harry … the ASIC guy

That’s the word Aart DeGeus invoked no less than 7 times to describe the business environment during Synopsys’ Q3 analyst call last week. “Some companies may do particularly well and others poorly … and the same is true in of course our market.”

Indeed, the EDA market is turbulent and there will be winners and losers.  With Mentor and Synopsys announcing earnings last Wednesday, we got a chance to peer ahead and see which skipper could steer his ship through the turbulent waters.

Mentor Graphics

Under cloak of darkness, before the sun rose in Wilsonville and before the market opened on Wall Street, Mentor announced Q2 revenue of $182.4M, exceeding Street expectations of $175M. Even though their core EDA business declined by 10% last quarter, they more than made up for it by quadrupling their business in the vertical automotive market from 5% to 20% of revenue. Mentor admits that this kind of jump is a one quarter fluke, still it looks like Mentor’s focus in this area and a developing focus in aerospace are paying off.

Mentor cited uncertainties in the economy as affecting current and future commitments. One interesting datapoint … for every $1.0M contract that was renewed last quarter, Mentor received $1.06M compared to $1.25M - $1.40M they had seen consistently in the past. This could be an aberration or it could signal that customers are reluctant to make larger or longer term commitments. As a result, Mentor has reduced expenses by cutting 150 jobs so far this year, closing offices, limiting travel and trade show participation, and even deferring replacement of PCs.

Looking forward, Mentor seem to be banking on two strategies. First is their vertical market focus in automotive and aerospace. Second, Mentor is positioning the transition to 45nm as an inflection point and an opportunity to replace existing physical design tools with their Olympus SoC solution, particularly emphasizing the need to handle multi-mode multi-corner design.

Lastly, their was no direct comment concerning the now defunct Cadence acquisition attempt. However, apparently Mentor was able to enact a golden parachute for its executives in case of takeover. They also spent and will continue to spend ~ $1M per quarter on “banking fees” associated with the Cadence offer and possibly looking at other ways to “structure” their business. Nudge, Nudge, Wink, Wink.

Mentor shares closed up 10% Wednesday.

Synopsys

In contract to Mentor, Synopsys announced it’s earning in full daylight and after the markets closed for the day. Q3 revenue was $344M compared to the market’s expectations of $340M, a healthy increase of 13% from last year. Unlike the automotive business carrying Mentor for the quarter, there was no single area that stood out for Synopsys. They signed a significant deal with National Semiconductor that includes access to Synopsys’ analog/mixed-signal and custom IC design tools (code named Orion), now in beta and scheduled for release this quarter.

As far as the turbulent environment is concerned, Synopsys is seeing mixed signals with “some customers racing forward to gain market share while others are holding back on their forward commitments”. Aart noted that in “sales situations that are heading towards closure you suddenly get two, three, four weeks more signature loops … that says typically that the approval is going up one or two levels in a company or that everything goes through the desk of the CFO”. Synopsys expects to benefit from this uncertainty as customers opt for safety, both technologically and financially. Still, they scaled back expectations for revenue growth to 6-7% in 2009.

There were also some interesting product notes. As I mentioned above, Synopsys will complete beta testing and formally introduce its AMS design tool, codenamed Orion, this quarter. Orion will plug a critical portfolio hole so that Synopsys can be a viable choice for key customers looking to consolidate all digital and analog design with a single vendor. On the place and route front, Synopsys claimed a production tapeout for their new Zroute router which implements diagonal routing and also runs multithreaded and faster than their current router.

Synopsys shares closed down 11% Thursday. Apparently, the fact that Synopsys lowered its cash flow forecast for 2009 from $325M to $320M-$325M spooked Terence Whalen of Citibank so much that he changed his recommendation for Synopsys from Buy to Sell. Hard to fathom, considering the slight amount of this change, considering that 2009 is still being planned by Synopsys, and considering Synopsys’ history of generating cash from operations.  Still, it does not take much these days I guess.

