Cadence Says A Plus Is Complexity Curve

As computer chips get smaller and more complex, chip designers and manufacturers need better tools to make them.

Cadence Design Systems (NASDAQ:CDNS - News) and other electronic design automation software vendors are benefiting from the trend toward tiny, yet powerful chips for smartphones, tablets, notebook computers and other devices.

Cadence has notched six straight quarters of double-digit year-over-year sales gains.

In that span, earnings per share have jumped by double or triple digits.

IBD spoke recently with Geoff Ribar, chief financial officer at Cadence, about the company and industry trends.

IBD: What's the best way to describe what Cadence does

Ribar: Without Cadence and, frankly, our competitors, our customers and the system companies — both chip companies and system level companies — couldn't design their products. They couldn't design the chips or the (circuit) boards that build into those products.

That's what EDA does. We help our customers design their end products.

We are a software company. But we do have a hardware business where we allow our customers to emulate in advance the software and hardware models that they are going to put into either a system or a chip.

IBD: Are chip designers and manufacturers becoming more reliant on the latest EDA

Ribar: Chips are getting more and more complex. A billion transistors and millions of lines of code right now are required to build a chip and a product.

The complexity is even higher when you look at a complex mobile platform, whether that's a mobile phone or tablet.

IBD: Cadence had a couple of down sales years in 2008 and 2009. How did the company turn things around

Ribar: The key thing that changed is that we brought in a new CEO (Lip-Bu Tan) at the end of that period. And he did several things that were very important. He worked really hard on strategy, deal quality and rebuilding relations with key partners and customers. He also worked very hard at changing the corporate culture. You'll see the rebound largely coinciding with his tenure here and the changes that he put in place.

Obviously, in 2008 and 2009 there was a global recession as well. But it was mostly his leadership and the rest of the Cadence team responding to that leadership.

IBD: Has Cadence taken market share since he started

Ribar: We probably lost some market share during the years before his tenure. And he's done a good job of recapturing some. We've highlighted a couple of major wins at top 10 semiconductor companies in Q2 for our digital product line. And in Q4 we highlighted a material win at a top 10 semiconductor company in our verification product line. So we are seeing some market share wins.

IBD: How long do you expect the current high level of chip research and development spending to continue

Ribar: I've been in this business a long time and mostly I worked on the chip side until I joined Cadence about a year and a half ago. I've seen R&D spend grow for 30 years, and I don't see that changing as long as Moore's Law (that chip capabilities will double every 18 months) continues to work.

The chips are more complex and software is more complex, and both of those require more R&D engineering spending. Generally the trend has continued up. Electronics have become more pervasive in all types of applications from cars to household appliances and industrial appliances.

IBD: How does Cadence fit into the overall EDA market

Ribar: Synopsys (NASDAQ:SNPS - News) and Cadence have a similar objective, which is to have an end-to-end solution for building the chip or the system. Typically that requires digital, custom and analog, and verification of those products, and it may require emulation also, and the software that supports that. We have to play in all parts of that business.

We are clearly perceived as a strong player in analog and custom. And the perception is that we're dramatically improving in digital as we've made investments over the past couple of years to catch up. The two digital wins we had in the summer are clear examples of that.

IBD: Where's most of the business nowadays in terms of the latest chip technology

Ribar: Today's nodes where most of the products are being designed are probably 40 (nanometer) and becoming 28 (nanometer). (This refers to the ever-shrinking widths of the circuitry etchings on chips.) Over time that's going to become more 28 and then 20 and 14. That's been the long-term trend. We're clearly investing to try to have leadership at 20 nanometer going forward.