益華電腦 (CDNS) 2009 Q3 法說會逐字稿

Good afternoon.

I'll be your conference operator today.

At this time, I would like to welcome everyone to the Cadence Design Systems third quarter 2009 earnings conference call.

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

(Operator Instructions) Thank you.

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

Please go ahead.

Thank you, Paula, and welcome to our earnings conference call for the third quarter of 2009.

The Webcast of this call can be accessed through our Website, www.cadence.com and will be archived for two weeks.

With me today are Lip-Bu Tan, President and CEO; and Kevin 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 January 3, 2009, our Form 10-Q for the period ended July 4, 2009, 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 results, which can be found in the quarterly earnings section of the investor relations portion of our Website.

A copy of today's press release, dated October 28, 2009, for the quarter ended October 3, 2009 and related financial tables, can also be found in the investor relations portion of our Website at www.cadence.com.

And now, I'll turn the call over to Cadence's CEO, Lip-Bu Tan.

Good afternoon, everyone.

I am pleased to report the third quarter results.

Revenue for the third quarter of 2009 met expectations.

Non-GAAP net earnings per share were ahead of forecast.

Cash flow from operations was better than planned.

And approximately 90% of orders in the period were ratable.

Despite another quarter of sequential improvement in the semiconductor industry, driven by tight inventory controls, customers are keeping a close reign on research and development budgets.

This is consistent with our experience in the past downturns.

As a result, we expect EDA recovery to lag semiconductor recovery by several quarters.

We experienced some of this lag in the third quarter, as bookings were lighter than expected.

Kevin will speak to this in his prepared remarks.

In the meantime, our efforts to strengthen our relationships with our customers and partners, from the semiconductor companies, to the foundries and IP suppliers are yielding positive results.

The feedback I'm receiving from them is that the level of engagement is now very good.

Cadence R&D is engaging earlier and more closely with customers.

We are winning an increasing number of benchmarks in digital design, as well as our traditional areas of strength, in mixed signal, custom design, verification and PCB.

In addition, we are delivering now capabilities and technology that directly address our customers' needs for greater productivity, faster time to market and reduced risks.

We still have a lot of work ahead of us but we are moving in the right direction.

We are making good progress in the digital market segment, the Encounter digital implementation system or EDI system, which will launch in December 2008, is gaining traction.

In January, over 70 customers had adopted EDI systems.

It enables many customers to reduce their overall cost of productions and manufacturing, in providing a single integrated solution for all aspects of digital design and signoff.

This translates into greater productivity for designers and better quality of silicon with regards to die size, timing, power and yield.

During the third quarter, we had number of competitive wins with EDI systems, including two related to low power.

One was a leading North American semiconductor company, focused on power management systems.

The other was Global Unichip, a Taiwanese fabless design company.

Global Unichip adopted the EDI system as part of the Cadence low-power solution.

After benchmarking our capabilities on the 65-nanometer, 10-million-gate low power design that had over 10 power domains and 50 power modes.

Global Unichip expects to enhance designer productivity and produce superior low power circuits using EDI system.

Cadence is the proven partner for custom analog design.

Our Virtuoso 6.1 platform has been introduced to and is being adopted by a broader set of customers, this is primary due to its highly accurate integrated custom design flow.

[Deva] Technology, which supplies high performance analog IC's for communications, computer, automotive and industrial applications, adopted a broad range of Virtuoso custom design technology in the third quarter.

A growing trend among our customers is a need to combine both digital and customer analog in the same design.

We have improved mixed signal designers' productivity through the interoperability of the EDI and Cadence Virtuoso platform for mixed signal prototyping, implementation, analysis and signoff, including manufacturing and DFM.

The value of this type of integration was demonstrated in the competitive replacements that we won for mixed signal design at a major North American semiconductor company, which is proliferating the solution within its wireless ASIC business.

Now, let me shift gears and talk about our front end business.

Verification persists as a major challenge for our customer.

This quarter, we advanced our verification solution along three fronts.

First, we announced our collaboration with Mentor Graphics Corporation to drive interoperability between verification components developed using legacy methods and those complying with open verification methodology or OVM.

