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Synopsys Likely To Roll-Up The EDA Sector

Posted on Thursday, Mar 18th 2010

Analysts are projecting positive trends for the electronics industry in the current year, with estimates ranging from 7% to 9% annual growth. Also, investment in R&D is expected to return after slowing last year. The increased demand is expected to drive growth in the semiconductor industry.

Conservative estimates predict 2010 to be a year of stabilization for the EDA space followed by growth in 2011, and 2010 is expected to be a year of industry consolidation. The largest player, Synopsys (NASDAQ:SNPS), is already acquiring smaller players in the market and will continue to do so. Cadence is trading at half of Synopsys’ market cap, which makes their acquisition currency weaker. Let’s take a look at the last quarter’s happenings.

Synopsys’s Q1 revenues of $330.2 million beat the market’s target of $328.8 million. EPS of $0.41 was also higher than the expected $0.39.

As the economy improves, Synopsys is confident that it will be able to seize growth opportunities in the low-power management, smart grid, automotive, and above all mobility and Internet connectivity segments. To cater to the growing demand, the company is focusing on expanding the total available market (TAM) outside of the core electronic design automation (EDA) market by adding new capabilities in the automotive and consumer segments. Synopsys is adding solutions and products that will help to augment the ability to model and verify complex systems.

Synopsys recently announced the acquisition of VaST Systems and CoWare to extend its virtual prototyping solutions and portfolio of design and verification products into the automotive and consumer application space. VaST’s processor sub-system models help to improve productivity and deliver higher-quality, better-tested products by accelerating the virtualization of electronic systems, thus enabling software development nine to twelve months before the silicon is available. VaST raised about $35 million in venture capital and has revenue in the $10 million-$15 million range.

CoWare is a supplier of software and services for electronic systems level (ESL) design, and by acquiring it, Synopsys is hoping to expand its own portfolio of design and verification products within the wireless, consumer, and automotive design segments. Synopsys also hopes that the acquisition will help it to develop more relationships in Japan. CoWare had raised about $30 million in financing, but had only about $10 million-$15 million in revenue, and for a long time has been flirting with a cash exhaustion scenario.

With both Coware and VaST, I guess, options were running out and investors have been impatient for a while, so Synopsys must have picked these companies up for little money, my guess is between $20million-$30 million each.

A likely future acquisition for Synopsys is Atrenta, a $45 million a year company that focuses on early design closure, RTL analysis, and optimization. Valuations these days are low, and it is a buyer’s market that Synopsys will likely continue to make very good use of.

Within the systems area, Synopsys is seeing growth in almost all titles, ranging from analog IP to connectivity standards such as HDMI. The company recently launched the new USB 3.0 standard, which it claims to be more than ten times faster than the earlier versions and capable of transmitting live high-definition video.

The company expects revenues of $331 million-$339 million with EPS of $0.38-$0.40, beating the Street’s expectations of EPS of $0.38 on revenues of $328.9 million. For 2010, Synopsys expects revenues of $1.33 billion-$1.35 billion with EPS of $1.52-$1.62 compared with the Street’s view of revenues of $1.34 billion and EPS of $1.55.

Last November the stock reached a 52-week high of $23.74, and it is currently trading at $22.62 with a market capitalization of $3.3 billion.

Meanwhile, Cadence (NASDAQ:CDNS) reported Q4 results that missed analysts’ revenue expectations, but the company managed to exceed earnings expectations through better cost management. Revenues of $220.3 million fell from the previous year’s $227.3 million and were marginally shy of the market’s target of $220.7 million. EPS of $0.06 was significantly higher than previous year’s loss of $0.04 per share and beat the market’s target EPS of $0.03.

For the year, Cadence reported revenues of $853 million with a loss of $0.16 per share compared with a loss of $0.04 per share suffered a year ago. Revenues for the previous year were $1.04 billion.

