益華電腦 (CDNS) 2010 Q1 法說會逐字稿

Good afternoon.

I will be your operator today.

At this time, I would like to welcome everyone to the Cadence Design Systems first quarter 2010 earnings conference call.

(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, Gerald, and welcome to our earnings conference call for the first quarter of fiscal 2010.

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 refer to our Form 10-K for the period ended January 2, 2010, 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 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 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 press release, dated April 28, 2010 for the quarter ended April 3, 2010, and related financial tables can also be found in the investor relations portion of our website, at www.cadence.com.

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

Good afternoon, everyone, and thank you for joining us.

Cadence is off to a good start in 2010, with revenue of 222 million, and non-GAAP EPS of $0.02, each at the high end of our guided range.

Cash and cash equivalent totaled 619 million.

Cadence team executed across the board.

Our focus on deep customer engagement continues to yield success.

Business improved across all regions, with particular strength in Asia and North America, and across all platform areas, especially verification, custom and digital design.

Before I give you the highlights of the quarter, I want to spend one minute on our strategy.

As discussed at our analyst day, we see electronic design undergoing a disruptive transformation, driven by fast growing end markets such as mobile device and mobile infrastructure, (inaudible) computing and [green tech].

Customers in these end markets expect the semiconductor suppliers to provide more complete hardware/software platforms that can serve their application driven systems.

To address this transformation, EDA industry might extent its solutions beyond its traditional focus on silicon realization to include SOC realization and system realization.

Last night, at Tech Museum in San Jose, California, we unveiled our vision of this market extension, entitled EDA360, the way forward for electronic design.

At the same event, we announced initial steps we are taking to enable system realization.

First, we announced a partnership with Wind River, the leading embedded software company.

The technical collaboration will integrate Incisive software extensions with Wind River Virtual platform.

The joint solution enables engineers to develop electronic designs well in advance of hardware availability and improves the productivity of system engineers.

Second, we announced availability of Cadence Verification Computing platform.

The product is the industry first to unify simulation acceleration emulation into single high performing verification environment.

This multi-year, multi-disciplined undertaking demonstrates our strong commitment to technology innovation, customer success, and operation excellence.

The Cadence Verification Computing platform offers massive scaling, high speed and resource sharing, in addition to supporting Cadence low power analysis and matrix-driven verification.

It's a truly breakthrough technology used by customers, including ARM and NVIDIA, to bring to market summer of this year most extraordinary electronic products.

Now let me give you some highlights of our first quarter.

Our Incisive verification platform had a strong quarter.

To just give you an example, as the largest system and semiconductor company in Asia, Cadence demonstrated the superiority of Incisive advanced verification methodology in a technical campaign, winning a significant increase in our verification business at this account, as well as digital business.

Turning to mixed signal design, which include both analog and digital technologies, Cadence continued to lead the industry.

In analog, we had a great, good solid first quarter result, driven by continued proliferations of Virtuoso 6.1 into our installed base.

We also saw the adoption of Incisive for mixed signal verification.

This was evident in LSI endorsement of our technology this quarter.

LSI renewed a multi-year agreement with Cadence for mixed signal design methodologies.

After reviewing competitive offerings, LSI chose Cadence because of the breadth of our product portfolio, leading age technologies, comprehensive methodology and mixed signal design expertise.

We had a strong quarter in digital, where the Encounter Digital Implementation system, or EDI, is proving its ability to reduce over all design time, especially on large complex SOC compared with competitive offerings.

As an example, Renesas used Cadence technology for end to end digital design, implementation and verification, and was able to reduce by half the design time of its large scale digital consumer SOCs.

Renesas is convinced EDI system is the most efficient product for very large scale design.

It's now considering deploying EDI system to other applications.

This is a significant testimonial to both Cadence differentiations and competitiveness.

We continue to drive strong ecosystem relationships.

CSMC expanded support of Cadence with their integrated (inaudible) for 65 nanometer, which provide customers a production proven tool using all Cadence technology from synthesis to (inaudible).

This integrated (inaudible) flow is enabled for low power design and sharpen time to volume for 65 nanometer designs.

