plant support our anticipated medium to long term demand. The acquisition of the building and needed investment as well as ongoing CapEx is expected to bring our capital expenditure and an updated long term financial model as part of our webcast strategy update for the investment community, which we plan to hold on August 18. We will provide more details closer to the event. Turning to the 3rd quarter non GAAP outlook. As we and our suppliers gain additional experience operating in the safety focus and socially distance manufacturing environment, we are again able to provide outlook ranges for the current quarter. As Mike mentioned, we expect DRAM revenue to strengthen in the third quarter. Layered on top of continued solid demand for our other products. These factors result in a Q3 revenue outlook in the range of 100 $70,000,000 to $180,000,000. I'll repeat that $170,000,000 to $182,000,000. The anticipated increase in DRAM revenue is expected to result in a less favorable product mix. Accordingly, non GAAP gross margins outlook for the Q3 for Q3 is in the range of 44 percent to 47 percent and non GAAP earnings per fully diluted share for Q3 is expected to be between $0.30 $0.38. The acquisition of the probe card assets of Adventist is not expected to have a significant impact on our Q3 results. A reconciliation of our GAAP to non GAAP Q3 outlook is available on the Investor Relations section of our website and in the press release issued today. With that, let's open the call we are not in the same room. Our first question comes from the line of Craig Ellis with B. Riley FBR. Your line is open. Yes, thanks for taking the question and congratulations on the nice execution team. I'll start with a question for Mike. Mike, I think in your prepared remarks, you indicated that you expected DRAM revenues to improve in the in the third quarter. I was interested in understanding the magnitude of improvement that the company is seeing. Would we expect DRAM to get back to what I think some of us would have thought would be a normalized range around $30,000,000 or maybe, not quite that robustly as you start the back half of the year. Yes. Thanks for the question, Craig. So just to calibrate everyone, recall going back to the fourth quarter of 2019, we had an 11 year high on DRAM revenues. We then expected some digestion here in the 1st part of 2020, which we've indeed seen. But as we move into the third quarter, seeing some real strengthening off the Q2 lows in DRAM, probably that in round numbers, that $30,000,000 annualized or $30,000,000 normalized level is a decent expectation for the third quarter. Obviously, this continues to be a terms business and so there's some uncertainty associated with that. But as all of the major DRAM manufacturers, sort of begin design releases for both mobile and server on 1Y and 1Z nodes, we're seeing quite a bit of increased activity as they begin to ramp those designs in the third quarter. I think that normalized $30,000,000 level, a good estimate from where we sit in the quarter right now. Great. And then if I could, one more on, on your prepared remarks. You mentioned advanced packaging a little bit more than I recall the last few calls. In reference to things that you're doing with, Leading Edge Foundry And Logic customers. The question is, with that as one of the three areas of strategic SAM expansion focus. Are you starting to see an acceleration in activity with your customers there? And how should we think about the rate of growth in that part of the business going forward relative to what you've seen in the past? Yes. I mean, in general, advanced packaging for us, a long term multiyear secular trend that really increases the opportunity for form factor. It increases test intensity and increases test complexity. Obviously, both trends good for us. I'd characterize the activity It's still very early innings. We're seeing more in the foundry and logic space. Recall that a lot of advanced packaging activity that we've benefited from previously has been in the DRAM space with high bandwidth memory or HBM. We certainly have seen things like fan out and some dye stacking in the founder and logic space. But as I said in the prepared remarks, the 7 nanometer node, 5 nanometer node in foundry and logic are going to prominently feature some of these advanced packaging techniques for a variety of integration schemes. I'd still characterize it as being, mostly early R and D and pilot production in the foundry and logic space with the arguable exception of fan out. But this is an exciting opportunity for form factor moving forward that are really going to drive the growth as customers combine both Moore's Law advances with the integration and performance advantages associated with advanced packaging. That's helpful. And then if I could just ask Shai a question on gross margin. And and congratulations to the team for a revenue guidance range that implies the record revenues are possible in the quarter. Aside the question is on the 44% to 47% range. I think we typically just think about mix as being the primary determinant, but with manufacturing being impacted by changes that are related to COVID. How should we think about the puts and takes that determine the lower end of the range versus the higher end of the range? Thank you. Sure. So the main element impacts gross margin continue to be mix. And as I said in the prepared remarks, since we expect DRAM to increase in Q3, and DRAM has a lower margin than foundry and logic. So as a percentage of their total revenue, DRAM is going to have a bigger share, which means it drags the gross margin down a little bit and that's why the range is $44,000,000 to $747,000,000, even though we see an increase in revenue. Our next question comes from the line of Brian Chin with Stifel. Your line is open. Hi, good afternoon. Nice job on the quarter and thanks for letting us ask a few questions. Maybe