Earnings Call Transcript - FORM Q1 2026

Operator, Operator

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

Stan Finkelstein, Vice President, Investor Relations

Thank you. Today we 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 statements with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions; the benefits of acquisitions and subsequent integration, anticipated timeline for and benefits from Farmers Branch, anticipated industry trends and volatility, the impacts of regulatory changes, including tariffs, the anticipated volatility in demand for our products, our abilities to develop, produce and sell products and meet ongoing demand, and the advancement of artificial intelligence impact on industry and demand 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 filings on Form 10-K with the SEC for the fiscal year ended December 27, 2025, and in our other SEC filings, which are available on the SEC's website at www.sec.gov. Forward-looking statements are made as of today, April 29, 2026, and we assume no obligation to update them. With that, we will turn now the call over to FormFactor's CEO, Mike Slessor.

Mike Slessor, Chief Executive Officer

Thanks for joining us today. FormFactor's first quarter revenue grew sequentially to another all-time record. The gross margin and earnings per share were significantly above the high end of our outlook range. In the current second quarter, we again set a revenue record and delivered sequential increases in both gross margin and earnings per share, extending the momentum that began in the second half of last year. These outstanding results exceed our target model on a quarterly run rate basis, and our current quarter outlook is expected to cap a string of results that validate the model on an annualized basis. We're proud to have delivered on this commitment and at our upcoming Investor Day at the NASDAQ MarketSite on May 11, members of FormFactor's executive leadership team will introduce our next target model along with the strategic priorities, long-term growth opportunities and operational initiatives that underpin it. We're also encouraged by how these financial results were achieved. We continue to benefit from our leadership position at the intersection of high-performance compute and advanced packaging, two powerful trends transforming the semiconductor industry. Our growth is fueled both by strength in familiar areas like probe cards for high bandwidth memory and accelerating contributions from newer foundry and logic opportunities like networking. The first quarter growth in probe cards for networking applications caused a leader in high-performance compute to become a 10% customer for the first time, and we're continuing to build our relationship with this leading customer in not only networking, but also probe cards for GPUs and systems for co-packaged optics. Operationally, these results represent a significant improvement from the execution challenges that previously limited our performance. While the pace of profitability improvement will moderate as we approach the limitations of our current footprint, later this year, we expect our Farmers Branch site to come online, providing increased capacity with structurally lower costs which will in turn create the foundation for future revenue growth and gross margin expansion. Aric will discuss our current operational performance and future plans later in the call. Turning now to segment and market level details. In DRAM probe cards, we delivered the expected sequential growth from the fourth quarter to reach another record with increased demand in HBM applications paired with sustained demand in DDR applications. As you've heard recently from our major DRAM customers, the environment continues to be supply constrained in DRAM overall, and we expect our customers to dynamically shift their wafer start mix between a variety of HBM and DDR designs to maximize their opportunity. Since probe cards are specific to each customer chip design, we expect our DRAM mix to correspondingly shift between HBM and DDR under these unusual end market conditions. We're again forecasting record revenue in DRAM probe cards in the current quarter, driven by another step-up in HBM demand. Most of this incremental growth is coming from a second customer's increased adoption of FormFactor's differentiated Smart Matrix full wafer contactor technology. Smart Matrix provides a unique combination of high parallelism productivity and high-speed performance, enabling our customers to test hundreds of completed HBM die simultaneously at the 10 gigabit-plus I/O data rate of HBM4. This capability is critical in advanced packaging processes like TSMC's CoWoS where stacked die test insertions provide the final test for the HBM stack where it's combined with GPUs or custom ASICs. Our second quarter outlook shows the impact of FormFactor's competitive advantage and the resulting market share gains as I/O speeds and overall stack bandwidth for HBM continue the relentless increase as the industry progresses from HBM3 to HBM4 and then on to HBM5. Shifting now to the foundry and logic probe card market. As expected, first quarter foundry and logic demand increased significantly over the fourth quarter driven primarily by growth in probe cards for networking applications. In the current quarter, we expect continued growth in foundry and logic probe revenue, driven primarily by incremental strength in data center CPU applications, building on top of continued strong demand in networking, as well as steady demand in PC and mobile. This data center CPU probe card demand is directly linked to the newly appreciated trend of increasing CPU compute intensity in AI inference use cases. This offers a powerful example of the value of FormFactor's diversification strategy as we strive to be a leading supplier to all major customers. In this case, we benefit from having put ourselves in a position to capitalize on unexpected demand for CPU probe cards from one of our long-term major customers. As we shared last quarter, we've continued to partner closely with this customer to support turnaround initiatives in the core business as well as in their effort to become a leading foundry. In addition, Intel recently awarded us the 2026 Epic Supplier Award, recognizing our world-class commitment to continuous improvement, collaboration and performance excellence. At the same time, as in HBM, we're successfully executing our strategy to be a top supplier to all the leading customers in the industry as we continue to build the foundation for market share gains at a large fabless XPU customer. Specifically, we've now been awarded a second design, building off our successful qualification and initial design win. In addition, our production qualification in leading-edge GPU applications at the world's largest foundry is nearing completion, with preparation now underway for second-half volume shipments and production support. Finally, as an additional component of FormFactor's expanding high-performance compute exposure, we continue to grow our custom ASIC business, following a multimillion-dollar design win and deepening engagement with several hyperscalers and their ASIC design partners. Turning to our Systems segment. In the first quarter, we experienced the expected seasonal reduction in demand. In systems, our focus continues to be two-pronged: one, executing on the growth opportunity in co-packaged optics; and two, helping customers solve the challenges of building scalable and commercially viable quantum computers. Staying with Quantum for the moment, in the first quarter, we announced the Flatiron dilution refrigerator, a new benchtop millikelvin platform designed to simplify optical and electrical measurement and accelerate quantum device development, characterization and chip-scale validation. In CPO, we're building on our decade-long R&D engagement with leading customers in their development of silicon photonics and CPO and are now beginning to ramp our Triton production test system co-developed with Advantest and Tokyo Electron. This ramp is accelerating, and we now expect 2026 CPO revenues to come in at the high end of the $10 million to $20 million range we've previously communicated. This acceleration is driven by two factors: first, the growing volumes of CPO chips planned for later this year; and second, our leadership in the important test insertion which ensures known good die on the photonic integrated circuit or pick wafer. Insertion 1 is proving to be a cost-effective and production-ready solution to ensure high yields of CPO modules built with advanced packaging processes like TSMC's CoWoS. Because of cost and complexity challenges, other test insertions like insertion 2, after stacking the electrical die on the PIC, are proving to be difficult for customers to implement in production. Finally, we successfully integrated our fourth quarter acquisition of Keystone Photonics, and our teams are collaborating to define and execute the world's leading silicon photonics and co-packaged optics probing roadmap. This includes electro-optical probe cards, which offer the promise of higher parallelism and higher throughput for our customers as we bring together our technology leadership in both electrical and optical domains. Before turning the call over to Aric, I want to thank the global FormFactor team. Achieving our target model is the result of their resilience in implementing multiyear investments in technology leadership, talent, customer focus and operational execution. We're well positioned as test intensity and complexity continue to rise at the intersection of advanced packaging and high-performance compute and we're excited to share our vision for the future of FormFactor at our May 11 Investor Day. Aric? You're up.

