Executive Summary / Key Takeaways

• FormFactor (FORM) is a critical enabler of the semiconductor industry's shift towards advanced packaging and generative AI, driving increased test intensity and complexity across its Probe Cards and Systems segments.
• Strategic investments in FICT Limited and a new Texas manufacturing facility are designed to secure critical supply, expand capacity, and reduce long-term operating costs, bolstering FormFactor's competitive position.
• The company is experiencing robust growth in High Bandwidth Memory (HBM), diversifying its customer base across all three major HBM manufacturers, and is well-positioned for the HBM4 transition.
• Despite record revenues, gross margins face near-term pressure from product mix shifts towards lower-margin DRAM and tariff headwinds, though management is actively pursuing initiatives to achieve its 47% target.
• FormFactor's Q3 2025 outlook anticipates stable revenue and slight margin improvement, with a notable one-time tax impact from the "One Big Beautiful Bill" (OBBB) legislation.

The Unseen Enabler of the AI Revolution

FormFactor, Inc., headquartered in Livermore, California, stands as a pivotal provider of essential test and measurement technologies across the entire semiconductor product lifecycle. Its comprehensive portfolio, encompassing high-performance probe cards, analytical probes, probe stations, thermal systems, and cryogenic systems, serves as the unseen enabler for the complex electrical and optical information extraction from semiconductor and electro-optical devices. This critical function supports everything from early-stage research and development to high-volume production.

The semiconductor industry is on a trajectory to reach $1 trillion early in the next decade, a growth fueled by two dominant themes: advanced packaging and generative AI. As the traditional pace of Moore's Law decelerates, innovations in advanced packaging and chiplets are accelerating customer roadmaps, delivering spectacular performance improvements in compute and memory. FormFactor is uniquely positioned at the heart of this transformation, providing the indispensable tools that ensure the quality and performance of each individual chiplet and the intricate stacks of chiplets within advanced packages. This paradigm shift inherently drives increased test intensity and complexity, creating a significant and sustained demand for FormFactor's specialized products.

FormFactor's strategic journey, initiated with its incorporation in 1993, has consistently focused on diversification and adapting to emerging market trends. Key historical moves, such as the 2016 acquisition of Cascade Microtech, significantly enhanced its radio frequency (RF) know-how, a capability now critical for high-speed testing. The 2020 purchase of Advantest probe-card assets further solidified its position within the broader test equipment ecosystem. More recently, the proactive divestiture of its China operations in February 2024 for $21.4 million, which yielded a pre-tax gain of $20.3 million, was a strategic response to escalating geopolitical issues and U.S. export controls that had become a structural headwind. This move allowed the company to focus on other opportunities while maintaining sales through a distribution partnership.

Technological Edge: Precision at the Forefront of Advanced Packaging

FormFactor's competitive advantage is deeply rooted in its differentiated technology, which is purpose-built to address the escalating demands of advanced packaging and AI. Its core offerings include proprietary probe card architectures like SmartMatrix and IntelliFusion for DRAM, advanced analytical probes, and specialized systems such as the CM300 Lab Probers and IQ2000/IQ3000 cryogenic probers. The company also leverages proprietary FEROS optical probes, particularly for electro-optical testing.

These technologies deliver tangible and quantifiable benefits that are critical for its customers. For instance, High Bandwidth Memory (HBM) probe card intensity is estimated at nearly 1% of HBM revenues, a figure that is double the average for the broader semiconductor industry. This highlights the disproportionate value FormFactor's probe cards bring to HBM production. Furthermore, the transition to HBM4 designs introduces more challenging test requirements, including higher speeds and wider temperature and scaling ranges. These complexities enable FormFactor to command higher Average Selling Prices (ASPs) for its high-speed cards. HBM4 products, with stacks potentially reaching 16 layers high (double that of HBM3), will significantly increase the number of probe cards required for "good chip out," as each component chiplet must be rigorously tested prior to stacking.

