Commentary: EDA Industry Update February 2005 -- What did the Last Quarter/Year Bring?

Commentary:

EDA Industry Update February 2005 -- What did the Last Quarter/Year Bring?


by Dr. Russ Henke and Dr. Jack Horgan
Henke Associates


 

In May 2003, August 2003, December 2003 and February 2004, May 2004, August 2004 and December 2004 EDA Commentaries by the authors (published on EDACafè.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 performancJuly 24, 2008es of these same EDA entities were documented as well. This February 2005 report covers their performances for the fourth quarter and the full year 2004.



EDA News Highlights

On January 12, 2005 Cadence announced that it had signed a definitive agreement to acquire Verisity, Ltd. in an all-cash transaction deal at $12 a share. This translates into about $286 million and a premium of 62% on the then-current stock price.

Verisity CEO Moshe Gavrielov, who will join the Cadence executive team, commented, "Customers are demanding solutions that automate the entire verification process and make it more predictable from planning to closure. This requires the integration of our VPA solution with a unified verification infrastructure. The combination of the two companies will greatly accelerate the delivery of these integrated solutions."

In their December 2004 EDA Commentary, the authors reported that Synopsys and Nassda had announced a proposed merger on December 1, 2004. On January 10, 2005 Nassda announced that the Federal Trade Commission had requested additional information and documentary material in connection with its review of the proposed merger. Both Nassda and Synopsys said that they intend to comply with the FTC's request as quickly as possible.



How did the EDA Vendors fair during the FOURTH quarter of 2004?

Table 1 - Nine Public EDA Companies' Latest Quarterly Revenue Performances ($000)



As shown in Table 1, the combined revenue performance of the nine EDA vendors in the fourth quarter of 2004 was $907 million, an increase of only 3% compared to the $883 million in revenue in the fourth quarter of 2003. The largest year-over-year quarterly increases were recorded by Synplicity (46%) and Verisity (45%). Altium, Ansoft and Magma also had good year-over-year growth in excess of 20%. Synopsys was the only quarterly year-over-year decliner. (Note: Total year cumulative group results are discussed later in this article).

On a sequential basis, the group created a notable quarterly revenue increase of 14% compared to the $795 million in the just prior quarter. Altium and Mentor had impressive gains relative to the prior quarter. Ansoft and Cadence also managed to get into double-digit growth territory.

Figure 1 - EDA Vendor Relative Size
(based upon Q4 2004 Revenues)



In Q4 2004, Cadence increased its market share to 37%, while #2 vendor Synopsys at 27% continued to decline as it adjusts to the increasing EDA customer preference for time based licenses ( Figure 1). The top three vendors (Cadence, Synopsys and Mentor Graphics) accounted for 88% of the total revenue for the entire group.

Table 2 Eight Public EDA Companies' Latest Quarterly Earnings Performances ($000)



Table 2 shows that the EDA group of eight (Altium did not report earnings) reported combined earnings in the latest quarter of $64 million, a drop of $2.6 million or 4% compared to the same quarter last year. Cadence profit rose year-over-year by $44 million to $60 million, nearly a 300% increase. This was offset by an equivalent income decline by Synopsys. Ansoft's earnings increased by almost 200%. Magma and Veristy net income fell a few million dollars each.

While combined year-over-year quarterly net income fell slightly, fourth quarter 2004 combined profit of $64 million showed considerable improvement relative to the combined net loss of $15 million in the just-prior sequential quarter. In absolute terms, Synopsys had major losses in the last two quarters compared to $30 million in profit for the fourth quarter of 2003. Mentor created a $22 million positive swing sequentially.



Company by Company Q4 2004 details:

On January 19, 2005 Altium Limited announced the results for its second quarter of fiscal 2005, the period ending December 31, 2004. Total revenue for the quarter was AUD$10.5 million, a 5% rise compared to AUD$10 million in the same quarter one year ago and a 30% increase compared to AUD$8.1 million in the prior quarter. In terms of US dollars, revenue was up 27% year-over-year and 42% sequentially.

In local currencies, US revenues were up 9%, Europe 16%, Japan 5%, SE ASIA 63% and Australia 17%, for an overall growth of 17%.

