益華電腦 (CDNS) 2009 Q4 法說會逐字稿

I will be your conference operator today.

At this time, I would like to welcome everyone to the Cadence Design Systems fourth quarter and fiscal year 2009 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 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, Casey and welcome to our earnings conference call for the fourth quarter and fiscal year 2009.

The webcast of this call can be accessed through our website, www.cadence.

com and will be archived for two weeks.

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 may differ materially from those expectations.

For information on the factors that could cause a difference in our results, please prefer to our Form 10-K for the period ended January 3rd, 2009, our form 10Q for the period ended October 3rd, 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 financial measures today.

Cadence's management believes to using GAAP results in evaluating our business, it can also be useful to measure our results using certain non-GAAP financial measures.

Investors and potential investors are encouraged to review the reconciliation with non-GAAP financial measures with their most direct comparable GAAP financial results which can be found in the quarterly earnings section of the Investor Relations portion of our website.

A copy of today's release, dated February 3rd, 2010 for the quarter ended January 2nd, 2010 and related financial tables can also be found in the Investor Relations portion of our website at www.cadence.com.

And with that, I will turn the call over to Cadence's CEO, Lip-Bu Tan.

Good afternoon, everyone and thank you for joining us.

Cadence's fourth quarter performance reflects the hard work the team put in last year.

Fourth quarter revenue was $220 million.

Net booking for the fiscal year total $650 million.

We continue to focus on efficiency, achieving non-GAAP net earning per share in the fourth quarter of $0.06.

Looking forward for 2010, we expect bookings growth between 26% and 34%.

However, expected order level and revenue in 2010 will yield a book-to-bill of less than one.

While working hard with a goal to reach book-to-bill over one, without impacting the quality of our business.

Kevin will provide the rest of the outlook in a few minutes.

In 2009, we positioned Cadence for future growth.

We improve our customer engagement, strengthen our foundation technology, and reduce our cost structure.

We identify new opportunities for growth and renew Cadence's culture of innovation and accountability.

I want to talk with you today about four elements critical to our business execution, operations, customers, technology, and strategy.

Our primary operation focus of 2009 was to improve customer relationships.

Throughout the year, I engaged at the highest levels with customers to demonstrate that the stronger relationship and partnership with Cadence will help advance their business objectives.

Whether these objectives are to expand in the emerging market, target a new end market, or deliver winning products to their end customer.

In order to strengthen our customer relationships from the -- from end to end, we rely our research and development team with our sales effort.

We rely our executives with our customer executive at key accounts.

And our research and development experts with theirs.

As a result of this alignment, we increased the number of technical engagement at these accounts, opening larger, greater business opportunity for Cadence with these customers.

These technical engagements allow us to craft solutions that deliver greater value to our customer and enable us to introduce and later proliferate new technology to improve customers' productivity and profitability.

This creates opportunity for a number of Cadence strategic wins and competitive replacement during the fourth quarter.

Speaking of our customers, Cadence's install base is stable and growing, which you can see from look at our product mix throughout the year.

Custom design, functional verification and digital contribute about one quarter of our business.

In addition, we saw some increase in the percentage of business from custom design throughout the year as Virtuoso 6.1 proliferated more broadly.

Thanks to the increase in technical engagement, while winning more benchmarks.

Let me give you three examples from the fourth quarter of our success delivering superior solutions and technology.

We made significant progress in the fourth quarter in helping customers to see the value in Cadence mix signal methodology and our expertise in this increasingly important domain.

One example is Texas Instruments which historically has been a great end lock customer.

We have now began to engage TI to help them solve the growing challenges of combining digital and an analog on leading H mix signal designs.

At one of the largest [fablous] in Asia, global leader in the wireless market, we prove that Cadence interlock mix signal methodology offers significantly greater productivity, predictability and quality of results than multi vendor floor the customer has been using.

Over the course of many months of exhaustive benchmarking, this customer saw first hand the methodology and end product advantages in using Cadence end-to-end for mix signal design.

Consequentially, Encounter Digital Implement system, or EDI, replaced existing digital supplier and the Virtuoso replaced the local vendor for custom.

Looking at the complexity of the SOCD customer faces, we were also able to deliver additional solutions for verification and packaging, including incisive simulation, the customer foot installation of Palladium hardware, and the establishment of Allegro packaging floor.

This was a significant win for Cadence and our customer.

