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

Yes. Net-net, I feel like it's much ado about nothing, right? There's a lot of noise associated with this HBM destacking. This is a very common, at a higher level, kind of a systems level architecture optimization that our customers do. We've seen Apple do it for years with handset configurations in mobile and memory content and different pieces. I think this is more of the same. And certainly, there's sensitivity associated with HBM complexity and how it impacts our business and the whole supply chain business. But for right now, as you say, there are multiple offsets. For example, there will be more HBM units associated with that. And then the networking infrastructure where we have a strong position to transact the data across these units probably goes up as well. It's one of the fundamental reasons why we've tried to build a diversified business that has exposure to all these pieces of the semiconductor industry. If we were just an HBM one-trick pony, then this might be cause for concern given the fact that we're -- have nice exposure to some of the other areas that would compensate for the HBM destack or the squeezing of the balloon in other places, we feel pretty comfortable that net-net, this is going to be neutral for us.

Understood. I ask about the third HBM customer, how is your progress there, are you gaining share?

Yes. Well, historically, we've been a significant supplier to all 3 major DRAM manufacturers worldwide, and that's still true. Our major competitor in the DRAM probe card space does have a very strong incumbent market share position at that third customer, whereas with our #1 customer, obviously, we have a strong incumbent market share position. And that's not an unusual situation given how those customers manage their supply chain. We do see some differences in test strategy between those customers that maybe we don't see as strong an adoption of our high-speed stack die configuration at that third customer, but we see some. And again, as we bring more capacity online, we're primarily in this capacity-constrained environment. So as we bring more capacity online, we do see an opportunity, and there is a very active conversation with that customer about what to plan for in '27 and into '28 as we have more capacity available to serve them.

Understood. And because you guys are very kind of popular in the photonics space, so I want to touch base on that. So first thing is recently, there's a lot of discussions around NPO. And I think you guys are pretty strong across silicon photonics overall, but I just want to understand, are you agnostic to NPO versus CPO and, kind of, the -- people talk about 4 insertions per CPO and how does it different in NPO?

Yes. I think broadly, photonics is one of the key growth themes that I'm really excited about for FormFactor. We've been investing in this area for the better part of a decade. And although we are seeing the initial real growth impact associated with CPO here in 2026, we started the year with a view of maybe $10 million to $20 million in revenue, have now successfully upgraded that to reaching $20 million by the end of the current third quarter. It's a leading indicator and maybe an early inning indicator of the broader photonics growth vector that we have and that we've been investing in, both organically, as I talked about, but the most recent acquisition we made of Keystone Photonics in late 2025, really an enabling technology for optical probing. And the way we're serving photonics is really the same way we serve the broader semiconductor market with electrical probes. Here, we're building optical probes and optical probe cards and optical probing systems. Going back then to the CPO versus NPO and even extending to the pluggables question, we've got pretty nice exposure across each, right? What we've tried to do and I think successfully done is build a fundamental optical probing technology, which is applicable across all of these. CPO, because of the investments some of our key customers are making is really making a positive impact on our growth in revenue here in 2026. But much more broadly, I see photonics as one of the growth vectors for FormFactor longer term. And a little early to say whether we'd be agnostic CPO to NPO to pluggables. But again, we've got pretty good exposure across all of those with photonics probing, photonics test as a fundamental theme that we're going to continue to drive a leadership position and invest in.

Do you see some pull-ins from NPO testing?

I wouldn't say from -- at the scale we're seeing CPO impact our 2026 revenue and that acceleration, we're not seeing the same kind of pull-in, but there's lots of activity for sure across the customer base.

And I know there's one big customer or like big group in the CPO market, but are you are engaging -- you get a lot of your revenue from? Are you engaging with the more broader, all the, like, CPO players in the market?

Yes. We are engaged very broadly. And if you go back, again, there's some details of this where we tried to share the history of both CPO and silicon photonics and our engagement in the industry. We've got hundreds of systems installed worldwide at close to as many customers. So a very broad customer engagement, all the names you'd expect where we have systems in their labs, in some cases, in pilot production. And one of the exciting things that we're now seeing in the second part of the year is broader production adoption of this Triton high-volume manufacturing platform at multiple foundries with multiple fabless customers. So seeing it broaden out a little bit. As you said, right now, pretty concentrated with one major foundry fabless partnership, but building backlog and building the breadth of the backlog where this diversifies a little bit beyond that one customer set.

