Dialogue with Greg Hinckley

Gregory (Greg) K. Hinckley serves as president of Mentor Graphics. Before he joined Mentor in January of 1997, he was senior vice president and chief financial officer of VLSI Technology, Inc. in San Jose, California. In the past he has held senior officer positions with Bio-Rad Laboratories and Raychem Corporation. Here, The Chilli talks to him about various issues in the EDA industry.

Gregory K. Hinckley

TheChilli: Could you comment on the current state of the EDA industry? What are the key drivers that are providing future growth?

The EDA industry has gone through a slow period coming out of the electronics industry recession. With fewer engineers employed, there are fewer tools required. But as the industry has recovered, we’ve seen that recovery flow through to us somewhat.

As for future growth drivers for the industry, I think we’ll continue to see new innovation driving the industry. With yield becoming more of an issue at smaller and smaller geometries, lots of work is going into DFM (design for manufacturing). These tools and techniques make sure that the design that you know is correct can actually be effectively manufactured in the process you have. Other areas like automotive design and C design of hardware are also quite interesting.

We are always on a lookout for the white space that we can begin to occupy. Mercedes Benz was once a very profitable company with quality product, but now it is at the bottom of the quality sheets and losing money: this creates a lot of design challenges. Automotive R & D is heavy in Europe; it manufactures 25 percent of the cars, and 50 percent of all automotive electronics comes from Europe.

TheChilli: The three big EDA vendors have dominated their particular niches with a sizeable market share. Is there any money to be made in being number three or four in a particular niche?

No, there really isn’t. Early on, customers benchmark and compare tools, but once a clear leader emerges in a field, most designers gravitate to it. This makes it a very hard business to be number two in a niche, and almost impossible to be number three or four.

TheChilli: Mentor tends to develop most of its new products internally, as opposed to via acquisitions. Could you comment on the merits of this strategy and the costs benefits of internal versus external acquisition?

I think this is an issue of core competency. Your engineers need to understand the problems facing your customers intimately and need to work with them to be effective. You certainly can buy technologies and products, but if you don’t have a core of highly skilled engineers that are living your customers’ problems, then I think you’ll have a hard time creating sustainable success.

Normally, it takes two years to develop a new product, and then in years three, four and five, a lot of combined effort and hard work by engineering, operation, sales and support is undertaken before the product has noticeable impact on revenues. RET (reticule enhancement technology) is a good example of this.

When we do acquisitions, we believe in acquiring not just the technology but also the key engineering IP i.e. the engineers. And we look for acquisitions where the Mentor sales and support infrastructure can add value, so we have a mutually beneficial match.

TheChilli: You serve a global customer base with global design activities, some of whom increasingly rely on second and third tier design and IP houses located in different time zones and cultures. What are the main sales, marketing, customer service and training challenges in addressing these multi-tiered market trends?

This trend has been going on for years, and it’s one of the reasons that there are naturally only a few large EDA companies. You have designers all over the world, designing all the time. You have to have sales and support people available to service that customer base wherever they are, and whenever they need it. You have to have a healthy amount of scale before you can afford to do that. Fortunately, we do.

We also have a big focus on small accounts, which form an important part of the ecosystem. Sometimes small companies become big in the future. As an example, when DEC (Digital Equipment Corporation) was the second biggest computer company in the world, Cisco was doing less than $100 million in revenue. Had we ignored this account, we wouldn’t be such a dominant supplier to Cisco today.

We have invested quite a lot in the infrastructure to support small and medium size accounts, including sales via distribution, telesales and a database of small venture-backed companies and white papers.

TheChilli: It used be that when the semiconductor industry started growing, EDA followed a few months later; is that co-relationship still there or has it changed fundamentally? Is this due to structural changes in the business model or the use of third party design houses?

Hard to say, though we think the move to three year time-based licenses has helped spread out this effect over years, rather than months. So as we get further out from the recession with engineering employment up, we’re hoping to see more of an up tick.

