FormFactor Inc (FORM) Q4 2020 Earnings Call Transcript

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FormFactor Inc (FORM 5.13%)
Q4 2020 Earnings Call
Feb 3, 2021, 4:25 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you, and welcome, everyone, to FormFactor's Fourth Quarter 2020 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 -- 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; the benefits of acquisitions and investments in capacity and information technology; the impacts of the COVID-19 pandemic; the impact of regulatory changes; the anticipated demand for products; our future ability to produce 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 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 3, 2021, and we assume no obligation to update them. Also as an aside, since this is an entirely remote earnings call for us, please bear with us on any audio delays.

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

Mike Slessor -- President and Chief Executive Officer

Thanks, Jason, and thank you everyone for joining us today. FormFactor delivered strong results in the fourth quarter of 2020, setting all-time quarterly and annual company records for revenue, non-GAAP operating profit and net profit. I want to thank and congratulate the global FormFactor team who demonstrated a combination of agility and tenacity to overcome a myriad of challenges and deliver these record results. As we begin 2021, robust demand for our products continues and we're adding capacity to meet that demand.

However, even with the strength that produce these results, the fourth quarter had its unique challenges as evident from gross margins below our October outlook range. Shai will provide more details later, but I'd like to start our call by addressing this issue. This gross margin reduction was caused by two primary factors of approximately equal impact. First, in our Probe Cards segment we reserved warranty costs for some early life reliability failures on a new foundry and logic product release. Since mid-November, our team has worked closely with the affected customer to resolve the issue, and this customer has qualified a modified architecture that eliminates the problem. This issue is now closed as we are shipping replacement units in volume and have implemented improvement actions in our product development and release processes.

Second, in our Systems segment, we executed against an unusually unfavorable product mix as we shipped several significant lower margin orders to end the quarter. These orders contained fewer high value features and options than in our typical mix as customers configured systems to meet a variety of end of year budget, lead time and volume purchase requirements. Some unfavorable product mix continues in our Systems segment backlog, but less than in the fourth quarter.

As we described in the past, the diversified nature of FormFactor's design specific consumable and R&D driven product mix will produce quarterly fluctuations in gross margin. Despite these short-term fluctuations, our long-term trajectory toward the 47% gross margins of our target model remains intact. And as you can see from our outlook, we expect a sequential increase in gross margin for the current quarter.

Turning to market level details, demand for foundry and logic probe cards was extremely strong in the fourth quarter. The strength is the result of new design releases in the fabless foundry ecosystem that ramped aggressively in both high performance compute and mobile applications, with continued strong growth associated with 5G handset launches. In the first quarter, these specific ramps are mostly behind us and we do expect a slight sequential decrease in foundry and logic probe cards.

On a longer-term basis, driven by 5G and advanced packaging, this market is a major growth opportunity as customers utilize FormFactor's differentiated market-leading products to meet their highly complex test requirements for millimeter-wave RF front ends, next-generation application processors and high power compute processors. In DRAM, we delivered the highest quarterly revenue of 2020 as customers released and ramped new designs in a combination of technology node migrations, 12 gigabit and 16 gigabit product ramps and the beginning of the HBM2 to HBM3 transition.

As a reminder, probe cards are a consumable with a specific each chip design, and so demand is generated not just by node migrations but also the release of new chip designs, such as 16 gigabit LPDDR 5. With this strong new design activity in place across our customer base, we expect first quarter and potentially first half DRAM probe card demand to continue at levels comparable to the fourth quarter.

The HBM3 transition is especially exciting for FormFactor that's yet another example of industry adoption of advanced packaging with customers stacking up to 16 individual silicon die to meet memory bandwidth and power requirements in high-performance compute applications. In these stack die architectures, the value of testing increases as more die are added to the stack to avoid incorporating bad component die into an otherwise good stack. As a result, as advanced packaging schemes like HBM3 are adopted, we are seeing a substantial growth in test intensity.

On top of that, the technologies required to test these devices are extremely complex and sophisticated. The dimensions of an individual MEMS fabricated probe are comparable to a human hair, they carried power at over an amp of current and signals at tens of gigahertz while lasting millions of contact cycles. Moreover, a typical probe card contains tens of thousands, if not hundreds of thousands, of precisely assembled MEMS probes. This combination of increased test intensity, which expands the number of probe cards required for wafer out and test complexity which widens FormFactor's competitive advantage is characteristic of all types of advanced packaging.

As the industry's focus moves to post-fab integration to offset the slowing of front-end Moore's Law wafer test and probe cards are taking a prominent role in enabling a variety of advanced packaging schemes like HBM stacking of DRAM die and heterogeneous integration of chiplets, and are at least partially responsible for the double-digit growth we delivered in both 2019 and 2020. These secular growth trends support our investments in capacity with increased capital expenditures, including our 2020 purchase of a new 90,000 square foot factory in Livermore, which is scheduled to begin revenue shipments in the second half of this year.

