FormFactor, Inc. (FORM) Earnings Call Transcript

Thank you and welcome, everyone, to FormFactor's Third 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 VP of Investor Relations, will remind you of some important information.

Thank you. Today's a company will be discussing the 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, including the ramp-up of manufacturing facilities, anticipated industry trends, potential disruptions in our supply chain the impacts of regulatory changes, including tariffs and changes in export controls, the anticipated volatility in 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 27, 2025, and in our other SEC filings, which are available on the SEC's website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, October 28, 2026, and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Thanks for joining us today. During the third quarter, FormFactor again grew revenue, gross margin and earnings per share, with each metric exceeding the high end of our outlook range. These results continue a theme you've seen from us for the past year, namely broad-based growth and demand from our diversified leadership position at the intersection of high-performance compute and advanced packaging and our ability to serve this demand by producing more output from our existing manufacturing footprint. On a year-over-year basis, we grew quarterly revenue close to 40% within essentially the same manufacturing footprint. Our fourth quarter outlook extends this trend. Although we are now reaching the limits of our ability to extract more output from our existing manufacturing footprint, we're also bringing our new Farmers Branch factory online. We recently qualified the assembly and test portion of this new facility and only a few days ago, shipped the first production unit to a leading customer. We celebrated these milestones last week, together with almost 200 customers, suppliers, partners, employees and government officials at a ribbon-cutting event that formally launched or nearly 300,000 square foot facility. Over the course of 2027, our top priority is the ramp-up of Farmers Branch. We'll ramp as quickly as we can while ensuring we both sustain the efficiency improvements we've demonstrated in the last year and maintain the market-leading product quality, it is one of FormFactor's foundational competitive advantages. Aric will provide more details on the status and plans for Farmers Branch later in the call. Earlier this month, we announced the expansion of our long-standing partnership with Teradyne, one of the world's leading automated test equipment, or ATE, suppliers. Together with our multiyear partnership with Advantest, this announcement formalizes the collaboration and partnership between FormFactor and both market-leading ATE suppliers. The goal of these collaborations is to speed up the development, validation and high-volume production of next-generation semiconductor applications, enabling high-performance compute, like high-bandwidth memory and co-package optics. These partnerships also reinforce and solidify the open ecosystem market structure that provides our mutual customers with full probe card ATE interoperability, enabling customers to select the optimum probe card and ATE combination for their specific chip architectures and designs. Turning now to segment and market details. Foundry and logic was one of the key drivers of our third quarter growth, increasing 10% sequentially on the expected broad-based strength across multiple applications. We expect continued demand growth and breadth in the current fourth quarter. In this market, we're building on our established positions in PCs, mobile, data center CPUs and networking, while adding new growth vectors like GPUs and hyperscaler custom ASICs. Specifically, during the third quarter, we shipped probe cards to the world's leading foundry for a single GPU design in multimillion dollar volumes. Building on this successful qualification and initial ramp, we're well positioned to meaningfully grow share in this important part of the foundry and logic market in 2027, with Farmers Branch providing the required capacity. Looking ahead in foundry and logic, accelerating trends of higher-speed interfaces, greater power density and increasingly complex advanced packaging chiplet architectures for next-generation GPUs and custom ASICs or increasing probe card performance requirements. These higher performance requirements make FormFactor's advanced MEMS probe technology, a requirement for cost-effective production test, and we're building the foundation to achieve share gains in 2027 across a diverse set of GPU and custom ASIC designs. Our exposure to multiple customers and applications provides us with several ways to participate in