Credence Systems Corp. (CMOS)

Credence Systems (CMOS) designs and manufactures engineering validation test equipment and automatic test equipment (ATE) used to test integrated circuits. Post acquisition of NPTest, Credence has extended into the higher-end portion of the ATE segment, repositioning itself as a top-tier player in the market.

The ATE industry is highly competitive and includes large firms such as Verigy, Teradyne, and Advantest. Characterized by aggressive pricing and highly volatile segment, the market offers little opportunities to nurture. Endorsing the same, Credence is witnessing long product lead times resulting in customers ordering during industry upturns, only to cancel their orders during sudden downturns, resulting in huge losses.

The unattractive economics of the ATE market are reflected in Credence's financial results with operating margins of negative 44% and returns on invested capital of negative 7% during the latest semiconductor industry cycle. Moreover, its sales fell 2% in 2005 because of weaker demand for ATE systems. As ATE market has matured it is unlikely that company will experience the same growth that it saw in the past.

Credence has a total of $102 million in cash and short-term investments dropped substantially, from $244 million in 2000. With $180 million convertible notes due in 2008 and operating cash flows not enough to cover up the same, it’s tough to substantiate positive outlook for the company.