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EDA Market Stabilizing?

Posted on Friday, Dec 18th 2009

The economy is limping back on track, as is evident from the increase in the number of PC shipments and smartphones, sales of which grew in Q309. In fact, silicon revenues were up in Q309 over Q209 in a reversal of the declines of the last few quarters. This is of course good news for the semiconductor industry. The EDA industry though will take a few more quarters to recover as its growth lags that of the semiconductor industry growth by a few quarters.

EDA companies continue to witness declining backlog levels. Given the current economic conditions, EDA customers are holding back the contract renewals until their expiration dates. EDA revenue is expected to decline between 10%-20% in 2009.

Cadence Design Systems, Inc. (NASDAQ:CDNS) announced its Q309 results on October 28. Cadence reported revenues of $216 million in Q309, compared to $232 million in Q308. In Q309, non-GAAP operating margin was 6% and operating cash flow was $22 million. Non-GAAP, net income in Q309 was $7 million, or $0.03 per share, as compared to a net loss of $23 million, or $(0.09) per share in Q308. Cadence ended the quarter with more than $571 million in cash.

Product revenue was $97 million, maintenance revenue was $92 million, and services revenue was $27 million. Revenue mix by geography for Q3 was 43% for the Americas, 20% for EMEA, 23% for Japan, and 14% for Asia. Ninety percent of orders booked in Q3 were ratable. The overall environment for Cadence remained challenging, and Q3 orders were lighter than expected due to the impact of financially distressed companies, a slight uptick in maintenance cancellations and weighted-average contract life was at the low end of the guided range of 2.8 to 3.2 years.

The company has increased the level of R&D engagement with its customers, and this is helping Cadence win with technologies that address customers’ need for better design productivity, increased predictability of schedules and results, and faster time-to-market. The company is setting an increasing number of benchmarks in digital design, as well as in its traditional areas of strength, in mixed signal, custom design, verification, and PCB.

The company entered into collaboration with Mentor to drive interoperability between verification components developed using legacy methods and those complying with open verification methodology, or OVM. OVM is gaining traction and is well on its way to becoming the industry standard verification methodology. Cadence also released OVM compliant PCI Express 3.0 Verification IP. The company’s verification IP portfolio is now two times larger than that its closest competitor. Cadence introduced the Incisive Enterprise Verifier, which delivers unique capabilities in both formal analysis and simulation. Moreover, its unique Engineering Change Order management analogy, or ECO, continues to proliferate throughout its installed base.

In the systems development space, the company announced the industry’s first transaction level modeling (TLM) design and verification flow. It also announced integration of this flow to support leading embedded software environments, and enable OVM hardware/software co-verification. Finally, Cadence introduced a system validation solution in collaboration with Rohde & Schwarz International to address the emerging 4G wireless market.

NVIDIA recently used Cadence solution to verify the entire multi-core design and the embedded software for its most complex graphics possessor, code named Fermi. This next-generation GPU with CUDA and unified cache architecture, has 512 cores, representing 3 billion transistors, making it three times larger than previous high-end graphic processor. Cadence solution’s ability to verify this entire multi-core design and this embedded software represented significant major breakthrough in electronic design scalability and was crucial in the rollout of the widely acclaimed Fermi GPU.

In August, Cadence entered into a multiyear software service agreement with GlobalFoundries. As a first step in the collaboration, GlobalFoundries has adopted a comprehensive suite of Cadence technologies, including the Virtuoso and Encounter design environments, and an additional solution for design, verification and manufacturing at 45-nanometers and beyond.

For Q409, the company expects total revenue in the range of $215 million to $225 million. Q409 non-GAAP operating margin is expected to be in the range of 6% to 8%. Non-GAAP net income is expected to be in the range of $0.02 to $0.04 per share. Operating cash flow in Q409 is expected to be in the range of negative $10 million to negative $5 million.

Synopsys, Inc. (NASDAQ:SNPS) declared its Q409 and FY09 results on December 2. Quarterly revenue of $338.3 million was down 4% compared Q408. However, the company’s full year revenue of $1.36 billion was up 2% Y-o-Y. Non-GAAP operating margin declined sequentially to 17.5% due to higher expenses in Q4. Full year Non-GAAP operating margin increased about 100 basis points Y-o-Y to 24%. Non-GAAP EPS was $0.33 in Q409 and $1.75 in FY09, compared to $0.43 in Q408 and $1.71 in FY08.

License revenue, time-based and upfront, declined 5% Y-o-Y to $301.3 million in Q409. Maintenance revenue was $36.9 million in Q409, an improvement of 2% from Q408. For FY09, the company generated $1.2 billion in license revenue and $152.0 million in maintenance revenue, which were up 1% and 9% respectively, from FY08. The company had bookings of about $1 billion in FY09 and ended the year with a total backlog of $2.2 billion.

