FormFactor Inc

NASDAQ:FORM

Earnings Call Transcript 2018-Q4

[Operator]

Thank you, and welcome, everyone, to FormFactor’s Fourth Quarter 2018 Earnings Conference Call. On today’s call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Shai Shahar.

Before we begin, Jason Cohen, the company’s General Counsel will remind you of some important information.

[Jason Cohen, General Counsel]

Thank you. Today, the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company’s financials. Reconciliations of GAAP to non-GAAP measures and other 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 conditions; foreign exchange rates; business momentum; business seasonality; the anticipated demand for products; customer requirements; our future ability to produce and sell products; the development of future products and technologies; 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 2017 and 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, February 6, 2019, and we assume no obligation to update them.

With that, we will now turn the call over to FormFactor’s CEO, Mike Slessor.

[Mike Slessor, Chief Executive Officer]

Thank you, Jason, and thanks everyone for joining us today. In the first quarter of 2018 FormFactor delivered its strongest financial performance of the year exceeding the high end of our revenue and non-GAAP earnings per share outlook. The primary driver of this performance was robust demand in both Foundry and Logic probe cards and engineering systems along with some customer pull-ins from 2019. As is evident from our first quarter outlook, we continue to experience relatively stable demand given the general industry backdrop.

Before we get into current details, I’d like to share two takeaways from FormFactor’s 2018 performance. First, we offset more than half the $40 million revenue reduction from our largest customers, no transition delay by capitalizing on our broad and diverse opportunity set, especially in advanced packaging. Second, when we compare the back half of 2018 to the front half, we grew revenue by nearly double digits even while broader semiconductor capital equipment demand shrink. As we described in the past, probe cards are a consumable that is specific to each new IC design. As a result, our underlying demand drivers are less cyclical than capital equipment because we benefit both from no transitions and the release of new designs on existing mature nodes.

And especially clear example, the demand generated by new designs on existing nodes comes from the trajectory of our largest customer in 2018. As they released new designs on their mature 14-nanometer node to compensate for the early 2018 delay and their 10-nanometer transition. In the second half, this business returned to $100 million plus annual run rate. With all major customers innovating on existing nodes and capacity, the design specific consumable nature of our products is significant and we are continuing to experience solid new design flow in the beginning of 2019.

We also continued during the fourth quarter to make progress on our long-term growth and diversification strategy. One of our strategy’s key principles is to invest in close partnerships with the industry leaders to ensure we are serving the industry’s most challenging and relevant electrical test and measurement requirements. As you can see from the supplemental slides posted on our website, we had three 10% customers in the fourth quarter, namely the world’s leading logic manufacturer, the world’s foremost foundry and the world’s top memory manufacturer. Engagement with customers like these strengthens our technology and market leadership positions, enabling us to serve new applications like advanced packaging that drive both revenue growth and competitive differentiation.

Finally, on the diversification front, even in a quarter where a memory probe card revenues declined by 20% as expected, we grew overall revenues by capitalizing on our other opportunities. In this first quarter of 2019, we are executing on a demand profile similar to the last quarter, albeit at a slightly reduced overall levels consistent with general industry conditions. Continued relative strength in Foundry and Logic probe cards and engineering systems is helping offset weaker DRAM and Flash probe card demand.

Along with the rest of the industry, our visibility is very limited at present. However, we expect these general trends to continue through the balance of the quarter. In more detail, our Foundry and Logic probe card business is being driven by multiple components of demand. First, our largest customer continues to release and ramp designs on the mature 14-nanometer node, while beginning activity consistent with the timeline required for this year’s expected 10-nanometer transition. At the world leading foundry, we continue to gain share and grow by supporting their 7-nanometer ramp primarily for a mobile application processor utilizing integrated fan-out advanced packaging.

This relationship is also broadening to other mobile and non-mobile designs. Given the well understood softness in mobile handset demand we are placing a very high priority on this beyond mobile components and diversification. But even with the current softness in handset driven component demand the level of engineering activity for 5G RF innovation among our key customers, is at all time high levels. Setting us up nicely for 2020 and beyond growth in mobile and RF as 5G handsets begin to roll out in volume.

