FormFactor - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $171.4M, down 9.6% q/q but up 1.6% y/y; GAAP gross margin was 37.7% and non-GAAP gross margin 39.2%. Non-GAAP diluted EPS was $0.23 at the high end of the outlook range.
• Results beat Wall Street consensus: revenue $171.4M vs $170.0M* and non-GAAP EPS $0.23 vs $0.19*, both above midpoints; FCF was $6.3M as higher CapEx weighed on cash conversion.
• Q2 2025 guidance calls for double-digit sequential growth: revenue $190M ±$5M, non-GAAP GM ~40% ±150 bps, and non-GAAP EPS $0.30 ±$0.04; management noted a mid-single-digit million revenue headwind and ~1ppt GM impact from tariffs.
• Strategic moves underpin long-term positioning: acquisition of a 20% minority stake in FICT (advanced probe card components), Taiwan service center capacity expansion, and EVOLVITY 300 system launch; Board authorized a new $75M share repurchase.

What Went Well and What Went Wrong

What Went Well

• Probe Cards resilience in Foundry & Logic: Q1 Foundry & Logic revenue grew to $85M (+$2M q/q), lifting mix to ~49.8% of company revenue, supporting gross margin relative to the midpoint of guidance.
• HBM trajectory intact with diversification: continuing shipments for HBM3E, increasing HBM4 sampling, and a growing contribution from a second HBM customer to support expected DRAM probe-card rebound in Q2.
• Systems margin mix improvement: Systems gross margin rose to ~44.5% (from 40.8% in Q4) on favorable product mix and lower manufacturing spend, with CPO demand set to ramp from lab to pilot production.

What Went Wrong

• DRAM weakness (non-HBM) and China export controls: DRAM revenues fell to $48.9M (−$14.4M q/q), with export restrictions limiting shipments of advanced node DRAM probe cards to China.
• Tariffs created quantifiable headwinds: management baked in a mid-single-digit million revenue reduction and a ~1ppt non-GAAP gross margin impact in Q2 due to import costs and customer tariffs, adding uncertainty to operating plans.
• Free cash flow compression: Q1 FCF was $6.3M (vs $28.8M in Q4) driven by lower operating cash flow and higher CapEx ($18.6M vs $7.7M in Q4), while total cash and investments declined on the FICT investment.

Transcript

Operator (participant)

Welcome, everyone, to FormFactor's First Quarter 2025 Earnings Conference Call. On today's call are Chief Executive Officer Mike Slessor and Chief Financial Officer Shai Shahar. Before we begin, Stan Finkelstein, the company's Vice President of Investor Relations, will remind you of some important information.

Stan Finkelstein (Head of Investor Relations)

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 the projections of financial and business performance, future macroeconomic and geopolitical conditions, the benefits of acquisitions and investments, anticipated industry trends, potential disruptions in our supply chain, the impacts of regulatory changes, including tariffs and changes in export controls, the recent U.S.-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 December 28, 2024, 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, April 30, 2025, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor CEO Mike Slessor.

Mike Slessor (CEO)

Thanks, everyone, for joining us. As expected, FormFactor reported sequentially lower first-quarter revenue and profitability due to anticipated reductions in demand for both DRAM probe cards and systems. In the current second quarter, we expect to deliver double-digit sequential revenue growth with increases across all our major served markets and segments and corresponding increases in gross margin and earnings per share. This anticipated second-quarter revenue growth is driven primarily by Hyperscaler's continued investments in generative AI, which is producing increased demand for high-bandwidth memory DRAM probe cards and co-packaged optics test systems, paired with moderate growth in foundry and logic probe cards for new chip designs in important high-unit volume end markets, specifically PCs and mobile handsets. We see no indication that these second-quarter demand increases are driven by tariff-related acceleration of orders.

If anything, our sequential growth outlook is tempered by the uncertainty created by the current tariff situation, and Shai will provide estimates of both revenue and gross margin reductions from specific tariffs. As a reminder, we manufacture approximately 80% of our revenue in the United States and therefore face a direct cost impact from tariffs on goods we import from non-U.S. suppliers. In addition, when we ship our products to countries such as China that have tariffs applied to goods that originate in the U.S., our U.S.-manufactured products now bear a higher cost for our customers. This is causing some customers to work with us to reevaluate their supply chains and cross-border logistics processes. We're taking a wait-and-see approach as we evaluate various tariff scenarios before committing to any significant changes to our manufacturing footprint and supply chain.

The notable exception is China, where recent tariff increases on top of escalating U.S. export controls have driven a continued reduction in our revenue from that region. This further validates our proactive decision in 2023 to divest our China operations and to focus on other opportunities and regions. Now let's turn to market and segment-level details. In DRAM probe cards, we experienced the expected first-quarter reduction in revenue from the record level of the fourth quarter. This was due primarily to lower non-HBM demand caused by further tightening of export controls, which limited our ability to ship probe cards for advanced DRAM designs to China. In the current second quarter, we expect DRAM probe card revenue to return to record levels, with sequential growth in HBM applications layered on top of steady demand in DDR5 and LPDDR5 applications.