"We are encouraged growth has continued across all markets in the six months to December 31, 2004, particularly as we move into the second half, which is traditionally the stronger half of the financial year," said Mr. Oboudiyat, Altium Joint CEO. "The release of Service Pack 2 (SP2) for Protel and Nexar contained over 150 new features and enhancements. From a technological advancement perspective, SP2 represents the most significant product upgrade Altium has so far delivered to its customers."

On February 16, 2005 Ansoft Corporation announced its financial results for the third quarter of fiscal 2005, a period that ended January 31, 2005. Total revenue for the quarter was $17.4 million, an increase of 24% compared to $14 million in the same quarter a year ago and an increase of 9% compared to the prior quarter. This $17.4 million compares to a forecast of $17 million. License revenue at $10 million accounted for 59% of total revenue. License revenue increased 27% year-over-year and 18% sequentially. Service and other revenue was up 21% year-over-year but down just over 1% sequentially.

Net income for the quarter was $2.8 million, nearly a 200% rise from the $941 thousand a year earlier and a 47% increase over the $1.9 million in the prior quarter.

"We are pleased to report that our earnings for the third [fiscal] quarter have more than doubled on continued revenue growth in our domestic and international markets," said Nicholas Csendes, Ansoft's President and CEO. "For the fourth [fiscal] quarter, we anticipate record revenue and earnings."

On February 3, 2005 Cadence Design Systems, Inc. reported its results for the fourth quarter and the year ending January 3, 2005. Total revenue for the quarter was $343 million, a 10% increase compared to $311 million in the fourth quarter a year ago and a 14% increase over the $302 million revenue figure for the just prior quarter. The revenue forecast had been in the range of $335 million to $345 million. Product revenue at $226 million was 66% of total revenue, an increase of 12% year-over-year and 24% from the prior quarter. Maintenance revenue at $83 million was 24% of total revenue and grew 6% year-over-year but dropped 1% from the prior quarter. Service revenue at $33 million was 10% of total revenue and grew 9% year-over-year while decreasing 4% from the prior quarter.

Cadence revenue mix by geography in Q4 2004 was 45% for North America, 30% for Europe, 14% for Japan and 11% for Asia. This represents a significant quarterly revenue shift away from the US in the last year. In the same quarter last year, North America accounted for 64% of Cadence revenue, Europe 16%, Japan 13% and Asia 8%.

By product segment, Custom IC had 27%, Digital IC 24%, Functional Verification 19%, DFM 9%, System Interconnect 9% and Service & Other 12%. These percentages have been fairly consistent over two years.

In the last quarter, approximately 75% of product business was represented by ratable licenses.

Cadence net income for the fourth quarter was a robust $60 million, up almost 300% from the $15 million in the fourth quarter of 2003 and up over 200% from the recent third quarter. This was due principally to a significant increase in operating income. Pro forma net income for the quarter was $80 million compared to $65 million in the fourth quarter of 2003.

"Cadence continued its consistent execution, in a challenging marketplace," said Mike Fister, Cadence president and CEO. "Strong demand for wireless, consumer electronics and high-performance computing plays to our specific strengths in analog mixed-signal and low-power digital design" .

On January 27, 2005 Magma Design Automation Inc. announced the results for its third fiscal quarter of fiscal 2005, a period ending December 31, 2004. Total revenue was $37 million, up 20% from the same period a year ago and 1% sequentially. The $37 million was at the low end of the revenue forecast given last quarter. License revenue of $32 million was 85% of total revenue, up 15% year-over-year and up 1% sequentially. Service revenue at $5.6 million was 15% of total revenue, a 58% increase year-over-year but a slight dip sequentially.

However, Magma net income for the quarter was a loss of $719 thousand compared to a gain of $3.7 million a year ago and compared to a gain $287 thousand in the prior quarter. On a proforma basis net income was $8.4 million, an increase of 22% compared to a year earlier.

North America accounted for 46% of total Magma quarterly revenue, Europe 34%, Japan 15% and AP 13%. Europe more than doubled in terms of revenue percentage from the last two quarters, while NA and AP dropped significantly.

