Credence Systems---Market Share Risin'
by SKYSAXMAN

CMOS Presentation

Fellow Fools,

Once again your intrepid correspondent ventured out into the heart of Silicon Valley to see what I could see. This past Wednesday I attended a presentation by Credence Systems Corporation sponsored by the Informed Investors Forum.

Credence Systems Corporation (Nasdaq-CMOS) is based in Fremont, CA. Amazingly enough for this area, they are involved in a semiconductor related business. Credence manufactures automatic test equipment (ATE) for high volume production testing of digital and mixed-signal integrated circuits. Speaking was Mr. Richard Okumoto, chief financial officer and senior vice-president of the company.

1995 has been a banner year for Credence, as it has for most companies in the semiconductor equipment sector. The stock price has a 52 week range of approximately 13 to 41 1/2. It is currently trading at around $30 per share. They are a young, growing company with increasing market share and a rapidly growing market to exploit. Their target market is presently around $1 Billion in 1995, but is expected to double in only two years. The entire ATE market is forecasted to expand to $7 Billion by the year 2,000. Recent numbers issued by the semiconductor industry association revised these numbers upward indicating continued strength throughout the industry.

Credence's clients are a list of some of the leaders in the semiconductor field, and include AMD, Cirrus, LSI Logic, VLSI, Atmel, Xilinx, Motorola, National Semiconductor, Adaptec, and Phillips. Major competitors include Teradyne, Megatest, LTX, and Schlumberger. While Schlumberger is large in the field, according to Mr. Okumoto, they basically have one client--Intel. I guess if you only have one major client, though, it is a pretty good idea to make that one Intel. Credence's strategy is to target some of the top 15 companies, some of the top growth companies, and some smaller companies who have the potential to be the next LSI or Cirrus.

Credence has been growing and increasing market share due to their advanced technology. They have patented proprietary CMOS technology to lower the cost to their clients. They do this in a number of ways. They have made their equipment smaller and able to run on less power. This decreases clients' costs in a very direct way. First, their equipment takes up less floor space (in fact, they have developed zero footprint machines, which can sit on top of a prober), uses less electricity, which results in less need for air conditioning. All these factors reduce the cost of running a fab, in addition to the fact that CMOS sells equipment for less than competitors. They have also developed what I believe is the first piece of equipment capable of testing both digital and mixed-signal circuits. Generally, a manufacturer needs separate equipment to test different types of chips. (For technical questions I would refer you to MF Chips, who can be found in the semiconductor folder of the market and industry analysis section. Go ahead, try to stump him--I dare you.)

Credence grew earnings by approximately 42% in 1992 and 1993. In 1995 they are showing 45% growth. Mr. Okumoto stated that the company is showing no signs of slowing down, that in fact their business has been accelerating even more in the second half of 1995 and the company's book to bill ratio recently increased to more than 1.15 to1. Credence has been doing an extraordinary job of increasing gross margins which are now at 60%. According to Mr. Okumoto, they are far outstripping their competitors in this area. His figures showed Teradyne/Megatest at around 45% and LTX at 32%. Credence's operating margins are steady at approximately 25%. Third quarter earnings released August 16, 1995 showed an increase in net earnings over the same period of a year ago of 63%. For the nine month period they were running 45% ahead of a year ago. Fourth quarter earnings are due to be released December 7. Mr. Okumoto intimated that he felt the report would be another strong one. From the audience came the inevitable question of the downgrading of the industry recently by Rick Whittington of Soundview Financial and what Mr. Okumoto thought of it. He stated that he has seen absolutely no slowdown in the industry whatsoever, and that is not the first time he has disagreed with Mr. Whittington. Credence now has approximately 50% of sales overseas, of which the large majority is in the far east, and the remainder in Europe. Business has been so good they are in the process of nearly doubling their manufacturing capacity, located in Beaverton, Oregon.

In short, my impression is that Credence Systems Corporation appears to be a well run, growing, cutting edge technology company with very good future prospects. For anyone wanting more information they can be contacted at (510)657-7400.

For Bay area residents Informed Investors are presenting more upcoming seminars throughout the area. It is a chance for individuals to see companies present "analyst style" programs that are pretty unique. For further information contact Steve Chanecka or Tim Quast at (800)992-4683.

Skysaxman

[Editor's note: Skysaxman is a part-time Foolish reporter based in Silicon Valley. He has previously written about an investment conference with Applied Materials, and currently writes the weekly analyses of the San Francisco 49ers in the Foolball area. His most recent Fribble, "God, Part 3" appeared on September 20.]