Earnings Call Transcript - FORM Q3 2021

Operator, Operator

Thank you, and welcome, everyone, to FormFactor's Third Quarter 2021 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Shai Shahar. Before we begin, Jason Cohen, the company's General Counsel, will remind you of some important information.

Jason Cohen, General Counsel

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 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 regarding projections of financial and business performance, future macroeconomic conditions, the benefit of acquisitions and investments in capacity and in new technologies, the impacts of the COVID-19 pandemic, our supply chain, the impacts of regulatory changes; 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 2020 and in our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, October 27, 2021, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Mike Slessor, CEO

Thanks, Jason, and thank you everyone for joining us today. FormFactor delivered solid results in the third quarter again recording the second highest revenue in company history with gross margins at the highest of our range. Together with sustained operating expense control, these factors resulted in non-GAAP earnings per share above the high end of our outlook range. We continue to benefit from strong demand for FormFactor's diversified set of market-leading semiconductor test and measurement products. And with our added production capacity now coming online, we are well positioned in the current quarter to deliver sequential growth. Like many companies in the semiconductor industry, we are facing a variety of supply chain and labor challenges. Our long-term investments in automation and vertical integration have helped reduce the effect of these headwinds. We have thus far successfully navigated these issues with minimal impact. We do expect this situation to persist into next year, and our team remains focused on actively resolving these challenges. Minimizing impact where supply chain is especially important as our capacity investments start coming online. Tool installations and qualifications are now underway in our new Livermore Manufacturing Center, which remains on track to deliver initial customer shipments in the current quarter. We are excited to be on the cusp of commissioning this new flagship facility, which will remove a growth constraint we've operated under for almost two years, helping us to reach the $850 million revenue target of our financial model. I'd like to provide some detail behind our sequential improvement in gross margins, as it provides insight into the importance of the design-specific product mix within each of our served markets. As you can see from the supplemental materials posted on our website, and as Shai will review later, third quarter revenue by segment end market was very similar to the second quarter, yet we delivered a 160 basis point improvement in gross margins. The largest single factor in this improvement was a more favorable product mix within the specific markets. As we've noted in the past, probe cards are consumable specific to each customer chip design, and the custom nature of each probe card design drives a different manufacturing cost and selling price. For example, two DRAM probe cards configured to test two different customer chip designs can produce significantly different gross margins because of the details of the probe card and tester configuration, like the difference between a one touchdown configuration versus a two touchdown configuration. Consequently, two quarters with similar revenues in each segment and market can and often do result in substantially different gross margins depending on the specific probe card shipped to produce that revenue. This variability is inherent to FormFactor's broadly diversified design-specific consumables business, and since we serve major applications at all the leading customers in the semiconductor industry, delivering probe cards to test hundreds of different chip designs each month, we expect to continue to see quarterly fluctuations in gross margin around the long-term trend line expanding to the 47% target of our financial model. Turning now to segments and market level details. Foundry & Logic probe cards, our largest business, performed at levels in the third quarter comparable to the second quarter, with an expected seasonal reduction in mobile application processor demand offset by an increase in microprocessor demand and sustained strong growth in 5G RF applications. With 2021 large foundry and logic wafer fab equipment investments now coming online at our customers, we are experiencing increasing demand for leading-edge foundry and logic probe cards. Along with their capacity additions, our customers are adding innovative advanced packaging architectures like EMIV and 3D fabric to their roadmaps to help offset the slowing of front-end driven Moore's law. As we discussed in the past, these chiplet or tile-based integration schemes drive both higher test intensity, which expands the number of probe cards required per wafer, and test complexity, which widens FormFactor's competitive advantage. With lead times of less than a quarter, short term visibility remains challenging as always, with the combination of significant customer capacity increases paired with their adoption of advanced packaging creating long-term demand for FormFactor's probe card products. Demand for DRAM probe cards in the third quarter sustained near the high levels of the second quarter, and we expect comparable strength in the current quarter. As in foundry and logic, we experienced demand shifts between different customers and different chip designs across multiple DDR4 and DDR5 designs in both mobile and PC server applications. FormFactor's ability to absorb these short-term fluctuations in demand from any one customer is the result of our long-term initiatives to be a diversified market leader supplying all major DRAM manufacturers and remains a key tenet of our operational strategy in all of our served markets. Our engineering systems business also delivered good results in the third quarter with gross margins at 50% for the first time since early 2020. A highlight of the quarter was the shipment and installation of multiple high-performance 300-millimeter optical metrology tools to a single foundry customer for enhanced packaging applications. Advanced packaging is a key driver for all FormFactor's businesses as our customers begin to adopt chiplet tile integration strategies to generate new test and measurement requirements. Let me close by noting that with an accelerating demand outlook, increased capacity to meet that demand, and good execution on both short and long-term gross margin improvements, we are well on the path to the target financial model we unveiled last year that delivers $2 of non-GAAP earnings per share on $850 million of revenue. Test and measurement is clearly gaining importance in the semiconductor industry, driven by powerful trends including 5G, advanced packaging, and memory content growth. Our leadership position in these attractive markets, paired with our differentiated strategy and disciplined execution will drive continued growth and share gains as we progress towards our target model. Shai, over to you.

