Commentary EDA Industry Update February 2004 -- What did the Last Quarter/Year Bring? By Dr. Russ Henke and Dr. Jack Horgan Henke Associates March 1, 2004

In May 2003, August 2003, and December 2003 EDA Commentaries by the authors (published on EDACafé.com), the then-current yearly and quarterly financial performances of a selected group of publicly traded Electronic Design Automation (EDA) companies were analyzed and compared. Expectations regarding the future financial performances of these same EDA entities were documented as well. This February 2004 report covers their performances for the fourth quarter of 2003 as well as for the full year 2003.

 

Preface

 

Based on news reports in the common media, it would appear that the general US economy has been improving in recent quarters. The US Gross Domestic Product had a spectacular third quarter with 8.2% growth and a lower but still positive fourth quarter with 4% growth. On Wall Street, the Dow Jones, S&P and Nasdaq rose 24%, 26% and 50% respectively for the 2003 year. Productivity increased 4.2 percent in the nonfarm business sector during 2003. Mergers & Acquisitions are on the rise as 2004 begins.

 

What about the electronics sector? During a February 2, 2004 webcast on "Fourth Quarter Results and Short Term Outlook," Doug Andrey, Principal Analyst for the Semiconductor Industry Association, presented data for the semiconductor industry as shown in Table 1 below:

 

 

 

Table 1 Semiconductor Industry Report - SIA

 

The total semiconductor worldwide market reported $166.4 billion in revenue versus $141 billion in 2002, a growth of 18%.

How did this strong performance translate into the revenues of our selected group of EDA software & services vendors?

 

 

How did the EDA Vendors fair during the fourth quarter of 2003?

 

 

Table 2 - Nine EDA Vendors' Latest Quarterly Revenue Performances ($ millions)

 

The combined Q4 revenues of the selected public EDA companies grew nearly 8% sequentially and 11% year over year. Magma was the biggest Q4 winner year over year with 66% growth. Only three vendors (Altium, Nassda and Verisity) had revenue declines year over year. All vendors had positive sequential Q4 growth except Synopsys, who dropped 10% largely due to a shift from perpetual to subscription licenses. The best performers on a Q4 sequential percentage basis were Mentor Graphics, Altium and Magma. Ansoft, Cadence, and Nassda had roughly 15% sequential growth.

 

 

Figure 2 EDA Vendor Relative Size

(Based upon Q4 2003 Revenues)

 

The three top EDA vendors (Cadence, Synopsys, and Mentor Graphics) accounted for 90% of the revenue in the fourth quarter. No other vendor reached five percent. In the previous quarter Synopsys had more revenue than Cadence.

 

 

Table 2 - Eight Public EDA Companies' Latest Quarterly Earnings Performances

 

The combined Q4 2003 earnings of the EDA companies grew 231% from $23.2 million to $76.8 million due to significant turn around at Cadence and Mentor Graphics. All vendors had Q4 earnings increases sequentially except Synopsys whose earnings dropped $12.4 million or 28%. Year over year combined earnings dropped 53%. Cadence had largest Q4 year over year decrease of $64 million or minus 73% due to special items, including income of $260 million last year from the Avant! Settlement.

 

Company by Company Q4 2003 details:

 

On January 14, 2004 Altium Limited reported its results for the second quarter of fiscal year 2004, the period ending on December 31, 2003. Total revenues were $AUD 9.9 million, a sequential increase of 11% but a drop of 25% from the same period last year. Altium does almost all of its business outside of its home country Australia, e.g 37% in the US and 52% in Europe. Consequently, its revenues are significantly impacted by shifts in the foreign currency exchange rates. The AUD has appreciated significantly over the last year. Revenues from the US were down 19% in US dollars but down 38% in AUD. European revenues were up 13% in local currencies but down 12% when presented in $AUD. When converted to $US, the total revenue for the quarter was US$7.3 million, up 27% sequentially and down 2.6% year over year. Altium did not provide any Q4 earnings information. For the fiscal year ended September 30, 2003 Altium lost AUD$7 million.

 

The company commented that "Worldwide, on a product by product basis both P-CAD and TASKING product lines had positive growth year on year, however sales of Protel did not meet expectations in the US or Australia in December. This shortfall in Protel sales during December is attributed to customer anticipation of the new Protel 2004 version release. The company believes that this is a short-term issue which will be resolved with the upcoming release of Protel 2004 next month on February the 16th."

 

"Whilst we are disappointed with our underperformance in the US during December, we are looking forward to a strong second half," says Kayvan Oboudiyat, Joint CEO, Altium. "Our confidence is supported by upcoming major product releases including two new products as well as 2004 versions of three of our existing products. We expect these product releases to drive increased sales, and we anticipate a continuation of the positive trend we experienced in the first five months of this year."

On February 18, 2004, Ansoft Corporation announced financial results for its third quarter of fiscal 2004 ended January 31, 2004. Revenue totaled $14 million, an increase of 13% compared to $12.4 million reported in the previous fiscal year's third quarter. Net income for the third quarter was $941,000, or $0.07 per diluted share, as compared to a net loss of ($58,000), or ($0.00) per diluted share in the previous fiscal year's third quarter.

