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Updated from 8:53 a.m. EST

Shares of

Cadence Design Systems

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continued to slide Friday after a brokerage advised clients to sell the stock in light of last night's earnings warning.

Cadence, a seller of automated design software and services for the semiconductor industry, was recently down $2.44, or 21%, to $9.22 on the

NYSE

.

The company said it now expects to earn 2 cents to 4 cents a share on a pro forma basis, on revenue of $272 million to $278 million in the fourth quarter. Analysts polled by Thomson Financial/First Call were predicting earnings of 14 cents a share on revenue of $329 million.

The miss prompted Merrill Lynch to slap a sell rating on Cadence shares.

Cadence blamed most of the shortfall on a shift away from its traditional term-license model to subscription licenses, a change that pushes significant amounts of revenue further into the future. Similarly, the company's largest customers are now pushing the length of agreements to about three years, compared with 2 1/2 years formerly.

Moreover, said Chief Executive Ray Bingham, "2003 will be a challenging year for our customers

semiconductor makers and designers. Our assumption is that bookings will remain flat."

San Jose, Calif.-based Cadence said subscription licenses accounted for about 83% of product bookings in the fourth quarter, up from 60% in the previous quarter. That figure will likely move to 90% in 2003, the company said during a conference call after the market closed.

The company's GAAP earnings will actually be much higher as a result of a $265 million payment to settle litigation from

Avant!

. The gain will offset a $70 million charge related to layoffs and plant closures. All things considered, Cadence expects to earn $88 million to $95 million, or 32 cents to 34 cents a share, in the fourth quarter.