Earnings Call: FormFactor Reports Record Q3 Revenue, Focuses on Diversification

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Earnings Call: FormFactor Reports Record Q3 Revenue, Focuses on Diversification

Leading semiconductor test equipment supplier FormFactor, Inc. (FORM) reported a record revenue of $207.9 million in the third quarter of 2024, exceeding the July forecast by $2.9 million. The company's non-GAAP earnings per share reached the upper end of expectations, indicating a 5.3% sequential increase compared to the previous quarter and a 21.2% rise year-over-year. Despite strong revenue growth, the company expects a decline in Foundry and Logic probe card demand, while projecting continued growth in DRAM probe card revenue in Q4, particularly driven by initial HBM4 designs.

Key Highlights:

  • Record Q3 revenue of $207.9 million, up 5.3% sequentially and 21.2% year-over-year.
  • Non-GAAP earnings per share are at the upper end of expectations, with a non-GAAP gross margin of 42.2%.
  • Record DRAM probe card revenue due to strong demand for DDR5 and HBM.
  • Expected decline in Foundry and Logic probe card demand due to weaker mobile and customer PC markets.
  • Sequential revenue growth in the systems segment benefiting from advancements in quantum computing and silicon photonics.
  • Operating expenses decreased to $59.3 million, contributing to stable operating income figures.
  • Free cash flow increased to $20 million, with total cash and investments at $360 million.
  • Q4 revenue is projected at $190 million, with a non-GAAP gross margin anticipated at 41%.
  • Remaining share repurchase program of $36.6 million under the current authorization.

Company Outlook:

  • Continued growth in DRAM probe card revenue is expected in Q4, with a focus on initial HBM4 designs.
  • Diversification strategy in Foundry and Logic to mitigate weak demand in mobile and customer PC markets.
  • Preparedness for future growth opportunities in co-packaged optics, expected to begin volume production between late 2025 and early 2026.

Negative Highlights:

  • Anticipated decline in Foundry and Logic probe card demand due to weaker mobile and customer PC markets.
  • Non-GAAP gross margin slightly below expectations primarily due to product mix challenges.
  • Expected decline in revenue from China due to geopolitical issues, ultimately forecasted to drop to zero.

Positive Highlights:

  • Strong performance with over $60 million in revenue from DDR5.
  • Increased spending from leading HBM providers and diversification among DRAM manufacturers.
  • Supplying probe cards to three major DRAM manufacturers creates new advanced packaging opportunities on the horizon.

Shortcomings:

  • GAAP gross margin decreased from 44% in Q2 to 40.7% in Q3.
  • Unexpected quality-related costs in the systems business due to warranty and inventory issues.

Q&A Highlights: CEO Mike Slessor addressed the competitive dynamics in the DRAM market and the impact of customer spending changes on market share. CFO Shai Shahar discussed the temporary decline in gross margin, attributing it to mix changes in the systems segment. Analyst Gus Richard queried the sequential decrease in gross margin, clarified as primarily stemming from changes in the DRAM mix. Slessor provided updates on co-packaged optics, forecasting volume production to begin between late 2025 and early 2026.

FormFactor's third-quarter results underscore the company's resilience to market fluctuations and its adaptability. With a strategic focus on diversification and preparations for future growth in areas like co-packaged optics, FormFactor is positioning itself to maintain a strong market presence while navigating the challenges of a dynamic semiconductor industry.

InvestingPro Forecasts: FormFactor's strong financial performance in Q3 2024 is further supported by data from InvestingPro. The company's market capitalization stands at $3.07 billion, reflecting its significant presence in the semiconductor test equipment sector. FormFactor's revenue growth of 5.33% over the past twelve months aligns with the reported 5.3% sequential increase in Q3 revenues, showcasing consistent growth patterns.

InvestingPro data reveals robust quarterly revenue growth of 26.65% in Q2 2024, which laid the groundwork for the record Q3 performance. The company's gross profit margin of 40.76% over the last twelve months aligns with the reported 42.2% non-GAAP gross margin for Q3, indicating stable profitability amid market challenges.

Two related InvestingPro Insights highlight FormFactor's financial strength:

  1. FormFactor holds more cash than debt on its balance sheet, supported by the reported $360 million in cash and investments, enabling continued share repurchases.
  2. The company's liquid assets exceed short-term liabilities, providing financial flexibility to navigate market fluctuations and invest in future growth opportunities like co-packaged optics.

These forecasts reinforce FormFactor's robust financial position and its capacity to weather potential declines in Foundry and Logic probe card demand while capitalizing on growth in DRAM and emerging technologies.

Investors seeking deeper insights into FormFactor's financial health and growth prospects can leverage additional InvestingPro insights, providing comprehensive analysis to inform investment decisions.