Cadence Design Systems, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparative periods ended July 2, 2022. The unaudited statements reflect the company’s calendar-year fiscal schedule adopted in 2023.
Business context and financial performance
Cadence sells electronic design software, hardware and intellectual property, plus related services, to customers developing integrated circuits and electronic systems. Management reports one operating segment. Approximately 85% of annual revenue is characterized as recurring.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $976.6 million | $857.5 million | $1,998.3 million | $1,759.3 million |
| Operating income | $299.3 million | $282.9 million | $621.8 million | $601.8 million |
| Net income | $221.1 million | $186.9 million | $462.9 million | $422.3 million |
| Diluted EPS | $0.81 | $0.68 | $1.70 | $1.53 |
| Operating margin | 31% | 33% | 31% | 34% |
| Operating cash flow | Not separately presented | Not separately presented | $681.2 million | $661.1 million |
Q2 revenue increased 14% year over year, led by product and maintenance revenue (+15%); services revenue declined 3%. First-half revenue also rose 14%. China revenue grew 54% in Q2 and 39% for the first half, primarily on demand for emulation and prototyping hardware. First-half R&D expense increased 22%, contributing to operating-margin compression.
Cash, debt and liquidity
- Cash and cash equivalents were $873.9 million at June 30, down $8.4 million from year-end 2022; net working capital was $446.8 million.
- First-half operating cash flow was $681.2 million; investing cash outflow was $129.7 million and financing cash outflow was $551.6 million. Cash declined by $8.4 million over the period.
- Debt had a $650 million principal balance: $350 million of 4.375% notes due October 2024 and a $300 million variable-rate term loan due September 2025. The term loan rate was 6.08% at quarter-end. No revolving credit facility borrowings remained outstanding.
- Management said cash balances and expected cash flows would be sufficient for operating and capital needs for at least the next 12 months. Approximately 73% of cash was held by foreign subsidiaries.
- Cadence repurchased $390.1 million of shares in the first half, and reported $627 million of remaining authorization. The June $200 million accelerated repurchase included a $60 million equity-linked amount expected to settle in Q3.
Material changes, outlook and unusual items
- Operating margin fell to 31% from 33% in Q2 and to 31% from 34% for the first half. Management attributed the decline to product and service mix and acquisition-related expenses that exceeded incremental revenue.
- Management cited sustained customer investment in complex designs and greater production capacity for emulation and prototyping hardware. Up-front revenue rose to 15% of Q2 revenue from 14%; first-half recurring revenue was 82%, versus 84%.
- Contracted, unsatisfied performance obligations were approximately $5.3 billion, including $0.4 billion of non-cancelable commitments. The company expected to recognize 57% of the amount excluding those commitments over the next 12 months. This is not a revenue forecast.
- Management expected a fiscal 2023 effective tax rate of approximately 26%; no specific revenue or earnings guidance is provided in the supplied filing text.
- On July 19, 2023, Cadence agreed to acquire Rambus’s SerDes and memory interface PHY IP business for approximately $110 million, subject to adjustments and closing conditions. The transaction was expected to close in Q3 and be funded with cash and short-term borrowings.
- Cadence acquired Pulsic in May for approximately $56.1 million net of cash acquired; purchase accounting recorded $47.4 million of goodwill. Certain employee-related consideration is expected to be expensed through Q2 2025.
Risks and contingencies
- Management identified expanded export controls, including restrictions related to advanced-node IC production in China, geopolitical conflict, foreign-exchange volatility and higher interest rates as relevant uncertainties. It currently expects the trade-control impact to be limited.
- Bell Semiconductor patent litigation includes claims against Cadence customers and requests for defense or indemnification. Cadence is not named as a defendant or respondent in those actions, has offered to defend some customers, and says it cannot estimate the potential impact. A related Cadence declaratory-judgment case was set for trial in January 2024.
- Cadence paid an approximately $49 million Korean tax assessment in January 2023 while contesting it; it recorded no reserve because management does not believe a loss is probable. Resolution may take one to eight years.
- Variable interest rates expose the term loan and any future revolving borrowings to higher interest expense. Cadence reported compliance with debt covenants at June 30.
Investor verification points
- Verify the durability and composition of growth, especially the contribution of hardware deliveries and China, and monitor recurring-revenue trends.
- Track operating-margin recovery against rising R&D and sales investment, acquisition costs and stock-based compensation.
- Review cash conversion, overseas cash availability, repurchases and the funding and closing terms of the Rambus transaction.
- Monitor the October 2024 notes maturity, variable-rate debt costs, the Korean tax dispute and Bell Semi-related customer indemnification exposure.