FORM Q2 Deep Dive: Margin Pressures Persist Despite AI-Driven Revenue Stability

August 12, 2025 at 23:02 PM EDT

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Semiconductor testing company FormFactor (NASDAQ: FORM) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, but sales were flat year on year at $195.8 million. The company expects next quarter’s revenue to be around $200 million, close to analysts’ estimates. Its non-GAAP profit of $0.27 per share was 10% below analysts’ consensus estimates.

Is now the time to buy FORM? Find out in our full research report (it’s free).

FormFactor (FORM) Q2 CY2025 Highlights:

Revenue: $195.8 million vs analyst estimates of $189.4 million (flat year on year, 3.4% beat)
Adjusted EPS: $0.27 vs analyst expectations of $0.30 (10% miss)
Adjusted EBITDA: $34.01 million vs analyst estimates of $32.95 million (17.4% margin, 3.2% beat)
Revenue Guidance for Q3 CY2025 is $200 million at the midpoint, roughly in line with what analysts were expecting
Adjusted EPS guidance for Q3 CY2025 is $0.25 at the midpoint, below analyst estimates of $0.33
Operating Margin: 6.3%, down from 9% in the same quarter last year
Inventory Days Outstanding: 82, down from 94 in the previous quarter
Market Capitalization: $2.3 billion

StockStory’s Take

FormFactor’s second quarter saw flat year-over-year sales, but revenue came in above Wall Street expectations, driven by robust demand in its probe card business, especially for high-bandwidth memory (HBM) applications. However, profitability disappointed, as management cited an unfavorable shift in product mix and higher ramp-up costs tied to a specific HBM DRAM customer. CEO Mike Slessor acknowledged that, despite FormFactor’s leading role in advanced semiconductor test solutions, “recent financial results and especially gross margins have not reflected our unique market leadership position,” pointing to ongoing operational and external challenges.

Looking ahead, FormFactor’s guidance is shaped by continued investment in advanced packaging and generative AI applications, but margin improvement remains a challenge. Management expects persistent headwinds from tariffs and rising operational costs, and noted that the margin model is unlikely to reach target levels in the near term. CFO Shai Shahar cautioned that tariff impacts could increase if new policies are enacted, and added, “we are taking steps to improve margins and make progress towards achieving our target financial model,” citing new manufacturing capacity and strategic investments as key actions.

Key Insights from Management’s Remarks

FormFactor’s management attributed quarterly growth to advanced packaging demand and HBM strength, but margins were held back by product mix and operational costs. Strategic investments and expanded manufacturing capacity were highlighted as key initiatives.

Advanced packaging momentum: FormFactor’s probe card business benefited from customer demand for advanced packaging and chiplets, which are essential for enabling generative AI and next-generation computing architectures.
HBM customer diversification: The company now ships in volume to all three major HBM manufacturers, broadening its customer base but also introducing quarter-to-quarter revenue volatility as ramp schedules differ.
Margin headwinds: Gross margins were pressured by a shift toward historically lower-margin DRAM products, operational cost increases, and persistent tariff-related expenses. Management cited a specific ramp-up with an HBM4 customer that required additional engineering resources, impacting profitability.
Strategic facility acquisition: FormFactor acquired a manufacturing facility in Texas to lower long-term operational costs and expand capacity, taking advantage of local incentives and a favorable labor environment. While near-term costs increased, management expects medium-term efficiency gains.
Product mix challenges: Seasonal strength in foundry and logic probe cards was partially offset by lower systems revenue and unfavorable mix, with management noting that DRAM and systems segments continue to exhibit gross margin variability.

Drivers of Future Performance

FormFactor projects near-term growth from advanced memory and AI-related demand, but margin recovery is challenged by tariffs and cost pressures.

Tariff and cost headwinds: Management expects tariffs on imported materials to remain a significant drag on gross margins, with potential for further impact if new trade policies are enacted. Operational costs—including labor and start-up expenses at the new Texas facility—will continue to pressure margins until efficiencies are realized.
AI and HBM-driven demand: The adoption of generative AI and advanced chip packaging is fueling increased test intensity and complexity, driving demand for FormFactor’s probe cards, especially for HBM4 and related products. Management believes higher test complexity can support improved pricing for select offerings.
Capacity expansion and diversification: The newly acquired Texas facility is expected to offer cost advantages and support long-term growth as industry test requirements evolve. Management is also seeking to diversify its customer base across all major HBM and hyperscaler markets to buffer against volatility and concentrate on high-growth AI and data center end markets.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will be watching (1) execution of the Texas facility ramp and its impact on manufacturing costs, (2) margin stabilization as FormFactor manages tariff and product mix headwinds, and (3) continued diversification of the HBM and hyperscaler customer base. Progress in advanced packaging and AI-related test solutions will also be key indicators of future competitiveness.

FormFactor currently trades at $30.05, down from $34.42 just before the earnings. At this price, is it a buy or sell? The answer lies in our full research report (it’s free).

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