益華電腦 (CDNS) 2009 Q2 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Cadence Design Systems second quarter 2009 earnings conference call.

After the speakers' remarks, there will be a question-and-answer session.

(Operator instructions).

Thank you.

I will now turn the call over to Jennifer Jordan, Corporate Vice President of Investor Relations for Cadence Design Systems.

Please go ahead.

Thank you, Michael, and welcome to our earnings conference call for the second quarter of 2009.

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 Lip-Bu Tan, President and CEO; and Kevin Palatnik, Senior Vice President and CFO.

Please note, that today's discussion will contain forward-looking statements and that our actual results my differ materially from those expectations.

For information on the factors that could cause a difference in our results, please refer to our Form 10-K for the period ended January 3, 2009, our Form 10-Q for the period ended April 4, 2009, the Company's future filings with the Securities and Exchange Commission, and the cautionary statements regarding forward-looking statements in the earnings press release issued today.

In addition to financial results prepared in accordance with generally accepted accounting principles or GAAP, we will also present certain non-GAAP measures today.

Cadence's 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 measures.

Investors and potential investors are encouraged to review the reconciliation of the non-GAAP financial measures with their most comparable GAAP financial results, including those set forth in our press release of July 29, 2009 for the quarter ended July 4, 2009.

A copy of this press release and financial tables can be found in the investor relations portion of our Website at www.cadence.com.

And now, I'll turn the call over to the Cadence CEO, Lip-Bu Tan.

Good afternoon, everyone.

I'm pleased to report that Cadence delivered on second quarter objectives.

Revenue for the second quarter of 2009 met expectations.

Non-GAAP net loss per share was ahead of forecast.

Cash flow from operations exceeded expectations and approximately 90% of our orders in the period were ratable.

The semiconductor industry saw improving orders in the second quarter but this was predominantly driven by inventory replenishment, some improvement in consumer demand and the Chinese government stimulus.

While many end markets have bottomed, customers are not predicting a rapid return to growth.

In Japan for example, customers are looking at another one or two years to recover because of weak demand and ongoing industry restructuring and consolidation.

The clearest progress has been in China, where stimulus is working and is helping deployment of handsets, wireless infrastructure and PC's.

Video is a rapidly emerging growth area.

In spite of some optimistic reports in the second quarter, semiconductor revenue is forecasted to decrease by about 20% in 2009 and R&D spending is expected to decrease at the same rate.

Most customers I talk to anticipate this will be a slow recovery.

They are maintaining tight control of their development budgets.

In this weak environment, Cadence is making good progress on our transition to 90/10 model, customer cautious and [make out] long-term visibility, combined with our focus on deal quality; impacted our contract duration during the first half of the year.

We are, therefore, adjusting our guidance for the contract duration, as well as our order guidance for the year.

Kevin will speak to this in more detail.

In regards to Cadence's recovery, we are making good progress.

We reduced our expense base to streamline operations.

We have embarked upon the initiative to return R&D to the forefront of the engagement with customers and within the industry ecosystem.

And we have seen our key technologies continue to grain traction.

During the second quarter, we announced a reduction in force, primarily aimed at aligning our field force to the changing semiconductor environment.

These adjustments, along with the additional cost controls, are expected to yield approximately $30 million in annual expense savings.

Our continuing focus on operating efficiency is improving profitability.

We now expect to be approximately break even on a non-GAAP basis for the second half of 2009.

In this environment, customers are focused on reducing their overall cost of design.

Earlier engagement with R&D enables us to better understand our customers' design challenges and to demonstrate that our technology and solutions are able to meaningfully impact the cost of design by improving designer productivity and shortening time to market.

This is the heart of the EDA and can, therefore, fuel innovation and deepen reliance between the customers and the EDA companies.

Account by account, we are engaging earlier with our R&D team.

The customer feedback is at the level of engineering and few engagements is extremely effective.

This is having a positive impact with customers, who increasingly report that they see us as an open, trusted partner.

And it is having a positive impact internally, where the R&D team is inspired by their increased interactions with customers and the field.

One example of this success is the extensive collaboration we announced with Toshiba Corporation during the second quarter.

The collaboration will address physical implementation, verification and custom analog integration for Toshiba and its ASIC customers throughout -- through the Virtuoso and counter-digital environments.