Aric McKinnis, Chief Financial Officer

Thank you, Mike, and good afternoon. Over the past three quarters, one of our top priorities has been to increase gross margins and deliver on our commitment to our target model of 47% non-GAAP gross margins at $850 million in annual revenues. We're proud to say that in Q1 '26, we achieved this target on a run-rate basis, but we're even prouder of how we achieved it, driving what we believe are durable gross margin improvements through operational effectiveness and financial discipline. The actions we took included: first, deploying our workforce and existing manufacturing footprint more effectively, which included the restructuring actions announced in early Q1; second, driving improvement in manufacturing yields in key process areas; third, innovating to reduce manufacturing spending; and lastly, reducing cycle times in key manufacturing operations. Even as we executed on record demand, we remain focused on driving improvements in these critical areas. This is the type of discipline that we believe is fundamental to driving sustainable financial results. Thanks to the FormFactor team's focused execution, we generated additional operating leverage on sequentially higher demand levels, driving even better progress than expected and a cumulative improvement of more than 1,000 basis points in gross margins over the last three quarters. At the midpoint of our Q2 guide, we expect to generate another 50 basis points of expansion. We believe the bulk of the improvements in gross margins are durable in nature, driven by improved operational effectiveness as well as discrete changes in our cost structure. We expect these fundamental improvements will help us to profitably navigate the impact of inevitable shifts in product mix and volumes. Non-GAAP gross margins improved by 500 basis points from Q4 '25 and exceeded the midpoint of our first quarter outlook by 400 basis points. As expected, continued operational improvements and higher volumes drove an approximately 100 basis point improvement from Q4 '25 that we believe is durable in nature. The overperformance against Q1 expectations is about half related to timing items and half related to durable improvements. The timing items of about 200 basis points are primarily driven by changes in customer-driven priorities within the quarter. This element may be transitory as driven by timing. The remaining overperformance of 200 basis points was split about 50-50 between, first, faster realization of cost savings from our first quarter restructuring action and second, unexpected relief from tariffs as IEP tariffs were discontinued and replaced by lower Section 122 tariffs during the quarter. These improvements are likely durable in nature. We continue to drive the unit cost of our products down, in part enabled by increasing output from our existing infrastructure. Our exposure to fast-growing markets that Mike described is generating demand that requires more output. As reflected in our record quarterly revenue in Q4 '25, again in Q1 '26 and now in our outlook for Q2, we are manufacturing at levels that would not have been possible even one quarter earlier. Improvements in cycle times, yields and how we deploy our workforce, in addition to reducing unit costs and improving gross margins, are enabling us to get more out of each tool, process and site by ensuring more good product out and better fungibility of our workforce. Our Farmers Branch site expansion is the next key priority and the project is on track and expected to begin to come online later this year and to ramp over the course of 2027. Bringing up this capacity on time and on budget is a key focus as it will enable the next phase of growth and gross margin expansion beyond our current target model. The trajectory of gross margin improvement and attainment of our target model is now evident, but our journey is not over. While we are optimistic about our ability to continue to drive profitable growth and believe we will continue to drive incremental improvements throughout 2026, we recognize that sustaining the progress that we have made will require ongoing focus and discipline. Further, we expect future gains to be achieved at a more moderate pace as incremental improvements require both more effort and more time than the rapid progress to date. We are excited to share our longer-term view at our May 11 Investor Day. Q1 '26 revenues of $226.1 million came in $1.1 million above the midpoint of the Q1 '26 outlook range of $220 million to $230 million. GAAP gross margins for the first quarter were 38.4% and down 380 basis points from 42.2% in Q4. Cost of revenues included $23.9 million of GAAP to non-GAAP reconciling items, of which $21.5 million related to our Q1 '26 restructuring actions announced on January 5. Details of the GAAP to non-GAAP reconciling items are outlined in our press release issued today and in the reconciliation table available on the Investor Relations section of our website. On a non-GAAP basis, gross margins for the first quarter were 49%, 510 basis points higher than the 43.9% we achieved in Q4 and 250 basis