益華電腦 (CDNS) 2008 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Cadence Design Systems third-quarter 2008 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator instructions).

I will now turn the call over to Jennifer Jordan, Corporate Vice President of Investor Relations for Cadence Design Systems.

Please go ahead.

Welcome to the earnings conference call for the third quarter of 2008.

The webcast of this call can be accessed through our website, www.Cadence.com, and will be archived for one week.

With me today are three members of the Interim Office of the Chief Executive, Lip-Bu Tan, Interim Vice Chairman of the Board; Charlie Huang, Senior Vice President and Chief of Staff of the Interim Office of the Chief Executive; and Kevin S.

Palatnik, Senior Vice President and CFO.

Please note that today's discussion will contain forward-looking statements and that our actual results may differ materially from those expectations.

For information on the factors that could cause a difference in our results, please refer to our Form 10-K for the period ended December 29, 2007, the Company's future filings with the Securities and Exchange Commission and the cautionary statements regarding forward-looking statements in the earnings press release issued today.

In addition to financial results prepared in accordance with Generally Accepted Accounting Principles, or GAAP, we will also present certain non-GAAP financial measures today.

Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures.

Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial measures, including those set forth in our press release of December 10, 2008, for the quarter ended September 27, 2008.

A copy of this press release and financial tables can be found in the investor relations portion of our website at www.Cadence.com.

Finally, I ask that you limit yourselves to one question and one follow-up during the question-and-answer session.

With that, I'd like to introduce Lip-Bu Tan, a director of Cadence since 2004, who has been appointed to the role of Interim Vice Chairman of the Board and a member of Cadence's recently formed Interim Office of the Chief Executive.

To provide a little background, Lip-Bu is the founder and Chairman of Walden International, a global venture capital firm, and he serves on the Boards of Directors of several companies, including Flextronics and SMIC.

He is a successful venture investor with over 20 years of experience in semiconductor and semiconductor design.

Lip-Bu?

Good afternoon, everyone.

Thank you, Jennifer, for the introduction.

I am sorry for my voice, as am recovering from a cold.

We have a lot to cover today.

I will briefly comment on audit committee investigation.

Additionally, I will address our priorities over the next quarter, after which I will turn it to Charlie Huang, for a review of the third quarter highlights, and to Kevin Palatnik, who will provide the details of the restatement and the third quarter financial results.

I would like to emphasize that Cadence, its management and its Board of Directors are actuarially committed to accurate, transparent financial reporting.

As announced on October 22nd of 2008, Cadence will be restating its quarterly financial statement for the first and second quarter of 2008.

Upon the completions of the investigation, the audit committee concluded that the [second] (inaudible) to the restatement were not the result of illegal conduct on any part of any of the directors, officers and any employees.

That said, as a result of the investigation, we identified a material weakness in our controls and have already taken and will continue to take steps to remediate it.

This is a top priority for us.

Kevin will provide more details on the restatement in his prepared remarks.

Turning to the business, Cadence Board of Directors established an Interim Office of Chief Executive to oversee the day-to-day running of the Company operations.

The Board has formed a search commit co-chaired by Dr.

John Shoven, Chairman of the Board, and me, to identify a candidate to lead the Company on a permanent basis.

We are moving quickly and we are exercising necessary patience to find the right CEO to lead the Company forward.

The members of the Interim Office of the Chief Executive will also ensure that the continuity as we transition to a new CEO.

I am delighted to be part of this operating team.

I have served on the Cadence Board of Directors for four years.

As a member of the Finance and the Technology Committee, I have worked closely with the engineering and the products groups.

With the formation of the Interim Office of the Chief Executive, we have a strong team focused on day-to-day operation of the Company.

We are not waiting for the new CEO to move forward.

We have reviewed various Company operations from sales pipeline to engineering and marketing and have [active involved] the customers.

Having spending almost two months working side-by-side with the team, I must say I am very impressed with the depth, strength of the Cadence leadership and the dedication, passion of our employees as they work through this transition.

They have a strong sense of responsibility and accountability.

I believe we have a world-class team in place that is well-positioned to execute on our business strategy.

I am also very excited and confident about our technology.

When I reach out to semiconductor company CEOs, many of whom I have worked with over the course of my career, they emphasize that Cadence technology is very competitive and is cutting edge in many areas.

While technology leadership is clear, we will grow and extend that strength.

We are going to build on our existing process to continually review the investments in our portfolio, and I am sure that the changes we make are online with our strengths and market demands.

In addition to the search for the permanent CEO, I have two other priorities.

