益華電腦 (CDNS) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cadence Design Systems second quarter 2002 earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterward, you will be invited to participate in the question and answer session. At that time, if you have a question, please press the one, followed by the four, on your telephone. As a reminder, this conference is being recorded Tuesday, July 23rd, 2002. I would now like to turn the conference over to Lisa Ewbank, vice president, investor relations. Please go ahead, ma'am.

Thanks, . Good afternoon everyone and welcome. With us today are Ray Bingham, president and CEO, Penny Herscher, executive vice president, and Bill Porter, chief financial officer. The Web cast of the call can be accessed through our Web site, at cadence.com, and will be archived for one week.

Before we begin, the safe harbor statement. The discussion today will contain forward-looking statements, and actual results may differ materially from those expectations. For more information about factors that could cause such a difference, please refer to the 10-K for the period ended December 29th, 2001, and the 10-Q for the period ended March 30th, 2002.

All numbers reflect earnings excluding goodwill and unusual items. With that, I'd like to turn the call over to Ray Bingham.

Good afternoon everyone, as you can imagine we are pleased with our results, both top line and the bottom line for the quarter. Particularly given the very challenging environment that we live in particularly the challenging environment our customers face. For a time when most companies are having significant difficulties, Cadence continued to see solid product results particularly in the high growth area of digital design. I won't down play the economic pain our customers are facing, while conditions haven't worsened, customers have certainly a dimmer view of how long it'll take to get to our recovery. Things looked a bit more positive in the first quarter of the year, then confidence waned again in Q2. While our customers are confident that the market will come back, they are not sure when that'll be, and are making spending decisions based on the uncertainty of the timing of that recovery.

You can see that in the market statistics which show that in the face of strong numbers in , segments like PCB and systems are still under quite a bit of pressure. Even as our customers scrutinize every purchase and hold off until the last moment in the purchasing decision, they remain committed to their process and methodology investments in 130, 90, and soon 65 nanometer. This is an environment where manufacturing costs are escalating. Single mass set can cost a million dollars projected to be more. They have to make these investments pay. Customers choose Cadence's advanced technologies in order to win as their new processes come online, as they deal with these investments and the challenge of the feature sizes that the TPHAPB meter designs bring to them. Significant design challenges are driving customers to use new, most advanced technologies. But TPHAPB meter design, 130 TPHAPB meters and below, physical design and design for manufacturing problems are the bottleneck. Our strategy is focussed precisely there, on what we call our customer's first success. Now my vision for the company is that we're close to our customers and we solve the whole problem from system onto a chip into a package, onto the board. The whole problem.

At Cadence we feel like we've come a long way over the last year and a half. We've added experienced chip design and EDA leadership to the IC business. We've pulled together the best team in the industry. We're providing our customers with technologies for the world's most advanced processes. As a result, we've leapfrogged the competition for next generation digital design. The best team, the best technology to solve customer's design problems now. Customers are excited about the new technology that they have seen coming out of Cadence. They know there is even more to come.

They want the flexibility to easily mix in this new technology, which means increased demand for subscription licenses, which permits customers to add new technology as it is released. Because of this demand, our will increase over the next several quarters as you may have seen in our press release. This license mix adjustment will, of course, suppress near term revenues, and then, of course, accelerating by the second half of 03 as accelerating those revenues as this transition is complete. And bookings expectations for the rest of this year remain the same. That is on the strength of our renewal visibility, and we continue to expect growth for the year to be in the mid teens.

There were more detail about this change of mix a bit later. So accelerating the ramp for new technologies show that future results, particularly in digital IC where we grew more then 50% year over year. Here's some highlights from the quarter. Once again the platform, essential technology for design, which for business in every region of the world. This only in contact expansions, completive replacements and brand new . Demand for our encounter-solution boards even stronger than we anticipated, driving significant growth in second quarter, up 30% sequentially over a very strong first quarter.

This by four major vendors up-grading their to encounter, along with the by a number of semi-conductor companies. I am very pleased to report that we had our first orders for our new . is the world's fastest router, it's generating a tremendous amount of interest. Finally the new technology from also demonstrated very good strength, even in the short time they had . the acceleration of business, coming from the integration of and into our flow and into our channel, we see the same kind of that , where we had a had similar experience for our OEM agreement beginning way last year. In the quarter, analog continues to be a big driver.

The customers are completely the entire platform have more analog . The faster percentage chips with mix signal content is expected to grow to 75% over the next few years. These complex XOCs require customized design solutions to enable analog mix-signal design. Using custom and digital integrated together in the same solution, drives major productivity increases for . Accordingly in Q2 we continue to see customers buy from both digital and custom flows. Seventeen out of the top twenty customers bought from our custom flow, fourteen of those bought from both custom and digital together. For the second quarter in a row, we saw strength in our quick triangulation and acceleration businesses.

