Thank you and welcome everyone to FormFactor's Second Quarter 2022 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Shai Shahar. Before we begin, Stan Finkelstein, the company's Vice President of Investor Relations, 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 includes also with respect to the projections of financial and business performance; future macroeconomic and geopolitical conditions; the benefits of acquisitions and investments in capacity and in new technologies; the impacts of the COVID-19 pandemic; anticipated industry trends; the disruptions in our supply chain; the impact of regulatory changes; the anticipated demand for products; our ability to develop, produce and sell products; 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 fiscal year ended 2021 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, July 27, 2022 and we assume no obligation to update them. With that, we will now turn the call over to FormFactor's CEO, Mike Slessor.

Thanks, everyone, for joining us today. FormFactor, again, posted strong results in the second quarter, delivering the second highest quarterly revenue in company history and again exceeding the non-GAAP gross margin of our target financial model. Together with good operating expense control in the current inflationary environment, this produced earnings per share at the high end of our outlook range. The second quarter financial results and overall themes were similar to the first quarter's as major customers continued to release and ramp new designs to meet demand for their products, driving strong results in our probe card business in both Foundry & Logic and DRAM. Customers also invested in their technology road maps with development of innovations like gate-all-around transistors, advanced packaging, silicon photonics and quantum computing, driving solid results in our systems business. During the second quarter, we made a small but important acquisition to augment our capabilities as a key supplier in the emerging quantum computing market, buying the dilution refrigerator product line of JanisULT. Dilution refrigerators are a key enabler for the operation of quantum computers being capable of tooling qubits to the ultra-low sub-10 millikelvin temperatures required for operation of superconducting quantum computers. This acquisition makes FormFactor the largest commercial dilution refrigerator supplier in the United States, strengthening and expanding our position with key customers as the leading supplier of not just test-and-measurement products but also now enabling infrastructure for quantum computing. Turning now to our third quarter outlook. Our sequentially weaker outlook is due primarily to reduced demand for Foundry & Logic probe cards from several major customers in both mobile and compute applications. As these customers adapt to the changing conditions in their end markets, driven by global macroeconomic uncertainty and inflation, they're changing their short-term wafer start-and-design release road maps by delaying selected…

Thank you, Mike and good afternoon. As you saw in our press release and as Mike mentioned, FormFactor, again, posted strong second quarter results, delivering the second highest quarterly revenues in company history with revenues and gross margin above the midpoint of our outlook ranges, EPS at the high end of the range and non-GAAP gross margin again exceeding our target financial model. Second quarter revenues were $204 million, a 3.4% sequential increase from our first quarter revenues and an increase of 8.4% year-over-year. Probe card segment revenues were a record $167.7 million in the second quarter, an increase of $7.7 million or 4.8% from Q1. The increase was driven mainly by higher Foundry & Logic revenues. Systems segment revenues were $36 million in Q2, a decrease of $1 million or 2.7% from the first quarter. Within the Probe Card segment, Q2 Foundry & Logic revenues were a record $122 million, a 7.3% increase from Q1, comprising 60% of total company revenues, slightly higher than the 58% in the first quarter. DRAM revenues were $37 million in Q2, $2 million or 7% higher than the first quarter and were 18% of total quarterly revenues as compared to 17% of revenues in the first quarter. Flash revenues of $8.5 million in Q2 were $3 million lower than in the first quarter and over 4% of total revenues in Q2, lower than the 6% in Q1. GAAP gross margin for the second quarter was 46.3% of revenues as compared to 47.8% in Q1. Cost of revenues included $2.3 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 47.4%, 160 basis…

[Operator Instructions] Our first question comes from the line of Craig Ellis.

Appreciate all the color on the dynamics in the business team. Mike, I wanted to go back to some of your comments on what's happening in foundry logic as you look ahead to the third quarter, I think you identified compute and mobility issues were at play. Can you give us some sense of the degree to which this is a mobility issue or a compute issue? And as you work with your customers as they're managing product cycles, what's your sense for when we actually work through what we're seeing in the third quarter and potentially rebound back to those $200 million-plus revenue levels for the company?