the growth of high-performance compute and shows the benefits of our diversification strategy, reducing reliance on any single customer program or architecture to drive our revenue and growth. Turning to DRAM probe cards. Third quarter revenue was as expected, essentially unchanged from the record levels of the second quarter, but the mix shifted significantly. This mix shift was also expected with APM revenue declining and DDR5 revenue increasing as our customers move our wafer start mix to more DDR designs to capture the profit opportunity provided by significant DDR market price increases. Since probe cards are specific to each customer chip design, our DRAM probe card mix tracks these dynamic customer product shifts, and we expect these quarter-to-quarter shifts between DDR and HBM to continue so long as the current bit constrained DRAM market conditions persist. Another important point related to this mix shift is that at the same time, we achieved record DRAM probe card revenues with a DDR5-heavy and HBM-light product mix, we delivered record gross margin performance. Compared to the form factor of years past, this is evidence of a very different profitability profile, demonstrating the impact of the successful execution of several DRAM probe card manufacturing cost reduction programs. The net result is improved DRAM probe card gross margins, which has turned less in the dependence of our company-level gross margins on product mix. Turning now to our Systems segment. Systems delivered a record quarter, growing 20% sequentially on accelerating demand for our Triton system for co-packaged optics or CPO applications. This accelerating demand has been evident in the steady increase in our expectations for this business in 2026. We started the year expecting between $10 million and $20 million of Triton revenue and now expect upwards of $30 million in 2026. In tandem with the growing CPO business, we're also serving demand for additional photonics applications, such as CPO's close cousin near-packaged optics or NPO as well as pluggable devices. This beyond CPO application coverage is the result of our intentional focus on developing the world's leading optical probing technologies applicable across a wide range of photonics applications. In this case, we've prioritized building leadership in test insertion 1, which ensures known good die or KGD, of the photonic integrated circuit or PIC. Both CPO and NPO architectures require KGD PICs before they are combined with the electronic ICs to form the optical module and scale-up and scale-out network switches. As a result, form factor benefits from broader photonics adoption, whether it be CPO or NPO. Part of our leadership position in Photonics probing stems from the acquisition of Keystone Photonics a year ago. As we've discussed, Keystone's innovative and differentiated optical probe technology enables high-efficiency optical coupling to our customers' photonic devices in much the same way our advanced MEMS probes provide best-in-class electrical connectivity to our customers' chips. To maximize our competitive advantage from this acquisition, we've made the decision to more tightly integrate the Keystone team and technologies into FormFactor, with an exclusive focus on enhancing FormFactor's development and delivery of the world's leading photonics probing solutions. We believe the exciting growth in CPO, NPO and pluggables represents the very early stages of widespread adoption of photonics in the broader semiconductor industry. Traditional copper interconnect is reaching physical limits in speed, heat and energy consumption and Photonics provides a fundamentally more efficient way to transmit data within and between data centers using light instead of electricity. FormFactor is ideally positioned to help lead test for this new area as our lab to fab strategy has produced a decade-long first-mover advantage paired with key customer and partner relationships. Before turning the call over to Aric, I want to once again thank the global FormFactor team for continuing to demonstrate remarkable agility and perseverance in navigating the current challenging supply environment. quickly resolving internal and external constraints to again grow in the third quarter. With our recent qualifications and Farmers Branch coming online, we're well positioned to accelerate our growth as test intensity and complexity continue to rise at the intersection of high-performance compute and advanced packaging. The midpoint of our fourth quarter outlook puts us on track to exceed $1 billion of revenue in 2026, and we're excited to cross this important milestone for FormFactor on the way to the $1.6 billion revenue level and $5 of non-GAAP earnings per share of our target model. Aric, you're up.

Thank you, Mike, and good afternoon. Q3 was another strong quarter for FormFactor. We delivered non-GAAP gross margin of 56.5% and non-GAAP earnings per diluted share of $1.04 on our fourth consecutive quarter of record revenues, revenue levels close to 40% higher than the same quarter a year ago. These results continue the operating story we discussed last quarter, addressing broad-based demand by driving higher output from our existing manufacturing footprint through improved cycle times, yields and operating efficiency. Revenue increased 9% sequentially, while non-GAAP operating expenses fell by approximately 250 basis points as a percentage of revenue. Combined with record revenue, these improvements produced strong operating leverage across the P&L. Non-GAAP gross margin increased 320 basis points sequentially to 56.5%. Approximately $10.5 million or about 380 basis points of benefit resulted primarily from tariff refunds and favorable subcomponent costs in our Quantum business that are not expected to recur. Excluding these items, non-GAAP gross margins would have been between 52.5% and 58%, about 150 basis points above the baseline described last quarter. This durable improvement in baseline non-GAAP gross margins is the result of continued improvements in labor performance, manufacturing spending, yields and other production costs. We now view around 53% as the gross margin baseline at Q3 volumes. Over the course of the Farmers Branch ramp in 2027, we expect leverage from higher volumes and increased operational efficiency to effectively offset the temporary inefficiencies typically associated with new factory ramps. Accordingly, we expect 2027 gross margins to continue at levels similar to the current baseline. Stepping through our results in a bit more detail. Q3 revenues of $280.5 million came in $10.5 million, above the midpoint of our Q3 outlook range of $260 million to $280 million and were up $22.3 million or 9% from Q2. Systems segment revenues grew on higher Triton photonic system revenues, reaching a new record of $59.5 million in Q3, up $11 million or 23% from Q2. GAAP gross margin for the third quarter was 54.7%, up from 50.7% in Q2. Cost of revenues included $5.1 million of GAAP to non-GAAP reconciling items, primarily related to stock-based compensation, amortization of intangibles and restructuring charges. Details of the GAAP to non-GAAP reconciling items are outlined in our press release issued today and in the reconciliation table available Relations section of our website. On a non-GAAP basis, third quarter gross margin was 56.5%, 320 basis points higher than Q2 and 100 basis points above the high end of our outlook range. The favorable impact of tariff refunds on gross margins in the third quarter was about 300 basis points or $8.6 million. In Q4, we expect to receive back the remaining roughly $2 million of tariffs paid under IEEPA or around 70 basis points at the midpoint of the outlook range. Once these refunds are received, we do not expect any ongoing benefit to baseline gross margins from tariff refund. Probe card gross margin increased by about 90 basis points to 55.3% as higher utilization, improved yields, manufacturing spending discipline and tariff benefits more than offset the less favorable mix in DRAM. Systems gross margin increased by more than 10 percentage points to 61%. About half of the Systems gross margin improvement from Q2 was driven by record revenue volumes that created significant operating leverage on fixed costs, primarily due to increased sales of our Triton photonic systems. The remaining improvement came from items we don't expect to recur as described earlier. Our GAAP operating expenses were $71.8 million for the third quarter, down from Q2 and down as a percentage of revenue. On a non-GAAP basis, operating expenses were $64.4 million or 23% of revenue and also down from the second quarter at $65.7 million or 25.4% of revenue. This approximately 250 basis point sequential improvement in non-GAAP operating expenses demonstrates continued operating leverage despite including increased Farmers Branch ramp costs. Included in Q3 operating expenses were $6.4 million of preproduction ramp costs. We expect these expenses to transition to the cost of revenues as capacity expansion phases are released to production. GAAP net income for the third quarter was $73.8 million or $0.93 per fully diluted share, up from GAAP net income of $56.2 million or $0.71 per fully diluted share in the previous quarter. The increase was driven primarily by higher revenue, higher gross margin and lower restructuring-related costs. Third quarter non-GAAP net income was $82.3 million or $1.04 per fully diluted share, up from $65 million or $0.82 per fully diluted share in Q2. About $0.09 of EPS was attributable to tariff refunds in the third quarter. The GAAP effective tax rate for the third quarter was 15.5% and the non-GAAP effective tax rate for the third quarter was 17.6%. Moving to the balance sheet and