Commentary: EDA Industry View May 2003 - Is a Major Upturn Near?

Nassda News Release April 16, 2003

"Despite an encouraging start to its financial year, TransEDA suffered along with most of the EDA market as a result of the downturn experienced during the second half of the year. This resulted in the Company not reaching its expectations in terms of financial performance. There have been a number of changes at Board level. We have reduced expenditure to adapt to the current economic climate without compromising our ability to produce high quality verification tools for our customers and we believe that the Company is now in a position to benefit from an up-turn in the market. Our first quarter figures are in line with expectations and we will continue to launch new products in the year ahead."
TransEDA News Release November 5, 2002

"We are pleased with our financial results for the quarter (ended March 31, 2003) in what continues to be a challenging global economic environment. While customers continued to scrutinize their product plans and struggle with budget priorities, the need for functional verification tools remained essential for those customers with increasingly complex designs. The following statements are based on current expectations: Revenue in the second quarter of 2003 ending June 30, 2003 is expected to be approximately $12.5 to $13.0 million (Note - flat to 4 percent growth versus a year ago quarter); Earnings per fully diluted share in the second quarter of 2003 is expected to be approximately $0.09 to $0.10 (Note - well down); Revenue for 2003 is expected to be between $55 and $57 million (Note - four percent to eight percent growth); Earnings per fully diluted share for fiscal 2003 is expected to be between $0.45 and $0.50 (Note - down)."
Verisity News release April 21, 2003


Based on the foregoing article in aggregate, it is probably safe to conclude that the public EDA segment is doing slightly better than the MCAD counterpart, but not by much.

On average, the EDA players included above had more revenue growth in 2002 over 2001, in percentage terms, than the MCAD companies covered on May 12; also, the EDA list contained a couple of companies with larger extremes of revenue performance than the MCAD list. However, the EDA list also showed an average loss at the net income line for 2002, while their MCAD list reported a slight net profit on average. Both groups posted a decline in net income for 2002, compared to 2001.

As we saw above, the EDA list outperformed the MCAD list in average price/sales ratio, although the EDA entities barely eclipsed the average price/sales ratio for the S&P 500. EDA companies are also spending more than MCAD on R&D as a percentage of revenue - but again, not by much. The three top companies in EDA enjoyed a 28% higher market cap than the three largest MCAD companies shown, but both segments' representatives average ROE (Returns on Equity) were negative for 2002, with MCAD's "slightly less negative" than EDA's. Meanwhile, both segments' representatives were well below the software and programming industry's average ROE.

Perhaps most telling: neither the EDA list nor the MCAD list averaged much revenue growth in their latest quarters over the same quarter last year. This result, combined with the management comments paraphrased from EDA-company press releases above, suggest that 2003 may not be a whole lot better than 2002 for either the EDA vendors or the MCAD software suppliers! Additionally, since six of the ten EDA companies listed in this article are headquartered in Silicon Valley, this is definitely not good news for the electrical engineers in the Valley who are part of the 7 percent of the EE workforce currently unemployed here.

Even if we begin to experience a real worldwide economic recovery, and assuming high tech follows suit, we're probably still looking at mid-2004 at the earliest before significant annual revenue growth rates start to return to either EDA or MCAD public companies. Which segment has the edge in the close race to recovery? If I were a betting man, I'd give a slightly positive edge to the EDA industry!

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About the Author
Since 1996, Dr. Russ Henke has been president of HENKE ASSOCIATES, a San Francisco Bay Area high tech business & management consulting firm. During his corporate career, Henke operated 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, Gould Electronics, Mentor Graphics, and others. Henke is an SME Fellow and currently serves on the SME International Board of Directors. He is also a member of the ASME and IEEE. Further information on HENKE ASSOCIATES is available at http://www.henkeassociates.net.

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