FOOL CONFERENCE CALL SYNOPSIS*
Randy Befumo (MF Templar)

CADENCE DESIGN SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDN)") else Response.Write("(NYSE: CDN)") end if %>
555 River Oaks Pkwy.
San Jose, CA 95134
(408) 943-1234
http://www.cadence.com/

ALEXANDRIA, Va., October 22, 1996/FOOLWIRE/ --- Revenue in the third quarter was a record $189 million, a 35% year-over-year increase from $140 million a year ago and 7% growth sequentially from last quarter's $177 million. Operating income for the quarter was $50 million, an increase of 53% year-over-year and 15% sequentially. The operating margin was 26.5%, 10.0% greater than last year. Earnings-per-share (EPS) came in at $0.36 EPS, up 50% compared to the year ago quarter -- excluding the one-time gain for the INTEGRATED MEASUREMENT SYSTEMS<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMSC)") else Response.Write("(NASDAQ: IMSC)") end if %> initial public offering. For the fourteenth consecutive quarter, bookings exceeded revenue and the company built backlog in the quarter. The company believes that it has continued to improve its business fundamentals as measured by things like the continued expansion of their services and operating margins.

REVENUES BY BUSINESS UNIT. Product revenue of almost $103 million was up 38% year-over-year and 4.7% sequentially. Services revenue at $31 million was up 81% year-over-year and 16% sequentially. Maintenance revenue of $55 million was up 13% year-over-year and 5.7% sequentially. Integrated Measurement Systems, their subsidiary public company in Portland, reported their earnings on October 17th and it was a positive earnings and revenue growth story.

IC LAYOUT PRODUCTS. Cadence saw strong performance in both the integrated chip (IC) layout and C&E product lines. In IC layout, which is composed of place & route, physical layout and physical verification, they saw 60% year-on-year growth and 7% sequentially even after a very strong report last quarter. Place & route showed a healthy 65% year-on-year improvement. Verification came in at 51% over last year. Layout was 81% over last year. The company is seeing a very strong market for physical design tools based on the continued shift to smaller process geometries.

CAE PRODUCT LINES. CAE, including the synthesis simulation and timing analysis tools, grew 30% year-over-year. That includes verilog simulation at 20% over last year, VHDL at 47% over last year, circuit and analog digital and mixed signal simulation at 73% year-over-year (a very hot area for them). Cadence is seeing a significant degree of success in the wireless market with their RF design solutions with several significant wins in this quarter in that area.

PRINTED CIRCUIT BOARD UNIT. They have not emphasized printed circuit board (PCB) area in recent quarters. Cadence is happy to report some signs of life. Cadence saw two large contract wins for board level design tools, including a very large deal with Sun Microsystems. Accordingly that group grew 70% year-on-year and 11% sequentially. The Alta group had a particularly good quarter with their highest ever booking quarter, 20% over their previous record in the fourth quarter of 1995 and 70% year-over-year growth in profit.

GEOGRAPHIC REVENUE BREAKDOWN. North America represented 49% of revenues, about $93 million. The year-over-year increase was 29% and there was an 8% sequential improvement. Cadence did 18% of its business, about $33 million, in Europe. Europe's performance was particularly good in that it came on top of a very strong second quarter and turned in another record performance for that area. The year-over-year improvement was 41% and the sequential improvement was 11% as they saw several large, repeat service deals in that area. Despite the large adverse currency impact of $7 (14%), Japan showed strong growth and came at $49 million, 26% of revenues. Japan was up 35% year-over-year. Asia revenues were $14 million, or 7% of their revenues -- a 61% year-over-year increase. The company is seeing a trend in the services arena where they have seen the second, third and even fourth services order from the same company as it begin to build long-term, sustainable relationships with these customers as their services provider.

PRODUCTIVITY, MARGINS & COSTS. Revenue per employee was up for the eleventh consecutive quarter to $221,000 per employee, a nice 15% productivity increase year-over-year. Product and maintenance margins both improved. Service margins increased from 29.9% to 31.1% from the second quarter to the third quarter. Operating expenses were relatively flat compared to last quarter. Research & development (R&D) expenses were up a very small amount at 16% of revenue. Marketing was up almost $3 million to 29% of revenues primarily due to increases in headcount as they strengthened their sales force around the world. General and administrative (G&A) was relatively flat quarter over quarter at 7.3% of revenue. The tax rate remained at 33%. Weighted average shares decreased by 1.7 million shares as a result of purchases of 1.1 million shares in the period for about $33 million as well as a lower average share price during the period.

BALANCE SHEET. Cash finished at $85 million, down from $99 million, the result of the stock repurchase and other normal capital expenditures. Receivables came in at $99 million and with that days sales outstanding (DSOs) improved one day to 47 days, staying in a very healthy range for them. Accounts receivable aging over 90 days remained unchanged at 6%. Deferred revenue came down $14 million from the second quarter to $101 million. There is an inclination to associate this with backlog. This is a connection that should not be made. The change in deferred revenue is a result of two factors: the third quarter is the period in seasonally highest rule-off of deferred revenue related to maintenance revenues and a deferred product rule-off related to their Japanese distributor. Their deferral of those revenues was awaiting license agreements and host ID certifications in that territory. Additions to backlog more than offset the reduction in deferred revenue.

MERGER WITH HIGH LEVEL DESIGN SYSTEMS. This will be a purchase accounting treatment, a tax-free exchange at a 0.22 fixed exchange ratio. The synergies between their floor planning or design planning product and Cadence's place & route technology is extremely strong. They anticipate that the addition of this technology will enhance their sub-micron design solution.

CADENCE VERSUS AVANT!. Cadence stressed that they believe that Avant!'s place and route software is substantially their own. They believe that they are going to win the suit and on the battlefield of technology. Cadence had some transition issues with their Dracula and Vampire products, but they are starting to get some design wins against Avant! in the veritech product line. This is not simply an issue of Cadence offering more service and maintenance, either -- they are beating Avant! on technology in these wins. Dracula lost to Avant!'s Vericheck on speed, which they have improved with Vampire. They have also improved accuracy as well.

LOOKING FORWARD. Cadence has been structuring the company and doing acquisitions to make sure that they have the entire set of technologies that are going to be required to make the "system on a chip" technology work. The foundation for this is being set up by an industry group working on a project called VSI. Cadence believes that they are prepared for this industry shift and that they have a number of products, like Alta, that play right into this. Cadence is also moving ahead with high performance circuit board level design products. The company is transforming itself from a straight tools company to a results-oriented solutions company.

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