cash flows. We delivered free cash flow in the third quarter of $64.8 million compared to $52.6 million in Q2. This increase in free cash flow was driven primarily by higher cash flows from operations, partially offset by higher cash spent on CapEx for Farmers Branch. Cash flows from operations were $104.3 million in Q3, up $42.5 million from Q2, and driven primarily by higher net income, partially offset by working capital investments to support the higher operating levels. At quarter end, cash -- total cash and investments were up $50 million to $399 million. Our capital allocation framework remains unchanged. Cash will be used to reinvest in the business, pursue targeted acquisitions to expand our served markets and to execute share repurchases with the objective of offsetting dilution from stock-based compensation. During the third quarter, we did not repurchase any shares. And at quarter end, $70.9 million remained available under the $75 million repurchase program authorized in April 2025. As Mike mentioned at the beginning of the current fourth quarter, we announced a collaboration with Teradyne. This included a $300 million investment in FormFactor in order to formalize our partnership and reinforce the open ecosystem for probe card and ATE solutions. The areas of partnership closely align with the growth areas in our target model and are intended to accelerate development of solutions for our mutual customers. This investment strengthens our balance sheet, but does not change our capital allocation priorities. With respect to investing in the business, the Farmers Branch ramp to initial target capacity remains on track, if not slightly ahead of our original schedule due primarily to optimization of timing of capital spending and favorable payment terms. We now expect 2026 cash capital expenditures for Farmers Branch to be between $100 million and $110 million, below our prior estimate of $140 million to $170 million. Importantly, this simply reflects changes in timing of cash rather than a change in scope or velocity of the ramp, as project commitments and total project costs associated with the initial target capacity remained aligned with our original plan. We expect the associated cash spending to shift into 2027 as we continue executing the ramp and the expansion of the site. And we expect capital investment in Farmers Branch to remain at similar levels in the next year. Exiting 2027, we expect Farmers Branch will have the capability to produce about $400 million in annual probe card revenue, and we expect that capability to ramp over the course of 2027. Preproduction ramp costs are currently recorded as a component of G&A, and we continue to expect $25 million to $30 million of Farmers Branch preproduction expense in 2026. As we begin production, costs will move from operating expenses into cost of revenues. We expect to see this begin in Q4 with about $5 million of start-up costs planned to move from OpEx to cost of revenues in the quarter and another $5 million remaining in OpEx, the latter related to capacity expansion phases not yet released to production. Turning to the fourth quarter non-GAAP outlook. We expect revenue of approximately $285 million, plus or minus $10 million. At the midpoint, we expect non-GAAP gross margin of 54%, plus or minus 150 basis points. The expected Q4 non-GAAP gross margins are better than the baseline gross margin of 53% described earlier, primarily on tariff refunds, better mix and higher volumes. At the midpoint, we expect Q4 non-GAAP operating expense of approximately $69 million, plus or minus $2 million, including Farmers Branch ramp costs. Our Q4 non-GAAP effective tax rate is expected to be within the range of 15% to 19%. Non-GAAP earnings per fully diluted share for Q4 are expected to be $0.95 plus or minus $0.09. A reconciliation of our GAAP to non-GAAP Q4 outlook is available on the Investor Relations section of the website and in our press release issued today. Q3's results and our Q4 outlook demonstrate the operating leverage available when strong demand is combined with an efficient cost structure and disciplined spending. We are continuing to produce more from our existing footprint through better cycle times, higher yields and improved resource efficiency, even while investing in Farmers Branch to create the capacity and structural economics required for the next phase of growth. Our position at the intersection of high-performance compute in advanced packaging provides broad exposure across the AI compute architecture from HBM paired with advanced GPUs, CPUs and custom ASICs to emerging co-packaged optics and other photonics applications. As we have demonstrated, the underlying operating model is substantially stronger than it was 1.5 years ago and positions us well to deliver against our target model of $1.6 billion in revenues at 55% gross margins and $5 of EPS. With that, let's open the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of Krish Sankar of TD Cowen.