points above the high end of our Q1 '26 outlook range. This increase in non-GAAP gross margins was driven primarily by improvement in the probe card segment, which was up 603 basis points to 50.5% and partially offset by the decrease in our Systems segment, which declined 350 basis points to 38% on seasonally softer demand and as we transition to production of our Triton system for co-packaged optics applications, as Mike described. Our GAAP operating expenses were $70.1 million for the first quarter, down slightly as a percent of revenue from the prior quarter and a decrease of 470 basis points from the same period in the prior year. Included in Q1 '26 operating expenses were $7.1 million of expense related to the preproduction ramp of Farmers Branch. Despite the incremental spending, the decrease as a percent of revenue demonstrates continued spending discipline across the P&L even as we drive innovation through R&D and fund the Farmers Branch expansion. GAAP net income for the first quarter was $20.4 million or $0.26 per fully diluted share, down from GAAP net income of $23.2 million or $0.29 per fully diluted share in the previous quarter. The decrease was driven by restructuring-related costs, net of tax, of $17.6 million incurred in Q1. First quarter non-GAAP net income was $44.5 million or $0.56 per fully diluted share, up from $36.6 million or $0.46 per fully diluted share in Q4. The GAAP effective tax rate for the first quarter was 2.1%, and the non-GAAP effective tax rate for the first quarter was 16.1%. Moving to the balance sheet and cash flows, we had free cash flows in the first quarter of $30.7 million compared to $34.7 million in Q4. The $4 million decrease in free cash flow was driven by greater capital expenditures and lower cash flow from operations. The decrease in cash flows from operations, which were down about $1 million from the prior quarter to $45 million in Q1, is driven primarily by higher working capital needs driven by our growth and $4.1 million in cash paid related to restructuring actions. At quarter end, cash and investments were up $28.1 million to $303 million. We continue to expect that cash CapEx for Farmers Branch will be between $140 million and $170 million in 2026. Preproduction ramp costs and G&A will be between $20 million and $25 million. Upon completion of the ramp to initial target capacity, we expect Farmers Branch to be accretive to gross margins. Associated with our investment in Farmers Branch, we secured certain incentives which we expect will partially offset these expenditures. Among others, incentives include about $24 million in cash grants designated to fund capital expenditures upon meeting certain criteria. During the first quarter, we did not repurchase any shares. At quarter end, authorization of $70.9 million remains available for future repurchases under the $75 million two-year buyback program that was approved and announced in 2025. We are committed to our share repurchase program as a tool to offset dilution from stock-based compensation over the two-year period of the program. In the short term, we have prioritized our deployment of cash to accelerate the ramp of our new manufacturing site in Farmers Branch. Turning to the second quarter non-GAAP outlook, we expect Q2 revenues of $240 million, plus or minus $5 million. This increase in revenues and the impact of continued gross margin improvement initiatives described earlier are expected to result in a higher non-GAAP gross margin of 49.5% plus or minus 150 basis points. As a reminder, we continue to see an adverse impact to gross margins from tariffs despite a recent reduction in the amount paid. We have assumed around 140 basis points of tariffs in our outlook for Q2. We have paid substantial EPA-based tariffs since they were put in place in 2025, and we expect some or all may be refundable in the future due to the Q1 '26 Supreme Court ruling. To be clear, we did not record a recovery of these amounts in Q1 and have not assumed recovery in our Q2 '26 outlook. We are actively monitoring developments in this rapidly evolving space. If the amounts we previously paid are deemed recoverable, we could receive a refund of $9 million to $11 million in tariffs previously recorded in cost of goods sold. At the midpoint of our outlook range, we expect Q2 non-GAAP operating expenses to be $65 million, plus or minus $2 million. Our Q2 non-GAAP effective tax rate is expected to be within the range of 15% to 19%. Non-GAAP earnings per fully diluted share for Q2 is expected to be $0.61 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. As demonstrated by our Q2 results and our Q2 outlook, we have now achieved our current target model. We believe we have more room to run in driving operating leverage, underpinned by our initiatives to improve our structural costs, increase capacity and expand our leadership position in the fast-growing markets that Mike described. We look forward to sharing our new target financial model and key elements of our strategy at our planned Investor Day in a little under two weeks. With that, let's open the call for questions. Operator?

