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Cadence Design Systems Inc. (NASDAQ:CDNS)

Q4 2008 Earnings Call

February 4, 2009 5:00 pm ET

Executives

Jennifer Jordan - Corporate VP of IR

Lip-Bu Tan - President and CEO

Kevin Palatnik - SVP and CFO

Analysts

Rich Valera - Needham & Company

Raj Seth - Cowen and Company

Matt Petkun - Davidson & Company

K.C. Rajkumar - RBC Capital Markets

Sterling Auty - JPMorgan

Tim Fox - Deutsche Bank

Operator

Good afternoon. My name is Ciara and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Design Systems fourth quarter 2008 Earnings Call. (Operator Instructions)

I will now turn the call over to Jennifer Jordan, Corporate Vice President of Investor Relations for Cadence Design Systems. Please go ahead.

Jennifer Jordan

Thank you, Ciara, and welcome to our earnings conference call for the fourth quarter of 2008. The webcast of this call can be accessed through our website, www.cadence.com, and will be archived for one week.

With me today are Lip-Bu Tan, President and CEO and Kevin S. Palatnik, Senior Vice President and CFO.

Please note that today's discussion will contain forward-looking statements and that our actual results may differ materially from those expectations. For information on the factors that could cause a difference in our results, please refer to our Form 10-K for the period ended December 29, 2007, our Form 10-Q for the period ended September 27, 2008, the company's future filings with the Securities and Exchange Commission and the cautionary statements regarding forward-looking statements in the earnings press release issued today.

In addition to financial results prepared in accordance with Generally Accepted Accounting Principles, or GAAP, we will also present some certain non-GAAP financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measures.

Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results, including those set forth in our press release of February 4, 2009, for the quarter ended January 3, 2009. A copy of this press release and financial tables can be found in the Investor Relations portion of our website at www.cadence.com. Lip-Bu?

Lip-Bu Tan

Thank you, Jennifer. Good afternoon, everyone. Let me begin by saying I'm delighted to be speaking to you as President and CEO of Cadence, and I am looking forward to getting out and meeting many of you this month.

Let me first comment on the semiconductor environment. Even the strongest of our customers are facing challenges in this economy. Despite this, I believe the challenges in the environment present opportunities for those who are best positioned, and Cadence is on solid ground.

We have $568 million of cash and cash equivalent on our balance sheet, a strong committed executive team, talented employees and a stable installed base. In 2008, we refreshed each of our major software platforms. Cadence is unique in the breadth and depth of the solution it supplies.

Furthermore, we made significant changes last year, which are already beginning to benefit our business. First, the transition to a 90/10 license mix is well on its way. In the fourth quarter, the ratable mix exceeded 85%. Second, as announced in November, we initiated a reduction in force that is expected to lower total costs and expenses by at least $150 million on the annualized basis.

Finally, we realigned our strategy to leverage the strengths of our core business and streamline the research and development organization accordingly. When I visit customers across the board, they have told me that Cadence is the crucial technology partner and they are relying on us to help them maximize the productivity of their design teams, particularly in this environment.

These customers' feedbacks support my experience working with our sales, marketing and engineering teams and teach me high degree of confidence in our competitive position. For example, one of our new customers recently made a decision to go with Cadence for their next design flow on the recommendation of a leading foundry partner, who told the customer, "Cadence has the most stable and matured digital design flow for 45 and 40-nanometer." This is the best type of endorsement.

Cadence offers the most complete solution for low-power design. Our leadership is based on the customer success and the expertise of the Cadence team. Cadence customers have reported more than 100 successful tape-outs using the Cadence low-power solution.

Indicative of the interest in our solution, there has been over 3,500 downloads of power forward initiatives, low-power guide. Our expert methodology service team plays a vital role in helping customers get up to speed on low-power design. Faraday collaborated with Cadence to build a low-power mobile platform design methodology, based on the new and counter digital implementation system.

Faraday successfully taped out 10 chips on this flow in 2008, and in 2009 intends to run 300 chip designs through it. Recent product upgrades are driving momentum for our digital flow. ST microelectronics, for example, has significantly increased their usage of the Encounter Digital Implementation System and is deploying it for 55, 40, 32 nanometer SoC.

