Weak Forecast Whacks Cadence

Updated from 4:59 p.m. EST

SAN FRANCISCO -- Shares of Cadence Design Systems(CDNS)plunged in late trading after the company missed Wall Street's fourth-quarter revenue expectations and guided the Street lower for 2008.

The stock was off 21.1% to $11.96.

The San Jose, Calif. maker of semiconductor-design software had a top line of $457.9 million, up 6% from revenue of $431 million in the same quarter of the prior year.

But that fell short of analysts' expectations for revenue of $470.3 million, according to Thomson Financial.

Benefiting from a $28 million settlement with the Internal Revenue Service, Cadence's net income rose 147% to $119.5 million, or 41 cents a share, vs. a net of $48.4 million, or 16 cents a year ago. The benefit added 10 cents a share to the bottom line.

Excluding items, EPS was 46 cents, in line with analysts' expectations.

For its first quarter now underway, Cadence said revenue would range from $280 million to $290 million -- about 27% below the Street's expectations. EPS, less items, will be 3 to 5 cents. Analysts were projecting a top line of $393.2 million and EPS of 30 cents a share.

For the full year, revenue will be $1.49 billion to $1.54 billion, and EPS, excluding items, will range from $1.11 to $1.19. Analysts were looking for $1.74 billion and EPS of $1.53.

Executives attributed the gloomy forecast to the troubled economic environment that semiconductor manufacturers face. "As a result of our discussions with customers in the fourth quarter and the increasingly aggressive pricing environment, we believe it's prudent to plan conservatively," CFO Bill Porter said on the conference call.

Forecasts for research spending by chipmakers in 2008 are predicting 4% growth, vs. 7% growth recorded in 2007, Porter said.

In fact, Intel(INTC) has forecast a 2.5% increase in its R&D spending this year, to $5.9 billion.

"We've got a very uncertain environment for customers," said CEO Mike Fister. "There's a skittishness out there." Cadence forecast conservatively to avoid being pressured by customers to lower prices to close deals expected in any particular quarter, executives said.

Porter said the company is holding onto market share. "This is not about competitiveness. This is about our ability to get better [full] value from the 40% of the business that we do in turns every quarter," he said. Backlog is now expected to account for the other 60% of business, down from 66% in 2007.

Although the company did not outline plans for reducing expenses in line with the cautious forecast, costs will come down in 2008, Porter said. Headcount, which stands at 5,300, will be reduced by 200.

Operating margin, excluding items, improved by 300 basis points in 2007, to 38%, Porter said. The company is targeting an operating margin of 27% for 2008. Operating cash flow of $350 million is expected.

Backlog increased to $2 billion in 2007, from $1.9 billion at the end of the previous year, Porter said. Cadence is forecasting backlog to increase to $2.1 billion this year.

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