Cadence Design Systems, Inc. — Q3 2018 Form 10-Q
Reporting period: Fiscal quarter ended September 29, 2018; results are also presented for the nine months ended that date. Cadence provides electronic design automation and system design enablement software, hardware, services and intellectual property (IP). The filing is unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $532.5 million | $485.4 million | $1,568.2 million | $1,441.3 million |
| Operating income | $103.6 million | $80.4 million | $282.5 million | $242.7 million |
| Net income | $99.3 million | $81.2 million | $247.4 million | $218.5 million |
| Diluted EPS | $0.35 | $0.29 | $0.88 | $0.78 |
| Operating margin | 19.5% | 16.6% | 18.0% | 16.8% |
- Q3 revenue grew 10%; product and maintenance revenue rose 10% and services revenue rose 10%. For the nine months, revenue increased 9%.
- Q3 net income increased about 22%. Other income was $1.1 million versus $12.4 million in Q3 2017, partially offsetting stronger operating income.
- Operating cash flow for the first nine months was $472.9 million, up from $343.9 million. Capital expenditures were $41.8 million.
- Cash, cash equivalents and short-term investments totaled $550.0 million at quarter-end, down from $692.5 million at December 30, 2017. Net working capital was $347.1 million, versus $337.6 million.
- Debt carrying value was $345.1 million, compared with $729.4 million at year-end. Cadence prepaid its $300 million term loan in July and had no revolving-credit borrowings; $350 million was available under the facility.
Changes, outlook and other notable items
- Revenue growth reflected expansion in software, emulation and prototyping hardware, and IP, particularly in North America and Asia. Asia revenue grew 19% in Q3; Japan revenue declined 4%.
- Cadence adopted Topic 606 in fiscal 2018 using the modified retrospective method. Prior periods were not restated, so comparisons are not fully like-for-like. Management said Topic 606 is expected to make fiscal 2018 revenue slightly lower than under prior accounting. Adoption increased opening retained earnings by $91.6 million, net of tax. For the first nine months, Topic 606 reduced reported net income by $3.9 million compared with prior-GAAP accounting.
- Contracted unsatisfied performance obligations were approximately $2.4 billion; Cadence expects to recognize about 60% over the next 12 months. Approximately 90% of revenue is recognized over time.
- Management expects fiscal 2018 effective tax rate of approximately 10%, subject to further Tax Act analysis; it expected to complete Tax Act accounting in Q4. Research and development expense and stock-based compensation were expected to increase during the remainder of fiscal 2018. No specific revenue or EPS guidance is provided in the supplied filing text.
- Management said cash, operating cash generation and available revolving credit should cover working capital and other liquidity needs, including acquisitions and repurchases, for at least 12 months. About 75% of cash and short-term investments were held by foreign subsidiaries.
- Cash used in financing was $560.3 million, primarily reflecting the term-loan prepayment, $150.0 million of share repurchases and repayment of $85.0 million on the revolving facility. $275 million remained under the $525 million repurchase authorization.
- Key risks include cyclical semiconductor and electronics demand, customer design-project spending, competition and pricing, timely hardware/IP deliveries and sole-source suppliers, technology execution, foreign exchange and international trade, tax-law uncertainty, cybersecurity, and litigation. The company reported routine legal matters but no specific material loss amount; it was in compliance with debt covenants.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Assess growth and margins in light of the Topic 606 accounting change and the non-restated prior-year comparison.
- Review the quality and timing of operating cash flow, including receivables, deferred revenue and the large share of cash held outside the United States.
- Monitor execution of the $2.4 billion remaining performance obligations and the concentration of revenue recognized over time.
- Track R&D and stock-based compensation growth, the final Tax Act accounting and actual effective tax rates.
- Evaluate debt, repurchase activity and liquidity alongside semiconductor-industry, foreign-exchange, trade and hardware-supply risks.