Archive for July, 2008

Cadence Q2 10-Q Report : Between The Lines

Wednesday, July 30th, 2008

Following up on my post last week on Cadence’s Q2 earnings call, here are my “between the lines” observations of Cadence’s Q2 10-Q report:

“Our recent announcement of the proposed acquisition of Mentor Graphics Corporation, or Mentor Graphics, has caused some customers to demand more flexibility in accessing new technology.”

Translation: When the large EDA vendors negotiate a multi-year deal with their customers, the deal will include “remix” rights allowing the customer to periodically alter his license mix (e.g. trade in simulator seats for synthesis seats). Typically, “new technology”, i.e. tools not yet available at the time of the deal, are excluded or are available only at some premium vs. existing technology. Evidently, Cadence customers are asking for the ability to remix in technology that might be acquired from Mentor. This is slowing things down and may have caused some deals to slip out.

To enable us to keep our focus on the value of our technologywe are moving to a license mix thatwill result in increased ratable revenue for us.” (Note: You can go to the 10-Q report for the full sentence, but the key part is shown above.)

Translation: EDA vendors that are publicly traded, like Cadence, need to hit their quarterly revenue estimates, or they are punished, as we saw last week. Since customers know this, they often defer purchases until the end of the EDA vendor’s fiscal quarter or year, resulting in the “hockey stick” effect (i.e. the graph of orders over time looks like a hockey stick with the big increase at the end of the quarter). By waiting until an EDA vendor is desperate to “make it’s numbers”, they can negotiate the best price. In order to be less dependent on the quarter end business, Cadence is increasing to a 90% ratable model. In this way, most of Cadence’s revenue will be determined by backlog orders, so they won’t need to heavily discount to hit their numbers.

“In order to provide our customers with the desired flexibility, our license mix will change to a higher proportion of licenses that require ratable revenue recognition which will result in a decrease in our expected revenue for the second half of fiscal year 2008.”

Translation: Instead of recognizing 100% revenue when the order is received (or the license is shipped) as for a perpetual license, the revenue for a subscription license is recognized “ratably” over the term of the license.  For instance, if the subscription license is for 24 months, then 1/24 of the revenue is recognized each month. So, in the upcoming quarters, Cadence will have reduced revenue due to the fact that the revenue is deferred out over the term on the subscription licenses. The nice part for Cadence is that they can attribute the decline in revenue over the next few quarters to the change in license mix.  This will be partly true, but they can also obscure poor orders performance since they do not report orders to the investment community, only revenue and backlog (as far as I know).

“To offset some of the impact of our expected decrease in revenue, we have implemented cost savings initiatives, including reducing headcount, decreasing employee bonuses and reducing other discretionary spending.”

Translation: I’ve heard that Cadence has already instituted 3 shutdowns this year, July 4th week, Thanksgiving week, and Christmas to New Years. Incentive bonuses usually accrue in Q4, so that will help later this year. I have not heard of any headcount reductions since last week, but maybe someone else has.

Hope that helps.

harry the ASIC guy

Email Penalty #3 - Illegal Motion

Monday, July 28th, 2008

About 5 years ago at Synopsys, I set up an internal email alias so that everybody working with one of our top customers, Qualcomm, could communicate important information to the entire team. All get on the same page. Make sure the left hand knew what the right hand was doing. Make sure we were communicating the same data and recommendations. Account managers … applications engineers … consultants … R&D … all working as one well oiled machine. I must say, it was a great idea … on paper.

One morning, after driving down to the San Diego office, I hopped onto a 10 AM conference call and logged into my email. As I watched my Inbox load, I noticed that there were about half a dozen messages sent that morning back and forth between two individuals who reported to me on the Qualcomm team. All regarding the same subject. Each one sent less than 5 minutes after the previous email.

As I settled into the conference call, I took a look at the latest email in the thread to get a sense of what was going on. Apparently, there was a disagreement between two members of our team as to the correct approach to addressing some methodology issue.  That’s fine.  People disagree.  But this was different.

Have you ever been at a party and a couple starts arguing in front of everyone?  At first you ignore it and make believe you’re not aware.  But then the tone gets angrier and the language gets personal and the voices get louder. Until you can’t ignore it and everybody stops what they are doing to watch in embarrassment what is happening in public that should have been private.

