Amid the semiconductor slump, chip design powers on

As some analysts fear the “worst semiconductor downturn” in a decade, Synopsys—a leader in chip design and testing software—is trending in a different direction.

The company specializes in electronic design automation (EDA) software, which allows semiconductor engineers to test out chip designs and run through the manufacturing process. For its fiscal Q3 2022, Synopsys reported above-target revenue of $1.25 billion, up 18% year over year—with projections to finish the year with revenue growth of more than 20%.

Cadence, another EDA company based in the San Francisco Bay Area, reported its most recent quarterly earnings in July, with $858 million—up 17.8% year over year, according to a recent release. And Siemens, the German industrial manufacturing giant, reported “double-digit growth” in its EDA business last quarter, though it did not break out that sector’s revenue under its “digital industries” umbrella.

“Based on this strength and confidence in our business, we are raising guidance for the full year—we expect to…pass the $5 billion milestone,” Aart de Geus, chairman and CEO of Synopsys, said on its latest earnings call.

After a period of record high demand, the sudden semiconductor slump has spread to chipmakers like TSMC, Samsung, Micron, Nvidia, Intel, and AMD, with reports of excess inventory for some products, shortages for others, and an overall decrease or standstill in demand. On ASML’s earnings call, for instance, executives described supply-chain constraints and delayed revenue.

“Looking at the more near-term market dynamics, we see a couple of mixed messages,” Peter Wennink, president and CEO of ASML, said on the company’s quarterly earnings call in July. “Some customers are indicating they are seeing signs of slowing demand in certain consumer-driven market segments, primarily PCs and smartphones. Other market segments like high performance computing and automotive are still seeing strong demand.”

When faced with similar questions on Synopsys’s earnings call, de Geus said chip research and development is especially insulated against market ups and downs.

“The design activities typically don’t mirror immediately what happens in the market because the market is really a function of the end sales, i.e., the quantity of chips being sold,” he said. “R&D is very stable against that. And more often than not, when there’s a flat period, or even a downturn, people invest in R&D to make sure that they have differentiation coming out of it.”

On Cadence’s most recent earnings call, Anirudh Devgan, president and CEO, seemed to echo the sentiment, emphasizing that despite “macroeconomic uncertainties,” customers are “relentlessly investing in their next-generation innovation.”

“Demand for our core EDA software remains strong and broad-based,” Devgan said.

Although Synopsys and other EDA companies may be shielded from some aspects of the semiconductor slump, they do have to regularly consider changes to the Entity List, a trade restriction document published by ​​the US Department of Commerce. Recently, the US expanded restrictions on trade with Chinese chipmakers, and at least one analyst on Synopsys’s earnings call projected it may slow the company’s growth.

De Geus said the company’s forward projections take the Entity List news into account, and that the changes “aren’t material” for Synopsys at the moment.

Moving forward, he added, the company’s key indicators show promise.

“So am I the right person to ask if we’re going to have a ’08, ’09 economy going forward? No, I’m not the right person, but I also don’t believe that that’s going to happen. And so the indications right now, subject to, of course, any crazy political situation…All our key customers are investing in technology and are racing forward.”