First, with Kevin Palatnik, ensure we achieve our planned expense reductions.

Second, focus on the top customer with Tom Cooley, who is leading the worldwide field organization.

Third, together with Charlie Huang, provide leadership to the team to build, sell the best products in the industry, enabling them to do what is best for our customer and the Company.

As I mentioned earlier, over the last past two months, I have worked with the senior management of our research and development teams.

Based on that experience and thoughtful consideration of our product lines and our strategy for growth, we have reorganized, streamlined research and development to leverage our market-leading position in verification, mixed signal and low-power design.

In his prepared remarks, Charlie will provide more detail on the strategy.

Let me comment briefly on the semiconductor environment.

In recent weeks, we have seen a large downward revision in the fourth-quarter expectation for many semiconductor companies.

In general, industry analysts' long-term forecasts suggest the semiconductor industry is maturing.

Design costs continue to rise, and demand volume and pricing impact, the opportunity for returning.

Subsequently, semiconductor companies [must] be very targeted.

They are focused on lowering their costs, improving productivity, reducing time to market and targeting the right process nodes.

However, the turmoil of the financial and credit markets have clearly had impact in the fourth quarter and similarly [to] (inaudible) in 2009, raising the level of caution and uncertainty.

That said, we are setting the foundation for longer-term growth.

We have commenced the shift to a highly ratable business model.

We have streamlined productive element.

We have undertaken a reduction in cost design to refocus the Company and bring our expense base and operating structure in line with our outlook.

The team has been (inaudible) about cost reduction choices.

Our aim is to reduce inefficiency and increase productivity while continuing to invest in areas that enhance our competitive position and growth.

Kevin will provide additional details on this in his prepared remarks.

In closing, I want to reiterate how pleased I am to be here.

Despite the challenging environment, Cadence is moving forward.

The changes we have implemented form a strong foundation for long-term growth.

With highly ratable business model and an appropriate cost structure, Cadence is well-positioned to be much stronger company going forward.

We are dedicated to delivering good technology for our customers and absolutely committed to execute.

Now I turn it over to Charlie Huang for some customer and product highlights for the third quarter.

Charlie?

As Lip-Bu mentioned, I'm going to share some of the recent highlights.

Before I do, I want to take a moment to discuss the changes we have made in our strategy and related reorganization of our research and development team.

As many of you know, Cadence offers the most complete and production proven solutions for electronic design in the industry.

Over the past two months we have honed our strategy to, one, focus on continuously delivering compelling products in our core market; two, offer complete solutions in the areas of mixed signal design, advanced [verification] and systems, advanced nodes and low power to help customers reduce their costs by increasing productivity, reducing time to market and streamlining their design flow; and three, enable customers to get the most out of these products and solutions through our robust offerings of service, education and methodology support.

In support of our revised strategy, we have reorganized research and development into two teams -- the front-end group, which includes logic design, advanced verification and systems under Nimish Modi; and the implementation team, which includes, custom analog, mixed signal, digital, manufacturing awareness and package and board design under Chi-Ping Hsu -- two leaders who are well-respected within Cadence, within the industry and by our customers.

They have excellent track records developing some of the industry's most successful products and solutions.

Nimish and Chi-Ping both report directly to the Interim Office of the Chief Executive to streamline management and accountability for product development.

These new development teams are structured to improve operational efficiency while fostering collaboration and integration across related products and technologies.

We expect new structure will deliver greater product synergy and tighter integration as we leverage our leadership positions to grow the business.

Now let me provide a few customer and product highlights that illustrate the strength of our technology.

The quality and breadth of our technology portfolio continues to provide customers with an attractive consolidation option as they seek to optimize their own productivity and efficiency.

For example, in Q3, NEC computer division selected Cadence as a primary EDA supplier in verification, emulation synthesis and digital implementation, including sign-off technology.

As the following product examples show, we continue to build on our market segment leadership to extend the capabilities and reach of our technology.

In the mixed signal custom segments, interest in Virtuoso 6.1 continues to grow with 30 new engagements in Q3.

We also released the latest update, Virtuoso 6.1.3, which incorporates many new technologies and delivers significant performance improvements.

The capabilities of Virtuoso 6.1 are far ahead of those recently announced offerings from our competitors.

Process design kits, or PDKs, are the backbone of the custom design ecosystem.

We made solid progress with the foundries this quarter on the development of new PDKs for Virtuoso 6.1.

PDKs are available today for TSMC processes from 180 nanometer down to 45 nanometer.