In addition, we add 25 new IP partners to the Chip Estimate.com chip pending and IP partners, including Boeing, Imagination Technologies, National Semiconductor, True Circuits, [Mirage] Logic and [Xylene].

These and all our IP partners share Cadence's vision of helping the design community achieve greater profitability and success by exploring the must up to date silicon-proven IP on Chip Estimate.com.

In summary, the Cadence team executed well in the first quarter.

Our differentiated technology is winning with customers, and our financial results continue to improve.

We have a clear view of where the industry is headed and are prepared to execute upon this vision with new technologies and solutions to help streamline the design process and improve our customer profitability and success.

Now I turn the call over to Kevin to take you through the financial summary and outlook.

Thanks, Lip-Bu, and good afternoon, everyone.

Today, I'll first summarize Q1 2010 financial results and move to the outlook for Q2, and finally the full year 2010.

Results for the Company's key operating metrics for Q1 were total revenue of $222 million, non-GAAP operating margin of 4% and operating cash flow of $47 million.

In Q1, the GAAP loss per share was $0.04.

On a non-GAAP basis, we recorded net income of $0.02 per share.

Total revenue for the first quarter was $222 million, an increase of 8% over Q1 of 2009.

Product revenue was $103 million, maintenance revenue was $93 million, and services revenue was $26 million.

Revenue mix by geography for Q1 was 40% for the Americas, 22% for EMEA, 23% for Japan and 15% for Asia.

Approximately 90% of orders booked in Q1 were ratable.

Weighted average contract life for Q1 was at the high end of our guided range of 2.6 to 3 years.

Total costs and expenses on a non-GAAP basis for Q1 were $212 million, a decrease of 12% from Q1 of 2009.

Non-GAAP operating margin for Q1 was a positive 4%, 22 points better than the negative 18% for Q1 '09.

This improves was due to both revenue growth and our highly focused expense management.

Q1 2010 ending headcount was approximately 4,400.

Q1 operating cash flow was $47 million and in line with prior guidance of $45 million to $50 million.

Total DSOs for Q1 decreased to 90 days from 106 days in Q4, primarily due to lower receivable balances.

Our quality of receivables remains high, with less than 1% of receivables over 90 days past due.

Capital expenditures totaled $10 million.

Cash and cash equivalents were $619 million at quarter end.

Now I'll turn to our outlook for Q2 and the full year 2010.

For Q2 2010, we expect revenue to be in the range of $215 million to $225 million.

Q2 non-GAAP operating margin is expected to be in the range of 5% to 7%.

GAAP EPS for the second quarter is expected to be in the range of a loss of $0.05 to a loss of $0.03, and non-GAAP EPS is expected to be in the range of net income of $0.02 to $0.04.

Operating cash flow for Q2 is expected to be in the range of $40 million to $50 million.

For the full year 2010, there's been no change in our outlook from what we provided on our Q4 '09 earnings call, with the exception of a slight exception in GAAP EPS.

Orders for the full year 2010 are expected to be in the range of $775 million to $825 million, with an anticipated weighted average contract life in the range of 2.6 to 3 years.

For the full year, we expect revenue to be in the range of $865 million to $900 million.

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 is expected to the range of a negative $10 million to a negative $8 million.

GAAP EPS for 2010 should be in the range of a loss of $0.23 to a loss of $0.13, and non-GAAP EPS is expected in the range of net income of $0.05 to $0.15 per share.

For the full year, we expect operating cash flow 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, and capital expenditures for 2010 are expected to be in the range of $30 million to $40 million.

In summary, we're off to a good start to the year, with Q1 operating results meeting or exceeding our expectations.

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

Operator, we'll now take questions.

(Operator Instructions)..

Your first question comes from Raj Seth.

Kevin, a couple quick ones.

I know that you're not changing your order guidance for the year, but I'm curious how relative to your expectations in Q1, which is a weaker bookings quarter seasonally, how bookings came in relative to your expectations?

And if you could make any comment on how the renewals that you did see in the seasonally slow quarter came in on a run rate basis?

Thanks.

