益華電腦 (CDNS) 2001 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cadence Design Systems second quarter 2001 earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session. At that time, if you have a question, you will need to press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded, Tuesday, July 17, 2001. I would now like to turn the conference over to Ms. Lisa Ewbank, Vice President of Investor Relations. Please go ahead madam.

Good afternoon, everyone and welcome. With us today are William Porter, Chief Financial Officer and Ray Bingham, President and CEO. The webcast of this call can be accessed through our website at www.cadence.com and will be archived for one week. Before we begin, of course, the safe harbor statement. The following discussion contains forward-looking statements and our actual results may differ materially from those discussed here. Additional information concerning factors that could cause such a difference can be found in the 10K for the period ended December 30, 2000 and the 10Q for the period ended March 31, 2001. All numbers reflect earnings excluding unusual items and goodwill. With that, I will turn the call over to Bill Porter.

Good afternoon, as you can see by our continued strong results in the products business, semiconductors, and system companies continue to invest in design technology for next generation products, while at the same time due to extremely soft business conditions, delaying spending in areas that they feel they have more discretion such as capital and consulting. Reflecting this continued technology investment by customers, earnings per share excluding goodwill and unusual items were $0.18 on net income of $46 million. As we announced last quarter, softness in the economy particularly in most of the service business led to some restructuring of Tality and strong cost management across the company. As a result, we booked a couple of unusual items; a $40 million restructuring charge for severance, facility closures, and asset writeoffs as discussed at our investor conference and a $26 million of writeoff of goodwill associated with the previous acquisition in the wireless portion of our Tality business. Q2 revenue was $348 million, an increase of 16% year-over-year with product revenue totalling $190 million, an increase of 35% year-over-year. Software subscription bookings were $82 million, 42% of software bookings. In the past eight quarters, we have booked approximately $600 million in subscription licenses, which averaged two and a half years in duration.

Our licensing transition is working very well. Approximately 80% of software bookings in the quarter were under renewable licenses with 20% from perpetual licenses and in Q2, over a third of software revenue came from ratable licenses right on target. And it is important to note that total software bookings increased approximately 50% year-over-year and remained at the same strong levels as they were in the last quarter and despite continued softness in the hardware emulation business due to capital spending constraints, quick turn bookings and revenue came in about flat sequentially, with particular strength in Japan. Driven by a combination of increased value of new technology and a discipline fostered by subscription licenses, software pricing continued to be firm. We continue to defer business that does not meet our pricing guidelines and our influx of new customers continued to be significant with 42 new customers this quarter. Success with the renewal cycle continued in Q2 with the two most significant renewals in North America and Europe at contract values more than 50% higher than previous contracts. We have good visibility into the renewal cycle and we expect to continue to have success. Approximately half of our software bookings in the second half are expected to be from renewals. Investment in design software is not discretionary. New technology and license renewals drive our software business. At the same time, some service offerings are seen as more discretionary.

Total service revenue of $74 million was down 8% year-over-year and sequentially with gross margin improving slightly to 34% due to cost reductions. At Tality, the drop in Q1 bookings affected revenue in Q2. In addition, the significant number of project cancellations in Q1 due to economic conditions subsided in Q2, but order delays particularly in the wireless consumer communications portion of the business continue. Tality revenue was $43 million, about flat sequentially. Tality's loss reduced Cadence's earnings of approximately $0.03 per share in Q2. During the quarter, Tality lowered its cost structure by reducing its workforce by 15% or about 200 people, primarily in the wireless design group. We expect continued improvement in operating margin throughout the next several quarters. Methodology Services revenue was $31 million, a decrease of 7% year-over-year reflecting our continued deployment of MS resources to drive new technologies in the product business; a strategy that has been very successful as you can see from our strong product results, and there has been some softness in discretionary spending areas such as education services. Ray will discuss the services business in more detail. North America contributed 58% of total revenue with Europe at 24%. Japan came in at 13% and Asia-Pacific at 5%. Regional breakdowns will vary quarter-by-quarter due to the timing of large deals, but I will say that software bookings activity was strong in all regions.

