Jennifer Jordan - Corporate VP of IR Mike Fister - President and CEO Bill Porter - Executive VP and CFO

Woojin Ho - Merrill Lynch Harlan Sur - Morgan Stanley Tim Fox - Deutsche Bank Matt Petkun - D.A. Davidson Stuart Muter - RBC Capital Market [Quincy Fen] - Tiger Management Rohit Pandey - HSBC Securities Rich Valera - Needham & Company Sterling Auty - J.P. Morgan

Good afternoon, my name is Michelle, and I will be your conference facilitator today. At this time I'd like to welcome everyone to the Cadence Design Systems' Third Quarter 2006 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. (Operator Instructions) At this time I'd like to introduce Ms. Jennifer Jordan, Corporate Vice President of Investor Relations for Cadence Design Systems. Thank you. Ms. Jordan, you may begin.

Thank you, Michelle. Welcome to our earnings conference call for the third quarter of 2006. The webcast of this call can be accessed through our website, www.cadence.com, and will be archived for one week. With me today are Mike Fister, President and CEO and Bill Porter, Executive Vice President and CFO. Please note that today's discussion will contain forward-looking statements and that our actual results may differ materially from those expectations. For information on the factors that could cause a difference in our results, please refer to our 10-K for the period ended December 31st 2005 and our 10-Q for the period ended July 1st 2006. In addition to financial results prepared in accordance with Generally Accepted Accounting Principles or GAAP. We will also present certain non-GAAP financial measures today. Management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-GAAP financial measure. Please refer to our earnings press release for a discussion of non-GAAP measures and to both our earnings press release and our website for reconciliations for GAAP and non-GAAP financial measures use in today's discussions. Now I will turn the call over to Mike Fister.