In addition to upgrading the install base, the Encounter Power System has had 16 competitive wins since the release in October 2008. During the fourth quarter, a major Graphic Processor Company replaced another EDA vendor solutions with the Encounter Power Solution System.

In addition, we continue to gain traction in front-end design. This represents an opportunity for Cadence to grow its business over the next few years. RTL compiler, our synthesis product, now has over 440 customers, while the Encounter Timing System has over 150 customers.

Conformal ECO Adoption is also growing. This differentiated product allows customers to capture engineering change order information during the design process and helps reduce design cycle time.

Verification continues to be number one risk for customer both in terms of direct costs and opportunity costs. Consequently we see a strong demand for our differentiated solution and we will continue to invest to grow our business.

The Open Verification Methodology, or OVM, has built momentum with over 6200 users, more than 50 industry panels and nearly 15,000 downloads as of the fourth quarter. OVM helps drive 36 replacements of competitive solution in 2008.

Cadence has also taken the lead in enabling design and IP reuse by providing broadest portfolio of Verification IP in the industry. The use of Verification IP to validate both Standard IP and proprietary designs increased designer productivity and reduced design cost significantly.

During the fourth quarter, we further expanded our Verification IP portfolio, adding support for the USB 3.0, PCI Express 3.0, high-speed protocols as well as the emerging Mobile Industry Processor Interface MIPISM. Related to IP, our ChipEstimate.com IP ecosystem was recognized with the 2009 DesignVision Award in the Semiconductor IP category by the International Engineering Consortium

DesignVision Awards recognize technologies, applications, products and solutions just to be the most unique and beneficial to the Semiconductor Industry.

ChipEstimate.com brings together IP and manufacturing process information from more than 200 IP suppliers and foundries. More than 20,000 users access this information in conjunction with Cadence tools to do their early chip planning and include 80,000 estimations of performance and cost of potential design. High capital budget impacted hardware emulation sales in the latter part of 2008. Even so, Cadence added 20 new customers during the year including several in the fourth quarter.

Engineers are finding the need for earlier debug and earlier software development and a demand for predictable, reliable, verification are outpacing the capabilities of alternative methodologies.

For an increasing number of customers, hardware emulation is the most cost effective and productive means to address these challenges. For example, Novafora, a startup company working on a video processor with several millions gates, are able to bring up their design on Palladium and discover significant architecture bugs before even committing to silicon, doing it in two to three weeks with Palladium, what would take two to three months with FPGA prototyping.

Other customers, including leading data storage and hard disk drive manufacturers, in Q4 are finding that using incisive software extensions with Palladium for hardware and software debug dramatically improves their productivity and reduces the debug time again from months to weeks.

Palladium Dynamic Power Analysis solution and C-to-Silicon compiler were each named finalists in their respective category of the design analysis and the design creation for the 2008 EDN Design Innovation Award.

Turning to custom market segment, Cadence leads the analog mixed signal domain. We expect to expand our leadership position with innovative new solutions. The latest release of the Virtuoso 6 series is receiving excellent reviews from the customer. 45 customers are using the latest generation Virtuoso in full production today, with over 70 reported tape-outs and more than 20 of these customers are working at 45-nanometer and beyond.

A major European semiconductor company reported a 33% increase in gain in productivity using Virtuoso 6.1, compared to older Virtuoso 5.4.1 platform. We have also made good progress with our foundry partners on the process development kits, or PDKs, for Virtuoso 6. Currently, there are 29 PDKs available for a full range of processors down to 32 nanometers. This level of ecosystem support is indicative of our unparalleled experience in custom design.

In circuit simulations, we added new technology to our Virtuoso Multi-Mode Simulation solution, generating excellent customer response.

Over 100 customers have adopted Spectre with Turbo technology for circuit simulation since its release. Turbo technology speeds simulation run-time, while preserving Spice accuracy. Customers also report significantly increasing their productivity with our new Accelerated Parallel Stimulator, or APS, for multi-core compute platform. APS improves convergence and capacity for designs with hundreds of thousands of transistors, reducing design and verification time from weeks to hours in most cases.

