Page 1 CADENCE DESIGN SYSTEMS, INC. Second Quarter 2018 Financial Results Conference Call Prepared Remarks of Lip-Bu Tan, Chief Executive Officer and John Wall, Senior Vice President and Chief Financial Officer 2:00 PM Pacific Safe Harbor Statement 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 review 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. A copy of today s press release dated for the quarter ended June 30, 2018, and related financial tables, and our CFO Commentary which was included in our 8-K filing today, can also be found in the investor relations portion of our website.
Page 2 Lip-Bu Tan, Chief Executive Officer Good afternoon everyone and thank you for joining us today. Cadence achieved excellent operating results for the second quarter with revenue increasing 8 percent year-over-year and a non-gaap operating margin of 30 percent. John will provide details in a moment. Our System Design Enablement strategy is perfectly positioned to enable the Data-Driven Economy and the multiple key technology waves driving it. We are increasing our footprint with systems companies and tailoring our solutions to vertical market segments. Not only is Cloud/Datacenter one of the most significant technology drivers, it also enables us to bring innovative design solutions and increased productivity to our customers. This past month at the Design Automation Conference, we introduced the Cadence Cloud, the industry s first broad cloud portfolio for the development of electronic systems and semiconductors. Benefits from using Cadence Cloud include improved productivity, intelligent scalability, optimized security, and flexibility. We collaborated with Amazon Web Services, Microsoft Azure and Google Cloud to deploy our cloud-ready products in customer-managed cloud environments. We also launched Palladium Cloud, which is a cloud-based emulation solution that easily addresses peak requirements of existing customers and brings emulation to new customers and markets. Finally, in conjunction with Cadence Cloud, we launched Liberate Trio, the first unified library characterization solution that employs machine learning techniques and is optimized for the cloud.
Page 3 Cadence Cloud is endorsed by our close partners ARM and TSMC, and more than 20 customers are using Cadence Cloud, including Annapurna Labs, an Amazon Company, and CNEX Labs. Additionally, the Aerospace & Defense vertical had another strong quarter. A major aerospace and defense company selected Cadence as its primary vendor for SoC design and verification including our software and hardware products. We also won a significant research contract with DARPA to develop advanced machine learning technologies that speed-up and optimize power, performance and area results. Watch for more announcements on this exciting project tomorrow. Now I will review a few additional highlights from Q2. Momentum continues to build for our IP business. It was another strong quarter for our flagship DDR and PCIe products. We prototyped the world s first DDR5 test chip, achieving a data rate of 4400 megatransfers per second in TSMC s 7-nanometer process. We had significant wins for DDR with a major semiconductor company, for PCIe with a leading storage company, and we are working with a mobile customer on a 7-nanometer sensor application. Tensilica added 5 new logos with wins for applications in IoT, wearables, photonics, and crypto mining. Moving on to our System Design and Verification solutions: In Q2, our broad-based renewal with LG Electronics included adoption of our Xcelium Parallel Simulator. Other key Xcelium adopters included a large Chinese customer, and an AI processor startup.
Page 4 Palladium added 6 new customers with 9 repeat orders. Two of the new customers are using Palladium Cloud. Ampere Computing chose Palladium Z1 for the development of their next-generation ARMbased server chip. Palladium Z1 was chosen for its scalability for large designs, state of the art debug features, stability, and availability over the cloud. Digital and Signoff continued to do very well with 8 percent year-over-year revenue growth. Our digital and signoff solutions continue to proliferate with existing market-shaping customers and win new customers. More than 20 customers adopted our full digital flow in the first half of 2018. Continuing our innovation in Signoff, we enhanced our Voltus IC Power Integrity Solution with an extensively parallel algorithm that provides up to 5X better performance with gigascale capacity and is cloud-ready. HiSilicon verified that the new Voltus solution can deliver improved performance results for their future 5G silicon development. Cadence also plays an important role in enabling More-than-Moore technologies such as RF, MEMS, and sensors through providing advanced tooling and packaging solutions. We launched the comprehensive, new Virtuoso RF Solution, partnering with National Instruments to streamline the design and verification process of analog and RF ICs and modules. In advanced packaging, we already support TSMC s InFO and CoWoS chip integration solutions, and we now added support for the new TSMC Wafer-on-Wafer stacking technology. Reliability also becomes more critical as semiconductors proliferate in new vertical segments like automotive, medical devices, industrial, and aerospace & defense. This quarter we introduced the Legato Reliability Solution, the industry s first software product that meets the challenges of designing high-reliability analog and mixed-signal ICs. Infineon successfully used this solution to speed-up simulation runtimes by a factor of more than 100.