Toshiba Japan has found that the integration of our Virtuoso and Encounter Digital Implementation System, delivers high quality, mixed signal designs in the sharper design cycle, for applications as diverse as LCD drivers, RF CMOS for mobile communications, and automotive devices for electric power steering.

By engaging earlier and more deeply with engineering R&D, we will continue to grow our relationships with our customers.

Our key mixed signal and digital technologies continue to gain momentum.

For example, Sanyo adopted Virtuoso 6.1, along with Virtuoso digital implementation for the development of power-management devices, RF tuners, and automotive DSP's after finding they could reduce design time by 25% compared with their previous flow.

In addition, Fujitsu Microelectronics and National Semiconductor are using the new Virtuoso multimode simulation to verify complex mixed signal designs with reduced run times.

We continue to emphasize our commitment and investment in digital design.

Encounter Digital Implementation system or EDI, continues to gain traction and we see the strength of the technology demonstrated on complex designs.

For example, Hitachi implemented a 50 million gig design in just five weeks with EDI.

EDI's unique capabilities include capacity for large-scale designs, parallel processing across the entire flow and the integration of comprehensive DFM suites.

This DFM suite gives designers process accurate manufacturing information early in the physical design flow and allows them to identify, analyze and correct yield limiting hot spots.

Over the past several quarters, we have also stepped up the level of research and development engagement with our ecosystem partners.

And particularly, in the areas of mixed signal and advanced node design.

For example, we recently announced that TSMC added EDI and our system-in-package technology to its 28-nanometer Reference Flow 10.0.

In addition, this morning, we announced that we achieved first-silicon results on the 32-nanometer common platform, high-k metal-gate analogy, manufactured at IBM.

Cadence and the Common Platform Alliance collaborated to tackle systematic and random variability in advanced node design.

The silicon results represent a significant milestone for designers with stringent DFM requirements.

And will enable our EDI system to provide significant power savings, view enhancements and time to market advantages.

Increasingly, essential to SOC design today, it's ability to integrate IP more seamlessly, to help customers improve their design and verification productivity, Cadence has developed a transaction level mode methodology put in use C-to-Silicon Compiler with Incisive Enterprise Simulator, to enable customers to create, verify and reuse IP faster with fewer resources.

Customers such as E3 in Taiwan, Renasis, [Toshiba] and Fujitsu are using this solution to facilitate IP creation and reuse and improve their designers' productivities.

Also, we have teamed with Xilinx to enable delivery encrypted simulation models of Xilinx IP and to expand the library of IP supported by Cadence Incisive functional verification.

Cadence is actively at work within the semiconductor ecosystem and with our customers on the industry's most pressing design challenges, mixed signal design, system level and advanced verification and design at advanced nodes.

In summary, we have streamlined and positioned the Company for the changing semiconductor environment.

Customers are telling us our level of engagement is extremely effective and our critical technologies are gaining traction.

Cadence recovery is well underway and I believe we will be very well positioned when we enter stronger renew cycle in 2010 and 2011.

Now, I will turn the call to Kevin to discuss our financial results.

Thanks, Lip-Bu.

And good afternoon, everyone.

As Lip-Bu discussed, we're pleased that we delivered on our second quarter objectives and continued to manage the business well in a difficult economic environment.

We delivered sequentially improved second quarter results, highlighted by our continued focus on expense management, delivering an 11 point improvement in operating margin.

As typical with prior calls, I'll summarize Q2 '09 financial results.

Then move to the outlook for Q3 '09 and the full year 2009.

Results for the Company's key operating metrics for Q2 were total revenue of $210 million; non-GAAP operating margin of negative 7%; and operating cash flow of $10 million.

In Q2, we recorded a GAAP loss per share of $0.29.

On a non-GAAP basis, the loss was $0.05 per share, better than our guidance range of a $0.09 to $0.07 loss.

Total revenue for the second quarter was $210 million.

Product revenue was $102 million.

Maintenance revenue was $80 million.

And services revenue was $28 million.

Revenue mix by geography for Q2 was 48% for the Americas.

21% for EMEA.

17% for Japan.

And 14% for Asia.