Turning to M&A, following two acquisitions in the second half of last year, our team is focused on integrating our additions. The Advantest's probe card assets we acquired in July are now fully integrated into our probe card operations, and we have launched an internal program to incorporate several technology subcomponents into FormFactor's probe card roadmap. We are also making progress introducing the acquired mainstream NAND flash probe card products into the global FormFactor channel and are working closely with multiple customers on first half 2021 qualification plans.

Our addition of HPD in the fourth quarter is also proceeding according to plan. We've integrated SG&A functions with the broader FormFactor organization. The combination of FormFactor's customer relationships and global footprint together with HPD's world-class cryogenic thermal control and test expertise has enabled us to engage companies and research institutes leading in the nascent field of quantum computing in the U.S., Japan and the EU. Although we do not expect a significant financial contribution from these activities in 2021, we are excited about the long-term growth prospects enabling quantum computing with our emerging leadership position in cryogenic test and measurement.

Finally, with record fourth quarter results and a solid first quarter outlook, we are making progress toward the target financial model we unveiled last year that delivers $2 of non-GAAP earnings per share on $850 million of revenue. Test and measurement is becoming a more important and strategic place in the semiconductor industry, driven by trends like 5G and advanced packaging. Our leadership position in these attractive markets paired with our differentiated strategy and disciplined execution will drive continued growth and share gains as we progress toward our target model.

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, we concluded the year with all-time record quarterly and annual revenues as well as non-GAAP operating profit and net profit, driven by continued strong demand in both our Probe Cards and Systems segments. Fourth quarter revenues and EPS were above the high end of our outlook ranges while gross margin was below the low end of our outlook range.

FormFactor's fourth quarter revenues were $197 million, an 11% sequential increase from Q3. Quarterly revenues increased 10% year-over-year and contributed to total fiscal 2020 revenues of $694 million, an 18% increase compared to 2019. Probe Cards segment revenues were $162.5 million in the fourth quarter, an increase of $12 million or 7% from Q3. The increase was driven by higher foundry and logic and DRAM revenues, partially offset by a decline in Flash revenues. Systems segment revenues were $35 million in Q4, an increase of $7.5 million or 27% from the third quarter.

Within the Probe Cards segment, robust demand for foundry and logic continued with revenues growing $14 million from Q3 to $123 million, comprising 62% of total company revenues in Q4, a slight increase compared to 61% in the third quarter. DRAM revenues were $35 million in Q4, an increase of $3 million from the third quarter and were 18% of total quarterly revenues, same as in the third quarter. As first communicated in the last earnings call, DRAM demand has returned to what we believe to be a more normalized quarterly run rate.

Flash revenues of $5 million in Q4 or $6 million lower than in the third quarter and were 3% of total revenues in Q4, same as in Q3. As expected, Flash revenues continued to be lumpy from quarter to quarter. GAAP gross margin for the fourth quarter was $78 million or 39.4% of revenues, as compared to 43.1% in Q3. Cost of revenues included $7.9 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. The increase of $1.5 million in the non-GAAP reconciling items in Q4 as compared to Q3 is related to the acquisitions of Advantest's probe card assets during the third quarter and HPD during the fourth quarter.

On a non-GAAP basis, gross margin for the fourth quarter was $86 million or 43.4% of revenues. 330 basis points lower than the 46.7% non-GAAP gross margin in Q3 and 60 basis points below the low end of our outlook range, mainly due to the warranty costs and less favorable mix as Mike mentioned.

Our Probe Cards segment gross margin was 43.9% in the fourth quarter, a decrease of 230 basis points compared to 46.2% in Q3. The warranty charge accounted for 110 basis points of the decrease in the consolidated gross margin and the remaining decrease was due to anticipated less favorable mix.

Our Q4 Systems segment gross margin was 41.3% as compared to 49.8% in the third quarter. The decrease of 8.5 percentage points was driven mainly by an unusually unfavorable product mix. This decrease in the Systems gross margin accounted for 1.5% of the 3.3% overall decrease in gross margins. We expect the Systems segment gross margin to improve to mid-40s in the first quarter. And as we have previously said, we expect it to range between the high-40s to low-50s. As we make progress toward achieving our target financial model gross margin of 47%, margins will fluctuate from quarter to quarter.

Our GAAP operating expenses were $56.8 million for the fourth quarter, $2.1 million higher than in the third quarter. Non-GAAP operating expenses for the fourth quarter were $48.1 million or 24.4% of revenues compared to $48.4 million or 27.2% of revenues in Q3. The decrease of $0.3 million was mainly due to one-time IT security remediation costs in the third quarter, partially offset by higher Q4 performance-based compensation and the addition of the businesses we acquired in Q3 and Q4.

Company non-cash expenses for the fourth quarter included $7.7 million for the amortization of intangible assets, $7.1 million for stock-based compensation and depreciation of $6.2 million. Fourth quarter amortization of intangible assets was $1.2 million higher than in Q3 as a result of the acquisitions completed in the third and fourth quarters. Stock-based compensation was $1.5 million higher than in Q3 due to the timing of annual grants, and the increase in depreciation of $1 million from the third quarter as a result of recent investments made in capacity expansions and acquisitions.

