Krish Sankar: Got it. Got it. And then I just had two other quick questions. Mike, if we look at your HBM share, you clearly have done a great job in HBM3 and3E [ph] versus HBM1 and 2. I’m just kind of curious, do you expect the momentum to continue next year or so when we get into HBM4 and beyond?
Mike Slessor: Yes. Krish, I think we see the same progression of test complexity, there really shifts competitive advantage towards us as we move from HBM3 to 4. I think one of the obvious ones is, it’s a higher – more die being stacked. And that clearly, as we look at customers’ test strategies, as I said in the prepared remarks, they’re not just probing each individual component die, but they’re probing the stack as they build it up. And so higher stacks probably mean less yield, but also probably mean higher test complexity, higher test intensity as we move to HBM4. In addition, obviously, the clock speeds go up, the densities go up. And so those are all good trends. And I think it’s one of the things where we’re spending a good fraction of our R&D budget on making sure we can continue to drive that capability road map forward and serve the increased complexity of HBM4 and derive some competitive advantage from it.
If I go back to your initial comment that Shai answered, actually, the mix between regular DRAM and HBM DRAM in the low 40s is nominally the same as it was in Q4. So that’s one of the reasons why you’re not seeing a margin uplift associated with DRAM.
Krish Sankar: Got it. Got it. And then a quick clarification. I think Brian asked this on the China ops divestment. To the multinationals in China, is this still going to go through the Grand Junction semi? Or is it going to be directly from Form?
Mike Slessor: Yes. No. Because the multinationals that operate in the region are global customers for FormFactor, they are not part of this distribution agreement. FormFactor will continue to support those customers in a global way and where we need local resources, we’ll contract those things out. But you can think of the multinationals, which historically have been the vast majority of our China revenue continue to be managed by FormFactor and are not part of the distribution arrangement.
Krish Sankar: Got it. Thank you very much, Mike. Thank you.
Mike Slessor: Thanks, Krish.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Tom Diffely from D.A. Davidson. Your question, please.
Tom Diffely: Yeah, thank you. And good afternoon. I guess, first of all, when you look at the memory segment, you talked about some next-generation DRAM chips, are you seeing anything on the flash side, any next-generation flash chips that require new designs?
Mike Slessor: Tom, as I think you know, our flash market share and consequently, our flash revenue is pretty minimal compared to DRAM. It’s a market where the requirements are not that challenging from a speed or density perspective, which is really where we derive competitive advantage and why we’re strong in DRAM. Flash because of die sizes, because of test feeds, because of things like built-in self-test to the chips, really hard to drive a competitive advantage. So we do have some share there. But as you can tell from our historical financial results, it’s not significant. We do see some new designs, but given my statement about our market share, we don’t have the broad view of the flash market that would allow us to make the same kind of observations we can in DRAM.
Having said that, I think the general view, when we talk to customers and other suppliers is that flash is probably going to trail DRAM in terms of recovery, that inventories are still high and pricing is not where it should be to drive an upturn. But we are continuing to be opportunistic in the flash market and where we can differentiate with speed and/or capability. We’re taking advantage of that.
Tom Diffely: Okay. And would you expect your flash share to go up over time given the acquisition you made a couple of years ago of some technology there? Or is it kind of in this segment or in this range for a bit?
Mike Slessor: Yes. I think it’s in this range for a bit. So the acquisition you’re talking about, we acquired Advantest’s probe card businesses a few years ago or business a few years ago. And if you remember, we primarily did that, although it is a flash test platform, a flash probe card platform. We primarily did it because it feeds elements of our DRAM road map that we’re now in the final qualification stages at with a key customer. That will help us from an overall market share perspective, at least at that customer. So we, again, acquired it more for the DRAM capability, although being engaged in flash does help you work out the bugs at a lower complexity level.
Tom Diffely: Great. Thanks. And as a follow-up, Shai Shay, when you look at the target model going from where we were in 2023 to the target model, like 700 basis points of margin improvement. Is most of that just coming from overhead absorption? Are there some cost reduction programs that need to take place?
Shai Shahar: I would say three things. One is volume. Yes, as you pointed out, we have been adding capacity, so we need volume to go up to fully utilize this capacity and improve absorption and utilization. The second element is mix. We expect the growth from where we are today to our target model to come mostly from Foundry & Logic, which is an area that has a higher gross margin. And the third component is the cost reductions. We have few initiatives across the company, some task forces to improve gross margin, focusing on costs, things like automation and vertical integration, more efficient production. And these things also expect to contribute on our way to reach the target model of 47%.