Raj, we don't normally talk about quarterly bookings or quarterly orders.

What we have talked about in the past are run rates, and when I look at both Q4 and Q1 run rates, as we talked about in the Q4 call, we did see run rates on par to slightly better than par, and we saw that same phenomenon in Q1.

And just to confirm the embedded assumption in your 775 to 825, is that the bigger deal renewals, which probably were second half weighted, would come in at 10% less than -- so 10% -- minus 10% run rate?

That's embedded in that overall guidance, correct?

Am I correct there?

Yes, the 10% planning assumption that we had, current renewal versus prior renewal, the assumptions for 2010 were that renewals would be 10% less than run rate.

Okay, great.

And then a question for Lip-Bu.

Lip-Bu, can you talk a little bit about this Cadence 360 announcement you made?

Obviously, something you've done with Wind River to start that off.

What are the sort of next steps in this strategy?

I would appreciate if you could talk a little bit more about what happens next.

Thanks.

Raj, thank you so much.

I think the EDA360 is the vision we have in terms of moving from silicon realization to SOC realization to system realization.

So it's -- from silicon, we have the full suite of solutions or the key platform -- foundation platform we have -- then we move up to the SOC realization, we move into the transition level modeling, the VIP, the IP integrations, and then we move into the system realization that a lot of our system company, that the difference shared with the application driven approach, and that we really need to have the whole verification platform that we mentioned and we announced, and also our partnership with Wind River, that is a step that we take, and we're going to continue to deliver some of this big vision we have.

One last one, if I might.

It sounds like the business, despite your conservative feeling -- negative 10% assumption, we'll see how that turns out -- it's flattish right now.

We haven't seen a real upturn in sort of EDA spending.

Historically, your emulation business has been a pretty good leading indicator.

Have you seen the emulation business itself pick up yet, or is that something that we're still waiting for later in the year?

Yes, maybe I can answer first, and then Kevin can add on to it.

So I think first of all, I think in the emulation we see good traction with a couple of very good successful customer deployment.

I think we announced with the NVIDIA, I think that is a very strong programs we have with the hyper emulation.

So anything in the [possessor-intensive] side you can clearly see the benefit of it; so I think overall we see good improvement in that.

And then in terms of the over all EDA spending, I think it's still lacking the growth of the semiconductor industry.

The budget is still tight, but we see signs of improvement while heavily engaging with customer, with new product development.

So over all I think we see signs of improvement.

Thank you.

Your next question comes from Sterling Auty with JPMorgan.

Hi guys.

It's [Sackett] here for Sterling.

Two questions from my side, first kind of housekeeping.

Japan had a very nice sequential end year over year growth.

What was the driver behind that?

Okay.

Yes, [Sackett], if you look back over 2009, and even leading back into 2008, specific to Japan, certain contracts in Japan are billed semiannually and certain contracts are -- the revenue is recognized on a due and payable basis, which basically means based on cash, so you'll see an uptick in both Q1 and Q3 and a downtick in Q2 and Q4.

Now th at's the pattern that you'll see as you look back to 2009 and partially 2008.

So it's merely a function of seasonality with Japan.

Got it, got it.

And the second question, I think Lip-Bu kind of touched on it in his previous answer, but we're in 2010, where hopefully EDA budgets are stabilizing from last year.

What are you kind of seeing out there just in terms of propensity to spend -- and yes, just leave it kind of broad based there?

Thank you.

Sure.

Sterling, I think -- I visit a lot of customer, and I think over all we see the environment is that the end markets, like the mobile device, mobile infrastructure, (inaudible) computing and [green tech], we see tremendous growth.

We are excited about it.

And in Asia Pacific, I think that China is driving the growth, and clearly you can indicate from the foundry, the tightness of the capacity.

And so overall, I think we see good signs, and it's early in the recovery, and we're going to continue to manage our business cautiously.

Thank you.

Your next question comes from Rich Valera with Needham and Company.

Thank you, good afternoon.

Just wondering if you could talk about -- give us sort of your latest thoughts on the competitive landscape, Lip-Bu, maybe across the major product areas?