first question, slash has been sort of an ancillary market for the company. And so my question I guess is what if any what was any manufacturing capacity is transferring over? Why was Advent test willing to exit the market And what gives you confidence you can re enter this TAM at an acceptably high margin level? Also, do you expect any incremental sales the acquisition in 3Q and is it immediately accretive? Yes. So, Brian, it's Mike. I'll take that one. I think focused on this acquisition, One of the very exciting pieces about it for us is the elements of technology. There a couple of key enabling subcomponent technologies that EvonTest had invested in over the years, both in terms of the MEMS technology, which as you know, is a enabler for making the individual probes as well as the interconnect technology that then connects those probes up through the printed circuit board to the tester. So one of the more exciting parts for it is the general technology, which we feel is applicable across many of our served markets and product lines in the future. The current revenue, which was about $7,000,000 in 20.19, expected to grow a little bit in 2020, is primarily associated with Flash. They've got a decent cost structure on this emerging product, but it was going to take some significant investments to really scale that. Things like the design automation that form factor really has, the worldwide support infrastructure that form factor already has, And so, you know, we worked with the Vontest to put together a business model for looking how we would help grow this business and the acquisition seemed to make sense. To set expectations, it's going to take us an assessment period to figure out what exactly those are, what flash market share we can gain, but there is an exciting opportunity there to grow off the single digit millions that that product I did last year. So we'll keep you updated as we go through that assessment. But I think overall, when I look at the technology portfolio we've acquired, some pretty exciting additions to the form factor roadmap. Interesting. So some IP synergies, even beyond Flash, but off memory, maybe that's like a $200,000,000 $250,000,000 kind of TAM just for Flash in itself? That's right. And I think, our primary focus here is to understand those technology synergy early. You're right. The overall flash TAM is something like $250,000,000 where we hold relatively small share. This will probably help like a gain share there. But again, some of the technology elements are very exciting for the broader form factor market space, not just in flash. Okay, great, great. Thank you. Maybe turning back to Logic for a moment, In the past delays in your MDU customers technology roadmap has increased the volatility of your revenue and really for that matter, the entire supply chain. You did provide some puts and takes in your prepared remarks. And it sounds like demand remains solid in the 3Q, but presently, I know this is kind of hard math maybe to put you on the spot with here, but when you tally up sort of the increased 10 nanometer activity the increased incremental advanced packaging opportunity and maybe minus a push out of 7 nanometer in calendar 'twenty one, do you think this could be somewhat of a push from a revenue perspective and any sorts of thoughts incrementally would be helpful? Yeah. It's certainly an interesting question because as you note, there are a lot of puts and takes. The a couple of things that have really driven this business to strong levels in recent quarters and even recent years. We've had this overlap of the 14 nanometer and the 10 nanometer node with this customer continuing to aggressively release designs on both of these nodes. We've also had what feels like a pretty fundamental increase in wafer test intensity trying to drive more test content to the wafer level, closer to the fab, that obviously drives up the overall wafer test and probe card end. And that's a theme we've seen across the foundry and logic space, but at this customer in particular. 7 nanometer in 2021, I think for us, by and large remained a development activity. So in 2021, probably not too much of a tailwind, but I do think as we look to longer term these elements of note overlap, probably some in the test intensity as yields go up and the node strategy stabilizes a little bit. I don't know whether there's a push, but I do think reasonably comparable levels are not a bad expectation, at least as far as we can see through the rest of 'twenty into 'twenty one. I'll give you the usual caveat that with a turns business where lead times are well within a quarter, our visibility remains very limited. But some of those trends we talked about as the puts and takes remain mostly intact, I think, as we go through the longer term future. Great, appreciate the thoughts, Mike. Thanks again. Thank you. And our next question comes from the line of Amanda Scarnati with Citi. Your line is open. Hi, thanks for taking the question. Mike, just going back to sort of this intel conversation and you touched upon this a little bit in your prepared remarks. But if Intel were to switch over to sort of an outsource manufacturing position for 7 nanometer or beyond, how do you think that that would impact your business or do you think it's sticky enough, what you do with Intel that it would have limited impact on it? Well, I think it's sort of an interesting data point on our fundamental customer strategy, right? Look back to form factors several years ago, we really didn't have a very strong foundry business. In fact, I think it's characterized fair to characterize it is pretty weak. We made it a strategic initiative to become a key supplier at the world's leading foundry so that if any of these shifts in manufacturing strategies from any of our customers, whether they be microprocessor IDMs, fab light customers, fully fabless customers. Those events