Magma Squeezed From Both Sides

I have not been too optimistic about the EDA industry’s growth potential. (Read: Future of EDA and Future of EDA Addendum). Last December, I had also recommended that investors stay away from Magma(LAVA). Their Q4 results, announced last month, were in line with my predictions.

For the quarter, their revenues of $55 million grew by 9.7% over the year but were short of the market’s expectations of $56.7 million. The EPS of $0.17, however, was marginally better than the street’s expectations of $0.16. The EPS grew by 89% over the year.

In the quarter, 82% of revenue was earned from backlog-related transactions, and 18% came from upfront orders completed in the quarter.

For the year, they clocked revenues of $214 million, recording a growth of 20% for the year. Their EPS for the year was $0.58, growing by 163% for the year.

For 2009, the company is projecting revenues to be $225–$230 million, representing growth of 5%-7.5% over the year. EPS is expected to be $0.50–$0.55. Q1 revenue is projected to be $50–$51.5 million with EPS of $0.07-$0.09.

During the quarter, Magma announced the acquisition of Sabio Labs to provide the technology for their new custom design platform, Titan. Titan provides the most automated mixed-signal design flow. They also announced a new extraction product, QuickCap TLx, which makes it possible for analog designers to achieve the narrowest possible error.

But there was bad news as well. The management spoke about having lost some of their key deals during the year. The economic conditions impacted them with some of their customers opting for lesser budgets than Magma’s anticipation.

A small company called ATopTech founded by ex-Avant! veterans of place and route has made in-roads into Magma stronghold Broadcom with a much faster tool that is engineered to take advantage of the newer multi-core processors.

Customers of EDA tools have the bad habit of playing vendors against each other, and with th entry of ATopTech, yet another lever for negotiation becomes available in the hands of the customers. Unfortunately, despite its relatively strong technology vis a vis its larger competitors, Magma has had to battle them on the all-you-can-eat front. Now, with the advent of ATopTech, it is going to have to battle additional competition from a small, technically superior, nimble competitor, that will likely offer aggressive pricing.

Over time, all the “juice” out of EDA will get squeezed out due to the no-floor pricing wars.

The Magma stock reacted to their lower outlook and market performance and fell to a new 52-week low of $6.20. It has risen since, and is trading at $7 levels.

I maintain my position – stay away from the company and the industry.

I also preserve my deep concern that the collapse of EDA as an industry will result in a severe crisis in the semiconductor industry.