FormFactor (FORM) Q3 2026 earnings review
FormFactor lifts its profit margin, but its factories near capacity
FormFactor, a maker of systems that test semiconductor wafers, beat the top of its own plan on sales and profit while approaching the capacity limit of its existing plants. Revenue rose 38% from a year ago to a fourth straight record on demand for processor probe cards and co-packaged optics gear. Gross margin excluding one-offs hit 56.5%, and chief executive Mike Slessor set a fourth-quarter plan that keeps that margin at 54%.
| Revenue | $280.5M +38.4% from a year ago |
|---|---|
| Gross margin, excluding one-offs | 56.5% up 15.5 percentage points from a year ago |
| Profit per share, excluding one-offs | $1.04 $0.33 a year ago |
| Q4 revenue outlook | $285M middle of the range: +32.5% from a year ago |
⚖️ Verdict: 🟢 Bullish
The story got better because the fourth-quarter outlook proves FormFactor's margin gains are durable. Last quarter, management said underlying gross margin stood near 51% and only a one-time tariff refund would lift the third quarter to 54%, so holding 54% in the fourth quarter shows factory efficiency is higher than promised. One caution: Slessor said output gains at current factories are slowing near capacity limits, which leaves sequential sales growth at 2% in the fourth-quarter plan while quarterly equipment spending quadrupled to $40 million.
The question now is whether the new Farmers Branch factory can ramp fast enough in 2027 to lift sales without dragging down the 54% gross margin. Either the extra capacity lets FormFactor win waiting processor and memory orders, or start-up costs weigh on profit just as customer memory orders cool. The first-quarter outlook in February, once Texas production begins, will tell.
🐂 Bull Case
Underlying Gross Margin Holds at 54% in Q4
FormFactor has spent the past year cutting manufacturing costs to lift its gross margin. Last quarter, executives said the underlying gross margin, excluding one-offs, stood near 51%, with a one-time $7 million to $9 million tariff refund set to push the third-quarter outlook to 54%.
Actual gross margin excluding one-offs reached 56.5% this quarter, down 15.5 percentage points of revenue in cost of making the products from a year ago. Even if the full $8 million middle of the tariff refund range arrived, underlying gross margin reached 53.6% by our math. More importantly, the fourth-quarter outlook calls for a 54.0% gross margin excluding one-offs, proving that factory efficiency gains—not just tariff refunds—lifted profitability.
What to watch: the exact tariff refund amount in the quarterly filing's footnotes. A smaller refund would mean underlying factory margins are already above 54% before the new Texas plant starts.
Co-Packaged Optics and Foundry Lift Sales
The semiconductor test supplier relies on two main growth engines: Foundry and Logic probe cards, which test processors and networking chips on silicon wafers, and its Systems segment, which sells testing equipment for co-packaged optics (CPO), a technology that packages optical connections directly alongside data-center chips.
Both businesses expanded this quarter. Foundry and Logic revenue grew 10% from last quarter on what FormFactor called "broad-based strength across multiple end applications". Systems revenue rose more than 20% from last quarter because of "higher demand for co-packaged optics". That lifted total sales 38.4% from a year ago to a fourth straight record of $280.5 million.
What to watch: the segment revenue table in the quarterly filing. It will show whether Systems topped its $48.5 million second-quarter record and how much revenue came from memory chips.
Operating Margin Reaches 33.5% on Lower Overhead
FormFactor had planned for operating expenses, excluding one-offs, to rise to about $70 million in the third quarter as it hired staff for its new Texas factory. Instead, the chip-testing company held those overhead costs to $64.4 million, down from $65.7 million in the second quarter.
- Operating expenses excluding one-offs: 23.0% of revenue, down 4.0 percentage points from a year ago
- Research and development: $29.5 million, down $1.6 million from last quarter
- Selling, general and administrative: $35.9 million, down $1.2 million from last quarter
- Operating margin excluding one-offs: 33.5%, up 19.4 percentage points from a year ago
Because overhead fell while gross profit rose, operating profit excluding one-offs reached $94.1 million, beating the 28.0% margin implied by the prior outlook by 5.5 percentage points by our math.
What to watch: fourth-quarter operating expense commentary on the conference call. A rebound toward $70 million would show that third-quarter spending was merely delayed into year-end.
🐻 Bear Case
Existing Factories Hit Their Output Limit
Chief executive Mike Slessor credited the third-quarter beat to increasing output "within our existing manufacturing footprint". For four quarters, the probe-card maker has squeezed more shipments out of its California and Asian plants by improving yields and production speed, pushing annualized sales past $1.1 billion.
That run of easy capacity gains is now ending. "While the productivity gains from our existing manufacturing footprint are moderating as we approach its capacity limits, we are bringing our new Farmers Branch factory online, which will provide additional capacity to support our growth," Slessor said. Because the current plants are full, the fourth-quarter outlook points to just 1.6% revenue growth from the third quarter at the middle of the range, down from 8.6% sequential growth this quarter and 14.2% in the second quarter.
What to watch: first-quarter revenue outlook in February. If the Farmers Branch ramp starts slowly, sequential sales growth will stay capped in the low single digits despite customer demand.
Texas Factory Spending Quadruples Before Adding Margin
To break through its production ceiling, FormFactor is equipping a new plant in Farmers Branch, Texas. Management previously told investors that this facility will not add to gross margin until the start of 2028, after a full year of initial production in 2027.
