Financial clouds gather over EDA

Financial clouds gather over EDA
SAN JOSE, Calif. — Cadence Design Systems Inc.'s first-quarter 2001 results sound great on first reading — a 34 percent gain over the same quarter a year ago. But a closer look hints at what some analysts fear might be the first signs of an EDA industry downturn. That's most immediately apparent in services, where Cadence's Tality organization has suffered a revenue hit and is currently undergoing a 10 percent layoff.

But some observers also believe that a protracted semiconductor industry downturn will cut into EDA product purchases as well. Analysts John Barr of Robertson Stephens and Erach Desai of Credit Suisse First Boston are now expecting 2001 EDA-industry revenue growth of around 10 and 12 percent, respectively — a far cry from the 20-plus percent most analysts were touting at the start of this year.

The forecast of a protracted slump was countered by Gary Smith, chief EDA analyst at Dataquest. Saying that his firm is sticking with its original 20 percent EDA growth estimate for 2001, Smith pointed to 30 or 40 "power users," among which Dataquest has found only two that plan to cut EDA expenditures. Services, Smith observed, "always get cut back in the initial part of a recession."

Cadence, the largest EDA vendor, reported first-quarter revenue Tuesday (April 17) of $345 million, a 34 percent year-to-year jump. Product revenue grew 72 percent compared with the same quarter last year. But revenue from services, including chip and product design support, was up only 6 percent on a year-to-year basis.

Tality Corp., which represents slightly over half of Cadence's overall services revenue, was down about 20 percent from the fourth quarter, with $44 million in revenue. Ray Bingham, Cadence president and chief executive officer, said the main problem was a severe cutback in the consumer wireless-communications sector, which resulted in cancellations and postponements of service contracts.

Tality has around 1,400 employees and is now cutting 10 percent of them, with the consumer wireless area the hardest hit. The company also provides design services in wired telecommunications and networking, mobile and Internet computing, and pervasive computing. Cadence has withdrawn Tality's initial public offering registration statement, but still hopes to eventually spin the company out, Bingham said.

Cadence's increased product revenue, Bingham acknowledged, was partially due to the company's painful 1999-2000 switch to subscription-based licenses. "Certainly the comparisons against a year ago are easy," he said.

Too easy, according to analyst Desai. He noted that Cadence's revenue is down 12 percent sequentially from the fourth quarter of 2000, whereas historically the first quarter comes in at 4 to 5 percent down. Cadence is expecting a sequentially flat second quarter — at roughly the same revenue as the first — whereas second calendar quarters are typically up 3 or 4 percent, Desai said.

Cadence has lowered its revenue guidance for 2001 from a 20 percent to an 18 percent year-to-year gain. This is due to lower services revenue combined with decreased revenue for the company's Quickturn emulation products. But Cadence is still expecting a 30 percent year-to-year gain in product revenue, Bingham said.

"Customers are struggling," Bingham said. "They're looking for ways to streamline costs, and one way is to broaden relationships with a standard supplier. Our renewals are getting materially bigger."

Neither Barr nor Desai thinks Cadence will meet its new guidance. Barr believes 2001 revenue will be up 13.8 percent; Desai pegs it in the 12 to 15 percent range. The real culprit, both say, is a slowdown in capital spending resulting from the semiconductor downturn.

"I thought we could absorb a 10 percent down year in semis, but now it looks like we're down 18 to 20 percent," said Barr. "If that's the case, I think it means EDA growth of about 10 percent for the year."

Barr said Cadence's first-quarter results look good because the EDA purchasing slowdown has just started to take effect. "Cadence thinks so too, by saying the second quarter will have the same revenue level as the first," Barr said. "But I think the slowdown will extend into the third and fourth quarters, and Cadence doesn't think so."

Dataquest's Smith, however, believes that Cadence's new projections of 18 percent revenue growth and 30 percent product growth are reasonable. "I'm pretty bullish on Cadence," he said. "I never did think they should be in the services business, but that's their business."