Yes. Thanks, Craig. As I said in the prepared remarks, we are seeing multiple sources of reduced sequential demand in Foundry & Logic probe cards coming from multiple customers in both mobile and compute and there's a lot of different puts and takes in that. I would say the components of each are similar in nature and the result of the customers changing their wafer start plans on specific designs as they adapt their product release road maps to their changing end market conditions. And since probe cards are specific to each design, lead times, as you well know, are well within a quarter, there's some short-term volatility there we're dealing with in our demand profile. I do want to draw a parallel, I know it's a while ago but back to the fourth quarter of 2019 where we saw exactly the same dynamic but in reverse. If you remember, we guided up inside the fourth quarter as Foundry & Logic customers, many of them similar Foundry & Logic customers we're seeing now, responded to stronger demand and drove our business up on these short lead times. So we have seen these dynamics have worked before. We remain excited about Foundry & Logic, as I said on the call. Advanced node WFE investments, advanced packaging, driving up test intensity and spending on probe cards and I think still an exciting growth opportunity for FormFactor despite the short-term volatility we see here.

Got it. That's really helpful, Mike. So Shai, I'll ask a follow-up to you and then go back in the queue. So appreciate the gross margin color and the breakdown, 1/3, 1/3, 1/3 across mix volume and higher manufacturing costs. The question is this, at some point and I suspect in the not-too-distant future, we're going to move through these transitions and be back to much higher volume and normalized mix. But how should we think about the higher manufacturing cost element that you talked about? When does that become a neutral or a tailwind to the business? Is there a revenue level that's needed? Or what should investors think about for that to become less of a headwind?

Thanks, Craig. Yes. So most of these additional manufacturing expenses in Q3 actually relates to capitalized variances that we were capitalizing to our inventory as part of the Q1 and Q2 inventory build and they're going to be amortized in Q3. So that big change, I don't expect it to be -- to happen again. There is some element of higher labor cost and higher cost of materials. We talked about it in previous calls as well. But these are built into the forecast and are built into our longer-term target model of 47% gross margin which we are still committed to.

And our next question comes from the line of Charles Shi with Needham & Company.

I want to dig into the weakness you're seeing in mobile for a minute. I believe you -- within the mobile, you have both the SoC probe card and RF probe card. Can you kind of tell us which one may be the bigger factor here in terms of the weakness in smartphone you are seeing here?

Yes, Charles, it's Mike. It's mostly related to SoC: applications, processors, modems, things like that. As we've told you, as we've moved through the first half of the year, coming off a very strong 2021, we -- the RF business has moderated some in the first half of the year. But as you saw from the SoC results, the general Foundry & Logic results and our narrative around it in the first part of the year, we're seeing some real strength there. In the third quarter, we're seeing that sequentially down, again, associated in mobile with design release road map changes, customers pushing out and, in some cases, reducing volume for certain chip designs and that has an impact on the overall probe card demand for those individual designs. So going Q2 to Q3, I'd say the delta primarily associated with reduced mobile SoC demand, if I carve it up between the mobile and compute sections.

Got it. Got it. On compute, is that more related to one specific customer? That's one part of the question. The other part is, is it more related to the change of the release schedule? Or it's more related to the adjustment of the volume that your compute customer is thinking about ramping?

Yes. As I said in the prepared remarks, it is multiple customers. Right now, although we're dealing with this nearly real time, it really does feel like mostly changes in design release schedules. You can imagine that with lead times much less than a quarter, the movement of a few weeks in and out to wait for ramp schedules can have a significant impact on our quarterly revenue. And again, in my response to Craig's question, I drew your attention back to Q4 '19, where this has worked in the opposite direction, there have been times where we can see this volatility of design release road maps, design release plans and wafer start plans impact things in a pretty sick and different [ph] way in any given period.

Got it. Got it. Maybe let me allow me very quick for the last question. You want to proceed your CapEx investment this year despite that Q3 seems to be a little bit of downtick in terms of business. Wonder whether you consider maybe you should delay a little bit of CapEx or you think the current weakness is maybe probably very short term in nature. You probably see more like a V-shaped kind of recovery in terms of demand so you want to proceed with the CapEx.

Yes, I'll take that. So we believe these headwinds are temporary in nature. We remain confident in both our strategy and the market position and we are continuing to plan capital investment as we track towards the long-term target model. These investments that we started a couple of years ago, they are required to maintain our industry leadership. That's why we didn't change the CapEx plans for the year and continue to expect to be between $60 million to $80 million for 2022. This is mainly in expanding capacity. Now I think that it is important to understand our customers are adding capacity which means they will need more probe cards and they will need -- we need to be ready to capture the growth in the market share game here.

And our next question comes from the line of Brian Chin with Stifel.

