The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q, or this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 3, 2009. Certain of these statements, including, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "should," "will" and "would," and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including but not limited to, those expressed in these statements. We refer you to the "Risk Factors," "Results of Operations," "Disclosures About Market Risk," and "Liquidity and Capital Resources" sections contained in this Quarterly Report, and the risks discussed in our other Securities Exchange Commission, or SEC, filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.

Overview

We develop electronic design automation, or EDA, software and hardware. We license software, sell or lease hardware technology, provide maintenance for our software and hardware and provide engineering and education services throughout the world to help manage and accelerate product development processes for electronics. Our broad range of products and services are used by the world's leading electronics companies to design and develop complex integrated circuits, or ICs, and electronics systems.

We primarily generate revenue from licensing our EDA software, selling or leasing our hardware technology, providing maintenance for our software and hardware and providing engineering services. In the past, our revenue has been significantly affected by the mix of license types executed in any given period. Our revenue may also be deferred until payments become due and payable or cash is received from certain customers and for certain contracts. Substantially all of our revenue is generated from IC manufacturers and designers and electronics systems companies and is dependent upon their commencement of new design projects. As a result, our revenue is significantly influenced by our customers' business outlook and investment in the introduction of new products and the improvement of existing products.

The IC, electronics systems and semiconductor industries are continuing to experience significant challenges, primarily due to a challenging macroeconomic environment, which could be characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. As a result of this downturn, some of our customers faced financial challenges during fiscal 2008 and the first three quarters of fiscal 2009 and may continue to face such challenges during the remainder of fiscal 2009. It is unclear when the macroeconomic environment may improve. We are continuing to see pressures on our customers' research and development budgets, and therefore our customers are still looking for more flexibility in the type of software and hardware products they purchase and how and when they purchase them. The current economic downturn in our customers' industries has contributed to the substantial reduction in our revenue and could continue to harm our business, operating results and financial condition.

Facing uncertainty and cost pressures in their own businesses or otherwise as a result of the overall economic downturn, some of our customers are continuing to wait to purchase our products and to seek purchasing terms and conditions that are less favorable to us, including lower prices and shorter contract duration. As a result of this trend, we experienced lower business levels for fiscal 2008 and we have forecasted lower business levels for fiscal 2009. We incurred net losses for fiscal 2008 and the first three quarters of fiscal 2009 and we expect to incur net losses

during the last quarter of fiscal 2009. To enable us to keep our focus on the value of our technology and to assist with customer demands, we are transitioning to a license mix that will provide our customers with greater flexibility and will result in a substantial portion of our revenue being recognized ratably.

Our customers may also experience adverse changes in their businesses and, as a result, may delay or default on their payment obligations, file for bankruptcy or modify or cancel plans to license our products. If our customers are not successful in generating sufficient cash or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us, although these obligations are generally not cancelable. Additionally, our customers may seek to renegotiate existing contractual commitments. Although we have not yet experienced a material level of defaults, any material payment default by our customers or significant reductions in existing contractual commitments could have a material adverse effect on our financial condition and operating results.

Our operating results are affected by the mix of license types executed in any given period. We license software using three different license types:
subscription, term and perpetual. Product revenue associated with term and perpetual licenses is generally recognized at the beginning of the license period, whereas product revenue associated with subscription licenses is recognized over multiple periods during the term of the subscription license. The timing of revenue recognition is also affected by changes in the extent to which existing contracts contain flexible payment terms and by changes in contractual arrangements with existing customers (e.g., customers transitioning from subscription license arrangements to term license arrangements). Our license mix is changing such that a substantial proportion of licenses will require ratable revenue recognition and we expect to have fewer changes in existing contractual arrangements with existing customers, and this will result in a decrease in our expected revenue for fiscal 2009. Due to the lower business levels and the change in the mix of license types noted above, we expect to incur a net loss for fiscal year 2009.

We plan operating expense levels primarily based on forecasted revenue levels. To offset some of the impact of our expected decrease in revenue, we have implemented cost savings initiatives, including reducing headcount, decreasing employee bonuses and reducing other discretionary spending. During both the second half of fiscal 2008 and the first half of fiscal 2009, we initiated a restructuring plan to decrease costs by reducing our workforce and by consolidating facilities. We expect ongoing annual savings of approximately $180.0 million related to these two restructuring plans and other expense reductions.

