Thank you. Today the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the Investor Relations section of our website. Today's discussion contains forward-looking statements within the meaning of the Federal Securities laws. Examples of such forward-looking statements include those with respect to projections of financial and business performance, future macroeconomic and geopolitical conditions; the benefits of acquisitions and investments in capacity and in new technologies; the impact of global, regional, and national health crises including the COVID-19 pandemic; anticipated industry trends; potential disruptions to our supply chain; the impact of regulatory changes including the recent US-China trade restrictions; the anticipated demand for products; our ability to develop, produce, and sell products and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended 2022 and in our other SEC filings, which are available on the SEC's website and in our press release issued today. Forward-looking statements are made as of today May 3rd, 2023 and we assume no obligations to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Thanks everyone for joining us today. FormFactor's first quarter revenue was comparable to the fourth quarter's, exceeding our outlook range due to shipments pulled in from the second quarter. We also generated significant sequential improvement in gross margin and profitability, achieving results at the top end of their ranges. In the second quarter, we anticipate similar results as we executed against the demand environment that remains relatively stable at diminished levels. While this cyclical downturn continues, we're carefully balancing short-term results and long-term investments with disciplined cost control to preserve quarterly profitability and protect our strong balance sheet. We continue to invest in R&D for new product innovation and competitive differentiation as well as in the long lead-time facilities and equipment components of our capacity increase plans. These investments are designed to produce market share gains and above-industry revenue and profit growth when we emerge from the current cyclical trough, positioning FormFactor to achieve and then surpass the levels of our current target financial model. Turning now to segment level details. In our largest business, Foundry and Logic probe cards, revenue increased significantly in the first quarter as we benefited from multiple technology-driven wins at major foundry and IDM customers. We expect some moderation in Foundry and Logic demand in the second quarter as customers digest these recent shipments in their initial production ramps of 5-nanometer and 3-nanometer mobile application processors, tile-based client microprocessors, and high-performance compute chips. Advanced packaging processes like Foveros and 3D Fabric are increasingly being adopted on the leading-edge Foundry and Logic chips providing an exciting opportunity for FormFactor. As we've noted in the past, these integration schemes drive both higher test intensity, which expands the number of probe cards required per good die and higher test complexity which raises the performance requirements for each probe card. Probe card architectures like FormFactor's MEMS technology are essential to meeting these challenging performance requirements at a compelling cost of ownership, while also fulfilling the short delivery lead-times that our customers' rapid and dynamic production ramps require. In Memory, as expected, we experienced weak first quarter demand for both DRAM and Flash probe cards as each of the major memory manufacturers reduced wafer starts to consume elevated inventory levels. However, even at these lower production levels, each of our major memory customers continues to advance the road maps with new design activity and innovations like DDR5 and third-generation high-bandwidth memory, which are driving a modest expected sequential increase in second quarter DRAM revenue. This provides insight into the unique characteristics of probe card demand. Since probe cards are a consumable specific to each customer's individual chip designs, early low-volume production activity for new DDR5 and HBM designs is generating demand for new probe cards albeit at lower volume levels than we typically see in a cyclical upturn. This new design activity extends beyond DRAM and is broad-based across our customer base and service markets. As a result, FormFactor's design engineering teams are currently operating at full utilization as we work with customers' test engineering teams to adapt our MEMS probe card architectures to their upcoming new chip designs. These diverse design projects span 3-nanometer processors, RF bond SAW filters, and HBM DRAM. They foreshadow demand acceleration for FormFactor when the industry returns to growth and these new designs ramp in volume. Similar to Foveros and 3D Fabric and Foundry and Logic, the growth of HBM is an exciting opportunity in the DRAM market as well as the die stacking advanced packaging process increases both test intensity and test complexity of HBM products compared to standard single-die DRAM architectures. This, in turn, increases both the number and complexity of probe cards required for good die out. HBM is also a key enabler for generative artificial intelligence with one of our major DRAM customers recently stating they expect their HBM sales to increase more than 50% this year with expectations for further growth next year because of AI applications' need for this higher speed memory. With probe card lead times typically being less than a quarter, our visibility remains very limited, but we continue to be encouraged by the relatively stable overall demand for our products along with the strong new design activity we're supporting across the industry. As is evident from the details of our outlook, we are experiencing underlying quarter-to-quarter shifts in spending between customers and markets, but our broadly diversified lab to fab product portfolio across Foundry and Logic, DRAM, and Flash probe cards together with our System Segment products enables us to compete for business across these diverse demand pools at all major customers producing the relatively stable overall top-line results we've demonstrated for the past several quarters and expect again in the second quarter. Shifting now to Systems. Our Systems business continues to deliver strong results with revenue and gross margin at near record levels again in the first quarter, and our second quarter outlook assumes record revenue. The strength is driven by our market-leading test and measurement products for early development of applications like silicon photonics, quantum computing, and advanced packaging metrology. Silicon photonics is an important and exciting driver in this segment. Our turnkey electro-optical measurement systems built on our CM300 and Summit200 engineering probers are tightly integrated with subsystems from leading partners like Keysight Technologies and PI. Together with FormFactor's electrical probe cards, these systems are enabling our customers to rapidly characterize, analyze and debug new silicon photonics devices in early development and pilot production. Independent market research forecasts a 30-plus percent growth rate for silicon photonics devices over the next several years driven by the data center speed and power efficiency improvements that derive from co-packaged optics. FormFactor is well-situated to capitalize on this opportunity as silicon photonics undergoes the transition from the lab to the fab. Finally, we continue to manage export restrictions in serving domestic China semiconductor customers. As a US-based supplier with significant exposure to the leading-edge foundry and memory technologies and customers affected by recent US-China export controls, these regulations are a headwind in all of our businesses. We believe this US-China trade headwind will persist over time and do not anticipate any relaxation of advanced semiconductor export controls. This, of course, provides a strong incentive for domestic China customers to onshore their supply base and de-emphasize foreign suppliers like FormFactor to ensure their business continuity. I'd like to close by reiterating that in the short term, we're encouraged by the stabilization of demand across our diversified product and technology portfolio in the first half of 2023. Over the longer term, we remain excited and confident in the growth prospects for FormFactor in the industry overall driven by the fundamental trends of semiconductor content growth and innovations like advanced packaging and silicon photonics. These are trends where FormFactor is well-positioned as an industry and technology leader and we're confident that our commitment to invest in R&D and capacity will position FormFactor to emerge from the current cyclical downturn a stronger and leaner competitor, enabling us to achieve our target model that delivers $2 of non-GAAP earnings per share on $850 million of revenue. Shai, over to you.

