Thursday August 19, 2004
Synopsys changes strategy to subscription model
Synopsys reported shocking results. Share prices plunged 30% today. Earnings and revenue for their 3rd quarter are way below expectations.
Reason: Customers are adopting a cautious stance on spending. Their primary customers are various chip designers and manufacturers. Synopsys makes testing, quality control and telemetry software that are employed in process control for chip fabs. Synopsys determined that their current upfront cost licensing model was to blame for customer hesitation in closing deals which were being pushed to later quarters. Interestingly, there was no mention of the woes of chip manufacturers who are pulling back their production and lowering their own offtake numbers for the later quarters due the last two months' weakening overall economic trend, lower consumer confidence, lower consumer spending convoluted by inflationary possibilities due to the oil prices. Synopsys's competitors have been steadily lowering their estimates over the last year or so.
Synopsys announced a strategy change to that of a maximally subscription based model to get more predictable stream of flows.
Sounds familiar...
Their revenues would no doubt plunge in the immediate quarters due to the move to lower priced subscription model but it is anticipated that longer term revenue streams would be healthy. That's the interesting part of this strategy.
While technically this might sound like a comparison of apples and oranges, can one differentiate Sun's push to a subscription based model for its software and that of Synopsys's decision? There is one major and perhaps obvious difference, in my opinion. Sun caters to a rather wide and deeper market, and can (at least, I believe so) take a chance to make a volume play through such a model while making competitors to look for alternative models.
Synopsys caters to a rather narrow market (albeit global) where their own competitors have substantially realigned their processes and business models over the last two years. It does have substantial IP in the area though. Will this change lead to Synopsys regaining its revenue stream or rate of profitability? I'd wait and watch and see this play out. No doubt, they will have to make big cost cuts to deal with lower revenues for many quarters to come until volume picks up.
This is going to be a solid practical lesson in leadership.
Posted at 02:03PM Aug 19, 2004 by Shreedhar Ganapathy in General | Comments[0]
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