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

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, 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. 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)

Based on market capitalization, we see once again in Figure 4 that the three leaders in both EDA and MCAD, when combined, represent but a small part of the software industry and, of course, an even smaller part of the entire technology sector.

Moreover, with the exception of Dassault Systemes, none of the six EDA/MCAD companies above is doing particularly well on ROE compared to the U.S. software & programming industry average, or even compared to the entire U.S. technology sector average in general - at least for the last year. (But don't forget - it's the leverage these EDA and MCAD vendors provide to their customers that is their appeal.)

How about the Q1 2003 performances of the EDA group?

In Q1 2003, two of the three largest EDA vendors, Mentor Graphics and Synopsys, had major quarterly revenue up-ticks year-over-year. Mentor Graphics was up 24 percent. Synopsys turned in a whopping 57 percent increase in the quarter ending April 30, 2003, easily leading the pack (see Figure 5). However, Cadence revenues were off 26% compared to the same quarter last year.

The seven smaller companies also produced mixed results, with Magma delivering an excellent 26 percent up-tick in year-over-year quarterly revenue; Nassda, Synplicity, and Verisity showing slightly improved revenue results year-over-year; Altium and Ansoft showing slight declines; and TransEDA enduring a drastic drop.

Relative to earnings per share (EPS), Mentor Graphics and Synopsys were understandably in the black in Q1 2003, but Cadence was in the red. However, only three of the seven smaller companies were able to show black ink (Magma, Nassda and Verisity) in Q1 2003.

Outlook for Q2 2003 and the rest of the year?

What are the management teams for these EDA companies saying lately about the rest of 2003? Some of their comments are listed below, paraphrased from recent company news releases as these companies contemplated their futures ("Notes" in parentheses are those of this author):

"Cadence will continue to execute with the financial discipline needed to respond to market dynamics when the market improves. Ours is the most complete technology design portfolio in the world, and now it's the most advanced as well. For Q2, the company expects total revenue in the range of $265 to $275 million (Note - this would be ~5 percent growth). GAAP EPS is expected to be in the range of 0 to 1 cent. For the full year 2003, GAAP EPS is expected to be in the range of 12 to 17 cents" (Note - no full year 2003 revenue estimate was provided).
Cadence News Release April 15, 2003

"For the current quarter (ending June 30, 2003), Mentor Graphics forecasts revenues of $156 million to $162 million (Note - flat with Q1) and GAAP earnings of 2 cents to 7 cents a share. Mentor repeated its full-year 2003 forecast, which calls for revenue of $665 million (Note - this would be 112% of 2002) and GAAP earnings of 39 cents a share. Analysts' current estimate is for 2003 earnings, excluding items, of 50 cents a share on revenue of $665.7 million."
Reuters News Release April 24, 2003

"Synopsys continues to exhibit strong financial discipline, despite a turbulent economic backdrop. Looking forward, we will continue to manage the company for steady revenue and earnings growth in 2003. Synopsys announced its operating model targets for the quarter ending April 30, 2003 and the full fiscal year. These targets assume the completion of the proposed acquisition of Numerical Technologies, Inc., before March 31, 2003, which is subject to a number of conditions, including receipt of regulatory clearances. Quarter ending April 30, 2003 targets: Revenue: between $275 million and $289 million; Earnings before goodwill (EBG): between $0.67 and $0.72 per share. Fiscal year 2003 targets: Revenue: between $1.130 - $1.180 billion (note - this would be 127% of Fiscal 2002); Earnings before goodwill (EBG): between $2.95 - $3.10; and subscription license duration: 3 - 3.25 years.
Synopsys News Release February 19, 2003

"Despite a tough economic backdrop, our second quarter (ending April 30, 2003) was the largest orders quarter in Synopsys' history. We are pleased with the Company's current momentum and look forward to achieving strong financial results during the remainder of fiscal 2003. Synopsys announced its operating model targets for the quarter ending July 31, 2003 and for full year fiscal 2003. Qtr revenue: $288 - $303 million; Total expenses: $207 - $214 million; Earnings per share: $0.77 - $0.82. Fiscal Year 2003 targets: Revenue: between $1.130 - $1.180 billion; Earnings per share: $2.95 - $3.10 (Note - same targets as forecast 3 months ago).
Synopsys News Release May 21, 2003

"With three quarters of results to draw on, the company now believes that revenue for the 2003 financial year (ending June 2003) will fall in the range of Australian dollars 45m-48m (US$ 24.7 million - 26.4 million)1. This revised revenue range is in line with the lower end of the company' s previous revenue estimates. Despite tough conditions, industry reports show that we have actually increased market share in the PCB segments of our business and hold a strong competitive position in our industry. From our investments in a broad range of technologies over the past three years, we are now poised to deliver a new line of electronic design tools. Whist we do not expect significant revenue contribution from this product line in the short term (12-18 months), we are confident that it will drive the performance of the business over the next three to five years."
Altium News Release April 10, 2003

"We had another quarter (ending January 31, 2003) of strong sequential sales improvement (Note - the quarter was down 12 percent year over year). Despite the challenging environment, we are confident that the strategic decisions and technological advancements we have made this year will return Ansoft to growth and profitability in the coming year and beyond." (Note - results of quarter ending April 30, 2003 will not be announced until May 28, 2003).
Ansoft News Release February 19, 2003

"We're pleased to announce such solid financial results this quarter (ended March 31, 2003), especially given the current economic climate. For the business outlook for Magma's fiscal 2004 first quarter which will end June 30, 2003, the company expects total revenue in the range of $21.5 million to $23.5 million (Note - would be ~124 percent quarterly growth versus a year ago quarter). GAAP EPS is expected to be in the range of $0.04 to $0.08 (Note - up from ~zero)."
Magma News Release April 29, 2003

"Although we remained profitable this quarter, we did not achieve our goals as many customers reduced or delayed their spending to control their own operating expenses and improve their bottom line results. Despite the change in customers' spending behavior, we intend to continue to improve our competitive position and productivity. We are committed to helping our customers to weather through the tough economic times and make their complex products successful. Moving forward, we do not yet see any meaningful improvements in our customers' spending pattern for the balance of fiscal 2003. As a result, we expect revenue of approximately $7.0 million and fully diluted earnings per share of approximately $0.00 for the quarter ending June 30, 2003. For fiscal 2003 (ending September 30, 2003), we now expect revenue of approximately $33.9 million to $34.1 million (Note - almost zero growth from previous fiscal year) and net income of $0.11 to $0.12 per fully diluted share (Note - well down from previous year)."
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