In memory consistent with recent reports from both our customers and other suppliers in the memory space. We do not expect significant acceleration in the first half of 2019. In DRAM, a continued string of 1Y node development and 1X node design release activity is producing relatively stable demand comparable to that in the fourth quarter.

In Flash, we continue to be opportunistic in serving the high end of a 3D NAND space, winning designs where the densities and test speeds require FormFactor’s advanced MEMS probe card technologies. As we navigate through the present memory down cycle, we are encouraged by the demand for our design specific consumable products to support customer design, innovation and product refreshes and are investing in our product roadmap to solidify our competitive advantage. A good example is this roadmap leadership is the award of Excellence in Technology Innovation, we recently received from SK Hynix.

Our engineering systems business continues to perform well, providing strong financial contribution as well as engagement with a wide range of customers in early R&D applications. At present, we are helping enable development of 5 and 3-nanometers CMOS, next-generation memories, millimeter wave RF for 5G communications, VCSELs, MicroLED displays, silicon photonics and power semiconductors.

Our new SUMMIT200 has received strong customer and market acceptance and we expect to transition the majority of our 200-millimeter shipments to this platform in 2019, as customers realize the benefits of automation to dramatically reduce their time to collect vast amounts of preproduction data for device characterization and yield improvement.

Before I hand the call to Shai, for further details on our fourth quarter results and first quarter outlook, I’d like to discuss an additional item. As Shai will explain in detail, in the fourth quarter we recorded $76 million of valuation allowance released on our deferred tax assets as a GAAP only benefit.

In our future non-GAAP results, we will include the resulting deferred task expenses to maintain a simple approach that is clearly aligned with SEC guidance. This will reduce the non-GAAP earnings per share in our outlook and target financial model. Of course, this does not impact our cash tax rate, as we continue to consume our U.S., based NOLs nor does it change our commitment to achieving all fundamental operating components of our target financial model.

Capitalizing on long-term market growth cared with share gains from our line of sight opportunities in advanced packaging, mobile data and automotive applications to grow the top line to $650 million and deliver $110 million of free cash flow.

Shai over to you.

[Shai Shahar, Chief Financial Officer]

Thank you, Mike, and good afternoon. As you saw from our press release and heard from Mike’s comments, our fourth quarter of results exceeded our revenue and EPS outlook. These results are another proof point of the benefits of successfully executing the diversification elements of our strategy.

FormFactor’s revenue for the fourth quarter of 2018 were $140.9 million, a 4.4% sequential increase and a 6.8% increase over the fourth quarter of 2017. Fiscal 2018 revenue totaled $529.7 million, a 3.4% decrease compared to 2017.

Probe card segment revenues of $116.2 million in the fourth quarter increased $4.5 million or 4.1% from Q3. Systems segment revenues of $24.7 million in Q4 increased 5.8% from $23.4 million in the third quarter. Within the probe card segment, Foundry and Logic revenue reached $76.7 million, the highest since Q3 2017, a 25% increase from $61.2 million in the third quarter and increased to 54% of total company revenue in Q4 compared to 45% in Q3.

DRAM revenues were $29.6 million in Q4, down $7.8 million to 21% of total revenue as compared to 28% in the third quarter. Flash revenues of $9.9 million were $3.1 million lower than in the third quarter, down to 7% of total revenue. And consistent with our expectations that Flash revenue will continue to be lumpy because of our opportunistic approach to this market. Approximately $5.8 million of the Flash revenues in Q4 were from NAND Flash applications.

GAAP gross margin for the fourth quarter of 2018 was $56 million or 39.8% of revenues, up 60 basis points compared to 39.2% in the third quarter. Similar to Q3, Q4 cost of revenues included $6 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issue today and in the reconciliation table available on the Investor Relations section of our website.

On a non-GAAP basis, gross margin for the fourth quarter was $62.1 million or 44.1% of revenues, up 40 basis points from 43.7% in the third quarter, and above the midpoint of our outlook range, mainly as a result of higher than expected revenue.

