Thank you, and welcome everyone to FormFactor's third quarter 2026 earnings conference call. On today's call are Chief Executive Officer, Mike Slessor, and Chief Financial Officer, Aric McKinnis. Before we begin, Stan Finkelstein, the company's VP of Investor Relations, will remind you of some important information.
Thank you. Today, the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the investor relations section of our website.
Today's discussion contains forward-looking statements within the meaning of the federal securities laws. Examples of such forward-looking statements include those with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions, the benefits of acquisitions and investments, including the ramp-up of manufacturing facilities, anticipated industry trends, potential disruptions in our supply chain, the impacts of regulatory changes, including tariffs and changes in export controls, the anticipated volatility in demand for products, our ability to develop, produce, and sell products, and the assumptions upon which such statements are based.
These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended December 27, 2025, 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, October 28, 2026, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor CEO, Mike Slessor.
Thanks for joining us today. During the third quarter, FormFactor again grew revenue, gross margin, and earnings per share, with each metric exceeding the high end of our outlook range. These results continue a theme you've seen from us for the past year, namely broad-based growth and demand from our diversified leadership position at the intersection of high-performance compute and advanced packaging, and our ability to serve this demand by producing more output from our existing manufacturing footprint. On a year-over-year basis, we grew quarterly revenue close to 40%, within essentially the same manufacturing footprint. Our fourth-quarter outlook extends this trend. Although we are now reaching the limits of our ability to extract more output from our existing manufacturing footprint, we're also bringing our new Farmers Branch factory online.
We recently qualified the assembly and test portion of this new facility, and only a few days ago, shipped the first production unit to a leading customer. We celebrated these milestones last week together with almost 200 customers, suppliers, partners, employees, and government officials at a ribbon-cutting event that formally launched our nearly 300,000 square foot facility. Over the course of 2027, our top priority is the ramp-up of Farmers Branch.
We will ramp as quickly as we can while ensuring we both sustain the efficiency improvements we have demonstrated in the last year and maintain the market-leading product quality that is one of FormFactor's foundational competitive advantages. Aric will provide more details on the status and plans for Farmers Branch later in the call. Earlier this month, we announced the expansion of our longstanding partnership with Teradyne, one of the world's leading automated test equipment, or ATE, suppliers.
Together with our multiyear partnership with Advantest, this announcement formalizes the collaboration and partnership between FormFactor and both market-leading ATE suppliers. The goal of these collaborations is to speed up the development, validation, and high-volume production of next-generation semiconductor applications, enabling high-performance compute, like high-bandwidth memory and co-packaged optics. These partnerships also reinforce and solidify the open ecosystem market structure that provides our mutual customers with full probe card ATE interoperability, enabling customers to select the optimum probe card and ATE combination for their specific chip architectures and designs. Turning now to segment and market details. Foundry & Logic was one of the key drivers of our third quarter growth, increasing 10% sequentially on the expected broad-based strength across multiple applications. We expect continued demand growth and breadth in the current fourth quarter.
In this market, we are building on our established positions in PCs, mobile, data center CPUs, and networking, while adding new growth vectors like GPUs and hyperscaler custom ASICs. Specifically, during the third quarter, we shipped probe cards to the world's leading foundry for a single GPU design in multimillion-dollar volumes. Building on this successful qualification and initial ramp, we are well-positioned to meaningfully grow share in this important part of the Foundry & Logic market in 2027, with Farmers Branch providing the required capacity.
Looking ahead in Foundry & Logic, the accelerating trends of higher speed interfaces, greater power density, and increasingly complex advanced packaging chiplet architectures for next generation GPUs and custom ASICs are increasing probe card performance requirements. These higher performance requirements make FormFactor's advanced MEMS probe technology a requirement for cost-effective production test, and we are building the foundation to achieve share gains in 2027 across a diverse set of GPU and custom ASIC designs.
Our exposure to multiple customers and applications provides us with several ways to participate in the growth of high-performance compute and shows the benefits of our diversification strategy, reducing reliance on any single customer, program, or architecture to drive our revenue and growth. Turning to DRAM probe cards, third quarter revenue was, as expected, essentially unchanged from the record levels of the second quarter, but the mix shifted significantly.