Specifically related to Japan, revenues were negatively affected by approximately $5 million due to currency impact. On a local currency basis, the Japan business grew 9% year-over-year. The balance sheet continues to be strong. The DSOs improved to 65 days. Aging continues to be healthy with receivables 90 days past two at 3%. We invested $40 millions to repurchase approximately 1.7 million shares of our stock, ending cash balances worth 141 million. Finally, let me turn to our business outlook for the remainder of 2001. We continue to see weakness in both in hardware emulation and services, but we have great deal of visibility into our software business for the remainder of the year and that business looks very good. So looking ahead, we anticipate total revenue in Q3 will increase approximately 11% year-over-year with operating margin expected to be in the 20% range. For the year, we anticipate product revenue growth of approximately 30% plus with total revenue growing approximately 15%. We expect service revenue to continue to be affected by the economy with flat sequential revenue expected through the rest of the year. Of course, we expect to continue to manage costs leading to an operating margin for the year in the 20% range. Now, I would like to turn the call over to Ray Bingham.

Thanks Bill, and thank you to all of you for joining us here today. We had the opportunity to talk with many of you in the past several months. Yet, it is clear that the macroeconomy and its impact on electronic design is an important thing to all of us. We all know that the electronics industry is in its worst downtrend many years and I find that our customers are feeling real pain. We have seen as we discussed last quarter, weakness in some of our services businesses and in our hardware emulation business. That is not news here, but the majority of our businesses, approximately 80% of Cadence continue to be strong. In Q2, we've not only met our overall top and bottom-line targets, we've exceeded our target in the software business with bookings up approximately 50% year-over-year. Many of you have asked and wondered, I am sure, how this could continue to be the case during times like these. Our customers continue to invest in the design of new products. They continue to invest in critical technology. They recognize that stopping their core business, not developing new products is just not an option.

The behavior changes and I can tell you that customers are being more careful, there are things that they are doing differently, but discontinuing their investment in design technology, in the development of new products is not one of them. Technology changes are requiring new and different solutions. In the digital IC space, challenges like time closure and signal integrity are driving retooling force. Growth in analog and mixed signal chips driven by increasing communications content in the system on a chip design is resulting in a strong custom IC business for Cadence as well. Now, the breadth and diversification of our customer base also helps us. Half of our 50 largest customers are well diversified participating in all four critical market segments, networking, wireless, computer, and consumer markets. Only two of our top 50 customers participate only in the wireless business. Nonetheless, the weaknesses in the end market for communication devices, even those in the wireless business, which has experienced the most significant weakness, are buying design solutions today. Just this quarter one of our large renowned customers, a large communications-focussed IC company, invested very heavily in solutions across the entire Cadence product line. New products have to be developed. Customers buying critical technologies plus the visibility created by our subscription in other renewable licenses plus the predictable schedule of large renewals gives me a great deal of confidence in the guidance that you will just heard Bill provide. With this let me turn to a couple of strategic issues and then I would like to finish up on some highlights from the businesses. At our investor conference in May, I talked a lot about the three components of our strategy, focussing on our customers, focussing on technology, and running the business.

You can see that it is working by the way we are able to come through a business climate like this one. I would like to talk first about our customers. When I first became CEO in 1999, I talked a lot about Cadence's focus on serving its customers in a much more positive way. Yet that was then and it continues to be my top priority. We have created a number of initiatives to not only improve customer service, but to become a true design partner with our customers, not just a vendor of tools and services. What we are seeing success we think in a number of measurable ways. You can see it in our financial performance. You can see it in our financial performance over the last eight quarters. You can see it in the types of relationships that we are developing with major customers such as TI and Hewlett Packard, and more recently with [____] and the likes of IBM. These multifaceted relationships include technology development together, design services outsourcing, leading-edge solutions such as our virtual CAD operation, joint technology planning with those customers and industry wide collaborations. Cadence is also the largest design technology provider for each of these partners. As you can see in our internal customer satisfaction survey is linked directly to each of our employees' compensation, we have exceeded again our goals. The customer satisfaction survey is back and customers are telling us that they are paying attention to increased customer support, increased customer service, better technology, and better connection in the marketplace. Now we are delighted to see that in the just completed EE Times 2001 survey, which you all may have seen that there was a strong confirmation of those same themes that we saw in our internal customer satisfaction survey.

The results for us were outstanding. Respondents to the survey named after sales support is the most important factor in selecting an EDA vendor and Cadence is now rated as a strong #1 in that category. We also moved into the #1 position in the best before sales system support and the most knowledgeable sales representatives. It is a testament to our focus on becoming consultative partners with our customers. Cadence showed marked improvement in every single customer satisfaction measure in this EE Times Survey. On the strategy side, Cadence is viewed as #1 in having a clear vision of the future. Our technology ratings are superior as well. We have moved into the #1 position for best technology to date as well as best technology in three years' time. It is a big move for Cadence. It is one that I am particularly proud of, it says that Cadence is focussed on its customers and that Cadence is listening better to its customers. Now, in the realm of listening to customers, one of the most substantive response is that I think we could have got in the analysis of the design automation conference. There we announced the making of our Genesis database available across the industry as a response to the things that we were hearing from our customers. Our customers are under tremendous pressure to get new products to market. This means that they need a design infrastructure that keep pace with technology and allows seamless sharing of data across the design chain. Cadence is committed to making this happen and has taken action to begin that process to this big customer issue.

