Commentary: Electronics IP Industry View - An August 2004 update

Dr. Russ Henke and Dr. Jack Horgan - Contributing Editor

by Dr. Russ Henke and Dr. Jack Horgan
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In May 2003, August 2003, December 2003, February 2004 and May 2004 EDA Commentaries by 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. This August 2004 report covers their performances for the second quarter of 2004.

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

Table 1 Nine Public EDA Companies' Latest Quarterly Revenue Performances

The combined performance of the nine EDA vendors was up a modest 3.5% year-over-year and 2.2% sequentially. Compared to the same quarter last year Magma, Nassda and Altium were big winners with 58%, 46% and 36% growth respectively. Ansoft, Synplicity and Verisity also managed double digit growth. Synopsys was the only decliner with a drop of 6.2%. On a sequential basis Altium and Verisity stood out with 33% and 24% increases respectively. Nassda also hit double digit growth. Ansoft at -29% and Cadence at -4.4% were the only decliners.

Figure 1 EDA Vendor Relative Size
(based upon 2Q Revenues)

On a market share basis Cadence barely beat out Synopsys for the top spot. The top three vendors accounted for 88% of total revenue.

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

Combined net income for the nine EDA vendors of $9.4 million was down 80% (-$40.6 million) year-over-year and down 66% (-$18.6 million) relative to last quarter. This is due mostly to Mentor Graphics. Mentor's net income dropped $37 million from the same quarter a year ago and $35 million from last quarter due to a principally to a tax on a dividend paid by its Irish subsidiary to the parent corporation. If Mentor's results are removed from the total figures, the remaining eight companies had earnings of $42 million, down only 3.7% year-over-year and up 63% from the prior quarter. Cadence was the only firm with significant earnings improvement (up $9.1 million) relative to last year. Synopsys was the second largest decliner in absolute numbers with a drop of $6.7 million. On a sequentially basis Synopsys was the leader with a gain of $13 million followed by Cadence with a gain of $12.5 million reversing prior losing periods. Note that in the prior quarter Synopsys recorded a $10 million charge related to the termination of the MoSys acquisition.

Company by Company Q2 2004 details:

On July 13th,2004 Altium Limited announced preliminary results for its fourth fiscal quarter ending June 30th. Total revenue was AU$12.8 million or about US$10.4 million. On a product by product basis, compared to the previous financial year, Protel sales were up, P-CAD sales were down, and with the exception of the reduction of a long-term service contract TASKING sales were flat.

“June was a record month for sales in real dollar terms in North America, Europe and Australia,” said Kayvan Oboudiyat, Joint CEO, Altium. “There was a 28% increase in sales booked in the second half of the financial year as compared to the first half. We are also pleased by the early results of sales from our new Nexar products seen in the three months to June, but we still expect that Nexar sales will take 12-18 months from its initial release (in February 2004) before material contribution to Altium sales revenue is realized.”

Analyzing Altium's financial performance is difficult since only a small fraction of revenue is generated in Australia. The impact of currency exchange rates is considerable. Altium's last report gave the total in AUD$ and geographic breakdown for the quarter and year in various local currencies. Previous quarterly reports during the fiscal year gave YTD numbers in both local and Australian currencies. By my calculations quarterly revenue was up in AUD$ 10.8% year over year and 72% over the prior quarter consistent with Altium's usual high fourth fiscal quarter. In local currencies US based revenue (43% of total) was up almost 9% year-over-year and 66% sequentially. European revenue (26% of total) in Euros was down 7.7% year-over-year but up three fold sequentially. No earnings numbers were given.

On August 18th, 2004 Ansoft Corporation announced the results for its first quarter of fiscal 2005. Total revenue was $12.7 million, an increase of 19% compared to $10.7 million reported in the previous fiscal year's first quarter but an almost 29% decrease sequentially. (Ansoft had given guidance 3 months ago for this quarter's revenue of between $12 and $12.5 million). There was a 49% drop in license revenue relative to the previous quarter mark of $12 million, although service and other revenue was up 14%. Net income for the first quarter was $30,000 as compared to a net loss of $1.2 million last year but down considerably from $2.8 million net income last quarter.

