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Tech stocks - Thursday, July 24, 2008

Saving Investors From The Potential Train Wreck Entitled FormFactor

We at tech:stocker expected the disappointing earnings report from E*Trade (ETFC:NASDAQ) whom we recommended readers not to waste their precious investment dollars on and we're happy to see one of our favorites, EMC (EMC:NYSE) not only beat its earnings estimates, but deliver a positive outlook for the year. Unfortunately the positive mood ends when looking at today's company, FormFactor (FORM:NASDAQ).

Why any analyst would have anything but a "sell" rating on FormFactor is beyond our reasoning (obviously "common sense" is not a requirement to become an industry analyst). Form Factor sells advanced wafer probe cards, and of course we at tech:stocker don't claim to be experts on this technology. But what has transpired at the company over the last few months would leave any sensible person wondering if the company has any adult supervision. Let's look at the timeline of events.

On January 4, FormFactor hired Dr. Mario Ruscev as President touting his strength as a "technologist". This hiring may not be questioned normally except that the CEO, Dr. Igor Y. Khandros was cut from a similar cloth as his background was more focused on research and development of new technologies.

This brings us to February 21 when the company announced that current CFO Ron Foster would be participating at the Morgan Stanley 2008 Technology Conference. Hardly earth shattering news but four days later the company announced that Ron Foster would be leaving the company but would remain until a successor was found. At best, this chain of events and how they were handled could be described as amateurish considering a replacement was hired a little over 30 days later. One press release announcing the resignation of the old and in with the new would have raised less suspicion.

Why Mr. Foster felt the need to exit the company quickly is unknown. Seldom do you see a man so close to the finances leave when the spreadsheets are filled with black ink. But this story only gets better.

On April 8, nine days after their first quarter ended, FormFactor issued a release saying it completely missed its first quarter estimates of $70 to 80 million and was now going to come in between $65 and 66 million. Why the company didn't deliver this news earlier (maybe new CFO Jean Bernard Vernet, a former co-worker of Dr. Ruscev at Schlumburger Limited, just started to realize his "buddy" hadn't told the entire truth when he recruited him and hit the panic button?) or just wait 21 days to announce everything in their earnings announcement is beyond our comprehension. But this gets better.

On June 9th, after the company has already admitted to weakness in the current DRAM market, and the company is undertaking cost-cutting measures, announces that the previously proclaimed "technologist", Dr. Ruscev, is now an "unusually capable operating executive who has a proven track record of revenue growth". In addition, the release states Dr. Ruscev is "an incredible visionary who has a proven track record of driving revenue growth." How FormFactor discovered these incredible traits in five short months is beyond us.

Until FormFactor hires some seasoned executives who have the leadership and maturity to run a self-proclaimed industry leader and not just develop products, we would prefer that our readers park their investment dollars in a money market. FormFactor is expected to keep returning negative profits for the rest of 2008, there's no reason why smart investors should provide them with the means to make this happen.