Thanks Jennifer. Q3 was another good quarter for Cadence. Revenue grew 9% year-over-year led by sales of our verification and custom platforms. Business fundamentals and outlook for 2006 were unchanged. Last quarter we spoke about how we view our business by looking at the macro environment and the needs of our individual customers. I want to give you a brief update on that. Generally we've not seen change in the environment or in our customer's behavior from the second quarter. Industry forecast for semiconductor growth in 2006 span from 6% to 12%. The analysts' estimates for semiconductor R&D spending remain in the high single digits in the second half of 2006. Recent numbers for the 12 months through 2006 showed the industry having grown about 8% and CDN Live, Silicon Valley event, had healthy industry participation of 25% over last year, with more than 650 customers attending. Talking the past about how the advantage we have with Cadence's breadth as well as our technological depth. Breadth is absolutely required to leverage the quarter of EDA design into adjacent market segments and successfully bring to the market new holistic solutions for designing complex electronic chips and systems. Let me a moment to talk about two such holistic initiatives that we are currently engaged in and to take things to the next level. First the Power Forward initiative; the objective is to enable design and production of more power efficient electronic devices. Today, over 400 user inputs from Power Froward advisors have been incorporated by Cadence into the common power format or CPF. This captures all power specific information in a single file to link design, verification and implementation. In the third quarter Cadence and SiP reached an agreement to accelerate industry education of how CPF through SIT's low power coalition. An example of (inaudible) initiative evidence, the Cadence Logic Design Team Solutions. This new solution expands our leadership in the front-end beyond Functions Verification. It leverages the full strength of Cadence by expanding both the Incisive and Encounter platforms. As with the front-ended [Torino], it re-architects the way RTL design is done, moving from what are today sequential and typically have hot processes to concurrent ones. The result is that our customers can address the growing and predictability crisis from RTL specification logic filing; while we receive strong testimonials for the Cadence Logic Design Team Solutions from major multi-specialist customers, such as Kawasaki Microelectronics to smaller office enterprises such as the QLogic corporations. Functional Verification continues to be the fastest growing segment of our business. We have more than 10 successful competitive simulation displacements within Incisive Enterprise, driven by our leading edge Verifications Process Automation Solutions. And these are the Xtreme III hardware acceleration platforms, which we launched at CDN Live in September, off to a strong start. Redback Networks, provider of video broadband networks shows the Xtreme III system's visibility to deliver high visibility and performance at each step of the design process, through a combination of transaction-based acceleration capability and Incisive Plan-to-Closure Methodology. The strong growth consumer electronics, our customers are increasingly pressured to improve their time-to-market and productivity in the areas of mixed signal design and full custom design. As we said, with the full production release of our next generation Virtuoso Custom Analog Platform is now available to customers. This follows a very successful early adoptive program that allowed us to incorporate feedback from more than 20 companies since its preliminary release in June. Full custom design capabilities is critical not only for mixed signal applications but also for full custom design and digital applications, such as memories and microprocessors. An early adopter of our new Virtuoso platform, Micron Technology continues to recognize our leadership of the Virtuoso Platform and leverages our full custom capability to bring the memory and imaging products to market. In Digital IC, where we've have engagement through 45 nanometers and continue to deliver innovative technology. We are shipping the Encounter Timing system or ETS, which rounds out the digital flow allowing customers to complete and Signoff designs, entirely within the Encounter Platform. We already have numerous public testimonials from ETS users. Apparent to standardize on ETS, Fujitsu is incorporating it into their ASIC implementation flow with final signoff, and [Faraday] is using it in production. We also have a great response to ETS from the foundry. We have some CSMCs validating for 65 nanometer flow, while UMC and SMIC are endorsing ETS for signoff on the advanced signal integrity announcements. The number 65 nanometer tape out completed with the Encounter platform continues to grow. Included in the first tape out the 65 nanometer low power chip using the ARM cortex-A8 processor core. This is the first wireless application processor platform base on the ARM cortex-A8, and is targeted to be the best performing processor available for a wireless hand set applications. We have aligned the chip efforts to leverage our analog mix signal capabilities, targeting the fast growing wireless and networking markets. Customers report the chips are saving them time and improving productivity. This quarter S5 Wireless, a fabulous company, focused on bring extremely low cost wide area locations inventory to market. Reported taking weeks of their engineers' time using the AMS kit. Silicon-package board, our focus on building growth, our direct and ultimate channels is paying off. The number and diversity of our customers in this market segment is best served by a combination of targeting channels. In the direct channel, improved field focus is drawing sales of Allegro products to semiconductor and networking companies, increasingly the (inaudible) and automotive accounts. In the order channel, while partners are demonstrating their expertise in growing the business for our low price, high volume OrCAD PCB products. In addition, we continue to make progress with our new system and package solution which Amcore selected is the basis for its system and package initiative in its design centers worldwide. In design for manufacturing adjacency, we have now collaborations with both Brion and Clear Shape, of Lithography-Aware Design Flow that use a consistent interface to link Cadence Digital Design optimization verification technology, where as the resolution enhancement technologies all focused on producing critical litho-induced yield problems in mass design challenges. We are also been collaborating with ASML on Advanced Resolution Enhancement technology in optical proximity correction software, that was used to produce silicon at 32 nanometers. Finally, I'm speaking at the NASDAQ London conference during the first week of December. I look forward to seeing many of you there. But now, let Bill take you through the numbers.

Thanks Mike. In the third quarter, we again executed on our strategy and produced strong financial results. Total revenue was up 9% year-over-year. Non-GAAP operating margin improved 3 percentage points to 28% compared to Q3 of 2005, and we had another great cash flow quarter where we reported operating cash flow of $60 million, a 12% increase compared to Q3 of 2005. GAAP earnings per share for Q3 were $0.14 compared to $0.07 in the same quarter last year, up 100%. Non-GAAP earnings per share were $0.026 for the quarter, compared to $0.21 in Q3 of 2005, a 24% increase. Total revenue for the third quarter was $366 million compared to $337 million in Q3 of 2005, up 9%. Product revenue was $245 million, maintenance revenue was $87 million and Services revenue was $34 million. Revenue mix by geography in Q3 was 54% North America, 22% Europe, 13% Japan, and 11% Asia. The tone of business was good across all geographies. In the quarter, approximately 49% of our product business was represented by ratable licenses. This percentage is lower than our typical rate in the mid 70s, because we elected to continue to work several contracts for better value. Our forecast for the revenue mix in Q4 is in the low 80s and in the 70s for the year. For the year, we expect to generate approximately 2/3 of revenue from backlog. Contract life calculated on a dollar weighted average basis remained at approximately 3 years. Q3 total costs and expenses on a non-GAAP basis were $265 million, down from $270 million in Q2. Our non-GAAP operating margin in Q3 was 28%, up from 25% in Q3 of 2005. We looked for a non-GAAP operating margin of about 34% for Q4 and 27% for 2006. Head count at the end of Q3 was about 5200. The quality of receivables remained high in Q3, with receivables 90 days past due at 1% within our historical range of 1% to 3%. Total DSOs were 93 days compared to 100 in Q2. We still expect DSOs to settle into the mid-to high 80s by the end of 2006. Q3 operating cash Flow was $60 million, versus $54 million in the third quarter of 2005. For 2006, we expect to generate cash flow of at least $425 million. Capital expenditures were $13 million for Q3, keeping us on track to spend approximately $75 million for the year. We repurchased 6 million shares of common stock in Q3, at a cost of $98 million. Cash and cash equivalents were $758 million at the end of Q3, compared to $826 million at the end of Q2. Stock-based compensation expense was $24 million for Q3, and for 2006, we continue to estimate stock-based compensation expense of approximately $100 million. Our non-GAAP measures excludes stock-based compensation expense. Now I'll turn to out look for Q4 in the year 2006. For Q4 we expect revenue to be in the range of $405 million to $415 million. GAAP EPS should be in the range of $0.20 to $0.22 and non-GAAP EPS in the range of $0.34 to $0.36. For the year 2006, we expect revenue to be in the range of $1.458 billion to $1.468 billion. GAAP EPS should be in the range of $0.50 to $0.52, and non-GAAP EPS in the range of $1.04 to $1.06. Other income and expense for 2006 should be in the $48 million to $52 million range. I'm confident that we're making progress against our objectives, to demonstrate growth, execute consistently and achieve our operating targets. Operator, we will now take questions.

