We will soon start to see the quarterly financial reporting installments of the “Big 3” public EDA companies. I predict they will be as boring as usual. I am not sure if I would want it any differently though.
Back in the 90s there were times when it was truly interesting to wait to see what Cadence, Mentor, or later Synopsys, might announce. I still have my brass-plated letter opener which Cadence gave to every employee in September 1990 when Cadence moved to the NYSE. Heck I even was excited to see the SVR (Silicon Valley Research, aka Silvar-Lisco) announcements. It was exciting to follow the industry then.
So what changed? The biggest change in the past 20 years is the EDA revenue model. Instead of primarily selling perpetual licenses and annual maintenance, EDA vendors sell time-based licenses (TBLs) with bundled maintenance. For the customers, this somewhat lessened the gamesmanship as to what enhancements they got for free, and what constituted a new product for which they would have to pay more money. But the financial community loved it since it forced a smoothing out of revenue. A 3-year license is now recognized ‘ratably’ – 1/36 of the purchase price is counted as revenue each month. Under the old perpetual licenses all of the revenue was recognized with the booking.
The effect of this change is fairly dramatic. If all the revenues were to be coming in on 3-year TBLs, then each quarter more than 90% of the company’s revenue is already made on the first day of the quarter. This is why all the analysts estimates are so close to each other and the announced number, too. How hard can it be?
Table 1. Analyst Estimates for Q4-CY-2012
How much do the analysts like predictability? Well, it was rumored that Cadence’s Executive VP of Sales Mike Schuh (now a General Partner at Foundation Capital), who lead Cadence’s sales team during its most explosive growth period, was forced out of Cadence after making his numbers yet again because a high percentage of the deals that actually closed that quarter were not in the forecast. So, despite always driving sales higher, Mike was seen as too unpredictable. [As an aside, I learned a tremendous amount watching Mike in sales situations – he was a brilliant salesman.]
So where has this predictability gotten the big EDA companies? Well first, they didn’t really make a quick switch to this model. Some of them cheated in the eyes of the financial community. They sold their deals to banks so they could pull all of the revenue forward. They did “respins” of deals before they would expire making it more difficult to properly estimate their effect on revenue over time. But, over the past few years it has all seemingly been cleaned up. So thanks to Lip-Bu, Aart, and Wally for giving us credibility with Wall Street. I am still waiting for the other effect that should have happened…
With a much more predictable revenue stream, I would have also expected it to be easier to plan an R&D investment stream, too. I expected that finally the Big 3 would come out with homegrown products that could redefine markets and upset the balance of power. That has not happened. Despite the declining number of EDA start-ups we are still not seeing any ground-shaking new products from the Big 3 EDA vendors. More about that in a later blog.
There is yet another way this model might change. We might see more moves into the EDA space from adjacent spaces. Recently, not all EDA acquirers have been the traditional EDA vendors. That might shake things up a bit, too.
Note: I run an executive consulting business. A list of my past and present clients can be found on my website, www.randysan.com.