Thank you, Mike, and good afternoon. As you saw in our press release and as Mike mentioned, Q1 revenues slightly exceeded the high end of our outlook range and non-GAAP gross margin and non-GAAP EPS were at the high end of the range. First quarter revenues were $167.4 million, a 0.9% sequential increase from our fourth quarter revenues and a year-over-year decrease of 15.1% from our Q1 2022 revenue. Q1 revenues were slightly above the high end of our outlook range, mainly due to shipments pulled in from the second quarter. Probe card segment revenues were $127.3 million in the first quarter, an increase of $3 million or 2.4% from Q4. The increase was driven by higher Foundry and Logic revenues mostly offset by decreases in DRAM and Flash revenues. Systems segment revenues were $40.1 million in Q1, a $1.5 million increase from the record fourth quarter and comprise 24% of total company revenues slightly down from 25% in Q4. Within the probe card segment, Q4 Foundry and Logic revenues were $101.6 million, a significant 24% increase from Q4. Foundry and Logic revenues increased to 61% of total company revenues compared to 50% in the fourth quarter. DRAM revenues were $19.8 million in Q1, $7.4 million or 27% lower than in the fourth quarter and were 12% of total quarterly revenues as compared to 16% in the fourth quarter. Flash revenues of $5.9 million in Q1 were $9.1 million lower than in the fourth quarter and were 3.5% of total revenues in Q1 as compared to 9% in Q4. GAAP gross margin for the first quarter was 36.5% of revenues as compared to 27.2% in Q4. Cost of revenues included $3.3 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today and in the reconciliation table available in the Investor Relations section of our website. On a non-GAAP basis, gross margin for the first quarter was 38.4%, 6.7 percentage points higher than the 31.7% non-GAAP gross margin in Q4. We achieved significant improvements in gross margin in the probe card segment and also delivered a higher gross margin in the Systems segment. Our probe card segment gross margin was 34.3% in the first quarter, a significant increase of 8.8 percentage points compared to 25.5% in Q4. The increase is due to the net effect of the following four factors; first, four percentage points of the increase relates to improved manufacturing expenses such as lower wafer processing costs and better production efficiencies. Second, three percentage points are due to a more favorable revenue mix with higher Foundry and Logic revenues and lower memory revenues. And third, three percentage points relate to a lower excess and obsolete inventory reserve. Partially offsetting these three positive factors is a two percentage point decrease related to lower factory utilization. In terms of labor cost, we achieved a full quarter of restructuring plan savings in the first quarter versus about one-third of the savings in Q4. In comparing Q1 to Q4, these additional savings were mostly offset by lower PTL taken in the first quarter and the typical beginning of the year impact of the annual benefits reset. Our Q1 systems segment gross margin was 51.7%, 130 basis points higher than the 50.4% gross margin in the fourth quarter, reflecting slightly higher revenue and a more favorable mix. Our GAAP operating expenses were $61 million for the first quarter, similar to the fourth quarter. Non-GAAP operating expenses for the first quarter were $51.2 million or 30.6% of revenues as compared with $47.9 million or 28.8% of revenues in Q4. The $3.3 million increase is primarily due to higher performance-based compensation, annual benefits reset, and less PTO taken. Company non-cash expenses for the first quarter included $9.3 million for stock-based compensation, $2.9 million for the amortization of acquisition-related intangibles, and depreciation of $7.6 million, all at similar levels to the fourth quarter. GAAP operating income was $0.1 million for Q1 compared with GAAP operating loss of $16 million in Q4. Non-GAAP operating income for the first quarter was $13.2 million compared with $4.8 million in the fourth quarter. GAAP net income