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CDNS > SEC Filings for CDNS > Form 10-Q on 25-Jul-2013All Recent SEC Filings

Show all filings for CADENCE DESIGN SYSTEMS INC

Form 10-Q for CADENCE DESIGN SYSTEMS INC


25-Jul-2013

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 29, 2012. 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. Overview

We develop solutions that our customers use to design increasingly complex integrated circuits, or ICs, and electronic devices. Our solutions are designed to help our customers reduce the time to bring an IC or electronic device to market and to reduce their design and development costs. Our offerings include software, two categories of intellectual property, or IP (commonly referred to as verification IP, or VIP, and Design IP), and hardware technology. We provide maintenance for our product offerings and provide engineering services related to methodology, education and hosted design solutions, which help our customers manage and accelerate their electronics product development processes. Substantially all of our business is generated from semiconductor and electronics systems manufacturers and designers and the renewal of many of our customer contracts and the decisions for new purchases are dependent upon their commencement of new design projects. As a result, our business is significantly influenced by our customers' business outlook and investment in the introduction of new products and the improvement of existing products.
The markets our customers serve are sensitive to product price and the time it takes to bring the products to market. In order to be competitive and profitable in these markets, our customers demand high levels of productivity from their design teams, better predictability in shorter development schedules, high quality products and lower development costs. Semiconductor and electronics systems companies are responding to these challenges and users' demand for increased functionality and smaller devices by combining subsystems - such as radio frequency, or RF, wireless communication, signal processing, microprocessors and memory controllers - onto a single silicon chip, creating a system-on-chip, or SoC, or 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. Our strategy is to provide our customers with the ability to address the broad range of issues that arise at the silicon, SoC, and system levels.
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 time-to-market and cost requirements. Providers of electronic design automation, or EDA, solutions must deliver products that address these 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 revenue includes fees from licenses to use our software and IP, and from sales and leases of our hardware products.


Table of Contents

We combine our products and technologies into categories related to major design activities:

• Functional Verification, Hardware and IP;

• Custom IC Design;

• Digital IC Design;

• System Interconnect Design; and

• Design for Manufacturing, or DFM.

The major Cadence® design platforms are branded as Incisive® functional verification, Virtuoso® custom IC design, Encounter® digital IC design and Allegro® system interconnect design. Our functional verification offerings include our VIP products, our Design IP offerings and our hardware 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.
The products and technologies included in these categories are combined with ready-to-use packages of technologies assembled from our broad portfolio of IP and other associated components that provide comprehensive solutions for low power, mixed signal and designs at smaller geometries referred to as advanced process nodes, as well as popular designs based on design IP owned and licensed by other companies such as ARM Holdings plc. These solutions 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.
During the six months ended June 29, 2013, we completed acquisitions that enable us to offer additional IP solutions to our customers. These acquisitions, along with our fiscal 2012 acquisition of Sigrity, influenced revenues and operating expenses for the three and six months ended June 29, 2013. It is expected that the impact of these acquisitions on our condensed consolidated income statements for the remainder of fiscal 2013 will result in a greater increase in our operating expenses than the increase in revenue generated from the acquisitions, in part, because the adjustment of deferred revenue to fair value.
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 as deemed necessary. 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 29, 2012.


Results of Operations
Financial results for the three and six months ended June 29, 2013, as compared to the three and six months ended June 30, 2012, reflect the following:
• An increase in our product and maintenance revenue, primarily because of increased business levels and increased revenue recognized from bookings in prior periods;

• An increase in employee-related costs, primarily consisting of incremental costs related to employees added from our fiscal 2013 and fiscal 2012 acquisitions and costs related to hiring additional employees; and

• An increase in variable compensation due to increased revenue, bookings and operating performance.

