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Synopsys Looks Healthy, But

Posted on Thursday, Dec 27th 2007

In our EDA review, Synopsys (Nasdaq: SNPS) is the second major player, always going neck-to-neck with Cadence.

Synopsys announced Q4 earnings on December 6, 2007. Unlike the losses posted by competitor Mentor, Synopsys executives were quite pleased with their results and momentum throughout the year enabling Synopsys to meet or exceed all of their original 2007 targets. Q4 revenues increased 11.2% to $315.2 million and annual revenues grew 11% to $1.212 billion. Additionally, expenses were $277.4 million, only a 3% increase.

Much of this cost control was achieved by sending work offshore and shifting one-third of their employee base to lower cost geographies. The company is currently sitting on $433.5 million in cash.

Synopsys also announced guidance for 2008 Q1 with revenue expected to be between $308-316 million and expenses to be between $262-278 million. Net income is expected to be $0.20 – $0.28 per share. However, they did state they expect 90% of the quarter’s revenue to come from backlog … which then leaves the question outstanding as to whether the company will be able to replenish the pipeline for the remainder of 2008. For all of 2008, Synopsys expects revenue between $1.3 billion and $1.315 billion.

As we discussed in the Cadence piece, these multi-year, all-you-can-eat contracts that are becoming the industry norm, are great for revenue predictability via backlogs, but they seem to be at the cost of the future.

Synopsys has 146.4 million shares outstanding with a market cap of $3.75 billion and a 52-week price range of $22 to $29/share. Currently priced at $26/share, and with a projected growth of 10% per year for the next few years, Synopsys appears to be healthy on paper.

The problem with SNPS as an investment is that the industry structure is broken, and the overall market shows very little momentum. EDA’s growth is based on Design Starts, not volume of IC shipped. While the IC shipped number has been growing at gangbuster rates with the surge in consumer electronics in particular, and the permeation of electronics into pretty much all aspects of our lives in general, design starts have not really grown at a comparable speed. In fact, the irony is that IC and system vendors are trying hard to make fewer designs become hit products, controlling the cost of IC design that has sky-rocketed.

All this bodes very badly for the EDA industry, and just as I have advised my readers not to invest in the online DVD rental business, I will advise you now to stay away from EDA as an investment category. As it stands, there is no money to make in these stocks.

What is also immensely frustrating is that there is hardly any thought leadership from the leaders of the industry to adjust its dynamics. Change, it seems, comes slowly to an industry that once rose high on the wings of rapid and abundant innovation. It is a shame, since EDA is such a critical part of the IC Design value chain!

SNPS 1 yr chart

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I strongly disagree with you. I think is a enough competition that other companies will try to design better than their competitors and try to capture new and broader mkt share?

Jay Thursday, December 27, 2007 at 10:58 AM PT

What?

Sramana Mitra Thursday, December 27, 2007 at 1:26 PM PT

Nice piece Sramana. My 2 cents on how revenue growth/profitability could be improved:
1. Moving jobs to low cost geographies ain’t easy. An average EDA developer needs to understand a bunch of s/w and h/w concepts, plus the fact that there is a lot of mutual interdependence of these 2 studies in EDA. Such engineers don’t come cheap. An average 7-8 year old in this field in India would end up making 40k USD a year, so maybe 1/3rd the price but not 1/5th or 1/10th. And for how long? And please remember attrition in low cost economies, particularly India, is like 18-20%.
2. Point tools like Calypto or Nusym might (Archpro already has) make a dent. But should they be acquired are they enough to send the revenue models soaring? No. The fact is that the digital design flow is mostly getting saturated. Maybe you could bet on the tool’s enhanced performance for billion gate designs, or having tools to support a raised design level abstraction or maybe have tools that are multi-core in nature.
But I am not sure how easy it’s gonna be, customers already have tasted blood. It might not be easy at all to move to the new flow.
3. Total disruption: How about something like analog synthesis? Maybe if we have a new flow for analog+mixed or just analog only, that could give a new direction to the industry.

Raman

Sundar Sunday, December 30, 2007 at 10:22 PM PT

I think “Jay” is parroting Mentor CEO Wally Rhine’s argument that as the IC companies go fabless or fab-lite the battlefield moves to design since process technology is no longer a way to differentiate products.

I share Sramana’s pessimism regarding the outlook for EDA software companies. The exponential increase in cost of mask sets at 65nm and below makes chip design cost prohibitive.

Henry Monday, December 31, 2007 at 2:59 PM PT

A public company’s valuation depends on revenue growth – and I think we have clearly established that the consumer electronics boom is not translating to a boom in design starts.

EDA leadership cannot be so out of touch as to not foresee what this means. Do they not care? That’s more troubling.

Without doubt, EDA is a critical part of the IC design value chain. But can we compete with the Googles? We will never be the darlings of Wall Street – why remain public at all?

S.Obilisetty Thursday, January 31, 2008 at 2:23 PM PT

It’s very troubling, indeed. I think people are trying to tackle the issue … but not with a lot of success.

Why remain public at all? Hmm… people who take companies private do so with some upside in mind.
It is seldom motivated by capital preservation. So, the issue is, who would be the investors if the companies try to go private?

Sramana Mitra Thursday, January 31, 2008 at 3:31 PM PT

[...] second-largest player, Synopsys, also does not seem to be having a good time. Synopsys’ issue is not with its own business, but with the industry, as was evident in its result…. The company acquired Synplicity earlier this year, and is also coming out with new products and [...]

Top 9 Semiconductor Infrastructure Stocks - Sramana Mitra on Strategy Wednesday, September 24, 2008 at 9:33 PM PT
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