On December 9^th Ansoft released ePhysics, new software that expands the capabilities of HFSS and Maxwell 3D. With ePhysics, engineers can now incorporate three-dimensional steady-state thermal, transient thermal and linear stress analysis into their existing electromagnetic-based design flows. On February 17^th the firm announced Nexxim, a new product targeting the next generation of analog/mixed-signal and high performance signal integrity applications,

Ansoft's President and Chief Executive Officer Nicholas Csendes commented, "Pretty good quarter. Our revenues increased 13% to $14 million compared to $12.4 million in the quarter last year. ... All three geographical regions experienced growth. North America and Europe did very well in the quarter. Although Asia lagged, we continued to see good growth in Japan. Sales of various product categories continued the trend of the last couple of quarters. As a percent of total revenue electromechanical rose from 24% to 19%, high frequency was steady at 63% and signal integrity declined to 12% from 18%"

On January 28, 2004 Cadence report its results for the fourth quarter and for the year ending January 4, 2004. Revenue for the quarter was $308 million, an increase of 14.6% sequentially and 12.4% year over year. Product revenue was up 30% relative to these two prior quarters but service was down an average of 12% and maintenance down an average of 6%. North America accounted for 64% of revenue at $197 million, an increase of about 25% relative to the two reference quarters. Ratable licenses accounted for approximately 75 percent of product bookings.

 

GAAP net earnings for the fourth quarter were $23.5 million, a significant improvement over the loss of $15 million in the prior quarter which had $63 million in restructuring charges. However, Q4 was a significant drop from the net profit of $87 million in the corresponding period a year ago which included the receipt of $260 million from the Avnti! settlement and a $61 million restructuring charge. Pro forma net income was $65 million compared to $5 million in the fourth quarter of 2002.

 

"The fourth quarter was a turning point for Cadence in digital design. Our Encounter platform earned 25 new logos and displaced competitors at several global IC companies," said Ray Bingham, president and chief executive officer of Cadence Design Systems. "We also saw good momentum in our Incisiveª functional verification platform and in our new Virtuoso custom design platform on OpenAccess."

 

"We're now one year into our subscription licensing," said Ray Bingham, president and CEO of Cadence. "We posted a top-line growth of 11 percent and our profitability is up about 700 percent, from 2 cents a share in 2002 to 24 cents a share last quarter." Bingham added that business is improving steadily in all major geographies. "This is the truth of how the license model transitions," he said. "It always dips at first. This is the quarter where we return to growth."

Cadence also announced that it will restate certain information in its financial statements for its fiscal year 2002, and the first, second and third quarters of fiscal 2003. These restatements will correct the accounting treatment for certain minority equity investments made by Cadence and its affiliated venture capital partnerships in prior periods. The adjustments are expected to affect primarily "other income" in the Consolidated Statements of Operations, and "other assets" and "retained earnings" in its Consolidated Balance Sheets for the periods affected. For the nine months ended September 27, 2003, GAAP net loss is expected to be decreased by approximately $1.8 million, or $0.01 per share. For the year ended December 28, 2002, Cadence's GAAP net income is expected to be reduced by approximately $4.9 million, or $0.02 per share.

On January 29^th Magma Design Automation reported the results for its third quarter of fiscal 2004, the period ending December 31, 2003. Revenue for the quarter of $31 million was a record up 20% sequentially and 67% year over year. In October 2003 Magma announced the acquisitions of Silicon Metrics and Random Logic Corporation by merger and an agreement to license patents and add key technologists from Circuit Semantics Inc.

Net earnings for the quarter were $3.8 million a 10% rise sequentially but a significant shift from a loss of $332 thousand for the corresponding period a year earlier.

"We had another strong quarter of financial results, reflecting the advances we are making in the market," said Rajeev Madhavan, chairman and CEO of Magma. "Blast Create was used with great success by more of our customers who experienced real economic benefit by using our integrated design flow. We added 21 new customers, the fifth consecutive quarter we added 10 or more. And with the December quarter's result we passed the $100 million in revenue for the calendar year, an achievement only a few EDA companies have ever reached. All in all, we continue to execute our plans and reach our targets."

On January 27, 2004 Mentor Graphics Corporation announced results for the fourth quarter. Software bookings rose over 15%, while total bookings climbed 5% relative to fourth quarter last year. Booking strength was centered on new products related to product design, especially the Calibre product line. Revenues for the quarter were a record $202 million up 29% sequentially and 12% year over year. Software and system revenue component was up 49% and 21% respectively, while service plus support revenue was up 3.5% and down 1% respectively. Maintenance revenue sharply rebounded as customer re-instatement of lapsed contracts ran at a record level.

 

Net income was $13 million, a dramatic turn around form the loss of $12.8 million the previous quarter but down year over year from $18 million. Special charges of $7.9 million or $0.30 per share was due largely to abandoned facilities. There were special charges of $5 million in the prior quarter and $8.2 million in the same quarter a year ago. Exceptional non-recurring incentive bonuses for engineering were triggered when Calibre product revenue exceeded $100 million for the year. Additionally, foreign exchange negatively impacted operating expense as the majority of Mentor's European revenue contracts are dollar denominated, while international expenses are in local currencies.

 

On the day of the quarterly conference call, the company announced the second largest order for a single product, Model Sim 5.8. In actuality the order was booked and dropped in the fourth quarter but rebooked today at customer request. Had the order stayed in fourth quarter, then several bookings metrics would have been improved substantially.

 

"Mentor's strength in new products continued to outweigh softness in overall electronic design automation spending," said Walden C. Rhines, chairman and CEO of Mentor Graphics. "The drive to smaller process geometries has accelerated the industry adoption of Mentor's Calibre product family, with particular strength in resolution enhancement technology (RET). During the quarter, Mentor received an order for Calibre RET that was the largest single product order in company history."