I believe that no single company, whether vendor or customer, can solve all design challenges. Cooperation within the design industry and across other industries such as manufacturing and software design is absolutely critical. Accordingly, we have announced that we have decided to contribute our advanced Genesis database technology to Open Access. Open Access is an electronics industry wide community charged with developing standards for design solutions. This industry collaboration was significantly enhanced interoperability. It will allow customers to integrate proprietary tools and contribute enhancements and provide performance, capacity, and functionality needed to address today's and tomorrow's design challenges. Some of the most influential leaders in the industry are founding members of the Open Access community including Intel, IBM, Motorola, [Aguirre], ST Micro, and some EDA companies like Mentor Graphics, and Simplex have joined in this Open Access community. We have already contributed the Genesis API to the Open Access group. The planning for releasing the detailed roadmap and later of the source is underway and will be communicated later this quarter. Customers I can tell you are cheering this move. The history has shown that the development of industry standards expands the market for all. It drives accelerated growth for well-positioned companies. We are serious of taking our customers, the electronic design industry, and Cadence to the next level and we are taking the right steps, we believe to make this happen. Now, I would like to turn just a moment to our technology and services results for the past quarter.

I believe that our results show that Cadence has a big advantage in the marketplace, particularly during times like this. Customers are looking for fewer suppliers. They are looking for solid players and vendors that they can be strategic partners with. This morning, I participated in a SEMICON, semiconductor industry CEO panel in San Francisco. At that conference, the EE Times published their own semiconductor survey, which said some interesting things about what our customers are looking for in this regard. They synthesized what customers need and are urging about is of course time to market. They are also talking of the fact that 80% of the respondents in this survey are talking about cutting their approved vendor list focussing tighter on a few partner suppliers. There is a big move among the semiconductor companies to partner with their vendors and their customers and at times likes this it will indicate fewer risks. So it is no surprise that when we look at the kind of purchasing patterns from our customers, we see strength across the border they look to buy solutions across our entire portfolio. In six of our top ten transactions this quarter, customers selected solutions from at least five of our six product segments. The rest of the top ten selected solutions from four of six segments. Customers want to standardize on reliable technology and our #1 or #2 position in every market we serve is a key competitive differentiation that enables us to partner with our customers. Now, I would like to run through a couple of highlights demonstrating proliferation of current technology and then focused on some new technology releases just briefly. Our growth in the Synthesis, Placement, and Routing market continues and in fact it is outpacing even our own expectations. We benefit from both retooling cycle here as well as Cadence's technology strength. Bookings for Q2 increased more than 50% in this space from the same period in 2000.

The Synthesis, Placement, and Routing product continues to gain more momentum; it is very exciting to see this and we are winning every nearly benchmark that we participate in during the year quarter and during the same quarter, we added 20 new SP&R customers, we had five repeat orders. The numbers continue to be strong. Five of our top 10 customers this quarter purchase SP&R. We now have a total of 90 customers, 25 of which have made repeat orders. We have many 100s of seats in the market place. As you may recall, we booked more of the Synthesis and Placement in our technology, nearly a $110 million in 2000, nearly double our nearest competitor. Although, we have not publicly disclosed our target for this year, 2001, I can tell you that we are well ahead of our 2001 goal. We are clearly winning in some of the largest companies in the world. In fact, seven of the top 10 semiconductor firms in the world are Cadence's SP&R customers. We are also seeing this acceleration in our custom analog mix signal business. This is driven by the increasing analog content in electronics making sales to custom solutions extremely strong in our quarter. Bookings for the second quarter were up significantly more than 50% over the same period a year ago, and this is a testament in our minds to our market leadership in analog mix signal and technology strength in this area of growing importance. During the quarter, 18 of our top 20 customers purchased custom designed products. It is a hard area. While the strong growth in both of our digital SP&R business and custom analog mix signal business is impressive, but even more important to us is the implication of this action for the future.

