Monday, June 18, 2007

FormFactor (NASDAQ:FORM): cutting prices for DRAM cards?

- Citigroup is out with some interesting comments on FormFactor (NASDAQ:FORM) saying recent checks suggest FORM is tracking to at least the high end of its $107-111MM revs guidance range for FQ2:07 (Jun) on the back of increased 70nm design activity for DRAM cards in April-May. While Q yet to close, CQ3 revs appear tracking +10-15% (consensus +9%).

The bad news is that margin pressure intensifying (especially in DRAM!), while NAND remains a dud. While revs still appear healthy, recent checks suggest FORM facing a considerably tougher pricing environment in its core DRAM market and is now cutting prices for DRAM cards owing to pressure from customers and a desire to keep MJC at bay.

On NAND, they still see very little progress due to ongoing technical issues at several custs, a situation further exacerbated by MJC's new mfg facility (now ramping, set to 3x capacity by 8/08) + new competitive offering from AMST in Korea. Expects FORM to increasingly shift focus to logic where new fine-pitch card could help in C2008.

While solid 2H revs should provide a backstop, NAND remains problematic and intensifying DRAM pricing pressure and ramping expenses should keep EPS in-check (best-case). With the stock +6% in two days, risk/reward appears only balanced and all things equal, the firm is still not buyers until $37-39. Maintains Hold, $45 tgt.

Notablecalls: It looks like MSCO's call from June 8 (see arhives) put a floor in for FORM. This, coupled with the overall positive tape helped the stock to gain some ground last week. MSCO's call was pretty simple - DRAM probe card revenues are highly correlated to bit shipments and not near-term capital spending or equipment order trends.

Yet, Citi's call includes some disturbing bits of information. Is FORM really forced to cut prices on DRAM cards after all? If Citi's right, I'm hard pressed to see any upside in the stock. Not sure FORM is an outright short based on these comments but the risk seems to be to the downside here.

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