Ever needed to analyze the cooling performance of an electronics board? Mentor's got a tool for that. Image: Mentor Graphics.

What: Shares of Mentor Graphics (NASDAQ:MENT) fell more than 30% on Friday morning. The carnage started on Thursday night, when the maker of tools for semiconductor design and manufacturing reported solid third-quarter results with a side of horrific next-quarter guidance.

So what: In the third quarter, Mentor's sales declined 0.7% year over year to $290 million. Adjusted earnings fell 18% to $0.28 per diluted share. Both figures were in line with the company's own guidance, and a rounding error away from analyst estimates.

But in the fourth quarter, analysts had been looking forward to earnings near $0.97 per share on roughly $439 million in top-line sales. Here, Mentor's official guidance points to earnings of $0.47 per share on sales of just $336 million. That's not even in the same ZIP code as Wall Street's estimates.

Now what: If Mentor delivers on these lowball promises, fourth-quarter sales would plunge 23% lower year over year while earnings would crash 57% lower.

CEO Wally Rhines said that customer interest is strong but the sales cycle for a recent spate of new chip-testing tools will take a while to yield results. Moreover, the semiconductor industry is boiling down to a smaller set of bigger players, thanks to a virtual hurricane of big-ticket mergers.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

And it's not like the company is staring down a big bounce in the next fiscal year, which would have excused the current weakness to a large degree. Instead, sales are only expected to increase by low single-digit percentages in the next fiscal year, starting from low levels including that diastrous fourth-quarter projection.

The report made an impact on other chip design tool specialists as well, but nowhere near the level experienced by Mentor itself. Both Cadence Design Systems (NASDAQ:CDNS) and Synopsys (NASDAQ:SNPS) fell more than 6% on Mentor's news, escaping a bigger hit because they aren't currently leaning on brand-new updates to their most important product lines. That was a big piece of Mentor's desperate puzzle on Friday.

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