TheChilli: The EDA industry has changed its business model from perpetual licensing to a subscription/terms license model. How do you measure your backlog? In other words does your backlog include the total dollar value for the term lease of three years or just a portion of the new bookings spread over time?

Mentor is a bit old-school on this. When we measure backlog we only measure that which is shippable within the next two quarters. We certainly track the rest, but think the role of backlog is to give near term visibility, so we only report out on the next two quarters.

When we get an order, we only recognize revenue when the product is fit for shipment; anything that is going to be after six months is booked in backlog. We use the same criteria for bookings - the revenue and booking windows have to be consistent. It gives us additional visibility of book-to-bill ratio, which determines future momentum. Some EDA companies use a one year bookings window.

TheChilli: As design and technology hurdles become major inhibitors for future growth, there is a trend for deep collaborative groups (EDA, lithography, foundries, IP houses, packaging, testing). They are forming virtual collaborative platforms. Could you comment on this trend, and how Mentor is addressing this trend?

Interoperability and cooperation among various vendors and suppliers is nothing new. Mentor has been at the forefront of interoperability and standards support for many, many years. We’ve been first off the block with standards support frequently, most recently in supporting the new full system Verilog specification.

TheChilli: Do you see IDM (integrated device manufacture) gaining strength as sharing of key proprietary data (e.g. yield, manufacturing and design quality issues) between outside organizations becomes more challenging?

A single 12-inch fab is so expensive that only the top 10 semiconductor companies can afford to own one. That means everybody has to work with this small handful of fabs. So customers have to learn how to work in this environment and get more data on the processes and flows.

That said, issues of design impacts on yield, and the ‘design for manufacturing’ trends that I mentioned before are relatively new. As these issues become better understood and software developed to solve these problems, more people will understand what it takes to be successful. Whenever you’re on a technology frontier, single large players who can afford to ‘go it alone’ tend to have the first mover advantage.

Even if at the beginning some foundries may not share proprietary, sensitive data, the industry will find a solution of how to share some data in order to keep the foundries full.

TheChilli: As designs become more complex and increasingly work at the system and sub-system level (electronics, electromechanical, fluidics, embedded software, tools), do you think that the current EDA industry has to transform itself into a systems design automation (SDA) one?

EDA technology is so complex and the domain knowledge so challenging that there is plenty to keep us focused. There are always emerging technologies within EDA, and electronic system level design is one emerging area. There are also areas where EDA technology can intersect with other disciplines, such as embedded software and IP. The EDA market goes through growth phases as it finds and addresses new problems. We’ll stay focused on design automation, and we see quite a number of new problems that should help take the industry to the next stage.

TheChilli: Mentor recently bought a vertical-based EDA company specializing in the automotive industry. Can you explain the rationale behind this move and could you envisage expanding into other vertical-based markets?

Investing more heavily in automotive has been a logical step for Mentor. We have sold products to this industry throughout Mentor’s history, and have developed a portfolio of technologies over the past 20 years to address various challenges in automotive electronics design. But with electronics now approaching 40 percent of vehicle cost, the automotive market represents a huge opportunity. Between our already existing technology and that gained through recent acquisitions, Mentor is uniquely positioned to address key emerging challenges in automotive electronics design.

As to other vertical-based markets, Mentor’s strategy has been to find opportunities in non-traditional markets where our competitors are not already in a strong presence. We will continue to pursue opportunities along those lines.

TheChilli: Many traditional, large companies are downsizing their operations, which affects design head count and activities, some of it being off-shored. Is there a difference in terms of total EDA investment per design head amongst the different regions of the world?

Successful companies do what it takes to get the job done, and that applies no matter where the company is based. Global enterprise operations enable efficient use of time and resources around the world.

TheChilli: Has Mentor noticed any regional differences and attitudes towards entrepreneurial culture, start-ups and risk taking? Is there a particular region or industry sector areas where this has worked very well?

