Motley Fool  Oct 3  Comment 
This fiscal year is shaping up to be a rebuilding one for the semiconductor equipment specialist.
WA Business News  Oct 2  Comment 
An Anzac memorial has been brought to life through an immersive light-based art installation initiated by cultural organisation FORM and the City of Albany.
Motley Fool  Aug 3  Comment 
Delayed customer orders continue to take their toll on FormFactor's financials.
Motley Fool  Aug 2  Comment 
Shares jump after the company released expectation-topping second-quarter results, but does the stock deserve the pop?


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. Wafer probe card sales accounted for 99% of fiscal 2004 revenue. FORM derives the remainder of its revenue from product sales, licensing, development fees and royalties. The company went public in an IPO during 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, completed 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. Wafer probers are used in wafer sorting applications roughly 85% of the time, 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 500 patents. The principal technology used in the probe cards is the proprietary MicroSpring interconnect technology. A legacy wafer probe card is comprised of a printed circuit board (PCB) with several hundred probe needles positioned to establish electrical contact with a series of metalized pads or balls on the semiconductor die or wafer. The differentiated MicroSpring-based technology utilizes a MicroElectroMechanical Systems (MEMS) approach in which a spring is used to push the probe card contact point down sufficiently to establish electrical contact. The wafer interconnect portion is manufactured using precision micro-machining in a semiconductor-like wafer fabrication process that is both scalable and repeatable. The technology is optimized for a low surface contact force and reliable contact performance. Additionally, proprietary design tools are used to reduce design time. The wafer interconnect portion is then integrated into a probe head. There are a variety of probe array platforms, including 50mm, 75mm and 100mm for use on 200mm wafers. Additionally, there is a 150mm platform used on 300mm wafers. The design objective is to limit the amount of times the surface has to be touched by the probe card ( touchdown') to complete the required electronic testing, consequently speeding up the testing process. FORM's products have a high degree of parallelism, since the interconnect can simultaneously touch many contact points. Each one of these wafer probe cards are custom designed and built to mechanically fit and electrically test a customer's unique semiconductor wafer design. The rest of FORM's probing system product line consists of MicroLign, MicroForce, TRE X64 X253 and high-speed probing.

The probe cards are used to test various types of semiconductor technologies. FORM currently divides the end application market into DRAM, flash memory and flip chip/logic. In fiscal year 2004, DRAM applications accounted for 69.0% of total revenue, flash 21.9%, flip chip 8.1% and other 1.0%. The DRAM market drivers impacting demand in the near-term include end market demand for the computing industry, architecture shift from DDR I to DDR II (type of DRAM memory), design geometry (process node) shift from 110nm to 90nm, wafer size shift from 200mm to 300mm, and density from 256Mb to 512Mb. Flash market drivers impacting demand in the near-term include end market demand for portable, mobile and consumer products, architecture shift from NOR SLC and NAND SLC to NOR MLC and NAND MLC, design geometry (process node) shift from 110nm to 90nm, wafer size shift from 200mm to 300mm, and density from 256Mb to 512Mb. Management intends to leverage the proprietary technology into new adjacent markets such as high-speed test (front end), burn-in and full final test.

Products are primarily distributed through a direct sales force, supplemented with a distributor (Spirox) that serves Singapore and China. Customers in the DRAM market include Samsung, Micron, Hynix, Infineon, Elpida, SMIC, IC Tech, Nanya and ProMOS flash market customers include Hitachi, Renesas, Toshiba, STMicroelectronics, Intel and Spansion and logic market customers are Intel and AMD. The company possesses a concentrated customer base, with roughly 64.8% of fiscal year 2004 revenue coming from distributor Spirox Corporation (20.0%), Elpida (18.7%), Intel Corporation (14.5%) and Infineon Technologies (11.6%). Geographically in 2004, North America contributed 35.8% of revenue, Asia Pacific 25.4%, Japan 25.5% and Europe 13.3%.

The company has exhibited strong growth and maintained a market-leading position. The wafer probe card market grew 17% from 2003 to 2004. The advanced wafer probe sub-segment grew to a $240 million market in 2004, and is expected to grow 24% annually through 2008 due to the more stringent technological requirements of newer wafer production processes. FormFactor grew 81% from 2003 to 2004, indicating that the firm is well positioned within the fastest growing segment and is taking market share. A new fabrication facility is ramping production this year and should almost double capacity, running at normal utilization rates. As a result of continuing operational expansion, the company increased personnel by over 80% during the last year, taking the total headcount to 616.

Even though many end markets in which wafer probes are used are suffering from sluggish demand, management asserts that the company has been unaffected. Semiconductor capital equipment orders have also declined slightly, as foundry capacity utilization rates have declined from the 100% level to the 90% level over the past two quarters. However, wafer probe card demand is driven by new wafer designs and not strictly capacity, therefore it is less sensitive to the traditional semiconductor capital equipment demand curve. Demand is primarily dependent on the need for new wafer designs utilizing increased density packaging along with continued deployment of 300mm wafer fabrication lines.

FormFactor's wafer probe cards are more expensive than competitors. However, because of increased efficiencies, fewer probe cards are required, and the total cost of ownership is lower. On the other hand, the high cost does make it more difficult to initially sell the product to a new customer. Given the fact that there has been little customer turnover, it is reasonable to assume that most customers are satisfied with the products.

Change is Good

The industry is continuing its march towards finer geometries. New semiconductor fabrication plants have been adding 300mm capabilities. These new production fabrication lines typically begin with memory applications such as DRAM, which require less complex processes. As the fab lines mature, some of the capacity is gradually shifted to the fabrication of logic ICs. Furthermore, older 200mm plants have begun to ramp production at smaller design geometries or the sub-110nm segment. Manufacturers are required to purchase a new suite of probe cards during any of these production line transitions. As a result, order momentum continued through the fourth quarter, with bookings rising to an all-time high for the company.

No Longer Capacity Constrained

The company has actually been capacity constrained for the past four quarters. A new plant has begun to ramp production, as 75% of the workforce has been trained and certified. Therefore, the company is no longer capacity constrained. The new plant should nearly double total capacity. In the interim, FORM has to absorb start-up costs that are impacting margins. . As the new plant starts running at a higher capacity level and closedown costs work themselves through the next two quarters, we expect margins to expand. We anticipate that expectations will continue to rise in conjunction with additional available capacity. Management believes the capacity will reach $125 million per quarter.

On March 15, 2006, the Company completed its follow-on offering in which it sold 5,000,000 shares of its common stock. The sales of shares of common stock by the Company resulted in aggregate gross proceeds of approximately $190 million, approximately $8 million of which the Company applied to underwriting discounts, commissions and expenses. As a result, the Company received approximately $182 million of the net offering proceeds.

New product launches.

Management is excited (as are we) about the company's launch of its new single touch-down 300mm probe card which is a derivative of FORM's harmony platform. This is in the NAND Flash segment, a very high growth area. The company is currently engaged with three early adopter market leading customers. This product has the potential to also address the DRAM and Wafer Level Burn In one touchdown 300mm challenges and may lay the foundation for FormFactor to become the only provider of complete testing solutions.


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