In summary, while environment is extremely difficult for our customer, this also represents opportunity for Cadence. Customers increasingly rely on Cadence products and people as extension of their own teams. This is a growing demand for us to provide complete solution to help our customers improving productivity, predictability and reliability of their design process in order to compete more effectively into this market.

I believe that when we do the right things for our customers, we do the right things for our business and consequently for our shareholders.

Now, Kevin will take you through the financials.

Kevin Palatnik

Thanks Lip-Bu. First, I will provide our results for Q4 and the full year 2008 and then provide our outlook for 2009. Results for the company's key operating metrics for Q4 were total revenue of $227 million, non-GAAP operating margin of a negative 9% and operating cash flow of $33 million.

For the full year 2008, total revenue was $1.039 billion, non-GAAP operating margin was a negative 3% and operating cash flow was $70 million. Orders totaled approximately $790 million for 2008 and year end backlog was approximately $1.8 billion.

We’re making good progress with the transition to a 90/10 ratable mix. As Lip-Bu said, over 85% of orders booked in Q4 were ratable. Weighted average contract life was consistent with our target range of three to four years. In Q4, we recorded a GAAP loss per share of $6.57. Included in this result was a charge of $5.47 related to the impairment of goodwill, intangible assets and fixed assets.

For the full year 2008, we recorded a GAAP loss per share of $7.29. On a non-GAAP basis, which excludes the impairment charges among other items, we recorded a loss of $0.04 per share in Q4 2008. For the year 2008, we also recorded a non-GAAP loss per share of $0.04. Total revenue for the fourth quarter was $227 million. Product revenue was $94 million, maintenance revenue was $98 million and services revenue was $35 million.

Revenue for the year 2008, totaled $1.039 billion. Revenue mix by geography for Q4 was 45% for the Americas, 22% for Europe, 18% for Japan and 15% for Asia. Total cost and expenses on a non-GAAP basis for Q4 were $247 million, a decrease of 14% when compared with Q4 of 2007. Non-GAAP operating margin for Q4 was a negative 9%. Quarter and headcount was approximately 4,900, keep in mind though that due to regulatory requirements, the previously announced reductions did not become effective for our San Jose workforce until after the close of the fourth quarter.

Operating cash flow for Q4 was $33 million and $70 million for the year 2008. Total DSOs for Q4 increased to 182 days from 174 days in Q3, as a result of high receivables balance and lower revenue. However, the quality of receivables continues to remain high with less than 1% of receivables more than 90 days past due.

Capital expenditures for 2008 totaled $97 million. This amount includes the completion of our new engineering building in San Jose.

Cash and cash equivalents were $568 million at year end, with the majority of our cash and cash equivalents invested in AAA-rated money market funds, with over 50% allocated to money market funds that invest exclusively in US government obligations.

Now I will turn to our outlook for Q1 ’09 and the full year 2009. For Q1 2009, we expect revenue to be in the range of $200 million to $210 million. Q1 non-GAAP operating margin is expected to be in the range of a negative 20% to a negative 18%.

GAAP EPS for the first quarter is expected to be in the range of a loss of $0.33 to a loss of $0.31 and non-GAAP EPS in the range of a loss of $0.13 to a loss of $0.11. Operating cash flow for Q1 is expected to be in the range of a negative $20 million to a negative $15 million. However, it includes severance payments in the amount of $30 million.

For the full year 2009, we expect revenue to be in the range of $830 million to $870 million. Order levels for 2009 are expected to be in the range of $800 million to $850 million, resulting in a year-end 2009 backlog of approximately $1.8 billion.

For 2009, we expect weighted average contract life to be in the range of three to four years. For the seasonal revenue pattern in 2009, we expect to generate 23% to 25% of annual revenue in Q1, 23% to 26% in Q2, 24% to 27% in Q3 and 24% to 28% in Q4.

GAAP EPS for 2009 should be in the range of a loss of $0.99 to a loss of $0.87 and non-GAAP EPS in the range of a loss of $0.36 to a loss of $0.24. We expect non-GAAP operating margin to be in the range of a negative 12% to a negative 10% on an annual basis for 2009. Non-GAAP other income and expense for 2009 is expected to be in the range of a negative $5 million to a negative $3 million, primarily due to lower interest income.