Finally, at NEC Electronics, the rising capacity and the challenge of design at 40-nanometer and the smaller process notes drove the adoption of EDI, including our TL Compiler and the Encounter timing system.

NEC used Cadence multi flow treader, digital floor end to end to complete ten complex basic design targeted for its 40-nanometer low power process technology.

The root of this success is our foundation technology, from system to board, we reflesh all of our foundation technology in the past 13 months.

EDI received a total refresh.

We also integrated more tightly our key Compilers, look ahead to capability with EDI and Encounter timing system to accelerate timing closure and improve quality of silicon.

The latest upgrade to our custom design floor, Virtuoso 6.14, was released this December on verification site we enhanced the open verification methodology, or OVM.

Advanced the capability of incisive enterprise manager, and expanded our portfolio of verification IP.

We also released Allegro 16.3 for package design in October.

In addition, we continue to innovate with solutions in the area of chip planning and system level design.

For 2010, we are focusing on quality, improved usability, interoperability and adoption of our foundation products, while driving more efficient software development practice.

Now, let me talk a little bit about strategy.

The semi conductor industry is undergoing a sea change.

First, to find the fastest path to profitability in the increasingly competitive global market.

We see opportunities in mixed signal design, IP integration, and product realization.

Ultimately, the customer are looking to EDI for shortest path to design creation, integration, and optimization.

We aligned our entire company around the strategy plan to address this challenge, and our customers are embracing it.

In fact, we relocated resources to make targeted investments to grow our business in tune with the strategy.

You will hear more about this at our analyst day on February 23rd.

With that, I would like to turn the call over to Kevin for financial summary and outlook.

Thanks, Lip-Bu.

First, I would like to review our results for Q4 and the full year of 2009 and then provide the 2010 outlook.

Results for the Company's key operating metrics for Q4 were total revenue of $220 million, non-GAAP operating margin of 10% and operating cash flow of $1 million.

For the full year 2009, total revenue was $853 million, non-GAAP operating margin was a negative 2%, and operating cash flow was $26 million.

Orders totaled approximately $615 million for 2009 and year-end backlog was approximately $1.6 billion.

We made good progress in our first full year of our transition to 90/10 routable mix.

Over 90% of our orders booked in Q4 were routable, as well as over 90% for the full year.

Weighted average contract life for Q4 was, again, near the low end of our expected range of 2.8 to 3.2 years.

Weighted average contract life for the full year was approximately 2.8 years.

In Q4, GAAP net income per share was $0.01.

For the full year 2009, we reported a GAAP loss per share of $0.58.

Non-GAAP net income per share for Q4 was $0.06, exceeding our guided range of $0.02 to $0.04.

For the year 2009, we recorded a non-GAAP loss per share of $0.06.

Total revenue for the fourth quarter was $220 million.

Product revenue was $114 million, maintenance revenue was $83 million, and services revenue was $23 million.

Revenue for the year 2009 totaled $853 million.

Revenue mix by geography for Q4 was 51% for the Americas, 24% for EMEA, 12% for Japan and 13% for Asia.

Total cost and expenses on a non-GAAP basis for Q4 were [$109] million, a decrease of 19% when compared with Q4 of 2008.

Non-GAAP operating margin for Q4 was 10%.

For the full year 2009 non-GAAP operating margin was a negative 2%.

Order and head count was approximately 4400.

The impact of our restructuring announced in January is not reflected in this figure.

Operating cash flow for Q4 was $1 million and was $26 million for the year 2009.

This is after cash severance payments of $51 million for the year.

Total DSOs for Q4 decreased to 106 days from 108 days in Q3, while the quality of our receivables remained high with less than 1% of receivables, more than 90 days past due.

Capital expenditures for 2009 totaled $41 million, a decrease of approximately $30 million from our historical run rate and a $56 million decrease from the $97 million in 2008.

Cash and cash equivalents were $569 million at year end.

Now, I will turn to our outlook for Q1, 2010 and the full year 2010.

For Q1 2010 we expect revenue to be in the range of $210 million to $220 million.

Q1 non-GAAP operating margin is expected to be in the range of 2% to 4% with non-GAAP total cost and expenses increasing sequentially to the $210 million to $215 million range due to seasonal factors.

GAAP EPS for the first quarter is expected to be in the range of a loss of $0.10 to a loss of $0.08 and non-GAAP EPS in the range of $0.00 to $0.02.

Operating cash flow for Q1 is expected to be in the range of $45 million to $50 million and after severance payments in the amount of $14 million.