Got it. And yesterday, we had one of the photonics players here on the stage and when asked about bottlenecks, they are like, the biggest bottleneck in the testing space. So it's probably not new to you, but I just feel -- I'm just curious, from a year ago versus now, are you seeing like this testing getting harder and harder, especially -- I know you are more in the insertion one, and probably something in two. But like from your perspective, are you seeing there's more challenges than you previously expected when you took on this challenge?

Yes. Well, being a bottleneck is a double-edged sword, right? It's a good place to be because it means you're relevant and you've chosen to solve a problem that the industry needs. However, it then does demand the resources to help resolve that bottleneck. And I think that's exactly where we are with CPO, having installed now tens of systems, ramping those in production, resolving some of both the technical and operational challenges in real time, partnering with the customer. You only work up that learning curve by being in the game and having systems installed. So is it more challenging? Probably not from a macro level. I think some of the details of the things we're learning, we couldn't have expected or anticipated without really participating in this production ramp. And I think it's what goes to the incumbency and leadership that we're building. That learning is invaluable, right, as you go through sort of the successive cycles of learning and make sure that we're solving these problems and resolving these bottlenecks associated with test in photonics production.

That makes sense. I'm going to take a pause here to see if there are any questions in the audience.

I'm curious on the gross margin, kind of, go forward. You've obviously had amazing success in expanding that. So I'm curious, looking forward, how much of it is expected to be in price or finding efficiencies? And just on the go forward in terms of how you're viewing the margin profile?

Yes. Well, I'll ground you in, again, what we shared with people at the Investor Day and the target model that produces 55% gross margin, $5 of earnings per share on $1.6 billion of revenue. And really, the trajectory from where we are today, we printed 53%, give or take, in the second quarter, guided the third quarter to 54%. There's some onetime tariff benefits there. So we're not as close to 55% as it might look at a high level. But it's really the same playbook as the gross margin improvement we've executed over the past year or so. Most of this is some of the analysts have called it, internal self-help, us improving yields, reducing cycle times. I'll use this as an opportunity to give a shout-out to our operations and engineering team on really making FormFactor a much more efficient manufacturer of these specialized products, and great progress there. Very little of this is due to pricing. We're a value-based pricer. And so something like HBM high-speed test where we're delivering unique value, we expect and our customers do compensate us for that. But we don't price our products like it's a commodity, right? This is not a supply/demand commodity-based market, at least in our view. And we think in a cyclical industry, right now, a very strong up cycle, but there will be a down cycle or a pause at some point, we want to make sure our conversation about our prices continues to be about value and not supply and demand. So really, the gross margin improvement to date has all been COGS-focused. Much of it going forward is COGS-focused as well and of course, delivering differentiated products that our customers compensate us for.

A quick question. You mentioned your opportunities of the business, right, so from optics and GPU and any other new areas? And do you think like if CPU ratio to GPU goes up, would that be positive for your business? And also, you mentioned you don't think you're like -- as a commodity for your products. So going forward, if we reach a more balanced state of supply and demand, what do you think could be some of the challenges? And even for the current like upward environment, what could be some difficulties in terms of accelerating your growth, challenges you face?