We continue to make good progress in our transition to a 90/10 license mix, with approximately 90% of our orders booked in Q2 as ratable.

However, customer caution, combined with our own focus on deal quality, impacted contract duration in the first half.

The weighted average contract was at the low end of the guided range of three to four years.

Total costs and expenses, on a non-GAAP basis for Q2, were $225 million, a decrease of 19% from Q2 of 2008.

Non-GAAP operating margin for Q2 was a negative 7%.

As you know, during the quarter, we commenced a workforce reduction of approximately 225 positions.

These reductions are expected to be completed in fiscal 2009.

When combined with other cost-saving measures, these actions should result in $30 million of annualized operating expense savings.

And we finished our Q2 '09 ending headcount was approximately 4,500.

As a result of our increased focus on collections and disbursements, operating cash flow for Q2 was a positive $10 million.

Total DSO's for Q2, decreased to 130 days from 152 days in Q1, as a result of lower receivable balances.

Our quality of receivables continues to remain high with less than 1% of receivables over 90 days past due.

Capital expenditures for Q2 totaled $7 million.

And cash and cash equivalents were $557 million at quarter end.

Now, I'll turn to our outlook for Q3 '09 and the full year 2009.

For Q3 2009, we expect revenue in the range of $210 million to $220 million.

Q3 non-GAAP operating margin is expected to be the range of a negative 1% to a positive 1%.

GAAP EPS for the third quarter is expected to be in the range of a loss of $0.14 to a loss of $0.12.

And non-GAAP EPS is expected to be in the range of a loss of $0.01 to a profit of $0.01.

Operating cash flow for Q3 is expected to be in the range of $0 to $5 million, including severance payments related to the June restructuring of approximately $15 million.

For the full year 2009, we expect revenue to be in the range of $830 million to $870 million.

As mentioned earlier, our experience in the first half of the year was that weighted average contract life was at the low end of the guided three to four year range.

We expect this trend to continue and therefore, we are updating our full-year 2009 guidance to an expected range of 2.8 to 3.2 years.

This is important as it will have a direct impact on order levels.

However, we do not expect this will have an impact on revenue or cash flow.

This duration change, which translates in to approximate 15% reduction in order levels, combined with a number of customers going out of business or filing for bankruptcy, results in expected total orders for the year in the range of $625 million to $675 million, compared to our previous range of $800 million to $850 million.

Our expense management efforts are leading to improved profitability for the year.

GAAP EPS for 2009 should now be in the range of a loss of $0.81 to a loss of $0.69.

Non-GAAP EPS should now be in the range of a loss of $0.20 to a loss of $0.08, a $0.13 improvement over the previous guided range.

We expect non-GAAP operating margin to be in the range of a negative 6% to a negative 4% on an annual basis for 2009, a 6 point improvement from the previous guided range.

Non-GAAP other income and expense for 2009 is expected to be in the range of a negative $4 million to a negative $2 million.

Operating cash flow is expected to be approximately break even for the full year 2009, including severance payments.

Our target for total DSO's at year end 2009 is now expected to be in the range of approximately 135 to 140 days, an improvement from our previous estimate of 150 days.

We are also tightening the range on capital expenditures for 2009 to approximately $40 million to $45 million from our previous estimate of $40 million to $50 million.

In summary, our second quarter results demonstrate that we are reducing costs, improving profitability and positioning Company for long-term growth, with excellent progress on our transition to the 90/10 model.

Operator, we'll now take questions.

(Operator instructions).

And your first question comes from Sterling Auty with JPMorgan.

Yes, thanks, hi, guys.

So, it seems based on what you said, it's a repeat of what we had on the first quarter call, the duration shortening, revenue getting reiterated but you're doing better than expected at expenses.

I think one of the key questions that we're going to get hit with is, as you look at the new bookings guidance for this year, how should we then, not looking for 2010 guidance, but how do you grow, let's say, the top-line revenue in 2010?

And what can the bookings kind of do if they're at this depressed level at this part of the cycle?

Sterling, this is Kevin.

So, it's not our practice to give color for the out years.

We do that typically in the fourth quarter earnings call.

We have said in the past and in the Q1 call as well, that we do see a larger number of renewals in 2010 compared to 2009 and '11 versus '10.