This mix shift was also expected, with HBM revenue declining and DDR5 revenue increasing as our customers moved their wafer start mix to more DDR designs to capture the profit opportunity provided by significant DDR market price increases. Since probe cards are specific to each customer chip design, our DRAM probe card mix tracks these dynamic customer product shifts, and we expect these quarter-to-quarter shifts between DDR and HBM to continue so long as the current bit-constrained DRAM market conditions persist.
Another important point related to this mix shift is at the same time we achieved record DRAM probe card revenues with a DDR5-heavy and HBM-light product mix, we delivered record gross margin performance. Compared to the FormFactor of years past, this is evidence of a very different profitability profile, demonstrating the impact of the successful execution of several DRAM probe card manufacturing cost reduction programs.
The net result is improved DRAM probe card gross margins, which in turn lessen the dependence of our company-level gross margins on product mix. Turning now to our Systems segment.
Systems delivered a record quarter, growing 20% sequentially on accelerating demand for our TRITON system for co-packaged optics, or CPO applications. This accelerating demand has been evident in the steady increase in our expectations for this business in 2026. We started the year expecting between $10 million and $20 million of TRITON revenue, and now expect upwards of $30 million in 2026. In tandem with this growing CPO business, we're also serving demand for additional photonics applications, such as CPO's close cousin, near package optics, or NPO, as well as pluggable devices. This beyond CPO application coverage is the result of our intentional focus on developing the world's leading optical probing technologies applicable across a wide range of photonics applications.
In this case, we've prioritized building leadership in Test Insertion One, which ensures known good die, or KGD, of the photonic integrated circuit, or PIC. Both CPO and NPO architectures require KGD PICs before they are combined with the electronic ICs to form the optical module in scaleup and scale-out network switches. As a result, FormFactor benefits from broader photonics adoption, whether it be CPO or NPO. Part of our leadership position in photonics probing stems from the acquisition of Keystone Photonics a year ago. As we've discussed, Keystone's innovative and differentiated optical probe technology enables high-efficiency optical coupling to our customers' photonic devices, in much the same way our advanced MEMS probes provide best-in-class electrical connectivity to our customers' chips.
To maximize our competitive advantage from this acquisition, we've made the decision to more tightly integrate the Keystone team and technologies into FormFactor with an exclusive focus on enhancing FormFactor's development and delivery of the world's leading photonics probing solutions. We believe the exciting growth in CPO, NPO, and pluggables represents the very early stages of widespread adoption of photonics in the broader semiconductor industry. Traditional copper interconnect is reaching physical limits in speed, heat, and energy consumption, and photonics provides a fundamentally more efficient way to transmit data within and between data centers using light instead of electricity. FormFactor's ideally positioned to help lead tests for this new area, as our lab-to-fab strategy has produced a decade-long first-mover advantage paired with key customer and partner relationships.
Before turning the call over to Aric, I want to once again thank the global FormFactor team for continuing to demonstrate remarkable agility and perseverance in navigating the current challenging supply environment, quickly resolving internal and external constraints to again grow in the third quarter. With our recent qualifications and Farmers Branch coming online, we are well-positioned to accelerate our growth as test intensity and complexity continue to rise at the intersection of high-performance compute and advanced packaging. The midpoint of our fourth quarter outlook puts us on track to exceed $1 billion of revenue in 2026, and we are excited to cross this important milestone for FormFactor on the way to the $1.6 billion revenue level and $5 of non-GAAP earnings per share of our target model. Aric, you are up.
Thank you, Mike, and good afternoon. Q3 was another strong quarter for FormFactor. We delivered non-GAAP gross margin of 56.5% and non-GAAP earnings per fully diluted share of $1.04 on our fourth consecutive quarter of record revenues. Revenue levels close to 40% higher than the same quarter a year ago. These results continue the operating story we discussed last quarter, addressing broad-based demand by driving higher output from our existing manufacturing footprint through improved cycle times, yields, and operating efficiency. Revenue increased 9% sequentially, while non-GAAP operating expenses fell by approximately 250 basis points as a percentage of revenue. Combined with record revenue, these improvements produced strong operating leverage across the P&L. Non-GAAP gross margin increased 320 basis points sequentially to 56.5%.
Approximately $10.5 million, or about 380 basis points of benefit resulted primarily from tariff refunds and favorable sub-component costs in our quantum business that are not expected to recur. Excluding these items, non-GAAP gross margins would have been between 52.5% and 53%, about 150 basis points above the baseline described last quarter. This durable improvement in baseline non-GAAP gross margins is the result of continued improvements in labor performance, manufacturing spending, yields, and other production costs.
