Thank you and welcome, everyone, to FormFactor's First Quarter 2021 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..

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 in new technologies, the impacts of the COVID-19 pandemic, the impacts of regulatory changes, the anticipated demand for products our future ability to produce and sell products, the development of future products and technologies, and the assumptions upon which such statements are based.

These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call.

Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for the fiscal year ended 2020 and in 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, April 28, 2021 and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor..

first, significant R&D resources are required to develop probe cards that meet increasing test complexity, and second, a coordinated global infrastructure at scale is needed to support simultaneous rapid customer product ramps to high volume in multiple regions around the world. Turning to our Systems segment.

We executed on a more favorable product mix in the first quarter, which helped gross margins return to target model levels. A key factor in this improvement was shipments of multiple systems to research labs for testing devices at cryogenic temperatures.

Test and measurement at these ultra-low temperatures, often approaching absolute zero, are critical in enabling a variety of applications from the emerging field of quantum computing to the more mature area of infrared detectors.

Combining the capabilities we added in the fourth quarter acquisition of HPD, with our legacy engineering systems, electrical and optical test and measurement know how, offers us significant long-term potential to drive further growth as we enable these technologically demanding R&D applications.

As cryogenic applications like quantum computing mature and reach volume production over the next several years, our early engagement in the lab positions FormFactor well to serve the production test needs of the industry, as we continue to execute the lab to fab strategy that benefits both our customers and ourselves.

Finally, with the tailwind from a continued strong demand outlook, we're on the path towards 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 powerful trends, including 5G, advanced packaging and memory content growth.

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 towards the target month. Shai, over to you..

Thank you, Mike, and good afternoon. As you saw in our press release, first quarter revenues were at the high end of our outlook range, the second highest in company history. Non-GAAP gross margin recovered to slightly below the midpoint of our outlook range and non-GAAP EPS was at the midpoint of the range.

FormFactor's first quarter revenue were $187 million, a 5.3% sequential decrease from our record Q4 revenue and an increase of 16% year-over-year. Probe card segment revenues were $159 million in the first quarter, a decrease of $3.6 million or 2.2% from Q4.

The decrease was driven by lower foundry and logic and slightly lower DRAM revenues, partially offset by an increase in Flash revenues. Systems segment revenues were $28 million in Q1, a decrease of $6.8 million or 20% from the fourth quarter.

Within the probe card segment, foundry and logic revenues decreased by $9.3 million from Q4 to $113.4 million in Q1, comprising 61% of total company revenues, a slight decrease compared to 62% in the fourth quarter.

DRAM revenues were $34 million in Q1, a decrease of $0.7 million from the fourth quarter and were 18% of total quarterly revenues, same as in the fourth quarter. The strong demand for DRAM continues the trends we have seen during the last three quarters, and we expect this to continue in the current quarter.

Flash revenues of $11.6 million in Q1 were $6.4 million higher than in the fourth quarter and were 6% of total revenues in Q1, up from 3% in Q4. As we've said in the past, we expect flash revenues to be lumpy from quarter-to-quarter. GAAP gross margin for the first quarter was 41.1% of revenue as compared to 39.4% in Q4.

Cost of revenues included $7.2 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today and in the reconciliation table available in the Investor Relations section of our website.

On a non-GAAP basis, gross margin for the first quarter recovered, as expected, to 45% of revenues, 160 basis points higher than the 43.4% non-GAAP gross margin in Q4, mainly due to warranty costs for foundry and logic new product released in Q4 that did not recur in Q1 and an anticipated improvement in the systems segment gross margin related to a more favorable product mix.

Also in Q1, we began to see rising costs for key MEMS raw materials like rhodium, which is expected to impact our manufacturing costs. Our probe card segment gross margin was 44.3% in the first quarter, an increase of 40 basis points compared to 49.3 -- I'm sorry, 43.9% in Q4.

