Commentary: EDA Industry Update – July 2010 What did nominal Q1 2010 Bring?

Guidance provided 3 months ago by Synopsys for Q1 2010 was for revenue between $331 million and $339 million, so they actual result of $338.1 was near the top of the forecat range.

"Synopsys again delivered solid results this quarter," said Aart de Geus, chairman and CEO of Synopsys. "While the customer backdrop remains cautious, we continue to execute well on our strategy to address customer needs ranging from mainstream to the most advanced silicon design flows, all the way to the rapidly growing IP and systems space. This quarter we made particular progress in the latter, where we believe we have an especially promising outlook."

GAAP Results

On a generally accepted accounting principles (GAAP) basis, net income for Q1 2010 was $39,549,000 [$39.5 million], or $0.26 per share, down 18.1% compared to $48,288,000 [$48.3 million], or $0.33 per share, for Q1 2009. Synopsys of course had no prayer that the net income [$39.5 million] in Q1 2010 could match the extra-large sequential Q4 2009 net income of $132,786,000 [$132.8 million].

Financial Targets

Synopsys also provided its financial targets for the nominal Q2 2010
Revenue: $330 million - $338 million
GAAP expenses: $275 million - $292 million
Other income and expense: $0 - $3 million
Fully diluted outstanding shares: 149 million - 154 million
GAAP earnings per share: $0.21 - $0.27
Revenue from backlog: greater than 90%

Synopsys' self description:

Synopsys is a world leader in electronic design automation (EDA), supplying the global electronics market with the software, IP and services used in semiconductor design and manufacturing. Synopsys' comprehensive, integrated portfolio of implementation, verification, IP, manufacturing and FPGA solutions helps address the key challenges designers and manufacturers face today, such as power and yield management, system-to-silicon verification and time-to-results. These technology-leading solutions help give Synopsys customers a competitive edge in bringing the best products to market quickly while reducing costs and schedule risk. Synopsys is headquartered in Mountain View, California, and has more than 60 offices located throughout North America, Europe, Japan, Asia and India.

General News that affects the Economy

Jobs, Jobs, Jobs:

July 01, 2010: Initial claims for US unemployment benefits rose last week for the second time in three weeks. At the same time, more than a million US people have lost benefits and more could be cut off now that Republicans in the US Congress have again blocked efforts to extend federal jobless aid. New claims for benefits jumped by 13,000 to a seasonally adjusted 472,000, the US Labor Department said July 01. More than 1.3 million laid-off workers (continued below)

won't get their unemployment benefits reinstated before lawmakers go on a weeklong vacation for Independence Day in the United States. The numbers could reach 3.3 million by the end of this month if the extension is not passed, the US Labor Department said. For the third time in as many weeks, Senate Republicans blocked a bill on June 30 that would have continued unemployment checks to Americans who have been laid off for long stretches. During the recession, the US Congress previously added up to 73 weeks of extra benefits on top of the 26 weeks typically provided by states. Some economists say they may now have to revise their forecasts for US growth in the third quarter, if the benefits are not extended. PS The benefits were not extended before Congress left town for the weekend!

From a June 27, 2010 article in the New York Times, the following are the gist/interpretation and excerpts of a warning by Nobel Laureate Economist Paul Krugman to policy makers in Washington DC:

Recessions are common; depressions are rare. There were only two eras in economic history that were depressions; i.e. the years of deflation and instability that followed the Panic of 1873, and the years of mass unemployment that followed the (Coolidge/Hoover) financial crisis of 1929-31. Both included short periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slumps, and both were followed by relapses.

“We are now, I fear,” said Krugman, “In the early stages of a third depression. The cost - to the world economy and, above all, to the millions of lives blighted by the absence of jobs - will nonetheless be immense. And this third depression will be primarily a failure of policy.” Around the world, some governments (and some US Congressmen) are preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, current US and certain world leaders slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today's governments recently allowed deficits to rise. And these better policies helped the US and the world avoid complete collapse: the recent recession brought on by the 2007-08 (Wall Street/Big Banks) financial crisis arguably (technically) ended (in mid 2009).

But future historians will tell us that that ending wasn't the end of the third depression, just as the business upturn that began in 1933 wasn't the end of the Great Depression. After all, current unemployment - especially long-term unemployment - remains today at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And without a change in policy, both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might expect policy makers to realize that they haven't yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy!

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the world economy, by “improving business confidence.”

As a practical matter, however, America isn't doing much better. The Fed seems aware of the deflationary risks - but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity - but because Republicans and conservative Democrats in Congress won't authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the national, state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it's true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners' medicine.

It's almost as if the financial markets understand what policy makers seemingly don't: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don't think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times. And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

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Review Article
  • Always interesting. July 09, 2010
    Reviewed by 'S. Lee Ryan'
    I have workd with Dr. Henke in the past and will say he was most helpful and insightful as well as practical in his knowledge. I look forward to reading his articles here very much. Thanks, Russ

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