Shai Shahar, CFO

Thank you, Mike and good afternoon. As you saw in our press release, and as Mike mentioned, third quarter revenues and non-GAAP gross margins were at the high end of our output range, with revenues again reaching the second highest level in company history. And non-GAAP EPS exceeded our expectations and were out of range. FormFactor's third quarter revenues were $190 million, a 1% sequential increase from Q2, and an increase of 6.7% year-over-year. Probe cards segment revenues were $155 million in the third quarter, a small increase of $1.2 million or 0.8% from Q2. As Mike mentioned, third quarter revenue by segment end market was very similar to the second quarter. System segment revenues were $35.1 million in Q3, an increase of $0.7 million, or 2% from the second quarter, mainly as a result of higher sales of optical metrology and thermal systems driven by advanced packaging and automotive applications. Within the probe cards segment, foundry and logic revenues increased by $1 million from Q2 to $105 million in the third quarter, comprising 55% of total company revenues, same as in the second quarter. DRAM revenues were $40 million in Q3, a decrease of $2 million or 5.5% from Q2, and were 21% of total quarterly revenues, compared to 22% of revenue in the second quarter. Flash revenues of $10 million in Q3 were $2.5 million higher than in the second quarter, and were 6% of total revenues in Q3, up from 4% in Q2. As we have said in the past, we expect Flash revenues to be lumpy from quarter to quarter. GAAP gross margin for the third quarter was 42.2% of revenues as compared to 40.6% in Q2. Cost of revenues included $7.2 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 third quarter was 46%, at the high end of our outlook range, and 160 basis points higher than the 44.4% non-GAAP gross margin in Q2. As mentioned, third quarter revenue by segment end market was very similar to the second quarter, and most of the improvement in gross margins, approximately two-thirds of it, was due to a more favorable product mix within the specific markets. Our probe cards segment gross margin was 45.1% in the third quarter, an increase of 180 basis points compared to 43.3% in Q2, the increase is mainly due to the more favorable mix I just mentioned. Our Q3 system segment gross margin was 60%, 90 basis points higher than in the second quarter. As we have said previously, we expect our system segment gross margin to range between the high 40s to low 50s. Gross margin remains an area of focus for us, and we're encouraged by our progress towards our target financial model gross margin of 47%. As a reminder, we expect that margins will fluctuate from quarter to quarter, mainly as a result of changes in product mix. Our GAAP operating expenses were $57 million for the third quarter, $1 million higher than in the second quarter. Non-GAAP operating expenses for the third quarter were $48.5 million or 25.5% of revenues, essentially flat with $48.4 million or 25.7% of revenues in Q2. Company non-cash expenses for the third quarter included $7.9 million for stock-based compensation, $2.5 million for the amortization of acquisition-related intangibles, and depreciation of $6.6 million. Amortization for acquisition-related intangibles decreased from $7.1 million in the second quarter, as certain assets became fully amortized during Q2. The increase of depreciation from $6.6 million in Q2 reflects additional assets being serviced as part of our capacity expenses. As disclosed in an 8-K filed last month, we adopted restructuring plans during the third quarter to streamline and improve the efficiency and business effectiveness of our operations. We are