Operator, Operator

And our first question comes from the line of Brian Chin from Stifel.

Brian Chin, Analyst (Stifel)

And congratulations on the really good results. First question. NVIDIA becoming a 10% customer other than the nice ring that it has to it. Can you explain why you break this out separately versus rolling up under TSMC? And also how much roughly of this is networking related? And what does that suggest or what does this suggest for your market share of the SAM for new and existing platforms?

Mike Slessor, Chief Executive Officer

Brian, it's Mike. I'll take that one. With all customers, as we report them, when they cross the 10% threshold it is required to be disclosed based on who's placed the PO and who's paying the invoice. And so in this case, you see we have two 10% customers in this quarter. And as I described on the call, the second 10% customer is associated with networking. We're still making excellent progress on the GPU qualification. As I said, we're now reaching the final stages of that and expect essentially the $20 million in revenue we've described in the second half. We're now investing and preparing the capacity and local support for that. Those POs we would expect to come from the foundry; just different business models in different parts of a fabless customer's business.

Brian Chin, Analyst (Stifel)

I'll leave CPO for the next question here. But one thing I wanted to ask you about, Mike, is that you've talked about the production ceiling that you're kind of working with until Farmers Branch comes online, good sequential growth kind of in line with the midpoint of Q1, further growth ahead of our models for Q2. I'm curious how much of your near-term growth is being driven maybe by NIC or ASP relative to just units, given the constraints you're operating on and maybe your ability to optimize within those constraints.

