益華電腦 (CDNS) 2010 Q2 法說會逐字稿

Good afternoon.

My name is Casey and I will be your conference operator today.

At this time, I would like to welcome everyone to the Cadence Design Systems second quarter 2010 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 second 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 July 28, 2010, for the quarter ended July 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 will turn the call over to Cadence CEO, Lip-Bu Tan.

Good afternoon everyone, and thank you for joining us.

The Cadence team executed and delivered strong, solid results in the second quarter.

Revenue of $227 million, non-GAAP operating margin of 11%, and operation -- operating cash flow of $58 million all met or exceeded guidance.

The combination of our strong technology portfolio with the closer collaboration of our sales and R&D teams is yielding results.

Business improved in the second quarter across all regions and across all product groups, strengthening our top line performance while our lower expense base helped improved bottom line.

During the quarter, we completed the acquisition of Denali, furthering our EDA360 vision in the areas of SoC and System Realization.

We also completed the issuance of $350 million of convertible notes, some of the proceeds of which were used to repurchase $200 million of existing convertible debt.

At the same time, we continue to invest in our foundation technologies.

We are having more discussions with customers regarding new design projects and additional technology that will be needed, particularly as customers begin to plan for complex Mixed-Signal SoC designs at the next generation process nodes.

To prepare for this, we are working extensively with our foundry partners on their 28-nanometer process flows and process design kits.

For example, three of Cadence new technologies, TLM-31 design and verification, 3D-IC design, and integrated DFM capabilities are now included in TSMC Reference Flow 11.0 for 28-nanometers.

We also collaborated with them to develop analog Mixed-Signal Reference Flow 1.0 for 28-nanometer node.

This is the first Reference Flow from TSMC specifically for Mixed-Signal design and incorporates the broad suite of Cadence technology offerings from the Virtuoso platform, delivering extensive coverage of design for design and verification and implementation of analog Mixed-Signal designs.

We have seen customer activity around 28-nanometer and 20-nanometer nodes increase.

In fact, to facilitate Mixed-Signal design at these geometries, we are currently working on 13 advanced node [PTKs] with variety of customers across multiple foundries.

While we are talking about foundries, let me comment briefly on the semiconductor environment.

Foundry capacity is still tight at 65-nanometers, with end markets such as video and wireless driving R&D development and critical projects.

Inventories strengths at OEM and EMS companies appear mixed.

Inventories are creeping up in automotive, industrial and telecom, while PC and computer are still low.

Thus far, we have not seen a change in tone at customers from the cautious optimism we have heard for awhile now.

But like you we are listening and watching the macro-environment closely.

Let me turn to some highlights for the quarter.

The Asia Pacific market was strong for us in Q2.

We had good results in Korea.

We had Samsung and Hynix increase their use of our technology.

In China, our superior performance led to a competitive win at Spectrum Communications, a leading [fabulous] company focused on mobile and wireless applications which have chosen to move to Cadence flow.

In Japan, our acquisition of Denali, combined with our efforts in system level modeling and the strength of our foundation technology, helped us win additional business.

In addition, Renesas Electronics newly established through the consolidation of NEC Electronics and Renesas Technology signed a multi-year contract for a wide array of leading-edge Cadence Technology from C-to-Silicon and Incisive metric-driven verification to Encounter Digital Implementation System, Virtuoso, Mixed-Signal solution, and Allegro system in package.

North America results this quarter were driven by add-on orders of new technology and existing customers.

This is an intended outcome of our change to 90/10 model.

We are exercising our ability to be patient and win incremental business as we progress to our renewal cycle.

This quarter, add-on purchases frequently spanned our full portfolio from Mixed-Signal design to large-scale digital and functional verification to PCB.

This was the case at Teledyne, the largest supplier of semiconductor test equipment, which executed a contract with Cadence, leveraging our comprehensive product portfolio.

In summary, I am pleased with our results in Q2 and the first half.

The team is executing efficiently and customers are adopting Cadence technology across the full range of our offerings.

This has improved for us in all geographies, and the combination of stronger business performance and a lower expense base helped improve our top and bottom line.