That’s exactly what was happening on this email thread.  As emails 7, 8, and 9 came in, the tone got angrier and the language got personal and the voices got LOUDER. And thanks to the email alias I had set up, there were now about 25 other people watching this “couples spat”.

I had to stop this, but I was stuck on this damn conference call !!!

Forget about the actual issue. This was now a matter of saving these two individuals from the ridicule of others on that email alias that were witnessing this boxing match. I sent urgent emails to the two individuals asking them to stop the emails and that I’d speak to them at 11 AM.

Email #10. #11. #12.

Mercifully, the call ended a little early and I was able to reach the consultants on their cell phones. One of the individuals was a contrarian, so from my previous post on the subject you know that:

1. If everyone else wants to take road A, he wants to take road B.
2. If everyone else wants to take road B, he wants to take road C.
3. If you’ve got a plan, he’ll tell you why it won’t work.
4. Once he takes a stand on an issue, he’ll never give up.
5. He doesn’t really care what others think about him.
6. Every battle is worth fighting … to the death.

Bottom line, he thought there was nothing wrong with “having it out” over email with everyone else copied.  In fact, this was good documentation since everybody on the team could now see the rationale of how this decision was arrived at. He was just trying to get to the right answer and can’t be bothered about having to worry about other people’s feelings.

The other individual just couldn’t resist replying to the emails since they came so fast. And he totally forgot that everyone else was being copied. He was pretty embarrassed.

In the end, the damage to these individual’s reputations was not that bad. As it turns out, the one individual already had a reputation as a hothead and contrarian and the other was more the victim than the aggressor. Still, I overheard comments in the office that day about this “tiff” and, in the end, the issue was not really addressed.

The morale of this story is that there are two rules:

1) If it takes more than 3 or 4 emails back and forth, then pick up the phone or walk over to the other person’s office. Email is a very inefficient and slow way to have a discussion or solve a problem compared to good old fashioned talking about it. Still, sometimes, and this was apparently one of those times, people just find the allure of the quick email response too appealing to resist.

2) If you break rule #1, don’t be stupid enough to copy everybody else.

harry the ASIC guy

Synopsys Calls, Mentor Raises

Thursday, July 24th, 2008

Not to be outdone, but with much less fanfare and ballyhoo than Synopsys’ donation of its Verification Methodology Manual (VMM) class library to the Accellera Verification IP (VIP) Technical Subcommittee, Mentor Graphics last week donated it’s Unified Coverage Database (UCDB) to the Accellera Unified Coverage Database Interoperability (UCIS) Technical Subcommittee.

Although not as hot a topic in the press and in the blogosphere, this represents a firm step forward in the standardization of the overall coverage driven verification methodology, whether you pray from the OVM or from the VMM hymnal. Whereas ratified or defacto standards already exist for the testbench languages, the requirements and coverage capture tools and formats are still proprietary to each of the 3 major vendors. This prevents the verification management tools of one vendor from being used with another vendor’s simulator. Having a UCDB standard will facilitate portability and enable more innovative solutions to be built by third parties on top of this standard.

Although Synopsys and Cadence have their own unique UCDB format, the basic elements of this standard should be much easier to agree upon without the political wrangling slowing the VIP subcommittee. I also think this is an opportunity for Synopsys, Mentor, and Cadence to show that they really can cooperate for the benefit of their customers and win back some of the goodwill lost in the OVM vs. VMM battle

harry the ASIC guy

All Eyes on Cadence………….

Thursday, July 24th, 2008

I just spent the last hour+ listening to to Cadence Q2 earnings conference call. (You can listen to the call here and read the transcript here).

Ouch!!!

As I write this at 12:30AM PDT on Thursday morning, I don’t know for sure how the markets are going to react. But I expect, as do all of the analysts, that Cadence shares will be down. Here are the lowlights that I took away:

1) Cadence revised their revenue and earnings guidance for 2008, not by a little, but by a lot. Analysts were projecting ~$1.5B revenue and Cadence is now projecting ~$1.1B, or ~25% less. (Note: This is in part due to a change in license mix as described below).

2) Cadence is increasing it’s license mix to 90% ratable going forward. Simply put, more of their revenue will be recognized over time rather than up-front (at the time of the booking).  That means lower revenue in Q3, although by design. (Note: This is the same thing that Synopsys did when it missed a quarter badly several years ago.  The change in license mix helps to obscure the real financials to the investment community. Bottom line: if you have bad news, put it all in one quarter).

