Cadence Reports Third Quarter 2023 Financial Results

SAN JOSE, Calif.--(BUSINESS WIRE)--Cadence Design Systems, Inc. (Nasdaq: CDNS) today announced results for the third quarter of 2023.

Cadence reported third quarter 2023 revenue of $1.023 billion, compared to revenue of $903 million for the same period in 2022. On a GAAP basis, Cadence achieved operating margin of 29 percent and recognized net income of $254 million, or $0.93 per share on a diluted basis, in the third quarter of 2023, compared to operating margin of 29 percent and net income of $186 million, or $0.68 per share on a diluted basis, for the same period in 2022.

Using the non-GAAP measures defined below, operating margin for the third quarter of 2023 was 41 percent and net income was $343 million, or $1.26 per share on a diluted basis, compared to operating margin of 39 percent and net income of $290 million, or $1.06 per share on a diluted basis, for the same period in 2022.

“I’m pleased with our strong Q3 performance and our relentless focus on driving innovation and delighting our customers,” said Anirudh Devgan, president and chief executive officer. “Generational trends including AI, HPC, and autonomous driving continue to fuel robust design activities, and 3D-IC designs are accelerating. We are excited about the momentum of our JedAI platform based Generative AI applications that are delivering breakthrough results for our customers.”

“Cadence delivered yet another strong quarter of top and bottom-line results in Q3, driven by growth across our businesses,” said John Wall, senior vice president and chief financial officer. “Our team’s strong execution and operational efficiency allowed us to raise our outlook for the year.”

CFO Commentary

Commentary on the third quarter 2023 financial results by John Wall, senior vice president and chief financial officer, is available at www.cadence.com/cadence/investor_relations.

Business Outlook

For the fourth quarter of 2023, the company expects total revenue in the range of $1.039 billion to $1.079 billion. Fourth quarter GAAP operating margin is expected to be approximately 31 percent and GAAP net income per diluted share is expected to be in the range of $0.85 to $0.91. Using the non-GAAP measures defined below, operating margin is expected to be approximately 42 percent and net income per diluted share is expected to be in the range of $1.30 to $1.36.

For fiscal year 2023, the company expects total revenue in the range of $4.06 billion to $4.10 billion. On a GAAP basis, operating margin for 2023 is expected to be in the range of 30.5 percent to 31.0 percent and GAAP net income per diluted share for 2023 is expected to be in the range of $3.48 to $3.54. Using the non-GAAP measures defined below, operating margin for 2023 is expected to be in the range of 41.5 percent to 42.0 percent and net income per diluted share for 2023 is expected to be in the range of $5.07 to $5.13.

The company utilizes a long-term projected non-GAAP tax rate, which reflects currently available information, as well as other factors and assumptions. The non-GAAP tax rate could be subject to change for a variety of reasons, including the rapidly evolving global tax environment, significant changes in the company’s geographic earnings mix, or other changes to the company’s strategy or business operations. The company expects to use this normalized non-GAAP tax rate through fiscal 2025 but will re-evaluate this rate periodically for significant items that may materially affect its projections.

A schedule showing reconciliations of the business outlook from GAAP operating margin, GAAP net income and GAAP diluted net income per share to non-GAAP operating margin, non-GAAP net income and non-GAAP diluted net income per share, respectively, is included in this press release.

Audio Webcast Scheduled

Anirudh Devgan, president and chief executive officer, and John Wall, senior vice president and chief financial officer, will host the third quarter 2023 financial results audio webcast today, October 23, 2023, at 2 p.m. (Pacific) / 5 p.m. (Eastern). Attendees are asked to register at the website at least 10 minutes prior to the scheduled webcast. An archive of the webcast will be available starting October 23, 2023 at 5 p.m. (Pacific) and ending December 15, 2023 at 5 p.m. (Pacific). Webcast access is available at www.cadence.com/cadence/investor_relations.

About Cadence

Cadence is a pivotal leader in electronic systems design, building upon more than 30 years of computational software expertise. The company applies its underlying Intelligent System Design strategy to deliver software, hardware and IP that turn design concepts into reality. Cadence customers are the world’s most innovative companies, delivering extraordinary products from chips to boards to complete systems for the most dynamic market applications, including hyperscale computing, 5G communications, automotive, mobile, aerospace, consumer, industrial and healthcare. For nine years in a row, Fortune magazine has named Cadence one of the 100 Best Companies to Work For. Learn more at www.cadence.com.

© 2023 Cadence Design Systems, Inc. All rights reserved worldwide. Cadence, the Cadence logo and the other Cadence marks found at www.cadence.com/go/trademarks are trademarks or registered trademarks of Cadence Design Systems, Inc. All other trademarks are the property of their respective owners.

This press release contains forward-looking statements, including Cadence's outlook on future operating results, strategic objectives, business prospects, technology and product developments, industry trends and other statements using words such as “anticipates,” “believes,” “expects,” “intends,” “plans,” “will,” and words of similar import and the negatives thereof. Forward-looking statements are subject to a number of risks, uncertainties and other factors, many of which are outside Cadence’s control, and which may cause actual results to differ materially from expectations expressed or implied in the forward-looking statements, including, among others: (i) Cadence’s ability to compete successfully in the highly competitive industries in which it operates; (ii) the success of Cadence’s efforts to maintain and improve operational efficiency and growth; (iii) the mix of products and services sold, the timing of orders and deliveries and the ability to develop, install or deliver Cadence’s products or services; (iv) change in customer demands or supply constraints that could result in delays in purchases, development, installations or deliveries of Cadence's products or services, including those resulting from consolidation, restructurings and other operational efficiency improvements of Cadence’s customers; (v) economic, geopolitical and industry conditions, including that of the semiconductor and electronics industries, government regulations and trade restrictions; (vi) capital expenditure requirements, legislative or regulatory requirements, changes in tax laws, interest rates, currency exchange rate fluctuations, inflation rates and Cadence’s ability to access capital and debt markets; (vii) the acquisition of other companies, businesses or technologies or the failure to successfully integrate and operate them; (viii) events that affect cash flow, liquidity, or reserves, or settlement assumptions Cadence may take from time to time with respect to accounts receivable, taxes and tax examinations, litigation, regulatory or other matters; and (ix) the effects of any litigation, regulatory, tax or other proceedings to which Cadence is or may become a party or to which Cadence or its products, services or properties are subject. In addition, the timing and amount of Cadence’s repurchases of its common stock are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors.

