益華電腦 (CDNS) 2010 Q3 法說會逐字稿

Good afternoon, my name is Kerrie and I will be your conference operator today.

At this time, I would like to welcome everyone to the Cadence Design Systems third quarter 2010 earnings 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 and welcome to our earnings conference call for the third quarter of fiscal year 2010.

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

It will be archived for two weeks.

With me are Lip-Bu Tan, President and CEO, Kevin Palatnik, Senior Vice President and CFO and Geoff Ribar, incoming CFO.

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

For information on the factors that could cause a difference in results, please refer to form 10k for period ended January 2, 2010 form 10Q, for the period ended July 3, 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 the financial results prepared in accordance with Generally Accepted Accounting Principals or GAAP, we will also present certain non-GAAP financial measures today.

Management believes that in addition to using GAAP results in evaluating our business, it can 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 direct comparable 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 October 27, 2010 for the quarter ended October 2, 2010 and related financial tables can be found in the investor relations portion of our website, at www.Cadence.com.

Now I will turn the call over to Cadence CEO, Lip-Bu Tan.

Good afternoon everyone.

Thank you for joining us.

I will provide the highlights of the quarter, after which Kevin will review the financial summary and outlook.

We will then open the call for questions.

Geoff Ribar is with us today and will be happy to answer any questions you might have about his background.

Cadence is laser focused to execute on our synergy to achieve our long-term objectives.

We intend to grow our business and increase shareholder value by delivering superior solution for system SOC and silicon realization, stronger customer engagements and improving operating margins.

During the third quarter, we made good progress on these objectives.

Revenue totaled $238 million, with non-GAAP earnings per share up $0.04.

Both results exceeded guidance.

Customer interest in Cadence product is high.

And our EDA360 Vision has captured the attention of the industry.

In fact, our recent CDN Life Silicon Valley User Conference was over subscribed.

I believe these results reflect our thought leadership, the strength of our technology and improved execution by the Cadence team.

We have aligned our product portfolio and engineering organization to the EDA360 strategy and key customers are responding.

In system realization space, the verification computing platform had a record quarter.

In SOC realization, the Denali integration is going very well.

In silicon realization, Virtual Source 6.1 consistently proves its superiority in technology campaigns and competitiveness of digital flow particularly for complex advanced node and low power designs keep improving.

On the ECO System front, we are making excellent progress.

And seeing great results from our collaborative efforts with our IP and foundry partners.

Let me give you some details.

Cadence verification computing platform called Palladium XP is a technology and market segment leader, enabling key elements of both system and SOC realization.

With this product, engineering teams can simulate, accelerate and communicate, emulate the design using the same engine for verification, power analysis, system validations, and hardware, software development.

It is a seamless component of our comprehensive verification solution, offering unmatched capability, and scalability while supporting designs from four million to two billion gigs.

And it can be configured for 512 simultaneous users which appeals to many of our advanced customers.

For example, during the third quarter, Broadcom selected the verification computing platform for in circuit emulation, transaction base acceleration and software development.

Palladium XP provides Broadcom with a state of art platform to validate the next generation SOC's.

Broadcom now has one of the largest Palladium installations.

In SOC realization, Denali provides an excellent foundation to enable us to deliver a rapid and smooth path to IP integration for customers.

This is a new business for Cadence and I am very pleased to report that the Denali is going well.

We had several significant design IP and verification IP wins.

Design IP did especially well in Q3 with strong demand for PCI Express, Generation 3, memory, and flash controllers.

With regard to silicon realization, adoptions of our Virtual Source 6.1 platform for custom and mixed-signal design has accelerated.

And competitiveness of our digital design floor has grown especially for complex advance note and low power design.

Improved interoperability with our custom and interlock solutions is driving customers to consolidate on Cadence products.

Let me give you some good examples.

We recently announced our collaboration with ARM to deploy our tools and methodologies to give customer earlier access to the complete floor to implement a new ARM Cortex-A15 processor.

Texas Instruments was the first semi conductor company to license the Cortex-A15 processor architecture and use the results of our collaborations to streamline the design cycle.

We believe that this collaboration will be important for many of our advanced customers.

In addition to virtual source, superior technical performance, advanced features and well spread adoption, the interoperability of our virtual 6.1 and encounter design [flows] is a major differentiator for customer pursuing the most advanced mixed signal designs.

Wolfson Microelectronics, leading supplier of high performance mixed signal semi conductor for the consumer electronic market decided that it was time to move from eternal schematic and layout tools to our commercial design tools and methodologies.