During FY09, Synopsys adjusted its expenses to align with the moderating demand. The company managed to post higher operating margin in FY09 by controlling vendor and contractor costs, compensation and headcount-related expenses, and discretionary spending. Even for FY10, the company expects to maintain non-GAAP operating margin at similar level as in FY09.

Synopsys was busy with new products, acquisitions, and new EDA partnerships in FY09. Almost a dozen companies, including key semiconductor companies such as Sunplus, Marvel, and Toshiba, have chosen Synopsys as their primary EDA partner during FY09.

Synopsys acquired the analog business group of MIPS Technologies, Inc. This acquisition broadened the company’s DesignWare intellectual property (IP) portfolio with a new family of analog IP such as analog-to-digital converters, digital-to-analog converters, audio codecs and power management. Synopsys also added HDMI TX and RX protocols to its existing interface IP solution.

The company continues to invest in new product developments. Among others, it introduced Lynx Design System during the year. Developed for 65-nanometer and below, Lynx features a complete open production proven digital design flow, with a built-in methodology, foundry-ready checks, and an advanced management cockpit. Lynx has a direct impact on total cost of design and gives customers instantaneous entry into a proven low power design flow.

The company generated operating cash flow of $236.7 million in FY09 and ended the year with $1.2 billion in cash and short-term investments. The company’s strong cash position provides it with sufficient financial flexibility to invest in new product development in the current market conditions. The company expects to generate operating cash flow in the range of $200 million to $220 million for FY10.

For Q110, Synopsys expects revenue in the range of $325 million to $333 million. Non-GAAP EPS for the quarter is forecasted in the range of $0.38 to $0.40, excluding $0.12 related to stock-based compensation expenses, $0.09 for amortization of related intangibles, and a positive contribution of $0.06 from net tax effect.

For FY10, Synopsys expects revenue in the range of $1.33 billion to $1.35 billion and Non-GAAP EPS in the range of $1.52 to $1.62, excluding $0.39 related to stock-based compensation expenses, $0.33 for amortization of related intangibles, and positive contribution of $0.21 from net tax effect.

Mentor Graphics Corporation (NASDAQ: MENT) announced its Q310 results on December 3. The company earned revenues of $189.2 million, in Q310 compared to $184.9 million in Q309. Non-GAAP gross margin was 87% in Q309, compared to 85% in Q308 and 84% in Q209, due principally to the effect of a higher mix of software product revenue. Non-GAAP EPS was $0.05 in Q310, compared to a loss of $0.04 in Q309. Cash flow from operations was $14 million for the quarter. The company’s top 10 accounts represented 50% of quarterly bookings, similar to last year, while the average contract life remained at three years. Book-to-bill was less than 1.0, but comparable to most third quarters.

During the quarter, Mentor saw positive signs of recovery in the semiconductor market with semiconductor unit shipments and revenue and foundry revenue and utilization all up. Having a diversified product line has helped the company to weather the difficult economic environment. Embedded software and cabling solutions were both up for the quarter. The company experienced strong results from design-to-silicon platform, including Calibre, Olympus-SoC place and route, and Tessent silicon test products, and a recovery in the emulation business.

Mentor achieved growth in bookings and revenue relative to last year. Bookings grew 5% and revenue 2.4%. Bookings were particularly strong in IC design-to-silicon business segment at 25%, and new and emerging market segment at 65%. Despite competitive pressure, the dollar value of renewals among the top ten contracts grew 5% versus the same contracts three years ago. This strength was driven by increased usage of existing products and by adoption of new products.

Revenue mix by geography was 40% for North America, 25% for Europe, 20% for the Pacific Rim, and 15% for Japan. Ratable revenue was nearly 55% of revenue, the same as the last quarter. For product revenue, 15% was subscription, 15% was perpetual, and 70% was term. New customers, excluding pads, were up 5% in number, but down 15% in value. New customers were up both in value and numbers sequentially.

Mentor’s strategy of focus on areas where it is number one had the combined effect of increasing the number renewal contracts despite pricing pressure in highly competitive areas such as the semiconductor industry, but also of achieving improved pricing in systems related businesses in the newly emerging areas of EDA. What makes Mentor different is the growing percentage of its business that is concentrated in areas where the market is growing, traditional EDA competition is minimal, and where Mentor has a commanding number one position. The company experienced a growing percentage of its bookings and revenue from the DFM & PCB market segments where it has number one market share. 

The company announced that its low power RTL-to-GDSII tool flow has been included in Taiwan Semiconductor Manufacturing Company, Ltd. (TSMC) Reference Flow 10.0. TSMC also selected the Calibre physical verification platform for its Integrated Sign-Off Flow. In October, the company signed a definitive agreement to acquire Valor Computerized Systems Ltd., a world leader in printed circuit board design manufacturing software solutions.

In August, the company closed its acquisition of LogicVision Inc., a market leader in built-in-self-test silicon test solutions. In November, the company unveiled its strategy for silicon test and yield analysis solutions incorporating both the company’s existing product line and LogicVision’s technologies under the Tessent brand.