for the first quarter was $1.3 million or $0.02 per fully diluted share compared with a GAAP net loss of $13.7 million or $0.18 per fully diluted share in the previous quarter. The non-GAAP effective tax rate for the first quarter was 13.9%, 7.4 percentage points lower than the 21.3% in Q4. In our previous earnings call, we discussed that we expected our non-GAAP effective tax rate in 2023 to decrease to 6% to 9% due to the expected benefits of the new advanced manufacturing investment credits or AMIC. However, in accordance with the IRS's recently issued proposed regulations, we plan to record the AMIC benefit as a reduction to our depreciation expense over the life of the assets rather than lowering our tax expenses. We have thus updated our outlook for the annual non-GAAP effective tax rate to mid-teens between 13% and 17%. The benefit above the line to gross margins and operating expenses are not expected to be material in 2023, since the reduction in depreciation will be recognized over the service lives of the qualifying assets. Maintaining profitability at the current reduced demand levels continues to be an important goal for us and the actions we took during Q4 to reduce our costs at the full impact in Q1 contributed to a first quarter non-GAAP net income of $12.5 million or $0.16 per fully diluted share compared to $4.1 million or $0.05 per fully diluted share in Q4. Moving to the balance sheet and cash flows. We had negative free cash flow of $7.3 million in the first quarter compared to negative free cash flow of $5.4 million in Q4. Cash provided by operating activities in Q1 was $12.3 million lower than the $20.7 million in Q4. The main reason for the decrease in cash provided by operating activities is timing of both tax payments and payments from our customers. We invested $19.7 million in capital expenditures during the first quarter compared to $26.2 million in Q4. With the core drivers underpinning our strategy still in place, we continue to execute on increasing our long lead time facilities and equipment portion of our capacity increase plan, albeit placing equipment in service at a slower rate to ensure capacity does not significantly outpace demand. We expect CapEx for 2023 to range between $50 million and $60 million. During the quarter, we received an $18 million grant from the State of California which we plan to record as a benefit of the P&L as we make progress in achieving the five-years planned goals of headcount increases and capital investment. No P&L benefit is expected in 2023. Overall, at quarter-end, total cash and investments were $240 million, down $2 million from year-end. As of the end of the first quarter, we had one term loan remaining with a balance totaling $15.2 million. Regarding stock buyback, during the first quarter, we did not purchase additional shares under our $75 million two-year buyback program. At Q1 quarter-end, $18.6 million remained available for future repurchases. Turning to the second quarter non-GAAP outlook, as Mike mentioned, we expect Q2 revenues to be similar to Q1 with lower Foundry and Logic revenues, partially offset by higher DRAM revenues and expected record revenues from our Systems segment. This demand results in a Q2 revenue outlook of $162 million plus or minus $5 million. Second quarter non-GAAP gross margin is expected to be 38%, plus or minus 150 basis points. The impact of slightly lower revenue and a less favorable product mix within the probe card segment is forecasted to be offset by increased higher-margin systems segment revenues and lower projected E&O reserve. At the midpoint of these outlook ranges, we expect Q2 operating expenses to be $52 million plus or minus $1 million, with the $1 million to $2 million increase as compared to Q1 mainly due to additional investments in R&D. Non-GAAP earnings per fully diluted share for Q2 is expected to be $0.12, plus or minus $0.04. A reconciliation of our GAAP to non-GAAP Q2 outlook is available on the Investor Relations section of our website and in our press release issued today. With that, let's open the call for questions. Operator?

