harry … the ASIC guy

It’s been a rocky month for EDA.

On July 23rd Cadence revised strongly downward its revenue forecast for the last 6 month of 2008. Cadence stock plummeted 30% the next day. As a direct result, Cadence scrapped its takeover bid for Mentor Graphics this past Friday.

On July 24th Rambus reported Q2 revenue down 10% from Q1 and down 25% from Q2′07. Their closing price that day of $14.70 culminated a decline of almost one-third over the previous month. As a result, Rambus has announced its cutting 20% of its workforce.

On August 7th, Magma pre-announced that its Q1 revenue would be 10% lower than expected. Result: $6.77 => $5.45 (-19%).

And just last week, MIPs announced a $100M write-down due to “the softening overall market for intellectual property and delays experienced in realizing expected synergies” (with the Chipidea acquisition). With it, a 15% layoff.

And so, all eyes will be on Synopsys and Mentor this Wednesday. First, Mentor will announce Q2 earnings at a 5:30 AM (PDT) conference call. (Show of hands, who is getting up early for that one). Then, Synopsys will announce Q3 earnings at a more reasonable time, 2:00 PM (PDT).

A few things that I’ll be watching for:

1. During Cadence’s earnings call, Mike Fister blamed most of their predicted revenue shortfall on their customers’ decision to postpone purchases in the face of uncertainty in their own businesses. This seems to be supported by the subsequent bad news from Magma, Rambus, and MIPs. If that is the case, expect to hear similar bad news and comments from Synopsys and Mentor.  If not, then the finger will point back to Cadence.
2. What will Mentor say about the withdrawn offer by Cadence? (Note: Mentor stock dropped 25% midday Friday after the news broke).
3. Several analysts and observers (including myself) felt that Synopsys would benefit from the uncertainty caused by the Cadence - Mentor acquisition battle. I’ll be interested to see if Synopsys’ numbers show that or if there is any anecdotal information of a big customer switching to Synopsys as a result.
4. This will be the 1st quarter since Synopsys acquired Synplicity, so look to see how that is going.  From what I hear, Synopsys plans to keep the businesses mostly separate through the end of FY08 (October).

It should be an interesting week…

harry the ASIC guy

Following up on my post last week on Cadence’s Q2 earnings call, here are my “between the lines” observations of Cadence’s Q2 10-Q report:

“Our recent announcement of the proposed acquisition of Mentor Graphics Corporation, or Mentor Graphics, has caused some customers to demand more flexibility in accessing new technology.”

Translation: When the large EDA vendors negotiate a multi-year deal with their customers, the deal will include “remix” rights allowing the customer to periodically alter his license mix (e.g. trade in simulator seats for synthesis seats). Typically, “new technology”, i.e. tools not yet available at the time of the deal, are excluded or are available only at some premium vs. existing technology. Evidently, Cadence customers are asking for the ability to remix in technology that might be acquired from Mentor. This is slowing things down and may have caused some deals to slip out.

“To enable us to keep our focus on the value of our technology … we are moving to a license mix that … will result in increased ratable revenue for us.” (Note: You can go to the 10-Q report for the full sentence, but the key part is shown above.)

Translation: EDA vendors that are publicly traded, like Cadence, need to hit their quarterly revenue estimates, or they are punished, as we saw last week. Since customers know this, they often defer purchases until the end of the EDA vendor’s fiscal quarter or year, resulting in the “hockey stick” effect (i.e. the graph of orders over time looks like a hockey stick with the big increase at the end of the quarter). By waiting until an EDA vendor is desperate to “make it’s numbers”, they can negotiate the best price. In order to be less dependent on the quarter end business, Cadence is increasing to a 90% ratable model. In this way, most of Cadence’s revenue will be determined by backlog orders, so they won’t need to heavily discount to hit their numbers.

“In order to provide our customers with the desired flexibility, our license mix will change to a higher proportion of licenses that require ratable revenue recognition which will result in a decrease in our expected revenue for the second half of fiscal year 2008.”

Translation: Instead of recognizing 100% revenue when the order is received (or the license is shipped) as for a perpetual license, the revenue for a subscription license is recognized “ratably” over the term of the license.  For instance, if the subscription license is for 24 months, then 1/24 of the revenue is recognized each month. So, in the upcoming quarters, Cadence will have reduced revenue due to the fact that the revenue is deferred out over the term on the subscription licenses. The nice part for Cadence is that they can attribute the decline in revenue over the next few quarters to the change in license mix.  This will be partly true, but they can also obscure poor orders performance since they do not report orders to the investment community, only revenue and backlog (as far as I know).