Mike Slessor, Chief Executive Officer

Yes, it's a great question, Brian. And it ultimately comes down to ASP versus volume. And as Aric went through in his prepared remarks, he provided a pretty clear bridge that showed the gross margin improvement up to the 49% level is really based on cost reduction in COGS. Now it's split on things that we believe are durable and things that we think are temporary. But pricing in ASP is not a major factor in that. We've always run a business where customers will definitely compensate us for value. Typically, that's been performance of our products and reductions in the cost of tests that we produce. In this case, there are some isolated incidents where customers are willing to pay expedite fees for a certain design because that offers value in this capacity-constrained environment, but pricing really is not a driver of the gross margin improvement. It's COGS reduction and our operations team continuing to improve yields and cycle times and get more out of the existing footprint. How far that can run, we'll see. But so far, they've done a fantastic job.

Operator, Operator

And our next question comes from the line of Matthew Prisco from Cantor.

Matthew Prisco, Analyst (Cantor)

So given the gross margin strength, I'd just like to dig in a little bit there. I know you listed out a few drivers, but can you perhaps just offer some more detail on how each of those drivers contributed to that 510 basis point increase quarter-over-quarter? And as we look forward over the last couple of quarters, things have improved more than expected. So how much more juice is there to squeeze with these current drivers ahead of that Farmers Branch ramp?

Aric McKinnis, Chief Financial Officer

Yes. So as mentioned in the prepared remarks, the 510 basis points, roughly 400 basis points were driven by a mix of durable and what I call transitory items. If I break those down, the durable piece is really related to faster realization of savings from our restructuring action. So we thought the expenses were going to be a little bit higher and we ended up being able to do better than that as we executed on that restructuring action. That was about 100 basis points in the quarter and those savings will persist as we move forward; they're permanent in nature. The other 100 basis points of that 400 basis points is really related to tariffs. The new tariff construct that we're operating under just has lower weighted average tariff rates, and so that's resulting in a savings for us. We do continue to pay tariffs today; it still continues to be a headwind. But as long as the current framework is in place, we expect those savings to also be durable in nature. The piece that is transitory in nature really relates to timing items both on spend and also in terms of prioritization of certain products that we were producing within the quarter. Those were decisions that were made in order and were not included in our original outlook. We think those things are temporary and will flip around as we move forward, primarily mix and cost timing items. We don't expect those to necessarily persist going forward. Now we do expect those to be replaced by durable improvements as we move forward into next quarter. So as you can see by our outlook, we are still expecting to be sequentially up — and that is because even though some of the improvement we saw in Q1 may abate, it is replaced by other improvements, and those are primarily related to the full-quarter impact of our restructuring actions and the savings associated with that. Also, volume is a factor as we move from $226 million to $240 million in revenues.

Matthew Prisco, Analyst (Cantor)

And then maybe on the foundry logic side, that business obviously coming in better than expected. Can you help give us the breakout of that business as it stands today, kind of between networking, smartphone, and all the different moving parts within it? And as you talked about kind of the AI driving the CPU demand, as we think about your ability to service that demand given the constraints on supply, are you falling short of that today? Or is there some kind of workaround where you can actually supply these incremental parts?

Mike Slessor, Chief Executive Officer

Yes, it's Mike. We don't break foundry and logic down other than qualitatively in some of these different drivers as we go sequentially forward. As we've done this quarter with the CPU demand that you talked about — the step-up in Q1 was expected, if you go back and parse our comments from the last call and around where we thought it would be. Now part of that's the answer to your second question: we are running at very, very high utilizations. If you look at the Q1 revenue results, we came in pretty close to the midpoint of the guidance, and that's a reflection of some of the constraints we have. The operations team, as you can tell from our outlook, has continued to squeeze more out of our existing footprint. That's true on the revenue side as well. One of the reasons gross margins are improving is we're producing more out of the same fixed-cost footprint by and large. There's a tremendous amount of leverage when we do that. Now we're working closely with customers; demand visibility is still a challenge in this business with lead times mostly shorter in the quarter. But this is an area where we've got a more active dialogue going with customers to make sure we're planning for whatever we can produce so we're meeting their needs in the face of surprise demand like this, the CPU and AI-driven demand.

