FormFactor (FORM) Q3 2025: Gross Margin Jumps 250bps as HBM4 Ramps, Targeting 47% Model
FormFactor’s Q3 saw a decisive 250 basis point gross margin improvement, fueled by cost discipline and strong HBM probe card demand. Management’s focus on cost structure and operational efficiency is beginning to yield sustainable margin gains, even as product mix remains in flux. The company’s roadmap to 47% gross margin is anchored by both tactical actions and long-term investments, with upside tied to advanced packaging and new customer qualifications in 2026.
Summary
- Margin Expansion: Gross margin improvement is now being driven primarily by cost actions, not just mix.
- HBM4 Momentum: Advanced memory test demand and HBM4 transition are strengthening FormFactor’s market position.
- 2026 Setup: New capacity, customer wins, and advanced packaging bets will shape next year’s earnings power.
Performance Analysis
FormFactor delivered sequential growth in revenue and profitability, with non-GAAP gross margin climbing to 41%—a 250 basis point increase over Q2, and at the high end of guidance. The company’s two core segments, probe cards and systems, both contributed to margin gains, with probe card margins up 254 basis points and systems up 260 basis points. The DRAM probe card business, especially high bandwidth memory (HBM), set a new record, while non-HBM DRAM is expected to drive further gains in Q4 as commodity DRAM demand and pricing recover.
Foundry and Logic probe card demand softened sequentially, as PC recovery remains limited to legacy nodes, dampening new probe card orders. Despite this, management highlighted a foundation for future market share gains—particularly in CPUs and GPUs—where new customer qualifications are underway. The system segment’s sequential growth was supported by both seasonal cadence and momentum in silicon photonics and quantum computing test solutions, with the Triton system advancing pilot production for co-packaged optics.
- HBM4 Test Complexity: The shift to HBM4, with higher stack counts and IO speeds, is increasing test intensity and probe card value.
- Cost Actions Bite: Labor reductions, overtime management, and manufacturing process improvements are driving structural margin gains.
- Free Cash Flow Recovery: Free cash flow rebounded to $19.7 million, reversing Q2’s outflow tied to the Farmers Branch facility investment.
Operating expenses remained disciplined, even as R&D and facility startup costs rose, reflecting careful capital allocation. The company repurchased $1.7 million in shares, primarily to offset dilution, and maintains a strong cash position to fund ongoing strategic initiatives.
Executive Commentary
"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. As you can see in our fourth quarter outlook, we expect to reach the model quarterly revenue run rate earlier than we achieve model gross margins. This disconnect is driving urgency across form factor in executing a program of rapid and immediate gross margin improvement actions that have already produced the 250 basis point increase from the second quarter, and we anticipate will produce an additional 100 basis point increase in the fourth quarter."
Mike Schleser, Chief Executive Officer
"We are focused on improving our profitability to the path to the 47% non-GAAP gross margins of our target model. We are committed to achieving these improvements in a sustainable way, and we believe the most critical elements of success for us in the short and mid-term are to drive improved operational effectiveness, which means optimizing output from our existing infrastructure, and better financial discipline. We believe focus in these areas will drive meaningful change in our unit costs and our gross margins."
Eric McInnis, Chief Financial Officer
Strategic Positioning
1. Margin Roadmap: Tactical and Structural Levers
Short-term gross margin gains are being driven by tactical actions—headcount reduction, overtime controls, and manufacturing spend cuts. Structural improvements, such as automation, yield enhancement, and defect detection, are underway to create durable cost advantages and reduce sensitivity to product mix.
2. Advanced Packaging and HBM Leadership
FormFactor is leveraging its leading position in HBM probe cards as the industry transitions from HBM3 to HBM4. The HBM4 ramp is early but promising, with rising test complexity and intensity favoring FormFactor’s differentiated SmartMatrix architecture, which enables high parallelism at 10Gbps+ speeds.
3. Diversification in Foundry, Logic, and Emerging Segments
Although Foundry and Logic demand is soft, FormFactor is qualifying new products with major CPU and GPU customers, laying the groundwork for market share gains in 2026. The company is also advancing in networking silicon and custom ASICs, with an eye on winning future high-value test business as requirements converge with advanced packaging needs.