The strength in our HBM probe card demand is driven by three factors. One, continued shipments of probe cards for existing HBM3E designs running in high volume. Two, increasing shipments for new HBM4 designs, which, as you've heard recently from our customers, are being sampled and are expected to begin ramping in volume in the second half of 2025. Three, a growing contribution from a second HBM probe card customer as we further diversify and grow our leadership position in HBM applications. HBM still comprises a small but growing portion of the total DRAM bits produced by our customers. However, because of their stacked die architecture with 8, 12, or even 16 individual DRAM die, HBM represents a much larger portion of the total silicon area and wafers produced.

Further, because HBM has increased test intensity, which expands the number of probe cards required per good die out, and higher test complexity, which raises the performance requirements of each probe card, HBM represents a significant part of overall test and probe card spending by DRAM customers. A recent third-party estimate placed HBM probe card intensity at almost 1%. That is, customers are spending nearly 1% of their HBM revenues on probe cards, a probe card intensity double that of the broader semiconductor industry. We believe these increases in test intensity and test complexity will continue to produce both market share and profitability gains for FormFactor as HBM and advanced packaging continue to grow, driven by the accelerating adoption of generative AI. Shifting to the foundry and logic probe card market, consistent with our outlook, first-quarter demand in this market was essentially comparable to the fourth quarter.

In the current second quarter, we're forecasting stronger foundry and logic demand driven by typical seasonal ramps of major mobile application processor designs and a family of client microprocessor designs. As with HBM and DRAM, advanced packaging continues to drive both higher test intensity and test complexity in the foundry and logic market, with a variety of new and challenging technical requirements for testing high-performance compute chips. Along with FormFactor's proprietary MEMS probes and high-throughput automated assembly robots, a key enabling component for advanced foundry and logic probe cards is complex multi-layer organic substrates. In the first quarter, together with MBK Partners, we completed the acquisition of FICT Limited, the world's leading supplier of these multi-layer organic substrates.

This acquisition solidifies FormFactor's access to this important enabling technology and does so in a more capital-efficient, lower-risk, and faster way than either an outright acquisition or internal development, a path some of our competitors have chosen to pursue. Returning to tariffs for a moment, as I mentioned earlier, we have no specific indications that this sequentially stronger foundry and logic outlook is due to tariff-related pull-ins. In fact, since probe cards have short lead times and are a device-specific consumable specific to each individual customer chip design, it is unlikely that customers would run the risk of having excess probe card inventory across numerous chip designs only to mitigate a potential future tariff. Turning to our system segment, the reduced first-quarter revenue was consistent with our outlook, and we now expect moderate sequential growth in the current quarter.

System growth is driven by our customers' rapid innovation in areas like quantum computing and high-performance compute, with development programs that require leading-edge measurement systems like our CM300 lab probers and IQ3000 cryogenic probers. Co-package optics, or CPO, using silicon photonics is one of the key drivers of the expected second quarter and longer-term growth in the systems business. Several of our customers have recently announced the insertion of CPO into their product roadmaps to take advantage of its compelling power and speed advantages in data center applications. Our multi-year collaboration with these customers has produced FormFactor systems, software, and optical probes that rapidly and accurately test the photonic IC, or PIC, chips that are the heart of the co-packaged optics engine. This, in turn, has strengthened our leadership position in the silicon photonics lab space, where we have an installed base of over 100 systems worldwide.

We're now extending that leadership to the production arena, and in the second quarter, plan to ship multiple systems to a single customer to support pilot production of the world's first high-volume co-packaged optics photonic integrated circuit. Although market estimates vary widely at this early stage of production and adoption, we expect CPO to be a significant midterm growth driver for FormFactor systems and probe card businesses. In closing, we continue to strengthen FormFactor's industry and competitive position, both through development of innovative and differentiated products and through partnerships with leaders like FICT, even as we deal with tariff headwinds. These internal and external initiatives are especially important and exciting as we meet the challenges of increased test intensity and higher test complexity associated with the adoption of advanced packaging in applications like high-bandwidth memory and co-packaged optics.

Successful execution of these and other initiatives will allow us to achieve and then surpass our target model that delivers $2 of non-GAAP earnings per share on $850 million of revenue. Shai, over to you.

Shai Shahar (CFO)

Thank you, Mike, and good afternoon. As you saw in our press release, Q1 revenues were $171.4 million, $1.4 million above the midpoint of our outlook range, and non-GAAP gross margin of 39.2% was near the high end of the range. This, together with OpEx slightly lower than the midpoint of the outlook, resulted in a non-GAAP EPS of $0.23 at the high end of the outlook range. First-quarter revenues decreased 9.6% from the fourth quarter and increased 1.6% year over year from our Q1 2024 revenues. Probe card segment revenues were $136.5 million in the first quarter, a decrease of $13.8 million, or 9.2%, from the fourth quarter. The decrease was driven by lower DRAM and flash revenues, partially offset by higher foundry and logic revenues.