Now having said that, we also said in the prepared remarks, we don't expect these lower bookings to cause any impact to revenue and/or cash in the short-term.

So, that's about all of the color I can give at this point.

We will calibrate 2010, specifically, in the Q4 earnings call.

Okay.

And then the follow-up question is just on the market share.

Now every dollar of bookings is that much more important.

You're going through the transition.

You mentioned some of the questions that hit the duration.

Can you give us some commentary in terms of how you see the market share?

Is there any shift, especially when it comes to those renewals?

Yes, Sterling let me start and then let me hand it over to Lip-Bu because I want to make a general comment on order levels or bookings.

As you know and as most folks on the call know, order levels can be driven higher by extending the length of contracts.

Often the result of that is lower deal quality.

Our focus is all about deal qualify.

It's not our goal to increase discounts to obtain longer duration contracts.

So, when we look at our competitors out there, when we look at market segment share, we don't see that materially changing.

Now with that, let me turn it over to Lip-Bu to talk about our technology portfolio and just general competitiveness.

Sure.

And Sterling, just to give you an update, the last two months I visited about 60 customers.

And so far from my collections, our position remains strong.

We didn't lose market share.

And also, our earlier engagement with our R&D team, with the customer, with the critical design, and I think while gaining a lot of traction and the customers really like our engagement from the R&D and also a few organizations together.

So overall, I think we are very positive and talking about the duration is shorter and we have a better chance to -- and we have a very strong portfolio.

Especially in the industry, most of the system on the chip, and SOC, and then also on the whole verification on the complexity, I think our portfolio really shines.

Thank you.

Thanks, Sterling.

Our next question comes from Matt Petkun with D.A.

Davidson.

Good afternoon.

Kevin, just to clarify, you're saying that the new estimated contract time -- did you give a range of 2.8 to 3.2?

That's correct, Matt.

And was the prior number three to four, so 3.5?

Also, correct, yes.

Okay.

I just wanted to clarify that.

Then is there any way you can break out the relative bookings weakness by segment or it is really broadbased?

And one of the things that we're noting, at least in this quarter and it's hard to make trends out of it, but it's consistent with what we're hearing from some of your competitors, is that it looks like your softer areas, where one, the customary but also the integrated system PCB business.

Yes, Matt, I'd say just generally, in terms of shorter durations.

We've talked about in prior calls, we had -- 2009 was a trough year, that we didn't see a lot of large renewals.

And so, our medium-tier companies and even smaller companies drive most of the business.

And I think in this economic environment, it's fair to say that they clearly have a lack of visibility long term.

So, call tha customer caution.

That, combined with our focus on deal quality, is what truly impacted contract duration in the first half.

Okay.

And then if I'm trying to get a sense of customer run rate, one thing I might look at is maintenance, which is down almost 20% year-over-year.

You guys aren't bundling maintenance into your new subscription deals.

That's correct, right?

Well, for both our time-based contracts, both term and subscription, right, we sell maintenance and product together as a fee.

It's called TCV or total contract value.

Right.

The sequential decline in maintenance, Q1 to Q2, primarily comes from reserves we took on certain contracts.

Talked a little bit about that in Q1.

We also increased reserves in Q2, as I said, for certain contracts.

And what happens with reserves as I'm sure you know, if the revenue you've taken is ahead of cash payments, when you take a reserve you no longer take revenue, until you catch up with that cash.

And that primarily caused maintenance to decrease sequentially.

Okay.

And then, just one final question.

I don't know if you can answer this but when you look at the product revenue this quarter, what percentage of that came from backlog?

That's something that we don't give, you know, specifics on, primarily because we just -- Q3 of last year, we moved to the 90/10 model.

I think as that model stabilizes, then I'm very willing to give much more specificity around backlog coverage.

Suffice it to say because we did move to the 90/10 in Q3 of last year, that coming into 2009, backlog was the highest for 2009, the highest it's been in a long time.

Okay.

Thanks a lot.

Thank you.

Our next question comes from Kakkean Rajkumar with RBC Capital Markets.

Hi, guys.

Thanks for taking my question.

To follow up on the questions on the contract, is this a trend that you're seeing across a large section of the customers?

