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Cadence Reports Q4 Revenue Up 14% Over Q4 2005
SAN JOSE, Calif., 31 Jan 2007

Cadence Design Systems, Inc. (NASDAQ: CDNS) today reported fourth quarter 2006 revenue of $431 million, an increase of 14 percent over the $378 million reported for the same period in 2005. On a GAAP basis, Cadence recognized net income of $48 million, or $0.16 per share on a diluted basis, in the fourth quarter of 2006, compared to $27 million, or $0.08 per share on a diluted basis, in the same period in 2005. Revenues for the fiscal year 2006 totaled $1.48 billion, an increase of 12 percent over 2005 total revenues of $1.33 billion. Net income for the fiscal year 2006 was $143 million, or $0.46 per share, compared to net income of $49 million, or $0.16 per share for the year 2005.

In addition to using GAAP results in evaluating Cadence's business, management believes it is useful to measure results using a non-GAAP measure of net income, which excludes, as applicable, amortization of intangible assets, stock-based compensation expense, in-process research and development charges, integration and acquisition-related costs, gains and expenses related to non-qualified deferred compensation plan assets, executive severance payments, restructuring charges, losses on extinguishment of debt, and equity in losses (income) from investments. Non-GAAP net income is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company's tax liability. See "GAAP to non-GAAP Reconciliation" below for further information on the non-GAAP measure.

Using this non-GAAP measure, net income in the fourth quarter of 2006 was $116 million, or $0.38 per share on a diluted basis, as compared to $93 million, or $0.29 per share on a diluted basis, in the same period in 2005. For the fiscal year 2006, non-GAAP net income was $336 million, or $1.08 per share, compared to $258 million and $0.83 per share in 2005.

"We had outstanding execution across all elements of our business, especially fueled by technology innovation and significant customer engagements in all regions," said Mike Fister, president and CEO of Cadence.

Bill Porter, executive vice president and chief financial officer, added, "We had a very good fourth quarter and year led by 20% or better year over year growth in our verification and custom businesses."

The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially. These statements do not include the impact of any mergers, acquisitions or other business combinations completed after Dec. 30, 2006.

Click here for the Q4 2006 Financial Schedules

Business Outlook
For the first quarter of 2007, the company expects total revenue in the range of $355 million to $365 million. First quarter GAAP earnings per diluted share are expected to be in the range of $0.10 to $0.12. Diluted earnings per share using the non-GAAP measure defined below are expected to be in the range of $0.23 to $0.25.

For the full year 2007, the company expects total revenue in the range of $1.575 billion to $1.625 billion. On a GAAP basis, net income per diluted share for fiscal 2007 is expected to be in the range of $0.69 to $0.77. Using the non-GAAP measure defined below, diluted earnings per share for fiscal 2007 are expected to be in the range of $1.26 to $1.34.

A schedule showing a reconciliation of the business outlook from GAAP net income and diluted net income per share to the non-GAAP net income and diluted net income per share is included with this release.

Audio Webcast Scheduled
Fister and Porter will host a fourth quarter 2006 financial results audio webcast today, Jan. 31, 2007, at 2 p.m. (Pacific) / 5 p.m. (Eastern). Attendees are asked to register at the Web site at least 10 minutes prior to the scheduled webcast. An archive of the webcast will be available starting Jan. 31, 2007, at 5 p.m. Pacific time and ending at 5 p.m. Pacific time on Feb. 7, 2007. Webcast access is available at www.cadence.com/company/investor_relations.

About Cadence
Cadence enables global electronic-design innovation and plays an essential role in the creation of today's integrated circuits and electronics. Customers use Cadence® software and hardware, methodologies, and services to design and verify advanced semiconductors, consumer electronics, networking and telecommunications equipment, and computer systems. Cadence reported 2006 revenues of approximately $1.5 billion, and has approximately 5,200 employees. The company is headquartered in San Jose, Calif., with sales offices, design centers, and research facilities around the world to serve the global electronics industry. More information about the company, its products, and services is available at www.cadence.com.

The statements contained above regarding the company's fourth quarter and fiscal year 2006 results, those contained in the Business Outlook section above and the statements by Mike Fister and Bill Porter include forward-looking statements based on current expectations or beliefs, as well as a number of preliminary assumptions about future events that are subject to factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Readers are cautioned not to put undue reliance on these forward-looking statements, which are not a guarantee of future performance and are subject to a number of uncertainties and other factors, many of which are outside Cadence's control, including, among others: Cadence's ability to compete successfully in the design automation product and the commercial electronic design and methodology services industries; the mix of products and services sold and the timing of significant orders for its products; economic uncertainty; fluctuations in rates of exchange between the U.S. dollar and the currencies of other countries in which Cadence does business; and the acquisition of other companies or technologies or the failure to successfully integrate those it acquires.

For a detailed discussion of these and other cautionary statements, please refer to the company's filings with the Securities and Exchange Commission. These include the company's Annual Report on Form 10-K for the year ended Dec. 31, 2005 and the company's Quarterly report on Form 10-Q for the quarter ended Sep. 30, 2006.