The increase is mainly due to Q4 warranty charge I just mentioned, partially offset by higher manufacturing spending and lower absorption on lower revenue. The favorable product mix in the Systems segment resulted in a significant recovery of 8 percentage points in gross margin from 41.3% in Q4 to 49.3% in Q1, even on lower revenue.

In the quarter, Systems segment gross margin returned to the anticipated range of high 40s to low 50s. As we continue to make progress towards achieving our target financial model gross margin of 47%, we expect that margins will fluctuate from quarter-to-quarter.

Our GAAP operating expenses were $54 million for the first quarter, $2.7 million lower than in the fourth quarter. Non-GAAP operating expenses for the first quarter were $46.4 million or 24.9% of revenues compared to $48.1 million or 24.4% of revenues in Q4.

The decrease of $1.6 million quarter-over-quarter is mainly due to lower performance compensation, partially offset by the impact of annual benefits and payroll taxes.

Company non-cash expenses for the first quarter included $7.1 million for stock-based compensation, $7.7 million for the amortization of acquisition-related amounts and depreciation of $6.1 million.

First quarter amortization of acquisition-related amount was $0.9 million lower than in Q4 as a result of finalization of purchase tax allocation related to our 2020 acquisition. Stock-based compensation and depreciation were similar to Q4.

Due to the gross margin recovery and a good expense control, we generated first quarter non-GAAP operating income of $37.6 million, effectively flat compared to the fourth quarter, despite $10.4 million in lower revenue.

GAAP net income for the first quarter was $19.6 million or $0.25 per fully diluted share compared to $19.3 million or $0.24 per fully diluted share in Q4. The non-GAAP effective tax rate for the first quarter was 18.6% as compared to 7.5% in the fourth quarter of 2020.

The lower rate in Q4 was a result of the onetime cumulative benefit in 2020 of application of regulations regarding global intangible low taxes income, also known as GILTI, and an increase in export revenues, as we mentioned in the previous earnings call.

The first quarter effective tax rate is within our communicated anticipated annual non-GAAP effective tax rate for fiscal 2021 of 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 US-based R&D credit.

First quarter non-GAAP net income was $31 million or $0.38 per fully diluted share compared to $35 million or $0.44 per fully diluted share in Q4. Moving to the balance sheet and cash flows.

We generated $19 million of free cash flow in the first quarter compared to $31 million in Q4, taking our total cash and investments to $272 million at the end of the quarter. The sequential decrease in free cash flow in the first quarter reflects changes in working capital, mainly an increase in inventories and a decrease in accrued liabilities.

As of the end of the first quarter, we had two term loans remaining on our balance sheet, totaling $32 million. We invested $13.5 million in capital expenditures during the first quarter compared to $14 million in Q4. This investment chiefly relates to the capacity expansion in the new building in our Livermore campus.

We continue to expect a significant investment in capacity in 2021, and CapEx for the year is expected to be between $80 million to $100 million, as communicated in our previous earnings call. 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.

At quarter end, our total cash balance exceeded the debt balance by $241 million, an increase of $18 million from Q4 quarter end. The increase is mostly attributable to strong cash flow from operations, less the cash used for capital expenditures, and $5.7 million used for stock repurchases during the quarter.

Turning to second quarter non-GAAP outlook. As Mike mentioned, we expect generally strong demand for advanced pop costs to continue with lower demand in foundry and logic and flash, offset by increases in DRAM and system. These factors result in a Q2 revenue outlook in the range of $180 million to $192 million.

Product mix is expected to be less favorable in Q2, with the decrease in foundry and logic and an increase in DRAM revenues, and we also expect higher raw materials costs, resulting in non-GAAP gross margin outlook for the second quarter in the range of 41% to 44%.

At the midpoint of these ranges, we expect Q2 operating expenses to be higher than Q1 by $1 million to $2 million, due to increasing headcount and R&D spend, partially offset by lower performance-based compensation. Accordingly, non-GAAP earnings per fully diluted share for Q2 is expected to be between $0.28 and $0.36.