Our probe card segment gross margin was 42.3% in the fourth quarter, a decrease of 40 basis points compared to 42.7% in Q3. Our Q4 Systems segment gross margin was 52.4% as compared to 48.1% in the third quarter. The significant increase of 430 basis points was driven by higher revenue, favorable product mix and release of warranty reserves due to improved product quality. As mentioned in prior earning releases, we continue to expect our Systems segment gross margin percentage to be at the high-40s to low-50s range.

Our GAAP operating expenses were $44.2 million for the fourth quarter, $0.6 million higher than in the third quarter. The fourth quarter operating expenses included $7 million of GAAP to non-GAAP reconciling items, non-GAAP operating expenses for the fourth quarter were $37.2 million or 26.4% of revenues, compared to $37.5 million in Q3.

Company non-cash expenses for the fourth quarter included $7.5 million for the amortization of intangible assets, $5.4 million for stock-based compensation and depreciation of $3.8 million. Amortization of intangibles was the same as in the third quarter. And stock-based compensation was $0.9 million higher than in the third quarter, due to timing of annual stock grants.

GAAP net income for the fourth quarter was $85.1 million, or $1.13 per fully-diluted share, compared to net income of $7.7 million or $0.10 per fully-diluted share in Q3. During the fourth quarter, we met accounting criteria that required a release of $75.8 million of the valuation allowance, which was previously recorded against our U.S. deferred tax assets. We excluded these non-cash deferred tax benefit from our fourth quarter non-GAAP net income.

The non-GAAP effective rate for the fourth quarter was 5.1%. 2% lower than Q3. Fiscal 2018 non-GAAP effective rate was 6% in line with our previously communicated range of 5% to 8% for the year. Fourth quarter non-GAAP net income was $23.5 million or $0.31 per fully diluted share compared to $19.6 million or $0.26 per fully diluted share in Q3, a 20% increase quarter-over-quarter.

Moving on to the balance sheet and cash flow, we generated $15.8 million of free cash flow in the fourth quarter, compared to $13 million in Q3, as a result of higher revenues and profitability, taking our total cash to $151 million at the end of the year. We spent $8.3 million on principal and interest payments on our term loan during the quarter.

Our total cash balance exceeded the balance of our debt by $86 million at quarter end, an increase of $15 million. In line with our annual capital spending plan of $16 million to $20 million, we invested $19.9 million in capital expenditures in 2018, including $7.5 million in Q4.

Before turning to our 2019 first quarter outlook, I would like to elaborate on our future effective tax rates. With the release of the $75.8 million of valuation allowance in Q4, we will now also record non-cash deferred cash expenses in addition to the unchanged 5% to 8% current tax expenses for the next several years. This will bring our effective tax rate to a range of approximately 23% to 26% beginning in the first quarter of 2019. As Mike described, we will not be excluding the effect of the non-cash GAAP charges from the non-GAAP outlook and earnings that we communicate.

Our cash tax rate is expected to remain at 5% to 8% of pre-tax income until we fully utilize the remaining $200 million of U.S. based NOLs. This is in line with how we developed the target financial model, which you have seen. By not excluding the non-cash deferred tax from our non-GAAP tax expense, our target financial model EPS is expected to be $1.25 as compared to the $1.50 prior to the release of the valuation allowance.

The other elements of our target financial model are not affected and we continue to target $650 million of revenue, 46% gross margin, 19% of operating income, and strong annual free cash flow generation of $110 million.

Turning to the first quarter of non-GAAP outlook, we expect Q1 revenue to be in the range of $127 million to $135 million and non-GAAP gross margins to be in the range of 41% to 44%. Non-GAAP earnings per fully diluted share, assuming an effective tax rate of 25%, which includes the non-cash deferred tax expenses I described, is expected to be in the range of $0.15 to $0.21.

