FormFactor, Inc. (FORM) Earnings Call Transcript & Summary

Thank you, and welcome, everyone, to FormFactor's Second Quarter 2026 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Aric McKinnis. Before we begin, Stan Finkelstein, the company's VP of Investor Relations, will remind you of some important information.

Thank you. Today'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 those with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions; the benefits of acquisitions and investments including the ramp-up of manufacturing facilities, anticipated industry trends, potential disruptions in our supply chain, the impacts of regulatory changes, including tariffs and changes in export controls, the anticipated volatility in demand for products, our ability to develop, produce and sell products and the assumptions upon which such statements are based. Those statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended December 27, 2025, and in our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, July 29, 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 for joining us today. FormFactor's second quarter revenue, gross profit and earnings per share set all-time records and we achieved 2 important milestones on the path to the new target model we introduced in May. First, we surpassed $1 billion annual revenue run rate. And second, we exceeded 50% gross margin. In the current third quarter, we expect to deliver sequential increases in both revenue and profitability as we extend our run of record results. Over the past 4 quarters, we've grown revenue by more than 30%, increased non-GAAP gross margin by 1,500 basis points and tripled our earnings per share. These improvements are the product of a multiyear effort to create and expand FormFactor's unique position at the intersection of high-performance compute and advanced packaging while simultaneously strengthening the company's execution to enhance profitability and drive operating leverage. Our second quarter results and third quarter outlook show a clear path to our new target model. Looking further ahead, our Farmers Branch site is on track to come online in the fourth quarter and ramp throughout 2027, providing increased capacity at a structurally lower cost. This will, in turn, enable us to accelerate revenue growth and generate additional profitability and operating leverage. Aric will discuss our current operational performance and future plans later in the call. The breadth of demand we saw during the quarter is particularly encouraging, with strength in major growth initiatives like high-bandwidth memory and copackage optics, powering sequential revenue increases in both the Probe Cards and Systems segments. This broad participation reflects the diversification strategy we've discussed for years and demonstrates the value of serving all major semiconductor customers and applications rather than concentrating on any single segment, customer or application. Currently, most of the manufacturing activity at this intersection of HPC and advanced packaging is occurring in Taiwan. FormFactor's important role in this region is evident in our supplemental materials. Second quarter revenue from Taiwan grew sequentially by more than 30%, and the world's leading foundry was again a 10% customer. Yesterday, we announced the expansion of our multiyear partnership with [ Keystone Microtech ], a provider of semiconductor manufacturing and test services based in [ Juba ], Taiwan. This latest step expands FormFactor's regional footprint in Taiwan, improving our local assembly and service capabilities and our responsiveness in supporting the exceptionally steep ramps of complex devices like GPUs and custom ASICs. Turning now to segment and market details. In DRAM Probe Cards, we delivered the expected sequential growth from the first quarter to set another record in this business with increased HBM4 demand paired with sustained demand in DDR applications. HBM comprised approximately 2/3 of our overall DRAM revenue, driven by 2 customers' continued adoption of FormFactor's differentiated SmartMatrix full wafer contract in high-speed HBM4 applications. SmartMatrix provides a unique combination of high parallelism productivity and high-speed performance enabling our customers to test hundreds of completed HBM stack simultaneously at the 10 gigabit plus I/O data rate of HBM4. This capability is critical in advanced packaging processes like TSMC's [ COOs and Intel's EMIB ] where stack die test insertions ensure a known good HBM stack before it's combined with costly GPUs or custom ASICs. Our second quarter results show the impact of FormFactor's competitive advantage and the resulting market share gains. As [ NIO ] speeds and overall stack bandwidth for HBM continue the relentless increase as the industry progresses from HBM3 to HBM 4 and then on to HBM5. In the current third quarter, we're forecasting DRAM revenues to be comparable to the record second quarter, but with a significant underlying shift from HBM to DDR. As you've heard recently from all our major DRAM customers, the supply environment continues to be extremely constrained and our customers are shifting their wafer start mix to DDR designs to capture the profit opportunity provided by significant DDR price increases. Since probe cards are specific to each customer chip design, we expect DRAM mix to track these dynamic customer product shifts while these unusual end market conditions persist. Shifting now to the foundry and logic Probe Card market. As expected, second quarter foundry and logic demand increased significantly over the first quarter. This increase was driven primarily by growth in probe cards for data center CPU applications, building on continued strength in networking applications, initial momentum in hyperscaler custom ASICs and steady demand in PC and mobile. In the current quarter, we expect continued growth in Foundry and Logic Probe Card revenue driven by broad incremental demand across our served application space in this market. Compared to a quarter ago, the trend of increasing CPU compute intensity to enable agentic AI use cases is now broadly appreciated and is resulting in increased probe card demand for data center CPU designs. FormFactor has opportunities to benefit from this trend in several ways. First, our long-term relationship and strong incumbent market share with a leader in data center CPUs. And second, an expanding relationship with the world leader in high-performance compute as our strong position in networking expands into supporting their GPU and CPU product lines. And third, our successful qualification and subsequent multiple design wins at a large fabless XPU customer. Each of these 3 customer relationships is in a different stage, but together, they represent a broad-based opportunity for FormFactor to serve growing CPU demand. They also provide an excellent example of the value of FormFactor's long-held diversification strategy. We're being a key supplier to all major customers for growing applications like CPUs provides us with broad exposure to the overall growth trend. Turning to our Systems segment. Systems revenue nearly doubled sequentially in the second quarter, albeit off an unusually weak first quarter. This growth was driven by 2 components: one, the recovery in our core engineering prober business; and two, and more significantly accelerating growth in co-packaged optics or CPO. A quarter ago, we forecasted our 2026 CPO revenues to reach the high end of the $10 million to $20 million range we communicated at the start of the year. We now expect to exceed that range by the end of the third quarter, and to significantly exceed the $20 million level for the year overall. 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 all-important test insertion 1, which ensures known good die on the photonic integrated circuit, or PIC wafer before it's combined with the Electrical Integrated Circuit, or EIC, to form the optical module in scale-up and scale-out network switches. The rapid growth of our CPO business is an exciting development, which we believe represents the very early stages of widespread adoption of silicon photonics in the broader semiconductor industry. Traditional copper interconnect is reaching physical limits in speed, heat and energy consumption, and photonics provides a fundamentally more efficient way to transact data within and between data centers by using light instead of electricity. FormFactor is ideally positioned to help lead test for this new area to the semiconductor industry as our lab to fab strategy has produced a decade-long first-mover advantage paired with key customer and partner relationships. Before turning the call over to Aric, I want to thank the Global FormFactor team as they continue to demonstrate remarkable agility in navigating the challenging supply environment by quickly resolving internal and external constraints. This agility helped deliver double-digit sequential growth in the second quarter, and we expect to grow again to another record in the current third quarter. We're well positioned as test intensity and complexity continue to rise at the intersection of high-performance compute and advanced packaging and are excited to be making good initial progress on the path to our new [ Targa ] model that commits to double revenue and more than double profitability by 2030. Aric, you're up.

