Semiconductor testing company FormFactor (NASDAQ: FORM) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 1.6% year on year to $171.4 million. The company expects next quarter’s revenue to be around $190 million, close to analysts’ estimates. Its non-GAAP profit of $0.23 per share was 21.7% above analysts’ consensus estimates.

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StockStory’s Take

FormFactor’s first quarter results reflected anticipated declines in DRAM probe card and systems demand, partially offset by stable foundry and logic markets. CEO Mike Slessor attributed sequential revenue softness to tighter export controls and lower non-high bandwidth memory (HBM) demand, but noted that ongoing investments in generative AI and advanced packaging are increasing test intensity and driving opportunities in HBM and co-packaged optics. Slessor stated, “HBM represents a much larger portion of the total silicon area and wafers produced,” highlighting the significance of this trend for the business.

Looking ahead, FormFactor’s guidance for the second quarter assumes revenue growth across all major segments, with particular emphasis on rising HBM probe card and foundry logic demand fueled by AI and new chip designs. However, management emphasized uncertainty from evolving tariff policies, indicating that the company is taking a cautious, wait-and-see approach regarding potential supply chain adjustments. CFO Shai Shahar noted, “We estimate a mid-single-digit million-dollar reduction in revenues and a one percentage point reduction in gross margins due to tariffs,” underscoring the external pressures factored into the company’s outlook.

Key Insights from Management’s Remarks

FormFactor’s first quarter was shaped by shifting demand in key semiconductor testing markets, ongoing product innovation, and the impact of global trade policies. Management focused on how product mix, tariffs, and industry trends are influencing both short-term results and long-term positioning.

• AI and HBM Demand: Generative AI adoption is increasing demand for HBM (high bandwidth memory) probe cards and co-packaged optics test systems. Slessor highlighted a ramp in HBM4 shipments and growing contributions from multiple HBM customers, positioning FormFactor to benefit from rising test complexity and intensity tied to AI-driven chip production.
• Tariff and Export Controls: New U.S. tariffs and export controls have directly reduced sales in China and increased costs for U.S.-manufactured products. Management noted that 80% of FormFactor’s manufacturing is in the U.S., meaning tariffs on imported subcomponents and exported finished goods are impacting both revenue and gross margin, with further uncertainty ahead.
• Customer Diversification: The company’s diversification strategy has lessened prior dependence on single large customers. Recent increases in client PC probe card demand reflect a rebound, but management stressed the importance of exposure to broader industry trends like advanced packaging and AI.
• Acquisition of FICT Limited: The completed acquisition of FICT Limited, a supplier of multilayer organic substrates, is expected to enhance FormFactor’s technology access and production efficiency for advanced probe cards, addressing new technical requirements in foundry and logic segments.
• Systems Segment Growth: Demand for FormFactor’s measurement systems is being driven by customer innovation in quantum computing and data center applications. The company plans to ship multiple systems supporting pilot production of co-packaged optics photonic integrated circuits, which management believes could fuel mid-term growth.

Drivers of Future Performance

Management’s outlook for the coming quarters centers on continued AI-driven demand, increased test complexity, and ongoing supply chain risks from tariffs. The company expects sequential growth but sees external factors as critical to achieving margin and revenue targets.

• AI and Advanced Packaging Expansion: Rising adoption of generative AI and advanced chip packaging is expected to drive higher sales of HBM probe cards and test systems, increasing both revenue potential and market share in these segments.
• Tariff and Geopolitical Uncertainty: Management identified tariffs and evolving trade policies as significant risks, with potential for further cost increases and revenue headwinds depending on future regulatory developments. The company is monitoring the situation but has not committed to supply chain changes.
• Product and Customer Portfolio Mix: Achieving targeted gross margins and earnings will depend on a recovery in end markets, a favorable shift toward higher-margin products, and increased market share in foundry and logic probe cards. Internal efforts such as lean manufacturing and new product architectures are also expected to contribute to future profitability.

Top Analyst Questions

• Charles Shi (Needham & Company): Asked about the quantified impact of tariffs on revenue and margin; CFO Shai Shahar explained that the guidance includes an estimated mid-single-digit million-dollar revenue reduction and a one percentage point gross margin hit, mainly related to costs of imported components and customer impacts in China.
• Craig Ellis (B. Riley Securities): Inquired about the rebound in sales to a major client PC customer and confidence in ongoing demand; CEO Mike Slessor highlighted the customer’s renewed investment in advanced test equipment as part of their turnaround strategy, along with FormFactor’s broader diversification into AI and HBM markets.
• Tom Diffely (D.A. Davidson): Asked about the transition between HBM3 and HBM4 probe cards and whether the product mix affects margins; Slessor noted that HBM generally carries higher margins than commodity DRAM, with incremental margin improvement possible as HBM4 ramps, though not matching foundry/logic margins.
• Christian Schwab (Craig Hallum Capital): Sought clarity on foundry and logic revenue outlook given possible PC demand from Windows 10 end-of-life; Slessor acknowledged the potential but flagged tariff uncertainty as a key headwind to realizing this growth.
• David Duley (Steelhead Securities): Asked about FormFactor’s position with a major GPU manufacturer and the significance of co-package optics; Slessor indicated the company is making progress in both switch and GPU probe cards, with co-package optics representing a new production opportunity.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will monitor (1) the pace of HBM and co-packaged optics adoption, particularly as customers transition to new AI-driven designs; (2) the impact of tariffs and export controls on both revenue and gross margins as global trade policies evolve; and (3) progress in integrating FICT Limited’s substrate technology to support advanced probe card offerings. The company’s ability to capture share in emerging applications and adjust to external pressures will be key indicators of execution.

FormFactor currently trades at a forward P/E ratio of 21.9×. Is the company at an inflection point that warrants a buy or sell? The answer lies in our free research report.

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