Nevertheless Nicholas Csendes, President and CEO, stated "Ansoft had a very successful first quarter,". "With the continued high level of activity we are experiencing worldwide, we expect to see good revenue growth and profitability for the balance of the year."

On July 21st, 2004 Cadence Design System reported its results for the second quarter. Total revenue was $287 million up 3.8% compared to $277 million in the same period last year and up 8% from the prior quarter. (Cadence had provided guidance 3 months ago that this quarter's revenue would be between $285 and $295 million). Product revenue of $165 million was up 2.8% and 6.8% respectively. Maintenance revenue of $84 million was up 4.4% and 7.5% respectively. Service revenue $37 million was up 15% and 7% respectively. Design for Manufacturing grew 62% and Services grew 53% sequentially. However, Digital IC Design was down 9.2%.

Net income for the quarter was $3.8 million up dramatically from loss of $8.8 million the previous quarter and loss of $5.3 million last year. Non-GAAP earnings in the second quarter were $42 million, as compared to $29 million in the same period last year.

During the quarter Cadence released Encounter 4.1 and First Encounter Global Physical Synthesis (GPS), a second-generation global physical synthesis solution. The company also introduced NanoRoute with super-threaded route acceleration. A partnership was created with ASML to develop advanced resolution enhancement, or RET, solutions that operate seamlessly with Cadence custom design flows. Cadence also signed an agreement with Rambus, which will provide customers with first-time access to serial-link IP and design services from a single source.

"We had solid financial results demonstrated by growth in the second quarter and we delivered innovative new technology," said Mike Fister, Cadence President and CEO. "Through collaboration and innovation, we have continued to help our customers address their most important design and manufacturing challenges."

On July 28th, 2004 Magma Design Automation, Inc. reported results for its first quarter in fiscal 2004 ending June 30th 2004. Total revenue was $36 million at the high end of its forecast, a 58% increase over the prior year and a 6% increase sequentially. Net income for the quarter was a loss of $2.5 million compared to a net gain of $73 thousand the prior year and a net gain of $4.4 million the prior quarter. On a pro forma basis net income was $7.7 million versus $4.9 million a year ago and $7.1 million a month ago. Expenses for the quarter included a $4.0 million in-process research and development charge related to Magma's acquisition of Mojave Inc., a $502 thousand charge for restructuring and $458 thousand for amortization of stock based compensation. In the corresponding period last year there was a $4 million charge for amortization of stock based compensation.

“The quarter just concluded continued Magma's growth trends,” said Rajeev Madhavan, Magma chairman and CEO. “It was the seventh consecutive quarter of increasing revenue as we had solid financial performance. We continue to work with designers addressing critical challenges in today's most aggressive chip designs.”

On Jul 22nd, 2004 Mentor Graphics announced its results for the second quarter. Total revenue for the quarter was $169 million up 3.2% sequentially and almost 8% year-over-year. Menotr had given guidance 3 months ago of $170 million in revenue for Q2. System and software revenue, 58% of the total grew faster than service and support revenue, 42% of the total, particularly with respect to the same period last year. Revenue by region was 50% Americas, 25% Europe, 15% Japan, and 10% Pacific Rim. Japan was particularly robust. Net income was a loss of $33 million a severe reversal from the $2.2 million in the prior quarter and the $4 million a year earlier. However, GAAP taxes fo the quarter were $38 million, $36.6 million of which was a charge arising from a one-time dividend declared by the company's Irish subsidiary to the US parent company in the amount of $120 million.

During the quarter, Mentor launched its CatapultC Synthesis product at the Design Automation Conference (DAC). Mentor also recently introduced the I/O Designer tool, a new product that facilitates concurrent chip-to-board design of field-programmable gate arrays (FPGAs) and the PCB, as the number of pins on the FPGA grows.