We now view around 53% as the gross margin baseline at Q3 volumes. Over the course of the Farmers Branch ramp in 2027, we expect leverage from higher volumes and increased operational efficiency to effectively offset the temporary inefficiencies typically associated with new factory ramps. Accordingly, we expect 2027 gross margins to continue at levels similar to the current baseline. Stepping through our results in a bit more detail.
Q3 revenues of $280.5 million came in $10.5 million above the midpoint of our Q3 outlook range of $260 million-$280 million, and were up $22.3 million or 9% from Q2. System segment revenues grew on higher TRITON photonic system revenues, reaching a new record of $59.5 million in Q3, up $11 million or 23% from Q2. GAAP gross margin for the third quarter was 54.7%, up from 50.7% in Q2. Cost of revenues included $5.1 million of GAAP to non-GAAP reconciling items, primarily related to stock-based compensation, amortization of intangibles, and restructuring charges. Details of the GAAP to non-GAAP reconciling items are outlined in our press release issued today and in the reconciliation table available on the investor relations section of our website.
On a non-GAAP basis, third quarter gross margin was 56.5%, 320 basis points higher than Q2 and 100 basis points above the high end of our outlook range. The favorable impact of tariff refunds on gross margins in the third quarter was about 300 basis points, or $8.6 million. In Q4, we expect to receive back the remaining roughly $2 million of tariffs paid under IEEPA, or around 70 basis points at the midpoint of the outlook range. Once these refunds are received, we do not expect any ongoing benefit to baseline gross margins from tariff refunds.
Probe card gross margin increased by about 90 basis points to 55.3%, as higher utilization, improved yields, manufacturing spending discipline, and tariff benefits more than offset the less favorable mix in DRAM. System gross margin increased by more than 10 percentage points to 61%.
About half of the system gross margin improvement from Q2 was driven by record revenue volumes that created significant operating leverage on fixed costs, primarily due to increased sales of our TRITON photonic systems. The remaining improvement came from items we do not expect to recur, as described earlier.
Our GAAP operating expenses were $71.8 million for the third quarter, down from Q2 and down as a percentage of revenue. On a non-GAAP basis, operating expenses were $64.4 million or 23% of revenue, and also down from the second quarter at $65.7 million, or 25.4% of revenue. This approximately 250 basis points sequential improvement in non-GAAP operating expenses demonstrates continued operating leverage despite including increased Farmers Branch ramp costs. Included in Q3 operating expenses were $6.4 million of pre-production ramp costs. We expect these expenses to transition to the cost of revenues as capacity expansion phases are released to production.
GAAP net income for the third quarter was $73.8 million, or $0.93 per fully diluted share, up from GAAP net income of $56.2 million or $0.71 per fully diluted share in the previous quarter. The increase was driven primarily by higher revenue, higher gross margin, and lower restructuring-related costs. Third quarter non-GAAP net income was $82.3 million, or $1.04 per fully diluted share, up from $65 million or $0.82 per fully diluted share in Q2. About $0.09 of EPS was attributable to tariff refunds in the third quarter. The GAAP effective tax rate for the third quarter was 15.5%, and the non-GAAP effective tax rate for the third quarter was 17.6%. Moving to the balance sheet and cash flows. We delivered free cash flow in the third quarter of $64.8 million, compared to $52.6 million in Q2.
This increase in free cash flow was driven primarily by higher cash flows from operations, partially offset by higher cash spent on CapEx for Farmers Branch. Cash flows from operations were $104.3 million in Q3, up $42.5 million from Q2, driven primarily by higher net income, partially offset by working capital investments to support the higher operating levels. At quarter end, total cash and investments were up $50 million to $399 million. Our capital allocation framework remains unchanged. Cash will be used to reinvest in the business, pursue targeted acquisitions to expand our served markets, and to execute share repurchases with the objective of offsetting dilution from stock-based compensation. During the third quarter, we did not repurchase any shares, and at quarter end, $70.9 million remained available under the $75 million repurchase program authorized in April 2025.
As Mike mentioned, at the beginning of the current fourth quarter, we announced a collaboration with Teradyne. This included a $300 million investment in FormFactor in order to formalize our partnership and reinforce the open ecosystem for probe card and ATE solutions. The areas of partnership closely align with the growth areas in our target model and are intended to accelerate development of solutions for our mutual customers.