Bookings were greater than anticipated, driven by the growing number - growing of our new palladium product. Palladium is clearly recognized as the industry-leading emulation technology. There's one every benchmark against and is driving competitive replacements in the U.S. and internationally, including in Europe, in Japan. As expected, the PC continues to be comparatively weak, as customers prioritize their budgets. We saw that reflected not only in our business, but industry numbers and recent data-quest, and reports.

Not withstanding, the weak market conditions number of new customer ratings, and competitive replacements against meta-graphics. Specifically, where chip design and board design working together delivered better results for designers. Four our top five customers purchased PCB solutions from us, a testament to the growing, growing need for integration of chip into package, onto boards. Recognition of our customers' needs for integration for designs drove our strategy to lead the move towards openness as an industry standard, specifically as part of the open access movement.

Open access gained momentum in Q2, both for technology and for the coalition. Adapting , we successfully demonstrated our 90 with customers, was based on the open access database. The included the encounter platform, custom design tools, physical verification solutions and third-party design for manufacturing tools. This demonstration was very well received by customers and demonstrates that open access is real, it's working, and we're already seeing performance and capacity increases on the part of customer flows.

More companies are seeing the promise of open access. Several new members signed up during the quarter, including Phillips and Sun, on the customer side, plus EDA companies like , , , and Numerical Technologies. Our combination of the best technology, the best team, and singular focus on our customers is working for us.

As you know, we have a business model that emphasizes renewal licenses. They give our customers the opportunity to easily upgrade their technology, and give us the opportunity to continue to grow our business. The power of our new technology and the completeness of our solution are driving higher values for our large renewals. In Q2, we had three such larger renewals. Phillips, National Semiconductor, and Paradyne. The value across these contracts averaged more than 50 percent higher than previous agreements two to three years earlier.

Phillips has selected our newest and most advanced technologies to address 90 and below design challenges. This program includes SOC Encounter, Fire and Ice, Voltage Storm, and many more of our leading edge solutions. This agreement evidences the depth and completeness of our solution for analog, digital, mixed signal, and system check, serving a broad range of markets for Phillips from consumer to industrial.

I'm also pleased to say that we added 33 new customers during the quarter, representing a variety of end markets, but primarily in the consumer and networking space. At this point, I'd like to introduce Penny Herscher, former CEO of , and now my executive vice president and chief marketing officer heading up Cadence strategy, design , and marketing.

Penny brings 20 years of EDA and semiconductor experience, and a strong sense of customer priorities. She'll spend a few minutes describing the impact of design on industry structure and some examples of how are customers are adopting.

Penny?

Thanks, Ray. This is a technically challenging time for our customers, the of designs. As our customers move into advanced design processes of 130, 90, and even 65 , they demand change.

At an industry level, design means infrastructural change. For the next generation of silicon and new now cost on the order of $2.5 billion. Manufacturing at nanometer scale is much more complex, and the yield is a huge challenge. In order to reduce cost and risk, even the largest integrated device manufacturers are now working together to align their manufacturing activity around a single set of design and process rules, frequently partnering with , or one of the other Asian that are bringing up next generation . Because of fat consolidation, and protest complexity, customers need to reduce risks now more than ever. The do this, they want a few major suppliers who can provide advanced, integrated solutions to by global technical services. At a technology level, nanometer design means connect. It means very high complexity chips analogous and digital Ichip, physics effects throughout the design process, and wire centric design.

Cadence's new technology, based on the encounter platform, is targeted to nanometer design. It provides manufacturing aware routing right inside the design planning, silicone virtual prototyping environment. floor planning based on wire information is simply not good enough. It failed to address manufacture ability issues, accuracy of signal integrity and routing congestion. The solution of coupled with the very fast signal integrity aware technology and the breadth of design to manufacturability tool is what is necessary for the next generation of process.

Let me give you some examples of how this technology advantage plays out into the market. First, the consumer start up company in southern California designing a 6 million gauge at a steady nanometer. In the previous .25 micron version of the chip, this customer use a synopsis of combination. They could not close timing, or four months later market and had to cancel the product introduction. This company selected the Encounter for its 130 nanometer design . the second example is . A North American based, global provider of high bandwidth semiconductors, silicone image originally used our analogue solution and then as a result of the integration, and the fact that reduced their time to by 3x, it selected Cadence over competitive offerings. Finally, Cadence signed a very significant Q2 agreement with Marvel Semiconductor which designed some of the worlds most complex networking chips. Marvel selected Cadence as its primary supplier and in Q2 purchased both digital and custom IT solutions, including our family, customized tools, , and .

With respect to services, we are aligning our design services strategy with our customer's nanometer design needs. As we mentioned in our June conference call, we have brought our design services capability in house so we can provide a continuum of services, from education to support to methodology service to complete design service and implement our leading by design strategy. Leading by design means two things. One, using our own design experts, working with real customers in high performance and high volume market to drive the development and quality of our tools and solutions. And two, helping our customers with critical designs for both design capacity and design capability that they would like us to take on.

