Cadence Design Systems, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 3, 2021; comparisons are with the three months ended March 28, 2020 unless otherwise noted. Amounts are in millions, except per-share data.
Business context and financial performance
Cadence provides software, hardware, services and intellectual property used in electronic product design. Results benefited from increased customer investment in complex designs, including hardware, software and IP. Product and maintenance revenue made up the large majority of sales.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $736.0 | $618.0 | +19% |
| Product and maintenance revenue | $699.1 | $581.7 | +20% |
| Services revenue | $37.0 | $36.3 | +2% |
| Income from operations | $203.9 | $139.4 | +46% |
| Operating margin | 28% | 23% | +5 percentage points |
| Net income | $187.2 | $124.0 | +51% |
| Diluted EPS | $0.67 | $0.44 | +52% |
| Operating cash flow | $208.4 | $217.7 | -$9.3 |
Net margin was approximately 25.4%, compared with 20.1% a year earlier. Cost of product and maintenance increased 17%, while operating expenses increased 11%; R&D rose 12%, reflecting continued investment and higher headcount. Cash flow from operations was lower primarily because of the timing of customer receipts and vendor payments. Capital expenditures were $17.0 million; operating cash flow less capital expenditures was approximately $191.5 million.
Liquidity, debt and capital allocation
Cash and cash equivalents were $743.0 million at quarter-end, down from $928.4 million at January 2, 2021. Net working capital was $557.4 million, versus $681.8 million at year-end. The company reported $346.988 million of carrying-value debt, representing $350.0 million principal of 4.375% senior notes due October 2024; there were no revolver borrowings. The $350 million revolving facility expires January 2022, and Cadence reported compliance with its financial covenants.
Investing activities used $206.2 million, including $189.3 million net cash paid for the NUMECA acquisition. Financing activities used $182.3 million, including $172.3 million of share repurchases. Approximately $566 million remained under the $750 million repurchase authorization. Management said existing cash and expected operating cash flows should cover working-capital and other liquidity needs for at least 12 months; approximately 60% of cash was held by foreign subsidiaries.
Material changes, outlook and notable items
- Revenue growth was broad across geographies, led by the United States (+26%) and Other Asia (+22%). China revenue rose 7%, but U.S. export restrictions continue to limit service and support for certain customers.
- Functional Verification rose to 26% of product and maintenance revenue from 23%; Digital IC Design and Signoff declined to 27% from 29%. These are revenue mix percentages, not growth rates.
- Cadence acquired NUMECA in February for $189.3 million net of cash acquired. Purchase accounting remained incomplete. The company said acquisitions are expected to increase expenses, including acquired-intangible amortization, more than revenue during fiscal 2021.
- On April 14, 2021, after quarter-end, Cadence acquired Pointwise to expand its computational fluid dynamics portfolio; initial acquisition accounting was incomplete at the filing date.
- Management expects fiscal 2021 effective tax rate of approximately 15%, compared with 7.5% in Q1. It expects marketing and sales and R&D expenses to rise during the remainder of fiscal 2021 due to added headcount. Operating-margin growth is expected to moderate as acquisition-related costs increase and travel, meetings and events potentially resume.
- Management expects recurring revenue to represent 85%–90% of annual revenue. Contracted but unsatisfied performance obligations were approximately $3.6 billion; about 60%, excluding non-cancellable IP Access Agreement commitments, was expected to be recognized over the next 12 months. This is not revenue guidance.
- COVID-19 had no material adverse impact on Q1 results, liquidity or cash flows, according to management, but remote work, customer-site access and payment delays remain uncertainties. The filing also identifies global semiconductor supply constraints as a potential risk.
Risks and contingencies
Key risks include evolving COVID-19 impacts; export controls and trade restrictions, particularly affecting certain China customers; semiconductor supply disruptions; the timing and mix of hardware and IP deliveries; competition and technology change; acquisition integration and execution; foreign currency exposure; and customer payment delays. Cadence uses short-dated foreign-exchange forwards; quarter-end notional principal was $471.1 million and estimated fair value was a $7.4 million liability. The filing describes ordinary-course litigation and indemnification matters but provides no clear quantified potential loss. No customer represented 10% or more of revenue or receivables.
Important facts for investors to verify
- Whether strong product and maintenance growth and the improved operating margin persist as acquisition costs and other expenses rise.
- Cash conversion and working-capital trends, especially the timing of collections and vendor payments, and the substantial decline in cash during the quarter.
- NUMECA and Pointwise integration, purchase accounting, acquisition-related expenses and expected contribution to revenue.
- Exposure to China export restrictions and semiconductor supply constraints, including any effects on customer demand or product delivery.
- Progress against the stated approximately 15% fiscal 2021 tax-rate outlook and the 85%–90% recurring-revenue expectation.
- Debt and liquidity position, including the January 2022 revolving-facility maturity, foreign-held cash and continued share repurchases.