Press release

Cadence Reports Third Quarter 2020 Financial Results

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Cadence Design Systems, Inc. (Nasdaq: CDNS) today announced results for the third quarter of 2020.

Cadence reported third quarter 2020 revenue of $667 million, compared to revenue of $580 million reported for the same period in 2019. On a GAAP basis, Cadence achieved operating margin of 25 percent and recognized net income of $162 million, or $0.58 per share on a diluted basis, in the third quarter of 2020, compared to operating margin of 21 percent and net income of $102 million, or $0.36 per share on a diluted basis, for the same period in 2019.

Using the non-GAAP measure defined below, operating margin for the third quarter of 2020 was 36 percent and net income was $197 million, or $0.70 per share on a diluted basis, compared to operating margin of 32 percent and net income of $153 million, or $0.54 per share on a diluted basis, for the same period in 2019.

“Cadence delivered outstanding results in the third quarter by continuing to innovate and delight customers,” said Lip-Bu Tan, chief executive officer. “System and semiconductor design activity remains strong and our Intelligent System Design strategy uniquely positions us to enable our customers to realize their cutting-edge designs. In the third quarter we expanded the scale and scope of our relationship with a global marquee company, and I am especially pleased with the momentum of our new systems products.”

“We are raising our 2020 revenue and earnings guidance primarily due to higher second half hardware and IP sales activity in China and continuing progress in our System Design and Analysis business,” said John Wall, senior vice president and chief financial officer.

During the third quarter of 2020, Cadence repurchased $75 million of its common stock and the Board of Directors has increased the previously announced authorization by an additional $750 million. As of the end of the third quarter of 2020, approximately $869 million remained available under the authorization to repurchase Cadence common stock. The actual timing and amount of repurchases will be subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors.

CFO Commentary

Commentary on the third quarter 2020 financial results by John Wall, senior vice president and chief financial officer, is available at www.cadence.com/cadence/investor_relations.

Business Outlook

For the fourth quarter of 2020, the company expects total revenue in the range of $720 million to $740 million. Fourth quarter GAAP operating margin is expected to be in the range of 23 percent to 24 percent and GAAP net income per diluted share is expected to be in the range of $0.48 to $0.52. Using the non-GAAP measure defined below, operating margin is expected to be in the range of 34 percent to 35 percent and net income per diluted share is expected to be in the range of $0.72 to $0.76.

For 2020, the company expects total revenue in the range of $2.643 billion to $2.663 billion. On a GAAP basis, operating margin is expected to be in the range of 23 percent to 24 percent and GAAP net income per diluted share for 2020 is expected to be in the range of $1.97 to $2.01. Using the non-GAAP measure defined below, operating margin for 2020 is expected to be in the range of 34 percent to 35 percent and net income per diluted share for 2020 is expected to be in the range of $2.68 to $2.72.

Our fiscal years are 52- or 53-week periods ending on the Saturday closest to December 31. Fiscal 2020 will be a 53-week fiscal year, with an additional week in our fourth quarter of 2020. Fiscal 2019 was a 52-week fiscal year.

A schedule showing a reconciliation of the business outlook from GAAP operating margin, GAAP net income and diluted net income per share to non-GAAP operating margin and non-GAAP net income and diluted net income per share is included in this release.

Audio Webcast Scheduled

Lip-Bu Tan, chief executive officer, and John Wall, senior vice president and chief financial officer, will host the third quarter 2020 financial results audio webcast today, October 19, 2020, at 2 p.m. (Pacific) / 5 p.m. (Eastern). Attendees are asked to register at the website at least 10 minutes prior to the scheduled webcast. An archive of the webcast will be available starting October 19, 2020 at 5 p.m. (Pacific) and ending December 18, 2020 at 5 p.m. (Pacific). Webcast access is available at www.cadence.com/cadence/investor_relations.

About Cadence

Cadence is a pivotal leader in electronic design, building upon more than 30 years of computational software expertise. The company applies its underlying Intelligent System Design strategy to deliver software, hardware and IP that turn design concepts into reality. Cadence customers are the world’s most innovative companies, delivering extraordinary electronic products from chips to boards to systems for the most dynamic market applications including consumer, hyperscale computing, 5G communications, automotive, aerospace, industrial and healthcare. For six years in a row, Fortune Magazine has named Cadence one of the 100 Best Companies to Work For. Learn more at cadence.com.

© 2020 Cadence Design Systems, Inc. All rights reserved worldwide. Cadence, the Cadence logo and the other Cadence marks found at www.cadence.com/go/trademarks are trademarks or registered trademarks of Cadence Design Systems, Inc. All other trademarks are the property of their respective owners.

