EDA Industry Update

All four major EDA players recently announced their results which, as expected, were not too encouraging. In this piece, we will provide an analysis of the industry’s recommended moves for the immediate future.

Synopsys (NASDAQ:SNPS) continued to perform better than the rest of the industry. With Q1 revenues of $339.8 million, they beat the market’s expectations of $334 million. EPS of $0.50 was also significantly higher than the market’s expected $0.41. Over the year, revenues grew 8% and EPS 14%.

In the current economy, customers are de-risking their businesses and are looking for vendors with financial stability. With Synopsys managing to boast $842 million in cash equivalents on their balance sheet, they definitely come out above peers in demonstrating such stability. The company also has a stable management team, and has not been involved in any confusing deals.

During the quarter they acquired the CHIPit business unit of ProDesign, a provider of high-speed application-specific integrated circuits (ASIC) and system-on-chip (SoC) verification systems. CHIPit is a line of automated ASIC prototyping solutions that provide hardware-assisted verification throughout the SoC and ASIC project life cycles. Synopsys is looking to integrate CHIPit’s products into Synopsys’ Synplicity Business Group to expand their presence in the prototyping segment.

During the coming year, they are looking at two strategic investments—custom design and system-level solutions. Synopsys expects to roll out their new analog/mixed signal design solution, Custom Designer, by this spring.

At the system level, they are addressing accelerating demand for more effective yet powerful hardware-based verification solutions by introducing an expanded rapid prototyping platform, Confirma, which will improve the economics of both embedded software development and system validation.

Synopsys’ innovations and the cost control measures already implemented are giving them confidence in their ability to achieve Q2 revenues in of $332-$340 million with EPS of $0.39-$0.41. For the year, they are looking at revenues of $1.37-$1.40 billion with EPS of $1.60-$1.72.

The stock is trading at $20.51 with a market capitalization of $2.94 billion. 

After having reached its peak of $23.75 in April last year, Cadence (NASDAQ:CDNS) has only been tumbling. Its stock is currently trading at $4.26 with a market capitalization of just over a $1.10 billion.

Cadence announced Q4 revenues of $227.3 million, a nearly 50% decline from the $458 million in revenues earned a year ago. The market was looking for revenues of $218.2 million. Loss per share of $0.04 was significantly lower than the $0.46 EPS earned a year ago. The market was looking for a loss of $0.06 per share. Cadence had to record a loss of $1.36 billion in the quarter related to impairment of goodwill.

For the year, revenues of $1.04 billion were 36% below the previous year’s $1.6 billion. Loss of $0.04 per share was also significantly lower than previous year’s EPS of $1.35.

By region, 45% of Q4 revenues were from North America, 22% from Europe, 18% from Japan and 15% from Asia.

For the coming quarter, they are expecting revenues of $200-$210 million with a loss of $0.13-$0.11 per share. For the full year 2009, they expect revenues in the range of $830-$870 million with a loss of $0.36-$0.24 per share.

The company ended the year with a cash balance of $568 million. Cadence has been an active acquirer in the past. Last year they made a failed bid for Mentor Graphics. Cadence should now take advantage of the current low valuations and get back into the acquisition game. I wrote earlier how Magma (NASDAQ:LAVA) could be one company to acquire. It looks even more so, at the current valuations.

Magma’s Q3 revenues of $30.7 million were higher than the expected $28.5 million and declined 45% over the year. Loss of $0.09 per share also managed to exceed the Street’s expectations of a loss of $0.15 but was a significant drop from the previous year’s EPS of $0.16.

Magma is expecting to close the year with revenues of $146-$147 million with non-GAAP operating margin of a loss of 6% to a loss of 4%. Non-GAAP EPS is expected to be a loss in the range of $0.21 to $0.19 per share compared to the previous guidance of a loss in the range of $0.29 to $0.25. To bring down their own cost structure, Magma cut 17% of their workforce.

The stock price reached record lows of $0.90, taking its market cap to an unbelievable low of $42 million. This makes me reassert that the company needs to merge to survive, and this is an excellent opportunity for Lip-Bu Tan to make his first significant mark on the industry.

I sat down with Magma’s CEO Rajeev Madhavan recently, and concluded that Rajeev has reconciled with the fact that he needs to get acquired soon, and that Cadence would be his preferred new home for Magma. Rajeev says that he has kept Magma focused on R&D, and is the only company among the EDA majors to be able to do innovation internally. I agree with this claim, and it is true that Magma has a very strong presence in the convergence device segment with market leaders like Qualcomm, Broadcom and TI as key customers. Cadence would benefit from the capability of internal R&D and also the progress that Magma has made from a product point of view in the past year.

Finally, Mentor (NASDAQ:MENT) also continued to be bogged down by the poor economy. The company missed their earnings outlook for the current quarter. Revenues of $243 million did meet the market’s expectations but were down 15% over the year. EPS of $0.35 fell by nearly 51% over the year from the $0.72 attained a year ago.

By segment, product revenue contributed $158 million, maintenance revenue was $77 million, and services revenue was $8 million for the quarter. Product revenues were down 22% over the year, while support and services grew 2%. Revenue mix by geography was 40% contribution from North America, 35% from Europe, 15% from the Pacific Rim, and 10% from Japan. There was a significant decrease in Japanese bookings from the previous year, as Q4 of last year including bookings that have more than doubled with large renewals.

For the year, revenues and EPS remained flat at $789 million and $0.20 respectively.

Like its peers, Mentor is looking at cost rationalization through job cuts, hiring freezes, salary increment freezes and travel restrictions. They are looking to cut expenses to the tune of $35 million per year through these measures.

In January, Mentor announced it completed the acquisition of Agility Design Solutions’s C Synthesis Suite, which it bought to acquire a position in electronic system level (ESL) design with a broad ESL tool suite on the market.

Mentor’s stock is trading at $4.50, taking its market capitalization to $423 million.

While each player might continue to see opportunities in the current scenario, I don’t think that the industry’s woes are going to end soon. With the market getting squashed, it is essential that players consolidate, and the most logical and viable next step is for Cadence to pick up Magma to bring down the number of providers from four to three. This is Lip-Bu Tan’s first action item. If he does nothing else but accomplish this, it would be a step in the right direction.

After that, I still think that the long term interest of the EDA industry would be served by bringing back Joe Costello to run Cadence.

Once Magma is out of the picture, it will be Mentor’s turn to be the company dying on the vine. Whichever way we look at it, EDA needs to become a two-horse race as soon as possible, for vendors to regain some negotiating power over pricing, and address one of the core dysfunctions of the sector.

Another critical dysfunction that Cadence has led the sector into is the compensation structure, which also can be addressed now, because of the utter chaos in the market. Executives get paid far too much, especially on the sales side, leaving little room in the P&L to address R&D, which is critical to the industry’s future.