FormFactor, Inc. Aktie

All right, everybody. Why don't we get seated and get ready. We're at the top of the hour. We're going to kick it off with a short video. Enjoy the show.

[Presentation]

Thank you, everyone, and welcome to FormFactor's Investor Day here at the Nasdaq market side at Times Square. My name is Stan Finkelstein, and we have a great agenda for you today. We have a great lineup of speakers. We're going to kick it off with our President and Chief Executive Officer; Mike Slessor. Mike will outline his vision for the business for the next 3 to 4 years. After Mike, we're going to have Sudhakar and Jens cover their respective businesses. Sudhakar runs our Probes view, Probes business and Jens runs our Systems business. Both of them will cover strategic priorities they will focus on long-term growth opportunities for their businesses as well as some of the operational initiatives, more near-term focused operational initiatives.

Then we'll take about 5 minutes break. After the break, we will have our Chief Commercial Officer, Aasutosh, keep it off with customer perspective. It's all about the customer. Aasutosh will hand it off to me, the Head of our Global Operations and Missy will cover both some of the important operational initiatives that were implemented over the last year or so, that resulted in very significant improvement in our financial performance. As well, she will provide an update to Farmers Branch expansion, our capacity additions and some of the very innovative ways that her team is approaching this capacity expansion. And after Missy, we will hand it off to our Chief Financial Officer, Aric McKinnis. He will provide a view of our financials, talk about capital allocation and closes off with our target model.

Before I hand it off to Mike, I want to bring your attention to forward-looking statements and GAAP to non-GAAP financial measures. And as he helps this slide on the background, I want to run through a couple of housekeeping items. So first, the presentation itself will probably take about hour forty-five to hour fifty minutes. We will take a break in between, and then we will have an hour for questions and ask for us. Unfortunately, we will only be able to take Q&A or take questions from people in this room. So for those of you online, I apologize. But obviously, you're welcome to stick around and listen to Q&A part of the presentation. We will have Crystal and Kelley who will join us later handle all of the mics. So if you guys have a question, raise your hand, you'll get a mic. Please keep your questions to 2 or 3, so we will have broader participation. And the last point, this presentation will be available on the Investor Relations section of our website. It will be posted right after we are done here today. And again, welcome, and thank you for joining us.

I'll hand it off to Mike now.

Thanks, Dan, and thanks to all of you for joining us for a few hours today to learn some more about FormFactor and the bright future we have had. I'm Mike Slessor, FormFactor's CEO. I've held that role since 2014 after joining FormFactor as part of FormFactor's acquisition of MicroProbe back in 2012.

I'm going to start with the punchline today. By 2030, we plan to double FormFactor's revenue and through operating leverage, more than double our non-GAAP earnings per share. We're going to do this by executing at a unique position that we've created, the intersection of high-performance compute and advanced packaging, 2 of the most powerful trends ever in the semiconductor industry. From that position, that unique position at the center of high-performance compute and advanced packaging, we're redefining as possible, redefining what's possible in terms of technology, in terms of products, in terms of scale, in terms of operational execution and of course, financial performance. Our plan is built on 3 foundational themes. First, starts with customers, focusing on building sustainable long-term relationships as a leading supplier to the top customers in the industry. And I'll get back to that in a minute and explain why it's so important in our business.

Second, continuing to build and grow our diversified position as a leader in wafer test, creating scale and a diversified set of revenue streams, both organically and through M&A. And then finally, realizing the benefit of that position of scale at the center of these 2 trends with a really renewed capability and focus on the ability to operate and execute at a world-class way. Today, our team is going to share how we get there and why forms a compelling investment opportunity.

I want to start with already motivated the idea that we're a key player in enabling high-performance compute. Let me do that by mapping our major products into a high-performance compute module or chip. So you see this thing at the center. I think everybody is familiar with the architectures by now, high-end compute logic devices like GPUs and custom ASICs at the center surrounded by high-bandwidth memory, a variety of networking and interface chips, some bridges and interconnect that tie all this together and in the very near future, nearly the present, co-packaged optics, which fuses photons together with electrons and allows the industry to take the next step forward.

So let's take our products. Starting on the left here, probe cards. Now we're the world #1 leader in probe cards and have been the #1 leader for well over a decade. We operate in both DRAM and Foundry and Logic probe cards up at the top, our DRAM architecture, which has been the real growth driver for our leadership in high-bandwidth memory. Down the bottom are Apollo Foundry & Logic Probe Cards. These got their start in applications like PC and mobile. You've now seen recently us extend that application space to networking and moving on to GPUs and custom ASICs. We're the only supplier of scale in both foundry and logic and DRAM probe cards. And that gives us the ability to create synergies, technology synergies and the basic R&D we use for things like the advanced MEMS probes that Sudhakar's going to share with you.

It gives us operational synergies and giving us more scale and more leverage operationally. And as you'll see in the future, as certain applications like custom HBM start to dominate the landscape, this fusion of DRAM and foundry and logic or logic IP on a chip, we're uniquely positioned to capture that opportunity.

Probe cards are an interesting device, an interesting product in that they are a device-specific consumable, probe cards are specific to each customer chip design. And so when a customer changes a mask set, no matter how subtle changes the die size, changes the specs, that means new probe cards and it drives a fundamentally different demand characteristics in our business than capital equipment, even capital equipment that operates very close to us like ATE. This is why we call it a design-specific consumable. And it's one of the very unique flavors of the probe card business and as I'll get to some of our competitive advantage.

Shifting over to our Systems segment. Jens is going to share with you how we're advancing the system segment with respect to serving co-package optics. This is an area that's a perfect example of our lab to fab strategy and the benefits of that strategy. We've been working with leading customers for almost a decade on silicon photonics, co-packaged optics and various photonic-based applications. We've taken that learning, that codevelopment, the refinement of the technology, again, working with key customers and now driven it into a production-worthy platform, collaborating with Advantest and Tokyo Electron.

And as I noted on the last earnings call a couple of weeks ago, we're now beginning to see the acceleration of production adoption here. The point is you can't get on this train right now. We had to be on this train a decade ago, working with leading customers on some real fundamental challenges associated with integrating optics into the overall production testing scenario. So you can see across all of the major applications driving high-performance compute. Each of these pieces of silicon that are essentially the engine room of generative FormFactor has a strong and relevant position.

Backing up for a minute and talking about how we got here and where we're headed, I talked about customers. And you see some names across the top. These are customers that have recently been in our SEC reports as at least 10% of revenue. This is a set of names that we're proud or leaders in the industry. And we work with these customers every day not just in serving their production requirements but in serving their next-generation R&D requirements [indiscernible] strategy. It's critically important. We have essentially -- not essentially, the largest R&D budget in our served markets. And these customers every day help us prioritize what we're working on, how we're developing it because the industry is moving so fast, they don't want to leave anything to chance,; right? They're dependent on our technology road map execution and then operational execution to get to their next challenge. And that's why these durable long-term customer partnerships are so important for our success.

I talked about expanding, growing and diversifying the business. We've done that both organically. You'll see some examples in a minute, but also through M&A. And here's a list of some of the major M&A events in company history. These have both been strategic acquisitions, but we also hold ourselves to the bar of them being financially accretive transactions. The most recent one we did at the end of 2025 was the acquisition of a small company called Keystone Photonics, who has an innovative optical probing technology that we think is a key enabler for driving the CPO road map forward.

A couple of milestones or a few milestones here. I won't talk you through all of them. But again, this notion that engaging early with these key customers in long-term partnerships is central to success. We shipped our first HBM probe card to our -- who's now our #1 customer in 2012, the year I joined FormFactor. We've worked with them and other DRAM customers to optimize this technology where it's now capable of astounding things in serving HBM4 and 4E and in the future onto HBM5. So Docker will touch on how this architectural development has occurred and why FormFactor has a competitive advantage that will continue to persist in this important market.

Same story from silicon photonics. And Jens will walk through the time frame associated with that and some of the key milestones is we're poised on the brink here of scale -- production at scale for CPO. The point again here is this is a multiyear, almost a decade engagement in refining the technology together with some of the customers you see on the top line. The other major milestone that I want to draw your attention to is a few years ago, we decided we had to change the organizational structure and some of the leadership of the company. You see -- you're going to hear from some of these leaders that we've added as part of FormFactor's executive team today. But this was a really fundamental shift from the organizational structure and people that have led FormFactor to that point. And it's basically responsible for the dramatic improvement in financial results we've had. The underlying financial results -- or the underlying operational results have improved similarly.

As we look ahead, we're making some very large investments this year in Farmers Branch. Missy is going to walk us through how we're doing that, right? Why it's going to drive some of the attributes of the financial model, doubling revenue and more than doubling profitability. But this is a big organic initiative for us. poised at this intersection of high-performance compute and advanced packaging, we've got the company in a very strong competitive position. We also need the capacity and capability to build all of these products. And that's why Farmers Branch and the global operations team is so central to FormFactor's future.

I want to come back and motivate the other side of this equation, advanced packaging and why it's important for a semiconductor test company. It's not obvious at first, but again, if we take one of these example, high-performance compute modules, a variety of GPUs, ASICs, HBM, networking, co-packaged optics, each of these subcomponents and the total collection is built using these techniques of advanced packaging, things like TSMC CoWoS, Intel, EMIB. These are the techniques the industry is using, as you saw in that video, to kind of make up for what undeniably is a slowing Moore's Law. It turns out that if you -- and this is true not just in semiconductors, but in almost anything, there's some pretty universal math associated with breaking something apart into its subcomponents.

A little bit of math on the chart, but I want to use one of the subcomponents of this high-performance compute module, HBM to motivate why test and probe are so important in enabling advanced packaging and therefore, high performance compute. We're going to contrast something we did years ago right? And HBM2 probe card for -- to test a 4 high stack, right? This was in the early days with our #1 customer. HBM was just developing and hadn't really required -- garnered the momentum associated with AI. So you take 4 chips, if you have an incoming defect rate of 1%, so of those 4 DRAM die that are coming into the stacking process, let's assume that 1% of them are not going to work, don't work. That results, as you can see on the chart, in a 3% to 4% yield loss in the stacking process. Not a disaster, right? Not great either.

As we move to today in 16 high HBM4, that math compounds the 1% incoming defect rate into a composite defect rate for the stack of something like 15%, an additional 10% yield loss just by stacking higher. And again, this is simple universal math. In addition, you can imagine that the HBM4 16-high stack is a lot more valuable than the 4 high HBM2 stack, a bunch of advanced node silicon A lot of process technology has gone into building this stack. This is an expensive thing to scrap. So we've got a situation where not only is the probability of scrap going up but the cost of scrap is going up. So something needs to be done. That's something is reducing the 1% incoming defect rate. And the way to do that is through wafer probe and wafer test. Screening for something close to what's been called known good die in the industry. And if you do that, you can move left on this curve and work your way back up right, to higher yields after the stacking process. That's why wafer probe and wafer test are so important in enabling advanced packaging.

And of course, the road map has only more of this happening, right? HBM is going to continue to increase, enabled by copper hybrid bonding. Future GPU products go from 1 GPU to 2 GPU to 4 GPU, right? This math is a fairly profound effect on the economics of the industry. And it's why 2 things are happening to our business in our business. One, what we call test intensity is going up. Test times are longer, more probe cards are required. Basically, the chips are being tested across more conditions and with more test vectors going through the park. It also means higher test complexity because each of these chiplets needs to be exercised across a broader process parameter range. If you think about things like speed, things like thermal conditions at different temperatures to make sure each of these chiplets is good before it goes into the stack, driving down that 1% defect rate so that the composite yield goes up and our customers have an economically viable advanced packaging process.

All right. Before I hand it over to the team, I want to kind of map out for you how we're now organized. I said this was a major change for us and give you some background on what these people own in our organization. You can see clearly from the last 3-plus quarters of financials that something has changed at FormFactor and it really teetotalers the people and the teams they've recruited in and the way they're coming together to drive FormFactor towards 2030 and the doubling of revenue. The most recent change is promoting Aric to CFO, right? That happened a little less than a year ago. And what he's done in partnering with me and the rest of the team is make sure there's absolute consistency between our strategic priorities, where we're spending money and how we're executing to make sure we're delivering a financial return on every dollar spent and invested. You can imagine that's critical with us spending the amount we are on Farmers Branch.

If we move to the center, this describes at a high level how we engage with the customers you've seen before. Aasutosh, our Chief Commercial Officer, will walk you through some of the details of that engagement. And the details, we use the word customer intimacy because the idea that we're building customized design specific products is really, really important for how we interact with these customers. Jens and Sudhakar, one of the things we did as part of this reorganization was get our business units and our business unit leaders really focused on developing and defining world-class leading products. And so they're going to walk you through some of the technical advantages that we have and where their focus is on engineering, product development and driving these new products that we codevelop with customers into strong market share positions.

Missy, who joined us about 1.5 years ago has completely revamped our operations. We decided we were going to create a global operations team, getting leverage benefits from the scale we have across all these different revenue streams. And you can see in the recent results, how that's benefited us, especially on the gross margin line. And then finally, Aric will bring us home with the details of our new target model.

Before I hand it over to Sudhakar, I want to frame what we view as FormFactor's durable competitive advantages. I talked about probe cards being customized to each customer chip design. And you can see some examples of how complex these things are over at the table there. To be able to do that on lead times well within a quarter and do it first time right, do it perfectly so that the probe card and probe cards because we're now doing this in parallel, get there on time but work out of the box. This is absolutely critical for success in the industry because our customers are depending on us to be able to ramp on their schedules. And as you've heard from companies like NVIDIA, TSMC, things are only getting faster, right? This idea of speed of light and a 1-year high-performance compute cadence has fundamental implications for a company that has to design and ramp things quickly in scale.

Another piece that's critical to our competitive advantage in probe cards is the MEMS technology. And Sudhakar will walk through that, but it's a foundational proprietary technology that we keep in-house. We've added to that, if I walk you back to our M&A strategy, Keystone Photonics offers an optical probe, which is the analog of these MEMS electrical probes as we move into the era of co-packaged optics and photonics taking a much more prominent role in compute. And then finally, as we're positioned, right, at this intersection of high-performance compute and advanced packaging and really redefining what's possible for FormFactor, we need to be able to build all these compelling products at scale and drive very fast ramps in the overall industry. Those are what I think -- we think, FormFactor's key competitive advantages are, again, as we redefine what's possible for FormFactor. Sudhakar?

Good morning, everyone. First of all, thank you for taking the time to spend with us this morning and early part of the afternoon. My name is Sudhakar Raman. I've been with FormFactor for about 5 years and I've been in the industry for about 25 years, working at various companies like Onto Innovation, Veeco and MKS, which is used to be ESI in the laser world.

As Mike mentioned, FormFactor is strategically positioned at the intersection of high-performance compute and advanced packaging. So what this means is with the demand for higher and higher computational power, we're seeing increasing demands on power and thermal density increasing, while advancements and essentially in the networking space is driving the demand for higher speed performance. So by addressing the thermal and the challenges that we have in front of us, we plan to double the probes business revenue by 2030 by innovating our differentiated advanced MEMS probe technology solutions and delivering differentiated products at scale to our customers.

I want to take a minute here to kind of point out how -- what's the major inflections happening in the marketplace. To the right of the slide that you see here, essentially, we see a pretty -- because of the high-performance compute and the advanced packaging trend that's happening, we see a pretty strong, robust growth in the advanced probe cards market. We're seeing a growth of about $2.8 billion to $4 billion by 2030 and primarily driven by all the major inflections that's happening across compute. When I say compute is GPU and custom ASICs SLS inflections happening in networking and HBM and DRAM. So if I take a moment and focus your attention to the bars, the kind of the size of the bars that you see, the wind of the bars, reflects the size of the market that we see today and continuing to grow in the very high single digits or double digits into the future.

So our plan is to gain market share in all these major growth segments that we are highlighting here. So as you know, we have a pretty good position in CPU, and we'll continue to see the growth that we are going to expect in the GPU and the networking sector. The other interesting trend is, as you see at the top of these bar graphs, what you see is all the different technology trends that's happening, right, whether the trend challenges or speed or whether it's higher parallelism or reduced pitches, but what's unique as you can see, there is multiple trends that are common across multiple segments. Being the leading provider of the probe card solutions, FormFactor has a very unique competitive advantage, having participating in all these major growth vectors. What do I mean by that? So we're able to see the trends across different market vectors and able to apply our innovative solutions strategically across all these areas with speed and efficiency.

Now as an example, as you can see on RF, all the way to the right, we have decades-long market leadership in RF. And RF, as we all know, kind of really lends itself in terms of developing high-speed probing technologies, which we're leveraging and migrating onto the high-speed networking space. And that's where we are starting to continue to see growth. and continuing to see our growing market share using differentiated solutions here. Now I want to take a moment and just kind of walk the audience through what the probe card is. It's very hard to see what exactly does the probe card do because it's kind of the design-specific interface that kind of integrates into an automated test equipment, or ATE, and on to the -- and that efficiently flows electrons and photons to the wafer. So think of it as essentially as a massive apparel high parallelism of lanes on a highway, right? That allows electrons and photons to travel efficiently from the test equipment on to the wafer.

So because each probe card is, as Mike said, it's highly engineered consumable, it's really designed, custom-designed and manufactured to the specific needs of the customer device. So what does this mean and makes to a standard automated test equipment. So what this really means is as FormFactor as a company, we're highly motivated and we encourage and maintain an open ecosystem. That's very, very important for us because we are able to serve the needs of the industry and the customer's road map very, very efficiently.

Now if you see here on the top, it shows -- it's also on the table on the right side is our foundry and logic probe card and in the middle is a DRAM or a HBM probe card with very, very high parallelism. Essentially, this kind of demonstrates the ability that we have to have extremely high parallelism, which is about 2,000 or even 3,000 devices under test and with extreme high density of pin cons. When I say extreme high density of [indiscernible], we're talking about tens of thousands to even 150,000 to 200,000 [indiscernible] that we can develop in a single probe card, that is, again, design specific to the customer's device. On top of it, we manufacture these things at tight pitches.

So just to illustrate as an example, just to give you some compare contrast, a probe card, you can think of it as a single basketball sometimes or even the size of 2 basketballs. But if you really get it down what is the actual probing area where all the needles of some people call it or we call it probes, it's kind of the tip of a pencil. And that's where you are seeing sometimes tens of thousands of pro being manufactured, assembled with very high accuracy and repeatability.

Now the probe itself is actually the size of a human hair. Majority of the hair in this room probably is somewhere between 50 to 75 microns in diameter, right? So imagine the level of complexity that is -- we're manufacturing here as these power requirements and thermal requirements are continuing to increase, we have to design these probes using advanced MEMS probe technologies Mike talked about the proprietary mechanism. Essentially, these are manufactured using standard semiconductor production proven semiconductor techniques like lithography, CMP, chemical and mechanical polishing and advanced plating technologies. Essentially, what this allows us to do is design it in such a way, it has the ability to carry multiple amps of current. The good corollary I can give you is think of your iPhone. iPhone take a few amps to charge, an entire iPhone. We send that amount of current with a single probe across tens of thousands of probes. And it sees somewhere between 100 to 200 degrees C of temperature at the same time. So the ability to withstand these kind of things is where the innovation comes in.

So the point being, the technical barrier to entry is very, very high. So in the subsequent section, I'll talk more about these technology innovations as well as architecture improvements that we're making to address the demanding needs of our HPC ecosystem here. So this slide will now dive into the foundry and logic space. We'll have 2 sections, one on foundry and logic, and another one will get into the DRAM and the memory space. Essentially, you can see here when Mike presented the entire HPC ecosystem, we talked about all the different devices. What we will focus in this section is going to be all around the GPU, custom ASICs, the networking and the co-packaged optics. And as you can see, there are 4 major trends that are driving essentially the technology inflection in this area.

Number one, is essentially increasing power density. What does that mean? So the devices are starting to see, particularly the GPUs, somewhere between 2,000 watts all the way in the future up to 10,000 watts in the device. So what this means is that thermal density is continuing to increase at the per meter square, you're going to see 200-degree -- 200 watts, which means you have to dissipate this heat as the customers are evolving the needs of HPC compute. So that's where it puts the owners on suppliers and companies like us to continue to innovate. Number two, Several of the high-speed test content from final test and system-level testing is kind of shifting left. They want to test every single die as a known good die to mitigate loss which Mike talked about through the HBM example, it applies the same exact logic and composite [indiscernible] applies here as well as in foundry and logic.

Number three, you see those red bars that's connecting different chips. We call it D2D here, die-to-die, Essentially, they are basically silicon bridge. Some people call it. Intel calls it EMIB. That's basically what that is. And it's really starting to have significant adoption both in the CoWoS as well as non-CoWoS architectures, right? And four is co-packaged optics with higher networking speed going from 1 12 to 24 in to 4 48, it's not only demand driving the demand for electrical probing, but is also driving the demand for optical probing. Jens will talk more detail about the CPO and the advances we're making there.

At the end of the day, what does this mean to form. For the past several years, we've been stating that there are 2 major vectors that are starting to drive and it's starting to play out, which is test intensity and test complexity. And it's really starting to play out with HPC and advanced packaging intersection. As you can see here, with the number of devices that need to get tested, that needs to be known, good dies, it's increasing the test intensity, which means more number of electrical probe cards and more number of electrical and optical combined probe cards, electrooptical probe cards as we call it. And second, with the test complexity increasing, it really plays well into our advanced proprietary MEMS manufacturing and technology development where you need to manage the thermal envelopes as well as high-speed with highpin count and high parallelism. So all of them are converging together, which is driving the advancements of these innovations even further.

I'm going to take a moment here and kind of dive a little bit deeper into kind of what are we doing as FormFactor to really future-proof the foundry and logic requirements and the technology inflections that's coming along as part of this whole high-performance compute. So on your bottom left graph that you're seeing here, we picked the 2 major vectors that is driving the technology and the technical requirements forward, which is power, which is translates to thermal and speed. As you can see, the GPU, the HPC compute ecosystem is continuing to drive the advanced MEMS technology, the development. But I want to kind of take a step back and address the custom ASICs piece of it.

Historically, in the past, custom ASIC has been about 2 to 3 nodes technology nodes behind. What does that mean? So it really means the demand for power and speed hasn't been there, which means you can actually cater to those needs of those custom ASICs with essentially what I would call as a medium, mid-end, mid-tier type of MEMS probes. But what we're seeing is the custom ASIC is now starting to be adopted with more of advanced technology nodes like 3-nanometer type nodes, increasing number of transistor cores and density increasing. So the power density is increasing thermal requirements are increasing, pushing the custom ASIC as well into the advanced men's category.

If I shift to the right side of the slide here, Essentially, what you're seeing here on the top right of the slide is what we call the Apollo probe card. On the table, it's that big rectangle 1 that you see. So that's our foundry and logic probe card. You see there's vertical lines that are the advanced MEMS probes that gets integrated into the ceramic plates, which alters are highly engineered with special proprietary coatings that we develop that gets integrated onto a metal multilayer organic is essentially an interposer, which can spread the electrical signals onto a PCV which gets integrated onto the automated test equipment platform. On your right, you're seeing is at advanced MEMS probe examples of a scanning electron microscope SAM pictures of actual how the probe tip looks. That's the size of the human hair I'm talking about. It's actually the tip that actually proves at the wafer pad or the wafer bump onto the customer device, right? And again, these are manufactured using advanced semiconductor techniques like lithography, plating techniques that I talked about.

But I want to kind of drag the attention to the 2 areas of innovation. One is in the power and thermal requirements. So why advancements is important? Because it gives us the ability by using this advanced semiconductor techniques, it gives us the ability to kind of marry or mingle different metals and alloys and come up with composite metals and composite materials essentially doing metallurgy engineering that is specifically designed to the customers' device needs. So this is very unique because and only through semiconductor manufacturing techniques, you can achieve this. This is -- and you can see there on the middle portion of the -- on the MEMS probes that are multilayers that are being developed. So that helps your ability to carry much higher currents and at much higher speeds at the same time. So you're designing in multiple requirements with a single with a single probe or multiple types of probes that are very, very application-specific needs.

The second one is I want to highlight the attention to the bottom right is on the probe card itself as we go beyond the pro tips into the ceramic plates where we are actually engineering new thermal dissipation materials that gets manufactured and coated on to these ceramic plates and that has the ability to dissipate the heat that's coming through the probes so that you increased the uptime and predictability of the yield, binning and the performance for the customer. And the other axis that you see here is the speed. And again, with speed, what you need is extremely high signal integrity, meaning very, very good, clean signal on -- very low signal ratio with very high signal degree needs to happen. So when we do these composite metals, the way we design these probes develop and manufacture it, it has very low impedance, very low assistance path to go through. So -- and again, it's at the tight pictures that the customer needs, whether it's EM-type pitches, or IOs that are much, much tighter pitches.

So those are the 2 major differentiating factors that we continue to evolve as we go from our advanced MEMS to even at future advanced MEMS. And we're pretty confident as we look at the requirements, our MEMS can confidently approach the requirements and even beyond, that's what we go in by future proof. Now switching gears on to HBM, as Mike talked about a multiple different stacks from 2 to 4E. What I want to really highlight here is there are 2 things, again, test intensity and test complexity playing out, as we've been talking about. So when you look at HBM3 to HBM3 to HBM4 or HBM4E, so we're seeing there are a number of stack going up, which increases the number of probe card needs to really test these tacks. So as an example, if I give you, you can think of test times increasing and the test insertion is increasing. So what does it mean to the overall the growth of the market. It increases the test intensity by about 25% to 30% when you go from 3 3 to 4 40. And we're expecting to continue to see the same as it migrates forward.

The other interesting be is test complexity, right? There are 2 areas within the test complexity that's critical to pay attention to. One is our differentiated SmartMatrix architecture provides a need to test at very high speed at very high parallelism. So this is the industry's only production proven platform that is able to test and give the customer the ability to do high parallelism productivity at speed and enables a customer to test hundreds of HBM stacks simultaneously. So that's #1 from a complexity standpoint.

Number two, as you can see, the base die migration from 3E to 4 to 4E to 5, we expect to see there is -- we're starting to see A lot of the hyperscalers and the end customers working with DRAM and HBM makers to integrate more of the logic functionality into the base tie. So that's what they're calling it as custom HBM. And the reason this is happening is really to optimize the AI performance, the power consumption and having the ability to have more space on either a GPU or XPU to have more compute power there. So they're shifting more into the base die of the HPM. What does that do to us? It means we need to start testing logic on a memory-based die along with the memory IP.

So this provides a very unique opportunity to differentiate for us because FormFactor is the only company that has production crew and platforms on both foundry and logic using our [indiscernible] architecture as well as in the DRAM [indiscernible] using SmartMatrix architecture. So with that, as we migrate into the, hey, what is advanced MEMS to for this industry from an HBM DRAM perspective. Again, here, we've picked up a parallelism and speed as 2 major areas. So the same set of advantages plays right here into the advanced MEMS techniques that we talked about. But more importantly, we can tailor the need and the customize these metallurgy and the different metals that we use to address the needs of memory probing, it's memory as in DRAM and HBM probing because for logic, they test a different type of functionality test versus in memory -- DRAM and HBM, it's very high parallelism but speed requirements has to be tested at the same time.

So when you see the smart Matrix architecture on the right side, we have integrated some unique thermal management mechanisms to take care of the needs of the customers different temperature that they want to test at in a single -- certain -- sometimes in a single test insertion.

So essentially, on top of the advanced MEMS, we have also designed in some new thermal anticipation and thermal management into the architecture that gives us a very unique ability to say, customers can test it from either from room temperature to sometimes as high as 175 degrees C without changing the proport for that test insertion. But again, the third one is we talked about the custom HBM migration with the test complexity increasing. What you're seeing on the right side of the TD MEMS that we improve is a 2D vertical MEMS probes, pretty similar to what I showed you a couple of slides ago. And this is where we are starting to see the fusion of 2D MEMS, advanced MEMS technology being integrated into a very high parallelism high-speed testing into the DRAM HBM-based eye architecture. So this gives us a very unique opportunity, again, to differentiate and continue to grow our market share and grow our revenue.

So kind of in summary, we talked about the test intensity increasing, driven essentially by the HPC and advanced packaging intersection, expanding this addressable market, SAM, as we call it, with the test complexity, both in foundry and logic, where the thermal and power are driving the needs for differentiated solutions and in HPM where there's a fusion of both with a custom HBM logic and memory IP are being fused together to test it gives us a unique opportunity for farm. And lastly, we also are seeing a new vector of growth, which is the convergence of electrons and photons and co-packaged optics. So this is going to be driving the need, which Jens will be talking about of how we're going to continue to evolve that market across multiple test insertions.

Kind of in closing, it's increasing test intensity and complexity in the HPC architecture. We believe our continued focus on developing and manufacturing differentiated and innovative solutions at scale. We'll layer down the foundation to double our Probes revenue by 2030. And now we will be in a position to kind of continue to further along on the technology evolution.

With that, I would like to thank you. I would like to introduce Jens Klattenhoff, who's our General Manager of our System Business Unit, who will talk about the CPO.

Good morning. Thanks for joining us today. As Sudhakar already said, my name is Jens Klattenhoff. I'm with FormFactor since 2016. And since 2021, I'm running the systems view as the Senior VP and General Manager. My background is in laser technology, which is a pretty good fit for co-packaged optics and silicon photonics. In my career, I worked for several optical measurement companies like Polytec and Baumer before.

