Test's split personality

Upbeat and downcast. The mood of the test field’s giant companies swung both ways in the turbulent year of 2007.

Hiromichi Toda of Anritsu sees prime opportunities in 3G, 3.5G, WiMAX, and WLAN.

“Semiconductor test is once again in one of its down cycles,” said S. Vidyasankar, a senior research analyst for Frost & Sullivan. “And that has put downward pressure on ATE equipment prices, which hurts profitability.”

Meanwhile, the ranks of the test industry’s Top 10 publicly held companies were rocked by two major acquisitions. Danaher, a diversified industrial powerhouse, brought Tektronix under its corporate umbrella last October. And last July, Aeroflex, the ninth largest publicly held test company in 2006, was acquired by private equity funds managed by Veritas Capital, Golden Gate Private Equity, and Goldman Sachs.

One thing was clear in analyzing company results for 2007: Companies heavily focused on equipment aimed at communications test led the pack in terms of percentage growth. For example, JDSU saw sales of its communications test and measurement products jump by 25% in fiscal 2007. Among its hot products: the T-BERD 8000 field instrument for high-speed fiber networks.

Dave Holly says that test products for triple-play services have contributed significantly to JDSU’s growth.

Japan’s Anritsu views communications test as a prime opportunity. President Hiromichi Toda pointed to growing opportunities for test devices resulting from deployment of 3G and 3.5G throughout the world, as well as from next-generation networks and the popularity of WiMAX and wireless LAN. Said Toda: “With the spread of the Internet and the increase in transmission capacity, the transmission speed of the backbone is becoming faster, from 2.5 Gbps to 10 Gbps. We even saw a 40-Gbps system commercialized recently.” As for Anritsu products aimed at such applications, Toda cited a new signal quality analyzer for testing optical transceivers and modules up to 12.5 Gbps, and the company’s spectrum analyzers and master base-station analyzers for deploying and maintaining mobile WiMAX networks.

Industry kingpin Agilent Technologies, by far the industry leader with sales of $3.4 billion in 2007, has been shifting more of its resources into test products for wireless and aerospace and defense applications. Ron Nersesian, GM of the company’s Wireless Business Unit, said Agilent’s new E6620 wireless test set for LTE designers is a good example of a hot-selling communications product. Another is the firm’s E6651A platform for WiMAX applications, including base-station emulation and protocol performance test. Agilent also has launched a new organization, called the Signal Networking Division, to focus company test technologies on such aerospace applications as electronic warfare, networked communications systems, military ATE, portable test, and data converters.

Even so, the sheer breadth of Agilent’s product line makes it difficult for the firm to sharply increase year-to-year sales. In 2007, for example, Agilent’s revenues in electronic measurement, viewed by analysts as a mature market, grew by just 3.4%. Compare that to a whopping 24% jump in sales for Agilent’s bio-analytical measurement business, a market where Agilent has a less dominant market share.

Agilent Technologies’ global sales pacesetters, says VP Ron Nersesian, include new test sets for wireless communications.

Of course, Agilent doesn’t lack competitors seeking to grab market share. Harman singles out National Instruments as a firm that year after year has posted double-digit growth, outperforming most companies in electronics test. In 2007, revenues grew by 12% to more than $740 million. “NI’s product pipeline is full in such areas as general-purpose and communication test, and it has leveraged LabView into other applications like industrial control, embedded systems, and mechatronics,” said Harman.

NI CEO James Truchard sees attractive opportunities in such areas as multicore- and emulation-based test systems. The firm will also continue to invest heavily in LabView FPGA technology. “It’s been amazing to see what users have been able to do with this technology—from implementing complex custom protocols to test missile systems to creating a software-defined radio,” said Truchard. Among other prime areas for new product investment: PXI and PXI Express.

The mood is far more subdued in semiconductor test. Advantest, the world’s leading equipment supplier in that segment, saw sales decline by 8.8%, much of it as a result of industry overcapacity in system-on-chip (SOC) testers and the stagnation of semiconductor prices. In recent years, Advantest has been expanding beyond commoditized memory ATE and into logic test, especially SOC test.

Advantest America’s R. Keith Lee: Customers want to expand parallel test capacity.

Teradyne, another major player in the SOC test market, also endured a tough 2007, with sales off 18.7% from the previous year. Frost & Sullivan analyst Vidyasankar, however, views the late 2007 acquisition of Nextest Systems as a positive development for Teradyne, since it strengthens the company’s capability in flash memory test, a sector that rides the booming interest in consumer electronics. Of Nextest’s $95.8 million in revenue in 2006, sales of flash memory testers accounted for $80 million.

Verigy, the company that emerged from Agilent’s 2006 spinoff of its ATE business, fared better than most firms in the ATE sector in 2007, with only a slight decline in sales. And its first quarter 2008 revenues were up 21% over the same period in 2007. Early this year, the company also completed the acquisition of Inovys, which provides products for design debug, failure analysis, and yield acceleration. Commented CEO Keith Barnes: “This acquisition allows us to further differentiate Verigy from other automated test equipment suppliers by offering a completely integrated solution, which leverages our proven SOC and memory test platforms with a best-in-class, time-to-yield solution for semiconductor manufacturing.”

For Credence, on the bottom rung of the Top 10 list, revenues were down 6.5% in 2007, but CEO Lavi Lev this year is stressing a strategy of focusing R&D on test platforms, such as the Diamond, that are used particularly in Asia-driven consumer semiconductor markets.

Two other leading companies, Tektronix and Aeroflex, began 2008 under new corporate umbrellas. Following its best performance in six years as an independent company, with sales of more than $1.1 billion in fiscal 2007, Tektronix was acquired by Danaher last October. While some observers wondered whether the instrument maker would lose some of its high-tech focus as part of industrial giant Danaher, analyst Vijay Mathew of Frost & Sullivan predicted the change will be beneficial for the Tektronix brand, just as it was for Fluke—another perennial member of the top 10 list—when it was acquired by Danaher a decade ago. A key reason: Danaher’s operating efficiencies could free up more development funds for further expansion of the Tektronix product line, which recently added new entries in signal sources, mixed-signal oscilloscopes, and real-time spectrum analyzers.

Rick Wills, who continues to head Tektronix operations, also sees synergies with Danaher’s other major electronic test unit, Fluke. “While the Tektronix and Fluke brands will remain separate operating entities, our customers will see benefits from focused R&D that drives continuous innovation.”

Aeroflex, which has been focusing increasingly on equipment for wireless test, also made its corporate switch on a high note. Prior to being purchased by the private equity firms last summer (which made it ineligible for this year’s top 10 list), the company reported a sales increase of just under 8% for the nine-month period ending March 2007 versus the prior year. It also had order backlogs totaling $253 million. Like the situation for Tektronix, Aeroflex could also gain from the change. “It’s going to allow Aeroflex to increase its R&D investment,” predicted Vidyasankar of Frost, “and they got a very good offer from Veritas.”

Such acquisitions, some would say, have whittled down the big players in test’s public arena. Yet, there are always up-and-coming firms that are looking for a niche to exploit. Perhaps the best example, argues Harman of Needham & Company, is EXFO. Targeting test opportunities in telecom, the Canadian company increased its sales in 2007 by nearly 20% to $152.9 million and is laying the groundwork for even more growth with key acquisitions in 2008.
 

Top 10 test-and-measurement companies in 2007 revenue (publicly traded companies)