This investment strengthens our balance sheet but does not change our capital allocation priorities. With respect to investing in the business, the Farmers Branch ramp to initial target capacity remains on track, if not slightly ahead of our original schedule. Due primarily to optimization of timing of capital spending and favorable payment terms, we now expect 2026 cash CapEx for Farmers Branch to be between $100 million and $110 million, below our prior estimate of $140 million to $170 million.
Importantly, this simply reflects changes in timing of cash rather than a change in scope or velocity of the ramp, as project commitments and total project costs associated with the initial target capacity remain aligned with our original plans. We expect the associated cash spending to shift into 2027 as we continue executing the ramp and the expansion of the site, and we expect capital investment in Farmers Branch to remain at similar levels in the next year. Exiting 2027, we expect Farmers Branch will have the capability to produce about $400 million in annual probe card revenue, and we expect that capability to ramp over the course of 2027. Pre-production ramp costs are currently recorded as a component of G&A, and we continue to expect $25 million to $30 million of Farmers Branch pre-production expense in 2026.
As we begin production, costs will move from operating expenses into cost of revenues. We expect to see this begin in Q4, with about $5 million of startup costs planned to move from OpEx to cost of revenues in the quarter and another $5 million remaining in OpEx, the latter related to capacity expansion phases not yet released to production. Turning to the fourth quarter non-GAAP outlook.
We expect revenue of approximately $285 million, plus or minus $10 million. At the midpoint, we expect non-GAAP gross margin of 54%, plus or minus 150 basis points. The expected Q4 non-GAAP gross margins are better than the baseline gross margin of 53% described earlier, primarily on tariff refunds, better mix, and higher volumes. At the midpoint, we expect Q4 non-GAAP operating expense of approximately $69 million, plus or minus $2 million, including Farmers Branch ramp costs.
Our Q4 non-GAAP effective tax rate is expected to be within the range of 15%-19%. Non-GAAP earnings per fully diluted share for Q4 are expected to be $0.95, plus or minus $0.09. A reconciliation of our GAAP to non-GAAP Q4 outlook is available on the investor relations section of the website and in our press release issued today. Q3's results and our Q4 outlook demonstrate the operating leverage available when strong demand is combined with an efficient cost structure and disciplined spending. We are continuing to produce more from our existing footprint through better cycle times, higher yields, and improved resource efficiency, even while investing in Farmers Branch to create the capacity and structural economics required for the next phase of growth.
Our position at the intersection of high-performance compute and advanced packaging provides broad exposure across the AI compute architecture, from HBM paired with advanced GPUs, CPUs, and custom ASICs to emerging co-packaged optics and other photonics applications. As we have demonstrated, the underlying operating model is substantially stronger than it was a year and a half ago and positions us well to deliver against our target model of $1.6 billion in revenues at 55% gross margins and $5 of EPS. With that, let's open the call for questions. Operator?
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. To remove yourself from the queue, press star one one again. Please limit yourself to one question and one follow-up to allow everyone the opportunity to participate. Please stand by while we compile the Q&A roster. Our first question comes from the line of Krish Sankar of TD Cowen. Your line is open, Krish.
Yeah. Hi, thanks for taking my question. I have two of them, Mike or Aric. First one, Mike, you mentioned that calendar 2027 gross margin is similar to the current baseline, which is 53%. I'm just wondering, I understand you have Farmers Branch ramping up. Are there any other headwinds to think about, or why wouldn't margins get better as volumes ramp next year?
Yeah, thanks for your question, Krish. I'll take this one. This is Aric. So we stated that we expect at current operating levels that our baseline gross margins are now at 53%, and that's up from the 51% to 51.5% we discussed last quarter. Of course, with any ramp of a production facility, you're going to have some inefficiencies, and that's associated with headcount additions and other spending that's required to support the ramp as you're ramping up capacity. What we expect to be able to do, and one of the planned potential successes of our strategy, is that we expect to be able to effectively offset that investment with associated increase in volume as well as efficiencies, similar to the ones that we've been driving over the last year and a half.
While you would typically see a degradation in gross margins as a result of a ramp, we think we can largely offset those potential inefficiencies that are temporary in nature and sustain the current operating levels.
