Commentary:
EDA Industry Update August 2006 -- What did the Last Quarter Bring?
by Dr. Russ Henke and Dr. Jack Horgan
Henke Associates
In May 2003, August 2003, December 2003, February 2004, May 2004, August 2004, December 2004, February 2005, May 2005, August 2005, November 2005, February 2006 and May 2006. EDA Commentariesby the authors (published on EDACafé.com), the then-current yearly and quarterly financial performances of a selected group of publicly traded Electronic Design Automation (EDA) companies were analyzed and compared. Expectations regarding the future financial performances of these same EDA entities were documented as well. The selected companies were Altium, Ansoft, Cadence, Magma, Mentor Graphics, Nassda, Synopsys, Synplicity and Verisity. .
Note: As part of continuing EDA industry consolidation, two previously-selected EDA vendors, namely Verisity and Nassda, have been acquired by others and hence have been dropped from the quarterly report.
This August 2006 report covers the performances of the remaining seven companies for the nominal Second Quarter 2006
In this issue, EDA News Highlights are followed by the revenue & earnings performances of the selected group of EDA players for Q2 2006, and then EDA vendor by vendor details. The top 3 EDA vendors are then compared to the top 3 MCAD vendors. EDA Vendor stock prices are discussed. Individual EDA vendor forecasts for Q3 2006 are provided.
Finally, for Geopolitical and Economic Commentary on conditions that affect the EDA Industry, i.e. such commentary that occasionally appears at the end of these articles, interested readers may be motivated to click on the following URL. It will take you to the EDA Commentary for May 2006, and you can scroll down to the Geopolitical Section, which has been updated from May all the way through mid-August 2006. Enjoy!
EDA News Highlights
On August 15, 2006 Dell Computer announced that, “Dell has identified a potential issue associated with certain batteries sold with Dell Latitude, Inspiron, XPS and Dell Precision Mobile Workstation notebook computers. In cooperation with the US Consumer Product Safety Commission and other regulatory agencies, Dell is voluntarily recalling certain Dell-branded batteries with cells manufactured by Sony and offering free replacements for these batteries. Under rare conditions, it is possible for these batteries to overheat, which could pose a risk of fire.” Approximately 4.1 million lithium-ion batteries are involved. On August 24 Apple announced a similar recall involving 1.8 million batteries affecting users of its iBook G4 and PowerBook G4 laptop models sold between October 2003 and August 2006. Sony estimates that the recall would cost between $170 million and $260 million. The higher figure equals about a quarter of Sony's net profit forecast for the business year to March 2007.
On August 17, 2006 Magma Design Automation reported that the US Patent and Trademark Office today rejected all the claims in Synopsys Inc.'s patent number 6,378,114 (the '114 patent'), calling into question the validity of the patent. The validity of the '114 patent” has been in dispute during the two companies' patent litigation currently before the US District Court for the Northern District of California. The US PTO's action does not invalidate the patent but is an intermediate step in the re-examination process that may ultimately result in the patent being deemed invalid. On August 23, Magma issued a statement that the US PTO had been asked to examine the validity of two of the three patents involved it the dispute between Magma and Synopsys. The request was initiated by a third party, because Magma has been prevented from seeking re-examination of these patents as the result of a court order.
On August 16, 2006 Synopsys announced that it has completed the acquisition of SIGMA-C Software AG, a Munich-based company providing simulation software that allows semiconductor manufacturers and their suppliers to develop and optimize process sequences for optical lithography, e-beam lithography and next-generation lithography (NGL) technologies. Synopsys acquired SIGMA-C in an all-cash transaction for $20.5 million.
On July 26, 2006 Synopsys announced that it has donated a library of advanced SystemVerilog assertion checkers defined in the ARM-Synopsys Verification Methodology Manual (VMM) for SystemVerilog to Accellera, the EDA organization focused on EDA standards.
North American-based manufacturers of semiconductor equipment posted $1.75 billion in orders in July 2006 (three-month average basis) and a book-to-bill ratio of 1.06 according to the July 2006 Book-to-Bill Report published August 18, 2006 by SEMI. A book-to-bill of 1.06 means that $106 worth of orders were received for every $100 of product billed for the month. The July 2006 bookings figure is about two percent lower than the final June 2006 level of $1.78 billion and over 73% higher than the $1.01 billion in orders posted in July 2005.