After evaluation, Wolfson chose Cadence mixed signal solution in virtual 6.1 for its superior performance and capability on Wolfson high performance and mixed signal design.

We continued to gain momentum in digital design.

Especially at 40, and 28 nanometers.

This is driving renewals of our Encounter digital design solutions, including RT l compiler, test and digital implementation.

It is also driving renewal for Incisive functional verification.

NEC Computers division of NEC Corporation, for example, renewed all these products in anticipation of beginning new high performance advance notes design.

In addition, we are demonstrating superior value in low power design.

As a example, Sequans used Cadence low power digital design flow on its SQ1210 WiMAX chip which supplies the baseband and triple band RF in North America very first 4G Android phones.

Finally, let me comment on the progress that we are making with our ECO System.

Strong business relationships with key strategic partners are required to realize our EDA360 strategy and enable deterministic path from system all the way to silicon.

I describe earlier the great work the Cadence team has done with ARM on the A15 processor.

This quarter, we also received public recognition from several foundry panels.

TFMC recognized Cadence with award for routing and extraction at 28 nanometer because of our QRC, and NanoRoute products.

FMIC adopted our silicon realization product line end-to-end for our low power solution.

Close collaboration with ECO System partners is resulting in meaningful incremental business for the Company.

In summary, Cadence had a successful third quarter.

Momentum for Cadence solutions is building at our key customers.

Driven by the combination of leading and competitive technology, and solid performance from the Cadence team, revenue and operation margin continued to grow.

There is still more work to do but I'm pleased with the results today.

Before I turn to the financial, I want to take a moment on behalf of our Board of Directors and all Cadence employees to express our gratitude to Kevin Palatnik for significant contributions and dedication to Cadence for over the last nine years.

As CFO, Kevin was instrumental in navigating Cadence through tremendous change during the past 2.5 years.

In particular, Kevin led the transition to highly reputable revenue model and played an important role in planning and executing the Company wide restructure plan.

Kevin, we are grateful to have benefited from your exceptional financial, operational and strategic leadership and we wish you all the best.

Thank you, Lip-Bu.

I appreciate the kind words and will add my personal comments after a review of the financials.

Good afternoon everyone.

Today, I'll first summarize Q3 2010 financial results.

And move to the outlook for Q4 and finally the full year 2010.

Results for the Company's key operating metrics for Q3 were total revenue of $238 million, non-GAAP operating margin of 9% and operating cash flow of $46 million.

In Q3, GAAP net income per share was $0.48.

This included a non-cash tax benefit of $0.56 per share due to settlement of our 2000, 2002 IRS examination.

On a non-GAAP basis, we recorded net income of $0.04 per share.

Total revenue for the third quarter was $238 million, an increase of 10%, over Q3 2009.

Product revenue was $118 million, maintenance revenue was $96 million and services revenue was $24 million.

Revenue mix by geography for Q3 was 43% for the Americas, 20% for EMEA, 20% for Japan, and 17% for Asia.

Approximately 90% of orders booked in Q3 were ratable.

Weighted average contract life for Q3 was at the lower end of the guided range of 2.6 to 3 years.

Total cost and expenses on a non-GAAP basis for Q3 were $218 million, in line with our expectations.

Non-GAAP operating margin for Q3 was 9%, compared to 6% for Q3 of 2009.

Q3 ending head count was approximately 4,600, up from approximately 4,500 at the end of Q2.

Q3 operating cash flow was $46 million.

This was above our guided range for Q3 as we continue to experience better than expected collections.

Total DSO's for Q3 were 87 days.

That compares to 92 days in Q2.

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

Capital expenditures for Q3 totaled $10 million.

Finally, cash and cash equivalents were $509 million at quarter end.

Now I will turn to our outlook for Q4 and the full year 2010.

For Q4 2010, we expect revenue to be in the range of $230 million to $240 million.

Q4 non-GAAP operating margin is expected to be in the range of 7% to 9%.

GAAP EPS for the Q4 is expected to be in the range of a loss of $0.06 to a loss of $0.04, and non-GAAP EPS is expected to be in the range of net income of $0.03 to $0.05 per share.

Operating cash flow for Q4 is expected to be in the range of $40 million to $50 million.

For the full year 2010, due to the growing strength in our business, we are increasing our guidance for orders to $925 million to $950 million, from the prior outlook of $875 million to $925 million.

However, there is no change in our view of weighted average contract life.

We are maintaining guidance at expected range of 2.6 to 3 years for 2010.

Revenue for the full year is expected to be in the range of $917 million to $927 million.