In the third quarter, as part of our strategy to expand into the emerging systems market segment, we announced the release of C-2-Silicon Compiler.

This product enables customers to reduce iterations between system specification and design implementation as well as improved designer productivity for IP creation and reuse.

We are already working with over 30 customers and have received our first renewal.

The increasing demands of system design and verification continue to drive sales of our hardware solutions.

In Q3, our Palladium system beat the competition at North American and Japanese computer firms and a North American communications supplier.

We announced two major enhancements to our advanced verification solutions this quarter.

In the first was a release of the latest version of the open verification methodology.

The second was a significant new release of our enterprise verification solution.

Our leading verification technology helped drive key wins in Europe and Japan this quarter.

On October 15th we announced the acquisition of Verification IP, or VIP, assets from several leading providers.

With the addition of these high-quality components, Cadence offers the broadest VIP portfolio, enabling us to help our customers resolve their key business risks, such as schedule and design process predictability, design team productivity and end product quality.

These asset acquisitions augment our existing leadership in VIP capability, including open verification methodology, multi-language reuse, protocol compliance and automated metric-driven verification methodology.

Last week, we launched the Cadence Encounter Digital Implementation System, a configurable digital implementation platform delivering robust scalability with complete support for parallel processing across the design flow.

With this new system, designers are now reporting dramatically improved design time, design closure and faster time to market for advanced digital and mixed signal devices.

Encounter Digital Implementation Systems advanced node technologies, including litho, CMP, thermal and statistical-aware optimization make it a uniquely capable solution for leading-edge 45- and 32-nanometer designs; those with aggressive design specifications, including 100 million or more instances, 1000-plus macros, operating speed exceeding 1 GHz, ultra-low power budgets and large amounts of mixed signal content.

The system provides comprehensive manufacturing-aware and variation-aware implementation and an end-to-end multicore infrastructure for fast, predictable design closure.

We have extended our market leading Cadence Low-Power Solution to the system level with the introduction of Palladium Dynamic Power Analysis, or DPA, and new capabilities within our InCyte Chip Estimator.

DPA enables SoC designers, architects and validation engineers to quickly estimate the power consumption of their system during design phase, analyzing the effect of running various real software stacks and other real world stimuli.

The InCyte Chip Estimator also helps drive architectural power specification and [intense] through verification and implementation by automatically generating common power format specifications.

We further extended our leading low power with the introduction of the Encounter Power System, a next-generation power integrity and analysis solution for digital implementation and sign-off with endorsements from several customers.

Over 120 designers have now taped out using our low-power solution.

In other digital highlights, a leading memory company completed multiple 45-nanometer tapeouts with our Encounter implementation flow.

Over 150 customers are now using our Encounter timing system in production, and we had several competitive displacements in the quarter.

In summary, Cadence remains committed to delivering compelling and innovative technology to its customers, offering leading capabilities in analog mixed signal design, advanced verification and low power.

We are very confident that the structure and team we have put in place will foster greater collaboration, synergy and efficiency in developing products that leverage these strengths to grow our business.

Now I will turn it over to Kevin for the third quarter results and outlook.

First, let me take you through the previously announced accounting investigation and the restatement of our quarterly financial statements for the periods ending March 29, 2008 and June 28, 2008.

As announced October 22nd, 2008, Cadence will be restating its quarterly financial statements for the periods ending March 29, 2008 and June 28, 2008.

We will adjust $24.8 million of product revenue recognized in the first quarter of 2008 and $12 million of product revenue recognized in the second quarter of 2008.

This revenue will instead be realized over the term of the relevant arrangement.

The results of the audit committee's investigation into the restatement issues are summarized as follows.

During the first quarter of 2008, Cadence executed a term license arrangement with a customer, and during the third quarter of 2008 Cadence executed a subscription license arrangement with the same customer.

As part of our regular quarterly review process for the third quarter, we identified certain factors that, when evaluated together, indicated that the software arrangements executed with this customer both in the first quarter and in the third quarter were negotiated in contemplation of one another.

Accordingly, we determined that the term license arrangement executed during the first quarter and the subscription license arrangement executed during the third quarter collectively represented a multiple element arrangement.

Because the subscription arrangement provides the customer with the right to use unspecified additional software products that become commercially available during the term of the arrangement, we determined that the revenue relating to this multiple element arrangement should be recognized during the term of the arrangement, beginning in the fourth quarter of 2008.

Consistent with good corporate governance practices, the Audit Committee and the Board of Directors, with the assistance of the special counsel and other advisers, conducted an investigation of the events that led to the restatement of our financial results.

