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| CDNS > SEC Filings for CDNS > Form 10-Q on 25-Oct-2012 | All Recent SEC Filings |
25-Oct-2012
Quarterly Report
Overview
We develop software, hardware and intellectual property which are used by
semiconductor and electronic system customers to develop and design integrated
circuits and electronic devices. We license our software, and two categories of
intellectual property, or IP, commonly referred to as verification IP, or VIP,
and Design IP. In addition, we sell and lease hardware technology. We provide
maintenance for our product offerings and provide engineering services related
to methodology, education, and hosted design solutions which help customers
manage and accelerate their electronics product development processes.
Substantially all of our revenue is generated from integrated circuit, or IC,
and electronics systems manufacturers and designers and is dependent upon their
commencement of new design projects. As a result, our revenue is significantly
influenced by our customers' business outlook and investment in the introduction
of new products and the improvement of existing products.
In order to be competitive and profitable in the price-sensitive markets they
serve, our customers demand high levels of productivity from their design teams,
better predictability in their development schedules and high quality products.
Semiconductor and electronics systems companies are responding to demand for
increased functionality and miniaturization by combining subsystems - such as
radio frequency, or RF, wireless communication, video signal processing and
microprocessors - either onto a single silicon chip, creating a system-on-chip,
or SoC, or by combining multiple chips into a single chip package in a format
referred to as system-in-package, or SiP. The trend toward subsystem integration
has required these chip makers to find solutions to challenges previously
addressed by system companies, such as verifying system-level functionality and
hardware-software interoperability.
Our offerings address many of the challenges associated with developing unique
silicon circuitry, integrating that circuitry with Design IP developed by us or
third parties to create SoCs, and combining ICs and SoCs with software to create
electronic systems. We provide our customers with the ability to address the
broad range of issues that arise at the silicon, SoC and system levels.
The most significant issues that our customers face in creating their products
include optimizing energy consumption, manufacturing microscopic circuitry,
verifying device functionality and achieving technical performance targets, all
while meeting aggressive cost requirements. Our semiconductor and systems
customers deliver a wide range of products in segments such as smart phones,
tablets, televisions, communications and internet infrastructure, and computing
platforms. Providers of EDA solutions must deliver products that address the
technical challenges while improving the productivity, predictability,
reliability and profitability of the design processes and products of their
customers.
Our products are engineered to improve our customers' design productivity and
design quality by providing a comprehensive set of EDA solutions and a
differentiated portfolio of Design IP and VIP. Product revenues include all fees
earned from granting licenses to use our software and IP, and from sales and
leases of our hardware products.
We combine our products and technologies into categories related to major design
activities:
• Digital IC Design;
• Functional Verification and Design IP;
• Custom IC Design;
• Design for Manufacturing, or DFM; and
• System Interconnect Design.
The major Cadence® design platforms are branded as Incisive® functional
verification, Encounter® digital IC design, Virtuoso® custom design and Allegro®
system interconnect design. Our functional verification offerings include VIP
products and are supplemented by our Design IP offerings. In addition, we
augment these platform product offerings with a set of DFM products that service
both the digital and custom IC design flows. On July 2, 2012, we acquired
Sigrity, Inc., or Sigrity, a provider of signal and power integrity analysis
tools for system, printed circuit board and IC package design. We are
incorporating the Sigrity technology into our Allegro product offering. We also
offer the Sigrity technology on a stand-alone basis.
The products and technologies included in these categories are combined with
services, ready-to-use packages of technologies assembled from our broad
portfolio and other associated components that provide comprehensive solutions
for low power, mixed signal and advanced-node designs, as well as popular
designs based on intellectual property owned and licensed by ARM Holdings, Plc.
These solutions and their constituent elements are marketed to users who
specialize in areas such as system design and verification, functional
verification, logic design, digital implementation, custom IC design and printed
circuit board, or PCB, and IC package and SiP design. We have identified certain
items that management uses as performance indicators to manage our business,
including revenue, certain elements of operating expenses and cash flow from
operations, and we describe these items further below under the heading "Results
of Operations" and "Liquidity and Capital Resources."
