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Electronic Design Automation (EDA): Failure of Capitalism?

Posted on Monday, Aug 12th 2013

EDA is a funny industry. It takes enormous intellectual horsepower to build software that can help design the chips that power today’s devices. It creates tremendous value. And yet, that value doesn’t translate into wealth these days.

Failure of capitalism? Let’s examine.

According to recent news by the EE Times, total EDA revenues grew 6% last year during the third quarter of the year to $1.11 billion. Within the industry, the computer-aided engineering market saw the highest growth at 12% to $632.5 million. Integrated circuit (IC) physical design and verification revenues grew a modest 3% to $326.7 million.

By region, while the Americas remained the leaders at a $715.7 million share, growth was modest at a mere 1% over the year. Asia-Pacific markets continue to report strong growth of 22% to $392.8 million and EMEA markets grew 4% to $267.5 million. Japan was the only market to report a decline of 5% over the year to $243.9 million. The growing demand of mobile devices like smartphones and tablets has helped drive the anemic growth in the EDA industry. For a long time, I have been a big promoter of wanting the EDA industry to consolidate. Last year Synopsys took the lead when it acquired Magma. This has helped reduce the price-war significantly.

Synopsys’s Financials
Synopsys’s (Nasdaq:SNPS) ended the second quarter with revenues up 15% over the year to $499.3 million. It ended the quarter with an EPS of $0.59. The market was looking for revenues of $496.5 million with EPS of $0.45.

By segment, license revenues grew 14% to $438.3 million and maintenance and service revenues grew 30% to $60.9 million.

For the current quarter, Synopsys expects revenues of $475 million–$485 million with EPS of $0.53-$0.55. The quarter’s outlook fell short of the Street’s projections of revenues of $496 million, with EPS of $0.57. Synopsys expects to end the year with revenues of $1.955 billion–$1.975 billion and EPS of $2.37–$2.42 compared with the Street’s expectations of revenues of $1.97 billion and EPS of $2.40.

Synopsys’s Acquisitions
Over the past year, Synopsys has made several acquisitions. After reporting the big acquisition of Magma, it bought SpringSoft and Ciranova to improve its IC offerings. Taiwan-based SpringSoft was a global supplier of specialized IC design software. Synopsys acquired SpringSoft for an estimated $417 million. The acquisition has helped it to expand its presence in Taiwan. Synopsys is hopeful of leveraging SpringSoft’s technology development capabilities to accelerate the delivery of a unified, powerful system-on-chip (SoC) debug platform, and offer increased automation in custom implementation tools to their customers.

Ciranova was a privately held player that helped improve productivity in custom IC design by reducing the resources needed to develop transistor-level layout on advanced nodes. Through the acquisition, Synopsys will be able to offer accelerated advancements in their custom IC design solutions and help design teams manage the complexity of nanometer designs. Terms of the deal were not disclosed.

Synopsys’ stock is trading at $37.68 with a market capitalization of $5.79 billion. Last week, it touched a 52-week high of $38.10.

Cadence’s Financials
Meanwhile, competitor Cadence (Nasdaq: CDNS) reported Q2 revenues of $362 million compared with previous year’s revenues of $326 million. EPS grew 10% over the year to $0.21. The market was looking for revenues of $359.5 million with EPS of $0.20.

For the current quarter, Cadence expects revenues of $360-$370 million with an EPS of $0.19-$0.21.They expect to end the year with revenues of $1.445-$1.465 billion and EPS of $0.80-$0.89. The Street was projecting the year’s revenues at $1.46 billion with earnings of $0.88 per share.

Cadence’s Acquisitions
Like Synopsys, Cadence has also been building their portfolio through acquisitions. Earlier this year, they announced the acquisition of Cosmic Circuits, Bangalore, India-based provider of semiconductor IPs. Cosmic Circuits has more than 300 IPs for mobile devices and is known for their offerings for advanced process nodes including 40nm and 28nm and extensive silicon-proven analog and mixed signal portfolio. Last year more than 50 million ICs were shipped with their IPs. The acquisition will help Cadence expand their presence within the mobile, datacenter and cloud segments of the industry. Terms of the deal were not disclosed.

To continue to strengthen their mobile footprint, they also bought chip design firm, Tensilica, for an estimated $380 million. Tensilica is focused on the smartphone and tablet segment through their configurable dataplane processing units optimized for embedded data and signal processing.  Through the acquisition, Cadence will be able to provide designers with an improved system-on-a-chip solution to help accelerate the development of newer products.