3) Cadence has started the regulatory approval process and acquired 4.7% of Mentor common stock in the open market and they say they are committed to the acquisition, but Mentor has not returned any calls.

So, how did the analysts react? Not well.

Much of the analyst part of the call was devoted to cordial debate over whether this “weakness” was due to poor economic conditions, economic uncertainty, and delayed migration to new technology nodes within the customer base (as Cadence contends) or to a more inherent weakness in Cadence’s business (as the analysts seemed to believe). For instance, one analyst asked “did the environment deteriorate that quickly that your bookings outlook could have gone from $1.5 billion down to $1.1 billion in one quarter?”

There also seems to be a belief that Cadence “over-consolidated”. When they did “all-you-can-eat” deals with some big companies, they basically “drained the pipe”, leaving them without an option to sell new technology.

And customers are just holding out and deferring purchases until they get a better deal.

There was also quite a bit of discussion concerning EDA Cards which represent half of Cadence’s business. Customers are demanding even more flexibility in when, what, and how they purchase software and hardware.

Lastly, Cadence will continue to look at expenses, i.e. expect some attrition.

Bottom line: No way to sugar coat this…it was a rough quarter and figures to be a rough year for Cadence.  Question is how much will Cadence be punished by the investors and how much will their EDA brethren (Synopsys, Mentor, Magma, etc.) be punished. We’ll find out tomorrow.

harry the ASIC guy

Email Penalty #2 - Delay of Game

Monday, July 21st, 2008

The prime directive drummed into me as a freshman AE (Applications Engineer) was to ALWAYS get back to the customer in a timely fashion.

Even if I did not have the answer…

Even if I was already working on the problem…

Even if I was not the person who could help him…

It’s practically no effort to return an email or a voice mail and just let your customer know what’s going on, so he’s not sitting in the dark.  A matter of fact, I’ll write the email for you and you can just fill in the blanks:

Hi <customer name here>,

I got your email regarding <problem, issue, question>. I’m going to <look at it tomorrow, send this on to R&D, ask my boss to handle it, etc>. I expect to have an update for you <in an hour, tomorrow, next week, etc.>. If you need an update sooner, please feel free to contact me directly.

Regards,

<your name here>

Simple, right?

I’m sure I’ll get little argument that this is the right way to treat real customers.  But, what about our internal customers?

In my job, I’m amazed at how long some people will “Delay the Game” without responding to an email, without a simple 1-minute acknowledgment that they would get back to me. Instead, I’m often left wondering what is going on, sometimes sending follow-up emails, voice mails, dropping by the office…all just to find out what is going on.

Look. I know you’re busy and you have more important people and issues to deal with than my little request. But, just realize that everybody that sends you an email asking for something (a question, a file, a meeting notice) is your customer. If you keep them in the dark by not responding, and you do this enough, you’ve lost your customer.

harry the ASIC guy

Email Penalty #1 - Too Many Men on the Field

Monday, July 14th, 2008

As I stated in my previous post, I’m starting a series of posts on “Email Penalties”…football style.  For the first penalty, to get into the swing of this, I thought we’d warm-up with one that happens every day and we all can relate to…

Too Many Men on the Field (5 yards)

More directly, too many people on the cc: list.

Several months ago, I came in to work to an email from Payroll that had been sent to a long list of distribution lists, informing us of new timekeeping processes.  Only one problem … I did not use the timekeeping system in question, but another one altogether. So, I did what any sane person would do … I ignored it.

I guess I was not the only person who had received this email in error. But apparently I was one of the few sane ones.

Throughout the morning, I received 3 or 4 emails from others like me, protesting that this did not apply to them and asking to be taken off of whatever email list had incorrectly tagged them. Fair enough, but only one problem.  Instead of replying directly to the sender only, they had hit “Reply All”, so I and everyone else on all these distribution lists now knew that Joe Smith (name made up) did not use this timekeeping system. What a waste!

The emails stopped around noon and so I figured this was over. I was wrong. This was only the tip of the iceberg and there was much more to come.

You see, a totally unrelated event had occurred that day.  There was a Blackberry outage so all the Blackberry users without email access had not seen this email. About 5pm the outage was resolved.  And thousands of Blackberry users checked their email and discovered this erroneous email sitting in their in boxes. And so, with fingers furiously striking tiny keys, they started to “Reply All”.  Peter had wandered into my office to discuss a technical issue, but every few seconds another email would interject from someone else that they “did not use this timecard system and please take me off the distribution list”.