 

"Nine product families set annual bookings records in 2003," said Gregory K. Hinckley, president of Mentor Graphics. "This strength offset continued weakness in emulation, consulting and FPGA. Printed circuit board performance did not match the extraordinarily strong fourth quarter of 2002 when bookings grew 85%."

 

On January 14 Nassda Corporation announced its results for the first quarter of F2004, which ended December 31, 2003. Revenue was $9.7 million, an increase of 16% sequentially and a decrease of 6% from the corresponding quarter the previous year. Net income for the quarter was $572 thousand, an increase of 77% sequentially but a significant decrease from $2.0 million for the period one year ago.

 

Legal fees have been quite substantial. They amounted to $2.3 million in the quarter and $7.8 million in F2003. These fees are related to the suit by Synopsys based on the alleged facts and circumstances relating to the departure of five Nassda founders from their employment at Synopsys.

 

"Even though first fiscal quarters are always seasonally challenging, we are pleased to have achieved satisfactory financial results by exceeding the revenue expectation, meeting the earnings target and increasing cash, cash equivalents and short-term investments by $2.9 million for the first quarter of our fiscal 2004," said Sang Wang, Chief Executive Officer.

 

On February 23, 2004 Synopsys reported on the results for its first quarter of Fiscal 2004, the period ending January 31, 2004. Synopsys reported revenues of $285 million a 6.4% increase year over year but a 10% decline sequentially. Revenue from upfront licenses dropped by $28 million sequentially, while revenue from time-based licenses increased by $3 million and revenue from services declined by $6 million. This result makes Synopsys number 2 for this quarter behind Cadence that it had been leading in revenue for the previous three quarters. Net income of $32 million was down 6.5% year over year and down 28% of the prior quarter.

 

"Against an economic backdrop that is showing promise for the second half of the year," said Aart de Geus, Chairman and Chief Executive Officer of Synopsys, "We have forcefully moved the ball forward in our core technologies, as well as in our new growth areas. We feel confident that Synopsys is positioned first in line with customers as spending continues to pick up."

 

Also on February 23, 2004, Synopsys announced the acquisition of Monolithic System Technology, Inc. (MoSys), a leading provider of high-density SoC embedded memory solutions in a cash and stock transaction valued at approximately $432 million (approximately $346 million net of cash). In 2003 MoSys had revenues of $19 million down 30% from $28 million in 2002. For the year MoSys had net income of $2.5 million a large drop from the $13.7 million in 2002. The reason for the drops was a significant reduction in royalties from Nintendo's Game Cube. In addition, Synopsys announced that it has acquired Accelerant Networks, a privately held company providing a highly efficient technology for high-speed serial interfaces for $22.5 million. These acquisitions will increase Synopsys headcount by 300 to 350 employees.

"As SoC complexity continues to increase, larger and larger parts of the chip will be delivered as pre-designed, pre-verified IP blocks," said Aart de Geus, chairman and CEO of Synopsys. "Synopsys' acquisition of MoSys and Accelerant will expand our IP portfolio to provide a comprehensive offering of standards-based IP, chip infrastructure IP and embedded memory IP. This important step puts us at the forefront of the market in helping to deliver the integrated solutions our customers need to reduce their manufacturing risk and lower the cost of design for high-performance chips."

On January 29^th Synplicity, Inc announced its results for the fourth quarter and the fiscal year ending December 31, 2003. Revenues for the quarter were $13.2 million, an increase of 5.3% sequentially and 12% year over year.

Net income was $445 thousand essentially flat on a sequential basis but a good improvement over the loss of $1.6 million in the same quarter a year ago, which included a $1.1 million write-off acquired in-process research and development.

"Synplicity had a good fourth quarter which capped a solid financial year, including the highest quarterly revenue since inception, the highest net income in the last eleven quarters and positive cash flow from operations of nearly $6 million for the year," said Bernard Aronson, president and CEO of Synplicity. "Fiscal 2003 was all about carefully managing expenses while we invested in our product lines to further advance our competitive position and take advantage of new market opportunities. As we look to 2004, we expect our investment in our ASIC products and our participation in the emerging Structured ASIC market will position us for strong ASIC product growth," Aronson concluded."

According to Bernard Aronson "Our primary focus in fiscal 2003 was to strengthen our product offering and expand international presence. I am pleased that we significantly broadened our product offering to address the needs of our ASIC and FPGA customer base and we grew our international business. For the full year 2003 international business comprised 56% of bookings and continued to be strong. This was driven by demand in Japan and Asia as well by our investments in products and our intention al sales operations."

 

On January 20^th Veristy reported on the results for the fourth quarter and the year ending December 31, 2003. Revenue for the quarter was $12.3 million, a 2% increase from revenue of $12.0 million for the previous quarter and a 16% decrease from revenue of $14.6 million for the quarter a year ago. Product revenue was roughly flat sequentially but down 18.5% year over year. Maintenance revenue was up 8.5% sequentially but down 11% year over year. Service revenue, a small percentage of total revenue, suffered the greatest percentage decline.

The Company's net income $2.34 million a slight (3.2%) rise from the pervious quarter but down 42% from $4.0 million for the quarter ended Dec 31, 2002 due mostly to the drop in revenue.

