Cadence Design Systems, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are to the periods ended July 2, 2011. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions. Cadence develops and licenses electronic design automation software and intellectual property, sells or leases hardware, and provides maintenance and engineering services.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $326.5m | $283.3m | $642.3m | $549.4m |
| Operating income | $50.6m | $25.0m | $96.0m | $42.5m |
| Net income | $36.4m | $26.9m | $67.5m | $33.2m |
| Diluted EPS | $0.13 | $0.10 | $0.24 | $0.12 |
| Cash from operations | — | — | $128.2m | $125.8m |
- Q2 revenue increased 15% year over year; first-half revenue increased 17%. Product revenue rose 32% in Q2 and 33% in the first half, while maintenance revenue declined 7% and 4%, respectively. Services revenue was down 2% in Q2 and up 2% for the first half.
- Operating margin was approximately 15.5% in Q2 versus 8.8% a year earlier, and 14.9% for the first half versus 7.7%. Gross margin, calculated from reported revenue and product, services and maintenance costs, was approximately 84.8% versus 81.8% in Q2 and 85.0% versus 82.4% for the first half.
- Q2 operating expenses increased 10% to $222.6m; first-half expenses rose 11% to $442.8m. Higher employee-related costs, including variable compensation and added R&D staffing, contributed. First-half net income also reflects a substantially higher tax provision than in 2011, when non-recurring tax benefits were recorded.
- First-half operating cash flow was $128.2m, up $2.4m. Investing used $68.5m, including $49.1m of purchases of available-for-sale securities and $18.3m of capital expenditures. Financing provided $4.3m. Cash and cash equivalents increased $60.1m to $661.7m.
- At June 30, cash, cash equivalents and short-term investments totaled $713.0m, compared with $604.6m at December 31, 2011. Net working capital was $155.6m, up $107.0m.
- Outstanding convertible-note principal was approximately $494.7m: $350.0m of 2015 Notes, $144.5m of 2013 Notes and $0.2m of 2023 Notes. The 2015 Notes’ $301.3m net carrying liability was classified current because the notes were convertible during July 1–September 29, 2012 following satisfaction of a stock-price condition. Their associated hedge asset and embedded derivative liability were each valued at $219.2m. No holders had elected conversion as of June 30.
Changes, outlook and notable items
- Management attributed product growth chiefly to higher annualized software contract values, hardware sales and leases, and revenue from prior-period bookings. Approximately 90% of bookings were of a type generating recurring, ratable revenue. Shorter software agreement durations shift revenue allocation from maintenance to product.
- Management expected operating expenses to increase during the remainder of fiscal 2012 versus the comparable 2011 period, due to planned hiring and the Sigrity acquisition. It expected services costs to continue declining as services engineers were redeployed to internal R&D and presales work.
- Management estimated an approximately 10% annual effective tax rate for fiscal 2012, including anticipated effects related to Sigrity; actual tax expense may vary. It stated that existing liquidity and operating cash flows should meet working-capital and other liquidity needs for at least the next 12 months.
- On July 2, 2012, after quarter-end, Cadence acquired Sigrity, a signal- and power-integrity analysis software provider, for approximately $78.3m net of acquired cash. Approximately $14.2m is deferred and conditioned on employee retention; the remaining approximately $64.1m was paid in July and is subject to purchase-price allocation.
- The securities class-action settlement of $38.0m and related derivative litigation settlements received final court approval on April 23, 2012, with dismissal with prejudice. The company had agreed to the securities settlement without admitting wrongdoing; insurance carriers were to cover approximately $22.2m of the class-action settlement.
- Key risks include cyclical semiconductor and electronics demand, long sales cycles and ratable revenue recognition, competition and technology change, customer payment delays, international and foreign-exchange exposure, reliance on a sole supplier for certain hardware components, and acquisition execution. A significant portion of cash was held by foreign subsidiaries; repatriation of permanently reinvested earnings could create additional taxes.
Most important facts for investors to verify
- Whether product-revenue growth and the high proportion of ratable bookings continued, and how that mix affects reported revenue and deferred revenue.
- Whether the 2015 Notes were converted or remained outstanding after their July–September 2012 conversion window, and the resulting cash and liquidity effects.
- Whether the Sigrity purchase-price allocation, retention-related expense and integration plans affected subsequent results as expected.
- Whether operating expense growth, the estimated annual tax rate and the stated liquidity outlook were borne out in later filings.
- Whether customer demand, collections, foreign-currency movements, investment values and contingent acquisition payments materially changed the company’s risk or cash position.