Product performance and size specifications of the mobile and other consumer electronics markets are requiring electronic systems to be smaller, consume less power and provide multiple functions in one system-on-chip, or SoC, or system-in-package, or SiP. The design challenge is also becoming more complex with each new generation of electronics because providers of EDA solutions are required to deliver products that address these technical challenges and improve the efficiency and productivity of the design process in a price-conscious environment.

With the addition of emerging nanometer design considerations to the already burgeoning set of traditional design tasks, complex SoC or IC design can no longer be accomplished using a collection of discrete design tools. What previously consisted of sequential design activities must be merged and accomplished nearly simultaneously without time-consuming data translation steps. We combine our design technologies into "platforms" addressing four major design activities: functional verification, digital IC design, custom IC design and system interconnect design. The four Cadence® design platforms are branded as Incisive® functional verification, Encounter® digital IC design, Virtuoso® custom design and Allegro® system interconnect design platforms. In addition, we augment these offerings with a set of design for manufacturing, or DFM, products that service both the digital and custom IC design flows. These four offerings, together with our DFM products, comprise our primary product lines.

We have identified certain items that management uses as performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below under the heading "Results of Operations" and "Liquidity and Capital Resources."

Critical Accounting Estimates

In preparing our Condensed Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our Condensed Consolidated Balance Sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates and make changes accordingly. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. For further information about our critical accounting estimates, see the discussion under the heading "Critical Accounting Estimates" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

Our critical accounting estimate for allowance for doubtful accounts is described below due to challenges currently affecting our customers as they adjust to the challenging economic conditions.

Allowance for Doubtful Accounts

We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. This allowance is based on our assessment of the creditworthiness of our customers, historical experience, changes in customer demand and the overall economic climate in industries that we serve. While we believe that our allowance for doubtful accounts is adequate and represents our current best estimate, we will continue to monitor customer liquidity and other economic conditions, which may result in changes to our estimates regarding our ability to collect from our customers. Changes in circumstances, such as an unexpected material adverse change in a customer's ability to meet its financial obligation to us or the customer's payment trends, may require us to further adjust our estimates of the recoverability of amounts due to us, which could have a material adverse effect on our business, financial condition and operating results. As a result of our assessment of increased risk of customer delays or defaults on payment obligations, we have increased our allowance for doubtful accounts to $24.9 million as of October 3, 2009, as compared to $7.5 million as of January 3, 2009.

Results of Operations

Financial results for the three and nine months ended October 3, 2009 reflected the following:

• Continuing pressures on the research and development budgets in our customer base due to the deceleration of growth in the IC, electronics systems and semiconductor industries and the challenging macroeconomic environment;
• Lower business levels due to the challenging macroeconomic environment and the timing of our contract renewals with existing customers;
• Lower business levels and up-front revenue recognized due to our transition to a ratable license mix, which began in the third quarter of fiscal 2008;
• Decreased costs throughout the company as a result of our restructuring plans and other expense reductions;
• An increase in our allowance for doubtful accounts and the proportion of arrangements for which revenue is deferred until payments become due and payable or cash is received from customers, as a result of our assessment of the increased risk of customer delays or defaults on payment obligations; and
• Our retrospective adoption of new accounting principles, as required by the "Debt with Conversion and Other Options" subtopic of the FASB Accounting Standards Codification, or Codification, which increased interest expense for all periods presented.

Revenue

We primarily generate revenue from licensing our EDA software, selling or leasing our hardware technology, providing maintenance for our software and hardware and providing engineering services. We principally utilize

three license types: subscription, term and perpetual. The different license types provide a customer with different conditions of use for our products, such as:

• The right to access new technology;
• The duration of the license; and
• Payment timing.