and shifts, we want those to be agnostic to So I think it's still early in sort of everybody figuring out what the impact of potential manufacturing strategies are for our largest customer, we really feel like we have our bases covered now that we're significant share and a key qualified supplier for the advanced nodes at the world's leading foundry. And then just on the capacity constraints, can you expand a little more on the impact that that had within the quarter, and if it's leading to any sort of significant backlog going into the September quarter. And when you expect that new capacity to be able to come online. Yes, and maybe we'll deal with the second part of the question first. So as we've told people in the past, inside our existing footprint, we're by and large capacity constraint, right? We've produced a high of near $180,000,000 in revenue in Q4 twenty nineteen as we work through the first half of twenty twenty with different shutdowns and then social distancing obviously reduced revenue levels. The 2nd quarter, we were fortunate to not have any significant shutdowns, but we got off to pretty slow start too, right? We were just re ramping and bringing people in and learning how to manufacture in this environment as were some of our suppliers. I think exiting the quarter, it's hard to use the word normal in this environment, but I'd say operationally, we're by and large back to normal and on a run rate basis, operating at, essentially the out the outputs, the throughputs, the cycle times that we want to with a couple of exceptions here and there. So if we look longer term, we're not pushing much of a backlog significant backlog into Q3. It's more of the normal demand profile. But that's what motivated us to go purchase, an extra shell for building, start to outfit it spend the CapEx to slowly build capacity so that we don't find ourselves constrained. We're obviously quite bullish about some of these trends like 5G and advanced packaging and we want to have at the very least the optionality to have the capacity in place to go capitalize on those opportunities and grow our And then the last question for Shay, just on the operating expenses, how quickly does that sort of ramp back up? And this might be something that you're going to talk about at the Analyst Day in a couple of weeks. But is the revenue came down or the OpEx came down quite a bit this quarter on sort of one off charges potentially when does that kind of revert back? And should we see a step up as we kind of go through the back half of the year? Yes, I think it's a good observation. And if you look at our outlook for Q3 and you do the math from the gross margin down to the EPS, you will notice that we expect higher OpEx in Q3. Probably in the range of 46000000 to 48000000 versus the 41000000 in Q2. And these increases can contribute to a few things. First of all, we have the acquisition that we announced today. They are adding to our OpEx with the higher revenue and performance in Q3, we expect higher performance based compensation. We also had our annual salary raise in the beginning of the quarter couldn't be in the beginning of the quarter. Travel is expected to pick up in Q3 after almost completely shallow in Q2. Some of our R and D teams are in addition to working remotely out going back to the office or to the labs. So we expect to see some ramp up of R&D projects and materials. And we also have a significant investment in information Technology and mainly hardening security, but also related to our ERP consolidation project, which we've talked about before. So some of these elements are one time in like the IT investment, some are variable structurally like the performance based compensation and some have a more permanent nature like salary races. And as you noted, we'll get into more details of, rest of the year, longer term, etcetera, in the analyst update we're going to do later in August. Thank you. Our next question is from David Duley with Steelhead Securities. Your line is open. Yeah. Thanks for taking my question. Mike, these are probably for you. As far as test intensity goes, I think Teradyne made a big deal on their most recent conference call about increased test intensity across the board not only with the APU chip but with many other parts. I was just wondering what you're seeing as far as test intensity goes and does the increased tester intensity translate directly to probe card intensity as well plus or minus or how should we think about that? Yeah. So I'll amplify what you just said. Obviously, given that we're the interface between the ATE equipment built by Teradyne and Evon Test and the customer chips on the wafer, there is a pretty direct correlation between the test intensity they see. And the volume of required probe cards. There's a variety of things driving this. 5G is a really good example. When you look at the complexity of testing some of these 5G chips, the frequencies involved, the brand new yield fallout modes that are involved the use of advanced nodes, which by themselves are probably not yielding where customers would like them to be. You end up having a variety of factors that are driving the need for more and more tests. The other nice thing obviously about testing at the wafer level for our customers is to get time more dollars into a chip that's not going to yield once it gets to the final package date or in the advanced package with some other chips. So I think there's some fundamental advantages to driving test intensity up at the wafer level. We, along with people like Teradyne and Advent tests, through our performance, are able to enable more of that, but some of it's just driven by the complexity of the silicon that's running through new applications like 5G and advanced packaging. And along those same lines, do you think when you think of the overall growth rate of the probe card market, would These trends help increase