Page 1 CADENCE DESIGN SYSTEMS, INC. First Quarter 2016 Financial Results Conference Call Remarks of Lip-Bu Tan, President and Chief Executive Officer, and Geoff Ribar, Senior Vice President and Chief Financial Officer April 25, 2016 2:00 P.M. Pacific Remarks of Alan Lindstrom, Group Director of Investor Relations Safe Harbor Statement Thank you operator, and welcome everyone to our first quarter 2016 earnings conference call. With me today are Lip-Bu Tan, President and CEO, and Geoff Ribar, Senior Vice President and CFO. The webcast of this call can be accessed through our website cadence.com and will be archived through June 17, 2016. A copy of today s prepared remarks will also be available on our website at the conclusion of today s call. Before we start I want to call your attention to our CFO Commentary which was included in our 8-K filing today and is available on our Investor Relations website at cadence.com. The CFO Commentary should be referenced in conjunction with both today s conference call remarks and the earnings press release issued today. Next, please note that today s discussion will contain forward-looking statements and that our actual results may differ materially from those expectations.
Page 2 For information on the factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission. These include Cadence s most recent reports on Form 10-K and Form 10-Q, including the company s future filings, and the cautionary comments regarding forward-looking statements in the earnings press release issued today. In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles, or GAAP, we will also present certain non-gaap financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to measure results using certain non-gaap financial measures. Investors and potential investors are encouraged to review the reconciliation of non-gaap financial measures with their most direct comparable GAAP financial results, which can be found in the quarterly earnings section of the investor relations portion of our website. Additionally, a copy of today s press release dated April 25, 2016 for the quarter ended April 2, 2016, and related financial tables, can also be found in the investor relations portion of our website. Now I ll turn the call over to Lip-Bu.
Page 3 Remarks of Lip-Bu Tan, President and Chief Executive Officer Good afternoon everyone and thank you for joining us today. Cadence delivered good operating results for Q1: Revenue was $448 million, up 9 percent year over year, Non-GAAP operating margin was 26 percent, Non-GAAP EPS was 28 cents, and Operating cash flow was $83 million. Looking at the environment, conditions have not changed significantly since last quarter. Semiconductor business conditions remain challenging, and we remain mindful of the ongoing consolidation in our semiconductor customer base. While we do not expect a material impact on our business in 2016, consolidations could pose a challenge to industry growth over the next few years. I will begin our Q1 business highlights with system design and verification. In February, I asked Anirudh Devgan, who has led the resurgence of our Digital & Signoff business, to expand his responsibilities to include leadership of our System & Verification Group. Anirudh will bring innovative ideas and drive to our next generation verification solutions. Cadence offers a holistic verification suite of connected solutions that are based on strong core engines and optimized for total verification throughput. Rapidly growing complexity and tight time-to-market requirements, make emulation more critical than ever for customers designing chips and systems for mobile, cloud, automotive and other verticals. Palladium Z1 sales ramped nicely as customers embraced its advanced enterprise-class capabilities, while demand for Palladium XP remained strong. As a result, Cadence achieved its best quarter ever for hardware revenue. While our primary innovation focus continues to be organic development, we will also consider strategic acquisitions that bring outstanding technology and talent.
Page 4 Recently, we announced that we had entered into a definitive agreement to acquire Rocketick Technologies. Rocketick brings pioneering technology and a talented team that will significantly increase the performance of our Incisive Enterprise Simulator using parallel computing on standard multicore servers. In the custom, analog, and mixed-signal design world, Virtuoso has been the de facto industry standard for the past two decades, used on the vast majority of designs with thousands of tape-outs. At our CDNLive Silicon Valley user conference earlier this month, we announced the nextgeneration Virtuoso platform including the Virtuoso Analog Design Environment Suite and the Virtuoso Layout Suite. - The new Virtuoso offers designers an average 10X improvement in performance and capacity across the platform. - The platform includes new technologies to address requirements of automotive safety, medical device and IoT applications. IP is an important component of our System Design Enablement strategy, and I am very pleased to announce that Pieter Vorenkamp has joined Cadence as senior vice president and general manager of our IP Group. Pieter comes to Cadence after 18 successful years with Broadcom, where he held roles of increasing responsibility, most recently as senior vice president of operations engineering. Pieter s rich experience will enable us to deliver high quality, differentiated products, as he drives the refinement of our IP strategy to focus on sustained and scalable growth. This quarter, I would like to highlight our Tensilica DSP cores, which are a very strategic component of our IP business. - In Q1, we had a key design win for 5G baseband DSPs with a leading mobile handset company. - And Spreadtrum licensed our Tensilica HiFi Audio/Voice DSP because of its ultra-low power capabilities.