A reconciliation of our GAAP to non-GAAP Q2 outlook is available on the Investor Relations section of our website and in our press release issued today. With that, let's open the call for questions.

Operator?.

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

Yes. Good afternoon, and thanks for the question. Shai, maybe starting with you on the gross margins. Obviously, nice to see the step function back up.

But when you look at the revenue at the high end of the guide range versus EPS below the midpoint, were the margins impacted during the quarter by any particular items?.

Well, as you know, Tom, we are a turns business, right? Even when we entered the quarter, we are exchanging backlog, but with the 6 to 8 weeks lead time, things change even within the quarter. And that's where we provide the range.

And because of these changes, even within the quarter, that's, in particular, just changes in the mix, we ended up with revenues closer to the high end of that range, but gross margin is slightly below the midpoint..

Okay.

I just wasn't sure if the high material cost was a surprise during the quarter?.

No, that's a good question. This is something we started noticing in the quarter, but we're mostly impact going forward. It's things that are in our inventory for Q1, but will start impacting gross margin or will impact gross margin in Q2..

Okay. That's helpful. Thanks. And then, Mike, you kind of a big picture question here.

When you look at one of your customers, or a customer, talk about $100 million of spending over the next three years, how does that translate from both the timing and a dollar amount to the probe card market?.

Yes. I think, there's been some pretty well-publicized announcements from several customers, particularly in Foundry & Logic, our largest market, about capacity and technology investments over the next couple of years. Those are going to result, obviously, in more wafer starts, more design starts.

And all of those designs and wafers are going to need to be tested by advanced probe cards. So if you look at how WFE and capacity increases translate into probe card spend, typically lags by somewhere between two and three quarters. Some customers are faster if they're going into existing facilities and it's just incremental additions.

But we would expect this significant build during 2021, especially a Foundry & Logic capacity to result in an increased demand for advanced probe cards as that capacity comes online either late in the year or into 2022..

And do you see a step function increase? Or do you see it kind of ramp up over a several quarter period as well?.

No, I think it will ramp up. There's -- of that magnitude, those investments have been announced over several years. Obviously, we're starting to see WFE accelerate here in 2021. But it takes a while logistically for all that equipment to get in, to get it qualified and to get it running. So I don't expect it to be a step function.

I would expect it to be rather gradual. But again, we're going to trail the equipment installs and qualification by a few quarters..

Great. Okay. Well, thank you..

Thanks, Tom..

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

Hi, there. Good afternoon and thanks for letting me ask a few questions. Maybe first to revisit the gross margin discussion a little bit. I think in the commentary I heard you referenced DRAM revenue run rate sort of back to the 2019 highs.

And so that suggests DRAM somewhere sort of quarter of the business in Q2, maybe sustaining a high run rate given sort of 180 companies earlier today, they're seeing a lot of growth in the wafer test part of that business.

And so I was hoping maybe you could talk about why the gross margins go down by 250 basis points at the midpoint? Because I noticed that back in the 2019 time frame, kind of sustained gross margins at the higher end of the range you're guiding in Q2, more kind of closer to the 44 plus percent. And so I guess that's the first question.

Second question would just be sort of on trajectory. I know you're not guiding for second half sales. So maybe it's a little bit difficult.

But in terms of getting back to sort of a 45%, 46% level, can you maybe provide some of the drivers that would kind of get you back in that range?.

Sure. Yes. So you rightly pointed out that we expect DRAM to grow to a similar level to the record we had in last year. So let's call it, low $40 million. And but you need to remember that even within the DRAM, there's a wide range of margins with different customers and different products.

So what we see in Q2 is not only DRAM going up, but also Foundry & Logic going down. And Foundry & Logic historically has higher gross margins than DRAM. So we see the phenomenon in Q2 of this shift in mix is that were a high gross margin revenues are being replaced by low gross margin revenues.

