FormFactor (NASDAQ:FORM), an equipment supplier to semiconductor manufacturers, reported its third-quarter results on Tuesday, Oct 31. While the quarterly results came in at the high end of the company's guidance range, investors pushed the stock down on Wednesday as management's forecast for the upcoming quarter fell short of analyst estimates. The stock was down 12% at 1:15 p.m. on Wednesday.

Semicondutor chips being tested by hand tool

Image source: Getty Images.

FormFactor Q3: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$143.7 million

$144 million

(0.2%)

Non-GAAP net income

$25 million

$29.2 million

(14.4%)

Non-GAAP earnings per share

$0.34

$0.40

(15%)

GAAP = generally accepted accounting principles. Data source: FormFactor.

What happened with FormFactor this quarter?

  • Revenue of $143.7 million compared favorably to guidance and also beat Wall Street's estimate by $3.5 million.
  • Probe card segment revenues declined 2% sequentially to $119.4 million. Management stated that the fall was driven by an 8% decrease in foundry and logic revenues as a result of customer order lumpiness.
  • DRAM revenue grew 3% sequentially thanks to "a robust demand environment."
  • Non-GAAP gross margin fell 310 basis points sequentially as a result of product mix.
  • Non-GAAP EPS of $0.34 was at the high end of guidance and also topped analysts' average estimate by $0.02.
  • Free cash flow for the quarter was $12 million.
  • Cash balance at quarter's end was $136 million.

What management had to say

CEO Mike Slessor had this to say in the company press release: 

FormFactor delivered another strong quarter of revenue and earnings driven by continued strength in all our businesses. Our broad market positioning across high growth semiconductor end markets such as data center, mobile and automotive continue to enable FormFactor to capitalize on industry momentum to deliver top-line growth and strong profitability.

On the call with investors, Slessor said that the company received a "significant" customer order to support a major 7-nanometer mobile application processor project. As a result, FormFactor will be building inventory in anticipation of volume shipments starting in the first quarter of the new year.

Looking ahead

Here's what management expects to happen in the fourth quarter: 

  • Revenue will land between $126 million and $134 million.
  • Non-GAAP gross margin will be between 43% and 46%.
  • Non-GAAP earnings per share will be between $0.24 and $0.30.

For context, revenue and Non-GAAP EPS in the year-ago period were $124 million and $0.20, respectively, so FormFactor expects to return to year-over-year growth during the period. However, the midpoint of this guidance represents a sequential decline. In addition, analysts were hoping to see at least $132 million in revenue and $0.26 in EPS for the quarter, so the midpoint of the revenue guidance was disappointing in that context.

Slessor likely anticipated that the market was going to react negatively to this news, so he did his best to make investors feel good about the company's long-term prospects:

With the continued strength of the overall semiconductor industry, augmented by our specific growth opportunities in advanced packaging, mobile data, and automotive ICs [integrated circuits], we are looking forward to delivering meaningful growth in the first half of 2018 as we progress toward our long-term financial model that delivers $650 million of revenue and $1.50 of non-GAAP earnings per share.

 

Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool recommends FormFactor. The Motley Fool has a disclosure policy.