4. Capacity Expansion and Cost Structure: Farmers Branch Facility
The new Farmers Branch, Texas facility is a strategic investment that will bring incremental capacity at structurally lower cost, supported by regional incentives. Initial capacity is expected online late 2026, with the majority in 2027, and the facility is designed for flexible support across product lines.
5. Systems Segment: Silicon Photonics and Quantum Computing
The systems business is gaining momentum from pilot production in co-packaged optics and investments in quantum computing test solutions. The Triton platform, developed with Advantest and Tokyo Electron, moves differentiated electro-optical probing from lab to fab, supporting next-gen data center adoption.
Key Considerations
This quarter’s results reflect an inflection in FormFactor’s ability to drive margin improvement through operational discipline and strategic market positioning, even as end-market demand remains uneven. The company is balancing near-term cost takeout with long-term bets on advanced packaging and new customer wins.
Key Considerations:
- Mix Independence in Margin Expansion: Margin gains are being achieved through cost actions that are sustainable regardless of product mix shifts.
- HBM4 and Advanced Packaging Tailwinds: Rising test complexity and industry transition to HBM4 are expanding FormFactor’s addressable market and competitive advantage.
- Customer Diversification Efforts: Ongoing qualifications with major CPU and GPU players are critical to reducing concentration risk and capturing new growth in 2026.
- Capital Allocation Discipline: Investment in Farmers Branch is being funded from a strong balance sheet, with a focus on long-term gross margin improvement and operational flexibility.
- Systems Segment Upside: Progress in silicon photonics and quantum test solutions positions FormFactor to benefit from secular data center and compute trends.
Risks
FormFactor remains exposed to cyclical demand swings in DRAM and Foundry/Logic, as evidenced by the lack of PC-driven CPU probe card growth and the continued revenue concentration in its largest HBM customer. Tariff headwinds continue to impact gross margin by 150 to 200 basis points, and competitive threats in custom ASICs and merchant networking chips could limit share gains if not addressed. Execution risk around the Farmers Branch facility and customer ramp timing also warrants monitoring.
Forward Outlook
For Q4 2025, FormFactor guided to:
- Revenue: $210 million, plus or minus $5 million
- Non-GAAP gross margin: 42%, plus or minus 150 basis points
- Non-GAAP EPS: $0.35, plus or minus $0.04
For full-year 2026, management reiterated its commitment to the 47% gross margin target model, with improvements expected to be driven by both ongoing cost actions and the eventual ramp of Farmers Branch capacity.
- Guidance assumes continued DRAM strength, incremental HBM4 growth, and ongoing cost reductions.
- Tariff mitigation remains a work in progress, and customer qualification wins could materially alter the revenue mix in 2026.
Takeaways
FormFactor’s Q3 performance confirms that cost discipline and operational improvements are translating into real margin gains, not just temporary mix benefits.
- Margin Inflection: The 250bps gross margin gain is primarily from sustainable cost actions, with further improvement targeted for Q4 and 2026.
- Strategic Growth Bets: HBM4, advanced packaging, and new customer qualifications are positioning FormFactor for accelerated growth and diversification next year.
- 2026 Watchpoints: Investors should monitor execution on Farmers Branch, customer ramp timing, and the conversion of pilot wins in CPUs, GPUs, and silicon photonics into material revenue streams.
Conclusion
FormFactor’s Q3 marked a step-change in margin execution, underpinned by tactical cost actions and a clear pathway to its 47% target model. The company’s strategic focus on advanced packaging, capacity expansion, and customer diversification sets up a pivotal 2026, though execution and end-market volatility remain key variables.
Industry Read-Through
FormFactor’s results highlight the increasing test intensity and complexity driven by the industry’s migration to advanced packaging and high bandwidth memory. The HBM4 transition and co-packaged optics pilot production signal broader demand for differentiated probe and test solutions across the semiconductor value chain. Competitors in probe cards, advanced test equipment, and silicon photonics should anticipate similar mix shifts, margin opportunities, and capital allocation imperatives. Tariff headwinds and customer concentration risks remain sector-wide issues, while operational discipline is emerging as a key differentiator in the current cycle.