Formfactor Loss Narrows, Revs Beats

Formfactor’s (FORM - Analyst Report) third quarter loss of 22 cents per share came in narrower than the Zacks Consensus Estimate of 31 cents loss per share.

Formfactor’s revenue of $41.3 million was down 24.6% sequentially and 20.7% from the year-ago quarter.

Revenue by End User

The DRAM, Flash and system on chip (SoC) customers generated 63.0%, 20.0% and 17.0%, respectively, of third quarter revenue.

The DRAM business decreased 32.0% sequentially to $26.0 million. The weakness in DRAM probe card demand was on account of softness in the core PC market. Since this pushed the demand/supply equation out of balance, there was also an impact on pricing, which therefore also contributed to the decline in product revenue in the last quarter. resulted from an oversupply of DRAM devices, which in turn resulted in a price decline and reduction in demand for PCs.

The Flash business was down 13.0% sequentially to $8.4 million. NAND revenue was flat with the previous quarter at $5.3 million. The decline in Flash revenue was due to weak lead-time execution and decreased complexity seen by customers.

The SoC business was $6.9 million, down 3.0% sequentially. Formfactor’s customers had a bad quarter, which was reflected in the company’s results in the last quarter.

Margins

The GAAP gross margin decreased 322 bps year over year to 19.8%. Lower volumes and unfavorable product mix were the main reasons for the gross margin contraction.

Total operating expenses of $22.8 million were up 3.7% from the year-ago quarter’s $21.9 million. The operating margin was (35.5%), down 1,630 bps from (19.2%) recorded in the previous-year quarter. Both research and development, and selling, general and administrative expenses increased as a percentage of sales, although the lower gross margin was an offsetting factor.

Net Income

The GAAP net loss was $14.5 million, or 35.1% of sales, compared with loss of $9.7 million, or 18.6% in the year-ago quarter. Reported loss per share was 29 cents in the last quarter, compared with 20 cents in the year-ago quarter.

After adjusting for restructuring charges and impairment of long-lived assets on a tax-adjusted basis and including stock based compensation, the proforma net loss per share came to 21 cents in the last quarter, compared with 19 cents in the year-ago quarter.

Balance Sheet

Inventories of $20.1 million were down 2.2% in the third quarter of 2012. The company ended with cash and marketable securities of $276.2 million, down $1.5 million during the quarter. Formfactor has no debt. Long-term liabilities totaled $5.6 million at quarter-end.

Guidance

For the fourth quarter, Formfactor expects revenue of $46.0−$51.0 million. The non-GAAP gross margin is expected to be in the range of 11%-17% due to lower factory utilization and fixed spending. Non-GAAP operating expenses are expected to be $23.0-$24.0 million. The cash burn in the quarter is expected to be $12.0-$14.0 million, excluding stock repurchase.

Our Recommendation

Formfactor an original equipment manufacturer (OEM) of automated wafer probe cards that are used in the back-end portion of the semiconductor integrated circuits (ICs) manufacturing process. It is a well-positioned player in the semiconductor industry and has further solidified its position with the addition of MicroProbe’s SoC probe card segment. The acquisition will make Formfactor a bigger player in SoC probe card market.

However, the lingering macroeconomic weakness and softness in the PC market that impacted Formfactor’s results in the last quarter are expected to continue in the next. Therefore, Formfactor’s core business (probe cards for DRAM and Flash) is likely to remain under pressure in the near term.

Formfactor shares therefore carry a Zacks Rank of #3, similar to front-end equipment suppliers Lam Research Corp (LRCX - Snapshot Report), which has a Zacks Rank of #3 and Applied Materials (AMAT - Analyst Report), which has a Zacks Rank of #4.