FORMFACTOR INC (FORM)·Q4 2024 Earnings Summary

Executive Summary

• Q4 2024 revenue was $189.5M, down 8.9% QoQ but up 12.7% YoY; non-GAAP EPS was $0.27 as mix shifted toward DRAM while Foundry & Logic (F&L) softened; non-GAAP gross margin fell to 40.2% from 42.2% in Q3 .
• DRAM probe-card revenue set a third consecutive quarterly record; HBM reached ~50% of DRAM revenue, while F&L demand declined as client PC/mobile remained weak; export controls will remove China advanced-node DRAM shipments from Q1 onward .
• Q1 2025 guidance: revenue $170M ±$5M; non-GAAP GM 38% ±150 bps; non-GAAP EPS $0.19 ±$0.04; drivers include seasonally lower Systems and non‑HBM DRAM (China export restrictions), with F&L and HBM roughly flat QoQ .
• Strategic catalysts: minority 20% stake in supplier FICT (~$60M) and Advantest partnership (ATE leader) to accelerate advanced packaging/test innovation; quantum/photonic Systems positioned for ramp into late 2025/2026 .

What Went Well and What Went Wrong

• What Went Well

  • Record DRAM probe-card revenue for a third straight quarter; HBM ~half of DRAM revenue, supported by a second significant HBM customer and early HBM4 activity .
  • Systems revenue increased sequentially; management highlighted co‑packaged optics and silicon photonics transitioning from lab to pilot production with potential volume ramp later 2025 into 2026 .
  • Strategic positioning strengthened via FICT (20% stake; ~$60M) to secure/advance key probe‑card components and a technology/PCB collaboration with Advantest, enhancing end‑to‑end test solutions for advanced packaging/HPC .

• What Went Wrong

  • Sequential declines in revenue, gross margin, and non‑GAAP EPS vs Q3 as forecasted, driven by reduced F&L demand; no F&L manufacturer reached the 10% customer threshold in Q4 .
  • DRAM‑rich product mix pressured corporate margins vs target; management reiterated the 47% GM target at $850M revenue but noted mix/volume headwinds at current levels .
  • U.S. export controls sharply curtail non‑HBM DRAM sales to China; management removed China DRAM to ~$0 in Q1, citing prior run‑rate of ~+$10M/quarter, a material headwind to near‑term DRAM ex‑HBM .

Financial Results

Quarterly trend (sequential; oldest → newest)

Year-over-year comparison (Q4 2023 vs Q4 2024)

Segment and end-market mix (Q4 2024)

KPIs and Cash Flow

Notes: Q4 2023 GAAP EPS includes a $73.0M gain from the sale of FRT excluded from non‑GAAP results; FY24 GAAP includes a $20.3M gain from the China divestiture excluded from non‑GAAP results .

Guidance Changes

Additional context: Q4’24 actuals vs Q3 outlook: Revenue landed ~$0.5M below midpoint ($189.5M vs $190M mid); non-GAAP GM ~80 bps below mid; non-GAAP EPS ~$0.02 below mid .

Earnings Call Themes & Trends

Management Commentary

• “HBM increased to approximately half of DRAM revenue… we now have a significant contribution from a second HBM customer, along with growing volumes of HBM4 designs.” – CEO Mike Slessor .
• “We experienced the anticipated fourth quarter reduction [in] Foundry & Logic… and for the first time in many years, did not have a Foundry & Logic manufacturer as a 10% customer.” – CEO .
• “It’s this DRAM rich mix that is largely responsible for gross margins well below our target gross margin of 47% at $850 million of annual revenue.” – CEO .
• “We are acquiring 20% of FICT for approximately $60 million… not expected to have a significant impact on our results of operations.” – CFO Shai Shahar .
• “We expect co‑packaged optics to begin to ramp in volume later this year and into 2026… providing a new growth vector for both our systems and probe card businesses.” – CEO .

Q&A Highlights

• Non‑HBM DRAM decline: Management removed China advanced-node DRAM shipments from Q1 due to new export controls (~$10M/quarter prior), the largest factor in the sequential Q4→Q1 revenue decline .
• F&L outlook: Broad-based weakness, especially in microprocessors; no 10% customers in Q4; management is pursuing new qualifications (incl. fabless CPU) to diversify .
• 2025 trajectory: Expect overall demand increase through 2025; HBM4 transition, potential PC recovery, new customer quals; Q1 likely the revenue trough .
• Systems path: Near-term seasonal step-down typical; co‑packaged optics shifting to pilot production, with a likely 2026 volume event .
• Margin cadence: HBM has higher margins within DRAM but below high‑end F&L; initiatives include a lower-cost DRAM architecture and share gains in higher‑margin F&L to move toward the 47% target GM .

Estimates Context

• S&P Global (Capital IQ) consensus estimates were unavailable at the time of analysis due to service limits; therefore, we benchmarked results against the company’s prior outlook (Q3 guide for Q4 and Q1 guide) rather than Wall Street consensus. S&P Global consensus comparisons could not be provided at this time.
• Relative to company outlook for Q4 (issued Oct 30): revenue was ~$0.5M below the midpoint; non‑GAAP GM ~80 bps below midpoint; non‑GAAP EPS ~$0.02 below midpoint .

Key Takeaways for Investors

• Mix headwind near term: DRAM‑rich mix and lower F&L volumes pressured Q4 margins; export controls create a step-down in non‑HBM DRAM in Q1, likely making Q1 the trough before 2H recovery drivers emerge .
• Structural HBM growth: HBM accounted for ~50% of DRAM in Q4; second major HBM customer added; HBM4 ramp and stack/layer/test‑intensity increases should support above‑market growth through 2025 .
• Systems optionality: Co‑packaged optics/silicon photonics transitioning to pilot production with potential late‑2025/2026 ramp—an incremental vector for both Systems and probe‑card demand .
• Strategic supply-chain moves: FICT stake and Advantest partnership support probe‑card technology roadmaps and supply assurance in advanced packaging; these could improve competitiveness and execution vs peers .
• Margin roadmap intact: Target model (47% GM at $850M, $2 non‑GAAP EPS) remains; management is introducing a lower‑cost DRAM architecture and pursuing higher‑margin F&L share to mitigate mix pressure as volumes recover .
• Watch near-term execution: Delivery vs Q1 guide, visibility on F&L demand recovery (PC/mobile), and timing/scale of HBM4 ramps are the key near‑term stock catalysts .
• Capital allocation steady: Strong liquidity ($367M cash & investments), continuing buybacks primarily to offset SBC; capex ~$35–45M expected again in FY25 .