This document includes forward-looking statements which are based on current expectations and preliminary assumptions that are subject to factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and other factors, many of which are outside Cadence’s control, including, among others: (i) Cadence’s ability to compete successfully in the highly competitive industries in which it operates; (ii) the success of Cadence’s efforts to maintain and improve operational efficiency and growth; (iii) the mix of products and services sold, the timing of orders and the ability to develop, install or deliver Cadence’s products or services; (iv) change in customer demands that could result in delays in purchases, development, installations or deliveries of Cadence’s products or services, including those resulting from consolidation, restructurings and other operational efficiency improvements of Cadence’s customers; (v) economic and industry conditions, including that of the semiconductor and electronics industries, government regulations and trade restrictions; (vi) capital expenditure requirements, legislative or regulatory requirements, changes in tax laws, interest rates, currency exchange rate fluctuations and Cadence’s ability to access capital and debt markets; (vii) the acquisition of other companies or technologies or the failure to successfully integrate and operate them; (viii) events that affect cash flow, liquidity, or reserves, or settlement assumptions Cadence may take from time to time with respect to accounts receivable, taxes and tax examinations, litigation or other matters; (ix) the effects of any litigation or other proceedings to which Cadence is or may become a party; and (x) the duration, severity and effects of the COVID-19 pandemic and containment measures on Cadence, its employees, and its suppliers and customers, which may also have the effect of heightening the other risks described in this paragraph. In addition, the timing and amount of Cadence’s repurchase of its common stock under the authorizations will be subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors.

For a detailed discussion of these and other cautionary statements related to Cadence’s business, please refer to Cadence’s filings with the U.S. Securities and Exchange Commission, which include Cadence’s most recent reports on Form 10-K and Form 10-Q, including Cadence’s future filings.

GAAP to Non-GAAP Reconciliation

Non-GAAP financial measures should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with generally accepted accounting principles, or GAAP. Investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with their most directly comparable GAAP financial results. Investors are also encouraged to look at the GAAP results as the best measure of financial performance.

To supplement Cadence’s financial results presented on a GAAP basis, Cadence management uses non-GAAP measures that it believes are helpful in understanding Cadence’s performance. One such measure is non-GAAP net income, which is a financial measure not calculated under GAAP. Non-GAAP net income is calculated by Cadence management by taking GAAP net income and excluding, as applicable, amortization of intangible assets, stock-based compensation expense, acquisition and integration-related costs including retention expenses, investment gains or losses, income or expenses related to Cadence’s non-qualified deferred compensation plan, restructuring, executive severance and other significant items not directly related to Cadence’s core business operations, and the income tax effect of non-GAAP pre-tax adjustments.

Cadence management uses non-GAAP net income because it excludes items that are generally not directly related to the performance of Cadence’s core business operations and therefore provides supplemental information to Cadence management and investors regarding the performance of the business operations, facilitates comparisons to the historical operating results and allows the review of Cadence’s business from the same perspective as Cadence management, including forecasting and budgeting.

The following tables reconcile the specific items excluded from GAAP operating margin, GAAP net income and GAAP net income per diluted share in the calculation of non-GAAP operating margin, non-GAAP net income and non-GAAP net income per diluted share for the periods shown below:

Operating Margin Reconciliation

 

Three Months Ended

 

 

September 26, 2020

 

September 28, 2019

 

 

(unaudited)

GAAP operating margin as a percent of total revenue

 

25%

 

21%

Reconciling items to non-GAAP operating margin as a percent of total revenue:

 

 

 

 

Amortization of acquired intangibles

 

3%

 

2%

Stock-based compensation expense

 

7%

 

9%

Non-qualified deferred compensation expenses

 

0%

 

0%

Restructuring and other charges (credits)

 

0%

 

0%

Acquisition and integration-related costs

 

1%

 

0%

Non-GAAP operating margin as a percent of total revenue

 

36%

 

32%

Net Income Reconciliation

 

Three Months Ended

 

 

September 26, 2020

 

September 28, 2019

 

 

(unaudited)

(in thousands)

 

 

 

 

Net income on a GAAP basis

 

$

161,630

 

 

$

101,514

 

Amortization of acquired intangibles

 

 

15,885

 

 

 

12,799

 

Stock-based compensation expense

 

 

45,334

 

 

 

48,279

 

Non-qualified deferred compensation expenses

 

 

1,779

 

 

 

52

 

Restructuring and other charges (credits)

