The Effect of EDA Licensing Model Shifts
Rita Glover, EDA Today, L.C.
July 2001
The electronic design automation industry continues to be a
difficult one for financial analysts to track. Since 1999, the
financial comparisons between the top four public EDA companies have been
more complicated because of differences in their product licensing models.
To make things worse, the two top EDA companies, Cadence and Synopsys, have
changed their licensing practices during the past two years, so that even
year-to-year comparisons within the same company have become difficult.
These changes have had an impact on EDA revenue statistics
for the past two years. "Just when the EDA world should have been
looking better than ever, it took a turn for the worse. Licensing
problems collapsed the 1999 industry growth to 1.9 percent," said Gary
Smith, Senior Analyst for Worldwide EDA at Gartner Dataquest.
"Confusion still characterizes EDA and its licensing
practices," observed Jordan Brysk, president of Ascendant Strategies Group,
a San Francisco-based consulting firm. "Revenue is the best
performance indicator, but shifts in licensing schemes are causing dramatic
shifts in EDA vendors' revenues. Now many vendors want to point to
their installed base or bookings, but only revenue can pay the bills, fund
R&D, and generate earnings."
To understand what the flap is all about, let's describe the
different EDA licensing models and their effects on vendors and customers.
EDA licensing models are of two basic types:
perpetual or time-based. A perpetual license, the
more traditional model, is a product license with a term that's so long that
it's effectively the same as an outright purchase. The length of a
perpetual license is typically 99 years, which is much longer than the
reasonable lifespan of any EDA product. Revenue is recognized all up
front, when the license is paid for. Maintenance -- which includes
technical support, bug fixes, and product updates -- may be purchased
separately at an annual price that is typically 10-15 percent of the
perpetual license price.
A time-based license is essentially a lease of
software for a shorter period of time (typically 2-3 years) that generally
includes maintenance. The time-based license is a more recent
innovation that is generally credited to Gerry Hsu, CEO of Avant!
Corporation. His motivation was to create an ongoing stream of
recurring revenue to support the high cost of new product development -- a
cost that was not being met by the one-time sales of perpetual licenses
through the relatively modest revenue stream of annual maintenance
contracts.
Another advantage that has made the time-based license very
attractive to the financial community is its "visibility factor." That
is, the future revenue that is anticipated to flow in to the vendor during
each quarter over the term of a time-based license makes it much easier to
predict the financial performance of a publicly traded company.
Time-based licenses come in two different flavors -- term
and subscription -- and both involve the lease of an EDA software
application or "tool" for some fixed period of time. The annual
pricing of a time-based license is estimated to be 20-40 percent of the
perpetual list price.
A term license does not include access to new technology.
To accommodate periods of peak usage by the customer, a term contract may
allow for additional licenses to be purchased at a negotiated discount, and
may allow the customer to request some re-mixing of the various tools that
are included in the contract. With a term license, the vendor
recognizes revenues all up front for financial reporting purposes.
Subscriptions are another type of time-based license, and
they differ from term licenses in that they include some limited access to
new technology. A subscription might allow customers to re-mix the
products they have selected for inclusion in the deal. It also may
allow extra licenses to be purchased for peak usage periods, and may even
include product upgrades, which are more extensive than just bug fixes
(updates).
Another key difference between term licenses and
subscriptions is that subscription revenues are recognized ratably;
that is, revenue is divided into equal portions for the term of the
subscription, with one portion recognized in each financial quarter.
The postponed revenue, known as backlog, is what enhances the visibility of
future revenue projections, and this is the primary reason that several
major EDA vendors are shifting to the subscription model.
The shift to ratable revenue means lower revenue results in
the near-term quarters, but sales gradually build up to create more revenue
that is visible long-term. Several major EDA vendors have changed
their licensing models, and these shifts will ripen and come of age in 2001.
Therefore, we predict that EDA growth rates in 2001 and the next several
years will return to their usual healthy levels of between 14-20 percent per
year.
Furthermore, the current semiconductor downturn could
actually have a positive effect on EDA revenues, because new design starts
become even more important whenever the semiconductor industry takes a dip.
Historically, EDA revenues track with semiconductor research and development
spending, and R and D budgets are seldom cut during a downturn.
Additional EDA opportunities are brought on by the need for retooling, when
design complexities exceed the capabilities of older tools, and newer
technologies are required to get the job done.
Further information: A report on
EDA Licensing Models is
available from EDA Today. EDA market statistics are available through
the EDA Consortium's Market
Statistics Service.
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