Thanks, Mike, and good afternoon. Q2 was another strong quarter for FormFactor. We delivered our third consecutive quarterly revenue record and drove additional non-GAAP gross margin expansion to 53.3%, demonstrating significant operating leverage and making progress on the priorities we discussed last quarter and at our Investor Day in May. At our Investor Day, we introduced our new target model with a goal of doubling revenues to [ $1.6 billion ] achieving 55% non-GAAP gross margin and more than doubling non-GAAP earnings per share to $5 per share by 2030. The current strong demand environment, combined with our continued focus on operational execution drove measurable gains towards the new target model in Q2. Non-GAAP gross margin increased 430 basis points sequentially and up nearly 15 percentage points as compared with Q2 of last year. Similarly, non-GAAP EPS increased by nearly 50% sequentially to $0.82 per share and more than tripled as compared with Q2 of last year. The quarter-over-quarter improvement in non-GAAP gross margin is driven by several factors. Approximately 1/3 of the improvement is from baseline cost reductions that are durable in nature. 1/3 is driven by the $32 million or approximately [ 14% ] quarter-over-quarter increase in revenues. And the remaining 1/3 represent items that we don't expect to recur, such as IEEPA tariff refunds and precious metal replay from our [ Valdini Park ] site shutdown announced early in Q1. Product mix remained strong in Q2, driven by factors like record HBM revenue within [ Devin ]. Excluding the timing items and mix favorability, we believe baseline non-GAAP gross margins have improved to around 51% in Q2 volumes. The combination of higher volumes and more efficient cost structure is enabling us to convert strong demand into higher gross profit and operating income. We have taken several measures to increase output in the short term, even as we prepare to ramp Farmers Branch starting at the end of this year. Gains in output have been primarily achieved through yield and cycle time improvement even as we see more constraints across the supply chain at current production levels. Our Farmers Branch site expansion remains on track to ramp starting the end of this year and continue to ramp over the course of 2027. Bringing this capacity up on time and on budget, remains a key focus as it will enable our next phase of growth and gross margin expansion. Stepping through our results in a bit more detail. Q2 '26 revenues of $258.2 million came in $18.2 million, above the midpoint of our Q2 outlook range of $235 million to [ $245 million ] and were up $32.1 million or about 14% from Q1. Systems segment revenues made a significant recovery, reaching a new record of $48.5 million in Q2 '26 up $20.6 million or 74% from Q1. GAAP gross margin for the second quarter was 50.7%, up from 38.4% in Q1. Cost of revenues included $6.7 million of GAAP to non-GAAP reconciling items, primarily related to stock-based compensation, amortization of intangibles and restructuring charges. Details of the GAAP to non-GAAP reconciling items are outlined in our press release issued today and in the reconciliation table available on the Investor Relations section of our website. Q1 GAAP gross margins included $18.8 million of restructuring costs that did not recur in Q2. On a non-GAAP basis, gross margin for the second quarter was 53.3%, 430 basis points higher than Q1 and 230 basis points above the high end of our Q2 outlook range. Probe Card segment gross margin increased to 54.4%, driven primarily by higher factory utilization, manufacturing spending discipline and improved yields. System gross margin increased to 48.5% driven primarily by higher volumes and favorable mix. Our GAAP operating expenses were $73.1 million for the second quarter, up from Q1, but down as a percentage of revenue. On a non-GAAP basis, operating expenses were $65.7 million or 25.4% of revenue compared to $62 million or 27.4% of revenue in Q1. This 200 basis point sequential improvement in OpEx as a percent of revenue demonstrates operating leverage across the P&L. And this is a result of continued spending discipline even as we grow, invest in key R&D programs and fund the Farmers Branch expansion. Included in Q2 operating expenses were $4.9 million of preproduction ramp costs for Farmers Branch. GAAP net income for the second quarter was $56.2 million or $0.71 per fully diluted share, up from GAAP net income of $20.4 million or $0.26 per fully diluted share in the previous quarter. The increase was driven primarily by