GAAP net income for the fourth quarter was $19.3 million or $0.24 per fully diluted share compared to $22.9 million or $0.29 per fully diluted share in Q3. The non-GAAP effective rate for the fourth quarter was 7.5% down from 12.7% in Q3. This lower rate is a result of the relative increase in export revenue in Q4 which benefits from the regulation regarding global intangible low taxes income, also known as GILTI, as we mentioned in the previous earnings call. The application of these new regulations resulted in a one-time cumulative benefit in 2020, which caused the full-year effective tax rate to be 13.4%, slightly below the lower end of the 15% to 20% range we previously communicated. We continue to estimate that the annual non-GAAP effective tax rate for fiscal year 2021 will be 15% to 20%.

As a reminder, our cash tax rate is expected to remain at 6% to 8% of non-GAAP pre-tax income until we fully utilize our remaining U.S.-based R&D credits. Fourth quarter non-GAAP net income was $35 million or $0.44 per fully diluted share compared to $31 million or $0.39 per fully diluted share in Q3. In summary, EPS was slightly above the high end of our outlook range due to the higher revenues and lower effective tax rate, partially offset by the impact of the lower gross margins.

Moving to the balance sheet and cash flows, we generated $31 million of free cash flow in the fourth quarter compared to $37 million in Q3, taking our total cash and investments to $259 million in the end of the quarter. The sequential decrease in free cash flow in the fourth quarter reflect an anticipated increase in capital expenditures. As of the end of the fourth quarter, we had two term loans remaining on our balance sheet totaling $34.5 million. We invested $14 million in capital expenditures during the fourth quarter compared to $5 million in Q3, which brings total 2020 capex to $56 million as compared to $21 million in fiscal 2019. This increase is in line with our previous communications and chiefly reflects capacity expansion in the new building in our Livermore campus.

We expect to continue the significant investment in capacity in 2021 and capex for the year is expected to be between $80 million to $100 million. As a reminder, we expect capex to return to 3.5% to 4% of revenues in our target financial model after we conclude these capacity expansions. I'm also glad to reported that during Q1 we went live with our ERP consolidation. These significant projects unify our ERP systems, will improve our operational efficiency and help us achieve our target financial model, and the go-live is an important milestone. At quarter end, our total cash balance exceeded the debt balance by $223 million, an increase of $15 million from Q3 quarter end. The increase is mostly attributable to strong cash flow from operations less cash used for HPD acquisition and capital expenditures during the quarter.

Turning to 2021 first quarter non-GAAP outlook, as Mike mentioned, we expect a generally strong demand for advanced probe cards with no demand in foundry and logic, DRAM and Systems, partially offset by an increase in Flash. These factors result in a Q1 revenue outlook in the range of $176 million to $188 million. Product mix is expected to be more favorable in Q1 and most of the unusual factors that impacted Q4 gross margin are not expected to reoccur in Q1, resulting in non-GAAP gross margin outlook for the first quarter in the range of 44% to 47%. At the midpoint of these ranges, we expect Q1 operating expenses to be comparable to Q4 due to the usual annual benefit reset and higher R&D spend, offset by lower performance-based compensation. Accordingly, non-GAAP earnings per fully diluted share for Q1 is expected to be between $0.34 and $0.42. 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. We ask that when you ask your question please indicate if you direct your question to Mike or to me, since as you can imagine, we are still not in the same room. Operator?

Questions and Answers:

Operator

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

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Hi there. Good afternoon and thanks for allowing us ask a few questions. Maybe just the first question, in terms of the gross margins in 4Q with those lower gross margin products that you've recognized and also expect to recognize a little bit in 1Q, were they probe systems? Because I know you obviously have a broader portfolio now of products in the system revenue component. So, with those probe systems and I guess where they not in the prior forecast and did they also represent a good chunk of the revenue upside that you reported in 4Q?

Shai Shahar -- Chief Financial Officer

Hey, Brian. This is Shai. Thank you for the question. And, yes, the majority of the lower margin impact came from the Systems segment. And some of these sales were not forecasted, but in a way that we always have a different mix of products. In this quarter, the mix was less durable in a very unusual way. As we said that we see less of these remaining in our backlog for Q1, and thus we expect the gross margin to be better in Q1.

But also I wanted to remind everybody that our margins will continue to fluctuate. We saw in Q4 of 2017 low System gross margin impacting us and if you look at Q3 of 2020 that margin went up to 46.7%. And so this quarter the unfavorable -- the unusual unfavorable mix, but we are confident that we are on our way to achieve a 47% gross margin of our target financial model.

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Got it. Before I ask my follow up just may be exclusive or may not be mutually exclusive, but also I note China sequential revenue was up pretty high magnitude, is there any sort of overlap there with sort of systems or is that more tied into the probe card business?

Mike Slessor -- President and Chief Executive Officer

Yeah, Brian, it's Mike. I'll take that one. A good observation, China revenue was again up pretty significantly. The bulk of that continues to be consistent with the insight we provided last quarter. It's probe card shipments to multinationals who are directing us to shift into their assembly and test facilities in China. And so the bulk of the revenue uptick for China really has nothing to do with the Systems business. Having said that, there were some lower margin configurations in the Probe Systems business that did contribute -- that went into China that did contribute to the shortfall in gross margins in that segment.