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

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

Today, I will first summarize Q2 2010 financial results, and then move to the outlook for Q3 and the full year 2010.

Results for the Company's key operating metrics were total revenue of $227 million, non-GAAP operating margin of 11%, and operating cash flow of $58 million.

In Q2, GAAP net income per share was $0.19.

This included a non-cash tax benefit of $0.25 per share associated with the acquisition of Denali.

On a non-GAAP basis, we recorded net income of $0.07 per share compared to a net loss of $0.05 per share for the second quarter of 2009.

Total revenue for the second quarter was $227 million, an increase of 8% over Q2 of 2009.

Product revenue was $117 million, maintenance revenue was $85 million, and services revenue was $25 million.

Revenue mix by geography for Q2 was 46% for the Americas, 23% for EMEA, 14% for Japan, and 17% for Asia.

Approximately 90% of orders booked in Q2 were ratable.

Weighted average contract life for Q2 was at the high end of the guided range of 2.6 years to 3 years.

Total cost and expenses on a non-GAAP basis for Q2 were $202 million, which includes the reversal of $10 million in bad debt reserves.

This reserve -- this reversal of bad debt was anticipated to occur during 2010, and was included in our guidance for the first half.

Non-GAAP operating margin for Q2 was a positive 11% compared to a negative 7% for Q2 of 2009.

Q2 2010 ending headcount was approximately 4,500, up from 4,400 at the end of Q1, primarily due to the acquisition of Denali.

Q2 operating cash flow was $58 million.

We exceeded our guidance of $40 million to $50 million primarily due to approximately $15 million of payments that were made in Q2 that were scheduled for Q3.

Total DSOs for Q2 increased to 92 days from 90 days in Q1, primarily to the A/R associated with the acquisition of Denali.

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

Capital expenditures for Q2 totaled $9 million.

Also in Q2, we repurchased 6.5 million shares of common stock at a total cost of $40 million in conjunction with our issuance of $350 million of convertible notes, due in 2015.

Cash and cash equivalents were $476 million at quarter end.

That represents a down from $619 million for Q1, primarily due to the acquisition of Denali, offset by our convertible note transactions, stock repurchase, and operating cash flow.

Now, I will turn to our outlook.

I will start with our order level full year forecast and then our Q3 outlook for key metrics and finish with full year 2010 key metrics.

Based on our first half results, and a review of our second half forecast, we now expect orders for 2010 to be in the range of $875 million to $925 million, up from our prior range of $775 million to $825 million.

The majority of the increase is due to higher run rates than originally planned for 2010, with the remainder due to the acquisition of Denali.

There is no change in weighted average contract life for full year 2010.

It is expected to be in the range of 2.6 years to 3 years.

Now, on to Q3.

For Q3 2010, we expect revenue be in the range of $225 million to $235 million.

Q3 non-GAAP operating margin is expected to be in the range of 4% to 6%.

GAAP EPS for the third quarter is expected to be in the range of a loss of $0.08 to a loss of $0.06 and non-GAAP EPS is expected to be in the range of net income of $0.01 to $0.03 per share.

Operating cash flow for Q3 is expected to be in the range of $20 million to $30 million.

Q3 operating cash flow is less than Q2 due to the payments that were scheduled for Q3 but paid early in Q2.

On to the full year.

For 2010 we expect revenue to be in the range of $900 million to $925 million, an increase from our prior range of $865 million to $900 million.

The increase is due to both the higher run rates than originally planned for 2010 that we have experienced on contract renewals and the contribution of Denali.

The acquisition of Denali was completed in Q2.

Denali's unaudited revenue for the 12 months ended March 2010 was approximately $43 million, and deferred revenue was about $40 million at closing.

Due to purchase accounting adjustments, approximately 70% of Denali's deferred revenue was written off.

As a result, we expect Denali to be approximately $0.01 dilutive, primarily impacting Q3.

We expect non-GAAP operating margin to be in the range of 6% to 8% on an annual basis for 2010.

This is an increase from the prior range of 4% to 6%.

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

GAAP EPS for 2010 should be if the range of a loss of $0.01 to net income of $0.03, and that compares to a prior range of a loss of $0.23 to a loss of $0.13.

