益華電腦 (CDNS) 2012 Q1 法說會逐字稿

At this time, I'd like to welcome everyone to the Cadence Design Systems first quarter 2012 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 Alan Lindstrom, Director of Investor Relations for Cadence Design Systems.

Please go ahead, sir.

Thank you, Allie, and welcome to our earnings conference call for the first quarter of fiscal 2012.

The webcast of this call can be accessed through our website, Cadence.com and will be archived for two weeks.

With us today are Lip-Bu Tan, President and CEO of Cadence; and Geoff Ribar, 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 filings with the Securities and Exchange Commission.

These include Cadence's most recent reports on Form 10-K and Form 10-Q, including the Company's future filings and the cautionary statements regarding forward-looking statements in earnings press release issued today.

In addition to financial results prepared in accordance with generally accepted accounting principals, 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 25, 2012, for the quarter ended March 31, 2012, and related financial tables can also be found in the Investor Relations portion of our website.

Now I will turn the call over to Lip-Bu.

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

Cadence is off to a good start for 2012 with bookings for both software and hardware exceeding expectations for Q1.

The quarter included two major renewal in North America and Japan.

For Q1, revenue totaled $360 million, non-GAAP operating margin was 21% and we generated $61 million of operating cash flow.

Based on Q1 results and our visibility into the rest of 2012, we are updating our outlook.

Geoff will present the details in a few minutes.

Let us look at a few of the highlights for Q1.

I will start with silicon realization.

We are significantly increased -- improved our digital design flow over the last three years.

In Q1, we introduced Version 11.1 of our Encounter RTL-to-GDSII flow for high-performance and large scale designs at 20-nanometers.

This new version includes in design double patterning support for the 20-nanometer silicon.

The growing strength of our digital flow enables us to pursue additional opportunities at the most advanced notes for designs using advanced multicore processors and for high-performance mixed signal designs.

In Q1, a major North American customer of our virtual custom and analog design flow replaced their existing digital flow with the Cadence Encounter digital flow in order to deploy a fully integrated mixed-signal design flow.

A major European customer also renewed a commitment to our mixed signal flow in Q1.

These wins follow a trend we started to see in recent quarters which is the need for integrated mixed-signal design and verification solution.

Our market segment leading virtual SoC product lines enables us to deliver value added solutions when integrated with our Encounter and Incisive platforms to meet these market requirements.

In Q1, virtual SoC EMS Designer, our mixed-signal simulation product won the 2012 ACE award in China in the category of best EDA product.

EMS Designer is used to verify mixed-signal SoCs like those used in mobile devices.

DFM technology is a key requirement for manufacturing SoCs at advanced process nodes.

We worked closely with Samsung foundry to develop DFM flows for in design optimization and physical sign-off for 32-nanometer, 28-nanometer and 20-nanometer SoC designs.

These new flows improved chip yield by addressing critical random and systematic yield issues.

We are seeing an increased in interest for design solution for 3D IC.

Cadence invested early in this space, working closely with several leading customers.

With TSMC, we collaborated on the test vehicles employing 3D IC technologies including true silicon VS to integrate an SoC and embedded DRAM on the silicon interposer.

Through our continuous investment in R&D and ecosystem development, we intend to remain well-positioned to capitalize on this major shift in semiconductor design and manufacturing.

Next, let us look at the SoC realization.

Extending our design IP business is a priority for Cadence.

Martin Lund joined Cadence in March to lead our SoC realization group.

Martin joined us from Broadcom where he served for 12 years, most recently as senior vice president and general manager for their network switching business.

The addition of Martin further strengthens my integrated Management team.

We continue to expand our design IP portfolio in Q1with the introduction of a high-performance, low-power controller and PHY for the LP DDRIII mobile memory standard and 40/100 gigabit Internet media access controller that enables the rapid deployment of SoCs for networking and high-performance computing.

Verification IP is one of our fastest-growing businesses.

It is used to facilitate SoC verifications and increasingly, to verify interface between multiple chips and peripherals such as memory, cameras and display.