As part of their IP expansion plan, Cadence announced the acquisition of Evatronix, a provider of USB, MIPI, display and storage controller IP with a base of over 600 customers. Poland based Evatronix is known for their silicon-proven IP portfolio that includes certified USB 2.0/3.0, Display, MIPI, and storage controllers that will complement Cadence’s existing offerings and help accelerate their IP roadmaps.

The market is pleased with Cadence’s expansion plans. Their stock is trading at $14.78 with a market capitalization of $4.20 billion. It touched a year high of $15.96 last month.

Mentor’s Financials
Mentor (Nasdaq: MENT) ended their first quarter with revenues of $226 million and earnings of $0.10 per share. They exceeded the market projections of revenues of $225 million and EPS of $0.05 for the quarter.

For the current quarter, Mentor projected revenues of $245 million with EPS of $0.17. They expect to end the year with revenues of $1.155 billion with EPS of $1.55. The market was looking for revenues of $240 million with EPS of $0.14 for the quarter.

Mentor’s Acquisitions
Mentor is not to be left behind in the global EDA acquisition spree. Earlier this quarter, they announced the acquisition of the Photomask and Lithography related software products business of SoftJin Technologies. Bangalore-based SoftJin Technologies provides customised software and design solutions to help with the semiconductor design and manufacturing. Through the acquisition, Mentor will be able to offer improved solutions to their customers to help simplify design challenges for the engineers.

Mentor’s stock is trading at $21.13 with a market capitalization of $2.38 billion. It touched a year high of $21.25 earlier this month.

Atrenta: The Largest Private Player
While the industry is dominated by these three major EDA players, there are several other smaller companies that are helping drive growth within the industry. One such company is San Jose based Atrenta. Atrenta is best known for their SpyGlass Predictive Analysis software platform that helps improve design efficiency.

SpyGlass is able to offer early-stage insight into SoC designs to help with heterogeneous IP import and quality validation, efficient chip assembly, detecting structural, coding and consistency problems as early as possible while ensuring a more accurate timing and power estimation. SpyGlass has been adopted by more than 200 companies and design engineers worldwide and has names like Fujitsu, IBM and LG as their customers.

Atrenta’s latest financials are not known. In 2010, they were operating at annual run rate of over $45 million. Till date, the company has received $33 million in venture funding from Hercules Technology Growth Capital, Samsung Ventures, Venrock, TL Ventures, Smart Technology Ventures, Investcorp Gulf Investments and Finaventures. I said earlier that Atrenta is a good acquisition target for the larger EDA players, although murmurs of acquisition offers from Cadence have so far evidenced no real outcome. At DAC this year, there were discussions of Atrenta’s IPO. However, I am not convinced that a small independent EDA player will find the IPO market terribly welcoming. It may cause more headache than is worthwhile.

Oasys Design Systems: Generating Excitement
Meanwhile, Oasys is a privately funded EDA software supplier known for their platform RealTime Synthesis which helps in design and implementation of ICs with more than 20 million gates. The company was founded in 2004 by alumni from Ambit and Cadence. The platform optimizes at a higher level of abstraction to help provide up to ten times faster turnaround times and helps build the capacity to synthesize the top level of the largest SoC’s, ASICs or IP blocks.

Their latest product includes RealTime Explorer that reduces time for delivery by as much as 2 months. The Explorer delivers SoC/ASIC front end design teams the ability to identify and resolve timing and routability issues before RTL hand-off to the back-end groups for synthesis and physical design implementation. Oasys’s products have received strong market approval.

Oasys does not disclose financials or funding details. But, earlier last week, the company received strong backing from Intel, Xilinx and former Cadence CEO, Joe Costello.

State of the Industry

It appears that the overall state of the industry and its top players has improved somewhat over the last couple of years. However, for its critical position in the semiconductor value chain, vendors remain poorly compensated. Innovation is necessary for the industry, but extremely expensive. At one point in its history, startups abounded, with an active M&A market. Nowadays, the volume of startup activity, as well as M&A have gone down. Risk capital has fled from the industry. That puts the onus of innovation on the larger players who are generally not very good at innovation.

I have often observed that Capitalism, as we know it today, is dominated by speculators, and the economic system we live in doesn’t necessarily have a great infrastructure to encourage and support more fundamental value creation.

As such, the EDA industry struggles, despite its unambiguous role in value creation.

Meanwhile, risk capital chases the 35th photo-sharing startup, lured by speculative billion-dollar exits like Tumblr, Instagram and such.

Depressing? I would say so.

Failure of capitalism? To an extent, yes.

Feel free to weigh in …

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