2013_Q3: The Good Times continue, with qualification

It’s clear that these are heady days in EDA and IP. The numbers have been up and to the right for a number of quarters now and everybody’s feeling good about things, including Mentor Graphics CEO Wally Rhines. He was doing the rounds last week talking up EDAC’s Market Statistics Service report on the industry for Q3_2013; the report was published this week on Tuesday.

On my phone call with Rhines I found him exuberant, so I started with a comment to which Rhines was not allowed to respond; he was speaking for EDAC in that conversation and not for his own organization.  “Wow,” I said. “Mentor is really doing stupendously if your stock valuations are any indication, up over 40 percent in the last year.”

Rhines said nothing, but did chuckle, so I continued: “Wow again, then, for the overall EDA and IP industries. Having said that, I’ve noticed – perhaps not for the first time – that Synopsys does not officially submit numbers for these quarterly MSS updates. What’s up with that?”

Rhines responded, “It’s true Synopsys does not provide additional information, but the total numbers for the industry are accurate.”

He noted that Synopsys is publicly traded, and regularly releases breakouts of their revenue numbers by segment. “If those numbers were to seem misleading to us,” he said, “we are free to question them about it. To date, they’ve been fairly cooperative in answering any questions.”

“So MSS acknowledges that not everybody reports,” I asked, “but still the conclusions are valid?”

Rhines answered, “We have a number of companies reporting specific numbers, and then when we feel there are omissions, it’s fairly easy to get accurate numbers [by way of] audits and published reports.

“Again, the total numbers are quite accurate and the detailed segment information reflects the trends in the industry. Also, Cadence and Mentor are reporting companies – along with 35 other companies – so there’s a great deal of information consolidated in this report, right down to the minutest detail.”

I asked who cares about the MSS numbers, given that the three big companies in EDA dominate the market and the situation’s even more consolidated in IP.

Rhines said, “The numbers are an advantage to the large companies and let us see how we are doing with respect to our competition, but the information is particularly important to the smaller companies. This is how they get their additional rounds of funding, by pointing to their market share. Some companies may drop out of the quarterly reporting [for a time], but overall the information for the industry is accurate [and widely used].”

“But many believe that VC funding is almost non-existent in EDA these days,” I said, “so where’s the use in the report for defending additional funding?”

Rhines answered, “Yes, and there is also a drought in venture-funded fabless startups, although there are a lot in China, Israel and India. Although it’s true in EDA that venture-funded startups are down, it’s hard to know [what level of investment is going on], because the majority may be angel-funded or self-funded.

“When you look at how much venture funding is going into semiconductors and EDA, you’re only looking at the public funding. The numbers comes from the large investments, because they are made public. Venture funds have share holders who need the information. Angels and self-funders like to stay invisible, however, until the time is right and when that’s the case, you can’t say that nobody wants to invest in EDA.”

Moving on, I noted that the IP market is particularly up, according to the report.

Rhines responded, “Be careful to note the difference between reporting and non-reporting SIP companies. It turns out the non-reporting companies have had terrific growth, whereas the reporting companies have had somewhat of a decline. Synopsys actually does report their SIP numbers, so that data is included, but ARM doesn’t report their numbers, or RAMBUS for instance.

“Although ARM is a member of EDAC and does report on some things, they do not report on their major business, so they are the principal non-reporting SIP company. Since the company publishes its revenue, however, we have the information and there is strong growth there. Nonetheless, I wouldn’t highlight IP revenue [as the most significant] in the MSS report. I would highlight physical design and services.”

“In addition, you can’t look at just one segment, because within any given quarter things fluctuate a lot. To just look at a particular quarter can be misleading. In fact, in Q3_2013, the reporting companies have actually been relatively flat.”

“If the MSS report went away,” I asked, “would it affect the arc of history in the industry?”

Rhines said, “The big companies could spend resources on [figuring things out] and Gary Smith does report out once a year, but his data is usually released 9 months after the data is [made available], whereas EDAC’s numbers are only a little more than a quarter after the fact.

“So there would be a loss without the EDAC report, and it would be heaviest on the small companies. But it would also be a loss for the bigger companies. Without the report, the world would then revert solely to Gary’s numbers. ”

“What you do personally get out of being involved in this quarterly effort to publicize the MSS report?” I asked.

Rhines was sure-footed in answering, “This is an obligation we all have for the good of the industry. You might also ask why am I on the board of SRC, the Semiconductor Research Corporation, which administers $40 million to universities. We all have to hire students [into the industry], so we need to be sure their curriculum is relevant to the kind of the people we need.

“Also, the EDA Consortium makes for a healthy EDA industry. Together we do things a single company can’t do, addressing the piracy issue for example.  Acting as a group, we can do something about it. Everybody in our industry has some obligation to support these efforts.”

“Okay,” I said, “give me the three main take-aways from the latest MSS report.”

Rhines answered, “Overall, EDA continues at a good stable growth rate as a healthy industry, despite the ups and downs that occur among our customer based. You’ve got a troubled Japanese market right now, and also consolidation in the wireless chip industry, yet EDA seems to be producing steady growth.

“Six-to-eight percent growth, year over year, is a good number. Not unusually large, but reflects good stability, and there is growth in employment in the industry as well.

“And third, it appears that IC physical design continues to be a strong segment, that and services, both of which speak to physical design at the smaller process nodes.”

Rhines offered a fourth take-away, although it wasn’t specifically articulated: These are good times to be in EDA and IP, and don’t let anyone tell you otherwise.

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Q3_2013 Revenue by Product Category …

* CAE generated revenue of $643.5 million, which represents a 1.7 percent increase compared to Q3_2012.

* IC Physical Design & Verification revenue increased to $362.9 million, an 11.1 percent increase.

* Printed Circuit Board and Multi-­‐Chip Module revenue of $152.5 million represents a decrease of 0.3 percent.

* Semiconductor Intellectual Property revenue totaled $476.9 million, a 12.7 percent increase.

* Services revenue was $93.5 million, an increase of 10.4 percent.

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Tags: ARM, Cadence, EDA Consortium, EDAC, Mentor Graphics, MSS, Synopsys, Wally Rhines

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