Last week, I said that I would be watching for 4 things.  So, what did I see?

1. The market uncertainty that Cadence noted is definitely affecting Mentor and Synopsys as well, so it is an industry problem, not just a Cadence problem.The waters are turbulent.
2. Little said about the Cadence acquisition.
3. Synopsys may be seeing some benefits from the uncertainly caused by the short-lived Cadence - Mentor courtship. Still, too early to tell.
4. Very little on the Synplicity acquisition except that things are going well.

For some more insight, see Gabe Moretti’s articles on Mentor and Synopsys and Sramana Mitra’s analysis.
harry the ASIC guy

It’s been a rocky month for EDA.

On July 23rd Cadence revised strongly downward its revenue forecast for the last 6 month of 2008. Cadence stock plummeted 30% the next day. As a direct result, Cadence scrapped its takeover bid for Mentor Graphics this past Friday.

On July 24th Rambus reported Q2 revenue down 10% from Q1 and down 25% from Q2′07. Their closing price that day of $14.70 culminated a decline of almost one-third over the previous month. As a result, Rambus has announced its cutting 20% of its workforce.

On August 7th, Magma pre-announced that its Q1 revenue would be 10% lower than expected. Result: $6.77 => $5.45 (-19%).

And just last week, MIPs announced a $100M write-down due to “the softening overall market for intellectual property and delays experienced in realizing expected synergies” (with the Chipidea acquisition). With it, a 15% layoff.

And so, all eyes will be on Synopsys and Mentor this Wednesday. First, Mentor will announce Q2 earnings at a 5:30 AM (PDT) conference call. (Show of hands, who is getting up early for that one). Then, Synopsys will announce Q3 earnings at a more reasonable time, 2:00 PM (PDT).

A few things that I’ll be watching for:

1. During Cadence’s earnings call, Mike Fister blamed most of their predicted revenue shortfall on their customers’ decision to postpone purchases in the face of uncertainty in their own businesses. This seems to be supported by the subsequent bad news from Magma, Rambus, and MIPs. If that is the case, expect to hear similar bad news and comments from Synopsys and Mentor.  If not, then the finger will point back to Cadence.
2. What will Mentor say about the withdrawn offer by Cadence? (Note: Mentor stock dropped 25% midday Friday after the news broke).
3. Several analysts and observers (including myself) felt that Synopsys would benefit from the uncertainty caused by the Cadence - Mentor acquisition battle. I’ll be interested to see if Synopsys’ numbers show that or if there is any anecdotal information of a big customer switching to Synopsys as a result.
4. This will be the 1st quarter since Synopsys acquired Synplicity, so look to see how that is going.  From what I hear, Synopsys plans to keep the businesses mostly separate through the end of FY08 (October).

It should be an interesting week…

harry the ASIC guy

Last Saturday, my daughter earned her orange belt in Karate. So we decided to treat her to some ice cream at Baskin Robbins.

You would think that an ice cream shop just down the street from the YMCA on a Saturday afternoon in August would be packed with happy chocolate coated faces.  Yet, we were the only customers.  Strange….

As we ate our ice cream and I walked around I started to realize that something was odd.  See if you can guess from these pictures I took with my cell phone…

I’m sure the owner had a good reason for each of these signs. But taken together, the impression I got was that she didn’t trust her employees and she didn’t trust her customers. In short, she didn’t consider how her customers’ might interpret or misinterpret the message that these signs were supposed to convey.

Emails can be the same.

When you write an email, you know exactly what you mean to say. But emails are just words and words are open to misinterpretation. If you write something in haste or just the wrong way, you can give a false impression, even if you don’t mean to. As a simple example, here is an email that I received recently from a former co-worker to whom I had not spoken in over 10 years:

My son’s high school robotics team has a competition at Northridge this week, so we’re going to be in town.  Here is our rough itinerary (below).  Would love to meet you and Joyce and any others at some point on the itinerary.   Please make suggestions for an activity (spice it up a bit — think like a high school kid).