 

 

13

 

 

 

(186

)

Acquisition and integration-related costs

 

 

6,739

 

 

 

1,838

 

Other income or expense related to investments and non-qualified deferred compensation plan assets*

 

 

(876

)

 

 

2,344

 

Income tax effect of non-GAAP adjustments

 

 

(33,451

)

 

 

(13,899

)

Net income on a non-GAAP basis

 

$

197,053

 

 

$

152,741

 

*

Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

Diluted Net Income Per Share Reconciliation

 

Three Months Ended

 

 

September 26, 2020

 

September 28, 2019

 

 

(unaudited)

(in thousands, except per share data)

 

 

 

 

Diluted net income per share on a GAAP basis

 

$

0.58

 

 

$

0.36

 

Amortization of acquired intangibles

 

 

0.06

 

 

 

0.04

 

Stock-based compensation expense

 

 

0.16

 

 

 

0.17

 

Non-qualified deferred compensation expenses

 

 

 

 

 

 

Restructuring and other charges (credits)

 

 

 

 

 

 

Acquisition and integration-related costs

 

 

0.02

 

 

 

0.01

 

Other income or expense related to investments and non-qualified deferred compensation plan assets*

 

 

 

 

 

0.01

 

Income tax effect of non-GAAP adjustments

 

 

(0.12

)

 

 

(0.05

)

Diluted net income per share on a non-GAAP basis

 

$

0.70

 

 

$

0.54

 

Shares used in calculation of diluted net income per share — GAAP**

 

 

280,024

 

 

 

280,666

 

Shares used in calculation of diluted net income per share — non-GAAP**

 

 

280,024

 

 

 

280,666

 

*

Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

**

Shares used in the calculation of GAAP net income per share are expected to be the same as shares used in the calculation of non-GAAP net income per share, except when the company reports a GAAP net loss and non-GAAP net income, or GAAP net income and a non-GAAP net loss.

Cadence expects that its corporate representatives will meet privately during the quarter with investors, the media, investment analysts and others. At these meetings, Cadence may reiterate the business outlook published in this press release. At the same time, Cadence will keep this press release, including the business outlook, publicly available on its website.

Prior to the start of the Quiet Period (described below), the public may continue to rely on the business outlook contained herein as still being Cadence’s current expectations on matters covered unless Cadence publishes a notice stating otherwise.

Beginning December 18, 2020, Cadence will observe a Quiet Period during which the business outlook as provided in this press release and the most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q no longer constitute Cadence’s current expectations. During the Quiet Period, the business outlook in these documents should be considered historical, speaking as of prior to the Quiet Period only and not subject to any update by Cadence. During the Quiet Period, Cadence’s representatives will not comment on Cadence’s business outlook, financial results or expectations. The Quiet Period will extend until Cadence’s fourth quarter 2020 earnings release is published, which is currently scheduled for February 22, 2021.

Cadence Design Systems, Inc.
Condensed Consolidated Balance Sheets
September 26, 2020 and December 28, 2019
(In thousands)
(Unaudited)
 
September 26, 2020 December 28, 2019
 
Current assets:
Cash and cash equivalents

$

1,306,564

$

705,210

Receivables, net

 

300,413

 

304,546

Inventories

 

47,979

 

55,802

Prepaid expenses and other

 

81,526

 

103,785

Total current assets

 

1,736,482

 

1,169,343

 
Property, plant and equipment, net

 

288,163

 

275,855

Goodwill

 

780,842

 

661,856

Acquired intangibles, net

 

227,753

 

172,375

Deferred taxes

 

722,656

 

732,367

Other assets

 

384,256

 

345,429

Total assets

$

4,140,152

$

3,357,225

 
Current liabilities:
Revolving credit facility

$

350,000

$

Accounts payable and accrued liabilities

 

290,886

 

316,908

Current portion of deferred revenue

 

477,003

 

355,483

Total current liabilities

 

1,117,889

 

672,391

 
Long-term liabilities:
Long-term portion of deferred revenue

 

84,646

 

73,400

Long-term debt

 

346,584

 

346,019

Other long-term liabilities

 

195,315

 

162,521

Total long-term liabilities

 

626,545

 

581,940

 
Stockholders’ equity

 

2,395,718

 

2,102,894

Total liabilities and stockholders’ equity

$

4,140,152

$

3,357,225

Cadence Design Systems, Inc.
Condensed Consolidated Income Statements
For the Three and Nine Months Ended September 26, 2020 and September 28, 2019
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended Nine Months Ended
September 26,
2020
September 28,
2019
September 26,
2020
September 28,
2019
 