To recap the June news, the combination of and now called the Cadence Design Foundry, will focus on high end digital analogue and signal IT designs. And the best of select businesses primarily in the systems area. This strategy is reflective of the fact that the IT design team has maintained respectable utilization of margins. Which unfortunately has not been the case in the systems market. In the four short weeks since the announcement to the . The teams have been fully integrated and are has assumed full operating responsibility for the combined . The complete, and the customer reaction has been positive. Finally, in employee reductions and business have been identified and the is now underway. customers are facing tremendous design, semiconductor infrastructure and business challenges. Cadence is uniquely equipped to help them with these challenges. With that I will turn it over to Bill, who will talk you through the financials and guidance going forward.

Thank you Penny. Good afternoon. Earnings per share, excluding goodwill and unusual items, were 24 cents on net income of 61 million dollars. An increase of 30% over the second quarter of 2001. total revenue for the quarter was 345 million sequentially. Product revenue for Q2 increased 19% year over year to 226 million. Maintenance revenue was down 2% to 82 million as we again saw the effect of customers seeking short-term budget relief by not renewing maintenance contracts. Surfaces revenue fell more than expected, to 37 million. Up 15% in sequential decline. As customers continue to aggressively manage costs that they deem discretionary.

The which produced revenue of 15 million. A sequential decline of about 30%. Even so, because of the restructuring actions we've taken in the systems segments that have been so weak, we made good progress in shares per penny. Methodology services was flat at 22 million. Subscription bookings were 85 million. 40% of total software bookings. And that's 48% if you include both subscription licenses and maintenance. And going forward, the percentages I will quote will represent subscription license and maintenance combined. So among the leaders in the industry we now have a standard way of describing subscription mix.

Contractor continues average about 2 and 1/2 years. Approximately greater than a of software revenue came from subscription backlog in Q2, and renewable licenses represented 93% of total, with only 7% under perpetual licenses. The shift to renewable licenses is as it enables customers to move more easily and upgrade their technology. Cadence to have a continuous renewal cycle. Software bookings grew 10% year over year, even during a quarter with only a few large renewals. As we have indicated before, we expect a larger volume of renewal activity in the second half, customer's schedule of large contracts. In Q2, North America contributes 54% of revenue, Europe 28%, Japan 10%, and Asia 8%. Europe was especially strong, driven by the renewal. Results of Asia were also up sequentially. The drop in North America and Japan revenues renewal mix for the quarter.

That said, the general business in Japan remains weak, while the rest of the regions continue to exhibit some strength. We continue to focus on productivity. In fact we were successful in reducing total operating costs 8 percent, or 22 million year over year, primarily due to the restructuring actions we've taken at Tality, but also because we're focusing on our expense structure.

Our cost management efforts have resulted in continued improvement in productivity measures. For example, costs and expenses per employee have improved 10 percent year over year. Operating margin for the quarter was 24 percent, up from 18 percent in Q2 of last year. Restructuring expenses and unusual items totaled up -- totaled 107 million, and as we discussed in the June call, 41 million is a result of the Tality restructure, primarily severance and facilities closures.

With the closing of the Simplex acquisition right before the end of the quarter, we have a $42 million charge, including 27 million for in process R&D, 8 million for severance, and 7 million for facilities and related assets. In addition, we took a $14 million write down of all the FPGA emulation inventory as our new processor based solution continues to gain rapid market acceptance.

We also needed to take a write down of $10 million in our venture and investment portfolio because of the market conditions. Though our business continues to run ahead of expectation, the business in Q2 was more back end loaded than we had been seeing. Following from that, DSOs increased 11 days to 75 days, five days as a result of linearity. Three days due to foreign exchange effects, primarily a large increase in the yen in June, and three days as a result of Simplex receivables being added without revenue due to the acquisition being completed at the end of the quarter.

But the quality of receivables remains healthy and unchanged, with receivables 90 days past due at 2 percent. on contacts receivables increased sequentially from 59 to 81 million, due to a reduced level of receivable sales. We sold 60 million in term receivables on a non-recourse basis, 20 million less than Q1. Deferred revenue increased sequentially to 232 million.

We invested 16 million to repurchase 1 million shares of our stock, and as you may recall, we were restricted during the Simplex acquisition process. The balance sheet continues to be strong. Hanging cash balance was 239 million. Finally, let me turn to the business outlook for the rest of the year to provide our first look at 2003.

We expect to see strength in software, 90 percent of the business, and continued weakness in services. Product booking's expectations for the year remain the same. We expect product growth in the mid teens. Because of the high demand for our new technology, we are seeing a significant increase in demand for our subscription licenses, which feature the ability for customers to mix easily in new technology during the license period.

