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FormFactor Inc (NASDAQ:FORM)
Q2 2019 Earnings Call
Jul 31, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you, and welcome, everyone to FormFactor's Second Quarter 2019 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Shai Shahar.

[Operator Instructions] Before we begin, Jason Cohen, the company's General Counsel, will remind you of some important information.

Jason Cohen -- Vice President and 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; and 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 2018, 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, July 31, 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. FormFactor delivered sequential and year-over-year revenue growth during the second quarter, resulting in strong cash generation and robust profitability at the top end of our outlook range. Our third quarter outlook continues this positive momentum. These results and outlook further validate our broadly diversified leadership positions in attractive consumables and R&D-driven markets which are less volatile than capital equipment. Two factors that have powered FormFactor's recent performance continue to be prominent themes, mainly strong foundry and logic and DRAM probe card demand driven by customer node transitions and design releases, and continued adoption of test-intensive advanced packaging.

During the second quarter we also delivered growth in RF probe cards from a combination of 5G pilot production and new customer wins for 4G LTE handset refresh cycles. In addition, we also capitalized on steady demand for engineering systems and enabling exciting next-generation applications like 5 nanometer CMOS, VCSELs, and silicon photonics. Our largest business, foundry and logic probe cards, continues to perform well on multiple fronts and I'd like to provide some detail in three specific areas. First, as I mentioned earlier, we are seeing strength in our RF probe card business as we deliver probe cards for testing of initial 5G handset RF front ends in addition to serving the typical mid-year BAW and SAW filter ramp to support second half 4G handset launches.

Filter probe card demand grew from new customer adoption of our technology, where we are providing increased test parallelism with best-in-class electrical performance enabling these customers to maximize their yields and make more efficient use of their installed base of test equipment. Second, we continued the long-term build of our foundry business, executing on multiple design wins at multiple customers. At present, this business is experiencing typical mid-year softness as we prepare for a major 5-nanometer mobile applications process or project that is expected to begin ramping in the fourth quarter. At present, we are executing on a variety of smaller, but nonetheless important, 10- and 7-nanometer design wins that are building out the breadth and scope of this business.

Third, our largest customer is progressing on plan with its well-publicized 10-nanometer ramp while still releasing new designs on its mature 14-nanometer node, both of which generate demand for our products. At the risk of repetition, let me remind everyone that probe cards are a consumable that is specific to each new chip design, and so we benefit both from the 10-nanometer node transition and the release of new designs on the existing 14-nanometer mode. Turning to memory, the robust demand for our DRAM probe cards may be surprising to some, especially given the well-understood backdrop of weak capital spending and decelerating bit growth.

With two of our DRAM customers as 10%-plus contributors to second quarter revenue and a strong outlook in the third quarter, I'd like to provide some background. As with foundry and logic, it comes down to the fundamental drivers of probe card demand, namely node transitions and new design releases on existing nodes. As you heard from each of the DRAM manufacturers directly, while they are scaling back overall capacity, they are simultaneously accelerating their transitions to new nodes with a shift under way in wafer starts, to the 1Y and 1Z nanometer nodes.

Notably, one major customer recently revealed a plan to nearly double its 10-nanometer class mix to 80% of wafer starts by the end of 2019. In addition, there is strong new design activity on existing nodes to support innovative architectures like high bandwidth memory, or HBM, using advanced packaging processes to stack individual die for higher performance and better yield. HBM is now involved in production at all three major DRAM manufacturers, and FormFactor's differentiated technologies are helping enable the industrywide ramp of this new memory architecture.

As we've discussed in the past, advanced packaging integration schemes like HBM drive general growth for probe cards and amplify FormFactor's specific competitive advantages in advanced probe cards. We detailed both these aspects during the keynote address at this year's Semicon West Test Vision Session, providing details on both the increased test intensity and accelerating test complexity that are benefiting our business. We expect these favorable trends to continue as the industry adopts advanced packaging architectures like HBM, integrated fan-out, chiplets and the like, to compensate for the slowing of classical front-end-driven Moore's law. Moving to our engineering systems business, the segment again delivered solid results posting sequential quarterly growth off a strong first quarter.