There can be no doubt that these two worlds, digital and analog, are converging and our customers face the challenge of putting a lot of analog and more complex digital content together in the same chip. Cadence is very well positioned to do this. We are very strong in both segments and that coupled with our super chip roadmaps we believe that puts us in the lead for the next wave of retooling beyond the current one, the convergence of analog and digital. Finally, it is beginning to appear that rumors of our demise in the physical verification business may have been a bit premature. Product bookings for the second quarter grew more than 50%. Evidence of our comeback in this phase continues, as we gain traction. Our new generation of [shore] product was purchased by five of our top 10 accounts in the quarter by 18 customers overall. Infact, we are starting to see some head-to-head wins and even replacements of caliber in some accounts. Now, the new technology. We are very excited about the new solutions that are being introduced. We showcased several of them back last month. To list a couple, our new analog mix designer for verification of mixed signal and systemized chip designs was the very popular event at our Jack demo group. Our custom process design kits are gaining momentum. We have added recently TSMC and [polar Fab] to the list of our partners. These kits have to open the foundry market for analog and mixed signal designs and allow customers, quick easy access to our solutions. We introduced 64-bit versions of our SP&R solutions providing the highest capacity available for these tools and we announced our latest version of our verification cartage solution.

For all the strength in the product business, we did see continued softness in the services business, as Bill mentioned. In the Tality business, the cliff in the communications market fell a lot of it at the beginning of the year. That certainly had a negative impact on that business. But the churn in that business seems to have subsided. The company is making good progress. Despite the continuing malaise in communications market, Tality was able to produce flat revenues sequentially. Book-to-bill was greater than 1 in the quarter and Tality had 13 transactions in excess of a million dollars, one almost $7 million. The IC part of the Tality business is really growing quite well. It grew 9% sequentially fueled by two things. First, the semiconductor companies continue to invest in advanced technologies and methods. And second, Tality continues to make good progress in developing strategic customer relationship with the customers relying on this outsourced model. The IC business is the segment that has migrated faster to more strategic partnerships and the power of these relationships is showing in the Tality results even at this time. A couple of examples of the relationships I am talking about include the agreement with Philips where we targeted the delivery of advanced chips for digital TV applications and an agreement with Fairchild to provide engineering services to the company's interphase and logic businesses, another major strategic partnership with Connects and Features the development of 21/2 g and 3 g wireless handsets. Finally, Tality also made significant progress in developing its leveragable IP business. Licensable IP represented approximately 10% of its total bookings for the quarter.

Last year at this time, Tality was growing at more than 40% a year. Based on the growth rate, we anticipated reaching profitability in Q4 of this year. As a result of the communication's cliff that I have mentioned in the first quarter, the growth rate has certainly slowed. We have taken the necessary actions to size the business to the current run rate. We expect the loss associated with Tality in terms of the cost of the Cadence P&L to be about $0.02-$0.03 in Q3 to strength to $0.01-$0.02 in Q4 and to achieve breakeven in the first part of next year. Now, I consider this to be an important accomplishment under these circumstances. Giving what's going on in the Tality businesses, this kind of progress is encouraging. And at times, when most comparable companies are experiencing losses many times that amount, the timing of Tality's profitability being pushed out a quarter or two is a hopeful sign in our minds. Now, some of the same mix things we have experience in the Tality business, on the margin, we are experiencing in the methodology business as well. We expect revenues in this business to be relatively flat as a result of the business slowdown certainly and its impact on discretionary spending, we also continue to deploy resources to help proliferate our new technologies. We will continue to make prudent investments in the longer term in this year in this area, scalable technologies such as our virtual CAD that is just beginning to show very important results, design environment's the same story from methodology services. However, it is in the early stages this virtual CAD environment that we're offering to customers is gaining traction.

We sold three additional engagements in the second quarter bringing this to a total of eight in Europe alone. So, to conclude during the time of considerable [_____] software customers, we continue to produce good results. The vast majority of our businesses are showing stronger than expected growth and in those areas experiencing weaknesses; we have taken the necessary actions to size the business to match demand. In services, we continue to move towards more strategic partnerships and the move that is resulting in prudent success and better margins as we go. Our business model is more predictable and just about any other area of software I can think of, the combination of subscription and other renewable licenses coupled with the significant renewal cycle produces much more visibility than we have experienced in the past. I am very pleased that our customers are telling the world that Cadence is the number one in almost every important area. That's where it starts. They are telling us that they like our technology, they are buying it, they are rating it highly, and they are giving us very high march for one of the thing that is more important to them having the best product support in the market place. Our very strong technology numbers reflect that the customer surveys that we do and that the Times did confirm that as well. So, with those comments, I would like to open it up now for any questions that you might have. Operator!