the overall growth rate and do you have an idea about the incremental growth caused by the move to advanced packaging? Yes. There are many things driving, the advanced probe card growth rate. And certainly, what we've seen historically And what various forecasts, either by us or by various market prognosticators indicate is that the Advanced probe card market is growing faster than the semiconductor market overall, primarily for those reasons, right? Test complexity, advanced packaging, really driving more and more tests, especially at the wafer level, which means more probe cards. This is going to be a fairly prominent topic, at our August 18th call. We're going to take a step back and look at our served markets again with everyone. And you'll see that some of these drivers that are upping both complexity and intensity are producing, above market growth rates for the high end of advanced probe cards where we lead. Okay. Final one for me and I'll pass it on to someone else. Can you take a guess as to as far as sub-ten nanometer processes coming out of the boundaries. What percentage of parts do you think are going into a true advanced package at this point? Well, some of that's a bit of a nomenclature question too, because advanced packaging means different things to different people. We've tried to be, a little bit more conservative in our So things like fan out, things like HBM, not regular flip chip, we view the former is advanced packages. So something like fan out. My guess is we're somewhere around 50% of the overall wafer outs at the advanced nodes are, again, integrated with some of these some flavor of advanced package like that. Obviously, you look at our key customers, they're pushing more and more of the technology burden at 7 and then 5 and below that. Onto some of these advanced packages. So we would expect that attach rate to increase over time. Thanks David. Thank you. And our next question is from the line of Tom Diffely with D. A. Davidson. Your line is open. Okay. Thank you. Thanks for taking my call. So, I guess, carrying on the capital intensity question, when you see a second or third generation ship on the same node, say 10 nanometers, are you actually seeing a decrease in test intensity at this point or is it still at fairly high levels? Certainly, our experience has been it's still at fairly high levels. You would expect a decrease over time as the fundamental yield of the node increases. The first designs out on the node typically are relatively low yielding. And so we're going to require more tests just to get a given number of good die out, but also to debug and reduce those failure modes. But we've seen test intensity hold up pretty well as we've gone through, for example, the 10 nanometer node. Because each new design has its own subtleties associated with its yield failure. So over multiple years, a node like 14 nanometer, which is now, I don't know, seven eight years old, certainly the est intensity was much higher at the start of the node than it is now. In general, at some of these advanced nodes, we do see the intensity diminishing, but not diminishing in a really significant way kind of holding in. Okay. So, Mike, when you look back at the, the delay of nanometer ramp initially a few years ago that caused a couple of quarters of pain for you. Was that just driven because it was a last minute delay and there were other designs that's 14 nanometers to take its place and there was just a waiting period, or is there something more to it that caused, the big dip in business for you? Yes. And Tom, I think you're talking about sort of the early part of 2018, if I recall. That was really problematic because of the last minute nature of it, sort of designs that were planned for the 10 nanometer node, once the 10 nanometer node was delayed, had to be re spun on the 14 nanometer node And that caused between a 1 2 quarter delay in our business as that reshuffling of our customer roadmap took place. I think if you look at the current 7 nanometer situation, obviously, we were not on the verge of 7 nanometer production here. And so, quite a bit different situation than 10 nanometer, which were where we experienced the change right on the verge of the planned production ramp of that node. Okay. That's helpful. Thanks. And then finally, when you look at the ramp that you've seen on the foundry business with more fabulous customers going to the leading edge. I guess I'm surprised we haven't seen that foundry become a 10% customer yet. Maybe just a quick update on how that ramp is going for you? Yes. I guess I qualitatively characterize that is we've been within striking distance of a 10% level over the past couple of quarters. So this is a significant business for us that continues to grow. Obviously at these kind of levels, aggregate revenue levels for the company, the bar gets higher to become a 10% customer. As we continue to diversify the business and win the business around. So I guess I'd say stay tuned given where this business is and the concentration of this business and how it's growing on multiple designs for multiple applications? I would expect to see it in the 10% list in the relatively near future. Thank you. And our next question comes from the line of Robert Mertens with Cowen. Your line is open. Hi, this is Robert Mertens asking on behalf of Krishna Suncar. Thanks for taking my question. Maybe first question for you, Mike, and then I have one follow-up. Just expand on the earlier capacity question when thinking about supply constraints earlier in the year and as capacity has come back online, do you see this as common throughout the whole industry? Do you think there's an opportunity once you start building out capacity in the future that form could take some share gains from any supply constrained, competitors? Yes, I think all of us I'll speak about sort of the market segments we operate in, but I think, most