We experienced robust demand for our 200-millimeter systems across a wide variety of semiconductor and optical applications, applications that are early in our customers' innovation and product development cycles. We continued to build our installed base of optoelectronics systems with multiple wins and installations for silicon photonics and VCSEL applications during the quarter. Paired with its solid financial contribution the systems business provides significant strategic value as we engage in early characterization and yield improvement of novel new devices in our lab-to-fab strategy. China continues to be a topic of significant interest and I'd like to spend a few moments discussing it.

As a reminder, we have a decade-plus direct presence in the region with an experienced and talented local team of nearly 100 long-tenured FormFactor employees and our China business has been relatively stable at just under 20% of overall revenue. This is composed of both shipments to large multinationals that operate in the region as well as domestic customers. In the second quarter, we experienced some shipment delays and backlog erosion due to restricted entity editions but we did not expect this to have a material impact to our short-term outlook, as the need for FormFactor's differentiated technology and our strong local presence enabled us to continue to compete in the region. Over the longer term it is unclear what specific impact current trade policies will have on FormFactor's business or the semiconductor supply chain in general, but it is unlikely to be stimulative.

Concluding with our outlook, with average lead times of less than a quarter, our visibility remains limited but we continue to be encouraged by the broad-based strength in our diversified consumables and R&D-driven demand profile. We continue to take advantage of our stable revenue stream to make investments that solidify our roadmap, capabilities and competitive advantage, especially in the areas that enable long-term growth like advanced packaging and 5G.

These drivers will enable us to achieve our target financial model, growing the top line to $650 million while delivering $1.25 of non-GAAP EPS and $110 million of free cash flow once broad-based market growth returns to the semiconductor industry. Shai, over to you.

Shai Shahar -- Chief Financial Officer

Thank you, Mike, and good afternoon. As you saw in our press release and as Mike noted, our second quarter of 2019 results were at the high end of our revenue and EPS outlook ranges, and our gross margin came in slightly ahead of our outlook. These results, again, show the benefits of our diversified leadership in probe cards and engineering systems, which dump in cyclicality as we benefit from industry spending on both and mature nodes.

FormFactor's revenues for the second quarter of 2019 were $138 million, a 4.4% sequential increase, and a 1.9% increase over Q2 2018. Probe card segment revenues of $113.6 million in the second quarter increased $5.5 million or 5.1% from Q1 2019. Systems segment revenues of $24.4 million in Q2 increased $0.3 million, over 1.1% from the first quarter. Within the probe card segment, foundry and logic revenues increased 3% from Q1 to $73.4 million, and was 53% of total company revenue in Q2, close to the 54% in the first quarter.

DRAM revenues were $36 million in Q2, an increase of $7.1 million from the first quarter, and were 26% of total quarterly revenue as compared to 22% in the first quarter. In contrast to generally weak industry results, this was our second highest quarterly revenue from DRAM during the last four quarters. Flash revenues of $4.2 million in Q2 were $3.4 million lower than in the first quarter, down from 6% of total revenue in Q1 to 3% in Q2, consistent with our opportunistic approach to this market. Approximately $2.6 million of the Flash revenue in Q2 were from NAND Flash applications. Going forward, we continue to expect Flash revenues to be lumpy.

GAAP gross margin for the second quarter of 2019 was $55.4 million, or 40.1% of revenues, 40 basis points higher than 39.7% GAAP gross margin in Q1. Cost of revenues included $5.8 million of GAAP to non-GAAP reconciling items which we outlined in our press release issued today and in the reconciliation table available on the Investor Relations section of our website. On a non-GAAP basis, gross margin for the second quarter was $61.2 million or 44.3% of revenues, a little higher than our Q1 gross margin of 44.1% and slightly above our outlook range.