consolidating certain manufacturing facilities, including moving operations into our new Livermore Manufacturing Center that will begin production in the current quarter. We expect these actions will be largely completed by the end of 2020. We estimate that these actions will reduce our cost structure by approximately $3 million to $4 million on an annualized basis once the actions are fully implemented. Non-GAAP operating income for the third quarter was $39 million, $3.8 million higher than in the second quarter. GAAP net income for the third quarter was $20.5 million or $0.26 per fully diluted share compared to $17.9 million or $0.23 for fully diluted share in Q2. The non-GAAP effective tax rate for the third quarter was 18.9%, practically the same as the 18.7% in Q2 and within our anticipated non-GAAP effective tax rate for fiscal 2021, 15% to 20%. As a reminder, our annual cash tax rate is expected to remain at 6% to 8% of non-GAAP pretax income until we fully utilize our remaining U.S. based R&D credit. Third quarter non-GAAP net income was $31.6 million or $0.40 per fully diluted share compared to $28.4 million or $0.36 per fully diluted share in Q2. Moving to the balance sheet and cash flows. We generated $14 million of free cash flow in the third quarter compared to $16 million in Q2. And we have a total cash and investments of $268 million at the end of the quarter. The third quarter $2 million sequential decrease in free cash flow reflects an increase in capital expenditures. As of the end of the third quarter, we had two term loans remaining on our balance sheet, totaling $27 million. We invested $20 million in capital expenditures during the third quarter compared to $18 million in Q2. This brings our year-to-date CapEx to $51 million, chiefly related to the capacity expansion in our Livermore Manufacturing Center. We continue to make significant investments in capacity in 2021, and most of that is behind us. We're fine-tuning the range for forecasted cash CapEx for the full year to $70 million to $80 million from the $70 million to $90 million previously communicated. As a reminder, we expect CapEx to return to 3.5% to 4% of revenues in our target financial model after we conclude these capacity expansions. At quarter end, our total cash and investments balance exceeded our debt balance by $241 million, an increase of $11 million from Q2 quarter-end. No significant share repurchases were made during the third quarter, and year-to-date we purchased 620,000 shares under our two-year $50 million share repurchase plan. This brings our year-to-date share repurchases total to about 0.8% of our outstanding shares. The main purpose of the plan is to offset dilution from stock-based compensation, and at quarter end $26 million remains available for future repurchases. Turning to fourth quarter non-GAAP outlook. As Mike mentioned, we expect generally strong demand to continue with sequentially higher foundry and logic and systems revenue. These factors result in a Q4 revenue outlook in the range of $192 million to $204 million. Non-GAAP gross margins for the fourth quarter is expected to be in the range of 44% to 47%. At the midpoint of these outlook changes, we expect Q4 operating expenses to be higher than Q3 by $1 million to $2 million, mainly due to increased investment in R&D and higher travel expenses as things start to get back to normal. Accordingly, non-GAAP earnings per fully diluted share for Q4 is expected to be between $0.37 and $0.45. Reconciliation of our GAAP to non-GAAP Q4 outlook is available on the investor relations section of our website and in our press release issued today. With that, let's open the call for questions.