"We are very pleased with the strengthened demand for our verification process automation (VPA) solutions that led to sequential growth in revenue and net income this quarter, all while building backlog. We generated approximately $10 million cash from operations, bringing our total cash position to a record $91 million. These results reflect Verisity's leadership position in providing customers world-class technology, enabling them to verify their most complex electronic designs," said Moshe Gavrielov, Chief Executive Officer of Verisity

On Dec 11 Verisity announced a definitive agreement to acquire Axis Systems, a privately-held company, offering a unique, third-generation simulation technology that combines all languages and required engines for hardware, embedded software and system-level verification. Under the terms of the agreement, Verisity will acquire Axis for approximately $80 million in cash and stock, with the stock portion representing less than 20 percent of Verisity's outstanding shares. Axis' audited revenue for the fiscal year that ended July 31, 2003 exceeded $20 million and Axis currently employs about 90 people worldwide. Verisity expects the transaction to close in the first quarter of 2004.

"This significant acquisition will expand our breadth of offerings and greatly expand our market," said Moshe Gavrielov, chief executive officer for Verisity. "Axis brings unique world-class technology, and together we will create the only company that is capable of providing a total VPA (Verification Process Automation) platform that will take projects from specification to verification closure."

 

 

EDA vendor performance for calendar year 2003

 

Figure 3 Top Three EDA Vendor Quarterly Revenue 2002 - 2003

 

The graph in Figure 3 clearly shows that the fourth quarter is the seasonally strongest. Cadence revenue dropped during 2002, held steady for three quarters of 2003 and rose significantly in the fourth quarter. Other than a positive blip in the 3Q2002, Synopsys revenue had been climbing steadily but fell back in the last quarter of 2003. After three quarters of flat revenue results, Mentor Graphics had a strong fourth quarter in 2003.

 

Figure 4 Second Tier EDA Vendor Quarterly Revenue 2002 - 2003

 

Figure 4 shows that Magma is the leading vendor in the second tier category both in terms of absolute revenue dollars and growth rate. All the other vendors save Synplicity dipped in early 2003. Synplicity had modest and steady revenue rise over two years.

 

Figure 5 EDA Vendor Annual Revenues 2002 - 2003

 

 

 

Figure 6 EDA Vendor Annual Earnings 2002 - 2003

 

 

 

For calendar 2003 Ansoft revenue $52 million up 11% from $46 million in 2003. For 2003 Ansoft posted a net profit of $2.2 million versus a net loss of $4.4 million in 2002. A major factor in this turn around was cost reductions in R&D.

 

For the year just ended Cadence revenue was $1.1 billion a 13.5% decrease from $1.29 billion in 2002. Product and service revenue were down substantially, while maintenance revenue was down modestly. Product revenue in the IC Implementation segment (33% of total revenue) was down 25%. Revenue was down 27% in Europe (17% of rev), 13% in North America (58% of rev) and 8.2% in Asia (8% of rev) but flat in Japan (17% of rev). Cadence had a net loss of $16 million in 2003 versus a net gain of $67 million in 2002. During 2002 Cadence received $248 million form a settlement with Synopsys related to Avant! Acquisition.

During calendar 2003 Magma had revenues of $100 million up 40% from the $71 million in 2002. Earnings for the year were $9.9 million, an increase by a factor of almost 9 times from the net income of $92 thousand in 2002.

For calendar 2003 Mentor Graphics revenue was $675 million, up 13.3% from $596 million in 2002. Net income of $7.9 million was a vast improvement on a loss of $14.3 million in 2002.

 

For calendar 2003 Nassda had revenues of $34.5 million down 7.5% from $37.2 posted in 2002. Much of the difference was due to a shift from perpetual to subscription licenses. Net income of $2.1 million was a drop of 71% from income of $7.4 million 2002.

During calendar year 2003 Synopsys had revenues of $1,194 million, up 16% from $999 million in 2002. Synopsys edged out Cadence by $80 million for the most revenue in 2003. In 2002 Synopsys had $289 million more in revenue than Cadence. Net earnings for 2003 were $160 million, a significant turn around form the net loss of $180 million in 2002, which included a $248 million payment to Cadence in a litigation settlement.

For calendar 2003 Synplicity had revenues of $49.5 million, an increase of nearly 9% from the $45.6 million in 2002. Net loss for the year was $377 thousand, a nearly ten fold reduction from the loss of $3.3 million in 2002, which included a $2.8 million write-off for acquired in-process R&D.

For calendar 2003 Verisity had revenue of $48.5 million, an 8% drop from $52.5 million in revenue for 2002. Net earnings for 2003 were $8.7 million versus $13.3 million in 2002. The $4.7 million drop is due almost totally to a corresponding drop in revenue.

 

EDA versus MCAD

 

The most recent quarterly performances of nine public MCAD Vendors were provided in the February 2004 MCAD Commentary published on MCADCafe. How did the top three EDA companies fair against the top three MCAD companies in 2003?

 

 

 

Table 3 Major EDA and MCAD Vendor Revenues 2002 - 2003

 

 

On the MCAD side Dassault Systemes had the best revenue growth year, as shown in Table 3. Autodesk was down slightly but had a strong fourth quarter. The end of life for AutoCAD 2000 in January 2004 should help sales in 2004. UGS PLM Solutions is a division of EDS. EDS has announced an intention to sell this unit in order to get badly needed cash. PTC, a fourth major MCAD player, continued its revenue slide from $719 million to $657 million. It should be noted that Dasssault and Autodesk sell mostly through third parties, while the all other vendors sell mostly directly.

On the EDA side both Mentor Graphics and Synopsys had strong year over year revenue performance while Cadence dropped nearly 16%, as depicted in Table 3.