(Operator Instructions) Your first question comes from Jay Vleeschhouwer of Merrill Lynch. Woojin Ho - Merrill Lynch: Good afternoon, this is Woojin Ho for Jay. Couple of questions, the EDA marketed is indicating for the past number of quarters, a much more positive slope for physical design applications, [PNR] specifically. Can you say with certainty that you're gaining share in that category?

Yeah, I think we're doing just quite well. The back end was doing around -- is not only doing most shifts, but if you bundle that with Encounter, we're doing all the hard ones and I think moving down nicely to try to start to proliferate that across continuing especially on the strength of our segmented product offering. Woojin Ho - Merrill Lynch: Okay. Now, are there any notable trends or Cadence activities directed at all towards the global or strategical regional accounts, i.e. any particular targeted sales or product programs that you have undertaken?

Yes, sure. I mean the segmented product offering allowed to go in settling at the right level of capability, if you go to many places in summary, what we have characterized are merging geographies, they're not tackling necessarily hard ones, they may be at seeing a 90 nanometers as opposed to 65. There's many of them, say, 130 nanometers and, that's one element of exactly what we do. The second element is that we retargeted the sales force almost a year ago with a focus on, as you say, regional accounts and have a nice growth and some of the testimonials that I offer are indicative of that because they may not be the biggest companies in the world, I think in some respects they're employing leadership there by innovating at a higher level of distractions. Woojin Ho - Merrill Lynch: Okay, and Mike lastly, do you view either design or methodology support services has any kind of leading coincident indicator and if so, how do those look to you?

Well, it's a very valuable tool for the company because we use the services capability either to demonstrate new technologies, help our customers kind of over a capacity, buffer that they may have poorly anticipated. They may need more capacity in a particular part of the design cycle and/or to kind of learning and rotate that intelligence that we get down into our basic developed resources, strategic element of our business for all three of those. As you can see from those comments, it's nicely subscribed, that means is very busy and we are using it a lot in translation in the consolidation with accounts big and small. And so, it's just a very mature part of our company and business and it acts in many different capacities for us. Woojin Ho - Merrill Lynch: Great, thank you.

Your next question comes from the line of Harlan Sur of Morgan Stanley. Harlan Sur - Morgan Stanley: Hi. Good afternoon. Nice job on the quarter. First question for you, Mike, lots of design activity and strong unit growth forecast in the memory space, both on flash and DRAM and, given the heavy use of custom tools and analog mix signal stimulation with the memory suppliers; I am just wondering, how much is Cadence benefiting from the positive trends we're seeing here and more specifically with respect to NAND flash, which is a relatively new product segment, is the team seeing an expansion of the market opportunity here, as this segment continues to grow pretty rapidly.