Got it. Thanks for that, Aric. Then a quick follow-up for Mike. Mike, I think you had pretty good tracks in the past on HBM. Just two-part question on it. One is, how do you think about all this chatter about HBM de-specing? How would that impact you? The part two version of that is, if we do more, lower the signal requirements or the pin speed requirements for HBM, how would it impact probe card intensity? Thank you.
Yeah. As you said, Krish, two parts to that. That HBM, it continues to be a major driver for our business, both here through 2026 and into 2027. On the de-spec, we are really not seeing any significant impact. To orient everybody, we do see third quarter HBM revenue down, but that is primarily a result of customers shifting mix. With the HBM4E and HBM5 design funnel we have and the forecast we have from customers, we expect continued strong growth in HBM. I will remind people that one of the places where we are really strongly differentiated is in the final stack test. Of course, this HBM de-spec involves more completed stacks with fewer die at each stack. We are moving from, for example, 12 high to 8 high.
This is potentially hard to account for all the moving parts, but we do not see any significant headwinds associated with HBM growth associated with the de-spec. On the speed question, if you look at the roadmap, the move from HBM4 to, as I said, we are working right now on initial designs for 4E and 5. That continues to be an advancing roadmap with higher speeds, and that has also been a place where FormFactor provides strong differentiation for our customers. High speed test performance, so they are guaranteeing to their customers they are meeting their test specs, with high productivity and high parallelism from our SmartMatrix DRAM architecture.
Thanks a lot, Mike. Super helpful.
Thank you. Our next question comes from the line of Craig Ellis of B. Riley. Your line is open, Craig.
Yeah, thanks for taking the question. Mike, I wanted to follow up on some of the comments around Foundry & Logic, given the strength we saw in the business. First, can you go into a little bit more detail on some of the things that were driving the sequential growth in the quarter? I think you indicated that you expected the business to grow again in the fourth quarter. Is it similar drivers? Is it new drivers? As you comment, can you help us understand the degree to which traditional x86 server strength is benefiting the business, in light of the fact that Micron was out there less than a month ago talking about high teens growth this year and next?
Yeah. Foundry & Logic, as you know, up in Q3, right around 10%. As I said in my prepared remarks, we expect Foundry & Logic to grow again in Q4. One of the key features of this growth, key drivers of this growth, is CPUs for presumably agentic AI use cases.
This has been an interesting development in 2026, and it is an example where we have really strong exposure, right? Both through historical long-term customer relationship where we have high native share. That customer, almost a 10% customer in Q3 based on this data center CPU strength, and we would expect them probably to appear as a 10% customer in Q4, but also exposure with x86 fabless and Arm CPU features. As that business continues to grow, nice exposure. It is one of the key drivers for Foundry & Logic right now.
That's really helpful. Thanks, Mike. The follow-up is on the systems business. You've been real clear this year we should expect strength in TRITON. It seems like it's coming in even stronger than we expected six months ago, maybe even three months ago. As you talk to customers, what are they signaling about the durability of the strength we're seeing today as we look through the fourth quarter of this year and into calendar 2027? Thank you.
Yeah. TRITON and Photonics has been one of the real highlights for us in 2026. It's been a set of investments we've been making for the better part of a decade. As you noted, we've accelerated our expectations now to north of $30 million in TRITON revenue for 2026 after starting the year at between $10 million and $20 million. Customers continue to be very bullish. It is still really dominated by one ecosystem, at least on the CPO side. As I mentioned, in the prepared remarks, one of the other things we're seeing is some diversification, where we're seeing adoption in NPO applications and some pluggables applications as well.
In pluggables, not necessarily the TRITON system, but a derivative technology. There's a focus area where we expect continued growth. Photonics is such a compelling solution for the power and energy challenges that the industry face.
It's really a question of when and not if, and we're seeing the early innings of that when really take place here in 2026 into 2027.
Very helpful. Thank you.
Thank you. Our next question comes from the line of George Brown of Deutsche Bank. Your line is open, George.
Hi, guys. Thanks for taking my questions. Just two from my side. Firstly, on the GPUs and maybe the ASIC side, I think you said in your statements that you shipped products for the GPU in this quarter, but I think your most of the step up in your sales to TSMC, which is again, a sort of over 10% customer, it sounds like it is mainly from TRITON or the CPO stuff rather than maybe less so the GPU.
