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EDA: Bring Costello Back?

Posted on Sunday, Dec 7th 2008

EDA stocks were not looking up when the market was good, and they definitely aren’t any better now that economic conditions are bad. It’s time to take another look at the EDA companies.

Not surprisingly though, Synopsys (SNPS) continued to be better than the rest. With Q4 revenues of $353 million, the company recorded annual growth of 12% and sequential growth of 3%. The market was expecting revenues of $350 million.

EPS for the quarter also beat the Street’s expectations of $0.38 and grew 8% over the year. Sequentially EPS was down by a cent.

For the year, revenues of $1.3 billion grew by 8% while the EPS of $1.71 grew by 25%. During the year, Synopsys repurchased 9.6 million shares at a cost of $220 million.

The company expects Q1 revenue of $332-$340 million with EPS of $0.40-$0.42. For the year, they are looking at revenues of $1.38-$1.41 billion with EPS of $1.60-$1.72.

Worsening economic conditions are making customers balance cost and efficiency and thus forcing them to focus more on productivity than on products. Synopsys is well positioned in such times, when customers are consolidating vendors and migrating to technically and financially strong key partners.

Synopsys continued to strengthen their product and productivity offerings with their IC compiler, which was strengthened by a new router delivering 10X faster performance and better-quality results.

The stock slipped to a record low of $13.94 late last month. It has recovered since, and is trading at $16.83. The stock jumped 12% on the results announcement.

A year ago, Mentor had a market cap of $1 billion and was perfect for an LBO, or for a private equity deal. Today, its market cap has fallen to $514 million, making it a very lucrative target. Maybe the company should have accepted Cadence’s offer of $16.00 per share earlier this year, especially because the Mentor management team would have today been running Cadence, had they done so.

Mentor’s bad run continued in the quarter with their announcing Q3 revenues of $185 million, which were  $1 million shy of the previous year’s numbers. For the quarter, they met analysts’ revenue expectations. Loss per share of $0.04 was a cent higher than the loss expected by the market. A year ago, Mentor broke even in the quarter.

Mentor was not spared by the market conditions, as customers are delaying the contract renewal pattern. Mentor gave revenue outlook of $270 million with EPS of $0.55. For the year, they are expecting revenue of $815 million with non-GAAP EPS of about $0.40. For Q109, they gave revenue outlook of $200-$210 million, with non-GAAP EPS of $0.05-$0.10.

Mentor’s stock slipped to a five-year low of $3.40 earlier last month, but has recovered marginally since and is trading at $5.56.

Meanwhile, Magma’s (LAVA) stock price reached a record low of $1.31 last week and is now trading only at $1.50 levels. The drop brings its market cap to an unbelievable low of $67 million, making me wonder if it will, indeed, die on the vine.

Magma announced Q2 revenues of $36.5 million, which exceeded the market’s expectations of $34.6 million, but they reported a substantial 32% reduction over the year and a 20% reduction over the previous quarter. Loss for the quarter came to $0.14 per share against the Street’s expectations of $0.19. The previous year, the company reported EPS of $0.15.

Magma expects Q3 revenues of $28-$29 million with loss per share of $0.17-$0.19. They expect to end the fiscal with revenues of $144-$146 million, with loss per share of $0.29-$0.25.

Given the need to improve productivity on tools, they are focusing on dramatically improving the productivity of Talus and their other key products in digital implementation and design products such as Titan.

Their products and technology might be good, as five of the six chip suppliers for the BlackBerry Bold smartphone are Magma customers and at least three of the chips in the phone were designed with Magma products, but given the economic conditions and the overall EDA industry’s situation, Magma continues to be in deep trouble.

And finally, no analysis of the EDA industry would be complete without comments on Cadence, until recently the largest of the pack, but now looking very shaky, radarless, and without a CEO. There is plenty of speculation in the industry and within the company about who should be the next CEO of Cadence.

Given Cadence’s dismal state, any experienced industry observer would conclude that the company’s board should at least explore bringing back Joe Costello, the charismatic CEO who led Cadence and the EDA industry during the glorious days. I was, therefore, astounded to learn that Cadence’s board has not approached Joe. (This information is as of right before Thanksgiving; I don’t have knowledge of later developments.) I tried to speak with Lip-Bu Tan, one of the longtime Cadence board members, but Tan did not respond.

I am, at this point, just as frustrated with Cadence’s board as I am with that of Yahoo! for making a series of bad decisions. The selection of the next CEO is a critically important decision, and I am anxious to see someone credible, with turnaround experience, as well as with deep, world-class EDA experience come on board. Not many people exist with that profile, since Synopsys, Magma, and Mentor are run by their founders, and Moshe Gavrielov, the only other CEO in the industry, is now running Xilinx. After the Mike Fister fiasco, it would be very risky for the Cadence board to recruit another first-time CEO, or one from outside the industry.

And that brings us to Costello.

EDA needs a serious industry-level re-engineering. The business model is broken, and has been for a while now. I have written about this ad nauseam. Wally Rhines, Aart de Geus and Rajeev Madhawan have all been in the industry for years, and have not displayed the kind of leadership necessary to break the patterns, and have been unable to introduce dramatic change. Joe Costello has spent the last decade outside EDA, and can perhaps bring the freshness needed at this juncture, while still being able to hit the ground running on core EDA matters. Joe will also likely be able to attract a strong set of senior executives into his executive team, something Mike Fister neither attempted, nor succeeded in doing. Ray Bingham attracted a strong team, but did not know how to manage the politics, turning his regime into one remembered for its dysfunctional backstabbing among key executives.

But from what I can tell, the Cadence Board has other ideas. And I am worried that the ideas may not exactly be brilliant, given their track record over the past decade.

This segment is a part in the series : EDA

. Bring Costello Back?

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