CADENCE DESIGN SYSTEMS, INC. Third Quarter 2015 Financial Results Conference Call

CADENCE DESIGN SYSTEMS, INC. Third Quarter 2015 Financial Results Conference Call Remarks of Lip-Bu Tan, President and Chief Executive Officer, and Geoff Ribar, Senior Vice President and Chief Financial Officer October 26, 2015 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 third quarter 2015 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 December 18, 2015. 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 new CFO Commentary which was included in our 8-K filing today and is available on our Investor Relations website at cadence.com. Since we are providing the CFO Commentary, Geoff s prepared remarks will be streamlined and certain metrics, not discussed in today s call, including historical comparisons, will appear in the CFO commentary. 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. 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 October 26, 2015 for the quarter ended October 3, 2015, and related financial tables, can also be found in the investor relations portion of our website. Our 10-Q for the quarter ended October 3, 2015 was filed today. Now I ll turn the call over to Lip-Bu.

Remarks of Lip-Bu Tan, President and Chief Executive Officer Good afternoon everyone and thank you for joining us today. Cadence delivered strong operating results for Q3: Revenue was $434 million, up 8 percent year over year, Non-GAAP operating margin was 27 percent, above the high end of our guidance range, Non-GAAP EPS was 28 cents, also above the high end of our guidance range, and Operating cash flow was $87 million, which keeps us on track for our guidance of $360 million for the year. Let s first address the environment. Semiconductor business conditions remain challenging and lower semiconductor growth for the year now appears likely. As we reported last quarter, we remain mindful of the ongoing consolidation in our semiconductor customer base. While we do not expect a material impact on our business nearterm, consolidations could pose a challenge to industry growth over the next few years. Now let s turn to the Q3 highlights. Our System Design Enablement strategy continues to create new vertical opportunities. In Q3, we signed a significant contract with GE Aviation for IP, hardware and system-level design services; A biomedical technology company adopted our low-power mixed-signal design flow; We became the provider for the functional verification environment of a leading automotive chip supplier; and A global automotive supplier significantly expanded its contract for functional safety verification to reduce their effort for ISO 26262 compliance.

In the digital and sign-off space, the theme for this quarter was continued innovation, adoption, and proliferation of our new products. We expanded our digital footprint across multiple growing industries and across multiple process nodes. We now have over 30 customers using the Innovus implementation system for advanced-node production designs. This includes seven of the industry s Top Ten semiconductor companies, where our digital implementation position has increased significantly. In just three months since its launch, the Genus Synthesis Solution has already been purchased by multiple customers with many more in evaluation. Cypress Semiconductor is standardizing on a Cadence full digital flow and Spectre XPS for full custom verification for their next generation 40-nanometer mainstream products. Innovation continued with the introduction of another new digital product the Joules RTL Power Solution. Joules delivers time-based RTL power analysis 20 times faster than previous solutions. One of our most exciting announcements of the quarter was that the nano-electronics research institute IMEC and Cadence completed the tape-out of the world s first 5-nanometer test chip using EUV combined with 193 immersion lithography and quadruple patterning. In signoff, our Tempus Timing Solution surpassed 200 tape-outs, while the Voltus Power Solution and Quantus Extraction Solution continued to add new customers. Cadence earned a Partner of the Year award from TSMC for joint development of the 10- nanometer design infrastructure. IP is the fastest growing part of our business, and is one of the key tenets of our System Design Enablement strategy. The new Tensilica Vision P5 fourth-generation imaging DSP was introduced in Q3, with significantly improved capabilities and performance. The Vision P5 already has a major design win, and we believe that the vision market presents a huge opportunity, especially in mobile, ADAS, and IoT applications.

Design IP had its best quarter ever. Two major customers, a systems company and a semiconductor company, have adopted our 14/16-nanometer multi-protocol SERDES PHY for production designs. Ours is the first multi-protocol SERDES PHY at this node. We also released a broad portfolio of design IP for TSMC s 10-nanometer FinFET process for which we already have secured multiple design wins, and We received a TSMC Partner of the Year award for analog/mixed-signal IP. Now let s turn to system design and verification. Verification remains the fastest growing challenge for our customers who must deliver functionally correct products within ever tighter market windows. Addressing the verification problem requires a holistic approach with the integration of multiple complementary products, which we provide with our System Development Suite. The Suite had an all-time record quarter in Q3, driven by growth in North America and China. The exciting news for hardware is that we have begun shipping our next-generation emulation platform. Purchases of Palladium XP II, the existing platform, continued at a good pace in Q3 with strong sales to systems companies. Sales of Protium, our FGPA prototyping platform, ramped significantly in Q3. Formal verification had a very strong quarter. A large systems company renewed and increased its JasperGold capacity by 50%. This was our largest order ever for formal verification. As companies in China move towards the leading edge they are adopting formal technology, and in Q3 we had our largest formal verification order so far in China. Our system interconnect business, which includes PCB, Sigrity system analysis and IC packaging tools, again delivered strong growth with revenue up 9 percent year-over-year. Our Allegro System-in-Package technology now supports TSMC s Integrated Fan-Out packaging technology, also known as InFO. InFO advanced wafer-level packaging technology provides cost

