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Battered and Bedraggled

Cadence Does a Management Restart

These are interesting times at Cadence. A bit too interesting. If you read some of the press blips over the last few weeks, it’s over; investors have given up; time to fold the tent and go home.

Wha? How could a solid EDA denizen find itself in such a position? And is it really over? Or is the press exaggerating? (Although really, since when does the press exaggerate?)

OK, granted, the stock price is at around 1994 levels (adjusted for splits). I’m not one to follow the financials as much as the technology, but, looking at the numbers, the issues really do seem recent: 2008 looks nothing like prior years. It’s like a sudden shock to the system. In the press release announcing their Q1 loss, there’s no real explanation, just a promise to “focus on improving our operating performance.” Even giving Google a good workout, it’s hard to find anything that explains such a rapid fall-off.

But the hits – in the boxing sense – just keep coming.

  1. Parts of the business where Cadence is the undisputed and largely uncontested incumbent are now being challenged by companies both large and small.

  2. An attempted merger with Mentor had to be abandoned due to the inability to finance the deal in the current economic environment. Even had that gone through, on-the-street whispers suggest the integration would have been difficult given perceived wide cultural differences between the companies.

  3. The management team was fired. Not just the top guy. They’re practically going to be starting with a clean slate.

  4. Just as a quarterly earnings webcast was to begin – literally minutes before – an announcement was made regarding a delay of the report and a likely restatement of the already-not-so-hot 2008 numbers. Doh! When I then checked the stock price, it had plummeted 41%, and Barron’s had declared that investors had given up on Cadence.

Call it the year of living woefully.

But not all portents and omens have been bad (not to mention the fact that the stock has seen some recovery). While the focus of the world is on the financials, no one seems to be paying attention to what this means to the many users of Cadence technology. Ultimately the numbers are derived from customers. In one admittedly anectodal, possibly anomalous, but I think not-to-be-discarded example, Cadence held a low-power-related conference for a full day in early October. Users sent a very bullish message by attending in numbers far higher than Cadence expected – it was basically standing room only. Yes, yes, I understand that the only real measure of customer confidence is a signed purchase order, but these aren’t exactly the kind of times where engineers have lots of free time on their hands to go attend day-long events. So it really did seem like a vote of confidence.

If there’s a place where the immediate interests of the financial guys and the customers cross, it’s not necessarily obvious. And that’s because of the short-term nature of how we do business, even when products take years of research to bring to market. Technology is a long-term prospect in a country where investors seem to know no time horizon longer than three months. Long-term investors are theoretically rewarded by well-thought-out plans that don’t cannibalize the future for the sake of dressing up next quarter’s results. Customers need a long-term solution, and, presumably, the patient and disciplined investor will be rewarded by happy customers.

But it’s naïve and facile to say that customers are critical to the long-term success of a company. The reality is that, as Cadence figures out how best to move forward, by law it must optimize the interests of investors and no one else. Nothing says that it has to be the long-term or short-term interest, and, given a choice, most people opt for short-term because less is left to chance. If customers and technology benefit from the choices made, so much the better, but that’s secondary. This isn’t an indictment of a mean-spirited company; it’s not intended to suggest that Cadence is mean-spirited: it’s a fact of American business.

Part of Cadence’s situation derives from its own particulars. Cadence founder Jim Solomon sees much of it rooted in the culture that grew during the tenure of recently-released CEO Mike Fister. Mike “structured his top team in such a way that he needed to be the guy with the vision,” he said, and, while Mike “is a very smart guy, he never seemed to engage with the EDA industry in way that would give him the understanding he needed to provide this vision and leadership.” When the top team doesn’t really understand things, the experts further down in the organization can’t really get their message across, so they get frustrated and leave.

But what Cadence is also struggling with is something that has bedeviled the entire industry for years: how the hell do you make money in EDA? EDA has become something to avoid. Investors don’t invest in EDA. New companies that are clearly in the EDA space will work hard to make sure the word “automation” doesn’t figure in the company name or literature. Tools are bad: technology, analysis, IP – yes, IP! – are better. Anything but EDA. Never mind that the whole technology sector falls apart without EDA.

The issue isn’t that EDA has no value; the issue is that no one has been able to figure out how to monetize that value in a way that rewards the EDA industry for its efforts. The classic picture painted is that of customers with the same budget each year. If the budgets are the same each year, then the overall market never grows, and the only way a company can grow is to scratch out a bigger share for itself. Not an attractive business model. No one has really cracked the code yet; and it remains to be seen if Cadence can come up with new ideas.

Cadence has started with an old idea: a 12% layoff, presumably needed in order to manage their money in the short term. How will that affect the long term? No one that survives a layoff could be considered worse off than the guy laid off, but such survivors have often fallen victim to the concept that we just have to “work smarter” and do all the work being done before, only now by fewer people. Dickens, meet Dilbert. So far, this doesn’t seem to be the current thinking, since, even though no specifics are available, VP of Corporate Marketing Adolph Hunter does agree that some projects might take longer to see the light of day. Cadence has said it will focus on core technologies but has provided no guidance on what is being traded off, or perhaps even abandoned. But something’s gotta give.

Of course, as they figure out where to assign their dollars, there’s a new calculation to toss into the mix: no fewer than seven shareholder lawsuits have been announced (or are being contemplated, with public trolling for lead plaintiffs). So in the budget allocation, the lawyers are clearly going to get their cut, with some going to investors (if they prevail), and with employees, technology, and customers in trailing position.

As gloomy as all of this seems, it doesn’t have to be as bad as everyone is making it out to be. As critical as he is of the prior regime, Mr. Solomon notes that “Cadence still has a great product line with wonderful potential,” and that the real question is whether the right leader can be brought in. If the engineering team can be re-energized by good leadership, and if there are enough dollars to eke out the bad times and build for the long term, based on bringing real value to their customers, it’s far from over, even if the short term gets darker before lightening up. Part of the test will be whether customers and employees will stick it through. In this economy, the employees don’t have many alternatives, but customers do. In the end, the customer will be the decider.

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