Non-GAAP EPS is expected to be in the range of net income of $0.12 to $0.16 per share, and that compares to a prior range of $0.05 to $0.15 per share.

For the full year, we expect operating cash flow of $155 million to $165 million after severance payments of approximately $16 million.

This is an increase of approximately $30 million from our prior guidance.

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, our first half key operating metrics met and in several areas exceeded expectations.

And with the anticipation that the contract renewal rates we experienced in the first half will continue into the second half, we feel confident in raising our guidance for 2010.

Looking forward, I believe that with our continued focus on execution, we will further expand our position with customers, grow the top line, and improve profitability over time.

Operator, we'll now take questions.

(Operator Instructions).

We will pause for a moment to compile the Q&A roster.

Our first question will come from Sterling Auty from JPMorgan.

Yes, thanks guys.

Two questions, the first one is on the run rate on the renewals, is it -- I know it this be nitpicky but is it 100% or are you seeing a little bit of growth in the size of the contracts that are being signed on renewal?

Sterling, this is Kevin.

So similar to what we talked about in our Q1 call and for that matter, our Q4 call, we saw run rates on par or slightly better.

That's, like I said, been consistent, Q4, Q1 and now Q2.

Okay.

Then my second question is the one push back that I have heard from investors and I share is looking at the EPS guidance here for September you did $0.07 in June.

What are the moving parts that we are missing to have the down sequential EPS?

Is it Denali dilution, is it the convertible bond?

Is it other investments that you are making?

Why would EPS be down sequentially?

Well, so Sterling, the largest piece of that is the bad debt reserve, the reversal that we took in Q2.

That was $10 million or effectively around $0.03 EPS.

Add to that looking forward, that $0.01 dilution for Denali, the $0.01 dilution for the notes, and that makes up a large piece of it.

Got it.

Thank you.

Thank you.

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

Hi.

Thanks.

Kevin, can you have two things going on here.

You have Denali and then better run rate business.

You talked about the increase in orders towards the $875 million to $925 million.

How much effect did Denali have there?

And then in your full year revenue guidance, how much of the guided revenues for the full year is Denali's revenue?

Thanks.

Okay.

So let's start with orders.

We moved the midpoint, if you will, from old range to new range by about $100 million.

I won't calibrate specifically but from a run rate perspective, the planning assumption for 2010 was about a 10% haircut and what we have experienced the last three quarters where run rates were on par to slightly better.

So, effectively we closed that gap, if you will, and the remainder was Denali.

On the revenue side, it approximates those levels, if you will, if you know what I mean.

Yes, yes.

Okay.

Thanks.

Appreciate that.

Our next question is from Rich Valera from Needham and Company.

Thank you.

It looked like the business in North America was pretty strong on a percentage basis, and in your prepared remarks you just talked about essentially good follow-on business or some incremental business.

Is there any other color you can add to North America, what that strength was due to?

Sure.

So I think, Rich, first of all, I think North America, as I mentioned, has add-on purchase with our existing customer, heavily engaging with customer on all fronts, in our product port polio.

We are making good tractions and we continue to execute the plan.

Okay.

And -- just on the balance sheet, there was I am sure this is related to the acquisition, but there was a big jump in other assets.

Can you give us any sense of what that is?

Sure, Rich.

About $80 million of that was due to the convertible hedge, the fair value of that hedge.

Okay.

That's it for me.

Thank you.

Thanks, Rich.

Our next question will come from KC Rajkumar from RBC Capital Markets.

Hi guys.

Thanks for taking the call.

You mentioned that the contract life for Q2 was on the higher end of your guidance.

Was it primarily due to the month of your contract from Renesas or did you see similar higher life from the other contracts as well?

KC, this is Kevin.

So, as you might imagine that weighted average contract life is just that, it is a weighted average -- dollar weighted average of the complete portfolio.

Renesas was a good size contract and that was weighted into that portfolio but I don't want to get into the specifics other than to say as we said in our prepared remarks that the overall dollar weighted average life was at the high end of the range.

Good enough.