Critical Accounting Estimates
In preparing our Condensed Consolidated Financial Statements, we make
assumptions, judgments and estimates that can have a significant impact on our
revenue, operating income and net income, as well as on the value of certain
assets and liabilities on our Condensed Consolidated Balance Sheets. We base our
assumptions, judgments and estimates on historical experience and various other
factors that we believe to be reasonable under the circumstances. Actual results
could differ materially from these estimates under different assumptions or
conditions. At least quarterly, we evaluate our assumptions, judgments and
estimates and make changes accordingly. Historically, our assumptions, judgments
and estimates relative to our critical accounting estimates have not differed
materially from actual results. For further information about our critical
accounting estimates, see the discussion in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations, under the heading
"Critical Accounting Estimates" in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2011.
Results of Operations
Financial results for the three and nine months ended September 29, 2012, as
compared to the three and nine months ended October 1, 2011, reflect the
following:
• An increase in the combined value of our product and maintenance revenue,
primarily because of a general increase in the annualized values of
software contracts with our customers and an increase in the sale and
lease of our hardware products;
• An increase in employee-related costs, primarily consisting of costs related to hiring additional employees during the period and incremental costs related to our acquisition of Sigrity;
• An increase in variable compensation during the nine months ended September 29, 2012 as compared to the same period in 2011; and
• An income tax benefit in the three months ended September 29, 2012, primarily resulting from a release of valuation allowance against our deferred tax assets due to the acquisition of intangible assets held by Sigrity.
Revenue
We primarily generate revenue from licensing our EDA software and IP, selling or
leasing our hardware technology, providing maintenance for our software, IP and
hardware and providing engineering services. We principally use three software
and IP license types: subscription, term and perpetual.
The timing of our product revenue is significantly affected by the mix of
license types in the bookings executed in any given period and whether the
revenue for such bookings is recognized over multiple periods or up-front, upon
completion of delivery.
We seek to achieve a consistent mix of bookings with approximately 90% of the
aggregate value of our bookings of a type for which the revenue is recurring, or
ratable, in nature, and the remainder of the resulting revenue recognized
up-front, upon completion of delivery. Our ability to achieve this bookings mix
in any single fiscal quarter may be impacted by an increase in hardware sales
beyond our current expectations, because revenue for hardware sales is generally
recognized up-front in the quarter in which delivery is completed.
Approximately 90% of the aggregate value of our bookings during the three and
nine months ended September 29, 2012 and October 1, 2011 was of a type for which
the revenue is recurring, or ratable, in nature.
For an additional description of the impact of hardware sales on the anticipated
mix of bookings, our other license types and the timing of revenue recognition
for license transactions, see the discussion under the heading "Critical
Accounting Estimates - Revenue Recognition" in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" in our Form 10-K
for the fiscal year ended December 31, 2011.
Although we believe that pricing volatility has not generally been a material
component of the change in our revenue from period to period, we believe that
the amount of revenue recognized in future periods will depend on, among other
things, the:
• Competitiveness of our new technology; and
• Size, duration, timing, terms and type of:
• Contract renewals with existing customers;
• Additional sales to existing customers; and
• Sales to new customers.
Revenue by Period
The following table shows our revenue for the three months ended September 29,
2012 and October 1, 2011 and the change in revenue between periods:
Three Months Ended Change
September 29, October 1,
2012 2011 Amount Percentage
(In millions, except percentages)
Product $ 216.6 $ 164.0 $ 52.6 32 %
Services 28.4 29.1 (0.7 ) (2 )%
Maintenance 93.5 99.4 (5.9 ) (6 )%
Total revenue $ 338.5 $ 292.5 $ 46.0 16 %
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The following table shows our revenue for the nine months ended September 29, 2012 and October 1, 2011 and the change in revenue between periods:
Nine Months Ended Change
September 29, October 1,
2012 2011 Amount Percentage
(In millions, except percentages)
Product $ 614.9 $ 463.7 $ 151.2 33 %
Services 86.9 86.4 0.5 1 %
Maintenance 279.0 291.7 (12.7 ) (4 )%
Total revenue $ 980.8 $ 841.8 $ 139.0 17 %
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For software arrangements, we generally recognize revenue ratably over the
duration of the arrangement and such revenue is allocated between product and
maintenance revenue. As the duration decreases, the allocation to maintenance
revenue decreases and the allocation to product revenue increases. Combined,
product and maintenance revenue increased during the three and nine months ended
September 29, 2012, as compared to the three and nine months ended October 1,
2011, primarily because of increased business levels, an increase in revenue
related to the sale and lease of our hardware products and increased revenue
recognized from bookings in prior periods. Maintenance revenue decreased on a
standalone basis during the three and nine months ended September 29, 2012, as
compared to the three and nine months ended October 1, 2011, primarily because
of the increased allocation to product revenue due to the gradual decline in the
average duration of our time-based software license arrangements.
