FormFactor (NASDAQ:FORM) Q3 Sales Beat Estimates But Quarterly Guidance Underwhelms

October 30, 2024 at 16:09 PM EDT

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Semiconductor testing company FormFactor (NASDAQ: FORM) announced better-than-expected revenue in Q3 CY2024, with sales up 21.2% year on year to $207.9 million. On the other hand, next quarter’s revenue guidance of $190 million was less impressive, coming in 4.8% below analysts’ estimates. Its non-GAAP profit of $0.35 per share was also 11.7% above analysts’ consensus estimates.

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FormFactor (FORM) Q3 CY2024 Highlights:

Revenue: $207.9 million vs analyst estimates of $200.3 million (3.8% beat)
Adjusted EPS: $0.35 vs analyst estimates of $0.31 (11.7% beat)
Adjusted Operating Income: $28.35 million vs analyst estimates of $25.35 million (11.8% beat)
Revenue Guidance for Q4 CY2024 is $190 million at the midpoint, below analyst estimates of $199.6 million
Adjusted EPS guidance for Q4 CY2024 is $0.29 at the midpoint, below analyst estimates of $0.34
Gross Margin (GAAP): 40.7%, in line with the same quarter last year
Inventory Days Outstanding: 78, down from 94 in the previous quarter
Operating Margin: 8.6%, up from 1.6% in the same quarter last year
Free Cash Flow Margin: 9.6%, up from 8.5% in the same quarter last year
Market Capitalization: $3.50 billion

“We are proud to have posted our all-time revenue record in the third quarter,” said Mike Slessor, CEO of FormFactor,

Company Overview

With customers across the foundry and fabless markets, FormFactor (NASDAQ: FORM) is a US-based provider of test and measurement technologies for semiconductors.

Semiconductor Manufacturing

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers, and data storage. The need for technologies like artificial intelligence, 5G networks, and smart cars is also creating the next wave of growth for the industry. Keeping up with this dynamism requires new tools that can design, fabricate, and test chips at ever smaller sizes and more complex architectures, creating a dire need for semiconductor capital manufacturing equipment.

Sales Growth

A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, FormFactor’s 6.1% annualized revenue growth over the last five years was mediocre. This shows it couldn’t expand in any major way, a tough starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. FormFactor’s history shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 2.9% annually. FormFactor Year-On-Year Revenue Growth

This quarter, FormFactor reported robust year-on-year revenue growth of 21.2%, and its $207.9 million of revenue topped Wall Street estimates by 3.8%. Management is currently guiding for a 13% year-on-year increase next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 10.5% over the next 12 months, an improvement versus the last two years. This projection is healthy and illustrates the market believes its newer products and services will fuel higher growth rates.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, FormFactor’s DIO came in at 78, which is 16 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

Key Takeaways from FormFactor’s Q3 Results

We were impressed by FormFactor’s strong improvement in inventory levels. We were also excited its EPS outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed analysts’ expectations and its EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, we think this was still a decent quarter although the outlook is weighing on shares. The stock traded down 4.1% to $42 immediately following the results.

Should you buy the stock or not?We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.

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