For most of last year, it looked as though the EDA market was still pretty healthy and growing at a respectable rate. Even as late as the third quarter of 2002, major EDA companies were reporting financial results that exceeded expectations. Though Gartner Dataquest did lower its forecast during the course of 2002, it seemed that product revenue growth for the year would still probably reach into the double digits.
Not so, as it turned out. The EDA industry was hit hard in the final days of 2002. Results for the fourth quarter were so dismal that industry growth for the full year was severely affected. EDA market growth, measured by product revenue, totaled only about 3.3 percent for 2002, far below our earlier expectations. The fourth-quarter decline in revenue was much more severe than we had anticipated.
The biggest contributor to the fourth-quarter shortfall was Cadence's disappointing financial performance at year's end. Up until the fourth quarter, Cadence-the largest EDA vendor-had demonstrated strong results for 2002. It appears that Cadence is still suffering through its shift in licensing models.
The EDA industry also felt weakness throughout the year in a number of market segments, especially pc board tools. Zuken, for instance, continued its sharp decline in 2002. Mentor Graphics also showed a substantial revenue drop as a result of its purchases of Innoveda and Ikos, both of which were in strongly negative year-over-year growth territory before they were acquired. Market consolidation among several other formerly leading vendors (e.g., the acquisitions of Avanti by Synopsys and Simplex by Cadence) further dampened industry growth as product lines were merged or phased out.
While many smaller EDA companies continued to exhibit fairly strong growth for 2002, the larger vendors almost uniformly experienced some degree of revenue deceleration, bringing down growth for the whole industry.
The short-term growth picture for the EDA industry changed significantly in view of the last quarter of 2002 and early 2003 earnings announcements. It has become clear that customer spending will remain well below earlier expectations through at least 2003. Without a robust recovery in the semiconductor market or general economy, EDA spending will continue to be depressed.
Nevertheless, looking ahead the key drivers for market growth remain unchanged. Market growth in the immediate future is still largely motivated by the acceptance of IC implementation tool suites for chip design. Adoption of IC implementation tools is still occurring, albeit at a somewhat more leisurely, protracted rate. Consequently, widespread implementation of the next generation of design tools-the intelligent testbench, silicon virtual prototyping and electronic system-level (ESL) tools-will be a bit delayed as well. And the persistent effects of the licensing model shift to subscriptions will have a negative influence on market growth.
Gartner Dataquest has therefore lowered its forecast for this year and next. The forecast growth rates for product revenue in both 2003 and 2004 have been greatly reduced, to 8 and 16 percent, respectively. Given the current economic environment, the switchover to IC implementation tools is not taking place quite as rapidly as we had earlier anticipated, though it certainly is happening.
Later years will take up some of the slack in growth as the next phase of EDA market development-the acceptance of ESL tools, intelligent testbenches and silicon virtual prototyping-has accordingly been pushed out. We won't see major growth of ESL tools until 2005, though it will extend well into 2007. But even this higher growth in 2005 through 2007 will leave the overall size of the market considerably lower than in our earlier forecasts because of the exceedingly low growth seen in 2002.
Our projected annual EDA growth for 2005 through 2007 is in the 20 percent range, thanks to the rise of the ESL tool set. By 2007, we expect the EDA market to reach nearly $6 billion in product revenue, approximately double its level today. The five-year compound annual growth rate through 2007 is 16.7 percent.
In the near term, EDA growth will be mainly driven by the continued adoption of IC implementation tools. The next trend beyond that will be the rise of the ESL tool set and its enabling technologies, especially the silicon virtual prototype and the intelligent testbench. Because the influence of ESL tool adoption has been pushed out from 2004 until 2005, EDA market growth will be significantly higher for the latter part of the five-year forecast period.
Laurie Balch is principal analyst for design and engineering at Gartner Dataquest (San Jose, Calif.).