So we are redefining what's possible. FormFactor is the global leader for wafer level test systems, and we are extending this leadership to a new era of computing. Over 3 decades, the systems business, formerly known as Cascade Microtech, which was acquired by FormFactor in 2016, builds his position in foundational markets like RF testing for mobile and connectivity devices, DC testing for logical and mixed signal devices and high-power testing for automotive semiconductors. Today, this industry is shifting. Advanced networking and high-performance computing are driving new demands for higher bandwidth and lower power consumption as well as rapid scaling for artificial intelligence and next-generation data centers. This shift is a structural growth opportunity for FormFactor when silicon photonic is moving into the high-volume manufacturing for the first time.

Our technology leadership, the global scale and the customer relationship we have with all leading co-package optic customers are -- positions us to set the standards for optical testing in this area. In the next couple of slides, I would like to show you how co-package optic will change our systems business, how FormFactor is well positioned in this market. and how our strategic partnerships will help us to make this shift happen. By 2030, we are actually planning to double our revenue within the Systems segment.

And I'd like to show you how co-package optic will be the engine of our growth. Traditional interconnects, electrical interconnects have fundamental limits. As data rates scale, couplings can't provide the required bandwidth and the power efficiency, which is required for hyperscaling computing and AI. Co-packaged optic will solve this. New architectures like TSMC's Coup technology are actually integrating optical IOs into the package close to the compute die. Leading platforms like NVIDIA's Quantum-X switches are already using this technology and switching to co-package optic designs. This creates a complete new opportunity for FormFactor.

As I said, when co-packaged optic is moving from design to high-volume manufacturing. As Mike and Sudhakar already talked about advanced packaging, advanced packaging is critical in advanced packaging that we are testing early because we are combining very expensive silicons, substrates and optical components in 1 device. So early wafer level test is essential, and that's exactly where FormFactor leads. We see silicon photonic and co-packaged optics, to be a multi-hundred million dollar opportunity by 2030 for us, which is a significant faster growth than our traditional markets.

We are not just entering the silicon photonic testing market. We created it from lab to fab. In 2017, we deployed our first 300-millimeter semi-automatic probe station to an institute in Germany. Since then, we have installed over 160 systems globally at startups, universities, leading co-package optic customers, foundries and other companies. The silicon photonic test system is known as the industry standard for optical testing, which is the foundation of co-packaged optics. In 2025, we acquired Keystone Photonics, the leading company for advanced probing technology. Keystone Photonics brings 2 assets to the company. First, their scalable optical proving technology; and second, their deep developed partnership with leading co-package optic customers. So this strengthens both our technology leadership as well as our market position at the right time because 2026 is an inflection here. When co-package optic is moving from design and niche production into high-volume manufacturing. With our TRITON system, we are providing a fully qualified production-ready test cell for co-packaged optic testing in high-volume manufacturing.

We already deployed several systems, as you heard from Mike, and we saw first revenue impact with qualification and niche production in '25 and expect strong growth in 2026 and beyond when high-volume manufacturing starts to increase for co-packaged optics. Like any other advanced packaging technology, the economics of co-packaged optics favors early wafer-level measurements. So let me talk a little bit about this test strategy. In semiconductor manufacturing, we are testing in different production points or insertions, as you heard from Sudhakar for HBM, for example. The known good die strategy, testing very early in the process is very critical for advanced packaging. As I said, your packaging expensive silicons, substrates, optical components. So an insertion on testing the photonic IC on a 300-millimeter wafer is where FormFactor operates and leads. We are catching defects very early in the process before high-value components are getting added to the package.

Testing here at this point reduces cost of good die by up to 5x compared to other insertions. We also accelerate the yield learnings and can isolate photonic issues from assembly and production effects. Later insertion access but they do not scale at least currently, high complex test systems, long cycle times, low throughput are not economically yet. So form factor focus on Insertion 1 today. Insertion 1 actually represents the foundational optical technology, which is required for all other insertions as well. So during the evaluation and during when the high-volume manufacturing for co-packaged optic gets more mature, we are able to deploy the technology, which we have developed for Insertion 1 into other insertions later on. Our co-packaged optic leadership with TRITON is built on deep partnerships from R&D to high-volume manufacturing or lab to fab. We engaged early with the leading high-performance computing company directly at the development stage.

Engaging that early helps us and the customer to shape testability into their devices and to design and scale -- to design scalable co-packaged optic architectures for the future. As a result, FormFactor is providing the whole life cycle and supporting the whole life cycle from lab to fab. I showed you how co-package optic will change our market, how we are idly positioned in this market and how our strategic partnerships will help us to make this shift. Along with Quantum, this positions the systems segment for durable and high-value growth. And now I'm excited to show you a video of our production-ready test cell for co-packaged optics in high-volume manufacturing called TRITON.

[Presentation]

Well, thank you, Jens, for your presentation. And I think we're at the point where we're ready to take about 5 minutes break, help yourself with coffee, pastries, et cetera. And we will kick it off with Aasutosh in the commercial part of our business, and I will see you at 11:05.

[Break]

All right. Good morning, and welcome back. So my name is Aasutosh Dave, and I'm Chief Commercial Officer at FormFactor, been with FormFactor 2 years now. Prior to that, I used to work at ASML, AMD, Mentographic Siemens. And I've covered the entire semiconductor design to silicon life cycle, and I'm super excited to be part of the FormFactor team. And the question always comes up to say what's exciting about FormFactor. It's all the advanced technology that's happening with advanced packaging, hyperscalers. And this is where test complexity that Sudhakar was mentioning, co-packaged optics, the industry is headed in a completely different era now.

So today, it's about one core idea. And Mike mentioned about this. Our strategy starts with the customer, and it's built to win in places where semiconductor industry is accelerating the fastest. When we talk about form factor strategy, it's a simple strategy, right? We are talking not just about redefining what's possible into the product areas. So Sudhakar and Jens talked about products that we have into Pros business unit, into test systems, co-packaged optics. So our strategy is taking that beyond what we have from the product point of view, but extending that to customer value. And how do we gain that, right? So it's just extending not just market leadership, but how do we grow our market share, too. So looking at this, we focus on global support, talking about customer intimacy plan and market leadership. At the end of the day, we want to make sure that we are driving all this value to the customer and then that helps us continue the leadership position that we have.

So what differentiates us and what keeps us ahead than competition is over support? And when you look at this global scale, it's not just the scale for the sake of it that we are spread across the region. I think it is more about we are at locations where it matters the most for the customers. This is a place where customers are ramping fast. This is a place where customers are ramping production cycles, and we are at the forefront of it. Any execution misses are super costly for the customer. So it makes extremely important for us to be there with the customers, the customers are ramping fast and simultaneously at multiple locations, and it becomes important for us to be there. So if you look at what's important from the customer point of view, all these geological locations that we have, customers want to ramp faster. We are talking about how these customers are advancing into the next technology nodes, making sure that we have our design team, we have our applications team.

We have our service and support organization into all these different regions helps enable these ramps along with the customer. So we have boots on the ground to work closely with the customer. It helps the faster response time. This is also what is mandated by the customer, but we are at the forefront of it. So global scale and support infrastructure is important. It helps us basically ramp faster. It helps us penetrate with the customers where they really need the support. And it also helps lock in with these customers where it becomes more -- it brings a stickiness on to the solution that we are providing along with the customers.

Switching gears a little bit. So we talk about global support. Now this question always comes up to say, what does the customer intimacy map look like? What is changing, right? So breadth is important, but what really differentiates us and how we engage -- how form vector engages with the customer is, we are not engaging with the customer at one single point in time. We are engaging with a customer for the entire semiconductor life cycle. And using this example, if you look on the left side, we are engaging from early R&D to high volume. Early R&D engagement helps us work closely with the customer to define the test architectures, which are changing significantly at a faster pace that we were talking about, that Sudhakar was talking about earlier.

And then staying involved with the qualification and driving all the way to the high-volume manufacturing, that continuity is super important and super critical. The early engagement, if you look on the right side, we engage with the customers on the R&D side, but we stay engaged with the customer all throughout the ecosystem and all throughout the life cycle of the product. You'll see that we are deeply engaged with multiple teams at a customer, whether it's R&D, yield management, quality, supply chain and high-volume manufacturing.

So we work with all of these customers together very closely, and we are embedded with all these customers. So if you look at this multi-trend engagement, it's strategic. And it becomes super important for us to make sure that we are developing not just one thing at a time, but we are developing as a solution than the value that we provide to the customers. And this core development drives a pull-through, it increases lifetime value and materially strengthens us for any competitive barrier. This is also where the dynamics are changing that we were talking about previously is to say this entire life cycle by which whether you're taking hybrid with memory applications, whether you're taking HPC, high compute applications and advanced packaging applications, having this life cycle and ecosystem is critical. So what customers talk to us is that we are no longer just a supplier. We are a co-development partner for all these customers.

I'm going to change gear. So we talk about global support. We talked about customer intimacy map and how we are embedded with the customer. This slide illustrates something more important. We are present not just through the semiconductor value chain, but we are trusted partners with these customers, and we are recognized by these customers from early-stage R&D to high-volume manufacturing, we are there. These customers are the one where any execution misses are not allowed. So this is -- the recognition is not just from the trophies point of view, but it's the value that we are providing to the customer. It's a testament from this customer that our operating model works that our execution model works. And when customers are looking at us, it's not just one particular team. They are not looking at us as a product or a technology. They're looking all throughout the ecosystem that you're talking about is the technology has to work perfect, quality, operations, service support, all has to work perfect, for us to get recognition from customers like this.

Another thing that you will notice is there are some repeat customers. So these repeat recognitions, it speaks more about consistency that we are delivering in the value to these customers. It's not like one-off awards that we are getting, but it is repeated recognition that kind of testifies again to say we have to keep repeating it. We have to make sure that we are providing the value not one time, but consistently. And when you look from a portfolio point of view, Mike had mentioned this in one of the slides. We are -- when you look at this perspective, right, we are in the semiconductor ecosystem. We are at all these semiconductor leaders in this industry, whether you're taking high-performance computing, AI applications, memory applications, we are working closely with these customers, but what also is critical is as these customers grow, as these customers are driving the market, we grow along with them.

So I wanted to make sure that, again, these awards recognition and the customers that we are engaging in, it's not just simple awards, but it's recognition from these customers on the value that we are providing to them. So we begin talking about our strategy starts with the customer, and we are leading at the forefront of these customers. We are #1 over there. And I'll end over there. So we begin talking about leadership, I'll close that as well. So as long-standing #1 leader in this industry, we continue to grow our market share. We continue to be #1. And everything that we are talking from the product technology development point of view, from the products, making sure that we are supporting the customer. We are bringing that value to the customer. And that happens with differentiated customer value, life cycle partnership, global support. And last but not least, is reliable scale. What I mean by reliable scale is we talk about capacity, we talk about operations.

And with that, what I would like to do is I would like to hand it over to Missy, Global Operations leader. She will talk a little bit more about global operations.

Okay. Hello, everyone. I'm Missy Figueroa, I'm the Senior Vice President of Global Operations. And I spent the last 28 years building and scaling semiconductor manufacturing, 24 years at Texas Instruments, 3 years at Wolfspeed and the last 18 months, strengthening and unifying global operations here at FormFactor. So over the last year, we've been redefining what's possible. We use test and measurement innovation with the rigor and strength of semiconductor manufacturing. And we've done that by building a unified global operations team that didn't exist in this form of 4.

We started by bringing together teams that had historically been distributed and aligning them under one operating model, one set of standards and one shared vision. We strengthened that foundation by bringing new leadership with deep semiconductor and manufacturing expertise and we integrated them with this strong legacy talent already here. This combination of fresh perspective and institutionalized knowledge has been a powerful catalyst. Our new unified operating model is already delivering results. And everything you'll see on the next few slides, the performance gains, the operational discipline as well as the impact of our new site, [ Alstom ] from this transformation.

So over the last 3 quarters, we delivered meaningful measurable improvements across our operations. And those gains did not happen by accident, they came from a disciplined approach to yield execution and efficiency. So first, yield. By reducing defectivity, scrap and operational friction, yields have steadily been improving. And as you can see on the graph, we'll continue to improve them through process improvements. These improvements have translated directly into better margins, more predictable outputs and faster start-up learning. The second is disciplined execution. By tightening cycle times and improving delivery predictability, we've not only strengthened our customer confidence, but we have also reduced our working capital needs. So what do I mean by reducing our working capital needs. Well, we've been able to get more out of our installed tool base, otherwise, boosting the asset utilization that we have today. And we've further done that by driving repeatable processes across each of our shifts, lines and sites. Our new operating momentum, our operating execution is already delivering results.

And the third driver is around efficiency, both as a cost-cutting exercise and a scaling enabler. So our goal here is to grow our output without growing the complexity of our operations. And to do that, we must operate in a fundamentally smarter way. So what does that mean? That means that we focused on things like reducing non-value add activity, simplifying work streams, harmonizing processes and also automating manual tasks. So our job here or the goal is really to make execution easier, and this allows our people to focus truly on the work that moves our business forward. Again, these are the 3 strengths that have accelerated the performance you've seen over the last 3 quarters, and they're the same durable repeatable capabilities that we plan to scale into our new factory.

Farmers Branch. Farmers Branch is built for performance and scale. It's not just a building. It's a next-generation operations hub designed to maximize flow, increase throughput and also provide sufficient growth for our future. We got a strategic head start by selecting this location. It's a brownfield. Why did we select a brownfield because by doing that, we were able to direct capital into capabilities rather than building infrastructure. It's positioned in a fast-growing semiconductor corridor in North Texas with deep access to talent as well as strong local and state incentives that have further strengthened our project economies. Since purchasing this site, we've really been intentionally laying the groundwork for the target model that you're going to see today. When we purchased the site, we talked about the MEMS fab expansion, right? We're going to expand our MEMS fab from Livermore into Farmers Branch. This frees up some critical capacity for us in Livermore that allows us to continue to develop our SmartMatrix roadmap that Sudhakar talked about earlier today, and it positions us for continued growth.

And earlier this year, we also announced the site closure of our Carlsbad A&T. We plan to consolidate our A&T line in Farmers Branch. This drives operational effectiveness and also better economies of scale for this site. So I'm going to spend the next few minutes talking about how we plan to ramp, what approach we're going to take, and then we'll talk a little bit more about kind of the life cycle of a factory and how that lays out and what our milestones are. So first, let's talk about how we plan to ramp. We plan to ramp in a modular fashion. This keeps execution risk low as well as deploys capital only as it aligns with demand. So every phase is directly tied to revenue. There will be no speculative capacity in no excess volume.

The second is around bringing in new tools and processes, right? So as you bring in new processes, we are planning to optimize those for scale. As you ramp a factory or as you transfer technology, there's really 3 approaches that you can take. The first one that I like to think about is just a whole new redesign. You typically see a new factory with a new redesign when you're transferring from diameters. So I think 150 to 200. This means that they're bringing all new tooling, having to reiterate on that tooling, it's extremely high risk. And typically, the time line is much longer because it takes a while for the performance and the yield gains to get there. The second is a copy exact. This is probably what most of you are more familiar with. You hear that term a lot, right? So copy exact means you pick up the site, basically, you put the same tools and the same processes in the new site. It's very low risk. But when you do that, you actually inherit all your legacy problems into that factory.

Or you can take a third approach, which is the approach we're taking, and it's a really balanced approach. It's actually kind of emerging of the first 2 that I talked about. And it's a copy smart approach. And we're taking a copy smart approach because we already know that we have proven technologies and capabilities. But we're going to bring those over, and we're going to think about bringing in some best industry practices. So by bringing in more advanced tool sets, our current technology, along with some industry best practices and process development and our learnings, we can optimize the site for cost, scale and long-term viability, which really just means that we have a faster start-up, more predictable output, higher quality and better performance from day 1.

So now I'll direct your attention to the bottom of the slide. If you look at the bottom of the slide, this is industry best practices for phasing of a factory life cycle. Phase 1 planning and pre-startup. Everyone goes through this, right? This is the design, the layout of the tools. Phase 2, pallet and qualification, as you bring in your first initial line, you go through a pallet and qualification of every single tool in every single process and then all combined. Phase 3 is your initial production ramp. Once you achieve that initial production ramp, now you really just move into the whole life cycle of a fab, which is ramping to target capacity and continuous improvement. And those cycles go on and on, which is why fabs can exist for 30 to 50 years. So today in Farmers Branch, we're actually in both Phase 1 and Phase 2. We're in Phase 1 because as we announced, this site had a clean room, but we need to further expand our clean room. So that construction is already underway. So we're in the middle of completing both the design and layout as well as having vendors come in to do the construction.

The second piece is really pilot and qualification. We're also in this phase. Why? Because when we announced the site, we were very specific, we purchased the site because it already had existing clean room over 50,000 square feet. So we've already been installing tools and as those tools are getting installed, the pallet and qualification is underway. This overlap was intentional for us. We chose this specifically because it met a faster ramp and reduced readiness risk. So our milestones are set. You can see here below, we're set to have both our MEMS fab line and our A&T side qualified by the end of this year, in December, with initial production ramp starting in 2027. And then once we complete those qualifications, we'll then move into a phased ramping, which means we'll start slowly increasing our output, we'll be bringing in additional tool sets. And then from there, we'll continue with operational improvements, things like tightening process windows, bringing in new innovation and so on.

Okay. So now we've talked about Farmers Branch, let's talk about how we're going to engineer it to get us to the next level. So earlier I said Farmers Branch was built for performance and scale. To further expand upon this, I want to spend a few minutes talking about what we're doing at the site. First, we're equipping this site with advanced tool sets. Advanced tool sets actually allow higher throughput in a smaller square footage, which means we're going to be generating more revenue per square foot in a clean room. Clean rooms are pretty expensive. So the goal here is to drive lower COGS. We also have a flexible, scalable layout. This means higher output densities, and it also reduces waste around manufacturing production space. So this creates a complex, high output environment that scales better than traditional setups. We have shorter travel pads and easier handoffs. The second is really around embedding digital tools and AI from day 1. We're going to have real-time data, analytics, automation and robotics, driving decisions across our floor.

Our quality control is also automated. We can detect and inspect millions of springs with speed and precision. So not only is our AI detect defects, it also classifies them, meaning faster, rapid response, root cause analysis and further yield improvements. And then third, we're ramping this in a capital-efficient way. And what do I mean by that? With these advanced tool sets, the processing capabilities and the batching actually means that we can ramp in the phased way that I talked about. This means that we're able to keep our investments disciplined and the return rate is high. Farmers Branch and our new operating model unlocks the next wave for FormFactor. And it unlocks what matters most profitable scale high yields, automated, cost-efficient production at a global volume capability that expands our margins with harmonized processes and tooling.

Resilient growth a diversified footprint with a secure supply chain. We have fungible manufacturing lines through our process improvements, and this also allows for on-time delivery in any volatile market, trusted execution, unbeatable quality and digital backbone that delivers identical data, metrics and outcomes, instilling our customers' confidence. And finally, looking forward, Farmers Branch, a fully fungible, digitally integrated site that comes online with the same performance DNA that you've come to expect from FormFactor. It positions us to scale a demand and allows us to deepen our customer partnerships. Profitable scale, resilient growth and trusted execution, that's what our operations makes possible.

And with that, I'd like to introduce our Chief Financial Officer, Aric McKinnis, to share our new target model.

Thank you, Missy, and good morning, everyone. Thank you for joining us today again. I'm FormFactor's CFO. Been in the role for a relatively short period of time going -- getting close to a year now. But I joined FormFactor actually back in 2019. So I've been with the company for a little while. Prior to that, I was with a company called Electro Scientific Industries that was subsequently acquired by MKS Instruments. And prior to that, spent about a decade in public accounting with Deloitte & Touche.

So the team did a pretty darn good job of laying out what our road map is going forward and how we're going to get there. I'm going to spend some time talking about what that will look like in terms of our financials, if you will. But before I get into that, I just want to say I'm really excited about FormFactor's position right now and our ability to execute on the plans that we're laying out here today. And the reason why I'm excited about it is because as you've heard from each of the people that presented, there's real fundamental substance here. There's a durable approach that we're taking. This is more than just a spreadsheet exercise. You've seen the renewed commitment that we've been demonstrating over the past 3 quarters or so around execution both from an operational perspective and also from a financial perspective.

You've heard from Sudhakar and Jens about our leadership position in the markets. We have an enviable position right now of being the #1 probe card supplier in the world. And we have a real ability to leverage the capability that we've developed over years those intimate customer relationships that you heard Aasutosh talk about and leverage those into these growth opportunities that we see in the intersection of high-performance compute and advanced packaging, 2 of the most powerful trends that we're seeing in the industry today. We have the breadth and depth of knowledge. And I think you've seen today, as people have spoken with you, the leadership change that we've also generated in that. So I think we also have the leadership that's required to drive our plan forward.

We've got a bold goal in front of us. We're going to double our revenues by 2030. We're going to drive more than double EPS in that same time frame. So let's dive into some of the details here. And let's start first by talking about where we've been. So our last target model was really established in 2020. And in that target model, we were targeting around $850 million in revenue, 47% gross margins, with operating expense as a percent of revenue of about 25% and a non-GAAP EPS of $2 per share. We've now demonstrated achievement of that target model. So our most recent quarterly results exceeded that target model performance. And if you include the latest guidance that we provided for Q2 2026, you can see that actually on a trailing 12-month basis, we've also demonstrated this model in a durable way. As we look forward and as you heard, in the prior presentations, we see significant growth in our markets, and we're expecting the market to grow to $4.5 billion.

In that environment, FormFactor expects to double its revenue to $1.6 billion. You've heard the levers that we want to drive in our operations from Missy. And we believe that we can achieve 55% gross margins at these revenue levels. And we're going to continue to drive operational leverage and discipline through our organization, generating further leverage on our fixed costs and on operating expense as a percent of revenue of 23%. And ultimately, a non-GAAP EPS of $5 per share over this time frame.

So you heard a lot about the market opportunities in front of us. And you heard about them kind of by segment or business unit in specific applications. So let's pull that together for you here a little bit and talk about our total addressable market. So today, our total addressable market is around $3.1 billion. We expect that's going to grow to $4.5 billion. And you heard what's driving that right? It's this increased intensity of this increased test complexity that we're seeing driven by high-performance compute, driven by advanced packages, things like HBM, and things like co-packaged optics. That's driving the expansion in our market, if you will. In addition, we expect to take market share. That's another element of that growth, and that multiplies the market growth percentage here.

So what you can see here is the market is expected to grow or we expect it to grow. And those expectations for us are based on third-party research. We also take into account our knowledge of the markets. Based on those inputs, we believe the market is going to grow at about 8% CAGR over this time frame. If we look at what we're planning for FormFactor, we're planning to do double that growth rate in the same time frame. And we're going to do that by the leverage that I mentioned on market growth, amplifying that with market share gains. And you heard from Sudhakar and Jens in particular about some of the competitive positioning that we believe is going to enable that. You also heard from Missy about how we're going to drive operational excellence that's really important for our customers. So if we get into the different components from a market perspective, again, you heard this kind of in bits and pieces earlier, but this will give you a sense of scale.

So if you look at the growth trajectory from $3.1 billion today to $4.5 billion in 2030, you can see the major -- what we do as being the major elements of that from a market perspective. Co-packaged optics, high-bandwidth memory, GPUs and custom ASICs. In addition, we have growth in our base business indicated here. The thing I want you to take away from this is how broad-based this is, right? We've got some buzzwords in here. There are some very popular topics. There's things that are very exciting and very fast moving, but it's more than just that, right? We're growing fundamentally. We're changing how we do things. We're changing how we approach the market, and we're so well positioned as a company. So we have multiple horses in this race. And I think we're uniquely positioned in that respect. So market growth, market share working together to drive a multiplier effect on our revenues, allowing us to grow from the 2025 base level of around $800 million per year to double that, $1.6 billion.

And as we do that, we expect to generate leverage on that volume and also, again, leveraging the value of what we provide our customers to generate even higher gross margins, generating a 1,400 basis point increase in gross margins from our 2025 baseline. And we're going to do that on what we think is a relatively similar mix. And the important element of that is that we aren't relying on luck. We aren't relying on mix to get this done. We're going to drive this out of fundamental, again, market, business value drivers. So we have good line of sight to this growth rate, I believe. We have good line of sight for how we can drive value for our customers.

Let me dive into gross margin road map here a little bit. So as I mentioned, 1,400 basis point increase. That's a big number that I would divide that progression into 3 main pillars, and those are volume, operational excellence or you could also call this execution. And then innovation. And you heard all of these elements, the team makes it really easy for me. You heard all of these elements in the prior discussions from the team, right? We expect the relative weighting of these components to be like you see here on the screen. So about 600 basis points from volume as we double revenues. About 500 basis points from operational excellence and about 400 basis points from innovation. Farmers Branch is a major enabler of volume and also innovation and operational excellence. So the contribution we expect Farmers Branch to ultimately be accretive to our growth, and it's a big part of this road map. And you see it's a piece of both of the 2 middle and last pillars here that you see.

Recent results demonstrate the credibility of this plan. So again, a very significant change in the trajectory of our gross margins. We believe that this is a balanced but achievable target. Our most recent quarterly results, we did 49% gross margins. In our most recent guide, we guided 50 basis points up from that level. Some elements of those things were temporary in nature today. We've driven very substantial improvement over the past 3 quarters. We believe that we can make those things durable and long-lasting as we move forward. And you can see the sort of path that we have been able to generate. Now it's going to get harder as we move forward, right? We've been able to pick some low-hanging fruit and make rapid improvements to date. As we continue to move forward and focus on these areas of excellence innovation, those things just naturally get harder. But we believe that we have a good potential to move that needle forward, and good line of sight to the drivers for that value.

As we move further down the income statement, you can see -- so we've got the growth we're going to generate significant dollars from gross profit by improving gross margins. And then we're going to make sure that we generate leverage all the way down the P&L, including operating expenses. And we're going to do that by ensuring that we maintain discipline around our spending across OpEx lines. And we're going to do that while we still continue to invest dollars where we should where we need to. R&D is very important for us as a company to maintain our competitive advantage. You heard about the product life cycle and about how our engagement with those customers from lab to fab is very important for our positioning for our learnings and for our customers as well and driving their learnings. It's very important for us to continue to spend money in R&D. And by generating higher profit levels, we're able to really fund that sort of investment that's required for us to continue to be the #1 supplier in our served markets.

That leverage continues down the P&L to EPS, moving us to -- from $1.27 in the baseline year of 2025 to $5 a share. That's about a 30% annual growth rate and EPS. So you can see the sort of leverage that we're getting across the P&L here. So in earnings power that we're generating we're going to invest that in driving the company forward. And one of the primary ways that we're going to do that is by focusing in the short term on the expansion of Farmers Branch. You heard how that's fundamentally driving these pillars of gross margin expansion. You heard how our customers are really pushing us to move faster and there's a lot of demand that we see today out there order to serve that Farmers Branch is probably the single most important short-term priority for us to really generate view in accretion in the business as we look to the next 1.5 years. It provides capacity we need today. It also provides a platform on which we can build capacity in the future as needed. And as Missy said, making sure that we match the capacity that we have to the demand that's out there.

In addition, Farmers Branch helps us on our gross margin road map. It makes us more efficient, drives down our unit costs as you might imagine, in Texas a little bit cheaper to manufacture there than in our existing footprint today in California. And so as we expand into that site, that lowers our average cost to produce. We'll continue to invest in M&A to the extent that it makes sense. And that's always been our strategy. You saw recently, we just did an acquisition of Keystone Photonics, very strategic type of acquisition, enabling an important technology for us on our road map for co-packaged optics. That's the sort of acquisitions that you can expect from us as we move forward. We'll continue to engage in a share repurchase program. The main purpose of that program is to buy back shares and offset the dilution from our stock compensation programs.

And as you can see by the graphic on the right-hand side of the slide, we've been successful in doing that from the time of our last event Investor Day that we had back in 2020 to today, we've driven down diluted share count over that same time period through this program. Long term, we expect to spend around 4% to 5% of revenues in sustaining capital just maintenance-type activities. So our target model ambitious. I think it's achievable. And I think importantly, it's self-funding. There's a lot of self-help elements in here. We're driving significant leverage across the business, and that's enabling us to do in things like Farmers Branch to invest in R&D to really sustain and move the business forward. I think it's structural, what we see in the markets. I think that we're driving organic growth that's really meaningful here and driving leverage across the business.

So thank you for joining me today as we share what I think is a very compelling vision of the future for FormFactor and the future for our customers. And with that, I'll hand it off to Stan.

So as always, we have some supplementary materials. I'm not going to spend any time on these slides, but I want you to know we have it. And we're going to take about 5 minutes quick break, so we can set all of the chairs on the stage, and then we will move to Q&A. So take 5 and let's reconvene at -- we'll do it at 12. So noon, I'll see you guys back.

[Break]

All right. Why don't we all get seated, we'll have our executive management team here on the stage, getting created for Q&A. And we have -- so we have an hour. We will have Crystal and Kelly handling mic. So please raise your hand when you have a question. We can see you, Craig, you'll get your mic in a second. Well, a lot of you. Okay. [Operator Instructions] And I will hand it off to Craig Ellis, [indiscernible] the mic.

And just logistically, all serve as MC and traffic cost. Some of the questions I assume will be directed at me, but I can also disposition them to our team.