How did the selected EDA Vendors fair during the Second Quarter of 2006
As shown in Table 1, the combined revenue performance of seven EDA vendors was $899 million, an respectable increase of nearly 12% from the $805 million in the second quarter of 2005 and a 3% increase from the $870 million in the just previous quarter. All the EDA firms had increased year-over-year revenue. Ansoft, Altium and Mentor had percentage increases in the mid teens. Synplicity had the smallest rise at 1.3%. On a sequential basis, Altium was the percentage growth leader at 49%. Cadence and Synplicity were far behind at 9.2% and 6.3%, respectively. Ansoft had a significant decline of 30%. Magma was the only other decliner at nearly -7%.
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Figures 1 and 2 above provide additional revenue comparisons among vendors. For Q2 2006, Cadence was number one at 39%, Synopsys number two at 31%, and Mentor Graphics number three at 20%. The “big three” accounted for 90% of total revenue for the selected group. Magma was a distant fourth at 5%. (A decade and a half ago, Mentor Graphics' revenue was double that of Cadence).
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Turning to earnings performances in Q2 2006, Table 2 shows that the EDA group of six (Altium did not report earnings) reported a combined net income $30 million. This was more than double the $13 million a year earlier and a 36% rise from the previous quarter. Nevertheless, return on sales (ROS) of the group is still barely over 3%. Magma had the largest Q2 loss at nearly $11 million. Mentor was the only other firm with a loss in the quarter, but the loss amount was much smaller than in the other quarters shown. Cadence had the largest profit at $30 million, way up from the same period a year ago when the firm endured around $37 million in charges for amortization of acquired intangibles, restructuring and write-off of acquired in-process technology.
Company by Company Q2 2006 details:
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Nick Martin, CEO and Founder of Altium Limited, said, "It is exciting to see the 2005/06 financial year conclude in such a positive way for Altium. We see clear evidence of the relationship between our investments in building a world-class sales organization, and the last three consecutive quarters of year-over-year revenue growth. It is gratifying, after several years of strategic technology development, to see customers, in both large enterprises and smaller organizations so enthusiastically adopting Altium Designer."
On August 24, 2006 Ansoft Corporation reported financial results for its first quarter of fiscal 2007, the period ended July 31, 2006. Total revenue for the quarter was $17.3 million, an increase of 17% over the $14.8 million in the same quarter a year ago, but a 30% decline from the $24.7 million in the just previous quarter. License revenue was $8.1 million, up 20% year-over-year but down 48% sequentially. Service and other revenue was $9.1 million, an increase of 15% year-over-year, but only an increase of less than 1% sequentially.
For the quarter North America accounted for 36% of total revenue in the quarter, Asia 51% and Europe 13%. See Table 4.
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The Electromechanical segment accounted for 18% of total revenue, versus 15% a year earlier. The High Performance segment accounted for 82%. The top three customers were Mitsubishi, Intel and Hitachi.
Net income for the quarter was $2.3 million, an increase of 96% year-over-year from $1.2 million, but a decrease of 72% sequentially from $8.3 million. There was a two-for-one stock split in the form of a stock dividend that was declared on March 7, 2006 and distributed on May 9, 2006. There was $600K in stock-compensation expense in the second quarter, the first quarter where this item was recognized.
Nicholas Csendes, Ansoft's President and CEO, said, “We are pleased to report strong revenue and earnings growth for the first quarter. For the next fiscal quarter, we anticipate continued revenue growth of around 10-15%.”
On July 26, 2006 Cadence Design Systems, Inc reported financial results for the second quarter, the period ended June 30, 2006. Total revenue was $358 million, a solid increase of 12% over the $321 million a year earlier, and a 9% increase over the $328 million a quarter ago.
Product revenue was $232 million, accounting for 65% of total revenue. This was a 15% increase over the $202 million in the same quarter a year ago, and an 11.5% increase sequentially. Maintenance revenue was $93 million, accounting for 26% of total revenue. This was a 4% increase year-over-year, and a 6% increase sequentially. Services revenue was $33 million or 9.2% of total revenue. This was a 13% increase year-over-year, and a 2% rise sequentially.
Table 5 below presents the breakdown by product segment. The original data provided by Cadence was in terms of percentages of total revenue. Functional Verification and Custom IC Design had solid growth year-over-year. Sequentially Digital IC increased by 42% while Custom IC Design and DFM experienced growth of 9%. For the quarter, Function Verification accounted for 22% of total revenue, Digital IC Design 26% and Custom IC Design for 27%. The other segments each contributed about 8%.
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On a geographic basis, North America accounted for 48% of total revenue, Europe 18%, Japan 24% and Asia 10%. On a year-over-year basis NA was up 9.4%, Europe up18%, Japan up 7.2% and Asia up 24%. Sequentially, Japan and Asia revenues were up over 20%, while North American and European revenues were up around 3%.