And because there is a specific mix to a specific customer and specific margin, it can fluctuate from quarter-to-quarter even if the DRAM revenue is at similar level.

And so if you look at the midpoint of our outlook range, yes, there’s 2.5% decrease from Q1 to the midpoint of Q2, I would say about 2% of it may be a little less than that relates to this shift in the mix from foundry and logic to DRAM.

And the remaining about 1%, a little bit less than that relates to the higher cost of materials that I mentioned in the call, specifically the rhodium. In terms of going back to the higher level, so we put a model in place last year, right? We talked about reaching 47% of target financial model.

We had some good evidence of our ability to get to these levels. If you go back a few quarters to Q3 of 2020, margin was almost at that model at 46.7%. So that was a good evidence that we can achieve this level.

And as we saw in the last couple of quarters and in the upcoming quarter, margin can fluctuate on our way to achieving that model, but we are confident that we are in our ability to get there..

Okay. I guess those -- the 50 basis points, maybe 100 basis points of hit from the higher input costs that can carry perhaps in the second half.

I guess, you'd expect the mix to probably turn not necessarily in DRAM going down, but thinking about how business trends for foundry and logic, perhaps those revenue streams could pick up a little bit towards the latter part of the year.

And so that will help you on the gross margin?.

Yes, Brian, I think….

Go ahead..

I think that's probably a reasonable scenario, right? We do see DRAM strength here in the second quarter. With lead times of less than a quarter, it's challenging to forecast much beyond that.

But certainly, the design activity that we're seeing pretends some DRAM strength through the middle part of the year and go back to Tom's question, with all of the capacity additions at the high end of foundry and logic, those almost half to turn into increased advanced probe card demand in the foundry and logic space.

So I think your scenario is a reasonable one to think about in the mix shift as we go through 2021..

Okay. And maybe one kind of last question, again, a little bit bigger picture or longer horizon here. But again, going back to what seemed to be positive developments just around over the past six-plus months around next-generation 3D packaging adoption, again, frankly, new fab build-out in general.

Thinking about your three-year targets that you gave last summer, I think it was 6% growth for probe cards for the market and your growth a little bit above that. Do you think those are now sounding too conservative, the 6% growth for the market? And I guess, again, that would bump up your growth potential as well..

Yes. It's a fair question and one that we've been posing to ourselves as well. When we put the model together, last summer, a little less than a year ago. This rapid increase in WFE in the industry capacity really hadn't been contemplated.

And so it's reasonable to assume that the assumptions associated with advanced probe card growth over the next couple of years, maybe that mid-single digits, I think we had a little bit higher than five, but mid-single digits may be more conservative.

Having said that, if we do see that happen, I agree with you, we should be able to outpace the market and grow faster, that will allow us to achieve the target model a little bit faster.

We're not going to go reset the target model, but hopefully, this increased capacity, increased WFE results in more wafer starts on leading-edge nodes, where -- obviously, where you look at 2020's results, we need that market that should provide a nice uplift and allow us to achieve $850 million in revenue and $2 in non-GAAP earnings per share before the 2023 timeframe we talked about..

Okay. Great. Thank you..

Thanks..

Thank you. Our next question comes from Charles Shi with Needham. Your line is now open..

Hi. Thanks for taking my question. I want to have a follow-up question on the DRAM probe card strength. Well, supposedly, you're getting somewhere about $42 million, $43 million in Q2.

And given that, as I understand, with the lead time for DRAM probe card, it's probably a little bit longer than you foundry and logic probe card, and you probably have a little bit better visibility into the third quarter or even fourth quarter here.

Are you, sort of, expecting third quarter can be run rating at a similar level at Q2 and fourth quarter and after running hard a few quarters may come down a little bit and maybe the momentum of foundry and logic probe card can pick up the slack and get you to a sequential growth kind of situation towards the year end?.