Revenue by Product Group
The following table shows the percentage of product and related maintenance
revenue contributed by each of our five product groups, and Services and other
for the past five consecutive quarters:
Three Months Ended
September 29, June 30, March 31, December 31, October 1,
2012 2012 2012 2011 2011
Functional Verification
and Design IP 30 % 33 % 30 % 32 % 30 %
Digital IC Design 23 % 22 % 23 % 21 % 22 %
Custom IC Design 24 % 22 % 23 % 23 % 23 %
System Interconnect 9 % 8 % 8 % 8 % 9 %
Design for Manufacturing 6 % 6 % 7 % 6 % 6 %
Services and other 8 % 9 % 9 % 10 % 10 %
Total 100 % 100 % 100 % 100 % 100 %
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As described in Note 2 in the Notes to Consolidated Financial Statements in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2011, certain
of our licensing arrangements allow customers the ability to remix among
software products. Additionally, we have arrangements with customers that
include a combination of our products, with the actual product selection and
number of licensed users to be determined at a later date. For these
arrangements, we estimate the allocation of the revenue to product groups based
upon the expected usage of our products. The actual usage of our products by
these customers may differ and, if that proves to be the case, the revenue
allocation in the table above would differ.
The changes in the percentage of revenue contributed by the Functional
Verification and Design IP product group for the quarters presented are
generally related to changes in revenue related to our hardware products, which
are included in the Functional Verification and Design IP product group.
Revenue by Geography
Three Months Ended Change
September 29, October 1,
2012 2011 Amount Percentage
(In millions, except percentages)
United States $ 141.5 $ 123.8 $ 17.7 14 %
Other Americas 4.7 6.1 (1.4 ) (23 )%
Europe, Middle East and Africa 66.4 61.6 4.8 8 %
Japan 58.8 51.0 7.8 15 %
Asia 67.1 50.0 17.1 34 %
Total revenue $ 338.5 $ 292.5 $ 46.0 16 %
Nine Months Ended Change
September 29, October 1,
2012 2011 Amount Percentage
(In millions, except percentages)
United States $ 414.9 $ 360.0 $ 54.9 15 %
Other Americas 18.7 19.5 (0.8 ) (4 )%
Europe, Middle East and Africa 191.1 174.4 16.7 10 %
Japan 168.8 150.3 18.5 12 %
Asia 187.3 137.6 49.7 36 %
Total revenue $ 980.8 $ 841.8 $ 139.0 17 %
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For the primary factors contributing to our increase in revenue across our geographies, see the general description under "Revenue by Period" above. Revenue by Geography as a Percent of Total Revenue
Three Months Ended Nine Months Ended
September 29, October 1, September 29, October 1,
2012 2011 2012 2011
United States 42 % 42 % 42 % 43 %
Other Americas 1 % 2 % 2 % 2 %
Europe, Middle East and Africa 20 % 21 % 20 % 21 %
Japan 17 % 18 % 17 % 18 %
Asia 20 % 17 % 19 % 16 %
Total 100 % 100 % 100 % 100 %
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No one customer accounted for 10% or more of total revenue during the three and nine months ended September 29, 2012 and October 1, 2011.
Most of our revenue is transacted in the United States dollar. However, certain transactions are denominated in foreign currencies, primarily the Japanese yen, and we recognize additional revenue from those contracts in periods when the United States dollar weakens in value against the Japanese yen and reduced revenue from those contracts in periods when the United States dollar strengthens against the Japanese yen. For an additional description of how changes in foreign exchange rates affect our Condensed Consolidated Financial Statements, see the discussion under the heading "Item 3. Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk." Cost of Revenue
Three Months Ended Change
September 29, October 1,
2012 2011 Amount Percentage
(In millions, except percentages)
Product $ 23.3 $ 18.2 $ 5.1 28 %
Services $ 16.8 $ 20.4 (3.6 ) (18 )%
Maintenance $ 11.1 $ 11.2 (0.1 ) (1 )%
Nine Months Ended Change
September 29, October 1,
2012 2011 Amount Percentage
(In millions, except percentages)
Product $ 60.3 $ 52.4 $ 7.9 15 %
Services $ 53.3 $ 61.1 (7.8 ) (13 )%
Maintenance $ 33.8 $ 32.8 1.0 3 %
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The following table shows cost of revenue as a percentage of related revenue for the three and nine months ended September 29, 2012 and October 1, 2011:
Three Months Ended Nine Months Ended
September 29, October 1, September 29, October 1,
2012 2011 2012 2011
Product 11 % 11 % 10 % 11 %
Services 59 % 70 % 61 % 71 %
Maintenance 12 % 11 % 12 % 11 %
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Cost of Product
Cost of product includes costs associated with the sale and lease of our
hardware and licensing of our software and IP products. Cost of product
associated with our hardware products includes materials, assembly and overhead.
