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Tuesday, February 5, 2008

FormFactor Q4:2007 Results

Unsurprisingly, another memory market supplier takes it on the chin.

Formfactor misses consensus revenues by approximately 5mm, coming in at 120mm versus expectation of 126mm. They blamed the shortfall on manufacturing issues with their new Harmony platform and said lead times have improved on this product significantly -- and wouldn't you know it, bookings declined a bunch. Lower bookings would improve product availability and bring down lead times -- one wonders if anything has changed in terms of their manufacturing issues -- all we know is they can meet demand better than before demand dropped a lot. They seem to be suggesting that customers couldn't wait for them to bring on more test equipment and had to resort to using competitor's available products and telegraphing weakness until at least the second half of the year.

Revenue guidance for Q1 falls to a 3 year low, coming in at 70-80mm versus street expectations of 120mm -- a 35-40% miss. That's... impressive. They lay off 14% of their workforce due to deteriorating DRAM recovery conditions.

And lets not even get into the cost accounting questions that will continue to dog the company. On second thought... lets get into it. This company had very suspicious margins for a prolonged period of time. I say suspicious because they held up amazingly well in an environment where all their competition saw cost pressures that somehow FormFactor managed to avoid. Sometime later, coincident with their CFO's departure, they discovered accounting irregularities. To me, this kind of discovery brings the whole historical model into question. Trying to gauge where business will stabilize is impossible as the measuring stick has the wrong numbers on it.

I'm sure there's value there but good luck figuring out what it is. It's unanalyzable in its current FORM as I think the whole business model is suspect till they clear the accounting dirt. As a bonus, they're a memory capex supplier, which is my least favorite sector.

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