FormFactor (NASDAQ:FORM) Misses Q2 Sales Targets

Full Report / August 02, 2023

Semiconductor testing company FormFactor (NASDAQ:FORM) fell short of analysts' expectations in Q2 FY2023, with revenue down 23.5% year on year to $155.9 million. On the other hand, next quarter's outlook exceeded expectations with revenue guided to $167 million at the midpoint, or 0.13% above analysts' estimates. FormFactor made a GAAP profit of $828 thousand, down from its profit of $30.2 million in the same quarter last year.

FormFactor (FORM) Q2 FY2023 Highlights:

  • Revenue: $155.9 million vs analyst estimates of $162.3 million (3.94% miss)
  • EPS (non-GAAP): $0.14 vs analyst estimates of $0.12 (14.5% beat)
  • Revenue Guidance for Q3 2023 is $167 million at the midpoint, roughly in line with what analysts were expecting
  • Free Cash Flow of $2.1 million is up from -$7.29 million in the previous quarter
  • Inventory Days Outstanding: 114, up from 100 in the previous quarter
  • Gross Margin (GAAP): 38.7%, down from 46.5% in the same quarter last year

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

FormFactor was founded in 1993 by former IBM researcher, Igor Khandros. The initial products served three semiconductor applications: sockets, packaging, and probe cards. FormFactor went public in June of 2003.

Designing semiconductors involves modeling, reliability testing, and design de-bug followed by qualification and production assessments. Along the way, testing and measurement occurs to ensure compliance with industry standards and to ensure accuracy. Since semiconductor manufacturing is a complex and resource-intensive process, detecting flaws early in the process means saving money and time. As such, testing and measurement impact yields, time-to-market, and overall quality.

FormFactor’s products – often customized to meet customers’ unique wafer and chip designs – address these testing and measurement needs through products such as probe cards, probe stations, thermal systems, and cryogenic systems. Probe cards, for example, ensure that a customer’s composite contact elements used in manufacturing are precise to length scales of a few microns and reliable across various compression levels. Thermal systems ensure precise temperature management during certain steps in semiconductor manufacturing.

Competitors in the market for probe cards, FormFactor’s largest product category, include Advanced Micro Silicon Technology, Chungwa Precision Test Technology, Feinmetall, and Japan Electronic Materials Corporation (TYO:6855).

Sales Growth

FormFactor's revenue growth over the last three years has been unimpressive, averaging 2.88% annually. This quarter, its revenue declined from $203.9 million in the same quarter last year to $155.9 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

FormFactor had a difficult quarter as revenue dropped 23.5% year on year, missing analysts' estimates by 3.94%. This could mean that the current downcycle is deepening.

FormFactor may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 7.67% next quarter, analysts are expecting revenue to grow 4.73% over the next 12 months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 114, which is 21 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Pricing Power

In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. FormFactor's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 38.7% in Q2, down 7.8 percentage points year on year.

FormFactor Gross Margin (GAAP)

FormFactor's gross margins have been trending down over the last 12 months, averaging 35.9%. This weakness isn't great as FormFactor's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.


FormFactor reported an operating margin of 7.16% in Q2, down 13.6 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.

FormFactor Adjusted Operating Margin

FormFactor's operating margins have been trending down over the last year, averaging 7.39%. This is a bad sign for FormFactor, whose margins are already among the lowest for semiconductors. The company will have to improve its relatively inefficient operating model.

Earnings, Cash & Competitive Moat

Analysts covering FormFactor expect earnings per share to grow 106% over the next 12 months, although estimates will likely change after earnings.

Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. FormFactor's free cash flow came in at $2.1 million in Q2, down 92.6% year on year.

FormFactor Free Cash Flow

As you can see above, FormFactor produced free cash flow of just $4.94 million in the last year, resulting in a measly 0.58% free cash flow margin. FormFactor will need to improve its free cash flow conversion if it wants to stay competitive.

Over the last five years, FormFactor has reported an average return on invested capital (ROIC) of just 14.2%. This suggests it struggled to find compelling reinvestment opportunities within the business.

Key Takeaways from FormFactor's Q2 Results

With a market capitalization of $2.87 billion, FormFactor is among smaller companies, but its $236.9 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We were impressed by how significantly FormFactor blew past analysts' earnings expectations this quarter. That really stood out as a positive in these results. On the other hand, it was unfortunate that its revenue missed analysts' expectations and its operating margin declined. Overall, this was a mixed quarter for FormFactor. The company is down 1.17% on the results and currently trades at $35.57 per share.

Is Now The Time?

When considering an investment in FormFactor, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in the case of FormFactor, we'll be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. On top of that, unfortunately its growth is coming at a cost of significant cash burn and operating margins reveal subpar cost controls compared to other semiconductor businesses.

FormFactor's price-to-earnings ratio based on the next 12 months is 40.8x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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