System segment revenues were $34.8 million in Q1, a $4.4 million decrease from the fourth quarter, and comprised 20.3% of total company revenues, down from 20.7% in the fourth quarter. Within the probe card segment, Q1 foundry and logic revenues were $85 million, a $2 million, or 2.4%, increase from the fourth quarter. Foundry and logic revenues increased to 49.8% of total company revenues compared to 44% in the fourth quarter. DRAM revenues were $48.9 million in Q1, $14.4 million, or 22.8%, lower than the record fourth quarter, and decreased to 28.5% of total quarterly revenues as compared to 33.4% in the fourth quarter. Within DRAM, HBM revenues decreased $3 million from $32 million in Q4 to $29 million in the first quarter.

Flash revenues of $2.4 million in Q1 were down $1.3 million from the fourth quarter and were 1.4% of total revenues in Q1 as compared to 1.9% in Q4. GAAP gross margin for the first quarter was 37.7% as compared to 38.8% in Q4. Cost of revenues included $2.6 million of GAAP to non-GAAP representing 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 39.2%, one percentage point lower than the 40.2% non-GAAP gross margin in Q4, and 1.2 percentage points above the midpoint of our outlook range. The decrease as compared to Q4 is driven by lower non-GAAP gross margins in the probe card segment.

The increase as compared to the midpoint of our outlook range is attributable mostly to a more favorable product mix. Our probe card segment gross margin was 37.8% in the first quarter, a decrease of 2.2 percentage points compared to 40% in Q4. The decrease from Q4 is mainly a result of decreasing revenues. Our Q1 system segment gross margin was 44.5%, an increase of 3.7 percentage points compared to 40.8% gross margin in the fourth quarter. The increase from Q4, despite the decreasing revenues, was mainly a result of a more favorable product mix and lower manufacturing spend. Our GAAP operating expenses were $61.3 million for the first quarter as compared to $66 million in the fourth quarter. Non-GAAP operating expenses for the first quarter were $50.2 million, or 29.3% of revenues, as compared with $55.2 million, or 29.1% of revenues in Q4.

The $5 million decrease relates mainly to lower performance-based compensation and facility expenses, partially offset by higher costs from annual benefits reset at the beginning of the year. Company non-cash expenses for the first quarter included $9.8 million for stock-based compensation, $0.7 million for the amortization of acquisition-related intangibles, and depreciation of $8.2 million, all similar to the fourth quarter. GAAP operating income was $3.3 million for Q1 as compared to the GAAP operating income of $7.9 million in Q4. Non-GAAP operating income for the first quarter was $16.9 million, compared with $20.9 million in the fourth quarter, a decrease of $4 million, or 19.2%. This reduction in operating income is due to lower revenues combined with lower gross margins, partially offset by the decrease in operating expenses.

GAAP net income for the first quarter was $6.4 million, or $0.08 per fully diluted share, compared with a GAAP net income of $9.7 million, or $0.12 per fully diluted share in the previous quarter. The non-GAAP effective tax rate for the first quarter was 14.7%, similar to the fourth quarter, and at the low end of the previously communicated range for the year of 14%-18%. First quarter non-GAAP net income was $18 million, or $0.23 per fully diluted share, down from $21.3 million, or $0.27 per fully diluted share in Q4. Moving to the balance sheet and cash flow. We generated free cash flow of $6.3 million in the first quarter compared to $28.8 million in Q4.

The main reasons for the decrease were operating cash flows that were $12.4 million lower than in Q4, primarily driven by lower profitability and greater outflows for working capital of $8.2 million, and CapEx that was $10.9 million higher than in Q4. We invested $18.6 million in capital expenditures during the first quarter compared to $7.7 million in Q4. We continue to expect CapEx of $35-$45 million in 2025, and as Mike mentioned, we are evaluating our capital investment plans in light of the evolving geopolitical and tariff environment. At quarter end, total cash and investments were $302 million, a decrease of $64 million from Q4.

The main reasons for the decrease were the $67 million paid for the investment in FICT, partially offset by free cash flows of $6.3 million, and cash received from the issuance of common stock in the amount of $21.6 million, including the $15 million received from issuance of 335,000 shares to Advantest. At the end of the first quarter, we had one term loan with a balance totaling $13 million. Regarding stock buyback, during the first quarter, we used $22.1 million to repurchase shares, utilizing the remaining funds under the existing buyback program. We fully utilized this two-year plan approximately seven months ahead of its expiration date, and our board of directors has approved a new two-year $75 million share repurchase program. The main purpose of our share repurchase program continues to be offset dilution from stock risk compensation.

