H & Q Part 4
June 17, 1999 - 9:04pm
Hambrecht & Quist
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Date: 6/18/99
4 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.
Cadence Design Systems (CDN/$13.81/MARKET PERFORM)
*We believe that Cadence should report an in-line June quarter with revenues of $300 million and EPS of $0.20, but we do note that guidance may still change for both the quarter and the year.
*Earlier this week, we reinitiated coverage of Cadence with a MARKET PERFORM rating. We believe that Cadence has a tough year in front of it, with some risks to market share as 0.18-micron design opens opportunities for competitors in key segments like place-and-route.
*We also believe the licensing model will need to be reworked over the next year, and the old flexible access model (FAM) deals may put some constraints on the company in terms of short-term revenue growth.
*We believe that the strategy and focus of the company has made a turn for the better, but that the benefits will not be seen until FY2000.
Mentor Graphics (MENT/$13.38/MARKET PERFORM)
*We expect Mentor to report a June quarter in-line with our estimates of $131 million in revenue and EPS of $0.14.
*In the past two quarters, Mentor has returned to top-line and bottom-line growth, driven by solid performance in several key business including the HDL business (anchored by Model Technology) and physical verification (where the Calibre product has been a phenomenal growth engine).
*We do not believe that recent strength in some of the older product lines, such as Board Station for PCB design, is sustainable. Some of these product lines are benefiting from Mentor selling Y2K upgrades for products that were not originally Y2K compliant, creating a non-recurring spike in demand in 1999.
*With the exception of Exemplar's FPGA synthesis business, Mentor lacks a large presence in design creation tools such as synthesis or place-and-route.
We believe the major upside opportunities in the back half of the year will be in next-generation design creation tools for 0.18 microns. We expect Mentor to make some product announcements targeting this space, and note that any share
in this sector would be all upside for Mentor. At this stage, we do not see Mentor as a likely winner in this arena, but we will reevaluate as the tools are announced.
MIPS Technologies (MIPS/$32.44/BUY)
*We expect MIPS Technologies to report a solid June quarter with potential for upside. We are looking for $15.5 million in revenue and EPS of $0.10 and believe the company can exceed that.
*Over the next several years, we expect to see Nintendo cartridge-based revenues (forecasted to be approximately $50 million in FY1999) trending towards zero. This is the major challenge facing MIPS - how to fill this gap and show compelling revenue growth.
*There are a few ways we expect MIPS to do this. In 1999, the company has seen major design wins for two chips that are going into the Sony Playstation 2 (PSX2). We expect the PSX2 to begin shipping in early 2000 in Japan and for Christmas 2000 in the US. We believe that PSX2 should be a major driver of unit volume for MIPS and could be a 20-million unit product in its peak year.
*Broadcom and Texas Instruments are also compelling licensees for MIPS in the set-top box arena where unit volume could prove to be in the tens of millions in the next couple of years.
*MIPS appears to be the leader for Windows CE-based personal digital
assistants (PDAs), and a break-out product or products in this sector also could generate significant royalty streams for MIPS.
Synopsys Inc. (SNPS/$57.25/BUY)
*We believe that the Synopsys June quarter is tracking well and expect the company to meet our estimates of $205 million in revenue and EPS of $0.64. We believe that the company will show some promising growth in Japan, a positive sign for the industry overall.
*Over the past two years, the company has transitioned towards one-year time- based licenses for approximately 50% of their revenue in any given quarter. During the transition, Synopsys experienced 10-15% growth rates, which we believe somewhat understated growth. As the licensing model stabilizes, we expect Synopsys to report better year-over-year growth (> 20%) comparisons. Renewal rates on TBLs appear to be better than 95%.
*Among the majors, Synopsys was the first company to introduce new products targeted at the 0.18-micron design creation flow. We expect the first product, Chip Architect, to be complemented by additional announcements and product launches throughout the year. Synopsys through the Everest and Gambit acquisitions has sought to build up some internal place-and-route capability that should help them field some more integrated design-creation tools.
* We believe Synopsys is best positioned among the majors to realize upside from the transition to 0.18-micron design-creation tools.
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