I told them Michael, Aric. First one, I think, Mike, you mentioned that alteration gross margin similar to the current baseline, which is 53%. I'm just wondering, I understand your Farmers Branch ramping up. Are there any other headwinds to think about? Or why would it margins get better as volumes ramp next year?

Yes. Thanks for your question, Krish. I'll take this one. This is Aric. So we stated that we expect that current operating levels that our baseline gross margins are now at 53% and that's up from the 51% to 51.5% we discussed last quarter. Of course, with any ramp of a production facility, you're going to have some inefficiencies, and that's associated with head count additions and other spending that's required to support the ramp as you're ramping up capacity. What we expect to be able to do and one of the planned potential successes of our strategy is that we expect to be able to effectively offset that investment with associated increase in volume as well as efficiencies similar to the ones that we've been driving over the last 1.5 years. So while you would typically see a degradation in gross margins as a result of a ramp, we think we can largely offset those potential inefficiencies that are temporary in nature and sustain the current operating levels.

Got it. And then a quick follow-up for Mike, I think you had like pretty good traction in the past on HBM. Just kind of a two-part question on it. One is how do you think about like all these chatter of HBM destacking, how would that impact you? And the part 2 version of that is, if we do more -- lower the signal requirements of the pin speed requirements for HBM, how would it impact probe card intensity?

Yes. So as you said, Krish, 2 parts to that, that HBM continues to be a major driver for our business, both here through 2026 and into 2027. On the destack, we're really not seeing any significant impact. to orient everybody, we do see third quarter HBM revenue down, but that's primarily a result of customers shifting mix. And with the HBM4E and HBM5 design funnel we have and the forecast we have from customers, we expect continued strong growth I'll remind people that one of the places where we're really strongly differentiated is in the final stack test. And of course, this HBM destack involves more completed stacks with fewer die at each stack. We're moving from for example, 12 high to 8 high. And so this potentially hard to account for all the moving parts, but we don't see any significant headwinds associated with HBM growth associated with the destack. On the speed question, if you look at the road map, the move from HBM4 to, as I said, we're working right now on initial design for 4E and 5, that continues to be an advancing road map with higher speeds. And that's also been a place where FormFactor provides strong differentiation for our customers. high-speed test performance. So they're guaranteeing to their customers, they're meeting their test specs with high productivity and high parallels from our smart matrix DRAM architecture.

Our next question comes from the line of Craig Ellis of B. Riley.

Mike, I wanted to follow up on some of the comments around foundry logic given the strength we saw in the business. First, can you go into a little bit more detail on some of the things that we're driving the sequential growth in the quarter. And I think you indicated that you expected the business to grow again in the fourth quarter. Is it similar drivers? Is it new drivers and as you commented, can you help us understand the degree to which a traditional x86 server strength is benefiting the business in light of the fact that Micron was out there less than a month ago, talking about high teens growth this year and next.

Yes. So foundry and logic, as you know, up in Q3, right around 10%. And as I said in my prepared remarks, we expect foundry and logic to grow again in Q4. One of the key features of this growth -- key drivers of this growth is CPUs for presumably a genetic AI use cases, right? This has been an interesting development in 2026. And this is an example where we have really strong exposure, right, both through historical long-term customer relationship where we have high native share that customer, almost a 10% customer in Q3 based on this data center CPU strength, and we would expect them probably to appear as a 10% customer in Q4, but also exposure with x86 fabless and ARM CPU features. So as that business continues to grow, nice exposure, it is one of the key drivers for foundry and logic right now.

That's really helpful. And then the follow-up is on the systems business. You've been real clear this year we should expect strength in Triton. It seems like it's coming in even stronger than we expected 6 months ago, maybe even 3 months ago, as you talk to customers, what are they signaling about the durability of the strength we're seeing today as we look through the fourth quarter of this year and into 2027?

Yes. Triton and Photonics has been one of the real highlights for us in 2026. So it's been a set of investments we've been making for the better part of a decade. And as you noted, we've accelerated our expectations now to north of $30 million in Triton revenue for 2026 after starting the year at between $10 million and $20 million. Customers continue to be very bullish is still really dominated by one ecosystem, at least on the CPO side. But as I mentioned in the prepared remarks, what are the other things we're seeing is some diversification where we're seeing adoption in NPL applications and some pluggables applications as well. In pluggables, not necessarily the Triton system but a derivative technology. There's a focus area where we expect continued growth, right? Photonics is such a compelling solution for the power and energy challenges that the industry face. It's really a question of when and not if, and we're seeing the early innings of that when really take place here in '26 into '27.

Our next question comes from the line of George Brown of Deutsche Bank.

