Commentary: EDA Industry Update August 2006 -- What did the Last Quarter Bring?


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%.

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).

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.

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