Also, it appears that the customers are sort of hedging their bets and not entering in to long-term contracts with any of the media companies because they want to keep their options open.

Or if is this is a trend that is specific to Cadence?

Kakkean, I can only talk to Cadence, and our experience in both Q1 and Q2, obviously.

I talked about earlier the fact that we didn't have large renewals in 2009.

So the mix, if you will, of large versus medium,versus small companies and therefore, contracts is more weighted to the medium and small companies.

And from their perspective, they're not willing to contract long and/or the terms that they would expect given increasing length was just too dramatic.

So, that's what I meant about deal quality.

We're very focused on that and we're not willing to give up more discount to lengthen the contract.

Okay.

Would it be possible to give some color on the -- was the contract life compression specific to any of your product segments?

I think it's fair, Kakkean, to say it was across the board.

Okay.

All right.

The bulk of the improvement in OpEx in Q2 versus Q1 seemed to have come from R&D.

The R&D is now at a level 50% of what it was for last year, last June.

Would you want to talk about that, as to how are you able to cut R&D so deeply and still be able to maintain a viable R&D effect?

Yes, Kakkean, I don't know whether you're looking at GAAP versus non-GAAP.

But on the non-GAAP side, sequentially year-over-year, we're down around 25% in R&D expense and that compares to overall the 19% I declared.

So slightly above the mean, if you will, for the Company.

So I don't see a dramatically different or pointed at R&D.

Okay.

Going forward, how should we look at OpEx for -- into the quarters?

Should we expect any further OpEx compression or should we expect the OpEx to trend in line with the plan?

Well, so I gave guidance for just operating margin, right, for Q3?.

And said we would be a minus 1% to a positive 1%.

So I think between that and the annual guidance, you can derive where OpEx is heading.

Okay.

And lastly -- last year on the call, the CO had made a comment that the -- which said that customers are staying longer on older [cross] nodes.

Is this still true?

Do you guys find that the base of no transition happened to pick up?

Are more companies transferring to 40, 45, and 65?

Yes, I'll take this one, Kakkean, if I can answer that question.

I think the answer has two parts.

One part I think you mentioned about the R&D cut and I want to just want to emphasize to you, that the R&D, the portfolio is quite strong.

We basically just bring more efficiency to our R&D organization.

And as we mentioned in the last quarter, we emphasize a lot more in the SOC, low power and also emphasize in the whole verification.

That is really a lot of time to market and design cost to the customer.

So those parts, I think, we are very, very strong and we are continuing to commit to that.

So I think that will address that R&D budget issue.

On the advanced notes and what we do -- I think we announced two announcements at the [dec].

One, is that we've announced with TSMC on the EDI and our system-in-packed on the 30-nanometer with TSMC.

And we also announced with IBM on the 30-nanometer on the Common Platform.

So, we are very committed to the advancements.

And then, we have been helping a couple of customers to [move] to the 32-nanometer and it works [great.] So, we are very committed to advanced nodes and that is our position.

Great.

Thanks, guys.

Our next question comes from Rich Valera with Needham & Company.

Thank you.

I just want to understand the bookings reduction a little better.

It looks to me like about $125 million of the $175 million was due to duration.

And there's another $50 million in there.

So, sort of adjusting for duration, assuming there was no duration change you would have brought down the bookings to around $775 million, it looks like.

So, the question going back to Sterling's question, is if you're doing $775 million of sort of duration adjusted bookings, can you grow the top line next year into something above $850 million or approached $900 million, which is kind of where the Street is looking?

I know you don't want to give guidance but just to say, do you think you are grow the top line next year with the bookings in the range you're suggesting?

That's the question.

Yes, hi, Rich.

It's Kevin.

I believe we can grow top line next year for sure.

And specific to the piece parts, if you will, between what was duration versus other, I mentioned in my prepared remarks, right, we are seeing a number of customers going out of business.

And so, the end result is that we take that business off of our books.

And so, that also contributes to the lower bookings levels.

Right, but -- yes.

Understood.

But that obviously -- you were suggesting like near term it doesn't affect revenue but at some point that does effect revenue because that's bookings you just don't have, which doesn't turn in to revenue.

Right?

Well, again, primarily it's related to decrease to durations.

The bankruptcies, sure.