Operating cash flow for Q1 is higher than the quarterly average for 2010, because of a one-time up front payment expected to be received in Q1 in the amount of approximately $20 million.

For the full year 2010, order levels are expected to be in the range of $775 million to $825 million with weighted average contract life in the range of 2.6 to 3 years.

For 2010, we expect the impact from financially distressed and bankrupt companies to decline from the levels we experienced in 2009.

We also expect approximately $10 million of reserves that were taken in 2009 to reverse in 2010.

We expect revenue to be in the range of $865 million to $900 million for 2010, with approximately 80% of expected revenue coming from beginning of the year backlog.

For the seasonal revenue pattern in 2010, we expect to generate 23% to 26% of annual revenue in Q1, the same range for Q2, 23% to 27% in Q3, and finally 24% to 28% in Q4.

GAAP EPS for 2010 is expected to be in the range of a loss of $0.29 to a loss of $0.19 and non-GAAP EPS in the range of net income of $0.05 to $0.15 per share.

We expect non-GAAP operating margin to be in the range of 4% to 6% on an annual basis for 2010.

Non-GAAP other income and expense for 2010 expected to be in the range of a negative $10 million to negative $8 million.

For the full year 2010, we expect operating cash flow in the range of $125 million to $135 million after severance payments of approximately $20 million.

We expect DSOs to be in the range of 80 to 90 days at year end 2010.

Capital expenditures for 2010 are expected to be in the range of $30 million to $40 million.

In summary, 2009 was a transition year for Cadence.

We were laser focused on several key aspects of the business which yielded improved operating efficiency, while strategically redeploying resources.

The increased level of sales and R&D coordination in our approach to engaging with customers is already yielding increased opportunities.

Our transition to a 90/10 routable license mix is on track to the first six quarters.

I believe that with a continued strong focus on execution, we are ready to expand our position with customers, grow the top line, and improve profitability over time.

Operator, we will now take questions.

(Operator instructions).

Our first question will come from Sterling Auty from JPMorgan.

Yes, thanks.

Hi.

Hi, Sterling.

First question would be in terms of renewals that you saw in the quarter, can you give us a sense as to what was the -- how was the back and forth with the customer?

Is it getting a little bit easier to get renewals done and in the past several quarters that we get in the down turn, kind of run rate on the renewals have been down 10% or so.

Is there any sense that you can give us as to what the run rate on renewals are looking like now?

Sure.

Sure, Sterling.

Thanks for the question.

So specific to renewals in the quarter and drilling down to the run rate, we did see a bit of a trend upward for Q4.

That's the flip side of pricing.

The competitive pricing is still out there, but we did see a slight uptick in run rate.

With regard to the portfolio, the business in the quarter, as you know throughout 2009, it's our trough year for bookings.

A lot of small, medium, very few large customers, and that's representative, frankly, of all of 2009.

But specific to run rate, we did see a bit of an uptick.

Okay.

And then my last question is, on the duration, when -- is that the low end in the guidance for next year, 2.6 to 3 years time lowers the low end of the duration.

Can you just give us an idea, is it just that you think the shorter duration is still going to appear in the first half of the year because of the tough economic times and as things get better, we will get to a normal three year or is there an actual kind of systemic change in terms of the customer appetite for contract length?

Yes, again, Sterling, looking at our portfolio in 2010, it's still made up of small and medium companies with more larger companies than 2009, and you weight that all together, the small and medium-sized customers still have, let's call it a proclivity to do a shorter duration contracts just because of their own uncertainties.

As I said in my prepared remarks, the 2.8 years for 2009, we don't expect that to change, even with the large contracts coming up for renewal in 2010.

And just to add a little bit of what Kevin described on the renewals area, we engage a customer, we see a lot more engagement with the customer.

I think that's a very good sign of recovery, and -- but we still continue to be cautiously proceeding, but I think the good sign is the engagement has increased a lot.

All right.

Thank you.

Our next question will come from Rich Valera from Needham & Company.

Thank you.

Good afternoon.

This year will be the third year in what's, in essence, sort of a reset cycle which should nominally take three and a half years which was your duration going into it.

I was wondering, a couple questions, one where do you see the sort of normalized level of the Company at this point?

I think previously you talked about a level around $1.2 billion or so, and the time frame for getting back to there on a revenue and or bookings basis.

Yes, Rich, the way I look at this, we are about six quarters into a three to four-year transition.

