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Comment: Will LTX-Credence survive ATE arena?

Posted: 07 Jul 2009 ?? ?Print Version ?Bookmark and Share

Keywords:automated test equipment? ATE? R&D?

Every four years or so, Credence Systems announces a new strategy. That's because the last one failed.

The company did not have a clear focus and never really relied on any R&D. It basically acquired other ATE rivals like IMS, NPTest. The company managed to bungle those mergers.

Therefore, it was no surprise that Credence itself was acquired. Last year, ATE rival LTX Corp. and Credence completed a big merger, resulting in the formation of LTX-Credence Corp.

Recently, I visited LTX-Credence headquarters and heard its new strategy. I remain skeptical. Before the merger, LTX and Credence were the weakest vendors in ATE. The combination of the two leads me to believe that the future is cloudy for LTX-Credence.

In the long run, I don't see how it can compete against its bigger rivals at Advantest, Verigy and Teradyne. LTX-Credence continues to lose money. The company's products are strong, but not disruptive. And the current downturn doesn't help matters. For 2009, the worldwide ATE market is forecast to decline 32 percent, according to Gartner Inc.

LTX-Credence recently completed its integration process. In a recent report, Vernon Essi, an analyst with Needham & Co. LLC, listed the three big accomplishments for the combined company:

1. Streamlining Products: "Management has already indicated that the development of the high digital content Sapphire tester has been suspended barring any new orders or upgrades to the system. The X-Series (formerly LTX's Fusion) will continue onward but will migrate its digital content upstream to leverage the digital density of Diamond. The ASL will continue to serve the analog area and LTX will introduce a newer single platform solution."

(The Sapphire logic tester was developed by NPTest, which was acquired by Credence. Sapphire is the logic tester of record at Advanced Micro Devices Inc. AMD has enough test capacity and won't need a new tester for awhile. Rival Intel Corp. is using an engineering version of the Sapphire tester. Meanwhile, Diamond is a low-cost digital ATE system, while ASL is an analog machine. Both are from Credence.)

2. Cost Containment: "In the absence of a production order ramp the primary focus for management continues to be reducing the EBITDA [earnings before interest taxes depreciation and amortization] breakeven to achieve positive cash flow. This results in part from the overall integration between LTX and Credence as the two rationalize their respective product lines to reduce costs and remain competitive. The EBITDA breakeven is now at $39 million in revenue and we are modeling it at about $40 million and expect the Jan. Q2 quarter to crossover to positive EBITDA of $0.5 on our revenue estimate of $42 million."

3. Customer Feedback: "Management indicated that the tone with customers is cautiously optimistic and that it has not lost a single legacy customer through the LTX-Credence integration."

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