Agilent Spinoff Verigy Flying High A Year After Going Public

Chip equipment maker Verigy has gone by a few names, but of late you could call it a highflier.

In 1999, Hewlett-Packard HPQ spun off its test and measurement unit as a separate company called Agilent Technologies A. Agilent, in turn, spun out the chip test part of its business in mid-2006 as Verigy VRGY.

Singapore-based Verigy makes equipment used to test flash memory chips and to test so-called system-on-a-chip devices, or SOCs, which have both compute circuits and other features on a single chip.

Verigy went public in June 2006, and it has shown a profit every quarter since.

For its third fiscal quarter that ends this month, analysts expect per-share profit to more than double from the year-earlier quarter, to 48 cents, though revenue is seen slipping 6% to $201 million.

The strong profit outlook, though, and generally good results of late has the share price nearly doubling since November. It now trades near 28.

Chief Financial Officer Robert Nikl joined Verigy in mid-2006. In a recent interview with IBD, he talked about the company's plans.

IBD: Has spinning off from Agilent changed the way you do business?

Nikl: From a customer vantage point, not a lot. Our customers often tell us how grateful they are we're a stand-alone company now.

And as a stand-alone public company, we're more focused -- and not only on customers. That was always there during the Agilent and HP days, but now there's the sense of alignment of what we do and financial results.

IBD: Chips have become more complex in recent years, helping boost sales of chip test gear. What else is driving sales?

Nikl: The other thing that factors in is that regardless of what's happening to pricing, bit growth (size of memory chips, as measured in bits of data they can store) continues to go up.

At Verigy there's a lot attention on (falling) Nand flash memory pricing. People said, 'When will that impact you?' My response is it's bit growth that drives test equipment sales. So, we're doing fine now.

IBD: What separates Verigy from its competitors?

Nikl: The thing that differentiates Verigy is we talk about a single platform. We have one single platform operating in both the memory and system-on-a-chip sectors.

On the memory side we have (products to test) DRAM (the main type of memory in PCs) and both Nor and Nand types of flash memory. In our case we tend not to chase commodity types of chips. So we don't do commodity DRAM, for example.

We go after the more technically differentiated products.

IBD: In its latest quarterly filing, Verigy says two customers, Spansion SPSN and Chipmos IMOS, accounted for 41% of sales. Are you worried that two customers account for such a large part of your business?

Nikl: Anybody in the memory chip space will suffer from concentration. There aren't a lot of memory suppliers left. From our perspective, the good news is having a lot of customers. If you look at our rivals Teradyne TER or Credence CMOS, they essentially have only SOC customers.

During the recent lull in the SOC cycle, with some folks having business go down, we were able to mitigate that to our memory business.

IBD: Are you trying to diversify further?

Nikl: We have already diversified to a degree. We have about 10 to 12 memory customers.

For example, we're also a supplier to the Intel INTC-Micron MU flash memory joint venture. They have in the past been a customer that accounted for 10% of our business. They supply to Apple AAPL for what we are hoping will be a really good roll out of the iPhone.

IBD: Last quarter your earnings rose year over year, but revenue fell. Is the company sacrificing market share to boost earnings?

Nikl: We are down a little bit from a revenue perspective, but earnings are much stronger.

There are a couple of dynamics. One thing that makes year-over-year comparisons a little problematic is that our first quarter as a stand-alone company was third quarter of 2006, the quarter starting in July 2006.

It still had one month of Agilent earnings, and two months of Verigy. And it was confusing because the Verigy business didn't keep a set of books that you would expect to see as a stand-alone company.

Also, the first half of 2006 was extremely strong.