Our inclusion of these non-cash deferred tax expenses reduces our Q1 outlook for non-GAAP diluted EPS by approximately $0.04 at the midpoint of the outlook. A reconciliation of our GAAP to non-GAAP Q1 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]

[Operator Instructions] And our first question is from Craig Ellis from B. Riley FBR. Your line is now open.

[Craig Ellis, B. Riley FBR]

Thanks for taking the question and Mike and Shai, congratulations on good execution and a real dynamic fourth quarter. The first question, I wanted to dig into is just related to the first quarter outlook. So clear that there are some gives and takes with better Foundry and Logic and it sounds like memory a little bit lower. The question is this. As we look at the biggest part of memory, it’s DRAM, I suspect that what you’re signaling is that DRAM could move closer to the mid-20s in revenue. The real question is do you have a sense for whether that would be the crop for the quarter, or given the gives and takes out there with node transitions and other things, would you be looking for that to occur later in the year?

[Mike Slessor, Chief Executive Officer]

Yes. So, thanks, Craig. And good question. So if I refer you back to some of the prepared remarks, there are quite a few puts and takes here. Starting with DRAM, reminding you that our lead times are well within the quarter, and so we’re making some assumptions on how our mix is going to end up with stuff we still have to book and ship. But we actually see DRAM being comparable in the first quarter to the fourth quarter. You can infer from that, if memory is weaker, that Flash is a little bit weaker, obviously, then from the fourth quarter to the first quarter. And coming off an unusually strong performance in Foundry and Logic, again, with all the lead time caveats, we are expecting that to pullback a little bit off the very strong performance in Q4.

Now, moving a little bit further out – in DRAM, in particular – but, overall, I would say our visibility is very limited. We do have indications from some of our key customers and forecast reviews that the second half will be better than the first half. But, again, with our lead times less than the quarter, that’s not really enough information for us to make a firm or definitive statement on trends. We’re really happy with where we are competitively in DRAM and our other served markets, continuing to capitalize on the demand and opportunities that are there as we move forward. But as you noted, it’s a very dynamic environment from a demand perspective.

[Craig Ellis, B. Riley FBR]

The second question is really one that’s more company-specific and it relates to a couple of the comments that you had in prepared remarks. One, you had highlighted that you’re doing well with advanced packaging. It seems like we’re seeing further signs of industry adoption beyond the large Taiwanese foundry. And then, clearly, you’re seeing some good traction, diversifying the Foundry and Logic business with that leading foundry. But the question is this. As you look at the company-specific things that are developing in 2019, what are the things that are on the list of the biggest company growth drivers for the year? If we ranked the top two or three things, what are the incremental drivers for FormFactor this year?

[Mike Slessor, Chief Executive Officer]

Yes. And I think you touched on one of them that’s – the top of the list really is the continued adoption and broader adoption of advanced packaging, whether it be integrated fan-out, HBM and HBM2 in the memory space, we see increasing traction and adoption across the customer space associated with this and in many different diverse ways. Obviously, our largest customer, right before Christmas, started to talk about advanced packaging as a piece of their roadmap as well, which I think is a significant development in the industry. So for sure, I’d rank continued adoption of a place where we have strong competitive differentiation, that being in advanced packaging, in general, as the top growth driver for us this year.

As we work our way down the list, I think whether it really materializes this year or not, I think RF and mobile data driven by 5G is another one. As I noted in the prepared remarks, a lot of engineering activity. We’ve now shipped multiple units of a single design in the 5G RF space to a leading customer so that’s an indication of pilot production. Again, whether it’s a 2019 material revenue event or not, it certainly is an exciting growth driver for us as we move forward.

And then keying off the third dynamic that we’ve talked about before, automotive silicon continues to be an exciting opportunity for us. Obviously, the adoption of silicon in the automotive industry continues unabated. The automotive industry, overall, certainly going through some ups and downs, but we see the innovation and drivers for future growth there being firmly in place and an opportunity that we like a lot.

[Craig Ellis, B. Riley FBR]

That’s real helpful. Thank you. And then I’ll ask a question to Shai and then get back in the queue. With regard to the gross margin outlook, the decrease sequentially, Shai, is that primarily volume or is there a mix element there, just breakout the variation quarter-on-quarter?

