Mentor may buck high-tech downturn
Despite a dip by a third in its stock price, the company expects to see its revenue rise and may add employees this year
Monday, April 16, 2001
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By Ted Sickinger of The Oregonian staff
As the semiconductor industry sails into one of its deepest and most precipitous demand troughs in 30 years, Wilsonville-based Mentor Graphics is still surfing the crest of a wave, anticipating its best year.
Sure, the industry's swoon has cleaved about a third of Mentor's stock price from its 52-week high of $33.62 on Jan. 23 to a $21.09 close on Thursday. Yes, its business could deteriorate if the economy continues southward. And not all industry analysts buy the company's blithe growth story.
But as Mentor celebrates its 20th anniversary and prepares to release its first-quarter earnings on April 24, managers at the second largest high-tech company based in Oregon are feeling fine. They are forecasting 22 percent revenue growth in the first quarter and 15 percent growth for the year.
Many experts expect the semiconductor industry to post one of its worst years ever in 2001 -- and a miserable first quarter -- but Mentor says its business is recession-resistant.
The reason? Mentor makes software and hardware that enable customers to automate design and testing of chips and printed circuit boards, and chip-makers must make new products requiring new testing and design tools during down times.
"There's only one way out of a price recession for a semiconductor company: designing new products or redesigning existing ones," Mentor Chief Executive Walden Rhines said.
Analysts agree.
"From past experience, chip companies are well aware that if they lose a generation of product development, they're toast," said Bill Frerichs of D.A. Davidson & Co.
It's a lesson Mentor learned in the early 1990s. The company was a pioneer in the electronic design automation industry and led the market until it became complacent, failed to develop a new generation of design tools, and saw such competitors as Cadence Design and Synopsys usurp its lead, Rhines said.
After an extended trip to the research-and-development woodshed and a series of acquisitions, Rhines said, the company is mounting a comeback. Since 1998, Mentor has been the fastest growing company in the electronic design automation industry.
"Now we have all new products while our competitors have older, more mature products," he said. "That means we have to spend more on sales and support. That's a burden we bear. But it makes our future much brighter."
Long product life cycles
It takes an engineer one to two years to learn to use new semiconductor design tools. So new products in the industry have fairly long life cycles, analysts say.
All of which benefits Mentor, which offers industry-leading products that test the design of smaller circuits and resolve optical distortions in manufacturing just as the industry undertakes the transition from .25 micron and .18 micron circuitry to the .13 micron level, which is about 1/1,000th the width of a human hair.
The company also surprised industry analysts by investing in what most players consider a mature sector of the business -- systems design software for printed circuit boards -- and generating solid growth in it.
Not all of the news is good. The chip industry slump has cut into the company's systems-consulting and hardware-emulation businesses, which account for about 15 percent of revenues.
Moreover, analysts such as Erach Desai of Credit Suisse First Boston have a "hold" recommendation on the stock. After watching the company grow its backlog by 40 percent last year, Desai sees flat growth rates in several of the company's business lines, moderating growth in North America, and no fundamental uptick in the company's earnings per share.
The assessment stands in sharp contrast with the view of Jennifer Jordan at Wells Fargo Van Kasper, who rates the company's stock a "strong buy" and thinks the only meaningful obstacle to the company's growth story would be a prolonged economic recession.
A plus from the downturn
Rhines said the downturn actually has helped the company with staffing. Turnover is down, and the company has the pick of talent that it might not have found during last year's high times, he said.
Mentor employs about 1,000 people at its Wilsonville headquarters and expects the number to grow by more than 100 this year. It is second in size only to Beaverton-based Tektronix among Oregon-based tech companies.
In the meantime, the company is hoping to avoid the kind of hubris that led to its drought a decade ago.
"We have to identify new markets," Rhines said. At the same time, he said, "We're forcing ourselves to do less, not more, and not allowing our competitors to take us into markets where we'd be me too."
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