We expect non-GAAP operating margin to be in the range of 7% to 9% on annual basis for 2010.

Non-GAAP other income and expense for 2010 is expected to be in the range of negative $12 million to negative $10 million.

GAAP EPS for 2010 is anticipated to be in the range of net income of $0.55 to $0.57, non-GAAP EPS is expected to be in the range of net income of $0.16 to $0.18 per share.

For the full year, we expect operating cash flow of $180 million to $190 million.

Expect DSO's to be in the range of 75 days, to 85 days at year end 2010.

Finally capital expenditures for 2010 are expected to be in the range of $35 million to $40 million.

In summary, Cadence produced solid financial results in Q3 as we drive towards our objectives for the year.

I believe we have built a strong focus on execution, and the Company has the opportunity to expand its position with customers, grow the topline, and improve profitability over time.

On a personal note since this is my last earnings call with Cadence, I would like the publicly thank the Cadence Board, Lip-Bu and the Executive Management team for their support on the many changes we effected at the Company over the last 2.5 years to position it for a very solid future.

Operator, we will now take questions.

(Operator Instructions).

Your first question comes from the line of Sterling Auty of JPMorgan.

Thanks, hi, guys.

First of all, Kevin, congratulations on an excellent finish to the career here at Cadence, and good luck in all your future endeavors.

But onto the questions, let me start with Lip-Bu.

Lip-Bu, looking at the results that have come out of the semiconductor companies over the last month here both interquarter and in the earnings release, how do you feel the sentiment is around spending on EDA solutions especially in light of the growing renewal cycle that you are in the middle of now.

Sterling, thank you for the questions.

First of all, let me address the environment.

So, over the last quarter I spent a lot of time with the key customers, clearly some near term softness in the PC and consumer market area.

But we see strong strength in the mobile and also some of the infrastructure video clean tech related area.

And I think you know that this year is very strong year for semiconductor, 25%, 30%.

But looking out the next five years all indication point to 5%, 7% growth, still very healthy.

From the customer feedback they are engaging with some of the very challenging design and we are very pleased to see the increase of the engagement.

So, overall I think the R&D spending I think is going to continue to be tight but I think it's starting to -- there is a couple of really good product direction coming up and that address what I'm describing earlier in the application driven design and for multiple different platform we are very excited to see that.

Okay, and second question is the contract length went back down to the low end of the range during the quarter.

I think the first two quarters you were near or at the upper end of the range.

Is that -- did you see that consistent among the contracts or was there a big bifurcation, meaning a bunch of longer term and a bunch of very short-term, how did it average out to where it came in for the quarter?

Hi Sterling, it's Kevin.

Hey, thanks for the front end of your comments.

I appreciate that.

Specific to durations, we been at the 2.6 to 3 years all year, and as you said on both Q1 and Q2 we were on the high end of that, for Q3 we were at the lower end of that.

The distribution was pretty consistent throughout.

I can't say it was bimodal in any way.

It was pretty consistent across the board.

Okay, great.

And then last one, more administrative, but it looked like a nice jump here in deferred revenue.

Was that just on some maintenance renewals on old perpetual licenses or what was the contributing factor to the nice jump in deferred revenue?

Yes, sure.

So to be specific, deferreds increased about $22 million.

Sterling, as you know, that's a function of both timing of billings and some cash collected.

We did have one contract that we actually billed on October 1, that was the customer's Q4.

It was our Q3 because we closed in October 2.

In that sense that created some deferred.

I don't really pay too much attention nor do I think the folks out there should to small variations quarter to quarter.

Great, thank you.

Your next question comes from the line of Rich Valera of Needham and Company.

Thank you.

If I could offer my best wishes in your future endeavors, Kevin, and a welcome to Geoff as well.

First, on the bookings front, nice to see you increasing the bookings guidance again, and last quarter it seems like most of that was due to a change in your assumed renewal run rate.

You went from, I think, assuming down 10%, to assuming flat to up 10%.

So wondering what drove the increase in bookings.

Was it another bump up in your assumed renewal run rate or was it something else?

If so, is there any product area or geography that drove that?

Hi, Rich, Kevin here, thanks again for the comments.

As we said over the past couple of quarters we've seen run rates be flat to slightly up and as you said we came in to the year with an assumption that renewals would be 10% down, we did not experience that in Q1 and Q2 so we adjusted guidance in the July call.

The remainder of this I will call it the fine tuning to the midpoint we're up $37 million.

The majority of that has to do with the accumulation of the increase in run rates.

It is flat to slightly up.