Operator, Operator

Our first question comes from Tom Diffely of D.A. Davidson.

Tom Diffely, Analyst

Thank you. Good afternoon and nice results. Mike, just a couple of quick questions about the industry and how it relates to probe cards. If we spend $85 million, $90 million on CapEx this year, what is the timing over the next year that's fully integrated into probe card business for you?

Mike Slessor, CEO

Yes, it's an interesting question, Tom, and one that we've tried to highlight for people. Obviously, 2021 is going to be an extremely strong record for wafer fab equipment. What we've seen over the years is, as those pieces of equipment get delivered, installed, qualified, and then begin to produce designs, there's a two to three quarter lag between those equipment shipments and us seeing probe card demand. You can imagine it does take customers some time to get the tools running, qualified, and producing the specific designs that require probe cards. Obviously, we continue to operate on very short lead times, or well within a quarter. So we are part of the reason for our large capacity investments here in 2021, so that we're ready as all of this wafer fab equipment comes online and begins producing leading-edge designs and that we can meet that probe card demand in 2022 and beyond.

Tom Diffely, Analyst

Great. And then as a follow up to that, Mike, when you look at the move from say five nanometers to three nanometers or the move from FinFET to GAA. What is the incremental opportunity for probe cards?

Mike Slessor, CEO

I don't know that there's a really big impact there, Tom. If we go back in history in foundry and logic, as we went from planar to FinFET, it drove up test intensity somewhat at the beginning of that transition, just because there are new DSAT modes that the customers have to understand and drive the yield down. As a result, they're going to test more and drive more data through the test chain, which will require more testers and probe cards. However, in the end of the day, that trend tends to level off as customers get better at controlling the parameters. I think the more interesting thing that's happening is we see a push towards more wafer test, likely associated with advanced packaging where people are trying to get something close to known good die before they assemble the individual dice into these advanced stacking packages. So, it may be less associated with transistor architecture and more associated with a move towards advanced packaging. We do see a bit of a tailwind there.

Tom Diffely, Analyst

Okay, great. That's helpful. And then Shai, final question here. When you look at the labor market, how is that impacting you today? I guess, both in light of expanding your facility in Livermore, and also restructuring a few other facilities?

Shai Shahar, CFO

Yes, it's true that we see some delays in hiring and vacancies usually last longer. You can see that by looking at our office for Q3, right? We expect it to be a little higher than we anticipated. But we believe we can manage it. We expect these labor shortages to result in better results as we get into Q4. We already have more people onboard one month into the quarter, which is encouraging, and we are on schedule to start production in our Livermore Manufacturing Center this quarter.

Operator, Operator

Our next question comes from the line of Brian Chin of Stifel.

Brian Chin, Analyst

Hi, there. Good afternoon, nice results, and thanks for letting us ask a few questions. Off the nice gross margin print here in 3Q and comparable I guess guidance for 4Q, I understand that there are costs and labor headwinds that might persist into next year. But also assuming that revenue maintains or progresses from 4Q levels. And maybe the next kind of even reaching in terms of logic foundry, what would hamper you from continuing to operate in sort of the upper half of a 44% to 47% gross margin range, not every quarter but at least averaging out to that over a full year?

Shai Shahar, CFO

So as we said in previous earnings calls, the biggest factor impacting our gross margin is product mix. We are running along this trend line, as Mike mentioned in the call towards our 47% gross margin as a target model. However, as we make progress towards that goal, we can say that things fluctuate along that line. We saw it in Q3 where it was 46%. When we look at the Q4 outlook revenues, at least at the midpoint, are higher than Q3, but gross margin midpoint is lower than the actual gross margin for Q3, primarily because of that mix. So that phenomenon, I think, will continue as we progress towards 47%.

Brian Chin, Analyst

Okay, thanks. And early this morning, Teradyne referenced, I think a 25% increase in test intensity for heterogeneous chiplet tile packaging relative to comparable monolithic IC. Mike, I think that's within range, maybe even toward the high side of what you've talked about previously. So I was wondering how big of a tailwind could this activity represent next year? Do you see broader activity across the handful of key leaders in this space? And does that add any basis points of growth on top of the revenue CAGR, as you've discussed at last year's analysts meeting?

Mike Slessor, CEO

Yes, to start with the second part of the question, if you look back at some of the underlying assumptions that went into the target model that gets us to $850 million in about 2023, advanced packaging and die stacking heterogeneous integration are very prominent drivers to help us reach that model. So when we think about the growth rates that get us there in 2023, they largely incorporate these factors. However, we are seeing some prominent leaders in the industry shift their roadmaps towards these heterogeneous integration techniques. Our largest customers have been very clear that they've got a major client processor coming out that will feature this architecture. As this architecture drives up test intensity at least initially, we expect some potential tailwinds there. But at the top level, we had already factored these considerations into our revenue growth assumptions that get us to $850 million in 2023.

Brian Chin, Analyst

Great, that's helpful. And maybe just was wondering, could you take a stab at if you double or even triple the transistor count on one of today's leading SOCs, what kind of proportional or not increasing test times you think we're talking about?