Thank you, ladies and gentlemen, if you wish to register for a question for today's question and answer session, you will need to press the 1 followed by the 4 on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the 1 followed by the 3. If you are on a speakerphone, please pick up your handset before entering your request. Please standby for the first question. Jay Vleeschhouwer from Merrill Lynch. Please go ahead with your question.

Thanks, good afternoon. Your subscription bookings in dollar amounted at $82 million was low sequentially from the first quarter and I am wondering if you regard that as any kind of a meaningful indicator or just a routine quarterly change in level. Secondly, can you talk about your pipeline business that is the business that you cannot necessarily count on as renewable or predictable business and third, is there any meaningful difference across the geographies by license type or are the major regions around the world more or less in the same mix in terms of license type of mix.

Jay, this is Bill. The subscription percentage of 42% is just the normal variation that we will see quarter to quarter.

Now, the question though is in dollar amount, you went from a $100 million in subscription bookings in Q1 to $82 million in Q2. Is that a meaningful indicator at all?

No, it is not, Jay. I guess that the point I make it was a lot higher percentage in Q1 relating to the higher dollar amount. In terms of pipeline for Q3, the pipeline continues to be very visible in addition to the renewals. So, we are seeing good visibility across all of our regions and in terms of license type, there is a pretty common view across most of our major customers in terms of license types, so really no big difference there.

Okay, one last followup, Ray. In previous calls, you just talked about several initiatives you had on the sales side in terms of defining account, how you are approaching accounts, certain initiatives you are going to proliferate, having started with the majors and moving out to some of the smaller accounts, can you just update us on what you are doing with some of those plans you had started talking about a year or so ago with respect to sales management, accounts coverage and in the current environment, are you in fact doing anything differently to deal with the definite volume as far as sales practices are concerned.

Sure Jay, well first of all, at the risk of doing a victory lap, I am delighted that the e-time survey conforms that this investment is focussed on customers in particular, the recognition of knowledgeable consultative approach to customers is valued as among the top four or five things that they are looking for. We are continuing to build on the success of this model; I will recall that we put in place both a technology partnership model where we assigned our senior executives to open a separate channel or an additional channel to customers. We are also in some of our geographies where we did not have strong global accounts capability have initiated that to build on the successes we are seeing primarily in North America and Europe at this point by engaging at that partnership level. We have not yet taken that same approach into the smaller accounts. We have a strong geography sales model that seems to be working very, very well for the customers who buy more narrowly or where the economies of scale just don't support that more consultative approach at this point.

Thanks Ray.

The next question comes from Garo Toomaajanian from Dain Rauscher Wessels. Please proceed with your question.

Thanks. Ray, probably a question for you, can you give us an idea who the competitors are that you are seeing in the SP&R benchmarks and really specifically if there are more competitors who are coming at it from a synthesis angle or from [_____] angle?

Well Garo, I think anything I could say there would be anecdotal though no surprise on the front-end we are seeing primarily synopsis. In the back end it's really to the step we see them is the magma and [_____] and I can tell you that it is there in particular that we are there in the back end that in particular we are winning. No surprise that it might be a jump all with synopsis on the front end. But in the back end, there really has not been a contest.

Has the legal situation had a warranty, whether that has played out turned into any kind of opportunity for you?

I think this is a sensitive area, but I will tell you again anecdotally that the guilty verdict has changed the nature of the dialogue and then the conclusion that many people are coming to. We are already beating them on the technology side, we were taking market share, but particularly as we move to the new geometries where there is a compelling design project reason to make a move, customers are looking at the combination of technology, the ability to support them, particularly at a time like this and the questionable background of the product and making a different type of decision than they did four-five years ago.

Okay, thanks. And also in the areas of customer visibility, you did mention that on the communications side, you have seen insurance subside, can you tell us how you are seeing changes in customer visibility in general?

In services, Garo, or in general?

It is really in general, in the product side in particular how you are seeing, I guess one of the issues is that your own customer visibility is extremely poor and this has certainly affected emulation and services and maybe to a degree of software sales as well. I am wondering if you have seen any changes in customer visibility?

