The amount of revenue generated per employee is a measure of the efficiency of a company and an indicator of its viability in a difficult market.
EE Times is running a poll that asks designers and managers to state how concerned they are about the financial stability of the vendors they currently work with. Of course EDA vendors are part of the suppliers designers rely upon to get their work done. So the results are very interesting to me. So far respondents are not painting a pretty picture. As many as 81% of respondents are either very or moderately concerned that their vendors will be able to successfully manage the deep global financial crisis. As much as 44% of those taking part in the poll say they are very concerned, while 37% are moderately concerned.
Putting aside for a moment the negative news that have surrounded Cadence, now the second largest EDA vendor, in the last half of this year, the small EDA suppliers are facing a challenging period. John Cooley has reported in his latest ESNUG post that Knowlent, Blaze DFM, and Stone Pillar are possibly out of business. I, unfortunately, do not have any independent information that would contradict that statement, although the web page of Knowlent is quite up to date and shows future engagements at DesignCon. Both Blaze DFM and Stone Pillar are very vulnerable to slower development and adoption of leading edge semiconductors processes. In addition Blaze DFM is finding a significantly increased level of competition in the DFM market segment from the largest four EDA vendors, who are offering greater tools integration with the rest of the design flow.
During my time as an executive manager, one of the tools we used to measure a company was its efficiency. The measure is obtained by dividing revenue by the number of employees. It provides an indication of how good a company is at managing cost of sales and how efficient the development departments are in generating competitive products. When I do that for the three leading EDA vendors, the numbers are a bit of a surprise, because they are lower than I would have expected. It was not a surprise to find out that Synopsys is the most efficient of the three, with a projected $235,000 per employee in revenue for 2008. Mentor shows that they need to work a bit on their productivity, since they will only generate $191,000 per employee if they achieve their projected 2008 numbers. Before the latest restructuring, Cadence's efficiency was $196,000 per employee, while following the layoff, the number increased to $226,000.
The new number is reassuring in the sense that it gives some credence to the company statement that they will not have to exit any of their markets because of the layoff. Its efficiency will still be less than Synopsys, thus the number is achievable. There are been rumors, following Magma's disappointing fiscal results, about the company's viability. Using the same measure I used for the other three leading companies, Magma's efficiency is $155,000 in revenue per employee. Thus the efficiency numbers fit the ranking of the four companies, from Synopsys, the leading EDA company in terms of revenue, to Magma which holds the number four spot.
The numbers clearly justify EDA vendors expansion, at least for development and support activities, into areas of lower man power costs. Given that fully burdened costs per employee in Silicon Valley is approximately $250,000 per year, without taking advantage of significantly lower costs off-shore none of the EDA companies would be profitable, and it is a clear alarm signal for those startups that have chosen the Valley as a convenient place to develop. Smaller EDA companies will find 2009 a very challenging year.