We’ve seen several stand-out hotspots - Cambridge and Bristol in the UK, and Austin (Texas) and San Jose (California) in the US.

In the UK we have seen a very strong and successful entrepreneurial culture particularly in the last 10 years or so. Compared to elsewhere in Europe this is strongly evidenced by the VC investments in UK. Companies such as ARM and more recently CSR are two prominent examples. In addition to start-up hotspots in Cambridge, and Bristol, there is also Silicon Glen in Scotland where the fabless semi model is very interesting. Mentor sees these entrepreneurs as a most important part of UK electronic industry and we are taking many steps to provide them every support.

TheChilli: Some EDA vendors have started taking equity stakes in start-ups. What is Mentor’s position regarding this issue? And at what point do you start carrying the losses and liabilities of those companies on your books?

As a company we are passionate about supporting entrepreneurs who want to start exciting new electronics companies. We do of course understand that the barriers to entry can be high, especially for fabless semiconductor companies at 90nm, so as a consequence we do not believe in providing the EDA tools in exchange for an equity stake because this kind of dilution will do little to fuel entrepreneurial activity, especially those making a play for the high growth markets. In fact we would possibly question the ambition of an entrepreneur who was willing to give their company up for tools - after all, it’s a reflection of confidence and expectation.

Based on experience in Europe’s biggest cluster of fabless startups we have a business model which lowers the barriers to entry, shares risk, and delivers business driver results through our trusted networks, and this is firmly centered on route-to-funding and route-to-market. When we have added this value we look to share in the startup’s success through the economic value of the future tool renewals.

TheChilli: A lot of investors have criticized the lack of a sufficiently experienced and skilled management pool which can take innovation and make a commercial success from it. How does a company like Mentor recruit, train and motivate key managers of technologies and businesses?

You encourage innovation and foster a culture of creativity, while understanding that successful innovation requires a long seeding time, and that not every innovation will turn into a successful product in the market.

TheChilli: How do you turn engineers into successful commercial managers?

At Mentor we are organized slightly like the old HP (Hewlett Packard) model, where there is a strong sales and administration function which is centralized, while products are lead by numerous business units which have their own product marketing and engineering. When business units become large, we split them and most importantly we empower them, which creates new opportunities.

The best way to train an engineer is to seat them next to a manager’s cubicle. This cubicle culture exposes the engineers to customer issues and support and this is the best way to learn by observation. This leads them to say “Hey, I can do that” and if the opportunities are there, they will rise to it. That is how we encourage and support engineers into management roles.

TheChilli: How has the introduction of Sarbanes Oxley (SoX) rules affected your company, and what are the main challenges and costs, associated with its implementations?

SoX has broad rules and requirements, parts of which are well done and parts of them are very complex. A CEO/COO/CFO is paid to be responsible for knowing what is happening and what to do. If they don’t, they shouldn’t be occupying those positions.

Some parts of SoX are good, designed to avoid Enron type problems. The most controversial part is the ISO quality assurance of the accounting profession. A small documentary or a record keeping problem can be portrayed and appear to be larger than it is due to the audit process. But SoX is also an opportunity to perform a job or a process well, thus creating a competitive advantage.

TheChilli: What is the current perception of Europe from a US perspective?

Fifty percent of Mentor's engineers are located outside the US. Europe is key for us - we have 12 R&D centres in Europe, Newbury & Manchester in UK, Les Ules & Grenoble in France, Gothebury & Kista in Sweden, Oulu in Finland, Nurnberg in in Germany, Katowice in Poland, Papoulis - Israel, Vienna - Austria, Egypt - Cairo, Budapest - Hungary, Milan - Italy. As the cost of telecoms lines and calls drops dramatically, we can create virtual teams.

Europe has a lot of deep domain expertise and knowledge in wireless, automotive and space technologies. Our fastest growing market is in Europe. Ericsson’s recovery has been phenomenal, “Europeans should recognize their strengths and take more pride in what they have.”

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© Chilli Publishing Ltd 2005

14NOV2005