higher revenue higher gross margin and lower restructuring-related costs. Second quarter non-GAAP net income was $65 million or $0.82 per fully diluted share up from $44.5 million or $0.56 per fully diluted share in Q1. The GAAP effective tax rate for the second quarter was 11.1%, and the non-GAAP effective tax rate for the second quarter was 16.2%. Moving to the balance sheet and cash flows. We delivered free cash flow in the second quarter of $52.6 million compared to $30.7 million in Q1. This increase in free cash flow was driven primarily by higher cash flows from operations. Cash flows from operations were $61.8 million in Q2, up $16.8 million from Q1, driven primarily by higher net income partially offset by working capital investments to support these higher operating levels. At quarter end, total cash and investments were up $42.8 million to $349 million. We continue to expect that the cash CapEx for Farmers Branch and capacity additions will be between $140 million and $170 million in 2026. Preproduction ramp costs are recorded as a component of G&A and are expected to now be around between $25 million and $30 million in total in 2026. With about $12 million incurred to date for Q2 and about $7 million expected in the current third quarter. Once production ramp begins, the costs currently recorded in G&A will become part of the cost of goods sold on a go-forward basis. Upon completion of the ramp to the initial target capacity, which is expected by the beginning of 2028, we expect Farmers Branch to be accretive to gross margin. Associated with our investment in Farmers Branch, we secured certain incentives with -- from both the state of Texas and the City Farmers branch that we expect will partially offset the associated expenditures. Among others, these incentives include a $24.2 million grant from the Texas Semiconductor Innovation Fund, designated to fund capital expenditures upon meeting certain criteria. Overall, we continue to expect that we are largely self-funding the investment in Farmers Branch from increased profitability, more efficient cost structure and cash flow from operations. During the second quarter, we did not repurchase any shares. At the quarter end, authorization of $70.9 million remains available for future repurchases under the April 2025, $75 million 2-year buyback program that is intended to offset dilution from stock-based compensation. In the short term, we are continuing to prioritize our deployment of cash to accelerate the ramp of our new manufacturing site in Farmers Branch. Turning to the third quarter non-GAAP outlook. We expect Q3 revenues of [ $270 million ], plus or minus $10 million. At the midpoint of this revenue range, we expect non-GAAP gross margin of 54%, plus or minus [ 150 ] days. The increase from the Q2 baseline of 51% described earlier, to Q3 outlook is driven primarily by items that are not expected to recur, specifically $7 million to $9 million or about 300 basis points in IEEPA tariff refunds that we expect to receive current third quarter. These refunds represent the return of tariffs paid starting in 2025 and through the beginning of 2026 prior to these tariffs being ruled on offer. The benefits of marginally higher Q3 revenue volumes are expected to be offset by less favorable product mix in DRAM, as Mike mentioned earlier. At the midpoint of the outlook range, we expect Q3 non-GAAP operating expenses to be $70 million, plus or minus $2 million, including about $7 million in preproduction rent costs for Farmers Branch. Our Q3 non-GAAP effective tax rate is expected to be between the range of 15% to 19%. Non-GAAP earnings per fully diluted share for Q3 is expected to be $0.86, plus or minus [ $0.09 ]. A reconciliation of our GAAP to non-GAAP Q3 outlook is available on the Investor Relations section of our website and on our press release issued today. As demonstrated by our Q2 results and our Q3 outlook, we are already making meaningful progress towards our new target model we shared in May as we capitalize on the strong secular trends at the intersection of high-performance compute and advanced packaging. Our differentiated products are driving demand in areas like high-speed test of HBM memory and traction in new addressable markets like co-packaged optics. These growth vectors, combined with our focus on execution, cost discipline and the timely ramp of additional capacity in Farmers Branch have resulted in good operating leverage in our Q2 results and chart and encouraging patents to the future. With that, let's open the call for questions. Operator?