Upon the completion of this investigation, the Audit Committee concluded that the circumstances that led to the restatement were not the result of illegal conduct on the part of any of our directors, officers or other employees.

That said, as a result of the investigation, we have identified a material weakness relating to the insufficient design and ineffective operation of certain internal controls over the recognition of revenue from term license agreements.

We have taken and will continue to take actions to remediate the deficiencies identified as promptly as practicable.

As part of the remediation efforts that we have begun implementing in response to the identified material weakness, we re-examined a transaction that occurred during the second quarter of 2008 in which we concurrently canceled a subscription arrangement and executed both a term license arrangement and a hardware arrangement with a customer.

We determined that, despite the cancellation of the subscription arrangement, the customer did not intend to substantively cancel its right to access future new technology because, at the time the subscription license was canceled, the customer intended to re-establish its right to access future new technology at a later time.

Accordingly, we have determined that $12 million of product revenue originally recognized in the second quarter of 2008 relating to the term license and hardware arrangement should be recognized ratably over the term of the arrangement, consistent with the way in which revenue was recognized on the canceled subscription arrangement.

Finally, because we're restating our quarterly report on Form 10-Q for the quarters ended March 29, 2008, and June [28], 2008, Cadence has also recorded two other revenue adjustments that were previously disclosed in our quarterly report on Form 10-Q for the quarter ended June 28, 2008, initially filed on July 29, 2008.

We determined that product revenue for two contracts totaling $8.4 million recognized during Q2 2008 should have been recognized during Q1 2008.

The net result of all the adjustments is an approximate decrease of $16.4 million to previously reported Q1 2008 revenue and an approximate decrease of $21.4 million to previously recorded Q2 2008 revenue.

A reconciliation of Cadence's previously reported and restated statements of operations for the quarter ended March 29, 2008 and the quarter and six months ended June 28, 2008 is included with the third quarter earnings press release.

Let me reiterate.

Cadence is absolutely committed to providing our investors with accurate and transparent financial reporting.

And, while we regret the delay in releasing our results for the third quarter of 2008, the Audit Committee's priority was to conduct a thorough investigation.

Now I will discuss third quarter results.

Results for our key operating metrics for Q3 were total revenue of $232 million, non-GAAP operating margin of a negative 14% and operating cash flow of negative $2 million.

We made excellent progress in Q3 on the transition to a 90% ratable mix.

The mix was over 80% ratable for orders booked in the third quarter with weighted average contract life consistent with our target range of three to four years.

As Lip-Bu addressed, we recently commenced a restructuring program to streamline our business and improve operational results.

The restructuring is expected to result in annual operating expense savings of at least $150 million.

The restructuring expected to eliminate at least 625 full-time positions, representing approximately 12% of our global employee base.

Due to the varying regulations in the jurisdictions and countries in which we operate, the headcount reductions will be realized over a period of time and are expected to be completed in the second half of 2009.

We expect to record a total restructuring charge of approximately $65 million to $70 million pre-tax, of which $48 million pre-tax was recorded in Q3.

We were strategic about restructuring the business with a goal of reducing inefficiency and increasing productivity while continuing to invest in areas that enhance our competitive position.

In Q3 we recorded a GAAP loss per share of $0.67.

The GAAP loss in Q3 included $0.28 for income taxes and the repatriation to the United States of certain foreign earnings and $0.19 for restructuring charges.

On a non-GAAP basis we recorded a loss of $0.09 per share in Q3.

Total revenue for the quarter was $232 million, product revenue was $107 million, maintenance revenue $92 million, and services revenue was $33 million.

Revenue mix by geography for Q3 was 43% for the Americas, 23% for Europe, 20% for Japan and 14% for Asia.

Total cost and expenses on a non-GAAP basis for Q3 were $265 million, a decrease of 6% when compared with Q3 of 2007.

Non-GAAP operating margin for Q3 was a negative 14%, and quarter-end headcount was approximately 5200.

Recall that we commenced the restructuring after the close of the third quarter.

Total DSOs for Q3 increased to 174 days from a restated 146 days in Q2.

The increase was primarily due to lower revenue resulting from the transition to a 90% ratable mix as well as fewer receivable sales.

Quality of receivables continues to remain high with less than 1% of receivables 90 days past due.

Operating cash flow for Q3 was a negative $2 million due to a lower level of receivable sales in the current credit environment.

Capital expenditures for Q3 were $20 million.