Our strategy to continuously expand our portfolio in fast growing vertical market segments.

In Q3, 2011, we expanded our verification IP catalog with offerings targeted at mobile application, one of the key drivers of the electronic industry.

In Q1, 2012, we added verification IP for two popular protocol standards used in cloud computing and data center applications.

Now, let us talk about system realizations.

The Cadence virtual system platform was named a winner in the 2012 UBM Electronic ACE Awards in the software ultimate product category.

During Q1, we also released the production version of our virtual platform for the Xilinx Zynq-7000 platform.

New on Cadence virtual system platform, this enables simultaneous development and validation of hardware and software before the hardware is even available, providing significant savings in development cost and time-to-market.

In another highlight for the system realization, Palladium XP posted stronger than expected sales in Q1, driven by continuing trend towards more purchases by the system companies and the growing sales in China.

Let me conclude with a few comments on our recent CDNLive user conference held in Silicon Valley.

The success of our CDNLive conference held last month is a clear indicator of Cadence technology process and a strong focus on deepening customer relationships.

Featuring keynotes by senior executives from ARM and TSMC, CDNLive highlighted the collaboration Cadence is fostering within the semiconductor industry to tackle the greatest technological challenges.

Attendance was up significantly, as were customer contributed papers.

With that, that will now turn it over to Geoff who will review the financial results and provide our outlook.

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

Cadence posted strong financial results for Q1.

I will review the results for the first quarter, present our outlook for Q2, and update the outlook for 2012.

Total revenue for the third quarter was $316 million compared to $308 million for Q4 2011 and $266 million for the year ago quarter.

The year-over-year increase was 19%.

Product revenue was $190 million.

Maintenance revenue was $96 million and services revenue was $30 million.

The revenue mix for the geographies was 44% for the Americas, 19% for the EMEA, 19% for Asia and 18% for Japan.

Total cost and expenses on a non-GAAP basis for Q1 for $250 million compared to $244 million for Q4 2011 and $230 million for the year ago quarter.

Headcount -- Q1 headcount was 400 -- 4,766 compared to 4,728 for Q4 2011.

Non-GAAP operating margin for Q1 was 21% compared to 21% for Q4 2011 and 13% for the year ago quarter.

For Q1, we recorded GAAP net income per share of $0.11 compared to $0.02 for Q1 2011.

For Q1 2012, non-GAAP net income per share was $0.17 compared to $0.17 for Q4 2011 and $0.09 for the year ago quarter.

Operating cash flow for Q1 was $61 million compared to $62 million for Q4 2011 and $56 million for the year ago quarter.

Total DSOs for Q1 decreased to 25 days, down from 43 days from Q4 2011 and from 62 days for the year ago quarter.

The reduction was due to our success of our ongoing efforts to match cash collections in the timing of revenue recognition.

These efforts have also led to corresponding reductions in accounts receivable and deferred revenue.

As a result, our new DSO target is 25 to 35 days.

Capital expenditures for Q1 were approximately $8 million.

Cash and cash equivalents were $660 million at quarter end, approximate 50% of our cash is in the US.

For Q1, over 90% of orders booked were ratable, including product maintenance and services.

Weighted average contract life for Q1 was approximate 2.8 years, higher than our target range of 2.4 to 2.6 for the year, due to a large multi year contract booked in Q1.

On a weighted average basis, run rates in Q1 contract renewals increased.

It is worth noting that due to the success of Palladium XP, hardware has become a larger part of our product mix.

Now let's address our outlook for the second quarter of 2012 and our update for fiscal 2012.

We are increasing our fiscal 2012 outlook for bookings, revenues and earnings per share due to strong Q1 results and the expectation of continued strong demand in Q2.

For Q2 2012, we expect revenue to be in the range of $315 million to $325 million.

Q2 non-GAAP operating margin is expected to be in the range of 21% to 22%.

Non-GAAP total cost and expenses should be up slightly compared to Q1 due to increased hardware sales.

GAAP EPS for the second quarter is expected to be in a range of $0.13 to $0.14.