Turning to the second quarter non-GAAP outlook, we expect a significant increase in revenues in Q2 to $190 million, plus or minus $5 million, with an increase in all major markets we serve, most notably in HBM, DRAM, and foundry and logic. This increase in revenues is expected to result in a higher non-GAAP gross margin of 40%, plus or minus 150 basis points. At the midpoint of these outlook ranges, we expect Q2 operating expenses to be $52 million, plus or minus $2 million, approximately $2 million higher than in Q1, mainly due to higher performance-based compensation. Non-GAAP earnings for fully diluted share for Q2 is expected to be $0.30, plus or minus $0.04. This Q2 outlook includes an estimated mid-single-digit million-dollar reduction in revenues and a 1 percentage point reduction in gross margins due to the impact of tariffs.

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?

Operator (participant)

Certainly. Ladies and gentlemen, we ask that you please limit yourself to one question and one follow-up. If you'd like to get into the queue, simply press star one one on your telephone. If you'd like to remove yourself from the queue, simply press star one one again. Our first question for today comes from the line of Charles Shi from Needham & Company. Your question, please.

Charles Shi (Analyst)

Hey, good afternoon. Mike and Shai, thanks for taking my questions. I think I want to start with the tariffs since it's very topical. Shai, if I hear you correctly, I think you are not just assuming some reduction in the gross margin because of tariff impact, but did I hear you that you are also baking in some revenue reduction because of tariffs? If that's the case, can you walk us through how you come up with the quantification you just provided? Thank you.

Shai Shahar (CFO)

Of course, yes. I do confirm that what I said in the prepared remarks is that we estimate mid-single-digit million-dollar reduction in revenues. It comes to how we come up with this number. It is obviously a very dynamic and uncertain situation. The estimated, and I think estimated is a key word here, the estimated mid-single million-dollar reduction across the overall revenue outlook is not tied to specific customers. A good example would be China, where most of the estimated reduction relates to multinational customers operating outside of the free trade zone and are subject to the current tariffs. We are working closely with our customers and actually with our vendors as well on different scenarios on a case-by-case basis.

As we said in the prepared remarks, we are taking, at least for now, a wait-and-see approach as we evaluate various tariff scenarios before we commit to any significant changes to our manufacturing footprint or supply chain.

Charles Shi (Analyst)

Got it. Thanks. The other part, definitely both Shai, both you and Mike talked about margin impact because there are input, manufacturing input actually coming outside of the U.S., while your manufacturing is very, very concentrated in the U.S. I wonder, can you provide a little bit more color or give us some examples? What are some input materials you are seeing today, maybe subject to tariffs and give us some sense because we know that there's a 90-day pause as well, right? I mean, excluding China, should we expect to see more of the gross margin reduction after the 90 days? That's a second part of this question. Thank you.

Shai Shahar (CFO)

Right. On the COGS side, as most of our manufacturing is in the U.S., about 80%, as Mike mentioned, import of supplies, things like subcomponents that we import from Japan and from Germany, these will be subject to the import tariffs. That is why we estimated the impact on the gross margin in Q2 to be a negative 1 percentage point. I think going forward, as we said, it is wait and see. It is a dynamic and uncertain situation, and we monitor it closely.

Charles Shi (Analyst)

All right. Thank you so much. I think I'll limit myself to two questions. Thank you.

Operator (participant)

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

Craig Ellis (Analyst)

Yeah. Thanks for taking the question and congratulations on the business's growth sequentially, Mike. I wanted to start by just talking about some of the key customer dynamics. Your former number one customer, now number two, popped back up to 12% of sales in the quarter. Can you help us understand, given their commentary around product mix moving back to N minus one and N minus two, but with them pushing on 18A and even running some wafers on 14A, what's happening with that customer and how confident you are in what is, in the first quarter at least, a bit of an uptick in their business?

Mike Slessor (CEO)

Yep. A good question, Craig. As you noted, this customer did return to our 10% customer list in the first quarter after not being there in the fourth quarter for the first time in a very, very long time. I think a couple of things. First of all, we do see increased activity in the client PC space as they ramp a new set of designs, really to try and regain their competitive position in one of their most important markets. I think thematically, even as they go through a very significant turnaround, one of their stated objectives is to regain process and product leadership in their served markets. To do that, they're going to have to invest, right? Investing in leading-edge capital equipment, leading-edge test equipment, and leading-edge consumables like those provided by FormFactor, I think has got to be a key part of that.

We are, if you sort of read between the lines of our commentary on the increase in Q2, expecting some continued strong activity there coming off what was a nice recovery in Q1. More broadly, I think, though, if you look at where we've taken the company over the last several years, one of the key drivers for our business now is HBM and the investments in generative AI, things like co-package optics. I think that represents a pretty significant transformation away from the very high indexing and concentration we had to client PC in the past. It's all part of the diversification strategy that we've been running for the past close to a decade.

I think indicative, again, we're going to compete as hard as we can for the client PC business across multiple customers, but we've also kind of transformed our revenue drivers to make sure we're exposed to trends like generative AI and HBM and CPO.

