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Why FormFactor, Inc. Is Tanking Today

By Brian Feroldi - Nov 1, 2017 at 8:10PM

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The company reported upbeat quarterly results, but uninspiring guidance caused traders to look for an exit.

What happened

In response to sharing disappointing guidance with investors, shares of FormFactor (FORM -1.51%), an equipment supplier to the semiconductor industry, fell as much as 13% in early morning trading on Wednesday.

So what

FormFactor's third-quarter results looked good and continued the company's streak of beating estimates. Revenue came in at $143.7 million, which was at the high end of management's guidance range and also compared favorably to Wall Street's estimate. Non-GAAP EPS of $0.34 was just as impressive and beat market-watchers estimates by $0.02.

However, management's guidance for the upcoming quarter put traders in a foul mood. The company expects revenue to land between $126 million and $134 million and for non-GAAP EPS to come in around $0.24 to $0.30. While those numbers represent decent year-over-year growth, the midpoint of this range represents a sequential decline.

What's more, Wall Street was projecting at least $132 million in revenue for the upcoming quarter, so the midpoint of revenue guidance failed to meet expectations.

Given the lower-than-hoped-for guidance, it isn't shocking to see the company's stock in the red.

A business person near a computer thinking hard.

Image source: Getty Images.

Now what

FormFactor's CEO Mike Slessor did his best on the call with investors to add some color to the company's disappointing revenue guidance:

As with many advanced node transitions, there is some short-term lumpiness in timing of customer demand, and in the fourth quarter we expect some digestion of the record third quarter shipments. However, as 10-nanometer volumes accelerate in the first quarter of 2018, we are also expecting and planning for a return to the record levels experienced in the third quarter as we support the release of leading-edge microprocessors that will power next-generation data centers.

He also stated that the company received a "significant" customer order during the period. In response, the company plans on building out inventory in the upcoming quarter in anticipation of kicking off a strong start to the year.

Regardless of the explanation, Wall Street kept its attention squarely focused on the disappointing revenue guidance.

Slessor knew the market wasn't going to take the news well, so he tried his best to paint a rosy picture for the company's medium-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, 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 dollars of revenue and a $1.50 of non-GAAP earnings per share.

In total, Slessor remains steadfast in his belief that the company's future is bright. Potential shareholders who agree with his bullishness might want to view Wednesday's drop as a nice opportunity to get in.

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