And non-GAAP EPS for Q2 is expected to be in the range of $0.17 to $0.18.

Now for our update of our fiscal 2012 outlook.

Bookings are expected to be in the range of $1.259 billion to $1.335 billion compared to the prior range of $1.265 billion to $1.315 billion.

We expect weighted average contract life in the range of 2.4 to 2.6 years for the year and to book at least 90% of our business for the year under ratable arrangements.

We now expect revenue to be in the range of $1.27 billion to $1.3 billion for 2012 compared to the prior range of $1.24 billion to $1.28 billion.

Non-GAAP operating margin is now expected to be in a range of 21% to 22% for the annual basis for 2012 compared to the prior range of 19% to 21%.

Non-GAAP and other income and expense for 2012 is expected to be in the range of negative $14 million to negative $10 million.

For 2012 we are assuming a non-GAAP tax rate of 26% and weighted average shares outstanding from 279 million to 285 million shares.

GAAP EPS for 2012 is expected to be in the range of $0.45 to $0.49 compared to the prior range of $0.39 to $0.49.

Non-GAAP EPS is now expected to be in a range of $0.66 to $0.70 compared to the prior range of $0.60 to $0.70.

For 2012 we are expecting operating cash flow in the range of $275 million to $305 million compared to a prior range of $255 million to $295 million.

DSOs for 2012 are projected to be in the range of 25 to 35 days.

Capital expenditures for 2012 are expected to be in a range of $30 million to $35 million.

So to conclude, Cadence again posted strong operating results.

We are making good progress towards achieving our goal of mid $20s non-GAAP operation margin in 2013.

While we do have concerns about the risk of the world economy, at this point as we look at Q2, design activity and demand for our product and services the still strong.

Operator, we will now take questions.

(Operator Instructions) We will pause for a just a moment to compile the Q&A roster.

Your first question comes from the line of Mahesh Sanganeria.

Thanks, guys, this is Richard Grace standing in for Mahesh.

Lip-Bu, you were talking about positive impacts from double multiple patterning as you see shrink to smaller geometries, can you give a little more color on that?

How much revenue growth that might drive in the future and any other benefits you are seeing as the geometries move to 22-nanometer and you see marked increase in double patterning at times, multiple patterning?

Good, thank you.

So I think, Richard and Mahesh, I think -- the question I think is on the 20-nanometer, the thin [film].

So, I think this is an area that we are making significant investment heavily engaging in our EDA 2 and IP.

This is a very important area and we have several collaborations with deep foundry IP customer engagement.

Clearly, when you move out the geometry, the thin film has become very important.

3D IC becomes very important, and so not just for the 20-nanometer, also for the 14-nanometer.

In fact, we're engaging to prepaying for the 14-nanometer process tool.

Along this progress, we have about 2,000 complete an ongoing, 20-nanometer, 22-namometer projects and as you know, we have about over 100 32-nanometer and 28-nanometer designs.

This is a very important area.

In some of the revenue of growth, I can't commented that, but this is very early phase of the development, and we are getting ourself ready in the tool and IP.

So, when the customer ready, it will be seamlessly from the tool to the foundry, and that's where we are in preparations.

Okay.

Thank you.

What are your thoughts on when EUV starts ramping?

Tell me your question again?

What are your thoughts on when EUV starts?

EUV, okay.

Yes, I think that area, we continue to look at it, and it is an important development.

But I think, is it ready for deployment?

I think, it is years away, but we keep a very close eye and we're collaborating with our leaders.

I think, it is very much a manufacturing challenge and issues.

Clearly, we work with our foundry.

We are keeping a close eye on that.

What solutions do you see in the market beyond 22-nanometer if EUV is not available?

Again, it is a manufacturing issue.

I think some of our equipment company and [upon us] and also the foundry may have a better answer for me, I would need to address that.

Fair enough.

Thank you very much, guys.

Thank you.

(Operator Instructions) Your next question comes from the line of Gus Richard.

Yes, thanks for taking my question.

