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CDNS > SEC Filings for CDNS > Form 10-Q on 25-Oct-2012All Recent SEC Filings

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Form 10-Q for CADENCE DESIGN SYSTEMS INC


25-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q, or this Quarterly Report, and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Certain of these statements, including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "intends," "may," "plans," "projects," "should," "will" and "would," and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the "Risk Factors," "Results of Operations," "Disclosures About Market Risk," and "Liquidity and Capital Resources" sections contained in this Quarterly Report, and the risks discussed in our other Securities Exchange Commission, or SEC, filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.
We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements.


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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."


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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.


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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  %

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  %

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  %

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 %

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.


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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  %

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 %

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 %

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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