Chris Edwards: October 2008 Archives

The $8m goodbye

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Three of the Cadence Design Systems executives who resigned in the middle of the month have not quite left the building. In a regulatory filing about the resignations, Cadence has revealed that Kevin Bushby, Bill Porter, James Miller and RL Smith McKeithen have each agreed to stay on for six months, earning up to $250,000 apiece, "to provide services to Cadence related to the transition of his prior executive responsibilities".

They will not be the only payments the executives receive on the way out the door from the San Jose-based EDA company. At the end of July, the directors, along with former CEO Mike Fister had their contracts revised. The revisions centred around the benefits, such as healthcare, and payments the men would receive should they be "terminated without cause", which is what happened in mid-October according to the 20 October 8-K filing.

When Fister joined, his termination agreement was structured to provide him with a salary of $24,000 for a year on his departure together with a couple of lump-sum payments: 1.8x salary and 1.8x annual target bonus. In July, shortly after the cancellation of the bid for Mentor Graphics, Fister's contract was altered to provide him with a total of four times his peak annual salary. He earned a salary of $1m in 2007.

The termination contracts for Bushby, Porter and Miller, as well as acting co-CEO Kevin Palatnik, were also tinkered with. Unlike Fister's, the changes were not as substantial but confirmed that Bushby, Porter and Miller would receive roughly double their respective annual salaries. In Bushby's case, that means a total of $1m. Porter would net $900,000 and Miller $800,000. McKeithen's contract was altered at the start of April to pay him up to $800,000 on departure.

Two years' worth of the former directors' options also vest on their leaving. However, given how far underwater they must be right now, partly thanks to the misplaced $24m announced last week, that is not likely to mean much.

Totalling that lot up, it will cost Cadence in the region of $8m cash to say goodbye to the bulk of its former senior executive team.

And the costs keep rising for Cadence with two legal firms deciding to file class-action suits against the company over the events that led to its sudden loss in share value. Dyer & Berens and Federman & Sherwood have filed separate actions just today. Another three legal firms are understood to be looking at class actions.

If you were wondering how things are at Cadence Design Systems, which saw its CEO and other execs resign last week, you are going to have to wait a bit longer. Less than half an hour before the Q3 conference call was meant to start, the company claimed it had discovered a problem with its Q1 figures and was going to have to go back and restate them. As a consequence, Cadence decided to postpone the Q3 results and the accompanying conference call.

"Cadence initiated the review after preliminarily determining during its regular review of its third quarter results that approximately $24 million of revenue relating to these contracts was recognized during the first quarter of 2008, but should have been recognized ratably over the duration of the contracts commencing in the second quarter of 2008. Cadence expects to restate its financial statements for the first quarter of 2008 and the first half of 2008 to correct the revenue recognition with respect to these contracts.

"Cadence will release its third quarter 2008 financial results and conduct a Webcast as soon as practicable."

I wouldn't expect a lot of warning when that conference call actually happens.

Samsung has decided to walk away from its planned takeover of Sandisk, but made sure it left visible wounds on the hapless flash-card maker. And, perhaps worst of all for Sandisk's current management, signalled to the markets that a deal is still possible but at a much-reduced price. The decision gives Samsung a lot more options over what it can do with all the cash it has in the bank in an environment where companies with heavy borrowings have suddenly become vulnerable.

The first paragraph is standard fare in these letters. Samsung CEO Yoon Woo Lee expresses disappointment with Sandisk's unwillingness to negotiate a deal. The gloves come off in the second paragraph - and reveal a pair of bejewelled knuckledusters:

"Nevertheless, we have obligations to our own shareholders which require that we take a disciplined approach, particularly with respect to significant initiatives such as this. That disciplined approach requires that we squarely face the growing uncertainties in your business, which may continue to deteriorate in this difficult economic environment and further impact your standalone value. Your recently announced third quarter results serve only to illustrate this risk. Your surprise announcements of a quarter billion dollar operating loss, a hurried renegotiation of your relationship with Toshiba and major job losses across your organization all point to a considerable increase in your risk profile and a material deterioration in value, both on a stand-alone basis as well as to Samsung."

And then Lee rounds it off with:

"As a result of these developments, we are no longer interested in acquiring SanDisk at $26/share."

To sign off, Lee wishes Sandisk's management well in a kind of "now that you're lying in the street try not to get run over" way.

There's a serious case of irony failure on the Barron's blog that is one of the first stories to appear online (aside from the press release itself) marking the resignation of Cadence Design Systems CEO Mike Fister. "What a surprise," remarked 'John'. The next commenter didn't quite get the joke but laid in with the perceived reasons why Fister got the, walked.

I didn't see the news until I got out of the radio silence of the underground bit of the BERR Conference Centre in Victoria Street this afternoon and, frankly, I wasn't going to cough up for WiFi in what is meant to be a government building for business. (There are, apparently, two picocells there. If anyone finds them, please let me know.)

It was both a surprise and inevitable. It was clear that Fister was no longer Mr Popular at Cadence, assuming there had been a period when he was. At an analysts event in September, CFO and now co-CEO Kevin Palatnik used faint praise to damning effect on one of Fister's strategies. This was just after telling analysts about the news that hasn't happened yet but will next week during the Q3 earnings call - that Cadence has potentially a lot of layoffs to make. This is from my online story of a couple of weeks ago at the IET's website:

At a September conference organised by Deutsche Bank Securities, Cadence chief financial officer Kevin Palatnik indicated that the company would make layoffs this year in a bid to improve operating margins. “I believe we can get back to 25 per cent [operating] margins. In the near term, we are very focused on expense management. So, we are looking at resizing the company. Our goal is, in the Q3 earnings call, to be public about our expense management actions. We will resize the company to the lower [sales] base plus the lower growth that we see in the next three to four years.”