I have a testimonial software on a particular NAND flash, I think to your point, it was interesting that Micron has a testimonial for us and in CND Live in San Jose, we had some particular sections with those kind of guys. There's an awful lot of our new Virtuoso focused at helping drive those technologies and drive not only to density but time the market. And I think in solution is good, stay tuned and what we'll try to do is funnel some technology testimonials that show some real progress there. Harlan Sur - Morgan Stanley: Okay, great. And I think you might have alluded to this a little bit earlier; but at Cadence Live we had the opportunity to speak with several of your customers, lots of discussions on the rollout of your next generation Virtuoso platform. And I think for most of the customers that we talked to, it wasn't a question of if, but when they would transition. And so, I guess the question is; can you give us a sense as to the upgrade opportunity ahead of the team as customers start to transition, and maybe over what period of time?

That's a good question. Its one of the reasons in the comments I put in, just how broad the engagements were, if you really adopted, there's over 20 companies. Bill noted particular strength in that part of the business this quarter, it wasn't -- it was coincidental, it was linked with the new Virtuoso platform. And it's something that will take over a year for some of our customers to embrace, because they're at different parts of their design cycles in terms of transition, and then some will bias it on a nodal transition process note, some will bias it on, what calendar time transition and some will focus on a product transition. So, what we're focused on now doing is working with customers in a very targeted way across the three different time continuous and focus first on the people who are going to move right away and then let the other ones move along as they come. One other thing I would point out is that, that product is segmented into the three tiers, L, XL and GXL, I think that's going to be an advantage to for customers intersected, even mid-cycle based on product transition or complexity. Harlan Sur - Morgan Stanley: Okay, great and then my final question, I know you made some commentary about just not seeing a whole lot of changes in terms of customer spending patterns from a macro level, but you know, outside of the memory space, semiconductor fundamentals have been pretty mixed at best, we heard about excess inventories in some segments of the market space, lower demand at the margin in certain segments like wireless for example, and so I'm just wondering, given that your customers in these areas have not pulled back on spending for design tools. What is it that they're focused on, what is it that's causing them not to pull back here? Is it focus on 65 nanometer and design execution, is it DFM related issues? Is it Verification issues? I mean what are the challenges that are forcing your customers to continue to spend?

They're across the board. Definitely people are focused on high integration for cost and many times that's a forward-looking process approach at 65 nanometer, which may itself have a mixed signal notion to it, because the structures don't report very nicely in the analog domain. I think verification is a various (inaudible) in your point, there is our systems on a chip, in a truer sense of the word, and we're seeing an awful lot of progress focused on considering those making the trade-offs as they approach those chips and then also trying to get the applications migrated on the market in ramp of the device. And the third thing I would say is that, many of those are very complex digital systems and the testimonial that I mentioned on, that used the ARM cortex 4 is a speed power product. That is, they're trying to build a speed performance device at really low power. And its one of the things that we look forward to with Power Forward, is a demands before it makes very good advantage of not only to tally of our Encounter system but now as you can see the improvements in the timing system in past, and I think those are all very thoughtful on our part to try to help those customers make those changes. Harlan Sur - Morgan Stanley: Okay, great, thanks a lot, Mike.

Sure.

Your next question comes from Tim Fox of Deutsche Bank. Tim Fox - Deutsche Bank: Hi. Thank you, good afternoon. Bill, if I could just start with a couple of questions; first, can you talk a little about the drop in the percentage of ratable, pretty precipitous drop to 49%. Can you go into a little bit more about what drove that for this quarter?

Sure, Tim. There's a tension that we look at between achieving quarterly metrics and then creating long-term value, and one of the things that we've been open discussing is that our objective is to provide some better solutions to customers and get some better value in return. During Q3, we achieved our primary targets of revenue growth, operating margin expansion and cash flow growth and then we consciously made a trade-off to work several contracts for better value at the cost of a lower ratable percentage for Q3. And for example, one contract that I'm familiar with, we've continued to work, and it's expected to close in Q4 for 25% more than we could have got at the end of Q3. So, as we look at it, our model hasn't changed, we are forecasting a radical mix in Q4 that is higher than normal, in the 80s and we will be at about 70s for the year. And we don't expect our year-end backlog or just look the business to change we're still looking at least $1.8 billion of backlog. So it was really about making a short-term trade-off for a secondary metric and get better value as we work to provide better technology to our customers when they need it and so we wanted that ability to increase that value and look things over more than a quarter's horizon. Tim Fox - Deutsche Bank: Okay, I think, I get that part of it. On the cash flow front, I think you reiterated your view for about 425 in cash flow from operations for the year. Do you anticipate a similar level of sales of receivables this year as you did last year? Is it more normalized in '06?