Okay. Yes. Craig Ellis, B. Riley Securities team. Thanks for the very informative session and impressive target model. I had a near-term question and a long-term question. The near-term question is we can see the demand is very, very strong. And it seems that we've been able to push up effective capacity recently with ops improvements how confident are we can continue to do that in the next year but for Farmers Branch ramps up? And does it mean that some of those ops gains that you showed us are really kind of pulling in a near term versus more back-end loaded?

Yes. Well, I'll hand this one to Missy, but I think it's important to note, remember on that time line, we're ramping Farmers Branch in less than a year, right? And we're making excellent progress on that.

So Missy, do you want to talk a little bit about the sustainable improvements we're making in our existing footprint?

Yes. So everything I showed today, the chart on the second slide really stem from our Livermore operations, which is where our MEMS factory is. We continue to drive improvements there. And so Mike alluded to it in our last earnings call, squeezing more out of the juice Today, we have several activities. So we're still focused on yield, cycle time reduction. And as we're able to improve in those spaces, we can pull in more demand, right? So as you improve your yield, you can start less wafers to satisfy one customer, which frees up way first for another. So I'm really confident in the projects that we have lined out and the continuous improvement activities that we have.

Great. And then the follow-up question is a long-term extension of that. As we look at the target models 2030 time frame, Mike, how do we think about the linearity of getting there with the contribution from probes versus systems? And then how below the top line to the COGS gains and the gross margin benefits pace on the way to 2030?

I'll take the question around the top line linearity, if you will, and some of the mix pieces and then hand off to Aric for -- as we work our way down the income statement.

We expect continued growth in these segments. I don't expect it to be linear, right, on the way to 2030 over that time frame. There's always been a cyclical industry. We operate with the principles that always will be a cyclical industry. Now the overall demand drivers and where the industry is with a set of capacity constraints would seem to indicate we're going to be in an undersupply condition for a while, but there'll be a few ups and downs on the way to 2030. That's why this idea of modular capacity is so important so that we can preserve the gross margin and not have a whole bunch of underutilization and large fixed cost flowing through the P&L.

Yes, I think Mike covered the majority. The only thing I'll add is that if you kind of reflect back on the slide, I have some pie charts on the side, and I mentioned that mix is relatively -- expected to be relatively consistent as we go through those in the next several years. And so what that implies that they're effectively growing over this time frame at similar rates, right? The same proportion of business for our systems segment as well as our Probe segment.

And another element that I think I glossed over a little bit was the gross margin profile. We're starting to see convergence in gross margin profiles between our Probe segment and our Systems segment. And in fact, if you look back at this last quarter, we exceeded 50% gross margin in the probe card business. And so we expect that trajectory to continue to continue in that direction as we drive these fundamental underlying cost improvements and drive scale, and we expect to see further convergence between the 2 segments.

Krish?

It's Krish Sankar from TD Cowen and thanks for doing a very informative presentation. Two of them. First one on the custom ASICs moving to advanced MEMS. Would that still be a kind of like how it is in GPU [indiscernible] 2-person rate? Or do you think the [indiscernible] MEMS competitor can actually also do custom ASIC advanced MEMS? And then I have a follow-up.

Sudhakar, do you want to take that?

Yes. Thanks, Krish, for the question. As I mentioned, what we are starting to see in the custom ASIC is it's starting to adopt more of the leading edge transistor nodes were coming down to 3 nanometers and 2 nanometers, which is essentially with higher density in cores, it's driving test complexity first. We're just translating to thermal. So we strongly believe that in the long term, this is going to be an advancements play with a 2-supplier market in the long term for the customer ASIC as well.

Got it. Got it. And then a quick follow-up on the silicon photonics. So the TRITON platform, it seems very interesting. Do you think eventually the CPO would eventually go kind of the semis route where they unbundle probe card away from testers? Or do you think this is the path forward in CPO testing, where it's an integrated solution?

Why don't I take that one? Because I think it's an industry supplier ecosystem question. why are we partnered so closely with Advantest and Tokyo Electron and it's because of speed, right? We've had some major customers over the past couple of years, tell us they need systems, they need them to ramp in high volume. It's difficult to work with everybody in an open ecosystem in that. So you focus, right? Longer term, I expect CPO and we expect CPO as a team to broaden out and have a very similar disaggregated model where all ATE systems work with all interfaces, whether they're probe cards or something slightly different, work with all handlers. But the time to market is so critical right now to meet this initial CPO wrap that demands some focus.

David?

I guess the first question is, you showed us a lot of great charts today. And one thing I noticed is that you plan to double revenue, but your is only going to grow by 50% between now and 2030. And then you showed us another chart where we had like 5 or 6 little vectors up. I'd like to know or if you could help us, which one of those vectors are going to provide the share gains that you're talking about to grow twice as fast as the market?

Yes. I think I'll ask Aric to consolidate this one because there's different pieces across the revenue scape for us.

Yes. I think the share gains where we're going to principally see share gains and where there's existing market today where we don't play as big as we think we should and we're entitled to places like CPU, some of the major CPU manufacturers out there where we have low to nonexistent share. We expect to penetrate their GPUs, we didn't participate historically in GPU tests. We expect that to change. We've indicated in the second half of this year. We expect to see demand ramping for GPUs for us with a major GPU producers in the world. And so those are the main vectors that are going to drive market share. Then we've got new growing markets like CPO. And that's really something that doesn't exist today that's going to drive growth as well.

Okay. And as my follow-up, I think you said the CAGR of semiconductors or your market is like 8%. And I'm kind of curious, that's kind of like the long-term growth rate of semiconductor unit volumes. But at least semi revenue grew like 25% last year. I think it's growing like over 60% this year. I guess it's going to grow by more than 20% next year. And I know there's a lot of increase in pricing in memory and GPUs, but units are definitely growing faster than 8%. So I'm kind of wondering what the disconnect is.

Yes. So the market figures that I shared, we -- in great part are based on third-party analyst reports. And remember that they are focused on the advanced probe card market. So it's not entire semiconductor spend, it's not capital spending. It's specific to the markets that we serve and the growth rates on average in that market in those industry reports is at an 8%. Now we expect to be participating in the elements of that, that are growing much faster, right? And so a kind of rate that's double that.

Okay. Charles?

Charles Shi, Needham. Mike, wondering if you can address what's the expected TAM for CPO testing such 1, 2, 3, 4 is insertions and tell us a little bit more expand a little bit more because I think you said one sentence, why you want to focus on Insertion 1? And a related question, what's the expected ramp timing? I think on the earnings call, you were talking more like 2028, I know it's hard to get an update like just 2 weeks later, but can you have it, what do you think about the ramp timing?

Let me connect those dots. And then I hand it over to Jens for some of the details on the insertions and the relative size and how we expect that to potentially evolve. So what we updated you on the call a couple of weeks ago, we'd initially set expectations for our CPO revenue in this year 2026 to be between $10 million and $20 million.

On the last call, we updated that to the high end of that range. And that's indicative of the momentum we're seeing and depending on how you want to classify production, the beginning of that production ramp. We've also updated you that we've now installed multiple TRITON systems in one advanced foundry. And that for me is always the indication that things are starting to tip towards production. The narrative from our customers continues to be very strong and even accelerating.

Yes. We are expecting SAM by 2030, around about 300 million to 400 million from our view today for co-package optics. While we are on Insertion 1, I think there are 2 things. First, I explained how the known good die strategy favorites very early testing. And we are very early in co-packaged optics, especially going in high-volume manufacturing. So yes, there are other insertions, but Insertion 1 is the most important one today to make this ramp happen. And we are involved in this insertion since over 9 years. So we developed the right strategy and technology there. And as I said, this deployed technology, which we have in Insertion 1, have the capability then later on to address also other insertions when high-volume manufacturing for co-packaged optics gets more mature.

So the 300 million, 400 million, that is all insertions, including equipment and test consumables. I just want to clarify.

That's the wafer level test SAM we are addressing.

Okay, which means Insertion 1 and 2?

Right.

Okay. Maybe a second question on gross margin. I know this is a question probably for Aric, maybe for Missy as well. So we're going back to the history, gross margin in the 50s for form factor. We've never seen this kind of gross margin. This is a very aspirational target. I know you laid out how you want to get there. And we noticed that part of the gross margin gain actually comes from productivity improvement, cost disciplined efficiency. But historically, this is a semiconductor industry. Very often, suppliers getting those efficiency improvement, very often, those values got given away to the customers. How do you make sure you don't give away the value created by those activities to customers so you can keep the margin to yourself and maybe get to the 55% gross margin by the end of this decade.

I think that's a -- it's a really good question. And it boils down to discipline and really delivering value to our customers. We're deliver value to our customers and solve important problems for them, like how are they going to yield in these fast ramps getting the production slots that they need. That's where we have the ability to really demonstrate value and differentiate ourselves. That's what's going to drive our ability to really protect our gross margins, if you will. It's why it's so important, why you see us talking here about what are we doing from a technology perspective? Why are we continuing to invest in R&D because over the long term, if you don't do those things, it's going to be very difficult to pursue for your gross margins. Matt?

Matt Prisco from Cantor. First, I just want to hit kind of the target model again, that 2030 number that you put out there. Is that anchored in any type of semiconductor revenue or anything like that? Because I know in the past, you guys have talked about having that intensity. You talked today about intensity going higher. And I asked about that anchor because every week, it seems like forecasts are going higher and higher with AI and everything. So as we start to think about that number shifting high. How does that translate to revenues?

So I'll hand this one to you in a second, but it came up in an earlier question, I think maybe from David. One of the reasons the overall industry is growing so rapidly from a dollar basis is ASP growth, right? And if you looked at 2 of our major DRAM customers, recent earnings, they had a DRAM 0% bit growth and north of 50% ASP growth. Our business is really unit-driven units on new designs. And there are opportunities for us to get some compensation for pulling things in, in this environment, securing capacity slows, but I'm sure you're going to see a decoupling between the classic probe card intensity on a dollar basis just because of these inflated ASPs.

Yes. And maybe we'll add to this. I think it's fair to for us to characterize ourselves as a management team as being pragmatic. There's a lot of bubbleliness out there in the market right now. A lot of excitement around some of these trends. I think we're much more focused on what's actually happening and making sure that we bring up capacity when we need it, that's aligned to the demand that's really out there and really keen in on what are those drivers, what are those indicators and making sure that we've got a flexible operating model that enables that. And I think Farmers Branch is a really good example of how we're doing that. It serves as a platform that not only addresses the immediate capacity needs that we have today, but actually serves as an ability to drive additional -- the ability to drive additional capacity in the future.

That's actually a perfect segue. And my next question is on Farmers Branch. Just love to know how you guys are thinking about that modular build-out today? Is that going to be kind of taking deposits from customers, getting capacity corridors? At what point do you guys feel comfortable building out that capacity? Maybe how long does it take you to build this capacity once you see the demand? And when do you think it's fully up and running?

Yes. So I'll take that one. We plan to have the site qualified later this year with initial production ramp starting in January. This industry is slightly different than typical device makers. So we get from a planning process, a real look at what our customers want. So doctors spent some time today talking about custom, right? So each of our probe cards are accustomed to what the customers ramp is. We have about a 6-month window where we can really understand exactly which products they're going to want us to run. That also happens to coincide with around our longest lead times. So through our [indiscernible] and planning process, we pay close attention. We also get early indicators from the close partnerships that we have with our customers. And as we get past the initial qualification and ramp, we're already looking forward to the next version, and we'll just do it in modular phases.

Yes. I think one of the interesting things about the current situation is, although our lead times, lead times, the POs customers place for a specific design are still well within a quarter. We've got much more engaged conversations on what their 6-month forecast is, right? They understand there's a capacity pitch all through their supply chains, not just in probe cards, right? And so whether -- you talked about potentially capacity agreements, paying for capacity, all of those different things are under discussion.

But I would argue that we're getting much better engagement, if not visibility on what customers think they need from us more than a quarter out now. In terms of raw capacity, our probes per week kind of thing. They still don't know what they want us to build, but they know they're going to need some of it.

And maybe just to layer on one component, the ability to add capacity now is no longer bringing up a full site. It's bringing on just additional equipment, additional tools. So our ability to do that with much shorter lead times in the future, if necessary is what I'm referring to when I refer to it as a plant.

Elizabeth?

Elizabeth from Citi. So I guess my first question is you talk about there's a lot of growth opportunities and sharing opportunities across GPU, ASICs, CPO, other things. I'm wondering when you think about your R&D budget, how do you think about like the priorities? And like how do you allocate your R&D resources across all these areas?

I'll let Aric take that one.

Okay. We'll go back to the disciplined part of the equation. And I mentioned driving efficiency and OpEx but continuing to invest in R&D. We recognize that R&D is one of the ways that we can drive significant sustained value with our customers and with our products it's important that we make that investment, but it needs to be made in the right places. And so making sure that we have the business process is the decision-making upfront as we are looking at those decisions.

And probably more importantly, in some cases, really narrowing the aperture a little bit and focusing you try to do too many things at once you're not going to get anything done. So we need to make sure that we maintain discipline in how many things we try to do at once. And then we've got the feelers out there with our customers to understand what really matters, and that's how we determine what we focus on.

Got it. And then on the CPO test part, I'm wondering if you could share your thoughts on the evolvement of the 4 insertions, the mix between the 4 going forward as things like from initial ramp to more mature stage of the CPO testing market and also like the shape of the CM growth into the next few years? Because like one of your test peers talk about. There is a fast run at the beginning of the TAM and then maybe slows down because things get more mature. So I want to hear your else on that as well.

I'll hand it off to Jens in a minute, but I think it's really important. We know this is going to change the dollar spent between the different insertions. Right now, for very good reasons, that Jens shared, there's a lot of the overall test spending being spent on Insertion 1. And we feel like that's a good place to focus because the foundational technology of optical probing is going to need to be used in any of the other insertions, right? This is going to change. It's going to involve. It's why this customer intimacy that Aasutosh and I talked about is so important, right? We're in there at the beginning. Customers are depending on us. They don't want to surprise us, right? And so there's very active engagement on not just with customers but other co-suppliers on making sure that we're going to be ready, whichever way this thing shifts, so it gets to HBM.

Yes, there's not really much to add. So one of the things -- no, no. I think as I think the Insertion 1 is already pretty complex, but it's getting even more complex if you're getting to the Coup technology, for example, as TSMC is providing it when you have double siding tests. So these systems are getting so complex that they are just not economically today. So we will see in the future, as Mike said, how this will develop over the different insertions, which insertions will be really necessary in the end for high-volume manufacturing. And right now, we are right at the beginning and right in place for Insertion 1.

Before we let Craig go again , V, you've got one?

Yes. So the first question I had -- so this is V from Evercore. The first question I had is in your SAM growth opportunities, I didn't see CPUs. So maybe some thoughts on what you're thinking for the CPU process probe card intensity.

Yes. It's a really good question. And it's in that base business bucket. But I think what you're probably referring to is some of the news cycle out there around agentic AI driving additional CPU intensity. And we are seeing some acceleration there, some interest there. To the extent that, that occurs, we have relationships in that space that I think you're aware have been traditionally quite strong, and I think we're well positioned to serve that market to the extent that we see that grow as a result.

So would that be further upside to your kind of revenue growth?

I think it remains to be seen. I would say that overall, as we've discussed, growing at double the market rates. I think we've got a balanced plan. We've got multiple growth vectors. I think what you're going to see is that reality is going to be different. Some of those vectors will be different as we move forward in time. This may be one of those areas. But I think overall, where we're targeting in terms of total growth and that rate is right where we really should be in terms of balance.

And if I may, one on gross margins, so you've laid out clear path for cost discipline and the levers you can pull, but top cards are getting more and more advanced. Does that imply an ASP increase with kind of a cadence for?

I kind of answered this a little bit earlier, but to reiterate, I think where we see ASP. ASP is kind of tricky, right? What I really care about is value and profitability. And that, for us, is driven by the same things that drive value for our customers. To the extent that we deliver value to them, we help them solve problems that we -- so you heard Mike talk about the yield losses that happened just because of packaging these things into advanced complex packages. Those have significant dollars tied to them. To the extent that we can solve those problems at a more efficient -- in a more efficient way for our customers that's going to drive value in our products and will drive the associated margins and ASPs.

Yes. David, did you have a question? Before we go back to Craig.

Dave Silver, Freedom Capital Markets. I had a question maybe about the target model and the breakdown between logic and logic and foundry and memory. So when the 2020 model was created, you probably had a certain breakdown of where the revenues are going to come from. My guess has changed a little bit over time, major customers, et cetera. Just could you just kind of single point is, but in 2030 from 2025, what is the share of growth from the memory side versus foundry and logic and I don't know, is that even the right way to look at it since there's going to be hybrid products that incorporate both sides. So we're going to have multiple sources, I guess. But just some comments on how much you're -- however you look at it, revenue or operating income? How much from the memory side? How much from foundry and logic?

Yes. So from a top line perspective, we expect the mix to be pretty similar today. I think I showed a couple of pie charts on this slide a little bit better growth in foundry and logic than, say, in DRAM. But you're hitting on a bit of a sore point with our last target model that I just want to it's been a little bit of time on. And when we set our target model in 2020, it was premised on a certain mix of foundry and logic and memory products. And at that time, there was a pretty significant difference in the margin profile between those 2 sub businesses, if you will.

We saw the mix shift and it was not favorable to our gross margins. And that's really been a pain point in us really achieving that target model. It's one of the reasons why we're so focused on driving fundamental underlying cost and efficiency improvements because if we do that, right, if we drive the cycle time and yields and things that Missy was alluding to, it's going to benefit all of our products, right? It doesn't matter if we're talking about DRAM. So we don't want to be the victims of mix. We don't want to be victims of volume. We want to be a company that produces competitive margins competitive fall through, if you will, from an operating perspective. Whatever the outside circumstances are, we'll control what we can control and we're going to do that as best as we can by exercising discipline and make sure we get the appropriate leverage.

And then maybe just a question or maybe an observation you can comment on, but this would be regarding talent acquisition, okay? So I always think where your major customers are located, your customers are national champions and they probably have first -- may have an advantage in acquiring the intellectual talent that they want. And you need to service them, you need to maintain a certain standard. Just maybe some comments about your confidence in kind of keeping up with the technical demands and the talent demands that your major customers are going to require, if you're going to hit your next target model.

Yes. I think I'm going to ask Missy to comment on how recruiting is going in Farmers Branch because it's basically a new area for us. But broadening out globally, are there challenges with talent right? Not a lot of people going into hardware engineering, material science, physics, the kind of things that underpin this business. But so far, we've been reasonably successful in recruiting the kind of people we need because they like the idea of -- if you look at the core constituents of the products we make, they're a really unique blend of mechanical engineering, electrical engineering, material science, physics, you don't get that in a lot of different places in the industry. It's one of the reasons I love work it here, right?

You've learned something new technically every day. And I think the people we've been able to recruit have that same passion for continued learning and learning in areas that are maybe a little bit different than mainstream semiconductor while also having the impact on a fast-growing smaller company. They can see their daily impact on what we do.

Yes. So with regards to Farmers Branch, it's located in North Texas with access to multiple universities right there in the area as well as several different community colleges. We're working with the North Texas Semiconductor Institute as well, along with some of the other major semiconductor companies within the ecosystem.

Today, we have -- we're on track with our hiring plans. So we've had no issues recruiting great talent. We are expanding that out. There are some high schools that we're considering working with. And North Texas has really spent a lot of time over the last 3 years. focusing on how do we bring in technicians. We all know that, that's an area in our industry where there's gaps right now is getting 2-year degrees. There's a real push there in North Texas to go drive it. So I'm really excited. That was one of the reasons why we selected this site specifically because we felt confident we could get the talent.

Other questions before we let Craig have a second swing.

[ Jason Ursener ] at [ Bumbershoot Holdings ]. I thought you guys did an amazing job of kind of explaining your position with your customers in memory, DRAM, why everything is, I guess, just set to have a great outlook for a long time. Could you maybe explain the memory customers in the LLMs, what's happening with some of the compression algorithms and relational database? It's beyond my understanding, but it is their focus to kind of use fewer DRAM over time, use less memory and kind of the whole cash system of AI? And how does that kind of impact some of this? Is it real? Is it not?

Yes. So it's also an area that I don't and I don't think any of us know much about. What I will say is it's quite clear given the dynamics, and I'm going to restrict things down to DRAM. Most of you know that we're not a relevant player in Flash, and we can get into that if you want. But it's really focusing on the opportunities where we can drive real value and differentiation. They're available in DRAM and HBM, of course, not in Flash. So I'm going to restrict the comments to that.

When you look at even with some of these compression algorithms and different things, the growth rates for compute and different elements of memory, whether they're HBM or the explosion we've seen in DDR5 for these applications, it's hard to invent a scenario where some sort of compression algorithm or compute innovation takes that off the trajectory of us being essentially undersupplying the market, us as an industry, right, undersupplying market. That's consistent with the narratives we hear from our customers. All the different pieces of that high-performance compute module we used as a consistent thread through the story. It's more memory, more memory, more memory. And I think over the years, the insatiable demand for compute, it's tough to figure out how some sort of algorithm development is going to flip that spread.

Okay, Craig?

All right. I wanted to go back to the point we made about the ambition to capture 50% incremental [ SAM ] share and the points we made about future-proofing our DRAM and foundry logic probe card products. But the question is, what do we need to do between now and 2030 with each of those products to ensure that we've got product leadership and are in a position to capture that 50% incremental share?

So as I alluded to in both segments, both foundry and logic as well as DRAM, HBM, the major vectors are driving this is test intensity and complexity. But I'll stay on the complexity side for now to really answer your question, with the increasing thermal demand that's happening, we're starting to see that the current set of products are not able to keep up with the next generation of GPU that's coming out next. So we've already closely working, as [ Ashutosh ] talked about, co-development. We're already working closely with our customers, leading-edge foundries and IDMs and how do we enable them to thermally manage and dissipate the heat that is getting generated because of the power. That's already underway, so to speak. So that's part of the things that is baked into the overall target model of getting those kind of design wins into the future and how that is growing is already baked in, particularly on the foundry and logic.

On the HBM and DRAM side, a similar set of trend is going on, on the power side, but also this custom HBM-based die that I talked about. is starting to drive new architecture development that may be coming to fruition more in the 2028 and beyond time frame. So that's already baked into it, and we're starting to work with all major customers in that space as well.

Got it. And then, Mike, because in talking about capital allocation, the company left the door open to M&A. And my sense was that was more tuck-in than something big. But can you help us understand where that type of thing might make sense for the form that you see between here and 2030?

Yes. M&A, as you saw, right, has been a fundamental tool we've used to build the current form factor. And we remain very active in prospecting for different things. It is more tilted towards the tuck-in. Keystone is a pretty good example of where we're putting our focus on priority. A key enabling subcomponent that drives the themes you saw today around high-performance compute and advanced packaging forward. So over this time frame, that's where we expect to focus.

I still -- I'll give you my standard. I still believe this part of the overall semiconductor equipment and consumables space needs to consolidate in the supply chain, right? If you look at what we're taking on as a leader in a small sub-piece of the industry, there are challenges, right, funding that. If you look at what happened at the front end 2 decades ago, right, there was consolidation. And now you have arguably 5 very capable large suppliers that drive the front-end wafer fab forward. I really think, right, the same thing needs to happen longer term in the back end in test and assembly because of the technical requirements associated with advanced packaging and the customers we're engaged with and the speed they want to move.

Matt Prisco, again. Just thinking about the share side, again, you talked about the opportunity in CPU, GPU and kind of that end driving the share gains. But as we think about memory and DRAM, HBM in particular, I guess what gets you most excited across the 3 insertions, whether you're talking that core die, the base die or the final test? As we think about mix of that market changing as more suppliers come to the market and maybe your primary customers dominance, it's more spread out over time. Is your -- are your gain opportunities in the other areas enough to kind of maybe offset that mix dynamic so you can gain share in the memory market?

Yes. So when it comes to the HBM and DRAM, again, going back, I feel like I'm going to repeat myself a little bit to answer your question as well. Going back to the test complexity and intensity piece of it. But it's really in the longer term, what's exciting about this space is it's the evolution of not only the stack height as we described about increasing number of probe cards needed to measure the increasing number of stack heights. But kind of HBM5 onwards where we think that the hybrid bonding is also starting to happen, and we're starting to watch. We don't know exactly how that's going to create new test insertions for us.

But what we do know is with the customer logic that's coming in from the right and shifting into the base die, we are starting to see we need to develop new architectures, which is kind of exciting because that's another new test insertion that's evolving that we are seeing that, hey, we will start to gain share and with new differentiated offerings at the same time. Because we -- as I mentioned, we're the only probe card supplier with production proven foundry and logic probe architecture as well as the DRAM, HBM probe architecture. So we will be able to kind of fuse those things together as we understand the requirements quite well.

Thanks for taking my second question. The first one is in Q1 of next year, what do you think the gross margin impact will be from bringing on Texas? And what I mean by that is you're going to obviously hit the depreciation button at one point or another. I imagine Q1 would be the quarter where you see the most increase in depreciation, but maybe I'm wrong. So that's one -- the first part of the question -- first question.

Second question is being somewhat capacity constrained in the second half of 2026, do you think you've lost market share? Or are the competitors in the same situation that you are?

Yes, I'll answer the second one first. Everybody is in the same constrained situation. That's one of the reasons why, one, as I mentioned, we're getting better, I'll call it, forecasting guidance from our customers is the overall probe card supply market is constrained, like many other places in the industry are. It's one of the reasons why we're executing with urgency as you -- I'm sure felt from Missy's presentation on getting Farmers Branch up and running so that we're not in a share loss situation, but even arguably could be on our front foot here and able to gain share based on availability. Do you want?

Yes. And maybe, yes, just to tag on to that a little bit. The levers that we're using today to drive really output up are the same levers that we're using to drive gross margin improvement in the short term and also over the long term, cycle times and yields, our ability to produce more good products with the same amount of inputs and do it faster means that we're generating more revenue intensity and more profit intensity in the same unit time, if you will. And that's going to -- that's what's going to enable us to -- and we're going to continue to push on those levers for the back half of the year.

As it relates to gross margins for Farmers Branch ramp, we believe that during the ramp, there are some headwinds that will -- but we're doing a fast ramp. And ultimately, that site is going to be accretive to gross margins. It's part of our gross margin road map, as I articulated. So as you look at those operational excellence and the innovation column, Farmers Branch is a key enabler of those 2 things. In that short period of ramp, about a year that we're talking about, we expect any headwinds associated with gross margins to be offset by the efficiencies that we're driving over the next several quarters.

Any more? Elizabeth again?

The one I had -- so on gross margin improvement, historically, you had a huge variation in gross margin, and you've kind of talked about it. It was product mix and volumes kind of both driving it hand in hand. But as you kind of stress test this 2030 model, like what kind of variation do you see now by product volume? Like will it be 5 percentage points? Or can it be like 2 percentage points down up.

Yes. I think in the normal -- so we do stress test our models. And we -- I think as Mike mentioned, we're under no illusion that we continue to operate in a market and an industry that remains cyclical despite all the optimism that we see. So we test our models. I think the way you -- so mix and volume will always impact gross margin. To the extent that we drive convergence between the gross margin profiles between our different products in different segments, which we see occurring, the importance of mix is going to be less important, exactly what our mix is. Now we do expect some variation from period to period around mix. And you -- plus or minus a couple of hundred basis points would be normal, right? To the extent we end up with a more extreme scenario, we take appropriate measures as required.

Elizabeth?

Sorry, I also have a gross margin question. So you laid out from 41% last year to 55% target model. It's a mix of like 40% volume, 35% execution and 25% innovation. But now we are sitting close to 50%. So I'm just wondering from now to 55% in 2030. What -- is there any difference between the mix of these 3? And what other things have been done? What are the things you can do more?

Yes. Good question. I think that you can think of it -- so those 3 pillars that I described in the road map from 41%, which, as a reminder for everyone, was 2025 baseline average gross margins for the full year, right? Obviously, we've generated a very different trajectory to date, but elements of that are temporary in nature. We need to make those things permanent. So that's one element.

But if you think about the distribution of the continued improvement from where we are today, if you will, to the 55%, you can -- it's similar to what I showed on that table, just scale is a little bit different. And what we've generated, the 1,100 basis point improvement that we've generated from Q2 of last year to today, if you look at our most recent guide, is also across all 3 of those pillars.

This is [ Danielle ], I'm from Stifel. I wanted to focus on Texas and Farmers Branch. So when you begin production there, what is the determining factor for if it'll be more focused on logic or more focused on DRAM, HBM?

Sure. I'll take that one. So as I mentioned in my presentation earlier, we now have fully fungible manufacturing lines, which really just means that I can run 2 different technologies through the same tool set. So as we see, again, kind of going back to the previous question around the shift in mix and demand, part of this reasoning was so that as we see that mix move, we don't have as much variation into our margins in turn. And so for us, we're starting with the foundry and logic, and that's what we'll be ramping first. And that frees up some additional capacity in Livermore to also still have foundry and logic as well as the DRAM.

Great. And to follow up, if you could give sort of a number or a guide for that maximum incremental revenue that you could see from Farmers Branch if we look at it from a 12-month window?

I'll let you take that one, Eric.