Accordingly, we expect our mix of subscription bookings, license and maintenance, to increase to 65 to 70 percent of software bookings in the third quarter. In the fourth quarter, it will increase to 70 to 80 percent. While this increased mix of subscriptions will not affect bookings, it will reduce revenue in the short term. We do not expect any meaningful recovery in the economy in the second half of the year, and we'll continue aggressively manage our cost structure.

So in Q3, we expect earnings per share to be approximately $0.15. For the year, earnings per share earnings per share expected to be approximately 80 cents. And in 2003, we expect earnings per share to be approximately $1. And the company expects that the change in mix of software licenses should enhance revenue visibility and beginning in the second half of 2003, accelerate revenue and earnings growth. As usual, we'll give more complete 2003 guidance in October earnings conference call. So with that, operator, I would like to open it up for questions.

Thank you. Ladies and gentlemen, if you wish to register 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 3 tone prompt to acknowledge you request. If you 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. One moment please for the first question.

with RBC Capital Markets, please proceed with your question.

Thanks. A few questions. First one is on the license model change. Do you have plans to do any of the old term base licenses at all, in Q3 and Q4 or will you go exclusively to subscriptions and perpetual?

Jethro, this is Bill. We will still have customers who will use term licenses. It will just be a much smaller percentage of the business as most customers are really looking for the new technology so they're just moving right in. A few may prefer to buy that separately but we're seeing most moving to subscriptions. Terms should be like perpetual, it will be a small percent of our total license balance.

OK. And you said that the reason that you're going through the changes that customers are asking for the ability to exchange tools and be able to add on new technology. Were any of the large renewals in Q2 subscription licenses for ?

You know, we don't talk about the type of contract we do with our customers but there's a mix of all of those licenses in our renewals.

OK. And as you reported in Q2, those three that we just talked about, the renewals came in greater than 50% bigger than the deal they replaced. Can I assume that with your guidance that product bookings expectations shouldn't change in the second half, that you'll continue to see renewals that are probably 50% bigger than prior deals in the second half of the year as well?

Yes. That a very safe assumption.

Great. And I know that you've been getting a lot of bang out of the recent acquisitions that you've done. How many of the, or maybe what percent of the software deals that you did in the quarter included software flowing cadmus, ?

It's Ray. I think that it's safe to say that because of what's driving this market is a desire for integrated solutions using leading technology that all, or virtually all, deals included new technology.

Were there some that were just as new technology, meaning exclusively a stand alone purchase of ?

Well, there were certainly one off transactions that were to point to a level, I would emphasize that, the theme that's driving this market and the reason that our customers are able to move to 130 and 90 nanometers because they're getting productivity out of solutions with leading technology.

OK. Terrific. And, just lastly, do you know what cash flow from operations was in the quarter?

yes. Let me just look on second for that here.

okay, and while you are looking, maybe I will ask about that maintenance. You did report that did continue to go up anyone has come back on that had gone off in the last several quarters.

the answer to the latter question, was yes. As customers needs for access to technologies moves through the design cycle, a few on the margin will play that game, moving in and out of maintenance.

the operating cash flow number, which as you know includes the receivables we sold, will be slightly over 60 million.

great. Thanks very much.

our next question comes from with . Please proceed with your question.

thank you. Bill, I wonder if you can comment on your expectations for non-renewal bookings growth in the second half. You've talked about mid teens growth over all, should we assume that non-renewal deals or businesses growing at the same rate, or is growth primarily being fueled by the renewals.

we'll see growth in both areas, Raj, just like we've seen it in the first half of the year. I don't expect any change in the non-renewal growth. Customers are interested in the new technology, whether or not they have renewal coming up in the second half.

and in the second half, what kind of coverage are you - comes from renewals? What's your expectations in terms of bookings coverage in the second half?

Raj, let me just make a clarification here that I think's important. When we talked about renewals, basically our focus is on the major renewals. We do renewal business with virtually every electronics company on earth. That's core to the visibility in the renewability of the revenue strength. So it's a little hard to separate a - the big renewals we can focus on because they drive the big part of the quarter, and the renewability of the licensing approach in general. The other point is that that there's is that the renewability is increasingly important to these customers. It gives them the opportunity to get access to technology as it develops. It gives them the ability in the licenses to add it as they need it, rather than waiting for the renewal starting whole new contracting cycle.

and typically, is recognition even across the term, or does that ramp with usage?

in the license?

yeah.

yes it's even across the term.

okay, I mean what I'm ultimately trying to square is R&D growth is, I don't know, single digits, couple of percents. You've reaffirmed guidance for mid teens, bookings growth. Clearly there is some advantage in your area, you're product mix, you're areas of historic strengths are clearly growing faster than some of the other areas in the business, but I am just wondering how you continue to grow at 15% or so, when R&D budgets are so tight, how much of that is driven by those large renewals? That's really what I was trying to get at.