For the Top 3 combined in MCAD and EDA, the year over year percentage growth in revenues for both sectors, was modest indeed, especially when one considers the 18% growth in semiconductors in general and the growth in US GDP in the last half of 2003.

 

 

Figure 7 Major EDA and MCAD Vendor Revenues 2002 - 2003

 

 

Table 4 Major EDA and MCAD Vendor Earnings 2002 - 2003

 

 

On the MCAD side Dassault earnings grew 30% year over year, while and UGS PLM improved a modest 3%. See Table 4. (The UGS figure is operating income rather than net income as this is the only number reported by EDS). Autodesk earnings dropped 32%.

On the EDA side Mentor Graphics went from a net loss to a net gain. Cadence did the reverse but with a larger difference, -$83 million versus +$5 million. Synopsys had a dramatic reversal, swinging from a negative $180 million to positive $148 million. Synopsys had a $248 million payment to Cadence in 2002. In general special items heavily impacted earnings.

The Top 3 MCAD companies had earnings as a percent of revenues of an impressive 14.1% in 2003, compared to 13.8% in 2002, a tiny improvement. The Top 3 EDA firms returned only 5% on revenues, but their return on revenues improvement over 2002 was dramatic.

EDA Companies' Stock Market Performances:

Let's take a look at how well the nine EDA Vendors performed in the stock market over the last two calendar years (See Figure 8 and Table 5). The combined figure for 2003 was a 41% improvement over 2002. As Table 6 shows, this is better than the Dow Jones and Standard and Poor's performance, but it's less than the tech-laden Nasdaq index. (As a point of reference, the nine selected MCAD Vendors grew their combined equity prices some 82% in 2003). Ansoft, Magma (LAVA), and Simplicity grew equity prices in 2003 by more than 100% and Mentor Graphics was next with an increase of 85%. Cadence and Synopsys, the industry leaders in terms of revenue, grew 2003 share prices close to 50%. Altium, Nassda and Veristy each lost 33% of share price during the year.

 

Figure 8 - Nine Public EDA Companies' Stock Prices

(Synopsys adjusted for 2:1 split September 2003)

 

 

 

Table 5 - Nine Public EDA Companies' Stock Prices

(Synopsys adjusted for 2:1 split September 2003)

 

 

 

Table 6 - Statistics of three major stock indices

 

 

EDA Vendor Financial Forecasts for 2004

 

Table 7 EDA Vendor Forecast for 1Q 2004

 

As Table 7 shows, both Cadence and Mentor Graphics are forecasting a significant sequential downturn from strong fourth quarter performance. However, all vendors except Verisity are predicting year over year growth for the initial 2004 quarter. Cadence and Synopsys are forecasting essentially flat quarterly growth year over year.

Details of next quarter's forecasts

No forecast available for Altium Limited.

Ansoft guidance for the next quarter is for revenues to be in the range $16.5 million to $17.3 million compared to $12.3 million a year earlier and to $14 million last quarter. Ansoft sees expenses for the next quarter to be about $1 million higher than this quarter. Most of the increase will occur in Sales and Marketing.

"Although the world economy continues to expand, it remains uneven and halting. As yet there is no strong global growth in technology markets. Nevertheless, we now see steady expansion in our two largest markets, the US and Japan. For the coming quarter we see a continuation of our recent growth pattern. ... As we look into the future we expect to see our 10% to 15% guidance to continue for at east the first half of our next fiscal year. We have introduced a number of new products recently and as they gain traction over coming quarters they should help ensure Ansoft's continued growth," said CEO Nicholas Csendes

In the first quarter of 2004, Cadence expects total revenue to be in the range of $260 million to $270 million, down from $307 million in the current quarter but in the range of the $262 million for the same period last year. Ratable licenses are expected to make up 75 percent to 85 percent of total software bookings, and about 70 percent of product revenue is expected to come from backlog. First quarter earnings are expected to be in the range of $(0.01) to $0.01 per share.

For 2004, total bookings growth is expected to be in the range of 7 percent to 10 percent. Because of the timing of contract renewals and normal seasonality, bookings and revenue will be weighted toward the second half of 2004. Total revenue is expected to be in the range of $1.175 to $1.225 billion versus $1.1 billion in 2003. Earnings per share for 2004 are expected to be in the range of $0.43 to $0.50 versus a loss of $0.06 in 2003.

"The decisive actions we took to strengthen our technology are beginning to bear fruit as our customers' operations improve and they gain greater visibility on their product development plans," said Ray Bingham. "We are poised to strengthen our position in digital at the leading edge; to exploit the market sweet spot for fast, complicated SoCs; and to develop indispensable business partnerships with our customers through platforms, services and open collaboration. This in turn will enable enterprises to create nanometer electronics profitably."

For the next quarter Magma anticipates revenues between $32 million to $34 million, a modest increase form the $31 million in the reported quarter. For the calendar year Magma anticipates revenues in the range of $138 million to $150 million a big jump from $100 million in 2003 and $71 million in 2002. For the quarter Magma expects net earnings per share to be between $0.09 and $0.15 versus $0.09 in the reported quarter. For the calendar year Magma expects earnings per share to lie between $0.44 to $0.60.

