Cadence Design Systems Q3 FY12/24 Earnings Review

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Duopolies Too Technical To Break

by Alex King, CEO, Cestrian Capital Research, Inc.

If you are going to run a monopoly or a duopoly or even an oligopoly, which is a great thing to do from the perspective of making money and lots of it, then you would be best advised to do it in a niche that nobody either (a) notices and/or (b) understands. It is pretty obvious if you have a monopoly in say Internet search because, well, everyone will be doing their searches using your site and app and whatnot. Similarly if you have a monopoly in operating systems everyone will notice this. And this kind of thing tends to attract the unwelcome attention of various forms of G Men who deign to rain on your parade and, indeed, your margins. Then you have to pay the G Men a few billion dollars to go away before you can carry on your business. Sometimes, if the G Men get real cute, you may have to break up your business into a larger number of smaller monopolies, and this for some reason seems to keep the suits happy. It also means free money for your shareholders, more often than not. But in the short term, all that government attention is just ... unwelcome.

So, if your let's-call-it-compelling-levels-of-market-share is in a niche which makes normalfolks' heads hurt then usually you won't get too much trouble, because there will be a weaker kid to go bully somewhere else. If, for instance, you make GPUs that give the US an edge on everywhere else in the world, then most likely you'll be fine. If you make semiconductor design software that only extreme forms of pointyheads know how to use, then even if you have basically one competitor and oh by the way you have already expanded into licensing actual designs for actual semiconductors .... then you're probably not today's government target. Probably explaining what functional verification is causes too many people to glaze over and nod as if they know what you are talking about. Whilst not, in fact, having a clue what you are talking about. This stuff is good for a quiet life.

Cadence Design Systems is a business that not many people have heard of despite the fact that what it does is absolutely core to the semiconductor industry. Between $CDNS and competitor Synopsys $SNPS, most all major semiconductor devices have been designed in whole or in part with their software at some point. The revenue growth, cashflow margins and balance sheet strength on offer from these two companies are most certainly duopolistic in nature; the technical depths at which they operate mean a breakup or other regulatory pressure-job is a lot harder to imagine than in other more visible market segments.

Here’s the Q3 headlines.

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