GAAP to non-GAAP Reconciliation
Cadence management evaluates and makes operating decisions using various operating measures. These measures are generally based on the revenues of its product, maintenance and services business operations and certain costs of those operations, such as cost of revenues, research and development, sales and marketing and general and administrative expenses. One such measure is non-GAAP net income (loss), which is a non-GAAP financial measure under Section 101 of Regulation G under the Securities Exchange Act of 1934, as amended. This measure consists of GAAP net income (loss) excluding, as applicable, amortization of intangible assets, stock-based compensation expense, in-process research and development charges, integration and acquisition-related costs, gains and expenses related to non-qualified deferred compensation plan assets, executive severance payments, restructuring charges (severance and benefits, excess facilities and asset-related restructuring charges), losses on extinguishment of debt, and equity in losses (income) from investments. Intangible assets consist primarily of purchased or licensed technology, backlog, patents, trademarks, distribution rights, customer contracts and related relationships and non-compete agreements. Non-GAAP net income (loss) is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company's tax liability.

Management believes it is useful in measuring Cadence's operations to exclude amortization of intangibles, in-process research and development and integration and acquisition-related costs because these costs are primarily fixed at the time of an acquisition and generally cannot be changed by management in the short term. In addition, management believes it is useful to exclude stock-based compensation expense because it enhances investors' ability to review Cadence's business from the same perspective as Cadence's management, which believes that stock-based compensation expense is not directly attributable to the underlying performance of the company's business operations. Management also believes that it is useful to exclude restructuring costs. Cadence has dramatically reduced the size of its design services business and portions of its product and maintenance businesses over the past several years. As a result, in 2001, 2002 and 2003, Cadence's GAAP statements of operations have included significant charges relating to such restructurings. Management believes that in measuring its operations it is useful to exclude such restructuring costs because the company's level of restructuring activities is expected to significantly decrease in the foreseeable future. Management also believes it is useful to exclude executive severance costs as these costs do not occur frequently. Management also believes it is useful to exclude gains and expenses related to its non-qualified deferred compensation plan assets as these gains and expenses are not part of Cadence's direct costs of operations, but reflect changes in the value of assets held in the plan. Finally, management also believes it is useful to exclude the equity in losses (income) from investments and investment write-downs, as these items are not part of Cadence's direct cost of operations. Rather, these are non-operating items that are included in other income (expense) and are part of the company's investment activities.

In the fourth quarter of 2006, Cadence's non-GAAP measure also excluded the loss associated with retiring a portion of its previously-issued convertible notes at a premium, and writing off related debt issuance costs. Management believes that in measuring Cadence's operations it is useful to exclude the loss on extinguishment of debt as the loss is not directly related to Cadence's operating performance and the associated transaction does not occur frequently.

In the fourth quarter of 2005, Cadence's non-GAAP measure also excluded the impact of the tax expense associated with Cadence's repatriation in 2005 of foreign earnings under the American Jobs Creation Act of 2004. This expense had no impact on Cadence's non-GAAP measure for 2006. Management believes it was useful to exclude the tax expense associated with the repatriation in 2005 of foreign earnings under the American Jobs Creation Act of 2004 as it eliminated a tax charge resulting from an event which is not expected to recur.

Management believes that non-GAAP net income (loss) provides useful supplemental information to management and investors regarding the performance of the company's business operations and facilitates comparisons to our historical operating results. Management also uses this information internally for forecasting and budgeting. Non-GAAP financial measures should not be considered as a substitute for measures of financial performance prepared in accordance with GAAP. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with their most directly comparable GAAP financial results.

The following tables reconcile the specific items excluded from GAAP net income in the calculation of non-GAAP net income for the periods shown below:

Net Income Reconciliation Quarters Ended
  December 30, 2006 December 31, 2005
(in thousands) (unaudited)
Net income on a GAAP basis $48,365 $26,566
Amortization of acquired intangibles
12,801 21,012
Stock-based compensation expense
23,549 7,696
Non-qualified deferred compensation expense
1,698 2,210
Restructuring and other charges
(71) 549
Integration and acquisition-related costs
360 516
Equity in losses from investments, gain on non-qualified deferred compensation plan assets - recorded in Other income, net
(54) 1,450
Loss on extinguishment of debt
40,768 -
Income tax related to repatriation of foreign earnings
- 30,082
Income tax effect of non-GAAP adjustments
(11,576) 2,939
Net income on a non-GAAP basis $115,840 $93,020


Net Income Reconciliation Years Ended
  December 30, 2006 December 31, 2005
(in thousands) (unaudited)
Net income on a GAAP basis $142,592 $49,343
Amortization of acquired intangibles
63,251 105,710
Stock-based compensation expense
103,986 39,902
Non-qualified deferred compensation expense
5,829 5,409
Restructuring and other charges
(797) 35,334
Write-off of acquired in-process technology
900 9,400
Executive severance payments
- 7,582
Integration and acquisition-related costs
1,748 3,644
Equity in losses from investments, gain on non-qualified deferred compensation plan assets - recorded in Other income, net
(3,744) 13,434
Loss on extinguishment of debt
40,768 -
Income tax related to repatriation of foreign earnings
- 30,082
Income tax effect of non-GAAP adjustments
(18,289) (41,656)
Cumulative effect of change in accounting principle
(418) -
Net income on a non-GAAP basis $335,826 $258,184