So how should we think about the GPU sort of contribution in Q3 and into Q4, and also as we go into calendar 2027 with more capacity coming online? And I guess in a similar vein, on the ASIC side, are there any updates here in terms of qualifications? I know last quarter you talked about the Google TPU likely requiring advanced MEMS at some point.
Any update there as well? And then I have a second.
Okay. Let me see if I can parse. There was a lot in that question. Let us start with the GPU. We did say in the prepared remarks that we shipped probe cards for a single GPU design to the world's leading foundry in multimillion-dollar quantities. And this is the very early part of us becoming a key part of those projects annually.
We are well-positioned to grow that business and start to take significant share in calendar 2027. And that is a key feature of our growth. Similar for custom ASICs, right? We have qualified, shipped multiple units, but we are really constrained essentially by our ability to produce in volume. And that is why Farmers Branch, getting that ramped up, as Aric described, is the number one priority for the company. Get ourselves very well positioned, whether it be GPUs, x86 fabless CPUs, custom ASICs, customers need our technology.
This advanced MEMS technology is a key enabler for high-performance compute, getting the capacity online to go deliver that top priority for the company, and we are executing really well on that as fast as we can.
Perfect. Thank you. Following on from what you said in terms of capacity, we are hearing more from your peers about accelerating capacity additions, really sort of doubling down here to ramp as fast as possible. I think Advantest said this morning they are accelerating their plans to double their capacity on the logic test equipment side and hinted at doubling again over the midterm. Just wondering how much flexibility here you guys have in terms of accelerating the ramp at Farmers Branch into 2027, maybe into 2028. Because I think there are multiple phases you have, I think phase 1 to phase 3. Obviously the injection from cash from Teradyne, I wonder if that helps, I guess is my question.
Yeah. I think, as Mike shared, this is our number one priority as a company right now, is making sure that we bring up the capacity at Farmers Branch as fast as possible, but within the context of making sure we preserve our quality and we do it the right way. I provided an expectation of where we think we would be able to exit 2027 at about $400 million of capability. That is framed on a variety of potential scenarios, and that is one that we think balances the risks with our execution ability.
We feel really good about the team that we have working on this. It is a team that has done this before. They have demonstrated their ability to deliver over the past year and a half on the cost improvements that we have been working on. So we feel really good about where we are at.
Maybe the additional point I will add here is that Farmers Branch is really a platform for us to build on going forward. By definition, it is flexible. That is one of the basic tenets around that site, is we want to make sure that we can add capacity in a modular fashion as we move forward and as the demand environment dictates. In the ramp phase, we have got plenty to do over the next 12 months. So, I think it is a good balanced view, what we put out there in terms of our potential exiting the year, and then moving beyond that into coming years.
Perfect. Thank you so much, guys.
Thank you. Our next question comes from the line of Matt Prisco of Cantor. Your line is open, Matt.
Yeah, thanks for taking the question, guys. I guess to start off, just to follow up on Farmers Branch there, how should we think about the linearity of that ramp throughout 2027? And do you expect to have the demand to fill that fab completely as it ramps to that $400 million annual run rate capability exiting 2027?
Yeah, I think, so I'll just reiterate, we expect to be able to exit the year at this $400 million annual run rate capability. That's a capability at exit, not necessarily the revenue. The revenue's going to be dictated by the timing of demand, as you state. Now, the current demand environment is clearly very strong. So I think our thinking right now is that capacity is the limiting factor, and that is why it's the number one company priority that we're focused on.
And then that linearity through the year, should we expect that to be even back half of the year?
Yeah, sorry. Then, I think the linearity is, it's a fair assumption to assume it roughly linear. Now, there could be puts and takes as things shift around in the schedule. But I think as a mental model, that's a fair way to think about it, starting at something close to zero and ramping up over the course of 2027 to the $400 million worth of annual capacity.
Got you. Then as my follow-up, just going back to gross margins, can you give a little more color on what's driving that two-point increase in the baseline? Then maybe the headwind at Farmers Branch, that early ramp you expect, can you quantify that headwind at all through 2027 so we can start thinking through, once we're at that full run rate, what kind of tailwind we can expect from that facility? Thanks.
