Still Too Many Players In EDA

For the fiscal 2010, Gartner projects the global semiconductor market to grow 27% over the year to $290 billion after having dropped 9% over the year in 2009 to $225 billion. Recently reported results of major electronic design automation (EDA) industry players saw growth exceed market expectations.

The biggest player, Synopsys (NASDAQ:SNPS) saw Q3 revenues of $336.9 million exceed the market’s expected $335.5 million. EPS of $0.31 was a cent higher than the market’s projected $0.30.

Synopsys has been consolidating smaller players in the market to expand its portfolio and market reach. Over the past three quarters, the company has closed seven deals, with Virage Logic being the biggest at $315 million. Of late, Synopsys acquired NuSym Technology, a company dealing in automated, intelligent verification software for IC design. Synospys will use NuSym’s technology to help strengthen its verification portfolio where Cadence is very strong. Synopsys hasn’t revealed details of the acquisition.

Besides building its products through acquisition, Synopsys is also investing heavily in R&D. In a recently released Bloomberg report, Synopsys was among the leading three players to have spent the largest percentage of their budgets on R&D during the past four quarters. Its competitor, Cadence, led the brigade with 40% of revenues, or $349.4 million, being spent on R&D. Synopsys has spent 32% of its revenues, or $433 million, on R&D in the past four quarters.

The company expects Q4 revenues of $349 million–$357 million with EPS of $0.37–$0.39. It expects to end the year with revenues of $1.354 billion–$1.362 billion with EPS of $1.58–$1.60. The Street was looking for annual revenues of $1.35 billion with EPS of $1.58.

The stock is trading at $23.07 with a market capitalization of $3.4 billion. It touched a 52-week high of $23.74 in November of last year.

Cadence (NASDAQ:CDNS) too managed to up the market’s projections for Q2. Revenues of $227 million were higher than previous year’s $210 million and exceeded the market’s projected $220.9 million. EPS of $0.07 beat the Street’s target of $0.03.

As part of its product enhancement plan, Cadence recently expanded its collaboration with ARM to develop an optimized System Realization solution for ARM processors. The solution will enable an end-to-end flow including interoperable tools, ARM processor and physical IP, services and methodology from embedded Linux to GDSII.

The company projects Q3 revenues of $225 million–$235 million with EPS of $0.01–$0.03 compared with the Street’s projected revenues of $225.5 million and EPS of $0.05. For the year, Cadence expects revenues of $900 million–$925 million with EPS of $0.12-$0.16. The market was looking for revenues of $877.1 million with EPS of $0.15.

The stock is presently trading at $6.85 with a market capitalization of $1.8 billion. In October of last year, it reached a 52-week high of $8.18.

Mentor (NASDAQ:MENT) reported Q2 revenues of $187.9 million compared with $182.6 million earned a year ago and $180.5 million projected by analysts. The company also managed to surprise the market with earnings of $0.01 per share compared with the expected loss of $0.04 per share.

Mentor has been following a strategy of focusing on being the leader in market positions in markets where application of EDA technology can provide new capabilities and reduce costs, such as transportation. One such area is deploying its system design capabilities in the transportation industry. For instance, it entered into a contract with Hyundai Kia to incorporate Mentor’s cable and wire harness methodology, known as the CHS, within the car maker’s design and manufacturing process. During the quarter, the automotive business reported growth of 95% over the year and helped to drive the system design segment to growth of 10% over the year.

Within the transport segment, the company is particularly encouraged by growth in China, which is focusing on developing a domestic automotive and aerospace industry using the latest technology. Reports estimate the Chinese automotive semiconductor market to grow 13.5% over the year in 2010 to reach $16.55 billion.

Mentor projects Q3 revenues of $220 million with EPS of $0.15. For the year, it projects revenues of $880 million with EPS of $0.65 compared with the Street’s target of revenues of $867.7 million with EPS of $0.64.

Mentor’s stock is trading at $9.03 with a market capitalization of $972 million. It touched a 52-week high of $10.10 earlier this month.

Magma (NASDAQ:LAVA) too managed to exceed expectations. Q1 revenues of $32.6 million exceeded market projections of $31.1 million. EPS of $0.05 was also higher than the projected $0.03.

Magma has been expanding its product portfolio and recently launched the Quartz iPOP, “improved Productivity, Operability and Performance” initiative to help adoption of its Quartz DRC and Quartz LVS software for designs targeted at 65 nanometers and below by providing scalable physical verification solutions while maintaining accuracy and costs.

Magma projects revenues of $33 million–$33.5 million for Q2 with EPS of $0.05–$0.06. For the year, it expects revenues of $132 million–$135 million with EPS of $0.18–$0.20. Analysts were expecting revenues of $32.3 million with EPS of $0.04 for the quarter and revenues of $133.2 million with EPS of $0.20 for the year.

The stock is trading at $3.13 with a market cap to $165 million. In April of this year, it touched a 52-week high of $3.88.

While market reports may paint a rosy picture of growth potential for the industry, I maintain that the overall market is too small for multiple players to compete in. Synopsys ended the quarter with over $1.2 billion in cash and equivalents. I hope that it will use some of this cash to make the four-horse race a two-horse one. Acquisition of Mentor would be a start as its Calibre solution would benefit Synopsys’ design rule checker (DRC) portfolio.