2HRS2GO: Analysts see life in Cadence

BancBoston Robertson Stephens wasn't about to let the month end without a new rating for Cadence Systems Inc. (NYSE: CDN) and its stock.

On a tepidly negative day for the broad market, shares of the chip design software maker were up nearly 12 percent today after Robertson Stephens analysts Dan Niles and Arnab Chanda upgraded the stock to "buy" from "long-term attractive". It's the third time in three months the pair changed its view of the stock; in June they downgraded Cadence to "market performer", and in July they raised it back to "long-term attractive".

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Last month's move took some contrarian thinking since it came the day after Cadence reported a second quarter disappointment and warned analysts not to expect anything resembling growth until the middle of next year. Much of the flatness will come as Cadence moves to a subscription system that covers shorter time periods than previous contracts.

In the month and 10 days since that quarterly report, Cadence is well on its way toward its stated goal of getting 30 percent of product bookings on the new model, Niles and Chanda report. Because the new system involves subscriptions of no more than two years, it avoids oversaturating the market for long periods of time; subscriptions also provide more predictable revenue.

That kind of change may sound minor, but one of Cadence's biggest problems was recording a ton of revenue at the start of a contract, then having to get by without any money coming in for the the majority of the deal's lifespan. Cadence's new model should smooth things out.

Niles and Chanda believe that's enough to get Cadence back on solid financial footing by next year, since the company's software remain as strong as ever. "Cadence has one of the best product suites in the indsutry," the analysts write. "The issues were more of support and usability."

You might worry about competition from rivals, but Cadence actually has a decent foothold for itself, with customers such as Intel, Texas Instruments, Motorola, Philips and others. And some Cadence rivals -- Avant! comes to mind -- have their own distractions to deal with. At least Cadence executives, as opposed to Avant!'s, don't face the possibility of jail time.

Besides, the overall industry's growth can accomodate at least a few players. "We are the beginning of a multi-year recovery for semiconductors, which should improve the prospects for design tool spending by semiconductor companies," say Niles and Chanda.

Not only is the industry as a whole recovering from the doldrums of the last couple of years, but chip makers are also moving to newer miniaturization technology. The transition to 0.18 micron line widths -- the spaces separating circuits on a chip -- from 0.25 micron means semiconductor companies will need new design software.

If Cadence returns to its normal revenue growth patterns, the company should be raking in revenue of $1.5 billion to $1.6 billion by 2001, Chanda and Niles note. That's a nice improvement from this year's expected sales of almost $1.1 billion.

Today's rise means Cadence currently trades at 38 times First Call's consensus estimate for 2000. But if you assume earnings will grow at the same pace as revenue -- Chanda and Niles aren't saying that, but what the heck? -- you're looking at estimated earnings of roughly 48 cents a share in 2001, which means Cadence is valued at about 28 times estimated EPS for 2001. For a software company among the leaders in a growing market, that's not bad.

Other issues:

Apple Computer Inc.

(Nasdaq: AAPL) Interim CEO Steve Jobs loves that cross-marketing. During the company's unveiling of the G4 PowerMac this morning at the Seybold conference, the first Photoshop demo led off with an image of the Buzz Lightyear character from "Toy Story 2", the sequel to the movie that made the reputation of Jobs' animation studio, Pixar. He also ended his presentation showing off a new (really, really expensive) LCD display with a clip from "A Bug's Life."

But more impressive was the nuts-and-bolts news, including 140,000 orders for the iBook so far. Apple also plans to ship the G4 this quarter, ahead of expectations. That kind of product juice should keep Apple's bottom line roaring.

IBM Corp.

(NYSE: IBM) The company currently promotes itself as a top dog in services, but it's practically regained command of the hardware market as well. With today's announcement, IBM now supplies sector leaders (or at least growth leader in the case of Dell) in consumer PCs, enterprise storage systems and networking.

AT&T Co.

(NYSE: T) Seven cents a minute for long distance phone calls didn't make investors happy, judging by the stock's decline over the last couple of days. It's not a big deal long-term, though, since consumer phone monies are becoming less and less important not only to AT&T's overall business, but to the revenues of all large telecom companies.

They're all pushing toward all-in-one communications suites, in which long distance is just one component. Until that strategy starts to show results, there's little point in getting too excited or worried about AT&T.

Broad market indices remained in negative territory this afternoon. With slightly less than two hours left in the session, the Nasdaq Composite Index was down 14.85 to 2697.84, the S&P 500 lower by 4.76 to 1319.26, and the Dow Jones Industrial Average down 40.21 to 10873.92. 22GO>