From Hambrecht & Quist Part 1:
June 17, 1999 - 9:04pm
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Date: 6/18/99
1 of 4 DAC '99 Preview; Tackling Tough Problems in the Big Easy
Next week, EDA and SIP vendors will meet in New Orleans for the 36th Annual
Design Automation Conference (DAC). DAC serves as the most significant
conference for chip design tool providers, and typically announcements at DAC
highlight the key issues facing the design community. We believe that the
critical issues involve the next-generation of design tools for 0.18-micron
designs, the recovery of the semiconductor industry and signs of life in Japan.
Opportunities:
*We expect an upgrade cycle for EDA tools targeted at 0.18-micron design to
begin in the second half of 1999.
*Recovery in application-specific integrated circuit (ASIC) business and
continued strong growth in communications ICs should help boost demand for
chip design tools and semiconductor intellectual property (SIP).
*As designs increase in complexity, third-party SIP is finding increasing use
in designs, creating revenue opportunities for both SIP and EDA companies.
*New problems in logic and physical verification have created the need for new
tools and methodologies, creating revenue opportunities for the majors and
start-ups.
*Transition to time-based licensing can enhance overall visibility for design
tool companies.
*Japan is showing signs of life for some industry participants.
Challenges:
*Many of the existing design tools appear to be "broken," creating
opportunities for market share shifts among the majors and the entrance of
nimble upstarts.
*Growth for the majors will come primarily from winning larger contracts from
a well-defined set of key customers.
*Customers appear willing to pay large licenses and royalties for only the
highest value SIP.
*Efforts by the majors to grow beyond EDA are still in their infancy.
Recommendations:
*Our top pick in EDA is Synopsys whom we believe to be best positioned to take
advantage of the 0.18-micron transition.
*Our top picks among the semiconductor IP companies are MIPS Technologies and
ARM Holdings.
36th Annual Design Automation Conference Preview
Next week, EDA and SIP vendors will meet in New Orleans for the 36th Annual
Design Automation Conference (DAC). DAC serves as the most significant
conference for chip design tool providers, and typically announcements at DAC
highlight the key issues facing the design community. We believe that the
critical issues involve the next-generation of design tools for 0.18-micron
designs. We believe that the transition to 0.18-micron design has the
potential to shake up the EDA industry, creating opportunities for both the
major players and young, aggressive start-ups. We also believe that a
recovery in the semiconductor industry and some signs of life in Japan bode
well for the industry as a whole. This report outlines our views of the
opportunities and challenges facing the EDA and SIP industries entering into
the 36th DAC.
OPPORTUNITIES / POSITIVE SIGNS:
Upgrade cycle for EDA tools targeted at 0.18-micron design to begin in the
second half of 1999.
In the past week, Intel launched its first microprocessor, a mobile Pentium
II, fabricated in a 0.18-micron manufacturing process. The major Taiwanese
foundries, Taiwan Semiconductor Manufacturing Corp. (TSMC) and United
Microelectronics Corp. (UMC) are currently launching their 0.18-micron
processes. We believe that we are on the verge of an upgrade cycle for EDA
tools targeted at 0.18-micron designs, and we expect purchases to begin in the
second half of 1999. We expect ASIC and ASSP design starts to shift from 0.35-
and 0.25-micron designs to 0.25- and 0.18-micron designs through 2000. We
believe that current design creation tools run out of steam after 0.25-micron
design, and that semiconductor companies will need to upgrade. (See the
"Challenges" section below.) This creates revenue opportunities for companies
targeted at next-generation design creation tools, particularly integrated
synthesis / place-and-route tools. We expect winners both on the public and
private company fronts.
Recovery in application-specific integrated circuit (ASIC) business and
continued strong growth in communications ICs should help boost demand for
chip design tools and semiconductor intellectual property (SIP).
On top of the 0.18-micron technology transition, we are seeing a recovery in
the ASIC market combined with robust secular growth in communications-related
application-specific standard parts (ASSPs). Historically, a robust
semiconductor market appears to drive an improved outlook for EDA tool
purchases on a two- to three-quarter lagged basis. See Exhibit 1. We do not
believe this is a clean enough correlation to use as a basis of projection,
but combined with other observations, a cyclical recovery argues for a more
favorable disposition towards the EDA sector. We believe the boom in
communications semiconductors provides some additional growth opportunities
for the EDA vendors -- reinforcing our belief that semiconductor industry
dynamics argue for better EDA growth levels. A number of new companies such as
Broadcom, PMC-Sierra, and Conexant have emerged as vibrant growing
semiconductor companies expanding the customer base for the major EDA players.
A similar boom in fabless PC-related semiconductor companies helped the EDA
industry grow in the early and mid-1990s.
Exhibit 1. EDA Industry versus Relevant IC Sectors,* Year-over-Year
Growth, by Quarter, 1994-1999
*Includes microprocessors, microperipherals, and cell-based ASICs
Source: WSTS, H&Q
As designs increase in complexity, third-party SIP is finding increasing
use in designs, creating revenue opportunities for both SIP and EDA companies.
Increasingly, the ASIC business is migrating towards system-level ICs that
have embedded microprocessors, memory, digital logic and analog/mixed signal
blocks. We believe that we will see both ASIC and ASSP vendors selling system-
on-a-chip (SOC) platforms targeted at particular applications, such as
wireless handsets and cable set-top boxes. Embedded microprocessors lie at the
heart of most of these SOC designs, and we see clear revenue opportunities for
MIPS Technologies and ARM Holdings who are well positioned to dominate the
bulk of these designs with their licensable RISC cores. The physical library
market has undergone a year of dramatic change with Artisan Components
emerging as the winner. Given the difficulty in design, analog / mixed-signal
is another area where we might see some interesting revenue growth
opportunities for private SIP companies, like Pivotal Technologies. We believe
that many elements of pure digital logic design will be dominated by the EDA
tool providers themselves, with companies like Synopsys offering SIP packages
that are available through low-cost licenses, providing incremental
opportunities for the EDA companies.
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