Operator, Operator

And our next question comes from the line of Krish Sankar from TD Cowen.

Hadi Orabi, Analyst (TD Cowen)

Congrats on the great results. This is Eddie for Krish. I'd like to follow up on the same question regarding CPUs. Your main IDM customer remains a large portion of revenues and for the past two quarters, the demand outlook for CPUs has meaningfully improved. I wonder, do you expect later this year for that customer to return to more than 10%? And if we look at the revenues, they're still like 40% to 50% below their peak in 2022. I wonder how you think about the recovery profile from that customer going forward?

Mike Slessor, Chief Executive Officer

Yes. If you look, obviously, this issue of 10% customers — that customer was not a 10% customer in Q4 nor was it in Q1. With some of the CPU demand, they'll be pretty close in Q2. I don't know whether they'll make the line, but they're going to be ramping back up. Of course, the other thing that's going on is we're making the absolute revenue threshold to hit 10% larger as we grow the overall top line for FormFactor. Will it return to the 2022 highs? I don't think so just based on some of the strength in CPUs, but as they continue to execute their turnaround plan and continue to make progress in the foundry business, especially associated with their advanced packaging technology, given the strong relationship that we have with them, and the award we referenced earlier, we're certainly hopeful that we can return to and potentially exceed the peaks of 2022.

Hadi Orabi, Analyst (TD Cowen)

And a follow-up. It seems you have meaningful demand drivers from NVIDIA and from the IDM, but your revenues seem capped near that $240 million level until you ramp your facility later this year. I'm just wondering how to think about September and December revenues. Should we expect flattish from that $240 million? Or do you think there are some optimization techniques that can take us $10 million to $20 million more than that?

Aric McKinnis, Chief Financial Officer

I'll take that question. As you can see from our Q1 results and our outlook, we've been able to now execute at $226 million in Q1 and looking forward to next quarter to $240 million. If you were to back a quarter off of each of those a quarter before, we probably couldn't have produced at those levels. We've been driving real-time efficiency improvements in terms of cycle times and yields in our sites. I think that is very much real-time, increasing our output out of our existing sites. It's very closely related to these efficiency improvements that we're making. It remains to be seen how much more of that we can drive. I do believe that there is still room for improvement, and we're going to continue to strive to make those improvements as we move through the remainder of 2026. To the extent we're successful in that, we expect to be able to continue to incrementally increase our output over the coming quarters.

Operator, Operator

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

Craig Ellis, Analyst (B. Riley Securities)

Yes. Congratulations on the really strong execution guys — both on the top line and gross margin. I wanted to start just by following up on the last question. So you've done a really good job over the last couple of quarters tuning the knobs with operations to drive significantly greater capacity and we're doing that with better yields, and that's helping to give us much better gross margin. How much of what you're doing at current facilities is going to be leverageable into Farmers Branch when you ramp that up late this year and next year?

Aric McKinnis, Chief Financial Officer

Our intent is to leverage all of that work. It's really fundamentally improving how we run our manufacturing processes. Moving a portion of our manufacturing and having the benefit of new tools will only improve cycle times and yields with some of the additional capability we get from a new tool set. We intend to preserve the gains that we have made and in fact build on them as we get access to newer equipment sets and a site that is more consolidated, which will allow us greater fungibility of our resources.

Hadi Orabi, Analyst (TD Cowen)

And then the follow-up question is regarding the networking business. It's interesting to see a big contribution there and a new 10% customer. How do we think about how this most recent quarter performed relative to the trend lines that you all have been seeing and what you expect from that customer? Is there a seasonal sine wave that goes along with that demand? How do we interpret where revenues could go from here, given what you've seen in the past and what your expectations would be?

Mike Slessor, Chief Executive Officer

I'll address the seasonality part. There is going to be some seasonality in that business. You've seen it reflected in our HPM business, which feeds into that customer's overall supply chain. Historically it's been first-half heavy and second-half a little bit lighter, although some of the product releases are starting to blend together. So I would expect some seasonality. Having said that, if we look at the overall demand environment, it's pretty clear from an external perspective that the second half continues to be pretty strong. We've got more active conversations with our customers because they understand there are capacity constraints, not just for us but for our competitors as well. So I think there are other opportunities that we can take advantage of, even if there is some seasonality around the annual cadence of these high-performance compute product releases.

