Cadence Shares Tank on Revenue Gaffe

The company announced Wednesday that it had to restate earnings after it improperly recognized revenue.
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SAN FRANCISCO - Cadence Design Systems (CDNS) - Get Report plummeted Thursday after the company said it would restate earnings reports for the first half of the year.

Shares tumbled $1.83, or 42.4%, to $2.49 in recent trading, after the company indefinitely delayed its third-quarter report Wednesday.

Cadence shares have come under a cloud because of the improper recognition of $24 million in revenue during the first quarter ended in March. That revenue should have been recognized "ratably" over the life of the contract beginning in the second quarter, the company said Wednesday.

Cadence, which develops software tools for the design of semiconductors, recently moved to a subscription-based revenue-recognition model used by its competitors. The move will make Cadence's revenue more consistent quarter to quarter, although it has the short-term effect of lowering revenue.

The first-quarter revenue gaffe, though, points to the real trouble at Cadence: possible loss of market share to competitors.

The revenue model change has contributed to an expected 30% drop in Cadence's year-over-year revenue in 2008, but probably does not fully account for it. The company has ceded the leadership position to


(SNPS) - Get Report


Synopsys, which uses a ratable revenue-recognition model, is expected to post a top line of $1.34 billion this fiscal year ending in October, a 10% increase over 2007. Synopsys is expected to report earnings in December. Shares were recently down 71 cents, or 4.2%, to $16.33.


iShares S&P Software Index

(IGV) - Get Report

, which includes Cadence, Synopsys and

Mentor Graphics


, was recently down 2.6%.

Cadence is still slightly ahead of Mentor in market share. That company is expected to report 17.6% year-over-year top-line growth for the third quarter, although Mentor has twice fallen short of the Street's estimates this year. It is due to report earnings in November.

Mentor was off 68 cents, or 8.6%, to $7.27 in recent trading.

Citigroup analyst Terence Whalen lowered his one-year price target on Cadence Thursday to $5.50, from $11.50. "Wednesday's accounting review freezes buybacks and casts doubt on results/guidance timing," he noted. Cadence, Synopsys and Mentor are noninvestment-banking clients of the firm.

Cowen analyst Raj Seth said in a note the improper revenue recognition may just be a mistake. Yet, "we've long believed that CDNS pulled revenues forward, but doubt that there was some accounting fraud."

"We still can't model the company given poor disclosure that we trust will improve," Seth wrote. Cowen makes a market in shares of Cadence.

Several of Cadence's top executives, including the CEO, resigned in mid-October. Board Chairman John Shoven and a director have stepped in to lead the company until a new chief executive is appointed.