For the quarter, Cadence had net income of $30.3 million, up 40% from the $21.7 million in the first quarter, and way up from the $483K in the second quarter of 2005. In the year ago quarter, there were around $37 million in charges for amortization of acquired intangibles, restructuring and write-off of acquired in-process technology.
Mike Fister, president and CEO of Cadence, said, “We again had great execution during the second quarter. Our analog, mixed-signal expertise is fueling sales across all our platforms from system validation to digital implementation."
On August 3, 2006 Magma Design Automation Inc. reported the financial results for its first quarter of fiscal 2007, the period ended July 2, 2006. Total revenue for the quarter was $41 million, an increase of 5.5% from the $38.8 million in the same quarter a year ago, but a 7% decline from the $44 million in the previous quarter. License revenue was $34.5 million, accounting for 84% of total revenue. This was an increase of nearly 2% year-over-year, and a decrease of 8.5% sequentially. Services and other revenue was $6.5 million, accounting for almost 17% increase year-over-year, and a 2.6% increase sequentially.
In the quarter North America accounted for 70% of total revenue, Europe 10.5%, Japan 8% and AP 12% (Table 6).
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Net loss for the quarter was $10.7 million, compared to a very small net loss of $23K in the same quarter a year ago, and compared to a much larger loss of $6.2 million in the just previous quarter. The costs of Magma's patent litigation with Synopsys continued to have an impact on profitability. Litigation expenses in the quarter were $4.4 million. Non-GAAP income for the quarter was $731K.
Rajeev Madhavan, chairman and CEO of Magma, said, "We performed according to our goals and completed a very successful first quarter. We met all our key financial targets and executed on our plan to invest in R&D."
On July 20, 2006 Mentor Graphics Corporation announced financial results for the second quarter, the period ending June 30, 2006. Total revenue for the quarter was $178 million, an increase of 15% compared to $154 million in the same quarter of 2005, and a 1.2% increase compared to the $176 million in the just prior quarter. System and Software revenue was $101 million accounting for 56% of total revenue. This was a 24% increase year-over-year from $81 million, and an almost 2% decline from the $103 million in the previous quarter. Service and Support revenue was $77 million, accounting for 43% of total revenue. This was a 5% increase both year-over-year and sequentially. In the quarter, revenue from the Americas accounted for 45% of total revenue, revenue from Europe 23%, from Japan 14% and from Pac Rim 18%. Table 7.
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Split of revenue by product line was 35% IC Design to Silicon, 25% Integrated Systems Design, 25% Scalable Verification and 15% New and Emerging.
Bookings were at near-record levels for the second quarter, and up about 20% from the second quarter of 2005. IC Design to Silicon bookings doubled over the second quarter of 2005, while Scalable Verification and Integrated Systems Design were both down about 5%, and New and Emerging was down 15%.
The company's net loss for the second quarter of 2006 was a mere $448K, compared to a loss of $6.8 million in the second quarter of 2005, and a loss of $5.9 million in the first quarter of 2006. The 2nd quarter recorded special charges of just $917K, compared to $2 million in special charges and acquisition related charges in the same quarter a year earlier.
Walden C. Rhines, chairman and CEO of Mentor Graphics, said, “Mentor Graphics turned in another strong quarter. Calibre continued to drive the business as design-for-manufacturing adoption strengthened. Customer adoption of the 90nm and 65nm process nodes, as well as prototyping at 45nm, is driving larger customer purchases."
On August 16, 2006 Synopsys, Inc. reported financial results for its third quarter of fiscal 2006, the period ended July 31, 2006. Total revenue for the quarter was $277 million, a good increase of 10% from the $251 million in the same quarter a year earlier, and an almost 1% increase form the $275 million in the prior quarter. TBL (time based license) revenue was $225 million, accounting for 81% of total revenue. This was a 19% increase year-over-year, and over a 7% increase sequentially. Upfront license revenue decreased of nearly 11% year-over-year and 44% sequentially. Maintenance and service revenue was $38 million, accounting for almost 14% of total revenue. This was a decrease of 18% year-over-year, and a decrease of 3.5% sequentially.
From a product perspective, 52% of revenue came from core Galaxy design, 26% from Discovery verification solutions, 8% came from IP, 10% from DFM, and 4% came from professional services. Table 8.
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From a geographic point of view, North America accounted for 53% of total revenue, Europe 17%, Japan 16% and Asia Pacific 14%. North American revenue increased 9% year-over-year, but declined 1% sequentially. European revenue increased almost 17% year-over-year, and 10.5% sequentially. Revenue from Japan grew over 13% year-over-year, but declined 8% sequentially. Revenue from Asia Pacific grew 4% year-over-year, and almost 10% sequentially.
