Chip makers inreasingly buying design software to cut costs
guardian.co.uk - UK
Reuters, Thursday March 19 2009
* Chip makers inreasingly buying design software to cut costs
* Synopsys stands to gain as cos source from single vendors
By Sayantani Ghosh
BANGALORE, March 19 (Reuters) - As Qualcomm's fabrication plants churn out chips for Nokia's latest mobile phones, programmers at Synopsys Inc's campus in Mountain View, California, are hard at work figuring out the best design that makes those chips tick.
As a nearly two-year-long slump racks the semiconductor industry, companies like Intel Corp and Qualcomm Inc are increasingly looking to cut costs by buying chip-design software instead of making it themselves.
"The recession essentially drives forward more a make-versus-buy question sense," Synopsys Chief Executive Aart de Geus told Reuters in an interview.
In the absence of a formidable rival, Synopsys is making the most of the shift in the semiconductor industry with smart acquisitions and a cheaper, bundled products offering.
Synopsys' closest rival, Cadence Design Systems Inc, has been rapidly losing business after a string of management decisions went awry.
While Cadence frittered away cash, buying back stock when its price was much higher, Synopsys used its kitty to buy businesses like Synplicity and CHIPit to boost its product portfolio.
Another trend helping Synopsys is that the larger chip makers are looking to source most of their design tools from one company as that makes purchases cost-effective. Also, as chip architecture grows more complex, software from different vendors might not always work well together.
"Traditionally, companies bought tools from many vendors, but that option has become less efficient because tools from different vendors may not work very well together," de Geus said. "The natural drift is to consolidate into fewer suppliers."
Matthew Petkun, an analyst at D.A. Davidson & Co, said: "There needs to be vendor consolidation. I think that the one most capable of doing significant consolidation right now is Synopsys given their balance sheet."
REVENUE MODEL A WINNER
Synopsys was among the first in its industry to move to a revenue model that allows customers to pay over the period of a contract, instead of making a large upfront payment.
Faced with a cash crunch and frozen credit markets, many customers preferred this mode of payment.
Cadence's ex-CEO Mike Fister had opted for a revenue model that allowed for a five-year license and recognized all revenue up front.
"They were playing with the books," said Gary Smith, an adviser for the design market. "So for three years they looked like the greatest thing since sliced cheese. But the bubble popped last year."
Last year, Cadence shifted from the upfront revenue model, but analysts say it will take the company a while to settle into the new model, which is similar to that of Synopsys.
Last quarter, Cadence posted a big loss, hurt by an impairment charge. Another rival, Mentor Graphics Corp, posted a dip in profit and forecast a loss for its next quarter.
In contrast, Synopsys posted solid results as revenue rose 7.7 percent. It exited the quarter with $842 million of cash, a rarity in the current landscape and proof that it planned for bad times.
The next big thing that Synopsys is betting on is a technology that helps chip designers embed more software on a chip, and analysts expect R&D dollars to flow into this field.
As chips become more complicated, the amount of embedded software that comes with the chip increases, and this new technology keeps the hardware and the software in the chip working in tandem.
Synopsys, which has mostly dealt with hardware design, is now buying into the methodology, a move that Smith says is a must if Synopsys wants to stay on top of its game.
Shares of Synopsys have fallen 12 percent over the past year, compared with a 60 percent plunge in Cadence's stock.
"In this economic hurricane around us, our ship is actually faring quite well on the high seas," said de Geus, who has a doctorate from Southern Methodist University in Texas. (Editing by Saumyadeb Chakrabarty and Deepak Kannan)
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