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In our EDA review, Synopsys (Nasdaq: SNPS) is the second major player, and is always going neck-to-neck with Cadence.

Synopsys announced Q4 earnings on December 6, 2007. Unlike the losses posted by competitor Mentor (MENT), Synopsys executives were quite pleased with the company's results, and momentum throughout the year which enabled Synopsys to meet or exceed all of its original 2007 targets. Q4 revenues increased 11.2% to $315.2 million, and annual revenues grew 11% to $1.212 billion. Additionally, expenses were $277.4 million, which is only a 3% increase.

Much of this cost control was achieved by sending work offshore and shifting one-third of its employee base to lower cost geographies. The company is currently sitting on $433.5 million in cash.

Synopsys also announced guidance for 2008 Q1 with revenue expected to be between $308-316 million, and expenses are expected to be between $262-278 million. Net income is expected to be between $0.20 - $0.28 per share. However, it did state that the company expects 90% of the quarter’s revenue to come from backlog, which then leaves the outstanding question of whether the company will be able to replenish the pipeline for the remainder of 2008. For all of 2008, Synopsys expects revenue between $1.3 billion and $1.315 billion.

As we discussed in the Cadence piece, these multi-year, all-you-can-eat contracts that are becoming the industry norm, are great for revenue predictability via backlogs, but they seem to be at the cost of the future.

Synopsys has 146.4 million shares outstanding with a market cap of $3.75 billion, and a 52-week price range of $22 to $29/share. Currently priced at $26/share, and with a projected growth of 10% per year for the next few years, on paper, Synopsys appears to be healthy.

The problem with SNPS as an investment is that the industry structure is broken, and the overall market shows very little momentum. EDA’s growth is based on Design Starts, not volume of IC shipped. While the IC shipped number has been growing at gangbuster rates with the surge in consumer electronics in particular, and the permeation of electronics into pretty much all aspects of our lives in general, design starts have not really grown at a comparable speed. In fact, the irony is that IC and system vendors are trying hard to make fewer designs become hit products, thereby controlling the cost of IC design that has sky-rocketed.

All this bodes very badly for the EDA industry, and just as I have advised my readers not to invest in the online DVD rental business, I will advise you now to stay away from EDA as an investment category. As it stands, there is no money to make in these stocks.

What is also immensely frustrating is that there is hardly any thought leadership from the leaders of the industry to adjust its dynamics. Change, it seems, comes slowly to an industry that once rose high on the wings of rapid and abundant innovation. It is a shame, since EDA is such a critical part of the IC Design value chain!

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Source: Synopsys Looks Healthy, But...