I’m sure that Dave just wanted to catch up on old times.  But I felt like I was being commissioned to plan an activity that was going to keep his high school age son, whom I had never met, from being bored. Not exactly what I had expected.

To be fair, I’ve done this too. What makes email so powerful, is that it is quick, easy, and immediate. And that is also the danger when it comes to misinterpretation.  Back in the “old days”, when we had to hand write and mail letters, we had plenty of time to choose our words carefully and read and rewrite what we had written. With email, you can just hit “send” and off it goes.

So, how can you and I keep from making this mistake?

A good rule of thumb, before sending an email, is to read it and ask “how might this email be misinterpreted”? Read it like you’re reading it for the first time. Put yourself in the shoes of the recipients. Try to anticipate what they might misinterpret and fix it. Especially if the email is important or sensitive. Especially if you are delivering bad news.

Better yet, if there is any doubt, pick up the phone or get off your butt and walk over to have a face-to-face conversation. And if it’s a real sensitive topic, discuss it over an ice cream.

harry the ASIC guy

Following up on my post last week on Cadence’s Q2 earnings call, here are my “between the lines” observations of Cadence’s Q2 10-Q report:

“Our recent announcement of the proposed acquisition of Mentor Graphics Corporation, or Mentor Graphics, has caused some customers to demand more flexibility in accessing new technology.”

Translation: When the large EDA vendors negotiate a multi-year deal with their customers, the deal will include “remix” rights allowing the customer to periodically alter his license mix (e.g. trade in simulator seats for synthesis seats). Typically, “new technology”, i.e. tools not yet available at the time of the deal, are excluded or are available only at some premium vs. existing technology. Evidently, Cadence customers are asking for the ability to remix in technology that might be acquired from Mentor. This is slowing things down and may have caused some deals to slip out.

“To enable us to keep our focus on the value of our technology … we are moving to a license mix that … will result in increased ratable revenue for us.” (Note: You can go to the 10-Q report for the full sentence, but the key part is shown above.)

Translation: EDA vendors that are publicly traded, like Cadence, need to hit their quarterly revenue estimates, or they are punished, as we saw last week. Since customers know this, they often defer purchases until the end of the EDA vendor’s fiscal quarter or year, resulting in the “hockey stick” effect (i.e. the graph of orders over time looks like a hockey stick with the big increase at the end of the quarter). By waiting until an EDA vendor is desperate to “make it’s numbers”, they can negotiate the best price. In order to be less dependent on the quarter end business, Cadence is increasing to a 90% ratable model. In this way, most of Cadence’s revenue will be determined by backlog orders, so they won’t need to heavily discount to hit their numbers.

“In order to provide our customers with the desired flexibility, our license mix will change to a higher proportion of licenses that require ratable revenue recognition which will result in a decrease in our expected revenue for the second half of fiscal year 2008.”

Translation: Instead of recognizing 100% revenue when the order is received (or the license is shipped) as for a perpetual license, the revenue for a subscription license is recognized “ratably” over the term of the license.  For instance, if the subscription license is for 24 months, then 1/24 of the revenue is recognized each month. So, in the upcoming quarters, Cadence will have reduced revenue due to the fact that the revenue is deferred out over the term on the subscription licenses. The nice part for Cadence is that they can attribute the decline in revenue over the next few quarters to the change in license mix.  This will be partly true, but they can also obscure poor orders performance since they do not report orders to the investment community, only revenue and backlog (as far as I know).

“To offset some of the impact of our expected decrease in revenue, we have implemented cost savings initiatives, including reducing headcount, decreasing employee bonuses and reducing other discretionary spending.”

Translation: I’ve heard that Cadence has already instituted 3 shutdowns this year, July 4th week, Thanksgiving week, and Christmas to New Years. Incentive bonuses usually accrue in Q4, so that will help later this year. I have not heard of any headcount reductions since last week, but maybe someone else has.