Page 5 Like Reliability, Functional Safety is very important to automotive, industrial, and aerospace & defense. ROHM used the Cadence Automotive Solution for safety verification, which is a critical component in its ISO 26262-compliant tool chain for automotive chips. Hitachi used our JasperGold platform to develop and receive certification for an industrial safety controller. Before turning it over to John, let me quickly summarize my comments: We drove excellent results through consistent execution and broad-based proliferation and adoption of our solutions to meet the needs of the Data-Driven Economy, We introduced the Cadence Cloud, the first broad portfolio of cloud-based EDA technologies, Our growing aerospace & defense business had another strong quarter, Our flagship IP products are doing very well in the market place, Adoption of our Xcelium Parallel Simulator is growing, Our digital and signoff solutions are proliferating with market-shaping customers and winning new customers, and Cadence solutions are helping enable continued innovation in electronics through More-than- Moore technologies. With that I will now turn the call over to John to review the financial results and provide our updated outlook.
Page 6 John Wall, Senior Vice President and Chief Financial Officer Thanks Lip-Bu, and good afternoon everyone. I m pleased to report we met or exceeded all of our key operating metrics in Q2. And as a result of strong execution across our business we are increasing our outlook for fiscal 2018. Before we get into Q2 results, I d like to remind you that Cadence adopted the new revenue accounting standard known as ASC Topic 606 for fiscal 2018. These new rules, as we often refer to them, are now GAAP for Cadence. The numbers I present for our second quarter are based on these new rules unless otherwise stated. Please also keep in mind that this is the first year we are reporting under the new rules which are not directly comparable to those of 2017, which were reported under ASC Topic 605, or the old rules. For all four quarters of 2018, we will show our quarterly results as reported under the old rules to allow comparison to 2017 on an apples-toapples basis. Having covered that, let s now go through the key results for the second quarter starting with the P&L. As reported: Total revenue was $518 million, Non-GAAP operating margin was 30 percent, GAAP EPS was 27 cents, and Non-GAAP EPS was 45 cents. And under the old rules, for direct comparison against Q2 2017: Total revenue was $515 million, - Up 8 percent year over year Non-GAAP operating margin was 30 percent,
Page 7 GAAP EPS was 26 cents, and Non-GAAP EPS was 44 cents. Now turning to the balance sheet and cash flow. Cash and short-term investments totaled 825 million dollars at the end of Q2, with approximately $475 million of that cash, here in the U.S. Debt outstanding at quarter-end was 650 million dollars. Operating cash flow in Q2 was 205 million dollars. During quarter we used 50 million dollars for share repurchases, and 45 million dollars to pay down borrowings under our revolving credit facility. As reported, DSOs were 39 days. Under the old rules DSOs were 36 days. I will now provide our updated guidance: For Q3, we expect the following results: Revenue in the range of $510 to $520 million, Non-GAAP operating margin in the range of 27 to 28 percent, GAAP EPS in the range of 22 to 24 cents, Non-GAAP EPS in the range of 40 to 42 cents, and DSOs of approximately 40 days. For fiscal 2018, we now expect: Revenue in the range of $2.07 to $2.09 billion, Non-GAAP operating margin of approximately 28 percent, GAAP EPS in the range of 95 cents to $1.01, Non-GAAP EPS in the range of $1.64 to $1.70, and Operating cash flow in the range of $535 to $565 million.
Page 8 We now expect the difference in revenue under the new and old rules to be approximately 25 million dollars As a result, under the old rules, our implied 2018 guidance at the midpoint is now expected to be: Revenue of approximately $2.105 billion, Non-GAAP operating margin of approximately 29 percent, GAAP EPS of approximately $1.06, Non-GAAP EPS of approximately $1.74, and Our Operating Cash Flow is expected to be approximately $550 million. Please note that we expect our operating cash flow to be the same under both the new and old rules, because our transition to the new rules in 2018 is just an accounting change and as a result there is no impact to our cash flows or to how we operate our business. For more details on the impact of the transition to the new rules on our financial statements, please see our CFO Commentary which was included with our 8-K filing today and is available on our website. To sum up today s call, I want to highlight that I am pleased with our progress. On an apples to apples basis, we are now expecting Annual revenue to increase by more than 8%, compared to the 7 percent revenue growth we achieved in 2017. We expect Non-GAAP Operating Margin, on the basis of the old rules, to improve to approximately 29 percent for the year, compared to 27.5 percent last year.
Page 9 And it s pleasing to me, to see so much of the improvement in profitability flowing through to operating cash, which we now expect to land at a midpoint of 550 million dollars for 2018, an increase of approximately 80 million dollars over last year. Before I finish, I d like to thank the extended Cadence team for their operational discipline, their drive and passion to make our customers successful, and for the very large part they have all played in allowing us to raise our guidance for the year. And with that, operator, we ll now take questions. Q&A Session Lip-Bu Tan, Chief Executive Officer In closing, Through continuous innovation and execution, we are well positioned with our System Design Enablement strategy to leverage the multiple technology waves that further proliferate our solutions with a broader base of customers. We are proud of the innovative and inclusive culture we are building at Cadence. I would like to thank all of our shareholders, customers and partners, board of directors, and hardworking employees for their continued support. Thank you all for joining us this afternoon.