Yes. So I think what's key to understand here, our target model doubling revenues between now and 2030. The investments that are included in these financials that we've shared, is they're all inclusive, right? So what you see and what we presented, it includes the required investment. And what we're doing in Farmers Branch will enable that revenue level. It also enables, like I've said, a platform for additional capacity to the extent it's required in the future. And it allows us shorter time to get to that because it's really about equipment sets.

Anyone else? All right. With that, I'll wrap it up then. Stan, do you want to. I talked a lot. We'll let Stan.

All right. Well, thank you all for joining us today and for people online, thank you again. I want to thank our executive management team and our CEO for putting this presentation together and hopefully found it informational and educational. And we will see you in the upcoming weeks, months, and please follow our story. Thank you all.

Thank you.

Thank you, and welcome, everyone, to FormFactor's First 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 Vice President of Investor Relations, will remind you of some important information.

Thank you. Today's a 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 us with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions; the benefits of acquisitions and subsequent integration, anticipated time line for and benefits from Farmers Branch, anticipated industry trends and volatility the impacts of regulatory changes, including tariffs, the anticipated volatility in demand for our products, our abilities to develop, produce and sell products and meet ongoing demand.

Advancements of artificial intelligence impact on industry and demand 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 filings 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. Forward-looking statements are made as of today, April 29, 2026, and we assume no obligation to update them.

With that, we will turn now the call over to FormFactor's CEO, Mike Slessor.

Thanks for joining us today. FormFactor's first quarter revenue grew sequentially to another all-time record. The gross margin and earnings per share significantly above the high end of our outlook range. In the current second quarter, we got to again set a revenue record and delivered sequential increases in both gross margin and earnings per share, extending the momentum that began in the second half of last year. These outstanding results exceed our target model on a quarterly run rate basis, and our current quarter outlook is expected to cap a string of results that validate the model on an annualized basis. .

We're proud to have delivered on this commitment and at our upcoming Investor Day at the NASDAQ market site on May 11, members of FormFactor's executive leadership team will introduce our next target model. Along with the strategic priorities, long-term growth opportunities and operational initiatives that underpin it. We're also encouraged by how these financial results were achieved. We continue to benefit from our leadership position at the intersection of high-performance compute and advanced packaging, 2 powerful trends transforming the semiconductor industry. Our growth is fueled both by strength in familiar areas like probe cards for high bandwidth memory and accelerating contributions from newer foundry and logic opportunities like networking.

The first quarter growth in probe cards for networking applications caused a leader in high-performance compute to become a 10% customer for the first time, and we're continuing to build our relationship with this leading customer in not only networking, but also probe cards for GPUs and systems for co-package optics. Operationally, these results represent a significant improvement from the execution challenges that previously limited our performance. While the pace of profitability improvement will moderate as we approach the limitations of our current footprint, later this year, we expect our Farmers branch site to come online, providing increased capacity with structurally lower costs will in turn create the foundation for future revenue growth and gross margin expansion.

Aric will discuss our current operational performance and future plans later in the call. Turning now to segment and market level details. In DRAM probe cards, we delivered the expected sequential growth from the fourth quarter to reach another record with increased demand in HBM applications paired with sustained demand in DDR applications. As you've heard recently from our major DRAM customers, the environment continues to be supply constrained in DRAM overall. -- and we expect our customers to dynamically shift their wafer start mix between a variety of HBM and DDR designs to maximize their opportunity.

Since probe cuts specific to each customer chip design, we expect our DRAM mix to correspondingly shift between HBM and DDR of these unusual end market condition resist. We're again forecasting record revenue in DRAM probe cards in the current quarter, driven by another step-up in HBM demand. Most of this incremental growth is coming from a second customer's increased adoption of FormFactor's differentiated Smart Matrix full wafer contactor technology. Smart Matrix provides a unique combination of high parallelism productivity and high-speed performance, enabling our customers to test hundreds of completed HBM deck simultaneously at the 10 gigabit plus I/O data rate of HBM 4.

This capability is critical in advanced packaging processes like TSMC's Coos where stack die test insertions provide the final test for the HBM stack where it's combined with GPUs or custom ASICs. Our second quarter outlook shows the impact of FormFactor's competitive advantage and the resulting market share gains as P&IO speeds and overall stack bandwidth for HBM continue the relentless increase as the industry progresses from HBM3 to HBM4 and then on to HBM5. Shifting now to the foundry and logic probe card market. As expected, First quarter foundry and logic demand increased significantly over the fourth quarter driven primarily by growth in probe cards for networking applications.

In the current quarter, we expect continued growth in foundry and logic probe revenue, driven primarily by incremental strength in data center CPU applications, building on top of continued strong demand in networking, as well as steady demand in PC and mobile. This data center CPU probe card demand is directly linked to the newly appreciated trend of increasing CPU compute intensity in AI inference use cases. This offers a powerful example of the value of FormFactor's diversification strategy as we strive to be a leading supplier to all major customers.

In this case, we benefit from having put ourselves in a position to capitalize on unexpected demand for CPU probe cards from one of our long-term major customers. As we shared last quarter, we've continued to partner closely with this customer to support turnaround initiatives in the core business as well as in their effort to become a leading foundry. In addition, Intel recently awarded us the 2026 Epic Supplier Award, recognizing our world-class commitment to continuous improvement, collaboration and performance excellence. At the same time, as in HBM, we're successfully executing our strategy to be a top supplier to all the leading customers in the industry as we continue to build the foundation for market share gains at a large fabless XPU customer.

Specifically, we've now been awarded a second design, building off our successful qualification and initial design win. In addition, our production qualification in leading-edge GPU applications at the world's largest foundry is nearing completion, with preparation now underway for second half volume shipments and production support. Finally, as an additional component of FormFactor's expanding high-performance compute exposure, we continue to grow our custom ASIC business, following a multimillion dollar design win in deepening engagement with several hyperscalers and their ASIC design partners.

Turning to our Systems segment. In the first quarter, we experienced the expected seasonal reduction in demand. In systems, our focus continues to be two-pronged: one, executing on the growth opportunity in co-package optics; and two, helping customers solve the challenges of building scalable and commercially viable quantum computers. Staying with Quantum for the moment. In the first quarter, we announced the flat iron dilution refrigerator, a new benchtop millikelvin platform designed to simplify optical and electrical measurement and accelerate quantum device development, characterization and chip scale validation.

In CPO, we're building on our decade-long R&D engagement with leading customers in their development silicon photonics and CPO and are now beginning to ramp our Triton production test system co-developed with Advantest and Tokyo Electron. This ramp is accelerating, and we now expect 2026 CPO revenues to come in at the high end of the $10 million to $20 million range we've previously communicated. This acceleration is driven by 2 factors: first, the growing volumes of CPO chips planned for later this year; and second, our leadership in the important test insertion on which ensures known good die on the photonic integrated circuit or pick wafer.

Insertion 1 is proving to be a cost-effective and production-ready solution to ensure high yields of CPO modules built with advanced packaging processes like TSMC's coup. Because of cost and complexity challenges, other test insertions like insertion 2, after stacking the electrical dye on the PIC are proving to be difficult for customers to implement the production. Finally, we successfully integrated our [indiscernible] fourth quarter acquisition of Keystone Photonics, and our teams are collaborating to define and execute the world's leading silicon photonics and co-packaged optics probing road map.

This includes electrooptical probe cards, which offer the promise of higher parallelism and higher throughput for our customers as we bring together our technology leadership in both electrical and optical oven. Before turning the call over to Eric, I want to thank the global FormFactor team. Achieving our target model is the result of their resilience in implanting multiyear investments in technology leadership talent, customer focus and operational execution. We're well positioned as test intensity and complexity continue to rise at the intersection of advanced packaging and high-performance compute and we're excited to share our vision for the future of FormFactor at our May 11 Investor Day. Aric? -- you're up.

Thank you, Mike, and good afternoon. Over the past 3 quarters, one of our top priorities has been to increase gross margins and deliver on our commitment to our target model of 47% non-GAAP gross margins at $850 million in annual revenues. We're proud to say that in Q1 '26, we achieved this target on a run rate basis, but we're even prouder of how we achieved it, driving what we believe are durable gross margin improvements. Through operational effectiveness and financial discipline. The actions we took included: first, deploying our workforce and existing manufacturing footprint more effectively, which included the restructuring actions announced in early Q1.

Second, driving improvement in manufacturing yields in key process areas; third, innovating to reduce manufacturing spending and lastly, reducing cycle times in key manufacturing operations. Even as we executed on record demand, we remain focused on driving improvements in these critical areas. This is the type of discipline that we believe is fundamental to driving sustainable financial results. Thanks to the FormFactor team's focused execution, we generated additional operating leverage on sequentially higher demand levels. Driving even better progress than expected and a cumulative improvement of more than 1,000 basis points in gross margins over the last 3 quarters.

At the midpoint of our Q2 guide, we expect to generate another 50 basis points of expansion. We believe the bulk of the improvements in gross margins are durable in nature. Driven by improved operational effectiveness as well as discrete changes in our cost structure. We expect these fundamental improvements will help us to profitably navigate the impact of inevitable shifts in product mix and volumes. Non-GAAP gross margins improved by 500 basis points from Q4 '25 and exceeded the midpoint of our first quarter outlook by 400 basis points.

As expected, continued operational improvements and higher volumes drove an approximately 100 basis point improvement from Q4 '25 that we believe is durable in nature. The overperformance against Q1 expectations is about half related to timing items and half related to durable improvements. The timing items of about 200 basis points are primarily driven by changes in customer-driven priorities within the quarter. This element may be transitory as driven by timing. The remaining overperformance of 200 basis points was split about 50-50 between first, faster realization of cost savings from our first quarter restructuring action and second, unexpected relief from tariffs.

As IEPA tariffs were discontinued and placed by lower Section 122 tariffs during the quarter. These improvements are likely durable in nature. We continue to drive the unit cost of our products down in part enabled by increasing output from our existing infrastructure. Our exposure to fast-growing markets that Mike drive is generating demand that requires more output. As reflected in our record quarterly revenue in Q4 '25, again in Q1 '26 and now in our outlook for Q2, we are manufacturing at levels that would not have been possible even 1 quarter earlier. Improvements in cycle times, yields and how we deploy our workforce in addition to reducing unit costs and improving gross margins are enabling us to get more out of each tool, process and sight by ensuring more good product out and better fungibility of our workforce.

Our Farmers Branch site expansion is the next key priority. And the project is on track and expected to begin to come online later this year and to ramp over the course of 2027. Bringing up this capacity on time and on budget is a key focus over the as it will enable the next phase of growth and gross margin expansion beyond our current target model. The trajectory of gross margin improvement and attainment of our target model is now evident, but our journey is not over.

While we are optimistic about our ability to continue to drive profitable growth and believe we will continue to drive incremental improvements throughout 2026. We recognize that sustaining the progress that we have made will require ongoing focus and discipline. Further, we expect future gains to be achieved at a more moderate pace as incremental improvements require both more effort and more time than the rapid progress to date. We are excited to share our longer-term view at our May 11 Investor Day.

Q1 '26 revenues of $226.1 million came in $1.1 million above the midpoint of the Q1 '26 outlook range of $220 million to $230 million. GAAP gross margins for the first quarter were 38.4% and down 380 basis points from 42.2% in Q4. Cost of revenues included $23.9 million of GAAP to non-GAAP reconciling items, of which $21.5 million related to our Q1 '26 restructuring actions announced on January 5. 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, gross margins for the first quarter were 49%, 510 basis points higher than the 43.9% we achieved in Q4 and 250 basis points above the high end of our Q1 '26 outlook range. This increase in non-GAAP gross margins was driven primarily by improvement in the probe card segment, which were up 603 basis points to 50.5% and partially offset by the decrease in our Systems segment, which declined 350 basis points to 38% on seasonally softer demand and as we transition to production of our Triton system for co-packaged optics applications, as Mike described.

Our GAAP operating expenses were $70.1 million for the first quarter, down slightly as a percent of revenue from the prior quarter and a decrease of 470 basis points from the same period in the prior year. Included in Q1 '26 operating expenses were $7.1 million of expense related to the preproduction ramp of Farmers Branch. Despite the incremental spending, the decrease as a percent of revenue demonstrates continued spending discipline across the P&L. -- even as we drive innovation through R&D and fund the Farmers branch expansion.

GAAP net income for the first quarter was $20.4 million or $0.26 per fully diluted share. Down from GAAP net income of $23.2 million or $0.29 per fully diluted share in the previous quarter. The decrease was driven by restructuring-related costs, net of tax of $17.6 million incurred in Q1. First quarter non-GAAP net income was $44.5 million or $0.56 per fully diluted share, up from $36.6 million or $0.46 per fully diluted share in Q4. The GAAP effective tax rate for the first quarter was 2.1%, and the non-GAAP effective tax rate for the first quarter was 16.1%.

Moving to the balance sheet and cash flows. We had free cash flows in the first quarter of $30.7 million compared to $34.7 million in Q4. The $4 million decrease in free cash flow was driven by greater capital expenditures and lower exposure from operations. The decrease in cash flows from operations which were down about $1 million from the prior quarter to $45 million in Q1 is driven primarily by higher working capital needs driven by our growth and $4.1 million in cash paid related to restructuring actions. At quarter end, cash and investments were up $28.1 million to $303 million. We continue to expect that cash CapEx for Farmers Branch will be between $140 million and $170 million in 2026. Preproduction ramp costs and G&A will be between $20 million and $25 million. Upon completion of the ramp to initial target capacity, we expect Farmers branch to be acetic to gross margins.

Associated with our investment in Farmers Branch, we secured certain incentives, which we expect will partially offset these expenditures. Among others, incentives include about $24 million in cash grants designated to fund capital expenditures upon meeting certain criteria. During the first quarter, we did not repurchase any shares. At quarter end, authorization of $70.9 million remains available for future repurchases under the $75 million 2-year buyback program that was approved and announced in 2025. We are committed to our share repurchase program as a tool to offset dilution from stock-based compensation over the 2-year period of the program.

In the short term, we have prioritized our deployment of cash to accelerate the ramp of our new manufacturing site in Farmers Branch. Turning to the second quarter non-GAAP outlook. We expect Q2 revenues of $240 million, plus or minus $5 million. This increase in revenues and the impact of continued gross margin improvement initiatives described earlier, are expected to result in a higher non-GAAP gross margin of 49.5% plus or minus 150 basis points. As a reminder, we continue to see an adverse impact to gross margins from tariffs despite recent reduction in an amount paid. We have assumed around 140 basis points of tariffs in our outlook for Q2. We have paid substantial EPA-based tariffs since they were put in place in 2025, and we expect some or all may be refundable in the future due to the Q1 '26 Supreme Court ruling.

[indiscernible] We did not record a recovery of these amounts in Q1 and have not assumed recovery in our Q2 '26 outlook. We are actively monitoring developments in this rapidly evolving space. If the amounts we previously paid are deemed recoverable, we could receive a refund of $9 million to $11 million in tariffs previously recorded in cost of goods sold. At the midpoint of our outlook range, we expect Q2 non-GAAP operating expenses to be $65 million, plus or minus $2 million. Our Q2 non-GAAP effective tax rate is expected to be within the range of $15 to 19%. Non-GAAP earnings per fully diluted share for Q2 is expected to be $0.61 plus or minus $0.04. A reconciliation of our GAAP to non-GAAP Q2 outlook is available on the Investor Relations section of our website and in our press release issued today.

As demonstrated by our Q2 results and our Q2 outlook, we have now achieved our current term model. We believe we have more room to run and driving operating leverage, underpinned by our initiatives to improve our structural costs, increase capacity and expand our leadership position in the fast-growing markets that Mike described. We look forward to sharing our new target financial model and key elements of our strategy at our planned Investor Day in a little under 2 weeks. With that, let's open the call for questions. Operator?

[Operator Instructions] And our first question comes from the line of Brian Chin from Stifel. [Operator Instructions]

And congratulations on the really good results. First question. NVIDIA 10% come other than the nice ring that it has to it. Can you explain why you break this out separately versus rolling up under TSMC? And also how much roughly of this is networking related? And what does that suggest or what does this suggest for your market share of the SAM for new existing platforms?

Brian, it's Mike. I'll take that one. With all customers, as we report them as -- when they cross the 10% threshold is required to it's based on who's placed the PO and who's paying the invoice. And so in this case, you see we have 2, 10% customers in this quarter. And as I described on the call, the second 10% customer is associated with networking. We're still making excellent progress on the GPU qualification. As I said, we're now reaching the final stages of that and expect essentially the $20 million in revenue we've described in the second half. We're now investing and preparing the capacity and local support for that. Those POs we would expect to come from the foundry, just different business models in different part of a fabless customers' business.

I'll leave CPO for the next question here. But 1 thing I wanted to ask you about, Mike, is that you've talked about the production ceiling that you're kind of working with until Farmers branch comes online, good sequential growth kind of in line with the midpoint of Q1 further growth ahead of our models for Q2, to ask this, but kind of curious how much of your near-term growth is being driven maybe by NIC or ASP relative to just units. Given the constraints you're operating on and maybe your ability to optimize within those constraints. .

Yes. So it's a great question, Brian. And it ultimately comes down to ASP versus volume. And as Eric went through in his prepared remarks, he provided a pretty clear bridge that showed the gross margin improvement up to the 49% level is really based on cost reduction on COGS. Now it's split on things that we believe are durable and things that we think are temporary. But pricing in ASP is not a major factor in that. We've always run a business where customers will definitely compensate us for value. Typically, that's been performance of our products, cost of tests that we produce reductions in cost of tests that are produced. And in this case, there are some isolated incidents where customers are willing to pay expedite fees for a certain design because that offers the value in this capacity-constrained environment, but pricing really is not a driver of the gross margin improvement. It's COGS reduction and our operations team continuing to improve yields and cycle times and get more out of the existing footprint. How far that can run, we'll see. But so far, they've done a fantastic job.

And our next question comes from the line of Matthew Prisco from Cantor.

So given the gross margin strength, I'd just like to dig in a little bit there. I know you listed out a few drivers, but can you perhaps just offer some more detail on how each of those drivers contributed to that 510 basis point increase quarter-over-quarter. And as we look forward over the last couple of quarters, combatted than expected. So how much more juice is there a squeeze with these current drivers ahead of that farmers branch ramp? .

Yes. So as mentioned in the prepared remarks, the 510 basis points roughly 400 basis points were driven by a mix of durable and what I call transitory items. And if I break those down, the durable piece is really related to faster realization of savings from our restructuring action. So we thought the expenses were going to be a little bit higher and we ended up being able to do better than that as we executed on that restructuring action. Those changes are -- it was about 100 basis points in the quarter. And those changes are going to persist at those savings will persist as we move forward, our permanent in nature.

The other 100 basis points of that 50% of the 400 basis points -- so the other 100 basis points is really related to tariffs. The new tariff construct that we're operating under just has lower weighted average tariff rates. And so that's resulting in a savings for us. We do continue to pay tariffs today. It still continues to be a headwind. But as long as the current framework is in place, we expect those savings to also be durable in nature. The piece that is transitory in nature really relates to timing items both on spend and also in terms of just prioritization of certain products that we were producing within the quarter.

Those were decisions that were made in order and were not included in our original outlook. We think those things are temporary and will flip around as we move forward, primarily mix and cost timing items. And so we don't expect those to necessarily persist going forward. Now we do expect those to be replaced by durable improvements as we move forward into next quarter into Q2. So as you can see by our outlook, we are still expecting sequentially up -- that is because even though we have some of the improvement we saw in Q1, even though some of that goes away, it is replaced by other improvements, and those are primarily related to the full quarter impact of our restructuring actions and the savings associated with that. Also, volume is a factor as we move from $226 million to $240 million in revenues.

And then maybe on the foundry logic side, that business obviously coming in better than expected. Can you help give us the breakout of that business as it stands today, kind of between that networking smartphone [indiscernible] all different moving parts within it. And as you talked about kind of the genetic AI driving the PP demand as we think about your ability to service that demand given the constraints on supply, are you falling short of that today? Or is there some kind of work around where you can actually supply these incremental parts .

Yes, it's Mike. I'll take that one. We don't break foundry and logic down other than qualitatively in some of these different drivers as we go sequentially forward. As we've done this quarter with the CPU demand that you talked about, -- the step-up in Q1 was expected, if you go back and parse our comments from the last call and right about where we thought it would be. Now part of that's the answer to your second question we are running at very, very high utilizations.

And basically, if you look at the Q1 revenue results, we came in pretty close to the midpoint of the guidance, and that's a reflection of some of the constraints we have. The operations team, as you can tell from our outlook, we're stepping up again pretty significantly sequentially. -- has continued to squeeze, I think you call it squeeze more juice out of things. That's true on the revenue side as well. One of the reasons gross margins are improving is we're producing more out of the same fixed cost footprint by and large. There's a tremendous amount of leverage when we do that.

Now we're working closely with customers on their demand visibility is still a challenge in this business with lead times right around mostly shorter in the quarter. But this is an area where we've got a more active dialogue going with customers to make sure we're planning for whatever we can produce. So we're meeting their needs and surprise demand like this, the CPU agent AI driving.

And our next question comes from the line of Krish Sankar from TD Cowen.

Congrats on the great results. This is Eddie for Krish. I'd like to follow up on the same question regarding CPUs. Your main IDM customer remains 100% of revenues and for the past 2 quarters, the demand outlook for CPUs have meaningfully improved I wonder, do you expect later this year for that customer to return to more than 10%. And if we look at the revenues, they're still like 40%, 50% below their peak in 2022. I wonder how you think about the recovery profile from that customer going forward?

Yes. And if you look, obviously, this issue of 10% customers that customer was not a 10% customer in Q4 nor was it in Q1. With some of the CPU demand, they'll be pretty close in Q2. I don't know whether they'll make the line, but they're going to be buttoning back up. Of course, the other thing that's going on is we're making the absolute revenue threshold to hit 10% larger as we grow the overall top line for FormFactor. .

So will it return to the 2022 highs? I don't think so just based on some of the strength in CPUs, but as they continue to execute their turnaround plan as they continue to make progress in the foundry business, especially associated with their advanced packaging technology, given the strong relationship that we have with them, I referenced the award that they gave us earlier this year. We're certainly hopeful that we can return and even exceed the peaks of '22.

And a follow-up. I mean, it seems you have these meaningful demand drivers from -- whether it's from NVIDIA, from the IDM, but your revenues seem -- correct me if I'm wrong, are they capped near that $240 million level until you guys ramp your facility later this year. I'm just wondering how to think about September and December revenues. Should we expect like flattish from that $240 million? Or do you think there are some optimization techniques that can take us $10 million to $20 million more than that. .

I'll take that question. As you can see from our Q1 results and our outlook, we've been able to now execute on $225 million in the Q1 quarter and then looking forward to next quarter to 240. I think if you were to back a quarter off of each of those a quarter before that, we probably couldn't have produced at those levels. We've been real-time driving efficiency improvements in terms of cycle times and yields in our sites.

And I think that is very much real time, increasing our output out of our existing sites. It's very closely related to these efficiency improvements that we're making. And it remains to be seen how much more of that we can drive. I do believe that there is still room for improvement, and we're going to continue to strive to make those improvements as we move through the remainder of 2026. To the extent we're successful in that, that will -- we expect to be able to continue to incrementally increase our output over the coming quarters.

And our next question comes from the line of Craig Ellis from B. Riley Securities.

Yes. Congratulations on the really strong execution guys. -- both on the top line and gross margin. I wanted to start just by following up on the last question. So we've done a really good job over the last couple of quarters. Tuning the knobs with our operations to drive significantly greater capacity and we're doing that with better yields, and that's helping to give us much better gross margin.

How much of what you're doing at current facilities is going to be leverageable into Farmers branch when you ramp that up late this year and next year?

Our intent is to leverage all of that work, right? What -- it's really fundamentally improving how we run our manufacturing processes. And I think that moving a portion of our manufacturing and having the benefit of new tools we will only improve in those areas in terms of cycle times and yields with some of the additional capability we get from a new tool set. So we all intend to preserve the gains that we have made and in fact, build on them as we get access to newer equipment sets and a site that is more consolidated, if you will, that allow us greater fungibility of our resources.

And then the follow-up question is regarding the networking business. So interesting to see big green there. On the 10% customer list. My question is this, as we think about that customer and the revenues that it's now driving, how do we think about how this most recent quarter performed relative to the trend lines that you all have been seeing and what you expect from that customer? Is there a seasonal sign wave that goes along with that demand -- or how do we interpret where revenues could go from here, given what you've seen in the past and what your expectations would be?

Yes. I'll address the seasonality part, Craig. There is going to be some seasonality in that business. You've seen it reflected in our HPM business, which obviously feeds into that customer's overall supply chain. First half heavy second half a little bit lighter, although some of the product releases are starting to blend together. So I would expect some seasonality. Having said that, if we look at the overall demand environment, it's pretty clear from an external perspective that the second half continues to be pretty strong, right? We've got, as I said, in response to the CPU question, more active conversations with our customers because they understand there's capacity constraints, not just for us, but for our competitors as well. And so I think there's other opportunities that we can take advantage of, even if there is some seasonality around the annual cadence of these high-performance compute product releases, if you will.

That's really helpful, Mike. And if I could sneak in one more. We're seeing more low-power DDR designing into certain AI systems going forward, it seemed like that could give legs to the kind of the legacy DRAM market that the company has served not making it as probe card intensive as HBM, but at least extending the life of different formats that might have had a different sign way. What does that mean for form? Is that right? Or is it not something that can benefit the business?

It depends, right? The real details of how our customers -- and I referenced this earlier in the call, shift their wafer start mix between HBM and DDR, primarily DDR5, but some legacy DDR4, as you alluded to in the mix is going to be really a pretty dynamic situation. the Chairman of 1 of our largest customers a few weeks ago publicly said that they're now getting better margins out of the DDR business than they are on the HPM business. .

And I think you're going to see all 3 major DRAM manufacturers optimize their mix around this in this overall bit capacity-constrained market. So there definitely is -- remembering that probe card demand is driven by new design releases and ramps of those specific designs. Each probe card is specific to a customer chip design there's a lot of devil in the details, but there is the potential for that to fill in some of the seasonality goals.

[Operator Instructions] Our next question comes from the line of Christian Schwab from Craig Hallum.

Congrats on a great quarter. I just have 1 quick question. Can you remind me -- I can't find any way now. What is the target revenue capacity that on a yearly basis that you're putting on in Farmers Market.

Yes. farmers Brad. So just to remind you Yes, are Yes. Just a reminder on the time line. So we are initially starting production that site at the end of this year, and we intend to ramp over the course of 2027 to the initial target capacity approximate sizing of the initial target capacity is something equivalent, more or less equivalent to our existing California footprint. You can think of that as maybe 40% of our -- I'm sorry, a little bit more than that. Yes, roughly 60% of our existing probe cards business today. So a pretty substantial capacity, what I think is probably more relevant is our ability to bring that capacity online modularly over time. So we're going to we're going to target initial capacity and then make sure that we're monitoring the outside environment. We're going to talk a bit more about this in our Investor Day on May 11 and should be able to provide some more details around it.

Our next question comes from the line of Dennis Paton from Needham & Company.

So just could you maybe give us an update on your data test partnership? Kind of what's the progress there? And what is the time frame to monetize on that partnership? .

Yes. I think the partnership with Advantest, we've talked about it as being most prominent with CPO. The Triton system over the years we've codeveloped with them in Tokyo Electron. But I wouldn't characterize it too much differently than our partnerships with a variety of other suppliers in the industry. We work very closely every day with Advantest competitor Teradyne because fundamentally, we believe that the test ecosystem needs to be an open ecosystem.

We trained our customers to rely on that for business continuity. We've all developed interface standards. So I think the CPO momentum that both of us and Advantest have talked about, I think as an example, where this codevelopment together with partners in ATE and probers and other instrumentation really produce a system that's useful for solving an important customer problem. So a great result of that partnership, we got partnerships similar to this all over the place.

Great. And then another question on Farmers Branch. So if I understood correctly, so you expect to replace basically most, if not all, of your California capacity with the capacity in Texas, right, which will be about 60% of it. And if that's correct, so when do you expect kind of revenue to start hitting the top line from Farmers Branch? What's going to be the first quarter that hits? And then when do you think you hit full capacity in that facility? .

Yes. To clarify, it's not a replacement. We're expanding our available capacity. And as I mentioned in my response earlier, we intend for that ramp to happen over the course of 2027. So pretty fast ramp time line with the first initial capacity coming on here at the end of the year at the very end. So not much impact to this year.

And our next question comes from the line of David Duley from Steelhead Securities.

I guess the first 1 is -- you mentioned your codeveloped tool and the Triton there for, I think, insertion number. You mentioned an insertion number. Will that be the vast majority of your TAM opportunity in CPO is top 1 particular step. I think there's like 4 insertion points and then a couple of like final testing. But -- so can you just kind of explain where you think most of your TAM and revenue would come from CPO as this insert you referring to or a different one? And then what is your total expectation for CPO revenue perhaps in 2027.

Yes. So David, I'll try to parse that in different ways. We're in the very early innings of CPO, right? This is the initial production ramp. We are focused on insertion One for a couple of reasons. One, it represents the sort of the foundational optical probing technology that's going to be needed in any of the insertions. If you think about any of the insertions you have to be able to optically probe the device. It's just insertion on essentially is the exclusively focused on that. There's a little bit of electrical program there, but it's really the optical proping step. So we're going to be able to port that technology, if you will, across all the other insertions.