Hope that helps.

harry the ASIC guy

About 5 years ago at Synopsys, I set up an internal email alias so that everybody working with one of our top customers, Qualcomm, could communicate important information to the entire team. All get on the same page. Make sure the left hand knew what the right hand was doing. Make sure we were communicating the same data and recommendations. Account managers … applications engineers … consultants … R&D … all working as one well oiled machine. I must say, it was a great idea … on paper.

One morning, after driving down to the San Diego office, I hopped onto a 10 AM conference call and logged into my email. As I watched my Inbox load, I noticed that there were about half a dozen messages sent that morning back and forth between two individuals who reported to me on the Qualcomm team. All regarding the same subject. Each one sent less than 5 minutes after the previous email.

As I settled into the conference call, I took a look at the latest email in the thread to get a sense of what was going on. Apparently, there was a disagreement between two members of our team as to the correct approach to addressing some methodology issue.  That’s fine.  People disagree.  But this was different.

Have you ever been at a party and a couple starts arguing in front of everyone?  At first you ignore it and make believe you’re not aware.  But then the tone gets angrier and the language gets personal and the voices get louder. Until you can’t ignore it and everybody stops what they are doing to watch in embarrassment what is happening in public that should have been private.

That’s exactly what was happening on this email thread.  As emails 7, 8, and 9 came in, the tone got angrier and the language got personal and the voices got LOUDER. And thanks to the email alias I had set up, there were now about 25 other people watching this “couples spat”.

I had to stop this, but I was stuck on this damn conference call !!!

Forget about the actual issue. This was now a matter of saving these two individuals from the ridicule of others on that email alias that were witnessing this boxing match. I sent urgent emails to the two individuals asking them to stop the emails and that I’d speak to them at 11 AM.

Email #10. #11. #12.

Mercifully, the call ended a little early and I was able to reach the consultants on their cell phones. One of the individuals was a contrarian, so from my previous post on the subject you know that:

1. If everyone else wants to take road A, he wants to take road B.
2. If everyone else wants to take road B, he wants to take road C.
3. If you’ve got a plan, he’ll tell you why it won’t work.
4. Once he takes a stand on an issue, he’ll never give up.
5. He doesn’t really care what others think about him.
6. Every battle is worth fighting … to the death.

Bottom line, he thought there was nothing wrong with “having it out” over email with everyone else copied.  In fact, this was good documentation since everybody on the team could now see the rationale of how this decision was arrived at. He was just trying to get to the right answer and can’t be bothered about having to worry about other people’s feelings.

The other individual just couldn’t resist replying to the emails since they came so fast. And he totally forgot that everyone else was being copied. He was pretty embarrassed.

In the end, the damage to these individual’s reputations was not that bad. As it turns out, the one individual already had a reputation as a hothead and contrarian and the other was more the victim than the aggressor. Still, I overheard comments in the office that day about this “tiff” and, in the end, the issue was not really addressed.

The morale of this story is that there are two rules:

1) If it takes more than 3 or 4 emails back and forth, then pick up the phone or walk over to the other person’s office. Email is a very inefficient and slow way to have a discussion or solve a problem compared to good old fashioned talking about it. Still, sometimes, and this was apparently one of those times, people just find the allure of the quick email response too appealing to resist.

2) If you break rule #1, don’t be stupid enough to copy everybody else.

harry the ASIC guy

Not to be outdone, but with much less fanfare and ballyhoo than Synopsys’ donation of its Verification Methodology Manual (VMM) class library to the Accellera Verification IP (VIP) Technical Subcommittee, Mentor Graphics last week donated it’s Unified Coverage Database (UCDB) to the Accellera Unified Coverage Database Interoperability (UCIS) Technical Subcommittee.

