FormFactor (FORM) Q4 2025 Earnings Call Transcript

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Date

Wednesday, Feb. 4, 2026 at 4:25 p.m. ET

Call participants

• Chief Executive Officer — Mike Slessor
• Chief Financial Officer — Aric McKinnis
• Vice President of Investor Relations — Stan Finkelstein

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Takeaways

• Revenue -- $215.2 million, setting a new all-time quarterly record and reaching the high end of guidance between $205 million and $215 million.
• GAAP gross margin -- 42.2%, a 40 basis point increase compared to 39.8% in the prior quarter.
• Non-GAAP gross margin -- 43.9%, up 290 basis points from 41% sequentially, exceeding the guidance range, with probe card segment up 364 basis points to 44.5% and systems segment down 50 basis points.
• GAAP net income -- $23.2 million, or $0.29 per fully diluted share, rising from $15.7 million, or $0.20 per share, in the prior quarter.
• Non-GAAP net income -- $36.6 million, or $0.46 per diluted share, up from $25.7 million, or $0.33 per share, sequentially.
• Operating cash flow -- $46 million, an increase of $19 million from $27 million in the prior quarter.
• Free cash flow -- $34.7 million, up $15 million from $19.7 million in the previous quarter, reflecting improved margins and disciplined working capital use.
• Total cash and investments -- $275 million at quarter end, an increase of $9.1 million from the previous quarter.
• Fiscal Q1 2026 non-GAAP revenue outlook -- $225 million plus or minus $5 million, signaling another sequential increase.
• Fiscal Q1 2026 non-GAAP gross margin outlook -- 45% plus or minus 150 basis points, with continued improvement initiatives.
• Fiscal Q1 2026 non-GAAP operating expenses guidance -- $62 million plus or minus $2 million, approximately $4.5 million higher than the prior quarter due to Farmers Branch start-up costs.
• Fiscal Q1 2026 non-GAAP EPS guidance -- $0.45 plus or minus $0.04 per fully diluted share.
• DRAM probe card revenue -- Achieved a record in the prior quarter, with guidance for another record in the upcoming quarter driven by HBM, projecting a move from "if in [the prior quarter], it was kinda mid forties. Think of it as a low fifties kind of number for [the upcoming quarter] based on where we currently sit."
• Gross margin expansion -- Achieved a cumulative improvement of 540 basis points over the last two quarters, with 110 basis points of additional expansion expected in the upcoming quarter.
• Farmers Branch facility -- Scheduled to initiate operations later in 2026, with capital spending estimates between $140 million and $170 million for the year and preproduction operating expenses of $6 million in the upcoming quarter and $20 million to $25 million for 2026, anticipated to be accretive to gross margin post-ramp.
• Share repurchase authorization -- $70.9 million remains available under the $75 million, two-year program launched in April 2025, with no shares repurchased in the prior quarter.
• Keystone Photonics acquisition -- Around $20 million cash was used for this December acquisition, adding differentiated optical probe technology for photonic device testing.
• Segment performance -- Probe card revenue will drive the bulk of the upcoming quarter's sequential revenue increase, while systems segment is expected to decrease seasonally.
• Tariff impact -- Gross margin continues to face a roughly 200 basis point headwind from tariffs, with mitigation efforts through drawbacks in process.
• Revenue target model -- Target model is 47% gross margin at $850 million annual run-rate revenue, excluding tariffs; current aim is 45% gross margin with tariffs.
• Operating expense leverage -- GAAP operating expenses were $67.3 million, a reduction of 340 basis points as a percent of revenue year over year, despite ongoing R&D investment.

Summary

FormFactor (NASDAQ:FORM) produced record quarterly and annual revenue, reporting sequential improvements in gross margin and earnings per share that surpassed both internal guidance and prior results. Management emphasized structural cost reductions, operational effectiveness, and disciplined resource deployment as the primary drivers of margin expansion and forecast that these improvements would persist, though at a more moderate pace. Capital deployment remains focused on the Farmers Branch facility to accelerate additional capacity and structural margin benefit, with continued attempts to offset tariff impacts and prioritize long-term profitability.

