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FormFactor Q2 Earnings Reverse Q/Q Loss, Revenues Beat

Zacks Equity Research

On July 30 after market closed, FormFactor Inc. (FORM) reported second quarter 2014 earnings of 2 cents per share which missed the Zacks Consensus Estimate of 4 cents. However, it was up from a loss of 9 cents recorded in the previous quarter.

Formfactor, Inc - Earnings Surprise | FindTheBest


FormFactor reached a milestone by accomplishing profitability for the first time since the fourth quarter of fiscal 2007. The sequential increase in the bottom line was primarily driven by increased revenues aided by improved business and enhanced operational performance.


Revenues of $67.4 million were up 20.4% sequentially and 7.4% from the year-ago quarter. This was ahead of the Zacks Consensus Estimate of $67.0 million. The sequential increase was broad-based across the System on Chip (SoC), DRAM and NAND Flash segments, with the Asia/Pacific and Europe/Middle East regions being the strongest.

Revenues by Geography

Region-wise, the Asia Pacific contributed 32% of second quarter 2014 revenues (up 54.0% from the prior quarter but down 7.8% from the year ago quarter). North America’s share was 25% (up 8.9% from the prior quarter and 11.8% from the year ago quarter) while South Korea brought in 22% of the revenues (up 16.7% from the prior quarter but down 2.6% from the year-ago quarter). Europe/Middle East accounted for 14% of the revenues (up 49.2% sequentially and 59.6% on a year-over-year basis). Japan contributed the remaining 8% (down 33.8% sequentially but up 50.0% from the year-ago quarter).

Revenues by End User

System on Chip (SoC) revenues in the second quarter amounted to $36.5 million, up 22.5% from the prior quarter and 32.7% from the year-ago quarter. Overall strength in this market is driven by strong demand across mobile application processors, personal computers and automotive applications and continued momentum from copper pillar applications.

Demand for FormFactor’s probe card solutions for copper pillar packaging also increased during the quarter and is accelerating further as companies are switching to the 28-nanometer technology node. This trend is expected to gain further momentum as SOC designs move to the 20-nanometer technology node.

Reported revenues for DRAM products were $26.4 million, up 18.9% sequentially but down 1.1% on a year-over-year basis. Both commodity and mobile DRAM contributed to the sequential increase with mobile DRAM continuing to grow as a percentage of sales. Management said that DRAM manufacturers appeared to be handling their production process in a more organized way, making the revenue stream less volatile.  FormFactor made progress at a key DRAM customer where it successfully met demand for volume production probe cards on two different designs, thereby gaining repeat orders. Moreover, it received orders for third designs that will start shifting in the fourth quarter.

Flash revenues were $4.5 million in the second quarter, an increase of 12.5% from the prior quarter but a decline of 47.1% from the year-ago quarter. NOR Flash revenues increased $0.5 million in the second quarter to $3.1 million, while NAND Flash revenues decreased $4.6 million to $1.4 million in the quarter.


Non-GAAP gross profit was $24.4 million, or 36.2% of revenues, compared with non-GAAP gross profit of $16.6 million, or 29.6% of revenues in the prior quarter.

Non-GAAP operating profit was $1.4 million, which was a marked improvement from the $4.6 million loss reported in the previous quarter.

Operating expenses adjusted for restructuring, acquisition, amortization, integration and asset impairment charges came in at $23.0 million, up 8.8% sequentially and down 1.4% from the year-ago quarter. The operating margin of 2.0% jumped 1,019 bps sequentially and was more or less consistent with the prior year.

Pro forma net income was $1.4 million (2 cents a share) compared to a loss of $4.8 million (9 cents a share) in the previous quarter and a loss of 3.4 million (6 cents a share) in the year-ago quarter.

Balance Sheet

The company exited the quarter with cash (comprising cash, short-term investments, and restricted cash) of $149.5 million, up $5.1 million from the prior quarter. FormFactor has no debt.

Cash generation in the second quarter was $5.0 million versus cash usage of $7.1 million in the previous quarter and cash generation of $1.0 million in the year-ago quarter.


FormFactor provided an encouraging guidance for the third quarter. The company expects revenues in the range of $68.0−$73.0 million. The Zacks Consensus Estimate is pegged at $70.0 million for revenues. Non-GAAP gross margin is expected to be in the range of 34%–348%. Non-GAAP operating expenses are expected to be $19.5–$20.5 million. Cash flow is expected to be positive and between the range of $4-$6 million.

Our Recommendation

FormFactor posted decent second quarter 2014 results with the top line surpassing the Zacks Consensus Estimate and the bottom line missing the same.

FormFactor is an original equipment manufacturer (:OEM) of automated wafer probe cards used in the semiconductor integrated circuits (ICs) manufacturing process.

The company witnessed strong momentum in the SoC business with escalating customer attention on the company’s product solutions, including its copper pillar test solutions, mainly driven by mobile, industrial and automotive applications. It also made noteworthy progress in recovering from the customer-specific DRAM problem that it faced in 2013. These developments will enable FormFactor to both re-engage with consumers and initiate new technologies into its operational practices. Additionally, management’s recent decision to focus on the mobile segment is likely to be beneficial.

We believe that FormFactor has the product pipeline and cost structure to register robust demand growth in all the markets and profitability going forward.

FormFactor shares carry a Zacks Rank #3 (Hold). However, some better-ranked technology stocks worth considering include Avago Technologies Limited (AVGO), NVE Corp. (NVEC) and Silicon Motion Technology Corp. (SIMO), all with a Zacks Rank # 1 (Strong Buy).

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