For the full year 2009, we expect to be breakeven for operating cash flow, including severance payments of approximately $40 million. We expect DSOs to be approximately 150 days at year-end 2009.

Capital expenditures for 2009 are expected to be in the range of $40 million to $50 million, a decrease of approximately $30 million from a historical run rate.

In summary, the global economic crisis in which we now operate is unprecedented in recent history and is affecting nearly all sectors of the economy. While it is a tough environment for our customers, we believe that we are taking the right steps to position Cadence for the future.

We believe our competitive position and financial position are sound, our transition to a 90/10 ratable mix is the right move for long-term value and we are highly focused on operating efficiency.

Operator, we'll now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Rich Valera with Needham & Company.

Rich Valera - Needham & Company

Thank you. Good afternoon and welcome aboard, Lip-Bu. If you could give, maybe, the revenue signature of your backlog, Kevin you talked about expecting the one, you have $1.8 billion of backlog entering 2009. Can you give us a sense of how that you expect to recognize that over the next couple of years, or how much you expect to recognize in 2009 specifically?

Kevin Palatnik

Rich, at this time we are really waiting for the model to be a bit more stable, more mature before we start disclosing coverage for the following year. We'd probably need a couple more quarters for that maturity to happen.

Rich Valera - Needham & Company

Okay. This is probably just a different way of asking the same question, but how about the percentage of ratable bookings you would expect for the year? You know, you said you are, I guess, 85% for the fourth quarter. Do you expect to be at or approaching 90% for all of 2009?

Kevin Palatnik

I expect given the skew of our business it's typically in the back half. I think, by that time we should achieve a 90/10 mix.

Rich Valera - Needham & Company

By the back half, you'd, so for the full year maybe not quite seeing that?

Kevin Palatnik

Very close to it, but not exactly 90/10, that's correct.

Rich Valera - Needham & Company

Okay. That's helpful. And then just wanted to talk about the expense side of things and how you achieve, you talked before about a target operating margin, at some point, I believe, of 25%.

And just wanted to get a sense of, obviously we can't predict of any precision maybe when that happens, but what kind of revenue level do you think you need to get to, to hit that and when you could achieve it, because it seems like if you have roll out the model even to 2011, very tough to get to that kind of op margin unless there was another maybe round of expense cut. So I just wanted to know how you're thinking about achieving these kind of 20% plus type of op margin targets.

Kevin Palatnik

So Rich, when we announced the new model in July of last year to the 90/10, a lot of folks did ask about when do you achieve a normalized bookings in revenue number? And the response we gave was, it's going to take three to four years to transition through this model. So middle of 2011 into 2012, that's when we really believe we can be above the 20 plus percent operating margins. It's going to take that time, if you will, to establish that stable model and achieve those margins.

Rich Valera - Needham & Company

And you think you can do that with your current cost structure which presumably would -- once you obviously you haven’t hit the cost base you're looking for and you will in a couple of quarters, but presumably you'll actually see some expense growth from that level just due to the natural inflationary cost increases. Is that sort of how you are thinking about it?

Kevin Palatnik

Yes. When we announced the restructuring in Q4, which as I mentioned in my prepared remarks, we're well on track with in both headcount and expense. The analysis that supported that did not focus solely on 2009. It was based on a longer term view, and so couple that with achieving somewhat stability in the model, we believe we can get to those margins in 2011, 2012 timeframe.

Rich Valera - Needham & Company

Great. And, one more and then I'll yield the floor. But, could you give any color on 2010. You've talked about 2009 being the trough of the bookings sort of cycle for you with 2010 being presumably meaningfully stronger. Is there any kind of color at this point you'd be willing to give in terms of how much better 2010 bookings might be relative to 2009?

Kevin Palatnik

Yes. I still believe that the renewal cycle in 2010 is stronger than 2009. However, I think we both agree that there is a tremendous amount of uncertainty in the economy today and frankly our customers also lack the visibility to go out that far. So we don’t believe it make sense at this time to give an estimate.

Rich Valera - Needham & Company

Fair enough. Okay, thank you for taking the questions.

Operator

Your next question comes from the line of Raj Seth with Cowen and Company.