You mentioned you had large bookings in the quarter, I was just hoping you could give a little bit more color on that.

Was that digital design flow or something else?

Hi, Gus.

This is Geoff.

We are not disclosing, but it was -- it affected a lot of our different segments of our business.

Okay.

Got it.

Then on the verifications side, it sounds like that's a lumpy business.

It looks like you had a little bit less of it in Q1 and you could have a little bit more of it in Q2.

I was just wondering if you have some thoughts on what the growth rate of that business will be over the next two to three years?

So, I think you were referring to our Palladium XP business, our hardware business, and that business was a huge grower for us last year.

We also believe it is a secular trend that more and more customers are going to be dependant on that.

Not just traditional chip companies, but system companies also.

That business, we continue to be thoughtful on when we guide our future quarters.

It is been a strong business for us, but there is competition in the marketplace.

We look forward to the competition, and we look forward to the strength of our business.

So, we anticipate that business to be relatively flat this year after such a strong growth last year.

If I can add a little bit, Gus, and clearly all the major complex SoC system or anything below 40-nanometer, they've become a very critical -- if you can find the box earlier in your design and verification is huge time-to-market advantage.

So, we continue to see tremendous growth in that area, and we have a very strong offering and we continue to drive for excellence on that.

Okay, great.

I will pass it on to the next person.

Thanks so much.

Your next question comes from Tom Diffely.

Yes, good afternoon.

A couple questions, first Lip-Bu, on the markets.

We've seen a lot of growth in Asian markets, on Enarmes' call the other day, they said 50% of their licenses came from Asia now.

With less than 20% of your [root] business in Asia, do you see that as a big growth opportunity, and any way you can quantify how big that opportunity is for you is going forward?

I think first Tom, thank you for the questions.

Clearly, the Asia potential is quite significant in all of that $300 billion plus industry, China alone consumes almost $100 billion plus.

So, clearly it is very fast-growing.

As also if you look at some of the fabless semiconductor company growth I think is coming up really strong.

You look at Spectrum, you look at High Silicon, there's a long list of company heavily engaged.

I think clearly that is as our strength and I think we're going to see more growth in that area.

So, you are correct, there is a lot of opportunity and clearly, we want to make sure that we capitalize on it.

Okay.

I think Tom, to add to it, we did comment on our Palladium XP business being particularly strong in China during this past quarter.

Over the last couple years, it looks you've gone from maybe 15% to close to 20% of your business in Asia in particular, does that get to 30% over time, or is it not quite that large?

Yes, I don't think that we can quantify that, but that clearly is a growing pattern.

I think you saw our announcement, we just opened up a Shanghai R&D center.

This is a very major commitment for us, and we are very well-positioned to capitalize on that Asia Pacific growth area.

I also think I'd add that as we grew from 15% to 20% approximately in Asia, that's when the revenue was growing very, very fast for the Company as a whole too.

Yes, okay.

Then also, it seems like every quarter we're hearing more in there about some of these large systems houses like Apple and Samsung and HTC starting to develop their own chips or wanting to develop their own chips.

What do you think this does, is there some way to quantify how big this expands the market having more players designing more chips?

Tom, it's a good question, and that's why I think in 2010 we launched our EDA360, and this is really the heart of the whole EDA360 application driven design.

Clearly, from the system company you mentioned, Apple, you mentioned some of the big ones, the Oracle and Google, a long list.

They all want to be differentiating not just from the application layer, they also really want a different shift on the hardware side.

So, we are seeing tremendous growth in that area and we're well-positioned to capitalize on it.

Okay.

Geoff, the last few years, your revenues in a certain year have been about 20% larger than the bookings in the previous year.

Is there some reason why that math keeps working, or is it just a coincidence?

Actually Tom, we don't look at it that way.

With the ratable model, really what matters is how much is in backlog and how much is coming out of backlog.

Then, it is a little bit different as of course the hardware, which has some amount revenue that's up front.

So, we don't look at it that way.

I'm glad the math works for you, though.

All right.