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Okay. Alright. Thanks, Mike. Maybe last question and the follow-up, to address your production capacity expansion, I guess, about 3Q and maybe 4Q, and can you increment up your capacity in Livermore say 5%, 10%, is that kind of a band that makes sense in terms of what you might be able to increment it up? And then also maybe back to Shai, in terms of gross margins, can you quantify any drag you might expect that some of that new capacity does ramp up and how that might be allocated across the year?

Mike Slessor -- President and Chief Executive Officer

Yeah. So, Brian, it's Mike, I'll start with the trajectory. As you've seen through 2020 even with all the different restrictions we've had manufacturing in California and Oregon, we've managed to steadily increased capacity. And we expect to be able to do that in the front part of 2021 in advance of bringing on the large capacity expansion associated with our new 90,000 square foot facility. Now, that will ramp fairly gradually. As I said, we expect to make revenue shipments starting in the second half there. But I think it's reasonable to also assume that inside our existing footprint, we're getting more efficient and something like high-single digit capacity increase percentage is probably not unreasonable from the existing footprint, obviously, adding the new factory gives us legs beyond that, but then take us to the $850 million level of our target model.

Shai Shahar -- Chief Financial Officer

Yeah. In terms of the impact on the gross margin, I think, the best way to describe it is that we took all that into consideration when we put out our model. So, the 47% gross margin, our target model and at $850 million of revenue as Mike described, take that capacity expansion into consideration.

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Got it. Kind of the front end of that you don't necessarily expect 50 basis point or some kind of drag in the second half of the year as some of that new capacity comes up.

Shai Shahar -- Chief Financial Officer

Not necessarily and we need to remember that mix still have the biggest impact on our gross margin. So, we have other factors in addition to just go live. And as Mike said, we're going to do it gradually in the 2021 the tools and adding capacity on top of the building and the rest of [Speech Overlap]

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Great. I'll back in the queue. Thanks so much.

Mike Slessor -- President and Chief Executive Officer

Thanks, Brian.

Shai Shahar -- Chief Financial Officer

Thank you, Brian.

Operator

Thank you. Our next question comes from the line of Charles Shi from Needham & Company. Your line is now open.

Charles Shi -- Needham & Company -- Analyst

Hey, Charles Shi here. Thank you for taking my question. Mike and Shai, I have a question regarding your quarterly run rate here, apparently your fourth quarter run rate is almost, if we annualize it, you are getting almost close to $800 million per year, which is probably less than 10% away from $850 million model. I just wonder, especially on the System revenue side, it looks like this was a record high for you, are we looking at the new normal here or do we expect some of the modulation of the Systems revenue going forward?

Mike Slessor -- President and Chief Executive Officer

Charles, I'd expect to see modulation in all the different segments. If I back up and look at the constituent drivers of revenue for FormFactor, we put together a pretty diversified portfolio drivers both through organic growth and the M&A we've done over the years. And in any given quarter there's going to be different puts and takes associated with those. In the fourth quarter, as you noted, we saw strength basically across the board. We had very high foundry and logic revenues, driven by the fabless foundry ecosystem and by IDMs. We had the highest DRAM probe card revenue in 2020. And as you know, Systems revenue was up both organically and due to some of the acquisitions we've made over the past year or so in that sector.

So, your observation associated with the $800 million run rate, certainly, is a reasonable one. Our outlook for Q1 comes down a little bit as some of those things come back to lower perhaps more normal levels. But we're going to see fluctuations quarter-to-quarter. That's why we've tried to build a diversified set of revenue drivers, so that we can manage those fluctuations inside each of our customers and inside each of our different segments.

Charles Shi -- Needham & Company -- Analyst

Got it. Got it. Thank you. So, Mike, if I may, I would like to just dig a little bit more into your probe card side of the business, definitely you did tell us that you expect some modulation in the first quarter for the foundry and logic side given that the design release activity going to probably slow down little bit associated with the 5G handset. Just wonder because in your long-term model, you are sort of expecting 8% plus-minus kind of advanced profile the probe card revenue growth. Given that last year your probe card was having a double-digit growth, do you also expect that that growth rate in 2021 to be slightly below the long-term growth rate or you think 8% is still a good number for this year and going forward?

Mike Slessor -- President and Chief Executive Officer

Well, the 8% was, as you know, a longer-term growth rate, obviously, the semiconductor industry, although collectively we've been pretty fortunate over the past couple of years to have much less cyclicality. You still going to have some fluctuations in demand. For the advanced probe card business in which we lead, we have had very strong growth the past couple of years. And so I think perhaps a little bit of moderation and digestion into 2021 is not a bad scenario to think about.