Well, the customer visibility on the product side, as we have said a number of times in our comments is strong. That comes from the licensed model, it comes from the kind of planning that we are doing with major customers, and it is coming from just the strength of the channel we were able to field into the market place. So they I would say, have been strong and remain strong. On the services side, there has been churn. The only hopeful signs that I have seen is that where we saw a lot of cancellations of projects that were even underway in Q1. We are not seeing that level of cancellations and we did not see them in Q2 that would have any indication that we will see that level of cancellations in Q3. What we do continue to see however is the long sales cycles for services projects. Anything that has anything to do with consulting for most customers, not those who are engaged with at a strategic level, but for most customers is viewed as a contractor and a contractor is a politically unpopular cast for most customers, same is true with capital spending. Capital spending is one of those things that our customers are focussed on to help them get through these tough times and so that affects the emulation business.

Right, okay, thank you.

Thanks, Garo.

Next question comes from John Barr from Robertson Stephens. Please go ahead with your question.

Yes, I wanted to just confirm from the beginning, you gave what percentage of revenue came from the subscriptions.

Yes, John, over a third of our revenues came from subscriptions in the quarter.

Over a third, I mean should we use 33% or does that mean 40 or ...

It is towards the upper end of the 30s, John.

Upper 30s?

Okay?

Okay. And you have made a couple of other comments at the same time, what 20% perpetual 80% renewal that's revenue?

No, let me just be clear, we are talking about renewable licenses. So 20% perpetual is correct and then the remaining licenses are the renewable pieces of which 42% were the subscription or ratable licenses.

And you are talking of bookings there?

We were talking about bookings, correct.

Okay. Software bookings, were they up sequentially?

They are about flat as we had expected, that would be, Q1 to Q2.

Okay. And then finally, in receivables you had some nice increases here, how much factor in the receivables was there in this quarter.

Continued to sell on non-resource basis, little over $60 million, which is just part of the way where we do term business.

Okay and so for the $60 million and how does that [prepare], looks like a little more than the last few quarters.

It has been pretty steady, John.

Okay, great. Thank you.

Welcome.

The next question comes from Jessica Kourakos from Goldman Sachs. Please go ahead with your question.

Hi. I think that was an excellent quarter, so congratulations folks. As far as I just have a couple of questions. I think you have beating the software line quite a bit over the last several quarters and I would say that the only concern that I have going forward is of any magnitude is how much of your cushion have you sort of mitigated essentially going into the second half of the year. Your officers have given, you have got quite a bit of visibility given there were no renewals in the second half but again, if we can just talk a little bit about to review the rest of the business that needs to be new that you need to close going into the second half and how comfortable you feel with that and in addition we can go back to your SP&R question I think that Garo had with product. Can you talk maybe instead about what percentage of your SP&R deals, you are actually in a competitive benchmark and I am just curious to see what percentage that is because it would seem as though a lot of those deals are related to some of your renewals and I am just trying to figure out how much benchmark really is going on because I think you called around and we are starting to hear you guys more in benchmarks, but we have not seen you that much over the last few quarters. So again, I am just trying to figure out how many of these deals really are being competitively benchmarked. Thanks.

Jessica, in terms of the strength in our software business, the metric that I would point to you is that is the percent above what those deals were originally done at, they were doing in this business. We have been talking about doing at 40% above what it have been what is have been 40% plus, what it had been done before. I believe Bill mentioned in his comments that the large subscription or the large renewals this quarter were done at 50% plus. If you just think through the kick as those kinds of over achievements whether at 40 or 50 or higher number will give you in a quarter on the size number we are talking about I think it really answers where the strength has come from. Our strength is not just there. We are doing well in the channel and we are adding new customers. There is a general reality that you can point to in those metrics around the notion that customers are investing in new design to be able to do the [deeps] of micron work that they have to do.

Before you move on, Ray, going back to sort of the premiums that you were just discussing being in the 50% range this quarter, that does not, if I am not mistaken, include some new technology that had been added to the contract. If you added those new products in that might not have been affiliated with the original contract, I guess, how much bigger ... what percentage of an increase in the deal prices have you seen?

Well it would be larger, but we have not attempted to communicate that particular number.

Would it be over 50%?

It would be larger. It is not an insignificant number, but it is one of those numbers that we have not chosen to disclose at this point. You also asked about how often do we contend in the benchmark area. Well, we tend to benchmark more in the front end because that is the newer space for us as far we are working against the larger entrenched position of Synopsis and we are seeing some success. In the back end, you probably don't see this as much in the benchmarking though the 20 is not a small number when you think about what it takes to do in this quarter or in this area being the fact and we are benefiting from the fact that we are already the standard, we are already are the approved vendor for this space, and we have been able to demonstrate that the technology does the job without having to invest into benchmarking.

And while given the fact that it seems as though a lot of EDA customers are trying to consolidate the number of vendors that they are using, I guess, would you think that there will be even less benchmarking maybe going forward that includes some of these startup companies?