Mike Slessor, CEO

Test time doesn't scale, as you might imagine, linearly with transistor count. There's all kinds of interesting test technologies that allow customers to ensure that there's not a one-to-one correspondence to that increase. However, I think going back to Tom's question earlier, the bigger aspect rather than the transistor architecture or transistor count is the push to drive more test content to the wafer level and die level, so that when they put the die into these advanced packages, they have a very high probability of ensuring that they're good. You could consider a scenario where if one of eight stacked dies is bad, and you don't have rework or redundancy available, that's a very poor yield. That's the fundamental economics that boost test intensity associated with heterogeneous integration and advanced packaging.

Operator, Operator

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

Craig Ellis, Analyst

Great, and congratulations on the nice execution and the outlook. Mike, I wanted to start just by getting some clarification on the Livermore facility. So one, I believe the press release and your comments indicated that it would be ramping in the fourth quarter. But is it ramping for revenues? And is the revenue associated with that ramp? The growth that we're seeing sequentially in the business or is just a part of that growth? I guess it would be part because you also said that systems is going to be a quarter-and-quarter.

Mike Slessor, CEO

Yes, it's a pretty modest contributor to the overall midpoint revenue outlook. But I think it is significant that we are bringing it online on schedule, which relieves a major growth constraint for us. We think about this in three components: the footprint we have, the installed tool capacities that we possess, and finally the labor in our factories. For those following us closely, you know we've been constrained by our footprint. So bringing this facility online, powering it up and getting tools installed, as we are doing now, alleviates that long lead time constraint that we've been under. There are other capacity expansions happening worldwide, one of them in our RF line, where we continue to see increasing business associated with 5G DRAM. So there are other components too. I'd say a modest part of the uplift in sequential growth from Q3 to Q4 is tied to the new facility. However, the potential from it is a much more exciting opportunity.

Craig Ellis, Analyst

Got it. And on that RF point, you mentioned that RF was particularly robust. Is that the RF front end for 5G smartphones, and is that the move from more high-end smartphones over the first year one and year two of shipments to next year's move more into the mid-range? I know we have a number of Android releases coming in the first quarter, and there's quite a bit of excitement about some new baseband products for those. Is that what you're seeing? Are you observing anything related to 5G that might be Wi-Fi related customer premise equipment, that type of thing, Wi-Fi 6, et cetera?

Mike Slessor, CEO

No, I think it's — there is some Wi-Fi 6 elements to it, but I really think the strength is being driven by 5G handsets. It's the growth associated with 5G handsets, but perhaps more importantly, from a testing perspective, the content growth in an RF front end within a 5G handset is significant compared to a 4G handset. The complexity associated with the components and functionality in a 5G handset results in a higher volume of components compared to the 4G version. The additional frequencies, especially the millimeter wave frequencies, drastically inflate the test complexity. So to answer your question, I don't think a large portion of it is from Wi-Fi 6; much of it is driven by the dynamics of 5G handsets.

Craig Ellis, Analyst

Lastly for me, and at the risk of admonishment versus the two question guidelines, could you talk a little bit more about the systems business? I thought that $35 million a quarter was a very robust quarter for the business. But it looks like it's growing above that. So as we look at the different pieces of that business, you mentioned FRT, but can you expand on what's happening there, Mike?

Mike Slessor, CEO

Yes, the systems segment can be broken down into three components. One is the legacy systems business that we acquired from Cascade Microtech. This was historically a low single-digit growth business serving R&D labs, failure analysis, and characterization. However, we have added two recent acquisitions to the systems segment: one being FRT, which provides metrology applications we are beginning to see, especially in foundry ecosystems related to advanced packaging. That's been a strong growth driver for that segment. The other addition is our acquisition of HPD, facilitating our entry into the quantum computing testing market. This is a testing infrastructure that supports providers of quantum computers. As that industry begins to mature, we're aiding them with the test and measurement applications required for their advancements. As we analyze the systems segment, which a couple of years ago was reaching only $25 million a quarter, the addition of FRT and HPD is the primary driver for its growth into the mid-30s and likely will grow into the high 30s in the near term.

Operator, Operator

Our next question comes from David Dooley of Steelhead.

David Dooley, Analyst

Yes, thanks for taking my questions. You mentioned that you had a nice improvement sequentially in gross margins. I was just curious. I'm sure there were still some supply constraints margin impact and higher freight costs. Could you perhaps help us understand how much is still dragging there with freight and supply issues?