For guidance based upon an expectation of a 12% increase in bookings, Mentor Graphics said that revenues would climb from $675 million in 2003 to $722 million in 2004. The table below shows the quarterly expectation:

 

 

 

 

CEO Rhines commented, "Early signs of recovery in the semiconductor industry have not seen much favorable impact on the EDA industry. Even though electronics firms cut back on design activities much less than other activities during 2001 and 2002, the severity of the recession has left them with an excess in EDA licenses. Therefore buying today is concentrated on areas where they have no licenses or can not remix licenses, namely new products"

 

For the next quarter Nassda expects total revenue of $9.8 million to $10.0 million and fully diluted earnings per share of approximately $0.03. Due to higher than expected Q1 revenue, Nassda has increased their revenue guidance for fiscal 2004 to be between $40.0 million to $41.0 million (an increase of 17%) but has stayed with its previous forecast for fully diluted eps of approximately $0.13 to $0.15. Nassda expects time-based license revenue as a percent of total revenue to lie between 50% and 60%.

 

"Although we continue to see signs of some recovery in the global economy and the semiconductor industry, we believe our customers will spend conservatively in the first half of calendar 2004. Therefore, we do not expect the R&D budgets to increase materially during the first half of 2004." said Tammy Liu, CFO.

 

Sang Wang further commented "We believe that the coming June and September quarters will be more prosperous for EDA as a whole, mainly because of a predicted strong upswing in semiconductor industry revenue. IC analysts have forecast a 20% to 25% growth rate in 2004 semiconductor revenues. Foundry production capacity has been utilized at 90% level. We are optimistic that EDA revenue should grow modestly in the second half of 2004. This is precisely the reason Nassda made a decision in the beginning of F2004 to increase our workforce to grow with the anticipated IC market expansion."

 

For the next quarter Synopsys is projecting revenue between $285 and $300 million, a modest 2.6% sequential growth and flat year over year. Backlog will account for 70% of this figure. Pro forma earnings are targeted between $0.31 and $0.35 per share. For fiscal 2004 the revenue target is #1.2 to $1.25 billion with pro forma earnings in the range $1.3 to $1.4 per share. This compares to $1.17 billion in Fiscal 2003. This includes estimated pro forma expenses of $214 to $221 million versus $79 million in the quarter just reported. The difference is due to acquisitions of Monolithic System Technology, Inc. (MoSys) and Accelerant Networks announced February 23, 2004. Expectation for fiscal 2005 remains at revenue of ~ $1.4 billion and pro forma earnings over $1.90 per share.

 

Per Doug Miller, Synplicity CFO, "Our forecast is driven by three factors: a) We are assuming that the North America economic condition and its impact on our customer base will begin showing modest improvement in the second half of the year. b) We believe the FPGA business will improve modestly in 2004 and c) We expect our ASIC synthesis business to grow substantially during 2004. ... ASIC bookings should represent 25% of total bookings in 2004 and time-based business should represent 30% of product bookings"

Synplicity guidance for the next quarter is for revenue to be in the range $13 million to $13.2 million which is flat relative to the quarter just reported but up 13% from the corresponding period in 2003. The firm also expects to breakeven for the quarter, while the fourth quarter had a modest profit of $445 thousand. Revenue for 2004 is expected to range from $54 to $56 million, an 11% increase over 2003. Operating expenses are expected to rise 6%. Net earnings per share should be between $0.04 and $0.06 as compared to $0.02 in 2003.

For guidance Verisity expects first quarter revenue to be approximately $11.5 to $11.9 million down from $12.3 in the current quarter but even with the same quarter a year ago. Earnings per fully diluted share are projected to be approximately $0.05 to $0.06 versus $0.11 both in the current quarter and for the first quarter of 2003. Revenue for fiscal 2004 is expected to be between $53 and $55 million an increase of 11% versus $48.5 million in 2003. Earnings per share are expected to be between $0.45 and $0.48 and improvement over $0.41 in 2003.

Conclusions for 2003:

For the Top 3 vendors combined in MCAD and EDA, the year over year percentage growth in revenues for both sectors, was modest indeed (3.1% to 3.5%), especially when one considers the 18% growth in semiconductors in general and the apparent growth in US GDP in the last half of 2003.

The Top 3 MCAD companies had earnings as a percent of revenues of an impressive 14.1% in 2003, compared to 13.8% in 2002, a tiny improvement. The Top 3 EDA firms returned only 5% on revenues in 2003, but their return on revenues improvement over 2002 was dramatic.

The Group-of-9 EDA Vendors managed to grow their collective equity prices 41% in 2003, an impressive number that pales only in comparison to the entire Nasdaq growth of 50% and a stunning 82% growth of the Group-of-9 MCAD Vendors.

 

Despite the improvement in earnings of the EDA Vendors in 2003, the combined EDA flat revenue performance during all of 2003, especially during the 2H 2003 period of statistical increases in US GDP and worker productivity, would not appear to be a good omen for the EDA industry.

 

To better understand the recent worldwide and national environment in which the both the MCAD and the EDA Industry is operating, let's review the state of macroeconomics and geopolitics.

 

As has been the case for several quarters now, occasional hopeful news is mixed in with frequent discouraging reports. As this EDA Commentary goes to press, the Nasdaq is completing its fifth straight negative week. Consumer prices rose a sharp 0.5 percent in January 2004, the largest increase seen in the CPI in eleven months. The consumer sentiment index fell to 93.1 in February 2004 from 103.8 in January, says the University of Michigan. Nevertheless, the index of leading economic indicators continued its upward trend, the Conference Board reported on February 19, 2004. The index rose by 0.5 percent in January, the largest increase in the index since October 2003.

 

But meanwhile Japan increased its terror alert to a heightened level on February 20. Recently, many airline flights headed to the US have been turned back or canceled because of terror threats. Saddam Hussein is in custody but Osama is still on the loose. Casualties on all sides continue unchecked in IRAQ, now aided by Al Qaeda where it was not present a year ago. Still no WMD found in IRAQ. American taxpayers are stuck with the IRAQ war bill of at least $1.67 billion per week. Focus on IRAQ has allowed the situation in Afghanistan to worsen. Allies such as Pakistan's Pervez Musharraf and Abdul Qadeer Khan are linked with stories of nuclear proliferation.

 

The US trade deficit is at record levels, posting a negative $489.4 billion for 2003. "This is not only a record, it is a record by a great deal," said Richard J. DeKaser, a National City Corporation economist. "We are developing a great reliance on foreign capital to pay for our debt, and it is clear that there is a greater reluctance to finance our trade deficit."

 

As the US federal deficit grows, today's headlines are filled with news of investigations into the sales of tax shelters to corporations and wealthy individuals that use such shelters to escape billions in federal taxes.

 

The US government's total national debt eclipsed $7 trillion as of February 17, 2004, with huge yearly budget deficits forecast for years to come (well over $500,000,000,000 this year alone).

 

The pattern over the last 27+ years is instructional (Source: US Department of Treasury, Bureau of Public Debt):

 

 

 

 

Yet as we mentioned in the preface, the US Gross Domestic Product had a spectacular third quarter in 2003 with 8.2% growth. But the GDP delivered a lower fourth quarter with 4% growth, below economists' expectations. Durable goods purchases increased only 0.9% in Q4, compared with an increase of 28% in Q3. Consumer spending, which accounts for two-thirds of gross domestic product, rose at a 2.6% pace in the fourth quarter, a sharp slowdown from the heady, tax-cut induced 6.9% gain of the prior three months.

 

In the fourth quarter of 2003, businesses increased investment in equipment and software at a 10% rate. Overall business investment grew at 6.9% annual rate during the fourth quarter. Both figures were down from the third quarter. On Wall Street, the Dow Jones, S&P and Nasdaq rose 24%, 26% and 50% respectively for the 2003 year. Productivity increased 4.2 percent in the nonfarm business sector during all of 2003. But worker productivity in Q4 2003 was only 2.7%, well below the Q4 "expectations" of economists and a far cry from Q3's heady 9.5% increase. Mergers & Acquisitions are on the rise as 2004 begins. Most mergers & acquisitions result in overall job reductions.

 

In other words, economic and geopolitical signals remain in a state of conflict and confusion.

 

Nowhere is the impact greater than in the area of job creation in the United States. Despite record low interest rates and tax cuts weighted toward the affluent, significant job creation in the US remains elusive. A month or two of encouraging albeit tiny numbers of new jobs (such as August and September 2003 as shown in the Chart below) are followed by a reversal in the trend, such as during the last few months of 2003.

 

 

 

Will the slight uptick shown above for January 2004 (a scant 112,000 jobs, by the way) again be followed by the type of plunge endured in February and March 2003?

 

More to the point, when (if ever) will the US really recover the 2,200,000 jobs lost since January 2001? Mixed messages from our appointed leaders make it difficult to say. No sooner did the just-issued annual report of the White House Council of Economic Advisors predict that the "US economy would add 2.6 million new jobs by the end of 2004", came the news that the White House quickly backed away from its own prediction, saying "the president is not a statistician".

 

But why are we surprised? Back when the White House was hyping its last tax cut, it predicted that 5.5 million jobs would be created between July 2003 and December 2004. The mid-February 2004 joint study by the Economic Policy Institute and the Center on Budget and Policy Priorities made this understatement, "Actual employment levels in recent years have fallen below administration forecasts" and that "it is quite unlikely that the administration's [current] target will be reached." You think?

 

It should also be borne in mind that the paltry job creation data also include millions of Americans who "have jobs" but who are "underemployed", working at lower-paying jobs for which they are overqualified or working part-time because they can't find full-time work. For those fortunate folks who do have jobs, wage and salary income, adjusted for inflation, has risen only 0.6% since 2001.

 

Because the country's leadership cannot generate confidence among employers that the current "economic recovery" is real, many companies are also psychologically reluctant to hire. By working its smaller staffs harder and harder, many employers create improved productivity numbers but few jobs. When such companies have exhausted their people, they often turn to temps and/or contract workers instead of full-time workers, thereby keeping open their options and avoiding added employee benefits' costs.

 

That's not all, folks! The White House also felt the recent need to distance itself from its own economic advisor's (N. Gregory Mankiw) assertion that "the loss of US jobs overseas has long-term benefits for the US economy." Mr. Mankiw's subsequent apology meant little. Federal Reserve Chairman Alan Greenspan added his gratuitous advice to American workers in a February 20 speech: upgrade your skills if you don't want to find your job outsourced overseas.

 

Of course, long before it became front-page news, the authors' past Commentaries on these pages already discussed the insidious outsourcing of US jobs to other countries. In January 2004, the US manufacturing sector suffered its 42^nd consecutive month of job losses. Manufacturing is the industrial heart of where EDA and MCAD operate. And of course, Greenspan's advice ignores the fact that more recently, it's the high-tech "information age" jobs being outsourced, the very assignments that were supposed to replace all the offshored manufacturing and industrial jobs in the US.

 

Siemens' February 17, 2004 announcement is just one of many cases-in-point, "Germany's Siemens will move most of the 15.000 software programming jobs from its offices in the United States and Western Europe to India, China and Eastern Europe." Said Anil R. Laud, managing Director of Siemens Information Systems. "Siemens has recognized that a huge amount of software development activity needs to be moved from high-cost countries to low-cost countries".

