EDA Observations and Outlook: A Wall Street Perspective - Rich Valera Managing Director, Needham & Company June 24, 2018 - Verification 3.0
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EDA Observations and Outlook:
A Wall Street Perspective
Rich Valera
Managing Director, Needham & Company
June 24, 2018
New York Boston Menlo Park San Francisco Chicago
Overview
What’s driving EDA growth?
What’s the growth rate of EDA been doing?
EDA IPO’s/Consolidation
Private and public investment in the EDA industry
Conclusions
2
Drivers of Semiconductor & EDA Growth
Growth Vectors
Internet of AI/Machine Webscale /
Automotive
Things Learning FAANGs
Driving Incremental Demand for EDA
3
Increasing Semi Content in Autos
Global Vehicle Production Semi Content / Vehicle Auto Semi TAM
(millions) ($) (billions)
$38B 6%
99M 3% $382 4%
91M 4%
89M 1% 2%
94M $344 $366
$332 $31B $34B
81M 89M 90M $29B
$342 $31B
$332
$297 $29B
$24B
CAGR ’16E-’19E: Max% Min%
Source: NXP Semiconductors
4
Increasing demand from IoT applications
IoT Semi Market SAM IoT Semi Technology SAM
$11.5B $11.5B
$9.7B $9.7B
$8.1B $8.1B
2013 2016 2020E 2013 2016 2020E
Smart City Smart Home Smart Industry Other Total MCU Wireless Sensors Total
Source: Silicon Labs, 2017
5
AI and Machine Learnings driving new design starts.
“The Cognite list now includes 22 chip startups world wide (a third
of them in China) and I am also following 5 or 6 more that are still in
stealth mode.”
Chris Rowen, February 2018
• AI/Machine Learning is a source of incremental chip design
• All FAANG players (ex-NFLX) are designing AI-related chips
6
FAANG’s Have Been Driving the NASDAQ Over the Last 5 years
FB
AAPL
FAANGs account for
~40% of the 5-year
AMZN
increase in value of the
NASDAQ
Rest of NFLX
NASDAQ
GOOG
Source: FactSet
• The Nasdaq composite is a market cap weighted index of 3,300 stocks; the FAANGs
represent between 0.1% to 0.2% of the number of stocks in the NASDAQ
• FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) have driven much (~40%) of
the performance/market cap increase in technology.
• All (ex-Netflix) also have, or are, developing in-house chip design capabilities
7
FAANGs have also been drivers of EDA – Apple
• Apple was first of the FAANGs getting into chip design, buying PA Semi in 2008 for
$280MM – leading to design of its own mobile App Processor, the A4, in 2010.
• Over time it has developed an increasing number of complementary chips to its co-
processor (i.e. motion coprocessor, GPU, neural engine)
8FAANGs have also been drivers of EDA – Amazon
Amazon buys Israeli chip-maker Annapura to develop chips for its
hyperscale datacenters.
- January 2015
Amazon is reported to be developing its own AI chip to facilitate
performance of its Alexa-powered devices.
-February 2018
• Amazon defied the original cloud paradigm that suggested cloud companies would
leverage standard hardware from a handful of vendors when it bought Annapura and
began designing chips to improve the performance of its datacenters.
• It is now reported to be devloping AI chips, further increasing its demand for EDA
9FAANGs have also been drivers of EDA – Google
Google announces its first tensor processing unit
(TPU), a custom ASIC used in Google’s datacenters
for machine learning applications.
-May 2016
• Google joined Amazon in custom chip design with its TPU.
10FAANGs have also been drivers of EDA – Facebook
“…is seeking to hire a manager to build an end-to-
end SoC/ASIC, firmware and driver development
organization”
- April, 2018
• Facebook appears set to join AMZN and GOOG in doing custom chip design.
11What’s the growth rate of EDA been doing?
EDA Industry Quarterly Revenue and TTM Growth Rate
Source: ESD Alliance
• The growth rate of EDA (blue line represents TTM average growth rate) has shown
some volatility around macro events
• ’08/’09 recession and record semi M&A/MENT in ’15/’16
• Otherwise the growth rate has been solidly trending upward towards DD% y/y.
