The licence-model hokey cokey at Cadence

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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]."

1 Comments

Cisco used to hold back systems from shipment that were fully assembled and tested to create a predictable revenue growth model. Revenue management strategies based on pushing out revenue are inherently more stable than those that borrow from the future.

It's clear from your extracted quotes that the "ratable mix" has been used to control how much revenue gets pulled in from future quarters into the current quarter. It's ironic that they picked credit card metaphors--gold card, platinum card--for some of their pricing models, because these revenue acceleration techniques have much the same effect as running up a large charge card balance, some near term enjoyment and then a long time to pay them off.

An even more fundamental problem is that they seem to believe that Moore's Law has been repealed and that EDA tool purchases are driven primarily by cost considerations and not by the need for innovation to close the still widening "design gap."

The Cadence strategy in the "Fister Era" was predicated on an assumption of supplier consolidation. They focused their sales efforts on companies that were consolidating on a single vendor and are now apparently surprised to discover a few years later that those same companies are spending less on EDA, they have unwittingly selected firms that are less design innovation oriented.

Since Moore's Law appears to have at least another decade before its' repeal, let's hope that the post-Fister Era is marked by a renewed focus on innovation and interoperability as significant contributors--but not the dominant player--in a complex and evolving ecosystem of technology suppliers.