• CEO Slessor said, "The overall stack bandwidth of HBM4 more than doubles HBM3 to an astounding more than 2 terabits per second."
• Non-GAAP gross margin improvement was attributed to higher manufacturing yields, workforce reallocation, reduced cycle times, and targeted cost discipline.
• DRAM probe card revenue strength is currently concentrated among the largest customer, but FormFactor reports active qualification progress and market share gains with all three primary HBM manufacturers.
• Growth in foundry and logic demand is shifting from traditional PC and mobile end markets to data center and networking applications, reducing customer concentration.
• FormFactor is pursuing additional output and margin improvements from its existing footprint while preparing for the operational ramp of Farmers Branch as a structurally lower-cost expansion.
• Management stated the Keystone Photonics acquisition enhances FormFactor's optical test capabilities for co-packaged optics and high-growth data center markets.
• Guidance for the upcoming quarter reflects both a sequential step-up in revenue and further gross margin expansion, with probe card sales projected to drive most of the increase.

Industry glossary

• HBM (High Bandwidth Memory): A type of high-speed computer memory used in advanced semiconductor and data center applications, characterized by vertical stacking and high I/O bandwidth.
• Probe card: A test interface device used during semiconductor wafer testing to establish electrical contact with device pads or bumps.
• SmartMatrix architecture: Proprietary FormFactor probe card technology that supports high parallelism and high-speed test capability for complex semiconductor devices.
• Co-packaged optics (CPO): Integration of photonic and electronic components within the same package to increase bandwidth and reduce power consumption in networking equipment.
• Drawback: A U.S. customs program enabling companies to recover paid import duties or tariffs on materials or components that are later exported.
• CM300XI: A FormFactor test platform designed for advanced semiconductor probing and metrology applications.
• Triton: FormFactor's test platform used for cryogenic and quantum device testing.

Full Conference Call Transcript

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 produce the 290 basis points 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 and foundry and 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-HVM 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 the 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 sixteen high stacks of cord I chiplets, up from the eight and twelve 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 PNIO 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 HBM3 to an astounding two 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 smart matrix 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 die simultaneously at the 10 gigabit plus IO 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 smart matrix architecture to meet the challenging specifications for HBM5 and beyond, further extending our differentiation in HBM applications. This combination of high parallelism product and high-speed performance, which is critical for several important test insertions in our customer's HBM process flow, is producing market share gains at all three 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 founder 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 toward 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. Continue to partner closely with these customers, 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 system segment, we delivered the expected sequential revenue increase in the fourth quarter driven by customer investment in co-package optics and quantum computing. In the first quarter, we're expecting the typical seasonal reduction in demand for co-package optics or CPM continues to be a primary area of focus for us. As it represents an exciting growth opportunity where we have a strong leadership position.

Strengthen FormFactor's leadership in CPO test, we recently made an important strategic initiative 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 conductivity. 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 beta 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 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? Aric, you're up.

Stan Finkelstein: Thank you, Mike, and good afternoon.

Aric McKinnis: Before we dive into the details of our fourth-quarter financial results, I want to remind you of our strategic emphasis on improving growth margins. Over the past two 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 two 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 two quarters, Q2 2025 gross margins were 38.5%. Through Q4 2025, 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 2026. Operational effectiveness improvements like reduced site 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 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. 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 2025 revenues, and our outlook for Q1 2026, 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 our existing manufacturing footprint.

These improvements enable us to get more out of each tool, process, 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.

Stan Finkelstein: As you saw in our press release, our Q4 2025 results were favorable to our outlook on revenues, gross margins, and EPS on both a GAAP and non-GAAP basis. Q4 2025 revenues of $215.2 million came in at the high end of the Q4 outlook range of $205 million to $215 million GAAP gross margins for the fourth quarter were 42.2%, up 40 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 card 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 46¢ per fully diluted share, up from $25.7 million or 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 2025. 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-start-up activities. We continue to expect 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 2026, up from $1.7 million in Q4 2025 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 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 two-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 two-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 margin 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 can continuing to take actions to mitigate the impact of these tariffs.