OVM is gaining traction and is well on its way to becoming the industry standard verification methodology.

Second, we released OVM compliant PCI Express 3.0 Verification IP.

Our VIP portfolio is now two times larger than that of our closest competitor.

Third, we introduced Incisive Enterprise Verifier, which delivers unique capabilities in both formal analysis and simulation.

Moreover, our unique Engineering Change Order management analogy or ECO continues to proliferate throughout our installed base.

The combination of these initiatives gives our customers an effective way to close verification.

For example, Fujitsu microelectronics recognized significant time and cost savings through this approach.

In systems development, we are focusing on two customer challenges.

First, we are increasing their productivity by elevating their design and verification to next level of abstraction.

This quarter, we announced the industry's first transaction level modeling, or TLM, design and verification flow.

We also announced integration of this flow to support leading embedded software environments, enable OVM hardware/software co-verification.

Second, we introduced a system validation solution, in collaboration with Rohde & Schwarz International, to address the emerging 4G wireless market.

Rohde & Schwarz International is a leading supplier of solutions in the field of test and measurement, wireless, broadcasting and radio communications These two initiatives combine to provide a more effective design and verification system development environment for our customers, enable them to significantly reduce costs.

Customers such as [E3,] Nethra Imaging and [Silicon Height] benefit from this now.

In addition, NVIDIA recently used Cadence solution in Incisive Palladium to deliver its most complex graphics possessor to date.

This next-generation GPU code named, Fermi, with CUDA and unified cache architecture have 512 cores, representing 3 billion transistors.

Making it three times larger than previous high-end graphic processor.

Cadence solution's ability to verify this entire multi-core design and this embedded software represented significant major breakthrough in electronic design scalability and was crucial in the rollout of the widely acclaimed Fermi GPU.

Speaking of multi-core, Cadence announced an extension to the multi-core support across all the technology platforms.

This puts us in a leadership position to enable customers' transition to multi-core.

Now, I would like to talk to you about the progress we are making with our ecosystem partners.

As I've said before, our progress with these key partners is critical to our customers' success and ours.

Over the past six months, we've worked extensively to improve our relationship with them.

And I'm pleased that we are starting to see the result of this efforts.

For example, in August, Cadence entered into a multiyear software service agreement with GlobalFoundries.

As a first step in the collaboration, GlobalFoundries has adopted a comprehensive suite of Cadence technologies, including the Virtuoso and Encounter design environments, and an additional solution for design, verification and manufacturing at the 45-nanometers and beyond.

Furthermore, GlobalFoundries will team with Cadence service organization to build differentiated capabilities that will support the most sophisticated chip designs at advanced process nodes.

Our expertise in custom design was an important factor in GlobalFoundries' decision to partner with Cadence.

Last quarter, we also announced that we will collaborate with ARM to create next generation SoC design flow that will accelerate time to market and lower costs of SoC integration and verification.

Under the terms of the agreement, Cadence chip planning system and the Incisive functional verification will be combined with ARM's AMBA Designer, Performance Exploration tools and Network Interconnect IP.

The results and benefits of this combination flow were demonstrated last week at ARM's [tech country.]

Related to next-generation design, it is more important than ever in a difficult economy, that we provide innovative technology and solutions for our customers to design differentiating products.

Next week, we will celebrate the outstanding engineers and design development teams who make this possible with Cadence Excellence in Innovation Awards.

The Excellence in Innovation Award program was developed to promote and publicize the wealth of innovative technology and products developed internally at Cadence.

With more than 800 patents issued, Cadence's patent portfolio is the largest -- larger than any other EDA competitors.

The innovation celebrated with these awards move the electronic design forward.

With the program itself supporting our priorities of creating long-term shareholder value, optimizing our customer development process and executing on our objectives.

Finally, we are strengthening the executive management team with the addition of Chief Marketing Officer, John Bruggeman.

John came to us from the embedded software company, Wind River, bringing an excellent understanding of our customers and the broader semiconductor ecosystem.

Already, he's helping us to refine and enhance our strategy.

In conclusion, we are on the right track.

Our level of engagement with customers have improved, as evident by increasing wins in digital design and continued success in traditional areas of strength, mixed signal, custom design, verification and PCB.