The improvement over Q1 was the result of better factory utilization and lower spend, mostly offset by less-favorable product mix. Our probe card segment gross margin was 42.7% in the second quarter, an increase of 80 basis points compared to 41.9% in Q1. The increase is due to the factors I described earlier. Our Q2 systems segment gross margin was 52% as compared to 54% in the first quarter. The decrease of 200 basis points was driven by less favorable product mix. As mentioned in prior earnings releases, we expect our systems segment gross margin to be at the high 40s to low 50s range.

Our GAAP operating expenses were $46.4 million for the second quarter, $1.5 million higher than in the first quarter. The second quarter operating expenses included $6.8 million of GAAP to non-GAAP reconciling items same as in Q1. Non-GAAP operating expenses for the second quarter were $39.6 million, or 28.7% of revenues, compared to $38.1 million or 28.8% of revenues in Q1. The increase of $1.5 million relates mainly to employee benefits as well as higher R&D investments. Company non-cash expenses for the second quarter included $7.1 million for the amortization of intangible assets, $5.3 million for stock-based compensation, and depreciation of $4.3 million.

Amortization of intangible assets and stock-based compensation were the same as in Q1. GAAP net income for the second quarter was $6.9 million, or $0.09 per fully diluted share, compared to GAAP net income of $5.5 million or $0.07 per fully diluted share in Q1. The non-GAAP effective tax rate for the second quarter of 2019 was 25.4%, 1% above the 24.4% in Q1, and in line with our previously communicated estimate of approximately 25% for the year. As a reminder, 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.

Second quarter non-GAAP net income was $16.1 million or $0.21 per fully diluted share compared to $15.2 million or $0.20 per fully diluted share in Q1. Moving on to the balance sheet and cash flows, we generated $29.9 million of free cash flow in the second quarter compared to $14.9 million in Q1, taking our total cash and investments to $179 million at the end of the quarter. The significant increase in free cash flow in the second quarter was mainly a result of timing of payroll and AP payments, and improved collection. Our DSO decreased from 56 days in Q1 to 47 days in Q2.

We paid $11.7 million in principal and interest payments on our term loan during the quarter, bringing our loan balance to $46.2 million at quarter-end. Our total cash balance exceeded the debt balance by $133 million, an increase of $28 million. While paying down the term loan remains our first priority for using cash, M&A continues to be an important part of our strategy and we intend to deploy capital to acquire leadership positions that expand our served markets. We invested $5.4 million in capital expenditures during the second quarter of 2019 as part of our annual capital spending plan of $16 million to $20 million.

Turning to the third quarter non-GAAP outlook, we expect Q3 revenue to be in the range of $137 million to $145 million. Although revenue is expected to be higher than in Q2 at the meet point of our outlook range, product mix is expected to be less favorable. These factors partially offset by continuous expense control and good operational execution lead us to estimate a non-GAAP gross margin for Q3 in the range of 42% to 45%. Non-GAAP earnings per fully diluted share for Q3 is expected to be in the range of $0.18 to $0.24. A reconciliation of our GAAP to non-GAAP Q3 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 to questions, Operator.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Craig Ellis with B. Reilly FBR. Your line is now open.

Craig Ellis -- B. Reilly FBR -- Analyst

Thank you for taking the question and Mike. Congratulations on the very strong performance in the quarter. My first question is more of a near-term question. So guidance is very clear, there's nice growth sequentially in the third quarter. But within that, are there any notable gives and takes in any of the product segments that we should be aware of as we kick off the back half of the year?

Mike Slessor -- Chief Executive Officer

I think thematically if you look at the third quarter, we expect it to look quite similar from a product mix and theme perspective to the second quarter. We expect continued incremental growth in both foundry and logic and DRAM probe cards for a lot of the reasons we talked about in the prepared remarks. Customers ramping, releasing new designs, and undergoing node transitions are all creating some strength.

Different pockets in the customer base, different pockets in the application space. But overall, we expect foundry and logic and DRAM to continue the positive trend they showed in the second quarter, through the third quarter, with the engineering systems business again being a pretty steady if slightly incremental grower. So not much difference for the top-level themes, Q3 over Q2, but as you noted a little bit of sequential growth.

