FormFactor (NASDAQ:FORM), which manufactures testing equipment for semiconductor components, reported its second-quarter results on Wednesday, and as expected, the company posted year-over-year declines in revenue and profits. However, the declines were not as bad as management had projected. Margins also held up well during the trying period. Traders bid up the stock in response to the better-than-expected quarterly results and on the hope that the bottom is in the rearview mirror.

SEmiconductor on top of graph paper

Image source: Getty Images.

FormFactor's second-quarter results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$135.5 million

$144 million

(5.9%)

Non-GAAP net income

$20.4 million

$29.2 million

(30%)

Non-GAAP earnings per share

$0.27

$0.40

(33%)

Data source: FormFactor. GAAP = generally accepted accounting principles. Non-GAAP = adjusted. 

What happened with FormFactor this quarter?

  • Revenue of $135.5 million landed near the middle of guidance. 
  • Non-GAAP gross margin was 44.9% during the period. This figure was at the high end of guidance for the quarter. However, it was still down 270 basis points when measured on a year-over-year basis.
  • Non-GAAP EPS of $0.27 was a penny higher than the top end of guidance.
  • Free cash flow reached $16.8 million during the quarter.

What management had to say

CEO Mike Slessor stated that the company's diversified business model allowed it to rebound from the lows experienced in the first quarter. He also explained why margins and EPS remained robust: "We benefited from a product mix biased toward our differentiated high-end products, driven primarily by growth in advanced packaging applications. Coupled with solid execution by our operations teams, this favorable mix produced gross margins near the levels of our target financial model, and, with good expense control, produced earnings per share above the high end of our outlook range."

On the conference call with investors, Slessor noted that two major customers have announced delays in their node transitions. As a result, he commented that "it is unlikely that 2018 will be a growth year."

Looking ahead

The delay in customer orders is expected to create short-term volatility in demand. As a result, management once again shared guidance that reflects a year-over-year decline in revenue and profits:

Metric Q3 2018 Guidance Range  Q3 2017 Actual Year-Over-Year Change at Midpoint
Revenue $130 million to $138 million $143.7 million (6.7%)
Non-GAAP EPS $0.20 to $0.26  $0.34 (32%)

Data source: FormFactor.

FormFactor's stock jumped by double digits the day following this earnings release. That move is a bit puzzling given that guidance calls for yet another quarter of declining revenue and profits.

However, it's possible that the bullish move is a result of Slessor reaffirming his faith in the company's ability to reach its long-term financial targets of $650 million of revenue and $1.50 in non-GAAP earnings per share:

"We remain committed to achieving our hard target financial model, and expect we will achieve this performance on a run-rate basis late next year. As the leader in our served markets, we will benefit from continued industry growth over that time frame, but we also require some resolution of the current node-transition issues at our major customers."

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