Is Verisity (Nasdaq: VRST) in trouble? Judging by its financial results, the opposite is the case. On the other hand, it was learned today that Verisity competitor Synopsis (Nasdaq: SNPS) has acquired a company named Co-Design Automation for $36 million. Synopsis reported that the acquisition is not expected to affect is business or forecasts for the rest of the year.
In a review of Synopsis published today, US Bancorp Piper Jaffray said the acquisition would enhance Synopsis’s positioning in its competition with Verisity, because acquiring Co-Design Automation will enable Synopsis to demonstrate its capabilities in Verisity’s field.
Meanwhile, Verisity is too concerned about the intensifying competition. The company broke its quarterly revenue record for the fifth straight quarter since its March 2001 IPO, reporting $12.5 million in revenue, up 9% from the preceding quarter (11.5 million) and just over its own $12.4 million forecast.
Verisity’s bottom line was even more unexpected. When it published its first quarter results, the company, predicted a second quarter $0.11 net profit per share. The company actually earned a $3.2 million net profit, amounting to $0.15 per share, up 45%, compared with the preceding quarter. Pro forma net profit, excluding compensation to employees was $3.3 million.
Verisity was the first Israeli company to issue its shares in 2001, after six months with no public offerings. Only one other company, Verint Systems (Nasdaq: VRNT), has had an issue since then. Verisity’s issue was in late March at $7 per share. Thanks to its good operating performance, the share achieved the status of the best primary issue in 2001, as measured by the share performance. The share is currently traded at $13.84 per share, reflecting a $257 million market value, 88% higher than the issue price.
The company now forecasts revenue of $14 million in the third quarter and $16 million in the fourth quarter, giving a total of $54 million for the year. Verisity also raised its profit forecast for 2002 from $0.54 per share to $0.58, including $0.16 per share in the third and $0.17 per share in the fourth quarter. The company will report a 93% profit margin for 2002. The company has cash reserves of $64.5 million, compared with $61 million at the end of the first quarter.
How will Synopsis’ acquisition of Co-Design Automation affect Verisity? Both Synopsis and Verisity are currently active in Electronic Design Automation (EDA) – the initial design of the chip on the working table, before the manufacturing process begins. There used to be three prominent companies in the field, besides Verisity: Synopsis, Cadence Design Systems (NYSE: CDN), and Avant!. Synopsis later acquired Avant!, while Cadence sued Avant! for patent infringement.
Meanwhile, Verisity identified a new, hitherto virgin market segment – verification – the ability to test the circuit and see whether it works, even before it is manufactured. Verisity began operating in this segment, which goes beyond basic pre-design planning to test the chip before it is manufactured.
Now, after Synopsis’s acquisition, it can be expected to enter the field, which up until now has belonged exclusively to Verisity, and compete there. In short, market competition will intensify. Incidentally, the two companies’ business is quite limited. The verification market is currently estimated at $200 million. The potential is much greater, but in order to exploit it, Verisity and its competitors have to educate the market intensively; i.e. create an even wider deployment of marketing capabilities in the various markets. A likely assumption is that Synopsis’s entry into Verisity’s field will relieve this educational burden somewhat, with the two companies jointly bearing the anticipated expense.
Published by Globes [online] - www.globes.co.il - on September 2, 2002