Just 2 from my side. So just firstly, on the GPUs and maybe the ASIC side, I think you said in your statements that you ship products for the GPU in this quarter. But I think most of the step-up in your sales to TSMC which is again a sort of over 10% customer. It sounds like it's mainly from Triton or the CPO stuff rather than maybe less so the GPU. So how should we think about the GPU sort of contribution in Q3 and into Q4? And also as we go into 2027 with more capacity coming online. And I guess in a similar vein, on the ASIC side, sort of are there any updates here in terms of qualifications. I know last quarter, you talked about the Google TPU likely requiring advanced MEMS at some point. So any update there as well? And then I have a second.

Okay. Let me see if I could parse, there was a lot in that question. Let's start with the GPU. We did say in the prepared remarks that we shipped probe cards for a single GPU design to the world's leading foundry in multimillion dollar quantities. And this is the very early part of us becoming a key part of those projects anyway. We're well positioned to grow that business. And start to take significant share in 2027, and that's a key feature of our growth. Similar for custom ASICs, right, where we qualified shipped multiple units but we're really constrained essentially by our ability to produce in volume. And that's why Farmers Branch, getting that ramped up, as Aric described, is the #1 priority for the company. Get ourselves very well positioned, whether it be GPUs, x86 fabless CPUs, custom ASICs, customers need our technology. This advanced MEMS technology is a key enabler for high-performance compute getting the capacity online to go deliver that top priority for the company, and we're executing really well on that as fast as we can.

Perfect. And just following on from what you said in terms of capacity. We're hearing more from your peers about accelerating capacity additions really sort of doubling down here to ramp as fast as possible. I think Advantest said this morning, they're accelerating their plans to double their capacity on the logic test equipment side and hinted at doubling against over the midterm. So just wondering how much flexibility here you guys have in terms of accelerating the ramp at Farmers Branch into '27, maybe into '28 because I think there's multiple phases you have, I think, Phase 1 to Phase 3. And obviously, the injection from cash from Teradyne, I wonder if that helps, I guess, is my question.

Yes. I think, as Mike shared, this is our #1 priority. As a company right now is making sure that we bring up the capacity at Farmers Branch as fast as possible, but within the context of making sure we preserve our quality and we do it the right way. I provided an expectation of where we think we'd be able to exit 2027 at about $400 million of capability, that's framed on a variety of potential scenarios and that's one that we think balances the risks with our execution ability. We feel really good about the team that we have working on this. It's a team that has done this before. They've demonstrated their ability to deliver over the past 1.5 years on the cost improvements that we've been working on. So we feel really good about where we're at. Maybe the additional point I'll add here is that Farmers Branch is really a platform for us to build on going forward. And so by definition, it is flexible. That's one of the basic tenets around that side is we want to make sure that we can add capacity in a modular fashion as we move forward and as the demand environment dictates. In the ramp phase, there's -- we've got plenty to do over the next 12 months. So I think it's a good balanced view of what we put out there in terms of our potential exit in the year and then moving beyond that in the coming years.

Our next question comes from the line of Matt Prisco of Cantor.

I guess to start off, just a follow-up on Farmers Branch there. How should we think about the linearity of that ramp throughout 2027? And do you expect to have the demand to fill that fab completely as it kind of ramps to that $400 million annual run rate capability exiting '27?

Yes. I think -- so I'll just reiterate, we expect to be able to exit the year at this $400 million annual run rate capability. That's a capability exit, not necessarily the revenue, the revenue is going to be dictated by the timing of demand as you state. Now the current demand environment is clearly very strong. So I think our are thinking right now is that capacity is the limiting factor, and that is why it's the #1 company priority that we're focused on.

And then that linearity through the year, should we expect that to be even...

Yes, sorry. And then, yes, I think -- I think the linearity is it's a fair assumption to assume it roughly linear. Now there could be puts and takes as things kind of shift around in the schedule, but I think a mental model, that's a fair way to think about it, starting at something close to 0 and ramping up over the course of 2027 to the $400 million worth of annual capacity.