Practical Chip Design

In a recent post we speculated about possible reasons for Cadence's sudden purging of its executive ranks. At that time, we mentioned that the all-you-can-eat licensing model contained a very dangerous temptation to quietly fold revenues for future products into current results. Such actions would be dangerous not only because they undermine future revenue growth, but also because they raise the potential for illegal manipulation of reported results.

This afternoon Cadence made the picture considerably darker by stating that it would delay announcing third-quarter results, while it is "reviewing, in conjunction with the company's independent accountants and legal advisors, the recognition of revenue related to customer contracts signed during the first quarter of 2008," to quote from the press release.

The release goes on to say that "approximately $24 million of revenue relating to these contracts was recognized during the first quarter of 2008, but should have been recognized ratably over the duration of the contracts commencing in the second quarter of 2008." Rather ominously, there was no statement about any possible review of second- or third-quarter reported results. But one assumes the auditors must be looking.

The release makes no reference whatsoever to Mike Fister's departure, and of course none could be positively inferred without a post hoc ergo propter hoc logical fallacy. Nor does it state that the improper recognition of revenue was intentional. It merely states the fact that revenue was recognized improperly, and that the company intends to restate results for earlier quarters to reflect what they believe to be proper accounting procedures. The release also says the review does not change the company's guidance on the third quarter.

So no definite conclusions are possible. But such news could hardly have come at a worse time, or under worse circumstances, given the word on the street. At this point we can only watch.