: so Raj, this is Penny. Let me take that one. There's no question of the budget are difficult for that right now, so we in no way discount that. But there definitely is infrastructural change occurring in the industry. So the consolidation of suppliers is a critical issue to the customers, and the new technology necessary to do nanometer design. Cadence's investment in the solutions -- basically anchored on the Encounter platform and taking advantage of the analog and customs strength of Cadence, integrated with additional platforms, lead customers to consolidate to a smaller number of suppliers as they try and address more and more complex technical needs ...

One follow up, if I might, Penny. There are clearly a lot of decisions being made right now for .13 and below. How soon do you think it will before larger customers are willing to describe whose platform their standardizing on. Because the reality is, sounds very much like you do, and would claim that they're moving towards becoming a standard at many of the large IDMs as well. Yet it's difficult so far to get any of those customers to sort of announce who they're standardizing on.

Or perhaps my assumption is wrong that we'll standardize on one primary supplier for the core IT flow. Is that correct?

, I think that you'll see them standardize on one or two, and that's why you're not going to see them talking, saying one or the other with two great in the next 21 months. Because the reality of doing a system on a chip is you need a very complex set of tools to do it at 130 and 90 nanometer, and there are customers who will have a digital flow that is primarily one vendor or an analog flow that is primarily another. And over the next two or three years, we expect to see them consolidate down onto one or two primary suppliers.

So do you expect to -- in the next year or so, to take meaningful share from in this core digital flow? Or do you think share remains roughly where it is?

Well, I believe that the first order is that share flows to large players.

Right.

The second order is that depending on the type of account, the quality and success with -- with the customer relationships, share will trade around between the two companies. I believe that we have a very compelling edge when it comes to the completeness of the solution that we deliver. Designing the whole problem, working on the whole problem rather than just part of the problem. And so -- so many customers, in our experience, and in current conversations today, are resonating with that idea.

They care about analog. They see it as a looming part of what they have to solve and not in two environments, but in an integrated involvement. They also care very much about the focus that they see from us on the 90 nanometer solution on an open access database, because it gives them flexibility as they create the flows that they'll rely on to go perhaps to 130, but certainly to 90.

All right, thank you.

Our next question comes from with Merrill Lynch. Please proceed with your question.

Thanks, a few questions for you. Bill, according to the arithmetic you gave of subscriptions, dollars, and percentage, that would suggest that your software product bookings might have been down sequentially from the first quarter, perhaps by a small amount. We've been looking for bookings to be up at least by a small amount sequentially, so, is that accurate? Are we that it was down sequentially and if that was the case, what, again, on point, why would you think that bookings would be up in the mid teens for the year as a whole? Secondly, in light of the lower revenue forecasts for the year and next year, at least with the model change, what are you going to be doing incrementally to manage or reduce costs to parallel that, more than what you've just done with the services restructuring? And then, thirdly, your point about demand for new technology as the rationale for increasing the subscriptions percentage, what do customers who've been buying subscriptions to date been doing with their remix option? You've been limiting it to, I believe, 10% of contract value, so to what extent are customers actually already been employing that capability and will you leave the remix percentage option the same? Or perhaps increase it?

OK. Jay, bookings do not drop sequentially from Q1 to Q2. In terms of cost structure, we're continuing to just look at areas where, you know, maybe duplication, or we can do things globally in a better way. And so those are some of the structural things we're doing to cost and will continue to do cost. One of the things we did is we established a services center in the US out of San Jose and are able to move out 20% of our cost and still get a very good team in place that will be there for quite some time. So there are structural areas like that we are looking at, throughout the company. In terms of remix, you know, customers continue to use their remix options. And, by and large, that is the level that we will see and continue at. We don't see it dramatically increasing but if a customer really wants something, you know, of course, we'll talk about it.

I think, Jay, one comment to add, is that we have seen already that this remix option is a tremendous opportunity for us to gain share. If you look at, for instance, the share that lost last year in '01, you can see that kind of mechanism at work.

OK. Follow up, I guess, to Ray. Just update as you have on previous calls with respect to the three major components of your sales and distribution model, that is, global, strategic and territorial account. What I'm after specifically is maybe talk about either buying behavior across the three types or what you're doing with respect to sales management, sales structure, quota and the like in light of the new forecast. I mean, given the material change in the outlook are you also going to have to adjust the, you know, sales practices in some way?

No, actually not. This is, let me emphasize. This is the change in mix of licenses. Our sales incentive structure, the way we train our salespeople is all around bookings. And so, from their point of view, this is not a meaningful thing, except that it allows them to have a far more flexible or easier conversation with customers about how they weave in new technology not only today, as we do renewals but also as we do renewals today, the flexibility that they'll have going forward as they look at our roadmap and see that there are things coming that they would like to have access to or may like to have access to.

So, no, the only change that I would flag for you is one that you've asked about before, which is the nature of how we work and the multiple communications channels that we invest into the customer account. Those are things that we've done in the recent month, actually, is to expand what we call our executive partner program. We focus it on half again as many customers, we've engaged more of our executives and we may engage more of our technical executives to handle these new technology discussions as the contest for next generation is on.