[Shai Shahar, Chief Financial Officer]

It’s primarily volume for Q1, although mix always has an impact on our gross margin, actual and outlook. In this case, it’s primarily volume.

[Craig Ellis, B. Riley FBR]

Thanks, guys.

[Operator]

Thank you. Our next question is from Brian Chin from Stifel. Your line is now open.

[Brian Chin, Stifel]

Hi, good afternoon. Thanks for letting us ask a couple of questions and congratulations on the 4Q results. So first question, maybe just to go back to your foundry customer. I think this is the first time where that customer is crossed above the 10% sales threshold. Based on your share expansion, do you have a line of sight to grow revenue at this customer on a year-on-year basis in 2019? Or is that maybe a little bit too early to call at this point?

[Mike Slessor, Chief Executive Officer]

So, thanks, Brian. And a good question. So, with the largest foundry, it is the first time they have appeared as a 10% customer for us at FormFactor. And that’s an important indicator of both our market share growth there but also, if you like, the served market inside that customer moving more toward FormFactor’s technologies. As we’ve talked about in the past, the opportunity for us there is really on the advanced nodes, 10-nanometer, 7-nanometer, and below. And I think the fourth quarter results are indicative of both that accessible market or served market growing as well as our share gains.

Now, right now, the activity, as we said in the prepared remarks, is pretty concentrated at 7-nanometer and a single mobile application processor that used integrated fan-out. It is broadening beyond that but that’s such a material part of that piece of that customer’s wafer starts that it’s difficult to drive any significant diversification at this point in time. And I think that’s then the answer to your question about whether we grow revenue there year-on-year. We are optimistic that we can, but in large part, it does depend on the state of the mobile handset industry as we walk through 2019 because that’s going to be the key fundamental underlying growth driver for our served market at that customer.

[Brian Chin, Stifel]

Sure. That’s very fair. Also, turning to your customer that’s ramping 10-nanometer CPU production this year, kind of curious, to what extent is that more sort of manifesting 2Q onwards, in terms of your business, and not necessarily a big stimulus here, in terms of Q1? I’m kind of curious how you would discuss sort of the contour of that business moving through the year.

[Mike Slessor, Chief Executive Officer]

Yeah. So, at present, it continues to be very heavily biased toward 14-nanometer activity. There is some 10-nanometer. And if we back up to the publicly available information, that customer said they want 10-nanometer parts, products on the shelves for 2019 holiday season. If we back up the typical production schedules and lead times for different things, for us that really becomes second quarter into the third quarter kind of event. All of the activity and signals that we have now are consistent with that. So no significant change that we reported last quarter and everything is staying on a pretty consistent timeline from a preparation standpoint to support that customer’s publicly stated timeline.

[Brian Chin, Stifel]

That’s very helpful. And maybe kind of a one look back question here. Going back maybe 18 months or so when you introduced your $650 million aspirational sales target, I think at the time, obviously, you weren’t expecting 10-nanometer to be delayed. But if you look at the other business segments, they’ve all basically met or exceeded the revenue targets you laid out at that point in roughly half the stated time. And so I guess I was curious, excluding your large logic customer, I’m wondering if you could give an update maybe on how some of those other growth initiatives in Foundry and Logic are playing out relative to your earlier expectations.

[Mike Slessor, Chief Executive Officer]

Sure. So I mean, the three growth components we talked about, similar to my answer to Craig’s question, advanced packaging, mobile data and automotive. I don’t want to pour cold water on myself but mobile data has not exceeded the expectations that we had. Obviously, the RF space, from either the BAW and SAW filter manufacturers or the different RF component manufacturers has gone through a bit of a tough time here in the last 18 months. That appears to be poised to turn around a little bit, especially with 5G driving as we get probably into 2020.