I would look at about the same level, Tim. It's pretty normal for us, as you know our program is, we can generate at least 25% of our product business from term licenses and when you look at just the rough numbers of close to $1 billion in product, that's going to generate about $250 million a year, and we'd like the use of that cash to do things like repurchase stock. And so, we think it's a good trade off and something we're comfortable with doing. It's a true sale program. Tim Fox - Deutsche Bank: Okay, Mike, if I could, maybe just a couple of quick ones for you. Any change in the competitive front in emulation? I know we've heard some recent noise from some of the competitors in the market. But I'm wondering if you're seeing any increase in competitive dynamics there? Any share loss to comment there? Thank you.

Yes, with some, some I guess, amount of pride I was talking about Xtreme III and selling completely that segmentation down another level and had a couple of testimonials there. There's definitely some, I've heard some rumors of competitive product and read about it, I haven't seen any losses. And that's such a strong part of our business. I don't know that I'm really looking backwards. I'm looking at the total complexity of our product offering and the emulation links nicely with what's were doing on Incisive. It will take another linkage with design team. I think that's really the strength that we're seeing and it bodes well for us in the future. Tim Fox - Deutsche Bank: Okay, and just finally, both of the major competitors in the space have done some recent acquisitions in the system level design area and I know you typically refer to that with your Verification platform. Do you have any views, or has your view changed at all about expanding your system-level capabilities beyond just the verification part of that element?

Yeah, we're innovating internally that, and moving up nicely, have announced a program that we call Builder that fits nicely up above verifications as someone tries to construct their platforms for tests, for architectural exploration, as well as for verification after you get it fixed. And then have been less public with that about another incubation, but it's out there. And I believe the strength of what we're doing, is going to be the strong linkage of those technologies to our implementation flow. And the big idea there, Tim, is you want to be able to test an idea as it would be implemented before you would implement it, that's the strategy that Bill and I have described a couple of times, like the analyst day and such. And so, it's very thoughtful what we're doing and I think that completeness of our strategy is one that builds nicely upon the implements and verification foundations and then kind of innovates us as back. So, beyond that, we're certainly collaborating with several companies in that space, where we have made point wise engagements with customers and that's kind of the strategy that we're onto. Tim Fox - Deutsche Bank: Very good, thank you. Nice quarter.

Sure, thank you.

Your next question comes from Matt Petkun at D.A. Davidson Matt Petkun - D.A. Davidson: Hi, good afternoon. Bill, just a point of clarification, I'm sorry I misunderstood. When you said 49% of business is ratable, did you mean, I know I misheard you, the 49% of new bookings were booked under ratable licenses or that 51% of your revenue came from backlog?

It was the first, Matt. Matt Petkun - D.A. Davidson: Okay, then I guess I missed the percentage of total revenue in the quarter that came from backlog?

It's still in the low 60s. I didn't mention that, but that's the answer. Matt Petkun - D.A. Davidson: Okay, I think previously you had said about 2/3 and I don't want to read too much into anything, but I mean, that would seem to make sense if you had more one-time deals in the quarter then.

Yes, it's within in that, I think normal range of a couple points here or there. Matt Petkun - D.A. Davidson: Okay, great. And then, your analyst day, or not analyst day, but I (inaudible) provided that analyst dinner, you gave us some clarification in terms of what you're seeing in percentages. I think it was specifically on the Encounter side for digital in terms of product tiering between L, XL and GXL. Can you kind of give us an update on that, maybe share how that is going for you also on the Incisive, kind of enterprise versus other levels of product tering?

Sure Matt. Let me just reiterate the, mix that we are expecting is around 10% to 20% in GXL, about 20% to 30% in L and the rest in XL and that experience is primarily around our digital platform. And what we have seen so far really focused on the high ends around mid-teens in GXL. We've got about three quarters now of experience and we are seeing, I'd say very similar but a very early trends in the rest of the platforms, so really, I think the best day that we have is around digital. We are seeing continued anecdotes back from the field that the segmentation helps us compete particularly with the Ls as we are able to move in at a base level and then we can work with our customers to sell up as their needs, get more complex. So, that is getting good feedback. And then also, particularly across the geographic accounts, we are continuing to see some good early intake of the kits primarily around mixed signal as we can help the smaller companies get time to market improvement. And that also interplays a bit with the services that was asked earlier, because the services teams can help with those small customers particularly as they move into some new technologies. So, the early indications I think are continuing to be good. At this stage, I think it's still too early for me to quantify that we've got the 1% to 2% growth that we're targeting from both segmentation and kits, but we're still feeling that the early progress is good and we're going to continue to focus efforts there. So, we see good returns particularly with the segmentation and then moving up the stack with smaller customers on the kits business.