The company projects 2010 revenues of $865 million-$900 million with EPS of $0.05-$0.15. Q1 revenues are targeted to be $210 million-$220 million with EPS of $0.00-$0.02. The market was expecting annual revenues of $900.6 million with EPS of $0.11. The Street was looking for a break-even first quarter with revenues of $213.9 million.

Cadence is continuing to expand and upgrade its product portfolio in the design and verification space. It recently released Encounter Digital Implementation (EDI) System 9.1, which is an integrated digital design solution. The solution delivers implementation and verification environment for the development of large-scale and complex system-on-chips (SoCs) and will help to improve designer productivity. Through the solution, Cadence will be able to offer design for manufacturing analysis capabilities in process nodes of 32nm and 28nm and will offer capability to design highly complex SoCs with hundreds of millions of gates, including IP elements and embedded processors.

The stock is trading at $6.32 with a market capitalization of $1.7 billion. In October last year, it reached a 52-week high of $8.18.

Mentor (NASDAQ:MENT) managed to exceed the market’s expectations for the previous quarter, but its projections for the current quarter fell short of the Street’s. Q4 revenues of $237.1 million fell 2% over the year and exceeded the market’s expected $230.1 million. EPS of $0.30 was also higher than the projected $0.28.

For the year, the company reported revenue growth of 2% to $802.7 million with EPS of $0.47.

During the quarter, Mentor extended its CatapultC Synthesis product to support the SystemC design language. The extension will allow designers a wider option of choices for system-level design. It also launched the Tessent YieldInsight product that will allow customers to use IC production fault data to help track and correct faults.

The company also announced the acquisition of the Virtual Garage product line from Freescale, a U.S. technology company. The Virtual Garage software suite addresses “the trade-off between value-of-variety and cost-of-complexity caused by optional electronic content; and provision of vehicle-specific design data, such as dynamic electrical schematics” within the design and management of automotive electrical and electronic systems. Mentor believes that the software suite will help to expand its participation along the value chain by letting it into product planning and online service documentation. Both of these functions are critical to their delivering strong software support.

Mentor projects Q1 revenues of $180 million with EPS of breakeven to a loss of $0.01 per share. The market was expecting revenues of $187.9 million with EPS of $0.04. For the year, Mentor projects revenues of $842.8 million compared with the Street’s target of $836.2 million.

Mentor’s stock is trading at $8.28, taking its market capitalization to $819 million. The stock touched a 52-week high of $9.73 in September of last year and was trading at year-low levels of $4.04 almost a year ago.

Magma (NASDAQ:LAVA) too managed to outshine expectations. Q3 revenues of $31 million exceeded the company’s earlier projections of $29.5 million-$30 million. A year ago, Magma reported revenues of $30.7 million. EPS of $0.04 was also higher than the projected $0.02-$0.03 range and exceeded previous year’s loss of $0.09 per share.

Continuing with its new product launches, Magma recently launched Tekton, a new timing analysis platform that offers higher capacity and faster runtimes than traditional tools while maintaining accuracy. Tekton runs multi-scenario analysis on low-cost hardware without requiring a battalion of servers and software licenses, thus addressing complex sign-off challenges cost effectively.

The company also released SiliconSmart ACE, a next-generation intellectual property characterization and modeling tool that leverages accelerated circuit engine (ACE) technology and embeds Magma’s FineSim SPICE simulator. The solution is targeted for design at 28nm and smaller process nodes.

The company projects revenues of $32.5 million-$33 million for Q4 with a loss of $0.08-$0.09 per share.

Its stock is currently trading at $2.62 with a market cap to $132 million. Earlier this year, it had touched a 52-week high of $2.80.

PDF Solutions (NASDAQ:PDFS) reported 7% growth in Q4 revenues to $14.8 million. The company ended the year with revenues of $48.4 million, down 35% from the $74.0 million earned a year ago. Net loss for the quarter was $0.03 per share, compared to a net loss of $2.92 per share a year ago. For the year, PDF reported net loss of $0.66 per share, compared with a loss of $3.48 share a year ago.