But those efforts are ongoing At the midpoint of these outlook ranges, 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 cost and our expanding leadership position in the fast-growing markets that Mike described. 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?

Stan Finkelstein: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please limit yourself to one question and one follow-up. One moment for questions. And our first question comes from Matthew Frisco with Cantor. You may proceed.

Matthew Frisco: Hey, guys. Thanks for taking the question. Mean, to kick things off, obviously, very strong performance on the gross margin side, on track to hit that mid 40% level, three quarters ahead of plan. So what's the big change statement here over the past ninety days? And how should we think about the primary drivers and the magnitude of the continued expansion here ahead of the Farmers' Rep? Yeah. Hi. Thanks for your question. Yeah. We're very pleased with the results that we have seen to date. And the Q4 2025 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 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 improvements we're seeing in our gross margin performance.

Now we do expect that as we look forward into 2026 that we may not make progress at the same speed and perhaps in smaller increments than what we've 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. Thanks.

And then moving to the memory side, as we think about forms revenue growth through the year within the backdrop of the HBM4 transition, accelerating supplier build plans, robust pricing tailwinds, customer market growth coming in ahead of expectations, 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?

Mike Slessor: Yeah, Matt. It's 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' branches fast as we can. We believe the overall demand environment is gonna continue to be robust. Based on conversations with customers, you know, 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.

Stan Finkelstein: Thank you.

Operator: Our next question comes from Charles Shi with Needham and Company.

Charles Shi: Hi. Good afternoon. Nice results. Maybe the first question, your Q1, guidance implies basically 9,000,000 annual run rate already, and we knew that, you in the past, you said you exist capacity, excluding Farmers Branch, was around maybe it can be slightly above 850. So any chance for you to go higher run rate between now and when the Farmers Branch comes online? That's the first question. Thank you. Yeah. 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 $225,000,000 a quarter.

We believe that the expansion that we've been able to create there in our output is closely related 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 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 continued our focus throughout 2026 on making further incremental improvement. 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, and I do have a second question. So may maybe where how much more do you think you can squeeze out of the existing ones? Like, out of, above that 225,000,000 level?

Stan Finkelstein: Yeah. 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 or how we're gonna get additional output out of out of our.

Charles Shi: Got it. Okay. Maybe another question for Mike. Mike, you talked about HVM. You are deeply engaged. With all customers already working on HBM5. R and 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 probe card perspective and any thought whether and how any of those things inflections could further benefit the form factor? Thank you.

Mike Slessor: Yeah. I think there's several, Charles, and it's one of the reason why this early engagement with our customers is required. I mean, HBM5 is a couple away 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.

Stan Finkelstein: 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. The overall stack bandwidth of HBM4 more than doubles.

Mike Slessor: 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.

Charles Shi: Thanks, Mike.

Aric McKinnis: Thank you.

Operator: Our next question comes from Craig Ellis with B. Riley Securities. You may proceed.

Craig Ellis: Yeah. Thanks for taking the question, guys, and congratulations. On very strong execution, both with revenues and the underlying drivers to much better gross margin. Mike, I'm gonna 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 three 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? Thank you.

Mike Slessor: Sure. Well, I think as most people know, we have a very strong share position as our number one customer. And so right now, the HBM market's kind of a sweet spot for us.

Stan Finkelstein: That's why it's been such an initiative to work closely with the other two HBM manufacturers, customers for us, to make sure we're taking

Mike Slessor: 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 of 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 number one customer. But there's really only two suppliers that can do anything close to this. And so I think there's the element of to really gain share at those two 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 in incumbent share positions at those other two customers, it's a significant opportunity.

Craig Ellis: Interesting. Thank you.

Stan Finkelstein: 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

Craig Ellis: being able to meet customer demand if in the near term, grows above 225,000,000 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 it how material can it be? In the next twelve to twenty four months to production and revenue? Thank you.