Yes. I mean, the mix shifts that you just articulated are certainly one of the possible scenarios. We have no visibility into the fourth quarter right now. No direct visibility in the fourth quarter. Obviously, our customer share forecast with us, we understand their design release cadences.

It's part of the reason why we're putting significant capacity in place. But PO visibility and PO lead times don't go anywhere close to the fourth quarter at this point. Your statement about the third quarter, sure we've got a little bit of visibility into there when you look at the lead times that we're currently running.

And if you look at past years, both 2019 and 2020, history would lead you to believe there's going to be some strong mobile foundry and logic activity in the fourth quarter. So the scenario you painted is not an unreasonable one.

Having said that, we just don't have the direct visibility to be able to, sort of, confirm that in any really affirmative way. It has been the pattern in the last couple of years. It's part of the reason why we are continuing to aggressively make investments, but I don't want to also create the expectation that, that profile is in the bag..

Okay. Thanks, Mike. Maybe a follow-up also on the gross margin because you've kind of talked about mix shift into second quarter, foundry and logic and Flash probe cards are down, but you expect DRAM and the Systems will come up. And the System business is higher gross margin -- that should offset some of the unfavorable product mix.

However, I think, Shai did mention a few factors, but I still feel like that -- your DRAM probe card gross margins kind of running at a relatively low level going into next quarter.

I wonder relative to your historical average, is Q2 slightly lower or is on a par? Or what's going on here for the gross margin for the year-end?.

So similar to what I answered to Tom, it's true that historic -- historically, foundry and logic has a higher gross margin than DRAM and Flash has lower than DRAM. But even within the DRAM, there is, of course, overlap with the high-end DRAM design can have a higher than foundry and logic DRAM gross margin.

And the low-end DRAM design can have a lower gross margin than the high-end Flash design. So within that range, what we see in Q2 is the shift in the mix is to a way that we have some high-volume design over low gross margin in the DRAM that -- and we are -- we're seeing lower foundry and logic designs that get off in Q2 with a high gross margin.

And the combination of these two is what creates the lower gross margin that we expect in the second quarter, in addition to the impact of the higher material costs..

Thanks. Maybe my last question, if I may. Zooming out a little bit to switching to a little bit longer term, your largest customer, they want to enter the foundry business.

And we just -- I just want to ask, Mike, if you have any thoughts on whether that could carry some of your strength -- market share strength at the existing -- I mean, let's call it, IDM 1.0 into this foundry side of the business of this particular customer or that could potentially open up some competition to your competitors.

Of course, I know you always expect competition when the market is growing strong.

But just any thought whether at a high level, this is a positive or negative for you guys? Or is a risk -- increasing risk for the lower risk for you?.

Yes. I think we view their aspirations to enter the foundry business is an exciting opportunity for us. Obviously, that customer -- the partnership and relationship there goes back well over a decade both between the companies and with the individuals involved. So there's a very close partnership.

And as we've begun discussions about how we can best support their plan to enter the foundry business, it's a pretty exciting opportunity. They've got some compelling assembly and test technologies that they can offer as part of that foundry business. It's not clear that they're going to be a major part of the foundry business at least initially.

But I think net-net, this really represents a positive for us. We have, obviously, a strong position in the foundry market right now. Their entry into it, I think we can help add value to their initiatives and hopefully mutually grow our businesses..

Thank you, Mike. Thank you. That’s all..

Thanks Charles..

Our next question comes from Craig Ellis with B. Riley Securities..

Guys, I'll start acknowledging that I'm leading with something that's at risk of beating a dead horse, but Shai, I get the intersegment mix dynamics that are going on in the guidance, the company has been very clear on those mechanics over time. The question though was really on the rhodium issue.

Do you have the ability to do any hedging? Or is there anything else you can do to mitigate the volatility of pricing there? Or is it just going to be a matter of you being a price taker for whatever happens with spot or whatever contract pricing plays out?.