Cadence repurchased 7.3 million shares of common stock in Q3 at a total cost of $58 million.

Cash and cash equivalents were $552 million at quarter end, and on August 15th we repurchased the election of noteholders pursuant to the terms of the notes virtually all of our convertible notes due in 2023 at a total cost of approximately $230 million.

Also in Q3, as I mentioned earlier, we repatriated approximately $200 million of foreign earnings to the United States.

At the end of Q3 approximately 55% of our cash position is in the US.

Now I will turn to our outlook for Q4 and fiscal 2008.

For Q4 we expect revenue to be in the range of $215 million to $225 million.

GAAP EPS is expected to be in the range of a loss of $0.29 to a loss of $0.27, and non-GAAP EPS in the range of a loss of $0.06 to a loss of $0.04.

For the full year 2008 we expect revenue to be in the range of $1.025 billion to $1.035 billion.

Order levels for 2008 are expected to be in the range of $775 million to $800 million, resulting in a year-end backlog of approximately $1.8 billion.

For 2008 we expect weighted-average contract life to be in the range of three to four years.

We expect non-GAAP operating margin to be at approximately a negative 3% on an annual basis for 2008.

GAAP EPS for the full year 2008 should be in the range of a loss of $1.13 to a loss of $1.11, and non-GAAP EPS in the range of a loss of $0.06 to a loss of $0.04.

Non-GAAP other income for 2008 should be in the range of $13 million to $14 million.

For 2008 we expect to generate operating cash flow of approximately $50 million.

This is a decrease of $125 million from our prior estimate, and with the credit markets as they are, we removed approximately $60 million of receivable sales from our outlook.

As you know, this is a timing issue between receipt of cash upon the sale of the receivable versus payments over the duration of the contract.

In addition, approximately $25 million of the reduction is due to fewer customers taking advantage of incentives to pay cash up-front.

Approximately $20 million is due to severance payments in the fourth quarter, and approximately $18 million is due to a Q2 receivable sale that was reclassified from operating cash flow to a financing cash flow.

We expect DSOs to be approximately 170 days at the close of 2008.

Capital expenditures for 2008 are expected to be in the range of $105 million to $110 million, which includes $35 million to $40 million for completion of the new engineering building at our San Jose campus.

Now I'll briefly comment on our preliminary look at 2009.

We expect order levels in the range of $800 million to $900 million.

We expect to see a stronger renewal cycle in 2010 and will provide our initial look at expected 2010 order levels on our Q4 earnings call.

In prior guidance we also provided a preliminary view of 2009 operating cash flow of $250 million.

As a result of the lower business levels for 2008 and 2009 just mentioned, our preliminary look at operating cash flow for 2009 indicates that we'll be approximately breakeven.

Approximately $150 million of the reduction is the impact of the lower business levels.

About $50 million is due to a reduction in our assumption related to the percentage of customers taking advantage of incentives to pay cash up-front.

And, finally, $45 million to $50 million results from severance payments.

In summary, as we continue to manage through the global economic downturn, we are pleased that our transition to the new ratable mix is on track.

During the quarter, we implemented a significant cost reduction program to refocus the Company, improve our operational execution and financial performance and bring our expense base and operating structure in line with our outlook.

We remain focused on improving efficiency and productivity while continuing to invest in areas that enhance our competitive position and growth.

Operator, we will now take questions.

(Operator instructions) Sterling Auty, JP Morgan.

I was wondering if you could give us a little bit more color on the CEO search in terms of, have you reviewed any candidates thus far in terms of the Board, and is there any update you can give us in terms of what your thoughts are on timing of naming a new CEO?

Dr.

Shoven and I, we are leading the search for the appointment of CEO, as I mentioned in my prepared remarks, and we are engaging a search firm, Heidrick & Struggles.

We are interviewing candidates, and the committee basically will ensure that the continuity toward transition to a new CEO.

We basically want to look for the best candidate in a timely fashion and exercise the necessary patience to find the right CEO.

We do not comment on the timetable for the search.

Okay.

And then the follow-up question would be, you made comments on the environment.

You've got the turnaround -- the restructuring going.

Kevin, I'm just kind of curious.

As we think about the bookings and the revenue, given the transition to the ratable model, how should we think about when we should see the bottom in revenue or the bottom in bookings?

Should that happen sometime in the December-March time frame and then start to see steady improvement as long as the environment doesn't get materially worse?

Or, where do you see the trough taking place, given the transition?

Sterling, there has been a lot of news in the news recently, and in light of the current environment it has become increasingly more difficult to sell incrementally.