Customer decisions regarding these aspects of license transactions determine the license type, timing of revenue recognition and potential future business activity. For example, if a customer chooses a fixed duration of use, this will result in either a subscription or term license. A business implication of this decision is that, at the expiration of the license period, the customer must decide whether to continue using the technology and therefore renew the license agreement. Because larger customers generally use products from two or more of our five product offerings, rarely will a large customer completely terminate its relationship with us at expiration of the license. See the discussion under the heading "Critical Accounting Estimates" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009 for additional description of license types and timing of revenue recognition.

We believe that pricing volatility has not generally been a material component of the change in our revenue from period to period. We believe that the amount of revenue recognized in future periods will depend on, among other things, the:

• Competitiveness of our new technology;
• Timing of contract renewals with existing customers;
• Length of our sales cycle; and
• Size, duration, terms and type of:

• Contract renewals with existing customers;
• Additional sales to existing customers; and
• Sales to new customers.

A substantial portion of our total revenue is recognized over multiple periods. In the past, a significant portion of our product revenue has generally been recognized upon the later of the effective date of the arrangement or delivery of the licensed software. We are moving to a license mix that will result in increased ratable revenue or revenue that will be recognized during multiple periods as the payments become due and payable, or as cash is received from certain customers and for certain contracts. As a result, we expect the percentage of product revenue from backlog to increase in future years.

Product revenue recognized in any period is also affected by the extent to which customers purchase subscription, term or perpetual licenses, and the extent to which contracts contain flexible payment terms. The timing of revenue recognition is also affected by changes in the extent to which existing contracts contain flexible payment terms and by changes in contractual arrangements with existing customers (e.g., customers transitioning from subscription license arrangements to term license arrangements).

We analyze our software and hardware businesses by product group, combining revenues for both product and maintenance because of their interrelationship. We have formulated a design solution strategy that combines our design technologies in "platforms," which are included in the various product groups described below.

Functional Verification: Products in this group, including the Incisive functional verification platform, are used to verify that the high level, logical representation of an IC design is functionally correct.

Digital IC Design: Products in this group, including the Encounter digital IC design platform, are used to accurately convert the high-level, logical representation of a digital IC into a detailed physical blueprint and then detailed design information showing how the IC will be physically implemented. This data is used for creation of the photomasks used to manufacture semiconductors.

Custom IC Design: Our custom design products, including the Virtuoso custom design platform, are used for ICs that must be designed at the transistor level, including analog, radio frequency, memories, high performance digital blocks and standard cell libraries. Detailed design information showing how an IC will be physically implemented is used for creation of the photomasks used to manufacture semiconductors.

System Interconnect Design: This product group consists of our printed circuit board, or PCB, and IC package design products, including the Allegro and OrCAD® products. The Allegro system interconnect design platform enables consistent co-design of interconnects across ICs, IC packages and PCBs, while the OrCAD line focuses on cost-effective, entry-level PCB solutions.

Design for Manufacturing: Included in this product group are our physical verification and analysis products. These products are used to analyze and verify that the physical blueprint of the IC has been constructed correctly and can be manufactured successfully. In connection with our cost savings initiatives that were implemented during the fourth quarter of fiscal 2008, we made certain changes to our DFM product strategy, including focusing on integrating DFM awareness into our core design platforms of Encounter digital IC design and Virtuoso custom design.

Revenue by Period

The following table shows our revenue for the three and nine months ended
October 3, 2009 and September 27, 2008 and the change in revenue between
periods:


                              Three Months Ended                                    Nine Months Ended
                       October 3,         September 27,                      October 3,        September 27,
                          2009                2008             Change           2009               2008             Change
                                                                  (In millions)

Product               $        96.9      $         107.6     $    (10.7 )   $       286.3     $         422.4     $   (136.1 )
Services                       26.7                 32.9           (6.2 )            83.7                98.8          (15.1 )
Maintenance                    92.5                 92.0            0.5             262.4               290.1          (27.7 )

Total revenue         $       216.1      $         232.5     $    (16.4 )   $       632.4     $         811.3     $   (178.9 )

Product revenue decreased during the three and nine months ended October 3, 2009, as compared to the three and nine months ended September 27, 2008, primarily because of lower business levels due to the challenging macroeconomic environment, the timing of our contract renewals with existing customers, our transition to a ratable license mix and a longer sales cycle. As a result, product revenue decreased for all product groups, and particularly for Digital IC Design, Functional Verification and Custom IC Design products.

