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FormFactor (NASDAQ:FORM) Beats Q4 Sales Targets, Provides Optimistic Guidance For Next Quarter


Full Report / February 08, 2023
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Semiconductor testing company FormFactor (NASDAQ:FORM) reported Q4 FY2022 results topping analyst expectations, with revenue down 19% year on year to $166 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $162 million at the midpoint, 7.01% above what analysts were expecting. FormFactor made a GAAP loss of $13.7 million, down on its profit of $25.9 million, in the same quarter last year.

FormFactor (FORM) Q4 FY2022 Highlights:

  • Revenue: $166 million vs analyst estimates of $155.3 million (6.89% beat)
  • EPS (non-GAAP): $0.05 vs analyst estimates of $0.03 ($0.02 beat)
  • Revenue guidance for Q1 2023 is $162 million at the midpoint, above analyst estimates of $151.4 million
  • Free cash flow was negative $5.38 million, down from positive free cash flow of $15.5 million in previous quarter
  • Inventory Days Outstanding: 93, down from 107 previous quarter
  • Gross Margin (GAAP): 27.2%, down from 43.4% 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 unremarkable, averaging 9.09% annually. Last year the quarterly revenue declined from $205 million to $166 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 19% revenue decline.

FormFactor's looks headed into the trough of the semi cycle, as it is guiding to revenue declines of 17.8% YoY next quarter, and analysts are estimating 9.13% declines over the next twelve months.

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 93, 2 days above the five year average, suggesting that despite the recent decrease the inventory levels are still slightly above the long term average.

Pricing Power

FormFactor's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 27.2% in Q4, down 16.2 percentage points year on year.

FormFactor Gross Margin (GAAP)

FormFactor' gross margins have been trending down over the past year, averaging 39.8%. The weakness isn't great as FormFactor's margins are slightly below the group average as is, potentially pointing to weakening pricing.

Profitability

FormFactor reported an operating margin of 2.88% in Q4, down 17.2 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

FormFactor Adjusted Operating Margin

Operating margins have been trending down over the last year, averaging 14.5%. Not a great indicator for FormFactor, whose operating margins are already a bit below average for semiconductors, driven by only modest pricing power and cost controls.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 108% over the next twelve months, although estimates are likely to change post earnings.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. FormFactor's free cash flow came in at -$5.37 million in Q4, down 122% year on year.

FormFactor Free Cash Flow

FormFactor has generated $67.1 million in free cash flow over the last twelve months. This is a solid result, which translates to 8.97% of revenue. That's above average for semiconductor companies, and should put FormFactor in a relatively strong position to invest in future growth.

Over the last 5 years FormFactor has averaged a 14.7% return on invested capital (ROIC), implying it has has a defensible competitive position and can invest in profitable growth.

Key Takeaways from FormFactor's Q4 Results

With a market capitalization of $2.27 billion FormFactor is among smaller companies, but its more than $238.1 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 very impressed by the strong improvements in FormFactor’s inventory levels. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was less good to see that the revenue growth was quite weak and operating margin deteriorated. Overall, this quarter's results still seemed pretty positive and shareholders can feel optimistic. The company is up 1.97% on the results and currently trades at $29.52 per share.

Is Now The Time?

When considering FormFactor, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although FormFactor is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been very weak, but at least that growth rate is expected to increase in the short term.

FormFactor's price to earnings ratio based on the next twelve months is 36.1x. We can find things to like about FormFactor and there's no doubt it is a bit of a market darling, at least for some. But it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.

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