Craig Ellis -- B. Reilly FBR -- Analyst

Thank you for that, and the follow-up question is more longer-term. As you went through the different businesses and it was helpful to get the three-part drilldown on foundry and logic, you touched on in a couple areas, two of the SAM expansion opportunities that the company has, RF in foundry and logic and then advanced packaging as you were talking about memory. The question is, the company has made some very strong progress in both of those areas. If we fast-forward to this time next year, where do you think the company is positioned relative to those SAM expansion opportunities and how would we be looking at automotive at that time?

Mike Slessor -- Chief Executive Officer

So, reiterating those three growth drivers, we've highlighted the bridge to our target model really being driven by advanced packaging, mobile data or RF, and automotive. I think advanced packaging and mobile data continue to be short-term highlights and as long as our served markets continue to hold up as well as they are, I think we can continue to show progress there. But we do have a ways to go to get to the target model on each of those.

Automotive, we're making steady progress although I don't think it's a surprise to anyone that our customers and their customers in the automotive supply chain are undergoing a little bit of demand contraction at the present. Longer-term though, that doesn't mute our opinion of the automotive opportunity. The content increase and the complexity really are a favorable tailwind for FormFactor in that automotive business. So I think good short-term progress on both advanced packaging and RF, we see that continuing as we go through into 2020. We need a little bit of help from the markets on the automotive growth driver.

Craig Ellis -- B. Reilly FBR -- Analyst

Thanks for that.

Mike Slessor -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Tom Diffely with DA Davidson. Your line is now open.

Tom Diffely -- D.A Davidson -- Analyst

Yes good afternoon. Following up on the last question, the strength you're seeing on the RF side, you mentioned 5G but is most of this driven by new designs for the handsets of 5G or is the strength kind of driven by just the renewal cycle of another round of 4G components?

Mike Slessor -- Chief Executive Officer

Yes, so Tom, going back to the prepared remarks it's both although I would characterize the 4G handset refresh as being a bigger component of the RF strength at this point. Part of that is we've continued to build out the customer base and you probably are aware that inside the handset supply market there have been some share shifts among the RF filter component suppliers.

We're doing better than we have historically, than some of the people who've had the short-term wins, by really providing the effectiveness and efficiency of the FormFactor high parallelism RF test solution. We're able to allow these people to reuse test equipment, still get great electrical performance and high yields, but really improve their overall cost of test structure by adopting our technology. So a little bit of 5G, some exciting indicators there. But the real material business growth was associated with the 4G refresh cycle that we're going through right now.

Tom Diffely -- D.A Davidson -- Analyst

Okay. And when we move from 4- to 5G in earnest over the next couple years is there a meaningful increase in complexity or the cost of a probe card to serve that new market?

Mike Slessor -- Chief Executive Officer

I think there's two pieces that have us excited about the transition to 5G. As you know, this is going to take a while and by no means do I want to set the expectation that we're on the cusp of some explosion. This is going to be steady as she goes, and increasing 5G content. I think the exciting part for us is both content-driven and complexity-driven. If you look at what our customers are saying about a 5G RF front end in the handset, and as a reminder our business is really driven by handsets and not so much infrastructure because of the units.

But if you look at the content in a 5G handset, there's a tremendous increase over 4G. You've got multiple input, multiple output. You've got beam steering, the ability to deal with all these or the need to deal with all these different near-millimeter-wave frequencies. So there's a big content increase and on top of that, the higher frequencies and new requirements like MIMO and beam steering, drive a complexity increase. Both of those play relatively well to our strengths and so we would expect a SAM increase or an opportunity increase as we move more from 4G into 5G.

Tom Diffely -- D.A Davidson -- Analyst

Okay. Are the individual probe cards more complicated or is it just more probe cards because of the complexity of the underlying chips themselves?

Mike Slessor -- Chief Executive Officer

I'd say the fencer probe cards, they're going to be kind of more of the same. Maybe we increase parallelism, that next step so they get a little more complex for testing, more die at once. The same theme that have driven our short-term results. But they are much more complex with some of these other components some of the different beam steering elements are very complex RF chips that will raise the things the probe card and the test system have to do. And we would expect to be compensated for that, so I think you -- it's reasonable to expect an ASP increase.