Services and Maintenance Revenue have also decreased during the nine months ended October 3, 2009, as compared to the nine months ended September 27, 2008, due to the timing of contract renewals with existing customers and an increase in the proportion of arrangements for which revenue is deferred until payments become due and payable or cash is received from customers, primarily as a result of our assessment of the increased risk of customer delays or defaults on payment obligations. Maintenance revenue also decreased during the nine months ended October 3, 2009, primarily due to a decline in maintenance fees resulting from a reduction in the average duration of software license arrangements, because the annual fee for maintenance is lower for arrangements with shorter durations. During the three months ended October 3, 2009, Maintenance revenue increased due to an increase in maintenance payments received during the period under arrangements for which revenue is recognized when fees are due and payable, partially offset by a decline in maintenance fees resulting from a general reduction in average duration of software license arrangements.

Revenue by Product Group

The following table shows for the past five consecutive quarters the percentage
of product and related maintenance revenue contributed by each of our five
product groups, and Services and other:


                                                           Three Months Ended
                            October 3,        July 4,         April 4,       January 3,        September 27,
                               2009             2009            2009            2008               2008

Functional Verification             21%             23%             20%              17%                  22%
Digital IC Design                   19%             24%             19%              26%                  20%
Custom IC Design                    28%             25%             26%              23%                  26%
System Interconnect                 11%             10%             12%              12%                  11%
Design for Manufacturing             9%              5%              9%               7%                   7%
Services and other                  12%             13%             14%              15%                  14%

Total                              100%            100%            100%             100%                 100%

As described under the heading "Critical Accounting Estimates" in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009, certain of our licenses allow customers the ability to remix among software products. Additionally, we have licensed a combination of our products to customers with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, we estimate the allocation of the revenue to product groups based upon the expected usage of our products by these customers. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the above table would differ.

Although we believe the methodology of allocating revenue to product groups is reasonable, there can be no assurance that such allocated amounts reflect the amounts that would result if the customer had individually licensed each specific software solution at the outset of the arrangement.

Services and other revenue has remained relatively consistent during each of the three month periods shown in the above table. Beginning with the three months ended April 4, 2009, the decrease in Services and other revenue as a percentage of total revenue is primarily due to lower services revenue as explained under the heading "Revenue by period" above.

Revenue by Geography


                              Three Months Ended                                    Nine Months Ended
                       October 3,         September 27,                      October 3,        September 27,
                          2009                2008             Change           2009               2008             Change
                                                                  (In millions)

United States         $        87.9      $          91.0     $     (3.1 )   $       263.9     $         339.8     $    (75.9 )
Other Americas                  4.1                 10.4           (6.3 )            14.0                25.8          (11.8 )
Europe, Middle East
and Africa                     43.4                 52.3           (8.9 )           136.7               180.4          (43.7 )
Japan                          50.2                 46.6            3.6             125.6               162.9          (37.3 )
Asia                           30.5                 32.2           (1.7 )            92.2               102.4          (10.2 )

Total revenue         $       216.1      $         232.5     $    (16.4 )   $       632.4     $         811.3     $   (178.9 )

Revenue by Geography as a Percent of Total Revenue


                                              Three Months Ended                       Nine Months Ended
                                      October 3,          September 27,         October 3,         September 27,
                                         2009                 2008                 2009                2008

United States                                 41%                     39%               42%                   42%
Other Americas                                 2%                      4%                2%                    3%
Europe, Middle East and Africa                20%                     23%               22%                   22%
Japan                                         23%                     20%               20%                   20%
Asia                                          14%                     14%               14%                   13%

Total                                        100%                    100%              100%                  100%

No single customer accounted for 10% or more of total revenue during the three and nine months ended October 3, 2009 or during the three and nine months ended September 27, 2008.

Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are in foreign currencies, primarily the Japanese yen, and we recognize additional revenue in periods when the United States dollar weakens in value against the Japanese yen as the result of foreign currency translation. . . .