Revenue:
Product and maintenance

$

630,329

 

$

548,105

 

$

1,813,384

 

$

1,639,651

 

Services

 

36,278

 

 

31,498

 

 

109,598

 

 

97,113

 

 
Total revenue

 

666,607

 

 

579,603

 

 

1,922,982

 

 

1,736,764

 

 
Costs and expenses:
Cost of product and maintenance

 

64,800

 

 

41,715

 

 

175,915

 

 

135,625

 

Cost of services

 

17,484

 

 

19,260

 

 

56,047

 

 

57,404

 

Marketing and sales

 

123,738

 

 

121,368

 

 

369,958

 

 

354,406

 

Research and development

 

250,934

 

 

240,542

 

 

743,423

 

 

700,566

 

General and administrative

 

35,928

 

 

33,204

 

 

105,161

 

 

97,713

 

Amortization of acquired intangibles

 

4,438

 

 

2,874

 

 

13,234

 

 

9,341

 

Restructuring and other charges (credits)

 

13

 

 

(186

)

 

(1,329

)

 

(1,188

)

 
Total costs and expenses

 

497,335

 

 

458,777

 

 

1,462,409

 

 

1,353,867

 

 
Income from operations

 

169,272

 

 

120,826

 

 

460,573

 

 

382,897

 

 
Interest expense

 

(5,325

)

 

(4,240

)

 

(15,876

)

 

(14,607

)

Other income, net

 

1,766

 

 

122

 

 

1,862

 

 

5,253

 

 
Income before provision for income taxes

 

165,713

 

 

116,708

 

 

446,559

 

 

373,543

 

 
Provision for income taxes

 

4,083

 

 

15,194

 

 

29,653

 

 

44,239

 

 
Net income

$

161,630

 

$

101,514

 

$

416,906

 

$

329,304

 

 
 
Net income per share – basic

$

0.59

 

$

0.37

 

$

1.52

 

$

1.21

 

 
Net income per share – diluted

$

0.58

 

$

0.36

 

$

1.49

 

$

1.17

 

 
Weighted average common shares outstanding – basic

 

273,996

 

 

273,329

 

 

273,633

 

 

273,224

 

 
Weighted average common shares outstanding – diluted

 

280,024

 

 

280,666

 

 

279,455

 

 

280,817

 

Cadence Design Systems, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 26, 2020 and September 28, 2019
(In thousands)
(Unaudited)
 

Nine Months Ended

September 26,

 

September 28,

2020

 

2019

 
Cash and cash equivalents at beginning of period

$

705,210

 

$

533,298

 

Cash flows from operating activities:
Net income

 

416,906

 

 

329,304

 

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization

 

107,019

 

 

91,400

 

Amortization of debt discount and fees

 

770

 

 

747

 

Stock-based compensation

 

138,723

 

 

134,789

 

Loss on investments, net

 

5,118

 

 

2,655

 

Deferred income taxes

 

(18,966

)

 

(10,938

)

Provisions for losses (recoveries) on receivables

 

1,087

 

 

(358

)

ROU asset amortization and change in operating lease liabilities

 

2,064

 

 

4,285

 

Other non-cash items

 

410

 

 

197

 

Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables

 

9,945

 

 

26,553

 

Inventories

 

6,376

 

 

(43,781

)

Prepaid expenses and other

 

22,769

 

 

38,703

 

Other assets

 

(21,287

)

 

3,554

 

Accounts payable and accrued liabilities

 

(30,455

)

 

(4,001

)

Deferred revenue

 

124,491

 

 

(6,968

)

Other long-term liabilities

 

4,430

 

 

4,163

 

Net cash provided by operating activities

 

769,400

 

 

570,304

 

 
Cash flows from investing activities:
Purchases of non-marketable investments

 

 

 

(33,717

)

Proceeds from the sale of non-marketable investments

 

 

 

2,952

 

Purchases of property, plant and equipment

 

(63,745

)

 

(47,527

)

Cash paid in business combinations, net of cash acquired

 

(197,562

)

 

(338

)

Net cash used for investing activities

 

(261,307

)

 

(78,630

)

 
Cash flows from financing activities:
Proceeds from revolving credit facility

 

350,000

 

 

150,000

 

Payment on revolving credit facility

 

 

 

(250,000

)

Proceeds from issuance of common stock

 

71,451

 

 

49,127

 

Stock received for payment of employee taxes on vesting of restricted stock

 

(85,515

)

 

(75,016

)

Payments for repurchases of common stock

 

