FormFactor's Q3 2025: Contradictions Emerge on HBM3/HBM4 Crossover, HBM4 Growth, and Gross Margin Strategies

Date of Call: October 29, 2025

Financials Results

• Revenue: $202.7M (Q3 2025), exceeded Q2 results and the midpoint of outlook
• EPS: $0.33 non-GAAP (Q3 2025), up from $0.27 in Q2; GAAP $0.20; non-GAAP EPS $0.33 was $0.04 above the prior outlook high end
• Gross Margin: Non-GAAP 41%, up 250 bps from 38.5% in Q2 2025; GAAP 39.8% vs 37.3% in Q2 2025

Guidance:

• Q4 revenue expected to be $210M ± $5M
• Q4 non-GAAP gross margin expected ~42% ± 150 bps (tariffs continue to pressure margins by ~150–200 bps)
• Q4 non-GAAP operating expenses expected ~$58M ± $2M
• Q4 non-GAAP EPS expected $0.35 ± $0.04; Q4 tax rate expected 17%–21%
• Farmers Branch capex expected $140M–$170M in 2026; initial capacity late 2026, majority online in 2027

Business Commentary:

• Revenue and Gross Margin Improvements:
• FormFactor reported third-quarter revenue of $202.7 million, exceeding both second quarter results and the midpoint of their outlook range, with a non-GAAP gross margin of 41%, up 250 basis points from the previous quarter.

• The improvement in gross margins was driven by cost reduction initiatives, including labor cost reductions and targeted manufacturing spending decreases.

• DRAM and HBM Growth:

• The DRAM probe card segment experienced a double-digit sequential growth in the third quarter, primarily due to growth in HBM, with HBM revenue reaching $40 million.

• The growth is attributed to increased demand for products like HBM4 and expectations for continued growth, supported by rising test intensities with higher speeds and bit counts.

• Systems Segment Momentum:

• FormFactor's Systems segment achieved sequential revenue increase in the third quarter and forecasts further growth in the current fourth quarter.

• This momentum is driven by progression towards initial production of co-packaged optics and significant investments in advancing quantum computing.

• Outlook for Future Margin Enhancements:

• FormFactor aims to reach the target model quarterly revenue run rate earlier than achieving the target model gross margins of 47%.
• The focus on immediate gross margin improvements through cost reductions and long-term initiatives, like expanding capacity in Texas, is expected to continue throughout 2026.

Sentiment Analysis:

Overall Tone: Positive

• "FormFactor's third quarter revenue, gross margin and earnings per share exceeded both second quarter results and the midpoint of our outlook range." "have already produced a 250 basis point increase from the second quarter" "we expect to again deliver sequentially higher revenue, earnings and most importantly, gross margin."

Q&A:

• Question from Craig Ellis (B. Riley Securities, Inc.): How would you frame up the growth gives and takes as you look out to 2026 for HBM and what will HBM4/HBM4E mean for probe-card intensity?
  Response: HBM4 is becoming the majority in Q4; early ramp into 2026 with continued HBM growth driven by higher layer counts and speeds, increasing test intensity and probe-card demand — FormFactor benefits from SmartMatrix and scale across memory and logic.

• Question from Craig Ellis (B. Riley Securities, Inc.): How do tactical (near-term) vs structural initiatives contribute to closing the ~500 bp gap to target gross margin and what linearity should we expect?
  Response: Near-term actions (headcount, OT management, targeted spend reductions) provide ~ $1M benefit in Q4 and ~$1.5M ongoing; longer-term structural improvements in cycle time and yields will drive the remaining margin gains through 2026.

• Question from Christian Schwab (Craig-Hallum Capital Group LLC): Is the 45% gross-margin target in 2026 driven by mix (foundry/logic vs DRAM), initiatives, or both?
  Response: Target is driven primarily by underlying cost-structure improvements (cycle time, yields) that are largely mix-independent, though mix and volume will still influence results.

• Question from Christian Schwab (Craig-Hallum Capital Group LLC): Can you quantify the potential positive impact in 2026 to foundry/logic from CPU and GPU customer ramps?
  Response: Not precisely quantified yet; successful CPU/GPU wins could contribute materially—addressable opportunity is tens of millions of dollars per quarter—dependent on qualification and commercial wins.

• Question from Brian Chin (Stifel, Nicolaus & Company): Q4 revenue growth appears driven by legacy DRAM; that mix is margin-neutral/negative — how are you still guiding higher gross margins?
  Response: While mix influences margins, the quarter-over-quarter improvement is mainly from mix-independent cost reductions (labor and manufacturing efficiencies) that are sustaining margin gains.

• Question from Brian Chin (Stifel, Nicolaus & Company): Timing of Farmers Branch capacity deployment?
  Response: Initial capacity expected late 2026 with the majority of capacity coming online in 2027.

• Question from Brian Chin (Stifel, Nicolaus & Company): Will Farmers Branch be focused on HBM or broader/fungible production?
  Response: The facility is designed to be flexible and efficient to support the breadth of product lines and enable resource mobility as market demand dictates.

• Question from Yu Shi (Needham & Company, LLC): Can you provide HBM revenue color for Q3 and what that implies for DRAM/traditional DRAM levels?
  Response: HBM was roughly $40M in Q3 and drove the DRAM sequential growth; HBM4 strength is expected into early 2026 while non-HBM DRAM contributes in Q4.