I do expect, and I think most industry participants who are really in this game expect the spending between different insertions to move around as a function of yield, as a function of product mix from our customers. So we have active conversations on all of these different sections with various partners and with customers, we've just chosen the initial ramp to really focus on insertion 1, and that's turned out to be a good ben,right, as you can tell from us raising our outlook for 2027. the sort of revenue opportunity with CPO, I'm going to punt to Investor Day. We're going to spend time talking about why we're differentiated the different insertions and the longer-term opportunities I think it fits pretty well in the context of the next target model we're going to share for you.

Just as a follow-up on the insertion #1, that's where you're basically optically proven the PIC or the optical part, which is like super important, right? Because you're going to team that up with an electronic part later on. And once you package it together if the PIC doesn't -- if that part doesn't work, then a real key part breaks the co-packaged expensive part, so you don't feel like this is the most important step for you to address.

Again, it goes back -- so I'm not going to -- I'm certainly not going to argue with you given where we focused our R&D resources and the momentum we're seeing. But imagine a scenario where you've got very, very high yields. Our customers have very, very high yields on the PIC wafer. Now I think you can infer that's probably not the case now. And for a while, as the new technology ramps, there's going to be a yield learning curve. But that's 1 of the reasons why we're continuing to pay attention to all the other insertions. And again, I can't overstress the idea that any insertion is going to require optical probing -- so if you get it right at insertion 1, you've got the toughest part of the problem solved for any of the other insertions.

Okay. Final thing for me is, could you just elaborate, I think you mentioned that most of your growth in HPM probe card revenue in Q2 is going to come from a new customer adopting a new application. Could you just elaborate a little bit more on what you said and what the opportunity is? .

Yes. What I said was for Q2, we do expect HBM to grow to another record -- and really, this is -- comes from a second customer increasing their adoption of our Smart Matrix technology for the at-speed stack test. This has been one of the staples of our HBM differentiation. And we're now seeing some more significant adoption from the 2 other customers, others that are our primary driver customer. And we see this as central to our differentiation in the HBM space. .

And our next question comes from the line of Elizabeth Sun from Citi.

Congrats on the results. So first on the follow-up on the HPM question earlier, you talked about the second customer increasing adoption in Q2. So I'm just wondering on the third HPM customer, are you seeing -- are you expecting to gain share as well going down the road?

Elizabeth, in the long term, consistent with our strategy that we've articulated basically since I got here, we want to be a leading supplier to all customers in the industry. So that's an initiative. Now clearly, there's some prioritization and choices going on given not just the production volume, but how thinly or -- and the whole industry's R&D resources are stretched. So longer term, it's a question of time frame, right? Longer term, yes, we expect to be a leading supplier to all 3 DRAM manufacturers for these at speed DRAM test. And I think there's a nice sort of validation of that here in the second quarter. .

The other thing I wanted to make sure I snuck in here was if you look at the growth in HBM, from the first half of 2025 to the first half of 2026, if you take the midpoint or guide we've grown our HBM probe card business by more than 50%. It's a great example of the increase in test intensity, test complexity now in the second quarter, a little bit more of a contribution from a second customer for this highly differentiated at speed test.

And on the CPO side, other than insertion one, are you still working -- are you also working with this similar group of partners? Or are you working with other like partners as well, like Teradyne or other probers testers providers?

Yes. So to be clear, the bulk of our work is on insertion 1, as you might imagine, we're very focused on that because that's the foundational here and now opportunity that we must execute on. I'll go back to what I've said before on this call and in other settings, we leave in the open ecosystem. And so a partner like Teradyne wants to focus together with us and make sure that we've got a compelling solution for some of the other insertions. We'll certainly engage in that discussion.

There's some details of resourcing and different relationships that need to be figured out as we do that. But the fundamental principle is we all need to operate in an open ecosystem to be as successful as we can and enable our customers to take on these significant technology challenges.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mike Slessor for any further remarks.

Thank you very much for joining us today. We're really excited to share the future of FormFactor now that we've achieved our target financial model, share with you the next target model. And really, the fundamental operating principles, development initiatives and growth areas that underpin that next target model for FormFactor. Hope to see you on May 11, either live in New York or we'll be webcasting the event as well. Until then, take care. .

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Thank you, and welcome, everyone, to FormFactor's Fourth Quarter 2025 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, anticipated industry trends; potential disruptions in our supply chain; the impacts of regulatory changes, including tariffs and changes in export controls, the anticipated volatility demand of our 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 28, 2024, and in our other SEC filings, which are available on the SEC's website at www.sec.gov. Forward-looking statements are made as of today, February 4, 2026, and we assume no obligation to update them.

With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Thanks, everyone, for joining us today. FormFactor's fourth quarter revenue, gross margin and earnings per share all exceeded both third quarter results and the high end of our outlook range, and we posted record revenue on both a quarterly and annual basis.

Building on that momentum, we expect to again deliver sequentially higher revenue and non-GAAP gross margin in the current first quarter. As you've consistently heard from us, we're focused on and committed to improving our gross margins on a path to achieving our target model. We're making progress faster than expected by executing a program of rapid and immediate gross margin improvement actions that produced a 290 basis point sequential increase in the fourth quarter and are forecasted to add another 100-plus basis point improvement in the first quarter.

Within our existing footprint, we expect to deliver both output increases and gross margin expansion throughout 2026, albeit at a more moderate pace than in the past few quarters. Later this year, we expect our Farmers Branch site to come online, providing increased capacity with structurally lower cost, creating the foundation for further revenue growth and gross margin expansion.

Aric will discuss details of both our current operational performance and our future plans later in the call.

Moving back up the income statement. Rapid innovation and accelerating investment by our customers, principally at the intersection of advanced packaging and high-performance compute is driving increased test intensity and test complexity, creating strong demand in our served markets. In some of these areas, like HBM and DRAM and network switches in Foundry & Logic, we today have leading market positions.

In others, like GPUs and custom ASICs, we're making steady progress on qualifications to produce market share gains and revenue growth. Driven by this revenue growth in our existing and building market positions with gross margin expansion from operational improvements and earnings leverage from disciplined operating expense control, we're closing in on our target financial model.

We expect these trends to continue, and we'll host an Analyst Day on May 11, where our executive team will share FormFactor's next target financial model and discuss the market opportunities, strategic priorities and operational focus areas underlying that new target model.

Turning now to segment and market level details. In DRAM Probe Cards, we delivered the expected sequential growth in the fourth quarter to a new record with the increase coming from non-HBM DRAM applications like DDR4 and DDR5. When we provided our outlook a quarter ago, we accurately forecasted DRAM growth would be driven by non-HBM strength, which is now understandable given the widely publicized end market demand and pricing for non-HBM DRAM.

In the first quarter, we again expect to post an all-time DRAM record, this time on HBM strength with contributions from both sustained demand in HBM3E and the early stages of the HBM4 ramp. As I've discussed previously, the ramp-up of HBM4 offers some exciting opportunities for FormFactor in 2026 and the first quarter offers an early glimpse into these opportunities.

First, the test intensity for each HBM stack further increases with the transition to HBM4 16-high stacks of core die chiplets, up from the 8 and 12 high stacks of HBM3 and 3E. This layer count increase is a powerful driver of increased test intensity, resulting in higher Probe Card spending by our customers for HBM applications.

As we've also seen in Foundry and Logic in recent years, this dynamic is not unique to HBM. All advanced packaging architectures require increased test intensity as each of the component die chiplets must be comprehensively tested to ensure that a single defective chiplet does not cause a failure of the entire stack.

In addition, both the pin and I/O speeds and overall stack bandwidth for HBM continue to increase at a relentless pace as the industry moves from HBM3 to HBM4 and then on to HBM5.

The overall stack bandwidth of HBM4 more than doubles over HBM3 to an astounding 2-plus terabits per second, and HBM5 bandwidth is projected to double again over HBM4. These speed increases drive greater test complexity, which produces competitive advantage for FormFactor as our SmartMatrix architecture is the industry's only production-proven Probe Card architecture that combines high parallelism productivity with high-speed test capability. This enables our customers to test hundreds of dies simultaneously at the 10 gigabit plus I/O data rate of HBM4.

And to ensure we're ready for the future, our global R&D and engineering teams are partnering closely with customers to advance the SmartMatrix architecture to meet the challenging specifications for HBM5 and beyond, further extending our differentiation in HBM applications. This combination of high parallelism productivity and high-speed performance, which is critical for several important test insertions in our customers' HBM process flow, is producing market share gains at all 3 major HBM manufacturers. We expect this trend to continue as we execute our long-term strategy to be a key supplier to all the leading customers in the industry, thereby growing and diversifying our HBM demand profile.

That said, our first quarter HBM revenue continues to be skewed towards our largest customer, consistent with the current market share split between our customers. Shifting to the Foundry and Logic Probe Card market. As expected, fourth quarter demand in this market was comparable to the third quarter. In the current first quarter, we expect increased Foundry and Logic demand levels. Notably, this growth is not anticipated to come from our historical drivers of client PC and mobile, but instead from a significant shift towards rapidly growing data center applications like network switches.

Our evolving customer makeup offers important evidence of this diversification as our top customer historically, a large microprocessor IDM was not a 10% customer in either the fourth quarter or for 2025 overall, even as we posted all-time record revenues in both of those periods. We continue to partner closely with this customer, supporting turnaround initiatives in their core business as well as their effort to become a leading Foundry.

Given our long-standing partnership and corresponding market share, FormFactor is well positioned to grow with this customer as they make progress in these areas. At the same time, like in HBM, we're successfully executing our strategy to be a top supplier to all the leading customers in the industry and continue to build the foundation for market share gains at a large fabless CPU manufacturer.

We're also accelerating the pivot to fast-growing high-performance compute applications with our ongoing production qualification in leading edge GPU applications. We continue to expect to be in a position to compete for volume orders for GPU probe cards later this year.

Finally, as an additional longer-term component of high-performance compute exposure, we're also growing our custom ASIC XPU business on the back of a multimillion-dollar mid-2025 design win and are expanding the future opportunity set in this space by deepening our engagements with the hyperscalers and their ASIC design partners.

Turning to our Systems segment. We delivered the expected sequential revenue increase in the fourth quarter, driven by customer investment in co-packaged optics and quantum computing. In the first quarter, we're expecting the typical seasonal reduction in demand for systems. Co-packaged optics or CPO continues to be a primary area of focus for us as it represents an exciting growth opportunity where we have a strong leadership position.

To strengthen FormFactor's leadership in CPO test, we recently made an important strategic addition to our optical test capabilities with the December acquisition of Keystone Photonics. 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. These optical and electrical probe technologies enable the highest fidelity test and therefore, yield, whether the device runs on photons, electrons or in some cases, like CPO, both photons and electrons.

Together with our market-leading CM300xi and Triton test platforms, Keystone's optical probe technology expands FormFactor's leadership position as we help enable the adoption of energy-efficient optical data transmission in tomorrow's data centers.

Before I turn the call over to Aric, I want to reiterate our continued commitment to achieving our target model. As expected, we reached run rate target model revenue levels before reaching target model gross margin levels, but have made excellent progress in closing the gross margin gap. We plan to continue that progress with output increases and gross margin expansion across our existing manufacturing footprint, followed by further improvement as we bring our Farmers Branch expansion online at a structurally lower cost.

We look forward to demonstrating continued progress in the first quarter of 2026 and are excited to share FormFactor's next target financial model in May at our Analyst Day as we meet the challenges and opportunities of increased test intensity and higher test complexity at the intersection of advanced packaging and high-performance compute. Aric?

Thank you, Mike, and good afternoon. Before we dive into the details of our fourth quarter financial results, I want to remind you of our strategic emphasis on improving gross margins. Over the past 2 quarters, we have made gross margins and our commitment to achieve our target model, one of our top priorities as a company.

We are pleased to have reached our revenue target and believe we are on track to demonstrate the target model gross margins, adjusting for the impact of tariffs within 2026. As we expand gross margins, we are committed to achieving these improvements in a sustainable way by driving operational effectiveness and better financial discipline across the company.

Over the past 2 quarters, we have taken several actions, including: first, reducing and reallocating our workforce and more effectively deploying those resources even as we execute on record level demand; second, driving improvement in manufacturing yields in key process areas; third, innovating to reduce manufacturing spending; and finally, reducing cycle times in our key manufacturing operations. We are seeing the benefits of these actions in the unit cost of our products, and we have made even better progress in Q4 against our multi-quarter gross margin improvement road map than we expected.

Looking back just 2 quarters, Q2 '25 gross margins were 38.5%. Through Q4 '25, we have generated a cumulative improvement of 540 basis points in gross margins. And at the midpoint of our guidance, we expect to generate an additional 110 basis points of expansion in Q1 '26.

Operational effectiveness improvements like reduced cycle times and higher yields are structural in nature and will drive durable gross margin expansion. These fundamental improvements in underlying cost drivers have a system-wide benefit that will help us weather and partially offset the impact of inevitable shifts in product mix and volumes.

Over the coming quarters, we will continue to drive a relentless focus on attacking these key cost drivers within our existing footprint. In addition to the improved operational effectiveness, we also believe that driving good financial discipline is critical to our long-term success.

Accordingly, we continue to examine our overall portfolio of products, markets and businesses, evaluating those elements of our operations through the lens of how each best supports our target model and our key strategic priorities. The reduction in force and site consolidation announced early in January is a recent example of how we are executing on this front. While the trajectory of gross margin improvement and the path to the target model is now evident, our journey is not over.

We will continue to drive incremental improvements throughout 2026, but at a more moderate pace given the speed at which we have worked through our road map to date. Even as we drive the unit cost of our products down, we are simultaneously enabling higher output from our current infrastructure. Our exposure to fast-growing markets that Mike described is generating demand that requires more output.

As reflected in our record Q4 '25 revenues and our outlook for Q1 '26, we are demonstrating the ability to produce at a higher level and in a more efficient footprint. Improvements in cycle times, yields and how we deploy our workforce in addition to reducing unit costs have the secondary benefit of increasing the available output from the same resources in our existing manufacturing footprint. These improvements enable us to get more out of each tool processed and site by ensuring more good product out and better fungibility of our workforce.

As Mike mentioned, we expect our Farmers Branch site to begin to come online later this year and to ramp over the course of 2027. This expansion is a good example of how we are taking advantage of our strong balance sheet to increase available capacity quickly at a structurally lower cost and create the foundation for further gross margin expansion and growth beyond the current target model, something we are excited to describe in further detail at our Analyst Day in May.

As you saw in our press release, our Q4 '25 results were favorable to our outlook on revenues, gross margins and EPS on both a GAAP and non-GAAP basis. Q4 '25 revenues of $215.2 million came in at the high end of the Q4 outlook range of $205 million to $215. GAAP gross margins for the fourth quarter were 42.2%, up 240 basis points from 39.8% in Q3. Cost of revenues included $3.6 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued earlier today and in the reconciliation table available in the Investor Relations section of our website.

On a non-GAAP basis, gross margins for the fourth quarter were 43.9%, 290 basis points higher than the 41% in Q3 and above the high end of our range. This increase in non-GAAP gross margins was driven by improvement in gross margins for the Probe Cards segment, which were up 364 basis points to 44.5%, partially offset by a decrease in Systems segment, which declined 50 basis points.

Our GAAP operating expenses were $67.3 million for the fourth quarter and down 340 basis points from the same period in the prior year as a percent of revenue, demonstrating additional leverage and continued spending discipline across the P&L, even as we continue to invest in R&D to drive innovation and fund projects like Farmers Branch for future growth.

GAAP net income for the fourth quarter was $23.2 million or $0.29 per fully diluted share, up from GAAP net income of $15.7 million or $0.20 per fully diluted share in the previous quarter. Fourth quarter non-GAAP net income was $36.6 million or $0.46 per fully diluted share, up from $25.7 million or $0.33 per fully diluted share in Q3. The GAAP effective tax rate for the fourth quarter was 13.6% and the non-GAAP effective tax rate for the fourth quarter was 15.7%.

Moving to the balance sheet and cash flows. We had free cash flows in the fourth quarter of $34.7 million compared to $19.7 million in Q3. The $15 million increase in free cash flows demonstrates the cash-generating power of the company at improved margin levels and the value of good financial discipline in working capital and operating expenses. Operating cash flows were $46 million in the fourth quarter, $19 million higher than the $27 million in Q3 '25, primarily driven by improved net income on higher revenues and gross margins and efficient use of working capital.

As Mike described, we used about $20 million in cash to acquire Keystone Photonics, a key element of our co-packaged optics product road map. And at quarter end, total cash and investments were up $9.1 million to $275 million. Since purchasing the Farmers Branch facility, we have made excellent progress in executing our planning and pre-startup activities. We continue to expect that the cash expenditures related to Farmers Branch capital will be between $140 million and $170 million over 2026.

In addition to the capital spending, we expect to incur roughly $6 million in preproduction operating expenses in Q1 '26, up from $1.7 million in Q4 '25 and in line with our project road map. Over the course of 2026, we expect preproduction operating expenses related to the ramp of Farmers Branch to be between $20 million and $25 million. Once production begins at the end of 2026, the majority of these costs will be recorded as cost of goods sold. And upon completion of the ramp, we expect Farmers Branch to be accretive to gross margins.

During the fourth quarter, we did not repurchase any shares. At quarter end, authorization of $70.9 million remains available for future repurchases under the $75 million 2-year buyback program that was approved and announced in April 2025. We remain committed to our share repurchase program as a tool to offset dilution from the stock-based compensation program over the 2-year period of the program. However, in the short term, we are prioritizing our deployment of cash to accelerate the ramp of our new manufacturing site in Farmers Branch.

Turning to the first quarter non-GAAP outlook. We expect Q1 revenues of $225 million, plus or minus $5 million. This increase in revenues and the impact of continued gross margin improvement initiatives described earlier are expected to result in a higher non-GAAP gross margins of 45%, plus or minus 150 basis points.

As a reminder, we continue to see about a 200 basis point impact to gross margins from tariffs. We are continuing to take actions to mitigate the impact of these tariffs, but those efforts are ongoing. At the midpoint of these outlook ranges, we expect Q1 non-GAAP operating expenses to be $62 million, plus or minus $2 million, approximately $4.5 million higher than Q4, mainly due to expenses related to the start-up costs for Farmers Branch.

Our Q1 non-GAAP effective tax rate is expected to be within the range of 15% to 19%, with a similar range expected for the fiscal year. Non-GAAP earnings per fully diluted share for Q1 is expected to be $0.45, plus or minus $0.04. A reconciliation of our GAAP to non-GAAP Q1 outlook is available on the Investor Relations section of our website and in our press release issued today.

As demonstrated by our Q4 results and our Q1 outlook, we're making encouraging progress to our target model. We also believe that we have more room to run, underpinned by both our initiatives to improve structural costs and our expanding leadership position in the fast-growing markets that Mike described. We look forward to sharing our new target financial model and the key elements of our strategy at our planned Analyst Day in May.

With that, let's open the call for questions. Operator?

[Operator Instructions]

And our first question comes from Matthew Prisco with Cantor.

I mean to kick things off, obviously, a very strong performance on the gross margin side, on track to hit that mid-40% level, 3 quarters ahead of plan. So what's the big change statement here over the past 90 days? And how should we think about the primary drivers and the magnitude of the continued expansion here ahead of the Farmers ramp?

Yes. Thanks for your question. Yes, we're very pleased with the results that we have seen to date and the Q4 '25 gross margins of 43.9% definitely represent a faster-than-expected improvement on our road map to improve gross margins. And we are a little surprised ourselves, but we're happy about that.

We took actions -- as a reminder, we took some actions to reduce our workforce early in Q4. We're starting to see the full benefit of those actions. And we continue to see improvements in our output in terms of cycle times and yields in our processes. And those are the primary drivers of the improvements that we're seeing in our gross margin performance.

Now we do expect that as we look forward into 2026 that we -- we may not make progress at the same speed and perhaps some smaller increments than what we have seen to date, but we believe that we are still on track to hit our target model gross margins at the target model revenue levels within 2026.

Great. And then moving to the memory side. As we think about Form's revenue growth through the year within the backdrop of the HBM4 transition, accelerating supplier build plans, robust pricing tailwinds, tester market growth coming in ahead of expectations. Can you maybe offer color on how you're thinking about these moving parts for Form? And how should we be linking these industry dynamics to Form's growth potential through the year for DRAM?

Yes, Matt, it's Mike. I'll take that one. Certainly, they're all tailwinds and some very powerful tailwinds. It's one of the reasons why we're investing aggressively in both making sure that we're getting as much as we can out of the existing footprint and then ramping Farmers Branch as fast as we can. We believe the overall demand environment is going to continue to be robust based on conversations with customers, data points like both major ATE manufacturers having very robust forecasts and views of 2026 and looking at the overall industry and where we're at.

So we definitely expect memory DRAM, in particular, to continue to grow, and it's an area where we're very focused on expanding our both competitive advantage, but also our capacity so that we can capture as much market share as we can.

Our next question comes from Charles Shi with Needham & Company.

Nice results. Maybe the first question, your Q1 guidance implies basically $900 million annual run rate already, and we knew that in the past, you said your existing capacity, excluding Farmers Branch was around -- maybe can be slightly above $850 million. So any chance for you to go higher run rate between now and when the Farmers Branch comes online? That's the first question.

Yes. Thanks for your question, Charles. As you can see from our Q4 results and our outlook for Q1, we believe we now have the ability to execute at a run rate of $225 million a quarter. We believe that the expansion that we've been able to create there in our output is closely related to the improvement actions that we have been focused on over the past couple of quarters.

As we focus on cycle times and yields, those improvements ultimately allow us to get more out of our existing footprint and get more good product out for every input that we put in. So we're effectively increasing the leverage on our existing infrastructure. And as I noted in the prepared remarks, we continue -- we're going to be continuing our focus throughout 2026 on making further incremental improvements. And so we do expect to continue to squeeze capacity out of our existing footprint over the course of the year.

Any thought -- maybe a quick follow-up, then I do have a second question. So maybe where -- how much more do you think you can squeeze out of the existing ones like above that $225 million level?

Yes. It remains to be seen. As we've noted, we've made substantial progress to date. We expect that our improvements going forward may not be of the same magnitude. We're happy with what we're seeing so far. But again, very closely linked to our -- the same initiatives that are driving our gross margin improvement are how we're going to get additional output out of our facilities.

Got it. Okay. Maybe another question for Mike. Mike, you talked about HBM, you are deeply engaged with all customers already working on HBM5 R&D. So mind if you tell us a little bit what are the key inflections at HBM5 as you can see right now from the test or probe card perspective? And any thoughts on whether and how any of those inflections could further benefit the FormFactor?

Yes. I think there are several, Charles. And it's one of the reasons why this early engagement with our customers is required. I mean HBM5 is a couple of years away from volume production, but you need to be ready with some complex R&D and capacity to deliver that complex R&D in volume to meet these ramps. I think same kind of dimensions that we've seen in the transition from HBM3 to 3 to 4 driving the inflections, increased layer heights, which are driving increased test intensity, one of them. HBM4 gets to 16 high. We'll see whether HBM5 continues to climb. But sort of -- and you're well aware of this, I think, the coupling with new packaging and stacking techniques like hybrid bonding are certainly a potential for HBM5.

And that's an interesting one for FormFactor because we have tremendous know-how on probing on copper. And without getting into all the details, copper is an important part of a hybrid bonding flow. I think the other thing is a dynamic, again, we've seen through the March of the HBM road map, and that's increased speeds, both the individual I/O speeds where the end customers are continuing to push for individual pin rates to go up, most recently, this 11 gigabits per second spec for HBM4, but also the overall stack throughput.

And when you think about testing at these high speeds with good productivity, and that means high parallelism while dealing with all of the challenges associated with power and thermal, these are all -- I'm not sure I'd call them inflections, but continued places where collaboration with customers is absolutely required to solve some very significant technical challenges.

Our next question comes from Craig Ellis with B. Riley Securities.

Congratulations on very strong execution, both with revenues and the underlying drivers to much better gross margin. Mike, I want to start with you, and I'll stick with the broader theme that Charles was on with DRAM. What I wanted to follow up on specifically in your comments, you had indicated, I believe, that the company is gaining share at each of the top 3 DRAM OEMs.

And so my question is, can you help us with how that's playing out in terms of the magnitude of gains that are possible across customers, the timing with which that will occur and any of the other things that might help us as we think about what the financial impact of that could do over the coming quarters?

Sure. Well, I think as most people know, we have a very strong share position in our #1 customer. And so right now, the HBM market is kind of a sweet spot for us. That's why it's been such an initiative to work closely with the other 2 HBM manufacturers, customers for us to make sure we're taking the competitive advantages of the SmartMatrix technology, high parallelism and high speed and really starting to use that as a beachhead, if you will, to increase market share at both of those customers.

Now I don't -- as I said, I think it's a sweet spot. We're never -- maybe not never. It's unlikely that we have grow to share positions like we have at our #1 customer. But there's really only 2 suppliers that can do anything close to this. And so I think there's the element of -- to really gain share at those 2 based on the technical differentiation that we have for HBM, tough to put a magnitude on it at this point. But given the growth of the HBM market and some relatively low incumbent share positions at those other 2 customers, it's a significant opportunity.

Interesting. The second question really relates to how well the business is executing at its current manufacturing facility and your proximity to what would have been previously considered an output ceiling. Can you just talk about your confidence in being able to meet customer demand if it in the near term grows above $225 million a quarter before you can get Farmers Branch up? And related to that, assuming that customer demand remains on a very strong trajectory, how quickly can you bring up Farmers Branch? And how material can it be in the next 12 to 24 months to production and revenue?

Yes. Thanks for your question. As you've seen, we've continued to increase the output of our current footprint, and we're going to continue to make the improvements maybe at a slower pace through 2026 to drive additional yield and drive additional improvements in cycle times that will also increase our output capacity, if you will.

However, Farmers Branch will come online on schedule at the end of the year. There's been no changes to that time line. That obviously provides us additional capacity beyond this year. We'll continue to do the best we can to enhance our throughput for this year. And we'll talk about the longer term in our Analyst Day in May, and that's where we'll really be able to see kind of the longer term.

Our business continues to remain relatively short-term visibility, right? We continue to operate an insurance business with visibility within a quarter. We're doing what we can to react within the time lines that we have, and I think we've done a pretty good job so far doing that.

And on that note, Aric, if I could just ask a follow-up to it. Clearly, your team executed just incredibly well in the fourth quarter given the big surge in gross margin. Was there anything that you would consider to be a one-off in that execution? Or are the levers that you're pulling things that you can continue to pull if the demand remains very strong?

Yes. Good question. I think that if I were to look at the increase from Q2 '25 through the end of the year and the 540 basis point improvement that we generate over that period of time, we estimate that about 2/3 of that improvement is related to the initiatives that we've been driving on the cost side, things like increasing our cycle time -- sorry, decreasing our cycle time and increasing our yields. And the remainder is things like volume. And in Q4, we did benefit from volume, right?

So we still have some additional work that we're wanting to do there. But as we've said in our last call and again in this call, we're really focused on changing the underlying cost drivers of the business so that at all operating levels and mix scenarios that we see, we are improving our performance and our leverage on our capacity, on our sites and on our cost structure.

Our next question comes from Brian Chin with Stifel.

Maybe first, just to square the Q1 revenue guide. I did notice that system and flash Probe Card revenue were both pretty strong sequentially in Q4, but systems can be seasonally softer in Q1. So when I look at the $10 million revenue growth Q1 versus Q4 at the midpoint, is Probe Card revenue maybe up more than the $10 million sequential? And how much of that sequential revenue increase is DRAM versus Foundry/Logic?

Yes, Brian, you're right. And I parse it a little bit in the prepared remarks. We do expect systems to be down in the first quarter as it often seasonally is. We're also undergoing a bit of a transition as we start to ramp up CPO and focusing resources on that because it's an exciting opportunity. But obviously, the implication there given the midpoint of the guide sequentially up $10 million is the Probe Card business is going to grow by more than $10 million. It's roughly equal parts of Foundry and Logic and DRAM.

And as I said in the prepared remarks, we're seeing some real strength in Foundry and Logic in areas that have not typically driven the business historically for FormFactor, not PC and not mobile, but instead things like data center network switches.

In DRAM, the step-up to a new record that we anticipate in the first quarter is due to HBM growth. So I hope that gives you enough detail for some of the moving pieces. But yes, we expect probe cards to outgrow systems, right, and be responsible for the majority of the step-up, in fact, more than the step-up in Q1 given the sequential decrease in system.

Okay. Great. Maybe two follow-up questions. One, on sort of the constraint in the next few quarters that you referenced, what is your sense of how constrained some of your advanced Probe Card peers are either in DRAM or Foundry Logic? And do you expect pure capacity to come online in a similar time frame?

Yes. I think if you follow our major competitors closely, I mean, 70% of Probe Card market share is owned by 3 of us. We have a primary competitor in Foundry and Logic and a primary competitor in DRAM. And they, like us, have all been transparent about the need and the initiatives to add capacity. You can imagine that we've got our head down here and are trying to add our capacity as fast as we can. This is an area, sure, we like to keep our competitive antenna up. But this is one where what our competitors do doesn't really make a difference to what we're going to do.

Aric talked about the faster-than-expected pace on both output and gross margin. We're applying the same urgency with getting Farmers Branch up and running. And so we're going to run as fast as we can and try and capture some incremental market share if we can, just with the ability to deliver.

