Formfactor, Inc.’s fourth quarter earnings beat the Zacks Consensus estimate by $0.03. The share price was down 6.2%, as revenue was way below expectations.
Revenue
Revenue of $33.0 million was down 24.6% sequentially and 17.3% year over year, much weaker than the 10% decline forecasted by management. The sequential decline in revenue was due to customers’ production dynamics and technology transitions. Some orders from the Dec quarter had previously been pulled into the Sep quarter, which also impacted results.
Revenue by End User
The DRAM business was down 35.2% sequentially and 24.2% year over year. The decline was attributed to slower DDR3 activity, as customers prepared for the next tooling cycle. This market was the primary factor for the revenue decline in the last quarter.
The Flash business was quite strong in the last quarter, posting a sequential increase of 28.8% and a year-over-year increase of 21.5%. The sequential improvement was the result of stronger demand for NOR probe cards.
The Logic business (SoCs) was up 27.7% sequentially and 2.3% year over year. The sequential improvement was due to strengthening of the wire bonding market.
Revenue by Geography
All regions other than Japan witnessed double-digit sequential increases, although they declined on a year-over-year basis. Japan saw a sequential decline of nearly 70%. The Asia/Pacific region (excluding Japan) was the largest contributor at 41% of total revenue. Japan generated 24%, North America 25% and Europe the remaining 10%.
The gross margin dropped to-8.5%, up 2,526 basis point (bps) decline from the previous quarter’s 16.8%. The much weaker revenue was the primary reason for the decline. However, poorer mix of products and initial high ramp-up costs on some products made matters worse.
Operating expenses of $32.2 million were slightly higher than the previous quarter’s $31.1 million. The operating margin was –106.0%, down 5,163 bps from -54.4% recorded in the previous quarter. The lower gross margin was responsible for around half of the decline, although both R&D and SG&A (as a percentage of sales) also increased.
Net Income
The pro forma net loss was $28.0 million, or 82.4% of sales, compared to loss of $23.9 million, or 54.6% in the previous quarter and loss of $25.1 million, or 62.9% of sales in the year-ago quarter. The only one-time item in the last quarter was a restructuring charge on a tax-adjusted basis.
The GAAP net loss was $28.0 million ($0.56 per share), compared to loss of $23.9 million ($0.48 per share) in the Sep 2009 quarter and loss of $30.0 million ($0.61 per share) in the December quarter of 2008.
Balance Sheet
Inventories were up 20.7%, following an increase of 14.0% in the September quarter. As a result inventory turns continued to decline to 5.6X in the last quarter, compared to 6.9X in the September 2009 quarter and 7.0X in the June 2009 quarter. Days sales outstanding (DSOs) improved significantly from 100 to 81 days, but we think this is largely due to the lower sales level in the quarter. The company ended with cash of $449.2 million, down $13.4 million during the quarter.
Guidance
For the first quarter, management expects revenue of around $40 million (+/- 10%). The gross margin is expected to remain under pressure in the next quarter, with COGS increasing by around $3.5 million. Non-GAAP spending on R&D and SG&A is expected to increase slightly.
Management currently expects revenue to be up 60% (+/- 10%) and non-GAAP operating expenses of $28-32 million. Management expects to generate profits by the second half of the year at a breakeven sales level of around $60 million.
Estimate Revisions
Six of the 10 analysts covering the stock have lowered their expectations within the last 30 days. What is more significant is that three of these analysts have lowered their estimates in the last seven days, since the company reported.
While the growth projected is encouraging, we cannot help but notice the very wide guidance range, which seems to indicate significant uncertainty in demand. We also note that inventory levels have been going up, which could mean that the company is accumulating slow-moving/non-moving inventory. Although management did mention some production ramp up related to new products, we are skeptical about the amount of such products in inventory. We would have thought inventory would be managed better, especially considering the fact that the company is burning cash.
The earnings surprise history is also discouraging, netting a negative 12.00% in the last four quarters. However, the Zacks Consensus estimate for the next quarter is -$0.52, indicating an upside potential of 5.77%. Consequently, shares could trade slightly higher if the odds work in favor of the company. This is the rationale behind the current Zacks Rank #3 (Hold) allotted to the shares.Zacks Investment Research