Shai Shahar, CFO

Actually, the supply issues haven't significantly impacted our gross margin. By the nature of our products and the way we ship them in terms with the customers, we’ve found that it does not have a big impact, both in Q3 and doesn't seem likely for Q4.

David Dooley, Analyst

And I know it probably wasn't very meaningful. Was there some revenue impact?

Shai Shahar, CFO

No, not at all, it was pretty small. Sometimes you can have a major probe card waiting to be shipped because it's missing a small component, but it has been really minor so far, primarily stage up by operation.

David Dooley, Analyst

Yes. And then as far as the FRT business, could you help us understand how big a segment of business or how big this market is? And what exactly are you measuring in the Advanced packages? You gave some description, but could you just dig in a little bit deeper, that would be great.

Mike Slessor, CEO

Yes, well, let's start with the application space. There are various new parameters that need to be measured on these chiplets primarily at the interfaces between the adjacent chiplets. For instance, if you're stacking two chips together, you want to ensure that the connections—typically solder bumps or copper pillars—are planar with minimal defects. Therefore, measurements related to the planarity of those surfaces, and factors like bow and warp, are vital for maintaining assembly yields in these new chiplet applications. Since this is an emerging application, it's challenging to size the market, but we estimate the total available market to be in the lower hundreds of millions of dollars, approximately $150 million to $200 million. This range accounts for potential fragmentation among various competitors and alternatives that will emerge across the different subsegments. It may take some time to grow to that scale, but we're excited about the FRT team's progress.

Operator, Operator

Our next question comes from Kris Sankar of Cowen and Company.

Stephen Chin, Analyst

Hi, thanks for taking my questions. This is Stephen calling on behalf of Krish. First question, maybe for Shai. If I could dig in a little bit more on the gross margin in the quarter and as part of the guidance for your probe cards revenues were flat compared to prior quarters that you guys had pretty nice margin expansion there. Was that more of a function of a better product mix within your foundries customer segment, or did you also see some material margin expansion within the memory customer segment as well?

Shai Shahar, CFO

Yes, in Q3 both our segments had better margins. If you look into Q4, the midpoint of the output range for gross margin in Q4 is below the 46%, it’s at 45.5%. The main contributor goes back to our previously mentioned about product mix within these specific markets. Traditionally, systems, foundry, and logic have higher margins than DRAM and Flash. But there exists overlap; high-end DRAM designs can outperform foundry and logic designs in terms of margins, and within DRAM, there can be significant variances in designs.

Stephen Chin, Analyst

Got you. Thank you for that. And as for my follow-up question on your larger Korean customer in your quarter. I imagine most of the business, there’s probe cards on the memory side. But can you talk about any potential opportunities longer term within their foundry business, as well?

Mike Slessor, CEO

Yes, they were a 10% customer in Q3, and I believe they were also a 10% customer in the second quarter. In Q3, there was a strong contribution from their foundry business as well. They are probably the only customer worldwide where we have a significant DRAM business and a strong foundry and logic business, not to mention our systems business as well. They have been a customer on the probe cards side and foundry and logic for many years. There is, as they grow their capability in competing for fabless customers, I do think there are opportunities there. However, we don't anticipate much share gain opportunity, as we already have a reasonable share and strong relationships with that customer across both the DRAM and foundry and logic businesses.

Operator, Operator

Our next question comes from Charles Shi of Needham and Company.

Charles Shi, Analyst

Good afternoon, Mike and Shai. Thanks for taking my question. First, I want to genuinely congratulate the FormFactor team for strong execution on gross margin. It looks like not only did your Q3 overall margins back up, but the probe card side is retaking the 45%. Really, congratulations on that. So I want to ask a bit longer-term question. I want to discuss market share. Obviously, we know where you are strong. You're very strong with a leading IDM on the microprocessor side. You have a solid position in the foundry sector with good exposure to mobile SoCs. Maybe let me start with microprocessor. Clearly, the leading IDM with an aggressive turnaround is becoming very interesting for us to observe the competitive landscape between them and other microprocessor providers. I want to understand your high-level view on the potential tailwinds or headwinds, considering that data competition between two microprocessor providers? How would any changing market share potentially affect your microprocessor probe cards business favorably or unfavorably? Then I have a follow-up.