Great. That's helpful. Maybe just last question. Can you size the AI GPU plus XPU, ASIC plus, I guess, data center networking, Probe Card TAM in 2025, kind of where your share shook out last year? And then when you think about the growth of the TAM in 2026, should it be similar to kind of that growth rate and year-over-year growth rate in AI accelerators? I think TSMC talked about a multiyear TAM, but it was sort of in the 50% plus range.

Yes. I think if you look at -- and I'm going to broad brush kind of the AI opportunity. If you look at the growth rate associated with things like GPU, custom ASIC, networking in the server rack, both scale up and scale out, these are areas of the industry that are growing much faster than the overall industry growth rate, which is growing pretty fast by itself. I don't know that I'd sign up for 50% growth, but it's clearly growing quicker than the rest of the industry.

And as we've talked about, we have some share gain opportunities inside that as well, both with the merchant GPU and the custom ASIC business. We've got strong positions in the networking piece, but are working to build out these other pieces. And it's an area where there's tremendous focus internally and with our customers on making sure that we're driving significant market share positions with those. I had to estimate it, we're talking about hundreds of millions of dollars of SAM for all of those different things in 2025, and we expect them to grow in 2026 and beyond.

Our next question comes from Robert Mertens with TD Cowen.

This is Robert Mertens on for Krish Sankar. I know you guys have spoken to great length about what you're seeing in the DRAM market and across -- the traction across all the high-bandwidth memory manufacturers. Did you provide a dollar amount for high-bandwidth memory Probe Card sales this quarter? And just any color you could give us on this calendar year, the shakeout maybe between what you're expecting between traditional DDR and DDR5 designs and those from high-bandwidth memory?

Yes. So it's an interesting question, Robert. Let me start with our HBM revenue in the first quarter. Again, connecting the dots on the guide that we provided, we expect DRAM to step up to another record in the first quarter with that growth being driven by HBM. And so if -- in Q4, it was kind of mid-40s, think of it as a low 50s kind of number for Q1 based on where we currently sit.

Now remember, this is a terms business and lead times still are well within a quarter. But our visibility for certainly the more complex DRAM cards is now extending out to the end of the quarter. If we then kind of think about commodity DRAM and the mix between HBM and DDR, this is a very dynamic and active situation. Not surprisingly, right? Our customers are wafer start constrained, and they're making choices every day of whether they start HBM wafers, HBM core die wafers or a DDR5 or a DDR4 part. And so for me to speculate beyond kind of our 6-, 7-, 8-week visibility, I don't have a view. And I'm not sure our customers have a view of how they're going to respond to the relative profitability they can generate, the relative share gains they can generate given how dynamic the DRAM, both HBM and DDR4, DDR5 markets are right now.

What I will say is we're positioned to serve both, and we'll continue to stay in close contact with our customers to make sure we are serving both effectively.

Our next question comes from Elizabeth Sun with Citi.

I guess the first question is, how should we think about the Foundry and Logic market this year? So still there's a lot of moving pieces. There's upside from networking and potential GPU qualification, but there is also some softness on your traditional like bigger end market smartphones and PCs. So I know it's still kind of early, but I want to get your thoughts on how should we think about Foundry and Logic growth this year?

Yes. Well, we do expect it to grow for us and as a market overall. And one of our key initiatives is to gain share. And so if the market is growing and we're gaining share, clearly, we're going to have a growth year. Now there's a lot of work to do in that, right? We've talked about the GPU call we're on track for and some of these other share gain initiatives, let's call it.

One of the, I think, important pieces I do want to highlight is the shift we've driven to make sure that we're participating in the sort of spectacular growth associated with high-performance compute. You see that in some of the first quarter results, again, primarily networking switches and some other pieces.

But the other point I made on the call, the fact that we delivered a fourth quarter and full year revenue record without our large microprocessor IDM being a 10% customer, I think, is a testament to the shift we've driven and the exposure we've now generated in the high-performance compute sector. So overall, lots of different pieces, but we expect it to grow, and we expect to gain share in 2026.

Great. And then, Aric, on gross margin, I think you talked about you are still on track to achieve the target model gross margin. I think that's 47%. Is that including the 200 bps tariffs impact? And also for that 200 bps, what's the mitigation method you are implementing? And how should we think about some upside from the mitigation?

Yes. The target model is 47% gross margins at $850 million a year run rate for revenue. And that did not include tariffs as a potential impact. And so what we've said is that we expect to hit the target model gross margins adjusted for our tariff headwind which is 200 basis points. So 45% is what we're targeting as long as we have a 200 basis point tariff headwind.

Now that said, we really want to stop spending money on tariffs. So we're doing everything we can to mitigate what's going on there. And the primary path that we're pursuing right now is something called drawbacks, where we work with the customs department to reclaim tariffs that we have paid for items that we have re-exported. That's a very detailed time-intensive process. We're working through it. We would love for that to go faster, if at all possible, but it could be several quarters before we see any benefit in our P&L from recoveries there.

[Operator Instructions]

Our next question comes from Vedvati Shrotre with Evercore ISI.

So the first one I had is, if you could quickly give us an update on where you are in the qualification process for GPUs and then for the custom ASICs. And it sounds like you kind of have it down and you're expecting revenues in the second half from both of those opportunities. Is that right?

Yes. Well, let me start with custom ASICs because as we updated you in mid-2025, we actually already have some design wins that have generated multimillions in revenue in the custom ASIC space and are now seeing the second leg of that for some recently announced custom ASIC. We've got a long way to go in that space to make sure we've got the broad customer coverage that -- and broad customer engagement to make sure that we're a key supplier on all the large custom ASIC projects in the industry.

But we're clearly relevant. We're generating multimillion dollars of revenue, and we see it as a growth area. On the GPU Qual, continue to make excellent progress. We're in a reliability test part of the qualification where our cards are being run with hundreds of wafers, multiple touchdowns, just making sure we've got the quality and reliability required to operate in a very, very demanding test application. And we continue to expect to generate revenue from this merchant GPU Qual in the second half of the year.

Understood. And have you quantified how much that opportunity could be?

We've kind of waved our hands at it. If you look -- and this is probably the merchant GPU opportunity. It's probably was a $50-ish million spend primarily with our competitor in Foundry and Logic in 2025. That may be conservative. So as test intensity continues to climb, as spend continues to climb, there's a significant opportunity there, obviously, as we're running something like $225 million a quarter. The custom ASIC one is a little harder to size, but we see significant growth there and the continued investment in these programs and projects make it a place worth really focusing our resources and making sure we've got strong market share and good coverage there.

Understood. And then the second question I had was on the gross margin side, you talked about cost strategies that bring up the gross margin, manufacturing footprint. Like does pricing play -- at some point, does pricing become a piece where you could drive gross margin expansion just given how much the test complexity is increasing in Foundry and Logic and in HBM, DRAM?

Yes. Let me take that. I know it was a margin question, but pricing is certainly an area of customer and product focus. So I'll take that one. Look, any time in this industry where you deliver incremental value you often are able to share, if you've done your job and share in that value you're providing for a customer. Often for FormFactor and for many other peers in the test and even WFE space, that comes from providing some sort of product attribute, higher throughput, better yield, a higher performance, a better spec.

But there's an interesting situation right now where if there's a specific program that's super important for a customer and valuable for their time to market, we're able to share in that value as well, share in that conversation. Now it's not across the Board, but it is an interesting time in the industry where the elements to share in the increased value the industry is creating are more than they have been in the past.

And maybe I'll just add to that really quick, that our main path for gross margin improvement is not pricing, but rather more long-term controllable items on the cost front. That's why you hear us emphasize that so much. Of course, if there's opportunities on the pricing front where we can deliver value, as Mike said, we love to see that. But that's not what we're relying on in order to drive long-term gross margin improvement.

Our next question comes from David Duley with Steelhead Securities.

Congratulations on the awesome execution on the gross margins. My question is kind of a 2-part question on HBM. You talked about the increase in intensity as we go from HBM3 to HBM4 to HBM5. I was just wondering if you could take a guess as to what the increased intensity was or probe intensity is between HBM3 and HBM4? And would it be a similar type of increase in intensity as we move to HBM5?

Yes. So one of the real drivers of test intensity is the stack, right? If I'm going to put -- if our customers are going to put 16 core die in the stack instead of 8 core die in the stack as for HBM3, that's going to increase the test intensity. Now there's other puts and takes in this. Their yields are going up. They're figuring out how to get rid of different defect modes. But I think a good rule of thumb is one that we've articulated in the past that maybe 20%, 25% on a like-for-like same stack out basis is not a bad way to think about the test intensity as we go from HBM generation to HBM generation.

Okay. And then as far as -- I think we understand you have very high market share at the market leader in HBM. I was just kind of curious so I can understand what the potential opportunity is. What do you guess your market share is on a combined basis with the other 2 HBM players?

I don't -- we haven't quantified that for people because it's tough to parse through all the different HBM application at each customer. What I'll say is, and I think I already said it, is we have low enough incumbent share that there's a real opportunity there as we deliver into places where we have differentiation like the high parallelism, high-speed test insertion I talked, where we're driving very strong share at all 3 manufacturers in that particular application.

Well, maybe another way to ask it is, so you're the #2 source at the other two guys essentially?

Correct.

From an overall DRAM standpoint.

I would now like to turn the call back over to Mike Slessor for any closing remarks.

Thanks, everybody, for joining us. As I said, as I close my prepared remarks, we're looking forward to continuing to demonstrate progress in growing revenue and expanding gross margin and profitability in our existing footprint and then updating you on our May Analyst Day on the longer-term prospects for FormFactor as we bring the Farmers Branch site online as well and drive more growth, more gross margin expansion. Thanks again for joining us, and take care.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Hi, everyone. I'm Madeleine Jenkins. I work on the tech hardware equity research team at UBS. And it's my pleasure to have Mike Slessor and Aric McKinnis from FormFactor. I think Mike will start with a brief introduction of the company, right, and then we'll head into Q&A.

Great. Well, thank you very much, Madeleine, to you and the UBS team for hosting us. We've had a great conference with a lot of meetings. So happy to finish up here. To get everybody up to speed on FormFactor and make sure we're all on the same page, we're a company in the semiconductor supply chain that provides test and measurement equipment. We operate in 2 segments: one called probe cards, which is about 80% of our $0.75 billion annual revenue, the other called engineering systems.

Probe cards are used at the end of the wafer fab to make sure chips are good before they go to the downstream assembly processes. And we've seen some significant growth in that business overall. I'm sure we'll get into some of the details driving that. But as the industry has started to adopt advanced packaging techniques, things like chiplets, high-bandwidth memory stacking, TSMC's CoWoS, that's driven a rather dramatic increase in what we call test intensity, the use of wafer testing to make sure these chiplets are good before they go to the downstream assembly processes.

We operate in a variety of subsegments inside probe cards, and we do lead in market share overall in advanced probe cards worldwide. The other 20% of our revenue, the Engineering Systems business, really focused on helping customers develop their next-generation technologies. And one of the real highlights of that business at present is enabling co-packaged optics, which are set to displace or at least partially displace the existing switches in data centers because of the much higher speed and lower power usage, lower energy usage associated with photonics.

So that probably gets us mostly up to speed on form factor. I think to get everybody sort of sharing what the topics we've covered during the conference are, we've got a lot of exposure to high bandwidth memory, right? And HBM, obviously, a key enabler of all these generative AI investments and NVIDIA's GPU road map. So lots of interest in that, that I'm sure we'll cover as well as co-packaged optics and where that's going from a top line perspective. There's also been a lot of interest around our gross margins and profitability and the recovery back towards our target model, and Aric will talk about that.

Perfect. So maybe if we go segment by segment, starting with logic and foundry, what's your kind of current assessment of the demand in that area?

Well, inside probe cards, if you look at our financial statements, we report these 2 segments, Probe Cards and Engineering Systems. But inside probe cards, there are some subsegments or submarkets that we often give people, almost always give people visibility to. And our largest business is foundry and logic. This is probe cards for testing chips like microprocessors, application processors, GPUs, different XPUs, but all the way through RF subcomponents as well.

And so it's a fairly broad-based business. And I think like most suppliers in the industry, our demand is being driven -- certainly, the growth in our demand is being driven almost exclusively by generative AI and the investments in high-performance compute in the data centers. That's also the case in memory, which we'll get to in a second. But if I look at foundry and logic, it's an area where our business classically was driven by mobile handsets and PCs.

For many years, Intel was our largest customer. That's changed, although they're still a significant customer. We've seen our growth really be driven by, again, these investments in silicon-enabling generative AI. That's true in logic and foundry. It's also true in DRAM. We've got a variety of initiatives underway as we continue to advance our technology road map based on our advanced MEMS technology. We use a derivative of microelectronic mechanical system technology to build the probes on a probe card. And these are remarkably complex structures, right? We test multiple chips at once, each with 50,000 to 100,000 contacts, all about the size of a human hair and they have to do this reliably for millions and millions of contacts.

So you can think about probe card as a fancy connector in between the test equipment built by Advantest and Teradyne and the wafer. But inside that connector, there's a great deal of complexity. And in foundry and logic, we're seeing that complexity in those customer challenges really accelerate, higher speeds, higher power, all the things you see on our customers' road map as they continue to progress down Moore's Law, but also take advantage of advanced packaging.

Perfect. And then maybe moving on to memory. You're saying that a lot of investor interest, I'm sure. How do you see that market next year? And what sort of revenues are you running out for HBM?

Well, memory splits into 2 subsegments. One, probe cards for testing DRAM devices, the other probe cards for testing NAND devices. We don't participate very much in NAND. So I'll focus most of my comments on DRAM. And DRAM has been a real growth driver for us, primarily because of high-bandwidth memory and HBM. As you'll notice in our financial filings, SK hynix has become our largest customer. And when we reported Q3 and gave Q4 guidance about 1 month, 1.5 months ago, we created expectation that we would again set another DRAM -- quarterly DRAM probe card revenue record.

Some of that's driven by continued strength in HBM. We're in the midst of the HBM3 to HBM4 transition with our customers and have actually are shipping in the third quarter and fourth quarter more HBM4 probe cards than we are HBM3. So we've achieved that crossover at this point. But we're also seeing some strength in the non-HBM DRAM part of the market. Applications like DDR5 are responsible for the sequential growth in our DRAM probe card business, kind of an interesting dynamic. And I think for people who follow the DRAM industry, if you look at spot pricing and contract pricing associated with modules like DDR5, I think it's pretty easy to understand why our customers are starting more wafers on those.

An interesting time where there's a set of capacity constraints across the industry and demand really starting to outstrip supply, not just with HBM, which I think is a well-understood dynamic, but now also with data center DRAM and data center DDR5 reaching some pretty critical shortage conditions. These are conditions we haven't seen for a long, long time in the industry.

Perfect. And then another kind of very exciting growth driver, co-packaged optics. Maybe could you just talk a bit about the demand that you're seeing there?

Yes. So we're in the very early innings of co-packaged optics or CPO. But this is an area where we've been collaborating with customers for the better part of a decade. It's primarily been in this engineering systems business, where we work with customers in their very early development and help them transition from what we call the lab to the fab. We now have multiple systems installed in fabs around the world doing pilot production for the initial volume CPO devices.

And we think we're going to start to see at least medium volume production in 2026. These are really exciting growth area for us and a great example of how early engagement with our customers in their labs allows us to really understand these challenges and then drive them into the production arena where the volume scale and our revenue grows. And I think from an organic revenue growth perspective, other than the markets we participate in today, like foundry logic and DRAM, CPO is poised to be a really interesting long-term growth driver for us. And we continue to invest to keep the competitive leadership position that we've cultivated over the last decade or so.

Perfect. And then maybe moving to gross margins. I think you did 38.5% in Q2. How do you see that progressing to your target model? And are there any impacts from tariffs?

Yes, great question. Gross margins is one of our key priorities that we're really focused on. And for those that maybe don't have as much context, our target model, which we established in 2020, is 47% gross margins at around $850 million of revenue. We -- if you look at our trajectory over the past couple of years, we have not been operating at those levels and hence, the focus.

And so what are we changing here? There's a couple of things that we're really focused on. And I guess I'd put it into 2 buckets: operational efficiency and really financial discipline. Neither of these are rocket science, if you will. It's focusing on the fundamental cost drivers in our business. And we started laying some important groundwork probably a year to 1.5 years ago and how we structured our global manufacturing organization.

We are the product of multiple acquisitions over time. And our structure 1.5 years ago kind of reflected that where we had this more business unit-oriented structure. That led to generalists running our manufacturing organization, people that were not specialized necessarily in high-volume manufacturing. As we've grown, we've come to acknowledge that, that's probably not the best way to progress forward and therefore, made some important changes in that space created a core manufacturing function and have brought in some real experts from outside the company who are very experienced with running high-volume wafer manufacturing.

And that has led us to start making progress in the important areas of yield and cycle time. And if you think about the effects of those improvements, there's a variety of important benefits to driving down cycle times and improving yields. First and obviously, you get more good product out for every unit that you put in, right? And so that results in a lower unit cost of your products and therefore, is supportive of higher gross margins.

You also decrease, if you will, your cycle time. And so -- and you also -- and that enables you to be more responsive to your customers. And you just make more efficient use of your overall resources. So again, not a rocket science concept here, but really focusing on this, it's an area where maybe we lacked focus in the past. So in our Q3 earnings call, we talked about this path that we're on. We've continued to make progress in this area.

And that's what's leading us from 38.5% gross margins to 41% in Q3 and the guide that we provided for Q4 at 42%. We expect to continue to progress on that road map, incrementally improving gross margins over the course of 2026, ultimately taking us up to our target model profit levels, barring tariffs, which didn't exist back in 2020. Unfortunately, they're a reality in our space today.

Perfect. And you mentioned the kind of new Texas fab. I just wondered what's the timing of that? What CapEx do you expect to spend? And then what revenue do you expect to generate from the fab?

Yes. So our Texas fab is a pretty exciting opportunity for us to, one, create potential for business expansion, additional capacity, but also, again, returning to this gross margin improvement initiative. It's a move into a lower-cost region for us. The time line for this is basically over the course of 2026 and 2027. We will be building out and ramping that site. And that will involve investment over the course of 2026 of around $140 million to $170 million.

We expect that once that site is up in full production after the end of 2027, that it will also be accretive to gross margin. Important to note here that we aren't depending on that improvement, that incremental improvement from Farmers Branch for purposes of our current target model attainments that is really enabling our future road map beyond the current target model.

Perfect. And maybe if we can kind of go back to AI. So what traction are you currently seeing at the GPU manufacturers?

Yes, yes. It's -- the major GPU manufacturer is a significant customer for us, but not directly on the mainstream GPU. That's been an area where we've been working with them and their foundry to qualify over the past several years, and have made excellent progress and expect to be able to compete for that business as we go into 2026. As I said, it's part of a broader engagement with that customer. And given where the growth in the industry is coming from, a really key strategic initiative for us to round out the relationship in supplying that customer. Key part of the supply chain, both for them, both directly and indirectly through HBM, obviously, but a piece that we're probably not quite as focused as the gross margin improvement, but pretty close.

Perfect. And then maybe also on the custom ASIC side, maybe talk a bit more about that opportunity in the next few years?

Yes. Custom ASICs are interesting in that we provided an update for people, I think it was in the second quarter, where we won a multimillion dollar opportunity and seen some revenue growth associated with that. But by and large, custom ASICs have not required advanced MEMS probe card technologies to date. And if you back up a few years, that was true of GPUs as well at lower densities, lower power, lower speeds, you can use a legacy probe card technology, don't need the advanced MEMS probe card technology.

And our customers obviously are going to go with the lowest cost -- lowest overall cost solution. As ASICs advance and start to approach where GPUs are today, we're pretty confident they're going to need these advanced MEMS probe technologies, and we're engaged with all the major ASIC vendors to make sure that we're ready in there in the same way we're now on the cusp of driving some GPU business now that it needs our advanced MEMS technology.

It also goes to the element of why we're making such a large investment in Texas. When you look at all of these fundamental growth drivers and how we have the company positioned we're running pretty close to capacity right now. Our Q4 guide was for $210 million. That would be an all-time record for FormFactor. And given all the elements I've talked about, HBM, GPUs, custom ASICs, we believe there's a lot of future growth potential in front of us, but we need the capacity in place to be able to serve it.

And maybe then on -- also on the smartphone and PC kind of end markets, how do you see those into next year?

Yes. So it's kind of the tale of 2 markets, right? I talked about the growth being really driven by generative AI. And historically, our business was driven by mobile handset growth and PC growth. That's really changed. Although mobile handsets, all the application processors have an annual refresh cycle. So we do get new business there. One of the interesting things about the probe card business is there's no reuse of probe cards designed to design.

They're essentially consumable when consumable driven by the obsolescence of old designs and the ramping of new designs. And so you've seen our foundry and logic revenue certainly move in lockstep with some of these annual refresh cadences on the silicon associated with big mobile handset launches like the iPhone. But from a secular growth perspective, it's been pretty flat, right, tracking again the overall handset market, which has also been pretty flat.

Similar story in PCs. For a while, we were holding out hope for a major PC refresh because high unit volumes associated with client PC drives a lot of probe card spending. But it does seem like PCs are lasting longer and longer, and there's no compelling application driving us to buy new PCs. So consequently, part of why we've shifted a lot of our R&D focus and a lot of our customer focus to make sure we've got great exposure in that overall high-performance compute generative AI supply chain.

And I know you've kind of touched on this already, but the competitive landscape, kind of how do you see that? And what are the areas would you say you're kind of stronger than your competitors?

Yes. It's an interesting competitive landscape. In each of the segments we talked about, we have one primary competitor. And what we've tried to do as part of our strategy is create scale and leverage across the combination of these served segments. In particular, we use the same basic MEMS fabrication technology to build the probes that go into our probe cards for both foundry and logic and for DRAM. And that's one of the core enabling technologies of the performance we're able to deliver. There's some other -- so we have a competitor in foundry and logic, an Italian company called Technoprobe.

We have a primary competitor in DRAM, a Japanese company called Micronics Japan or MJC. In the systems business, we have a Taiwanese competitor called MPI. But by and large, each of these served segments are 2 supplier markets, right, where the competitive dynamic continues to be pretty rational. We all understand that we need to make large investments, drive our R&D road maps forward to be competitive and make the capacity investments we talked about. But we also understand that none of us is going to run away with the market. Our customers need 2 suppliers for business continuity and balance. And I think it's led as in many other subsegments of the semiconductor supply chain like inside WFE -- it's led to a pretty balanced and healthy competitive situation.

And can you kind of give us a rough sense of your market share at the 3 DRAM for HBM specifically?

Yes. Well, DRAM for HBM is a bit of an estimate at this point. As I said, and this is all in our public filings, SK hynix our largest customer. And I think most people understand that they have very strong market share as our customer in HBM bits produce. And as a consequence, that's a sweet spot for us and is driving a very strong market share position for us in HBM.

Given where we focused on things like high-speed test, where we have a strong competitive advantage and customers need that performance, I think HBM4 it's been well publicized is a big step-up in speed from HBM3 and HBM3E. So we've invested a lot in that high-speed capability and it really differentiates us for HBM, which has driven a very strong market share position in high-bandwidth memory probe codes.

Perfect. And maybe a final question on HBM. Obviously, there's a lot of chatter about potentially kind of changing the packaging going forward. I know it's probably quite a few years out. But does that change kind of how you see that market at all?

I don't think it changes how we view the market. It's one of the reasons why we do spend 13%, 14%, 15% of revenue on R&D because -- these -- the change to a 1-year road map cadence in high-performance compute has really accelerated the need to partner with customers and other suppliers and innovate. And so changes in packaging technology, maybe HBM goes from solder micro bumps to hybrid copper bonding. That's something where we're developing copper probing technologies so that we're going to be able to effectively test those devices.

But just like the co-packaged optics story, those are things we're co-developing now with customers to be ready when and if those insertions happen. And I think that's one of the things that really characterizes our engagement model with customers is a very, very close coupling of our engineering team with their engineering teams to make sure we've got solutions ready when these big road map changes occur.

Perfect. And maybe a more general question. Are you considering M&A at all?

Yes. As Aric said, we're really a product of M&A. And I'll let Aric talk about capital allocation in a minute. But FormFactor is built on a set of acquisitions. We continue to believe that M&A thoughtfully and carefully done to expand our served markets is a great way to deliver growth and shareholder value. But if you look at the things we've done recently, they've basically been a set of small technology tuck-ins. In the systems business, we've acquired a footprint in test for quantum computers. That's a market that certainly is nowhere near commercialization today. Well, depending on who you talk to, maybe it's closer than some other people think.

But compared to the mainstream semiconductor business, it's still in an embryonic phase. I think that -- and I continue to think I've been of this opinion for many years, that back-end suppliers like us need to consolidate. If you look at what happened in the front end to create the WFE suppliers of scale, that was largely driven by M&A and has created a much healthier ecosystem for front-end WFE suppliers.

If you look at the back end, our customers are now relying on us to drive this advanced packaging road map forward. whether it's things like HBM, TSMC CoWoS, the bar is being raised on our ability to innovate, our ability to produce at scale. And I do think the collection of companies nominally our size, sort of between $0.5 billion and $1 billion in annual revenue could benefit from some consolidation and scale.

Interesting. And Aric, would you like to touch on...

Yes, regarding our deployment of capital, I would say over the next year to 2, we're going to be clearly focused on our expansion that we're doing in Texas. That's going to be where we're really focused. But we will continue to be opportunistic as it relates to technology tuck-ins and potential opportunities like that. And it's one of the benefits of having a strong balance sheet like we have, the ability to be opportunistic, see those opportunities and take advantage of them.

Perfect. And maybe for the last couple of minutes, kind of what's your vision for FormFactor over the next kind of 3 to 5 years? How big can it be?

Right. Well, as I said, it's founded on these market share leadership positions in our served markets. And we think if you look at starting at the highest level, there's a consensus view that the semiconductor industry is going to reach $1 trillion sometime either late this decade or early next decade. And I think when that view was put forward a few years ago, there were a lot of skeptics. But given the growth we've seen, given the silicon content associated with high-performance compute and the growth that's driving, I think most people who follow the industry and are in the industry feel like we're a lot closer to that than we might have been 4, 5 years ago.

So if you look at a $1 trillion semiconductor industry, and what's spent in our served markets, our served markets are actually growing faster than the overall semiconductor industry, partially because of this increase in test intensity associated with applications like CPO, advanced packaging, HBM. We've seen a real increase in what we call test intensity, which means our markets are growing faster than the semiconductor market.

If you then peel inside of that, we're working very hard, although we do lead in overall market share to gain share. If you look at our served markets, we're in round numbers, somewhere around 30% market share across all served markets. So there's clearly pockets of opportunity to gain share in there as well. You put all of that together, and it's not too hard to at least do the math to see the vision of FormFactor doubling from here.

Think of it as $1.5 billion in revenue, given all those growth drivers. But it's one of the reasons why we're making big investments in expanding our capacity. We've got great products, great positions, just look at our HBM leadership position and very strong customer relationships. Those are things that we're working hard to basically continue to grow and strengthen while expanding our ability to manufacture at scale by adding a Texas facility to our current revenue footprint.

Perfect. And if you...

The only thing I would add to that and do it more profitably.

Hence, the focus on gross margins, right?

Perfect. And on that note, I guess, unless there's anything either of you want to add, maybe we can kind of wrap up a few minutes early.

No, I think we covered it. Thanks, everybody, for attending, and thanks again to UBS for hosting us.

Of course. Thank you, Mike and Aric.

Thank you, and welcome, everyone, to FormFactor's Third Quarter 2025 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 also with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions; the benefits of acquisitions and investments, including acquisition of manufacturing facility, 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 28, 2024, 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 29, 2025, and we assume no obligation to update them.

With that, we will now turn the call over to FormFactor's CEO, Mike Slessor. Sorry about that. Thanks for joining us today.

Thanks for joining us today. FormFactor's third quarter revenue, gross margin and earnings per share exceeded both second quarter results and the midpoint of our outlook range. Our outlook for the current fourth quarter builds on the third quarter and we expect to again deliver sequentially higher revenue, earnings and most importantly, gross margin.

As you heard from us on last quarter's call and in meetings with many of you since then, we're focused on and committed to improving our profitability to get back on a path to the 47% non-GAAP gross margins of our target model.

As you can see in our fourth quarter outlook, we expect to reach the model quarterly revenue run rate earlier than we achieved model gross margins. This disconnect is driving urgency across FormFactor in executing a program of rapid and immediate gross margin improvement actions that have already produced a 250 basis point increase from the second quarter, and we anticipate will produce an additional 100 basis point increase in the fourth quarter.

We expect these short-term improvements will continue throughout next year, steadily closing the gap to the target model gross margin of 47%. At the same time, we're also executing longer-term structural initiatives that will further improve our gross margins, including developing and commercializing differentiated new products to drive increased market share and pricing as well as qualifying and ramping our new Farmers Branch, Texas facility to rapidly and cost effectively expand our capacity in a region with lower operating costs and a variety of financial and regulatory incentives.

Aric McKinnis, who became our CFO on August 12, will provide more details on both the short- and long-term initiatives. While we're intently focused on improving gross margins to generate the profitability warranted by our leadership positions in both probe cards and engineering systems, we're also working to expand those positions, principally at the intersection of advanced packaging and high-performance compute.