Then finally, when you look it margin expansion, it sounds like your plan is still to get into the mid $20s for next year -- for the out year?

Yes, it is still mid $20s for 2013 in total.

Yes, great.

All right, thank you.

Thank you.

Your next question comes from Krish Sankar with Bank of America Merrill Lynch.

Hi, this is Thomas Yeh for Krish Sankar.

That's for taking my questions, and congrats on the strong results and guidance.

Can you elaborate a little bit more on how much the beat was caused by earlier than expected customer renewals?

How should we think about bookings for the full year?

How does the quarterly review calendar look through 2012 compared to the previous year?

So Tom, we raised our bookings guidance by $20 million at our midpoint.

I think our performance, vis-a-vis our guidance, is always subject to a bunch of things.

I do think that extremely strong bookings in Q1.

The timing of bookings continues to be very good, more linear than I think has historically been the case in EDA.

The hardware business, as Lip-Bu mentioned, came in strong also.

So, I think all those things contributed.

We also raised the revenue guidance at midpoint by about $25 million, so I think we are seeing both strong bookings and strong revenue.

Thanks, that's helpful.

Given some of the yield problems that are still occurring at the foundries, can you provide us with some color on how yield issues impact EDA spending?

How have your conversations with customers changed compared to the last quarter in terms of their R&D spending budgets?

Tom, let me answer that, Lip-Bu here.

First of all, I think some of the supply challenges at 28-nanometer and others are clearly are more manufacturing related, not related to design.

We don't see slowdown in the X design activities still remain very strong, especially in the 28-nanometer and 20-nanometer we are heavily engaged.

I think so far we are very well-positioned, and I think this kind of -- no impact to our design activity.

Thanks, that's very helpful.

Then finally, longer-term, what are your views on an average EDA industry growth you're assuming?

For example, that you reach a more normalized year in 2013?

Yes, I think -- first of all, I think we remain very excited about this industry.

Clearly, the semiconductor industry outlook is very bright.

If you look at all the beautiful and exciting and our new gadget and electronic devices, semiconductor is really the heart of it.

So EDA is very critical essential part of the design.

So, all in all, I think we are going to see continued good growth.

Especially, I mentioned earlier the application driven design is going to be significantly even more.

So I think overall, I think the industry is going to be healthy.

I think overall, we look at the semiconductor industry growing at mid single-digits.

But overall, another design activity we see have been very strong.

We are excited about this industry.

Thanks so much.

Thank you.

Your next question comes from Raj Seth with Cowen.

Thank you.

This is [Simeron Var] in for Raj Seth.

I have a few quick questions.

The first one is for Lip-Bu.

Lip-Bu, you talked -- you've talked before on how you expect the Synopsys plus Magma combination to be good for you as well as the industry.

Have you seen any customer activity that validates that view for you, or is it too early to tell right now?

Yes, Simeron, first of all, let me answer that question and Geoff will fill you in to add onto it.

So overall, we see that merger has open tremendous door for us.

We're heavily engaging and capitalize on it.

Clearly, a lot of customer are looking for automated design flow.

Also, I think I mentioned and my script the whole mixed signal flow -- the integrated mixed signal design and verification become more and more important.

We see a trend of customer and decided to all integrate in analog and digital, and that really played into strength.

A lot of customer looking for a second source of the design flow, and that is really exciting for us.

Great, thank you.

I had a couple quick ones for Geoff.

Geoff, can you talk about how your emulation business did to this quarter versus your internal expectations?

Then secondly, you've talked about how expense growth for this year would be slight higher as you restore some of the pay reductions you took during the downturn.

Is there any change about how you're thinking about OpEx linearity in the second half?

Any color that you could give us there would be great.

Thank you.

I think we said during our prepared remarks, Simeron, that emulation business was stronger than our expectations in Q1.

It's still an area that we look at going forward, and we've again, had great growth last year.

We expect the growth to be relatively flat to maybe slightly down, as we said in our last call.

But again, that business has continued to consistently surprises us on the upside.

