Subject: Jay's recent Wall Street analysis of SNPS, MENT, CDNS, LAVA stock

From: Jay Vleeschhouwer <jvleeschhouwer=user domain=earthlink got net>

Hi, John,

The EDA Consortium (EDAC) has released its market statistics for the periods
through 2Q10.  The EDAC data show detailed product category and geographic
revenues for the industry, to which I add bookings, industry forecast, and
industry profitability comments.

EDA BOOKINGS

For 2Q10, the combined product bookings of the three largest suppliers, I
infer, were about $515-$520 million, compared with about $415-$420 million
a year earlier.  Synopsys accounted for more than half of these combined
bookings, just as it accounts for the largest part of the industry's
current operating profits.

For the trailing twelve months, their combined product bookings appear to
have been about $1.92 billion, more or less flat year/year.

I foresee combined product bookings for the three largest EDA companies of
$2.24 billion in 2010, vs. $1.89 billion in 2009 and $2.13 billion in 2008.

The estimated software book/bill for Cadence this year is 1.25x, for Mentor
1.0x, and for Synopsys 1.0x.  The combined product book/bill would therefore
be slightly in excess of 1.0x, continuing a trend of the last several years
wherein composite industry book/bill has been converging around parity.

This signifies in the aggregate, little net organic growth.


CURRENT VENDOR MARKET SHARE

As for vendors' share of total industry revenue, the results were:

  - Synopsys had 32% of industry revenues in the quarter, vs. 34% a year
    ago.  Its share for the trailing twelve months was 32%.

  - Cadence Design had 22% of total industry revenues for the quarter, up
    slightly from 21% in 2Q09.  The trailing twelve-month share was 21%.

  - Mentor had 18% share in the quarter, down from 19% in the year ago
    quarter.  Mentor's share for the trailing twelve months was 19%,
    up from the 17% it averaged from 2005-2008.

  - Magma had 3% share in 2Q10, and for the trailing twelve months,
    LAVA's share was also 3%.

We can infer that Intel continues to account for about 5% of commercial
EDA spending.


PRODUCT MIX STILL MATTERS

While product category revenues can easily vary quarter to quarter (owing
to the timing, size and mix of contracts, not to mention license model
transitions), it is still useful to gauge category revenues over a period
of several quarters and years to see where design investments are trending.

Ideally, an EDA vendor's portfolio will be aligned as much as possible to
where the growth in such spending is occurring or likely to occur.  In the
2Q10, we can see that the net effect of the sizeable flat-to-up categories
outweighs the sizeable declining categories (the individual categories --
not unlike bookings -- can however fluctuate from one quarter to the next,
underscoring why it's best to think about the industry in terms of multiple
years to discern real trends).

Among the categories that appear to have been trending FLAT to HIGHER in
recent quarters are:

  - Printed circuit board (11% of industry revenues).  Up 13% year/year
    and flat for the trailing twelve months.  MENT and CDNS are the
    principal domestic suppliers.  Cadence's "system interconnect"
    business showed a gain in the quarter, and MENT's integrated system
    design even more so.  MENT's recently announced acquisition of Valor
    would have to contributed to the improvement in what has been one of
    the most important franchises since the inception of the company.

  - Analysis tools (7% of revenues).  This category, which in turn consists
    of five sub-categories (such as transistor-level analysis, power, and
    static timing) was up 2% for the quarter and thus down 3% for the
    trailing twelve months, an improvement over preceding rates of decline
    of -10% in 2008 and -13% in 2009.

  - Hardware/software co-design & co-verification, or ESL (5% of revenues).
    This category was up 11% for the quarter, leading to 10% growth for the
    trailing twelve months.  ESL is an important category for MENT.

  - RET EDA (7% of revenues).  This category was flat year/year against a
    strong 2Q09, and up 24% sequentially from 1Q10 (the sequential increase
    more or less corresponds to the increase MENT reported for its
    "Design to Silicon" segment).  For the trailing twelve months down 12%
    to $266 million.  This category, which has to do with yield enhancement
    is of particular long-term importance to each of the four largest EDA
    suppliers (MENT especially with its Calibre franchise).

  - Hardware-assisted verification (5%) was down 11% year/year for the
    quarter but up 28% sequentially from 1Q10 and up 13% for the trailing
    twelve months.  Cadence has the majority of product revenues here,
    though both Cadence and Mentor contributed to the sequential increase.