Thank you. Our first question comes from Brian Chin of Stifel. Please go ahead, Brian.

Hi, there. Thank you. Good afternoon and appreciate everyone. I will ask a few questions. Maybe to start with on gross margins, I know that mix plays a role certainly in how gross margins trend from here. But what quarterly revenue in up level do you need to bring gross margins to sort of the 40% or let's say below 40% level? And I know kind of the second part of that is that, although all caveats typically apply in terms of limitations to your visibility, what would be the more likely drivers that would drive a sequential pickup that's needed to get to those revenue levels or maybe even beyond in the second half of the year?

Sure, Brian. I'll take that. I think if I try to draw a trend line, I would say that, at the current revenue level is 160-something, 165 maybe a quarter, we expect to be at the high 30s. We saw 38.4%, we're talking about midpoint of 38% in Q2. If you go back to Q3 of last year, once we get back to these revenue levels of around 180, we expect gross margin to be around 42%. And once we get to the 200 million level on a quarterly basis, we expect to see gross margins around our target model of 47% as we saw in the first half of 2022. We need that increase to come mainly from Foundry and Logic, which is our higher margin market within the probe cards business to support these increases over this trend line. It's going to continue to fluctuate based on mix as you noted. But this trend line I think represents our thinking on this subject.

Okay. And then maybe even to expand on that and maybe also pull Mike in here as well. I guess the commentary you saw a little bit of pull-ins, pull-forward in Q1, drove some higher revenue, additional sequential for Foundry and Logic. Is the right way to think about that if some of these initial ramps that those probe cards are against in terms of flagship smartphones, PCs, et cetera? If those ramps progress then there's potential for sort of follow-on orders or activities that could happen maybe in 3Q and that would sort of be the catalyst to start to drive revenues higher in the second half of the year. What's kind of maybe the right way to think about how revenue can move from here?

Yes, Brian, this is Mike. I'll take that. The pull-ins from what we currently thought we're going to be Q2 net into Q1 that led to revenue above the top end of the range, it really came from three places. One, we have some very short lead time products. RF is a good example, where there's perishable demand to meet a specific customer wafer out schedule. And if we can ship it on time, we get the business. If we can't ship it on time, we don't. And so those are ones where we had a little bit more in Q1 than we thought we'd might. We had a few specific customer requests to accelerate delivery on specific designs, mostly associated with the ramps that you talked about. There's some pretty prominent ramps in the industry, flagship smartphones, applications, tile-based client microprocessors that are going on right now. And some of those wafer out schedules accelerated a little bit. And we had some recognition of deferred revenue in Q1 that we didn't think we'd get until Q2. As we look forward now to the second half, as you noted we have very limited visibility given the lead times we have. But I think if we see, in demand in some of these areas, whether they be mobile handsets, whether they be client PCs, start to pick up a little bit and our customers start to more aggressively ramp those particular devices, I think we could see some upside. Right now, we're, as we said, reasonably pleased that we've sized the business for current levels, which as we go through the middle part of the year, appear to be kind of a baseline stable demand level that we're operating to. But the factors you talked about could lead to some upside. We don't have any visibility to that upside at this point, but longer-term it's part of the reason why we're continuing to invest in capacity and R&D.

Okay. All right, that’s helpful. Thank you.

Thanks.

Thank you. Our next question comes from the line of Tom Diffely of D.A. Davidson. Your line is open, Tom.

Yes. Good afternoon. I appreciate the opportunity to ask questions. First of all, it sounds like you had strong design activity during the quarter. I'm curious if the new designs are more design-intensive on your part moving forward and if you are currently constrained in design capacity.

We noted that our design teams are quite busy collaborating with customer test engineering teams on the next generation of devices such as high bandwidth memory, DDR5, and some 3-nanometer foundry parts. This is crucial for our future. As you know, probe cards are tailored to each customer chip design. While we are not experiencing significant volume ramp-up at the moment, the design work being conducted is not notably more complex than what we have managed over the past few years. Our design teams are engaged across various customer markets, preparing first articles and ensuring that our technology will meet the requirements of these upcoming designs. We are also shifting a few probe cards for customers to validate, which will enable us to produce these new designs efficiently and with high quality when the industry sees growth.

So how much of your activity is based on design to a node versus design to a very specific chip itself?

It's all the latter, right? You basically get qualified for a node or a set of requirements, 3-nanometer foundry is a good example, and you need to have the right mechanical and electrical characteristics to essentially accommodate the envelope of different specific chip designs that are going to be produced on that node. But then our design team goes to work with the foundry, with the fabless customer, to customize that architecture that MEMS probe architecture to each individual chip design, so that we're ready to go when those individual chip designs for example, a 3-nanometer application processor that's ramping in the middle part of the year, we're able to produce that probe card as I said, in a high-quality predictable way and the architecture is validated on it.

Great. Very helpful. And then, for a follow-up moving to China, how big was China for you in the quarter? And it sounds like you expect that business to kind of decline over time. What kind of tail, do you think there is there?

Yes, that's an interesting question. We do share our regional revenues on our Investor Relations website, so you can see how they break down globally. In the last quarter, our revenue from China was around $27 million, which is the lowest we've seen in a while. This figure consists of two parts: shipments to multinational companies operating in the region, including some major global customers involved in Memory, Foundry, and Logic operations. Their production activities determine where they send these shipments. The decline I’m referencing primarily pertains to the support of domestic customers in China, and we are still working to understand the timeline for that. With the export controls and restrictions as a U.S. supplier, our ability to provide support for advanced semiconductor projects is limited, especially for advanced nodes and leading-edge technologies. In our systems business, we are enabling new capabilities, while our probe card business focuses on high test intensity for leading-edge nodes and complex designs, where customers struggle with yields. Unlike some WFE manufacturers discussing trailing-edge opportunities in China, we aren’t heavily involved in that market. Therefore, I believe that over the next couple of years, we will see that business decline to very minimal levels.