Raj Seth - Cowen and Company

Hi, thanks. First Lip-Bu, let me offer my congratulations on your appointment. I'm curious, if you sort of abstract away from the details, just philosophically, how you think about M&A here. Your predecessor had an apparent bias towards internal development excluding [Veracity] you didn’t do any M&A. How do you think about that in the context of what's going on weekend startups et cetera, perhaps a comment or two there?

Lip-Bu Tan

Raj thank you so much. First of all, let me address your question. We would be very focused on enhancing shareholder value. And for me right now the priority is focused on looking closely with the customer, and then focus on our core competence, and then really focus on execution and accountability, and we are open in exploring options to enhance our product offering, but I think at this time we kind of really focus on the execution.

Raj Seth - Cowen and Company

And conversely as you think about getting things back on track, are there areas of the business that you might consider divesting yourselves of that aren’t core. Have you gone through that exercise yet?

Lip-Bu Tan

Right. To answer your question, first of all, I'm quite heavily involved leading with the engineering development team to look at our product offering and portfolios, and we’re going to continue monitoring those developments and then focus on the area that we are really strong at, and that we have leadership and then the area that we need to focus at this time, I think, we are not going to be specific, and I think we’re right now continuing reviewing and monitoring that.

Raj Seth - Cowen and Company

Okay. And the last one for Kevin, Kevin I know you were asked this in the previous question, but last quarter, you did give some indications about suggesting backlog coverage into ’08 without maybe repeating all those numbers. Has anything changed, has there been a material change and whatever it was you’re expecting last quarter to now?

Kevin Palatnik

Nothing changed, it may have slightly improved a bit.

Raj Seth - Cowen and Company

Okay, thanks.

Operator

Your next question will come from the line of Matt Petkun with Davidson & Company.

Matt Petkun - Davidson & Company

Kevin, on the last call, l I believe you said and obviously that was a quarter past, but that bookings for next, for this current year 2009, are expected to be 800 to 900 million. You are now within that that range, but at the lower end. What’s changed in that number?

Kevin Palatnik

Yeah. Matt that’s right, we did grow with guidance of 800 to 900 on a preliminary basis, and again you’re going to hear this common theme about uncertainty. We experience it, our customers experience it. So we did tighten the range to 800 to 850. Most of that tightening was in the second half of that year, of 2009 obviously, and therefore from a revenue standpoint, we really didn’t change anything in revenue in the range, in the midpoint of the range, if you will. But, we see more uncertainty in the second half, so we did tighten it up a bit.

Matt Petkun - Davidson & Company

Okay. And then in the deals that you are signing this year. Can you give any rough numbers in terms of the average term of these deals?

Kevin Palatnik

Yes. We still see three to four years, our experience coming out of Q4. We did see some smaller companies' contract a bit, but frankly it was so small, it didn’t move the needle, we’re still in the three to four range.

Matt Petkun - Davidson & Company

Okay. And then to get back to the previous caller's question, not previous but a few callers ago. I think the street's really grappling with the normalized bookings level for Cadence. Even in this more uncertain time, I think people are trying to understand what normalized bookings look like.

And as you conduct a bit of a postmortem over the previous management situation and you look at the bookings that we enjoyed in 2007, is it safe to say what we all assume which is that there was a fair amount of deal pull-ins and that really that’s what's extending the bookings, extending the trough for bookings into theoretically 2011?

Kevin Palatnik

Yes, Matt, so I did talk about a trough in the last call. I think the best way to approximate the normalized bookings number would be to look back over the last three to five years of implied bookings, we didn’t give that guidance, but you can get there given revenues public and backlogs in our K. That would be a good approximate for a normalized bookings number.

Matt Petkun - Davidson & Company

Okay. I guess that’s why we’re talking about hoping for a snapback. Just finally, the last question would be, on the renewals that you are seeing or deals that are coming up for renewal. Are you seeing a lower percentage hit rate of, say term deals that are of falling off or percentage of customers coming back on or reducing prices or reducing seats any specific trends in the business that is out there?

Kevin Palatnik

Yes, I think generally the close rate hasn’t changed that much. I mean customers are spending a little bit more time qualifying EDA vendors, but as Lip-Bu described in the prepared comments, I mean our product portfolio is probably the best it's ever been and we're competing head on, we're doing very well. So again from a Q4 to Q1 look ahead, we see close rates about the same.