Mentor expects its market to recover quickly as leading indicators such as consulting and training, distribution sales, and the number of new customers, continued the sequential increase from the bottom in Q1.

In Q410, the company expects revenue of about $230 million, non-GAAP earnings per share of about $0.28. Cash flow is expected to be approximately $15 million in Q410.

Magma Design Automation, Inc. (NASDAQ: LAVA) announced its Q210 results on December 3. Magma reported revenue of $29.7 million for Q210, compared to $36.5 million in Q209 and $28.8 million in Q110. In Q210, the percentage of revenue from backlog-related transactions was greater than 90%. Operating income in Q210 was $3.1 million or 11% of revenue, compared to Q110 operating income of $3 million, or 10% of revenue. Non-GAAP net income was $1.7 million or $0.03 per share in Q210, compared to a non-GAAP net loss of ($6.3) million, or ($0.14) per share in Q209. The company generated $3.9 million in cash in Q210.

The company experienced traction in its core Talus platform as well as with its newer products. In digital implementation, Talus 1.1’s competitive advantages continue to drive adoption. Wintegra selected Talus Vortex, Talus Design, and Talus Power Pro as it incorporated more functionality in a single chip while reducing power consumption, area, and cost. Intrinsity implemented the world’s fastest RM cortex A8 processor core using Talus Vortex and Talus Power Pro. The core was implemented in Samsung’s 45-nanometer low power, low leakage process technology, and it’s being used in the development of standard mobile system-on-chip (SOC) products.

In the analog segment, the company made good progress. In simulation, continues to grow. Magma added more than 10 new customers in Q210 and continues to gain share in the memory and FPGA markets consistently delivering accurate results with three to four times better performance than competitors’ products. The company continues to gain momentum as several customers recently placed additional orders. Magma added five new top mix signal customers, four of which also adopted the Titan AEX analog design acceleration.

During the quarter, Hynix announced that it is standardizing on FineSim for circuit simulation, Toshiba adopted Quartz for physical verification of advanced flash memory designs, and Exar selected Titan ADX to accelerate analog design. Three of the world’s top 10 semiconductor companies became Quartz VOC LVS users in Q210. These are big wins that validate the company’s leadership position in the EDA market. This further demonstrates the company’s strengths in product innovation.

Magma launched RTL-to-GDSII reference flow for SoC designs that incorporate POWERVR SGX graphics accelerator cores from Imagination Technologies, a leader in SoC intellectual property. Based on Talus 1.1, the design implementation system leverages the recently enhanced optimization capabilities of the Talus Design 1.1 synthesis tool and the Talus Core technology that performs timing optimization concurrently during routing. The Talus Flow Manager also provides an out-of-the-box reference flow that engineers can quickly and easily tune for their specific SGX-based designs.

In Q310, the company expects total revenue in the range of $29.5 million to $30.0 million and non-GAAP EPS to be in the range of $0.02 to $0.03. Non-GAAP operating margin is expected to be in the range of 10% to 11%.

The EDA industry will not see pickup in revenues till we move well into 2010 and only when the customers are certain that their markets have recovered will they allocate significant amounts to R&D and technological upgrades, leading to meaningful growth for the industry. For the moment, stabilization is all we can hope for.

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Hello Sramana,

Based on what I hear from the top semiconductor companies, EDA budgets will be flat at best in 2010 and in most cases will decline 10-20%.

The EDA pickup may not be until 2011, if at all, so expect even more consolidation.

D.A.N

Daniel Nenni Saturday, December 19, 2009 at 6:34 PM PT

there will still be only 3 players if at all in 2010
middle. Cadence has merely delayed its demise.
2 notes each over 100 million dollars are due
in 2010 and 2012. All Cadence employees
can hope for is their $20 options will be
underwater for all eternity. they have no courage
to come out of that miserable organization.

having a bunch of outdated managers and acquiring half
*%$&ed immature technologies has not gotten
CDNS anything. Cadence is still too
top heavy and its CMO keeps making unrelated
statements about social media. Cadence
managers are totally non technical and they
are just trying to collect their paychecks
till it stops coming.

LAVA is no better – most of the better staff who
had other options have already left Magma.
Rajiv and his cronies still trying to milk whatever
is left of his organization.

Most senior EDA R & D guys have made successful
transitions to other industry .
What is left
is stupid individuals who are reluctant to change.
Ted Vucurevich is at an a oil and gas org. so are other employees who have
exited EDA already.

Cadence and Magma will both die. Under Aart
SNPS will rule and come out as the better
company. Just don’t hire Rajiv or any of
the other Cadence managers to head your next
company.

krylov Tuesday, December 22, 2009 at 2:33 AM PT

Hi Sramana,

Do you expect more consolidation as part of this “stabilization”?

rjt Sunday, December 27, 2009 at 10:04 PM PT

I do. As I have said many times before, EDA is not a large enough market to support 4 major companies.

Sramana Mitra Monday, December 28, 2009 at 12:25 PM PT