Although not as hot a topic in the press and in the blogosphere, this represents a firm step forward in the standardization of the overall coverage driven verification methodology, whether you pray from the OVM or from the VMM hymnal. Whereas ratified or defacto standards already exist for the testbench languages, the requirements and coverage capture tools and formats are still proprietary to each of the 3 major vendors. This prevents the verification management tools of one vendor from being used with another vendor’s simulator. Having a UCDB standard will facilitate portability and enable more innovative solutions to be built by third parties on top of this standard.

Although Synopsys and Cadence have their own unique UCDB format, the basic elements of this standard should be much easier to agree upon without the political wrangling slowing the VIP subcommittee. I also think this is an opportunity for Synopsys, Mentor, and Cadence to show that they really can cooperate for the benefit of their customers and win back some of the goodwill lost in the OVM vs. VMM battle

harry the ASIC guy

I just spent the last hour+ listening to to Cadence Q2 earnings conference call. (You can listen to the call here and read the transcript here).

Ouch!!!

As I write this at 12:30AM PDT on Thursday morning, I don’t know for sure how the markets are going to react. But I expect, as do all of the analysts, that Cadence shares will be down. Here are the lowlights that I took away:

1) Cadence revised their revenue and earnings guidance for 2008, not by a little, but by a lot. Analysts were projecting ~$1.5B revenue and Cadence is now projecting ~$1.1B, or ~25% less. (Note: This is in part due to a change in license mix as described below).

2) Cadence is increasing it’s license mix to 90% ratable going forward. Simply put, more of their revenue will be recognized over time rather than up-front (at the time of the booking).  That means lower revenue in Q3, although by design. (Note: This is the same thing that Synopsys did when it missed a quarter badly several years ago.  The change in license mix helps to obscure the real financials to the investment community. Bottom line: if you have bad news, put it all in one quarter).

3) Cadence has started the regulatory approval process and acquired 4.7% of Mentor common stock in the open market and they say they are committed to the acquisition, but Mentor has not returned any calls.

So, how did the analysts react? Not well.

Much of the analyst part of the call was devoted to cordial debate over whether this “weakness” was due to poor economic conditions, economic uncertainty, and delayed migration to new technology nodes within the customer base (as Cadence contends) or to a more inherent weakness in Cadence’s business (as the analysts seemed to believe). For instance, one analyst asked “did the environment deteriorate that quickly that your bookings outlook could have gone from $1.5 billion down to $1.1 billion in one quarter?”

There also seems to be a belief that Cadence “over-consolidated”. When they did “all-you-can-eat” deals with some big companies, they basically “drained the pipe”, leaving them without an option to sell new technology.

And customers are just holding out and deferring purchases until they get a better deal.

There was also quite a bit of discussion concerning EDA Cards which represent half of Cadence’s business. Customers are demanding even more flexibility in when, what, and how they purchase software and hardware.

Lastly, Cadence will continue to look at expenses, i.e. expect some attrition.

Bottom line: No way to sugar coat this…it was a rough quarter and figures to be a rough year for Cadence.  Question is how much will Cadence be punished by the investors and how much will their EDA brethren (Synopsys, Mentor, Magma, etc.) be punished. We’ll find out tomorrow.

harry the ASIC guy

The prime directive drummed into me as a freshman AE (Applications Engineer) was to ALWAYS get back to the customer in a timely fashion.

Even if I did not have the answer…

Even if I was already working on the problem…

Even if I was not the person who could help him…

It’s practically no effort to return an email or a voice mail and just let your customer know what’s going on, so he’s not sitting in the dark.  A matter of fact, I’ll write the email for you and you can just fill in the blanks:

Hi <customer name here>,

I got your email regarding <problem, issue, question>. I’m going to <look at it tomorrow, send this on to R&D, ask my boss to handle it, etc>. I expect to have an update for you <in an hour, tomorrow, next week, etc.>. If you need an update sooner, please feel free to contact me directly.

Regards,

<your name here>

Simple, right?