Craig Ellis (Analyst)

That's helpful. The follow-up question is more on the DRAM business. It seems quite notable that despite the BIS restrictions on China and what that did, the revenues sequentially were back at records in the second quarter. Can you help us understand what the mix would be between HBM and non-HBM revenue in Q2 that you factored into guidance? As we think about the trend line for DRAM, intermediate term, it seems like the magnitude of growth might mean that your now number one customer could approach 30% of sales in Q2 or, if not, soon thereafter. Can you just talk about how we think about the path to low to mid 40% gross margins given how high DRAM mix is indexing? Thank you.

Mike Slessor (CEO)

Yeah. I'll talk to the customer dynamic and then pass it over to Shai for the gross margin analysis. If you listen closely to the comments we made prior on this call, really all the growth in DRAM is coming from HBM. We see the non-HBM, so DDR5, low-power DDR5, a little bit of residual DDR4, continuing to be pretty steady but flat at around $20 million a quarter, which historically for FormFactor is a cyclical low for the commodity DRAM business. Really all the sequential growth Q1 to Q2 that we're projecting is due to HBM growth. I enumerate a couple of factors for that. One is continued strength in HBM3. Second is an acceleration of HBM4 that I think you've heard from all of our customers quite recently and their customers as well.

Us continuing to round out our customer profile and revenue contributions. We have revenue contributions from all three HBM manufacturers, but we're beginning to see at least our second HBM customer start to drive a more significant contribution. Shai, do you want to discuss gross margin?

Shai Shahar (CFO)

Of course. First, I would like to emphasize that we are committed to the target model, including the 47% gross margin at $850 million of annual revenue runway. However, we are currently delivering revenues with a very different mix than when we put our target model in place. There are a few things that we are doing now. We are working on together with the things that need to happen in the market for us to achieve the target model gross margin. When it comes to revenue, we need the overall end markets to recover since we need a higher volume to achieve our model. We are also targeting a higher market share in the higher margin foundry and logic market. On improving the cost side, we are developing a lower-cost DRAM architecture as an example.

We also have a few internal initiatives like OPS organization consolidation that we did last year, things like lean manufacturing automation, all target gross margin improvements. All of this together will get us to the target model gross margin of 47%. Actually, if you go back a year ago, and I know that it seems like a long time now, but in the second quarter of 2024, with revenues of approximately $200 million, gross margin was higher than 45%. That was a good validation point for us on our ability to make progress towards the target model.

Craig Ellis (Analyst)

Thank you, guys.

Mike Slessor (CEO)

Thank you.

Operator (participant)

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

Tom Diffely (Managing Director)

Yes. Good afternoon. Thank you for taking my questions. Mike, curious, when you look at the second half of the year and we look at the high bandwidth memory growth, can you prioritize or rank the continuation of high bandwidth memory 3 versus the growth coming from moving to 4 versus the growth coming from a new customer there?

Mike Slessor (CEO)

Yeah. As we move through 2025, and I'll preface this with the comment that even in normal times, our visibility in this business is very limited. Remember, we have lead times well within a quarter. We're operating with short lead times and limited visibility even in normal times. These are decidedly not normal times. What I would say about the mix of HBM3, which is primarily 3E at this point for us, transitioning to HBM4, we expect that crossover to happen sometime probably late in the second half of 2025 based on the different elements that we're seeing from customer forecasts, customer qualifications, and our conversations with our key customers.

I do think based on what we see in terms of volume and market positions of our customers in HBM, we would continue to see a pretty strong contribution from the leader in HBM, even as the transition goes from 3E to 4. They seem to have a pretty strong position as HBM4 begins to be sampled. We are also excited about adding significant revenue contributions from a second HBM customer. Of course, we have got smaller but significant revenue contributions from the third major manufacturer as well. I would say the real driver is going to be continued 3E volumes and with a transition and a crossover to 4 sometime late in the year.

Tom Diffely (Managing Director)

Is there a revenue or margin difference between 3 and 4 for you?

Mike Slessor (CEO)

I wouldn't say a significant one. HBM generally has better margins than standard commodity DRAM because of the increased test complexity, things like higher speeds. There is a move to higher speed going from 3E to 4 that may drive a bit of an uplift, but I wouldn't consider it to be something that pushes HBM probe cards up into the foundry and logic margin space, for example.

Tom Diffely (Managing Director)

Okay. As a follow-up, Shai, when you look at revenues in the first quarter, and if, say, they were at the $212 level, would you have hit your $2 of earnings, or do you need a different mix or more cost reduction programs to get there?

Shai Shahar (CFO)

Yeah. It's similar to my answer that I gave to Craig a few minutes ago, right? Even at higher volumes, we need better mix, and there are still internal programs we are still working on to get this improvement.

Tom Diffely (Managing Director)

Great. Thank you.

Mike Slessor (CEO)

Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Krish Sankar from TD Cowen. Your question, please.

Eddy Orabi (Equity Analyst)

Hey, guys. This is Eddy for Krish. Maybe just a clarification about the tariffs. Correct me if I'm wrong. You mentioned one point, margin impact on the cost side for Q2. How should we think about the worst-case scenario for September margin impact from the tariffs, just assuming things don't change into September?

