SAN JOSE, Calif. " Despite remaining bullish about a broad-based recovery of the electronics industry, American Technology Research (ATR) financial analyst Erach Desai is bearish on the entire EDA sector.
In a desknote issued Wednesday (Oct. 29), Desai, who covers EDA and semiconductors for ATR, downgraded Synopsys from a "hold" to a "buy" and dropped coverage of two smaller, public EDA firms, Nassda and Verisity.
"We believe that a combination of buyer power coercing favorable 'terms' on multiyear subscription deals, poor business practices in the form of 're-mix' allocations and low-barriers to competition are shifting the EDA market from a stage of market expansion (which really ended in late 2000) to a state of market-share retention by the larger vendors," Desai wrote.
As a result of the move to market-share retention, Desai predicted that EDA revenues, if business remains stable, will grow to slightly more than 2 percent for 2003 with revenues growing to 5 percent in 2004 (the low end of ATR's preliminary target) and 7 percent in 2005.
Desai added a caveat: The industry can exceed these expectations if it addresses a number of growth inhibitors in the next 12 to 18 months. These include EDA vendor's excessive adjustments of licensing models to cover up slow bookings, a lack of consolidation and an over abundance of small, "financially-strapped" EDA firms and "immature and irrational pricing competition."
He also told EE Times that if EDA companies do not address these inhibitors and other problems affecting the sector, the industry could possibly see "flatish" growth over the next two years.
In downgrading Synopsys, Desai said he he does not believe Synopsys bookings will grow more than 6 to 8 percent in 2004. Wall Street analysts consensus for Synopsys in 2004 is $1.3 billion in revenues and earning per share (EPS) of $1.71. ATR had predicted Synopsys revenues would total $1.32 billion, with EPS of $1.8. It now predicts Synopsys revenues in 2004 will be $1.25 billion, with an EPS of $1.60.
For 2005, ATR predicted Synopsys '05 revenues would reach $1.46 billion, with an EPS of $2.10. It now predicts Synopsys will post 2005 revenues of $1.35 billion and an EPS of $1.85.
"At the end of the day, [Synopsys] is likely the best-positioned larger EDA vendor in the market, but we believe that the stock has limited upside from current levels," Desai wrote.
Desai also reiterates his "hold" ratings for Cadence, Mentor Graphics and Magma while dropping coverage of Nassda and Verisity. Both previously had "hold" ratings and traded at low volumes.
"We like both companies," Desai said. "We are impressed with their technological prowess and focused point-tool product offerings. We believe that the management teams are very credible and of the highest integrity. We just don't see an environment in which they can thrive as growth companies, given the business practices of the larger EDA vendors. Due to a lack of institutional interest in the names, we are dropping coverage effective immediately."