Right. Well, there was quite a few questions in that question. Let me start with the growth aspect to it. As I said, right now, the simplest way to think about our situation is we are capacity constrained. And so what's limiting our growth, if you will, or what's constraining our growth is our capacity. That's one of the reasons why we're making significant investments in ramping the site in Farmers Branch, Texas. We're going to have a grand opening in late October, customers, some -- lots of different people -- but that's really a milestone in us qualifying and bringing that site online, a site which we expect to deliver twice the current California probe card capacity from -- in the current phase. So that really unlocks one of the key limiters to our growth. If we look at some of the market-driven or demand vectors for that growth, we talked about photonics. We talked a little bit about GPU. One of the ones you touched on as well is CPUs, where we have a great position, one of our historic long-term customers, one of the major CPU suppliers to the industry. Their business obviously getting stronger associated with some of the turnaround they've done and the CPU strength. And we recently qualified and won some designs at a fabless CPU and GPU manufacturer. In addition to that, there's a third customer building their own CPUs for their overall high-performance compute products where we've won some designs and expect to have that as a 2027 contributor. So across the spectrum, largely what we shared with people at the May Investor Day, the growth vectors associated with this intersection of high-performance compute and advanced packaging or chiplets, and our ability to really efficiently manufacture both in our existing footprint and then the exciting capacity and output unlocked by the Farmers Branch investments as we move into 2027. We put all those pieces together, we're looking forward to a strong end to 2026 and a strong year in 2027.

I'm just wondering about the recurring revenue aspect of your business. And as you're getting these new wins, how should we think about the recurring as a percentage of overall revenue, how would that grow?

Yes. So probe cards, they are a consumable. But when I got into the business about 15 years ago, they were consumable because they actually wore out, right? They -- essentially, there's cleaning cycles that wear these probes down. And they have to be -- that's still true in markets like automotive and industrial where product life cycles are very long. It's no longer true in areas of the market like high-performance compute and mobile, where product life cycles are essentially less than a year. What makes probe cards still a consumable is that they're unique to each customer chip design. And so as our customers release a new product, a new mask set, as a customer like NVIDIA goes from Blackwell to Rubin, to Rubin Ultra, those are each new probe cards, even though they use the same capital equipment and test equipment because essentially, the probe position and the way the connections and netlist works, they're different for each chip design. And that's what drives the consumable nature now. So less recurring because of a wearout cycle and more consumable because of the rapid increase in design change velocity in the industry today.

One more question. On the capacity side, finally here. So a lot of the feedback we get from investors is that you are being very cautious on ramping up the capacity, which I think I totally understand you want to be cautious and you don't want to sacrifice the gross margin. But I'm just curious if demand is going through the roof. And then like how fast can you ramp up your capacity at Farmers Branch?

Yes. So cautious is one way to put it. I think if I were to self-assess us, we are conservative as a management team, but I think we're approaching this thoughtfully. When you look at the purchase of the Farmers Branch site a little over a year ago, we purchased a site that had a ready-to-go clean room. Had expansion potential. It's close to a 300,000 square foot site. So the ability to have the infrastructure and factory shells, if you will, to expand further. Now that doesn't mean we're going to turn on all the capacity at once because, again, we want to make sure that capacity is matched to demand so that we're not facing large utilization and therefore, gross margin headwind. But right now, given the demand environment, we're trying to bring this site, on-site as fast as we can. Now again, we're doing it in a thoughtful, measured way. We're not putting our customer relationships or our customers' production at risk, doing careful, thoughtful, comprehensive qualifications of the core technology and making sure that we're properly qualified before we ship out of the site, start to ship the initial qualification units in the fourth quarter and again, ramping through 2027 to deliver a substantial increase, essentially 2x the existing capacity as we get through the back part of 2027.

So if, say, demand is there like $1.6 billion level ahead of the schedule, like just not like -- assumably getting to that level early '28 or late '27, are you able to support that level?

Yes. If you look at the $1.6 billion level in 2030, the assumptions associated with that, I think one that people have challenged us on being too conservative is really the market forecast, the served market growth. Now we deliberately chose to use an external market forecast, so everybody had visibility to those assumptions. Arguably, that high single-digit market growth rate was overly conservative. We're putting capacity again in place as fast as we can to meet the demand we have associated with all the opportunities that we've laid out for people today. And I think the expandability, the flexibility of that site to add capacity in tranches as we see -- get good visibility to demand. I think we're in a position if the market and our ability to then execute on these initiatives drives the demand side of the equation, we will be able to reach the target model faster than 2030. But it really depends on the demand side of the equation.

Okay. That's good to hear. And with that, we are out of time. Thanks, Mike, for coming to our conference.

Thanks again for having us.