Cadence spins off services unit at Tality

By Brian Fuller, EE Times
July 17, 2000 (4:58 p.m. EST)

SAN FRANCISCO — Cadence Design Systems Inc. announced Monday (July 17) that it is spinning out its lucrative design-services business into a separate company called Tality. The spin-out was expected, although its timing had remained a mystery.

In a news release, Cadence said it has filed an S-1 registration statement with the Securities and Exchange Commission to float public shares in Tality. Cadence will retain 80 percent of Tality, whose name derives from a melding of the words "totality" and "talent," Cadence said.

Bob Wiederhold, formerly vice president of Design Services at Cadence, will become president and chief executive of Tality. Duane W. Bell, former chief financial officer for Globeset Inc., an e-commerce infrastructure company, will become Tality's chief financial officer. The company will be headquartered here, with 1,000 engineers at 14 design sites worldwide.

The spin-out has long been in the works, as Cadence chief executive Ray Bingham has searched for a way to unlock the value of the services unit, heretofore trapped inside Cadence. The company's stock was off fractionally in initial trading after the announcement, to a little more than $22 per share.

In an interview in Scotland two weeks ago, Bingham refused to confirm or deny that a spin-out was imminent, although pressure from Wall Street had been building.

Much of that pressure is pure math. Cadence's '99 revenues total $804 million for products and a whopping $295 million for services. Former Cadence chief executive Joseph Costello initiated the full-on services push in 1995 amid an EDA-sector slump, insisting that systems and IC houses needed not only tools, but also help, in a world of tighter time-to-market windows. The business has grown prominently, but with only one or two high-level contracts. Wiederhold said two weeks ago that the design portion of design services (as opposed to methodology se rvices, the other half of the services business) made up half of services revenue and is growing 50 percent per year.

The growth could be even faster but for engineering-resources constraints, he said, adding that Cadence Design Services will add 600 people this year. Factoring in attrition, that increase will probably net to 450 additional workers this year.

Wiederhold reckons that design services — in the broadest sense, what companies spend in one form or another to start and complete a design project — is a $50 billion business, part of which is clearly low-hanging fruit for Cadence, which calls itself the largest design-services company in the world, and three times the size of its nearest competitor.

It is this type of market potential and the growth rates of the services business — which includes everything from a complete design to partial aspects of design such as design-verification — that is intriguing for analysts. The largest portion of Cadence's business — $ 804 million in its traditional EDA tools market — is expected to grow with the industry at some 10 to 12 percent a year. But if services is growing at a rate closer to 50 percent a year, it will overtake the tools portion of Cadence's business in the near future. The potential, plus the not-insignificant revenue stream, makes for interesting stock-valuation prospects, according to analysts.