New capabilities, innovation and invention in these areas are improving our customer productivities and reducing their costs of development so that they can bring superior products to market.

We continue to strengthen our management team.

We are refining our strategy and improving our operational efficiency to position us for longer term when the renewal cycle improves.

We still have a lot of work to do but we are pleased with our progress to date.

I would like now to turn the call over to Kevin to discuss our financial results.

Thanks, Lip-Bu.

And good afternoon everyone.

In a continuing difficult economic environment, I'm pleased to report sequentially improved third quarter results.

Highlighted by strong expense management, which drove a 13 point improvement in operating margin and contributed to better than expected cash flow.

Today, I'll first summarize Q3 '09 financial results, then move to the outlook for Q4 '09 and the full-year 2009.

Results for the Company's key operating metrics for Q3 were; Total revenue of $216 million.

Non-GAAP operating margin of 6%.

And operating cash flow of $22 million.

In Q3, we recorded a GAAP loss per share of $0.05.

On a non-GAAP basis, we became profitable, reporting net income of $0.03 per share.

Non-GAAP EPS was better than expected primarily due to lower operating costs.

Total revenue for the third quarter was $216 million, of which, product revenue was $97 million, maintenance revenue was $92 million and services revenue was $27 million.

The sequential increase in maintenance revenue was due to the receipt of semi-annual payments from certain customers for which revenue is recognized when payment is received.

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

We continue to make good progress in our transition to a 90/10 license mix.

Approximately 90% of orders booked in Q3 were ratable.

However, the EDA environment remained challenging and Q3 orders were lighter than expected due to the impact of financially distressed companies, a slight uptick in maintenance cancellations and weighted-average contract life coming in at the low end of the guided range of 2.8 to 3.2 years.

Total costs and expenses on a non-GAAP basis for Q3 were $204 million, a decrease of 23% from Q3 of 2008, reflecting the success of our expense management efforts.

As a result of this very focused expense management, non-GAAP operating margin for Q3 improved to a positive 6%, as was said earlier, 13 points better than Q2.

Our Q3 '09 ending headcount was approximately 4,400, down from 5,200 at the end of Q3 of 2008.

Q3 operating cash flow improved to $22 million.

But I'd like to note that approximately $10 million came from early payments that were scheduled for Q4 '09.

Total DSO's for Q3 decreased to 108 days from 130 days in Q2, primarily due to lower receivable balances.

Our quality of receivables continues to remain high, with less than 1% of receivables over 90 days past due.

Capital expenditures for Q3 totaled $8 million.

And cash and cash equivalents were $571 million at quarter end.

Now, I'll turn to our outlook for Q4 '09 and the full year 2009.

For Q4 2009, we expect revenue to be in the range of $215 million to $225 million.

Q4 non-GAAP operating margin is expected to be in the range of 6% to 8%.

GAAP EPS for the fourth quarter is expected to be in the range of a loss of $0.08 to a loss of $0.06.

And non-GAAP EPS is expected to be in the range of net income of $0.02 to $0.04.

Operating cash flow for Q4 is expected to be in the range of negative $10 million to negative $5 million.

Q4 operating cash flow is less than Q3 due to the payments that were scheduled for Q4 '09 but paid early in Q3 '09.

For the full year 2009, we expect revenue to be in the range of $845 million to $855 million.

We expect weighted-average contract life to be in the range of 2.8 to 3.2 years for the full year of 2009.

Even though lighter than expected orders were experienced in Q3 and the continued challenges in the environment, we are reducing our estimate of expected orders for the year to a range of $600 million to $625 million, from the prior range of $625 million to $675 million.

GAAP EPS for 2009 should be in the range of a loss of $0.66 to a loss of $0.64.

And non-GAAP EPS is expected to be in the range of a loss of $0.10 to a loss of $0.08.

Non-GAAP operating margins is expected to be in the range of a negative 4% to a negative 2% on an annual basis for 2009.

Non-GAAP other income and expense for 2009 is expected to be in the range of a negative $5 million to a negative $3 million.

