EDA Licensing Trends EDA Consortium East Coast Annual Meeting Jordan Brysk Ascendant Strategies Group, Inc. September 11, 2001

© 2001 Ascendant Strategies Group, Inc. Overview n Licensing issues confront all software (and even some hardware) vendors – not EDA-specific n No “one-size-fits-all” answer for all vendors n Critical factors to consider: – Cash flow – Revenue predictability – Affordability (for customers) – Opportunity for recurring revenue – When-If-How-Why to make a change – What to say to investors, analysts, and customers

© 2001 Ascendant Strategies Group, Inc. “EDA 2000: Sorting Through the Confusion” “Just when the EDA world should have been looking better than ever, it took a turn for the worse. Licensing problems collapsed the growth to 1.9 percent.” — Gary Smith, Gartner Group (Dataquest) November 20, 2000

© 2001 Ascendant Strategies Group, Inc. EDA 2001: Growing or not? “While 2 percent is the reported figure [revenue growth forecast], that number is understated.” “We think that sales this year will be up about 12 percent compared to last year, due to unrealized revenue from bookings that have already been placed." — John Barr, Robertson Stephens & Co. (from EE Times, July 27, 2001)

© 2001 Ascendant Strategies Group, Inc. What’s going on? n Vendors have changed licensing models n Accounting rules require different kinds of licensing contracts to be treated differently n Vendors have considerable discretion over terms and conditions… …especially those with products and services in high demand – those that fulfill near-term needs

© 2001 Ascendant Strategies Group, Inc. Revenue Recognition Criteria n Delivery of value n Existence of contract n Pricing determined/determinable n Reasonable prospect for collection

© 2001 Ascendant Strategies Group, Inc. Licensing Models: Perpetual n A virtual purchase of software for an indefinite period of time (up to 99 years) n Revenue recognized upon delivery n Maintenance 10-15% per annum n Concerns: – Affordability for customers – Poor linearity (and discounting?) – Is there enough recurring revenue?

© 2001 Ascendant Strategies Group, Inc. Term Licensing n A lease of software for a finite period of time (most often 2-3 years) n Invoices either up-front or periodic (financing) n Product revenue usually recognized up front – 20-40% per year of perpetual pricing – Maintenance typically bundled in (recognized ratably) n May allow for some re-mixing, or more licenses for peak usage – caution: potential to erode pricing n Concern: Have you precluded follow-on opportunities for the duration of the term?

© 2001 Ascendant Strategies Group, Inc. Subscriptions: Model of Virtue? n A lease of software for a finite period of time (typically 2-3 years) n Invoices issued periodically (annually or quarterly) n Revenue recognized ratably – Similar to term license pricing; premiums possible – Maintenance typically bundled in n May allow for re-mixing, licenses for peak usage, and may even include upgrades (value over time) n Concerns: What will this do to your top line? How much negotiating strength can you really gain?

© 2001 Ascendant Strategies Group, Inc. Broadline Vendors Tend Toward Ratable Revenue Recognition Point ToolBroadline Vendor Type License Type Perpetual Subscription Upfront Ratable Revenue Recognition

© 2001 Ascendant Strategies Group, Inc. Investing in EDA n For investors, predictability is king n In EDA, some confusion persists – Dramatic shifts in licensing model usage  dramatic shifts in revenue and earnings n Confusion hurts entire industry, but may disproportionately impact: – Anyone who is not the leader – Outliers along the spectrum of business practices

© 2001 Ascendant Strategies Group, Inc. Recommendations n Changing in public can be embarrassing n Be conservative: use at least some subscriptions – Provides visibility, smoother results, higher valuations n Flexibility can provide negotiating strength, but be somewhat consistent and transparent – If you plan for a mix, set a range expectations – Avoid dramatic, disruptive changes n Cash flow: get the money if you can; some AR OK n Communicating to investors/analysts: be direct – Focus on reported results – and don’t disappoint! – Don’t expect to get credit for bookings and backlog