Matt Petkun - Davidson & Company

Okay. Thanks a lot.

Kevin Palatnik

Thank you.

Operator

Your next question comes from the line of K.C. Rajkumar with RBC Capital Markets.

K.C. Rajkumar - RBC Capital Markets

Hi, guys. Could you comment on the base of no transition to 40 and 32-nanometer has the base for 40 picked up as falloff, how are the trends looking?

Lip-Bu Tan

Yes. K.C., I am sorry, you broke up a little bit. Can you repeat the question?

K.C. Rajkumar - RBC Capital Markets

Yes. My question was on the base of no transition to 40 and 32 nanometers. Is the number of tape-outs per quarter that you guys are seeing, is it increasing, holding flat or dropping off?

Lip-Bu Tan

Yes. Clearly I think first of all, K.C. in some of the design, in some of the 40-nanometer and below, in some of that, it's trending down and clearly see a little bit slowing down on that, but I think that increasing the design complexity. And so, I think that way plays into our strength in terms of provide the solution for them to differentiate their design and make them more competitive. So I think you really see it as opportunity for us.

K.C. Rajkumar - RBC Capital Markets

Okay. Secondly, is it possible to give us a rough idea as to your top line's exposure to the various node, I mean what fraction of your revenues can you estimate comes from the leading edge, what fraction from the mid notes?

Kevin Palatnik

K. C., frankly, I don't have that breakout at this point. It's something I can look forward on and potentially get back to you on it.

K.C. Rajkumar - RBC Capital Markets

Okay. When I look at your cash flow statements, I find that the sale of receivables has apparently gotten slower than last quarter. Do you expect that trend to continue into Q1 or do you expect the sale to pick up?

Kevin Palatnik

No. As we talked about in our Q3 call and I'll repeat it again today, our sale of receivables, going forward, I mean, both given the credit markets and our own, if you will, practice where it make sense to sell receivables, where there are low discount rates, we will do that particularly in the Japan region, but going forward the numbers are going to come way down.

K.C. Rajkumar - RBC Capital Markets

Okay. And lastly, there are a couple of large tax items on both of your income sheet as well as the cash flow. Can you explain those items please?

Kevin Palatnik

K. C. I'm sorry I didn't hear, there was large number of what?

K.C. Rajkumar - RBC Capital Markets

Tax items, tax.

Kevin Palatnik

Okay. You want to be specific on the balance sheet.

K.C. Rajkumar - RBC Capital Markets

Yes. There is the tax item on the income sheet that is $200 million and there are items on the cash flow of about $220 million. Can you explain where they are from?

Kevin Palatnik

Yeah, sure. So the 200 is related to evaluation allowance that we did. Okay, the evaluation allowance picks up NOLs and tax credits that are called the deferred tax assets, DTAs. And so, based on the accounting rules effectively, we had to write those down because we are experiencing cumulative losses. From an economic standpoint, it doesn't imply that we can't use those, because that cumulative losses can turn around. But we had to revalue, if you will, those DTAs and write them down.

K.C. Rajkumar - RBC Capital Markets

Okay. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Sterling Auty with JPMorgan.

Sterling Auty - JPMorgan

Yeah, thanks. Hi, guys. Kevin, can you give us some description on the renewal experience in the quarter in terms of the renewals that you got, the dollars that they are signing up for versus the last contract, especially in light of all the headcount reductions that are going on in the semiconductor industry?

Kevin Palatnik

Yeah. So, Sterling, Q4 to Q3 from an economy standpoint, from a general customer standpoint, I think there are significant differences. However, in Q4 and these are part of the metrics we are looking at, we did see slight improvements in what I'll call run rate. Okay, that was our experience for Q4 and we'll see what happens in Q1.

Sterling Auty - JPMorgan

Okay. And then on the expense and the restructuring, can you walk us through how we should think about the expenses coming out of the structure, because if I look at the guidance, if you are 200 to 210 in revenue for the first quarter, 18% to 20% loss on operating margins, it seems to imply that your total expenses are going to be once again somewhere around $240 million or so, doesn’t seem to be much of a sequential change. How should we think about the expenses not only in the first quarter, but then as we move forward through the year?

