FormFactor Inc. (FORM): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:
FormFactor is an OEM of wafer probe cards used in the back end of the semiconductor manufacturing process. The company posted a lower-than-expected fourth quarter loss. Management provided encouraging revenue guidance for the upcoming quarter. We believe that FormFactor's decision to shift focus away from the PC DRAM market toward mobile segment is likely to be beneficial. Form has the product pipeline and cost structure to register robust growth and profitability going forward. However, we believe the weakening demand for probe cards might prevent the company from absorbing all of its manufacturing costs, impacting margins. We have a Neutral recommendation on FormFactor shares.

Overview:

Based in Livermore, CA, FormFactor, Inc. (FORM) is an original equipment manufacturer (OEM) of automated wafer probe cards that are used in the back-end portion of the semiconductor integrated circuits (ICs) manufacturing process. The company went public through an IPO in June 2003.

The back-end of the manufacturing process takes place after a wafer (usually made of silicon) has completed the device formation stage, in which multiple copies of an IC device have been constructed on it. A wafer prober then moves the wafer so that each IC device's electrical contact points are properly aligned with the probe card's pins, facilitating the parametric or functional testing of the device. Parametric testing is done both during and at the completion of the device fabrication process. Functional testing, done after final construction, determines whether the device meets performance specifications (wafer sorting).

Following the wafer sort, the wafer is cut or separated into individual die. Electrical leads are then attached to the die surface. This is followed by die encapsulation and packaging within an environmentally protective encasement. The purpose of the die package or encasement is to protect the semiconductor device from environmental elements and secure the electrical contacts to the protruding electrical leads. In addition, the encasement acts as a medium through which thermal energy or heat is dissipated from the die. A final test is then conducted on the chip.

Roughly 85% of wafer probers are used in wafer sorting applications, while the rest are used in parametric testing. Thus most of the testing is done in the back-end of the fabrication process. Each probe card is custom-built for each specific wafer, as well as for the test equipment that accepts the probe card's electronic information. Functionally, this test equipment increases the efficiency of the manufacturing process through the detection and removal of defective semiconductor devices prior to final assembly.

The primary challenges facing wafer prober and probe card manufacturers are the transition to larger wafers, the shrinking of device sizes, increasing throughput requirements, and devices running at greater speeds and at lower power.

FormFactor has an extensive intellectual property (IP) portfolio, with over 707 patents.

The company's wafer probe cards are used by manufacturers of dynamic random access memory (DRAM), system-on-chips (SoCs) and Flash. These three markets generated 57%, 26% and 17% of 2012 revenue, respectively. DRAM revenue was down 11.4%, SoC up 60.4% and Flash up 19.7% from 2011 levels.

The principal technology used in the probe cards is the proprietary MicroSpring interconnect technology, which utilizes a MicroElectroMechanical Systems (MEMS) approach. Here, a spring is used to push the probe card contact point down sufficiently to establish electrical contact, thus limiting the number of times the surface has to be touched by the probe card ( touchdown') to complete the required electronic testing, thus speeding up the testing process. The wafer probe cards are, of necessity, custom designed and built to mechanically fit and electrically test a customer's unique semiconductor wafer design. The rest of the company's probing system product line consists of MicroLign, MicroForce, TRE X64 X253 and high-speed probing.

Products are primarily distributed through a direct sales force, supplemented with a distributor (Spirox) in China and three independent sales representatives in Europe and North America. SK hynix was the largest customer in 2012, having generated 29.4% of total revenue. Samsung was the second largest customer in 2012 with a 12.4% share.

Given the manufacturing locations in Asia, the company derives most of its revenues from the region. North America has started to grow in recent times because of the increasing level of manufacturing activity in the region. The revenue distribution by geography was as follows South Korea 33% (up 49.2% from 2011), Taiwan 21% (down 31.4%), North America 15% (up 6.3%), Japan 12% (down 27.7%), Asia/Pacific 13% (up 62.9%) and Europe 6% (up 65.3%).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: DRAM , FORM , IP

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