"While the overall electronic design automation business climate remains challenging, Mentor's strength in products for new design methodologies continues to fuel growth," said Walden C. Rhines, chairman and CEO, Mentor Graphics. "Examples include Calibre resolution enhancement technology, automotive cabling, analog/mixed-signal design and new printed circuit board (PCB) design tools. We also had seven product families that set bookings records for the second quarter."

"By region, Japan clearly is leading Mentor's overall growth, with new strength there in PCB design tools," said Gregory K. Hinckley, president, Mentor Graphics. "Despite weakness in our new and emerging product category, we saw important areas of strength. Our cabling business, for instance, won two contracts directly with automobile manufacturers this quarter, a critical milestone for the business and an indication of its growing momentum."

"Mentor's focus on new design methodologies is sustaining the company's growth, even in the mixed business environment we continue to experience," said Rhines.

On July 14th, 2004 Nassda Corporation announced its results for the second quarter. Revenue for the quarter was $11 million, above its 3-month old forecast. This result was a 12% sequential increase and a whopping 46% increase over the same period last year. Subscriptions accounted for 53% of revenue, maintenance 23% and product licensing 24%.

Net income for the quarter was $1.1 million up $315K or 42% sequentially and up $870K or 443% year-over-year.

“We are very excited to have achieved our highest level of revenue and met our earnings target. In addition, our cash, cash equivalents and short-term investments increased by approximately $3.7 million during the quarter and totaled $99.9 million as of June 30, 2004,” said Sang Wang, Chief Executive Officer. “On the product development front, we also released our new HSIMplus platform during the quarter and now offer a suite of options to help address the major stumbling blocks to the success of large and complex IC designs at 130 nanometer and below, such as reliability of power and signal networks, the timing impact of dynamic voltage drop and the effects of crosstalk noise.”

On August 2nd, 2004 Synopsys announced preliminary results for the second quarter. The Company then said that it expected total revenues to be $279 million to $283 million, compared to its previous target range of $300 to $320 million. The Company expected GAAP earnings per share to be $0.15 to $0.19, compared to its previous target range of $0.20 to $0.25, and non-GAAP earnings per share to be $0.31 to $0.34, compared to its previous target range of $0.35 to $0.40.

On August 18th, 2004 Synopsys formally announced its final results for the second quarter. Total revenue for the quarter was $281.7 million, a 6.2% decrease compared to revenue of $300.4 million for the third quarter of fiscal 2003 and a 4.4% drop sequentially. On a product segment basis Gallaxy (60% of total) declined almost 12% year-over-year and Discovery (21% of total) declined just 1.2%. On a positive note smaller segments such as Design for Manufacturing (7.2%) grew 43% and Service (4%) grew 9.6%. On geographic basis North America (56% of total) declined 12%, Europe (16%) dipped 5.1% while Japan (16%) grew 14.8%. On a sequential basis Gallaxy declined 9% while Discovery increased 1.2%. Also Japan and AP each declined around 20%, while North America grew 1.4%.

Synopsys net income for the quarter was $41.8 million down almost 14% compared to net income of $48.5 million for the third quarter of fiscal 2003 and up 46% from the $28.7 million in the previous quarter. On a non-GAAP basis, net income was $53.2 million, compared to $66.9 million last year and $57.1 million last quarter.

“Clearly, our third quarter was tough, mainly due to lower-than-expected bookings for upfront licenses, with several contracts being pushed out very late in the quarter,” said Aart de Geus, chairman and chief executive officer. “In July, customers became markedly more cautious about extending existing commitments and spending cash, particularly impacting our upfront bookings, which under our model require front-loaded payment terms. Recent announcements in the industry of lower earnings and reduced forecasts suggest continued caution on customer spending. This caution, and the fact that we anticipate 2005 will be a relatively low renewal year for Synopsys, will reduce our bookings expectations for fiscal 2005.”

“Against this backdrop, with new technology rolling out this year and accelerating in 2005, and with the advantage of a strong existing backlog, we have decided to move Synopsys immediately towards a maximally subscription-based license model,” continued Dr. de Geus.

