Cadence Design Systems, Inc. — Q2 2019 Form 10-Q
Reporting period: Unaudited quarter ended June 29, 2019; comparisons are with the quarter ended June 30, 2018. Six-month results are for the periods ended on those same dates. Cadence provides electronic-design software, hardware, services and design IP, primarily to semiconductor and electronics-system customers.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $580.4 million | $518.4 million | $1,157.2 million | $1,035.7 million |
| Operating income | $133.7 million | $93.1 million | $262.1 million | $178.9 million |
| Net income | $107.2 million | $75.1 million | $227.8 million | $148.0 million |
| Diluted earnings per share | $0.38 | $0.27 | $0.81 | $0.53 |
| Cash from operations | — | — | $431.8 million | $362.9 million |
Margins: Q2 gross margin was approximately 89.4% versus 88.6%; operating margin was 23.0% versus 17.9%; and net margin was 18.5% versus 14.5%. For the six-month periods, gross margin was approximately 88.6% versus 88.2%, operating margin 22.6% versus 17.3%, and net margin 19.7% versus 14.3%.
- Q2 revenue increased 12% year over year, driven by 12% growth in product and maintenance revenue; services revenue rose 6%. Six-month revenue also grew 12%, while services declined 2%.
- Q2 product and maintenance revenue was $548.0 million; services revenue was $32.4 million. Digital IC Design and Signoff represented 31% of product and maintenance revenue, Custom IC Design and Simulation 26%, Functional Verification 22%, IP 11%, and System Interconnect and Analysis 10%.
- Cash and cash equivalents were $633.4 million at June 29, up $100.1 million from year-end 2018. Net working capital was $369.1 million. Current assets were $979.2 million and current liabilities $610.2 million.
- Total debt carrying value was $345.7 million, principally the 4.375% senior notes due 2024. No revolving-credit borrowings were outstanding at quarter-end, compared with $100 million at December 29, 2018. The company reported covenant compliance.
- Six-month investing cash outflow was $61.7 million, including $33.7 million of non-marketable investment purchases and $30.6 million of capital expenditures. Financing cash outflow was $269.0 million, including $156.1 million of share repurchases and net repayment of revolving-credit borrowings.
Material changes and management commentary
- Management attributed product and maintenance growth to customer investment in complex designs, including machine learning, 5G, aerospace and defense, automotive, and cloud data-center markets. Revenue increased in every reported geography; China revenue rose 68% in Q2 and 48% for the first half.
- Operating income improved as revenue growth outpaced expense growth. R&D and marketing and sales spending increased, principally due to hiring and investment in technical sales support. Hardware-related costs also rose with higher emulation and prototyping sales.
- China revenue faces export-control exposure: during Q2, U.S. Entity List restrictions limited the company’s ability to provide products, maintenance or support to certain customers. Cadence expects China revenue in the second half of fiscal 2019 to be lower than in the first half.
- Approximately $2.8 billion of contracted, unsatisfied performance obligations remained at June 29; the company expected to recognize about 60% over the next 12 months. This is not a forecast of total future revenue.
Outlook, risks and unusual items
- Management expected 85%–90% of fiscal 2019 revenue to be recognized over time. It expected marketing and sales and R&D expenses to increase during the rest of fiscal 2019, primarily due to additional hiring, and forecast a fiscal 2019 effective tax rate of approximately 12%.
- Management stated existing cash, operating cash flows and available revolving-credit capacity should meet working-capital and other capital and liquidity needs, including acquisitions and repurchases, for at least 12 months. Approximately 53% of cash was held by foreign subsidiaries.
- Key risks include export restrictions and international trade uncertainty; cyclicality and customer spending in semiconductor and electronics markets; competition and pricing pressure; technology changes; hardware delivery and sole-supplier risks; foreign-exchange and tax exposure; and execution and integration risks associated with acquisitions and strategic investments.
- Cadence adopted the new lease standard in fiscal 2019, recognizing approximately $80 million of additional lease assets and liabilities at adoption, with no impact on beginning retained earnings, operations or cash flows. Balance-sheet comparisons are therefore not fully comparable.
- The filing describes ordinary-course legal disputes and contingencies but does not provide a clear quantified estimate of potential losses. Restructuring estimates were revised, producing approximately $1.0 million of credits during the first half.
- The Board authorized an additional $500 million of repurchases in February 2019; approximately $519 million remained available at quarter-end. Repurchase timing and amounts remain subject to business and market conditions and other factors.
Important facts for investors to verify
- Whether Entity List restrictions, including any licensing developments, materially affect China sales, customer support, collections or second-half results.
- Whether strong revenue growth and margin improvement continue, particularly given higher R&D and sales investment and the delivery-sensitive hardware and IP businesses.
- Whether cash generation, foreign-held cash and available credit remain adequate alongside repurchases, strategic investments and debt obligations.
- Whether the approximately $2.8 billion of remaining performance obligations convert to revenue on the expected schedule, and how much is subject to delivery or customer-demand changes.
- Whether the estimated fiscal 2019 tax rate and expected expense trajectory remain consistent with actual results.