(250,047

)

 

(231,131

)

Net cash provided by (used for) financing activities

 

85,889

 

 

(357,020

)

 
Effect of exchange rate changes on cash and cash equivalents

 

7,372

 

 

(12,736

)

 
Increase in cash and cash equivalents

 

601,354

 

 

121,918

 

 
Cash and cash equivalents at end of period

$

1,306,564

 

$

655,216

 

Cadence Design Systems, Inc.
(Unaudited)
 
Revenue Mix by Geography (% of Total Revenue)

2019

2020

GEOGRAPHY Q1 Q2 Q3 Q4 Year Q1 Q2 Q3
 
Americas

44%

42%

44%

46%

44%

43%

44%

42%

China

10%

12%

10%

9%

10%

13%

12%

17%

Other Asia

19%

19%

21%

20%

20%

18%

19%

19%

Europe, Middle East and Africa

18%

20%

18%

18%

18%

19%

18%

16%

Japan

9%

7%

7%

7%

8%

7%

7%

6%

Total

100%

100%

100%

100%

100%

100%

100%

100%

 
 
 
 
Revenue Mix by Product Category (% of Total Revenue)

2019

2020

PRODUCT CATEGORY Q1 Q2 Q3 Q4 Year Q1 Q2 Q3
 
Custom IC Design and Simulation

25%

26%

26%

25%

25%

25%

24%

24%

Digital IC Design and Signoff

30%

31%

30%

29%

30%

29%

28%

27%

Functional Verification, including Emulation and Prototyping Hardware

24%

22%

20%

24%

23%

23%

24%

23%

IP

12%

11%

15%

13%

13%

14%

14%

15%

System Design and Analysis

9%

10%

9%

9%

9%

9%

10%

11%

Total

100%

100%

100%

100%

100%

100%

100%

100%

Cadence Design Systems, Inc.
Impact of Non-GAAP Adjustments on Forward Looking Operating Margin
As of October 19, 2020
(Unaudited)
 
Three Months Ending Year Ending
January 2, 2021 January 2, 2021
Forecast Forecast
 
GAAP operating margin as a percent of total revenue

23% – 24%

 

23% – 24%

 

 

 

Reconciling items to non-GAAP operating margin as a percent of total revenue:

 

 

 

Amortization of acquired intangibles

2%

 

3%

Stock-based compensation expense

8%

 

7%

Acquisition and integration-related costs

1%

 

1%

 
Non-GAAP operating margin as a percent of total revenue†

34% – 35%

34% – 35%

The non-GAAP measures presented in the table above should not be considered a substitute for financial results and measures determined or calculated in accordance with GAAP.
Cadence Design Systems, Inc.
Impact of Non-GAAP Adjustments on Forward Looking Diluted Net Income Per Share
As of October 19, 2020
(Unaudited)
 
Three Months Ending Year Ending
January 2, 2021 January 2, 2021
Forecast Forecast
 
Diluted net income per share on a GAAP basis

$0.48 to $0.52

 

$1.97 to $2.01

 

 

 

Amortization of acquired intangibles

0.06

 

0.23

Stock-based compensation expense

0.21

 

0.70

Non-qualified deferred compensation expenses

 

Restructuring and other charges (credits)

 

Acquisition and integration-related costs

0.02

 

0.08

Other income or expense related to investments and non-qualified deferred compensation plan assets*

 

0.02

Income tax effect of non-GAAP adjustments

(0.05)

 

(0.32)

 
Diluted net income per share on a non-GAAP basis† $0.72 to $0.76 $2.68 to $2.72
 
 
Cadence Design Systems, Inc.
Impact of Non-GAAP Adjustments on Forward Looking Net Income
As of October 19, 2020
(Unaudited)
 
Three Months Ending Year Ending
January 2, 2021 January 2, 2021
($ in millions) Forecast Forecast
 
Net income on a GAAP basis $134 to $146 $551 to $563
 
Amortization of acquired intangibles

17

 

64

Stock-based compensation expense

58

 

196

Non-qualified deferred compensation expenses

 

1

Restructuring and other charges (credits)

 

(1)

Acquisition and integration-related costs

5

 

21

Other income or expense related to investments and non-qualified deferred compensation plan assets*

1

 

5

Income tax effect of non-GAAP adjustments

(14)

 

(88)

 
Net income on a non-GAAP basis† $201 to $213 $749 to $761

The non-GAAP measures presented in the table above should not be considered a substitute for financial results and measures determined or calculated in accordance with GAAP.
 

*

Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

CDNS-IR