Tom Diffely -- D.A Davidson -- Analyst

Okay, great. And just clarification, earlier you talked about the foundry market having multiple designs, multiple customers. Is that multiple established customers working with the foundry, or multiple foundries that you're working with?

Mike Slessor -- Chief Executive Officer

It's elements of both. So as you probably know our sale of a probe card and delivery of a probe card into the foundry ecosystem involves both the fabless customers, the chip designers, as well as the foundries themselves. And we continue to build out our presence and share at multiple foundries but also across the fabless space, adding new fabless customers and increasing our share irregardless of the foundry they decide to produce at, with each of these fabless customers.

Tom Diffely -- D.A Davidson -- Analyst

Okay, great. And finally, a follow-up on the Flash market itself. Obviously down quite a bit year-over-year. It sounds like that's more of you guys being opportunistic as what products you take versus just weakness in the marketplace?

Mike Slessor -- Chief Executive Officer

Yes. Again, compared to DRAM we've got relatively small market share in Flash. We continue to view this as opportunistic. Where there are Flash opportunities, where customers find value in our technology and will compensate us for that value, we're going after those opportunities. But that's a pretty small subsegment of the overall flash market. In the current environment, obviously Flash spending is weaker. But I'd characterize our maybe reduction in Flash revenue year-over-year more associated with the lumpiness or the volatility associated with our small share position being concentrated at a few customers on a relatively small number of high-end designs.

Tom Diffely -- D.A Davidson -- Analyst

Okay. Thanks for your time today.

Operator

Our next question comes from the line of Christian Schwab with Craig Hallum. Your line is now open.

Quinn Bolton -- Needham -- Analyst

Hey great thanks for taking my question. Most of them have been answered. The only question I have is, as we continue into 2020, what type of trends would you need to see in DRAM for that to be a growth year?

Mike Slessor -- Chief Executive Officer

For DRAM probe cards to be a growth year 2020 over 2019, is that --

Quinn Bolton -- Needham -- Analyst

Yes.

Mike Slessor -- Chief Executive Officer

-- what you're looking -- yeah, OK. Well, I think as I said in the prepared remarks, DRAM is perhaps surprisingly strong at this point given the overall backdrop. I think if we continue to see customers transition nodes, adopt advanced packaging like HBM and continue to drive an increased design diversity we could see a growth year in DRAM. But a reminder that our visibility is pretty limited, our lead times average much less than a quarter.\

And so our 2020 crystal ball is a little foggy at this point. We've got ourselves obviously in a good market position given the current results and as long as those node transitions, design releases and customer packaging innovation continue, I think we're in good shape to continue to have robust DRAM results going forward.

Quinn Bolton -- Needham -- Analyst

Fabulous. I guess I do have one more question. The -- what -- I know that probe cards obviously don't wear out that quickly, but new designs happen more rapidly. Can you tell us a rough estimate of what portion of your business you believe is consumable in nature?

Mike Slessor -- Chief Executive Officer

If by consumable you mean actually wears out and requires direct replacement, I think that's a relatively small fraction of our business at this point. It does depend on segments in application. The real consumable driver of our business is the fact that customers continue to accelerate design changes which essentially obsolete the probe card. So they're consumed by no longer able to work.

The one exception probably is something like automotive, where product life cycles are very long compared to something like mobile or data center. And those we do see a continued robust refresh and reorder business, where the individual probe cards wear out multiple times over a design life. That's not the case in mobile, where essentially the probe cards are being bought to service a very steep ramp, and in most cases never really wear out.

Quinn Bolton -- Needham -- Analyst

Great. No other questions thank you.

Mike Slessor -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Quinn Bolton with Needham. Your line is now open.

