EDA Keeps Its Head High

Electronic News, July 9, 2001 by Laurie Balch

Lowered financial expectations. Delayed salary actions and hiring freezes. Layoffs. Earnings shortfalls. Bankruptcies.

These matters are the crux of announcements we've become accustomed to hearing nearly every day from companies that span the gamut of high-tech industries. We've watched, with that oh-so-familiar sinking feeling in our stomachs, as the market capitalizations of all the big-name technology stocks of the past decade have fallen lower and lower with a resounding market-wide thud. It seems that the forecast for the entire high-tech sector must be frighteningly negative.

Yet that isn't the case at all. Simply lumping together all segments of the technology sector into this abysmal picture ignores the diversity of high tech and the interdependence of individual market segments. It is this interdependence that is the primary reason that the EDA industry has emerged as a bright spot in the overall high-tech landscape.

Many industry observers have commented that EDA, as a supplier to the semiconductor industry, is bound to suffer the same fate as its customers. The drastic economic downturns being undergone by the semiconductor industry seem sure to rapidly infect the EDA industry. But what some observers fail to recognize is that the performance of the EDA industry is more closely related to the technological advances of the semiconductor industry than to the economic conditions in the semiconductor industry. We are currently in the midst of a major technology shift to the smaller semiconductor geometries of 0.13-micron and 0.10-micron chip designs. These cutting-edge technologies require cutting-edge EDA tools to successfully turn out the next generation of designs. This means continued purchases of the latest and greatest products that the EDA vendors are developing in order to capitalize on these advanced manufacturing processes.

In large part, what is really driving this march forward is that semiconductor companies realize their own role in ending their recession is to stomp hard on the design accelerator during these down times. Having brand new products on the market will speed up the economic recovery by fueling demand for innovative and sophisticated designs. Investment in R&D has not been subject to the cutbacks seen in fab capital expenditures. In fact, in the few instances where rumors have surfaced about a semiconductor company reducing R&D spending, subsequent investigation by Gartner Dataquest in San Jose found all but one story meritless. There is only one semiconductor company we have found reining in R&D expenditures, and this instance is far from typical.

For these reasons, Dataquest is continuing to hold firm to a preliminary forecast of 20 percent annual growth overall for the EDA industry in 2001. So far, the largest EDA vendors have already had strong first-quarter performance. Cadence Design Systems Inc. reported first-quarter product revenue growth of 72 percent over the same quarter in 2000 and Mentor Graphics Corp. had 19 percent growth. Synopsys Inc. was the one oddity among the largest EDA companies, as it reported negative growth for the quarter; however, Synopsys' (nasdadq: SNPS) negative growth was due to a change in its software licensing strategy and the fundamental product growth for the company was actually quite strong. Smaller EDA companies, such as publicly traded. Synplicity Inc. and Simplex Solutions Inc., have reported first-quarter growth of 225 percent and 96 percent, respectively. In total, the EDA industry has demonstrated quite good growth to date, and its prospects for sustaining that growth are excellent.

Nevertheless, all of this speaks to just software product growth for the industry. While software product sales are the core of EDA, there is also a significant services component of EDA revenue. One shortfall in the EDA industry may be coming from consulting services. While semiconductor vendors may not be scaling back tool purchases, they are bringing more design work back in-house. They are being more selective about which design projects they choose to embark upon and are focusing more internal effort on completing those that are most critical. This leads to the inevitable decline in design outsourcing, and EDA vendors' consulting businesses are feeling the effects. Still, services revenue has not actually declined; it merely has seen extremely modest growth for most EDA vendors.

The overall health of the EDA industry remains strong, though. EDA vendors' financial guidance for the rest of 2001 has not deteriorated, as has been the case for many of their customers. What remains vital in order for the industry to achieve prolonged success is its ability to roll out its powerful new set of design tools. Product innovations such as the emerging silicon virtual prototype, IC implementation toolset, and the intelligent test bench will be essential in addressing the challenges faced by engineers and shaping the future of semiconductor design. Customer demand is solid for next-generation EDA technologies. The key will be to introduce those tools on schedule and with the promised capabilities. Execution is the name of the game.