Description

Company Description

LeCroy Corp. is a test and measurement company that offers high-performance digital oscilloscopes and communication protocol analyzers. The oscilloscopes are tools used by designers and engineers to measure and analyze complex electronic signals in order to develop high-performance systems, validate electronic designs and improve time to market. Engineers use oscilloscopes on a broad spectrum of products from smartphone development to new router design. LeCroy offers seven families of oscilloscopes, which provide different solutions depending on the specific industry requirements. Digital oscilloscopes are ~85% of sales.

LeCroy’s protocol analyzers are used by designers and engineers to reliably and accurately monitor communications traffic and diagnose operational problems in a variety of communication devices to ensure that they comply with industry standards. Protocol analyzers are ~15% of sales.  

LeCroy sells products into industry sectors that are developing products, which rely on increasingly complex electronic signals to provide the features and performance their customers require. These industries include the following: Computers/IT/Consumer, Automotive/Industrial, Data Storage, Defense and Aerospace and Telecommunications. LeCroy’s geographical revenue distribution is ~ 1/3^rd US, Europe and Asia.

Investment Thesis

• Accelerating demand for high-bandwidth oscilloscopes driven by high speed, next generation data communication networks; strong big picture demand story
• Sustainable competitive advantage based on patented technology; 116 issued U.S. patents, 2 issued foreign patents, 4 patents pending and +300 claims protecting the inventions
• LeCroy is entering the low-end of the market with the purpose of “building a user base at low end, drive profits in the midrange and builds its reputation at the high-end.” The low end of the market makes up ~50% of the overall oscilloscope market, LeCroy currently has a fairly low market share (mid-single digits) providing substantial room to grow by taking market share.
• Raised $21MM of equity in November 2010 to reduce a high cost-cost revolving credit facility; debt free by the end of FY12 via cash generation; currently $29.7MM convertible notes; Issued guidance on August 16, 2011: $195MM-$200MM in revenue, 15% EBITDA margin and EPS $1.15 to $1.20 (EBITDA and EPS non-GAAP) with a high probability of 20% growth Y-o-Y due to the continued digital media explosion; great risk reward in buying a solid growth story at 7x EPS

Industry & Products

Test and Measurement equipment is used in all aspects in the design, development and production of electronic products and systems. The equipment verifies the functionality and performance of new product designs to guarantee product quality and confirm compliance to industry standards. In a study from Prime Data, Inc. an independent research firm tracking the Test and Measurement industry; the market for this equipment was ~$5.9B in 2009. Growth in the Test and Measurement industry is driven by technological improvements in electronic systems performance, growth in the electronics sector and emerging technologies and standards. Designers are constantly required to upgrade and increase the performance of their products via new features and capabilities. The improvements are achieved through advanced semiconductor technology and require the design of faster, more powerful and complex electronic systems. The demand for analysis tools that allow designers and manufacturers to improve these products is being driven by the proliferation of digital media and LeCroy is happy to assist through their suite of digital oscilloscopes.

Oscilloscopes are among several instrument types used by engineers for testing and analyzing electronic signals. An oscilloscope utilizes a graphical display device that allows an engineer to view and electronic signal. The most basic display of an oscilloscope plots a signal’s voltage vs. time (typically in billionths and trillionths of a second) providing the designer/engineer insight into the performance of an electronic circuit.

The three primary specifications of an oscilloscope are its bandwidth, sample rate and memory length. Higher bandwidths capture higher speed signals, increased sample rate improves resolution and longer memory allows capture of longer, more complex signals. The pricing for oscilloscopes is based on bandwidth levels and required specifications. Real-time oscilloscopes with bandwidths ranging from 20 MHz up to 32 GHz are available. Oscilloscopes fall into five major categories.