Innovations in this space like the stacking of DRAM chiplets to produce HBMs, which are then integrated with GPUs in multi reticle CoWos packages, co-packaged optics and even chiplet-based processors deployed at the edge are all driving increased test intensity and test complexity, creating increased demand in our served markets.

In some of these areas, like HBM and DRAM and network switches and foundry and logic, we today have leading market share positions. In others, like GPUs, we're making steady progress on qualifications to produce market share gains and revenue growth.

Turning now to segments and market level details. In DRAM probe cards, we delivered the expected double-digit sequential growth in the third quarter to a new record, primarily from growth in HBM. In the current fourth quarter, we expect to post another record primarily from an increase in non-HBM applications like DDR5 and LPDDR4, likely driven by the well-publicized recent increases in commodity DRAM end market demand pricing and customer profitability.

In HBM, we've now reached the anticipated HBM3 to HBM4 crossover as HBM 3E ramps down and HBM4 ramps up. With the overall net result being total fourth quarter HBM revenue similar to the third quarter. We continue to have significant contributions from all 3 major HBM manufacturers as we execute our long-term strategy to be a key supplier to all the leading customers in the industry, thereby growing and diversifying our HBM demand profile.

Consistent with the current market share split between our customers, however, our HBM revenue continues to be skewed towards our largest customer. The ramp-up of HBM4 offers some exciting opportunities for FormFactor as we look ahead to 2026.

First, the test intensity for each HBM stack further increases with the transition to HBM4 16-high stacks of core die chiplets from the 8 and 12-high stacks of HBM3 and 3. As we've detailed in our past discussions of advanced packaging, each of these core die chiplets must be comprehensively tested to ensure that a single effective core die does not cause a failure of the entire stack.

In addition, the I/O speeds of HBM4 increased substantially over HBM3, and our customers are now striving to exceed the JEDEC specification of 8 gigabits per second. This performance increase in greater test complexity drives competitive advantage for FormFactor as our SmartMatrix architecture is the industry's only production-proven high parallelism probe card architecture that can operate at these 10 gigabit plus frequencies, providing our customers with the unique capability to validate their product performance at these higher and more valuable I/O speeds.

Shifting to the foundry and logic probe card market. As expected third quarter demand in this market was sequentially weaker than the second quarter, and we expect similar foundry and logic demand levels in the fourth quarter. Despite broader indications of the beginning of a PC recovery, we're not experiencing significant growth in probe cards for CPU applications. We believe this is because the increased demand is being served by our customers' existing legacy node designs, where they're able to employ their existing probe card fleet.

As a reminder, probe cards are a device-specific consumable. And as this customer ramps volume on their new designs on new leading-edge silicon nodes, we expect to see increased demand for probe cards and CPU applications. This current situation also highlights the need to execute our strategy to be a key supplier to all the leading customers in the industry and we continue to build the foundation for market share gains at a large fabless CPU manufacturer.

Having achieved qualification in a specific application with this customer earlier this year, we're now building on that penetration and qualifying our market-leading Apollo MEMS probe card technology on a mainstream CPU device that's forecasted to ramp in volume next year. And continuing on the theme of diversification and market share growth in foundry and logic, we've now met all technical requirements for a major GPU application with a new variant of the same Apollo MEMS probe card architecture and are now in the pilot production stage of qualification. Once we complete this final stage of qualification, we'll be in a position to compete for volume orders for GPU probe cards in the first half of 2026.

Turning to our Systems segment. We delivered the expected sequential revenue increase in the third quarter and are forecasting additional growth in the current fourth quarter. Some of this strength stems from the typical seasonal cadence of the systems business, but we're also experiencing increased momentum in the progression towards initial production of co-packaged optics or CPO as well as the significant investments being made to advance quantum computing towards full-scale industrialization.

In co-packaged optics, in addition to the multiple CM300xi systems running pilot production for our primary CPO customer at their foundry, we've now installed multiple units of our next-generation Triton silicon photonics test system. Developed in collaboration with Advantest and Tokyo Electron, Triton brings together fab level automation and integration of both optical and electrical probe and test capability for our customers.

Triton represents the next step in our silicon photonics product road map as we transition our differentiated electrooptical probing technology from the lab to the fab, helping enable the adoption of energy-efficient optical data transmission in tomorrow's data centers.

Before I turn the call over to Aric, I want to reiterate our continued commitment to achieving the 47% gross margin of our target model. As you can see from our fourth quarter guidance, we expect to reach target model revenue levels before we reach target model gross margin levels, but we've shown meaningful progress towards closing this gap.

We plan to continue gross margin improvement in a direct factoring footprint by making continued progress this quarter and in 2026, layering on further improvement as we then bring our farmers branch expansion online at a structurally lower cost.

These multipronged initiatives will improve our competitiveness and add capacity at lower cost enabling us to grow FormFactor as we meet the challenges of increased test intensity and higher test complexity associated with the adoption of advanced packaging in applications like high-bandwidth memory, co-packaged optics, and quantum computing Aric, you are up.

Thank you, Mike, and good afternoon. Before we dive into the details of our third quarter financial results, I want to express my excitement as I move into the role of CFO and begin to leverage my experience across operations and finance to drive operational efficiency and financial discipline. I truly enjoy working across varied constituents to find innovative ways of driving value and continuous improvement.

I also want to spend a couple of moments to summarize how we plan to drive sustainable improvement in profitability, emphasizing the key focus areas that will guide our actions and our priorities in both the short and the longer term.

As you heard from Mike, we are focused on improving our profitability to a path to the 47% non-GAAP gross margins of our target model. We are committed to achieving these improvements in a sustainable way and we believe the most critical elements of success for us in the short and midterm are to drive improved operational effectiveness, which means optimizing output from our existing infrastructure, and better financial discipline. We believe focus in these areas will drive meaningful change in our unit costs and our gross margins. This focus starts with some immediate action. First, on the labor front, we just completed a reduction in headcount, reducing costs even as we execute on existing demand and prepare for future demand.

Furthermore, we implemented changes in how we manage over time in all of our manufacturing sites, immediately reducing our unit labor costs. Second, with respect to our manufacturing processes, we executed on targeted decreases in manufacturing spending. For example, we have expanded our existing precious metal recovery process to reduce waste in our manufacturing line among implementing other improvements.

Beyond these immediate actions, over the coming quarters, we will continue to drive a relentless focus on reducing our manufacturing expenses by attacking the fundamental drivers of cost within our existing footprint.

For example, focusing on improving yields and reducing manufacturing cycle times by smartly deploying automation, implementing more effective defect detection capabilities and implementing new factory management tools and analytics.

Improvement in areas like cycle times and yields are structural and we believe improvements in these areas drive durable cost benefits that will help us to weather and partially offset the impact of inevitable shifts in product mix and headwinds presented by new challenges, such as what we have seen recently with tariffs.

Even as we drive the unit cost of our products down, we are aiming to simultaneously enable higher output from our current infrastructure, reducing cycle times and improving yields enable this objective while also supporting our continued ability to be a top-performing supplier by increasing the quality and speed with which we address our customers' needs as they address rapidly growing demand in areas like high-performance compute and HBM.

In addition to our laser-like focus on improving operational effectiveness, we will also exercise good financial discipline and continue to examine our overall portfolio of products, markets and businesses, evaluating all of our operations through the lens of how each best supports our target model and our key strategic priorities.

We are changing how we communicate our financial results. Instead of residing breakdowns by product and market, we will continue to provide this important data in the supplemental materials on our investor website. And our discussion will focus on the key actions we are taking and the key drivers for our short and midterm road map to achieve our target model.

As you saw in our press release, we are favorable to our Q3 outlook on revenues, gross margins and EPS for both GAAP and non-GAAP. Q3 '25 revenues are $202.7 million, non-GAAP gross margins are 41%, up 250 basis points from 38.5% in Q2 '25, and non-GAAP EPS is $0.33, and $0.04 above the high end of the outlook range of $0.21 to $0.29. GAAP gross margins for the third quarter were 39.8% compared to 37.3% in Q2.

Cost of revenues included $2.5 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today and in the reconciliation table available on the Investor Relations section of our website. As I mentioned, on a non-GAAP basis, gross margins for the third quarter were 41%, 250 basis points higher than the 38.5% non-GAAP gross margins in Q2 and at the higher end of our outlook range. This increase in non-GAAP gross margins is driven by improvement in both segments.

The Probe Card segment was up 254 basis points and the Systems segment was up 260 basis points to 40.8% and 42%, respectively. The reductions we have made in labor costs and manufacturing spending are starting to have an effect on our financial results. This progress represents the start of a more disciplined path that will yield incremental improvement in gross margins, leading us back to our target model gross margins over the course of 2026, as you heard from Mike.

Our GAAP operating expenses were $62.6 million for the third quarter, effectively flat as a percent of revenue from the prior quarter and down 130 basis points from the same period in the prior year, demonstrating continued discipline in spending across the P&L, even as we continue to invest in R&D in projects like Farmers Branch to drive innovation and future growth beyond the immediate term and even beyond our current target model.

GAAP net income for the third quarter was $15.7 million or $0.20 per fully diluted share compared with a GAAP net income of $9.1 million or $0.12 per fully diluted share in the previous quarter. Third quarter non-GAAP net income was $25.7 million or $0.33 per fully diluted share up from $21.2 million or $0.27 per fully diluted share in Q2.

The GAAP effective tax rate for the third quarter was 29.1% and the non-GAAP effective tax rate for the third quarter was 21.2%. We are continuing to refine our approach to key provisions of the recent tax legislation.

Moving to the balance sheet and cash flows. We had free cash flow in the third quarter of $19.7 million compared to a negative $47.1 million in Q2. Remember that the reason for the negative cash flow in Q2 was the $55 million investment in the Farmers Branch, Texas manufacturing facility.

Operating cash flows were $27 million in Q3, $8.1 million higher than the $18.9 million in Q2 '25, primarily driven by the improved net income on higher revenues and improved gross margins. At quarter end, total cash and investments were up $16.7 million to $266 million.

Since purchasing the Farmers Branch facility, we have made excellent progress in executing our planning and pre-startup activities. This project is a good example of how we are taking advantage of our strong balance sheet to enable the next stage of growth and continued improvement in our gross margins over the long term.

We expect the cash expenditures related to Farmers Branch will be between $140 million and $170 million over the course of 2026 and believe that this investment will enable further improvement in gross margins beyond our current target model. During the third quarter, we used $1.7 million to repurchase shares.

At quarter end, $70.9 million remained available for future purchases under the $75 million 2-year buyback program that was approved and announced in April 2025. As a reminder, our share repurchase program objective is to offset dilution from stock-based compensation.

Turning to the fourth quarter non-GAAP outlook. We expect Q4 revenues of $210 million, plus or minus $5 million. This increase in revenues more favorable product mix and the cost reduction initiatives described earlier are expected to result in a higher non-GAAP gross margin of 42%, plus or minus 150 basis points.

As a reminder, we continue to see a 150 to 200 basis point impact on gross margins from tariffs. We are taking actions to mitigate the impact of these tariffs, but those efforts are ongoing. At the midpoint of these outlook ranges, we expect Q4 non-GAAP operating expenses to be $58 million, plus or minus $2 million.

Approximately $3.5 million higher than Q2, mainly due -- sorry, Q3, mainly due to higher incentive-based compensation, planned spending on R&D and expenses related to the start-up of costs for our new manufacturing facility in Farmers Branch.

Our Q4 effective tax rate is expected to be within the range of 17% to 21%. Non-GAAP earnings per fully diluted share for Q4 is expected to be $0.35, plus or minus $0.04. A reconciliation of our GAAP to non-GAAP Q4 outlook is available on the Investor Relations section of our website and in the press release issued today.

As demonstrated by our Q3 results and our Q4 outlook, we are making encouraging progress to our target model. As recent initiatives to improve our structural costs take effect, and we are able to better leverage our fixed cost as demand increases.

With that, let's open the call for questions. Operator?

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

Nice execution, guys, and Aric, welcome to the call. Mike, I want to just start with you. Thanks for all the insight on the top line and how the business segments are performing. I was hoping you could go back to some of your DRAM commentary and specifically commentary around HBM4 and the cutoff with the business having reached the cutoff in the recent quarter and flat sequentially. How would you frame up the growth gives and takes as you look out to 2026 for HBM. And if we look at the next transition without getting the cart too far before the horse as HBM4E becomes much more customizable. What will that mean for probe card intensity.

Yes. Thanks, Craig. So we did experience the crossover or are experiencing the crossover in the fourth quarter as HBM4 takes over as the majority of our HBM revenue. All three customers, as I said, are contributing to this. But we're fairly early in this HBM4 ramp. I think most people understand the timing and how it's linked up to a major high compute -- high-performance compute product launch next year.

And so we expect continued growth from here in our HBM4 business and our HBM business overall. If you look at -- as we go through 2026, a couple of elements of test intensity and test complexity are increasing with HBM4, as I mentioned in the prepared remarks. Test speeds are going up, the layer counts are going up. These are all powerful tailwinds for probe card intensity.

And as we move to HBM4E and then 5, those tailwinds continue, right? We expect higher speeds and higher bit counts. The other interesting wrinkle is, as you mentioned, this idea of a custom HBM base die. And I think that's -- although it's further out on the horizon, it's something we're partnered with customers very closely right now, as it combines high-end logic and memory controllers on the base die for HBM, obviously, FormFactor in a place where that can offer some significant differentiation as we're the only supplier of scale in both memory and logic probe cards.

Very helpful, Mike. Aric, the follow-up is for you. So thanks for the granularity on the levers that you're pulling to close to 500 gap -- 500 basis point gap to target GM. The question is this, as we look at things that, in my words, not yours, maybe more tactical versus those structural things that you talked about, how do those two things contribute in relative size to closing that 500 basis point gap -- and can you talk about the linearity that we should expect from where we are to 500, acknowledging that there's going to be mixed dynamics that move up and down along the way.

Yes. Thank you for your question. The 41% that we have as results in Q3 represents a meaningful improvement from last quarter. And we're already seeing the benefit of some of the actions that we have taken. We are not done, as you know. And so the restructuring actions that I referred to, we believe we'll continue to provide benefit heading into Q4 of about $1 million.

And then on an ongoing basis of about $1.5 million thereafter. In addition to that, we have plans in place to continue to drive improvements in, as you noted, kind of fundamental cost structure areas, focusing on things like manufacturing cycle time and yields, and we believe that those will address both the gross margin road map over the course of 2026 as well as bring more output out of our existing facilities.

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

Brian, you might be on mute. Brian Chin, we're not hearing you.

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

Just my first question regarding the gross margin target of 45%. It sounded like you think you will attain that level in 2026. Is that a statement regarding mix of business improving in foundry logic versus DRAM? Or is that a statement regarding the initiatives that you're doing or a combination of both.

As I mentioned in our prepared remarks, we are focused on changing the underlying cost structure across all of our products. And those underlying elements such as manufacturing cycle time and yield, those are independent of mix. Of course, there are always going to be elements of mix that impact us as well as volume. And we do expect to continue to see those impacts as we move forward.

But the road map that we have in place we believe will bring us up to target model gross margins over the course of 2026, as you know, with mix independent.

Fantastic. And my second question has to lead to -- can you quantify the positive impact on 26 foundry logic from potential ramps of CPU and GPU customers, a broad range, Mike.

Yes. Christian, we haven't really quantified that. As I noted in the prepared remarks, we're making excellent progress on the qualifications and competing for business. This is a critically important initiative for us to continue to diversify our customer base and grow share in foundry and logic. We would expect a significant impact as we move through 2026. But as the selections and commercial negotiations are ongoing, it's hard to quantify.

I will say the addressable markets associated with those two opportunities are significant. And if you look at one of our competitors who's been the primary vendor for it, you can see the impact of those. It's tens of millions of dollars a quarter from a served market perspective. Now we got to go compete and win on the back of these qualifications and bring that revenue and market share in.

And our next question comes from the line of Brian Chin from Stifel.

Maybe first, and I apologize if I cover any ground that's been covered already between calls. But the -- for Q4, it sounds like the revenue growth, is that -- that's mainly being driven by so to speak, legacy DRAM, if I heard that right, even across the business encompassing logic/foundry.

And I would even think of that being kind of a margin at best case, neutral, but probably a little bit negative, but you are guiding gross margins higher. Can you maybe kind of speak to how you're able to offset or improve that on the gross margin line? That's the first question.

Thank you for your question, Brian. I think there are some general relationships that we can draw from the market level DRAM versus foundry and logic. And in general, we do see some differentiation in standard margins across those markets. But we also need to remember that even within those markets, there's product level changes in profitability that can drive increases or decreases quarter-over-quarter as that mix changes.

So there is an element of mix in there. But again, one of the main reasons why our gross margins and standard margins are improving quarter-over-quarter is really in great part, driven by the cost improvements that we're making, which is, again, mix independent, and we believe will sustain regardless of the mix of foundry and logic versus DRAM.

And I know you've announced an amount of CapEx increase for next year tied to the Farmers Branch facility and capacity expansion. Have you provided -- sorry, earlier in the queue or earlier in the call, details or some sense in terms of the timing of that deployment and sort of when some of that increased capacity will be available to the company.

Yes. So we have a detailed project plan that extends over the course of 2026 and 2027. We expect some of the initial capacity to come online late in 2026 with the majority of that capacity coming online into 2027?

Majority in 2027. Okay. Is it -- is it going to be focused mainly on like HBM market? Or have you not stated? Or is there kind of broader fungibility in terms of what you can produce in that facility initially?

That's a great question. While we are focused on continuing to drive incremental gross margin improvement, that's one of the things we have our eye on, we are also focused on making sure that as we invest additional capital into our manufacturing footprint that we're creating a manufacturing environment that's flexible and efficient in supporting our future growth and making sure that it can serve the breadth of our product lines and that we are able to move resources back and forth as the market dictates.

And our next question comes from the line of Charles Shi from Needham & Company.

Mike, Aric, by the way, Aric, welcome aboard. Looking forward to working with you. So the question on HBM, I don't recall you actually start an HBM revenue number for the third quarter in mind if you provide some color there, is that in target $11 million incremental DRAM revenue like all HBM? And what that means for traditional DRAM was still at the $20 million per quarter, that kind of a 12-ish level. But yes, I get it's going to increase into Q4.

Yes, Charles, for Q3, just to put a few more details around it. Most of the sequential growth in DRAM in the third quarter going -- second quarter to third quarter, was driven by HBM. So it was -- HBM in round numbers was $40 million in the quarter, in the third quarter, pretty close to the previous high.

As you know, we now see in the fourth quarter some of the non HBM DRAM taking over, but in conversations with our customers, understanding that our lead times are still really well within a quarter, in most cases, we see some pretty strong growth associated with HBM4 as we move through the first part of 2026. And I think most suppliers who are participating in high-performance compute and the HBM4 and associated GPU and other networking chip ramp see the same strength.

Got it. Allow me -- I mean, forgive me for being a glass half empty this time, I have to do it. But looks like some commentary around your CPU customer, which disappeared from the 10% customer list this time feels like you are basically saying the revenue was kind of, I mean, getting to a pretty depressed level in third quarter. Mind if you put a little bit more quantitative color where your top CPU customer, where the revenue number was in Q3? And what's your projection into Q4 and given all the cost-cutting effort they're going through?

Yes. So you're correct in noting that our large CPU customer was not a 10% customer in the third quarter. But I'll take the glass half full position say that we still delivered revenue above $200 million, close to all-time highs. And if we talk about expectations for Q4, as I said in the prepared remarks, we're not seeing a lot of strength in the PC sector in the CPU sector, but still working very closely with that customer. They're a key partner for us. And as they go through some of their changes in restructuring and cost cutting, we're very closely partnered with them in making sure that we're a supplier that's continuing to help them through that. It's a long-term partnership.

I'll also shift gears on you and talk about why it's so important that we qualify at both major CPE manufacturers. And as I said in the call, we're making good progress there generate revenue from those projects in 2026.

And our next question comes from the line of Elizabeth Sun from Citi.

I guess my first question is, Mike, you were talking about ASICs, contributed about a couple of million dollars last quarter. So I'm just curious, in Q2, so just curious in September quarter, did you see any contribution in ASICs project? And also just -- could you share us any updates on your engagement in the ASIC projects?

Yes. I think the custom ASICs space is an interesting growth opportunity for us. We're engaged with all the major hyperscalers, and we highlighted for you last quarter that we'd won a significant project that contributed to second quarter revenues. There's a little bit of contribution again in the third quarter, but I think these are long-term engagements with the hyperscalers.

There is significant business there and to be perfectly transparent with you, we've got a smaller competitor who's doing a pretty good job serving that business with the two major ASIC -- custom ASIC projects in the industry. We believe that as things -- as the ASIC projects start to get closer to the specs required for GPUs, things like power, speed, density that those -- that market is going to consolidate towards the 2 top foundry and logic suppliers who have advanced MEMS probe technology. But for now, that's a hole in both our and our primary competitors revenue that we're both working to fix.

I think the other point to make is when we look at the sort of the fundamental spend associated with high-performance compute in the logic space, GPU versus custom ASIC, it continues to be dominated by GPU. And that's why it's so important that we qualify for the merchant GPU business and start to participate in that.

That makes sense. And then on the Farmers Branch, I'm curious if you could share as it ramps majority in 2027, what would be the tailwind for the gross margin side?

Yes. So you're correct in that we will be ramping and investing over 2026 and 2027. We have detailed models and the detailed project plan associated with this project. And as we look at that and we look forward, we believe that our investment there will yield incremental gross margin improvement over the long term, as we move forward, and that's kind of beyond our current target model.

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

A couple of questions. Aric, I hate to do it, but I'm asking another gross margin question. When you look at the move from 38.5% last quarter to 42% this quarter. Could you segregate the impact of mix, overhead absorption and perhaps the cost reduction programs? Are they roughly the same? Or is one greater than the others?

Yes. Good question. And you're correct in the elements there. So mix, volume and cost improvement actions all contributed to the improved gross margins quarter-over-quarter. But as you could see from my prepared remarks, we are very focused on making sure that we are managing the underlying cost drivers that are going to persist period in and period out. If I were to characterize the relative contribution, I would say that the volume, for example, is the minority of the change from last quarter.

Okay. That's very helpful. And then Mike, obviously, some nice momentum again in the silicon photonics on the system side. What are the next couple of milestones that we're looking for in that space to see some progress going into the fab itself?

Yes. I think the key milestones, Tom, are that are going to be externally available or some planned product launches early next year, mid next year. And I think some of our customers have been pretty transparent about the insertion of CPO co-packaged optics into the road map. And I think if those are -- or when those are commercially successful, that will be the next catalyst for CPO.

Right now, we're in pilot production, moving towards volume production -- as I noted, we've now installed multiple units of our Triton system, which is positioned for high-volume manufacturing of CPO, so we're ready to go when that begins to ramp. But probably the first externally visible catalyst is going to be some announcement coming in the early part of next year.

[Operator Instructions]. Our next question comes from the line of Krish Sankar from TD Cowen.

This is Steven Chin on behalf of Krish. Mike, I just had one first for you on the networking opportunity. I don't recall like from my previous conversations, but within foundry and logic is networking silicon and specifically data center type solutions. Are those a meaningful part of your foundry logic exposure today. And could you also talk about the long-term opportunities potentially with a major GPU customer versus merchant networking chip opportunities?

Yes. I think on the networking silicon side, this is currently, I'd call it an important part of the business, but some of the growth projections that we have are pretty significant. And that's one of the reasons why we highlighted it this quarter. I think you've probably heard pretty recently from some of the AT manufacturers that they see similar drivers in their business.

And so as networking becomes a much more important part of the overall internal data center silicon content, that's an area where we're excited to take a strong incumbent position and continue to build revenue around that share position.

I didn't understand the second part of the question. Can you repeat it for me.

Yes. Just in terms of your opportunities for future wins at, for example, a merchant networking companies versus bench opportunities at a major GPU vendor in the market just because the merchant networking companies, they -- as you mentioned earlier, they do use a smaller probe card vendor for some of the ASIC designs. Just kind of curious if that's also similar for some of these higher performing network to silicon as well?

Yes. I think it's an interesting question, right? As we've seen the ARC over the last 5 years of GPU requirements, for example, move into the space that requires an advanced MEMS probe card technology because of power, speed, pin count, pitches, there's really only two suppliers worldwide that can do that. And I think the evolution as GPUs are now firmly in this space. Obviously, we've got work to do as we qualify and start to win business there.

But I think elements of these networking chips are also moving towards that space. And so in the whatever 15-odd years I've been in the probe card business, you've seen the steady progression of all kinds of different pieces of silicon migrate towards where requirements absolutely dictate the need for advanced probe card technologies.

And for those of you familiar with our story, you know that, that's one of the areas of key investments and key differentiation that we have, both in foundry and logic and in DRAM.

Great. And for my follow-up, a question for Aric on the investments for Farmers Branch. You mentioned the is the target of $140 million to $170 million over the course of, I think, calendar '26. Just wondering, how does that break out between -- is that all CapEx? Or is there some component of R&D potentially in there as well?

Most of that is capital expenditures. It is a mix of different types of assets building improvements, clean room build-out and equipment. So various lives on those, but that spend is primarily focused on the build-out of the -- physical build-out of the site and the manufacturing equipment that goes along with it.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mike Slessor for any further remarks.

Thanks, everyone, for joining us today. And let me add my welcome to Aric in his first earnings call. We're going to be doing a couple of conferences and events as we go through to the end of the year, and we hope to see you there and continue to update you on FormFactor's progress on the evolution to the 47% gross margin of the target model. Take care.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Thank you, and welcome, everyone, to FormFactor's Second Quarter 2025 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Flesher, and Chief Financial Officer, Shai Shahar. Before we begin, Stan Finkelstein, the company's VP of Investor Relations, will remind you of some important information.

Thank you. Today's a 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 includes us with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions; the benefits of acquisitions and investments, including acquisition of manufacturing facility anticipated industry trends, potential disruptions in our supply chain, the impact 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 28, 2024, and in our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, July 30, 2025, and we assume no obligation to update them.

With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Thanks, everyone, for joining us today. FormFactor reported sequentially stronger second quarter revenue that exceeded the high end of our outlook range due to higher-than-anticipated growth in our probe card business. Despite this revenue strength, non-GAAP gross margin and overall profitability fell short of our outlook, mainly caused by an unfavorable shift in product mix and unforecasted ramp-up costs for a second HBM DRAM customer.

In the current third quarter, we expect to deliver revenue comparable to the second quarter and slightly higher gross margin and operating profit. Before we dive into segments and market level details, I'd like to spend a few moments reviewing the year-to-date. FormFactor's business continues to be driven by 2 dominant themes: advanced packaging and generative AI. As front-end-driven Moore's Law slows, the innovation and performance offered by advanced packaging and chiplets allows our customers to accelerate their road maps and deliver spectacular performance improvements in compute and memory.

These innovations like the stacking of DRAM chiplets to produce HBMs that are then integrated with GPUs in multi reticle [indiscernible] packages. Copackage optics, and even chiplet-based processors deployed at the edge are enabling the transformative capabilities of generative AI, fueling forecasts of semiconductor industry growth to $1 trillion early in the next decade. As the leading supplier of probe cards and systems that ensure the quality and performance of each individual chiplet and the stacks of chiplets in the advanced package, FormFactor is uniquely positioned in enabling these innovations.

We continue to be excited by our growth prospects as advanced packaging drives increased test intensity and test complexity, creating increased demand for our products. At the same time, we acknowledged at our recent financial results and especially gross margins have not reflected our unique market leadership position. There are multiple reasons for this gross margin underperformance, including a product mix shift towards historically lower-margin markets like DRAM, operational cost increases and the recent headwinds presented by tariffs. As we said in previous quarters, we're taking steps to address each of these root causes, including developing and commercializing differentiated new products to drive market share and pricing but at the same time improving our operational performance and manufacturing costs under the new global operations organization and leadership we put in place last year.

In the first half of 2025, we've also utilized FormFactor's strong balance sheet to make 2 strategic investments designed to improve longer-term competitiveness and profitability. One, a minority equity investment in FICT, the leading global supplier of multilayer organic substrates, which are a critical enabling probe card subcomponent for us and our competitors; and two, the purchase of a fit-for-purpose brownfield manufacturing facility in Farmers Branch, Texas.

The Farmers Branch facility acquisition allows us to rapidly and cost effectively expand our process capability and capacity beyond our current manufacturing footprint. It also provides a clear path to lower our ongoing manufacturing costs as is located in a region with lower operating costs and a variety of financial and regulatory incentives. Our team has made excellent progress in executing our planning and pre-startup activities since the June 2 purchase announcement, and we've recently obtained the certificate of occupancy for the site.

We're currently finalizing schedules for tool installation and specific product ramps with the detailed timing and magnitude of the ramp governed by process tool lead times, CapEx requirements and the specific financial incentives committed by the state and local governments.

Turning now to segment and market level details. In DRAM probe cards, HBM drove the expected sequential growth in the second quarter. In the current third quarter, we expect continued growth in both HBM and DRAM overall. FormFactor's top customer remains the market share leader in this market. In addition, we are also now shipping in volume to all 3 major HBM manufacturers as we execute our strategy to be a key supplier to all the leading customers in the industry thereby growing and diversifying our HBM demand profile.

