SAN JOSE, Calif. — The market for automatic test equipment (ATE) is finally improving after a severe downturn in the industry. But ATE vendors are still taking dramatic cost-cutting actions to offset the slower-than-expected fab-tool recovery.

In a move to cut costs, for example, IC test supplier Teradyne Corp. is expected to cut 7 percent of its workforce, or 400 jobs, according to a report from SG Cowen Securities Corp. here Wednesday (Aug. 20).

The move, which follows a string of layoffs and losses for the ATE maker, is expected to save the company about $40 million in annual costs, according to the report from the New York-based investment banking firm.

It will also reduce its breakeven point to $330 million in sales per quarter, compared to $350 million before the action. The Boston-based company is expected to show breakeven results by its fourth fiscal quarter.

When asked if Teradyne would resort to layoffs in order to cut costs, a company spokesman said: "We have not announced a decision to that effect."

The spokesman added that Teradyne is determined to reach to breakeven by the fourth quarter of this year. The company is on track to reach a breakeven point of $350 million per quarter by the fourth quarter, according to the spokesman. The company has made no announcement regarding a move to lower its breakeven point.

Meanwhile, in its current third fiscal quarter, Teradyne is expected to show a 5 percent order jump over the previous period. "Expect flattish semi test orders, (but) demand is broadening," the SG Cowen report said.

Teradyne reported sales of $331.5 million for the second quarter of 2003, and a net loss of $52.5 million, or minus $0.28 per share. This compares to sales of $309.9 million and a loss of $50.7 million in the like period a year ago.

Other ATE makers are suffering as well. On Tuesday, ATE supplier Credence Systems Corp. posted sales of $45.5 million in the third quarter, a decrease of approximately 5 percent from net sales of $47.7 million in the third quarter of fiscal 2002. Net sales increased approximately 7 percent sequentially, from net sales of $42.5 million in the company's second fiscal quarter.

The net loss for the third quarter was $31.7 million, or minus $0.50 per share, compared to a net loss of $19.0 million, or minus $0.31 per share, in the third quarter of fiscal 2002.

Credence put a positive spin on the results. "We are pleased to announce our third consecutive quarter of revenue growth and the highest quarterly revenue in the last year," Graham Siddall, chairman and chief executive officer of Credence, said in a statement.

"We believe business conditions are gradually improving and as this trend becomes evident and sustainable, our strong portfolio of products in both the engineering and production test space will drive improvement in the business," he said.

Not all are suffering, however. Despite lackluster financial results in its third fiscal quarter, Agilent Technologies Inc. saw a continued rebound in test-equipment orders in the period, which reached their highest level in three years.

Still, the signs are gloomy for ATE and the entire chip-equipment industry. A recovery in the semiconductor and chip-equipment markets is possible in 2004, but not a "hard recovery" in the fab-tool segment until 2005, according to a new report from VLSI Technology Inc.