But I want to make sure, the out-performance has really been driven in the growth initiatives outside of our largest customer in advanced packaging and in automotive applications. And that’s one of the reasons why we continue to be so excited about advanced packaging. The adoption, the various means customers are using to do heterogeneous integration with advanced packages, innovate on their roadmaps and drive things forward. I think in 2019-2020 timeframe, we’ll have significantly exceeded the incremental growth target we put forward. I think it was $60 million for advanced packaging. I think we’ll be well ahead of that by the time we get through this year.

[Brian Chin, Stifel]

Great. Thanks for the color.

[Operator]

Thank you. [Operator Instructions] And our next question is from Tom Diffely from D.A. Davidson. Your line is now open.

[Tom Diffely, D.A. Davidson]

Yes. Good afternoon. So, maybe just to extend the discussion here. When you look out over the next couple of years, it seems like the advanced packaging and the 10 and 7-nanometer, expansion of new clients there, as well as RF, are the two big drivers. Can you somehow explain or talk about the relative opportunity between those two? Which one is the bigger opportunity over time? It sounds like RF, obviously, is delayed a little bit versus the 7-nanometer work, but just on a big picture basis, long-term, which one’s a bigger opportunity?

[Mike Slessor, Chief Executive Officer]

Yes. So, good question, Tom. I think, from where we saw it when we originally put together the model, I think we probably thought RF was a bigger opportunity long-term. But as we see advanced packaging being a way that the industry innovates around the slowing and stalling of Moore’s Law, I think that’s going to be a bigger opportunity for us on a relative basis. Certainly, the one wild card in that statement is 5G adoption and 5G rollout because the amount of RF innovation and RF silicon content that’s going to have to go into a 5G handset is significant. And so there’s content growth there in an area where we have pretty strong competitive differentiation.

But if I were to go back and examine the assumptions underlying the revenue growth of advanced packaging versus mobile data, I think advanced packaging, not only are we ahead of where we thought we’d be at this stage of the game, I think it’s got legs beyond that. Again, almost as a substitute or a proxy for Moore’s Law innovation, as that gets tougher and more expensive to do for our customers.

[Tom Diffely, D.A. Davidson]

Okay. Interesting. So, and then maybe just moving over to the memory side of the equation. If we do have an extended delay of going down to the next nodes, what is the typical redesign activity that you see at existing nodes for DRAM today since we’re not nearly as commoditized as we were, as an industry, five, 10 years ago?

[Mike Slessor, Chief Executive Officer]

Yes. Well, there’s been a substantial difference if you like the designs per node at a given customer in DRAM over the past several years. And some of its driven by the complexities and costs and difficulties of scaling to the next node, which I think are well-understood by everyone who operates in the industry. So, we’re seeing nodes live a lot longer, the incremental gain from scaling or shrinking being a lot smaller, and the difficulty going up.

So, what is the result? If we go back to something like the 20-nanometer node or even the 18-nanometer node more recently, we’re seeing – I’m going to go off the top of my head – but I would say close to 2 times the designs on any given node at a customer than we were back when nodes were in the 30-odd-nanometer range. So, it is driving more design innovation, another reason that we continue to see strong design activity in DRAM and all of our businesses, but in DRAM, in particular, even though the node shrinks have slowed significantly.

[Tom Diffely, D.A. Davidson]

And the average lifecycle or lifespan of a node today? Is it only a couple years?

[Mike Slessor, Chief Executive Officer]

It really depends on product and segment. Yes, it really depends on design and segment. If you’re in mobile, it’s at the short end of a year, obviously, because those designs are typically slated for a given handset and those things have lives of not much more than a year. If I take the opposite end of the spectrum and look at automotive DRAM, which has some very high, stringent quality requirements, the lifecycle for our products in automotive DRAM is measured in more like large fractions of a decade. So, a pretty broad spectrum of design lives there. But most of our activity certainly comes both from the mobile DRAM space and the server DRAM space that you can think of as a year, year and a half lifecycles.

[Tom Diffely, D.A. Davidson]

Okay. Great. And then, finally, just an accounting question. What was the triggering event that caused the valuation allowance at the end of the quarter?