Net income for the quarter was $7.5 million, compared to $17.3 million in the corresponding quarter last year, and $5.4 million in the previous quarter. In the year ago quarter there was a one-time gain associated with a litigation settlement received in connection with the acquisition of Nassda Corporation. GAAP net income for the current period includes employee stock-based compensation expense of $15.6 million.
Aart de Geus, chairman and CEO of Synopsys, said, “Our third quarter was excellent, as we again executed well on all fronts. Our momentum is visible through strong financial results, customer adoptions of our technology and the introduction of innovative new products.”
On July 25, 2006 Synplicity, Inc. reported financial results for the second quarter the period ended June 30, 2006. Total revenue was $15.4 million, an increase of 1.3% over the $15.2 million in the same quarter a year ago, and a 6.3% increase sequentially over $14.5 million. License revenue was $7.9 million, accounting for 52% of total revenue. This was a decrease of 5% year-over-year, and an increase of 11.5% sequentially. Maintenance revenue was $7.5 million or 48% of total revenue. This was an increase of 9% year-over-year, and an increase of 1.4% sequentially.
Net income for the quarter was $1.1 million. This was a modest increase from the $921K net income a year ago, and up considerably from the net loss of $1.1 in the just previous quarter. Much of the year-over-year difference was in the area of stock-based compensation expense.
Gary Meyers, president and CEO of Synplicity, said, “During the second quarter, we re-focused the company onto our core FPGA implementation strength and delivered solid execution to our plan, resulting in revenue and earnings growth despite our exit from the ASIC business. Orders in our focused growth areas of Synplify Premier, Certify, and Synplify DSP exceeded our expectations and continued to demonstrate our leadership. With spending under control and an exciting roadmap of unique high value solutions in hand, we look forward to building greater shareholder value in the future.”
EDA versus MCAD
The detailed quarterly performances of a selected group of public MCAD Vendors has been provided in the authors' August 2006 MCAD Commentary recently published on IBSystems' portal MCADCafe.
As Table 9 below shows, the three top mechanical CAD companies (Autodesk, Dassault Systemes and UGS) sported Q2 2006 revenues of $1,107 million, 36% higher than the $813 million from the three leading EDA firms. This quarter, Autodesk announced that it had begun a voluntary review of the company's historical stock option granting practices and the related accounting. As a consequence, the firm did not provide any earnings data, so comparing earnings of the top 3 this quarter is not relevant.
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Keep in mind that Autodesk sells its products predominantly through valued added resellers and distributors. Dassault Systemes sells predominantly through IBM and its Business Partners and in some instances, notably SolidWorks, through VARs. Thus, if one were to count actual end user purchases of the latter MCAD products, the combined MCAD revenue total would raise the Big 3 MCAD dollar total substantially. On the other hand, Autodesk has not-insignificant revenue outside MCAD in AEC, GIS and Media/Entertainment.
The comparison of earnings across the two industries is also difficult general due to a plethora of one-time charges associated with acquisitions. The earnings comparison for UGS is further complicated by purchase accounting adjustments related to its Venture Capital buyout from EDS.
EDA Vendor Stock Performance
As shown in Tables 10 and 11 and Figure 3 below, the combined stock prices for the EDA vendors were up 24% year-over-year in absolute dollars, and up 27% in average percentage change. This compares to a nearly 4% drop in average price for the three leading stock indexes. Ansoft is the growth leader at +70%, with Altium close behind at 58%. Cadence and Mentor had over 20% year-over-year growth. Magma (LAVA) was the only decliner at -12%.
The combined stock prices on a sequential basis rose 6.2% in absolute dollars, an average price increase of about 5%. Altium was the biggest gainer at 52%. Cadence was a distant second at 14.5%. Magma had 38% sequential decline in stock price. Mentor was the only other decliner at -5.3%. In Q2, the three major stock indexes rose an average of 7.4% from the just prior quarter.
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Forecast Guidance from Individual EDA Providers
The combined revenue forecast for the next quarter (Q3 2006) is for about 5% growth year-over-year, but a 1.6% drop compared to the 2nd quarter just reported. Ansoft is the most optimistic regarding year-over-year quarterly growth. Only Synplicity predicts a decline. Ansoft is also the most bullish on a sequential basis at almost 17%. Magma is the only other firm forecasting growth. (Table 12).