As a result, we are much more reliant on our core renewal cycle.

I won't get specific to the month, but our 2009 outlook takes into account the challenges we believe our customers are working through, and also what is probably the trough in our renewals cycle.

Matt Petkun, D.A.

Davidson & Company.

First, on the CapEx for 2008, Kevin, did you say that would be around $105 million to $110 million?

Matt, I did say $105 million-$110 million, but that includes the completion of our engineering building.

Net of that, we are looking at about $70 million.

Okay, so it's consistent with last quarter's discussion?

That's correct.

Right, okay, just wanted to clear on that.

And then the initial guidance for cash flows next year -- you are saying $150 million of the delta between last quarter's assumption and this quarter's assumption is because of the result of lower business levels.

I would have assumed maybe not as much as that.

Could you share with us what your prior bookings assumption was or orders assumption was, if your current assumption is $800 million to $900 million for next year?

Sure, sure.

And for more details, Matt, we probably should go off-line.

But in the July call when we announced the transition to a higher ratable model, the 90/10, we also talked about order levels of $1.1 billion for the year.

And, if you think about a three to four-year duration, then you can factor down into the cash impact.

Okay.

And then, just finally, any update -- I assume there, just given the accounting review, there were no purchases of your shares made this quarter.

And, given the overall cash situation, you would probably hold off on buyback near-term?

From a repurchase standpoint, in Q3 we repurchase 7.3 million shares.

But going forward, like many other companies, we're really in the mode of conserving cash, given the uncertainty in the markets.

Okay.

And, did you say how much -- what the average price was for those shares?

I didn't.

Can you?

Sure.

Let me look it up here.

I think it was $58 million.

Yes, that's what I see -- $58 million treasury stock in the quarter.

Okay, thank you.

Tim Fox, Deutsche Bank.

Just to follow-up a little bit on the revised guidance here, you have taken down '08, I guess, by about $100 million in revenue in next year's outlook for bookings.

Is this primarily the result, as you mentioned, about incremental business?

I'm wondering how much incremental business had you planned on booking in Q4.

Are you looking at this point now at just primarily renewals?

At this point we are looking primarily at renewals.

When we went out in July's call and we talked about changing the model, we also talked about being patient and waiting for the natural expiry or within one quarter of expiry.

The market has certainly -- or the environment has certainly changed since the July call.

You've seen all the recent announcements in Semicon and so forth, so we really are down to the core renewal cycle for 2009.

Okay, and the follow-up, I guess, for one of the other folks on the call here -- a lot of talk has been made about the market share gains and the possibility of trying to gain some share in your custom business.

I'm just wondering, given the activity level with the new Virtuoso product, are you seeing any share shift at all, any concerns about Cadence's position in that key market for you going forward?

We have had good take-up on Virtuoso 6.1.3, and from what we have seen, we do not see anything that is from [our] competitive offering that makes us vulnerable in this regard.

We see -- our capability is to be far ahead of this.

In general, we believe we have a strong relationship with our customers.

They are counting on us to work with them and be their partner to go through this next cycle, and we overall see our product portfolio to be doing quite well comparatively.

And going forward with the right leadership team in place, the resources at their disposal, we believe the R&D leaders and Tom will continue to grow our business on the solid foundation that we have.

Jay Vleeschhouwer, Merrill Lynch.

Could you first elaborate a little bit more on the functional or geographical effects of the reduction in force in terms of the precise effects that you've taken on sales, support and R&D?

I appreciate the two-part R&D structure now, but could you be a little bit more precise as to what has come out of each part of the Company?

Let me start at the top.

We did announce at least 625 positions.

The breakdown of that regionally -- I'll just comment on North America; that's our most expensive headcount base, and approximately 70% of the reduction will come out of North America.

From a functional standpoint, all functions were impacted.

We did an evaluation.

From a project standpoint, we look for basically appropriate returns.

And we made investments in certain areas.

We basically [dis-embedded] in certain areas.

But at this point we really do believe we have the right structure in place to build on our strengths and grow the business going forward.

Alright.

With respect to the order number for this year, just to clarify, that number is everything -- it's products, services and maintenance.

And if so, is it fair to say that the natural ongoing run rate for the non-product, services and maintenance business, together is, in terms of bookings, something in excess of $300 million a year?

Is that what you are assuming or seeing for this year, and, as well, into next year?

So, Jay, from a bookings standpoint, or order levels, that does include product, maintenance and services.

Okay?

