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What to Make of FormFactor's Reported Results


A summary of what came from the conference call.

FormFactor (FORM) was one of my two picks for investors in 2010. The company pre-announced that it would miss guidance in early January -- largely the result of timing issues at DRAM customers. Now that it's reported results, I thought I'd summarize what came from the conference call.

Revenue was $33 million in the quarter, down 17% from last year and down 25% sequentially. Virtually the entire miss came from Elpida as Japan revenue was down 65% year-year. Elpida is in the process of two lithography shrinks on its DDR3 parts and it's apparent that those developments have had a temporary negative impact on FormFactor.

Dramatically lower than expected revenue led to a significantly greater-than-expected loss per share of $0.56. The company used cash for operations but the net cash position remains quite sold at $9.03 per share (57% of market capitalization). The balance sheet remains debt-free with A/R and inventories well within reasonable parameters.

The company is showing progress in diversifying its customer base. NAND flash revenue grew 29% sequentially and revenue from logic customers increased 28% from the third quarter. The new Matrix family of probe cards is being evaluated or already being adopted by top-tier memory manufacturers. Tests by FormFactor have demonstrated that the Matrix products can result in reduced wafer test costs of as much as 30%.

The shift of production to Singapore remains on schedule with the expectation that operations will begin to see the margin benefit in the fourth quarter of 2010. Until that time, the need to run duplicate operations to insure customer service will require slightly higher operating expenses than originally anticipated, but nothing outrageous.

Management is expecting revenue in the first quarter to be about $40 million (±10%). Furthermore, they anticipate hitting breakeven on $60 million in revenue in the third quarter at a gross margin in the 40%-45% range. The rationale for management's outlook is based upon design activity for new wafer cards (each new process shift at customers requires a new design). Fourth-quarter design activity increased 40% sequentially and was at the highest level since 2008 and one month into the first quarter, design activity has continued to rise.

When FormFactor pre-announced, I noted that the recommendation was based upon what was going to happen in 2010, not in the fourth quarter of 2009. Unlike some other types of wafer fab equipment, the demand for wafer probe cards isn't primarily dependent upon new capacity expansion plans (i.e. new fabs or new lines within existing fabs). On the contrary, process technology changes (i.e. shrinks) drive demand, and that's where you'll see the bulk of capital spending in 2010.

FormFactor is also a primary beneficiary of technology developments within product groups. The shift to DDR3 from DDR2 is currently taking place among DRAM suppliers. That drives new demand and will through next year. On the NAND side, higher densities and more bits per cell all spur growth for FormFactor.

Nothing has changed as these catalysts remain in place. The only difference is that now I have some skin in the game.
Position in FORM.
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