Maybe let me happen to -- back to the gross margin freight a little bit here. I appreciate sort of the bucketing and the attribution. But to be blunt -- and I understand there's some effects and that's what I kind of want to unpack a little bit here. But -- yes but that -- but the revenue level we're talking about, even with say like a 20% decline in foundry logic Q-on-Q, it sort of implied in 3Q, if that's right. I would expect still sort of mid-40% gross margins, not necessarily going the 800 basis points decline Q-on-Q from the revenue level in the second quarter. And so -- yes, I mean is my math in terms of segmentation kind of right? And then I guess if we just did sort of like a -- I know this is not guidance but if revenues were just flat in Q4 and sometimes you even get a bit of a late kick from your customers in Q4 in terms of foundry. But if Q4 revenues were flat, what sort of -- are some of these impingements on gross margins going away? And where would your gross margins kind of normalize out to on, say that this flat revenue, not a guidance but just sort of a scenario for Q4?

Yes. So on revenues level similar to Q2, $200-and-something million. On a similar revenue profile and product mix to Q2, we estimate that gross margins would have been our target model gross margin of 47%. So if you take the three components I was talking about, some of them -- so the mix, I think we understand, the fixed cost over lower level of revenue, I think I addressed that now when I talked about similar level -- revenue level and similar gross margins for Q2. And the additional manufacturing expenses and I answered that before as well. This -- some of it is higher labor cost and higher cost of materials. But a big part of it in Q3 is timing of manufacturing costs that we capitalized in the first half of the year or mainly in Q2 and we're going to amortize in Q3, so we don't expect them to repeat. And so taking all that into consideration, as I said earlier, we are committed and feel confident with getting into our 47% gross margin.

That capitalized cost then does still stay with the -- in the cost of goods sold in 4Q as well?

Well, it depends on the inventory build in Q4, I'm not going to drag you into all that accounting. But most of it will be amortized, if not all of it will be amortized in Q3 and how much is going to go into Q4 depends on how much inventory you're going to have at Q3 end. But I'll go back to my first remark. On a similar revenue level of $200 million plus, similar revenue profile and product mix, we estimate a gross margin of 47%.

Okay. And in terms of understanding, I'm not surprised by this adjustment phase for some of your customers. It kind of makes sense relative to my understanding of the business. What sort of duration or how long do you think this adjustment period will take based on history, based on your discussions? Because it could be a quarter, it could be two but is the understanding here that they'll release probe cards against future products and wafer starts once they're through this adjustment period.

Yes, Brian, it's Mike. I'll take that. The timing, as always in this business and the visibility, a little bit uncertain given that lead times are well within a quarter. But as you might imagine, we're having some very detailed conversations with these customers to make sure we understand what their demand profile is going to be, what some of these rescheduling scenarios look like. And right now, it does seem like a pretty short-term event. I'm not sure I want to create expectations right now that there's a snapback in early Q4. But right now, things like us continuing with our capacity expansions, continuing to invest in R&D., I think, are pretty good indicators that we don't view this as a structural long-term change in the Foundry & logic market. We remain excited about the growth prospects for Foundry & Logic.

Maybe if I could just ask one more and this is sort of intertwine, I guess, Mike, what you just talked about but would you say your key customers have determined their wafer test strategy needs for their upcoming heterogeneous integration ramp-ups -- yes and I know it's -- maybe it's mobile a little bit in terms of some of the readjustments that are happening right now. But I know that was something that was still being decided. And I guess based on your, I guess, response, do you envision this -- when do you envision that being a meaningful contributor to the business? Could that happen in Q4? Is it maybe more like a first half of next year?

Yes. I think the different heterogeneous integration or chiplet or tile-based strategies, mostly still in the development phase with different customers. We are delivering probe cards in pilot volumes to major customers for those products. And I think it's probably, as we said in the past, an early 2023 event, there are contributions to our revenue right now associated with those pilot ramps. But again, as those customers adapt their product release road maps and ramp plans to their end market conditions, we might expect to see some changes there as well. But certainly, everything is setting up for 2023 to be a pretty major adoption year in terms of advanced packaging, chiplets and heterogeneous integration.

Our next question comes from the line of David Duley with Steelhead Securities.

Yes. I guess I have a couple. Just to clarify things, I think one of your big customers are going to grasp the three nanometer sometime next year. When will that start to impact demand from moving from five or seven nanometers to three nanometers? When will you start to see an increase in three nanometer probe card demand?