Operating cash flow for the full year 2009 is expected to be in the range of $15 million to $20 million.

This full year range takes into account severance payments from prior restructurings in the amount of approximately $55 million.

Our target for total DSO's at year-end 2009 is expected to be in the range of 120 to 125 days, a further improvement from our previous estimate of 135 to 140 days.

Capital expenditures are expected to be in the range of $40 million to $45 million for the full year.

In summary, our third quarter results demonstrate improved operational execution by the Cadence team.

We continued to successfully reduce costs and became profitable in the quarter.

We still have work to do and we'll continue to focus on operating efficiency, while positioning the Company for longer term growth.

Operator, we'll now take questions.

(Operator Instructions) Your first question comes from Sterling Auty of JPMorgan.

Thanks.

Hi, guys.

It's my sense, in terms of when you look at the industry, I'm wondering if you're seeing the same thing.

That you're not going to see the uptick in orders until we get into the new year because you need the new R&D budget set based on a healthier environment.

And then, once you get into the new year, making their decisions on what projects they're going to do before they turn to spending.

Is that the kind of lag that you're talking about?

Yes, Sterling.

I think that captures it pretty well.

As you know, most companies do their budget planning in the fall for the following year.

And so while we see, from a semiconductor standpoint, orders tick up a bit, I think they're letting that flow through and expanding margins, keeping a tight rein on their R&D buckets.

But as they do fall planning for 2010, there should be some planning for additional expense related to software.

There is a lag for that and our view is we'll probably see that in the second half of 2010.

Okay.

And then, as you look at the -- on your expense side, given the guidance that you have, what should we be thinking in terms of total expenses in the fourth quarter relative to the third quarter, up, down or flat?

And does that become -- where's the low-water mark as you look at the total expenses based on what you're planning from here?

Sure.

Thanks, Sterling.

So all in, both cost of goods and operating expense, we were at $204 million for Q3.

We do expect a minor uptick in Q4 related to the seasonality of our quarters.

Q4, typically, is our largest quarter, so commissions take a little bit of an uptick.

Trying to establish Q3/Q4 expense as the basis for 2010, I think it's a little misleading, since seasonally, the second half of the year, many folks pay off a portion of their payroll taxes.

That comes back in the first half of the year.

In addition, like many companies in the Valley, in 2009, we did not have a merit program.

So, using Q3/Q4 as a new base, I think, is a bit misleading.

Okay.

And last question, which is a little bit nitpicky but in terms of ratable mix, when you say it's approximately 90%, was it below 90% or above 90%?

It was slightly above 90%.

Okay, thank you.

Thank you.

Your next question comes from Rich Valera of Needham & Company.

Thank you.

Just trying to understand the reduction in bookings.

This is, I think, the third quarter in a row where you've reduced bookings.

And it doesn't really seem like the environment has been getting incrementally worse.

Admittedly, maybe not getting a lot better.

But just trying to understand what on the margin caught you by surprise this quarter?

Because you had already talked last quarter about distressed companies, bankrupt companies, a lot of it seemingly the same things that we talked about this quarter.

So, just trying to understand sort of what incrementally kind of caught you off guard this quarter versus last quarter?

Yes, Rich, sure.

So we did talk when we lowered outlook or the bookings guidance, orders guidance, if you will, in Q2, to the range of $625 million to $675 million.

Embedded in that reduction was, we said, approximately $50 million for bankruptcies.

And that was based on our experience, obviously, of Q1 and Q2.

We fully expected the number of bankruptcies or financially distressed companies to diminish in Q3 and Q4.

And we saw a little bit of an uptick.

And so, that's why we did a little bit of fine-tuning just to be totally transparent at the order level and brought it to the new range of $600 million to $625 million.

Okay.

And I know it's early and you guys don't want to give 2010 guidance but sort of looking at the Street numbers in terms of revenue for next year, something north of $900 million.

You'd need, I'd say, at least $850 million of bookings to have a shot at those kind of numbers.

Which is a pretty huge jump, certainly percentage-wise, from where you are now.

And it's not at all clear that you'd be willing to back something like that.

And I know you don't want to give numbers but I'm just wondering, can you give any color about the relative strength you see in 2010 versus 2009, to give some confidence that such a substantial jump might be possible next year?