FormFactor's R&D initiatives are strategically aligned with these industry shifts. The company is developing and has shipped pilot volumes of a new, lower-cost DRAM architecture for the non-HBM commodity market, with a full launch anticipated later in 2025. This aims to improve margins in a historically lower-profitability segment. Concurrently, FormFactor is extending the differentiated high-speed and temperature scaling performance of its SmartMatrix and IntelliFusion platforms for HBM applications. In the burgeoning field of Co-Packaged Optics (CPO), FormFactor's multi-year collaboration with customers has yielded specialized systems, software, and optical probes for photonic IC (PIC) chips. Multiple CM300xi systems are already in pilot production, with the goal of achieving high-volume production by the first half of 2026. The fusing of electrical and optical test capabilities in CPO represents a significant opportunity, as CPO offers compelling power and speed advantages critical for reducing data center energy consumption, a growing limiter for AI growth. In quantum computing, FormFactor's IQ2000 and IQ3000 cryogenic probers are instrumental in characterizing and testing quantum processors, positioning the company for a market that, while still years from high-volume production, is reaching an inflection point.

For investors, these technological advancements translate directly into a stronger competitive moat, enabling higher ASPs, lower costs through efficiency, and ultimately better margins. They solidify FormFactor's market positioning and underpin its long-term growth strategy in the most critical and rapidly evolving segments of the semiconductor industry.

Competitive Landscape: Differentiating in a Dynamic Market

FormFactor holds a prominent position in the semiconductor testing equipment market, particularly in probe cards, where it is recognized as a key player driving growth. The company was notably recognized by customers worldwide in the TechInsights' 2025 global customer satisfaction survey as the #1 global supplier in both test subsystems and focused chip-making equipment categories, "far outpacing our direct competitors." This underscores its strong brand and technological leadership.

FormFactor's direct competitors include industry giants such as Teradyne , Advantest , and Keysight Technologies . While these rivals offer broader portfolios or specialize in high-volume testing, FormFactor differentiates itself through its focus on precision, customization, and specialized applications.

Compared to Teradyne (TER), FormFactor's offerings in probe cards and analytical probes provide a more specialized focus on precise device characterization and failure analysis, particularly for advanced packaging and memory testing. Teradyne, with its broader scale, typically focuses on high-volume, standardized testing solutions. This difference is reflected in their profitability metrics: FormFactor's TTM Gross Profit Margin stands at 38.68%, significantly lower than Teradyne's annual Gross Profit Margin of 55%. Similarly, FormFactor's TTM Operating Profit Margin of 5.40% and Net Profit Margin of 5.75% trail Teradyne's 19% for both metrics. This suggests that while FormFactor excels in specialized niches, Teradyne's scale and broader market reach enable higher overall profitability and operational efficiency.

Against Advantest , a leading supplier of automated test equipment, FormFactor differentiates through its specialized probe cards and systems tailored for detailed analysis and prototyping, offering greater precision in applications like image sensors and electro-optical devices. Advantest, like Teradyne, excels in scalability and global reach for high-volume testing. FormFactor's TTM Gross Profit Margin of 38.68% is also considerably lower than Advantest's annual Gross Profit Margin of 57%. Advantest's annual Operating Profit Margin of 32% and Net Profit Margin of 21% also significantly outpace FormFactor's, indicating Advantest's strong profitability from scale and R&D efficiency.

In comparison to Keysight Technologies (KEYS), which provides a broad range of electronic measurement and testing solutions, FormFactor's probe cards and systems offer materially better performance in semiconductor-specific applications such as failure analysis and thermal testing. Keysight, however, boasts a broader ecosystem of measurement solutions. Keysight's annual Gross Profit Margin of 63% is notably higher than FormFactor's, reflecting its diversified portfolio and strong position in communications testing. FormFactor's specialized focus, while providing a technological edge in specific semiconductor test areas, results in lower overall profitability compared to Keysight's broader market adaptability.

FormFactor's competitive advantages, or "moats," include its proprietary technology in probe cards and cryogenic systems, a strong brand reputation in precision testing, and established distribution channels to major semiconductor manufacturers. These advantages translate into higher pricing power, customer loyalty, and recurring revenue streams from maintenance services. For example, its probe technology offers significantly higher accuracy in failure analysis, leading to faster innovation cycles in R&D-intensive markets.

