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FormFactor Inc. (FORM - Analyst Report) reported third quarter 2013 loss of 11 cents per share, wider than the Zacks Consensus Estimate of a loss of 3 cents per share.

Revenues of $67.6 million were up 7.9% sequentially and 63.9% from the year-ago quarter.

Revenues by End User

System on Chip (SoC) revenues in the third quarter amounted to $31.7 million, an increase of $4.2 million or 15% from the prior quarter. Overall strength in this market is currently being driven by the shift from PC to mobile application processors where probe card solutions are more complex and require higher parallelism. The recent introduction of new models of smartphones and tablets as well as the planned releases of new mobile products and gaming platforms for the holiday season is also driving demand.

The reported revenues for DRAM products were $28.8 million, an increase of 8% or $2.1 million from the second quarter. Stronger mobile DRAM demand drove the increase in the last quarter. During the third quarter, the company experienced component delivery delays and product issues that impacted deliveries to a DRAM customer, which in turn impacted revenues for the quarter.

Flash revenues were $7.1 million for the third quarter, a decrease of $1.4 million or 17% from the second quarter. NOR Flash revenues decreased $3.3 million in the third quarter to $1.9 million, while NAND Flash revenues increased $1.9 million to $5.2 million in the quarter.

Margins

Third quarter reported gross profit was $12.5 million or 18.5% of revenues compared to $8.2 million or 19.8% of revenues in the year-ago quarter.. A disappointing non-GAAP gross margin resulted from lower-than-forecasted manufacturing utilization in September as a result of the significant drop in demand.

Operating expenses adjusted for restructuring, acquisition, amortization and asset impairment charges came to $19.2 million, up 1.2% from the year-ago quarter. As a result, the operating margin improved from -26.3% to -9.9% during the year.

The pro forma net loss was $6.5 million (11 cents a share) compared with a loss of $10.7 million (21 cents a share) in the year-ago quarter.

Balance Sheet

The company exited the quarter with cash and marketable securities of $156.3 million versus $154.5 million in the prior quarter. FormFactor has no debt. Long-term liabilities totaled $10.3 million at quarter end, remaining flattish sequentially.

Cash generated from operations was $1.8 million in the third quarter compared with $1.0 million in the prior quarter and cash usage of $1.6 million in the third quarter of 2012.

Guidance

For the fourth quarter, FormFactor expects revenues in the range of $46.0−$50.0 million. Non-GAAP gross margin is expected to be in the range of 10%–15%. Non-GAAP operating expenses are expected to be $19.0–$20.0 million. Cash usage is expected to be in the range of $12.0-$16.0 million.

Our Recommendation

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

However, with probe card demand exhibiting a downward trend, the problem of under-utilization of factories is likely to persist, which will further prevent the company from absorbing all of its manufacturing costs. Strict cost control measures will be adopted by management to bring the situation under control. Additionally, management’s recent decision to focus on the mobile segment is likely to be beneficial.

FormFactor shares carry a Zacks Rank #2 (Buy). Other technology stocks worth considering include Cirrus Logic Inc (CRUS - Snapshot Report), and Freescale Semiconductor Ltd (FSL - Snapshot Report),  both with a Zacks Rank #1 (Strong Buy), and Avago Tech Ltd Ord (AVGO - Snapshot Report) with a Zacks Rank # 2.
 

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