Cadence is still in the process of righting the ship, but the maneuver is proving effective so far. As has been the case with Magma, being in debt is no fun at all, and it requires financial operations that appear strange to engineers accustomed to straight forward solutions. Thus, in the EDA industry which is dominated by engineers and by unabated competition, financial results are often read in order to find weaknesses instead of strengths. I have already received calls about Cadence "embellishing the results. Just as it was the case with Magma last year, when the qualified report by the auditors created consternation only for the source of the problem to be quickly resolved, the fact that Cadence received a $15 million dollars that was scheduled for 3Q in 2Q. Once again, though, the critics have not taken into account the transparency with which the company reported it and the fact that the guidance for 3Q fully reflects the facts.

Revenue of $227 million dollars, non-GAAP operating margin of 11% and operating cash flow of $58 million dollars, all met or exceeded guidance. Business improved in the second quarter across all regions, and across all product groups, strengthening the top line performance, while the lower expense base helped improve the bottom line.

Lip-Bu Tan, President and Chief Executive Officer, stated that " The combination of our strong technology portfolio with the closer collaboration of our sales and R&D teams is yielding results. During the quarter we completed the acquisition of Denali, furthering our EDA360 vision in the areas of SoC and System realization. We also completed the issuance of $350 million dollars of convertible notes, some of the proceeds of which were used to repurchase $200 million dollars of existing convertible debt."

In addition the company also repurchased 6.5 million shares of common stock for a total of $40 million dollars. I believe these financial operations are aimed at diminishing the negative cash flow due to the outstanding debt as well as to maintain share value.

Lip-Bu singled out relationships with TSMC, Samsung, Hynix, Spreadtrum Communications, NEC, Reneas, and Teradyne as examples of partnerships that both contributed to results and offer concrete opportunities for the immediate future.

The Numbers

Comparing results for the first half of 2009 with present year results one can see that total revenue has increased by approximately $33 millions while expenses related to operations have decreased by $70 million. The bottom line results show that the company has gone from a loss of over $137 million to a profit of $37.5 million.

In prepared remarks, Kevin Palatnik, Senior Vice President and Chief Financial Officer stated that " Based on our first half results, and a review of our second half forecast, we now expect orders for 2010 to be in the range of $875 million to $925 million dollars, up from our prior range of $775 million to $825 million dollars. The majority of the increase is due to higher run-rates than originally planned for 2010, with the remainder due to the acquisition of Denali."

Turning to profitability the company forecast varies from a GAAP loss on one cent per share to a profit of 3 cents per share, while non-GAAP results should range between 12 and 16 cent per share profit. Both forecast are much better than the previous year's results.

Those who follow this page are aware of the debate about the ranking of EDA companies produced by Gary Smith, where consulting revenue are not counted in order to rank vendors by yearly revenue. If you are not familiar with what I am covering see http://www.gabeoneda.com/silicon-beach/being-number-two-eda.

Cadence reports this source of revenue as "Services". During the first six months of 2010 Cadence generated a little over $51 million from services, down from $57 million the previous comparable period. Using Gary's method revenue was $398 million, up from $359 in 2009 which means an increase of $39 million in what Gary considers EDA revenue. Hopefully this will be the last time I have to point out these figures. EDA vendors can no longer just be tools providers. They must become providers of Intellectual Property at all levels, including consulting, if they want to continue to grow.

Most EDA companies report revenue by geographical areas, and Cadence is no exception. The results show a lower percentage revenue from Japan and a larger from rest of Asia. This is to be expected as both China and India increase their importance in the electronic industry. But what is refreshing and something I have not seen detailed in other reports is the report of revenue by product groups. Cadence is performing better in Functional Verification and is maintaining his position in Digital IC Design, with about a 1% decrease in the other market segments (Custom IC, DFM, System Interconnect, and Consulting).