In the past when the semiconductor industry moved from one design architecture to another, it was a rather orderly process. The new technological advancement would replace the older one, which subsequently faded away and died a natural death. That's no longer the case. Today, when new technologies are developed, they ride alongside the ones they are supposed to be replacing. That seems to suggest that multiple versions from different generations can harmoniously co-exist.
An environment that supports such diversity is a breeding ground of profits for companies that are able to capitalize on it. Motley Fool Hidden Gems recommendation FormFactor (NASDAQ:FORM) is not only taking advantage of the situation but also exploiting it for the benefit of shareholders. Today's memory marketplace is spawning opportunities for the leading manufacturer of advanced test wafer probe cards to enhance and widen its industry dominance.
Last week, FormFactor released its third-quarter earnings report, with results that surprised analysts because of its strength and breadth. Earnings that were expected to fall by 26% on revenues only 12% higher instead came in 21% ahead of guidance on revenues that grew by a similar percentage. Moreover, bookings reached a record $62.9 million, nearly 40% over last year, while gross margins improved to 45.3%, up from 41.6% last quarter. The market sat up and took notice, causing the stock to jump 20% in one day.
Why the turn of events? Why did FormFactor seem to have such ennui the week before but exhibit a startling change afterwards? Simply put: the co-existence and convergence of emerging technologies discussed above.
DDR is the legacy memory architecture that, though giving way to next-generation DDR2 memory, is still able to hold its own. It's also the most widely used type of memory today. FormFactor's customers have been moving to smaller 90 nanometer sizes in DDR memory before they do so in DDR2. The transition is occurring, only more slowly than anticipated. Customers have been tooling for multiple designs and need multiple sets of FormFactor's probe cards. Both architectures exist side-by-side because transitions are driven not only by performance needs but also by the necessity to reduce costs. Legacy technology has become cheaper these days, and that provides profit for FormFactor. We could very well see future-generation DDR3 running alongside not only DDR2 but also DDR. Those would be heady times indeed for FormFactor.
Equally important has been the company's new manufacturing facility, which is now running 24/7 and is the only MEMS facility of its kind in the world. MEMS -- or micro electro mechanical systems -- are devices that use microfabrication techniques to machine moving parts. FormFactor's disruptive MicroSpring technology is an example of this design capability, which is allowing computer chip manufacturers to test their chips in one pass, a design innovation never before achieved. It will soon be available for chips used in all sorts of consumer devices, including cell phones and digital cameras. It's a huge untapped market that is allowing FormFactor to forecast annualized revenue growth rates exceeding 25% for the next few years.
The new factory can produce revenues of as much as $80 million per quarter, and it's operating at about 75% of that capacity already. Within its normal budget for capital expenditures, the probe card maker can expand that number to $120 million per quarter. Investors who heeded my note the other day to view FormFactor's price softness as an opportunity to get back on the profit curve are finding themselves riding higher today.
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Fool contributor Rich Duprey owns shares in FormFactor and recommended the stock for Hidden Gems. He does not own any of the other stocks mentioned in this article. The Motley Fool has a disclosure policy.