Okay. I appreciate your time, Mike.

Thanks, Tom.

Thank you. Our next question comes from the line of David Duley of Steelhead. Please go ahead, David.

Yes. Thanks for taking my question. I have a couple technology questions. As far as in your Foundry and Logic probe card business, I know one of your big customers now is in production with a chiplet module type product. I was wondering now that you've seen that in production, what sort of increases in probe card intensity are you seeing from that chiplet or module strategy whatever that might refer to.

Yes, this is one we've talked about in the past and I think some of the APE manufacturers have talked about in the past as well. Typically, on a like-for-like basis, we're seeing somewhere between a 20% and 25% increase in what we call test intensity. And loosely speaking that's the number of probe cards required per good die out. And that comes from a couple of different reasons. One, fundamentally you're breaking what used to be one chip up into multiple chiplets. And so that requires an individual probe card for each of the chiplet. If that was done perfectly, efficiently there wouldn't be an uplift there, but you need buffer probe cards and different elements like that, that do cause an increase. The more significant part of the increase really is associated with the move towards something close to what people call known good die. You can imagine if you're going to stack eight chiplets together, you want to have very high confidence that each of those chiplets is good before you commit it to the stack, because it turns out there's not a lot of rework or redundancy in these chiplet architectures. So customers are testing these chiplets much more comprehensively than they might test a single die package. And that's really what's responsible for the increase in intensity, something like 20% to 25% that we're seeing.

Okay. As my follow-up along the same lines, I think you referred to it in your prepared remarks where you're seeing kind of a large increase in probe intensity in the high-bandwidth memory, specifically for AI-type applications. I think, Mike, you might have said 5 or 7 times increase in the number of memory devices in one of the servers for an AI server or application. Could you just talk or elaborate a little bit more about that?

HBM has been an intriguing opportunity for us over the years. We are currently developing new designs for the third generation of HBM. Several of our customers have indicated a growing demand for high-bandwidth memory in AI modules, which will be a driving factor as we navigate through the AI adoption cycle. As a provider of test consumables and probe cards, it is noteworthy that HBM is fundamentally based on a chiplet architecture, utilizing multiple DRAM die—up to 16 stacked die—to create the final HBM product. Each of these die requires individual testing, consistent with the requirement for known good die. Additionally, there are extra insertions as customers wish to verify the integrity of the stack during the progression from four to eight to 16 die. As we've observed in previous quarters, our DRAM revenues have approached and even surpassed $40 million, significantly driven by the adoption ramps linked to HBM. Thus, this presents another compelling opportunity where advanced packaging is increasing probe card demand.

And I'm sorry just as a follow-up to that. Do you think that your high-bandwidth memory portion of your memory business is going to see a big uptick from AI since there's so much more per server?

It's hard to say at this point, right? We're early in an adoption curve. There's no question directionally that AI requires more high-bandwidth memory. We talked about one of our customers talking about a 50% growth rate in their HBM business. But, how much that is in relation to our overall DRAM probe card business and what that adoption curve looks like over time, I think are still open questions that we're going to see. But there's no question the direction is positive for us.

Thank you.

Thanks, Dave.

Thank you. Our next question comes from the line of Christian Schwab of Craig-Hallum. Your question please, Christian.

Hey, great. Hey, thanks guys. Just a quick follow-up on that Mike on the high-bandwidth memory. So, if your largest memory customer continues to dominate that market and obviously we're taking off 20% of production and then after they get supply and demand imbalance in the memory market then they're going to increase utilization rates and they're going to tweak the equipment before they buy a ton more capacity. So, probably a longer cycle, right? But on the high-bandwidth memory side, your commentary, should AI accelerate as some people assume it does. I mean could that leading customer drive your DRAM business back into the 30 million category, even if we're still in a low and memory CapEx spending for adding new wafers?

I see the potential for growth. We are anticipating a sequential increase in our DRAM revenue for the second quarter, starting from relatively low levels. In rough figures, our DRAM revenue was about $20 million in the first quarter, and we expect it to rise from there. However, WFE is not expected to increase from the first to the second quarter. An interesting point is that probe cards, which are design-specific tools, can be separated from WFE. If things go well and we experience a strong increase related to HBM, which could become a significant factor in DRAM wafer starts, it might be possible for us to reach the $30 million mark per quarter, even during a cyclical downturn in memory. Again, we're not predicting a major change in DRAM at this moment; we're simply pointing out an interesting opportunity in the second quarter that could boost our overall probe card revenue.

Right. And the other thing that's kind of helping you correct me if I'm wrong in DRAM is the fact that we finally have working silicon from everybody out there for DDR5, right?

Yes.

We have had DDR5 for quite some time, but we now finally have the working silicon available. This should certainly accelerate the transition, as the memory prices for manufacturers will be significantly higher than DDR4, providing us with additional momentum. Is this more significant than HBM, or is HBM more crucial?