CFO Steve Shevick added “The brief explanation of why we fell short is that we did not book and ship our forecasted level of upfront licenses during the quarter. Though the pipeline was sufficient, too many opportunities fell out late in the quarter. Many opportunities fell out due to our payment terms requirements. As I have explained in past quarters, in order for us to recognize revenue upfront the customer must pay 75 percent of the license amount plus the first year's maintenance within one year of shipment. This is the most stringent standard applied by the major EDA vendors. As Q3 developed, customers became less willing to agree to these terms.”

During the quarterly analyst call Aart de Geus touted the benefits of this new strategy as preserving pricing on their technology, being more attractive to customers than up-front payment alternatives, enabling a better matching of products and services to current customer needs and providing greater visibility to revenue while decreasing end-of-quarter uncertainty. He also pointed out that Synopsys will be in the low part of its renewal cycle for the next five quarters with their global and strategic accounts, which make up two thirds of their business.

Note: After its final results announcement, Synopsys shares fell more than 28 percent in after-hours trading. Analyst on the call hammered away at why the shortfall was not recognized earlier. One analyst commented “This is now a show me story that lacks catalysts, and suffers from a loss of management credibility” Another said "the company revealed in stunning detail the fact that it is as susceptible to the vagaries of the semiconductor cycle as its customer base.”

On July 21st, 2004 Synplicity, Inc. announced financial results for the quarter ended June 30, 2004. Revenue for the quarter was $14.2 million,, slightly above its 3-month old guidance. This results was a 16 percent increase from revenue of $12.2 million for the quarter ended June 30, 2003 and a five percent sequential increase from revenue of $13.5 million the prior quarter.

Net income for the second quarter was $469,000 compared to a net loss of $599 last year and a net profit of $296 last quarter.

“Our strategy to expand our market opportunities continues to pay off for us, and I am proud that we exceeded both our revenue and earnings guidance for the quarter,” said Bernard Aronson, President and CEO of Synplicity. “Bookings for our ASIC synthesis products grew 60% over the same period last year, led by multiple license sales with major customers. Overall bookings for our ASIC products represented 24% of total product bookings, and we believe we continued to maintain our leadership position in the FPGA synthesis marketplace. In addition, year-to-date bookings from time-based and multi-year arrangements as a percent of total bookings grew to 25% from 16% for the same period last year. Though these bookings do not fully contribute to revenue immediately, they are a source of recurring revenue and help increase our revenue visibility," Aronson concluded.

On July 26th, 2004 Verisity Ltd. announced its results for the second quarter. Total revenue was $13.7 million, at the high end of its 3-month old guidance. This result is a 10% increase from revenue of $12.5 million for the same quarter in 2003, and a 24% increase from revenue of $11 million for the prior quarter. Net income was a loss of $2.5 million compared to net gain of $2.2 million last year and a net loss of $2.2 million last quarter.

In May Verisity announced a new product package specifically targeted for high-performance chip- and system-level verification. SpeXtreme is a direct kernel integration of Verisity's recently announced SpeXsim and the Xtreme-II acceleration and emulation solution acquired with the acquisition of Axis Systems. SpeXsim combines Verisity's Specman Elite for process and testbench automation Specman Elite with Axis' event-based, mixed-language simulator Xsim.

"We are very pleased with our financial results for the quarter. We built substantial backlog while growing revenue to $13.7 million. Customers have embraced our expanded product offerings, quickly validating our recent strategic acquisition of Axis Systems," said Moshe Gavrielov, chief executive officer of Verisity. "We are now able to offer customers the full complement of solutions required for block, chip and system level verification. This has significantly fortified our competitive position in the verification marketplace. Our quick integration of Axis Systems allowed us to announce our SpeXtreme solution, integrating our market leading testbench automation solution with simulation, acceleration and emulation. SpeXtreme targets high performance chip- and system-level verification that will enable customers to significantly increase their verification performance," added Gavrielov.

EDA versus MCAD

The most recent quarterly performances of nine public MCAD Vendors will be provided in the August MCAD Commentary soon to be published on MCADCafe. Meanwhile, how did the top three EDA companies fair against the top three MCAD companies in Q2 2004?

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