Cadence Results: Good but Palladium under Price Pressure

Cadence announced their 2Q results this afternoon. I listened to the conference call.

You can read all the details of the results in the press release but the big picture is:

• Revenue $379K, net income $23M GAAP or $64M non-GAAP (8, 21c per share, beat estimates by 1c). Equivalent quarter last year was $362M so less than 5% increase)
• making adjustments to outlook for rest of 2014
• increasing size of share repurchase
• environment has improved since start of year (although as questioners pointed out, this hasn’t really shown through in the numbers)
• high spots: differentiated IP especially into system companies, hardware/software co-design
• Tempus and Voltus doing well: Tempus has over 30 customers, 5 new ones this quarter including Broadcom using it for sub-20nm flow; Voltus over 25 customers, Quantus QRC just announced. In the questions people were really trying to find out if Tempus was displacing PrimeTime but nobody was talking.
• Completed acquisition of Jasper
• Palladium demand strong driven especially in mobile, driven by FinFET and 64 bit
• Multiple foundry partners at 10nm
• First EDA company enaged with ARM on 64-bit v8 architecture
• Introduced Protium (FPGA prototyping system)
• Weighted average contract life was 2.2 years. This is unusually low and could be a red flag but Jeff Rebar (CFO) said it was just the product mix this quarter and nothing seemed to be unusual

Some significant IP introductions:“In Q2, we continued to introduce new IP and VIP products, including memory modules for the 3D hybrid memory cube (HMC), the industry’s first VIP for PCI Express Gen Four and silicon proven DDR4 IP for both the 28 nanometer FDSOI process and for the TSMC 16 nanometer FinFET process”

Where was all the business? 44% Americas, 23% Asia, 22% EMEA and 11% Japan. Or cutting the pie the other way, 21% functional verification, 30% digital IC (including signoff), 28% custom IC, 11% system interconnect and analysis (I think that is the trendy new name for PCB), 10% for IP.

One area to watch: Palladium shipments are up. That’s the good news. Palladium revenue is down. This is due to margins coming under pressure since both Mentor (Veloce) and Synopsys (Eve) have competitive product lines. Cadence’s revenue is moving more towards software and less hardware, however the decline in hardware revenues is bigger than the increase in software revenues so Cadence are slightly reducing the outlook for the rest of the year (before increasing it a little again due to Jasper) and reducing their margin outlook too.

Other factors hitting expenses: the Jasper acquisition. I’m not sure of all the details but I believe that most Jasper business that was already booked but not yet recognized as revenue was wrapped into the accounting of the acquisition. But the expense for Jasper will still come due each quarter. Jasper should be accretive next year though.

Another factor: Cadence had a voluntary retirement program which obviously included packages for people that took it. That causes a hit in the short term but reduces the expense run-rate in the long-term.

Outlook: for Q3 Cadence expects $390-400M revenue. For the whole of 2014 they expect booking $1.75-1.8M which is a little up, primarily due to Jasper but also slightly stronger software bookings. Revenue $1.57-1.59M, the increase again being primarily due to Jasper. Operating margin is expected to be down a little due to declining hardware margins at 25-26% (versus a solid 26% before). They will repurchase about $300M shares over a two year period.

Nothing dramatic. Things to watch:

• pressure on Palladium pricing (there was no announcement but it is clear from a couple of answers there will be a new version coming out early next year riding Moore’s law and getting more gates per $)
• how well Tempus, Voltus and Quantus really are doing versus the competition (especially PrimeTime)
• new product announcements in the pipeline
• IP is now 10% of Cadence’s business but they have invested a lot to acquire it (especially Denali and Tensilica) so they need to grow it

SeekingAlpha transcript of the conference call is here.

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