To counter the scale and diversification of its larger rivals, FormFactor has implemented strategic responses. The equity investment in FICT Limited, a leading supplier of complex multi-layer organic substrates, was a capital-efficient move to secure access to a critical enabling probe card subcomponent, accelerating product roadmaps and fostering closer supply chain collaboration. This approach allows FormFactor to gain influence without the full financial and execution risks of an outright acquisition. Furthermore, FormFactor's technology partnership and share purchase agreements with Advantest (ATEYY) aim to develop wafer-level test cells for high-volume manufacturing of silicon photonics integrated circuits used in CPO, strengthening collaboration across the test and assembly supply chain. The company is also actively diversifying its Foundry & Logic business into AI-driven applications, such as GPU qualifications and hyperscaler custom AI business, to reduce its dependence on the more tepid PC and mobile markets.

Financial Performance: Growth Amidst Margin Headwinds

FormFactor's recent financial performance reflects a company capitalizing on secular growth trends while actively addressing operational and market-driven challenges. For the second quarter of 2025, FormFactor reported revenues of $195.8 million, exceeding the high end of its outlook range, primarily due to higher-than-anticipated growth in its probe card business. For the first six months of 2025, total revenues stood at $367.15 million, a slight increase from $366.19 million in the first half of 2024. This follows a strong fiscal year 2024, where annual revenue reached $763.6 million, marking a 15.2% increase from $663.1 million in fiscal year 2023. A significant driver of this growth was HBM revenue, which more than quadrupled in 2024, adding $100 million to the top line.

Despite this revenue strength, profitability has faced headwinds. Net income for Q2 2025 was $9.09 million, translating to $0.12 per diluted share. For the first half of 2025, net income was $15.48 million ($0.20 per diluted share), a notable decrease from $41.17 million ($0.52 per diluted share) in H1 2024. This decline is largely attributable to a $20.3 million gain recognized in H1 2024 from the divestiture of its China operations, which did not recur. Non-GAAP gross margin for Q2 2025 was 38.5%, falling at the low end of the company's outlook. This was a sequential decrease from 39.2% in Q1 2025, and significantly lower than the 40.9% reported in H1 2024. The gross margin underperformance is primarily attributed to an unfavorable product mix, with a greater proportion of historically lower-margin DRAM products, increased operational costs, and the impact of tariffs. Additionally, Q2 2025 included unforecasted ramp-up costs for a second HBM DRAM customer, although this issue has since been resolved.

Liquidity and capital resources remain robust, supporting FormFactor's strategic investments. Cash and investments totaled approximately $249.3 million at June 28, 2025, down from $360.0 million at December 28, 2024. This decrease was largely due to significant capital expenditures, including the $55 million acquisition of the Farmers Branch manufacturing facility. Free cash flow for Q2 2025 was negative $47.1 million, primarily driven by $47.7 million higher CapEx. Excluding the Farmers Branch investment, free cash flow would have been $8 million. Encouragingly, fiscal year 2024 saw a substantial improvement in free cash flow, reaching $79.1 million, up from $8.57 million in 2023. Further enhancing its financial flexibility, FormFactor entered into a new $150 million revolving credit facility agreement on July 29, 2025. The company also continues its share repurchase program, utilizing $2.4 million in Q2 2025, with $72.6 million remaining under the current $75 million authorization, primarily aimed at offsetting dilution from stock-based compensation.

Outlook and Strategic Initiatives: Paving the Path to Target Model

FormFactor's outlook for the third quarter of 2025 reflects a period of continued strategic execution and operational adjustments. The company anticipates revenues of $200 million, plus or minus $5 million, comparable to the second quarter. This stability is expected to be driven by increases in the Systems segment and DRAM (including HBM), partially offset by a moderate decrease in Foundry & Logic demand due to seasonal factors and the ongoing "tepid" state of the PC and mobile markets. Management explicitly acknowledges that relying on PC and mobile for strong Foundry & Logic growth is not a wise strategy, and resources are being redirected towards generative AI-driven areas like GPUs, hyperscalers, and custom ASICs.