Kevin Palatnik

Yeah, Sterling, whenever we start the New Year, Q1, Q2 payroll taxes and the like are so much front end loaded, they start over again. If you take Q4 expense to Q4 of '09 expense, you should see another 4% to 5% reduction. And by that time, we'll be fully through the restructuring. We are about half way through right now both in North America and around the world.

As we said in the last call, it would probably take us through the end of the first half to work through all of the work councils around the world. But, we should see from expense benefit another 3% to 5% from the Q4 numbers.

Sterling Auty - JPMorgan

All right. Thank you.

Kevin Palatnik

Thank you.

Operator

Your next question comes from the line of Tim Fox of Deutsche Bank.

Tim Fox - Deutsche Bank

Thank you. Good afternoon. Lip-Bu I was just wondering if you could give us some of your feedback from early discussion with customers, some are related to what Sterling was asking about, the massive layoffs that we are seeing, out of the NEC and others. What has been the overall view of customers regarding R&D, headcount and design activity, do you see any sign that there is going to be an extension of design or product cycles that might actually delay the renewal visibility that you might have into '09?

Lip-Bu Tan

Sure. Tim thanks so much for your question. So first of all I think the -- by visiting some of the key customers for us and general feedback is now, the visibility are low for them, and especially in the consumer electronics area it's kind of hard hit. And the medical and some of the infrastructure side Tim, relatively better, and so I think overall in our feedback is it's a very tough environment. And clearly that’s the environment we’re working in and in terms of the R&D, they tend to be more focused now and in term of their product development, and they are more targeted and in term of the headcount, clearly there are some reduction, and some are already happening in Japan and some of in US.

And then, in term of the product focus, and it tends to really play into our opportunity for us -- is that now that we're more focused on time to market and also the productivity and on first time pass, and that’s why the deep partnership with the customer had become critical. Our engineering and our sales team are really in front of our customer to help them to identify the area that we can really help them to design better and more quickly and more cost effective to the market.

Tim Fox - Deutsche Bank

Okay, thank you. And for Kevin, two quick ones, just circling back to the order guidance for the year, is there a way that we can think about what level of that 850 is based on almost entirely renewals at this point. Are you anticipating any turns business in that number or any share gains, just to give us some kind of sensitivity around the visibility in that order flow?

Kevin Palatnik

Thanks Tim. So the ranges we discussed, 800 to 850 tight – a little bit more tight in the second half of the year, our business is primarily dependent on renewals and we’ve talked about in the past, the trough that we are experiencing. I think let me stop there. Yes, let me stop there. Or could you repeat your question, I’m sorry Tim.

Tim Fox - Deutsche Bank

Yes. Essentially what we are looking at. Of that 800 to 850 how much of that are you seeing as coverage from the kind of very visible renewals or is there anything on top of that incremental business that you’re looking to do and or market share gains or is that kind of a pure renewal view?

Kevin Palatnik

It’s primarily a pure renewal view. We don’t expect significant market segment share shifts in the near term. If you look I think over history, market segment share shifts have been in the one to three to maybe 5% range. So in the short-term it’s primarily a renewal base.

Tim Fox - Deutsche Bank

Okay, great. And lastly you may have mentioned this but I don’t know if I missed it, the tax rate -- non-GAAP tax rate for ’09, anything changing there?

Kevin Palatnik

No change, 26%.

Tim Fox - Deutsche Bank

26%. Thank you.

Kevin Palatnik

Thank you.

Lip-Bu Tan

Well, thank you everyone for calling in this afternoon, I believe that Cadence technology portfolio and our competitive position are strong. We have a steady pipeline of new technology in production for 2009, while it is a tough environment for our customers. We are taking the right steps to position Cadence for the future. Finally, I'm looking forward to meeting many of you in the upcoming weeks. Thank you.

Kevin Palatnik

Thanks everyone.

Operator

Thank you for participating in today's Cadence fourth quarter 2008 earnings conference call. You may now disconnect.

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Source: Cadence Design Systems Inc. Q4 2008 Earnings Call Transcript
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