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Individual Company by Company Guidance
Altium did not provide any guidance for the next quarter. For fiscal 2005/2006, Altium expects revenue to be AUD 45.5 million compared to AUD 40.1 million the previous financial year. This is the result of expected annual product sales growth in the US (up 32%), SE Asian (up 25%) and European (up 14%) markets and represents an overall annual increase of 20%. Altium also expects profit after tax between AUD 1.0 million and AUD 1.5 million for the 2005/06 financial year.
As guidance Ansoft is expecting revenue in the next quarter to be in the range of $20 million to $20.5 million. For the year Ansoft expects revenue growth of 10% to 15%.
For the third quarter of 2006, Cadence expects total revenue in the range of $350 million to $360 million, compared to $358 million in the quarter just completed. For the full year 2006, the company expects total revenue in the range of $1.425 billion to $1.475 billion.
As guidance Magma expects total revenue for the next quarter to be in the range of $40 million to $44 million. This compares to $41 million in the quarter just reported, and to $40 million in the same quarter in 2005.
As guidance Mentor Graphics expects revenue of approximately $180 million for the third quarter, compared to $178 million in the quarter just reported and $164 million in the third quarter of 2005. For full year 2006, the company expects revenue of $763 million, compared to $705 million in 2005.
Gregory K. Hinckley, president of Mentor Graphics, said, “We continue to keep a tight lid on expenses, with GAAP operating expense rising a modest 5% on a 15% rise in revenue. Our renewal outlook for the second half of the year remains solid. This, combined with strong execution in the second quarter, strengthens our confidence in the business.”
As guidance Synopsys expects revenue in the next quarter to be in the range of $274 million to $282 million. This compares to $277 million in the quarter just concluded and $252 million in the same quarter a year ago. For fiscal 2006 the firm expects revenue between $1,086 million and $1,094 million, compared to $992 million last year.
As guidance Synplicity expects revenue in the next quarter to be in the range of $16.0 million to $16.5 million. This compares with $15.4 million in the quarter just reported and with $16 million in the third quarter of 2005. The company also expects revenue for the year to be in the range of $63 to $65 million.
EDA Consortium's Market Statistics
During Q1 2006, North America accounted for 47% of total EDA revenue, Europe for 18%, Japan for 24% and ROW for 11%. (Table 14)
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Reporting companies employed 23,128 professionals in Q1 2006, up 4% from the 22,236 reported in Q1 2005.
Walden C. Rhines, chairman and CEO of Mentor Graphics Corporation, and vice-chair of the EDA Consortium, “Last year's fourth quarter strength expanded in Q1, fueled by solid growth in North America and Western Europe.”
The EDA Consortium is the international association of companies that provide tools and services that enable engineers to create the world's electronic products. EDA is the critical technology used to design electronics for the communications, computer, space technology, medical and industrial equipment and consumer electronics markets among others.
Geopolitical and Economic Commentary:
Finally, for Geopolitical and Economic Commentary on conditions that affect the EDA Industry, i.e. such commentary that occasionally appears at the end of these articles, interested readers may be motivated to click on the following URL. It will take you to the EDA Commentary for May 2006, and you can scroll down to the Geopolitical Section, which has been updated from May all the way through mid-August 2006:
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About the Authors:
Since 1996, Dr. Russ Henke has been president of HENKE ASSOCIATES, a San Francisco Bay Area high-tech business & management consulting firm. The number of client companies for Henke Associates now numbers forty. During his corporate career, Henke operated sequentially on "both sides" of MCAD and EDA, as a user and as a vendor. He's a veteran corporate executive from Cincinnati Milacron, SDRC, Schlumberger Applicon, Gould Electronics, ATP, and Mentor Graphics. Henke is a Fellow of the Society of Manufacturing Engineers (SME) and served on the SME International Board of Directors. He is also a member of the IEEE and a Life Fellow of ASME International. In April 2006, Dr. Henke received the 2006 Lifetime Achievement Award from The CAD Society, presented by CAD Society president Jeff Rowe at COFES2006 in Scottsdale, AZ.
An affiliate of the HENKE ASSOCIATES team since 2001, LA-based Dr. John R. (Jack) Horgan co-authored this August 2006 EDA Industry Commentary. Dr. Horgan's prior corporate career has included executive positions at Applicon, Aries Technology, CADAM and MICROCADAM, as well as a stint at IBM. Dr. Horgan is also an editor of EDAcafe Weekly.
Since May 2003 the authors have now published a total of forty-five (45) independent articles on MCAD, PLM, EDA and Electronics IP on MCAD, PLM, EDA and Electronics IP on IBSystems' MCADCafé and EDACafé. Further information on HENKE ASSOCIATES, and URL's for past Commentaries, are available at http://www.henkeassociates.net.
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