Well it is clear from what we see, it is clear from the output of this e-time semiconductor survey that I saw today at [Semicon] that their customers are consolidating numbers. I do not know if that means they won't benchmark, yet they did say expressly that they are taking a lot less risk with things that are not proven.

Hey great, thank you.

Thank you.

The next question comes from Erach Desai from CS First Boston. Please go ahead with your question.

Good afternoon. The first question is, I guess, a clarification. If you started off the year with total revenue guidance and I know the environment has changed a lot, but if the total revenue guidance of more that 20% last quarter, I think you moderated it to 18% and now you are suggesting 15%. Is there another like that feels like might need to be adjusted or is this a level that you guys are very comfortable with?

Erach, you can see the pattern has related primarily to services, if not all services and so, given the outlook for flat services for the rest of the year, we are very comfortable with how those numbers look for the rest of this year.

In terms of then talking about the software business, if I look at second quarter over first quarter ... bookings on the software side were marginally down. Your revenues were up about 5%, 4.5% and if you sort of back into your numbers that you are suggesting, Bill, correct me if I am wrong, I have this fat calculator I keep using. But in any event third quarter and fourth quarter sequentials look like 10%, sequentially on the product side and that just in this environment seems like tough nuggets.

Well just a couple of clarifications, Erach, the business as we had indicated was going to be flat in Q2 compared to Q1 just based on the timing of the renewals. So, I think that kind of indication of softness is just when the timing of the deals was happening and then as we look forward we do have very good visibility into the renewals and as I mentioned 50% of our business in the second half is from renewals with the success for having there and the premiums we are going to get. We think it is probably a [hill] decline and we think we got great momentum and we don't see any problems getting over that hill.

I think that beats the horse to death. Let me ask the second set of questions one, it relates to, I guess, the renewals. Was the IBM deal that was coming up for fourth quarter or I will say it another way, I guess, fourth quarter 1998 IBM deal ... was that the deal that was renewed here in the second quarter?

Erach, one of the things that we are not doing is discussing any particular customer items in terms of renewals and we just haven't been doing that this year.

Okay, and then just related to the whole renewal cycle of the major product deal, when you guys talk about apples to apples up 40%, 50% on the contract basis. This is just for clarification purposes, dollars to Cadence, not some other measure of booking's, or anything, just dollars to Cadence is going to recognize. Correct?

That is correct.

Okay. Final, just some housekeeping, was the wireless subsidiary writeoff, was that Symbionics or what was that left for Symbionics?

It was not Symbionics.

And how much was the head count reduction overall that was in this charge of $40 million?

The overall head count is in excess of 300.

Thank you.

The next question comes from David Veal from Morgan Stanley. Please go ahead with your question.

I know you mentioned earlier that customers are sort of anecdotally consolidating their choices of vendors. I wonder whether they are sort of telling you about their own outlooks and how it might affect their purchasing behaviors overtime. Specifically, are they asking you to structure deal's any differently and if so what does that imply for 2002 and beyond. Secondly, I know that you mentioned that pricing was firm. I wonder, is that also the case for the industry or has the customer softness undermined the discipline. Thanks.

David, I think that one of the things that is particularly powerful about the kind of relationships we are building with strong customers is the ability to do things, to help them in crafting solutions, and sometimes that means both the services we deliver and the products we deliver, and to structure those deals in a way that is useful or helpful to them, and so I will tell you on the margin that is one of the competitive advantages, we have. We can work across the broader spectrum and work with customers if there is a structuring of the deal that is helpful to them. But on the margin, what that means is that we are broadening and increasing the size of our relationship. Our customers do not ask for those kinds of adjustments concession structuring without offering something in return and where we have been able to work with customers to create a deal that is helpful to them, we have always received something of a high value in return for that. That is felt like a win-win across the board. More broadly, if you were just looking at the business that comes from the regions, the non-strategic accounts stuff, I would say that there is very little change in how that market feels on the software side of the house.

David, in terms of the pricing we have continued to be very steady in looking at the deals and working them and have not really seen anything that indicates that there is bad behavior in the industry. I know we can just monitor what we see, but we have not seen indications of having to do matches on pricing from a competitive perspective ... so no indications here that we are seeing any pricing problems.

Great, thank you.

The next question comes from [Andrew Dunlich] from ING Bearings. Please go ahead with your question.

Yeah, good afternoon ... just a couple of quick housekeeping things. What was your cash flow from operations for the quarter?

