( ESNUG 489 Item 7 ) -------------------------------------------- [03/11/11]
Subject: Not EDA users, Not MENT rivals, Not MENT employees
THE WATCHER'S VIEWS: These coments are from the people who aren't EDA users,
nor are they MENT rivals, nor are they MENT employees:
This is *SUCH* B.S.! Icahn's a cancer that's leached onto Mentor because
it's undervalued and he's admittedly involved simply to make a buck.
Fine, so is every other investor. Unfortunately making a QUICK buck will
be disruptive or even destructive, and Icahn's put himself in a position
to be both.
It will be interesting to see what your survey turns up, but I'm solidly
behind:
C. Mentor is left alone to run as it has before.
- John Donovan of Low-PowerDesign.com
X - A. Generally positive.
Over many many years Mentor is an EDA company where staff stays and
consistently talks about the positive culture. As we all know, that
is a rarity in EDA and rather refreshing. Perhaps instead, Mentor
should be the one acquiring!
X - A. Mentor is acquired, presumably by Synopsys or Cadence.
While it may be a contradiction to my previous comment, an acquisition
would mean one less major competitor for start-ups to compete against.
While leaders in certain domains, they are an "also" tool in several
areas, and that means price becomes the issue and deals are made that
hurts competition and profitability in EDA.
- Mark Gilbert of the "EDA Careers Corner" advice column
B. Mentor sells off or closes its less profitable product lines.
MGC has some excellent market-leading products, w/ good R&D and generally
well-balanced sales and marketing. However, too many perennially market-
trailing products continue way too long, when they should be sold off or
ramped down, and MGC is not very well coordinated in their positioning
strategy, leading to disconnects across divisions and product groups.
Neither Synopsys nor Cadence users will benefit from a MGC acquisition,
and these EDA leaders will have too much distraction to manage the
cultural differences and product breadth challenges. The end result
would be either EDA company selling off major chunks of MGC for little
value to keep the few strong strategic growth areas.
This same result would be better achieved by MGC management making those
hard choices themselves and keeping more competitive choice for customers
and less distraction for the big two EDA players.
- [ An Anon EDA Watcher ]
A. Generally positive.
Wally Rhines and his team are very ethical, and up-front. Good product
for fair value. Are there improvements possible, yes, but that is true
everywhere. They do NOT carelessly spend money.
C. Mentor is left alone to run as it has before.
Mentor is #2 or #3 in the traditional EDA business (SNPS=#1), and have
the ability (and talent) to address new technology challenges as it
becomes necessary for design challenges. The integration of software
development early in the design process is continuing to be a technical
challenge. Mentor has technology in this area.
What was not ask is there another "combination" of companies that might
make sense. Possibly ARM + Mentor (interesting), or GlobalFoundries,
or TSMC + Mentor (not my choice). There are others as well, but that
would take much more thought.
- [ An Anon EDA Watcher ]
MENT Q4 '11 EARNINGS RELEASE
For the most recent quarter, Mentor's revenues came in comfortably above
guidance and my estimates, at $307.5 million, up 30%, which brought total
fiscal year (FY11) revenues to $914.8 million, up 14%.
We can infer that Mentor's product bookings were nearly a quarter-billion
dollars last quarter, for a product book/bill of around 1.15x. In
addition, it appears that total product bookings for the fiscal year were
around $600 million, a new high, which, if correct, would indicate that
Mentor's product bookings were higher than Cadence's, as was the case in
2009 (though the margin of difference was larger in 2009).
The growth of Mentor's bookings for the quarter and for the year (three
of the four main segments were up for the year) resulted in the good
revenue growth and, therefore, good margin leverage (the non-GAAP margin
improved to 11.6% last year, from 8.7% the year before).
CARL ICAHN'S MENT SG&A COMPLAINT
The issue of margin levels - or, more specifically, the selling,
general & administrative operating expense ratio - vs. the immediate
peer and vs. the rest of software seems to be the main issue underlying
the recent $17 unsolicited bid for Mentor (the offer implies an
enterprise value of slightly less than $2 billion, or just 2.2x trailing
revenues). That is to say Mentor is considered to be not nearly as
profitable as it could or should be. In FY11, Mentor's GAAP SG&A ratio
was 45.7% (44.3% excluding stock-based compensation); by comparison,
Synopsys' GAAP SG&A ratio was 32.9% last year, on nearly $400 million
more in revenues.
If we look at a technical software company of roughly comparable size,
Parametric Technology, the GAAP SG&A ratio was 37.8% (a large part of
the difference can be explained by PTC's having a much higher ratio
of indirect sales, which presumably would have the effect of lowering
selling cost ratios). On the other hand, even Adobe Systems, a very
profitable and market-dominating company four times as large as Mentor
(albeit serving a very different market than EDA), had a GAAP SG&A
ratio in FY10 of 42.8% (39.1% non-GAAP).
Mentor can indeed do better, but it doesn't seem to be an outlier or
egregious under-performer so much as a company that is within reach
of a few hundred basis points of margin improvement. If Mentor can
continue to grow in the mid-single digits, or better, then operating
margins should improve to the mid-teens or better.
Mentor can and should be more profitable, but the "structural" issue
seems to have more to do with scale, not with profligacy on the SG&A
line. As revenues grow pursuant to a good product mix (a mix aligned
as much as possible to the several growing categories of the dozens of
segments within EDA being a fundamental concept), coupled with what we
should expect to be further conscientiousness around cost management
(bringing that G&A ratio down a couple of hundred basis points would
be good), then operating margins should continue to increase.
It's notable that Mentor highlighted the profitability of its decades-
long franchise in PCB, which, along with Calibre, is an earnings and
cash flow bastion for the company; presumably other segments or products
are not quite as profitable yet, but might grow to be more profitable
over time, especially those where Mentor made early investments, such
as system-level design.
GROSS MARGINS:
Finally, it's important to note that Mentor's gross margins are
typically in the 84.5-86% range, where Cadence's are in the low-80s
and Synopsys' around 80% (the differences having to do in part with
how the vendors account for support costs).
- Jay Vleeschhouwer's EDA industry research comment of 03/01/11
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