Palatnik said attempts to improve pricing for EDA tools, in a market where tool complexity is increasing but the user base is not, did not pay off: “[CEO] Mike Fister came into the company in 2004 and one of his early initiatives was to stratify pricing by product capability, so we had good, better and best pricing...We stratified that [pricing] based on feature and function. Frankly, it has been moderately successful at best...We see some benefits [from stratification] at the high end in some sub-segments of our business but, overall, business has been relatively flat.”

When I heard the last bit on the recording, I thought that Fister was a goner. It's odd for a CFO to align his boss with a failed strategy unless that boss is not long for the company. However, rumours suggested that Fister was to be given "another chance" by the board to turn the company around after the failed attempt to buy Mentor Graphics. If Fister was to get another chance, the board clearly changed its mind.

Although we may look back at this in the context of extensive layoffs next week, What was surprising about today's news was the departure of some Cadence stalwarts. Field operations vice president Kevin Bushby and former head of Cadence in Europe is going as is Bill Porter, who had moved out of the CFO chair. Porter and two other veeps are not being replaced.

The guidance that Cadence has given for its Q3 results is the same as the range provided by Palatnik in the Q2 call, including a 26 cents per share or so loss, so no real surprises there. The one to watch out for next week is the full year amount, which was, in the middle of Q3, around $1.13bn in sales with earnings per share around 52 cents.

AMD has bought itself some time with the decision to hive off its manufacturing operation and has silently answered the question of what it is going to do about getting its own products made. It is just about conceivable that AMD's core processor business might follow ATI to Taiwan, where the graphics chipmaker has had its products fabbed for years.

If AMD really wanted to frighten the horses, it would do exactly that. If anything, AMD could well be set to pull business away from the Taiwanese foundries such as TSMC. But, in setting up The Foundry Company with money from Abu Dhabi - an operation that almost certainly has to join IBM's Common Platform group to gain any business at all — AMD is more or less set on a course to even tighter links with IBM. AMD's silicon-on-insulator (SOI) process uses technology licensed from IBM, although the x86 processor maker has not joined Common Platform to date.

TSMC has clearly been angling for processor business in general, having decided to introduce a high-k, metal-gate process at what it calls the 28nm process node. Processors, graphics processors and field-programmable gate arrays (FPGAs) are the target for this version of the process. AMD's endorsement would have been a major boost even for the world's runaway number-one foundry. However, TSMC has never been keen on SOI whereas a number of vendors in the Common Platform camp have worked with it. IBM is the obvious candidate for external SOI production. But Samsung has worked with SOI in the past and, although a tiny player in the foundry business, is the fastest-growing. And it has a full 300mm fab dedicated to the foundry business, something that the The Foundry Company won't.

Bill McClean of IC Insights put out a note last night on AMD's stated funding plans for the fabs that will go into The Foundry Company, assuming that the deal - with its non-US source of funds - clears the regulatory hurdles and a possible spat with Intel over patent rights. It concluded:

"Given that Foundry Company’s capital spending budget for the next five years is forecast to be less than AMD’s capital spending outlays over the previous five years, it is highly unlikely Foundry Company will help AMD gain additional marketshare. In fact, AMD will be lucky to sustain flat marketshare in the MPU segment. Moreover, a significant portion of the Foundry Company’s budget must be allocated to the new foundry business, and this, of course, will take away precious spending needed for MPU production!"

The capital expenditure for the company next four years will be between $3.6bn and $6bn. That sounds like a big heap of money but even at its maximum it's only about half of what TSMC spent in the last four. Not only does this money has to be divided between AMD and foundry-oriented gear, which will probably mean additional equipment for bulk silicon wafers on top of those used for SOI, it's guaranteed to be less than what AMD itself spent in the past four years.

McClean also noted: "There is a lot more to being in the IC foundry business than hanging out a sign and announcing you are a foundry, just ask some of the Malaysian and Chinese foundry startups about the difficulties of gaining marketshare in this segment of the IC industry."

In the past five years, TSMC got the recipe right and built up a formidable reputation for getting it right. You often hear fabless companies say, when asked who they're using: "TMSC, of course." Now, you have to add a little dose of scepticism. Like Fight Club, TSMC's customers are wary of talking too much about their relationship with the foundry except in those rare situations where TSMC tows them around to tout the company's advantages. However, you don't hear the same things about many of the other foundries and trust in a foundry's ability to deliver is probably the biggest contributor to their continued growth.

It's not all TSMC. SMIC picked up some loyal customers early on, partly due to the seemingly tireless Richard Chang who, like TSMC chairman Morris Chang, spent many years at Texas Instruments. SMIC has overtaken Common Platform member Chartered Semiconductor Manufacturing but it's been hard work and the company remains a fifth of the size of TSMC.

There is some good news for The Foundry Company in terms of its position. AMD's annual sales are close to $6bn. If you split that in half to come up with what The Foundry Company's sales might be to AMD, then that puts the business fairly close to number-two foundry UMC. Equally, the dominance of one company in the foundry's business is unlikely to attract other fabless players unless the company can bring something the other foundries, or Common Platform suppliers cannot.

For TSMC, the situation will be interesting. Suddenly, with The Foundry Company onboard, the Common Platform group would as an aggregate be able to claim number-two status. Total sales would still lag TSMC but, in perception terms, the group could claim to provide a serious alternative to TSMC and provide the thing that the big fabless companies keep saying they want - true multiple sources for the same products. And that makes the strongly capitalised Samsung even more of a threat to TSMC.