“To offset some of the impact of our expected decrease in revenue, we have implemented cost savings initiatives, including reducing headcount, decreasing employee bonuses and reducing other discretionary spending.”

Translation: I’ve heard that Cadence has already instituted 3 shutdowns this year, July 4th week, Thanksgiving week, and Christmas to New Years. Incentive bonuses usually accrue in Q4, so that will help later this year. I have not heard of any headcount reductions since last week, but maybe someone else has.

Hope that helps.

harry the ASIC guy

Not to be outdone, but with much less fanfare and ballyhoo than Synopsys’ donation of its Verification Methodology Manual (VMM) class library to the Accellera Verification IP (VIP) Technical Subcommittee, Mentor Graphics last week donated it’s Unified Coverage Database (UCDB) to the Accellera Unified Coverage Database Interoperability (UCIS) Technical Subcommittee.

Although not as hot a topic in the press and in the blogosphere, this represents a firm step forward in the standardization of the overall coverage driven verification methodology, whether you pray from the OVM or from the VMM hymnal. Whereas ratified or defacto standards already exist for the testbench languages, the requirements and coverage capture tools and formats are still proprietary to each of the 3 major vendors. This prevents the verification management tools of one vendor from being used with another vendor’s simulator. Having a UCDB standard will facilitate portability and enable more innovative solutions to be built by third parties on top of this standard.

Although Synopsys and Cadence have their own unique UCDB format, the basic elements of this standard should be much easier to agree upon without the political wrangling slowing the VIP subcommittee. I also think this is an opportunity for Synopsys, Mentor, and Cadence to show that they really can cooperate for the benefit of their customers and win back some of the goodwill lost in the OVM vs. VMM battle

harry the ASIC guy

I just spent the last hour+ listening to to Cadence Q2 earnings conference call. (You can listen to the call here and read the transcript here).

Ouch!!!

As I write this at 12:30AM PDT on Thursday morning, I don’t know for sure how the markets are going to react. But I expect, as do all of the analysts, that Cadence shares will be down. Here are the lowlights that I took away:

1) Cadence revised their revenue and earnings guidance for 2008, not by a little, but by a lot. Analysts were projecting ~$1.5B revenue and Cadence is now projecting ~$1.1B, or ~25% less. (Note: This is in part due to a change in license mix as described below).

2) Cadence is increasing it’s license mix to 90% ratable going forward. Simply put, more of their revenue will be recognized over time rather than up-front (at the time of the booking).  That means lower revenue in Q3, although by design. (Note: This is the same thing that Synopsys did when it missed a quarter badly several years ago.  The change in license mix helps to obscure the real financials to the investment community. Bottom line: if you have bad news, put it all in one quarter).

3) Cadence has started the regulatory approval process and acquired 4.7% of Mentor common stock in the open market and they say they are committed to the acquisition, but Mentor has not returned any calls.

So, how did the analysts react? Not well.

Much of the analyst part of the call was devoted to cordial debate over whether this “weakness” was due to poor economic conditions, economic uncertainty, and delayed migration to new technology nodes within the customer base (as Cadence contends) or to a more inherent weakness in Cadence’s business (as the analysts seemed to believe). For instance, one analyst asked “did the environment deteriorate that quickly that your bookings outlook could have gone from $1.5 billion down to $1.1 billion in one quarter?”

There also seems to be a belief that Cadence “over-consolidated”. When they did “all-you-can-eat” deals with some big companies, they basically “drained the pipe”, leaving them without an option to sell new technology.

And customers are just holding out and deferring purchases until they get a better deal.

There was also quite a bit of discussion concerning EDA Cards which represent half of Cadence’s business. Customers are demanding even more flexibility in when, what, and how they purchase software and hardware.

Lastly, Cadence will continue to look at expenses, i.e. expect some attrition.

Bottom line: No way to sugar coat this…it was a rough quarter and figures to be a rough year for Cadence.  Question is how much will Cadence be punished by the investors and how much will their EDA brethren (Synopsys, Mentor, Magma, etc.) be punished. We’ll find out tomorrow.

harry the ASIC guy

One of the shortest but most relevant exchanges during the Cadence analyst call concerning the Mentor acquisition was an exchange between Sterling Autry of JP Morgan and Kevin Palatnik, CFO of Cadence.

