EDA Growth Dips Again: 3Q03 Global Forecast Update

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1 Forecast Analysis EDA Growth Dips Again: 3Q03 Global Forecast Update Abstract: The electronic design automation market has taken another downturn during the first half of An improved second half will be necessary for the market to see positive growth for the year. By Laurie Balch Strategic Forecast Statements Expected market growth in the near term has been further lowered to only 1 percent for 2003 and 14.9 percent for 2004 as a result of negative trends of early Because the influence of the electronic system level (ESL) tools will emerge starting in 2005, electronic design automation (EDA) market growth will be significantly higher for the latter years of the forecast period, approximating 20 percent per year from 2005 through Publication Date:25 August 2003

2 2 EDA Growth Dips Again: 3Q03 Global Forecast Update Year to Date Market Review Once again, the first half of this year was very disappointing for the EDA market. It is not the first time in the past two years when we ve seen the EDA industry exhibit far lower-than-expected growth, but we certainly hope it is the last time we ll see this phenomenon as a result of lingering licensing issues. The biggest contributor to the shortfall this time was negative growth from Cadence, which continues to be plagued by its shift in licensing models. Through much of 2002, the company was being carried by continued product sales constructed as flexible access model (FAM) deals. Cadence s move away from this much-derided licensing model to subscription-based licenses has prolonged the company s and the entire industry s downward revenue trend. When new deal opportunities started to dry up in the last months of 2002, the lack of a strong subscription license base led to a huge revenue decline in the fourth quarter, continuing into Unlike Cadence, many other EDA companies have been able to demonstrate fairly strong growth to date. Synopsys and Mentor Graphics had positive growth in the first half of 2003, even accounting for significant acquisitions made by both companies, relative to the same period one year ago. Magma reported excellent growth, while Synplicity had growth in the low single digits. This is in contrast to the situation surrounding the disappointing market performance that befell EDA in the fourth quarter of Though Cadence was the major culprit that time as well, other large EDA companies also had a substantial negative pull on the market. For specifics about the fourth quarter declines, please see "EDA Growth Comes Up Short: 2Q03 Global Forecast Scenarios Update, ," HARD-WW-DP The unique position Cadence is in points to other potential factors compounding the Cadence licensing problem. Cadence has a greater share ofthemainstreamuserbasethandosomeofitscompetitors,whichare concentrated more deeply among power users. Since Cadence stands alone in its negative growth, it looks like its mainstream users are deferring or forgoing their tool purchases more than their power user counterparts. This may very well be spurred by mainstream users reducing their dependence on application-specific integrated circuits (ASICs) in favor of application-specific standard products (ASSPs), or simply choosing to get out of the integrated circuit (IC) business altogether. The economics of chip design make custom development too expensive for many mainstream users at present, a trend that may not reverse until electronic system level (ESL) tools become more advanced in their functionality and widely available. Changes Compared With Previous Forecast The short-term growth picture for the EDA industry changed significantly after the earnings announcements of the last quarter of 2002 and first half of It has become clear that customer spending will remain well 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 25 August 2003

3 below our earlier projected levels through at least Without a robust recovery in the semiconductor market or general economy, EDA spending will be depressed. Adoption of IC implementation tools is still occurring, albeit at a somewhat more leisurely, protracted rate. Consequently, widespread implementation of the next generation of design tools the intelligent test bench, silicon virtual prototype and ESL tools will be a bit delayed, as well. Additionally, the persistent effects of the licensing model shift to subscriptions will have a negative influence on market growth. We have therefore reduced our forecast for 2003 and Later years will take up some of the slack in growth as the ESL tools begin to take off in But, even this higher growth in 2005 through 2007 will still leave the overall size of the market considerably lower than in our earlier forecasts because of the exceedingly low growth seen in early For further details on the long-term market forecast, please see the 2003 Worldwide EDA Forecast to be released in September. 3 Forecast Scenario Commentary In the face of continuing economic uncertainty, Gartner Dataquest has developed three forecast scenarios for the EDA market. The best case, most likelycaseandworstcasescenariosareshownintable1. Table 1 EDA Worldwide Forecast Scenarios, Product Revenue EDA Forecast Revenue (Millions of Dollars) Best Case 2,985 3,580 Most Likely Case 2,790 3,205 Worst Case 2,625 2,835 EDA Forecast Annual Growth (Percent) Best Case Most Likely Case Worst Case Source: Gartner Dataquest (August 2003) Looking forward, the key drivers for future market growth remain unchanged. Market growth in the immediate future is still largely motivated by the acceptance of IC implementation tool suites for chip design. However, because of the aforementioned licensing hiccups since the last quarterly forecast update, the projected growth rates for 2003 and 2004 have been reduced even further to 1 percent and 14.9 percent, respectively. Given the current economic environment, this switchover to IC implementation tools is not taking place quite as rapidly as earlier anticipated, though it is certainly happening. The next phase of EDA market development the acceptance of ESL tools, as well as the intelligent test bench and silicon virtual prototype has accordingly been pushed out. We won t see major growth of ESL tools until 2005, but it will extend well into For more information about these specific market 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 25 August 2003