And let me go off-line for anything else, for the details.

Okay.

I guess the point I'm getting to is, the implication of the '09 bookings number now, is that as low or week as '08 product bookings were?

You're almost implying that '09 product bookings will be even lower.

Is that fair to infer for now?

Services over the years have been relatively constant from an order level standpoint.

Okay.

And then, looking into 2010, you're assuming that the '06 and '07 deals that you did with the normal or longer than average durations come up in 2010.

You will renew those.

But, do you think that you can get back to the absolute level of bookings that you might have had back in '05 and '06, just on the product side?

Do you think you get back to sort of the previous roughly $1 billion of annual product-only bookings?

Or, could you fall short?

We do see a stronger renewal cycle in '010 and '011 compared to '09.

As I mentioned earlier, we do believe that that is the trough in our core renewal cycle.

Beyond that, the environment is so uncertain that -- let me just leave it there.

Alright.

And then, lastly, a number of your customers are under not just economic distress, but certainly under some kind of structural distress.

They have had to divest or shut down or otherwise trim themselves in some way -- like NXP, for example.

Are you seeing customers coming back to you intra-contract and -- to try to negotiate down, even well before the normal early renewal process, just because they are under so much unusual duress?

We have seen some of that, Jay, but not in large amounts.

The core of our business, beyond the large accounts, not the same financial distress that the larger companies are in.

K.C.

Rajkumar, RBC Capital.

Let me pursue a question asked earlier.

Do you guys have a target time period for choosing the new CEO?

Because, as you can all imagine, trying to finalize on the Company in a reasonable time frame, I would imagine, is kind of critical for the Company's prospects going forward.

I mentioned earlier, we're trying to find the best candidate, and we don't have a timetable.

But we exercise the necessary patience to find the right CEO.

And then, meanwhile, I think the Interim Office of the Chief Executive has been working to hunt with the team and then execute the plan, and we are (inaudible) for the new CEO.

On the headcount cuts that have been done so far, can you guys give us a profile for how much OpEx savings should we expect in the first two quarters of next year?

I'm not going to get into that level of detail on the call.

As you might imagine, this has a bit of staging as we look throughout 2009.

In 2008 we have the Warren Act in California, so we have to give our employees 60 days notice.

Outside of California, we can basically effect the restructuring much sooner.

And in jurisdictions around the world, there are varying regulations that we have to comply with.

So, as I said in the prepared remarks, our expectation is to be complete with restructuring by the end of 2009.

Finally, a question on products.

Into next year, can you mention a few key products from which you are planning to get the maximum booking rates?

Is it a transition to node-based bookings, or is it coming from the launch of Virtuoso?

Or, is it to some of the system electronics?

We see our customers focused more around mixed signal, low-power and verification product lines, and there are take-ups on advanced nodes, obviously.

But with the economic environment, I think the number of customers taking up advanced nodes or very advanced nodes will be somewhat moderate.

That doesn't mean that we will slack off on developing these technologies as we think these are the foundations that we'll build for our future growth.

Terence Whalen, Citigroup.

I think, Kevin, you mentioned you expect orders next year to range between $800 million and $900 million.

I guess a corollary question -- do you expect backlog to grow next year from the $1.8 billion, and backlog you expect in 2008?

A little premature, but I will say that backlog should be about flat.

We are still working through the.

There's a lot of uncertainty going forward, but it should be about flat.

Okay, and then my follow-up question is with regard to expenses.

If I take the third quarter expenses and think of them in terms of marketing, sales, general and administration and R&D; if I cascade that run rate forward, is that a decent baseline?

Or, from here, have we only seen a partial amount of expense cut, and could we expect quarterly expenses, perhaps, to be, say, 10% below that going forward?

I think you'll see improvement.

As the restructuring gets phased in, you'll see improvements in the quarterly expense, OpEx.

Free cash flow, I think you said your baseline this year is close to 70.

What about next year?

What is a reasonable CapEx number?

From a CapEx standpoint, our planning is 70.

We're looking at that very hard to see if we can reduce that, but for planning purposes at this point, $70 million.

Raj Seth, Cowen & Company.

Kevin, you talked about an expectation that backlog -- we would exit this year with backlog of about $1.8 billion.

In order to help us model and in the spirit of transparency you talked about, can you talk a little bit, if not exactly, about what you would expect the revenue signature of that backlog to look like over the next couple of years?

Raj, in our Q4 call we'll come out with revenue and EPS guidance for 2009, and my preference would be to do it at that time.