Non-GAAP gross margin for Q3 2025 is projected at 40%, plus or minus 150 basis points, indicating a slight improvement from Q2. This outlook, however, incorporates a 1 to 1.5 percentage point reduction due to current tariffs, with a potential increase to 1.5 to 2 percentage points if tariff policies escalate. Non-GAAP operating expenses are expected to be $55 million, plus or minus $2 million, primarily due to additional headcount and a full quarter of expenses from the new Farmers Branch manufacturing facility. Non-GAAP earnings per fully diluted share for Q3 is guided at $0.25, plus or minus $0.04. A significant factor impacting Q3's reported EPS is the "One Big Beautiful Bill" (OBBB) Act, signed on July 4, 2025. This tax reform, which repealed R&D capitalization and reduced foreign-derived intangible income (FDII) deductions, will result in an approximate 31% effective tax rate for Q3 due to a one-time catch-up for income taxes. The annual effective tax rate for 2025 is now expected to be in the range of 19% to 23%, up from the previous 14% to 18%, though it is expected to reduce cash tax payments by approximately $5 million for 2025.

For the full year 2025, FormFactor anticipates an overall increase in demand for its products and expects to achieve year-over-year top-line growth. The company remains steadfast in its commitment to its target financial model of $850 million in annual revenue, 47% gross margin, and $2 non-GAAP EPS. While acknowledging that recent performance and the Q3 outlook do not yet show a clear path to this profitability level in the near term, management is executing a multi-pronged strategy to bridge the gap.

Key strategic initiatives include the $55 million acquisition of the Farmers Branch manufacturing facility in Texas. This 50,000 square-foot clean room facility is a scarce, fit-for-purpose asset that aligns with FormFactor's strategic roadmap, offering significant operational flexibility and a clear path to lower ongoing manufacturing costs due to its location in a lower-operating cost region with potential financial and regulatory incentives. This investment has led to an increased 2025 CapEx forecast of $110 million to $130 million.

The 20% equity stake in FICT Limited, a $67.2 million investment, is crucial for securing access to critical multi-layer organic substrates, accelerating product roadmaps, and fostering supply chain collaboration. Operationally, FormFactor has restructured its global operations leadership to drive lean manufacturing and automation, aiming to improve gross margins. Product diversification efforts are focused on growing the Foundry & Logic business in AI-driven applications like GPUs and custom ASICs, and the company is actively ramping pilot production for Co-Packaged Optics (CPO), targeting high-volume production in the first half of 2026.

Despite these opportunities, FormFactor faces several risks. The quarter-to-quarter volatility in HBM demand is expected to continue due to customer output concentration. Persistent lackluster demand in client PCs and mobile handsets remains a challenge for the Foundry & Logic segment. Tariffs continue to be a significant headwind, impacting gross margins, with potential for further increases. Integration risks associated with the FICT investment and the Farmers Branch facility, along with geopolitical risks such as China export controls, also warrant close monitoring.

Conclusion

FormFactor is strategically positioned at the nexus of the semiconductor industry's most transformative trends: advanced packaging and generative AI. Its deep technological expertise in high-performance probe cards and advanced test systems, coupled with a proactive diversification strategy, underpins a compelling investment thesis. While the company has demonstrated robust revenue growth, particularly in HBM, and is making critical strategic investments to secure its supply chain and expand capacity, near-term profitability has been impacted by product mix shifts and external headwinds like tariffs.

Management's clear commitment to its long-term target financial model, supported by initiatives like the Farmers Branch facility and the FICT investment, signals a focused effort to enhance operational efficiency and expand higher-margin opportunities. FormFactor's technological leadership in areas like HBM4, Co-Packaged Optics, and quantum computing provides a strong foundation for future growth. For discerning investors, FormFactor represents a unique opportunity to gain exposure to the secular growth of AI and advanced packaging, driven by a company that is actively adapting its strategy and technology roadmap to capitalize on these profound industry shifts.