Year to date, shares of Synopsys (SNPS) are up nearly 35% as the company continues to benefit from its intellectual licensing business. Synopsys reports earnings on Wednesday. Can it maintain its momentum?
Over the last decade, semiconductor companies have come to rely on the Electronic Design Automation industry for verification tools and intellectual property, as well as design software.
EDA is often seen as a backwater of the semiconductor equipment industry, but without software to design semiconductors, the industry wouldn't exist. After all it's impossible for Nvidia (NVDA) to design, verify and simulate a Pascal processor with 15 billion transistors squeezed on to a 600 millimeter square die without software.
The EDA companies often get whipped around with the capital equipment spending cycle, but that's unfair, since the companies have a treasure trove of intellectual property at their disposal. For example, as a design for a USB port becomes standardized, EDA companies often sell predesigned pieces that can be easily dropped into a complex design. Increasingly, semiconductor designers are simply licensing EDA IP and pasting them into their designs. Why reinvent the wheel?
IP licensing is a growth area for the industry, since it's difficult to grow software revenue. It's hard to sell new software, because once a chip has been designed, it's extremely difficult and time-consuming to port the design to a different platform. EDA software has a steep learning curve, and engineering teams have their favorite tools. Switching costs are astronomical. It reportedly took Nvidia four years to design the Pascal graphics processor. Nvidia is not switching software platforms any time soon.