EDAC recently reported the second quarter financial results for 2005 and the news is not positive. Although there is no cause for panic, the numbers show that the EDA industry has yet to find a way to profit from increases in sales of electronic products. While the last reported figures for the US electronic industry show a year-to-year increase of at least 10%, the EDA industry barely met the same revenues numbers as the previous year for the same period. To make matters worse, while most industry sectors are reporting increased productivity figures, the EDA industry generated the same revenues as in the previous year but employed 4 percent more people than in Q2 2004.

When you combine both factors you must conclude that this industry segment is not an attractive target for investment. This will continue to keep the stock prices of publicly traded EDA companies at best flat overall. More importantly, the industry has shown very little growth in the last three years, and thus private EDA companies will find it impossible to go public. This leaves only one exit strategy: acquisition. Venture Capitalists and EDA entrepreneurs will continue to realize their return on the investment by receiving equity, most often in the form of cash, from a larger EDA company. In most cases the price paid is much more than the demonstrable worth of the company, thus decreasing the potential funds the industry has available for either R&D or market expansion.

EDAC broke out the revenues by market segment: CAE, the largest tool category, generated $445 million, a six percent decline from the previous year. When you consider that the industry acknowledges that verification consumes over 50% of a development project budget, and that ESL (Electronic System Level) design is considered by most analysts as the primary tool to shorten development time and cut costs, the results are puzzling. Do lower revenue indicate a significant price erosion, or do they instead indicate that companies have purchased most of the verification tools in previous quarters? Why can’t EDA vendors make a strong case for ESL that will generate the revenues required to justify staying in the market? I have discussed my views about ESL in previous articles, and the more time passes the more it looks like my pessimism is justified.

The two segments showing an increase over the same period last year are PC board and MCM tools, up 3%, and IC Physical Design & Verification that gained 2%. The increase in the PC board segments is justified by the increase in complexity in board design, requiring more analysis tools to cope with parasitic effects, as well as new manufacturing technologies and new packaging. The small increase in the IC segment is disappointing, since it shows a reticence on the part of the electronic industry to aggressively move to new fabrication processes. Moving from 130 nm process to 90 and especially 65 nm requires a significant investment. Industry spokespersons are united in declaring that designers cannot be successful at 65 nm with the same tools they used at 130 nm. And even the move to 90 nm, once considered equivalent to a shrink, requires investment in new EDA tools. The only other explanation is price erosion, especially the unofficial price erosion that occurs when large EDA vendors sell bundles or “all you can eat” licenses in order to either maintain or gain control of large corporate accounts.

The bottom line seems to be that the only reason we still have an EDA industry is that it is essential to the design and manufacturing of electronic goods and that its complacent approach to revenues makes it desirable for the electronic industry to keep it around.

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