Hadi Orabi, Analyst (TD Cowen)

That's really helpful, Mike. If I could sneak in one more: we're seeing more low-power DDR being designed into certain AI systems going forward. It seems like that could give legs to the legacy DRAM market that the company has served — perhaps not as probe-card intensive as HBM, but at least extending the life of different formats that might have had a different trajectory. What does that mean for FormFactor? Is that right, or is that not something that can benefit the business?

Mike Slessor, Chief Executive Officer

It depends. The real details of how our customers shift their wafer start mix between HBM and DDR, primarily DDR5 but some legacy DDR4 as well, will be a dynamic situation. I referenced earlier in the call that the chairman of one of our largest customers publicly said recently that they're now getting better margins out of the DDR business than they are on the high-performance memory business. I think you're going to see all three major DRAM manufacturers optimize their mix around this in this overall bit capacity-constrained market. Remember that probe card demand is driven by new design releases and ramps of those specific designs. Each probe card is specific to a customer chip design, so there's a lot of devil in the details, but there is potential for that to fill in some of the seasonality gaps.

Operator, Operator

Our next question comes from the line of Christian Schwab from Craig Hallum. Margins out of the DDR business are lower than they are on the high-performance memory business. I think you're going to see all three major DRAM manufacturers optimize their mix around this in this overall bit-capacity-constrained market. Remember that probe card demand is driven by new design releases and ramps of those specific designs. Each probe card is specific to a customer chip design, so there's a lot of devil in the details, but there is potential for that to fill in some of the seasonality gaps.

Christian Schwab, Analyst (Craig Hallum)

Congrats on a great quarter. I just have one quick question. Can you remind me what is the target revenue capacity on a yearly basis that you're putting on in Farmers Branch?

Aric McKinnis, Chief Financial Officer

Just to remind you on the timeline, we are initially starting production at that site at the end of this year, and we intend to ramp over the course of 2027 to the initial target capacity. The approximate sizing of the initial target capacity is more or less equivalent to our existing California footprint. You can think of that as roughly 60% of our existing probe cards business today. So it's a pretty substantial capacity addition. What I think is probably more relevant is our ability to bring that capacity online modularly over time. We're going to target initial capacity and then monitor the outside environment. We're going to talk a bit more about this in our Investor Day on May 11 and should be able to provide more details around it.

Operator, Operator

Our next question comes from the line of Dennis Paton from Needham & Company.

Unknown Analyst, Analyst (Needham & Company)

So could you maybe give us an update on your data test partnership? What's the progress there and what is the time frame to monetize on that partnership?

Aric McKinnis, Chief Financial Officer

I think the partnership with Advantest is most prominent with CPO. The Triton system we codeveloped with them and Tokyo Electron. But I wouldn't characterize it too much differently than our partnerships with a variety of other suppliers in the industry. We work very closely every day with Advantest and with other partners because fundamentally we believe the test ecosystem needs to be an open ecosystem. We train our customers to rely on that for business continuity and we've all developed interface standards. I think the CPO momentum that both we and Advantest have talked about is a good example where this codevelopment together with partners in ATE and probers and other instrumentation really produces a system that's useful for solving an important customer problem. It's a great result of that partnership, and we have partnerships similar to this all over the place.

Unknown Analyst, Analyst (Needham & Company)

Great. And then another question on Farmers Branch. If I understood correctly, you expect to expand capacity and not necessarily replace most of your California capacity. When do you expect revenue to start hitting the top line from Farmers Branch? What is the first quarter that will hit and when do you think you hit full capacity in that facility?

Aric McKinnis, Chief Financial Officer

To clarify, it's not a replacement; we're expanding our available capacity. We intend for that ramp to happen over the course of 2027, so a pretty fast ramp timeline with the first initial capacity coming on at the very end of this year. So there won't be much impact to this year; the ramp and more visible revenue contribution will be primarily in 2027.

Operator, Operator

Our next question comes from the line of David Duley from Steelhead Securities.

David Duley, Analyst (Steelhead Securities)

First, you mentioned your codeveloped tool, the Triton, and insertion number one. Will insertion one be the vast majority of your TAM opportunity in CPO? Can you explain where you think most of your TAM and revenue would come from in CPO as this insertion is being addressed? And what is your total expectation for CPO revenue perhaps in 2027?