And I know you're very strong in analog -- doesn't sound like there's been much competitive headway been made there -- but just in digital, how you feel you stand, functional verification and then also in DRC, which sounds like it is an area you haven't given up on?

And just any updates there.

Sure.

So I think, Rich, a couple of points I can touch on.

I think you're absolutely correct, in the analog side we have a very strong foot hold, and our migration toward the Virtuoso 6.1 has been very successful, and so I think we are very pleased in the analog side.

In term of the digital side, we continue to be very competitive, especially in the advanced nodes.

We had a couple of very strong wins.

As I mentioned in the Renesas situation, clearly they are a very complex large scale SOC, our product really shine; and then also we have a heavy commitment into the advance nodes with our foundry partners.

Relationship has been improved substantially, so I think that part, I think, will be very strong.

Verification is a very fast growing area.

Most of the complex chip, the bottleneck is in the verification side.

That part we are doubled down on that and we have a strong offering, and we're going to continue to strengthen by engaging heavily with the customer, specifically how to help them in terms of reduced (inaudible) and design cost reductions, so I think that part, you will hear more from us.

Okay.

That's helpful.

Kevin, could you say if you factored any receivables, and how much if you did?

We did not factor any receivables, Rich.

Great.

And it sounds like there was no change in the duration one way or the other, which is interesting.

So you basically still expect to see something around that 2.8 level?

Yes.

Q1 came in as expected.

As we said in the prepared remarks, it is at the high end of the range, but for the full year we still see the 2.6 to 3.0.

Okay.

That's helpful.

Thank you.

Your next question comes from Jay Vleeschouwer with Ticonderoga Securities.

Thanks, good afternoon.

Could you comment on your active installed base of products?

At the analyst meeting, Lip-Bu, you mentioned that on the whole, the customer base was stable in terms of the actual volume of seats or licenses in place, and I'm wondering if that's still the case?

And when you look at over the next year, where do you think you have the most opportunity to actually grow?

Is this other product areas your active base of licensed seats?

That's the first question.

Great, so I think let me answer the first question.

So I think our installed base and our continued (inaudible) to strength, and we're heavily engaging in the top 38 customers in term of (inaudible) and also strategically how to engage in their design flow and then help them into their design, shorten the time duration and also time to market, and that part will continue to make a lot of inroad.

And in term of the product side, as I mentioned earlier, analog is very strong for us, and we continue -- the 6.1 continue to proliferate, and then verification become more and more bottleneck for the customer design, and we have been very, very strong engaged with the customer to enable them.

And so that part, I think, we're going to continue to see more changes.

And then in term of the -- a lot of customers, I think, are moving into the advanced nodes, 32 and 28 and beyond, and we're heavily engaging with them.

Every process node, we can take the leadership in some of the area, and so we are heavily engaging.

Okay.

Just to clarify, so everything you just said would suggest that you think there will be an enlargement of the actual physical number of licenses in place of actively used and paid for Cadence seats, is that what you are meaning?

Yes.

And in fact, a couple of customers I think to also start hiring, and so I think going to be more design engineers would be using our tools.

So we are cautiously optimistic.

Okay.

Kevin, just two quick financial questions.

Would it be fair to say that the sequential increase in your maintenance revenue in Q1 was tied into the earlier comment you made about Japan and the due and payables contract so that second quarter maintenance should drop back down then go back up sequentially by about this amount in the third quarter?

That's correct, yes.

Okay.

And then, if you were to have some sustained revenue upside, where do you think you would incrementally invest to take advantage of the higher revenue?

And conversely, if revenues were to be light for some reason, where do you think you would then choose, if anywhere, to perhaps be more cautious on spending?

Yes, Jay, I won't go into those specifics.

We laid out a vision paper with system SOC and silicon realization, and clearly those would be the areas we'd be investing in.

Okay.

And lastly -- sorry back to Lip-Bu -- how do you think you are doing in terms of win rates for design infrastructure decisions below 45 nanometer?

Whatever that number of selections happens to be for customer infrastructures for 28 and so forth, what do you think your success rate is, particularly on the digital side?

