Cadence layoffs coming, analysts say

Cadence layoffs coming, analysts say
SAN MATEO, Calif. — Cadence Design Systems is reportedly in the midst of laying off 10 to 15 percent of its staff, roughly 550 employees, according to a desknote issued Friday (June 27) by financial analysts at SG Cowen. The desknote follows several weeks of rumors that a major layoff or restructuring at Cadence is underway.

The SG Cowen desknote speculates Cadence is currently making cuts across all its business groups, with an emphasis on reducing excess R&D staff. The desknote said SG Cowen expects Cadence to hit its projected second quarter numbers but could fall short of third quarter expectations. Cadence announced that it will have its second quarter earnings call on July 15th.

Two weeks ago, a Cadence spokesperson refused to confirm or deny to EE Times that a restructuring was taking place. Reached Friday for comment, a Cadence spokesperson called the SG Cowen note "speculative," adding that "Cadence cannot comment on speculation."

In recent weeks, sources have said Cadence is reducing its head count across all its business groups to come into parity with Synopsys' employee count. Sources said the restructuring is ongoing and cuts are being done strategically. They also note Cadence will likely announce the cuts in its second quarter earnings call.

Analysts point out that Cadence purchased over half a dozen companies just last year and that it may simply streamline itself.

"Cadence went on a buying spree last year so it wouldn't be surprising to see a reduction in headcount," said Erach Desai, analyst with American Technology Research Inc. "I think internally they have been looking at what product areas to fund and what areas to cut."

Desai said that an area that Cadence could obviously cut is in R&D. Cadence spent 25 percent of its revenues or $326 million in 2002. But Desai and other industry watchers have pointed out that Cadence didn't build itself into a long time leading EDA company by building tools, rather by buying companies. Since Cadence was formed in 1988 through the merger of SDA and ECAD, it has purchased more than 50 companies to maintain its business.

"Part of management's concern is that people on Wall Street will think Cadence doesn't invest enough in R&D," said Desai. "In fact, Cadence's model is very different than anyone else's so it wouldn't be disappointing to me or frankly anyone else who really covers this industry if their R&D expenses dropped. Cadence is good at buying new tools, integrating them into new flows and selling those flows."

Observers said that despite pouring hundreds of millions into R&D, Cadence's R&D team hasn't developed from scratch a market leading IC design product in over half a decade.

Industry watchers also point out that the layoff is merely a step in the cycle of life for the EDA business, as a big round of layoffs from one of the big companies usually means there will be a fresh new batch of EDA startups next year that Cadence, Synopsys and Mentor can buy.

Other analysts have noted Cadence recently appointed a new sales manager and is likely restructuring sales territories. The company is also reportedly moving key executives to new locations.

The move comes on the heels of Cadence buying its Japanese distributor Innotech Corp. for an undisclosed amount. Cadence last week said the move will allow Cadence to reestablish closer relationships with its Japanese customers.

Cadence can also pocket Innotech's 15-20 percent markup on Cadence tools, which could add between $20 million to $60 million in revenues this year without having the acquisition negatively affecting its bottom line this quarter. It remains unclear if Cadence can claim past revenues Innotech reaped from its markup on Cadence tools.

Financial analysts point out that in passing Cadence's revenues last quarter, Synopsys counted over fifty percent of its new bookings coming from Japan.

When Synopsys purchased Avanti a year and half ago, it also bought out Avanti's distributor in Japan and claimed that distributor's markup. In that respect, the Cadence Innotech acquisition will put it on an even playing field with Synopsys.