Shrinking Violence Blog

Faced with its inability to raise funding for the buyout, Cadence Design Systems has decided to withdraw its offer for Mentor Graphics. Instead, the company is to spend $500m on buying back its own shares.

Cadence blamed Mentor: "Mentor Graphics’ failure to engage in substantive discussions on our all-cash premium proposal prevented us from confirming for our financing sources the significant synergies associated with this transaction."

However, Cadence also lost faith in the deal: "That, along with our revised outlook and the present economic climate, led us to conclude that financing terms for the transaction are no longer attractive for our shareholders."

The share buyback programme is now worth close to $1bn. The market reacted by pushing Cadence's share price up by more than 5 per cent. Mentor's fell 25 per cent as the promise of a cash offer disappeared.

Mentor claimed Cadence's cancellation of the offer was "inconsistent with both Cadence's recent public statements and recent communications between Mentor Graphics and Cadence".

Penny Herscher, who was a Cadence Design Systems executive for a while after the EDA giant bought her company Simplex Solutions, reckons her old employer should have done the same as Synopsys some years back and just moved to a 100 per subscription licence model and have done with it.

But where's the fun in that? We couldn't have had the ten years of licence-mix changes that Cadence has treated us to.

See if you can guess when each of these changes took place. And check out the talk of "visibility" and "transparency":

"Additionally, this product sales model lets us build revenue predictability and visibility, while receiving appropriate value for our products. Based on this new approach, we're confident that we'll achieve the revenue performance and profitability that has been characteristic of Cadence in the past."

The Company's product sales model will include a new subscription license (usually two years), which makes available both current and new products. Because it includes undelivered technology, the subscription license requires revenue to be recognized ratably over the license period.

The Company estimates that over time 30 per cent of product bookings will follow this subscription model.

As a result, total revenues in the third quarter are expected to decrease from the current quarter.

Or this one:

Cadence expects its subscription bookings, which going forward include subscription licenses and maintenance combined, to grow from 48 percent of the mix of software bookings in Q2 to 65-70 per cent for Q3. For Q4, the company anticipates approximately 70-80 per cent of software bookings to be under subscriptions.

The company expects that the change in mix of software licenses should enhance revenue visibility and, beginning in the second half [of the following year], accelerate revenue and earnings growth.

The joy of flexibility:

"In the quarter, approximately 49% of our product business was represented by ratable licenses.

This percentage is lower than our typical rate in the mid 70s, because we elected to continue to work several contracts for better value. Our forecast for the revenue mix in Q4 is in the low 80s and in the 70s for the year. For the year, we expect to generate approximately 2/3 of revenue from backlog."

And why 100 per cent ratable is bad:

"I think as you compare over the long term it’s the amount of business that you’re able to win and I fully admit that our model is a much more transparent model than one that is 100 per cent ratable. [The mix was about 60 per cent upfront/40 per ratable at this point]."

...because he fixed it in the mix.

Don't believe me? From the Seeking Alpha transcript (I haven't had a chance to listen through the audio yet) of Cadence Design Systems' Q2 conference call:

"...we made the difficult but necessary decision to lower our outlook, and transition to an approximately 90% ratable license mix. We believe this transition will enable to us keep our focus on the value of our technology, and this decision is the right one for our business over the long-term and for building sustaining strong customer relationships in the future."

Which, as I recall, was the reason last time for adjusting the balance between how much revenue Cadence recognises upfront for licences in its quarterlies versus the amount spread out over the term of the licence. I need to dig out the old 10Qs and 10Ks and transcripts to find the previous changes in but, as I indicated in my first blog post about the attempted takeover of Mentor Graphics, this kind of financial shuffling is a familiar one to anybody who watches the electronic design automation. I didn't think they'd have the balls to try it again. I await the day when one of the big EDA companies goes for a 110% rateble mix and starts invoking complex numbers in its non-GAAP reporting.

This means that the discrepancies between Cadence's and Mentor's financials will be that much larger if the merger goes through, which makes any comparisons between the businesses now and in the future even tougher for anyone trying to analyse the figures.

And with that, over to Indeep.