Shai Shahar (CFO)

I think it's too early to say that, right? This is a very dynamic and uncertain situation. You can try to extrapolate that 1% into the future, but at this point, I think it's wait and see before making speculations.

Eddy Orabi (Equity Analyst)

Okay. Noted. The question on the HBM side, I mean, one of your main customers, they're opening up a big fab, and it will be operational later this year. I wonder, historically, when these customers open up new fabs, do you see an increase in HBM probe card demand, or is it really unrelated because customers can move their components from one fab to the other?

Mike Slessor (CEO)

I think where a new fab is related to additional output and additional capacity, that will drive new probe card demand. If it's replacement capacity, and if it's the situation I'm thinking about, it's not replacement capacity, it's additional capacity, that drives incremental demand for probe cards because the existing fabs are still running the old designs, still utilizing those probe cards. Now, one of the key factors in this is timing. Typically, it takes a few quarters for a new fab to become operational and ramp, and that's a best case. That's with some of the most operationally aggressive and efficient customers in the world. Just because a new fab opens its doors and starts taking delivery of equipment, it's usually two to three quarters before you see significant probe card demand associated with the wafers being output from that fab.

Eddy Orabi (Equity Analyst)

Okay. Thank you, Mike.

Mike Slessor (CEO)

All right. Thanks, Eddy.

Operator (participant)

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

Christian Schwab (Senior Research Analyst)

Great. Thanks for taking my questions. I know it's very early and visibility is limited, but is customer dialogue as it relates to your foundry and logic business, assuming that we do see an uptake in demand for PCs in the second half, given the end of life of Windows 10? No one talks about it anymore with all the tariff discussion. Would we expect foundry and logic to return to a $100 million-plus type of revenue in the back half of the year? Is that fair?

Mike Slessor (CEO)

I think if you factor everything together, on the last call, I reminded you that we did say we expected 2025 to be a growth year, and some of that was going to have to be driven by mid-year, second half foundry and logic growth through some of these large consumer markets. I think the whole tariff and geopolitical situation has obviously thrown at least a shadow of doubt on top of that. I think if you take that aside and assume there's going to be some sort of rational outcome to what's going on with tariffs right now and that the consumer continues to spend and there is this PC refresh cycle, I think your assumption is very, very valid.

There's just a lot of ifs in that scenario as we look right now at some of the headwinds, mostly due to tariffs and U.S. trade policy and a variety of reactions to U.S. trade policy as we operate in this business.

Shai Shahar (CFO)

Right. Great.

Christian Schwab (Senior Research Analyst)

Thank you. My second question, given the recent investment with Advantest, is there any update on anything on working together or thinking about markets together that make you more positive about the future, short, medium, or long term?

Mike Slessor (CEO)

Yeah. I think the Advantest investment in FormFactor, and to be completely transparent, was simultaneous with some investment in one of our competitors. This is really a statement of at least Advantest's commitment to the open ecosystem, where any probe card, at least any leading probe card, works with any tester. Teradyne, the other major ATE manufacturer, although they have not made an investment in it, there's very close collaboration with them as well. I think as we move forward here, part of the things that have us optimistic about the growth of the business, things like advanced packaging and the adoption in both places like HBM, but also in the GPU space, is driving a tremendous increase in complexity and a need for all of us as collaborators in building test systems to work closely together to make sure we're meeting this accelerated high-performance compute roadmap.

I think it's a rational response that we're all working closely together, collaborating closely, and making sure that our R&D teams are very well aligned and interlocked in what we have to deliver to support each other's roadmaps. I think the exciting part of it is when you lead in businesses like this and the technical complexity and speed is getting higher, the speed of innovation is getting higher, that really does create a significant competitive advantage and barriers for anybody else to enter.

Christian Schwab (Senior Research Analyst)

Great. No other questions. Congrats on a good quarter, and Good.

Mike Slessor (CEO)

Thanks, Christian.

Shai Shahar (CFO)

Thank you.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, if you do have a question at this time, please press the star one one on your telephone. Our next question comes from the line of David Duley from Steelhead Securities. Your question, please.

David Duley (Managing Principal)

Yes. Good afternoon. Thanks for taking my questions. I was wondering, as far as the major GPU manufacturer, I think they've started to use advanced probe cards. Where are we on the qualification with that customer? You keep mentioning co-package optics. I'm wondering, is that the insertion point for you guys with this customer, or is that a separate kind of opportunity? Thanks.

Mike Slessor (CEO)

Yeah. David, that customer has multiple opportunities, both current and future for us. We've updated people in the past that we have a strong position in their switch business. The co-package optics opportunity has largely been in the lab space, but as we devoted some significant time on this call to updating you, we see this transitioning very rapidly into the production space. If you go look at what these customers have said, what this customer in particular has said about CPO, co-package optics, insertion in the roadmap, I think it's pretty easy to connect those dots. On advanced probe cards for GPUs, we're addressing that opportunity through a qualification primarily at their foundry, and that qualification is going well. We've got cards there that are being evaluated. We think we've got a compelling technical solution. This is a new technology, a new product for us.