Meanwhile, the cash and expense bills are arriving now. Capital expenditures—cash spent on property and factory gear—jumped to $39.6 million (14.1% of revenue) in the third quarter, up from $9.6 million in the second quarter. Factory start-up costs on the income statement also rose to $6.4 million from $4.9 million last quarter. By our math, the full-year capital spending plan of $140 million to $170 million leaves $75.6 million to $105.6 million of spending for the fourth quarter alone.
What to watch: fourth-quarter capital expenditures and factory start-up costs. Once the Texas plant begins operating late in the fourth quarter, these start-up costs move into cost of revenues and weigh directly on gross margin.
Risks this quarter didn't answer
FormFactor posts its detailed segment, regional and customer breakdowns on its website and in its quarterly filing rather than in the earnings release, leaving five standing concerns unreadable today.
- Memory chip (DRAM) revenue and high-bandwidth memory (HBM) mix: missing from the release; the filing's segment note will show if DRAM held near its $85.0 million second-quarter record.
- Graphics processor (GPU) probe-card sales: not mentioned in the release after management said production units would ship for revenue in the third quarter; the conference call will test whether shipments occurred.
- Co-packaged optics (CPO) dollar revenue: described only as driving >20% Systems growth; the call will test whether cumulative 2026 sales crossed the $20 million mark.
- Tariff refund receipts: not separated in the release tables; the filing will show how much of the planned $7 million to $9 million refund arrived in the third quarter.
- Customer and Taiwan concentration: posted separately; the filing's footnote will show whether sales to SK hynix and TSMC rose above their 35.3% combined share in the second quarter.
👓 Other Themes
Expanded Teradyne Partnership Targets High-Performance Compute
After the third quarter ended, FormFactor expanded its longstanding partnership with automated test equipment maker Teradyne. The chip-testing company said the deal aims at "accelerating the development, validation, and high-volume production of next-generation semiconductor applications enabling high-performance compute". The release gave no financial terms or revenue timeline, so the commercial effect cannot be measured yet.
💲 Other KPIs
Deferred revenue—cash customers have paid in advance for products or services not yet delivered—jumped 52.6% from last quarter and 69.2% from a year ago. After dipping slightly in the second quarter, the $12.6 million sequential addition is the largest in the past two years and points to higher customer prepayments ahead of fourth-quarter shipments.
Free cash flow rose 23.3% from last quarter and more than tripled from $19.7 million a year ago. Operating cash flow climbed to $104.3 million because accounts receivable fell 2.0% even as sales grew, allowing the business to fund $39.6 million of factory equipment and still add $49.8 million to its cash and marketable securities.
Diluted shares edged down 0.2% from the second quarter but remain up 2.2% from 77.7 million a year ago. The test-equipment maker spent nothing on share buybacks for a third consecutive quarter, choosing instead to use $35.6 million over the first nine months to cover employee stock-award taxes and preserve cash for the Texas factory.
🔮 Guidance
New. The middle of the range ($285.0 million) calls for 32.5% growth from a year ago and 1.6% growth from the third quarter, as existing plants near their capacity limits. FormFactor has beaten the middle of its quarterly revenue plan for seven straight quarters, by an average of 3.6% over the last four; if the pattern holds, fourth-quarter revenue would reach about $295.3 million by our math.
New. The plan puts the middle of the range at 52.3%, down 2.4 percentage points from 54.7% in the third quarter, but up 10.1 percentage points from 42.2% a year ago. The sequential dip matches the roll-off of one-time third-quarter tariff refunds and the start of production at the new Farmers Branch plant.
New. The middle of the range is 54.0%, down 2.5 percentage points from 56.5% in the third quarter and identical to the 54.0% target the company set for the third quarter three months ago. Holding the 54.0% mark in the fourth quarter shows that underlying gross margin has stepped up from the ~51% baseline management described last quarter.
New. At the $0.84 middle of the range, GAAP profit per share would drop 9.7% from $0.93 in the third quarter, while nearly tripling from $0.29 a year ago. The outlook includes $0.11 per share of stock-based pay, intangible amortization and restructuring charges.
New. The middle of the range ($0.95) points to an 8.7% sequential dip from $1.04 in the third quarter, driven by the 2.5-point gross margin step-down, and a 106.5% increase from $0.46 a year ago. The company has beaten the middle of its profit-per-share outlook in each of the last five quarters.
❓ Key Questions
How much did tariff refunds add to Q3 gross margin?
Management planned for $7 million to $9 million (~3 percentage points) of tariff refunds in Q3. Knowing how much arrived, and whether any slipped into Q4, tells investors the exact underlying gross margin of the factories.
Did GPU probe cards generate revenue in Q3?
After four quarters of timeline delays, management said on last quarter's call that production units for a graphics-processor customer were shipping for revenue in Q3. The release did not mention GPUs inside its Foundry and Logic commentary.
What were Q3 DRAM sales and the HBM share?
Last quarter, management expected Q3 memory-chip probe-card revenue to stay near its $85 million record, but with a shift from high-margin HBM toward standard DDR memory. The press release did not disclose DRAM revenue.
Why did Q3 operating expenses fall $5.6M below plan?
Overhead excluding one-offs was $64.4 million against a $70 million outlook that included $7 million for the Texas ramp. Investors need to know if FormFactor found lasting cost savings or simply pushed hiring into Q4.