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Synopsys' fiscal woes are its own, EDA competitors insist

Posted: 01 Oct 2004 ?? ?Print Version ?Bookmark and Share

Keywords:eda? synopsys?

Much of the EDA industry sought to distance itself last week from the fiscal misfortunes of its leading player, Synopsys Inc., which followed up a $25 million quarterly shortfall with sharply lower expectations for this year and next.

As Wall Street scolded Synopsys, competitors insisted that the industry as a whole is seeing steady growth. "We're focused on our business," said Cadence CEO Mike Fister, "and nothing is different for Cadence between today, yesterday or two weeks ago."

Synopsys blamed its twin embarrassments on cautious customers and their demands for tool discounts, which he said Synopsys will not provide.

Synopsys dropped its first bombshell Aug. 2 when it warned that it was going to fall $25 million short of expected third-quarter revenue. Then on Aug. 18, the company stunned the investment community during an earnings call by lowering its bookings guidance $450 million for fiscal 2005, to a pre-Avanti-acquisition level of $900 million.

"I don't see this as being indicative of the beginning of a slump in EDA," said Roy Jewell, president of Magma Design Automation. "It is more the problem of one major supplier. Although we believe that spending on EDA products will show flat to low growth over the next year or soas we've stated publiclywe continue to see customers beginning new, increasingly complex designs."

During last week's earning call, Wall Street analysts asked Synopsys officials how they could not have foreseen that 2005's bookings were off the mark.

CEO Aart de Geus said Synopsys missed third-quarter estimates largely because some deals were postponed until next quarter. "In July, our customers became markedly more cautious about extending commitments and spending cash," de Geus said. "This was triggered by some inventory buildup and a lack of visibility. Since then a number of our customers have announced earnings below expectations or reduced forecasts."

He also told the analysts that customers were delaying tool purchases to get last-minute discounts on Synopsys' newer products but that the company decided not to cut prices, which in the long term would lower the tools' value. "With the spending environment in wait-and-see mode, we don't want to compromise the pricing of our new technology. That is why we have decided to transition to a maximum subscription model where 90 percent or more of our revenue rolls off of our backlog every quarter."

The adoption of greater subscription, he said, would affect revenue for the rest of this year and next, with de Geus predicting that renewals will kick back in sometime in 2006.

EDA vendors and some analysts agree that the problems at Synopsys are its own and insist that EDA is headed not into dire straits but down a path of continued flat to slow growth.

Magma, the largest of the new public EDA companies, posted strong second-quarter bookings and revenue, as did Verisity, Synplicity and Nassda.

Mentor Graphics remains the only other EDA company to lower guidance, modestly predicting third-quarter revenue of $165 million and $170 million compared with previous estimates of $170 million.

"The evidence of spillover of the electronics industry health to a recovery in the EDA industry has been elusive," Mentor CEO Walden C. Rhines said in the company's second-quarter earnings call.

In the short term, many analysts believe, Synopsys' woes will temporarily hurt others in EDA. Nevertheless, they said, customers are still buying tools.

Synopsys has lost some credibility, they said, noting that it has changed its licensing mix a few times over the past four years and now has made matters worse by neglecting to revise booking estimates sooner. "Recent messaging from Cadence and Magma appears increasingly credible in light of this miss by Synopsys," said SG Cowen analyst Raj Seth. "Synopsys management has lost a lot of credibility. Somewhere there was a gross miscalculation on the health of the market and the depth of their market opportunity going forward."

In a desknote after the earnings call, Merrill Lynch EDA analyst Jay Vleeschhower noted that Synopsys has missed bookings for the three straight quarters. After the call, Bank of America and DA Davidson downgraded Synopsys from Buy to a Hold. Merrill Lynch and RBC Capital Markets had downgraded Synopsys after Aug. 2 warning.

But "at the end of the day, Synopsys is still Synopsys," said American Technology Research's Erach Desai, who upgraded Synopsys stock from Sell to Hold in July.

- Michael Santarini

EE Times

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