Our next question comes from David with Morgan Stanley. Please proceed with your question.

yeah, could you guys give us some - you gave us EPS guidance, but could you, given the mix shift, could you give us - I have a few questions here, but could you give us some first, guidance on revenue for 3Q and the year?

David, this is Bill. With the changing mix, that's why we specifically did not put revenue guidance in, because there is a little bit more uncertainty with it. I think we wanted to give you an uncertainty with the EPS, but there's numbers of ways to get there. So that's where we are comfortable at this stage, and as we get into our normal pattern for Q3, we'll give you a good outlook for what we think 03 looks like in response.

thanks. Could you give us some idea on the EPS reduction, I mean is there any production due to or is it just the subscription mix?

it's strictly the mix. We when came in, that there would be about a penny dilution in Q3 and Q4, and that has not changed. So this is really the mix of licenses that's changing.

okay, just two more, and on the mid teens bookings growth for 2002, I just want to make sure that this isn't apples to apples compare? Meaning is the 15% bookings growth, are you folding back into the 01 numbers, the inclusion of maintenance, so that it's an apples to apples year-over-year compare? You know what I am saying?

David, it's a good clarifying question. This is an apples to apples comparison that bookings number is product only.

that bookings - that the product only, no maintenance bookings guidance number?

porter. Gross. That is correct. That's what we've been given before and that's why that has not changed.

okay, I just wanted to make sure of that. I know that this has been a question, but I think it's sort important that we at least get the numbers here, and that is anyway you guys look at it, you basically done 10% bookings growth for the first half of this year, pretty close, right? From a products standpoint, yet you continue to guide for 15% for the entire year. So what I think what we are just trying to see. What everyone, I think, is struggling with here is, yeah we all know that your renewals are going to pick up later this year but will it be enough to drive, the 20% so to compares in the back part, and if not, then there's numbers rifted and I think that's why people are focused on what will be renewal here. You had given an indication of 65% contributions from non-renewal bookings in 2002. Is that still the right number to be looking for -- you know, maybe you can just clarify, because otherwise I just think people have a hard time getting to why you expect such acceleration.

, I think Ray clarified the question first of renewals so that the -- you really have to look, we're talking about just large renewals, not total renewals. So it's a broader number when you talk about total renewals. And then secondly, we had good bookings momentum coming out of Q2 as we did in Q1, so we do see good bookings growth in the second half. That gets us to mid teens growth.

Is it fair to say, sort of that same mix, non-renewal, 65 percent for the year?

, let me take one more whack at this.

Again, as you define it. Large versus small, I mean, you guys define the apples to apples.

No, those percentages were smaller than that in the first half and larger than that in the second half. The first half was -- the 35 percent number you're thinking about was for the year as a whole. The first half was -- had thin renewals, and the second half had robust renewals of the large variety.

OK, yes. I'm just curious to know whether that's -- you know, whether that's still the case. Whether 65 percent is still a reasonable number to be using going forward.

This is Penny, maybe I could clarify. You know, when Ray and Bill stress changes bookings guidance, even though we're looking at a different mix. The reason is because the customers 130 nanometer -- nanometer design problem, it leads them to buy more software from Cadence, , which drives renewals growth because of the new technology and because of the integrated solution. So it nets out to -- you go do 130 and 90, you're doing a big deal with a major supplier, you want more new technology, it drives you renewal.

Then Cadence tracks big deals to from the global set of renewals, as for the majority of the business, it's renewable.

Well is it -- could you give us some idea of what maybe non-renewal mix versus renewal has been in the first half of this year?

Well, , let me just mention it one more, then I think we probably need to move on. We said coming into the year that our large renewal business was 35 percent, and that it was lighter in the first half than in the second half.

Yes.

OK? So our large renewal business in the first half was less than 35 percent, our large renewal business in the second half will be larger than 35 percent of the total amount of business we do in the second half.

OK, that's clear. Thanks a lot.

Our next question comes from with Wells Fargo Securities. Please proceed with your question.

This is , actually, and I've had to hop on and off the call here today so I've missed a couple things along the way. First, I was wondering if you could shed some light on -- a little more light on the way that this has been driven by customers, and if you -- I guess it gets back to sales force question, there's really no involvement in the sales force in whether there's a subscription or not a subscription. And is this a strategy to get around people potentially not renewing at as high levels as they would have because they're concerned about paying up front on a term license?

, no it has nothing to do with . What it is is when you have your discussion with your customer and they'd like to have more new technology, it's the easy discussion because it just moves right into a subscription license. And that's really all it is.

Is it additional -- I guess I'm asking, is it additionally appealing in this environment where people have come back and said that it's still very challenging to get things signed off, you know, to get large chunks of cash authorizations signed off. Is this a way around that issue?

, Ray here. I think it's -- it's an easier conversation for a variety of reasons.

OK.