I believe HBM is increasingly significant due to the test intensity linked to the advanced packaging structure it utilizes. If we observe that HBM starts to represent a larger share of wafer production driven by AI, there will likely be more potential for growth. The transition to DDR5 is positive, as you've pointed out, and while the average selling prices are higher, this has been one of the slowest transitions in terms of data rates and DRAM architecture within my career. We continue to see a substantial amount of DDR4 usage in both mobile and PC markets.

Okay. And then my last question talking about slow migrations. Your largest customer appears to possibly have fixed their ALs and it's in the process of rolling out five new generations of chips in four years versus trying to have a 14-nanometer chip compete with a 7-nanometer chip and lose market share everywhere. So I saw that you guys saw some sequential growth there. And in your prepared comments you suggested that certain trends in the industry you could surpass your previous model expectations. It's just kind of math. If they're successful that's materially good news for you, correct?

Sure, of course. We have worked hard to diversify our customer base and business by growing elsewhere and growing in different segments. The systems business is a good example now up in the neighborhood and above $40 million a quarter. But how our largest customer goes right is obviously a key driver for FormFactor's success. I'd also argue it's pretty important for the industry right? There's always been a technology pioneer a technology leader. And as they work on things like tile-based architectures, I think the whole industry will benefit if they're able to accelerate and really execute on pushing the Foundry and Logic technology platform forward.

Great. Perfect. Thanks. No question. Thanks.

Thanks, Christian.

Thank you. Our next question comes from the line of Craig Ellis of B. Riley. Your question, please, Craig.

Yeah. Thanks for taking the question, and thanks for all the color so far guys. I wanted to start off just picking up on the last question with the largest customer. It was great to see the mix increased by about 350 basis points quarter-on-quarter. The question Mike is of that 350 basis points and knowing that you are trying to win back share at that customer this year how much of the increase in mix is that customer just executing better on their own road maps more consistently to the prior point more consistent with their nodes? And how much of that would have been share gain or form in programs that you may not have had last year or maybe new programs this year?

Yeah. I think market share across the board has become a very important initiative for us, right? It's no secret certainly to the people on this call that we lost share in Foundry and Logic our biggest business in 2022 to our primary competitor. But it's also we've been pretty transparent with you that we've recommitted ourselves to share gains, made some organizational changes, and people changes and compensation changes to really focus the team on market share. As you note in Q1, we did see a good improvement there, but it's been our experience over the years that market share is not a one-quarter event, right? You can have different designs that you won different designs that your competitor won that can shift share in any given quarter depending on who's spending and who's the incumbent. So this is going to continue to be an area of focus for FormFactor both at our largest customer but across the customer base as we continue to compete with our major customers our major competitors in Foundry and Logic in Memory and then in Systems.

So is it fair to say Mike that to the extent there was short gain in 1Q that you think there's still a considerable ways to go until you're happy with the share you recapture to that customer?

Absolutely. I think the way we think about it is you need to make small steps forward. It seems like there was some progress forward in Q1, but in no way would I call us satisfied with what we've accomplished. This is very much a work in progress.

Okay. Clear message. Regarding the second question, I know there's been a lot of interest in DRAM. Let me frame it differently and see how you might respond. In my model, which may not be accurate, DRAM revenues in the first quarter reached seven-year lows, and the fundamentals in the DRAM industry are likely at a 20-year low. While revenues are outperforming the industry, they are still at historically low levels. My question is this: When considering the potential to return to more normalized levels in the high 20s to mid-30s range, could you elaborate on how you build that "layer cake"? High-bandwidth memory is a relatively small segment of total server DRAM memory, yet it is very part intensive. How much of the recovery will come from increased DDR5 volume in PCs and smartphones? And how much will stem from other areas? I'm not asking for a specific timeline, but as you envision a return to normalized shipment levels, how do the components fit together?

Yeah. I think if you build the layer cake as you said, it's going to require a couple of things. Obviously, DRAM end-markets are very weak. And I think it's clear that all of our customers are under shifting in demand to try and consume some of the persistently high inventory that's still out there. So the first thing that has to happen is that DRAM supply and demand get back into balance and essentially our customers start to ship to the actual demand that's out there. They all seem to have a slightly different view of when that's going to happen, but that very much is probably the first piece of the layer cake and getting back to the mid-30s. The second piece, some of the stuff that Christian talked about in his question, DDR5 will drive new memory designs. New memory designs require new fleets of probe cards. And certainly, there's DDR5 in the mix a significant amount of DDR5 in the mix right now. But I think more DDR5 is probably a piece to that. If we see adoption of that take off a little bit. And then, the third piece is we stack up the layer cake and the part that you probably inferred from my comments, I'm most excited about is HBM. And it's exciting because it is yet another example of the industry moving to back-end integration and advanced packaging to drive its innovation road map forward. It's cool to be helping enable AI which is a fundamentally game-changing technology for the world and semiconductors are underpinning it. And then finally, when you think about our advanced packaging and as you noted, the high probe card intensity associated with advanced packaging, it's an outsized opportunity for us on a per wafer star basis. So I think it's probably the icing on the cake right now but probably becomes a bigger part of the cake if all these things line up for us.