When we looked at our peak back in 2007, we were on record back then, talking about three to four years with more of the duration leaning towards the four.

We changed our model mid-year 2008, so we are really only into six quarters of that transition.

We've done a good job with the routable mix, as I mentioned in my prepared remarks.

For the last six quarters we were at or exceeded the 90/10, but as far as normalized levels, that's not something that I want to get into.

Okay.

Fair enough.

Can you talk at all about the linearity of bookings you expect this year?

Do you expect it to be pretty heavily back half weighted, sort of normally back half weighted or more so than historically?

Any color would be helpful.

Sure, Rich.

Typically our business is between 35% and 40% in the first half and the remainder in the second half.

I think it will continue to fall in that range, maybe with a slight bias to the second half.

Okay.

That's helpful.

And then just to clarify Sterling's question on run rate, you said you saw a slight uptick in run rate in the fourth quarter.

Would that have been up from the -- I guess, the down 10% level of the third quarter?

I'm not familiar with the down 10%, but we do every quarter, we look at the prior renewal and the current renewal and we look at run rates contract to contract, and that's what we are describing, from the last time a customer renewed, there was a slight uptick in many of the contracts in the Q4 renewal.

Oh, I'm sorry.

So you actually on a contract-to-contract basis, you actually saw a slight uptick in the fourth quarter overall?

That's correct.

Okay.

That's a very helpful clarification.

Okay.

That's it for me.

Thank you.

Thank you.

Our next question will come from Jay Vleeschhouwer from Ticonderoga Securities.

Thanks, good afternoon.

For Kevin, first, could you comment on your maintenance billings over the course of 2009 and do you think you will see much in the way of maintenance billings improvement in 2010.

And, again, short of a follow-up on a question earlier about duration.

So you are in effect correlating shorter durations with size of customer, so that at some point when the larger customers begin their renewal cycle, later this year or 2011, then the durations should possibly start stretching out again, is that your thought?

Sure.

Let me start with maintenance and then I will get into duration.

If you look at the trend over 2009, you will see maintenance typically trickles down in periods Q2 and Q4, to the tune of approximately $10 million.

That's due to certain contracts in Japan, where we recognize revenue semi annually, rather than quarterly.

Is that fair?

Yes.

Specific to duration, in terms of size of customer and so forth we have been very transparent on a quarterly base with duration.

We will continue that going forward.

Both Lip-Bu and I believe in more transparency.

There's an expectation that the larger customers typically want longer contracts.

They have more visibility into longer term projects, more resources and the like.

If you do the math, though, it does have a slight positive biased to overall duration, but, frankly, the small and medium contracts in 2010, we still believe, based on our math, that the 2.6 to 3.0 is a good range for duration, but we will be transparent as we go through the quarter.

Just to clarify on the maintenance situation, Lip-Bu said that the install base is stable or steady.

Does that suggest that therefore your maintenance billings, not revenues, but billings have been and should from here be steady, or do you think that your actual number of seats installed, users installed, will start growing again and/or reinstatements such as your maintenance will go back up and then an R&D question for Lip-Bu.

Okay.

From a maintenance perspective, the semi annual billings in Japan drive a lot of the revenue variance quarter to quarter.

In terms of stability, we do see stability, we do see, hopefully, an expanding footprint which should drive maintenance.

The offset to that will be on average shorter durations because maintenance is -- is tied to durations as well, if you are aware of that accounting.

I won't get into it into the call, but maintenance should be flat to growing going forward.

Okay.

Then finally for Lip-Bu, over the course of 2009, your total R&D spending was down over $100 million and over the last two years, $150 million.

I assume some of that was attributable to the withdrawal of the DFM business, perhaps in scaling back in some others like PCB and DFB, but that's a pretty significant cut in a couple of years, even if you grant that the Company is much more efficient.

So my concern is that magnitude of cut could conceivably affect your R&D effectiveness over the next two, three, four years, even if you've introduced new technologies you say over the last year and a half or so.

Perhaps you could address that.

Sure.

Happy to address that.

First of all, as you know, the industry are going to a sea change and I mentioned in my statement that the customer has already focused on the process path to profitability and so we basically realign our resources in line with our strategy that we want to put focus on.

So the mixed signal design, IP integration, SOC stabilization and then some of the key area of the foundation technology, where people are investing in that and then meanwhile, we continue to streamline our resources, but we are very confident in our R&D team.

