Semiconductor testing company FormFactor (NASDAQ:FORM) reported Q3 FY2023 results topping analysts' expectations, with revenue down 5.14% year on year to $171.6 million. However, next quarter's revenue guidance of $165 million was less impressive, coming in 4.76% below analysts' estimates. Turning to EPS, FormFactor made a non-GAAP profit of $0.22 per share, improving from its profit of $0.06 per share in the same quarter last year.

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“We continue to operate efficiently in what we see as a relatively stable near-term demand environment across our diversified product and technology portfolio,” 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.

Semiconductor Manufacturing

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

Sales Growth

FormFactor's revenue growth over the last three years has been unimpressive, averaging 0.24% annually. This quarter, its revenue declined from $180.9 million in the same quarter last year to $171.6 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).

Even though FormFactor surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 5.14% year on year. 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 0.59% next quarter, analysts are expecting revenue to grow 9.67% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

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 99, which is 6 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.

Key Takeaways from FormFactor's Q3 Results

Sporting a market capitalization of $2.63 billion, FormFactor is among smaller companies, but its more than $244.4 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

We were impressed by FormFactor's strong improvement in inventory levels. We were also excited its revenue, EPS, and free cash flow outperformed Wall Street's estimates. These beats were driven by strong results in its foundry & logic and systems divisions. On the other hand, its revenue guidance for next quarter underwhelmed and its operating margin shrunk. We note that poor revenue outlooks have been the norm in semiconductor land this quarter, so the company's guidance is consistent with its peers. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $33.27 per share.

So should you invest in FormFactor 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.