Having said that, you look at some of the drivers like 5G and advanced packaging and they continue to drive strong customer investment in wafer test and measurement. And so it's still obviously very early in the year, but a lot of the conditions that did drive that strong growth in the past couple of years continue to be in place. We're working hard to put the capacity in place to execute on those. But certainly high single digits is a reasonable long-term growth rate to think about our probe card business. Fluctuations will happen quarter to quarter for sure.

Charles Shi -- Needham & Company -- Analyst

Got it. Thank you. Maybe my last question, I want to ask a little bit more about China, knowing that the domestic Chinese customers do not really have a major contribution, a lot of that is that the multinationals, over the past quarter do you see any change of behavior, any stockpiling by some of your Chinese, domestic Chinese customers ongoing? Any color would be great.

Mike Slessor -- President and Chief Executive Officer

Yeah. I mean, we're working pretty closely with a couple of those key customers, key China domestic customers especially in the memory space. FormFactor obviously has a nice technology differentiation in memory, especially in DRAM. And so we've been quite closely partnered with some of those customers. They are ramping fairly aggressively, so I don't think there's the opportunity for a lot of stockpiling. It would be difficult for us to tell in any way. But I think we continue to work closely with those customers to monitor the regulatory environment and make sure that we can extract whatever opportunity that we can out of the domestic China customers in addition to serving the region with the large multinationals that we're supporting.

Charles Shi -- Needham & Company -- Analyst

Thank you.

Mike Slessor -- President and Chief Executive Officer

Thanks, Charles.

Operator

Thank you. Our next question comes from the line of Craig Ellis from B. Riley. Your line is now open.

Craig Ellis -- B. Riley Securities -- Analyst

Yeah. Thanks for taking the question, and congratulations on the nice revenues in the quarter. Mike, I wanted to start with a question for you. So, the Systems business was particularly strong in the quarter, I don't recall, at least I don't see in my model that we are getting about $30 million we were rounding at $35 million. At times in the past you've helped us see some of the different technology drivers that are contributing to Systems strength. So, what was it in particular that contributed to Systems strength and were there -- was there or were there a singular or multiple tech teams that you're seeing, as you see that kind of demand pull in the quarter?

Mike Slessor -- President and Chief Executive Officer

Yeah. I think, as a reminder for people, the Systems business really serves leading edge R&D and development for the key customers in the industry. There is a couple of drivers to that. First of all, there is the organic essentially the engineering prober business we acquired as part of the Cascade Microtech deal, but as a reminder we also report FRT, our advanced packaging metrology and inspection business that we acquired in late 2019 and now HPD the cryogenic test and measurement business we acquired in Q4.

So, there is organic growth components associated with some of the exciting things happening in the semiconductor industry, whether it's CMOS advancements, some of the optoelectronics pieces that are served by that engineering prober business, the legacy Cascade business. But we've also got some nice additions and accelerations through our M&A strategy that are being reported in the System segment.

Craig Ellis -- B. Riley Securities -- Analyst

That's helpful. So, would it be fair to think there should be really a kind of low to mid-30s business going forward or whatever reason could it back more toward the mid-20s where it was, what was tracking over a multi-year basis.

Mike Slessor -- President and Chief Executive Officer

Yeah. I think, with the M&A additions although HPD for us a little bit more futuristic in serving quantum computing. There is a contribution there. But I'm not sure it would shift the way to model much. The FRT business continues to grow nicely, again, driven by the unique metrology and inspection requirements of advanced packaging. That's a theme for FormFactor across our businesses whether they'd be probe cards or engineering systems.

And so, going back to the mid-20% levels, I think, would be a disappointment for us because it implies some contraction among all those businesses. As we get adoption with the FRT business, as we get a little bit of momentum around the cryogenic test and measurement space was HPD and see some of the slower but steady growth associated with the classical Systems business, I think, it's reasonable to expect that segment to report certainly in the low-30s.

Craig Ellis -- B. Riley Securities -- Analyst

That's very helpful. I also wanted to ask a question about customers and that's really a two-part question, and I'll keep it with you. The first part of the question is given Intel's historic significance as a customer to the company and following some recent commentary from an incoming CEO that seems to point toward retain a significant manufacturing operation, I was hoping to get your updated views on Intel. And then with that as a takeoff point, if you could talk about some of the opportunities that the company has to expand its customer base over time, it's been a big part of the growth story over the last numerous years and what are the opportunities that you see out there today? Thank you.

Mike Slessor -- President and Chief Executive Officer

Sure. Our largest customer represents an anchoring relationship for the company. It's a long-term engagement well over a decade long and we spend a lot of our resources and management bandwidth making sure we're in lockstep with that customer. Having said that, it's a little early to understand the implications of their CEO transition. I do think the spectrum of manufacturing strategies that are available to them from IDM on one end to fewer fabless on the other. Certainly, the recent comments would indicate that the things have swung back a little bit closer to the IDM strategy.

But I think -- if we look further beyond to the rest of the industry, this is basically why FormFactor has made it such a priority to serve all of the leading customers in the industry, whether they be IDMs or foundries in all of the different segments because we want to make sure that we're able to support these customers and have the opportunity to win business no matter what their manufacturing strategy is, obviously a very dynamic time in the semiconductor industry and we want to have our bases covered, so that we could have -- do have a good opportunity space.

