FORM Q3 Deep Dive: Margin Initiatives and Advanced Packaging Trends Drive Outlook

Semiconductor testing company FormFactor (NASDAQ:FORM) reported Q3 CY2025 results beating Wall Street’s revenue expectations, but sales fell by 2.5% year on year to $202.7 million. On top of that, next quarter’s revenue guidance ($210 million at the midpoint) was surprisingly good and 5.2% above what analysts were expecting. Its non-GAAP profit of $0.33 per share was 32.7% above analysts’ consensus estimates.

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StockStory’s Take

FormFactor’s third quarter was marked by a positive market reaction, driven by operational improvements and product mix shifts discussed by management. CEO Mike Slessor highlighted the company’s focus on gross margin recovery, citing a 250 basis point sequential improvement from cost controls, labor reductions, and manufacturing efficiencies. Slessor explained, “We’re focused on and committed to improving our profitability to get back on a path to the 47% non-GAAP gross margins of our target model.” The company’s success in expanding its leadership in high-bandwidth memory (HBM) probe cards—particularly as test complexity increased with HBM4 adoption—was also a key driver of quarterly performance.

Looking ahead, FormFactor’s guidance reflects optimism around both further margin gains and demand in advanced semiconductor markets, especially as next-generation HBM4 and co-packaged optics ramp. Management expects short-term improvements to continue, supported by ongoing structural initiatives that target gross margin expansion. CFO Aric McKinnis noted, “We are focused on changing the underlying cost structure across all of our products…improvements in these areas drive durable cost benefits that will help us to weather and partially offset the impact of inevitable shifts in product mix and headwinds presented by new challenges, such as what we have seen recently with tariffs.”

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to cost discipline, execution in advanced packaging markets, and progress on margin improvement actions.

• Margin improvement actions: FormFactor executed immediate cost reduction measures, including headcount reductions and overtime management across manufacturing sites, which began to positively impact gross margins. The company also expanded its precious metal recovery process to cut material waste.
• HBM probe card leadership: The transition from HBM3 to HBM4 drove growth in the DRAM probe card segment, with management noting record quarterly revenue. The higher test intensity and complexity of HBM4 stacks, requiring advanced probe card technology, reinforced FormFactor’s competitive position.
• Foundry and logic diversification: Despite weak demand from CPU applications, FormFactor made progress qualifying its Apollo MEMS probe card technology with a major fabless CPU manufacturer and entered the pilot production phase for GPU probe cards, setting up potential revenue gains in 2026.
• Systems segment momentum: Growth in the Systems segment was supported by new installations of the Triton silicon photonics test system, developed in partnership with Advantest and Tokyo Electron. This system aims to capitalize on the industry shift towards co-packaged optics and data center upgrades.
• Farmers Branch facility: Investment in the new Texas facility is intended to lower operating costs and support capacity expansion, while enabling further margin improvement as new technologies are commercialized.

Drivers of Future Performance

FormFactor’s outlook is shaped by demand for advanced semiconductor test solutions and ongoing cost-reduction initiatives targeting margin recovery.

• Advanced packaging demand: Management expects sustained growth in high-performance compute, especially HBM4 and co-packaged optics, to drive higher probe card intensity and complexity. The transition to HBM4, with increased stack heights and I/O speeds, is anticipated to support revenue and market share gains.
• Ongoing cost discipline: Structural cost-reduction efforts, like automation and improved defect detection, are designed to yield steady gross margin expansion regardless of product mix, helping to offset external pressures such as tariffs.
• Capacity and product flexibility: The ramp-up of the Farmers Branch facility will provide scalable, flexible manufacturing capacity to serve diverse product lines, positioning FormFactor to adapt to changing market demand and support future technology rollouts.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the rate of margin improvement as operational changes take hold, (2) progress in customer qualifications for CPU and GPU probe cards, and (3) the commercial adoption of the Triton system for silicon photonics testing. Developments at the Farmers Branch facility and expansion in co-packaged optics will also be important signposts.

FormFactor currently trades at $53.68, up from $47.64 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).

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