• High-end: comprises instruments with the ability to capture and analyze signals ranging from 4 GHz up the highest available bandwidths, include the super high-end with bandwidths greater than 20 GHz; these instruments  ASPs are from $50,000 to $300,000 depending on their capabilities
• Mid-range: largest part of the sector consists of general purpose lab and bench instruments and comprise instruments with the ability to capture and analyze signals ranging from 300 MHz up to 6 GHz; ASPs range from $3,000 to over $50,000 depending on the specifications
• Economy: instruments with the ability to capture and analyze signals ranging from 20 MHz to 300 MHz; generally sell for below $3,000
• Handheld oscilloscopes: a variety of handhelds sell for less than $3,000
• Sampling oscilloscopes: for certain high speed applications, where repetitive signals are available it is possible to use sampling oscilloscopes to view and measure signals. Sampling oscilloscopes do not capture real time data and therefore are less expensive than real time oscilloscopes; can have bandwidths up to 100 GHz and can range in price from $22,000 to $50,000

Protocol Analyzers are “standard specific” tools; they enable a design engineer to analyze the “conversation” between two devices which employ the specific standard. The characteristics of each standard, including its principal uses, physical medium, transmission speed and distance covered, vary greatly. Many distinct communication standards are emerging to meet the growing demand for digital connectivity in the industries that LeCroy serves. LeCroy’s protocol analyzers are used by semiconductor, device, system and software companies at each phase of their products’ lifecycles. LeCroy’s protocol analyzer business is a good cash generator with a continuous eye on developing lower cost products to fend off competition. 

End Users

LeCroy products are used by electronic designers and engineers principally in the research and development process of new products. These end users use oscilloscopes and other test and measurement tools to validate the performance of electronic designs and components. 

• Computer/Semiconductor/Consumer Electronics (36% of revenue): this sector includes companies providing components, interfaces, subsystems and complete products for high speed and general purpose network servers and related devices and systems. Requirements in this sector are driven by:
  • Growth in the capability and complexity of devices, which now provide a higher level of integration and functionality 
  • Dramatic increase in the use of high speed  serial data 
  • New interface standards, which enable increased interoperability and higher levels of bandwidth between devices and peripherals 
• Data Storage (10% of revenue): hard disk drives and optical storage devices. Requirements in this sector are driven by:
  • Pressure to reduce product development lifecycle
  • Increasing need to store more data on storage media
  • Migration of hard disk drives to portable media applications and consumer devices
• Automotive/Industrial (27% of revenue): this sector includes auto OEMs, component suppliers to auto OEMs and industrial equipment manufactures. Requirements in this sector are driven by:
  • Proliferation of electronic control units to various auto subsystems, such as engine control and braking
  • Progression of networked electronic control units
• Military/Aerospace: this sector includes companies that provide components and systems for defense and commercial airplane applications. Requirements in this sector are driven by:
  • Applications that use complex communications signals in challenging environments
  • Extraordinarily high need for precision and reliability given the consequences of failure
  • Need for long-term support due to long military program life

Competition

LeCroy’s three major competitors are Agilent Technologies, Danaher (acquired Tektronix 11/23/07) and Rhode & Schwarz, a private German company. 

Q4 Highlights

• Q4 revenues of $47.5MM were +29% Y-o-Y, marking the ninth consecutive quarter of sequential revenue growth
• Oscilloscope orders +30% and order linearity throughout the quarter was stellar; 68% of orders came in the first 9 weeks of the quarter and the book-to-bill ratio in the quarter was 1.03
• LeCroy CEO: Tom Reslewic: “Based on the order growth we saw in Q4 and despite the recent turbulence in the financial markets, we are entering 2012 with optimism. The month of July was very strong, in fact the strongest on record, ahead of last year by 8% and ahead of April by 13%.”
• Order growth was strong across all geographies; America grew 21%, Europe up 30% and Asia-Pacific including Japan grew 39%
• New $75MM revolving line of credit with an additional $15MM accordion provision; replacing the previous $50MM credit line
• LeCroy CFO: Sean O’Connor: “Our significant operating leverage, coupled with the success of our market leading product lines continues to translate into solid bottom line performance. With our new credit facility and shelf registration in place, we have the financial flexibility to invest in future growth of our business.”

Summary

Based management’s guidance on August 16, 2011 of $1.15 on the low end would result in a price of $13.80 for LeCroy. This multiple is well below LeCroy’s growth rate, but given the market carnage a multiple haircut is reasonable. LeCroy’s EPS growth improved balance sheet, increased market share and favorable macro trends for digital are all factors deserving of a reasonable EPS multiple. In the event of a takeover, which is reasonable (see DHR acquisition of TEK ~16x EBITDA) a price for LCRY in the $18-$20 range is feasible. 

Catalyst