Quinn Bolton -- Needham -- Analyst

Hey guys congratulations on a nice results and outlook. I wanted to start with your sort of longer-term model. When we look at that long-term model I don't think you guys have forecast much growth from your largest customer or from the DRAM application, yet you're looking at near term I think your largest customer was -- was back near the higher end of its historical range. DRAM again near the high end of the historical range. And so I'm wondering whether those two parts of the business could actually be bigger contributors to that long-term plan than you might have thought 6, 12 months ago. And then I've got a couple of follow-ups.

Mike Slessor -- Chief Executive Officer

Yes. I think you've characterized the underlying assumptions in our long-term model correctly and I do think although there may be some short-term strength from both of those components, I don't know that there's something we want to depend on as secular growth drivers. Certainly as our largest customer transitions from 14 nanometer to 10 nanometer, and there's some overlap in design releases remaining on 14, but the ramp in 10, we may see some upside to the historical $100 million annual run rate there. But I think I'd want to set the expectation that that's probably transitory.

We're not expecting that to be a persistent theme as 10 nanometer stabilizes and most of the roadmap goes on there. I think DRAM historically for us, we do see test content increasing associated with applications like HBM. Customers in DRAM are obviously very cost-sensitive and are always working hard to get that test intensity back down. Having said that, right, there are reasons to believe that it could be a bit of a growth driver.

If we look at the long-term model, though, really the drivers continue to be advanced packaging, mobile data and automotive over that longer term. And so in any given period, we may see some acceleration toward the 650 annual run rate coming from different places. But in some sort of average sense, I don't think we expect too much fundamental growth from DRAM or our largest customers.

Quinn Bolton -- Needham -- Analyst

Okay, great. And then you talked about the foundry business, sort of two questions there. One you mentioned the 5-nanometer design near year-end, and then also I think TSMC has recently stated that they're seeing sort of better-than-expected demand for their 7-nanometer nodes here in the near term and building out some additional capacity to support that demand. Wondering if you're seeing any sort of flow-through from that incremental demand on the 7-nanometer? And back to the 5-nanometer question, do you feel like you've got pretty good market share for that initial 5-nanometer application?

Mike Slessor -- Chief Executive Officer

Yes. Maybe dealing with the 7-nanometer question first, we have talked about winning additional designs at this customer beyond just sort of the major leading-edge mobile application processor that really dominates their 7- and 5-nanometer wafer starts. So we have seen some of that flow-through, I think, or leading indicators of some of that flow-through. I think that business continues to be pretty seasonal and driven around the major mobile application process or project.

As we look forward to 5-nanometer and that ramp and our preparations for it, again, expect to begin those sometime in the fourth quarter. Certainly our share had that customer in 2019 of the addressable 10- and 7-nanometer opportunities has continued to increase. We feel like we've probably got somewhere around a 50% share position of that served part of the market at this point. We're obviously going to have to compete aggressively, continue to execute like we have in supporting the customer. But I think if we do that we're in a reasonable position to show another strong result associated with share on that 5-nanometer apps processor project.

Quinn Bolton -- Needham -- Analyst

Great. Thank you thank you ladies and gentlemen.

Operator

[Operator Instructions] Our next question comes from the line of Brian Chin with Stifel. Your line is now open either.

Brian Chin -- Stifel -- Analyst

Nice results and thanks for letting us ask a few questions. I guess first, just to confer here on DRAM, so as you guessed are a little surprised pleasantly by the resilience and in fact strength you're seeing in the DRAM probe card sales even in the midst of a pricing downcycle. And you did a really nice job outlining what's driving this. I guess, though, from a behavioral standpoint if you had to put your finger on it, why do you think your customers are staying more active and even more aggressive at this point in a down cycle relative to historical behavior? I guess the tag along there, on a margin, do you also think you're getting any market share in DRAM?

Mike Slessor -- Chief Executive Officer

Yes, so a good question and as you might imagine one that's a topic of internal discussion and internal debate. I think one of the key differences from historical behavior or historical market conditions is although our customers' DRAM prices have gone down significantly, their prices to their customers or the spot prices in the market, they're still at least at this point, reasonably profitable. And so continuing to invest in redesigns and competitive differentiation, in new architectures like HBM, are the kind of things they're still funding.