Even with this more diversified demand profile, we expect the quarter-to-quarter volatility in HBM demand we've seen over the past several quarters to continue as all 3 of our customers' output is concentrated in a relatively small number of designs that are ramping up on short lead times. More broadly, we're continuing to strengthen our leadership position in HBM probe cards as growth accelerates and are excited about growing this business with FormFactor's differentiated smart Matrix and Intelifusion DRAM probe card architecture.

Shifting to the foundry and logic probe card market. Consistent with our outlook, second quarter demand in this market was sequentially stronger as we delivered seasonal ramps of major mobile application processor designs and a family of client PC microprocessor designs. Given the seasonal nature of this strength, we expect a moderate reduction in third quarter demand in this market. These segment results provide a proof point of FormFactor's industry leadership and strong customer partnerships as 2 foundry and logic customers topped the 10% threshold in the second quarter.

In addition, we were recognized by our customers worldwide in the Annual Tech Insights 2025 Global Customer Satisfaction survey as the #1 global supplier in both test subsystems and focused chip-making equipment categories, where we received high rankings for quality and technology leadership far outpacing our direct competitors. I'd like to thank our customers for their partnership and commend their worldwide team for their commitment to our core form value of focus on the customer as we strive to continuously improve our customer collaboration and support.

Turning to our Systems segment. We experienced a slight sequential reduction in second quarter revenue due to a variety of pushouts. These systems have now been shipped, and we expect this to result in sequential growth and an improved overall product mix in the third quarter. Our systems business continues to be driven by customer development and adoption of advanced technologies like copackage optics, or CPO and as well as the significant advancements being made in quantum computing.

In CPO, we now have multiple CM300 Xi systems running pilot production for our primary customer and are working closely with them, their foundry and partners like Advantest to ready this technology for high-volume production in the first half of 2026. In quantum computing, the first half of 2025 has seen significant advancements in the commercialization of this revolutionary computational technology with an acceleration of technical achievements like Google's progress and error correction with their Willow platform and statements from industry icons like NVIDIA's, [indiscernible] Wong, the quantum computing is reaching an inflection point.

FormFactor's IQ 2000 and IQ 3000 cryogenic probers are an important part of this advancement with the system helping customers characterize, test and improve their quantum processors and the associated logic and communication circuits. Although high-volume production remains a few years out, testing of quantum computing chips is yet another area where FormFactor is ideally positioned.

In closing, we remain committed to our target financial model, which delivers 47% gross margin on $850 million of annual revenue. At the same time, we acknowledge that our recent performance has not demonstrated a clear path to that level of profitability, which is why we're taking the steps I mentioned earlier to improve margins over the medium term, both organically and through strategic investments like FICT and Farmers Branch.

These multipronged initiatives will improve our competitiveness and add capacity at lower cost, enabling us to grow form factor as we meet the challenges of increased test intensity and higher test complexity associated with the adoption of advanced packaging in applications like high-bandwidth memory, co-package optics and quantum computing. Shai, over to you.

Thank you, Mike, and good afternoon. As you saw in our press release, Q2 revenues were $195.8 million, $0.8 million above the high end of our outlook range. and non-GAAP gross margin of 38.5% was at the low end of the range. These, together with OpEx slightly higher than the midpoint of the outlook, resulted in a non-GAAP EPS of $0.27, $0.1 above the low end of the outlook range. Second quarter revenues increased 14.3% from the first quarter and decreased 0.8% year-over-year from our Q2 '24 revenues. .

Probe card segment revenues were $162.1 million in the second quarter, an increase of $25.6 million or 18.7% from the first quarter. The increase was driven by higher revenues in all the markets we serve, most notably in foundry and logic and DRAM. Within the probe card segment, Q2 foundry and logic revenues were $100 million, a $14 million or 16.7% increase from the first quarter.

Foundry and Logic revenues increased to 50.8% of total company revenues compared to 49.8% in the first quarter. DRAM revenues were $57.1 million in Q2, $8.2 million or 16.8% higher than the first quarter, an increase to 29.1% of total quarterly revenues as compared to 28.5% in the first quarter. Within DRAM, HBM revenues increased $7.4 million from $29.5 million in Q1 to $37 million in the second quarter.

Flash revenues of $5.5 million in Q2 were up $3.1 million from the first quarter and with 2.8% of total revenues in Q2 as compared to 1.4% in Q1. Systems segment revenues were $33.7 million in Q2, a $1.1 million decrease from the first quarter and comprised 17.2% of total company revenues down from 20.3% in the first quarter. GAAP gross margin for the second quarter was 37.3% as compared to 37.7% in Q1. Cost of revenues included $2.4 million 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 second quarter was 38.5%, 0.7 percentage points lower than the 39.2% non-GAAP gross margin in Q1 and at the low end of our outlook range. The decrease as compared to Q1 is driven mainly by lower non-GAAP gross margins in the Systems segment. The decreases compared to the midpoint of our outlook range is attributable mostly to a decrease in systems revenues, which have higher margins as well as higher manufacturing spend and higher ramp-up costs related to shipments to an HVM DRAM customer.

We incurred these additional ramp-up costs to meet some unique performance requirements for an HBM 4 design specific to this customer. Our engineering team has partnered closely with this customer's technical team to identify and validate resolution of the issue, and we expect to have fully incorporated the necessary modifications to the specific design during the current third quarter.

Our probe card segment gross margin was 38.3% in the second quarter, an increase of 0.5 percentage points compared to 37.8% in Q1. The increase from Q1 was driven by several factors, including favorable absorption and higher revenues that were partially offset by higher manufacturing spend, which include higher costs from tariffs and the ramp-up cost I just mentioned. Our Q2 Systems segment gross margin was 39.4%, a decrease of 5.1 percentage points compared to 44.5% gross margin in the first quarter. The decrease from Q1 was mainly a result of lower revenues and unfavorable product mix and higher manufacturing spending, which includes costs from tariffs.

Our GAAP operating expenses were $60.6 million for the second quarter as compared to $61.3 million in the first quarter. Non-GAAP operating expenses for the second quarter were $52.5 million or 26.8% of revenues as compared with $50.2 million or 29.3% of revenues in Q1. The $2.3 million increase relates mainly to higher performance-based compensation, increased labor costs from higher head count and annual salary adjustments and increased operating expenses from the new Farmers Branch manufacturing facility we purchased late in the second quarter.

Non-GAAP expenses for the second quarter included amortization of acquisition-related intangibles and depreciation of $9.6 million, $0.7 million higher than the first quarter. and $9.4 million for stock-based compensation, $0.4 million lower than the first quarter. GAAP operating income was $12.3 million for Q2 as compared to the GAAP operating income of $3.3 million in Q1. Non-GAAP operating income for the second quarter was $22.8 million, compared with $16.9 million in the first quarter, an increase of $6 million or 35.2%. This increase in operating income is due to higher revenues, partially offset by lower gross margins and an increase in operating expenses.

GAAP net income for the second quarter was $9.1 million or $0.12 per fully diluted share compared with a GAAP net income of $6.4 million or $0.08 per fully diluted share in the previous quarter. The non-GAAP effective tax rate for the second quarter was 16.5%, 1.8 percentage points higher than the 14.7% rate for the first quarter.

The recent passage of the one big beautiful bill or OBBB, provided a permanent repeal of capitalization of R&D expenditures while also lowering foreign-derived intangible income, or FDII, tax benefits. As a result, we now expect an increase in our effective tax rate for the full year to the range of 19% to 23% from the previously communicated range of 14% to 18%.

The while increasing our effective tax rate and income tax expenses by approximately $2.6 million for the first 3 quarters of 2025. This bill reduces our cash taxes for the year by approximately $5 million. I will say more about the impact of this new legislation on our Q3 effective tax rate and EPS later in the Q3 outlook section of my remarks.

Second quarter non-GAAP net income was $21.2 million or $0.27 per fully diluted share, up from $18 million or $0.23 per fully diluted share in Q1. Moving to the balance sheet and cash flows. We had a negative free cash flow of $47.1 million in the second quarter compared to a positive $6.3 million in Q1. The main reason for the decrease in free cash flows were CapEx, $47.7 million higher than in Q1 due to the $55 million purchase of the Farmers Branch manufacturing facility and operating cash flows that were $4.6 million lower than in Q1, primarily driven by greater outflows for working capital of $9.2 million.

If we exclude the $55 million investment in the Farmers Branch manufacturing facility, free cash flow would have been $8 million or $1.6 million higher than in Q1. We invested $66.3 million in capital expenditures during the second quarter compared to $18.6 million in Q1. As mentioned, the increase was due chiefly to the purchase of the Farmers Branch manufacturing facility. As Mike mentioned, since we purchased the facility last month, we have made excellent progress in executing our planning and pre-startup activities. We are currently finalizing our plans, and we will provide updates as we continue to make progress. With this purchase and additional related investments we expect to make in the facility, we increased our expected annual CapEx for 2025 from the range of $35 million to $45 million to $110 million to $130 million.

At quarter end, total cash and investments were $253 million, a decrease of $50 million from in Q1. The main reason for the decrease was the purchase of the Farmers branch facility. At the end of the second quarter, we had one term loan with a balance totaling $13 million. I also would like to report that yesterday, we entered into a new $150 million revolving credit facility agreement. This facility together with more than $250 million on our balance sheet, enhances our financial flexibility and provides us with additional liquidity to support our strategic initiatives, working capital needs and general corporate purposes.

During the second quarter, we used $2.4 million to repurchase shares. At quarter end, $72.6 million remained available for future purchases under the $75 million 2-year buyback program that was approved and announced in April 2025. Our capital allocation strategy has not changed, and our share repurchase program goal is to offset dilution from stock-based compensation. Turning to the third quarter non-GAAP outlook. We expect Q3 revenues of $200 million plus or minus $5 million, with increases in systems and DRAM, including an HBM and a decrease in [indiscernible]. This increase in revenues and a more favorable product mix are expected to result in a higher non-GAAP gross margin of 40%, plus or minus 150 basis points.

This Q3 outlook range includes a 1 to 1.5 percentage point reduction in gross margins due to the impact of tariffs, assuming tariffs remain at their current level. If the tariffs and goods imported to the U.S. do increase, a possibility that was indicated by the administration, the impact of the tariffs on our gross margins could increase to 1.5 to 2 percentage points at the midpoint of our outlook range.

As Mike mentioned, we remain committed to our target financial model, which delivers 47% gross margin on $850 million of annual revenue. At the same time, we acknowledge that our recent results and our Q3 outlook are not showing a clear path to achieving the model in the near term. And so we are taking steps to improve margins and make progress towards achieving our target financial model. At the midpoint of these outlook ranges, we expect Q3 operating expenses to be $55 million, plus or minus $2 million, approximately $2.5 million higher than Q2, mainly due to additional head count and a full quarter of expenses related to operating our new manufacturing facility in Farmers Branch.

Regarding income taxes. As I mentioned earlier, the passage of OBVB effective retroactively from January 1, 2025, result in an increase in our annual effective tax rate. Our Q3 income tax provision will include the onetime catch-up for income taxes for the first and second quarters, which will result in an effective tax rate of approximately 31% in Q3. If we exclude the impact of the new tax legislation on the third quarter effective tax rate, it would have been in the previously communicated range. Q4 effective tax rate, which will not have the onetime catch-up effect of the new tax legislation is expected to be within the new annual range of 19% to 23%.

Non-GAAP earnings per fully diluted share for Q3 is expected to be $0.25 plus or minus $0.04. If we exclude the impact of the new tax legislation, the midpoint of the EPS Q3 outlook range would have been $0.32. A reconciliation of our GAAP to non-GAAP Q3 outlook is available on the Investor Relations section of our website. and in our press release issued today.

With that, let's open the call for questions. Operator?

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

Ask a few questions. Maybe firstly, just -- sorry if I missed this, but how much residual customer or HBM product cost is still embedded in the third quarter gross margin guide.

Not sure I understand the question. The residual -- if you're talking about the ramp-up cost when we .

You think that hasn't already been reflected in that quarter.

Yes. There is no additional ramp-up costs assumed in for this HBM customer or others.

Okay. Got it. So you're comfortable that that's behind relative to the product ramps for.

As we said in the prepared remarks, we resolved the issue with the customer in the third quarter.

Got it. Got it. Maybe just on the broader business trends relative to how you talked about third quarter across your markets. surprise to nobody but consumer PC phone markets continue to feel somewhat underwhelming. I know you don't want to guide 4Q per se, Mike. But -- as of today, do you think that trend of higher sequential DRAM systems and lower sequential logic foundry could persist in the 4Q as well? And any thoughts about how that kind of trend impacts gross margins?

Yes. So if we look at -- and we're not going to guide Q4. But if we look at the current trends, clearly, our business and the industry overall is being driven by 2 fundamental trends: one, advanced packaging, the second generative AI. And clearly, there [indiscernible]. I think in growing the Foundry and Logic business, we're also taking the approach of not just waiting for recovery in mobile and PC but doing qualifications for things like GPUs, the hyperscalers and custom ASIC. And in fact, there are some contributions of hyperscaler custom ASIC in our second quarter results, where we've delivered significant volumes of one of those custom ASIC chips.

And so I think I agree with you. The PC and mobile markets remain tepid. I don't think pinning founder and strong foundry and logic secular growth on those is particularly wise move. We did see some second quarter seasonal strength, but shifting our focus to grow the Foundry and Logic business in areas driven by generative AI is where we're putting more and more resources. I think we'll continue to see DRAM growth driven by HBM strength. And systems really levered, as I said in my prepared remarks, to copackage optics, and, to some extent, quantum computing as that continues to develop. All told, that is -- continues to be a challenging product mix for gross margins which is why we're taking the steps we outlined in the prepared remarks, to improve gross margins and get back on track to our target model 47% level.

Got it. And then maybe last question. As you begin to ramp up with your largest customer, HBM4 and then presumably with second and third customers, HBM4 as well. do you see a better -- that's a way for test intensity, but also maybe a margin margin potential out of those products? And how significant is that sort of Q2 into Q3? And where do you think that goes in the next couple of quarters as a percent of the HBM business?

Yes. it's still a pretty balanced demand profile between HBM 3 and 4, but definitely increasing trend on HBM 4. And as we said, I think in the last call, we expect that crossover to happen sometime in the latter part of 2025. HBM4 does have, at least for certain test insertions, more challenging test requirements. What we refer to generally is increased test complexity with things like higher speeds, different temperature and scaling ranges. So HBM4 does offer the opportunity, at least for some of these high-speed insertions for us to deliver more value -- and when we do deliver more value, higher yields, higher performance envelope, we do get compensated for that by our customers. So HBM 4, at least part of the test insertions, we do expect to have higher ASPs for the high-speed [indiscernible].

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

Yes. The first question I wanted to ask is just to follow up on gross margins to clarify that I've got all the pieces correct. So Shai -- for the third quarter, 40% guide, there isn't any customer HBM start-up costs in there. But did you say there were any headwinds from tariffs and -- and given the level that we're at, is there anything happening with competitor pricing at these levels or any other one-offs that might be adversely affecting gross margin.

So I'll say again, yes, we don't expect additional ramp-up costs in Q3. So the 40% gross margin assumes no repetitive expenses like in Q2. When it comes to tariffs, what we said is that the 40% assumes 1 to 1.5 percentage points headwinds from tariffs as they stand today, there are some things that might increased tariffs on August 1, and there are other rules that might be imposed by the government. And that's what we say that if these things will actually happen, the headwinds might increase to up to 2 percentage points. .

When it comes to competitors' pricing, we don't see significant changes in that. And it goes back to Mike's answer on the previous question, it all depends on the value we deliver to our customers.

Got it. And then the second question is for Mike. Mike, I was hoping that you could just step up to a higher level and talk about the business and how it performs toward target model parameters given that, that was an emphasis in your commentary. And specifically, the question is that we're only about 7% or 8% from target parameter revenue levels on a run rate basis, but we're 700 basis points away on gross margin. So if you were to have been out the 3 or 4 things that can help us bridge that gross margin gap, how would those prioritize? And what would be the relative contribution.

Yes, Craig. So I think an absolutely fair observation and one that we tried to point people to in the prepared remarks. We recognize that we're just shy of the revenue levels, at least on a quarterly run rate basis of the model, yet a long way away from the gross margin levels. There is an element of volume that is helpful for gross margin. There's also a variety of different operating cost reductions that we are continuing to execute on. I'll remind people that around a year ago, we completely changed the operating organizational structure and have brought in some very talented people from the outside with strong semiconductor experience. We're now gaining momentum and improving our operations and lowering our operating costs. And so there's some short-term elements there as well.

And then finally, the initiatives around growing our foundry and logic market share with things like GPU qualifications with things like addressing the hyperscaler custom AI business as we continue to see a pretty lackluster PC and mobile environment. Those are roughly all 3 equal components as we think about bridging our way back up to the 47% of the target model at $850 million in revenue.

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

Maybe for Shai, when you look at the ramping of the new facility in Texas, what do you think the impact will be, if any, on the P&L over the next few quarters? And then once up and running, what is the -- what do you think the long-term impact or benefit to margins will be?

Yes. So we acquired this facility about a little over a month ago, right? We're still working on our plans and it's been only a few weeks since we closed it. We will provide updates as we make progress. And as I said in the prepared remarks. One of the reasons, I think it's a good reminder that we acquired this manufacturing facility is that it is located in a lower-cost region. So we are committed to the target model. The Farmers Branch facility is part of our medium-term process as we expect lower cost of operations in that region, including environmental related cost, labor cost. And also, as I said in the prepared remarks as well, we are seeking state and local incentives which would lower our cost as well.

But we won't see an impact on the P&L after it's up and running?

We will provide an update on that as we make more progress. .

Okay. And then getting back to the start-up costs, would you expect to see start-up costs at some point down the road for your third high bandwidth memory customer?

Tom, it's Mike. I'll answer that one. I think the headline for the second quarter results and what we're trying to convey is we're now shipping in volume to all 3 major VM providers. They've all been customers for many years, primarily on commodity DRAM, but we're now qualified in shipping in volume. The issue with one customer in the second quarter was really associated with a single design. And as you know, probe cards are consumable specific to each chip design in customizing our architecture to meet that specific design at this customer, our engineering team made a choice that we had to go back and change. We couldn't reach one of the critical specifications for that customer. And that's as sort of the fundamental root cause and reason for this charge in the quarter that we're calling a start-up cost.

We don't see anything like that. at that customer with other designs or with any other customer. The issue has been resolved. Unfortunately, it did have a gross margin impact. But as we continue to build share at those other 2 HBM manufacturers, we don't see anything more like this. It's part of ramping up and learning some of the subtleties of delivering into a specific application with each customer. But now that we're at volume with all 3 of them, I don't expect -- and have resolved the specific issue associated with that one design. I don't expect anything else like this to come along.

And our next question comes from the line of Charles Shi from Needham & Company.

I'm actually viewing the ramp-up cost issue that happened in Q2 with another HBM customer, probably I see that as a good problem to have. To me, it feels like you guys are more deeply involved in that particular customer's ramp. So if I go back maybe like a 1 year-ish or maybe a little bit longer, I thought that you guys were initially had a pretty low market share assumptions with that particular customer. But how have things been involved and let's say compared with your -- the HBM leader, the market share you have there. How is your market share at this current -- this particular customer being, I mean, is it actually getting closer to the market share you have as a leader or any way you can quantify that would be great for us to to think about your HVM ramp going into the future?

Got it. Well, I appreciate the glass is half full approach to the the ramp-up cost issue. Obviously, we aspire to execute more cleanly than that, both for our financial results and in delivering to our customers. But nonetheless, it is indication of strong participation in a second customer's HBM4 ramps. I'd say we've got a lot of share opportunity there, right? If I contrast it to our #1 customer, where we have a very strong share position, based on a strong historical partnership with that customer that goes back -- essentially decades as well as some great collaboration on aligning our technology road maps -- that's a very strong share position.

And as I've said in the past, I don't expect to duplicate that share position at the other 2 DRAM manufacturers. Having said that, if you want to view an entitlement share position as maybe a 50-50 split, we're a long way from there. So that opportunity is in front of us. We definitely need to improve our execution as we've shown, and we need to increase our capacity, which is part of the optimization we're doing in our existing footprint, but it's also longer term behind us deploying our balance sheet to buy the Farmers Branch facility and begin to ramp it up.

Maybe another question. I think it wasn't really being addressed anymore. Your microprocessor company, the customer, microprocessor customer they are going through quite a lot of restructuring recently, restructuring, cost cutting, probably a lot of reasons of how they're going to do manufacturing, how they're going to do product development, et cetera. I don't think you actually mentioned about the revenue trend for that particular customer. It was nice to see that customers' contribution actually went up in Q2, but what's the thoughts going forward from here and especially the implication from the restructuring that is currently underway? What would be the implication based on what you see today?

Well, obviously, there is a lot going on at that customer. If we look at what we're executing to now and the dialogue between the company, there's been no significant change. But obviously, you see some revenue volatility in our results with that customer. And I don't think that's a reflection of any kind of share volatility. I think that's a reflection of changes in programs, changes in priorities and changes in demand. .

Longer term, if I back out a little bit, this is why it's so important for us to continue to make progress around our strategy of being a supplier to all the leading customers in the industry. They're all going to go through headwinds and tailwinds and ups and downs. And we want to make sure that we're a supplier to all the major customers in the industry so that we're somewhat insulated or at least buffered from these ups and downs of an individual customer. It's why it's so important for us to be now shipping in volume to all 3 major HBM providers. It's also why it's important that we continue to make progress, and we have made progress in the second quarter on qualifying and shipping in volume with the large fabless microprocessor company.

So different elements, no big change on the ground with that customer. But certainly, many different scenarios, which could be either positive or negative, but we're working hard to insulate ourselves by making sure we're exposed to the alternative demand streams.

And our next question comes from the line of David Duley from Steelhead Securities.

I was wondering, first off, if you could just talk a little bit about what you might expect from the hyperscaler customers or the GPU customers in the second half of the calendar year. You talked about having some, I think, hyperscale revenue in the quarter that just ended. I'm wondering if we're going to start to see the GPU guys use advanced probe cards and what the qualifications are scheduling are around that. And are you seeing also the other area of excitement for some companies in the networking segment. I'm just wondering what you're seeing in these AI markets in the third and fourth quarter.

Yes. So if we look at -- let me start with the hyperscalers and then we'll move to the GPU piece. I think we've got pretty good exposure overall to networking. Although for us, it's not the biggest business. Some of these higher volume, high test intensity markets like the GPUs and the custom ASICs really are where we see the biggest broker opportunity. So having said that, we did have a nice contribution, a multimillion dollar contribution in the second quarter from one of the hyperscalers and custom ASICs, where we delivered one of our advanced probe card technologies to test one of their custom ASICs. We continue to focus on what really is a new segment and application space for the industry, right?

A lot of these hyperscalers are launching their own chip design and chip test teams, and that's a new activity where us and other members of the test ecosystem are focusing a lot of our application engineering and R&D resources. So seeing some nice progress there. On the GPU front, we are continuing to make progress at qualifying for GPU testing, primarily through the foundries as the foundries are responsible for both the wafer sort and then the eventual advanced packaging associated with it.

There has been adoption by the large GPU manufacturer of advanced probe cards. Unfortunately, that went to our competitor first. And I think if you follow them, you understand that. But we're rapidly catching up and qualifying and now moving into a phase of volume pilot production, where we expect to generate revenue around that application from that customer in the second half.

Okay. And then I'm a little bit curious as to with a flat outlook in Q3 to the Q2 revenue, why you would be bringing on additional capacity in Texas. I understand it's lower cost, but maybe help us understand what your capacity utilization rate is at your current facilities and what the thinking is of buying another facility with Obviously, I think people expect more growth from you guys, but is there a reason you bought Texas now? Or what's the rationale?

Yes. I got to paint a longer-term picture for you because I agree, right if you could bring capacity online instantaneously, you wouldn't really do it now with a flat outlook. But if I look at our prospects longer term, and let me paint a much longer-term or multiyear opportunity for you. If you look at the overall industry, I think most consensus forecasts have the semiconductor industry growing to $1 trillion sometime early in the next decade. So 5-ish years out. .

If we look at our markets, you've seen them grow faster than the industry. Test intensity is going up and HBM is a great example, where HBM test intensity basically 1% of HBM revenues are spent back on probe cards. That's a significant step-up from the industry average. And so if we put that math together, with even some modest share gain aspirations for us, it's not too hard to see doubling the size of form factor, and we need to have capacity in place. It takes a while to do these things.

The purchase of Farmers Branch was motivated by a couple of things. Certainly, that long-term opportunity, but also it's kind of a perfect fit for us. And there were a handful of facilities like this and by a handful, I mean, 2 in the U.S. that were the right size, equipped to -- with the right facilities, the right clean room capabilities. So this was really an opportunistic buy for us to get us the optionality and future capacity in place that we're going to need, arguably 2026, 2027, but you've got to start that now if you're going to be executing and qualified with that facility with our key customers over that time frame.

Okay. And I'm going to take one other shot at the second half revenue kind of levels? I know you don't want to guide to Q4, but is there any reason to expect that the current HBM ramp that we're seeing at the 2 major customers who are part of your customer mix would slow down for any reason in the near term given what we've heard from their big customers and the hyperscalers. I mean, it's just seniors. So anyway, I love your commentary there.

That's right. And again, I want to reemphasize that we are shipping in volume to all 3 shipping HBM probe cards to all 3 major DRAM manufacturers. So we're beginning to diversify that business. But we also took pains to point out that there is going to be some quarter-to-quarter volatility. The direction is clear, right? The investments by the hyperscalers, the increased DRAM bid intensity associated with HBM coupling to the GPUs, it's clear that, that's a strong growth market, and we expect that business to grow. .

But even as you've seen through the HBM 3 to 3 now into 4 trajectory, where our revenue was dominated by a single customer, the leader, there's some volatility in there. So no question, the long-term trend line is up. That doesn't mean every quarter is going to be sequentially up. I'm hoping and expecting that as we bring all 3 HBM customers on and their share balances a little bit that, that will diversify the business some and smooth things out. But the secular growth in HBM is something we completely agree with. It's part of the reason why we're making some of these investments in capacity like Farmers Branch and improving our overall output and yields.

[Operator Instructions] Our next question comes from the line of Christian Schwab from Craig-Hallum Capital.

Most of my questions have been asked, but just a follow-up on the hyperscaler GPU custom ASIC business. it's good to do a few million dollars in the most recent quarter, but is kind of an initiative to help grow foundry and logic and improve gross margins in [indiscernible] the company. I mean, how long of a timeframe do you expect that to be more of a significant contributor and scale number?

Yes. I think it's a great question and one that we're debating internally because there's clearly some different crosscurrents in what GPUs are going to be used for, what merchant GPUs are going to be used for, what custom ASICs are going to be used for. But I think as we look into the latter part of 2025 and into 2 we're working hard to make sure we're exposed to both of those trends. I updated you on the GPU. Paul gave you some updates on the hyperscaler piece. To a large extent, our business in the hyperscaler custom ASIC is going to depend on the success of their product road maps. And I think a lot of that is still a to-be-determined state. Having said that, it is a great opportunity to potentially diversify the Foundry and Logic business further and move its demand drivers away from things like PC and mobile, which seem to be stuck in pretty unexciting growth times.

And our next question comes from the line of Gus Richard from Northland Capital Markets.

Just on the tariffs, 1.5% is a reasonably good-sized impact. And I'm just wondering, first of all, is it your imported raw materials. And then if that's the case, what can you guys do to diversify your supply chain to minimize the impact?

Yes, you're right, Gus. This is a significant impact on our gross margins. It's because we are importing goods into the U.S. So what we do in response is we are working closely with our vendors on different scenarios. It's really on a case-by-case basis. But as we said in the previous earnings call, we are taking kind of wait-and-see approach as we evaluate various tariff scenarios before committing to any significant change to our manufacturing footprint and our supply chain. .

And we're also looking into maybe getting drawbacks options. But we need to keep in mind the semiconductor supply chain is complex, and we are developing our supply chain to mitigate the impacts of the tariffs as much as possible. while acknowledging the negative impact on the gross margin as a result of the tariffs under the different scenarios.

Got it. And then, a followup is on silicon photonics, I think in the second half, we should be entering into pilot production, at least in some programs. And I was just wondering if you could give us a little bit of a status on where those ramps are and what those pilot programs are?

Yes. I touched on it in the prepared remarks. We now have multiple systems installed that are indeed involved in pilot production, primarily at the foundry for our large driver customer. The work now is really on making sure this technology is hardened and ready for high-volume production as we move into 2026. So we've got multiple tools running production levels they've never run at before, right? -- pilot production levels to with 1 or 2 designs but really a lot of the work and investment going on right now, both by us, our customers and our partners is to make sure that we're all ready for what's anticipated to be a significant ramp as we move into 2026.

And you probably know, CPO is one of the more compelling silicon photonics and co-packaged optics or CPO, One of the more compelling ways to reduce data center energy consumption, which I think in any reasonable scenario is going to start to turn out to be the limiter in AI growth. You just can't get the power for data centers to build out. And so I think solving -- helping solve this part of the equation of the actual energy consumption, power usage of the data center is a pretty exciting place for us to be.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mike Slessor for any further remarks.

Yes. Thanks for joining us today. If you take a look at our Investor Relations website, we're doing several conferences in late August and the early part of September, and we'd hope to see you there. Until then, take care.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.