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Thursday, October 26, 2006

Cadence Business Model Like Selling Maps to Miners

By William Trent, CFA of Stock Market Beat

Frequently it is said that those who made the most money during the San Francisco gold rush (the 1849 one, not the Internet boom) were those who sold the shovels. A similar analogy for the semiconductor industry would point to the equipment makers. However, as we have noted often, eventually the miners won’t need any more shovels either. That’s why Cadence Design Systems (CDNS) points to a better business model still.

According to
Chief Financial Officer Bill Porter said many companies involved in the microchip industry had trimmed their forecasts for the rest of this year, citing weak demand and an uncertain consumer spending picture. However, he said, Cadence was somewhat immune to those forces since its products were used by research and development teams, not factories.”A lot of what we see in the industry has to do with inventory levels and pricing, but we have been able to see consistent R&D activity and spending,” Porter said.

So, they are confirming what we’ve been saying but claim they are immune to it. Their 9% growth year/year is far lower than the semi equipment makers’ recent 70% gains, but is likely far steadier. We’ll call them the map makers. Helping the miners find their way to riches, or at least pointing out the best places to dig. And of course, R&D creates a mixed bag for the semiconductor makers themselves. A hot new product could fill up some of the excess capacity, but could also make the existing inventory piles obsolete. But still, better at least not to be piling it higher.

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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