We are selling more call it units or more licenses of software especially at the advanced nodes, and our advanced products, if you will.

Frankly, it's fine tuning primarily done through run rates.

I don't want to put words in your mouth but are you seeing sort of from flat to slightly up or are you saying maybe on average you are seeing slightly up, is there any sort of qualitative change to the renewal run rate level?

No.

I wouldn't say there is any significant change.

It's been flat to slightly up since Q4 '09 and this just represents the last fine tuning as we close out the year.

Fair enough.

Then, this maybe related but you had a pretty strong quarter for maintenance.

Is that just timing of renewals or what was going on there?

So Rich, we have talked about this in prior quarters if you look back over time due to certain contracts in Japan that revenue is recognized on a do and payable basis, we actually bill those contracts in Q2 and Q4, we collect in Q1 and Q3.

When we collect, we effectively recognize revenue.

So you will see bump ups in Q1 and Q3 historically, going as far back as early 2009.

You will see cyclical down in Q2 and Q4, and cyclical bump up in Q1 and Q3.

Okay.

That's helpful.

Lip-Bu, I would love to hear of any examples of application driven design or just anything more on that topic of how you think you guys can sort of drive this paradigm shift towards application driven design.

Any sort of more concrete examples of that.

I think Rich couple of things.

First of all we focus on our foundations in the silicon realizations, we have very strong offering especially advance node.

We have had some successful replacement in the digital side, and then secondly, in the SoC realizations, and now clearly the Denali integration and provide that integration path for us and that's very exciting.

On the whole I call it the verification platform and the system application area we clearly have a strong offering in the Palladium verification side and we expand beyond that.

Clearly that we highlight in my script Broadcom is a good example and we have good success and we have multiple other success.

So, I think overall, this whole EDA360 vision that we lay out there for the industry, we are implementing towards that.

Okay.

Thank you.

Thank you, Rich.

Your next I question comes from the line of Kakkean Rajkumar of RBC Capital Markets.

Hi guys.

Thanks for taking the question.

Now that you have had a couple of quarters of upside to the booking guidance, could you take a step back and see how do you see the next couple of years panning out?

Hi KC, it's Kevin.

Customarily we don't talk about future years in terms of calibrating it until our Q4 call.

So we will remain with that practice, if you will.

However, anecdotally what we said in the past and we reiterate today is that as we look at our renewals, as we said last year where as ten was stronger than nine when we look forward we are continuing to say that 2011 in both strength and depth we see a larger amount of renewals in 2011 than 2010 and similarly we see more in larger renewals in 2012 versus 2011.

Again, anecdotally as we progress through our renewal cycle we see strength in 2011 and 2012 but we're not going to calibrate that until our Q4 call.

Fair enough.

Do you find that the customer contract renewals are coming in as per schedule or do you still find lingering customer hesitancy in booking the contracts?

Okay, KC.

Kevin again.

If I understand your question correctly, let me say up front that we are not renewing early.

When we moved to the 90/10 model, the highly ratable model, it was our intent and we've executed against that that we were going to be patient, we were going to wait and renew closer to expiry.

We've done that throughout 2010 and as we look forward there is no reason to change that.

As you know the leverage between the customer and ourselves, that negotiation it's a better discussion as we get closer to expiry.

The sales force has done a tremendous job in adopting that and we have not done significant amount of early renewals or let me just say early renewals this year at all.

Okay.

Finally, from our side, any thoughts on whether the old margin target of 26%, is that still the target go forward and also is it something with concrete plans for the next three years.

Sure, I think KC, if I understand your question about the longer term operating margin, we are very much committed to that and clearly we expect revenue to increase as we move through the renewal cycle.

And then we demonstrate that we commitment to managing the costs and so we are committed to that.

But we are not going to give you the specific timing.

Finally from our side, all our thanks for Kevin's service.

Thanks, Kevin.

Thank you.

(Operator Instructions).

The next question comes from Tom Diffely of DA Davidson.

Good afternoon.

First question, I was wondering if you could give us a little color on how you allocate the cost of revenues?

We saw product costs go up a little bit and service and maintenance go down a bit this quarter.

I'm kind of curious what your methodology is?

Yes.

Complicated question Tom, this is Kevin here from a COGS standpoint there is little variability in software between let's say product and maintenance, where there is some variation if you will is on hardware.

If we have a large hardware quarter that will impact COGS.

From a services standpoint, we actually have some flexibility in how we use services engineers.

And when we acquired Denali, the folks that were working on in services some IP development, we finally categorized that with the addition of Denali into our R&D.