There are a couple of key customers both in the microprocessor space and in the mobile and automotive space where there are some objectives that we have to go gain share, and expand and continue to diversify our overall customer base, even from the leadership position that we have.

Craig Ellis -- B. Riley Securities -- Analyst

That's helpful. Thank you. And then lastly if I could sneak in one more before dropping back into the queue. Shai, helpful to get the color on the opex intensity for the March quarter. The question is, what would the contour of opex look like? Beyond that, are there things that are happening either with R&D or other programs maybe related to just new facilities that would cause us to have to think about some incremental expense or will it potentially even drift down. Thank you, Shai.

Shai Shahar -- Chief Financial Officer

Sure. So, if you look at opex for 2020 for the overall view it was 26% of revenue. And given the growth in 2020 and the required capacity expansion and we put some programs that are on hold in 2020 just because of COVID restrictions and stuff like that. In 2021, we do expect opex to catch up, a lot of investments in R&D. And but also small things like travel that we hope and believe they will restart at some point. So, we will continue to invest in R&D. And we expect to see more leverage in SG&A and making progress on that in 2021 on our way to the target model of R&D at 13% in SG&A at 12% of revenue. So lot of it will be there in 2021, but on our way to be there.

Craig Ellis -- B. Riley Securities -- Analyst

Thank you.

Operator

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

Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst

This is Tyler on behalf of Christian. Thanks for letting us ask couple of questions. First question for Mike probably kind of revisit your previous question maybe asked another way, your foundry and logic probe card business was very strong in Q4 here and you said that you expect it to be down maybe, down modestly sequentially in Q1. So, the question is, would we still expect after the strong 2020 for the foundry and logic to grow in 2021? And if so, what would be kind of the major drivers there, I know you mentioned 5G ramps are kind of over after Q4. So, if you do expect growth, kind of what are the major drivers of that you point to? Thanks.

Mike Slessor -- President and Chief Executive Officer

Yeah. So, first of all, I certainly wouldn't characterize the 5G ramp is over, but there was -- remember, probe cards are specific to individual customer chip designs. And so if you have customers all ramping a particular design at once, that's going to create strength in that time period where you're delivering and recognizing revenue on those cards, and this is a business that's very time-sensitive, right. You have to deliver the probe cards in time for those customers to test the wafers. So, we don't have a lot of flexibility on delivery time. So, you had the coincidence of both our largest customer returning to almost historically high levels in the fourth quarter.

In the fabless foundry ecosystem, a couple of mobile and a couple of high-performance compute designs, the mobile designs for sure associated with 5G that ramped hard. We just see those that specific concentration of designs, not necessarily happening in the first quarter. I mean, our guidance is obviously not down by a huge amount. And so you can see there is still significant strength there.

Longer term, as we look through 2021 and next couple of years toward target model, growth in foundry and logic probe cards is one of the fundamental underlying drivers of our path toward that model and 5G is a huge part of it. So, by no means is the 5G ramp over. We just had a bunch of design stack up that we had to deliver in the fourth quarter that lead to the all-time record quarterly revenues.

Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst

Makes sense. Perfect. Understood. And thank you for clarifying to comment on site. And second question then moving on to the DRAM probe card side, strong end of the year after couple of quarters of more digested in the beginning of 2020. You said you expect that kind of flat Q1 maybe even still in the first half. So, I was wondering could we expect kind of $35 million, $40 million levels sort of baseline for that business, or over time can we get back to be above $40 million a quarter like we saw a couple of years ago?

Mike Slessor -- President and Chief Executive Officer

Yeah. The way we think about DRAM and obviously being a supplier in the DRAM supply chain value chain, you have to be prepared to deal with cyclicality, at least on a quarterly basis. We saw that as you noted in 2020, right. We went from what was a multi-year high in Q4 of '19 at about $40 million in DRAM revenues down to $20 million in next quarter. That's a pretty extreme swing. But I think it does represent the bands in which that business should be expected to operate in any given quarter. 2021 though does seem to be a pretty decent year for the overall DRAM supply chain. There's going to be investments in capacity. As we told you we see strong design pipelines from our customers that are feeding our business. I think though that a reasonable expectation in any given quarter is probably a $30 million maybe low $30 millions kind of run rate for DRAM with some unusual swings up and down as different design release cadences either are additive or substractive with each other. So, think about it in $35 million probably the high-end of what I want to give you for an average level, but certainly starts with the three.

Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst

That's great. Very helpful. That's all we have. Thanks, guys.

Mike Slessor -- President and Chief Executive Officer

Thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Tom Diffely from D.A. Davidson. Your line is now open.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Yes, good afternoon. Thanks for taking the question. Mike, maybe another geographic question for you, when you look at Taiwan, it was about 25% of the business, but I was surprised to see that TSMC was not a 10% customer, so maybe just talk a little bit about the dynamics in Taiwan.

