Cadence Design Systems, Inc. — Q1 2019 10-Q
Reporting period: Three months ended March 30, 2019; comparisons are with the three months ended March 31, 2018. Unaudited results. Dollar amounts below are in millions unless stated otherwise.
Business context
Cadence provides software, hardware, services and reusable design intellectual property used to develop electronic systems and integrated circuits. It reports as one operating segment. Management attributed growth to customer investment in complex designs, including machine learning, 5G, workload-specific computing, aerospace and defense, and automotive applications.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $576.7 | $517.3 | +11% |
| Product and maintenance revenue | $543.5 | $480.6 | +13% |
| Services revenue | $33.2 | $36.7 | -9% |
| Income from operations | $128.4 | $85.8 | +50% |
| Net income | $120.6 | $72.9 | +65% |
| Diluted EPS | $0.43 | $0.26 | +$0.17 |
| Operating cash flow | $185.4 | $157.6 | +$27.8 |
Gross margin was approximately 87.8% in both periods. Operating margin increased to approximately 22.3% from 16.6%; net margin rose to approximately 20.9% from 14.1%. Operating expense increased 2% to $375.1 million, while expenses as a share of revenue fell to 65% from 71%. Other income was $5.2 million versus other expense of $0.7 million a year earlier; interest expense declined to $5.4 million from $7.0 million. The reported effective tax rate was 6.0%, including a $14.4 million stock-compensation tax benefit.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $538.9 million at March 30, 2019, up $5.6 million from year-end. Approximately 84% was held by foreign subsidiaries.
- Net working capital was $286.5 million, up $44.4 million from December 29, 2018. Current assets were $917.9 million and current liabilities $631.4 million.
- Total debt carrying value was $395.5 million: $50.0 million under the revolving facility and $345.5 million carrying value for the $350 million 2024 Notes. Cash exceeded debt by approximately $143.4 million, before lease obligations. The company reported compliance with debt covenants.
- Operating cash flow was $185.4 million; capital expenditures were $15.3 million, implying operating cash flow less capital expenditures of approximately $170.1 million. Investing activities used $46.0 million, including $33.7 million for non-marketable investments.
- Financing activities used $134.1 million, including $81.1 million of share repurchases. The board authorized an additional $500 million repurchase in February; approximately $594 million remained authorized at quarter-end.
- Deferred revenue was $397.1 million. Contracted unsatisfied performance obligations were approximately $2.8 billion, with about 60% expected to be recognized over the next 12 months.
Outlook, commentary and risks
- 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, citing hiring, customer support needs and technology investment.
- Management expected a fiscal 2019 effective tax rate of approximately 12%; quarterly rates may vary, including due to stock-based compensation tax effects.
- Management stated that cash, operating cash generation and available revolving-credit borrowings should meet working-capital and other capital needs, including acquisitions and repurchases, for at least 12 months.
- No specific full-year revenue or earnings guidance is provided in the filing text.
- Key disclosed risks include cyclicality and uncertain spending in semiconductor and electronics markets; international trade restrictions and geopolitical developments; competition and pricing pressure; delivery and supply risks for hardware and IP; foreign-exchange and tax-rate variability; customer consolidation; and cybersecurity, intellectual-property and litigation exposure. Litigation is described as arising in the ordinary course; the filing does not provide a clear quantified aggregate loss estimate.
- Cadence adopted lease accounting Topic 842 in fiscal 2019, recording approximately $80 million of additional lease assets and liabilities at adoption without impact on opening retained earnings, operating results or cash flows. The March 30 balance sheet includes $105.1 million of operating lease liabilities.
Most important facts for investors to verify
- Whether product and maintenance growth and the $2.8 billion performance-obligation balance convert to revenue as expected, particularly given hardware/IP delivery timing.
- Whether rising sales, R&D and technical-support investment sustains growth without reversing the quarter’s margin improvement.
- Cash availability and repurchase capacity, considering that 84% of cash was held abroad, debt covenants apply, and repurchases used $81.1 million in the quarter.
- The sustainability of the low quarterly tax rate relative to management’s approximately 12% full-year expectation.
- Exposure to semiconductor-industry conditions, trade restrictions, foreign currencies, hardware suppliers and unquantified litigation or other contingencies.