[Shai Shahar, Chief Financial Officer]

We accumulated enough profitability in the last several years, plus we forecast to continue to be profitable. These were the main criteria that we met. We see it as a benefit, right? Now, we have forecasted profitability, which means this is an indication of our ability to utilize our NOLs and reduce our cash taxes in the future.

[Tom Diffely, D.A. Davidson]

Okay. Great. Thank you for your time today.

[Mike Slessor, Chief Executive Officer]

Thanks, Tom.

[Shai Shahar, Chief Financial Officer]

Thank you, Tom.

[Operator]

Thank you. [Operator Instructions] And our next question is from Gus Richard from Northland. Your line is now open.

[Gus Richard, Northland]

Thank you. Thanks for taking my question. Just to dig in a little bit on the advanced packaging, there’s high-bandwidth memory, there’s fan-out, and then there’s chiplets that people are talking about. Can you talk about the relative strengths of those three areas, and maybe ones that I’m not aware of, that’s driving that upside in your demand for probe cards?

[Mike Slessor, Chief Executive Officer]

Sure. So, they’re on a little bit different cadences. And given the early adoption cycle of each of those technologies – high-bandwidth memory or HBM in DRAM, integrated fan-out typically in logic to then pair the processor up with DRAM, or some of the chiplet heterogeneous integration schemes. If I back you up to the early part of 2018, we had some very strong DRAM results that we gave people color on was driven by HBM. That’s pulled back a little bit as customers work through some DRAM inventory and as the data center, which is the primary application for HBM, softens a little bit. But I think as HBM becomes more widely adopted, it becomes the primary DRAM advanced packaging application.

Various flavors of fan-out currently being mostly employed in mobile. But I think there’s some interesting potential. If you look at what some of the AI silicon designers, silicon fabless vendors are doing, there’s some really interesting performance gains they’re going to get from AI engines by packaging the DRAM very close to the processor. And we’re participating in some of the initial development there. So, I see integrated fan-out in what is generally thought of as the mobile AI, high-performance compute space being another leg of growth.

And chiplets, I think, is still pretty early. From our perspective, same fundamental drivers there. It moves things toward FormFactor’s strengths, from a speed and interconnect density perspective. And as we’ve talked about in the past, it also raises the test intensity because you’re needing to move toward known good die. But I would say HBM, fan-out, and chiplets, all examples, probably, in that relative magnitude, driving our revenue today with lots of upside to go in the future as these things become adopted.

[Gus Richard, Northland]

Got it. Very helpful. And then on the RF side of the business, what percentage of your business is RF today?

[Mike Slessor, Chief Executive Officer]

Well, it’s a difficult classification and one of the reasons we don’t break it out. Because there’s a bunch of different components. There’s modems, there’s RF filters, there’s some different components. But you can think of it as somewhere around between $60 million and $90 million in any given quarter. If I back up and reference you, it was obviously, prior to the acquisition of Cascade Microtech, reported by Cascade Microtech separately. We’ve seen some growth in that business but consistent with where the RF component customers are reporting their businesses. It hasn’t grown at a spectacular rate.

[Gus Richard, Northland]

Got it. And then when we go to millimeter wave, would that be a significant uplift in pricing for probe cards for that application?

[Mike Slessor, Chief Executive Officer]

It’s certainly an uplift in both the available market for our technologies where we’re differentiated. Pricing, as we’ve talked about, can be a bit of an elusive issue with probe cards because one of the things – pricing depends a lot on what kind of parallelism, how many chips you’re going to test at once. But I’d say on a like-for-like basis, they’re a much higher performance probe card and so, as you go up in frequency and move up, in particular, to the millimeter wave space, we’re going to get compensated better than we would for a lower frequency part.

[Gus Richard, Northland]

Got it. All right. Thank you very much.

[Mike Slessor, Chief Executive Officer]

Thanks, Gus.

[Operator]

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Mike Slessor for closing remarks.

[Mike Slessor, Chief Executive Officer]

Great. Thank you all for joining us today and we’ll talk to you again in a quarter. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect.