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Monday
December 13, 2004
From: EDACafe
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About This Issue
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Interview with a CFO of an EDA Firm
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December 6 - 10, 2004 By Dr. Jack Horgan
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Read business product alliance news and analysis of weekly happenings
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Introduction
This week's commentary is an interview with Gregory C. Walker, Chief Financial Officer & Senior Vice President of Finance of Magma Design Automation. Magma is the fourth largest EDA vendor with revenue of $114 million in its fiscal 2004 ending 3/31/04. Magma had revenue of $37 million in its last reported quarter. Like the previous interview of George Janac, CEO and Founder of Silicon Navigator, the intent is to understand what it is like to be an executive in the EDA industry rather than query the interviewee concerning the company's financial performance, strategic direction or recent product
introductions. Overtime I intend to conduct interviews with a CTO, CIO and other executives (Any volunteers?).
Biography
Greg Walker joined Magma in 2002 as chief financial officer and vice president, finance. He gained significant experience in the EDA industry in six years at Synopsys, serving ultimately as vice president of finance. In his most recent experience prior to joining Magma he served as CFO, and later as interim CEO, for Accrue Software, a leading provider of customer relationship management products. He also served as CFO for Duet Technologies, as CFO for Netpower Inc., as treasurer and director of planning at Integrated Device Technology, as manager of corporate general accounting for IBM's ROLM division, and as manager of strategic planning and analysis for Xerox Corporation. Walker received
an M.B.A. from the University of Rochester in Rochester, New York, and a B.A. in economics and history from Union College in Schenectady, New York.
Define or describe the role of a Chief Financial Officer (CFO)
Within the EDA industry I think that much more than in many of the other industries that I have been involved in the CFO and his staff need to be a very outwardly faced organization within the company. And what I mean by that is rather than being inwardly faced and serving the audit and control role, it needs to play a very active role in the management of the company, in field with the deal flow and deal structures and also in how you put together development projects and funding activities. From what I have seen it's a much more focused and complex effort in EDA than I have seen in most of the other industries I have been involved in. We concentrate a lot on working out our
relationships with the sales force, the R&D team and the Application Engineering team to make sure that we can work well with them and be involved in the entire process within the company not just the back end financial flow.
What Departments does the CFO have responsibility for?
In my case and I think it's pretty typical I have all of Finance including planning, M&A, the legal organization, the IT organization, HR and Corporate Operations that includes quality management and quality assessment. They determine the ways that we are going to set up as performance metrics and measures and run the weekly operations review. R&D, S&M and Business Unit Managers do not report to me.
What is the relationship between the CFO and the CEO?
In our case it's a very close and advisory kind of role both with the CEO (Rajeev Madhavan) and with the President (Roy E. Jewell) of the company. With the CEO I'm involved very much in strategic discussions about where we want to be in 3-5 years and what are the types things we need to get there; how do we make that happen and all those kind of things. And then with Roy, the President, I spend a great deal of time working on how we grow the operations of the company in a reasonably efficient and effective way. And how do we scale as we go from being an early stage company a few years ago. So it is a very active and advisory role.
What is the relationship between the CFO and the Board of Directors?
In this environment it's got to be pretty close. We just went through a number of changes in the board within the last year. So we are still working on those relationships and mechanically on how we work together, and so forth. It is very important in the regulatory world that we are living in these days that the CFO and the board have a very good relationship and particularly the audit committee. We are very close. The person who chairs our audit committee, Kevin Eichler, is the CFO at MIPS. So he is an active CFO these days. We go through similar things. It is great to have another partner that I can turn too and say “How are you guys approaching this kind of problem?” He kind of
does the same thing with me. It's a growing tightness; it's a very, very close relationship we are trying to build as we move ahead with the new board.
What has been the impact of recent corporate governance legislation?
It has become an almost overwhelming requirement that I think is fairly well intentioned but probably poorly implemented at this stage, particularly for smaller companies. The burden placed on us and companies in our scale on the regulatory compliance across all corporate governance but particularly with Sarbanes/Oxley rules is very, very high and very expensive. When we look at that and at what it is costing us to get to where we need to be to pass our compliance test coming up in the end of the first half of calendar 2005, we are spending a tremendous amount of money. While they are good things to do, it's not probably the highest priority spending that we could be doing right now.
There is a very poor sense of proportion within the rule. I am looking at spending somewhere around $0.04 to $0.05 per share in additional compliance on top of our normal audit processes.
How is the strategic direction of the company set?
It is really set among the senior management team and then very much worked upon day to day by the CEO, President and myself. We meet obviously with people outside the company and with board members. But it is really the kind of situation where the CEO, CTO and SVP Engineering provide the technical vision and direction we are going and then myself and the President in conjunction with the CEO work on how we can actually make that happen. What can we do organically? What do we have to do through acquisition? As you well know EDA is a very acquisitive oriented industry. So we have to look what are the acquisitions we need in order to get to where we want to be, how we fund those, what is
the sequence in timing and working all that looking at the available candidates, on what kind of funding resources we need to have. So you have to be very intently involved in that. You have to be very open to financing techniques and very creative deal structuring.
How do you asses the value of a potential acquisition?
It is done in a number of ways simultaneously. You do some of the traditional discounted cash flow, return on investment analyses, you do the standard multiplier and comparisons of recent deals analysis that you do with bankers. You look at what is the value as a percentage of your total enterprise that you are willing to attribute to make the acquisition happen. And you look at how competitive the bidding is on a particular deal. You go through all of those different analyses and try to focus on an agreed upon value at the senior management level and board level. And then you go try to make that deal happen based upon that evaluation.
Who are the primary negotiators in a possible acquisition?
It is normally either myself, the CEO and the President and then I have a person on my staff responsible for mergers and acquisitions, who came out of the investment banking world. At different stages, depending upon which deal, all of us will become involved at some level.
How does the company decide where to spend the money?
We start with our commitment to the shareholders to deliver earnings per share. We build a financial model around that. The model determines the kind of resources we can distribute through the company. Then we match that up against the bottoms up requests from the organizations. Essentially the senior management team which includes the SVP of S&M and business unit GMs, SVP Engineering- we sit down and essentially negotiate how we are going to distribute these resources. We try to make it a discipline approach where if someone is asking for incremental resources, we want incremental commitments out of them. Whether that be with the engineering organization for new products or pushed up
delivery schedules or the sales team with increasing quotas and targets or with my organization asking for more resources to shorten the close cycle or things like that. Make sure that everybody appreciates the fact that these resources are precious and that there is some discipline behind how we go about distributing that. In most cases for us resources means headcount.
We really focus on how we are going to bring on headcount into the company. Clearly in our growth stage the key focus centered around the engineering and field organizations, scaling those groups up to match hopefully growing demand. It's really a negotiation of senior management team that at the end of the day we all have to buy into.
How does the fact that your business is international impact the CFO?
It makes the job far more complex on all levels. Starting right from the sales transaction and the complexities of being international brings local currencies. What are the local country regulations? Pretty much everything in the company. Because we are so internationally oriented, over 50% comes from offshore, it is a far more complex enterprise than it would be if it were a company of the same size that was principally a US oriented company. All of my organization whether that be my legal staff, HR, the finance team have world wide responsibilities and have to be able to deal with situations anywhere in the world. We tend to work an almost 24/7 basis at some point in time because
somewhere in the world the company is functioning at all hours.
Things like tax planning become very complex. All of our regulatory fillings, export controls even things as simple as employment agreements world wide differ dramatically in Korea and China. Things like that. It means that people in my organization have to have a level of knowledge and a level of recourses that they can pull up that is far greater than if they were in a domestic organization.
How and when do you do currency conversion for reporting purposes?
We do conversions monthly and then report them quarterly. They are under FASB 52 guidelines as to how you do that and depending upon what the transaction is. If it's a balance sheet item it might be held at historical rate, average rate during the period, or be held for month or quarterly end rate. The accounting rules specify exactly what to do with each transaction. Then for all foreign locations you have to decide what the local currency is going to be. In some cases a foreign location is essentially a branch doing transactions principally in US dollars even though in a foreign location. They have a functional currency of US dollars. Other enterprises, groups, branches or
subsidiaries may have local currency as their functional currency. You have to make a determination site by site depending upon fact and circumstances on what currency that entity is going to operate in and then once you make that decision, there is a specific set of accounting rules for actually converting and consolidating back into US dollars on a report basis.
Do you do any currency hedging?
In our case we principally use non-derivative currency exposure management techniques where we are trying to match up naturally timing and denominational currencies of spending, revenues and cash flow. We do that to the greatest extent possible. We have had discussions at the board level on whether we should actively look at hedging currency risk through foreign currency markets, the futures markets, the option markets and so forth which I have done at other places at different stages. I think at our scale and at our level of ability to manage right now the board has said we don't want to undertake that but it is something we have to review occasionally. So say we now have this level of
overall currency risk that we can naturally hedge parts of it but some part is uncovered unless we do something active. At some point I wouldn't be surprised that the board decides that we now think the risk is great enough and complex enough that we want to take active measure to hedge that. But we have not done that yet.
What is the underlying rationale for stock repurchase that we see happening?
It serves a number of purposes. First, to a certain extent it is making a statement of the company's view of the future performance of the company. More important it allows you to bring stock back into the company for excess cash that you can then utilize for incentive programs through the organization. We here in Silicon Valley particularly a lot of compensation is incentive stock options. By doing stock repurchasing programs, it's a way to fund some of those types of compensation programs and without creating further dilution of the stock on the street. We did our first one of those in the June ending quarter. In September quarter we did a million share repurchase for around $17
million. It's a fairly small one at our stage but we wanted to put the mechanics in place so that if we decide to do more of these downstream we've got all the mechanics worked out to do it. We know how to execute it. It is a very good way if you have a market opportunity that you consider the right valuation to fund this kind of program.
What are the major challenges facing a CFO these days?
There is a kind that I would call business challenges and a kind I would call regulatory challenges. From a business challenge standpoint, particularly in EDA, keeping up with the business, particularly model changes and structural changes that are going on in the industry is very, very important. You see recently that Synopsys has announced changing their model for revenue and contracting and so forth. Cadence has gone through a certain number of shifts back and forth. We've got a model and that is shifting, there are trends going on. We are seeing the length of contracts shortening. It is very important for a CFO to be aware of those shifts and have a hands on approach for knowing
what is going on there and what impact those will have on the business. That's a challenge.
In these days the regulatory and government environment is very tricky and very risky and the penalties have gone up dramatically for even unintentional errors and things like that. You really have to build an organization that views compliance as an important item these days because one simply can do it alone. The world is too complex, the competition is too complex. So you have to focus on building a very high quality organization.
How do you go abut generating revenue and profit forecast given these shifts?
It is such an intensely competitive industry. So you really have to keep tabs on what you are doing, what other companies are doing, and how that is going to impact the forecasting ability. What is going on at the macro level versus the micro level. We roll up the sales pipeline detail from the field. We match that against our market level studies and what I call financial and mathematical analysis and look for logical places where they intersect.
That's what we consider the highest probability. Is it disconnected? Are we missing something? Has there been a shift in the marketplace? How much of the pipeline is likely to close? What kind of deals are we likely to close? It really requires a lot of sophistication from pure financial viewpoint but the real thing is having my team that deals with the field understanding the psychology and being able to communicate with the field organization and be able to read the field organization's body language.
What have been the biggest surprises?
I was gone and retired for a while. I just came back for this role and this industry two years ago. First thing that surprised me was how completely the market had shifted to time-based licensing and how much confusion that was creating. The other thing was the fact that the amount of decline in the semiconductor industry during the downturn cycle was most dramatic that I had ever remembered. It was very difficult. We are seeing the impact of that within the EDA industry. These two things were very surprising. The last one that really surprised me was that most of the people that I knew in the nineties were still in the industry. A lot of the people were the same. It was kind of nice
to come and say I know these folks and these folks. It is an industry where people tend to stay in for long periods of time. Everybody knows everybody.
Are there other things of possible interest to our readership that we haven't discussed?
Probably one thing that is going to be a big challenge for all the firms in Silicon Valley is if there is really a shift in accounting rules to expensing of options. What's that going to do to compensation and compensation plans within the Valley? I don't have a good answer for that but that's one of the things that we spend a lot of time thinking about, worrying about , lobbying against and so forth. It could have a big impact on the way the Valley operates 2 or 3 years down the road. That's probably the only area we haven't talk about.
What is the CFO's perspective of offshoring?
Other than the complexity that we talked about being a very internationally oriented company, I don't see it as a large impactor, particularly within an R&D organization. Magma is a company that right from its start had distributed R&D groups overseas in the Netherlands. We have R&D units several places in the US and in Korea, China, India and Europe. So it makes communications a little more difficult, it makes financial operations more difficult but from a day to day operations perspective do we see a big negative impact? No. We see it as very positive. If you really look at R&D organizations within much of the EDA, it is a multicultural organization anyway. Whether they all sit here
or sit around the world, I really don't think it makes a lot of difference. If you walk around R&D at Synopsys, Cadence, Magma or any of the companies, you will see a very multicultural organization. I remember another interview about this subject where I said in reality we are not really outsourcing, we are providing a vehicle for people to return home and work from there. It's very true a large part of the organization is from India, from China and so forth.
It's a wave of the future. One of the things we see in this cycle in semiconductor is a lot of the advanced design work that previously was reserved for the US has now moved offshore. So that's having some impact on how resources get deployed as many more designs that were traditionally done in the US are done in India or in China and so forth. So we have to be very aware of that in how we deploy our support resources.
Thanks to Greg Walker for his participation in this interview.
Late Breaking News - Changing of the Guard
IBM introduced the first PC in 1981. IBM is now selling its PC business for about $1.75 billion in cash, equity, and other considerations to Lenovo Group Ltd (formerly Legend), China's largest personal computer maker with 27 percent of China's computer market.
IBM will take an 18.9% ownership stake in the new company, which will sell PCs under the IBM "Think" trademark family brand. Stephen M. Ward Jr, who now runs the IBM's Personal Systems Group, will become the new CEO of Lenovo Group. Lenovo will hire around 10,000 IBM PC employees. About 2,300 work in the US and around 40 percent work in China.
IBM's PC division, which suffered losses in 2002 and 2003, is expected to generate revenue of $11 billion and pre-tax profits of up to $200 million this year. According to industry analysts IBM has 5 percent of the worldwide PC market in 2004 compared to 16.4 percent for Dell and 13.9 percent for HP.
This is the biggest overseas acquisition by a Chinese technology company to date. Lenovo was founded in 1984 by academics at the government-backed Chinese Academy of Sciences. After the deal closes Chinese government will hold a 46 percent stake in the company. IBM clearly hopes to leverage Lenovo's influence and sales force as it targets Chinese banks, manufacturing companies, government agencies, and consumer-product outfits with its servers and services.
Letter to the Editor
Thanks for bringing-up this issue.
Alt-S is Synopsys Distributor in Eastern Europe for last 5 years, concentrating mainly on Russia. Excluding [those] who have an illegal copy of a software product would have purchased a legal copy even if a free copy was not available, e.g. students, garage operations with usd2k/year turn-over etc. we estimate that we loose about 80% of the revenue due to piracy in Russia (for
every 1 license sold 4 to 5 are used illegally). Some companies (design centers, not being our customers, even put our [Synopsys] s/w on their web-sites as tools they use for design services.
Others, with tens and tens of designers buy just one license of each type, to have legal End User Software License Agreement.
Best Regards,
Wieslaw Paprocki
Alternative Solutions Alt-S
SYNOPSYS Distributor, Eastern Europe
Thanks for sharing your experience. Any one else had similar experience?
Weekly Highlights
EDA
Altium Adds Support for Latest Quartus II Release to Nexar
Mentor Graphics Joins Serial ATA International Organization
Mentor Graphics Announces Platform Express Product Support for the new SPIRIT 1.0 Specification
Stone Pillar Technologies to demonstrate Silicon Insight™ data management system at open suite during IEDM
Summit Design Appoints Dr. Emil Girczyc President and Chief Executive Officer; EDA Veteran Brings Experience to Address Emerging ESL Market
Cadence Senior Vice President & CFO, Bill Porter, to Present at the Lehman Brothers T4 2004 Technology & Telecom Trends for Tomorrow Conference
Synopsys Announces Industry's First Fully Released Verification IP for the AMBA 3 AXI Standard
Sequence PhysicalStudio Offers Leading S3 Graphics Chip Fastest Available Reduction of Timing and Noise Iterations
IP and SoC
QualCore Logic Adds Serial ATA, SerDes Cores to Product Portfolio; High-Speed, Flexible Cores Pre-Verified in Silicon
Tower Semiconductor Announces Sale of All of Its Shares in Saifun Semiconductor; Tower to Sell Saifun Shares for $39 Million
Xilinx Business Update for December Quarter Fiscal 2005
Toshiba Expands Family of SOP Advance MOSFETs With 8 New Lead-Free Finish(1) Devices for Greater Power Efficiency
Cypress Ships Single-Chip Reference and Spread-Spectrum Clock Generator For Intel's Alviso Chipset
Court Denies Remaining Samsung Sanction Appeals
Worldwide VoIP Semiconductor Market to Take Off, Reaching $1.7 Billion by 2008, IDC Predicts
Kawasaki Microelectronics Licenses SafeNet's SafeXcel IP Security Engines for Its ASIC IP Portfolio
Infineon Expands in Asia - New Production Plant for Automotive and Industrial Power Technologies in Malaysia
Despite Obvious Gains, WiMAX Presents Niche Opportunities Through 2008 for Semiconductor Suppliers, IDC Reveals
Leading Foundries Spur Widespread Adoption of Fabless Semiconductor Association Mixed-Signal/RF PDK Checklist; Checklist Promotes Quality Standards
Advanced Semiconductor Engineering, Inc. Announces November 2004 Net Revenues
TI Updates Fourth-Quarter 2004 Business Outlook
Actel Corporation Announces Fourth Quarter Business Update
TriQuint Semiconductor Announces Previously Scheduled Q4 Mid-Quarter Financial Update Call; Live Webcast Conference Call Scheduled for Tuesday, December 14, 2004
Zarlink Revises Guidance for Third Quarter Fiscal 2005
UMC Reports Sales for November 2004
TI Unveils Integrated Power over Ethernet Solution with Four Independent Ports
Altera's Quartus II Version 4.2 Delivers FPGA and CPLD Performance Leadership
Actel Introduces Enhanced Low-Cost Starter Kit for Flash-Based FPGAs
IDT Delivers Industry's First Single-Chip Clocking Device for Next-Generation Intel Centrino Mobile Technology-Based Notebook PCs
Conexant Expands Product Development Resources in India; Paxonet Acquisition Adds More Than 100 Experienced Design Engineers
IC Media Develops First CMOS Image Sensor Using 2.575 Micron Pixel
More EDA in the News and More IP & SoC News
Upcoming Events...
--Contributing Editors can be reached by clicking here.
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