 

The harsh fact is that the current economic "expansion" following the 2001 recession is the weakest post-recession expansion in post-WW II history. Check out the Table below from the Economic Policy Institute analysis for jobwatch.org:

 

Employment After a Recession

Change in total employment, 34 months after a recession began

		Recession started under:
Feb. '45 - Dec. '47 :	+6.4%	Truman
Nov. '48 - Sep. '51 :	+6.1%	Truman
July '53 - May '56 :	+3.9%	Eisenhower
Aug. '57 - June '60 :	+2.3%	Eisenhower
April '60 - Feb. '63 :	+2.6%	Eisenhower
Dec. '69 - Oct. '72 :	+4.8%	Nixon
Nov. '73 - Sept.'76 :	+2.5%	Nixon
July '81 - May '84 :	+2.7%	Reagan
July '90 - May '93 :	+0.7%	Bush I
Mar. '01 - Jan. '04 :	-1.8%	Bush II

 

 

So while the nation's GDP is up, corporate profits are up, stock markets are up, and worker productivity is up...job creation in the US was still a net negative in 2003. In his February 20, 2004 OP-ED article, "The Dark Side of Free Trade", Bob Herbert of the New York Times put it succinctly, "The multinationals and the stock market are doing just fine. But American workers are caught in a cruel squeeze between corporations bent on extracting every last ounce of productivity from their US employees and a vast new globalized work force that is eager and well able to do the jobs of American workers at a fraction of the pay."

 

And Mr. Herbert again in "Theory vs. Reality" on February 23, "One of the great achievements of the United States has been the high standard of living of the average American worker. This was the result of many long years of struggle to obtain higher wages, shorter work weeks, health and pension benefits, paid vacations, safe working conditions, a measure of job security and so on. It is not an advance to move to a situation in which all of that can vanish with the flick of a computerized switch. High-quality employment is the cornerstone of the economic well-being of America's vast middle class. Among the questions we should be asking about the real-world effects of unrestrained trade is what happens to the US economy after we've shipped so many jobs from so many sectors overseas that American families no longer have the disposable income to buy all the products and services they need to buy to keep the consumer economy going."

 

By the way, if our gentle readers don't think the current administration's economic policies and budget deficits are threats to the well being of ordinary Americans, maybe our readers missed this February 25, 2004 recommendation from Alan Greenspan, as reported by Martin Crutsinger of the AP:

 

WASHINGTON (AP) - Federal Reserve Chairman Alan Greenspan urged Congress on Wednesday (February 25, 2004) to deal with the country's escalating budget deficit by cutting benefits for future Social Security retirees. In testimony before the House Budget Committee, Greenspan said the current deficit situation, with a projected record red ink of $521 billion this year, will worsen dramatically once the baby boom generation starts becoming eligible for Social Security benefits in just four years. Greenspan did not rule out using tax increases to deal with the looming crisis in Social Security, but he said that tax hikes should only be considered after every effort had been made to trim benefits.

"Greenspan staunchly defended this administrations tax cuts, even though the cost of making them permanent would increase the federal debt by about $1.5 trillion over the next 10 years, said Edmund L. Andrews in the New York Times on February 26, 2004. (That's "trillion" with a "t", folks!).

 

EDA and Semiconductors - Looking Forward

 

Figure 8 SIA Global Semiconductor Forecast 2004

 

Notwithstanding the uncertainty in the economy and in the worldwide political situation, there are some good signs that the markets indirectly served by EDA vendors are improving. On February 2, 2004 the Semiconductor Industry Association presented its forecast for 2004. The $194.6 billion forecast for 2004 is a 17% increase from the $166.4 billion in 2003. (In November 2003, the SIA presented their multiyear forecast, highlighting a strong growth estimate for 2003. The actual results for 2003 at $166.4 billion were up from the $163 billion November projection).

 

Table 8 SIA Forecast for Global Semiconductor Market ($ billion)

 

"Based on our quantitative forecasting model for equipment, Advanced Forecasting believes that growth for 2004 will be stronger than 55% over 2003," said Rosa Luis, Director of Marketing and Sales for Advanced Forecasting. "The semiconductor equipment market is coming from such a low bottom, due to reduced capital investment from 2001, that in order to keep up with escalating IC demand, equipment will have to grow very quickly."

Bookings for semiconductor equipment have already risen steadily since their bottom in 2Q-2003. Cumulative bookings during 2003 amounted to $22.3 billion, an 11 percent growth over 2002. While the IC industry began recovering from the 2001 recession in 2002, equipment revenue remained flat due in large part to over-capacity from the 1999-2000 boom.

 

 

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About the Authors

 

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 Applicon, Gould Electronics, ATP, and Mentor Graphics. Henke is a Fellow of the Society of Manufacturing Engineers (SME) and served on the SME International Board of Directors. He is also a member of the IEEE and a Fellow of ASME International. An affiliate of the HENKE ASSOCIATES team since 2001, LA-based Dr. John R. (Jack) Horgan co-authored this article. Jack's career included executive positions at Applicon, Aries Technology, CADAM, and MicroCadam as well as a stint at IBM. Since May 2003 the authors have now published a lucky total of thirteen (13) articles on MCAD, PLM, EDA and Electronics IP on IBSystems' MCADcafe and EDAcafe. Further information on HENKE ASSOCIATES, and URL's for past Commentaries, are available at http://www.henkeassociates.net.