David, it's Mike. Again, given the lead time characteristics of the Foundry & Logic probe card business, you're pretty close to the wafer start ramps associated with those. So it's not like it's a two to three quarter in front of the wafer ramp, maybe one quarter if I were to estimate it for you. Again, that goes to some of the dynamics we've talked about in the past that lead to our confidence in the Foundry & Logic market as customers continue to invest in wafer fab equipment added these advanced nodes, whether they be three nanometer or others. We're pretty confident they're going to utilize those for new designs and ramp those new designs but that's still in front of us. And again, probably a one quarter -- we'll lead it by one quarter in terms of wafer starts and then wafer outs for a node like three nano.

So just to be clear, if wafer starts to ramp up the three nanometer in Q3 of next year, you'd start to see it in Q2?

Yes, I think that's a fair kind of ballpark estimate.

Okay. And are you currently contemplating lowering expense levels because of the near-term reductions in demand, given, as you mentioned, you have slow lead times? So you have some idea of when demand is going to improve. But are you contemplating lowering operating expenses in the near term?

Yes, I'll take that. So regarding expenses and both cost of sales and OpEx, some of our costs are designed to be variable, like performance-based compensation and over time. And it is reflected in the Q3 outlook we provided today, right? We are seeing OpEx, for example, going down from $54.5 million to around $52 million in Q3. But overall, we are maintaining our cost structure and capacity to support higher revenue quarters and stronger demand as we make progress towards the target financial model. So no structural -- significant structural changes to OpEx at this point. We'll continue to look into that and make adjustments if needed in the future.

Okay. Final one for me is, I think you described a vast majority of the reduction in revenue sequentially from $204 million to $183 million was coming from the Foundry & Logic business. I guess that suggests that the memory business is going to be flat in Q3. Would you expect there to be weakness in that market as well given all the kind of difficulties we've seen from players in that space and the weakness in PCs? Or are other markets for DRAM absorbing that and you feel like you can make it over the next few quarters without a reduction in DRAM demand?

At this stage of the game, David, I think it's more of the latter. It's something we're obviously keeping a very close eye on given some of the CapEx announcements from our customers, most recently SK Hynix last night. But we are seeing DRAM probe card demand and flash probe card demand hold up reasonably well here. Part of that, I think, is customers are continuing to release new designs, DDR4 and DDR5, both mobile and server. They're definitely shifting mix around as our Foundry & Logic customers are between the different end market segments. But so far, that memory business seems to be holding up as well. The one caveat again that I'll remind you of is our lead times are relatively short. So memory probe cards, lead times well within a quarter as well. But for now, we do see decent design activity, continued strong demand at approximately the levels we've seen in the first half of the year.

And our next question comes from the line of Robert Mertens with Cowen.

This is Robert Mertens on behalf of Krish Sankar of Cowen. Just looking into the September quarter guidance, you'd mentioned the turn in the foundry logic demand both from the compute and mobile markets. Are you able to break down a bit more if this is a function of in unit cuts or push out on designs? Just trying to get a better sense of when the slowdown started or when you were able to see demand start to slow down and then maybe what the duration of the current pause would be. And then I have one follow-up.

Yes, Robert, it's Mike. This is a pretty rapidly, changing situation. We've seen customers, again, reacting to their end market conditions and changing design releases, ramps on different products and different, I'll call it, volatility in the Foundry & Logic demand. It's obviously difficult for us with our industry vantage point to pinpoint exactly what the root cause of this is. But I think it's at least plausible that it's tied to some of the reduction in consumer spending we've seen on things like handsets and PCs. So in terms of duration, difficult to say right now. But again, I'll point back to our continued plan to increase our capacity, our continued commitment to the $2 non-GAAP earnings per share model at $850 million in revenue. We don't see a structural change here. We see some short-term volatility. And especially in Foundry & Logic, we remain awfully bullish about the growth prospects given all of the advanced node WFE investments and the shift to advanced packaging at those advanced nodes.

Great. That's definitely helpful. And then just real quick on recent guidance from other back-end peers are seeing a similar weakness into the second half of the year but it doesn't seem like the same thing from the front-end manufacturers. There hasn't been any sort of major cuts with WFEs. There's sort of a way to think about the discrepancy between the front end and back end, whether it's like a disconnect in demand or just a function of varying lead times between the two. I just wanted to see if you had any opinion on that.

Yes. This may be a longer conversation but we have seen, historically, a back-end, test-and-assembly investments be shorter lead times and be more responsive to customer demand, obviously, closer to the end of the line. And I think the other dynamic here, although to be clear, this is just my opinion, the very long lead times associated with the bulk of front-end equipment mean that customers are going to have to not necessarily cancel but lose their priority in terms of deliveries. And so I think given the circumstances in the industry over the past couple of years, where everybody has been trying to claw their capacity up, I think customers with the longer lead times associated with WFE are probably pretty reluctant to change those investment plans.

