Mentor Graphics (MENT), has had a roller coaster second quarter. Cadence made a hostile takeover bid for Mentor in June of this year, only to revoke it last week. Mentor’s stock slipped 20% after the end of bidding to $10.33. Yesterday’s announcement of the Q2 results managed to lift the stock 10%. It is currently trading at $11.48.
Q2 revenues of $182.4 million exceeded the market’s expectations of $175 million even though they were 13% lower than the previous year. The company reported a loss per share of $0.02 compared with the Street’s expectation of a loss of $0.12. Last year they had reported EPS of $0.15.
By segment, Product revenue was $96 million, Maintenance revenue was $77 million and Services revenue was $9 million. Product revenue was down 25% from last year’s Q2 while the other segments grew 6%.
Mentor is expecting revenues of $220 million in Q3, with an EPS $0.15-$0.20 per share. For the year, revenue expectations remained at $915 million, while EPS was revised upwards to $1.05-$1.10.
Mentor has been focusing on market expansion both in terms of geographies and segments addressed. For the quarter, North America contributed 35% while Europe brought in 30% of revenues. Japan showed considerable expansion with revenue contribution of 20%, and the Pacific region contributed 15%.
In market segments, Mentor expanded in the automotive and general transportation segments. They have been running programs to address cable and wire harness layout, and network simulation and controls for the automotive industry in particular. They also extended this effort to the aerospace industry. During the quarter, bookings from the automotive industry increased four times to 20%, compared to 5% in the previous quarters.
The other EDA stock that I maintain at Sell is Magma (LAVA).
The stock recently reached an all-time low of $5.31. It had recently announced preliminary results for Q1. Magma is expecting revenues in the range of $44.5-$45.5 million for the quarter against the earlier announced outlook of $50.0-$51.5 million. The market had been expecting revenues of $48 million. They also revised their EPS downwards from the previous range of $0.07-$0.09 to a revised range of loss $0.04-$0.01. The market was looking for EPS of $0.03.
The company blamed performance on economic conditions, which have resulted in delays in customer purchasing decisions, and on channel transition.
Synopsys (SNPS), the second-largest player in the industry, also blamed economic conditions, specifically the lengthening sales cycle and customers’ increasing caution, as a reason for worry. Yet, their Q3 results announced yesterday exceeded the market’s expectations.
Revenues for the quarter increased 13% over the year to $344 million compared to the market’s expectations of $340 million. EPS also grew by 38% to $0.44 against the Street’s expectations of $0.39.
They gave a Q4 revenue outlook of $348-$356 million with EPS of $0.36-$0.39. For the year, they revised their revenue outlook to $1,332-$1,340 million with EPS of $1.65-$1.68.
Synopsys launched a few new products to gain a lead in the market and recently announced their relationship with National Semiconductor as their key EDA supplier. They are even partnering with National Semiconductor on their new analog mixed signal design solution. They launched a new router – Zroute – which is a multi-threaded router integrated into an IC compiler that has delivered a 10x increase in speed.
Further, they tied up with ARM and announced the industry’s first comprehensive low-power verification solution which enables customers to adopt best practices for low-power designs faster.
The stock, however, slipped 5% to $22.85 in the after hours after the results announcement.
While the overall macroeconomic outlook continues to deteriorate, the semiconductor industry still grew 5.5% in the first half of the year and 3% sequentially in the current quarter, with June growth of 8%. Despite this, my stand on the EDA industry is still gloomy. It is not a case of Mentor, Synopsys or Magma being individually poor performers, but more a case of the industry itself being in poor shape.
Cadence, the fourth major EDA company, is in huge trouble. The stock has crashed dramatically, and the outlook is not only weak, but confused. There is probably going to be a leadership change in that company soon. I imagine, the Board cannot just sit around and watch such value degradation!
Meanwhile, the four-dog fight for a small bowl of EDA food continues, the destructive price war continues … an overall sorry situation!