About 27 minutes into the conference call, Sterling Autry asked why Cadence was estimating only $50M in operating income benefit considering Mentor’s operating income in 2007 was $120M. Indeed, $1.6B to acquire $50M in income seems like a poor deal indeed.

Kevin Palatnik’s response included the following, “the industry has had a history, from a customer perspective, of trying to get more and include features and not pay for it. So I think we just have to be able to demonstrate value to the customers. So I think, in the short term, I think, there is always the customers asking for the combination and not paying for it.”

The crux of the issue is simple math: 1 + 1 = ??? …how much will Cadence-Mentor be able to charge for their combined products?  If  1+1 > 1.5, then the combined company will be in pretty good shape.  If 1 + 1 < 1.5, then it will be difficult to “extract the value” of the acquisition. In that case, expect lots of layoffs, products being scrapped, and products being sold off.

From my experience, Kevin Palatnik is only partially correct that “the industry has had a history, from a customer perspective, of trying to get more and include features and not pay for it”. When I started with Synopsys in 1992, their flagship tool was Design Compiler. Synopsys added new features and voila…DC-Expert.  Then DC-Ultra. Now DC-Graphical. Each one sold at a premium to the predecessor and customers would pay for the upgrades.

But not without voicing their displeasure, both privately and also publicly on places like ESNUG. It often seemed arbitrary and self-serving to customers what Synopsys deemed an “update” (covered by their tool support) and what they deemed an “upgrade”.  And they felt they were being nickel-and-dimed.

On the other hand, people need to eat, and the EDA tool developers are no exception. They do not work for free. It seems unique to the EDA industry, that customers expect, once they buy a tool, to get any and all improvements to the product for free. This is not the case when I buy MS Office or most any other desktop application, but it is definitely a reality in EDA.

To add to the confusion, I can now download almost any desktop application I need for free as open-source (e.g. Open Office), or use it for free online (e.g. Google Docs), and get access to upgrades for free as well. This has changed customer expectations dramatically.

I’d like to know what you (EDA vendors and customers) think about this:

1. Should customers pay more for EDA tool enhancements or should they be part of the tool “support”?
2. How do you decide what is an “update” and what is an “upgrade”?

harry the ASIC guy

“Never miss an opportunity to keep your mouth shut”.

I googled this quote and it looks like it might have been Mark Twain or Abraham Lincoln or someone around those times. Whoever it was, I took their advice last week regarding the Cadence - Mentor acquisition, at least as far as anything on this blog was concerned. I have my views as to what will likely happen, but I’ve expressed them privately for the most part. Instead, I was listening to what others had to say.

And boy are there lots of opinions! As the dust settles, I’ve noticed something very interesting. There seems to be two camps.

In one camp are the people who are opposed to the merger or feel it won’t work. I must admit that this is the camp I am in, informed by 14 years in the EDA industry and bystander to several mergers, good and bad. The specific reasons have already been covered by others. They raise the spectre of Daisy/Cadnetix, pointing out significant product overlap, the difference of corporate cultures, FTC concerns, etc.

In the other camp are those who think this is a good idea, good for the industry, good for the companies, good for the shareholders. And they are mainly from the financial analyst and investment community. I admit, I have only a rudimentary understanding of the Wall Street side of the business, and the finances involved, so I ask you for your help to explain to me…

What do the Analysts Know that We Don’t Know?

harry the ASIC guy

Several weeks ago, Tommy Kelly published a blog post entitled DAC and the VLSI Homunculus :

“To the unwary conference goer (and the EDA companies: my addition), the most important part of the VLSI design and verification problem, is tools. Choose the right tool, and you’ll be fine. Get it wrong, and you’ll never tape out a chip again…But far, far more important are the knowledge, skills, experience, and artistry of the people who use those tools. Peopleware, not Software or Hardware, is the most important VLSI body part.”

Having spent the last decade plus of my life in some way, shape, or form in the ASIC design consulting business, I could not agree with Tommy more. Never did my clients insist on using a particular tool. But almost always they’d ask for a consultant by name, because he had the “knowledge, skills, experience, and artistry” to get the job done.

And so, when I read the EE Times Story entitled EDA Vendors Get Squeezed on Two Fronts, I had to laugh. Here were the EDA vendors once again bemoaning the fact that the EDA industry is not able to “capture the value” (i.e. charge more for its products) that it justly deserves. The article referenced strategies such as royalties that have been rejected before. (After all, if you were a general contractor, would you pay a royalty to the company that made the hammer or the saw?)

