FormFactor (NASDAQ:FORM) Beats Q1 Sales Targets But Quarterly Guidance Underwhelms

Adam Hejl /
2023/05/03 4:36 pm EDT

Semiconductor testing company FormFactor (NASDAQ:FORM) reported Q1 FY2023 results beating Wall St's expectations, with revenue down 15.1% year on year to $167.4 million. However, guidance for the next quarter was less impressive, coming in at $162 million at the midpoint, being 3.21% below analyst estimates. FormFactor made a GAAP profit of $1.34 million, down on its profit of $29.9 million, in the same quarter last year.

Is now the time to buy FormFactor? Access our full analysis of the earnings results here, it's free.

FormFactor (FORM) Q1 FY2023 Highlights:

  • Revenue: $167.4 million vs analyst estimates of $162.6 million (2.96% beat)
  • EPS (non-GAAP): $0.16 vs analyst estimates of $0.13 (19.6% beat)
  • Revenue guidance for Q2 2023 is $162 million at the midpoint, below analyst estimates of $167.4 million
  • Free cash flow was negative $7.29 million, compared to negative free cash flow of $5.38 million in previous quarter
  • Inventory Days Outstanding: 100, up from 97 previous quarter
  • Gross Margin (GAAP): 36.5%, down from 47.9% same quarter last year

“FormFactor’s first quarter revenue was similar to the fourth quarter’s, exceeding our outlook range due to timing of shipments, as we delivered significant sequential improvement in gross margins and profitability,” said Mike Slessor, CEO of FormFactor,

With customers across the foundry and fabless markets, FormFactor (NASDAQ:FORM) is a US-based provider of test and measurement technologies for semiconductors.

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers and data storage. The growth of data and technologies like artificial intelligence, 5G networks and smart cars are also creating a next wave of growth for the industry. To keep up with ever changing customer needs requires new tools that can design, fabricate and test at ever smaller sizes and more complex architectures, and that is driving the demand for semiconductor capital manufacturing equipment.

Sales Growth

FormFactor's revenue growth over the last three years has been unimpressive, averaging 6.04% annually. Last year the quarterly revenue declined from $197.2 million to $167.4 million. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

FormFactor Total Revenue

Despite FormFactor revenues beating analyst estimates, this was still a slow quarter with a 15.1% revenue decline.

FormFactor's looks headed into the trough of the semi cycle, as it is guiding to revenue declines of 20.6% YoY next quarter, and analysts are estimating 0.81% declines over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

FormFactor Inventory Days Outstanding

This quarter, FormFactor’s inventory days came in at 100, 8 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from FormFactor's Q1 Results

With a market capitalization of $2.1 billion FormFactor is among smaller companies, but its more than $236.3 million in cash and positive free cash flow over the last twelve months give us confidence that FormFactor has the resources it needs to pursue a high growth business strategy.

We were impressed by how FormFactor outperformed analysts’ earnings expectations this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was less good to see that the revenue growth was quite weak and that free cash flow missed expectations. Additionally, both revenue and EPS guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were not the best we've seen from FormFactor. The company is down 1.9% on the results and currently trades at $26.87 per share.

FormFactor may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.