The one other thing, the segmentation you asked on the verification side, is a little bit different. I don’t think its going to stratify that way. Enterprises across the continuous designers and verification engineers, that's a characteristic of a extremely big organization and so on. So, it's a lot more targeted around the size of the company that we're penetrated on and we're focused as a high end companies to start off with. So, it's almost irrelevant in some respects what the distribution of the enterprise segmentation strategy is right now. Matt Petkun - D.A. Davidson: Okay, that’s a good point. Just one other final question from me, I know you guys, I think it was this quarter, launched the Xtreme III in the Emulation product line. I know you are not going to give specifics, but I am just wondering how much hardware is right now, roughly as a percentage of the total? It seems like that has been one a couple of markets when you've been gaining a lot of share, and I'm just wondering if you could kind of provide some updates on that?

Yeah, Matt, the Xtreme just released at the end of the quarter and I think it's going to continue to fill out our strong business in Emulation. It's a very natural move from simulation up to the hardware acceleration and then to Emulation. We don't break out specifics for the hardware business besides, it has been doing well. It is -- adds the capability that others don't have for product line, and we think it's going to continue to grow. Matt Petkun - D.A. Davidson: Okay, thanks a lot. Nice quarter.

Thank you.

Your next question comes from Stuart Muter of RBC Capital Market. Stuart Muter - RBC Capital Market: Yeah thanks. Good afternoon and thanks for taking my questions. I guess first question, is really Japan revenues dropped off as a percentage fairly substantially from Q2 to Q3. Could you talk a little about what was driving that?

Yes, Stewart, it's nothing more than the mix of business by geography which does have some volatility depending on which contrasts it closed and revenues in a particular quarter and in a particular geography. As we look at our Japanese business, it continues to be very strong. We have a very good pipeline, as we look at Q4 and as we continue to look out into that business. It's really based on the strength of the technology and the customers in Japan are investing. We've seen that, we expect that to continue. So, I think you're seeing just a little bit of stronger business in North America and Europe this quarter. But we still see the trends as we look at it, kind of our weighted average basis -- full quarter basis continue to do well in Japan. Stuart Muter - RBC Capital Market: So Bill, you think, it will be higher as a percentage in Q4?

Generally, I expect, yes it will. Stuart Muter - RBC Capital Market: Okay. And a quick question for Mike. In terms of the early feedback on 45 nanometers, what are your customers, really -- where are they struggling with 45 nanometers? Does it continue to be designed for manufacturability? Is it continued power, could you talk a little bit about what you're hearing with the early feedback on one of the design challenges of 45 nanometers?

Yeah. It's very early, good question though. It's a trade-off of density and power. On those kinds of process technologies, you can put a lot of stuff on there. Say, you want to integrate for value and that's why Power is such a huge component of care. The pure performance of those when you trade-off power, like that wireless chip example, that I was mentioning is manageable. And often times it's not just an element of, hooking the transistors together, the conception of the chip and then improving that it works and that's why the verification linkages are so interesting, and that's why the design team is notable. So, it really -- if I could characterize, it's sound probably, characteristically (inaudible), it increasingly becomes a system design problem as opposed to just a semiconductor design problem. As they go into production, I think we'll see a whole rap of DSM associated opportunities. And the approach that we take, say an example on a [Power 40] even with the breath of the encounter offering is to look across that barrier of implementation down into the manufacturability. And we'll see, about a year from now us, is to ask, ask the question again and I think it will shift more to a production kind of a mantra like 90 was a year ago. Stuart Muter - RBC Capital Market: Okay. That's helpful. Thanks very much.

Alright.

Your next question comes from the line of [Quincy Fen] of Tiger Management. [Quincy Fen] - Tiger Management: Hey, guys. My call was -- my question was regarding the fluctuations in the revenue but you guys seem to have already touched on that, so that's it?