These additional hardware manufacturing costs make our cost of hardware product
higher, as a percentage of revenue, than our cost of software and IP products.
Cost of product also includes the cost of employee salary, benefits and other
employee-related costs, including stock-based compensation expense, amortization
of acquired intangibles directly related to our products, as well as the costs
of technical documentation and royalties payable to third-party vendors.
A summary of cost of product is as follows:
Three Months Ended Change
September 29, October 1,
2012 2011 Amount Percentage
(In millions, except percentages)
Product-related costs $ 19.7 $ 15.3 $ 4.4 29 %
Amortization of acquired intangibles 3.6 2.9 0.7 24 %
Total cost of product $ 23.3 $ 18.2 $ 5.1 28 %
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Nine Months Ended Change
September 29, October 1,
2012 2011 Amount Percentage
(In millions, except percentages)
Product-related costs $ 50.9 $ 44.8 $ 6.1 14 %
Amortization of acquired intangibles 9.4 7.6 1.8 24 %
Total cost of product $ 60.3 $ 52.4 $ 7.9 15 %
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The changes in cost of product during the three and nine months ended September 29, 2012, as compared to the three and nine months ended October 1, 2011, were primarily due to increases in hardware costs and amortization of acquired intangibles. Hardware costs increased primarily due to an increase in hardware sales. Amortization of acquired intangibles included in cost of product increased primarily due to amortization of intangible assets acquired with our acquisition of Sigrity on July 2, 2012 and our fiscal 2011 acquisitions. Cost of product depends primarily upon the mix of hardware and software product sales in any given period, and also depends upon the timing and extent to which we acquire intangible assets, acquire or license third-parties' intellectual property or technology and sell our products that include such acquired or licensed intellectual property or technology.
Cost of Services
Cost of services primarily includes employee salary, benefits and other
employee-related costs, costs to maintain the infrastructure necessary to manage
a services organization, and provisions for contract losses, if any. Cost of
services decreased by $3.6 million during the three months ended September 29,
2012, as compared to the three months ended October 1, 2011, and decreased by
$7.8 million during the nine months ended September 29, 2012, as compared to the
nine months ended October 1, 2011, primarily due to a decrease in employee
salary, benefits and other employee-related costs. Certain of our design
services engineers have been redeployed to internal research and development
projects or to assist with pre-sales activities, resulting in lower cost of
services expense. We expect to continue to utilize our services engineers on
internal projects and pre-sales activities and we expect our cost of services to
continue to decrease during the remainder of fiscal 2012, as compared to fiscal
2011.
Cost of Maintenance
Cost of maintenance includes the cost of our customer support services, such as
telephone, online and on-site support, employee salary, benefits and other
employee-related costs, amortization of acquired intangible assets and
documentation of maintenance updates. There were no significant changes in cost
of maintenance during the three and nine months ended September 29, 2012, as
compared to the three and nine months ended October 1, 2011.
Operating Expenses
Our operating expenses include marketing and sales, research and development and
general and administrative expenses. Factors that may cause our operating
expenses to fluctuate include changes in the number of employees due to hiring,
acquisitions or restructuring activities, foreign exchange rates, cost reduction
strategies and the impact of our variable compensation programs, which are
driven by overall operating results. Our employee salary and other
compensation-related costs increased during the three months ended September 29,
2012, as compared to the three months ended October 1, 2011, primarily due to
hiring additional employees for our research and development activities and the
addition of employees through the acquisition of Sigrity employees. Our employee
salary and other compensation-related costs increased during the nine months
ended September 29, 2012, as compared to the nine months ended October 1, 2011,
. . .
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