So that's in part why the services costs came down.

Overall gross margins will hover between 83 and 85 points, depending on hardware contribution.

Are the trends in hardware, is that seasonal at all?

It's not seasonal, we did announce the new verification commuting platform back in April.

We have seen some very good progress or very good adoption of what Lip-Bu described as Palladium XP.

But there is no seasonality to it.

It's a new product out there, it's a next generation product and we've seen really good adoption.

Okay.

Thanks.

Then, on the interest expense and other income line are those at ongoing levels at this point, or were some one timers in there?

No, at this point it's pretty well stabilized when we did the notes, the largest impact of that on the interest expense side, we've got a full quarter effectively in there now.

Yes, those are pretty good numbers.

Okay.

Good.

I notice your DFM business was up a bit in the quarter.

So, I guess first, what products do you categorize in this segment and then, do you see continued strength there?

I'd rather than get in to the products per se let me just talk about the overall trend and DFM products are quite often used in Japan and I'm going to refer back to the cyclicality of Japan revenues, that also impacted DFM category.

Okay.

All right.

Then it looks like there is some -- definitely some strength in the semiconductor world out there and the core EDA business, what about in the adjacent markets like PC, how is that business?

As I mentioned earlier I think PC's still have some softness but I think there is some encouraging signs but overall I think the infrastructure part of the business is still continuing to be very healthy.

So I think it's encouraging, but most important I think we are heavily engaging with our customers and I think clearly we have a superior product and I think we are very encouraged.

Yes, actually, I misspoke there.

I meant to say PCB on the print circuit board business.

Okay.

Yes, I think PCB continued to be very strong business for us.

We are committed to it and it ties in very well so that we can provide the whole end-to-end design and clearly the customer also needs the year-end performance so I think it is important to build that into the design and that's a very strong offering for us.

It's definitely a focus for you going forward then as well.

Absolutely.

Finally, maybe one more question on the bookings or the orders, how much of the increase or does any of the increase -- does that reflect competitive wins or is it straight renewals at this point?

It's a combination of both, Tom.

We don't calibrate specifically what competitive displacement is versus run rate versus other.

Suffice to say that we do see a strengthening of our business reflected in the raise in July and the raise currently.

Okay, all right.

Well, thanks again.

Thank you.

Your final question is a follow up from the line of Sterling Auty of JPMorgan.

So I'm going the try first with a nitpicky one, Kevin, so in terms of the ratable model I know you are saying approximately 90%, but given the contract duration, was there anything in the quarter that would have made it on the heavier side of 90% or the lighter side of 90%?

Approximately 90% is plus or minus 1 or 2 points.

Let me stop there.

It was a good quarter for us and as we look in to Q4 we see a strength and that's why we raised.

So bookings for the all reasons we described earlier are healthy for the year.

The other one on the cash flow, so the increased collections and improvement in DSO's what is the thought about the continued trajectory of that and the contribution to cash flow moving forward?

Sure.

So we did increase guidance overall for the year for cash flow, right the $180 million to $190 million.

That's a reflection of just the strength in collections, the strength in bookings and the collectibility of those bookings.

In terms of sustainability -- we will talk about that in our Q4 call as we give guidance for 2011.

Actually I won't.

But Geoff and Lip-Bu will.

Okay.

Maybe we shouldn't let the whole call go without putting Geoff on the hook a little bit.

One of the things that I wondered and I'll be interested to spend more time and get a chance to understand your background a little bit better but you are coming in to a situation that's a little bit specialized in terms of the transition to a subscription model.

Is there anything in your experience or take aways for even the short time you are getting to transfer knowledge from Kevin and the whole staff that's there currently, can you give us a little bit of detail in terms of your knowledge base of a subscription style model?

Not that it's that difficult from the accounting standpoint but the understanding of it and the ability to communicate it outward to all the key constituencies.

Sure, Sterling.

This is Geoff.

So, as you are probably aware, I spent almost my whole career in the semiconductor business as a customer of EDA, I'm certainly very familiar with Cadence from that background, but I will also admit I have lot to learn about the subscription model and Kevin and the finance team here is quite capable, so I'm quite sure that they will get me through that process and I really appreciate Kevin's help and the team will get me through.

Great, thank you.

Thank you everyone for calling this afternoon.

We have a strong Q3.

We are laser focused on executing our plan and clearly our commitment to advanced node and our foundation tools and solution and the SoC and system level, EDA360 are starting to pay off.

Looking forward to speaking with you soon and thank you again for joining us.

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

You may now disconnect.