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In a MAY 2003 EDA Commentary by Russ Henke (published on EDACafé.com), the then-current yearly and quarterly financial performances of a select 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. (For additional information on the selected EDA companies at the bottom of this article, click here).

The conclusions in May 2003? A gloomy economic outlook still gripped most high-tech companies. The public EDA segment was doing slightly better than its MCAD counterpart, but not by much. The May data further suggested that the remainder of 2003 was no more promising than 2002, for either the EDA vendors or the MCAD software suppliers - although the EDA vendors might have had a slight edge.

As reported in the August 2003 EDA Commentary, the results for Q2 2003 revealed that the EDA industry was maintaining - perhaps even increasing - the slight edge that it enjoyed in May 2003 in revenue/earnings achievements over its MCAD counterparts. In August, most of the nine EDA companies expected a fairly decent second half of 2003, whereas most of their MCAD counterparts were not nearly as confident. Similarly, EDA stock valuations were registering respectable YTD gains in contrast to a lackluster performance among the MCAD stocks.

Now another quarter has elapsed. It's appropriate to ask how prescient the EDA industry predictions were back in August and what's the EDA outlook today for the rest of 2003 and into 2004 within today's changing economy? The authors offer their thoughts on the subject.

Introduction:

As December 2003 dawns, the US economy is signaling a long-awaited pick-up after three years of doldrums, deficits and deepening unemployment.

For the quarter July though September 2003, the US Gross Domestic Product (GDP) is reported to have grown at a seasonally adjusted 8.2% annual pace, up from the preliminary figure of 7.2% and up from the 3.3% rate in Q2. The third quarter's 8.2% rate was the best quarterly performance in twenty years. Investment in homes leaped at a 20% rate, up from the previous quarter's 7% rate. Overall business investment increased 11%, up from 7% the previous quarter, the fastest rate since the first quarter of 2000. Purchases of equipment and software climbed even faster (at 15% rate). American Factory Orders even rose 0.5% in September, according to an AP report on November 5, 2003 (Jeannine Aversa).

The Semiconductor Industry Association (SIA) reported that worldwide sales of semiconductors increased 6.5% to $14.4 billion in September 2003, up from $13.6 billion in August. The future looks bright (see Chart 1 below).

Chart 1 - The Semiconductor Market per the SIA

Alas, very little of this good news was reflected in net job creation in Q3 2003. Nearly three million jobs had been lost in the US in the past 3 years through July 2003. The Labor Department reported on August 1, 2003, that 486,000 U.S. jobs had vanished in all categories just since January 2003. While jobs were finally beginning to be added at an average rate of 95,000 per month in the August - October 2003 period, according to preliminary reports, it would take nearly 3 years at this rate to get out of the deep hole and return to employment levels of early 2001. Indeed, the 95,000 jobs per month figure falls far short of the steady 175,000 to 200,000 jobs per month growth rate needed to restore healthy employment levels. Most economists agree that GDP must rise to 4%+ or more over many quarters, before sustainable jobs growth begins to occur.

The US Department of Labor reported that the number of unemployed persons, 9.0 million, was virtually unchanged in September, and the unemployment rate was 6.1 percent, the same as in August. October unemployment nudged down to an even 6%. These figures do not of course include long term unemployed who have stopped actively seeking work and those formerly unemployed who may have taken temporary or lower paying jobs. The Labor Department reported on December 4 that for the work week ending Nov. 29, applications for jobless benefits rose by a seasonally adjusted 11,000 to 365,000. In an article in CBS MarketWatch on November 28, Citigroup Global Markets economist Bob DiClemente said, "Not only is the current number of unemployed workers high, but the rest of the work force is underemployed, on average." Rex Nutting CBS Marketwatch.com reported on December 4, "The number of workers still collecting unemployment benefits also increased slightly in the last week to 3.385 million. The continuing claims figures do not include some 810,000 Americans receiving extended federal benefits that are available only after workers have exhausted their state benefits, typically after six months." The NY Times' Louis Uchitelle said on December 6, "The long-term unemployed - those seeking jobs for six months or more - grew in November 2003 to 23.7% of all unemployed, the highest level since July 1983."

Some fear that many jobs may be permanently lost by a shift to offshore resources. Offshore outsourcing was a key component of the August 2003 EDA Commentary, and it sparked both a panel discussion in a November 10 Peggy Aycinena EDA Weekly as well as dialogue in late August inside the IBSystems' EDA Forum

Job loss in manufacturing sector, where both EDA and MCAD "live", continues with the loss of another 24,000 in October 2003, according to an AP report on November 7 (Leigh Strope). Through October, US manufacturing payrolls had contracted every month since July 2000 and face a huge uphill climb when they do finally turnaround.

These Commentaries have asserted that the keys to the EDA and MCAD Industries' economic importance lie in the leverage its users apply to create the everyday goods with which we are all familiar. (These goods include automobiles, trucks, military gear & weapons, appliances, farm & construction equipment, aircraft & aerospace vehicles, electronic integrated circuits, microprocessors, memories, boards, MCMs, computers, PDAs, cell phones, automotive electronics, avionics, smart appliances, etc.).

In short, EDA and MCAD are arguably responsible for enabling almost all of today's manufacturing industries, which are the centerpieces of creating real productivity and real wealth in every modern economy. The manufacturing jobs' erosion implies a smaller base for EDA and MCAD to enable, at least in the US.

In the sequel, we'll examine just how the selected public Electronic Design Automation (EDA) companies faired in this environment during Q3 2003.

How did the EDA Vendors fair during the third quarter of 2003?

On the revenue front the EDA vendors' combined total revenues of $819 million were up slightly from previous quarter and down a modest 4.5% year-over-year. Individually the results were mixed. Magma and Ansoft improved both sequentially and year over year. Synopsys enjoyed record setting revenue for the most recent quarter, per results just announced December 3, 2003. Altium rose year over year in US$ but dropped back versus the previous quarter. The opposite was true of Nassda. See Figure 1 below.

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