This had become an event.

It was obvious after 15 minutes and dozens of emails that “Reply All” was not a good idea. There were numerous individuals sane and brave enough to admonish others not to “Reply All’ … in an email that they sent by hitting “Reply All”!!! Duh.

One person sent a “Reply All” that said “The Yankees are going all the way this year.”

Another said “Greetings from Virginia” to which came the reply “Greetings from Florida”.

“I’m not like all those others.  ADD ME TO YOUR LIST!!!!”

“I haven’t seen a reply from President Bush yet–or did I miss that one?  Go Sabres/Bill”

“Hi”

One person referenced the despair.com poster on Idiocy, “Never underestimate the power of stupid people in large groups.”

I packed up to go home, a 20 minute drive, and found 200 more emails waiting for me. Eventually, the torrent subsided.

The next day, the entire company received an email from the CIO informing us that the previous day’s email “generated 15 million unnecessary emails” throughout the company.

harry the ASIC guy

Email Penalties

Friday, July 11th, 2008

There’s no debate that email has become at once a valuable tool and a misused and overused communications medium. Seth Godin recently posted an extensive email checklist of do’s and don’ts for marketing email. I’d like to do something similar for corporate and business email, the kind of day to day email we use at work.

I’m also big football fan.

(The American kind … my apologies to the international folks).

I won’t tell you which college and pro teams I root for, but their initials are USC and NYG ;-)

So, with the football season coming up, I thought I’d address the corporate email issue by suggesting some new penalties that need to be added to the game of “email”.

Starting Monday, I’ll be posting one each week, up until the football season begins. And I welcome your contributions as well, especially good stories and anecdotes that help to illustrate the new penalties.  Feel free to email them to me (harry at theASICguy dot com) or post them as comments.  And let me know if it’s OK to use your first name, full name, or no name.

harry the ASIC guy

One + One = ??? - What Would You Pay?

Wednesday, July 2nd, 2008

One of the shortest but most relevant exchanges during the Cadence analyst call concerning the Mentor acquisition was an exchange between Sterling Autry of JP Morgan and Kevin Palatnik, CFO of Cadence.

About 27 minutes into the conference call, Sterling Autry asked why Cadence was estimating only $50M in operating income benefit considering Mentor’s operating income in 2007 was $120M. Indeed, $1.6B to acquire $50M in income seems like a poor deal indeed.

Kevin Palatnik’s response included the following, “the industry has had a history, from a customer perspective, of trying to get more and include features and not pay for it. So I think we just have to be able to demonstrate value to the customers. So I think, in the short term, I think, there is always the customers asking for the combination and not paying for it.”

The crux of the issue is simple math: 1 + 1 = ??? …how much will Cadence-Mentor be able to charge for their combined products?  If  1+1 > 1.5, then the combined company will be in pretty good shape.  If 1 + 1 < 1.5, then it will be difficult to “extract the value” of the acquisition. In that case, expect lots of layoffs, products being scrapped, and products being sold off.

From my experience, Kevin Palatnik is only partially correct that “the industry has had a history, from a customer perspective, of trying to get more and include features and not pay for it”. When I started with Synopsys in 1992, their flagship tool was Design Compiler. Synopsys added new features and voila…DC-Expert.  Then DC-Ultra. Now DC-Graphical. Each one sold at a premium to the predecessor and customers would pay for the upgrades.

But not without voicing their displeasure, both privately and also publicly on places like ESNUG. It often seemed arbitrary and self-serving to customers what Synopsys deemed an “update” (covered by their tool support) and what they deemed an “upgrade”.  And they felt they were being nickel-and-dimed.

On the other hand, people need to eat, and the EDA tool developers are no exception. They do not work for free. It seems unique to the EDA industry, that customers expect, once they buy a tool, to get any and all improvements to the product for free. This is not the case when I buy MS Office or most any other desktop application, but it is definitely a reality in EDA.

To add to the confusion, I can now download almost any desktop application I need for free as open-source (e.g. Open Office), or use it for free online (e.g. Google Docs), and get access to upgrades for free as well. This has changed customer expectations dramatically.

I’d like to know what you (EDA vendors and customers) think about this:

  1. Should customers pay more for EDA tool enhancements or should they be part of the tool “support”?
  2. How do you decide what is an “update” and what is an “upgrade”?

harry the ASIC guy