EDA Industry Precarious

There is some consolidation happening in the failing EDA industry. It hasn’t reached the proportions that I would like to see, but at least it’s a start. While the biggest merger in the related industry was that of NEC and Renaissance, the EDA industry itself was not left untouched. Synopsys announced a $22 million cash acquisition of the Analog Business Group of MIPS Technologies, and Mentor signed a definitive agreement to acquire LogicVision. Here is a quick analysis of these companies’ recently announced quarterly results.

Synopsys’ (NASDAQ:SNPS) second quarter results were, as usual, better than the market’s expectations. Revenues of $336.8 million grew 4% over the year and just managed to beat the Street’s outlook of $336 million. EPS of $0.45 was also better than the Street’s expectations of $0.40.

Going forward, Synopsys projects revenues of $342-$350 million in Q3 with an EPS of $0.40-$0.42. For the full year, they expect revenues of $1.35-$1.38 billion with EPS of $1.62-$1.72.

The company is presently in a legal battle with the IRS and is facing a potential $50 million payout should they lose their case. However, since the current payment would be fully offset by any tax liability in the future, they don’t see any material impact.

Synopsys upheld their commitment to strategic investments and product upgrades. With customers still focusing on ROI for investments, their new product launches such as Custom Sim for unified analog simulation, the new open design system called Lynx, and deployment of multi-core technology in DCS functional simulator are expected to help improve productivity and reduce design costs, thus giving the company more market share.

Continuing their acquisition spree from last quarter, this quarter they announced the acquisition of the Analog group of MIPS. Through the acquisition Synopsys is looking to add a new analog IP product line, including data converters, audio codecs and video, and complement their existing portfolio of interface IP with HDMI products.

While the stock continued to perform better than most of its peers, it is not immune to the industry fallout. The stock is currently trading at $19.82, taking the company’s market capitalization to $2.86 billion.

Synopsys’ biggest rival, Cadence (NASDAQ:CDNS), is still struggling in the poor economy. Their recently announced Q1 results were rather unexciting. Revenues of $206 million fell 24% from the $271 million reported a year ago. Management attributed the fall to both the weak economy and seasonality. They suffered a loss of $0.10 per share during the quarter.

By segment, product revenues contributed $87 million, maintenance revenues brought in $90 million, and services revenues $29 million. By geography, 42% of the quarter’s revenues came from the Americas, 24% from EMEA, 19% from Japan, and 15% from Asia.

During the year, Cadence is focusing on execution, improving productivity, and investing in their core business to grow revenues. For instance, they are investing in Virtuoso, the backbone of custom design flows in the electronic industry, to further advance their leadership in verification and custom design. Recently, they launched Incisive Palladium Dynamic Power Analysis or DPA in the system design and verification space. DPA received the EDN Innovation Award in system design.

They are targeting Q2 revenues of $205-$215 million with a loss per share of $0.09-$0.07. For the entire fiscal, they are estimating revenues of $830-$870 million with a loss per share of $0.33-$0.21.

Cadence again ended the quarter with over $500 million in cash, part of which it should be using towards investment in consolidation opportunities. Though last year they had acquired smaller pieces in the industry, and even gone for the big pie of wanting to acquire Mentor, they seemed to have cooled off for now. Magma should be their next target.

The stock is currently trading at $5.71 with a market capitalization of $1.50 billion.

Meanwhile, Magma’s (NASDAQ:LAVA) Q4 revenues of $34.1 million are 38% lower than the previous year’s $55 million. For the year, revenues fell 31% to $147 million. Magma attributed the significant decline to the poor economy, which forced delayed purchase decisions and shorter duration of renewal of contracts.

For the quarter they earned $0.07 per share compared to a loss of $0.09 a year ago. Fiscal 2009 ended with a loss of $0.15 per share compared to the EPS of $0.58 a year ago.

Going forward, Magma projects much lower Q1 revenues of $27.5-$28.5 million with EPS of $0.00-$0.01. For the fiscal 2010, they are expecting revenues in the range of $120-$125 million with EPS of $0.01-$0.03.

During the quarter, they expanded their Talus product by launching a new version which they claim gives them the “best technology edge ever in design implementation”. Talus has been created to target advanced process nodes and is presently ready for 28 nanometer designs. Magma expects this segment to grow significantly as demand increases for applications such as notebooks, handhelds, consumer electronics and embedded applications.

Their other major technological release came in the form of the new release of Quartz DRC/LVS, which the company says delivers “better performance than any physical verification product up to 3-10x faster than competitive products”.

Magma might be hitting all the right notes in terms of technical advancements, but it is still too small a player to be able to make it big in the contracting EDA industry. With the company having finally reconciled to the thought of being taken over, I am hoping Cadence’s Lip-Bu Tan will make a move soon.

The stock is currently trading at severely low levels of $1.35, taking its market cap to $62 million.

Mentor’s (NASDAQ:MENT) results were no better than the rest. Revenues of $193.8 million grew 8% over the year. The market was looking for revenues of $201.8 million. EPS of $0.09 was marginally higher than the Street’s expected $0.07.

Mentor has figured out the importance of consolidation for growth and recently announced a merger agreement with LogicVision for $13 million in stock. LogicVision’s proprietary built-in-self-test (BIST) technologies focus on achieving high-quality silicon manufacturing tests while reducing test costs for complex system-on-chip devices. Its chief product, the Dragonfly Test Platform, embeds the BIST functionality into semiconductors at the design stage. Mentor hopes to add this functionality to their own design tools. With test costs becoming an expensive and unaffordable piece of bringing complex chips to market, the trend is squarely to move to a BIST model, instead of an extensive phase of testing post-manufacturing, using expensive test equipment. LogicVision has as customers Qualcomm, Broadcomm, and several other players in the convergence device chip industry. That’s a customer base that Mentor is after.

Mentor is projecting revenues of nearly $165 million with a loss of $0.10 per share. Analysts were expecting revenues of $191 million with EPS of $0.03. Their future does look quite gloomy, given that the company said there would be no “significant” contract renewals in the coming quarter.

Mentor’s stock is trading at $5.48, taking its market capitalization to $515 million.

Most EDA players believe the market will pick up as companies realize the need to invest in their future now so as to emerge as leaders when the economy picks up again. That may be happening to some extent, but I still would not count on any significant rebound. The EDA industry looks very precarious, and other than Synopsys, the other 3 major players look wobbly at best. If they continue to resist the inevitable consolidation that I have been calling for over the last 3 years, the level of misery in store is just sordid.