In the past I have looked to testing companies as barometers of growth in the communications market. Oftentimes they can be utilized as a forward-looking indicator – a sign of optimism or pessimism in the market.
Admittedly in a more complex world where broadband, VoIP and wireless are growing at varying levels and landlines are dying, it may be more difficult to make a solid correlation as product mix and marketshare per segment can throw you off. Moreover, testing companies have to build test systems without the benefit of standardized components meaning they have to construct many of their systems from the component level up.
This business model has tremendous costs associated with it and when there is a disruption in the financial markets and carriers and equipment providers see hiccups in their financing and/or capital expenditures get put on hold for other reasons – such as the recent financial shock, a testing company becomes a less accurate measure of industry health.
These are some of the thoughts I had recently as I was analyzing Ixia. The company has been on an M&A tear recently and is now in a position to benefit from its increased percentage of carrier and wireless business. Acquisitions of Catapult Communications and Agilent’s NX2 line helped the company grow top line revenue by 32%. As was expected, there will also be company-wide cost-cutting resulting in reduced staff duplication. This move should result in $11 million in annual cost savings.
The company expects fourth quarter revenue in the range of $54-$56 million while analysts expected $52.93.
Acquisitions are notoriously challenging to pull off so it is unclear if Ixia can be used as a barometer in the near future. If the company pulls off these acquisitions perfectly then their ability to reduce costs and leverage synergies could be responsible for it to do even better than the communications market as a whole. If they do an average job then we may see them underperform the overall market.
So far the results look encouraging and it will be worth watching the company this year to see how well they pull off their restructuring.