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FormFactor Inc. (FORM - Analyst Report) reported fourth quarter 2013 loss of 25 cents per share, narrower than the Zacks Consensus Estimate of a loss of 26 cents per share.

Revenue

Revenues of $48.5 million were down 28.0% sequentially but up 1.9% from the year-ago quarter. However, reported revenues beat the Zacks Consensus Estimate of $48.0 million.

Revenues by End User

System on Chip (SoC) revenues in the fourth quarter amounted to $29.9 million, an increase of $1.8 million or 6.0% 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.

Reported revenues for DRAM products were $15.1 million, a decrease of 48.0% or $13.7 million from the third quarter. The decrease resulted primarily from lost orders from a key DRAM customer due to certain execution challenges as well as market seasonality.

Flash revenues were $3.5 million for the fourth quarter, a decrease of $3.6 million or 17% from the third quarter. NOR Flash revenues increased by $0.6 million in the fourth quarter to $2.5 million, while NAND Flash revenues decreased by $4.2 million to $1 million in the quarter. The decline in NAND Flash revenues resulted from less high parallelism design opportunities and customers.

Margins

Gross profit in the fourth quarter was $4.3 million compared to a loss of $3.1 million in the year-ago quarter.

Operating expenses adjusted for restructuring, acquisition, amortization and asset impairment charges came to $23.2 million, up 5.9% from the year-ago quarter.

Pro forma net loss was $13.9 million (25 cents a share) compared with a loss of $16.9 million (32 cents a share) in the year-ago quarter.

Balance Sheet

The company exited the quarter with cash (comprising of cash, short-term investments, and restricted cash) of $151.5 million, $5.2 million lower than the prior quarter. Cash flow in the fourth quarter was benefited by higher-than-forecasted customer receipts. FormFactor has no debt.

Cash usage for the fourth quarter was ($5.2) million compared to $1.8 million of cash generated in the prior quarter.

Guidance

For the first quarter, FormFactor expects revenues in the range of $53.0−$57.0 million while the Zacks Consensus Estimate is pegged at $54.0 million. Non-GAAP gross margin is expected to be in the range of 23%–27%. Non-GAAP operating expenses are expected to be $18.0–$20.0 million. First-quarter cash usage is expected to be between $6 million to $10 million, including the $1.2 million for restructuring activities.

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.

We believe that Form has the product pipeline and cost structure to register robust growth and profitability going forward.

FormFactor shares carry a Zacks Rank #3 (Hold). However, some better-ranked technology stocks worth considering include Integrated Device Tech (IDTI - Snapshot Report) with a Zacks Rank # 1 (Strong Buy), and Ambarella Inc (AMBA - Snapshot Report) and Freescale Semiconductor Ltd (FSL - Snapshot Report), both with a Zacks Rank #2 (Buy).

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