We've got a compelling technical solution to go compete for that business, and I hope we'll be able to update you positively in the second half of the year. We already have a pretty significant relationship with that customer in both the switch and co-package optics space and are now making some progress and pushing into the core GPU space.

David Duley (Managing Principal)

It is kind of a three-headed opportunity there?

Mike Slessor (CEO)

Yep. Yep. As with many of these customers, the opportunities are multifaceted. These are big companies with broad product lines. It goes to the fundamental strategy that FormFactor has driven of trying to lead in these related markets where we have fundamental technology competencies and product competencies and can offer a broad suite of products to help these customers with their test and measurement needs.

David Duley (Managing Principal)

Okay. One of the major OSATs reported last night and has talked about making a huge investment in test and I think talked about similar to the things that you've talked about, higher intensity for both probe and test. They went out of their way to highlight how they think there's going to be more test insertions. I'm just kind of wondering, and this is involving advanced packages, both GPUs and high bandwidth memory. I'm just kind of wondering, from your perspective, you've talked about an intensity level for these advanced packages. I think it's 25%-35% higher. Would you expect that percentage to get higher going forward? If there were more test insertions, would that equate to more probe cards sold? Thanks.

Mike Slessor (CEO)

Yeah. Yeah. Certainly, there's a good linkage or correlation between the number of test insertions and probe cards sold. I'll take you back to the HBM example because it's one I think that most people have a pretty good understanding of. As you're building an HBM product, it's a stack of 8, 12, even 16 die compared to a commodity DRAM that's a single die. Each one of those 16 die that's stacked up needs to be tested. You've got, in theory, 16 times the test insertions that you otherwise would have. Now, there's offsets to that, right? There's not the bit count in each, and therefore the test time in each of the stacked DRAM. It gives you an indication of the increase in test intensity driven by this die disaggregation or chiplet architecture.

Each of the chiplets or die going into these advanced packaging stacks, whether it be HBM, whether it be GPUs, whether it be client processors, they all need to be very close to known good. Otherwise, you end up with a scenario where a single die can essentially cause a scrap event for all the other die in the stack. There is no question it is driving increased test intensity.

David Duley (Managing Principal)

Thank you.

Mike Slessor (CEO)

Yep.

Operator (participant)

Thank you. Our next question is a follow-up from the line of Craig Ellis from B. Riley Securities. Your question, please.

Craig Ellis (Analyst)

Hey, thanks for taking the follow-up question. Mike, I wanted to go back to some of the commentary you've had on CPO and its benefiting the systems business now. You indicated it has the potential to benefit the probe card business. I don't recall your mentioning that before. The question is relative to an application that's very probe card intensive, like the HBM examples you just provided to David, and others that are much less probe card intensive, whether it's more of the commodity DRAM, other memory types, etc. Where do you expect CPO to fall out, and how broad is your engagement in CPO? Thank you.

Mike Slessor (CEO)

Yeah. Yeah. Let me start with the second question first. I mean, our engagement in CPO, we run the same strategy there or have run the same strategy there that we've run across most of our businesses, where we partner very closely with a handful of customers and make sure that we're serving their needs, and then we fan out to the rest of the industry. We see that broadening right now. I think it's fair to say we're a recognized leader in the lab space in silicon photonics and co-package optics. That's now extending to this early production.

If we go back to the impact on probe cards, we have brought it up a couple of times before, but we're early enough in the production ramp and optimization of this where the different test insertions and the requirements for those test insertions are still really being optimized between us and our customers. I think there'll definitely be an electrical component and an optical component. One of the reasons why we're so excited about CPO is that it brings these two things together where we have fundamental expertise and a leadership position in the lab space as well as in the production space with production probe cards. The fusing of electrical and optical test is something where we think there's a big opportunity in front of us.

A little hard to size and estimate right now in these early days, but I think you can stitch together sort of the fundamental strengths of FormFactor with the customer needs they're going to have as they try and ramp these devices.

Craig Ellis (Analyst)

That's helpful. Thanks, Mike.

Mike Slessor (CEO)

Thanks, Craig.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, if you do have a question at this time, please press star one one. Our next question comes from the line of Brian Chin from Stifel. Your question, please.

Brian Chin (Analyst)

Hi. Good afternoon. Thanks for letting us ask a few questions. I do not foresee this, Mike, being a multi-year trend, but Intel is seeing a surprising resurgence in shipments of an older platform in Raptor Lake. If there is a higher concentration of mono CPUs versus sort of chiplet CPUs built for PCs this year, does that have a little bit of a dampening effect on the company's maybe revenue potential or trajectory this year?

