Cadence Design Systems, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Cadence provides electronic design automation software, hardware, services and semiconductor intellectual property. The unaudited quarter ended March 28, 2020; comparisons are with the three months ended March 30, 2019. Amounts below are in millions unless stated otherwise.
Financial highlights
| Metric | Q1 2020 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $618.0 | $576.7 | +7% |
| Product and maintenance revenue | $581.7 | $543.5 | +7% |
| Services revenue | $36.3 | $33.2 | +9% |
| Operating income | $139.4 | $128.4 | +9% |
| Net income | $124.0 | $120.6 | +3% |
| Diluted EPS | $0.44 | $0.43 | +2% |
| Cash from operations | $217.7 | $185.4 | +$32.3 |
| Cash and cash equivalents at quarter-end | $946.3 | $705.2 at prior fiscal year-end | +$241.1 |
Operating margin was approximately 22.5%, compared with 22.3%; net margin was approximately 20.1%, compared with 20.9%. Gross margin, calculated as revenue less product and services costs, was approximately 87.9%, versus 87.8%. The effective tax rate was 4.8%, versus 6.0%.
At March 28, total debt carrying value was $696.2, consisting of $350.0 borrowed on the revolving facility and $346.2 on the 2024 Notes. Current assets were $1,399.5 and current liabilities $1,012.4; reported net working capital was $387.1, down from $497.0 at December 28, 2019. The company said it was in compliance with debt covenants and expected cash and operating cash flows to cover liquidity needs for at least 12 months.
Material changes and notable items
- Revenue growth reflected increased customer investment in complex designs, including AI, 5G, aerospace and defense, automotive and cloud data-center applications. China revenue rose 42% to $83.8, while Japan revenue fell 19% to $41.5, primarily due to hardware-installation timing.
- Operating expenses increased 7% to $401.0, including R&D expense of $241.7, up 6%, and marketing and sales expense of $125.7, up 8%. Management attributed increases mainly to hiring and continued product and technical-sales investment.
- Cadence acquired AWR and Integrand for approximately $195.0 net of cash acquired, broadening RF/microwave design capabilities associated with 5G. The acquisitions added $119.1 of goodwill and $101.3 of definite-lived intangible assets. Management expected acquisition-related expenses, including amortization, to exceed acquired revenue during fiscal 2020.
- Cash from investing activities was $(216.0), including $193.8 paid for business combinations. Financing activities provided $245.8, including the $350.0 credit-facility draw; the company also repurchased $100.0 of stock. Approximately $269 remained under the $500 repurchase authorization.
- Deferred revenue was $521.1 at quarter-end, and contracted remaining performance obligations were approximately $3.7 billion, including $189.0 of non-cancellable IP Access Agreement commitments. The company expected to recognize about 55% of the applicable obligations, excluding those IPAA commitments, over the next 12 months.
Outlook, risks and contingencies
- COVID-19: The pandemic had no material adverse impact on Q1 results, but management expected Q2 revenue to be below what it had anticipated at the start of the year. Shelter-in-place restrictions were disrupting hardware installation at customer sites and access to labs needed for some IP development. Management considered some delayed hardware and IP revenue potentially recoverable in the second half, conditional on containment and lifting of restrictions; broader economic effects remained uncertain.
- Management expected 85%–90% of fiscal 2020 revenue to be recurring and forecast a fiscal 2020 effective tax rate of approximately 14%. It also expected marketing and sales, R&D and interest expense to increase during the remainder of fiscal 2020. No overall fiscal-year revenue or earnings guidance is stated in the provided filing text.
- Risks include uncertain customer demand and collections amid the pandemic, dependence on timely hardware and IP delivery, export restrictions affecting certain China customers, semiconductor-industry cyclicality, limited hardware suppliers, foreign-exchange exposure and acquisition integration. Approximately 47% of cash was held by foreign subsidiaries.
- The $350.0 revolving-facility borrowing was described as a precautionary liquidity measure. The facility was fully drawn at quarter-end, at a stated rate of 2.05%, and has variable-rate exposure. The filing describes ordinary-course litigation and contingencies but does not provide a clear quantified aggregate exposure.
- Cadence recorded a $2.0 cumulative retained-earnings reduction upon adoption of the expected-credit-loss accounting standard. It also recorded $1.1 of restructuring credits during the quarter.
Important facts for investors to verify
- Whether delayed Q2 hardware and IP deliveries were recognized later in 2020, and how pandemic-related demand or collection risks developed.
- Revenue growth, bookings and customer exposure in China, including the continuing effect of Entity List restrictions, and the timing-driven decline in Japan.
- Cash generation and liquidity after the precautionary $350.0 borrowing, including repayment plans, variable interest costs and covenant headroom.
- Whether AWR and Integrand delivered expected strategic benefits and how acquisition-related amortization and expenses affected results.
- How much of the $3.7 billion remaining performance obligations converted to revenue, given timing, customer product selections and delivery dependencies.