Yes, I think, Jay, so far we have been heavily engaging with customer and they're moving to the advance nodes, and some of them are more aggressive to 28, and then some of them at 32.

We have various degree of engagement, so out of in our top 38, the leading one that you are know, and are pursuing that.

We are pretty much engaging that heavily, and so I don't keep track of win and loss, but I think so far we don't have any major loss and I think we're heavily engaging.

Okay.

Thank you very much.

Welcome.

(Operator Instructions).

And your next question comes from K.C.

Rajkumar with RBC Capital.

Hi guys, thanks for taking my question.

A couple of quick ones.

The Q1 numbers were at the high end; number two, your saying that you expect the paid seats to enlarge during the year.

And yet you're leaving the calendar 2010 guidance unchanged.

Is that considered as something built into the guidance?

Yes.

So, K.C., obviously the numbers for Q1 were at the high end of the ranges that we provided in our Q4 call, and there's a myriad of small things that drove that.

But frankly, it's still early in the year, and while there are some indications that there are improving conditions, there's also still a lot of risk in the environment.

So it's premature to change anything on the year.

We'll look at that throughout the year.

Compared to the situation three months ago, would you say that the pace of 40 and below nanometer tools and also the customer base has increased, or stayed about the same?

Yes, answer your question, yes, increased.

And so I think depending on the various application, some that need the more performance, low power, they are more aggressive pushing into the advanced node like video.

This is a very fast growing area.

Quite a few customer are moving to the advanced nodes, and same thing with 4G and in some of the mobile chipset, they are pushing into the advanced nodes, and so answer your question, yes, does increase.

Okay.

So if the adoption of those tools have increased, why would you expect the order run rate to decrease as the year goes by?

Casey, can you repeat that, please?

Yes.

If the adoption of 40 and below tools have increased -- and I assume the pricing of those tools would be higher than the older nodes -- how would you characterize the order run rate as the year goes by?

Okay.

If I understand your question correctly, K.C., we do all of our planning for the current year in the last couple of months of the prior year, right?

So we did 2010 planning in the Fall of 2009.

The planning assumption we used, as we mentioned earlier, was basically a 10% haircut current renewals versus priors, and we're early in the area.

We're staying with those planned assumptions.

We'll evaluate that as we go through the year, and as soon as we believe that that changes, we'll let everybody know.

Okay.

And lastly from our side, could you give some specific examples of how do you plan on integrating the Wind River (inaudible) software into your future product offerings?

Yes, as I mentioned earlier, (Inaudible), we have our Incisive extension to the embedded Wind River virtual platform.

That integration is happening right now, and we're working with a couple of customer, and so this is the first step that we take and we're going to have more collaboration with Wind River and other system companies.

So I think this is the beginning of that whole system realization.

Great.

Thanks, guys.

Our final question comes from Tom Diffely with D.A.

Davidson.

Yes, good afternoon.

Another question on the EDA360 initiative.

Over time, when you look at this vision, what do you think the impact is going to be on your business model based on OpEx, or service versus product or margins or what have you?

Yes.

So I think this is a good question.

I think this is we're embarking on something that is an extension of the core EDA.

The potential market would be in larger lot, and because we're engaging reaching out to the system level and then the system company.

And so in term of the margin or the operation, it is too early to elaborate, but if we are just taking the initial steps, and over the quarters I think we're going to unfold more to you.

Okay.

So just wait and see, huh?

So if we look at the current model, is there an easy way to look at the tax rate over time?

It seems to bounce around quite a lot.

Yes, the best way to look, Tom, is the non-GAAP tax rate.

It's been a very constant 26 points.

Okay.

And then, the other item that bounced around a lot is the other income.

Sounded like you gave some kind of guidance earlier on that?

Yes, on OI&A, we said that for the year it would be minus 10 to minus 8 million.

Okay, but it could still be quite volatile on a quarterly basis?

Yes, and those are non-GAAP numbers, obviously.

Okay, all right.

Thank you.

Thanks, Tom.

Well, 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 first quarter 2010 earnings conference call.

You may now all disconnect.