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, providing engineering services and earning royalties generated from the use of our IP.
The timing of our product revenue is significantly affected by the mix of hardware and software products 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 hardware sales, because product revenue for hardware sales is generally recognized up-front in the quarter in which delivery is completed.
Greater than 90% of the aggregate value of our bookings during the three and six months ended June 29, 2013 and June 30, 2012 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 29, 2012. Revenue by Period
In the condensed consolidated income statements for the three and six months ended June 29, 2013, we combined product and maintenance revenue because product and maintenance revenue is generally recognized from agreements that require customers to purchase both the product and associated maintenance in a bundled offering. We reclassified prior period product and maintenance revenue balances to conform to the current year presentation.
The following table shows our revenue for the three months ended June 29, 2013 and June 30, 2012 and the change in revenue between periods:

                              Three Months Ended                 Change
                            June 29,        June 30,
                              2013            2012        Amount    Percentage
                                   (In millions, except percentages)
Product and maintenance $    338.0         $    297.5    $ 40.5         14  %
Services                      24.5               29.0      (4.5 )      (15 )%
Total revenue           $    362.5         $    326.5    $ 36.0         11  %


The following table shows our revenue for the six months ended June 29, 2013 and June 30, 2012 and the change in revenue between periods:

                            Six Months Ended                Change
                         June 29,      June 30,
                           2013          2012        Amount    Percentage
                                (In millions, except percentages)
Product and maintenance $    666.3    $    583.8    $ 82.5         14  %
Services                      50.5          58.5      (8.0 )      (14 )%
Total revenue           $    716.8    $    642.3    $ 74.5         12  %

Product and maintenance revenue increased during the three and six months ended June 29, 2013, as compared to the three and six months ended June 30, 2012, primarily because of increased business levels, increased revenue recognized from bookings in prior periods and revenue recognized from our 2013 acquisitions. Services revenue decreased during the three and six months ended June 29, 2013, as compared to the three and six months ended June 30, 2012, because of the redeployment of certain of our design services engineers to internal research and development projects related to our Design IP activities. No one customer accounted for 10% or more of total revenue during the three and six months ended June 29, 2013 or June 30, 2012.

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
                           June 29,       March 30,     December 29,     September 29,      June 30,
                             2013           2013            2012             2012             2012
Functional Verification,
Hardware and IP                 28 %           26 %            30 %             30 %             33 %
Digital IC Design               23 %           25 %            23 %             23 %             22 %
Custom IC Design                25 %           25 %            24 %             24 %             22 %
System Interconnect
Design                          11 %           10 %             9 %              9 %              8 %
Design for Manufacturing         6 %            7 %             6 %              6 %              6 %
Services and other               7 %            7 %             8 %              8 %              9 %
Total                          100 %          100 %           100 %            100 %            100 %

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 29, 2012, 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, Hardware and IP product group for the quarters presented are primarily related to changes in revenue related to our hardware and IP products, including revenue recognized from our acquisition of Tensilica during the three months ended June 29, 2013.


Revenue by Geography

                                     Three Months Ended                 Change
                                   June 29,        June 30,
                                     2013            2012        Amount    Percentage
                                          (In millions, except percentages)
United States                  $    159.2         $    142.9    $ 16.3         11  %
Other Americas                        5.6                5.8      (0.2 )       (3 )%
Europe, Middle East and Africa       77.8               65.0      12.8         20  %
Japan                                45.5               53.9      (8.4 )      (16 )%
Asia                                 74.5               58.9      15.6         26  %
Total revenue                  $    362.5         $    326.5    $ 36.1         11  %




                                   Six Months Ended                Change
                                June 29,      June 30,
                                  2013          2012        Amount    Percentage
                                       (In millions, except percentages)
United States                  $    308.4    $    273.4    $ 35.0         13  %
Other Americas                       10.2          13.9      (3.7 )      (27 )%
Europe, Middle East and Africa      156.7         124.7      32.0         26  %
Japan                                98.9         110.1     (11.2 )      (10 )%
Asia                                142.5         120.2      22.3         19  %
Total revenue                  $    716.7    $    642.3    $ 74.4         12  %

Most of our revenue is transacted in the United States dollar. However, certain revenue transactions are denominated in foreign currencies, primarily the Japanese yen, and we recognize reduced revenue from those contracts in periods when the Japanese yen weakens in value against the United States dollar and additional revenue from those contracts in periods when the Japanese yen strengthens against the United States dollar. 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." Revenue for Japan decreased during the three and six months ended June 29, 2013, as compared to the three and six months ended June 30, 2012, primarily due to business conditions facing our Japanese customers. Because of these conditions, we expect revenue for Japan to continue to decrease during the remainder of fiscal 2013, as compared to the same period in 2012.
For the primary factors contributing to our increase in revenue in other geographies, see the general description under "Revenue by Period," above. Revenue by Geography as a Percent of Total Revenue