Yes. So what we see in the quarter is the prices of rhodium went up from 16,000 per ounce to 28,000 per ounce, right? It's almost double. And I'm not a commodity expert, and we are not in that market. We look into what are the options when it comes to hedging, forward contracts and things like that.

But if you read the papers and look at what cost that, it looks like there were some productions, mining issues in South Africa that impacted last year, because of COVID. I think it's too early or we don't know yet if that's a long-term phenomenon or that should be resolved soon over the last -- the next few months.

But we'll certainly look into what are the options in dealing with such fluctuations..

Okay. That's helpful. Mike, I wanted to turn it to you for a couple of questions. So the first question is regarding one of your prepared remarks statement, and it was about aggressive technology and capacity execution.

And I just wanted to see if you could follow-up and provide a little bit more color on the things that the company is focused on this year with technology and exactly what we should think about with respect to capacity, if there's any color beyond just the CapEx number that sounds like it's reiterated from where we were to start the year?.

Yes. I think I'll start with capacity, because I think if you go back to our analyst presentation from last August and then the subsequent earning calls, I think it's pretty clear. Our capacity increases associated with advanced probe cards, putting a new fab in place, gradually building out the capacity.

But right now, we're basically footprint limited and continue to be footprint limited until that new building comes online in the second half here. So no real changes there. We continue to execute on the plan we've talked about in prior calls.

On the technology piece, it's really about serving some of the accelerated requirements, especially in foundry and logic associated with advanced packaging and 5G. If you look at our customers' advanced packaging road maps, things like die stacking, modular die, heterogeneous integration, really drive up probe card complexity quite substantially.

The pitches or the densities we have to contact are much, much higher. The pitches are -- mean the probes are much, much closer together. And we have to test at higher frequencies with higher currents and do all of this in a way that continues to scale with the basics of cost and quality.

And so, the vast majority of our technology investments are really targeted towards doing that, continuing to keep pace and even stay ahead of our key foundry and logic customers' requirements to enable their advanced packaging road maps.

It's pretty clear that 7-nanometer or one customer, 5-plus or another going to have advanced packaging as a really central part of their technology road map. And our investments today are pointed at making sure we could properly enable those..

And just to be clear on some of the things that you're seeing there, Mike, are the investments today and being an enabler, something that shows up in revenues in the back half of this year, first half of next year, through next year, is it really something that comes on board in the second half of 2022 and 2023, 2024?.

Yes, it will be -- there will be contributions later this year as some of those things ramp in pilot production. But they're going to be hard to discern from the mainstream business that we have in, especially in foundry and logic and DRAM. I'd expect more.

And you can go look at our key customers' product road maps and where they're talking about driving some of these advanced packaging architectures into volume, it's really a 2022, 2023 kind of event. But to be ready for that, we need to be investing in R&D now..

Makes sense. And then lastly for me, if I could. From time-to-time, when you characterize the foundry market, you've talked about the breadth of customers in Foundry and Logic. And certainly, we had to 10%-plus customers this quarter.

But, as you look ahead, do you expect the breadth of some of the larger customers to broaden out in the back half of the year and next year? Or as we think about some strengthening in the back half in Foundry and Logic, could we expect it to be some of the same customers that were strong in 1Q?.

I think you will see, we've got a set of customers, if you look back historically that often sort of popping another, the 10% list. I think we expect those same customers in both the Foundry business and in the Memory business to continue to be staples of our 10% list.

The breadth, though, in our business is interesting, because sometimes the Foundry itself is the customer. But sometimes, it's the fabless design house, that's the customer.

And so, the breadths of the number of fabless customers that we're serving, whether directly with the fabless customer and their design and test team or indirectly through the Foundry, that breadth continues to expand and increase.

And I think that's central to our continued diversification and trying to continue to drive a broad set of demand opportunities for form factor..

Make sense. Thanks guys..