4 4 EDA Growth Dips Again: 3Q03 Global Forecast Update segments, please see "EDA 2002: The Automation of RTL Design," SWTA- WW-MT The best case and worst case scenarios for 2003 and 2004 are based on the lingering lack of clarity about the future growth timing and direction of the semiconductor market. Should the impact of licensing changes continue to affect revenue in the second half of this year, 2003 growth could actually fall into negative territory, though probably just barely so with a maximum decline of 5 percent should be much better, with a minimum of 8 percent growth, as the overall economic environment shows steady improvement and licensing model changes taper off from the previous year. The best case scenario will likely only reach high singledigit growth in 2003 but should see double-digit growth in Though the possibility of 8 percent growth in 2003 and 20 percent growth in 2004 remains, we believe that current economic and market conditions make achievements of these scenarios unlikely. Our projected annual EDA growth for 2005 through 2007 is in the 20 percent range thanks to the rise of the ESL toolset. By 2007, we expect the EDA market to reach approximately $5.5 billion in product revenue, approximately double its level today. The revised full five-year EDA forecast is shown in Figure 1. The five-year compound annual growth rate (CAGR) through 2007 is 14.9 percent. Figure 1 Top-Line EDA Worldwide Forecast Through 2007, Product Revenue (Millions of Dollars) Market Size ($M) 6,000 5, ,000 4, ,000 3, , ,000 2, , , , , ,000 1, Source: Gartner Dataquest (August 2003) Drilling down into the major market segments within the EDA industry shows how they will not all be affected equally by current industry 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 25 August 2003

5 5 economic conditions. Figure 2 shows the updated Gartner Dataquest forecast for each of the three main EDA market segments computeraided engineering (CAE), IC and printed circuit board (PCB) tools. Our forecast for all segments has come down for 2003, largely because of the effect of licensing shifts. Figure 2 Product Revenue Forecast by Major Application, Annual Growth Rate (Percent) Growth (%) CAE IC PCB Source: Gartner Dataquest (August 2003) Throughout the forecast period, CAE is expected to be the strongest growth segment as a result of investment in the next generation of tools. EDA subapplications, such as the intelligent test bench, silicon virtual prototype and ESL toolsets, will drive the major growth for CAE for much of the rest of this decade. Customers will continue to transition their spending to these CAE tools as they complete their investments in IC implementation tools. As a result, CAE market growth will surpass the growth of the IC segment. PCB growth will remain meager for most of the forecast period. Of all three EDA market segments, PCB is the weakest, and growth will be anemic through PCB growth will trend further into negative territory in 2003 and only barely climb back into positive growth the following year. PCB tools will then begin to see more solid growth as the need to replace and update outdated technology forces a new investment cycle to take hold Gartner, Inc. and/or its Affiliates. All Rights Reserved. 25 August 2003

6 6 EDA Growth Dips Again: 3Q03 Global Forecast Update Gartner Dataquest Perspective Yet another negative turn for the EDA market will lead to nearly flat 2003 growth. While many EDA vendors have returned to positive financial performance, Cadence continues to be afflicted with negative revenue growth. Cadence s numbers are affected by its shift in licensing models and the decision albeit most likely a temporary one by many mainstream users to move away from designing ASICs. Though not all EDA market segments will be affected equally, the overall picture for the industry shows growth of only 1 percent and 14.9 percent for 2003 and 2004, respectively. In the next several years, EDA growth will be mainly driven by the adoption of the silicon virtual prototype and intelligent test bench, followed by the emergence of the ESL tools. Because the influence of ESL tool adoption has been pushed out from 2004 until 2005, EDA market growth will be significantly higher for the latter years of the forecast period, approximatly 20 percent per year from 2005 through Key Issue What are the future growth prospects for this industry? This document has been published to the following Marketplace codes: HARD-WW-DP-0554 SEMC-WW-DP-0325 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice