The EDA & Electronics IP Almanac: Q3 2010

All members of Morfik's team will join Altium and Altium will acquire all of Morfik's IP and other assets, which are located in Sydney, Hobart, and Kiev, Ukraine. Morfik's CEO, Aram Mirkazemi, will join Altium's executive team as Chief of Engineering. He will work with Altium's founder and CEO/CTO Nick Martin on defining R&D strategy and directing product development.

As announced to the market on September 16, 2010, the acquisition will bolster Altium's engineering team and technological capabilities in the web application domain, and accelerate the development of this platform for Altium's customers. When developed, this will also let electronics designers develop their own ecosystems of intelligent, connected devices, running their own cloud-based applications. These 'device ecosystems' will provide the next generation of experiences for their customers.

More immediately, when combined with the forthcoming Release 10 of Altium Designer, this will provide a framework for the creation of a web-based content delivery model that will in turn allow for a significant improvement in the value added by Altium's subscription services.

Altium will continue Morfik's existing business model, which sells software tools and subscriptions for building web-based applications. Altium believes this is fundamental to the development of the distributed applications that provide the intelligence in future device ecosystems. Historically, Morfik has focused on building cloud applications that serve conventional personal computers (desktop and mobile). This focus will now expand to include the more application-specific devices created by electronics designers that will be part of the next generation of the Internet.

On October 27, 2010 Cadence Design Systems (NASDAQ:CNDS) reported its nominal third quarter 2010 revenue of $237.93 million, up 10.10% compared to revenue of $216.12 million reported for the same period in 2009, and up 4.79% compared to $227.06 million reported in the just prior nominal Q2 2010. Actual Q3 2010 revenue of $237.93 million was above the top of the $225 to $235 million revenue guidance range provided by Cadence 3 months ago

On a GAAP basis, Cadence recognized an amazing net income of $126.75 million, or $0.48 per share on a diluted basis in the nominal third quarter of 2010. Saywhat? Reading just a little further in the Q3 report we find that this auspicious result was solely due to the fact that Cadence's third quarter 2010 net income included a whopping $143.22 million income tax benefit related to the settlement of an Internal Revenue Service examination of Cadence's federal income tax returns for the tax years 2000 through 2002. Without this tax windfall, Cadence would have had to report a Q3 2010 GAAP loss of $16.46 million. The latter is more comparable to the GAAP loss of $14.05 million back in Q3 2009.

Needless to say, that EPS of $0.48 for Q3 2010 was above the EPS guidance 3 months ago of $(0.10) to $(0.08).

The Murky World...

Alas, with the above paragraphs, we enter once more into the murky world where we'd prefer not to go - the world of eternal financial debate over which performance numbers (if any) actually provide a “real” snapshot of the relative performance of business enterprises.
Most observers choose GAAP earnings over non-GAAP earnings as a reasonable choice, as there is theoretically more consistency as to what is included. But as we have already seen, even GAAP earnings can contain huge variables like income tax benefits (or penalties) that distort the current GAAP earnings figures, but drop in from a distant past at arbitrary moments.

Once one crosses the border of this murky world of financial debate, there's usually no hope of return to sanity. One is doomed to a never-ending trip into a search that is equivalent to searching for the fountain of youth. It does not exist! Oh sure, you can look at earnings before interest and taxes (EBIT); sometime that helps, but not always. To its credit, Cadence publishes its financials with lots of details for the past five quarters in its quarterly reports, as do others. The numbers are usually found deep into its supplementary report.

When we dare to enter, we see, indeed, over the last five quarters, Cadence has been operating at a “loss from operations,” with the only exception being Q2 2010. However, when the quarterly “interest” and “other expense” figures are tacked on to each of those five operations numbers, all five become “losses”. Then the next line either adds or subtracts the income tax provision, magically transforming three of those five quarters from negative to positive net income numbers.

What's a person to do? One answer is to keep looking for the magic single number which “tells all,” such as comparing the “free cash flow” generated by one company vs. another.

This writer has found over the years, that it's best to hire a really smart, experienced CFO and ask him or her to explain it all to you.

Meanwhile, in these pages, we'll keep using GAAP net earnings, and warn the reader (when possible) of anomalies like tax benefits from the past, etc. Returning now to Cadence's Q3 2010 report…

"Cadence had a successful third quarter. Momentum for Cadence solutions is building at our key customers, driven by the combination of leading and competitive technology and solid performance from the Cadence team. Revenue and operating margin continue to grow. There is still more work to do, but I am pleased with our results to date," said Lip-Bu Tan, president and chief executive officer.

Oops…here we go again; right out of the Cadence Q3 report: “In addition to using GAAP results to evaluate Cadence's business, management believes it is useful to measure results using a non-GAAP measure of net income or net loss, which excludes, as applicable, amortization of intangible assets, stock-based compensation expense, integration and acquisition-related costs, acquisition-related income tax benefits, shareholder litigation costs, gains or losses and expenses or credits related to non-qualified deferred compensation plan assets, executive severance costs, restructuring charges and credits, amortization of discount on convertible notes, losses on extinguishment of debt, equity in losses or income from investments, write-down of investments, and gains or losses on the sale of investments. Non-GAAP net income or net loss is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company's tax liability.” Got that?

Business Outlook

The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially:

For the fourth quarter of 2010, the company expects total revenue in the range of $230 million to $240 million. Fourth quarter GAAP net loss per diluted share is expected to be in the range of $(0.06) to $(0.04).

For the full year 2010, the company expects total revenue in the range of $917 million to $927 million. On a GAAP basis, net income per diluted share for fiscal 2010 is expected to be in the range of $0.55 to $0.57.

Cadence self description

Cadence enables global electronic-design innovation and plays an essential role in the creation of today's integrated circuits and electronics. Customers use Cadence® software and hardware, methodologies, and services to design and verify advanced semiconductors, consumer electronics, networking and telecommunications equipment, and computer systems. Cadence is headquartered in San Jose, Calif., with sales offices, design centers, and research facilities around the world to serve the global electronics industry. More information about Cadence and its products and services is available at .

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