Where maybe in previous downturns the entire spigot was cut off and they really tried to cut back on everything because the profitability was so much worse than it is today. Obviously, you know, we look at that with a lot of interest in the trajectory of the end markets. We're hopeful that things will bottom and improve in DRAM. Certainly the last set of earnings calls from our customers would lead you to believe that we might be turning a corner. But I think that's the fundamental reason -- is there still profitable -- it's not really winter like it has been in the past. It's more like a late autumn, and so they continue to invest for spring.

Brian Chin -- Stifel -- Analyst

That's helpful. I was thinking also the diversity of end markets, it's not one -- one key end market and then two, but kind of three and then the extent that they're trying to fulfill various markets and kind of optimize. Wondering if that had a little bit of a help as well. Also just curious, even thinking from a seasonality standpoint if you will, you're operating at pretty robust levels on the DRAM probe card business. If that was, to say, slacken a little bit beyond sort of your 3Q visibility in say 4Q, you did talk to -- about the 5-nanometer sort of mobile process of ramp. Do you think those two factors, one going up, maybe one we're seeing a little bit -- do you think they're kind of offsetting one another in Q4?

Mike Slessor -- Chief Executive Officer

Maybe not addressing the magnitudes exactly, but you've touched on one of the fundamental cornerstones of our strategy. And whether it be the acquisitions we've done or the organic growth that we've driven in acquiring new customers and releasing new products, having all of these different opportunities that you can go address in any given time period so that you've got a relatively stable revenue stream of consumables and R&D-driven spend to go fund your innovation roadmap is exactly what we're trying to achieve.

So your example, you know, we don't have a lot of visibility into the fourth quarter at this point. But your example is a good one, where you could have these offsets associated with one of our major businesses perhaps taking a bit of a step back, another one taking up the slack and allowing us to continue to invest. I think that's thematic of our strategy to date and the direction we'll continue to drive FormFactor.

Brian Chin -- Stifel -- Analyst

Maybe to fan -- one last question just to fan this out a little bit longer term. Alluding again to your $650 million revenue target for a few to several years from now, I think it embedded around $60 million incremental sales from advanced packaging. You guys seem to be tracking pretty well against that. But I'm curious, how much of that TAM contemplated chiplet packaging and to what extent could this activity augment that TAM over, say, a 2- or 3-year horizon?

Mike Slessor -- Chief Executive Officer

Yes, I think when we -- when we first pulled together the model and talked about advanced packaging, there were really two applications that we had line of sight to. One was HBM and you see that certainly manifest in our DRAM results in the second quarter, and in our third-quarter outlook. The other piece was integrated fan-out, which is at least partially responsible for our share gains at the world-leading foundry. I think chiplets and some of the other things that have come to the fore, some of them talked about now notably from our largest customer, I think over the longer term you can probably consider those to be additive to the $60 million opportunity.

Now, they're probably not additive over the same time frame, so don't take the $650 million and turn it into a $700 million. But I think advanced packaging has got much longer legs than maybe we originally thought it did when we put the -- the long-term model together.

Brian Chin -- Stifel -- Analyst

Great. Thank you for the call.

Operator

Our next question comes from the line of Gus Richard with Northland. Your line is now open.

Gus Richard -- Northland -- Analyst

thanks for taking the question. Just to follow on, on advanced packaging in the current quarter could you talk about the relative strength between HBM integrated standout and chiplets, which -- which of those drove the strength in the quarter? Or which were strongest?

Mike Slessor -- Chief Executive Officer

So it would have been HBM, head and shoulders above the other two for a couple reasons. First of all, as we said in the prepared remarks, HBM really now in volume production at all three major manufacturers. And they've talked about it as a significant -- each of them talked about a significant part of their innovation roadmap. So there's not tons of wafer volume but it's -- it is significant and it is material, and obviously materials are results.

