A Letter to Mike Santarini
The following is an adapted version of the actual response email that I sent to Michael Santarini, Senior Editor at EDN, in reaction to his recent opinion column posted on January 19, 2006.******************************** Mike: I am glad to see that the turning of the New Year has left you with your wit and charisma intact! Ann Steffora Mutschler [Senior Editor, Electronic News] and I have obviously chatted through the years, and she pointed out that you had a very good column that I should check out. I did, and ... whoa! Good for you! I'm somewhat envious because I don't know if I could have done a better job. And, you took on the "holy grail" of EDA ... EDAC. Shudder, shudder! You’ll need to don your gorilla suit on February 2nd to get in the door. Quite seriously, I had hoped to be at the EDAC CEO gathering on February 2nd. No surprise, however, that DesignCon is the week after, so most of us out-of-towners have to choose (I'd swear EDAC does this on purpose!). I had teased Ann that I wanted to be first in line for the Q&A, which follows the usual "it was a decent growth year Here's the rub: I have consistently maintained a database of revenue analysis for the public EDA companies (separately from the EDAC data, which includes privates, and more as your piece observed). For CY04, the public EDA companies generated revenues of $3,258.9mm. This was up 1.1% y/y [year over year], when semiconductors grew by 21.0%. And, this included such "itsy bitsy" companies like NSDA and VRST that got gobbled up by the big two (at least, that’s how they would characterize them, if asked to show apples-to-apples revenue comparisons). If the current slate of public companies deliver on their consensus revenue expectations for 4Q (and most will be in the range), public company EDA revenues will be $3,276mm in CY05. This would be +0.5% y/y (flat, essentially), when semiconductors will likely have grown by 8.5% (my numbers on semis are not as updated, but I believe that is in the ballpark). So, my question for the erudite and optimistic panelists is: why on earth would the public EDA industry grow (more than 5%), when it could not do so against the backdrop of a strong semiconductor recovery in the past three years? And, that "lag factor theory" (that I pioneered at SoundView) is a 2-3 quarter lag, not a 2-3 YEAR lag, so please don't fall for that excuse. My point, which I believe is consistent with that you intone in your piece, is first and foremost lets get a grip on reality and stop lying. There has been no growth for years now and will not be until something structurally changes. In my opinion, one or more of the big EDA players has to fail big time to bring about some sanity in the industry. Or, perhaps Peggy Aycinena's solution/suggestion was the right one: TSMC takes out CDN. However, I just don't see anyone doling out north of $5 billion for either of these behemoths! Another more reasonable possibility is for a group of private equity firms to band together and take Cadence private. Recognizing that there is no meaningful top-line growth or pricing power in the industry, these investors would attempt to tackle Cadence’s bloated cost infrastructure (arguably the most bloated in public EDA land). Bringing on a leaner and hungrier executive management team that is driven by operational execution, rather than over-inflated 'pro-baseball-esque' pay packages would do a world of wonders! By way of backdrop, Ray Bingham easily cleared about $3mm-$8mm in annual compensation (including options) over the past five years. Mike Fister obviously deserved more: north of $10mm annually guaranteed (with a "work around" for stock option expensing called restricted stock). Recall that during Bingham’s stewardship, Cadence’s revenues fell from a peak of $1.4b to about a $1.1b level and "true" operating margins (not pro forma nonsense) have deteriorated. Thus, the bar for Fister is relatively low, so to speak (incidentally, I’ll publicly acknowledge my mis-judgment if Fister ends up earning every nickel of that pay package). Given the stock market’s irrational run-up of CDNS’ stock price to the $17 level, this option is also very unlikely. If the stock price were to stagnate around $10 for six months or so, perhaps some savvy PE guys would come calling? But, I digress … again! Back to my point: would someone please ask this question of the panel on February 2nd (you can quote my analysis, or I can forward it to you): Why on earth will the public EDA industry grow (more than 5%), when it could not do so against the backdrop of a strong semiconductor recovery in the past three years? I realize that when we in the media and analyst communities do this, we are viewed as cynical and pessimistic (and thus, of course, anti-American!). As I've tried to say a million times (and no one listens), I only strive to be a change-agent: one who digs for the truth and looks for the pragmatic possibilities. If that’s anti-American, Abraham Lincoln is turning over in his grave! In any event, keep up the good work and hope to run into you during the week of DesignCon. Best, Erach Desai ******************************** As principal of Desaisive Technology Research, Erach Desai currently works as an independent consultant in the areas of market strategy and financial analysis of the electronics economy. In that vein, he provides services to professional investment firms, business & financial media organizations, and stock market regulatory agencies. Starting as an ASIC design artist, Erach evolved into a high-technology marketeer before making the transition to Wall Street. Erach’s stock research coverage over the past 10-plus years has included electronics components (semiconductors) and electronic design infrastructure (which encompasses the enabling technologies that fuel the electronics revolution). As of January 21, 2006, Erach has no stock ownership positions to disclose relative to the EDA or semiconductor IP/infrastructure industries. ******************************** January 21, 2006 Erach can be reached at Erach@DESAIsive.com.
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