Cadence's Troubles Impact Sector

SAN FRANCISCO - Semiconductor software developers paid the price across the board Thursday for Cadence Design System's(CDNS Quote) bearish revenue outlook, delivered Wednesday.

Mentor Graphics(MENT Quote) was recently off $1.08, or 11.8%, to $8.11, while Synopsys(SNPS Quote) was down $1.75, or 7.3%, to $22.29.

But it was Cadence that felt the most pain from the news, knocking the stock down $4.99, or 32.9%, to $10.17 Thursday. Cadence disclosed that revenue would come in about 27% below the Street's estimates.

Each company's outlook is somewhat affected by its mix of revenue. For instance, Cadence disclosed Thursday that 40% of its revenue will come from "turns," or revenue that is recognized up front in license renewal deals. Such deals are harder to close in a weak economy.

Matthew Petkun, an analyst with D.A. Davidson, said Thursday that Mentor is more exposed to an industry downturn due to its revenue mix, which he estimated at approximately half from turns and half from subscriptions, which are recognized or over the life of the contract. The company is due to deliver its next earnings report Feb. 28.

Most of Synopsys' revenue comes from subscriptions, Petkun said. He estimated only 10% of that company's top line comes from turns.

Petkun said that Cadence issued low guidance likely because it had successfully pulled deals otherwise slated for 2008 into fiscal 2007.

"In June of last year there were rumors ... that Cadence was in talks" with private equity investors, and the company may have been bolstering its quarterly reports. "I'd highlight that ... there's nothing to validate this [theory] other than conjecture," he added.

Davidson makes a market in all the stocks mentioned. None of the companies are investment banking clients of the firm.