Verigy (Nasdaq: VRGY) is one of those companies that I check in on from time to time, but I still managed to miss that it reported earnings last week until I saw its stock price had rocketed by over 20% on Friday. Let's take a look to see what Wall Street liked so much.
Verigy makes equipment that is used to test semiconductor chips, both before the chips are packaged and after. For its first quarter of 2007, revenue clocked in at $165 million, which is down 3% over the previous year, while net income totaled $13 million or $0.22 per share. If we deduct separation costs related to its spinoff from Agilent (NYSE: A) as well as some restructuring charges, earnings per share totaled $0.28, which was a good bit higher than the $0.20 that was expected. This performance, along with a strengthening outlook, probably explains the stock price jump. A year ago Verigy recorded a GAAP net loss of $16 million ($0.32 per share), but it also had higher separation costs of $15 million.
To top things off, the firm provided a better-than-expected outlook of $170 million-$180 million in revenue for Q2 and net income of $17 million-$20 million. Last week Analog Devices (NYSE: ADI) lifted semiconductor investor spirits with bright predictions for the future, and Verigy echoed those sentiments by saying that things appear to be picking up. It will be interesting to see if the pickup continues through the rest of the year.
During Q1, 48% of revenue was from memory customers, which may be concerning to some, but not to me. While the business may continue to be volatile, I see an overarching trend toward multichip packaging (MCP) which is going to continue to drive strong test sales. (Motley Fool Hidden Gems recommendation FormFactor (Nasdaq: FORM) is also riding this wave.) MCP benefits Verigy because it places a premium on identifying defective die before they are put in their protective cases. Packaging is expensive, and if a single die in a package is defective, the entire package has to be tossed out. Combine the knowledge that some MCPs contain up to 16 die with a comment from the KLA-Tencor (Nasdaq: KLAC) folks that more than 50% of die are defective at the leading edge 65 nanometer geometry, and it's easy to understand why memory companies are investing money in testers for use prior to packaging. After all, what percentage of packaged devices will work properly if half of the individual die coming out of the factory aren't functional? The answer turns out to be much less than 1% for a package containing 16 die -- you'd better get rid of as many bad ones as possible before packaging to raise the odds!
No matter how the rest of the year goes, I like Verigy's positioning in the semiconductor chip equipment hierarchy, and I think it's worth a deeper look. Nevertheless, you should definitely do your due diligence on this one, as sales of test equipment have historically been very volatile.
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Fool contributor Dan Bloom and his wife own shares in KLA-Tencor but have no financial interest in any other company mentioned. The Fool has a disclosure policy.
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