12EDA and IP IPOs – late 90’s early 2000’s were good times
1996 1997 1998 1999 2000 2001 2002
• The late 90s to early 2000s were a prolific time for EDA/IP IPOs
• 2001 was particularly remarkable since the ongoing collapse of the tech bubble
resulted only a handful of tech IPOs, but 5 EDA/IP companies managed to get public.
13…the following 15+ years have been all about consolidation
• Virtually all of the IPOs of the prior era (CEVA the lone exception) have been
consolidated.
• Many larger scale private companies, including multiple “near IPO’s,” e.g., Denali,
Tensilica, Apache and SpyGlass (Atrenta), were bought before going public.
• It goes with saying that industry has become very concentrated, one could argue an
oligopoly, with most of the revenue driven by 3 companies.
14Investment in EDA – From the Private side…
Investment in Private EDA/Semi IP Companies
50M 8
45M 7
40M
6
35M
30M 5
25M 4
20M 3
15M
2
10M
5M 1
M 0
2000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016 2017 2018
Total Amount Raised (MM) # of Fundings
Source: Crunchbase
• Investment in private EDA companies, has been on somewhat of a downtrend, outside
of the 2012 outlier from a $25MM investment in Real Intent by Andy Bechtolsheim.
15Investment in EDA – From the Private side…
EDA Private Company M&A
17.0
15.0 7
Average Age at Acquisition
13.0 6 6
11.0 5
9.0 4 4 4
7.0
5.0
2
3.0
1.0
2010 2011 2012 2013 2014 2015 2016 2017
Number of exits Average Age at Acquisition
Source: Vista Ventures, LLC
• The number of EDA private company exits has been declining, we think directly relating
to fewer private companies being formed.
• The time to exit for these companies (blue line) has generally been well over 10 years.
This long gestation and the relatively small TAMs many EDA privates look to pursue, we
think helps explain the modest amount of VC funding flowing into EDA.
16…and the public side.
45.0%
R&D as a % of SNPS/CDNS Revenue
40.0%
35.0%
Synopsys
Cadence
30.0% Average
25.0%
20.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Company Filings
• With EDA industry an “oligopoly” (per slide 14) – one might think the main players
could see less competition, reduce investment and look to maximize profits.
• This has not been the case. Combined Cadence/Synopsys R&D has been on a generally
upward trend over the last 10 years*
• We see this is as positive for the industry, especially as it relates to job growth.
17What’s happened to public EDA Valuations?
• The market has generally trended upward with an expanding P/E over the last 5 years.
• The NTM P/E of the S&P 500 has gone from ~13.5x to ~16.5x during this time.
18What’s happened to public EDA Valuations?
• But public EDA names have seen dramatically more multiple expansion than the market.
• CDNS and SNPS have seen their NTM P/Es expand from ~14x to ~26x and 22x, respectively.
19What’s happened to public EDA Valuations?
EDA Stock 5-Year Performance
Price Price 5 year 5 year
Ticker 6/21/13
17.18 6/22/18 Return CAGR
S&P 500 SP50 $1,592.43 2783.76 74.8% 11.8%
Cadence CDNS $14.37 $44.13 207.2% 25.2%
Synopsys SNPS $35.21 $90.92 158.2% 20.9%
EDA Average 182.7%
Source: Factset and Needham & Company estimates.
• … and EDA stocks have sharply outperformed the broader market.
20Summary/Conclusions
The EDA/Semi IP market is seeing healthy growth, with strength
from Auto, IoT, A.I. and relatively new consumers of EDA in the
webscale/cloud space.
EDA has seen considerable consolidation, which has not been
matched by private company formation and IPOs.
VC investment has been limited due to smaller TAM size and long
gestation of many EDA companies, but opportunities still exist for
privates solving challenging problems.
Overall (public and private) investment, revenue growth and job
growth in the EDA/IP industry remain healthy.
And public company investors have shown an increasing
appreciation for the value of EDA, as reflected in higher absolute and
relative multiples of public EDA companies.
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