Categories that appear to be trending LOWER in recent quarters are:

  - IC implementation (10% of revenues).  This category, place & route, was
    down 2% for the quarter and down 9% for the trailing twelve months, an
    improvement however from the low-to-mid 20s rates of decline from
    4Q08-3Q09 (coinciding with not only the recession but the initial
    quarters of Cadence's model change).  Still IC implementation under-
    performed the overall "physical design & verification" category for
    the trailing twelve-months.  This would roughly correspond to the
    declines reported by Cadence in "digital IC" and by Synopsys in "core
    EDA" (which includes P&R, the largest part, and verification).

  - RTL simulation (8% of revenues).  Up 14% for the quarter and down 2%
    for the trailing twelve months, slightly below CAE overall but in
    line with the industry decline.  This category is important to each
    of the largest vendors.

  - Synthesis (6% of revenues).  This category -- of particular importance
    historically to Synopsys -- has generally lost share of total spending
    over the past decade.  In the most recent quarter, synthesis was down
    5% year/year, and thus down 6% for the trailing twelve months.

  - Analog/mixed-signal simulators (5% of industry revenues).  This product
    category was down 2% for the quarter, leading to a trailing twelve
    month decline of 3%, a modest decline as compared to the reductions in
    2008-2009 but under-performing nonetheless the overall CAE group of
    which it is a part [we should note that the results for various AMS
    reporting categories, including simulators, have been affected by the
    withdrawal of the former Ansoft as a contributor to the date, pursuant
    to its acquisition by Ansys in mid-2008].


REGIONAL EDA MARKET NUMBERS

North America declined by 1% year/year to $463 million.  North America
remains the largest EDA market.  For the trailing twelve-months, North 
 EDA revenues were $1.879 billion, vs. $1.925 billion.  Synopsys has
reported declines in its North America business in three of the past
four quarters, while Cadence has reported increases in three of the past
quarters, against very easy comparisons to weak year-earlier results.

License & maintenance revenues were down 2% year/year for the quarter to
$304 million, and by 1% for the trailing year to $1.55 billion.

In terms of North American vendor share:

  - Synopsys had 36% share in 2Q10, unchanged.  For the trailing twelve
    months, Synopsys' share was 35%.

  - Cadence's revenues represented 22% share in the quarter vs. 21% share
    in 2Q09 and 21% share in 2009.

  - Mentor had 16% share, down from 19%.  For the trailing twelve months,
    MENT had 17% share in North America.

  - Magma's revenues represented 4% of the North America market, vs. 3%
    in 2Q09.

In Europe, EDA was up 4% to $202 million.  This was the first positive
comparison since 2Q08.  For the trailing-twelve months, Europe contributed
$814 million, vs. $880 million.  Mentor accounted for the largest part of
the trailing-year decline, mostly due to the declines in the second half
of its FY10 (ended January 2010).

License & maintenance revenues were up 1% year/year to $162.5 million.  For
the trailing-twelve-months, license & maintenance revenue were $661 million,
down 8%.

In terms of European regional share by vendor

  - Cadence had 26% share, up from 23%.  For the trailing twelve months,
    CDNS had 24% share in Europe.

  - Mentor had 24% share, vs. 27%.  For the trailing twelve months, MENT's
    share in Europe was 25%, consistent with the average from 2005-2008.
    Mentor's best market share has typically been in Europe.

  - Synopsys' share was 22% share, down from 25% share in 2Q09.  For the
    trailing twelve months, Synopsys had 23% share, as compared with
    the 22% 2005-2008 average.

  - Magma had 1% share, vs. 4%.  For the trailing twelve months, Magma
    had 2% share.

In Japan, EDA revenues were $175 million, down 2% year/year.  For the
trailing twelve months, revenue from Japan was $781 million, down 5%.

License & maintenance revenues in Japan decreased 2% year/year to
$146 million, which also showed the usual large sequential decline
from the first quarter.  For the trailing year, license & maintenance
revenues were $661 million (thus matching the European market), down 3%.

In terms of Japanese share by vendor

  - Synopsys held 35% share, vs. 37%.  For the trailing year, Synopsys'
    share was 32%, vs. 32% in the year-earlier period and as compared
    with the 22% average from 2005-2008.

  - Cadence had 18% share, vs. 20% a year before.  For the trailing
    twelve months Cadence had 21% share, as compared with an average
    of 32% from 2005-2008.

  - Mentor's share was 12%, vs. 9%.  The trailing twelve month share
    too was 16%, vs. 12%.  Mentor's share in Japan is typically lower
    than in the other regions, but the recent data show some signs of
    improvement.

  - Magma's share was 3% share, vs. 1%.  For the trailing twelve-months
    its share was 2%.

Finally, non-Japan Asia was up 27% year/year to $204 million, or almost a
fifth of the industry.

For the trailing year the region was up 10% to $703 million.  For much of
the past decade to date, non-Japan Asia has been the fastest growing region
for EDA, though it has not avoided an occasional sharp deceleration or
outright decline.

Last quarter, China became the largest EDA market within the region, with
revenues of $45.4 million, vs. $25.7 million in 1Q10 and $25.2 million a
year earlier.  To date (such country numbers have been reported only since
1Q09), Taiwan was on average the largest market, followed by Korea.  Last
quarter, both Taiwan and Korea declined sequentially from 1Q10, though
each was up year/year.

In terms of Non-Japan Asia share by vendor

  - Synopsys had 32% share, down from an unusually high 39% a year ago.
    Its share for the trailing year was 34%, vs. the 32% average during
    2005-2008.  Over the past half-decade, Synopsys' best share has
    been on average in this region.

  - Mentor's share was 22%, up from an unusually low 16% a year before.
    For the trailing year, its share was 21%, vs. the 17% average
    during 2005-2008.

  - Cadence had 19% share in Asia/Pacific in 2Q10, unchanged.  For the
    trailing year too its share here was 18%.

  - Magma's share was 3% in the region.  For the trailing year, its
    share was 3%, vas. the 2.5% average during 2005-2008.


EDA PROFITABILITY

The composite non-GAAP operating profitability of the top three companies
was about $119 million, or 15.8% of their combined revenues (with Synopsys
accounting for two-thirds of those earnings), vs. $91 million a year before.

For the trailing twelve months, combined non-GAAP operating income was about
$432 million, or about 14.3% or revenues.

For the current year, combined non-GAAP operating profitability of the top
three suppliers could be about $500 million, about 15.8% of combined
revenue, vs. $390 million, or 13% of revenues, last year.  We should also
expect to see material improvements in cash flow as well.


SUMMARY

For 2Q10, EDA revenues were $1.043 billion, up 4.2% year/year, the first
increase since 4Q07.  As always, the industry revenues are a function of
both organic effects and license revenue model effects, i.e., the multi-
year effects of reported results of CDNS' and SNPS' model transitions,
particularly those of CDNS at the time being.

For the trailing twelve months, industry revenues were $4.22 billion,
down 2%, the smallest such decline in two years; if industry revenues in
3Q10 are as much as in 2Q10, then the trailing twelve month revenues will
be flat to slightly up for the year ended 3Q10.

License & maintenance revenues were up 3% in 2Q10 to $849 million, and for
the trailing twelve months were up 2% to $3.44 billion.

The 2Q10 combined revenues of Cadence Design, Mentor Graphics, and Synopsys
of $752 million accounted for 72% of total revenues, in keeping with their
typical proportion of industry revenues.  Including Magma Design, the main
group of publicly-held EDA companies accounted for $784 million, or 75% of
the industry.  All else being equal, the recent acquisitions by Cadence
of Denali and by Synopysys of Virage will tend to increase the Big 3 share
of EDA, once they work through the effects of having written down much of
the acquired deferred maintenance revenues.

Based on my current estimates for the largest companies, we can estimate
that EDA will be about $4.38 billion in 2010, or up about 4.8% from 2009,
which was down 10% from 2008.

Besides underlying organic bookings (see above), Cadence's license model
transition will still have material effects on Cadence's reported results,
as it goes through the rebound effects of the model change; its results
are of course material enough to significantly affect the industry's
reported results, in addition to other organic and mix effects.  The
industry's peak was $5.15 billion in 2007, so, organically and otherwise,
there's still a long way to go to get back to the old highs.  In the
meantime, however, bookings and profitability trends are improving.

    - Jay Vleeschhouwer
      Ticonderoga Securities, LLC                New York City, NY