The commentary around the haircut of 10% being better than what you guys had hoped for last year.

Has it improved between Q1 to Q2 -- as the order haircut, has it been better in Q2 compared to Q1?

Yes.

So KC, specific to run rates, so we have talked about in the past, on these calls, when we did our planning for 2010, we were coming off of 2009 that was basically cyclical down for semis and it had its impact on EDA.

So for planning purposes we assumed run rates or contract renewal rates in 2010 compared to its prior contract renewal it would be down by 10% or 10% haircut.

What we experienced in Q4 2009 Q1 2009 -- 2010, excuse me, and now Q2 2010 where the contract renewals came in about on par, meaning equivalent to the prior renewal.

In some cases slightly better and we haven't seen any change in Q2 versus Q1.

They have both been about on par or a little bit better.

Okay.

Lastly, from my side.

This far into the year, and as you folks look into next year, do you find that the order -- pace of orders from your customers are looking up slightly than what you would have thought back in Q1, would you believe that the, on average, and not specific to you guys -- the [EDA] but just for next year, from your average silicon company would be up from what you had set for, what would be your general thoughts into second half, and next year at a high level?

Okay.

Sure.

So,KC, as we have talked about in the past, looking at Cadence we always expected as we progressed to our renewal cycle that we would show strong booking reps, and also, as we have said before, as we look into 2011 versus 2010, 2011 was stronger from a dollar perspective than 2010.

And last year we said 2010 would be stronger than 2009.

We have been very consistent in that communication.

In February, we recalibrated 2010 and now we are recalibrating based on the planning assumption 2010 but that has no impact on 2011.

From a planning perspective, unlike going into 2010, where we were coming off of a difficult 2008 and 2009 so we used the planning assumption of a 10% haircut.

When we looked at 2011, our planning assumption all along had been at that point in time, there would be a recovery such that run rate would be on par or better.

So the change right now, the increase in guidance that we are promoting for 2010 has no impact on 2011.

Okay.

Thank you, folks.

(Operator Instructions) Our next question will come from Sterling Auty from JPMorgan.

All right.

I am back for a couple more.

First, Kevin, I was a little confused by your description of how much revenue contribution are you expecting for 2010 for Denali?

Yes, so with the 70% write off of the deferred, as you might imagine, that's a pretty significant impact.

So I didn't calibrate Denali specifically, in that at this point I am not going to do that.

There are still some filings that are going to come out in the next whatever it is, umpteen number of days, but I don't want to quote Denali at this point.

Okay.

And then you made the description in terms of the bookings, the run rate improvement but then the rest is Denali.

I wasn't sure if there was a comment in there whether you were trying to suggest there was a certain amount of bookings or an actual amount that you calibrated on the bookings side or not for Denali.

Typical with the [A/R] or just generally software, Denali carried a deferred, they carried backlog and then there's some from new that they do.

Their contract positions are a little bit different than Cadence in that they had on the IP side, one year contracts, and then on the EDA tool side it had extended out to two years and sometimes three years.

Though the IP revenue, if you will, is linear over that first year, but the deferred write off impacts that.

So, I know I am being a little bit vague here but I am not going quote Denali revenue in the second half at this point.

Okay.

No, that's fair.

Question for Lip-Bu.

You talked about the strength across the product portfolio, but I am curious did you see any particular strength on the type of [Venn] customer, you mentioned the inventory levels and different types of companies out there.

Are you seeing any particular strength out of areas, whether it be consumer electronics or wireless or anything else?

I think, Sterling, a couple of things I can comment, one, by visiting a lot of customers.

I think the end market and I mentioned earlier before is that the mobile device, mobile infrastructure, video, the IP traffic and then the cloud computing and the [clean] tech are driving the growth.

And then other part is also China is driving a lot of growth.

So I think overall I think you will see the industry this year is going to be a strong 20% plus, and even next year I anticipate to be a high single digit growth.

So overall the sentiments of the customer are cautiously optimistic because they are heavily engaging with us and our portfolio across the Board have been winning and we have been executing the plan that I am excited about.

Okay.