Mike Slessor (CEO)

Let me address it maybe more generally. An older design like that, it would be my expectation that any customer would have already bought all the probe cards they need to test that device. Probe card spending is usually very, very intensive in the early part of a ramp when yields are low and die outputs are peaking. My anticipation or estimation in a situation like that would be a customer probably pulls the probe cards they need off the shelf to test those older devices. There may be a little bit of follow-on, but you can see from that dynamic, if there was a giant mix shift away from new designs in the leading edge back towards ones where customers are reusing the tooling and probe cards, that would have a significant impact on our business and the overall probe card spend.

Brian Chin (Analyst)

Okay. No, that's helpful. Maybe just shifting to memory, just firstly, and I apologize if I missed sort of this couching of it, but within sort of the evolution of your product mix from 3E and then towards 4 and maybe in the latter part of the year, it's still your expectation that HBM revenue is up year to year? Secondly, kind of more under what you can control and maybe for Shai, are you still on track to ship and sample some of those more cost-competitive non-HBM DDR5 probe cards this year? How's that sort of adoption and potential going for next year?

Mike Slessor (CEO)

Yeah. I think we do expect on the current trajectory HBM to grow year on year. I think consistent with our customers' expectations for their HBM growth and the transition to new designs like HBM4 and higher stacks of HBM3E. We do expect it to grow. I'll continue on with the new DRAM architecture. We shared with you last time that we're developing and releasing a new lower-cost DRAM architecture for the non-HBM commodity market, and we've shipped, I'll call it pilot volumes, to our beta customer associated with that, and that program's going well.

Brian Chin (Analyst)

Okay. Great. Thanks, Mike.

Operator (participant)

Thank you. Our next question comes from the line of David Silver from CL King & Associates. Your question, please.

David Silver (Managing Director)

Yeah. Hi. Thank you. I had a question maybe about your systems sales. Mike, in the past, you've talked about how, on the one hand, you say you have very low visibility for the timing of near-term orders, I guess, but the system sales do kind of tell a different tale, I guess, looking out a little bit further beyond that. I guess from a lab-to-fab perspective. What do the demand for your systems products right now tell you, both, I guess, in quantity, but also maybe the types of machines that seem to be most in demand?

Mike Slessor (CEO)

Yeah. In our comments on visibility, there's varying degrees of visibility, right? Because a lot of our products, certainly for probe cards, are highly customized and specific to an individual customer chip design. A set of probe cards only works for a single chip design. The visibility associated with that essentially tracks our customer's prediction of what wafers they're going to start when. Typically, that foreshadowing, that forecasting is not very good. When we think about longer-term visibility as to perhaps not volumes associated with individual designs, but broader trends in the industry, which is what I think you're kind of alluding to in the systems business, the visibility gets quite a bit better.

Now, that doesn't mean we know shifting to the systems business that we're going to ship 20 systems or 10 systems associated with co-package optics, but we know we're going to ship some systems associated with co-package optics because we've been working very closely with these driver customers, and we understand their ramp timing. The quantities and therefore the business volume that drives fundamental production visibility for us is the part that continues to be pretty elusive, and I would expect it to stay elusive in an environment where the industry continues to innovate extremely rapidly and go through very, very, very quick ramps of new products.

David Silver (Managing Director)

Okay. Great. I apologize in advance. Unfortunately, I was dropped off the call for a little bit, so I apologize if I'm making you repeat yourself. In your prepared remarks, you did talk about the FICT relationship and the effects of tariffs potentially on the products that you purchase there. Could you just remind me or tell me, does FICT have any alternate production points, or are they solely based in Japan as far as the tariff relationships go? Is there any flexibility from utilizing assets or production sites in other geographies? Thank you.

Mike Slessor (CEO)

Yeah. I think I'll answer that question a little bit differently. Shai's commentary on some of the gross margin pressure associated with imports from Japan is much more general than just FICT. We have a lot of suppliers arrayed worldwide, and although there's been a 90-day pause on the big headline tariffs, if you followed closely, you know there were some small incremental ones that were put in place. That's behind the one-point gross margin headwind that we talked about in our Q2 outlook. I'd say the more exciting thing about the FICT partnership and the closing is the access it gives us to a pretty unique technology. Their manufacturing footprint is in Japan, but a very specialized technology that years ago was spun out of Fujitsu, and we're very happy to be partnered with MBK Partners as a shareholder.

I'm a board member at FICT and a closer coupling now between FormFactor and FICT. I disassociate that a little bit from tariffs. We were talking more broadly about supplies we import from Japan, which go far beyond the business with FICT.

David Silver (Managing Director)

Sure. Okay. Great. Thank you very much.

Mike Slessor (CEO)

Thanks. Thanks, David.

Operator (participant)

Thank you. 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 (CEO)

Thanks, everybody. Over the next month to six weeks or so, we've got several conference appearances where we hope to be able to continue to update you on the business. Hopefully, we'll have more clarity on tariffs and how we're responding. We hope to see you then. If we don't see you then, we'll see you when we announce second quarter results. Take care.

Operator (participant)

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