Integrated fan-out I think continues to have secular growth but is pretty lumpy because the adoption is still mostly mobile, at least from a wafer start perspective. And so they're going through sort of the mid-year usual softness associated with mobile, with delivering probe cards for mobile application processors. So you know, a quarter, a quarter and a half from now, that could easily flip around just based on the granularity and the individual time. I think chiplets, we're still in very early innings, at least with our engagements with our key customers.

Again, an exciting opportunity going back to Brian's question, to give more legs to the advanced packaging story. But right now, you know, really the volume is being driven by HBM and integrated fan-out.

Gus Richard -- Northland -- Analyst

And on the integrated fan-out, was that primarily just one customer or has that broadened out to multiple customers? And I'm talking about device guys.

Mike Slessor -- Chief Executive Officer

Yes, so there are -- there are designs from multiple customers but the volume, again, is really being driven by one customer.

Gus Richard -- Northland -- Analyst

And then just in terms of your target of 40% market share, can you just give a little bit of color on A, how big you think the probe card market will be this year, and that would sort of the answer question to how much market share you think you're gaining.

Mike Slessor -- Chief Executive Officer

Yes, I think given that it's not a broadly covered market we kind of have to do a little bit of triangulation on it. But I believe it was the advanced probe card market was about $1.3 billion last year. With expectations that it will contract sort of 3% to 5% this year, so a much more -- much less of a reduction than say some of the more volatile capital equipment, but a reduction nonetheless. Obviously if you take our first-half results and take the midpoint of our third-quarter guidance, that would imply we are gaining share and making progress on this 40% share bogey.

Gus Richard -- Northland -- Analyst

Okay. Fundamentally in your presentation it says market was $1.6 billion. I'm assuming the rest of it is engineering systems?

Mike Slessor -- Chief Executive Officer

That's right. That's right. So you asked me about the probe card market, good clarification. The other part of our served market is engineering systems, which is separate and distinct from probe cards. Obviously the two work together nicely but that's about another $300 million of served market that gets you to the $1.6 billion.

Gus Richard -- Northland -- Analyst

Right. And I'm assuming that -- is just that entering market flat, steady, or increasing or decreasing?

Mike Slessor -- Chief Executive Officer

I think probably a fair assumption that it's something close to flat this year. We've seen some nice growth in the market and in our business over the past couple years and given that it's primarily driven by customer R&D budgets which continue to be strong, it -- I think it's a reasonable assumption that it probably doesn't contract. But probably flat year-on-year.

Gus Richard -- Northland -- Analyst

Got it. And then I guess the last one for me on the engineering systems, is last quarter I think you shipped an engineering system from MicroLED. Is there any incremental activity in that market, are you beginning to see some pickup in interest or commercialization of the technology?

Mike Slessor -- Chief Executive Officer

Well, so our engineering system exposure, as a reminder, is very early in customer product development cycles. And the work we've done on MicroLED and continue to do on MicroLED still is pretty early. We have not got any indications that there's an imminent production ramp of this. I think it is a compelling technology. It has some cost issues that people need to work through.

But from a performance standpoint, it's clear that it's going to be adopted somewhere. And we like the position we're in. The activity continues. We didn't make a big highlight of it this quarter because in the quarter, certainly silicon photonics and VCSELs were a bigger part of our optoelectronic mix. But you can -- the MicroLED activity continues and I think we're well-positioned when it finally does reach commercialization.

Gus Richard -- Northland -- Analyst

Okay great. That's it for me.

Mike Slessor -- Chief Executive Officer

Thank you so much.

Operator

Thank you. This includes today's question-and-answer session. I would now like to turn the call back to Mike Slessor for closing remarks.

Mike Slessor -- Chief Executive Officer

All right, thank you very much for joining us today and we'll talk to you again in a quarter.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Jason Cohen -- Vice President and General Counsel

Mike Slessor -- Chief Executive Officer

Shai Shahar -- Chief Financial Officer

Craig Ellis -- B. Reilly FBR -- Analyst

Tom Diffely -- D.A Davidson -- Analyst

Quinn Bolton -- Needham -- Analyst

Brian Chin -- Stifel -- Analyst

Gus Richard -- Northland -- Analyst

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