Thanks Craig..

Thank you. [Operator Instructions] Our next question comes from Krish Sankar with Cowen. Your line is now open..

Hi. This is Robert Mertens on behalf of Krish. Thank you for taking my question.

First, how should we think about the margin profile of the engineering systems business? I know you mentioned, product mix headwinds from late last year have been worked through, but would you expect any similar volume patterns this year or seasonality? And then, just a quick follow-up..

In terms of seasonality, if you look back in the last two, three years, I think we see Q1 usually a little lower than Q4. It usually relates to the fact that many of our customers in that market are universities and educational institutions that have budget to consume. And closer to year-end, we see a little pickup in orders.

And then in Q1, it's a little lower. In terms of the margin, we are saying, at least in the last three years, that the margin for the Systems business will fluctuate between the high 40s to low 50s. That's our target. That's where we -- that's also what we took into consideration when we built our long-term model of overall 47% gross margin.

On the way there, things will fluctuate, but within that range with what we expect..

Great. Thank you.

And then, just a quick one around the NAND Probe Cards business and new products and just thinking about on qualification through the first part of the year, when should we think about timing of any sort of new recognition of the business?.

Yes. Our NAND business really is -- has two components at this stage in the company history. The first is the legacy FormFactor NAND business, which continues to be opportunistic for us. We are, for most of mainstream NAND, not cost competitive. And so that business, you've seen historically has been pretty lumpy.

We talked last quarter about starting to leverage the products and technology, we got as part of the acquisition of the Advantest probe card assets to try and go after a little bit more of the mainstream NAND Flash market. That product is a lot more cost competitive. And so, we're beginning to work on exercising that option.

We're still in very early innings, discussing with customers' qualification plans, trying to extend that business a little bit beyond the single-digit millions revenue it had at the time of acquisition. So, any qualification time line for a new architecture in the industry takes several quarters, so probably getting us into the back half of '21.

And then you got to go compete for designs and win and ramp. So, that's going to take you into sort of the middle part of '22. But as we go through that, we'll certainly keep you updated, as we make progress on trying to exercise that option in NAND flash..

Great. Thank you. That’s all from me..

Thank you. Our next question comes from Amanda Scarnati with Citi. Your line is now open..

Hi, good evening. Just on to TSMC.

Can you just talk a little bit about what the total opportunity can look like there, both from a perspective of what the opportunities for TSMC to outsource would look like as a percentage of their total probe card business? And what that looks like in terms of what FORM can achieve in terms of market share there?.

Yes. I think -- so at that customer, we're really focused and really only relevant and qualified for the advanced nodes, say, 10-nanometer, 7-nanometer, 5-nanometer and on. But those nodes represent the entire opportunity for FormFactor. There's very little in-sourcing that goes on for those advanced nodes because of the complexity.

And so, go back to the question earlier about the significant WFE CapEx and investments in these advanced nodes, we expect that opportunity is going to continue to grow from where it is. If you look at where the revenue was in the first quarter, it's starting to nudge up against that $100 million annual run rate.

Still reasonably concentrated and is going to -- we are going to see quarter-to-quarter fluctuations. But as we address more designs on those advanced nodes and more of that customer's wafer starts to move to that advanced nodes, we're optimistic that we can continue to grow that business long term..

Great. And then, can you talk about capacity? And if you're still capacity constrained at these levels or if you've been able to open up new capacity through the extent that we talked about a couple of quarters ago..

I think, Amanda, in some areas, we are still capacity constrained. And it depends on the specific product mix. We have multiple factories with different dynamics. But by and large, in these levels of revenue, we are at still capacity constraints..

Thank you..

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Mike Slessor for closing remarks..

Thanks everyone for joining us again this quarter. We're going to be at a bunch of conferences as we go through the late spring and early part of the summer and hope to see you there. Take care and stay safe..

This concludes today's conference call. Thank you for participating. You may now disconnect..