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

Congrats on the very strong results and impressive gross margins. I had a clarification on the question. Aric, on the clarification, did you say that 51% or [ 50% close ] margin is the new baseline? And as Farmers Branch comes online is going to be more accretive. So should we assume as these revenue levels go higher, the gross margin should be better than 53%?

Yes, thank you for your question. Just to clarify what I said, the actual gross margins for the quarter were 53.3%. That included some items that we don't think are recurring that we're some tariff refunds and things like that, that reclaim from precious metals, for example, those things won't recur. So the recurring or sustainable element of gross margins, we believe, is more like at the current volumes and mix. So we expect that, that's the new baseline that you should be thinking of. Does that answer your question?

Yes. And that incorporates in Farmers Branch when it comes online?

So that's the current baseline with our current operating footprint. We do expect that Farmers Branch and it comes online will be accretive to current gross margin levels.

Perfect. Awesome. And then a quick follow-up for Mike. Mike, it's kind of impressive to see like TSM being 11% customer. I'm just wondering, is some of the -- like last year NVIDIA, I think it's mostly networking chips. I'm just wondering, does Ruben and CPO for NVIDIA come under TSM or it be under NVIDIA? And what is the status of the Ruben call?

Yes. Let me address that one first, Krish. There really is no component of GPU business in the second quarter results for this 10% customer. As we've said in the past, we expect this to be a second half event for us and we're on track. We're qualified as we've shared with you and are shipping production units for revenue here in the third quarter. The CPO piece does flow through that 10% customer. So it is, in many cases, with the combination of the fabless foundry ecosystem, you recognize revenue in different places depending on the market segment, even depending on the individual product line may have.

Our next question comes from the line of Matthew Prisco of Cantor.

I guess first, on Foundry and Logic. Can you provide some more color on the breadth of the strength you're seeing there today? And then I know you highlighted the kind of agentic AI in CPU demand. How are you thinking about that as a potential upside source versus your target model was outline only a couple of months ago now?

Yes. So the strength as we went from Q1 to Q2, in Foundry and Logic. As we said on the call, primarily associated with an upstep in CPU demand from one of our historically strong customers. But as we look at our opportunity in the CPU space, which we do view as a longer-term opportunity, there's a couple of different ways that we're exposed to that. As I mentioned, the growing relationship with the leader in high-performance compute. They've obviously are starting to participate in the CPU business. And remember, we're qualified and now competing for share with the large fabless CPU manufacturer. So a great example of where we're diversified and sort of no matter how the CPU market share landscape shakes out between our customers, we feel like at least have the opportunity to participate. All of those relationships are in different phases. So it all hits today. It will have different components for us. But again, a good example of our goal to be a broad-based supplier to all the leaders in the industry.

Got it. That's helpful. And then maybe on the supply side, the efficiency is obviously coming in much better than we had expected. How do we think about your ability to continue driving efficiencies from here within the current footprint through the end of the year, maybe into '27 as well? And then maybe more importantly, Farmers Branch coming online in 4Q and ramping through next year. How do we think about the timing of the revenue contribution there? How meaningful can that be over the next few quarters?

