Semiconductor testing company FormFactor (NASDAQ:FORM) missed analysts' expectations in Q2 FY2023, with revenue down 23.5% year on year to $155.9 million. On the other hand, next quarter's outlook exceeded expectations with revenue guided to $167 million at the midpoint, or 0.13% above analysts' estimates. FormFactor made a GAAP profit of $828 thousand, down from its profit of $30.2 million in the same quarter last year.

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“As we navigate the current cyclical downturn, we continue to benefit from FormFactor’s diversification strategy and broad Lab-to-Fab product portfolio, which differentiate us from our direct competitors,” said Mike Slessor, CEO of FormFactor,

With customers across the foundry and fabless markets, FormFactor (NASDAQ:FORM) is a US-based provider of test and measurement technologies for semiconductors.

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers and data storage. The growth of data and technologies like artificial intelligence, 5G networks and smart cars are also creating a next wave of growth for the industry. To keep up with ever changing customer needs requires new tools that can design, fabricate and test at ever smaller sizes and more complex architectures, and that is driving the demand for semiconductor capital manufacturing equipment.

Sales Growth

FormFactor's revenue growth over the last three years has been unimpressive, averaging 2.88% annually. This quarter, its revenue declined from $203.9 million in the same quarter last year to $155.9 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

FormFactor had a difficult quarter as revenue dropped 23.5% year on year, missing analysts' estimates by 3.94%. This could mean that the current downcycle is deepening.

FormFactor may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 7.67% next quarter, analysts are expecting revenue to grow 4.73% over the next 12 months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, FormFactor's DIO came in at 114, which is 21 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from FormFactor's Q2 Results

With a market capitalization of $2.87 billion, FormFactor is among smaller companies, but its $236.9 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We were impressed by how significantly FormFactor blew past analysts' earnings expectations this quarter. That really stood out as a positive in these results. On the other hand, it was unfortunate that its revenue missed analysts' expectations and its operating margin declined. Overall, this was a mixed quarter for FormFactor. The stock is flat after reporting and currently trades at $36.02 per share.

FormFactor may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.