Description

According to a recent report from semiconductor research firm Gartner Dataquest, LogicVision increased its already-dominant position in Built-In-Self-Test (BIST) for integrated circuit (IC) design and manufacture to a 72% market share in 2001. (Up from 52% in 2000.) Despite continuing difficult conditions in end-markets for ICs, and the halving of semiconductor design starts in 2002, LGVN’s niche in embedded or built-in-self-test (BIST) continues to promise the most cost-effective IC test methodology going forward. LGVN’s BIST technology is increasingly being recognized (and licensed) as must-have intellectual property, especially in the faster-growing area of complex Systems-on-a-Chip. SOCs combine multiple devices, often mixing analog and digital signal processors, and already figure prominently in the design of advanced consumer electronics, medical equipment, and wireless applications. (Gartner Dataquest estimates the SOC market will reach $22 billion by 2006, growing at a better than 30% annual rate, and that the adoption of BIST will grow nearly as fast.)

Despite the current IC industry downturn, semiconductor innovation continues to rapidly evolve toward ever-smaller line widths, as well as increasing device complexity and speed. (Moore’s Law is alive and well.) But increasingly complex ICs and SOCs with smaller geometries, mixed signal processors, often employing a variety of third-party IP cores, and all operating at higher speeds/frequencies-- present mounting design, manufacture, and test challenges. In the area of IC-test, for example, the most advanced and complex IC/SOCs are far outstripping the ability of traditional, external testers to reliably test at the speeds at which the newer devices are being designed to operate. Already, “big-iron” external testers can cost between $3-5 million, and are expected to reach $10+ million by 2003.

LogicVision’s patented IP and software (sold under license) enables chip designers to efficiently embed re-usable self-test modules or gate arrays directly onto semiconductor devices. BIST allows ICs to be tested at-speed throughout the device’s lifecycle. LGVN embedded-test enables at-speed test from the earliest electronic design phases to first silicon/prototype to volume production, and then, even remotely*, once the devices are deployed in the field. LGVN’s BIST, and other IC-test technologies, allow more timely and cost-efficient test, as well as more accurate chip diagnostics, all of which helps speed a chip design’s time-to-market as fewer costly and time-consuming physical design revisions are required. LGVN offers its licensees lower cost and better ROI, a lifeline to a semiconductor industry in growing need of both.

LGVN IP is sold under license, (predominantly under 3 year terms) to a customer list that includes Intel; Sun Microsystems; National Semiconductor; Fujitsu; Hitachi; LSI Logic; NEC; Cisco Systems; Nortel Networks; Motorola; Sony; Boeing Satellite Systems, and others. (On LGVN’s conference calls it has been repeatedly stated that LGVN has historically had a 100% customer license renewal rate.)


Historically LGVN has maintained a license-to-service sales-ratio of 70-30% with overall gross margins between 70-80%. In its most recent quarter (Q3/’02) LGVN sales were: 69% License revenue and 29% Service, plus 1% Royalty (as end-products begin to emerge from the OEMs with ICs employing LGVN’s embedded-test technology.)

Operating Revenues for Q3 ’02 were $3.98mm vs. $4.8mm in Q3 ’01 but up sequentially from $3.7mm in Q2 ’02. For the first 9 mos. of ’02, operating revenues were $13.52mm vs $11.82mm (+14.4%). GAAP net loss for Q3 ’02 was $2.45mm (.16). Excluding non-cash items the loss was $1.4mm, and is expected to remain in the $1-1.5mm range over the next 3 quarters (through 6/03). Revenues are fairly predictable as historically 40-60% come from backlog. Approximately $4.5mm per quarter in revenue is considered ‘break-even’. (NOLs through Q3 ’03 were $54.4 mm) The ‘consensus’ on compounded EPS growth over the next 5 yrs. is 45% annually.

Currently trading at a 32% discount to net cash ($1.82 vs $2.68), LogicVision has 15.022mm diluted shares outstanding/no debt/ and $40.2mm in cash/marketable securities. TEV: ($12.86mm).

It should be noted that many net-cash investment screens may not turn up LGVN because $22.5mm of its $40.2mm in cash/securities are intermediate term U.S. Treasury Notes purchased after the Nov ’01 IPO ($9.00) and which show up on the balance sheets as marketable securities. No doubt these T-Notes have appreciated in value since their purchase, and remain highly liquid.

LGVN offers a low-risk opportunity to invest (or trade) in a technology leader in the rapidly growing SOC market. LGVN could offer financial or strategic investors an attractive next-generation technology—unlike many other me-too technology firms that have fallen from grace over the last several years. This combination of promising technology (and blue-chip client list) and a share price discount to net cash could prove an attractive proposition to an established electronic design automation (EDA) firm, several of which are proven serial acquirers, in an attempt to fill out an integrated IC design and test product offering. Traditional IC test/tool equipment makers could also be interested. Teradyne and Credence Systems both have made strategic pre-IPO investments in LGVN. Finally, cash-rich cos. trading near break-even offer firms an alternative financing proposition in the face of stingy capital markets.



* In February, 2002 Lockheed Martin (Missile Division), using a device jointly developed by LogicVision and National Semiconductor was able to REMOTELY test, via LMT’s intranet, a printed circuit board containing both analog and digital circuitry. LMT engineers were able to remotely probe the device in real time.)

Catalyst

Catalyst: Shares selling at 32% discount to net cash-and-U.S. Treasury Securities on the balance sheet for a near break-even (on cash-basis) technology-sector leader with a 72% market share. Along with its compelling valuation, and its leading, niche position, LGVN does business in a sector (EDA and IC test) historically characterized by frequent acquisition activity. Another potentially attractive wildcard is LGVN’s new Validator, a hardware & software silicon de-bug product that has been receiving extremely positive reviews in the semiconductor trade press as a potential break-through IC test product, and which is expected to begin contributing to sales in Q4 ’02. For traders or investors I expect the discount to net cash to close rapidly as the current sell-off in the EDA sector dissipates.