Financial analysis is a demanding task. It requires not only a knowledge of accounting and statistics, but also a deep understanding of the industry and the impact of the overall financial conditions on its results. The EDA industry is a small sector in the financial world, and yet quires some knowledge, or at least appreciation, for the engineering principles it applies and the physical laws it must respect.

Jay Vleeschhouwer is the financial analyst covering the EDA industry that I respect the most. On July 15th he sent out his newsletter covering the industry results for 1Q10. I published the newsletter on this site with his permission. I did so because his analysis not only presents an accurate report on the largest publicly traded EDA companies, but also touches on a few points that have been recently topics of reports by other observers.

The Numbers Justify EDA360

In reporting on EDA bookings, Jay observes that "The combined book/bill would be ≈1.0x, continuing a trend of the last number of years where composite book/bill has been converging to parity. This signifies in the aggregate, unfortunately, little foreseeable total organic growth."

This is a consequence of the nature of the business. the EDA industry produces tools that are licensed and used to develop new product. Its prices are still the result of historical factors, based on the allegded cost of internally developing a tool versus purchasing it from an outside vendor. When taking into consideration that EDA tools are required to develop any electronic product, and the very healthy returns enjoyed by both semiconductors and system houses, it is easy to come to the conclusion that the EDA industry, which competes maily on price, has been undervaluing itself since its inception.

The three largest companies, representing 71% of the industry's revenue, continue the discounting behavior that has made the industry famous, just for the priviledge of claiming particlar large semiconductors and system companies as their customers.

Thus, Jay concludes his observation with this statement: "in order to enable some incremental growth, of the dozens of reported EDA product categories, the companies need to have and find (or acquire) some number of products or addressable categories where there will be some foreseeable growth, owing to specific technical needs of new ICs, new processes, perhaps capacity, and/or new methodologies."

This is exacly what John Bruggeman says in its EDA360 document. Two factors spell the end of growth based on present technologies. CMOS based manufacturing is reaching the point where only few companies will be able to afford the development and manufacutrng costs associated with leading processes. And secondly, the atomic structure of matter will terminate the miniaturization of feature sizes that has sustained the introduction of new products, or new version of existing products, by EDA vendors.

The EDA industry needs to not only be ready to support whatever new fabrication technolgy will be employed, but also enlarge its reach to support new applications, new computer architectures, and new market segments outside the silicon based reality in which it "survives" at present.

Who is Number Two?

I have recently received a number of press release and other emails stating that Mentor is now the second largest EDA vendor, having overtaken Cadence in yearly revenue. In most cases the observation is attributed to Gary Smith, although I have not received any statement to this effect directly from Gary.

Yet, looking carefully at the numbers reported by Jay, this seems unlikely. In 1Q10 Cadence had 21% of industry revenue while Mentor had 17% for a delta of almost $42 million. Mentor's website states that revenue were "almost" $800 million in the last 12 months, while a look at Cadence's revenue puts the company on track to achieve revenue of around $880 million.. Studying the regional results reported by Jay also confirms my understanding that at best the statement that Mentor is now number 2 in revenue is due to variations in quarterly revenue recognition.

Does this statement have anything to do with Carl Ichan' efforts to gain a seat on the board of Mentor? Or his statements that the company is not profitable enough?

I think that the argument about who is number two in the industry is quite irrelevant. What is more important is that the gap between Synopsys, the undisputed number 1, and whomever is number two is widening.