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

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

by Dr. Russ Henke

May 23, 2003

What does the landscape look like for the EDA segment? Are public EDA vendors better off than their MCAD counterparts? One industry observer offers his thoughts on the subject.

In a May 8, 2003 commentary by this author published in MCADcafe.com, recent yearly and quarterly financial performances of eight (8) public Mechanical Computer Aided Design (MCAD) companies were analyzed and compared. Expectations of future financial performances of these same MCAD entities were documented. The conclusions? A gloomy economic outlook still grips most high-tech companies and, in terms of major revenue growth, a significant MCAD turnaround is unlikely during 2003.

What about MCAD's companion industry segment: Electronics Design Automation?

As the premier tradeshow for electronics design automation (EDA) vendors approaches (DAC 2003, June 2-6, Anaheim, CA), let's take a closer look at some of the top players in this category. EDAtoolsCafe.com tracks the financial performance of seventeen (17) public companies across the broader electronics tools market, from which we have arbitrarily selected ten (10) to represent EDA vendors in the software & programming industry.

Taken together, three of these EDA companies (Cadence, Mentor Graphics, and Synopsys) represent a dominant 90 percent of the total revenue in this grouping, and each of these three companies offers a wide array of software products and services.

The remaining seven (7) EDA public companies selected - Altium, Ansoft, Magma, Nassda, Synplicity, TransEDA and Verisity - offer specialized software/services products in specific EDA niches. Combined, they generate the remaining 10 percent of the revenue of the ten companies being considered here. Not infrequently, some of these seven smaller companies partner with one or more of the Big Three (Cadence, Mentor, Synopsys) to provide end-customers with broader solution suites. (Of course, the possibility always remains that one or more of the seven could become acquisition candidates for the Big Three as well).

The collective annual revenue of these ten selected EDA companies worldwide is just north of $3 billion, which compares favorably to the combined ~$4 billion in annual revenue created by the eight MCAD companies covered on May 12. However, even the pooled ~$7 billion in revenues of both of the selected MCAD and EDA company groupings pales in comparison to the $150 billion spent globally on an annual basis across all categories of software.

As with MCAD software, however, the importance of the EDA software niche lies in the leverage it provides to users applying the tools. EDA helps to create the electronic integrated circuits, microprocessors, memories, boards, MCMs, computers, PDAs, cell phones, automotive electronics and avionics, smart appliances, and other such electronic systems now clearly omnipresent in our everyday lives.

More than ever before, it's truly an electromechanical world!

Both MCAD and the slightly more youthful companion industry of EDA are arguably responsible for enabling virtually all contemporary manufacturing industries - industries which are creating real productivity and national wealth in every modern economy.

So how did the ten selected EDA companies do in 2002 versus 2001?

As seen in Figure 1, four of the ten EDA companies examined enjoyed good double-digit percentage growth in revenues in 2002 compared to 2001 (Synopsys, Magma, Nassda and Verisity). It may even be asserted that both Synopsys and Magma created excellent revenue growth: Synopsys for growing 43 percent on top of such a large base, and Magma for increasing revenues 82 percent year over year.

Mentor Graphics held its own in 2002 versus 2001 revenues. Cadence revenues dropped almost 10 percent, a small drop in terms of percentage points, but a large drop in terms of dollars at $137 million. Altium, Ansoft and Synplicity revenues also sank nearly 10 percent, but on smaller bases. TransEDA suffered the most precipitous drop in 2002, shedding nearly 40 percent of its 2001 revenue level.

On the other hand, the records of these companies in GAAP net income performance, year over year, were considerably less robust than their respective revenue realizations. Fully seven of the ten showed decreases in profitability, with six reporting red ink.

Cadence dropped nearly $70 million in net income, but stayed in the black. Mentor Graphics lapsed into the red, and Synopsys tempered its impressive revenue growth with a massive loss at the net income line in 2002.

Three members of the seven smaller companies managed improved profitability in 2002 over 2001. Nassda and Verisity scored modest gains, and Magma matched its remarkable revenue growth with a ~$30 million improvement at the net income line. Verisity's net income-to-revenue ratio (+25 %) was the best of the ten in 2002.

Altium's net fell, but stayed black; Ansoft's losses deepened; Synplicity slipped into the red; and TransEDA paired its precipitous revenue plunge with an even more disastrous loss at the net income line (see Figure 1 below).

Price/Sales Ratio

Another key parameter that observers use to compare companies, is the ratio of market capitalization to ttm (trailing twelve month) revenues, which provides insight into how the stock market values the "quality" of each company and its financial performance.

How did our chosen EDA companies fare recently in this category? (see Figure 2)

The range of these price/sales ratios among the nine of the ten EDA companies where such ratios are meaningful, was 0.80 at the low end (Altium), up to a spectacular 7.43 for Magma. (The range for the eight public MCAD companies reported on May 12, was narrower: 0.51 for MSC.Software to a top figure of 4.64 for ANSYS).

The Big Three EDA companies (Cadence, Mentor, and Synopsys) sported an average price/sales ratio of 2.53, with Synopsys leading the three at 3.70. (The three largest stand-alone MCAD companies - Autodesk, Dassault Systemes, and PTC - averaged only 2.44, with Dassault Systems at the top of that list at 3.98). Adding in the price/sales ratios for the remaining six EDA companies in this study drives the average for the nine EDA companies up to 3.33. Adding in the four additional MCAD companies, however, does not improve the price/sales ratio average beyond that of the top three MCAD companies.

Since the S&P 500 average price/sales ratio for the same period was 3.16, the nine public EDA companies are slightly outperforming the S&P 500, whereas the seven MCAD companies mentioned are under-performing.

Another interesting analysis might be to compare the percentage of company revenues spent on R&D by the three largest entities in EDA and in MCAD for the most recent year (see Figure 3).

Mentor Graphics and Dassault Systemes spend notable percentages of revenue on R&D, above their respective Big Three segment averages. The EDA Big Three spend slightly more on R&D than their MCAD counterparts, as a percent of revenues (3.3% more). In general, however, both EDA and MCAD are R&D intensive - not surprising, given the complexity that these automation tools face in helping to solve the design-to-manufacturing challenges associated with present-day electromechanical systems.

Of course, the larger the revenue base of a company, the more absolute dollars are available to R&D at the same percentage level. Others may argue, however, that the more the company revenue, the more the R&D team must tend to legacy code and customers rather than to new developments.

What can we ascertain about Market Capitalization and Return on Equity? (Figure 4)

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