FormFactor Inc. FORM reported second-quarter 2015 earnings of 7 cents per share which beat the Zacks Consensus Estimate by a penny. Earnings increased 40.6% sequentially and a whopping 204.1% year over year.
Revenues
Revenues of $73.9 million were up 4.3% sequentially and 9.7% year over year. Revenues beat the Zacks Consensus Estimate of $73.0 million.
The sequential increase was driven by modest increases in each of the company’s product markets.
All the segments, System on chip (SoC), Dram and Flash increased sequentially. Region-wise, only North America and South Korea declined from the last quarter.
Revenues by Geography
The Asia Pacific contributed 35% of second-quarter 2015 revenues (up 4.1% from the prior quarter and 19.2% from the year-ago quarter). North America’s share was 23% (down 6.5% from the last quarter but up 1.2% from the year-ago quarter), while South Korea brought in 21% of the revenues (down 7.7% from the prior quarter but up 6.1% from the last year). Japan contributed 13% (up 77.8% sequentially and 88.2% from the year-ago period). Europe/Middle East accounted for the remaining 8% of total revenue (up 7.3% sequentially but down 35.2% year over year).
Revenues by End User
SoCrevenues amounted to $34.6 million, up 3.6% from the prior quarter but down 5.2% from the year-ago quarter. The weakness of the PC market was more than offset by stronger mobile processor revenues driven by specific new designs. The company’s automotive and industrial application revenues continued to be healthy in the second quarter.
SoCs contributed 46.8% to the company's second-quarter revenues, flat sequentially.
Reported revenues for DRAM products were $35.3 million, up 2% sequentially and 33.7% on a year-over-year basis. DRAM was the largest contributor to revenues during the quarter, bringing in 47.7% of the total revenue.
Growth in DRAM resulted from FormFactor’s customers continuing their shrinks to the 2X nanometer (nm) node.
Flash revenues were $4.0 million, up 42.9% from the prior quarter but down 11.1% from the year-ago period. NOR Flash revenues increased $1.4 million in the second quarter to $2.0 million. NAND Flash revenues, including the new Vector probe card, decreased $0.1 million to $2.1 million.
Margins
Non-GAAP gross profit was $26.1 million, up from $25.4 million in the previous quarter. While the higher revenues led to an increase in gross profit dollars, the gross margin was impacted by manufacturing inefficiencies. The gross margin was down 58 bps sequentially and 93 bps year over year.
Non-GAAP operating profit was $4.1 million compared with $3.0 million in the previous quarter.
Operating expenses adjusted for restructuring, acquisition, amortization, integration and asset impairment charges came in at $21.9 million, down 2% sequentially and 4.7% year over year. Operating margin of 5.6% was up 133 basis points sequentially and almost flat with the prior year.
Pro-forma net income was $4.2 million (7 cents a share) compared with $3.0 million (5 cents a share) in the previous quarter and $1.4 million (2 cents a share) a year ago.
On a GAAP basis, net income in the second quarter of 2015 was $0.8 million (1 cent), as against a net income of $0.7 million or 1 cent per share in the previous quarter, and a net loss of $4.3 million or 8 cents in the comparable year-ago period.
Balance Sheet
FormFactor exited the quarter with cash (comprising cash, short-term investments, and restricted cash) of $178.7 million, up $6.6 million from the prior quarter. The company has no debt.
The company used a portion of cash to buy back shares for the first time since 2011.
At the end of the second quarter, the company had $21 million to $25 million remaining under the authorized $25 million stock repurchase program which extends through Apr 2016.
Guidance
For the third quarter, FormFactor expects revenues in the range of $63.0–$68.0 million. Non-GAAP gross margin is expected within 31–34%. Cash flow is expected to be positive and range within $5 million to $7 million.
Non-GAAP fully diluted earnings per share, excluding SBC, is expected in the range of $0.01 to $0.05
Our Recommendation
FormFactor is an original equipment manufacturer (OEM) of automated wafer probe cards used in the semiconductor integrated circuits (ICs) manufacturing process. The company beat the Zacks Consensus Estimate for both the top line and the bottom line in the second quarter.
In the third quarter, the company expects PC-related demand to be weak. However, because of improved market and customer diversification compared with earlier cycles, the present softness is expected to be partially offset by solid demand from Mobile SoC and Mobile DRAM Probe Card.
The Advanced Probe Card market is a structurally attractive area of the semiconductor supply chain. The company’s SoC business is preparing for the probe card refresh cycle associated with the third major 40-nm microprocessor platform recently announced by one of its largest customers.
To test these processors, a device specific fleet of probe cards is required. So even though the transition from 40-nm to 10-nm is postponed, there is a comparable device change replacement cycle for probe cards that FormFactor is well positioned to capitalize on.
On the cost and efficiency front, the company is focusing on arranging its resources and investments more broadly across the SoC, DRAM and Flash probe card markets. This should help it contain its costs better while targeting growth opportunities across markets. This will eventually benefit FormFactor’s market share, revenues and gross margin.
FormFactor shares carry a Zacks Rank #3 (Hold).
Some better-ranked stocks in the technology sector are Expedia Inc EXPE, PetMed Express Inc. PETS and Amazon.com Inc. AMZN. All these stocks sport a Zacks Rank #1 (Strong Buy).
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