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This Turnaround Is Off to a Great Start

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Every journey of a thousand miles starts with a baby step. FormFactor (Nasdaq: FORM  ) took that tentative first step today on a quest to restore the company to its former glory after a few bad years.

The maker of testing equipment for semiconductor manufacturers in general, and memory chips in particular, just reported a so-so third quarter with sales and earnings broadly in line with expectations. That shouldn't exactly excite anybody. But then the freshly appointed management team showed that it might have the chutzpah required to pull off a turnaround, as evidenced by a firm grip on the company's market position and a couple of bold moves in early days on the job.

CEO Tom St. Dennis has been on the job for all of six weeks, and CFO Richard DeLateur stepped into his position last May after the former CEO and CFO pair left the company amid floundering performance. Tom brings a solid resume of industry experience from 25 years of service in senior positions with chip manufacturing peers Applied Materials (Nasdaq: AMAT  ) and Novellus Systems (Nasdaq: NVLS  ) , and he was also CEO of Wind River Systems long before Intel (Nasdaq: INTC  ) bought that designer of software development tools.

The first order of business for DeLateur and St. Dennis is to get a tight grip on expenses without hobbling the research on which FormFactor's future depends. The goal is to break even in non-GAAP profits by the middle of next year, assuming at least $65 million of quarterly revenue, which would imply about 37% sales growth by then from today's $47.3 million level. But it should only take $50 million of sales to break even in terms of free cash flow, so cash flows should generally be stronger than earnings. By then, operating expenses should decline from $29 million to about $20 million.

"We think that is achievable," DeLateur said. "By no means is it easy but when we are at that level, fully half of that budget will be dedicated to R&D."

On top of that, the company just announced a $50 million share buyback program to boost earnings and juice shareholder returns, which marks the company's first major buyback and a reversal of a tendency to dilute your holdings with unfortunate helpings of freshly printed shares.

All of this adds up to an eminently Foolish business direction. Quality management is rule No. 1 for running a successful business, much like cardio is paramount to surviving a zombie invasion. I like what the FormFactor team is showing me here, and I don't think you should be scared of this stock anymore.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Intel is a Motley Fool Inside Value recommendation. FormFactor is a Motley Fool Hidden Gems choice. Motley Fool Options has recommended a bull call spread position on FormFactor. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of FormFactor and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

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Related Tickers

10/21/2016 4:00 PM
AMAT $28.43 Up +0.05 +0.18%
Applied Materials CAPS Rating: ****
FORM $10.15 Up +0.03 +0.30%
FormFactor CAPS Rating: ***
INTC $35.15 Down -0.28 -0.79%
Intel CAPS Rating: ****
NVLS.DL $0.00 Down +0.00 +0.00%
Novellus Systems,… CAPS Rating: **