Yes, so Rich, as you said, we won't calibrate, in any detail, 2010 until our Q4 earnings call.

But what we said in the past and we're saying today is that, we do see a better renewal year in 2010 than 2009.

Can you qualify that further, as in a much better renewal year or would you be willing to go that far?

No, it is a better renewal year and that's all I'll say at this point.

Okay.

And just in terms of the renewals you did have, how were the run rates?

And I think last quarter, you said, if you sort of backed out the companies that went away or went bankrupt, that you were seeing fairly flat renewal levels, relatively flat.

Can you characterize that for the third quarter?

Sure.

I'd say, in general pricing, is very, very competitive right now, especially in the digital area.

As you know, we moved to a 90/10 model, we've made very good progress on 90/10.

And that allows us to be a bit more patient so we can focus our deals on the right value.

How about run rates, though?

How does that translate to run rates?

I think pricing and run rates correlate.

Pressure on pricing will put pressure on run rates, generally.

Right.

Keeping with the same durations.

Right.

Okay.

Thank you.

Thank you.

Your next question comes from Raj Seth with Cowen & Company.

Hi, thank you.

Just a couple of follow-ups, if I could.

The lower order prospective you have for this year, whatever the absolute number is, has that had a material impact on your bookings expectations for next year or is that primarily driven by the renewal cycle beginning to come back?

Yes, Raj, certainly, we wanted to fine-tune, right, the Q4 outlook as well as the full-year outlook given now our Q1 through Q3 experience.

As far as how it rolls out, if you will, into 2010, let me reserve comment with that until we come out and fully calibrate 2010.

Okay, fine.

Can you follow up a little bit on your commentary with regard to expenses?

You suggested Q3/Q4 probably aren't the right baseline to use given some seasonal spending, et cetera.

Can you help us think about what kind of sequential decline we might see in Q1 of next year or is that also too far out?

Yes, I don't expect a sequential decline.

In fact, I see a sequential increase.

There's a couple of things, like payroll taxes or a portion of payroll taxes, that come back in Q1/Q2.

In addition, we have our annual sales kickoff in January, so that drives a little more expense when compared to Q4.

So, again, it will be an increase between Q4 and Q1 rather than a decrease.

Okay.

Thank you, that's helpful.

I must have misunderstood you.

And can you just touch on what you mentioned with regard to NVIDIA with their Fermi architecture.

Just a quick question, is that an emulation product that you use there or is that software that was used?

And then, a separate question but related, have you begun to see yet a pickup in your emulation business, which is usually a leading indicator for you, tends to follow capital cycles more than R&D cycles, have you begun to see a pickup yet in that business?

Thanks.

The answer is, now.

And with respect to your question about NVIDIA and we're very excited we're working with them on this very advanced graphics processor chip.

It's emulations and it's a challenging design.

And we are very proud to have helped them to do this very big multi-core, 512 core, that I mentioned earlier.

And so, I think it's a very big accomplishment there.

So that was emulation solution but in general, you haven't yet seen a broader pickup in the emulation business.

Correct?

That is correct.

That's correct, Raj.

We expect that CapEx constraints are going to last another quarter or two before we see a pickup.

Okay, great.

Thank you.

Your next question comes from Matt Petkun from D.A.

Davidson and Company.

Hi, good afternoon.

First, Kevin, I don't know if I missed it.

Did you give the average duration of the deal signed just in Q3?

Yes, Matt, we said we were at the low end of the range from 2.8 to 3.2 years.

Okay, thanks.

And then, help me understand how we should think about the maintenance line item.

That was a surprise coming back and I think a useful surprise, given the softness in the product revenues.

What drove that increase and how should we think about that line item going forward?

Yes, so Matt, certain of our contracts are what's called -- we revenue them when due and payable.

And what that basically means is we don't take revenue until we receive the cash.

And we have certain customers that are on a semi-annual billing plan.

So they get billed, if you will, in Q2 and Q4 and we get paid in Q1 and Q3 and that drives the revenue increase.

And you're recognizing that revenue not ratably but up front or at once?