Easier conversation because, as our customer looks at the flexibility that a subscription gives them in terms of access to new technology, he can be comfortable that if something else comes down the road six months from now, a year from now, a year and a half from now, easy to mix it in and he hasn't created a rigid box that makes it hard or expensive to mix it in later.

And of course, with the subscription license, you naturally talk about paying over time, which I'm sure is very appealing to most electronics companies today.

And it is still your plan to keep that percentage that they mix in something of a fixed percentage with some flexibility based on the individual customer. But so you don't run into the problem from before.

Yes.

Thank you.

Our next question comes from with and Company. Please proceed with your question.

Good afternoon. Bill, did you come up with a cap ex number? I had to -- I was distracted, I'm not sure I got it.

Let me -- no, I didn't say it, but let me get it for you. , go ahead, if you had another question.

Second is, as you go to market, as I understand it, of course there's a great appeal to being able to mix in newly integrated technologies, possibly with the open access database. And recognizing that you've just acquired some rather key technologies which are not particularly stitched together, this strategy makes a certain amount of sense. What I'm wondering is, though, are you going to essentially offer to forgive lapsed maintenance to customers who have gone off maintenance if they'll convert to a subscription? Is that part of the appeal?

Well, the answer to that part of the question is no.

, that we pay, you know, responding to something you said about, you know, new technologies that are not terribly well integrated together. What's not well understood out of the marketplace is that the technologies that Cadence acquired over the last year had actually been working together in the marketplace for a while, so the SPC Encounter products and the team had been working on high-end together.

The Simplex technologies have been integrated into Cadence for a couple of years now because of the good relationship that existed between Simplex and Cadence. So the process of integrating these technologies in the face of the customer is a lot simpler than people outside of the customer base really understand. As we go to market, providing an integrated digital solution for nanometer design, the customers are delighted with what they see and our ability to install solutions today -- to do , is material value to the customers that will drive the higher of new technology provisions.

But it's not a situation where Cadence is scrambling to integrate a bunch of different things. These teams have been working together in the face of the customer for a while.

OK, so basically what you're talking about is new-new technologies.

Yes.

OK, and then on last maintenance, you're going to ask customers to that up before they engage in new deals, or ...

Well sure. That's been our practice and it's an important part of the integrity of the business that you offer. It -- can be forgiven. There's not much point to stick with it when business times turn sour.

OK, and finally, the -- the last issue is, Bill, you said you're going to report in line with the other leading company, I suppose that's . Does that mean there are going to be three revenue lines, one for perpetual, one for maintenance and services, and one for subscription license, or what are the labels going to be on the income statement.

Yes, Bill. We will rate and do that -- at the end of the year. What we want to make sure of is we're reporting a similar definition for subscription bookings, so that's really the key point. And then we'll look and see, you know, what the income statement should look like, you know, as we look at the full year and get all that pieced -- those pieces put together.

For your other question, cap ex is 36 million during the quarter.

OK, and what are you anticipating for the full year.

Oh, it should be about that run rate, you know, about 120 for the year.

OK, thanks a lot.

Our next question comes from with CS First Boston. Please proceed with your question.

Yes, thanks. I don't want to beat the renewal issue to death here, but you know, given what's I think a lot of the news we see over the last couple weeks of kind of a renewed round of headcount reduction, I guess, you know, Lucent and now AMCC, and others. Has your visibility at all changed into the renewal streams in the second half and in early 2003?

I mean, is there any risk of -- maybe not specific to Cadence but specific to the industry that the renewals don't come in full. And then also, could you touch, could you just mention what the geographic spread of the renewal streams is. Is it any different than the way revenues are right now?

Well, , let me start with -- I can't speak for the rest of the industry, of course, but our renewal business is strong, and our business generally -- our product business is strong as customers are trying to figure nanometer design out. And that's -- that's strong for large renewals, it's strong for what we call channel renewals.

The -- I think that the -- one piece to remind you of is that whether a renewal is $1 million or $100 million, it has a sell cycle of six to 12 months. It's something we track deal by deal by deal through the sales force in a very elaborate way. And so we've got a lot of visibility on this stuff, and the negative times that we're all enduring has not taken the wind out of the sales of that product side of the business. It certainly -- certainly encouraged the services business, as we've seen, but on the product side, and particularly IT product side, could come in actually above plan, not below plan.

OK. And on a geographic nature?

Yes, , that's just something that we'll -- you know, change deal by deal based on what happened. So that one's not one that we're going to call in advance.

OK, and then lastly, maybe a little color on -- I think you guys have talked to this in the past, but when you talk about a 50 percent higher renewal contract side to when it was originally signed two or three years back, can you quantify or at least talk to what is -- what percent of that 50 is due to tool prices increased, or just an increased quantity of various different tools in the flow versus market share gains, or versus increased seat count.

Yes, , it's primarily related to the inclusion of new technology in the flow. I don't think it's really visible that seats aren't growing dramatically, and I don't think we expect that. It's really -- the value of new technology is what's been growing visibility to us, and that's how they've been -- you know, we've been able to show those type of increases.