Tom Diffely: Okay. But would you say that over the absorption is the biggest factor?
Shai Shahar: I would say it’s distributed kind of equally between the three components.
Tom Diffely: Okay. That’s helpful. Appreciate your time today. Thank you.
Shai Shahar: Thanks, Tom.
Operator: Thank you, one moment for our next question. And our next question comes from the line of Christian Schwab from Craig-Hallum Capital. Your question, please.
Christian Schwab: Great. Mike, on the DRAM business and the 50% sequential revenue growth, is that driven by your current lead customer? Or is that expansion starting to ramp with the second customer?
Mike Slessor: Yes. When you break down the increase, it really is driven by our lead HBM customer, who also leads the overall HBM marketing share. So – that’s the primary driver. I did – it’s probably a subtlety, but I did in the prepared remarks say that we expect revenue from all three major DRAM manufacturers in HBM. So there’s engagements for those. But when we think about the Q1 step-up, it’s very much driven by our lead customer. It’s a key 2024 strategic objective for us to make sure that we capitalize on HBM growth at all major DRAM manufacturers. And I think we’re making some pretty good progress with that.
Christian Schwab: Once you have all three, how big could the high bandwidth memory portion of the business be?
Mike Slessor: Yes. Yes, it’s a good question. And I – so I think we’ll stick with the idea that our HBM revenue in 2024 on a quarterly basis could double from the quarterly run rate that we had in 2023. And the reason for that is it’s a little difficult right now to sort out how much double counting is going on in terms of forecasting between the different suppliers of HBM, DRAM are customers. I think if you back out the forecast, the growth and add them all together, the growth assumptions are probably there’s some double counting in there. So I think our – the expectation that we communicated on the last call and through some of the investor conferences as we’ve gone through the back part of the year and to start 2024 of the HBM run rate doubling on a quarterly basis from where it was in 2023, the right expectation. And then you can see in Q1, we’ve made some good steps towards that.
Christian Schwab: Okay. That’s great. On the Foundry & Logic business, the leading manufacturers of chips, whether it’s Intel or AMD or TSM are kind of pretty optimistic regarding aggregate unit growth and the huge volume markets of PCs and smartphones, they’re just not all that enthusiastic about it in March. But they are as we go throughout the course of the year. And given some of the new design ramps and new chips coming to market throughout the course of the year. I mean is it logical that, that business exits the year at $100-plus million run rate again?
Mike Slessor: Yes. I think you’ve identified the key drivers for it. Certainly, in the first part of the year, whether you look at our Q1 guidance, kind of extrapolate what some of those customers in the high unit volume markets like PCs and handsets are conveying. There’s some optimism associated with the second half. Given our visibility, right, remember that probe cards have lead times well within a quarter, much less than a quarter. And so our direct visibility doesn’t extend anywhere close to that. But I think the combination of inventories being at much healthier levels and probably now a balance between output at these key customers and the actual sell-through. That’s now been resolved. So that puts things in a better place.
And I think if there’s some end demand pickup in these large unit volume markets like PCs and handsets in the second half, we should see some growth there. But it’s beyond the – beyond our visibility beyond the head labs. What I would say to close that topic is, when I compare things to a year ago and people were optimistic about a second half recovery in 2023, I feel like the industry is in much better shape from an inventory and production and capacity standpoint a year later here in the first part of 2024.
Christian Schwab: Great. And then I’ll just slip in one more question, if I can. You’ve been working on a qualification with a potential large customer for some time, I think a few quarters anyway, I guess. Is there any update on where we sit with that? And do you feel better about that? Do you feel better about potential timing of that? Any update would be great?
Mike Slessor: Yes. We don’t have a huge update for you, but we have talked about this in the past. Obviously, the large fabless microprocessor and GPU customer is a place where we do not have significant share. And given our strategy of diversification, different customers, different markets, that’s an important place for us to qualify and hold a significant share position, especially given their leadership in some of the end markets. We have made some – as you know, we’ve been at this for a while. We have made some changes in how we’re resourcing that. The good news is the customer has a clear 2-supplier strategy, and there’s really only 2 suppliers that can do this and FormFactor’s one of them. So it’s really up to us to improve our execution and get there.