Yeah. So the increase in the baseline gross margins is driven really by the same things that we've been seeing over the past year and a half. It's cycle times, it's yield, just improving our efficiency in our existing footprint. We're getting more out with the same amount of resources, and that's driving up our gross margins because it's driving down our unit cost. That's really what's driving that, once we exclude those non-recurring items. As it relates to 2027, we haven't quantified the pluses and minuses over that timeframe, mainly because it's a false sense of precision. But we are committed to, when we exit the year, after we have completed that initial ramp, that it will be accretive to the gross margin levels we see today once we're at that initial capacity.
Thanks, guys.
Thank you. Our next question comes from the line of Elizabeth Sun of Citi. Please go ahead, Elizabeth.
Thank you. Thanks for taking my question. I guess my first question is also on the Farmers Branch. I understand you are trying to ramp as fast as possible throughout next year, but I'm just curious, for the near term, it seems like capacity's becoming more of a constraint on the growth. It seems like Q4 is kind of constrained on that as well. So I'm just curious, as we go into Q1 next year, how much longer does the capacity continue to be a headwind or a constraint? And it's just how fast you can ramp in Q1, for Farmers Branch, so that it doesn't become a constraint.
Yeah, I agree that we're starting to see more and more tightness in our ability to produce. We're operating at the limits of what our current footprint can do, and as you correctly noted, maybe just we've managed to squeeze out significantly more production over the course of this year, from the beginning of this year to the end of this year. And that's driven through these process improvements, these efficiencies that we've driven, really the same footprint.
We've squeezed that orange multiple times now, and it's getting harder and harder to get more out of that. You can see that in our outlook for Q4, where our incremental guide up a little bit less than maybe the prior quarter, what we were able to achieve. So you're correct in your statement that we are starting to see those limits.
Farmers Branch is, of course, the relief valve for that. I will just go back to what I said previously, is that we expect that capacity to come online effectively linearly over the year to that $400 million ending exiting capability.
Okay, got it. On the gross margin side, I think Aric talked about, or Mike talked about there is structurally increasing gross margin in DRAM side. There is cost programs you are executing. I am just curious right now, is there any pricing element in that gross margin improvement for DRAM overall, and also how far is DRAM gross margin away from FormFactor Logic right now?
Elizabeth, this is Mike. I will take that. What we did note, and just to orient everyone, we delivered again record DRAM revenue. At the same time, delivered record
We are near record company gross margins. That is something you would have not seen from the FormFactor of the past, and it goes to these DRAM cost reductions. If I look at the DRAM gross margins and parse them, there is very little contribution from price increases. As we have shared with people in the past, our business model is really about delivering value to our customers and then getting compensated for that value. So we are not running a commodity business here. There are situations where an expedited delivery or a capacity reservation is valuable for our customers, and they are compensating us for that, but it is not the prominent theme associated with DRAM gross margin improvement.
Thanks, Mike. Thanks, Aric.
Once again, to ask a question, please press star one one on your telephone. Again, that's star one one to ask a question. Our next question comes from the line of Charles Shi of Needham. Your line is open, Charles.
Hi, good afternoon, Mike and Aric. Maybe want to push you guys a little bit more on the Farmers Branch gross margin. Understand that during the ramp there's always offsetting factors, but in a steady state, let's say once Farmers Branch is fully ramped, you're in a steady state, there's no ramp cost-related headwinds left. I'm sure you know the cost structure of that new facility, and what would be the steady state gross margin accretion to the overall FormFactor, if you can shed some light into that would be great. Thank you.
Yeah, I think, over the longer term, what we're seeing in terms of what we've been able to achieve so far this year as an example, and as we head into the ramp of Farmers Branch, is very close alignment to the target model that we communicated earlier this year in terms of operating leverage and the sort of gains that we're able to drive as volumes increase. I think that continues to hold as we exit the Farmers Branch ramp. And the target model did include the investments required to build out effectively the capacity to support the $1.6 billion revenue level. So I think looking at the target model profitability is a good guide for you beyond next year.
Okay, thanks. Maybe a question for Mike. Mike, the TRITON system revenue, if I understand correctly, from last year to this year, based on what you just said, north of $30 million, it is approximately 4x of last year's level. Obviously, this is probably still a small part of the FormFactor business, 3% or 4% of the total, but let us say you have had franchises in the past that you can grow multiple times in a short amount of time, like HBM franchise, right? Do you have the capacity in place, let us say that the TRITON system demand can do another 3x or 4x or even higher going into next year? With all the attention on Farmers Branch, that seems like a probe card facility. Anything you are doing on the system side? Thank you.
Yeah. TRITON really has been a great growth story for us in 2026. As I mentioned earlier, it is really the result of many, many years of investment and partnership with some of the driver customers. In 2025, it was zero revenue. So it has gone from zero to $30-plus million here in 2026. When you look at how we manufacture the TRITON system, it is a little less internally focused and more externally focused on different subcomponents.
We are basically integrating and assembling some subcomponents, and so it is not quite the capacity constraints that we have in what is a pretty vertically integrated business in probe cards. All of our growth forecasts, even at the high end, remember we talked about this being a $400 million served market in 2030, showing good progress this year to start to move on the way there.
We expect the same in 2027, and we do not expect capacity to be a constraint on the growth of that business.
Thank you. Our next question comes from the line of Brian Chin of Stifel. Please go ahead, Brian.
Hi there. Good afternoon. Thanks for letting us ask a few questions. Hey, Mike. In the past, when TSMC has bobbed its head over 10%, that is, I think, two quarters in a row. The business was $100 million below the run rate you are at now, so call it $190 million or $180 million versus $280 million now. Historically, the composition of that business, there has been certainly a bias towards things like mobile processors, et cetera. That kind of historic larger part of the TSMC Foundry & Logic business, is that kind of a similar size and kind of all the incremental growth from 10% at $180 million versus 10% at $280 million, is that all coming mainly from custom ASICs, or how would you describe how the composition of that TSMC business has evolved?
Yeah. It is actually a microcosm of how we have driven our larger growth strategy at the company. There is multiple components to it. As you note, historically, that business was anchored in essentially mobile application processor ramps, broadened out a little bit as high-performance compute started, broadened out a lot this year with some more high-performance compute and different projects, and we have also got the TRITON system there now as well.
So a broader-based set of opportunities with that customer, again, an almost perfect parallel to the way we are driving growth and diversification for the overall company, where we have got exposure to multiple different opportunities, making sure that when those opportunities hit, we have got exposure to them. I think, the business with that customer, again, a perfect microcosm of how we approach driving the overall growth strategy for FormFactor.
Okay. That is helpful. Then, in terms of the initial waves or batches of products that you start to bring up in Texas in the new probe card facility, is there a bias towards just new customer designs straight into Texas? Or, is there some sort of balance there between products that maybe you are transferring out of Livermore and moving there? What is kind of the thought process on what kind of-
Yeah
batch lead offs?
Yeah. That gets pretty in the weeds, but let me try and give you some of the themes for it. We are initially ramping assembly and test for our Foundry & Logic products, and we will be adding the MEMS front end for Foundry & Logic products in 2027. That frees up DRAM capacity at Livermore.
The set of customers served out of Farmers Branch primarily, well, not primarily, exclusively Foundry & Logic customers. Within that set, we are obviously optimizing things for speed to ramp. If customers want a lengthy, detailed qualification process, well, maybe they are going to be closer to the end. We want to make sure we are utilizing that capacity as aggressively as we possibly can. One of the earlier questions about us being capacity constrained, we do not want that capacity sitting idle while customers decide whether they are going to qual or not.
There is very much a bias, whether it be new customers or existing customers who have a practical but aggressive qual plan to get them into Farmers Branch first.
That is pretty helpful. Then maybe in terms of the comment that things are going a little bit ahead of plan, is that in terms of your initial view of how that engagement is going with your customers? Is that kind of the learning curve on training new employees and hiring them? Is that the availability of the equipment sets?
Yeah. It is really a reflection on the expected revenue shipment timing. So we initially expected the first revenue outs to either be at the very, very end of this year to the beginning of 2027. As Mike mentioned in his prepared remarks, we shipped our first card in the last couple of weeks. So that is the acceleration that we are seeing. That said, the other areas that you mentioned, such as workforce, et cetera, also seem to be going well. Again, we have got a really good team working on this. I think we are continuing to tick through the milestones at a good pace.
All right. Sounds good. Just be careful lifting those cards in the factory. That's it for me. Thanks.
Thank you. I would now like to turn the conference back to Mike Slessor for closing remarks.
All right. Thanks, everybody, for joining us today. An exciting time for FormFactor. As I said in the prepared remarks, our guidance implies going through $1 billion of revenue this year for the first time in company history. We've got a bright future in front of us with Farmers Branch coming online. Thanks for joining.
This concludes today's conference call. Thank you for participating. You may now disconnect.