Mike Slessor -- President and Chief Executive Officer

Sure. Well, there's a lot of action in Taiwan, right. We have one of our large memory customers, has a large production and test facility there, a lot of the outsourced assembly and test capacity of the world is in there. So, Taiwan revenue is not necessarily the world's largest foundry. But with them, they were a 10% customer in the third quarter. They were close to a 10% customer, again at the record revenue levels of the fourth quarter. And given the continued momentum we have in delivering into their advanced nodes. As a reminder, this is for us a 10 nanometer, 7 nanometer, 5-nanometer kind of business, but we're doing a nice job, I think, of broadening that business.

We've got multiple mobile and high performance compute designs that we're shipping here in the first quarter. And I wouldn't be too surprised to see them back on the 10% list sporadically up and down in the near future.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Okay. So, in general, how often do the fab assembly and test guys buy the probes from you versus the foundry when the wafers went out the door?

Mike Slessor -- President and Chief Executive Officer

It really depends on individual customer and even individual projects. We'll have some customers who like to hand all of that over to either the foundry or the outsourced assembly and test house. We'll have some customers that want to manage it very carefully. So, it's one of the unique aspects of this business as you have a very broad engagement with all kinds of different elements of the semiconductor manufacturing team.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Okay, great. And moving over to the Flash business, obviously, it's very lumpy. But I was surprised it dropped as much as it did, especially since the acquisition of Advantest's technology I thought maybe to be a little bit more of a sustained business going forward?

Mike Slessor -- President and Chief Executive Officer

Certainly, that's one of our aspirations as we talked about that acquisition. There were two fundamental annexed to it. The first one was, there were some very interesting technology that resided there that we felt was useful on the FormFactor DRAM and foundry and logic roadmaps. The second one was we felt like we may be able to make some progress in using a cost competitive flash technology that team has developed and push it into the broader FormFactor customer base places where they really hadn't access before. The second one, I talked about both of these in the prepared remarks, but that second element those things take a while to come to fruition. We are in active discussions with multiple customers on qualifications for the first part of 2021. But given that business with single digit millions revenues historically, I wouldn't expect annually, right, I wouldn't expect it to make a big impact on our flash business until we're able to gain some traction with these additional customers.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Okay. That makes sense. And then finally, Shai, when you look at the gross margins in your target model, does that require a different product mix, the mix has a big impact on margins on a quarterly basis. But if you look over the next year or two to get to the target model, do you need to see certain parts of your business grow faster than others?

Shai Shahar -- Chief Financial Officer

So, as a reminder, even though it was not really reflected in the Q4 gross margin, historically, the Systems business has the highest gross margin followed by foundry and logic then DRAM and Flash. And, of course, there is some overlap when we move from one market to another, it's not as we see in Systems is higher and everything, Flash is lower. So, as we grow the business when we presented the $850 million model, we talked about most of the growth coming from the foundry and logic. And so this will help achieving the 47% gross margin.

But together with operational excellence that we're working on, the ERP implementation project is one of them. The additional capacity will help, of course, but these are the main drivers.

Tom Diffely -- D.A. Davidson & Co. -- Analyst

Okay. Thanks, Mike. Thanks, Shai.

Mike Slessor -- President and Chief Executive Officer

Thanks.

Operator

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

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Hi there, again. Just maybe a quick follow-up, probably for Mike, HBM3, SoiC, Foveros, when you kind of look at the Avant-guard [Phonetic] of advanced packaging technologies, when you think that will really begin to favorably impact your revenue CAGR in probe cards?

Mike Slessor -- President and Chief Executive Officer

I think, you've seen some of that already. If you look at the probe card market in 2020, it almost certainly grew faster, I mean, we'll find out in a couple of months when VLSI rolls up their survey. They almost certainly grew faster than the historical correlation with the semiconductor industry that we've observed. That also was the case in 2019. And so I think you're seeing the leading edge of some of these things. But each of the projects you talked about still pretty early innings. If you look at those as a fraction of wafer starts for any of our customers, they are still relatively small.

Having said that, they consume a good fraction of the test capacity because of the need for high test intensity and high test complexity to make sure you've got something close to known good die as we've talked about in various, well, most recently the Analyst Day we did last year. So, I think, you're already seeing the leading edge of this. If you look at our results and the probe card market results over the past couple of years, obviously, as the semiconductor industries continues to accelerate adoption of these, I think, various customers have made pretty firm comments that for 7-nanometer and 5-nanometer they view advanced packaging with these various architectures as being a big part of their innovation roadmap. I think, you'll see that probe card intensity continue to increase.

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Okay. Makes sense. And maybe one last other quick follow-up, in terms of going back to sort of the commentary around modulation of revenues and segments, at a high level across the semi industry it's harder in some areas and others, but there is some ability to sort of meet wafer demand. Some areas of maybe advanced, some areas of mature nodes and you guys play more in the advanced area. But based on that those sorts of wafer constraints for upstream for you guys, do you see that playing into -- in anyway playing in the modulation of your revenue as we kind of walk through this year?