A comment that might be helpful also is you think about how customers are thinking about getting as many designers in front of robust design solutions as possible, is that not all of our major relationships were done on seat basis. Our customers are compelled -- are very interested in putting as many designers in front of seats as possible. And to the extent that it's not tied to seats, many customers view that as a way of making design tools more accessible to more people within the enterprise.

OK, great. One last one, was there any revenue from Simplex in the last -- the last couple of days in the quarter? Was it ...

It was not meaningful, .

Not meaningful. OK, great, thanks a lot, guys.

Our next question comes from with . Please proceed with your question.

Yes, hi. Initial was to keep subscription about one-third of the bookings and then now we are seeing it is creeping up to two-third. Why there is a sudden change in customer buying pattern and all happening in just one quarter?

Well, , it -- it didn't just happen in one quarter. Let me see if I can paint how we -- how we came to this conclusion. The first thing that happened was the development of a lot of new technologies to address -- to address a re-tooling cycle that is really heating up right now. We did it with internal development, we did it with some very important acquisitions that have happened over the last 14, 15 months.

We capped those acquisitions off with the completion of the Simplex acquisition, and so think of it as just a lot of new technology available for -- at a time when customers need new technology. At the same time, customers are making buying decisions, and they're -- they know they're going to be making buying decisions in the future. And as they renew their licenses, as they renew those -- those engagements with us, at the end of their old license, they are increasingly looking for the ability to access new technology that will be coming out, yet, in the future.

For that they need the flexibility. So we found ourselves over the last several quarters often struggling to be able to fit the customers' need for that access into the old constraints of just one-third . We saw customers pushing against that, and we increasingly saw the channels struggling with the inability to offer that flexibility.

But Ray, I would say if that was the case, and if I missed it, it was not really communicated well to the Street, that maybe a quarter two-thirds of the booking may go -- the subscription route.

Well, , well first of all -- first of all, we've been, you know, based on -- based on this vernacular, we've been running in the mid 40s for some time. And, you know, I think that suggests the move in this trend, in this direction. Secondly, we are, we felt it was important to keep faith for investors to complete this quarter successfully based on the model that we had communicated but then tell you going forward that not, not cold turkey, not all at once, but over a couple of quarters, we'd be making this transition and give you, and give the kind of communications that we think is important for investors to have.

OK. Couple more questions on separate topics. When you look at your at the end of third quarter, how would you categorize, do you expect for that improvement or do you think may increase further at the end of third quarter?

Yes, will be moving up slightly because, as you know, revenue will not be growing as fast because of the rival nature of subscriptions and the receivables will just take a little time to burn off.

I see. Now, with the change in your revenue model, how will it impact the cash flows. Could you talk about that please?

Sure, it's not going to have any dramatic increase, change on cash flows.

Both for third and fourth quarter, there is nothing that we are missing here that could change the cash flow numbers?

Yeah, I don't think, it's not going to be changing cash flows. You know, we've looked at it, you know, and cash flows continue to be positive. It's not going to have a significant change.

Thank you so much.

Our next question comes from Jeff with Needham and Company. Please proceed with your question.

Hey, good afternoon. Just a couple of things, most of my questions have been answered. Do you have the head count for the quarter?

Sure, I'll get that for you. Why don't you keep going.

OK. My other question kind of concerns a technology question and I was kind of wondering if, this is kind of directed at Ray, if you felt that the industry now has adequate sort of feel for all of the necessary technologies for .13 microns and below. Or if you feel that there are still some holes out there that need to be filled. And then maybe you could comment specifically about where you feel Cadence is in addressing those issues.

Jeff, I think I'll take that one. The customers are doing 130 production design today and while, as an industry, we can always do better, in the majority of the flow is in place, then well we have to work with the foundries on yield improvements.

The 90 nanometer Cadence demonstrated its flow at the conference based on open access and has had very positive effects on customers, although as we go into production on 90 nanometer, obviously, there's going to be continuous aggressive moves to improve the technology to make it really streamlined. 65 nanometer is another challenge all over again. I think as an industry, we have to team up with our customers and, to be frank, I think many of our customers are trying to figure out exactly what 65 nanometer is going to mean.

But, from a design perspective, and from the manufacturing perspective. So, one of the things that is both challenging and fascinating about is with every protest load change, you have to not chuck your technology. So, Cadence is in a really strong position at 130 and 90 because of the integrated solutions based on the digital and the analogue flows and then, working really closely with the customers and with on what 65 nanometer is going to need over the next couple of years. We have to design and implement that.

Your head count number is 5700. : OK. Thanks a lot.

Operator, let me bring this call to a close. I'd like to thank everyone for participating with us. We think that we are very well positioned. We're very pleased with the results of this quarter and look forward to more conversations with you as we move through this particular time period. Thanks.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your line.