It's a lot more efficient and very targeted and we are very comfortable and confident that we are fully capable to support our customer.

I want to add to that.

If you look at the January restructuring that we did and the 8K that we published, we talked about the operating benefit of that restructuring to the tune of $18 million or $19 million and there was a comment in there that substantially all of that operating benefit would be reinvested in certain product technologies.

So I think that ties into the question you asked.

Thank you.

Our next question will come from Ryan Goodman from Banc of America Merrill Lynch.

Hi.

You have spoken a bit about the pricing environment seeing a bit of an uptick or at least the run rate in the quarter.

Can you speak more specifically on the customized sea market, with respect to what you are seeing there with respect to pricing and competition.

Sure.

In some of the pricing that we see the digital design side is very competitive.

With the 90/10 we are more patient and focus on the quality -- the deal quality.

In some of the custom side and analog side, we are very good.

We are very successful in the custom side and then we continue to leverage our presence in the custom to the mixed signal, and as I mentioned in the North American account, that we won and then leverage into the digital side and then at the Fairchild.

one of our account that the competitor is targeting heavily, and you can see from our release, Fairchild clearly declare our mix signal leadership and superiority.

So I think to answer your question on the digital side, yes we see competitions, but we are winning.

And as I mentioned, we have continued in almost 250 projects that we continue to engage and win in the last two years.

So I continue to stable and growing.

And meanwhile, on the custom side, we are defend very well.

Okay.

Great.

Just one other question.

We are seeing a little bit of M&A activity pick up in the activity.

Just curious how you are thinking about that, if you are in an execution mode and get through the revenue model transition, or if you are open to doing some transactions over the course of the year as opportunities come up.

Good question and let me answer it that way.

We are always looking for ways to increase the strength of our Company and also increase the shareholder value, even though we do not comment on specific deals that we are working on.

So I think we have an open mind and continue to look at our product portfolio in a meaningful area that we want to expand, we continue to look at that to strengthen the Company portfolio.

Okay.

Thanks.

Our next question will come from Raj Seth from Cowen and Company.

Hi, thank you.

I just had a quick one.

Kevin, forgive me, I know you said this, but the transcript has two different numbers.

Can you remind me what the bookings were in 2009 and as you look into 2010, with your sort of midpoint up 30% guide, what assumption are you making for the run rates of the bigger deal renewals that you expect to begin happening, I presume probably more in the second half.

Thanks.

Sure.

Sure.

Raj.

So for 2009, we achieved $615 million of bookings.

And if you remember, our last guidance was $600 million to $625 million, so we achieved the midpoint of our guidance.

Sure.

The growth area for 2010 or overall growth in bookings, we said 24% to 36% and that ties to $775 million of bookings to $825 million bookings.

In terms of run rates and so forth, frankly, given Q4 experience is a single data point of a slight uptick, I will tell you that we planned flat to slightly down, little bit of a haircut in overall run rates to achieve that bookings range.

Great.

Thanks.

That's all I have.

Thanks, Raj.

And our final question will come from Kakkean Rajkumar from RBC Capital Markets.

Can you talk about your 25% margin target, when do you plan to get there?

Yes, Kakkean.

We believe that non-GAAP operating margin of 25% is a very achievable long-term goal or objective, however, we are not going to be specific at this point on the timing of that.

Okay.

Is this something which you are planning to achieve in the -- by the time the -- only at the end of transition to the new M&A model?

As I mentioned, we have done really well with our transition of 90/10.

For the last six quarters we have been at or exceeding that 90/10 more routable than not and as I said, we still want to achieve those mid-20 operating margins non-GAAP, but we are not going to be specific about timing.

Okay.

And one last question from me.

Where are we in the EDA budget cycle, now that the top line for semiconductors are picking up.

Do you find the EDA budgets at your customers have begun to loosen up?

Yes, I think -- let me answer this question.

So I think all the indication I receive in terms of semiconductor growth this year would be like the low to mid-teens, but EDA impact is -- our R&D spending, I would say is lagging the growth of the sales.

So we are seeing sort of lagging.

So from the EDS side, we are seeing 1% to 6% growth in the industry.

Okay.

Thank you.

With that, thank you, everyone, for calling in this afternoon.

We look forward to speaking with you soon, and thank you again for joining us.

Ladies and gentlemen, thank you for participating in today's Cadence Design Systems fourth quarter and fiscal year 2009 earnings conference call.

You may now disconnect.