Mike Slessor, CEO

Yes, we certainly have strong share at the leading microprocessor manufacturer. However, the fabless microprocessor manufacturer has posted some impressive growth recently, which hasn't gone unnoticed. Our share there is lower, so we have a strong initiative in place to raise it at the fabless microprocessor customer. Currently, if there were to be a one-to-one shift in share, that would be a net headwind for us, essentially a net loss. But we've been focusing on this area and are seeing good traction. Consistent with our long-term strategy, we aim to be a leading supplier to all the primary customers worldwide, so we feel positioned to positively address that.

Charles Shi, Analyst

Thanks for that informative response, Mike. Maybe I'd like to pivot to the mobile SoC side. It's been reported that one of the Chinese smartphone makers is working on bringing the applications processor design back in-house, starting from three nanometer designs. This appears to indicate an evolving trend where assistant companies are taking their designs in-house. This might present headwinds for one of your indirect foundry customers in the mobile sector, a U.S. company. How does FormFactor perceive potential landscape shifts in the mobile SoC space, especially as system companies tend to favor one leading foundry over another? This dynamic might provide you with a slightly stronger position there. Any insights would be appreciated.

Mike Slessor, CEO

Yes, the trend towards more vertical integration with our customers is interesting. It’s not new, as hyperscalers have been taking designs in-house. The trend among large handset manufacturers is also shifting toward designing internally, making them more akin to their own silicon companies. This quickly makes customer management more complicated, as many of these fabless customers manage their designs and testing operations directly instead of outsourcing. However, it is crucial for us to maintain strong relationships with all leading fabless and foundry customers. By doing so, we can safeguard against shifts in their manufacturing and sourcing strategies.

Operator, Operator

Our next question comes from Christian Schwab of Craig-Hallum.

Tyler Burmeister, Analyst

Hey, this is Tyler on behalf of Christian. Thanks for allowing us to ask some questions and congrats on the great quarter. I'd like to inquire about your DRAM probe cards business. Your implied Q4 guidance indicates flat performance; however, 2021 has been a robust growth year. Thus, why should we be concerned about continued momentum throughout 2022? You're catering to all customers, and there are ongoing design transitions next year. So I'm curious if there's anything that may hinder this momentum?

Mike Slessor, CEO

That's a good question and a topic of significant internal debate indeed. One thing to remember is history shows that the DRAM probe cards market is cyclical, much like the rest of the DRAM supply chain. Over the past couple of quarters, and we expect in this current fourth quarter, we're near the historical highs of high $30 million to low $40 million in quarterly revenue for DRAM probe cards, which is above the mid-30s that we've previously communicated as the average normalized level. The fundamental drivers for this have been ongoing design releases and transitions. As long as that continues across our customer base, I don't see any reason why a mid-30s assumption isn't reasonable. It is slightly surprising to us that we've seen two consecutive quarters at or around that $40 million level, representing all-time record quarters, but our execution in DRAM has been solid, and it appears we may have gained some share there in 2021.

Tyler Burmeister, Analyst

That's great. I appreciate that insight. My second question relates to the supply chain. It seems that you are executing well and not facing substantial impacts. Nevertheless, you've mentioned expecting challenges to last into next year, presumably based on discussions with your customers. Do you envision potential benefits resulting from this environment leading to enhanced visibility?

Mike Slessor, CEO

Yes, the supply chain issues have been quite interesting. The root cause of many of these challenges stems from the semiconductor shortage itself. We've had some obstacles with subsystems that aren’t vertically integrated, and they’ve been influenced by an isolated chip shortage. I don’t believe it has significantly improved our visibility, as we're still operating with lead times well within a quarter. However, we hope that as capacity comes online, driven by numerous expansions across the industry, especially at leading edge nodes, we will be able to sustain solid demand across our business portfolios. Many of our advantages stem from being relatively vertically integrated, which has allowed us to continue managing supply chain matters better than most.

Operator, Operator

Thank you. At this time, I'd like to turn the call back over to Mike Slessor for closing remarks.

Mike Slessor, CEO

Great. Thanks everyone for joining us again. We're hopeful to attend a couple of conferences by the end of the year. I don't know if that will be in-person or virtual, but I hope to see you there and thanks for your continued interest in FormFactor. Bye-bye.

Operator, Operator

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