Okay. Operator, are there any more questions?

(Operator Instruction) Your next question comes from Rohit Pandey of HSBC Securities. Rohit Pandey - HSBC Securities: Thank you. I have about four or five questions here. Bill or Mike, if I look at the digital IC design revenue contribution, that's the lowest this quarter compared over the past ten quarters. So, what drove down the contribution?

Rohit, for digital and we have a strong portfolio from across the different product lines and they will perform and out perform in different quarters as our experience. And so as you look at that trend, you'll see that we'll have fluctuations by product group, for example in Q1, digital was down and then Q2 digital was up. So I think as we just look at digital for the year, it's probably a little lower than we and on the contrary custom is exceeding our expectations, really based on the success of digital also. So, I think normal fluctuations is something that, we see because of just the strength of our overall product portfolio. And then when we look at our digital technology, it continues to strengthen. We're not seeing competitive losses. And we are continuing to see good progress introducing initiatives, like Power Forward. We're pretty exciting about the Logic Design Team Solution and we're getting very good feedback as Mike described on encounter timing system. So I would just chalk it up to normal fluctuations and I think we're continuing good trend with that technology.

Well Pandey, and one thing really, -- and I think you noticed. As you would, in the advance process nodes like 65 nanometer where a few of the testimonials were focused, Virtuoso also has another (inaudible) for digital has a full custom tool. And so, probably gone lower in our own minds that to continue to the world, since how pure digital is for digital but, I think concur with Bill's comment. Rohit Pandey - HSBC Securities: Okay. And when I look at year-over-year revenue growth quarter-by-quarter, its been slowing down since the first quarter. So, should I expect it to reserve looking forward or how should I think about it, like you were 12% for the first quarter and the second quarter, 8.5 for the third quarter. How should I think about the year-over-year growth?

Yes, as we look at growth, we look at it over a longer-term horizon. And it's a little bit of the law of large numbers. We have consistently set that we would grow in, the high single-digits and we've done some better than that. And so we've been very pleased that we've been able to grow little faster than that. But we plan our business around our R&D growth. And so as we look forward and we think that there can be some fluctuations in growth rate, but we're pretty pleased that we've been growing the business over the last few years, faster than the industry and if we try to plan the business conservatively, so that we can hopefully overachieve to some of those growth rates. Rohit Pandey - HSBC Securities: And on the accounting side this quarter, you have a credit for non-deferred compensation. So how does that work?

I'm sorry, I don't understand that question. Rohit Pandey - HSBC Securities: You have a credit for the non-deferred compensation, usually that's an expense, I'm looking at the pro forma reconciliation and it's on page --

Okay, I understand your question now. Rohit Pandey - HSBC Securities: Yeah, okay.

With non-deferred comp, what happens when the value of the portfolio goes up; it hits our compensation expense. And then there's an offsetting increase in other income. So, the net impact on your P&L is zero. But it hits you in two different lines. So, on the contrary, when the value of the deferred comp portfolio goes down, you get a credit in compensation expense and on the other side you get a reduction in your other income from the portfolio. Again it nets out to zero. And that's the way it needs to be accounted for. Rohit Pandey - HSBC Securities: Okay, and last one on the ratable, if it went down to 49% and you said it was a trade-off made. So, should I think that your overall backlog should be higher now because you were able to extract more value out of the customers by pushing back the renewal from this quarter?

Yeah, as I described it, Rohit, it was really the quarter change. As we look at the full year, we expect our backlog to be about the $1.8 billion that we were predicting all along. So, this is really a trade-off between Q3 and Q4. The model itself I think remains, so this is about making choices for a secondary method versus really getting that value that I described in that particular example. Rohit Pandey - HSBC Securities: So, was it logistics, like you could not close deals or was it you just thought, like you will capture the value by pushing it to the fourth quarter?

If we wanted to focus and just get that business closed, I believe we could have, but we would have given up too much value. Rohit Pandey - HSBC Securities: Okay, got it.

So this is really about making a choice for a longer-term. Rohit Pandey - HSBC Securities: That’s all that I have, thank you.

Thanks.

Your next question comes from Rich Valera, Needham & Company. Rich Valera - Needham & Company: Thank you. I was just following up on some earlier Virtuoso question. Mike, I was wondering if you could give a us a sense of the ASP difference from the new Virtuoso versus old one, just to give us some sense of the revenue, certain opportunity if your customer base were to all upgrade over time?