                                 Three Months Ended        Six Months Ended
                               June 29,     June 30,    June 29,     June 30,
                                 2013         2012        2013         2012
United States                      44 %         44 %        43 %          43 %
Other Americas                      1 %          2 %         1 %           2 %
Europe, Middle East and Africa     21 %         20 %        22 %          19 %
Japan                              13 %         16 %        14 %          17 %
Asia                               21 %         18 %        20 %          19 %
Total                             100 %        100 %       100 %         100 %


Cost of Revenue
                               Three Months Ended                  Change
                             June 29,         June 30,
                               2013             2012        Amount    Percentage
                                    (In millions, except percentages)
Product and maintenance $     28.1           $     32.4    $ (4.3 )      (13 )%
Services                      15.1                 17.1      (2.0 )      (12 )%



                              Six Months Ended                  Change
                           June 29,        June 30,
                             2013            2012        Amount    Percentage
                                  (In millions, except percentages)
Product and maintenance $    57.9         $     59.6    $ (1.7 )      (3 )%
Services                     33.5               36.4      (2.9 )      (8 )%

The following table shows cost of revenue as a percentage of related revenue for the three and six months ended June 29, 2013 and June 30, 2012:

                           Three Months Ended         Six Months Ended
                         June 29,      June 30,    June 29,      June 30,
                           2013          2012        2013          2012
Product and maintenance      8 %            11 %       9 %            10 %
Services                    62 %            59 %      66 %            62 %

Cost of Product and Maintenance
Cost of product and maintenance includes costs associated with the sale and lease of our hardware and licensing of our software and IP products, employee salary, benefits and other employee-related costs, cost of our customer support services, amortization of acquired intangibles, as well as the costs of technical documentation and royalties payable to third-party vendors. Costs associated with our hardware products include 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. A summary of cost of product and maintenance is as follows:

                                           Three Months Ended                    Change
                                        June 29,        June 30,
                                          2013            2012           Amount        Percentage
                                                    (In millions, except percentages)
Product and maintenance-related costs $      22.3            29.5     $     (7.2 )         (24 )%
Amortization of acquired intangibles          5.8             2.9            2.9           100  %
Total cost of product and maintenance $      28.1     $      32.4     $     (4.3 )         (13 )%


                                            Six Months Ended                  Change
                                         June 29,        June 30,
                                           2013            2012        Amount    Percentage
                                                (In millions, except percentages)
Product and maintenance-related costs $    48.3               53.8    $ (5.5 )      (10 )%
Amortization of acquired intangibles        9.6                5.8       3.8         66  %
Total cost of product and maintenance $    57.9         $     59.6    $ (1.7 )       (3 )%


Cost of product and maintenance depends primarily upon hardware product sales in any given period, employee salary, benefits and other employee-related costs, 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. The decrease in product and maintenance-related costs during the three and six months ended June 29, 2013, as compared to the three and six months ended June 30, 2012, was primarily due to decreased hardware sales between the respective periods. The increase in amortization of acquired intangibles related to cost of product and maintenance during the three and six months ended June 29, 2013, as compared to the three and six months ended June 30, 2012, resulted from increased amortization of intangible assets related to our fiscal 2013 and fiscal 2012 acquisitions, which was partially offset by certain acquired intangibles becoming fully amortized. We expect cost of product and maintenance to increase for the remainder of fiscal 2013, as compared to the same period in fiscal 2012, primarily due to amortization of intangible assets recorded in connection with our fiscal 2013 acquisitions.

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. 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 certain design services engineers on internal projects and pre-sales activities. 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, foreign exchange rates 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 and six months ended June 29, 2013, as compared to the three and six months ended June 30, 2012, primarily due to incremental costs related to employees added from our fiscal 2013 and fiscal 2012 acquisitions, hiring additional employees for our research and development and sales activities, and higher variable compensation as a result of improved business performance. Many of our operating expenses are denominated in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. 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." We expect our operating expenses to increase during the remainder of fiscal 2013, as compared to the same period in fiscal 2012, due to the addition of employees through our fiscal 2013 acquisitions and expected hiring of research and development and sales personnel.
Our operating expenses for the three and six months ended June 29, 2013 and June 30, 2012 were as follows:

                                 Three Months Ended                 Change
                               June 29,        June 30,
                                 2013            2012        Amount     Percentage
                                      (In millions, except percentages)
Marketing and sales        $     95.3         $     80.4    $  14.9         19 %
Research and development        136.4              112.0       24.4         22 %
. . .
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