Commentary: Electronics IP Industry - A November 2005 Update

Comments on the IP business of Cadence, Mentor Graphics and Synopsys:

The Top 3 EDA Vendors in overall annual revenue are also important players in the IP providers' niche. The difficulty in comparing the Top 3 EDA Vendors' IP business to one another is caused by the differences in how each company arbitrarily chooses to define the revenue components of its respective IP businesses. Further, none of the TOP 3 EDA Vendors unbundles profitability of its respective IP-related business lines, precluding IP earnings' comparisons.





EDA Consortium's Market Statistics

On October 5, 2005-The EDA Consortium's Market Statistics Service (MSS) announced that EDA industry revenue for Q2 of 2005 was $1,091 million, versus $1,094 million in Q2 2004. Total product revenues, without services, were $1,028 million in Q2 of 2005 vs. $1,024 million in the same quarter of 2004. During 2Q 2005 CAE accounted for 41% of total industry revenue, IC Physical Design & Verification for 27%, Semiconductor IP for 19%, PCB and MCM for 8% and Services for 6%.



Walden C. Rhines, chairman of the EDA Consortium and chairman and CEO of Mentor Graphics Corporation, said: "The EDA industry continues to realign, as strength in printed circuit board, IC physical design and verification, offsets weakness in traditional markets like computer-aided engineering. Japan continued its strong growth momentum, up 15% over the second quarter of 2004."

North America at $528 million accounted for 48% of total industry revenue and was flat year over year. Europe at $189 million accounted for 17% of total industry revenue and was also flat year-over-year. Japan at $242 million accounted for 22% of total industry revenue and was up 15% year-over-year. ROW at $132 million accounted for 12% of total revenue was up 5% year over year.

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.



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The U.S. Employment Picture

The data in the foregoing reveal that revenue for the G7 Electronics IP providers was down this last quarter, as were their market caps. The EDA industry in general has been struggling just to stay flat for years. Yet U.S. GDP is apparently rising and corporate profits in general are up (with energy company profits at obscene levels). But what have not been doing well are U.S. nonfarm employment levels.

Having witnessed the net deterioration in employment for the past five years, the U.S. job situation sank even further during the last three months. Job growth slowed in October 2005, even excluding the direct impact of two monstrous hurricanes, the U.S. Labor Department said on November 4, 2005. Nonfarm U.S. payrolls rose by only 56,000 in October 2005, well below the already pessimistic estimate of 102,000 that economists had predicted. Worse, previously-reported job growth in August and September was revised lower by a cumulative 36,000.

These last three months represent a precipitous fall off from the meager job creation year-to-date through July, which averaged barely enough to keep up with population growth. See Figure 3 below. "The job market may have been weaker than previously thought before the hurricanes struck", said Christopher Piros, director of investment strategy for Prudential's Strategic Investment Research Group. "While payrolls have expanded by 48,000 from August to October, the growth came from a 52,000 rise in temporary employment and a 45,000 gain in construction jobs. Meanwhile, the rest of the economy has lost 49,000 jobs," Piros said. "That's not exactly a picture of strength."



Real U.S. consumer spending declined for the second straight month in September. Adjusted for inflation, real spending fell 0.4% in September after dropping 1% in August, the Commerce Department reported. It's the first back-to-back decline in spending in 15 years.

Meanwhile, inflation soared at the fastest rate in 24 years in September, further eroding consumers' purchasing power. Trying to fend off inflation, Fed policy-makers bumped up its key interest rate to its highest level in more than four years on November 1, 2005, making it still more difficult for U.S. employers and employees alike to get credit. More rate increases are expected.

The latest jobs picture comes as President Bush is confronted with his own sagging job ratings. Bush's job approval is at the lowest level of his presidency. The latest AP poll showed Bush's approval rating has dipped to 37% compared with 39% just a month ago.



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 more than three dozen. 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 Fellow of ASME International. An affiliate of the HENKE ASSOCIATES team since 2001, LA-based Dr. John R. (Jack) Horgan co-authored this article. Jack's career has included executive positions at Applicon, Aries Technology, CADAM and MICROCADAM, as well as a stint at IBM. Since May 2003 the authors have now published a total of thirty four (34) independent articles on MCAD, PLM, EDA and Electronics IP on IBSystems' MCADcafe and EDAcafe. Further information on HENKE ASSOCIATES, and URL's for past Commentaries, are available at http://www.henkeassociates.net.



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