And our next question comes from the line of Christian Schwab with Craig-Hallum.

I'm wondering what your thoughts are just kind of bigger picture when the Foundry & Logic demand could kind of come back, right? We're seeing a pretty pronounced normalization of smartphone and PC demand. But pre-COVID, PC demand was down five out of seven years and smartphones' shrank for four years going into it on a year-over-year basis as replacement cycles extended. Being the two most important markets as far as units are concerned, semiconductors, are you at all fearful that this could kind of be a prolonged level of less volume than maybe we've seen in the last few years?

Christian, it's Mike. I don't think fear falls, right, the way I'd like to describe it but we're certainly watching that. And I think, as I said on one of the previous questions, I think, this all comes back to consumer and macro drivers. If demand for PCs, for handsets does materially slow down for a long period of time, this has to result in lower chip demand and therefore lower probe card demand. One of the things we have seen historically, though, is in times like that, many of our customers accelerate their innovation road maps and start to release more new designs to try and differentiate their positions in tough market conditions for them. So again, watching the situation, as I'm sure everyone on this call is. But for now, things still seem to be structurally pretty strong in the industry. Again, that's why we're continuing to invest in capacity to make sure that we can meet continued growth in demand in Foundry & Logic and in our other segments as well.

Great. And then a follow-up on the investment in additional capacity. When you guys decided to do that, was there an assumption on wafer starts or one million square inches of silicon or number of chips that you determined that you needed to make these future investments? Or is there anything behind the scenes where you believe any of your three largest customers that you've talked about previously, that there was an opportunity for market share gains versus other players in the space?

Yes. There's a set of different variables that led us to commit to the significant capacity additions and capital expenditures we've been making and are continuing to make. Some of it is wafer starts on advanced nodes in the industry and million square inches of silicon tends to be not a bad proxy for that. But the other is and we brought this up before, the increasing test intensity associated with both advanced nodes and advanced packaging. Simply put, each wafer start needs more probe cards because customers are investing more in wafer test both to improve yields and to reduce their overall cost. So when you put all those things together, along with some very detailed and specific conversations with our key customers about their long-term capacity needs, that's what led us to embark on the capacity increases a couple of years ago. So that as Shai said, we can retain our leadership position and even increase our leadership position in the markets we serve.

Great. And if I could just squeak in one more last question. With the slowdown that's happening kind of in the back end echoed by Teradyne earlier today as well, do you think we're in an opportunity now where with things kind of normalizing to some degree? Do you think there's an opportunity for increased M&A activity to create scale in the back end? Or where do you think there is still a significant interest in that?

Well, I can tell you we remain very interested in that. We've been public and consistent about our view that continued diversification, continued consolidation to drive scale in the back end is something of value. I guess I'm hopeful that things stabilize a little bit here that everybody understands where their businesses are headed. We resume on a bit of a growth path and this becomes perhaps a catalyst for those conversations to start. But right now, very focused on making sure we're executing against the demand. We do have strength in the systems business, continued solid memory results and staying close to our customers to make sure we're able to adapt to their changing wafer start schedules and deliver the probe cards when we need them.

And our next question comes from the line of David Silver with CL King.

I think I'd just like to -- first question would just be to kind of clarify things a little bit. But beyond kind of the medium-term decision-making by the -- your major customers regarding design releases and ramp-up schedules. There's, I guess, a longer-term effort by those same customers to add significant, new wafer fab capacity in the U.S. My timetable says a lot of it is for the 2024 to 2026 timeframe. Can I assume that your discussion of maintaining CapEx and things like that for new capacities that you're trying to align with those longer-term major capacity additions by your customers. And hence, it's kind of a sign that, that next wave of new fab development, a lot of it in this country is, it remains on track. So what we're talking about today and what we might be looking at in the 2024 to 2026 timeframe are different, right? There's the shorter medium-term issue but then the longer term in your view remains intact.

I think that's a good way to summarize it. And Shai sort of alluded to that when he talked about our capacity increases, keeping pace with our customers, whether they're domestically-based or other places around the world. We are a global supplier and these capacity investments are going to be needed for us to continue to lead the industry forward and capture the demand associated with all of these new fabs, these new fabs producing at advanced nodes. So yes, there almost always in this business is this timing decoupling of adapting to the short term but continuing to invest and strengthen the company for the long term.