Indeed, the EDA industry is largely a Cortical Homunculus, having a distorted view of how important it is to the success of it’s customers projects. Yes, the tools are a key enabler, but more important are the designers, the people using the tools. Through my years, I have had the honor or working with designers that I would take with me wherever I go, my A-Team. And it would not matter what tools they use, they’d be successful anyway they’d need to do it!!!

I’ve spent a good portion of the last year talking to people in the EDA industry, marketing people and sales people. They tell me things like the following:

• EDA is a dying business
• EDA companies are just trying to take market share from competitors
• There’s very little new in EDA
• All the innovation comes from the small companies

They are probably not listening to me, but just in case, here is my advice to the big EDA companies.

Try Something New!!!

Instead of stealing EDA share from eachother in the analog design or verification market, solve a new problem. Make our lives easier. In basic economic terms, there is only one type of company that “captures the value” of its offering, and that is the monopoly, the one-of-a-kind product that solves a must-solve problem.

harry the ASIC guy

(Postscript: I wrote this article prior to Cadence’s offer today to buy Mentor Graphics, but it relates to the same point. Instead of doing something new, the EDA vendor strategy is to take away, or in this case BUY, market share from its competitors.

OK … I’m registered to go to DAC for at least one day, maybe two. I’ll definitely be there on Tuesday and probably Wednesday evening for a Blogging “Birds-of-a-Feather” session that JL Gray is setting up. Besides hitting the forums and other activities, I’ll have about half a day to attack the exhibit floor or the “suites” to look at some new technology. If you want to meet up, drop me an email and we can arrange something.

Cadence won’t be there and I already talk to Synopsys and Mentor on a regular basis, so I’m planning on focusing on smaller companies with new technology. Here’s what’s on my list so far…

Nusym - They have some new “Path Tracing” technology that finds correlations between a constrained random testbench and hard-to-hit functional coverage points. With this knowledge, they claim to be able to modify the constraints to guide the simulation to hit the coverage points. The main benefit is in getting that last few % of functional coverage that can be difficult with unguided constrained random patterns.

Chip Estimate - Having been around for a few years and recently bought by Cadence, they are basically a portal where you can access 3rd party IP and use the information to do a rough chip floorplan. This allows you to estimate area, power, yield, etc. I’m real curious as to their business model and why Cadence bought them. At a minimum, it should be entertaining to see the hyper-competitive IP vendors present back-to-back at half hour intervals on the DAC floor.

I have a few others on my list, but there are so many small companies that it’s hard to go thru them all and decide what to see. That’s where I need your help.

What would you recommend seeing and why?

On her Standards Game Blog  today, Karen Bartleson announced that Accellera is forming a subcommittee to define a standard for verification interoperability.  That is, to try to settle the VMM / OVM war.  As I have stated before in comments on JL Gray’s Cool Veification Blog, this is the right move because it give us input into the process, rather than just the EDA vendors controlling the process for their own benefit.  Also, as I argued in a previous post entitled “The Revolution Will Not Be Televised”, the influence and pressure of the verification community and especially the Cool Verification Blog were at least in part responsible.

Of course, Synopsys will tell you that they are just doing the right thing

It’s not clear how Cadence and Mentor will respond.  Hopefully they’ll join the effort.  Let’s keep the pressure on.

I just attended Aart DeGeus’ keynote address at SNUG 2008 and there were two highlights:

1. Synopsys is back in the analog design market! Filling the gap in their product portfolio, they announced a new in-house developed product called Orion that is aiming directly at the Cadence users of Virtuoso. Orion is in beta right now and will work with Open Access. They did a canned demo and highlighted ease-of-use and productivity over Virtuoso.
2. Besides questions on Orion, all the other questions were regarding VMM / OVM and the path to getting a truly open standard verification methodology. Cliff Cummings and John Cooley asked the most direct questions on this topic, such as:

• Will VMM ever be truly open and not just licensed?
• Is there any attempt to speak directly to Mentor and Cadence to try to combine OVM and VMM?
• Can we use VMM with another System Verilog simulator?

Synopsys’ plan is to donate VMM to Accellera and have Accellera drive a standard verification methodology. When asked about working with Mentor/Cadence, Synopsys asked the designers to try to push them to the table within Accellera. I expect this battle will continue.

More later…. harry the ASIC guy