Yes. We're very excited about the output we've been able to drive out of our existing footprint. And just to reiterate, that was driven in large part by the transformation that we've done in our global operations team really thinking and doing different. And we see those benefits being driven primarily from yield and cycle time improvements. As you can tell by our most recent results and also by our outlook for next quarter, we've been pretty successful, and we intend to continue to push on those levers through the end of the year in advance of Farmers Branch starting to ramp beginning in Q4. The [indiscernible] targeted capacity of Farmers Branch is roughly equivalent to our California approach [indiscernible] to date. So we expect that, that will come online over the course of the year, but should contribute meaningful capacity to extend the demand...

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

Let me start by recognizing the stellar execution in the quarter, a nice job team. Mike, I'll start with DRAM since there haven't been questions there. I think 3 or 4 quarters ago, we all wondered if some of the legacy formats like DDR4 and 5 would come back and here they are. Can you help us understand how long live do you see some of the strengths that you talked about for 3Q and how we should properly think about the DRAM business from here given that it does seem to have at least some near-term legs?

Yes. Well, the DRAM overall, both HBM and DDR5 is a pretty dynamic marketplace right now, both for our customers and for us. And as we said, we see a pretty significant mix shift in Q3, although the top line DRAM revenue is expected to be pretty similar to Q2, we expect the mix to shift towards DDR quite significantly that really in conversations with our customers is a rational reaction to the pricing they're seeing in the market where they can generate more profit by starting DDR5 wafers surprisingly than they can HBM4 [indiscernible]. And so I think there's going to be a very adaptive and dynamic environment where there -- and you've heard this from them in recent earnings calls, they are going to adapt their product mix to maximize their profit opportunity. And that's -- given the Probe Cards are a device-specific consumables as they change their wafer start mix, we're going to see our mix change correspondingly.

And then the follow-up question goes back to a point you made in your prepared comments around the breadth of demand and it's really brought home by the fact that on the 10% customer list, the ones disclosed you have many big customers beyond that total 35% of revenue. So 65% of the revenue comes from those not at 2% in the quarter. The question is this, as we think about the business opportunities from here, and I think you've alluded to competing for business at a fabless CPU supplier and you talked about other 2 half revenue at a leading GPU supplier. How many opportunities are there like that? Can you give us your [ pareto ] list and help us understand the timing that those could come into the model?

Yes. So there's a bunch of different opportunities. And I'll ground people back in what we said at our Investor Day in early May. The segments and the customers we're operating in, where we plan to gain more than half of the increase in the addressable market between now and 2030. They're pretty familiar places, right? It's things like GPUs, it's things like co-packaged optics, custom ASICs. In addition, when we look at expanding our HBM business, for example, coming back to DRAM, I made the point that we're seeing strong adoption now from 2 customers. And so this broadening and diversification and share gains, you're seeing the early innings of what we told you was going to happen at the Investor Day, you're seeing the early innings here in Q2 results and the Q3 guidance.

Our next question comes from the line of Elizabeth Sun of Citi.

Congrats on the good results. I guess my first question is on the CPO side. Mike, you talked about CPO is total CPO revenue expected to cross over $20 million by Q3 and another step up in Q4. So I'm just wondering for the CPO reps throughout the year, is it increasingly higher quarter-over-quarter? And [indiscernible] how much revenue can you do for this year in CPO?

Yes, it's an interesting question, right? So to ground everybody, when we came into the year, we said we were expected to do between $10 million and $20 million in CPO revenue and today, we've upped that -- we're going to expect to do $20 million by the end of Q3 this quarter. How much more on top we do in Q4 for the full year, kind of an open question right now. We're seeing some significant acceleration in this business. But it's new technology. It's a new technology for our customers. It's new technology for us. So we certainly expect to be above $20 million for the year. The magnitude of that is a little tricky to judge right now. What I will say, all of these new technology programs, they always have acceleration digestion phases. Right now, we're seeing strong acceleration. And a reminder that this is a significant market. We told you at Investor Day that our piece of that served market, about $400 million by 2030. Right now, accelerating pretty hard towards that.

Got it. That's good to know. And my second question is on the HBM side from the competition perspective, you are pretty strong [indiscernible] customers. So I'd like to ask how about the share dynamics at the third biggest HBM customer? And also, one of your foundry logic [indiscernible] peers has been pretty vocal about talking about getting into the HBM market. So I'm just curious how do you see the competition environment going forward in like say HBM4E and going forward?