suppliers in these segments had to deal with some sort of disruption and reduced capacity in the first half of twenty twenty. It came at different times around the different around the world and in different ways. But I think I'd characterize our served markets as all being capacity constrained right now. Things like advanced cards and engineering systems are not easy to build. And so there's only a handful of suppliers, including form factor, that it can really produce into those spaces. We've made the decision to make some investments to both add capacity over the longer term, clearly a 90,000 Square Foot Building is going to offer a significant manufacturing capacity increase, but we're also not going to do it all at once. We're going to be fairly gradual how we outfit this building and the number of tools we add to it to make sure that we keep our supply and demand and reasonable balance. But over the long term, some of the secular growth trends we've talked about, we're pretty bullish that the Advanced probe card market is going to continue to deliver market growth outside the semiconductor industry. And we want to have sort of the flexibility and optionality to be adding capacity inside a larger footprint and go win that demand. Great. And then just one on the DRAM market. Thinking of the current strength over the next few quarters, is the main driver still just the technology transitions or have you seen any early signs of capacity growth within the market? ProbeCard demand remember is driven by new designs, right? So new chip designs, whether they be on existing nodes or new nodes, So a node transition, and I think there's a fairly decent understanding among the supply chain that there are some node transitions taking place in DRAM right now, that is going to drive probe card demand. Let's say for us, fewer capacity, tends to be less of a driver. Obviously, if customer is going to produce more wafers as an existing design. They're probably going to need more probe cards. But where we see the big spikes in demand for DRAM probe cards is on no transitions and new design releases. And that's part of what we're seeing right now that's helping, the relative strength in the 3rd quarter. Thank Our next question goes to the line of Charles Shai with Needham And Company. Your line is open. Thank you for taking my question. This is Charles Xi on behalf of a Quinn Bolton. I'm not sure this question can be better addressed by Mike or Shai, but if I look at your midpoint of your guidance for the third quarter 'twenty, it's about roughly $20,000,000 up sequentially. And if you want us to model like DRAM revenue at roughly $30,000,000 level. That's about $10,000,000. So I have to think that the foundry logic part of the business is probably holding up very well and or even like grow sequentially by about another $10,000,000. So I really wonder that whether the strength or even the growth is really coming from the foundry part of the business or the directly coming from your largest, the logic customer. And on top of that, I think we, you guys talked about maybe some of the demand on your largest customer could be transitory as we talked in Q4 last year. Are you still thinking about that or you have really changed your view on that and whether that customer is really going to set the new normal instead of at $30,000,000, maybe now it's $16,000,000? Charles, it's Mike. I'll take that one. A lot of different elements to that question. Let me see if I can try and distill it. So Sequentially, Q2 to Q3, you're right, in big round numbers at the midpoint were up a little less than 20,000,000 we already discussed, I think it was Craig's question, the DRAM was probably going to be around the $30,000,000 level, which represent again in big round numbers up about $10,000,000 sequentially. So the foundry and logic business as well as some of the other businesses, the systems business continues to do pretty well, all contributing, to some level of sequential increase as we go Q2 to Q3. I think where we see particular strength in that mix really is in the foundry business. If you think about the seasonality or design release cadence of those businesses. We're coming up on a time when a lot of the fabless customers are aggressively releasing and ramping designs. Primarily to meet late year handset release cycles. So lots of activity there. So lots of different puts and takes that get us from Q2 to Q3, but DRAM and then a little stronger in the foundry business are probably 2 of the big elements. Returning to the microprocessor business, We touched on this a little bit earlier in the Q And A session, I think. Some of the elements that caused us to be a little bit conservative when we gave when we talked about Q4 and the strength of that customer. I think are probably a little more robust. Things like test intensity, this multiple node overlap probably continues for a long time. Even as 7 nanometer gets thrown into the overall factory mix, we would still expect 10 nanometer to be around. So I think there's some elements of it to get us above the sort of previous expectation of $100,000,000 annual run rate. I don't think the run rates we've delivered in the 1st part of 2020 are sustainable at that level, but probably think about it as somewhere in the middle of the $100,000,000 annual run rate and then the run rate we've been operating at in the past couple of quarters. Thank you. Thank you. And I'm not showing any further questions. I'll now turn the call back over to Mr. Spencer for closing remarks. Great. Thanks everyone for joining us today. We're looking forward to touching base in, a little under a month where we're going to provide you with a new model update. And as I said, take a step back and and look at some of our markets and the growth opportunities that are driving form factors business toward that next target model. Thanks again for joining us and stay safe.