In the longer term, if there was a renewal with one of those customers in 2011, '12 or '13, sure it could have been impact out there.

And that's what I meant by near term versus long term.

Sure.

And then just to following up on another question with respect to products.

Maybe this is for you Lip-Bu, where are the areas where you really want to invest and either gain share or develop new competencies versus -- obviously, there must have been some areas where you pulled back as you cut R&D?

If you could just give a sense of where your real priorities are for investment and what are the key areas of investment and growth for you?

And likewise, where you are looking to save money?

I think, Rich, that's a good question.

What we see in dealing with the customer very actively right now, is that we see a tremendous opportunity.

It's in the SOC, primarily the mixed-signal area.

And that is really our stronghold in the analog and the digital side.

And then secondly, I think talking to the customer, they are very, very focused on their design costs.

And a lot is in the verification because chip is getting very complex.

And if you'll recall, we have a very strong portfolio and position in the verification side.

And then, you also move up to the whole SOC realization, the IP integration.

So I think that those are the areas that we are investing.

And then on the DFM side, we are more focused on the design flow to our foundry partners with TSMC and Common Platform.

And we have enhanced tremendously on our relationship with our foundry and the ecosystem.

And then, on the IP side, we are very strong enhanced with our IP partners.

We want to be the open, trusted partner.

So I think we're going to see a tremendous opportunity by engaging customers very deeply when they are a key design.

And I think it will pay off in 2010 and '11 and beyond.

Great.

Thank you.

Thanks, Rich.

Our next question come comes from Raj Seth with Cowen & Company.

Thanks.

Kevin, I jumped on a little late and I'm sure you've gotten questions around this bookings change already.

But I just want to make sure that your expectations or targets for longer term margins here are unchanged in the context of somewhat lower bookings, albeit driven in large part by duration change.

And if your targets are the same -- well, are they the same?

Have they changed at all?

Raj, they haven't changed, our long-term goal is to get back to 25% operating margins.

I think between the November action and June action, we've demonstrated our willingness to do that.

And I think in the past conversations we've had, I've also said regardless of the top line, we're committed to getting back to those numbers.

Good.

Thanks, Lip-Bu, can you talk just a minute about -- you talked about priority and technology investment.

Can you talk a little bit about what you are trying to gain share with some of the bigger companies, the bigger, more important customers in the industry, where I believe you've acknowledged that perhaps your share isn't what you want it to be?

I know you put a bounty on getting new business at those customers.

Can you talk a little bit about what's happening there?

Yes, happy to share with you.

As I mentioned earlier, we are very focused on the top 30 customers and we're engaging very heavily from the R&D team and also a few organizations in partnership.

So that we can really engage in the certificate discussion, the key design flow that they have.

So that we basically help them with the time to market, the design costs and also the efficiency, productivity that they're looking for.

So, we're heavily engaging with the top 30 and I think we're going to bear fruit and we're going to see traction in the years to come.

Lip-Bu how long of cycle is it once you start engaging more deeply with R&D at these customers?

They help drive feature sets in your products, et cetera.

How long a period before you start to see the benefit from this activity, do you think?

Yes, it's a good question and I think it ranges from customer to customer.

You range from six month to one year but I think we see a tremendous feedback from our customers.

They really like the engagement with our end R&D team.

And they're starting to appreciate the portfolio we have, the emphasis technology that we have.

And we are very aggressively working with our customers to offer key challenge in design.

And I think this is critical for their success because we really like to help them on the -- provide the time to market and it's very critical for their success.

Good.

One last follow-up for Kevin.

Kevin, you mentioned about $50 million of the decrease in bookings coming from customers in financial trouble, et cetera.

As you look at your current customer base, do you think there's risk of materially more coming out of bookings from customers in similar trouble or do you think that has been pretty well scrubbed at this point?

I think it has been scrubbed, Raj.

I think the $50 million captures all of it.

Okay.

Thank you.

Thank you.

(Operator instructions).

And we have no further questions in queue.

Good.

Thank you, everyone for calling in this afternoon.

We look forward to speaking with you soon.

And thank you, again, for joining us.

Thank you, everyone.

Thank you for participating in today's Cadence Design Systems first quarter 2009 earnings conference call.

You may now disconnect.