Not ratably but when we receive --.

On payment.

So per the terms of the billing plan, when we receive payment, that's when we'll take the revenue.

Okay.

So what is -- I'm having a hard time coming up with what your normalized maintenance levels are.

Is it kind of the average of the last three quarters?

Plus or minus, yes.

That's a good proxy.

Okay, great.

And then, I think it was roughly a $37 million decrease to the midpoint of the bookings.

Did you -- is your new guidance, assuming that the bulk of that bookings short fall occurred in Q3 or are you having a softer outlook for Q4 bookings as well?

It's the latter.

Softer outlook for Q4 in particular?

Yes, we see more of the distress, a little bit more in front of us than behind us.

Okay.

And can you be any more specific about distress?

When I read the headlines, I see more companies coming out of bankruptcy than going into it.

So, maybe if you could help us understand what types of customers you're talking about and what types of distress you're talking about.

Sure, Matt, that's a good question.

I think what we've said throughout the year is we don't see a lot of large renewals in 2009.

That we see more of those in '10 and '11.

And so, the majority of our business in 2009 is the mid-tier to really small end customers.

And it's the small end, if you will, the smaller customers that don't have the financial resources, obviously, of the larger customers.

And it's those customers, if you will, that are falling down a bit.

Okay.

And is it safe to say that a lot of that's more on the analog and then the system interconnect part of the business?

It's across the board.

Okay.

Thanks so much.

Thanks, Matt.

Your next question comes from KC Rajkumar with RBC Capital Markets.

Hi, guys.

Thanks for taking my question.

On the lower bookings guidance, is it possible to break up between a lower contract life and the higher rate of companies going out of business?

KC, just directionally, I'll say that the majority of the decrease was related to financial distress than the lower duration.

Okay.

Second, are you folks continuing to see that the renewals are coming closer to expiry?

Yes, I think, KC, in this environment, we want to be patient, given our 90/10 model and get the right value.

And customers are looking to extend the utility of their software as long as they can.

So, yes, we're seeing more and more closer to expiry.

Going into next year, is it fair to assume that the bulk of your orders will be coming from larger sized customers, as opposed to this year?

I'm sorry, KC, the bulk of our --?

Would be coming from the larger size customers?

Yes, so I think one way to characterize this, if we break down our customer set into super large, large, medium and small.

Whereas, in 2009, we see more of our business coming from medium and small.

Next year, we'll see a large, medium and small.

Okay.

Do you expect next year's orders to move more towards companies that are in the process of node transition, as opposed to the other kind?

Yes, KC, just generally, I'd say the folks that move to further advanced nodes, they establish or buy a fair amount of software to help in that transition but it's not proliferated across the company.

They're very targeted with those advanced nodes.

So my expectation is more of the increase, if you will, or more of the renewals will come from existing nodes.

Okay.

And lastly, the increase in your DFM segment compared last year, is that mostly because of the new acquisition?

Yes, it is related to the acquisitions that we did in the summer of 2007 but as you know, most companies in EDA offer some level of remix, re-profiling of the configuration.

And we saw, in Q3, a couple of companies do remix into that DFM software set.

And lastly, if I could, when we try to sort of reconcile our models to work towards the long term goal of a 25% off margin, what would be a reasonable number that we can assume for expense growth for the next couple of years?

KC, I'd rather talk about 2010 and beyond during the Q4 call.

Okay.

Thank you, folks.

Thanks, KC.

(Operator Instructions) Your next question is a follow-up question from Sterling Auty of JPMorgan.

I know you don't give the detail in terms of what the bookings actually were but just a couple of qualitative questions around it.

Were bookings up sequentially from the second quarter to the third quarter?

Yes.

In order for you to get to, let's say, the midpoint of the new bookings guidance, would the bookings have to be up sequentially again or could they be flat or down?

Our expectation is that since Q4 seasonally is always our strongest quarter, sequentially they should be up.

Okay.

Because I'm looking at it -- if I look at the duration and I look at the mix and how it all cascades through, maybe I was just too aggressive with my fourth quarter, I actually think your bookings in the quarter were more in line.

So, that's what I'm trying to reconcile in terms of the distressed.