One second, Andrew. EBITDA was about $95 million for the quarter.

And then you mentioned that as a result of the new pricing structures, there was a lot of interest in all your software products, which you turned away because you did not like the price. Can you quantify about how much that was?

I cannot give you, it is just information when deals just are not quite ready, we just have to continue to work them, but those are on the margin.

Right so, but that is not included in the 50% renewals in the second half.

Correct.

Okay and of the remaining 50%, this has been a small piece of what is coming. But, ultimately it has to get done.

I do not know that it has to get done. There is always a business that just isn't quite ready, so I think our business for the second half, the pipeline business, which is the non-renewals, is also very firm, and we have a pretty good visibility into that as well.

Okay, then, lastly it sounds like overall, the services and the non-product business has come down again in terms of forecast, but the product side is very strong ... even up. How does that trends lead into the bottom line and your feelings for what is being published?

Well, I think you will see that margins obviously get the benefit from slightly higher software content. So, you will see in the operating margin still in the neighborhood that we indicated which is 20% plus for the year and we are just going to continue to manage expenses at the same time so I think there is opportunity on both sides.

Do you expect pricing to improve from the 50% premium levels or stay the same?

In this environment, I think it will probably stay the same.

Okay, thank you very much.

The next question comes from Raj Seth from SG Cowen. Please go ahead with your question.

Hi. Thank you. Two quick ones, one on the Tality side, you talked about some expense in head count rationalization this quarter I think 200, are you pretty much done there or do you anticipate further cuts on the expense side even it was somewhat moderate and then Bill, can you talk a little bit about how the ongoing renewal cycle plays out into the first half of 2002 and if you are able, maybe help us think about what kind of growth rate on the product side we might expect next year.

Raj, on the Tality side, we believe we have done the work that needs to be done. With that, the business is sized to produce a utilization rate that is in the healthy range and based on both the positive book-to-bill that we saw this quarter and the reduction in the cancellation churn, we feel like we can build from here. So, we do not expect to do even small adjustments going forward.

Okay, thanks.

Yeah, Raj in terms of next year, probably we are going to defer that until we get into Q3, but we will still have the same type of visibility that we have today. Just in this environment, I think it is probably better that we let another quarter pass and then we will talk about 2002.

Okay, that is fair. How long does the current cycle ... I sometimes get confused about where it get started in late 1997 or early 1998 ... how long does that fab renewal cycle start this cycle. How long does it go if you do not want to talk about numbers or coverage?

I think it is continual and there are various lengths of all the renewals and so we will see some actually begin to renew again next year quickly, those are on the shorter end of the range. So, we will continue with some of the larger renewals and then we will start actually some new renewals.

Okay thanks. H. RAYMOND BINGHAM/ WILLIAM PORTER: Operator, we have time for one more question.

And our last question comes from Jennifer Jordan from Wells Fargo. Please go ahead with your question.

Good afternoon everyone ... just a couple of quick follow-up question here. The first is that, in looking at the way the cycle is working right now and people continuing to purchase tools, do you get any sense right now of when customers believe that they need to really be in their generation of designs that they need is production first to turn around in the third quarter of next year.

Jennifer, I think our customers are on a forced march to be in the next generation designs capability today. Again in the [Semicon] Conference that I participated with all with the major capital equipment capital vendors, they say that even those 300 mm fabs have been built and are idling, are using this time to get their act together in the deeps of micron areas. The [exact] same thing is truly designed. The designs are ready to go into those fabs.

Then when you look at trends I think if you are looking at the [custom-IC] and the analog digital convergence trends that we have been talking about a little bit ... what kind of ramp up do you see for that going forward? Obviously this is going to be a harder area, specifically, if you do more this system and chip designs and if you look at that kind of growth, do you see that any specific ideas about where that goes over the next eight to twelve months?

I think that you can see that there is strength today, it is part of the reason for the strength in AMS and the analog mix signal group. The longer ramp is to actually be able to manage the convergence of digital capability and analog capability in a single environment, and we see that in late 2002 or beginning of 2003 when those environments can be credibly delivered to customers.

When you look at the areas where you have won benchmarks with your share of product, the one new business for these share product, is that being driven by its capability to do analog?

Sure that is the particular strength of Cadence. It is not the only strength, but it is the particular strength and one that we are using to leverage ourselves back into that physical verification market.

Okay. Thank you very much.

Thanks everyone for joining us. We appreciate your interest in Cadence. We will see you next time.

Ladies and gentlemen, that does conclude your conference call for today. You may all disconnect and thank you for participating.