effective system scaling to increase bandwidth, and will be an ideal solution for mobile and IoT applications. Now in summary: Cadence continued to deliver strong operating results in an environment that remains challenging, The System Design Enablement strategy is bringing more innovation and an increasing vertical focus to our business and solutions, In digital and signoff, we saw continued innovation, adoption, and proliferation of our new products, We are steadily introducing new products and gaining customers in IP, We have started shipping our next-generation emulation platform, And, our PCB, system analysis and packaging tools posted another strong quarter of growth. Now I will turn the call over to Geoff to review the financial results, and provide our outlook.

Remarks of Geoff Ribar, Senior Vice President and Chief Financial Officer Thanks Lip-Bu, and good afternoon everyone. As Alan mentioned at the start of our call, we introduced our CFO Commentary this quarter. As a result, I will be focusing on the quarter highlights and operational drivers in my prepared remarks. You will find all of the numbers in the CFO Commentary, which was included in our 8-K filing today and was also made available on our website. The CFO Commentary should be referenced in conjunction with both my remarks and the earnings press release issued today. Now for the Q3 results. As Lip-Bu discussed, the environment remains challenging, and the pace of customer consolidation seems to continue unabated. So I am especially proud of the way we have been able to achieve good results in this environment. Total revenue was 434 million dollars, up 8 percent year-over-year. Revenue exceeded our expectations due to the timing between Q3 and Q4 of certain transactions. As Lip-Bu said, we have begun shipping our next-generation emulation platform. We expect to begin recognizing revenue in Q4. Total costs and expenses on a non-gaap basis were 316 million dollars, up 9 percent year-over-year. As previously discussed, the growth in expenses this year reflects the investments we are making in R&D and technical customer support. Non-GAAP operating margin was 27 percent, unchanged from 2014. Results exceeded our expectations due to both higher revenue and better expense management. GAAP net income per share was 25 cents.

Non-GAAP net income per share was 28 cents, up 8 percent year-over-year. In addition to higher revenue and better expense management, lower than assumed interest expense contributed to better than expected non-gaap EPS. Operating cash flow was 87 million dollars, compared to 88 million for Q3 2014. Cash and short-term investments were 711 million dollars at quarter-end, compared to 744 million at the end of Q2. DSOs were 28 days. Our new stock repurchase program is off to a strong start. We repurchased 5.9 million shares of stock in Q3 for 120 million dollars. Our program target remains 1.2 billion dollars by the end of 2016 and we expect the pace of repurchases to pick-up in Q1 2016 after the final settlement in December of the warrants associated with the convertible debt we retired in June 2015. Financial Outlook Now let's turn to our outlook for the fourth quarter. We expect Q4 revenue to be in the range of 434 to 444 million dollars. This expectation takes into account the timing of certain transactions between Q3 to Q4. Also please recall that Q4 2014 included an extra 15 million dollars of revenue due to the extra week in our fiscal 2014. This is a good time to remind everyone that while our software and maintenance revenue is highly predictable, revenue for both hardware and IP is lumpier, which may contribute to increased variability in quarterly revenue as these businesses grow.

Non-GAAP operating margin is expected to be in the range of 27 to 28 percent. GAAP EPS for the fourth quarter is expected to be in the range of 20 to 22 cents. Non-GAAP EPS for the fourth quarter is expected in the range of 28 to 30 cents. Now for our fiscal 2015 outlook. Bookings are projected to be in the range of 1.87 to 1.93 billion dollars, unchanged from last quarter. Revenue is expected to be in the range of 1.695 to 1.705 billion dollars. The midpoint is unchanged from last quarter. Hardware revenue is expected to increase in 2015 compared to last year. Non-GAAP operating margin is expected to be in the range of approximately 26 to 27 percent. This is up from our prior expectation of 25 to 26 percent due to strong execution and expense management. As we discussed last quarter, remember as you think about next year that: Our investments in hiring for R&D and technical customer support have ramped throughout the year and will continue to do so in Q4. Hence we will exit 2015 at higher expense run rate than where we are at present. GAAP EPS is now expected to be in the range of 75 to 77 cents. Non-GAAP EPS is now expected in the range of $1.06 to $1.08, which is up 7 cents at the midpoint from our initial guidance for 2015 due to strong execution and expense management. We expect operating cash flow to be approximately 360 million dollars, unchanged from last quarter. You will find guidance for additional items in the CFO Commentary. So with that, operator, we'll now take questions.

Remarks of Lip-Bu Tan, President and Chief Executive Officer In closing, I am very proud to highlight that the Great Place to Work Institute has recognized Cadence and our hardworking employees by including Cadence in its 2015 list of the world s 25 Best Multinational Workplaces. I would like to thank all of our employees, shareholders, customers, and partners for their support. Thank you all for joining us this afternoon.