Just as architects use software to design buildings, so
doesMentor Graphics (
MENT
) help engineers design chips for the semiconductor industry.
The Wilsonville, Ore.-based firm makes design automation
software and hardware. Its products are used to conceptualize,
design, emulate and test various electronic systems and
components.
Mentor is the oldest and third-largest company within the
electronic design automation, or EDA, space. The other two
players areSynopsys (
SNPS
) andCadence Design Systems (
CDNS
).
"Typically, about three-fourths of the total industry's
revenue is comprised of these three companies. And the remaining
one-fourth is proportioned over many other smaller, mostly
usually privately held companies," said software analyst Jay
Vleeschhouwer at Griffin Securities.
"Everything that we take for granted and have for many years .
.. none of that could exist without the technology of these
companies. It would be humanly impossible to get the degree of
complexity and microscopic scale that we see in semiconductors
and chips without the software tools that are used to create
this," he said.
Strategic Focus
Mentor's strategy is to focus on areas with the largest market
share and the best capability, said Mentor's chairman and CEO
Walden Rhines.
"That's a little different from others who spread themselves
more broadly. One of the reasons that we are doing well is that
there's a whole new generation of semiconductor technology coming
along and Mentor is the leading supplier of physical verification
tools for integrated circuit design," Rhines said.
The new generation is referred to as the 28/20 nanometer
design, which is part of the constant move to smaller, deep
sub-micron range of designs. With the device complexity and
number of components increasing, the semiconductor industry's
demand for power and capacity of design and verification tools is
rapidly increasing.
Mentor's flagship product is Calibre, which is a software used
in the verification and analysis of chips.
"Before you spend millions upon millions of dollars putting a
new chip into production and then, sometime later, discovering
that there may actually be something wrong with it, you don't
want to get to that point without having tested and verified the
chip design," said Vleeschhouwer.
Mentor also does chip verification via hardware. Its latest
product is Veloce 2, where you can emulate a prototype of a
chip.
"In years past, it was a fairly special-purpose kind of
product, used only by certain kinds of chip designs. Now, in the
last two years, it's ... used much more broadly by a wide range
of people who do complex chip designs," said Rhines.
"It's become the most cost-effective way for people to verify
that their designs are, in fact, correct in doing what they are
supposed to do," he added.
The company expects the emulation portion of its business to
grow 100% for the year.
Mentor also has strong technology in the design of printed
circuit boards, or PCB. These are the laminated boards that are
populated with electronics that go into phones, tablets and
computers.
"Mentor is by far the market leader in that PCB category,
which, even though it doesn't get a lot of attention from
investors, happens to be part of the largest end-markets in EDA,"
Vleeschhouwer noted.
Software comprises more than 90% of Mentor's business and
three-quarters of that goes into designing chips, while the other
quarter goes into designing systems.
The latter is another fast, though at times bumpy, area of
growth for Mentor. The systems include everything from printed
circuit boards to automobiles to airplanes.
"The systems business, surprisingly, is very rapidly growing
because planes, trains and automobiles have traditionally been
designed by more manual methods and they're in the process of
automating their design processes," said Rhines.
The cost of products usually ranges in the five- to six-digit
numbers. About half of a booking is recognized as revenue when
the company delivers the product.
The remainder is either delivered as support over the life of
the contract or as services that go along with the contract,
explained Rhines.
Some of Mentor's semiconductor customers are Toshiba,
Freescale Semiconductor andIBM (
IBM
) . Systems customers includeBoeing (
BA
), BMW, Airbus, Honda andGE (GE).
The average life of a contract is three years and customer
relationships tend to be long-standing.
"They are extremely long relationships, the majority of our
revenue comes from customers that we've been doing business with
for decades and last year, our average three-year contract
increased between 25% and 40% compared to the prior contract of
the three years before," Rhines said.
He estimates similar increases this year, with some quarterly
variability.
Often, customers will buy products from multiple vendors, and
will assemble and mix and match various software. There is a
relatively small pool of customers and within that set, an even
smaller number of engineers who work on designing electronic
products.
"These companies, Mentor, Synopsys and Cadence, have
increasingly overlapping product lines," said Vleeschhouwer.
"They increasingly either try to diversify or bulk up in areas
where they are already strong."
Asian Growth
Geographically, the fastest growth in the past decade has come
from the non-Japan Asia, especially China, Korea, Taiwan and
India. Mentor has the No. 1 market share in China and India, said
Rhines.
"A lot of the customers have put more and more engineering
resources into India, and so the revenue follows where the
engineering bodies are," said Vleeschhouwer.
Also, structural and organic growth contributes to the
region's growth.
"In Korea, you've got customers like Samsung that are putting
a ton of money into R&D and China is trying to build up its
industry, so they'll have to consume and hopefully pay for
software," he added.
Europe, while it doesn't represent the largest region in terms
of revenue, is a region where Mentor has the best market
share.
"It's a very esoteric industry. It's probably hard for most
people to really get a feel for how a chip is designed. Everyone
takes it for granted, you turn on your iPhone and that's it,"
said Vleeschhouwer. "It's an extraordinary engineering
accomplishment. If you think about the capabilities and the speed
and the memory storage that gets packed into this extraordinarily
small thing, that doesn't happen unless you have the right
software tools."