Got it. And then the last question. Just looking at the supplemental materials I noticed Samsung wasn't listed as one of the 10% revenue customers. Is that simply because they haven't been over the last five quarters, or was there any other reason why they dropped off? And can you just comment on how you're feeling about both on the DRAM and then on the Foundry and Logic side of that customer's business?

We had a few customers who were close to making the 10% list in Q1, but due to the way the numbers turned out, they didn't qualify. I wouldn't view this as significant. Regarding market share, the points I made about Foundry and Logic apply universally. We have realigned our focus and incentives to ensure we provide technology that leads to market share growth. In these segments, there are typically only two suppliers capable of meeting advanced requirements, which is why we are investing in research and development. This allows us to offer compelling products that justify a premium price, increase our gross margins, deliver value to our customers, and simultaneously gain market share.

Got it. Clear message. Thanks for the help, Mike.

Thanks, Craig.

Thank you. Our next question comes from Krish Sankar from Cowen. Your line is open, Mr. Krish.

This is Robert Mertens on for Krish. Thank you for taking my questions and congrats on navigating through a difficult industry environment, I guess just to start off, I know we've talked a bit about it but, on the gross margin side of things it looks like you're expecting 40 basis point contraction to the margins in the June quarter with sales slightly down and the mix shift more DRAM and less the Foundry and Logic compared to the first quarter. Could you just give some of the puts and takes into the June quarter gross margin guide? Are there any incremental margin drivers expected from the cost reduction plan or manufacturing efficiencies that are baked in there?

You mentioned most of the items. The reduction in restructuring costs is already accounted for in Q1, and it will continue to affect us in Q2. We are maintaining similar production levels, so there are no changes in that aspect. The factors that lead to a decrease from 38.4 in Q1 to a midpoint of 38 in Q2 are the ones you highlighted. I can repeat them: we anticipate slightly lower revenue, with 162 being the midpoint range compared to 167, which negatively impacts our numbers. The lower contributions from Foundry and Logic, along with increased Memory, also have a negative effect. However, these are partially mitigated by our expectation of record systems revenue, which will lead to a higher margin impact since the Systems segment offers our highest gross margin. Additionally, we expect P&O expenses in Q2 to be lower following high E&Os in Q4 of last year and still elevated in Q1, but normalizing in Q2.

Great, got it. And then just one more if I can. In terms of the systems business, obviously, it's been performing really well and capitalizing on the lab-to-fab strategy. I was just trying to see if there's any way to parse out the current demand strength from a handful of technologies or specific R&D projects or is it sort of more broad-based a lot of different components in that side of the business? Thanks.

The systems business does tend to be pretty broad-based. You're dealing thematically with new technologies. We've talked on this call about silicon photonics. Last call I think we talked about silicon carbide a little bit. Our investments in cryogenics for quantum computing tests are in that bucket, metrology and inspection for advanced packaging in there as well. So, it's a pretty broad spectrum of applications. But the common theme to them is you're working with customers in their very early development, things that will come to production for several years from now. And that gives us I think some strategic value out of the systems business because we get foresight into some of these applications which are going to go to production and get us better equipped to deal with them when they get to the fab things like CMOS image sensors VCSELs have been nice examples of that where we've taken engagement systems business engagement from the systems business and turned them into production probe card products. The other piece obviously, as Shai noted, it's a pretty good financial contributor. And we've seen some of the nice growth out of it, but nice growth with good profitability especially on the gross margin line helped buffer the cyclical downturn in the overall semiconductor industry in the probe card business, which is heavily levered to new design activity and ramping that new design activity, which given the current downturn across the industry customers have pulled back pretty significantly on ramping new products.

Got it. Thank you. That’s very helpful.

Thanks.

Thank you. Our next question comes from the line of Charles Shi of Needham. Your question please, Charles.

Thank you. Thank you for taking my question. Hey Mike and Shai, I think you went through several very detailed questions about quite a few corners of your business with various analysts asking questions ahead of me. I'm going to ask a little bit higher-level question. I think in the second half last year on the way down in terms of the business you mentioned about design starts design projects getting optimized some got reduced and the existing surviving design actually the volume got adjusted downward. So, I just want to ask you as where we stand in early May? What do you see in terms of those two vectors the design starts and the volume specific to each design start? Are design starts coming back? Obviously, volume may not come back yet but I just want to get some thoughts on that regard. Thank you.

It's a great question, Charles. We touched on this in our prepared remarks. We're observing strong new design activity, where our design teams collaborate with customer test engineering teams to ensure we have validated probe cards ready when they start ramping their new designs and volumes. Currently, the designs that are ramping aren't numerous and aren't scaling to high volumes, as reflected in industry trends and customer discussions about our revenue. However, we want to highlight that there has been a resurgence in new design activity. While these designs aren't currently ramping, they place us well for when the industry eventually returns to growth, allowing us to scale these designs effectively. On the quantitative side, our design teams, which we did not downsize during the Q3 restructuring, are operating at full capacity. This marks a notable difference compared to the second half of the previous year, as we faced a decline. We're prepared for when these designs eventually ramp up, although they aren't doing so at the moment. As we've mentioned, we believe we are currently in a low point until growth returns to the industry, whether that happens late this year or next year. I'm quite optimistic that we've secured designs that will drive our revenue toward our target model.

Thanks Mike. I want to ask specifically about the part of the revenue exposed to mobile. Obviously, I want to exclude the discussion around microprocessor and high-performance compute here for a bit. On the mobile side, I think I did hear you some pull-ins for on the RF side of your business. But any other green shoots, are you seeing right now in the SoC side of the mobile business for you? Maybe let's exclude the iOS side of the business. Because there seems to be some seasonality in Q4 or Q1 but going into Q2, do you see some moderate recovery in the mobile business on the SoC side or RF side? Thank you.

Yeah. So mobile for us is pretty broad-based. And if you look at FormFactor over the past several years, mobile handset growth and 5G adoption have been a big driver for us. Obviously, that's pretty weak right now both from a component standpoint, but also from an end to handset market standpoint. One of the things we're working on pretty aggressively here in the first part of the year is making sure that we've got the technology in place to ramp on some of the major mobile application processor designs in the industry. As they move to 3-nanometer foundry platforms, there are some new requirements there that we've had to deliver. Some of that was a contributor to Q1. We said we expected a little bit of digestion here in Q2 given the volumes we ship. But I think more broadly, we need to see whether it's SoC or application processor or the RF component side. I think we need to see a return to broad-based handset growth in both the Android and the iOS ecosystems to really drive that business forward.

Got it. Maybe lastly if I may. Mike, the DRAM business I thought you were expecting another leg down in the middle of the year when a quarter ago, but it looks like that leg down is already here looking at the DRAM revenue numbers. I just want to ask, are you still expecting another leg down, or you think maybe Q1 would be the low watermark for the DRAM business? Maybe the modest growth into Q2 there is more left to go into the second half of the year? Thank you.

We're not indicating a turnaround in DRAM. The sequential increase from Q1 to Q2 is mainly linked to specific DDR5 and HBM activities that we've discussed. Given the lead times and the pace of inventory usage along with new product launches in the DRAM sector, it's uncertain if we are truly back to growth. In the best-case scenario, we may see gradual growth, but it seems likely that we will remain at the low point until our customers' inventory situations improve.

Thanks Michael. I owe as always for the great color. Thank you.

Thanks Charles.

Thank you. Our next question comes from Gus Richard of Northland Capital Markets. Please go ahead, Gus.

Yes. Thanks for taking the questions. You talked a little bit about the transition to 3-nanometer and I'm just wondering your designers sort of intersecting is that transition broadening out beyond app processors to AI ASICs or GPUs CPUs? Can you just talk about the mix in those apps processors have more or less probe card intensity than some of the other types of silicon.

Currently, our focus on 3-nanometer technology is primarily around app processors. The level of testing intensity varies based on the customer's testing methods and their overall strategy. For instance, when considering advanced packaging, using 3-nanometer for a set of chiplets leads to higher test intensity, whether for high-performance computing parts or mobile parts, compared to a single large chip. This is related to the trend towards known good die that we discussed earlier. Therefore, there isn't a straightforward rule to say HPC is generally more intense than app processors or the other way around. However, if any of these chiplets are included in advanced packages for the final product, we are definitely observing a significant rise in testing requirements.

Got it. In your systems business, you mentioned silicon photonics in your prepared comments. I'm curious how close that is to commercialization. Are there only a few customers or just one vendor? Any insights on how you expect that to develop over the next 6 to 18 months?

Yes, we have a few customers who are already in production, although they are in niche applications. What's exciting for us is that we are observing an increasing number of potential customers in this market. As companies recognize the advantages of co-packaged optics and their integration into data center architectures, the benefits in terms of power and speed are very compelling. However, if we assess when this will significantly impact our customers' profits, as well as our own, it is likely to be closer to 18 months rather than the six months you mentioned.

Okay. Okay. And it's a handful of customers that are doing this at this point.

Yes.

Thank you. I would now like to turn the conference back to Mike Slessor for closing remarks.

Great. Thanks everybody for joining us today. Thanks for some of the questions that allowed us to describe our view of the industry and its current state. We're signed up to do several sell-side conferences in the months of May and June so we hope to see you at one of those and be able to answer more questions and update you on FormFactor's progress as we work through this cyclical downturn. Have a great day and take care.

This concludes today's conference call. Thank you for participating. You may now disconnect.