And last question would be, as you look at the investment that you've made in R&D, are there any new products or new versions of existing products that is you are particularly excited about here for the second half?

Good question.

I think first of all we continue strengthen customer analog portfolio and I think peripheration of 6.1, we are excited it is increasing nicely.

On the digital front, we have been continuing to progress in to the advanced nodes and you can hear my comment on the 28-nanometer, the 20-nanometer so heavily engaging with customers.

That gives us a lot of opportunities and clearly the trend is moving to SoC and then we have a very strong offering in terms of analog and Mixed-Signal blocks.

And right now with the Denali acquisition, that gives us a lot of leverage in terms of IP and then fully, and now the SoC integration, the customers embrace that big time.

And the other thing is we are continuing to execute toward our EDA360 Vision in terms of implementing the SoC and the system utilization.

I think that has been very well [commented], very exciting for our customers.

Great.

Thank you.

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

Hi.

Just a quick follow up, Lip-Bu, you mentioned in your prepared remarks that customers remain cautiously optimistic, but you haven't seen a change there.

Usually EDA with some lag picks up on the semi side (inaudible).

I know there's a lot of debate around if we are near a peak -- if we can see a peak, et cetera.

What do you think, the financial results of your customers are in most cases quite strong.

What do you think is required for your customers to open their pocketbooks?

Is that timing issues, some better confidence and sustainability of the cycle, or is that driven by manufacturing node transitions that might drive another leg of infrastructure that's required to support new nodes?

Thanks.

Good question.

First of all, I think we consistently indicated, I think, the EDA spending is lacking about six months.

In terms of the customers so far, some of the winning customers are continuing to executed very well.

And I think I'm encouraged by the engagement we have in terms of the advanced notes and some of the critical projects that engage us, and especially in the SoC complex, the design.

We are excited about that and meanwhile, I think that they're cautious about the next year, and in terms of visibility and also we tie-in with the macro environment so we continue to engage and then cautiously optimistic and then execute to our plan.

Okay.

Thanks.

Our final question comes from Rich Valera from Needham and Company.

Thanks.

Kevin, can you tell us what's driving the increase in your guidance for cash from operations?

So, Rich, I mean, that's going to follow basically the increases in revenue, the increases in bookings, and the overall net income increase going forward.

The midpoint of the guidance is $160 million.

If you look at what we did in Q1, it was $47 million.

If you look at what we did the in Q2, it is $58 million.

Net of the early pay it was $43 million.

If you add those early pays to Q3, again, midpoint of the range it is $25 million plus the $15 million gets you to $40 million.

So we feel confident in that $155 million to $165 million guidance.

Great.

I just wanted to clarify, I think you said in prepared remarks that the $0.03 you got in second quarter the bad debt reserve was baked into your guidance?

Yes, it was, and in February when we gave 2010 guidance, it was already included.

It seems like if you took $0.03 out of the quarterly EPS guidance which I think was $0.02 to $0.04 you would have been actually sequentially down.

And I am just wondering why you would have presumed to actually be sequentially down in the second quarter versus first quarter.

We probably need to recalibrate.

So we published $0.07.

$0.03 off of that $0.07 is $0.04.

We did $0.02 in Q1.

So sequentially, we were up, even netting the bad debt reserve.

No, I understand.

I am just talking about your guidance, when you gave the guidance of $0.02 to $0.04 for the second quarter.

If you were assuming a positive $0.03 contribution there that would have assumed a $0.01 loss to a positive $0.01, whereas you've done $0.02 in the first quarter.

I am just wondering why you would have guided for a sequential decline in EPS in the second quarter.

Sure.

I guess the way I look at it, Rich, is normalizing for the one-time bad debt reversal, $0.07 down to $0.04.

Sure.

That compares $0.01 to $0.03 in Q3.

Add back the Denali dilution, add back the nodes dilution, and you get $0.03 to $0.05.

Right.

Right.

So effectively, sequentially at the midpoint, we are flat to if you take the high point, an increase.

Understood.

Okay.

Thank you

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

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

Thank you for participating in today's Cadence Design Systems second quarter 2010 earnings conference call.

You may now disconnect.