Stan Finkelstein: Yeah. Thank you 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 then drive know, additional improvements in cycle times that will also increase our output capacity, if you will. However, you know, Farmers Branch come online on schedule. At the end of the year. There's been no changes to that timeline. That obviously provides us additional capacity beyond this year. Will continue to do the best we can to enhance our throughput through this year. And we'll talk about the longer term in analyst or at 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. You know, with visibility within a quarter. You know, we're doing what we can to react within timelines that we have, and I think we've done a pretty good job so far doing that.

Craig Ellis: And on that note, Eric, if I could just ask a follow-up to it. Clearly, you 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.

Stan Finkelstein: Yeah. Good question. I think that if I were to look at the increase from Q2 2025 through the end of the year and the 540 basis point improvement that we generate over that period of time We estimate that about two-thirds of that improvement is related to the initiatives that we've been driving on the cost side. Things like increasing our site cycle time actually, decreasing our cycle time and increasing our yields. And the remainder is things like volume and we did benefit from volume. in Q4, 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, 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 on our capacity, on our sites, and on our cost structure. Very good. Thanks, Mike.

Craig Ellis: Thanks, sir.

Aric McKinnis: Thank you.

Operator: Thank you. Our next question comes from Brian Chin with Stifel. May proceed.

Brian Chin: Hi there. Good afternoon. Thanks for letting us ask a few questions. Maybe first, just to square the Q1 revenue guide I did notice that system in 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 10,000,000 revenue growth Q1 versus Q4 at the midpoint, Is probe card revenue maybe up more than the $10,000,000 sequential? And how much of that sequential revenue increase is DRAM versus foundry logic?

Mike Slessor: Yeah, Brian. You're right. And I parsed it a little bit in the prepared remarks. We do expect systems to be down in the first quarter as it often seasonally is. 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 10,000,000 is the probe card business is gonna grow by more than 10,000,000. It's roughly equal parts of foundry and logic. And DRAM.

And as I said in the 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, yeah, 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.

Brian Chin: Okay. Great. Maybe the 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 peer capacity to come online in a similar time frame?

Mike Slessor: Yeah. I think if you follow, our major competitors, closely, I mean, you know, 70% of probe card market shares owned by three 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 they're trying to add our capacity as fast as we can. This is an area, sure, we like to keep our content at competitive antenna up.

But this is one where what our competitors do doesn't really make a difference to what we're gonna do. Eric talked about the faster than expected pace on both output and gross margin. We're we're applying the same urgency with getting Farmers Branch up and running. And so we're gonna 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.

Brian Chin: Can you size the AI GPU plus XPU ASIC plus, I guess, data center networking probe card TAM, and 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 in 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. Yeah.

Mike Slessor: I think if you look at and I you know, I'm gonna 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 you know, 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, you know, we're talking about a 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.

Brian Chin: Great. Great. Thanks, Mike.

Aric McKinnis: Thank you.

Operator: Next question comes from Robert Mertens with TD Cowen. You may proceed.

Robert Mertens: Hi. This is Robert Mertens on, for Krish Sankar. Thanks for taking my question. I know you guys have spoken to great lengths about what you're seeing in the DRAM market across the traction across all the high bandwidth memory manufacturers. Can you provide a dollar amount, for high bandwidth memory probe card sales this quarter? And just any color you could give us on, on this calendar year, the shakeout maybe between what you're expecting between traditional DDR and DDR5 designs and, those from high bandwidth memory. Thank you. Yeah.

Mike Slessor: Yeah. It's it's just 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 HPM. And so know, if in Q4, it was kinda mid forties. Think of it as a low fifties 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 cord eye wafers, or a DDR5 or a DDR4 part. And so for me to speculate, beyond kind of our you know, six, seven, eight week visibility, I don't have a view. And I'm not sure our customers have a view of how they're gonna gonna 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 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.

Robert Mertens: Great. Thank you. That's helpful.

Stan Finkelstein: Thank you. Our next question comes from Elizabeth Sun with Citi. You may proceed.

Elizabeth Sun: Hi. Thanks for taking my question. I guess the first question is how should we think about the foundry logic market this year? So, you know, there I see there's a lot of moving pieces. There's upside from, you know, networking, potential GPU qualification, but there's also some softness on your traditional, like, bigger mark bigger end market or soft smartphones and PCs. So I like to kind of early, but I want to get your thoughts on how should we think about phonologic growth this year.