• Question from Yu Shi (Needham & Company, LLC): Can you quantify revenue from your top CPU customer in Q3 and expectations into Q4 given their cost cuts?
  Response: The large CPU customer fell below the 10% threshold in Q3, reducing near-term revenue contribution; nonetheless overall revenue remains near record levels and FormFactor continues to partner closely while pursuing additional CPU/GPU qualifications for 2026.

• Question from Yiling Sun (Citigroup Inc.): Any ASIC project contributions in Q3 and updates on ASIC engagements?
  Response: Custom ASICs had a small contribution in Q3; engagements with hyperscalers continue but a competitor currently serves key projects — market may consolidate toward top MEMS suppliers as ASIC specs approach GPU-like requirements.

• Question from Yiling Sun (Citigroup Inc.): What tailwind to gross margin will Farmers Branch provide as it ramps?
  Response: Farmers Branch is modeled to deliver incremental long-term gross-margin improvement beyond the current target model as capacity and lower-cost footprint scale.

• Question from Thomas Diffely (D.A. Davidson & Co.): Of the move from 38.5% to 42% non-GAAP gross margin, can you separate mix, overhead absorption and cost-reduction contributions?
  Response: All three contributed, but volume was the minority; structural cost actions and efficiency improvements were the primary drivers of the quarter-over-quarter margin increase.

• Question from Thomas Diffely (D.A. Davidson & Co.): What are the next milestones for silicon photonics to move into the fab?
  Response: Externally visible catalysts will be customer product insertions/announcements early to mid next year as pilot production moves to volume; Triton systems are installed and positioned for high-volume CPO manufacturing.

• Question from Kinney Chin (TD Cowen): Is networking silicon a meaningful part of your foundry/logic exposure and how does the opportunity compare to GPU/merchant networking?
  Response: Networking is an important and growing element of foundry/logic exposure; many networking chips are migrating to advanced-MEMS requirements where FormFactor's technology is well positioned, similar to GPU opportunities.

• Question from Kinney Chin (TD Cowen): The $140M–$170M Farmers Branch figure — is it all CapEx or are there R&D components?
  Response: The $140M–$170M is primarily CapEx, covering site build-out, clean-room improvements and manufacturing equipment.

Contradiction Point 1

HBM Revenue Growth and Crossover

It involves differing expectations for HBM revenue growth and the timing of the crossover from HBM3 to HBM4, which impacts revenue projections and investor expectations.

What are the growth drivers and challenges for HBM in 2026, and how does HBM4E's customization affect probe card intensity? - Craig Ellis (B. Riley Securities, Inc.)

2025Q3: The crossover in HBM revenue from HBM3 to HBM4 is occurring in Q4. Growth is expected in HBM4 due to increased test speeds and layer counts. - Mike Slessor(CEO)

What is the margin potential for HBM4 products, and how significant is the impact from Q2 to Q3? - Brian Chin (Stifel, Nicolaus & Company, Inc.)

2025Q2: We expect HBM4 to have higher ASPs for high-speed cards due to delivering more value. - Michael D. Slessor(CEO)

Contradiction Point 2

Gross Margin Improvement Strategies

It involves differing explanations for the strategies aimed at improving gross margins, which are critical for financial performance and investor expectations.

Will 2026 gross margins reach 45% due to mix or cost initiatives? - Christian Schwab (Craig-Hallum Capital Group LLC)

2025Q3: We aim for 45% gross margin in 2026 through changes in cost structures, not just mix. Structural improvements in manufacturing cycle times and yields will impact gross margins. - Aric McKinnis(Senior VP & CFO)

What residual customer or HBM4 product costs remain in the third-quarter gross margin guidance? - Brian Edward Chin (Stifel)

2025Q2: Improved gross margins are driven by cost improvements, not just mix. - Shai Shahar(CFO)

Contradiction Point 3

HBM4 Growth Expectations

It involves differing expectations regarding the growth of HBM4, which is a key revenue driver for the company and crucial for future revenue projections.

Can you outline the growth drivers and challenges for HBM in 2026 and the impact of HBM4E's customization on probe card intensity? - Craig Ellis (B. Riley Securities, Inc.)

2025Q3: The crossover in HBM revenue from HBM3 to HBM4 is occurring in Q4. Growth is expected in HBM4 due to increased test speeds and layer counts. - Mike Slessor(CEO, President & Director)

Are two customers ramping up in HBM4, and how are the hyperscalers progressing? - David Duley (Steelhead Securities)

2024Q4: Most of the increase in HBM revenue this quarter came from HBM3, with contributions from HBM4. We expect HBM4 revenue to grow as new designs ramp in 2025. - Mike Slessor(CEO, President & Director)

Contradiction Point 4

Gross Margin Improvement Strategy

It involves differing explanations for how the company plans to improve gross margins, which directly impacts financial performance and investor expectations.

Will 2026 gross margins reach 45% through mix or cost initiatives? - Christian Schwab (Craig-Hallum Capital Group LLC)

2025Q3: We aim for 45% gross margin in 2026 through changes in cost structures, not just mix. Structural improvements in manufacturing cycle times and yields will impact gross margins. - Aric McKinnis(Senior VP & CFO)

If Foundry & Logic and microprocessors remain smaller, how will corporate gross margin be affected? - Thomas Diffely (D.A. Davidson)

2024Q4: Improvement beyond that $250 million is primarily a function of indirect materials costs, both from volume and pricing and from lower-performing products that we're able to move out of the -- out of the mix. - Shai Shahar(CFO)