Did the distressed actually hit partially in the third quarter but most of the impact happens to the fourth quarter?

I think that's a fair representation.

All right.

Thank you.

Thanks, Sterling.

Your last question comes from Rich Valera of Needham & Company.

Thanks.

Kevin, I was just hoping you'd give us the baseline expenses that are implied in the fourth quarter guidance..

You mentioned $204 million was the baseline for the third and I'm coming out at around $210 million, I think, for the fourth quarter.

But I just wanted to sort of confirm that that was the level that was implied there.

Yes, so I did say $204 million and I want to be clear, that's more than operating expense.

Right?

That's all expenses, sure.

We expect a slight uptick, probably not as strong as you've calculated.

Okay.

That's helpful, thank you.

Thank you.

We do have another question from Greg Eisen of ICM Asset Management.

Thanks, good afternoon.

I'll make this brief.

I was just a little bit confused on the ratable aspect of your business this quarter.

You said that slightly above 90% of the orders booked in Q3 were ratable in their revenue recognition method.

For the revenues that you actually recognized in the quarter, the revenues, not the booking orders but revenues, can you tell us -- I didn't quite get, what was the ratable portion of that?

If you said that and I didn't hear it?

Greg, yes, typically, we just talk about the 90/10 model and how close we are to the 90/10.

The approximate -- if we're plus or minus a small bit around that 90%, we just say approximately 90%.

And that's about as much guidance as we give.

Well, you said what the orders were but what's the answer to the question on the revenues themselves?

I don't quite follow what you just said.

Well, so what I say is, generally from a business perspective, what we describe in terms of order levels is just the ratable number at -- compared to 90/10.

And so, for the quarter, we were approximately 90%.

That's our target model and it just confirms that we met our goals, if you will, for ratability in Q3.

Great.

That's what I needed to know.

Thank you.

Thank you.

Okay.

With that, thank you everyone for -- one more question?

Yes, your final question is from Doug Rudisch of Brookside.

Hi, guys.

I'm trying to reconcile the transitory versus the permanent.

And I know at times like these, it's a little bit tricky, especially when you're in transition, to get the quarters exactly right.

But when you look out a little bit longer and you think about the permanent endpoint relative to where you were, from both a margin and a booking perspective, how much do you think is permanent loss and how much do you just think is timing and transitory issues?

And assuming the end markets are fine, what's the sense of the -- without giving a specific number, the directional trajectory, you should get back to X what you think is permanent loss?

So Doug, if I followed most of it, are you talking related to the 90/10?

No, I'm talking related to bookings now, short term versus where the model should recover to on a matured basis in terms of revenue and EBIT margin.

Clearly, the revenue probably won't be where it peaked last time and there is clearly some permanent loss in terms of bankrupt customers and other industry issues.

But what's your sense of your feel of where we should all end up at the end of the day once you work through some of this transitory stuff, which is still hard to forecast?

Yes, Doug, you're asking me to go out into 2010, '11 and '12 and I'm really not prepared to do that.

I think we should wait until the Q4 call and then, we can talk specifics around 2010.

And that will help everyone with trajectories going forward.

Yes, again, I wasn't asking for specific numbers.

I was just asking for some sort of emotional color from either you or Lip-Bu on where you think this is all going at the end of the day.

And I understand if you're not prepared to talk about it but just wanted to modify the question a bit.

Yes, so, as you know, as financial people, we rarely get emotional.

So, I'll just as a that based on our renewal cycle, we do see growth in Cadence going forward.

But again, I'm not going to calibrate that at this point.

I think I can throw in a little bit.

I think our engagement with the customer is very good.

And I think we're heavily engaging with some of the design for the tough challenges.

And I think we are progressing very well.

And I think it's just a timing and also the budget constraints that we're working through.

So, in the longer run, I think we're going to see good, solid progress from our customers.

Thank you.

Thanks, Doug.

Okay.

With that, thank you, everyone, for calling in this afternoon.

We are looking forward to speaking with you soon.

And thank you again for joining us.

Thank you for participating in today's Cadence Design Systems third quarter 2009 earnings conference call.

You may now disconnect.