Yeah, it's less about pure ASP than it is, buying in at the level that you want to or that you need to, and we bundle in, in the GXL, a lot more EFM oriented capability and so I think what will happen in the ASP uplift and as Bill said, we'd love to share this at the analyst day when we get out there in a couple of months, more than by anecdote. We'll get sell-out from the mid-level which is about where we had Virtuoso before up into the GXL level and the price points will help to not give somebody a technology that they can't use and therefore harp in the debate about why it should be cheaper, and it will more allow them to participate every time as they value the features. Does that make sense? What I'm saying? Rich Valera - Needham & Company: Yes, I think it does. You haven’t mentioned alternative pricing models recently. Just wondering how that's going, if that's still a significant initiative, and if there is any forward movement down the alternative pricing front?

Yeah Rich, this is Bill. I think we continue to, what I would say experiment with a number of innovations around pricing in addition to what we've talked about in terms of our segmentation. The level is about the same level we talked about in 2005 at our analyst day. But we still look at that. We don't really have much to say. We've talked and we still experiment around particularly some of the DFM technologies because again we think there's some volume application. But still, early days. So, as part of getting better value to customers, you want to give them better solutions and we continue to see, is there a different opportunity to improve how we package and how we price.

Well I could trying (inaudible) anticipate. It's interesting to me to see customers that are thinking out further in time, looking for ways that are more shared-risk reward, either around pockets of their business or big pieces and, really have -- that's one of the reasons we, that's where we have as you know, have done most of the experimentation that Bill was talking about. And I think it takes a very mature relationship to really have that conversation because you want to be viewed as an equal as opposed to lesser than equal. You know, let it to do on that for the -- when we do the analyst day, we are definitely are going to have some of our experience to share there. I believe with a lot of passion, just like I did when I came into the industry, that's both valued by some of our customers and will be in some time, in some segments, especially the manufacturability segment, the way that we have to operate to really be effective as a business. Rich Valera - Needham & Company: Thanks, and just one final one for Bill. You called out the other income of $48 million to $52 million for the full year, is that higher than you had expected previously? And if so, what is that?

It's up just slightly, Rich, from the update I gave last quarter. And we're just continuing to see a slight pick-up from other interests, or our interest income from our portfolio, was a little bit bigger. Rich Valera - Needham & Company: Okay, and could you remind us what it was last quarter?

The range; I think it's up a couple million from the total range we gave last quarter. But I can check with -- I can check it and have that for you. Rich Valera - Needham & Company: Okay, that's great. Thanks very much.

Your final question comes from Sterling Auty of J.P. Morgan. Sterling Auty - J.P. Morgan: Actually Bill, I jumped on a little bit late. I heard some of the description on the last question that was regarding the ratable. I guess I'm still not clear, I understand kind of what you guys have done for some time, and chose of walking away from business where you didn’t think you are getting value out of the customer. But in totality, if I look at declined deferred revenue, how much of that was seasonality, and then -- versus the revenue; I just want to gauge how tough the quarter may have been?

Yes, Sterling, I think there's really too different questions, so, let me just separate it. The deferred revenue, that was really a mechanical difference in dates, and what I mean by that is, in Japan for example, they generally will bill on semi-annual cycles. Last year, our end of quarter, which was October 1, was really the end of Q3. So, we billed a lot of items the last day of Q3 and it increased our deferred revenue. This year, October 1, fell into Q4, and so those increased billings in Japan happen in Q4, so you don't see the pick-up in deferred revenue. So, that's why you don't see the increase in deferred revenues this year that you did last year, it's really a seasonal billing. That's separate from what we decided to do this quarter as we looked at our portfolio business. And based on the strength of the technology and the richness of our pipeline, we could see that we were going to hit our primary targets and based on the mix of business that we were still discussing with a number of customers, those decisions were to continue to work, those contracts were essentially a subscription business, a little bit longer. So, we can get that value that I gave you example of. Sterling Auty - J.P. Morgan: But did it cause you, it pushed other business to a more upfront or what's that business already heading in that direction?

No, that business was already heading in that direction, that's why we could see based on the mix, which contracts that we would continue to work. Sterling Auty - J.P. Morgan: Okay. Thank you.

Ladies and gentlemen, this concludes today's Cadence Design's third quarter 2006 earnings conference call. You may now disconnect.