MENLO PARK, Calif. EDA and intellectual property (IP) vendors are feeling the ill effects of the semiconductor downturn, but should recover in step with the chip sector when it rebounds, according to Robertson Stephens analyst John Barr.
EDA sector revenues have traditionally trailed the rise and fall of semiconductor industry revenue by six months, but a retooling driven by new 0.18-micron processes is under way, which should keep the EDA industry's recovery in step with a semiconductor recovery, Barr said in a presentation here. IP companies should also see their royalty licensing models finally pay off as chips are produced at 0.18 micron, he said.
Some signs are already pointing to a semiconductor recovery, Barr said. Mask starts at 0.18 micron are increasing, for example. It is widely believed that designs built in 0.18-micron processes will require the latest tools from EDA vendors, thus driving up revenues.
But a broad recovery for the semiconductor industry is unlikely by mid-2002, so EDA companies should look to certain application areas that could fuel the semiconductor recovery, Barr said.
"Conventional wisdom says that in  there is going to be a semiconductor rebound," said Barr. "I'm not sure there is going to be a broad rebound. Nonetheless, if you look at carrier spending on new technologies, optical packet-based infrastructure, it is really key to the IC outlook of 2002. Communications R&D is critical to semiconductor R&D."
Lower interest rates have reinvigorated automobile and consumer electronics sales, propping up the semiconductor industry for the time being, he said.
"If you look at the economy as a whole it is hanging in there," said Barr. "The consumer is spending to carry us forward, but it doesn't seem clear to me that we are going to see a rebound unless liquidity continues to advance. Therefore we need to zero in on what works and what's not to create opportunities for our companies."
Ba rr said that networking equipment and basic cellular are beginning to warm up, noting that consumer confidence in November has risen surprisingly above October's level.
Japan's design automation market is still slumping, however, Barr said.
"If you look at Japan EDA sales in 1995 it was 24 percent, in 2001 it is estimated at 18 percent," he said. "Japan is a very important market for design automation, but there aren't any tail winds there to help."
Semiconductor and system companies must keep innovating to dig themselves out of the slump, Barr said. This will help EDA and IP companies, he said, because 0.18-micron designs effectively require new tools and use more IP, he said.
Timing closure tools, functional verification, configurable MPU cores and yield optimization tools are currently seeing good business and should drive growth of the EDA sector, he said.
Print-circuit board, FPGA and emulation areas are not doing well now, but should recover, he said.
Many IP providers have c hanged their licensing models and now get the bulk of their revenues from royalties, Barr said. Designers will likely use more IP to complete large-gate-count designs implemented in 0.18 micron, he said. When these designs start to come out of foundries, IP companies like ARM, Virage Logic and Artisan Components should see royalties boom, he said.
"Despite the downturn, next-generation design automation and semiconductor IP ideas are working," Barr said. "People are building companies out of it and some are going public, and the outlook is solid."