Mike Slessor, Chief Executive Officer

David, we're in the very early innings of CPO. This is the initial production ramp and we are focused on insertion one for a couple of reasons. One, it represents the foundational optical probing technology that's going to be needed in any of the insertions. If you think about any of the insertions, you have to be able to optically probe the device. Insertion one is essentially exclusively focused on that. There's a little bit of electrical probing there, but it's really the optical probing step. We're going to be able to port that technology across all the other insertions. I do expect, and I think most industry participants expect, the spending between different insertions to move around as a function of yield and product mix from our customers. We have active conversations on all of these different sections with various partners and customers; we've chosen the initial ramp to really focus on insertion one, and that's turned out to be a good bet as you can tell from us raising our outlook for 2026. The longer-term revenue opportunity with CPO we'll discuss in more detail at Investor Day where we'll lay out why we're differentiated, the different insertions and the longer-term opportunities in the context of the next target model we're going to share.

David Duley, Analyst (Steelhead Securities)

Just a follow-up on insertion one: that's where you're basically optically proving the PIC or the optical part, which is really important because you're going to team that up with an electronic part later on. Once you package it together, if the PIC doesn't work that can be a key failure point. So you feel like this is the most important step for you to address?

Mike Slessor, Chief Executive Officer

Again, it goes back to where we've focused our R&D resources and the momentum we're seeing. Imagine a scenario where customers achieve very high yields on the PIC wafer; that's not the typical case today and as the new technology ramps, there will be a yield learning curve. That's one reason we're continuing to pay attention to all the other insertions. Any insertion is going to require optical probing — so if you get it right at insertion one, you've addressed one of the toughest parts of the problem for other insertions as well.

David Duley, Analyst (Steelhead Securities)

Okay. Final thing for me: you mentioned most of your growth in HPM probe card revenue in Q2 is coming from a second customer adopting Smart Matrix technology. Could you elaborate a little more on that and what the opportunity is?

Mike Slessor, Chief Executive Officer

What I said was for Q2 we expect HBM to grow to another record and this largely comes from a second customer increasing their adoption of our Smart Matrix technology for at-speed stacked die test. This has been one of the staples of our HBM differentiation and we're now seeing more significant adoption from the second customer in addition to our primary driver customer. We see this as central to our differentiation in the HBM space.

Operator, Operator

And our next question comes from the line of Elizabeth Sun from Citi.

Unknown Analyst, Analyst (Citi)

Congrats on the results. First, a follow-up on the HPM question earlier: you talked about the second customer increasing adoption in Q2. Are you seeing or expecting to gain share with the third HPM customer as well going forward?

Mike Slessor, Chief Executive Officer

Elizabeth, in the long term consistent with our articulated strategy, we want to be a leading supplier to all customers in the industry. That's our objective. Clearly, there is prioritization and choices going on given production volume and how stretched R&D resources are. Longer term, yes, we expect to be a leading supplier to all three DRAM manufacturers for these at-speed DRAM tests. I think there's a nice validation in Q2 as we see growth in HBM; from the first half of 2025 to the first half of 2026, by the midpoint of our guide, we've grown our HBM probe card business by more than 50%. That's a strong example of increasing test intensity and complexity.

Unknown Analyst, Analyst (Citi)

And on the CPO side, other than insertion one, are you still working with the similar group of partners or are you working with other partners as well like Teradyne or other probers and test providers?

Mike Slessor, Chief Executive Officer

We are very focused on insertion one because it's the foundational opportunity we must execute on. But we operate in an open ecosystem. A partner like Teradyne can work with us to make sure we have a compelling solution for some of the other insertions and we'll engage in that discussion. There are details of resourcing and relationships to be figured out, but the fundamental principle is that a cooperative, open ecosystem is critical for the industry to take on these significant technology challenges.

Operator, Operator

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mike Slessor for any further remarks.

Mike Slessor, Chief Executive Officer

Thank you very much for joining us today. We're really excited to share the future of FormFactor now that we've achieved our target financial model, and to share the next target model. We'll lay out the fundamental operating principles, development initiatives and growth areas that underpin that next target model for FormFactor. Hope to see you on May 11, either live in New York or via the webcast. Until then, take care.

Operator, Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.