Analyst foresees no EDA rebound until late 2003

Analyst foresees no EDA rebound until late 2003
SAN JOSE, Calif. — Prompted by rising share prices and a gloomy 2003 outlook for the EDA industry, analyst Erach Desai this week issued "sell" ratings on shares of the market's three largest suppliers — Cadence Design Systems Inc., Synopsys Inc. and Mentor Graphics Corp. Desai, an analyst at American Technology Research Inc. (ATR), said the EDA industry will not hit bottom until mid-2003.

Although ATR is a newly-minted "sell-side boutique," Desai has been following the EDA industry for years and has often taken a contrarian approach. In early 2001, for example, he warned that growth for the year would be less than the industry was forecasting; his analysis proved correct.

Desai initiated his ATR coverage in September 2002 with a "sell" rating on Synopsys, and "hold" ratings on Cadence and Mentor. He briefly upgraded Synopsys to "hold" when its share prices fell, and then downgraded all three industry leaders to "sell" after their share prices rose to a point where ATR foresees a downturn over the next 18 months.

At the core of Desai's analysis is a belief that the semiconductor industry will continue to decline in 2003. "Fundamentally, semiconductor units are not growing that much unless there's a killer app we're missing," he said. "And we're in a deflationary pricing environment, which you can see from those $300 PCs at WalMart."

In his latest analysis, Desai argues that major vendors are making incremental job cuts and that many of them will come from R&D. He also pointed to Cadence's recent quarterly report, which lowered growth rates for second-half bookings to 7-to-10 percent, down from earlier 15 percent growth projections.

Desai's pessimism is partly driven by a recent EDA Consortium (EDAC) report that said that EDA revenues for the second quarter of 2002 were down 10 percent on a year-to-year basis. Desai said he expects around 4 percent EDA revenue growth for 2002, and no growth for 2003.

But Desai's views are not universally shared. Laurie Balch, analyst at Gartner Dataquest, said her firm is predicting 11.5 percent EDA growth in 2002 and 17.7 percent growth in 2003. But the Dataquest figures reflect product revenues only, not services, which is the hardest-hit portion of EDA.

"The latest thinking is that we will see an economic recovery taking place in the second half of 2003," Balch said. "Until then, EDA tool spending will likely show modest growth, but will really pick up in the latter half of the year."

Few financial analysts are placing "sell" ratings on major EDA company stock. Research reports at Yahoo Finance show that a majority of analysts retain "strong buy," "buy," or "hold" ratings on Cadence and Synopsys, with Mentor receiving more mixed reviews.

Brad Mook, an analyst at Investec, cited the EDAC numbers and Cadence's revised bookings forecast in an Oct. 21 report. He retains a "strong buy" rating on Synopsys shares, but said the current downturn "should ultimately drive accelerated investments in advanced design tools."

Desai estimated that Synopsys' bookings through the first half of 2002 have been declining 5-to-10 percent, and that Mentor's booking have declined around 10 percent. He said that investors are "baffled" by changes in licensing models, and that accurate sequential revenue comparisons won't be available until late 2003.

Cadence, Synopsys and Mentor all declined comment on Desai's latest report.

Desai is bullish on other EDA vendors. He has "buy" ratings on Verisity Design Inc. and Nassda Corp., for example. His "hold" rating on Magma Design Automation Inc. is due to short-term concerns about the company's revenues.

"All three are providing a solution to a compelling need," he said. "The relative revenue run rates for these companies are smaller, and the dollar amounts they have to generate to get growth are not of the same ilk as Cadence."