If you're going to build semiconductor chips, you need to have somebody test them before they get shipped to customers. Verigy (NASDAQ:VRGY), recently spun off from Agilent (NYSE:A), is one of those testing companies, and it reported favorable-looking results for its fiscal third quarter after the bell yesterday. But could there be a slowdown on the horizon?
Revenue grew 81% year over year and 12% sequentially to reach $214 million, and the company recorded a GAAP profit of $13 million, or $0.23 per share, compared with last year's $22 million, or $0.44-per-share, net loss. This quarter's GAAP result includes $24 million in restructuring and separation costs associated with the split from Agilent.
Sales of flash memory-testing instruments showed particularly strong growth and totaled $63 million -- 57% higher than during the previous quarter and more than tripling the previous year's tally. While Verigy is well established in the NOR flash testing market -- it counts both Spansion (NASDAQ:SPSN) and Intel (NASDAQ:INTC) as customers -- it is just gaining traction in the NAND flash market. The company greatly expanded its future potential sales by gaining two new NAND flash customers during the quarter.
Verigy's solid performance also extended to its system-on-a-chip (SOC) testing products. Sales of SOC products grew 60% over Q3 2005 and totaled $118 million.
Verigy operates in a competitive market, but this performance shows that its products are being well received. EETimes recently published a piece on the challenges in testing NAND flash memory and showed that test times for these chips are heading skyward, with the unsurprising result that test costs are also leaping higher. Given the difficulties, there should be plenty of room for an innovative company to differentiate its products.
So, what does the future hold?
Well, there may indeed be a slowdown ahead. Orders at the end of the third quarter totaled $199 million compared to $313 million at the end of the second quarter. And the book-to-bill ratio sits at 0.93. A value less than 1 generally means that business is slowing down.
If the potential for share-price volatility makes you uneasy, you should probably avoid these shares. A meaningful downturn would probably give them a pretty brutal haircut, since the semiconductor-test market is more cyclical than the overall semiconductor industry. You don't have to look too far back to see the effect of the semiconductor cycle on this company's revenues. During the quarter ended April 30, 2004, revenues reached $187 million, but just three quarters later, sales tumbled to a mere $79 million.
Nevertheless, if you can stomach the volatility and focus on the long term, these shares may be worth a look.
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Fool contributor Dan Bloom owns shares of Intel, which is a Motley Fool Inside Value recommendation. (You can try it out free for 30 days.) The Motley Fool has a disclosure policy.