Page 5 Now moving on to digital and signoff. The success and momentum we gained with our new flow has continued with strong adoption of the full flow in Q1, especially with customers in mobile, consumer, automotive and IoT segments. In Q1 a leading mobile chip company adopted our digital and signoff flow for its most demanding 10-nanometer projects. The Innovus implementation system added more than 15 new customers in Q1, while our Genus RTL synthesis solution, added more than 25 new customers. TSMC certified our digital and signoff tools for 7-nanometer design and 10-nanometer production, and Samsung Foundry certified our tools for its 14LPP process. Finally, we also announced today that Geoff Ribar has decided to retire from Cadence in March 2017. Geoff has been a great partner to me and the company over the past five and a half years. As an integral member of my leadership team he has made long-lasting contributions to the company. During Geoff s tenure, we have consistently met or exceeded our financial objectives, improved both our operating margin and cash flow, strengthened the balance sheet, and optimized our return on capital. Geoff has done an outstanding job of executing on the strategy and management philosophy that the Board and I have put in place, and has built a strong finance team. We have initiated a comprehensive search to identify our next CFO and Geoff is working with me in the search process. Once the new CFO is appointed, Geoff will work collaboratively on the transfer of responsibilities and will remain actively involved with us through his retirement date. While Geoff s retirement is bittersweet, we all congratulate him on a successful career as a CFO and wish him well in the next chapter of his professional life. In summary: Cadence once again delivered good results in a challenging environment;
Page 6 Our portfolio of solutions across chip, package, board, systems and software, and IP, guided by our System Design Enablement strategy, best position us to drive new business in verticals including automotive, aerospace, medical, and across IoT applications. Strong, broad-based demand for the new Palladium Z1 contributed to our best hardware revenue quarter ever; The innovative new Virtuoso platform strengthens and solidifies our position in custom, analog and mixed-signal design; and Our digital and sign-off solutions are proliferating with current customers and gaining new customers. Now I will turn the call over to Geoff to review the financial results, and provide our outlook.
Page 7 Remarks of Geoff Ribar, Senior Vice President and Chief Financial Officer Thanks Lip-Bu, and good afternoon everyone. It has been an honor for me to serve as CFO of Cadence for the past five and a half years. And I am extremely grateful for the support of my colleagues and our talented extended team. I will work with Lip-Bu in the search process, and I am fully committed to ensuring a smooth transition and look forward to maintaining our strong momentum throughout the transition process. I am confident that our strong CEO, executive team and finance team will continue to successfully execute on strategic initiatives and drive shareholder value, just as we have over these past five and a half years. Now moving onto our results, please note that the CFO Commentary that we posted on the investor section of our Company website should be referenced in conjunction with both my remarks and the earnings press release issued today. As Lip-Bu discussed, Q1 was a good quarter in what remains a challenging environment. Innovative new products and strong execution continue to distinguish us in the market. Total revenue was 448 million dollars, up 9 percent year-over-year. Non-GAAP operating margin was 26 percent, compared to 23 percent for Q1 2015. Timing of revenue and expenses contributed to a higher than expected margin for Q1. We are maintaining our revenue and margin outlook for the year. GAAP net income per share was 17 cents. Non-GAAP net income per share was 28 cents, up 22 percent over the year ago quarter.
Page 8 Operating cash flow was 83 million dollars. Cash and short-term investments were 907 million dollars compared to 711 million dollars at the end of Q4 2015. Recall that in January we entered into a 3-year, 300 million dollar term loan and drew 50 million dollars on our revolving credit agreement. At quarter-end, we had 700 million dollars of debt outstanding. Approximately 45 percent of cash and short-term investments were in the U.S. at quarter-end. DSOs were 32 days, down from 35 in Q4. We repurchased 11.6 million shares of stock for 240 million dollars, which represents a little less than 4 percent of shares outstanding. Before turning to our outlook, let me call your attention to the following items: As Lip-Bu mentioned, we believe Rocketick will help accelerate our innovation in functional verification to address the increasing challenges of system design complexity. This acquisition is expected to close in Q2, and is not expected to have a material impact on our 2016 financials. We have not disclosed the terms of the transaction. We undertook a restructuring during Q1 as part of our ongoing efforts to optimize resource allocation and operate the business efficiently and effectively. The restructuring charge was 14 million dollars. Now let s turn to our outlook.
Page 9 Financial Outlook There are no changes to our fiscal 2016 outlook for bookings, revenue, operating margin, Non-GAAP EPS or cash flow. We continue to expect: Bookings in the range of 2.0 to 2.1 billion dollars, which equates to 8 percent growth at the midpoint. Revenue in the range of 1.79 to 1.84 billion dollars, which would be 7 percent growth at the midpoint. Non-GAAP operating margin of approximately 26 percent. GAAP EPS in the range of 71 to 81 cents. Non-GAAP EPS of $1.15 to $1.25, and Operating cash flow in the range of 380 to 420 million dollars. For Q2 we expect: Revenue in the range of 445 to 455 million dollars. Non-GAAP operating margin of approximately 25 percent. GAAP EPS in the range of 17 to 19 cents, and Non-GAAP EPS in the range of 27 to 29 cents. Approximately 90 percent of revenue is expected to come from beginning backlog. You will find guidance for additional items in the CFO Commentary. So with that, operator, we ll now take questions.
Page 10 Remarks of Lip-Bu Tan, President and Chief Executive Officer In closing, I am proud that for the second year in a row FORTUNE Magazine has recognized Cadence and our hardworking employees by including Cadence in its list of the 100 Best Companies to Work For. I would like to thank all of our shareholders, customers and partners, board of directors, and employees for their continued support. Thank you all for joining us this afternoon.