Cadence Announces Third Quarter 1999 Results; Company Ahead of Schedule with License Model Transition and Delivers Next-Generation Technology for Industry Retooling Cycle - Company Financial Information

Edge: Work-Group Computing Report, Oct 25, 1999

Cadence Design Systems, Inc. (NYSE:CDN), the world's leading supplier of electronic design products and services, Tuesday announced third quarter revenue of $226 million and a diluted loss per share of $0.07, excluding unusual items and goodwill amortization. As expected due to the Company's transition to its new license model, third quarter revenue declined 32% from the third quarter of 1998 resulting in an operating loss. In the third quarter, Cadence booked 45% of its software products under the new subscription model, exceeding the Company's goal for the transition. Based on the move to more subscription licenses and its strong pipeline of next-generation products, Cadence expects year-over-year revenue growth to return during the second quarter of 2000.

For comparative purposes, except where noted, the results discussed throughout this release reflect earnings before unusual items and goodwill amortization. Product revenue for the third quarter of 1999 totaled $81 million, down 57% from the third quarter of 1998. Services revenue was $73 million, an increase of 5% over the third quarter of 1998. Services gross margin came in at 35%, which is consistent with the previous quarter and substantially higher than the 28% posted for the same period in 1998.

During the third quarter, Cadence recorded unusual items totaling $12 million, primarily related to in-process research and development costs associated with the acquisition of OrCAD, Inc., which was completed in the third quarter. Quarterly results included $17 million of goodwill amortization. Including the effects of these unusual items and goodwill amortization, the Company reported a diluted loss per share of $0.17.

"I am very pleased with the significant progress we made this quarter. Our change in licensing strategy and vigorous technology focus is producing a favorable response with customers and the business results we expected," stated Ray Bingham, CEO and president of Cadence. "We are on track. Our new subscription model is working. The Cadence product and services portfolio is outstanding. Our delivery organizations are getting to market faster with critical capabilities. We have a solid development pipeline of new products that is on schedule to converge with the industry-wide retooling for next-generation silicon."

Primed for Industry Retooling Cycle As more designs migrate to 0.15 and 0.12 micron technologies for systems-on-a-chip (SOC) and onto high-speed printed circuit boards, companies will remodel their product development environments with state-of-the-art electronic design automation tool suites. This transition is expected to begin in earnest in mid-2000.

Bingham added, "Our strategy for the remainder of this year and the near term is clear. We are retooling our portfolio with the key design technologies and services, like PKS and SOC integration platforms, which will accelerate the mainstream transition to silicon processes of .15 micron and beyond. This is the critical first step to building the next-generation design flow, and we are already well on our way to delivering the industry's only complete, production-proven solution."

During the third quarter, Cadence delivered its next installment of breakthrough technologies predicted to revolutionize the way multi-million gate chips are designed and verified. These include a new release and reduced pricing of the Company's traditional synthesis software, Envisia Ambit synthesis, and the much-anticipated delivery of the new Envisia synthesis with PKS technology. PKS, which stands for physically knowledgeable synthesis, was one of the more notable developments in the EDA industry this year. It is the first product to integrate synthesis with physical design, which is a mandatory requirement for deep sub-micron chip implementation. Additionally, Cadence enhanced the usability and productivity of its Affirma logic verification product line this quarter with an integrated, easier-to-use version of the Affirma FormalCheck model checker.

The services organization also delivered new offerings in the third quarter. The Cadence Design Services group launched capabilities utilizing SOC integration platforms and introduced an industrial electronics competency that extends Cadence design expertise into larger markets. The Methodology Services group is being realigned to more effectively provide integrated design environments for customers. The Company's services business furthers its strategy of addressing the productivity and time-to-market requirements of information-age electronics companies in the high-growth wired and wireless communications, information computing, and industrial and consumer segments.

Business Outlook These statements are forward-looking, and actual results may differ materially. These statements do not include the impact of potential acquisitions that may be completed after the third quarter of 1999.

* The Company exceeded its third quarter expectations for the licensing transition with 45% of software bookings ($44 million) under the new subscription model. The Company will continue to target 30% of software bookings to follow the subscription model.