FormFactor (FORM) Beats Q2 Earnings & Revenue Estimates

FormFactor Inc. (NASDAQ:FORM) reported second-quarter 2016 earnings of 10 cents, which beat the Zacks Consensus Estimate by 3 cents.

Revenues

Revenues of $83.1 million were up 55.0% sequentially and 12.4% year over year. The improvementwas driven by an increase in both foundry and logic shipments for a key customer and stepped-upDRAM business.

Also, revenues came inabove the Zacks Consensus Estimate of $77.8 million and the company’s guidance of $76.0 million to $80.0 million.

On a sequential basis, system on chip (SoC) and DRAM increased, while Flash decreased. On a geographic basis also, each region improved sequentially.

Revenues by Geography

Asia Pacific contributed 20.8% to second-quarter revenues (up 6.8% sequentially but down 32.2% year over year); North America accounted for 38.0% (up 79.5% sequentially and 82.7% year over year); South Korea brought in 21.2% (up 97.8% sequentially and 12.8% year over year); Europe/Middle East contributed 14.6% (up 55.1% sequentially and 105.1% year on year); and Japan accounted for the remaining 5.4% (up 45.2% sequentially but down 53.1% year on year).

Revenues by End User

SoC revenues were $57.9 million, up 60.4% from the prior quarter and 67.3% from the year-ago quarter.

Reported revenues for DRAM products were $24.2 million, up 48.5% sequentially but down 31.4% year over year.

Flash revenues were $1.0 million, down 16.7% from the previous quarter and 75.0% from the year-ago period.

Margins

Non-GAAP gross profit was $27.5 million, up from $18.9 million last quarter. The gross margin was up 1,100 bps sequentially but down 212 bps year over year. The sequential increase was attributed to higher revenues and a favorable product mix.

Operating expenses adjusted for restructuring, acquisition, amortization, integration and asset impairment charges came in at $20.7 million, 0.2% higher sequentially but down 5.5% year over year. Operating margin of 8.2% was up both sequentially as well as year over year.Pro-forma net income was $6.4 million in the second quarter compared with earnings of ($9.1) million in the previous quarter and $4.2 million in the year-ago quarter.

On a GAAP basis, net profit in the second quarter was $36.9 million (or 61 cents) compared with net income of $0.84 million (earnings of 1 cent) in the year-ago period.

Balance Sheet

FormFactor exited the quarter with cash (comprising cash and cash equivalent, and Marketable securities) of $118.3 million, down from $187.2 million reported in the prior quarter.

Cash usage in the second quarter was $68.8 million versus $0.4 million in the prior quarter. Excluding cash attributable to the acquisition of Cascade Microtech, cash usage was $1.5 million.

3Q Guidance

Management expects third-quarter 2016 revenues in the range of $118–$126 million. The Zacks Consensus Estimate is pegged at $117.4 million. On a GAAP basis, the company projects gross margin of32–36% and fully diluted earnings per share of loss of 3 cents to 3 cents. On a non-GAAP basis, gross margin is expected at40–44% and earnings per share are projected at17–23cents. Cash flow is expected to be positive $10 million to $12 million, excluding acquisition-related payments.

Our Recommendation

FormFactor is an original equipment manufacturer of automated wafer probe cards used in the semiconductor integrated circuit manufacturing process. The company reported a decent quarter with both the top and the bottom lines beating the Zacks Consensus Estimate.

During the quarter, the company completed the acquisition of Oregon-based Cascade Microtech to expand further into the semiconductor testing space. The merged entity will gain a leading position in the semiconductor testing market by leveraging its resources to expand into newer markets.

The Advanced Probe Card market is a structurally attractive area of the semiconductor supply chain. The deal will further expand FormFactor’s product portfolio to better serve the production probe card and engineering systems markets. The company expects the deal to expand its market share in both the Foundry and Logic probe card business driven by secular trends in RF filter growth.

The combined entity will achieve significant cost and revenue synergies supported by an expanded product portfolio, a bigger customer base and better infrastructure. The merger is expected to be immediately accretive to gross margins, profits and earnings per share.

FormFactor carries a Zacks Rank #2 (Buy). Investors may consider stocks such as Ambarella, Inc. (NASDAQ:AMBA) , Cirrus Logic, Inc. (NASDAQ:CRUS) and Silicon Motion Technology Corp. (NASDAQ:SIMO) , each of which carries a Zacks Rank #1 (Strong Buy).