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EDA Feeling Icahn’s Touch

Posted on Thursday, Mar 31st 2011

The EDA industry is finally seeing some much-needed action. Carl Icahn, the largest shareholder in Mentor Graphics (NASDAQ:MENT), realizes the importance of consolidation in the industry and believes that Mentor needs to be merged with another player, a move that could cut costs significantly. Several years ago, I had proposed the same thing.

Mentor’s Financials
Meanwhile, Mentor reported strong Q4 earnings. Revenues of $307 million were 15% higher than the previous year’s $237.1 million and exceeded the market’s expectations of $222 million. EPS of $0.43 also grew over the previous year’s $0.39. The company ended the year with revenues of $915 million and EPS of $0.25 compared with previous year’s revenues of $803 million with a loss of $0.23 per share.

For the current quarter, the company projects revenues of $225 million with EPS of $0.15 compared with the market’s expectations of $106.5 million with EPS of $0.04. Mentor expects full-year revenues of $1 billion with EPS of $1.00 compared with the Street’s target revenues of $948.1 million and EPS of $0.82.

Mentor’s Tie-Ups
During the quarter, Mentor tied up with ARM to provide an automated memory test and repair solution for ARM embedded memories and processor cores. It also combined Veloce hardware emulation technology with equipment from Rohde and Schwarz, the largest test and measurement supplier in Europe, to deliver a hardware-accelerated debug platform for wireless communication systems-on-chip. It collaborated with IBM, Global Foundries, and Samsung to design a test chip for 32nm and 28nm IC manufacturing technologies, using its Olympus-SoCTM place and route system and the Calibre physical verification and design for manufacturing platform.

Mentor’s Cost Control Measures
Icahn believes that the company has not been managing costs effectively and runs more expensive operations than its competitors. Mentor, however, has been following severe cost control measures such as cutting outside technology services by 35% and implementing revised travel policies that will reduce travel costs by $4 million annually.

Mentor’s stock is trading at $14.72 with a market capitalization of $1.65 billion. It touched a 52-week high of $16.56 earlier last month.

Synopsys’s Financials
Competitor Synopsys’s (NASDAQ:SNPS) Q1 revenues increased 10.4% over the year to $364.6 million but missed the Street’s target of $365.2 million. EPS of $0.44 was better than the market’s projected EPS of $0.40.

For the current quarter, the company projects revenues of $386 million-$394 million with EPS of $0.43-$0.45. The market was looking for revenues of $374 million with EPS of $0.43 for the quarter. For fiscal year 2011, Synopsys projects revenues of $1.5 billion-$1.53 billion and EPS of $1.67-$1.77 compared with the market’s projections of $1.52 billion in revenues and EPS of $1.74.

Synopsys’s Product Innovation
Synopsys continued to develop newer products for the market. Recently, it released the next-generation DesignWare Data Converter IP solutions, which are capable of delivering more than 50% more in power in a smaller area than the previous generation of data converters. The DesignWare Data Converter IP can reach high sampling rates with dynamic performance while processing signal bandwidth beyond 100 MHz, making it ideal for WiFi and home networking products.

The company also introduced Proteus LRC for lithography verification to provide comprehensive features that help to identify locations in a design that are sensitive to process variations. The product is designed to deliver the accuracy needed for 28nm and below technology.

The stock is trading at $27.64 with a market capitalization of $4.17 billion. It touched a 52-week high of $29.35 in December of last year.

Cadence’s Financials
Cadence (NASDAQ:CDNS) reported Q4 revenues of $249 million compared with the previous year’s revenues of $220 million. The loss of $0.08 per share was significantly higher than previous year’s EPS of $0.01. For the year, the company reported revenues of $936 million compared with the previous year’s $853 million. EPS of $0.07 was a penny higher than the previous year’s earnings of $0.06 per share.

For the current quarter, the company expects revenues of $255 million-$265 million with loss expected to range from breakeven to $0.02 per share. For the full year, it expects revenues of $1.03 billion-$1.07 billion, with EPS of $0.00-$0.10.

Cadence’s Product Enhancement
Cadence too continued to add to its product portfolio. It recently expanded its portfolio of verification IP (VIP) and memory models. The CadenceVIP offering supports new protocols such as MIPI to address early IP verification and integration through to system validation. It also supports all major third-party simulators, thus becoming a one-stop shop of mainstream and emerging protocols for developing and verifying advanced electronic designs.

The company also announced new advancements to help boost verification productivity for ASIC and FPGA designers. The new capabilities expand the scope of metric-driven verification (MDV) and enable faster and more comprehensive verification closure and Silicon Realization.

Cadence is trading at $9.76 with a market capitalization of $2.62 billion. It touched a 52-week high of $10.28 earlier last month.

Magma’s Financials
Magma’s (NASDAQ:LAVA) Q3 revenues grew 12% over the year to $34.8 million. EPS increased to $0.08 compared with previous year’s $0.04. For the current quarter, Magma projects revenues of $35 million-$35.5 million. EPS for the quarter is expected to be in the range of $0.07-$0.08.

Magma’s Customer Wins
Magma’s product offerings helped it add significantly to its client list. In the last quarter, it added 14 new customer logos, including four new users of its library characterization product, SiliconSmart ACE.

It earlier released product, Talus Vortex 1.2, continued to receive rave reviews. The company says that the product is being used in eight of its top 10 accounts. Magma also claims that its product is helping one of the leading chip companies develop 1.2 million cells per day, equivalent of any other player in the industry.

The stock is trading at $6.69 with a market cap of $446.7 million. It touched a 52-week high of $6.84 earlier this month.

Carl Icahn owns 14.7% of Mentor Graphics and has offered to buy the company for $17 a share, translating to $1.9 billion. That is a premium of 12% over the current prices. Three years ago, Cadence too bid for Mentor. Mentor rejected the $16 per share bid citing growth, stability, and regulatory risks. The latest news releases report that Mentor has rejected Icahn’s bid as well. Mentor feels it needs to be independent to be able to continue wit its strategic growth plan. The management states that the recent offer “undervalues the company and its future prospects.” This is consistent with Mentor’s stance all along, and its resistance to consolidation. As a result, EDA as an industry continues with the same dysfunctions of pricing model and business model issues – a moribund industry from which investment and innovation have fled.

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