Okay, even how much you would expect in 2009 of the $1.8 billion, even roughly, it's something you don't want to give out?

Not at this point.

It's very early in the process.

We were compelled to give you order levels for 2009 because of the impact to cash, but the remaining details we'll talk about in the Q4 call and late January, early February.

And as you go through the subsequent quarters, will you be providing any additional information to help us model this?

Will you be giving, for example, a bookings mix every quarter?

Are you going to give us that kind of detail every quarter?

Yes, Raj.

When we talked in July and talked at length about the new model going forward, I mentioned that I did believe in increased transparency.

We're still working through the details of that.

I wanted to achieve a stable model and then start opening up to provide more transparency.

I think we made good inroads in Q3.

I believe we'll continue to make good inroads in Q4, and I will report on that in late January, early February.

How have you effected the shift in mix in the business?

How have you gotten customers to move towards subscriptions from term deals, given the fact that, at least in your model, historically, people have been able to pay over time so there's not a big difference, at least as I understand it, in the cash outflow?

How have you been getting customers to move towards subscriptions?

Sure.

The easiest way to create a ratable situation, if you will, is basically combining a gold card and a platinum card; or, if you will, a term agreement and a subscription agreement.

From an accounting standpoint, that by default becomes a multiple-element arrangement, and revenue is taken ratably over the term.

Okay, so you're not moving pricing around, per se; it's really more bundling to give you the contingent liability that requires the ratable recognition?

That's correct.

Rich Valera, Needham & Company.

With respect to cash from operations, Kevin, is there anything you can say about what you would look for in 2010 in a more normalized financial environment so, presumably, you don't have some of the issues with respect to prepayments by your customers and you can factor in a more normal level of receivables?

I'm just trying to get a sense of how you would view a more normalized cash from operations number, although you are admittedly not fully phased in, still, at that point.

I think it will correlate to just overall order levels.

So, since we see a stronger renewal cycle in 2010 and 2011, at this point in time we would expect that cash would grow beyond the breakeven.

But at this point, it's really premature to talk about 2010 or '11.

Great.

And, I know before the market really turned down -- and I think this was back in August -- you were talking not so much sort of officially, but about still maintaining the goal of a 20% to I think even 25% operating margin.

I guess my question is, is that still an operative goal?

If so, is there any time frame you would be willing to attach to that at this point?

So, in terms of transitioning to a 90/10 model, we still believe in that transition or at the end of the transition, we can get to mid-20s or higher operating margins.

Given the length of our contracts are, on average, three to four years, we would expect that that's approximately the transition time to get through the new model.

Great, that's helpful.

Can you give us the tax rate, other income and share count that's embedded in your fourth quarter guidance, if you have that detail?

I think you can get there, Rich, on the non-GAAP OI&E, the, $13 million, $14 million was the annual number.

When we filed the Q in the next day or so, you'll have that detail.

Shares should be relatively flat.

And there was a third item?

The tax rate?

Oh, tax rate, okay.

So, on the non-GAAP side, we use 26%.

Very good.

And the share count at the end of the quarter, of the end of Q3, was that pretty similar to the overall, or was the ending count actually lower than the average count?

Ending count was slightly lower.

Sterling Auty, JP Morgan.

I think you mentioned that in the quarter the bookings were over 80% ratable.

Can you give us an indication of what you're thinking here for the fourth quarter?

Should it still be that high?

Could it fall back just because of seasonality and some customers' preference?

And, when do you think you can finally make that transition for the 90% of bookings being ratable?

So, Sterling, for Q4, we believe that we'll see, at a minimum, the same level of ratability that we did in Q3.

Early forecasts say it may improve a little bit, but we are waiting to see.

Yes, I think that answers it.

Okay.

And then, can you review -- did you mention the bookings level for the full year in '08 for comparison to what you said for '09?

Yes.

We said, between $775 million and $800 million, order levels for 2008.

I'm going to ask you, even though I don't think you will answer.

But how much of that was front-half loaded when you had more up-front revenue recognition?

So, just seeing how we impact and get to that $1.8 billion backlog for the end of the year?

So, Sterling, when we announced the model change in July, we really did focus on the going forward rather than looking back.

We are all about putting the Company on the right foot to grow and build a strong foundation going forward.

So, let me leave it there.

There are no further questions.

You may proceed with your presentation or any closing remarks.

Well, thank you, everyone, for calling in and for your questions, and we will talk to you early next quarter.

Thank you.

Thank you for participating in today's Cadence third-quarter 2008 earnings conference call.

You may now disconnect.