Diluted Net Income per Share Reconciliation Quarters Ended
  December 30, 2006 December 31, 2005
(in thousands, except per share data) (unaudited)
Diluted net income per share on a GAAP basis $0.16 $0.08
Amortization of acquired intangibles
0.04 0.07
Stock-based compensation expense
0.08 0.03
Non-qualified deferred compensation expense
0.01 -
Restructuring and other charges
- -
Integration and acquisition-related costs
- -
Equity in losses from investments, gain on non-qualified deferred compensation plan assets - recorded in Other income, net
- -
Loss on extinguishment of debt
0.13 -
Income tax related to repatriation of foreign earnings
- 0.09
Income tax effect of non-GAAP adjustments
(0.04) 0.02
Diluted net income per share on a non-GAAP basis $0.38 $0.29
Shares used in calculation of diluted net income per share—GAAP 307,472 319,647
Shares used in calculation of diluted net income per share—non-GAAP (A) 307,472 319,647


Diluted Net Income per Share Reconciliation Years Ended
  December 30, 2006 December 31, 2005
(in thousands, except per share data) (unaudited)
Diluted net income per share on a GAAP basis $0.46 $0.16
Amortization of acquired intangibles
0.20 0.34
Stock-based compensation expense
0.33 0.13
Non-qualified deferred compensation expense
0.02 0.01
Restructuring and other charges
- 0.11
Write-off of acquired in-process technology
- 0.03
Executive severance payments
- 0.02
Integration and acquisition-related costs
0.01 0.01
Equity in losses from investments, gain on non-qualified deferred compensation plan assets - recorded in Other income, net
(0.01) 0.04
Loss on extinguishment of debt
0.13 -
Income tax related to repatriation of foreign earnings
- 0.10
Income tax effect of non-GAAP adjustments
(0.06) (0.12)
Cumulative effect of change in accounting principle
- -
Diluted net income per share on a non-GAAP basis $1.08 $0.83
Shares used in calculation of diluted net income per share—GAAP 312,457 314,383
Shares used in calculation of diluted net income per share—non-GAAP(A) 312,457 314,383
(A) Shares used in the calculation of GAAP earnings per share are expected to be the same as shares used in the calculation of non-GAAP earnings per share except when the company reports a GAAP loss and non-GAAP income, or GAAP income and a non-GAAP loss.

Investors are encouraged to look at GAAP results as the best measure of financial performance. For example, amortization of intangibles or in-process technology are important to consider because they may represent initial expenditures that under GAAP are reported across future fiscal periods. Likewise, stock-based compensation expense is an obligation of the company that should be considered. Restructuring charges can be triggered by acquisitions or product adjustments as well as overall company performance within a given business environment. Losses on extinguishment of debt can be incurred on remaining convertible notes. All of these metrics are important to financial performance generally.

Though Cadence management finds its non-GAAP measure is useful in evaluating the performance of Cadence's business, its reliance on this measure is limited because items excluded from such measures often have a material effect on Cadence's earnings and earnings per share calculated in accordance with GAAP. Therefore, Cadence management typically uses its non-GAAP earnings and earnings per share measures, in conjunction with GAAP earnings and earnings per share measures, to address these limitations.

Cadence believes that presenting its non-GAAP measure of earnings and earnings per share provides investors with an additional tool for evaluating the performance of the company's business, which management uses in its own evaluation of performance, and an additional baseline for assessing the future earnings potential of the company. While the GAAP results are more complete, the company prefers to allow investors to have this supplemental measure since, with reconciliation to GAAP, it may provide additional insight into its financial results.

Cadence expects that its corporate representatives will meet privately during the quarter with investors, the media, investment analysts and others. At these meetings, Cadence may reiterate the Business Outlook published in this press release. At the same time, Cadence will keep this press release, including the outlook, publicly available on its Web site.

Prior to the start of the Quiet Period (described below), the public may continue to rely on the Business Outlook contained herein as still being Cadence's current expectations on matters covered unless Cadence publishes a notice stating otherwise.

Beginning Mar. 16, 2007, Cadence will observe a "Quiet Period" during which the Business Outlook as provided in this press release and the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q no longer constitute the company's current expectations. During the Quiet Period, the Business Outlook in these documents should be considered to be historical, speaking as of prior to the Quiet Period only and not subject to update by the company. During the Quiet Period, Cadence representatives will not comment on Cadence's business outlook or its financial results or expectations. The Quiet Period will extend until the day when Cadence's First Quarter 2007 Earnings Release is published, which is currently scheduled for Apr. 25, 2007.

For more information, please contact:
Jennifer Jordan
direct:408.944.7100
investor_relations@cadence.com
Investors and Shareholders
Cadence Design Systems, Inc.
Adolph Hunter
direct:408.914.6016
publicrelations@cadence.com
Media and Industry Analysts
Cadence Design Systems, Inc.


Cadence is a registered trademark and the Cadence logo is a trademark of Cadence Design Systems, Inc. All other trademarks are the property of their respective owners.