Show me the money

With the help of the folks at VitalCom PR, I had a chance to listen in on a roundtable discussion with three executives from EDA - Steve Wang, Vice President of Marketing and Co-founder of Axis Systems, Inc., Vess Johnson, President and CEO at Silicon Metrics Corp., and Jeff Jussel, Vice President of Marketing at Celoxica. The topic on the table was money, in particular where are the profits today in EDA and where will they be tomorrow. The answers these fellows came up with were in some ways predictable and in some ways quite surprising.

Wang - “Our customers right now are in emerging markets - we're selling to the embedded market, embedded processors as well as embedded operating systems. There are lots of emerging applications on the automobile front. On the consumer front, it's wireless and multi-media. Dataquest is projecting numbers for software revenue growth in 2003 to be over 2002, as much as $700 million dollars, which will closely match the 2001 level. Demand has returned in the embedded market and the growth there is very healthy. Sony, for instance, is purchasing quite substantially, investing more and more in EDA tools. And certainly Sony is very healthy from a company standpoint.”

“One area that continues to be difficult is the communications sector. Investment is not quite as heavy there because there's still a lot of over capacity. Some of those customers who used to have multiple projects are now trying to focus on a single project. From that standpoint, they've really scaled back. They used to tape out a chip and move on, but now they're actually staying around to see the thing through to production.”

Johnson - “I agree with that assessment. We sell into foundries, COTs, IDMs. The most activity is in the larger IDMs. We see them in a period of retooling, putting in place new design flows for 130 nanometers and 90-nanometer effects. The major push is for IDMs to look at new technology and try to make decisions on whether to build or buy. [We see them] leaning towards buy rather than deviate from their core competency to build internal tools.”

“But the rest of the industry is struggling at 130 to 90 nanometers. Maybe they're resorting back to 130 nanometers, but the problems still persist. Still the push for the retooling is to get ready for the new wave. Certainly the larger companies like IBM are pushing ahead into the 90-nanometer arena, but other companies may be waiting to see. The transition to 90 nanometer will worsen problems.”

Jussel - “It's a back-to-basics economy. Not as good as it was in the 1990's, but not as terrible either. Companies now must realize that budget freezes and cuts only work so far. They have to return to focusing on product features. Some companies are moving to the cutting-edge at 90-nanometer technology. Others are taking advantage of 180 and 130 nanometers where there are lots of cost/performance advantages, where they can wring additional profits out of established technology.”

“In any market there are going to be some industries that are doing better than others. We've definitely seen examples of that. One area that is doing very well is defense. A lot of our defense companies are investing at the system level to take advantage of 180 and 130 nanometer capabilities. We take hardware/software co-design and target it into FPGAs and [we think] the defense guys may decide to go there rather than pursue an ASIC. The FPGA guys should be feeling confident about their future. It will become more cost effective to try to make it on an FPGA.”

Question - “Somebody in EDA is making money on something out there. Who is it? What are they making and how are they doing it?”

Wang - “The companies making money are those providing value to customers, which [in turn] generates repeat orders. You can sell one or two tools, but you can't keep re-selling without convincing a company. If you look at Wally Rhine's presentation [at the EDAC panel in February], EDA is interesting. A lot of the small companies are Number One in their own sector and there are lots of small sectors. So you can carve up the industry and make money in lots of ways.”

“The ESL [electrons system level] space is an example. A lot of design tools have been focused on the design side, but not on the verification side. There are a whole lot of C-level people who were focusing on getting from design to the RTL level. But for ESL types of design, there's been too much focus on design. Over time, people have figured out that the problem is verification. That's going to be next wave for ESL.”

“From an industry standpoint, the climate has changed to more of a top-down approach. Sales [strategies] have changed, so we want to approach it from a very high level. Companies want to make sure that purchase orders go up to Board-of-Directors level. And we've had a couple of situations where the PO has stopped at the CEO level. Previously, companies set their budgets on a yearly basis, but now it's being changed to a quarterly basis.”

Johnson - “I think that if you bring value to the customer - issues that are on the top ten list of problems - you'll succeed. Products that are on the fringe don't do as well. In a down economy, you have to get back to basics. We know that the closer you are to the customer the more you understand the problems. I've been in EDA for a long time. EDA tends to ride the ups and downs of the market fairly well. When the market is down, a lot of our customers tend to go into retooling and prepare to emerge a lot stronger. During these times, they make the build-versus-buy decision by looking at what they can get off the shelf.”

“I don't think EDA has never been down. Look at the Q1 2003 earnings from the public EDA companies. They're not great, but EDA doesn't have the sharp downturn [that characterizes the rest of the semiconductor industry]. It's a more gentle wave. That's just the nature of our market.”

“Are our sales cycle longer? I wouldn't be surprised if you're seeing a 25% to 50% increase in the cycle due to instability in the market. Typically you try to position your sales force to get as many high-level contacts as possible and to remember that the strategy should always be very focused on execution.”

Jussel - “It always helps if you're one of the big guys in EDA because the mainstream products always remain key. Our strategy is to fit into that flow without disrupting, while bringing in a new technology that the customers can't live without. In ESL, it's not a problem of design versus verification. [Vendors] haven't failed because they were doing design tools. They failed because they included one-off languages without a user basis, where there was no ability to tie into the design flow or the verification system. The key to ESL is to tie into the existing flow and provide the ability for hardware/software verification.”

“The Dataquest market numbers indicate you have to deal with all levels [in a customer's organization]. In most companies, that may not mean the CEO or the Board, but you [always] have to go to the CAD tool [users] and develop demand in the engineering team by proving improvements in their productivity. At same time, you have to work with the CAD department and work to prove how you'll work into their design flows. It's a lot more complex right now because people don't have design budget to try things out. So you have to deal with all the players at once. But, once you're in there, it can be very satisfying.”

Question - “What about using the web and on-line sales strategies?”

Jussel - “That's not something that we're going to address at this point. There are markets where you can get access over the web periodically, but most customers want to know they will own the code. For the companies who want to include you in their design flows, they want to know that they can design you in. [On-line sales] fit better where people have money for one-off use, but for us [the strategy] is less appealing. And, you need to distinguish between on-line licensing versus web use of a tool.”

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