Mike Slessor: Yeah. 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's growing and we're gaining share, clearly, we're gonna have a growth here. Now there's a lot of work to do in that. Right? We've talked about the GPU qual 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 wanna highlight is you know, 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, networking switches and some other pieces. But the other point I made on the callthe fact that we delivered a fourth quarter and full year revenue record without our, you know, 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 have expect to gain share in 2026.

Elizabeth Sun: Great. Thanks, Mike. And then Eric, 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 tariff impact and also for that 200 bps, what's the mitigation method you are implementing? And how should we think about, like, you know, some upside from the mitigation?

Stan Finkelstein: Yeah. The target model is 47% margins at $850,000,000 a year run rate for revenue. And that did not include tariffs as potential impact. And so what we've said is that we expect to hit target model gross margins adjusted for our tariff headwind which is 200 basis points. So 4545% 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 reexed That's a very detailed time intensive process. We're working through it. You know, 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.

Aric McKinnis: Thanks, Eric.

Operator: Thank you. And as a reminder, to ask a Our next question comes from Vedbati Schroeder with Evercore ISI. You may proceed.

Vedbati Schroeder: Hi. Thanks for taking my question. So the first one I had is, if you could quickly give us an update on where you are the qualification process for GPUs and then for the custom ASIC, 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?

Stan Finkelstein: Yeah. 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 in the industry. But you know, 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 you know, 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 call in the second half of the year.

Vedbati Schroeder: Understood. And have you, like, quantified how much that opportunity could be?

Mike Slessor: We've kinda waved our hands at it. You know, if you look and this is probably the merchant GPU opportunity. You know, it's probably was a 50 ish million dollar 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 know, 225,000,000 a quarter.

Stan Finkelstein: Custom ASIC one's a little harder to size.

Mike Slessor: But we see significant growth there and the continued investment in these programs and projects make it a place worth really, you know, focusing our resources and making sure we've got strong market share and good coverage there.

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

Mike Slessor: Yeah. Let me take that. I know it was a margin question, but pricing certainly in the area of customer and product focus. So I'll take that one. Look. Anytime 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, you know, a higher performance, a better spec. But there's an interesting situation right now where

Stan Finkelstein: you know, if there's a specific

Mike Slessor: program that's super important for a customer, and valuable for their time to market, we're able to share in that value as

Craig Ellis: well, share in that conversation. Now

Mike Slessor: 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.

Aric McKinnis: Thank you, Shane. And maybe I'll just add

Stan Finkelstein: maybe I'll just add to that really quick that, you know, 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 bump, 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.

Vedbati Schroeder: Understood. Thank you.

Stan Finkelstein: Thank you.

Operator: Our next question comes from David Duley with Steelhead Securities. You may proceed.

David Duley: Thanks for taking my questions, and congratulations on the awesome execution on the gross margins. My questions kind of a two-part question on HBM. You talked about the increased intensity, as we go from HBM3 to each 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. Would it be the a similar type of increase intensity as we move to HBM5?

Mike Slessor: Yeah. So one of the real drivers of test intensity is the stack. If I'm going to put your if our customers are gonna put 16 core die in the stack in of eight core die in the stack. As for HBM3, that's gonna 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.

David Duley: 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 kinda 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 two HBM players?

Mike Slessor: I don't we haven't quantified that for people. And because it's it's tough to parse through all the different HBM application. Excuse me, 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 three manufacturers in that particular application.

David Duley: Well, maybe another way to ask it is, so you're the number two source at the other two guys, essentially. Correct.

Mike Slessor: From an overall DRAM standpoint.

David Duley: Alrighty. Thank you.

Stan Finkelstein: Thank you. I would now like to turn the call back over to Mike Slessor for any closing remarks.

Mike Slessor: Thanks, everybody, for joining us. As I said, as I closed my prepared remarks, we're looking forward to continuing to demonstrate progress in growing revenue and expanding gross margin and profitability in our existing foot 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.

Operator: Thank you. This concludes the conference. Thank you for your participation. May now disconnect.

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