Mike Slessor -- President and Chief Executive Officer

That's a tricky one. I think, if you think about it from a bottoms-up perspective, for sure, there are individual designs with individual customers, they get pulled in or pushed out depending on the priority calls they make with respect to the overall capacity they're able to secure. And so at a -- at an individual design level, you see that it work every day as our mix shifts around in the factory. But part of our strategy, again, has been to try and be exposed to so many of those different drivers that they essentially all average themselves out through the diversification of our business across all of the different puts and takes in the industry.

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Okay. Yeah, great. Thanks for all the answers to the question. Thanks.

Mike Slessor -- President and Chief Executive Officer

No problem. Thanks, Brian.

Operator

Thank you. Our next question comes from the line of David Duley from Steelhead. Your line is now open.

David Duley -- Steelhead Securities -- Analyst

Yeah. Can you hear me?

Mike Slessor -- President and Chief Executive Officer

Yeah, we can hear you, Dave.

David Duley -- Steelhead Securities -- Analyst

Okay. Sorry, I have had some technical issues. I think, in your prepared remarks you talked about NAND qualifications in the first half of this year and ramping up in the second half of the calendar year. Could you just elaborate a little bit more on that? And do you have targets for growing this business now that you seem to be engaged with the broader set of customers?

Mike Slessor -- President and Chief Executive Officer

Yeah. So, I think, I'd characterize the first part of 2021 as planting some seeds, the acquired -- our legacy NAND Flash business, our legacy Flash probe card business, remember, we need to be fairly opportunistic essentially skimming the high end of the opportunities that are available to us, because it really is a higher cost platform and we can't be cost competitive in the real sort of majority of 3D-NAND.

The Advantest acquisition gives us what I characterize as an option to go participate there. And so we've begun discussions with a couple of existing FormFactor customers on beginning a qualification in the first half of the year. Remember, that qualifying a new architecture with a major customer usually takes a while. And so I wouldn't want to create the expectation that we'll check the qualification box in the first half and then see skyrocketing NAND revenues, because we also want to be careful that we're meeting all of the capacity and delivery requirements once we do get qualified with these customers.

So, it's a little early for us pre-qualification to be setting growth rate targets, but there is an aspiration for us to grow our NAND Flash market share on the back of having a much more cost competitive NAND Flash program.

David Duley -- Steelhead Securities -- Analyst

Maybe, you could just characterize it and do you have a target for market share rather than a growth rate for your business?

Mike Slessor -- President and Chief Executive Officer

Well, so the NAND Flash probe card market, in round numbers between $200 million and $250 million a year spent by our customers. Some of that you can probably considered to be captive to some Korean suppliers, so probably not really servable market by us. But if you think over the long term, I don't think it's unreasonable that we could take our share position from what do we do 2025 million a year, so 10% and over the next couple of years on the way to the target model may be get that up into the teens.

Again, market share gains, where you're introducing a new product to a new set of customers, not new to FormFactor but new to that product is a long slow slog and one that we're committed to, see, we can make up. But again, it's a little early to be making top line permits [Phonetic].

David Duley -- Steelhead Securities -- Analyst

Okay. And then one technical question from me, you spoke about DRAM and how I think it's becoming more test intensive as you stack the DRAM parts in these type bandwidth configurations. What percentage of the DRAM now do you think is stacked in that configuration, and what percentage you think the market will move toward over time. I'm just trying to figure out, because it seems like a key driver to demand for probe cards. So the more information here. I can get the better.

Mike Slessor -- President and Chief Executive Officer

Yeah. So, HBM structures in general maybe implicit in your question are a pretty small portion of overall industry DRAM wafer starts, right. The vast majority of DRAM is not the stack die high-bandwidth memory configurations, these high-bandwidth memory configurations whether it'd be HBM2 are now moving to HBM3 are really targeted at the specific requirements of high performance compute, very high bus speeds, decent power management. And so it's -- if you want to come out from a revenue perspective, it's probably, I don't know, single digit percentage of DRAM, overall revenue for our customers.

Wafer starts probably a little bit higher than that because you're assembling, you have to build a lot of wafers to assemble a 16 high stack of die. So, still understanding, it's a sub-segment of overall DRAM. I don't think it's reasonable to expect that all DRAM will become stacked, but we do see some growth there and any growth there is good because of the high test intensity and high test complexity.

David Duley -- Steelhead Securities -- Analyst

Thank you.

Mike Slessor -- President and Chief Executive Officer

Thanks, Dave.

Operator

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

Mike Slessor -- President and Chief Executive Officer

Thank you everyone for joining us on this first call of 2021, and we'll talk to you if not at some conferences between now and then on our next conference call after completing the first quarter. Take care.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Jason Cohen -- Vice President and General Counsel

Mike Slessor -- President and Chief Executive Officer

Shai Shahar -- Chief Financial Officer

Brian Chin -- Stifel, Nicolaus & Company -- Analyst

Charles Shi -- Needham & Company -- Analyst

Craig Ellis -- B. Riley Securities -- Analyst

Tyler Burmeister -- Craig-Hallum Capital Group -- Analyst

Tom Diffely -- D.A. Davidson & Co. -- Analyst

David Duley -- Steelhead Securities -- Analyst

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