"Our third quarter continued Magma's growth in revenue for the ninth consecutive quarter," said Rajeev Madhavan, chairman and CEO of Magma. "During the next several quarters we expect to announce new products that will further enhance our leadership over our competitors and enable us to continue that growth."

On January 27, 2005 Mentor Graphics Corporation announced its results for the fourth quarter and the calendar year. Total Q4 revenue was $214 million, up 6.5% from $202 million in the fourth quarter a year ago and up 33% from the prior sequential quarter. The $214 million was above the forecast of $205 million. System and software revenue at $140 million was 65% of total revenue, an increase of 9% year-over-year and 56% from the prior quarter. Service and support revenue at $75 million was 35% of total revenue, up 2% year-over-year and up 4% sequentially.

Revenue by region for the fourth quarter as a percentage of total revenue was 40% North America, 30% Europe, 15% Japan, and 15% Pacific Rim. The largest change on a percentage basis was North America that had been 52% a year earlier.

By product platform, revenue was 35% Scalable Verification, 30% Calibre Design to Silicon, 20% Integrated System Design and 15% New and Emerging products. Year-over-year Scalable Verification increased 32% and New & Emerging products 27%, while Design to Silicon was down 10% and Integrated Systems down 6%.

Net income in the last quarter was $16 million compared to $13 million in the fourth quarter of 2003 and to a net loss of $5.7 million in the just prior quarter.

"Mentor's growth in a sluggish EDA environment is being driven by the successful proliferation of our younger product portfolio including the Calibre and Scalable Verification tools and newer printed circuit board design tools. Seven of the top ten deals in the quarter were renewals with an aggregate bookings increase of 40% over the prior deals, on comparable terms, including contract length. Customers need, and are willing to pay for, new products that solve their problems," said Walden C. Rhines, chairman and CEO of Mentor Graphics. "Furthermore, we saw significant momentum from our newer, emerging products as we received significant orders in cabling, embedded software, high speed board design, and coverage-driven verification."

On January 12, 2005 Nassda Corporation announced the results for its first quarter of fiscal 2005 ending December 31, 2004. Total Revenue for the quarter was $11.3 million, an increase of 16% from $9.7 million in the same quarter last year and an increase of 2% from $11.0 million for the prior quarter. This was highest quarterly revenue in corporate history. Product revenue at 20% of total revenue decreased 27% year-over-year but increased 28% from the prior quarter. Subscription revenue at 56% of total revenue increased 51% year-over-year and decreased 2.3% sequentially. Maintenance revenue at 24% of total revenue increased 6.4% year-over-year and decreased 2.6% sequentially.

Nassda net income for the quarter was $1.3 million, an increase of 135% from $572 thousand for the quarter a year earlier and an increase of 669% from the $175 thousand in the prior quarter. Operating expenses for the first quarter of fiscal 2005 were lower than expected, primarily due to lower litigation costs.

Sang Wang, Chief Executive Officer, said "First fiscal quarters are always seasonally challenging. We are pleased to have achieved satisfactory financial results, exceeding both the revenue and earnings expectations for the first quarter of our fiscal 2005 and maintaining our total cash, cash equivalents and short-term investments balances at $101.0 million."

Nassda CEO Wang continued, "Even though the semiconductor industry completed 2004 with good growth, we expect that the customers will continue to be very cautious with their spending. Nevertheless, as design starts steadily move to smaller and smaller geometries, we expect the need for nanometer verification software will become even more prominent."

On February 16, 2005 Synopsys, Inc. reported its results for the first quarter of its fiscal 2005, the period ending January 31, 2005. Total revenue for the quarter was $241 million, a 15% decline from $285 million in the fourth quarter of 2003 and a 5% improvement sequentially. The $241 million was near the high end of the range ($233 million to $243 million) given as forecast last quarter. Time based licenses increased 9% year-over-year and increased from 60% of total revenue a year ago to 78% in the quarter just completed. Upfront license revenue dropped 82% year-over-year and dropped from 21% of total revenue to 4.5%.

On a geographic basis North America accounted for 55% of total Synopsys revenue, Europe 15%, Japan 19% and AP 11%. As a percent of total revenue, Japan was up two percentage points, while North America and AP were each down 1%. In absolute dollars both North America and Japan improved.

