Why Is FormFactor (FORM) Up 14% Since Its Last Earnings Report?

A month has gone by since the last earnings report for FormFactor, Inc. (NASDAQ:FORM) . Shares have added about 14% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is FORM due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

FormFactor (FORM) Q4 Earnings Miss, Top-Line View Dull

FormFactor Inc. reported fourth-quarter adjusted earnings of 24 cents per share, which missed the Zacks Consensus Estimate by 3 cents. However, the bottom line increased 20% year over year on top-line strength coupled with stringent cost control.

Revenues increased 6.5% from the year-ago quarter to $131.9 million, slightly better than the Zacks Consensus Estimate of $130 million. The figure was within the company’s guidance of $126-$134 million.

Management provided an unimpressive first-quarter 2018 revenue guidance, which is expected to decline sequentially due to delay in 10 nm production probe card demand from the company’s largest customer.

However, management is optimistic that probe card shipments to this customer will begin to ramp up in the second quarter of 2018. FormFactor expects record shipments to this customer in the second half of 2018.
FormFactor also announced the retirement of CFO Michael Ludwig, effective Mar 2.

In 2017, earnings were $1.21 per share compared with 49 cents reported in 2016. Revenues surged almost 43% to $548.4 million.

Quarter Details

Foundry & Logic revenues (52.1% of revenues) were almost flat on a year-over-year basis at $68.7 million.

During the quarter, FormFactor started delivering shipments of a new design to a foundry, which utilizes probe cards and advanced packaging applications at leading edge nodes. Moreover, probe card for RF applications increased in the fourth quarter.

Revenues for DRAM products (24.2% of revenues) were $31.9 million, up 32.4% year over year. Management stated that demand environment was robust in the quarter. Technology node transitions and a strong datacenter demand environment continued to positively impact probe card demand.

Flash revenues (5% of revenues) were $6.6 million, reflecting an increase of 10% from the year-ago quarter. Almost half of the flash revenues were from NAND flash applications.

Systems revenues (18.7% of revenues) declined 2.4% year over year to $24.7 million.

Operating Details

Reported gross margin expanded 440 basis points (bps) on a year-over-year basis to 36.9%. On a non-GAAP basis, gross margin contracted 270 bps to 41.8%, primarily due to a massive decline in system segment gross margin.

FormFactor’s investment to establish technology for emerging silicon photonics applications, unfavorable mix of thermal sub-systems sold and stronger Euro dented system segment margin.

Research and development (R&D) and selling, general and administrative (SG&A) expenses, as percentage of revenues, declined 70 bps and 90 bps, respectively.

In dollar terms, Reported operating expenses (including restructuring and impairment charges) plunged 21.1% year over year to $43.2 million. Reported operating expenses, as percentage of revenues, declined from 44.2% in the year-ago quarter to 32.8%.

As a result, FormFactor reported operating income of $5.4 million against net operating loss of $14.5 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Dec 30, 2017, cash (comprising cash and cash equivalent as well as marketable securities) was $141.4 million compared with $134.9 million as of Sep 30, 2017.

Cash from operations was $26.5 million compared with $17.6 million in the third quarter. Free cash flow was $23.5 million, up from $21.4 million in the third quarter.

FormFactor repurchased $8 million stocks in the fourth quarter and $19 million in fiscal 2017. The company has share repurchase authorization of $25 million.

Guidance

FormFactor expects first-quarter 2018 revenues between $112 million and $120 million.

On a non-GAAP basis, the company projects gross margin of 40-43% and earnings of 12-18 cents per share.

FormFactor expects systems non-GAAP gross margin in the high-40s to low-50s range for the first half of 2018.

Management reiterated long-term model of $650 million in revenues and earnings of $1.50 per share. The company believes that results will be driven by strong semiconductor growth trends in advanced packaging, mobile data and automotive applications.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been three revisions lower for the current quarter. In the past month, the consensus estimate has shifted by 41.8% due to these changes.

FormFactor, Inc. Price and Consensus

VGM Scores

At this time, FORM has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregte VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for growth and momentum investors while value investors may want to look elsewhere.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. It's no surprise FORM has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.