I’m sure I’ll get little argument that this is the right way to treat real customers.  But, what about our internal customers?

In my job, I’m amazed at how long some people will “Delay the Game” without responding to an email, without a simple 1-minute acknowledgment that they would get back to me. Instead, I’m often left wondering what is going on, sometimes sending follow-up emails, voice mails, dropping by the office…all just to find out what is going on.

Look. I know you’re busy and you have more important people and issues to deal with than my little request. But, just realize that everybody that sends you an email asking for something (a question, a file, a meeting notice) is your customer. If you keep them in the dark by not responding, and you do this enough, you’ve lost your customer.

harry the ASIC guy

As I stated in my previous post, I’m starting a series of posts on “Email Penalties”…football style.  For the first penalty, to get into the swing of this, I thought we’d warm-up with one that happens every day and we all can relate to…

Too Many Men on the Field (5 yards)

More directly, too many people on the cc: list.

Several months ago, I came in to work to an email from Payroll that had been sent to a long list of distribution lists, informing us of new timekeeping processes.  Only one problem … I did not use the timekeeping system in question, but another one altogether. So, I did what any sane person would do … I ignored it.

I guess I was not the only person who had received this email in error. But apparently I was one of the few sane ones.

Throughout the morning, I received 3 or 4 emails from others like me, protesting that this did not apply to them and asking to be taken off of whatever email list had incorrectly tagged them. Fair enough, but only one problem.  Instead of replying directly to the sender only, they had hit “Reply All”, so I and everyone else on all these distribution lists now knew that Joe Smith (name made up) did not use this timekeeping system. What a waste!

The emails stopped around noon and so I figured this was over. I was wrong. This was only the tip of the iceberg and there was much more to come.

You see, a totally unrelated event had occurred that day.  There was a Blackberry outage so all the Blackberry users without email access had not seen this email. About 5pm the outage was resolved.  And thousands of Blackberry users checked their email and discovered this erroneous email sitting in their in boxes. And so, with fingers furiously striking tiny keys, they started to “Reply All”.  Peter had wandered into my office to discuss a technical issue, but every few seconds another email would interject from someone else that they “did not use this timecard system and please take me off the distribution list”.

This had become an event.

It was obvious after 15 minutes and dozens of emails that “Reply All” was not a good idea. There were numerous individuals sane and brave enough to admonish others not to “Reply All’ … in an email that they sent by hitting “Reply All”!!! Duh.

One person sent a “Reply All” that said “The Yankees are going all the way this year.”

Another said “Greetings from Virginia” to which came the reply “Greetings from Florida”.

“I’m not like all those others.  ADD ME TO YOUR LIST!!!!”

“I haven’t seen a reply from President Bush yet–or did I miss that one?  Go Sabres/Bill”

“Hi”

One person referenced the despair.com poster on Idiocy, “Never underestimate the power of stupid people in large groups.”

I packed up to go home, a 20 minute drive, and found 200 more emails waiting for me. Eventually, the torrent subsided.

The next day, the entire company received an email from the CIO informing us that the previous day’s email “generated 15 million unnecessary emails” throughout the company.

harry the ASIC guy

There’s no debate that email has become at once a valuable tool and a misused and overused communications medium. Seth Godin recently posted an extensive email checklist of do’s and don’ts for marketing email. I’d like to do something similar for corporate and business email, the kind of day to day email we use at work.

I’m also big football fan.

(The American kind … my apologies to the international folks).

I won’t tell you which college and pro teams I root for, but their initials are USC and NYG

So, with the football season coming up, I thought I’d address the corporate email issue by suggesting some new penalties that need to be added to the game of “email”.

Starting Monday, I’ll be posting one each week, up until the football season begins. And I welcome your contributions as well, especially good stories and anecdotes that help to illustrate the new penalties.  Feel free to email them to me (harry at theASICguy dot com) or post them as comments.  And let me know if it’s OK to use your first name, full name, or no name.

harry the ASIC guy