As far as the growth in expenses, you're exactly correct.

We are fully -- essentially, fully restoring benefits to the employees that we cut during the downturn.

We've traditionally dropped more than 50% of our revenue growth to the bottom line.

This year we had originally forecasted slightly less than that.

With the growth in revenue a little bit, we are actually closer back about to the 50% right now.

We are pretty much in line with that, and I think you can probably do the math and come up with the answers for your model.

Great.

Thank you.

(Operator Instructions) Your next question comes from the line of Jay Vleeschouwer from Griffin Securities.

Thanks.

Geoff, a financial question for you first.

Following up a new comments regarding cash flow and accounts receivable, especially.

Is there, beneath what's going on there in terms of DSOs, a change in the customer concentration at all?

You've typically had a fairly narrow range of top 10% or 20% -- or top 10, 20 customers as a percent of your AR.

Is that concentration, do you think, going to change at all?

Either in terms of AR or for that matter, even in bookings?

No, I think we actually have to have a pretty good balance as far as AR and bookings and revenue as far as customer concentration.

Our top 10 is less than 40% overall, essentially, of all of those numbers.

We don't have any top 10 or 10% customers in any of those categories.

I think we're pretty happy with the distribution of our product and our revenue and our AR and our bookings.

Okay.

Lip-Bu, following up on an earlier question regarding Asia.

One of the drivers to the growth of Asia-Pac as a consumer of EDA over the last number of years has been their consumption of IP.

I think they're the second largest market after North America for IP.

I'm wondering if you could comment on your positioning with IP for that market and as well, if you foresee having to make any significantly new investments in services at all to support your IP strategy in that part of the world or globally.

Good question.

I think clearly, Jay, as you correctly point out, the Asia growth is significant, we are well-positioned to capitalize on that.

On the IP front, yes, there's a significant market for -- it's really China and Asia on the IP side.

Clearly, in my remarks that IP is a very important priority for us.

We are delighted to have Marin Lund to join us.

So he spearhead our whole SoC.

That includes IP and service.

So, that area we are going to double down.

We are very focused on that area.

Clearly, tie in very well with our EDA360.

Then clearly, we have a very strong footprint in the memory Denali acquisition way exceeding our expectation, we are delighted on that.

Then clearly, some of the -- we mentioned about 1,400 internet.

Clearly it's a good market in Asia for the products.

So, we are already accelerating our strategy on the IP and we're engaging quite heavily with our customer.

Okay.

With respect to the Magma acquisition.

Are you seeing, or have you been making any hires of -- for Magma employees, either in terms of R&D or product management or sales or any other areas?

Yes, I think we continue to recruit and hire the best talent.

Clearly, not just targeting the Synopsys Magma merger.

We're looking at all the best talent we can get in the industry, so we are excited about that.

Okay.

Lastly, and a bit of news of the day, it appears that Mentor has announced a new emulation platform today, the Veloce2.

I'm wondering if you've taken new and improved competition in emulation into account or if you could talk about a product refresh that you are planning for in the Palladium area?

Yes, I think first of all, I think clearly, we've known and seen in their products, and clearly it is not a surprise to us.

We keep a very close eye on it.

Meanwhile, we welcome competitions.

We remain confident about our Palladium product and features and performance.

But seeing that we're not taking our competitors lightly, we take it very seriously.

We've seen them in couple of accounts, so we know their product and performance, and we welcome the competition and we continue to [lie] and are confident of our product offering.

Thanks, Lip-Bu.

Thank you.

We will now turn it over to Mr.

Lip-Bu Tan, President and CEO of Cadence for his closing remarks.

Sure.

Thank you.

In closing, Cadence is off to a good start in 2012.

The strength and momentum of our technology, which is leading to the expansion of the existing relationship as well as new engagements gives me confidence that the rest of the 2012 will be good for Cadence.

Thank you, everyone, for joining us this afternoon, and I look forward to speaking with you soon.

Thank you for participating in the Cadence first quarter and fiscal year 2012 earnings conference, you may now disconnect your lines.