While neither Magma nor PDF Solutions are acquiring companies, they are partnering with each other. Recently, PDF Solutions selected Magma’s Titan Mixed-Signal Design Platform to shorten the design process for delivering first-time-right characterization vehicle test chips. PDF Solutions will also use Titan to develop digital and analog library cells with predictable silicon behavior based on PDF Solutions’ proprietary regular layout patterning solution.

The stock is trading at $4.65 with a market capitalization of $124 million. Earlier this month, it touched a 52-week high of $4.92.

The current year will be a year of stabilization and consolidation for the industry. While Synopsys has already started to acquire smaller players, what is really needed is for the bigger players to consolidate, but none of them seems confident enough to make any move. No wonder Synopsys remains king of this hill.

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I spent 15 years in EDA. 2009 finally saw a major sign with the success of one EDA golden boy, who sold his company for $170M, two years after having started it on his own.

I’m talking about Aaron Patzer, former Nascentric engineer. The company is called Mint.com. Maybe you should interview him for his views on where EDA is headed.

Alain Raynaud Thursday, March 25, 2010 at 3:01 AM PT

Alain,

Lot of people from EDA have made their fortunes in other industries. Tony Zingale ran Clarify and made a great deal of money on that deal. But the opportunities for making fortunes WITHIN EDA seem to have dwindled.

Sramana Mitra Thursday, March 25, 2010 at 9:51 AM PT

Sramana, I wodul advise you double check (try other sources) revenues and valuations of VaST and CoWare…

Lauro Rizzatti Thursday, March 25, 2010 at 11:52 AM PT

I think that you do a nice job, Sramana, of summarizing the current state of EDA. I like your thoughts on how Synopsys is embracing their leadership role and deploying their growth strategy, as well as how the other EDA leaders are driving their companies toward the future. I have a bit of a different perspective. My response seemed a bit long, so I put it in our Dassault Systemes “3D Perspectives” blog. https://perspectives.3ds.com. I think it’s interesting to look at EDA from the PoV of it’s target market – Semiconductor. My thought is that Semiconductor has 3 distinct personalities whose focus is split between technology, bottom-line and top-line. The vendors that can embrace all three of these personalities will be able to drive EDA to the next level. Let me know what you think.

Rick Stanton Wednesday, March 31, 2010 at 9:35 AM PT

Rick,

The concern I have in response to what you are saying about the “manufacturing” personality of the semiconductor industry is that EDA is becoming a non-profit sector, which is not sustainable given how much R&D is needed to stay in the cutting edge of this business.

I am certain that consolidation is essential, but even beyond that, Synopsys needs to figure out how to extract more value from its customers – be it through IP licensing, be it through royalty.

Sramana Mitra Wednesday, March 31, 2010 at 4:15 PM PT

Good point, Sramana. I think you take the traditional stance on the future of EDA. It’s accepted that EDA has to change in order to continue. Most believe that means that the technology needs to change. And EDA companies seem to be taking that to heart by trying to diversify their offers. The moves Synopsys has made in the past couple of years bear that out. But I believe that the business model defining EDA companies as semiconductor product design tool vendors will also need to change. You point that out with the push into multiple domains and extending into IP licensing and royalties. I like to look at consortia such as Common Platform on how semiconductor design chain companies (EDA, IC, Fabs) are working together to get more out of the model. The different view that I look to in the more distant future extends that out to the end-market application companies holding becoming stronger stakeholders. Let’s go back to those old HP commercials. “What if…”. I like to imagine the “what if” that goes with EDA working more closely with product design tools on the future of medical devices (like BioMEMS), automotive or consumer devices.

Rick Stanton Wednesday, March 31, 2010 at 5:43 PM PT

TAMs for those kinds of opportunities are too small. I have looked at all that at great length.

Sramana Mitra Wednesday, March 31, 2010 at 5:47 PM PT