The Galaxy platform generated 59% of total revenue for the quarter, Discovery platform 22%, DFM 10%, IP 6% and Service 3%. Galaxy is down a few percentage points relative to total revenue, while DFM is up a few.

"Q1 was a very good quarter. I am excited to see the pieces coming together on a vision we have been pursuing for several years," said Aart de Geus, Synopsys chairman and chief executive officer. "Across the board, our latest technology advances are showing success and the anticipation of new technology in 2005 is contributing to the momentum we see. We are also expanding our addressable market beyond the traditional bounds of EDA and adding significantly to Synopsys' competitive differentiation."

Steve Shevick, Synopsys Chief Financial Officer & Sr. VP Finance, commented, "Q1 was the second quarter in our transition to an almost fully ratable license model, and I am pleased to report that we met or exceeded our goals on every financial metric. Operationally, with approximately 91% of revenue coming from backlog, we reached our revenue target well before the end of the quarter. Free of quarter-end revenue pressure, we are better able to focus on quality of orders and on receiving appropriate value for our technology."

In late January 2005, Synopsys received a second information request from the FTC under the Hart-Scott-Rodino Act. The firm is working on providing the FTC with all requested information, and Synopsys remains optimistic that it will close the Nassda transaction before the end of this current quarter.

On February 1, 2005 Synplicity, Inc. reported results for the fourth quarter and year 2004. Total revenue for the quarter was $15.1 million, a 14% increase from revenue of $13.2 million for the fourth quarter of 2003 and a 7% sequential increase from revenue of $14.1 million. The $15.1 million was above the $14.3 million forecast given last quarter. License revenue of $8.5 million accounted for 57% of total revenue. License revenue increased 16% year-over-year and 11% from the prior quarter. Maintenance revenue was up 13% from the same quarter a year ago and up 3% sequentially.

Net income for the quarter was $803 thousand, up 80% from $445 thousand in the fourth quarter of 2003 and up 24% from $646 thousand in the prior quarter.

"We had an excellent fourth quarter which capped a strong financial year, including the highest quarterly revenue and earnings since inception," said Gary Meyers, Synplicity president & CEO. "In fiscal 2004 we grew product bookings, revenues and earnings. As we look to 2005, we expect that the combination of our leadership position in FPGA synthesis and our strong positioning in the structured ASIC market will provide us with solid revenue and earnings growth," Meyers concluded.

On January 24, 2005 Verisity Ltd announced its financial results for the fourth fiscal quarter and year ended December 31, 2004. Total revenue for the quarter was $17.8 million, a 45% increase from revenue of $12.3 million for the fourth quarter of 2003, and a 15% increase from revenue of $15.5 million for the prior quarter. This $17.8 million was above the high end ($17 million) of the projected range given last quarter. License revenue at $10.8 million accounting for 61% of total revenue was up 48% year-over-year and 26% from the prior quarter. Maintenance revenue accounting for 38% of total revenue was up 38% year-over-year and up less than 1% from the prior quarter. Other service revenue amounted to $206 thousand.

GAAP income for the quarter was a net loss of $1.6 million compared to a net gain of $2.3 million in the prior year and a net loss of $3.3 million in the prior quarter. Non-GAAP income was $382 thousand compared $2.4 million a year ago and $146 thousand last quarter. Non-GAAP results for the quarter and the year exclude non-cash charges related to equity issuances, amortization of deferred compensation, amortization of intangible assets resulting from the acquisition of Axis Systems which was completed on February 9, 2004, and one-time expenses for professional services in respect to the recently announced definitive agreement for Verisity to be acquired by Cadence Design Systems. Non-GAAP results for the quarter and the year ended December 31, 2003 excludes stock-based compensation.

"Our financial performance in the final quarter of fiscal 2004 was stellar. We grew revenue 15% and increased non-GAAP net income by 162% sequentially, and built very substantial backlog," said Moshe Gavrielov, chief executive officer of Verisity.



EDA versus MCAD

The detailed quarterly performances of nine public MCAD Vendors will be provided in the February 2005 MCAD Commentary soon to be published on MCADCafe. In the meantime, it might be interesting to see how the top three EDA companies faired against the top three MCAD companies in Q4 2004.



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