Got it. I did have a question, I guess, about -- I guess TechInsights or VLSI published some survey results that once again had form factor at the very high end of the rating scale, customer ratings. And when I look through the results, in particular, I think what stood out was your performance in China or from China-based customers. And I was just wondering if you could make a couple of comments on that. The -- was the increase or the improvement kind of across the board in your ratings? Was that due to a particular effort on FormFactor's part, maybe building out your footprint in that area? And then maybe just a tiny bit of background. But in China, would this reflect mostly the Chinese operations of the multinationals? Or is this -- or are a significant portion of the survey results coming from Chinese-headquartered companies.

Yes. I'll talk, first, generally about customer relationship -- actually, David, can you mute? I'm getting a lot of background noise. I'll talk first about customer satisfaction and customer relationships in general. It's been one of the cornerstones of our strategy and our culture to really invest in these relationships with key customers and I think our survey results are a reflection of that. This is a small, concentrated industry. There are only so many suppliers and so many customers and so we work very closely together. But that customer intimacy is really important in driving market share and in making sure that we deliver to customer expectations and adapt along with them in all of the various fluctuations in their business models. I think the improvement in the score results, probably several different factors. We don't know exactly which customers respond there. But if you look at the way we communicated through the pandemic, through supply chain issues, through different delivery challenges, through different logistical challenges, I think those are areas where we really paid attention on nurturing and cultivating these customer relationships and that's probably reflected generally in the results. Again, I don't know exactly who responded to the survey. But speaking to our China business, it is still mostly the multinationals who operate in the region, driving our revenue there. So if you make the assumption and this is purely an assumption, that the survey results are aligned with the business we do, you'd have to assume it's mostly multinationals. But we have had some success in gaining market share with some of the key memory manufacturers there and some of the fabless companies there and so that's probably reflected in the results as well.

[Operator Instructions] Next question comes from the line of Hans Chung with D.A. Davidson.

So I have a couple. So first, regarding the -- your commentary around the end market demand, the mobile and compute. So is there weakness across the board? Or it's more like low end on the mobile side and then maybe PC on the compute side? And do you see any changes in the high-end smartphone or the high-performance computing?

No, I think as we tried to convey both in the prepared remarks and in the questions we've had so far, we have seen reduced demand pretty broadly in both mobile and compute. Now it's difficult for us often to tell exactly whether a certain chip is going to be destined for a high-end handset or a mid-range handset. That's also true of the RF components. We obviously have insight into the specific designs but to be able to partition and segment exactly where this chip is going to end up in terms of its end markets can be difficult from where we sit. So it feels to me, again, I don't want to call it broad-based but there is multiple customers across multiple segments that are changing their design release road maps and short-term wafer start plans.

Got it. And then second question regarding the gross margin. So as we enter into 2023, then I think we have the three nanometer transition, we have DDR5 and then we have the heterogeneous integration, the chiplet. So it's fair to say all these could be a tailwind for gross margin from a product mix perspective. And if so, let's say, if the quarterly revenue rebound to $200 million next year, then can we see the gross margin to go above the 47% level?

So mix -- this is Shai. I'll take this one. Mix has always had a major impact on our gross margin, right? We saw it in previous quarter. We saw it in this quarter, too. When we talk about our target model of $850 million of revenue and 47% gross margin, most of the growth should come from Foundry & Logic. And Foundry & Logic historically has a higher gross margin. So it's kind of in line at least with some of the things you said that the growth in Foundry & Logic will drive higher gross margin and will help us get to the 47% gross margin target model that kind of in line. As for revenue bouncing back to $200 million plus, I mentioned it earlier in the call and the simple answer is, yes. At the revenue level, similar to Q2 of $204 million, for example, with a similar revenue profile and product mix, we estimate the gross margin would have been our target model of 47%, right? So our target model overall $850 million, 47% we are making progress towards the model. But margin will fluctuate. We said it before and we see it in this quarter as well, this quarter meaning Q3.

Thank you. I'm showing no further questions. So with that, I'll hand the call back over to CEO, Mike Slessor, for any closing remarks.

Thanks, everybody, for joining us today. We're scheduled to attend several of the late summer investor conferences where we're eager to update you on our continued progress towards the target model. So I hope to see you then. If we don't, stay safe and we'll talk to you on our Q3 results call. Take care.

Ladies and gentlemen, thank you for participating. And you may now disconnect.