For a detailed discussion of these and other cautionary statements related to Cadence’s business, please refer to Cadence’s filings with the U.S. Securities and Exchange Commission, including its most recent report on Form 10-K, subsequent reports on Form 10-Q and future filings.

All forward-looking statements in this press release are based on management's expectations as of the date of this press release and, except as required by law, Cadence disclaims any obligation to update these forward-looking statements to reflect future events or circumstances.

GAAP to Non-GAAP Reconciliation

Non-GAAP financial measures should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with generally accepted accounting principles, or GAAP. Investors are encouraged to review the reconciliation of non-GAAP measures contained within this press release with their most directly comparable GAAP results. Investors are also encouraged to look at the GAAP results as the best measure of financial performance.

To supplement Cadence’s financial results presented on a GAAP basis, Cadence management uses non-GAAP measures that it believes are helpful in understanding Cadence’s performance. One such measure is non-GAAP net income, which is a financial measure not calculated under GAAP. Non-GAAP net income is calculated by Cadence management by taking GAAP net income and excluding, as applicable, amortization of intangible assets, stock-based compensation expense, acquisition and integration-related costs including retention expenses, investment gains or losses, income or expenses related to Cadence’s non-qualified deferred compensation plan, restructuring and other significant items not directly related to Cadence’s core business operations, and the income tax effect of non-GAAP pre-tax adjustments.

Cadence management uses non-GAAP net income because it excludes items that are generally not directly related to the performance of Cadence’s core business operations and therefore provides supplemental information to Cadence management and investors regarding the performance of the business operations, facilitates comparisons to the historical operating results and allows the review of Cadence's business from the same perspective as Cadence management, including forecasting and budgeting.

The following tables reconcile the specific items excluded from GAAP operating margin, GAAP net income and GAAP net income per diluted share in the calculation of non-GAAP operating margin, non-GAAP net income and non-GAAP net income per diluted share for the periods shown below:

Operating Margin Reconciliation		Three Months Ended
	September 30, 2023			October 1, 2022
		(unaudited)
GAAP operating margin as a percent of total revenue		29	%		29	%
Reconciling items to non-GAAP operating margin as a percent of total revenue:
Stock-based compensation expense		9	%		8	%
Amortization of acquired intangibles		1	%		1	%
Acquisition and integration-related costs		1	%		1	%
Restructuring		1	%		0	%
Non-qualified deferred compensation credits		0	%		0	%
Non-GAAP operating margin as a percent of total revenue		41	%		39	%

Net Income Reconciliation	Three Months Ended
	September 30, 2023			October 1, 2022
(in thousands)	(unaudited)
Net income on a GAAP basis	$	254,321		$	186,305
Stock-based compensation expense		88,032			73,451
Amortization of acquired intangibles		15,603			12,813
Acquisition and integration-related costs		14,213			11,418
Restructuring		11,582			14
Non-qualified deferred compensation credits		(1,749	)		(2,885	)
Other income or expense related to investments and non-qualified deferred compensation plan assets*		(11,755	)		4,539
Income tax effect of non-GAAP adjustments		(27,147	)		4,433
Net income on a non-GAAP basis	$	343,100		$	290,088

*	Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

Diluted Net Income Per Share Reconciliation	Three Months Ended
	September 30, 2023			October 1, 2022
(in thousands, except per share data)	(unaudited)
Diluted net income per share on a GAAP basis	$	0.93		$	0.68
Stock-based compensation expense		0.32			0.27
Amortization of acquired intangibles		0.06			0.05
Acquisition and integration-related costs		0.05			0.04
Restructuring		0.04			—
Non-qualified deferred compensation credits		—			(0.01	)
Other income or expense related to investments and non-qualified deferred compensation plan assets*		(0.04	)		0.02
Income tax effect of non-GAAP adjustments		(0.10	)		0.01
Diluted net income per share on a non-GAAP basis	$	1.26		$	1.06
Shares used in calculation of diluted net income per share		272,427			274,957

*	Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

Cadence Design Systems, Inc.
Condensed Consolidated Balance Sheets
September 30, 2023 and December 31, 2022
(In thousands)
(Unaudited)
	September 30, 2023		December 31, 2022
Current assets:
Cash and cash equivalents	$	961,982	$	882,325
Receivables, net		426,505		486,710
Inventories		163,693		128,005
Prepaid expenses and other		272,283		209,727
Total current assets		1,824,463		1,706,767
Property, plant and equipment, net		379,776		371,451
Goodwill		1,500,442		1,374,268
Acquired intangibles, net		347,617		354,617
Deferred taxes		874,805		853,691
Other assets		504,272		476,277
Total assets	$	5,431,375	$	5,137,071
Current liabilities:
Revolving credit facility	$	-	$	100,000
Accounts payable and accrued liabilities		598,261		557,158
Current portion of deferred revenue		665,906		690,538
Total current liabilities		1,264,167		1,347,696
Long-term liabilities:
Long-term portion of deferred revenue		100,609		91,524
Long-term debt		648,801		648,078
Other long-term liabilities		303,904		304,660
Total long-term liabilities		1,053,314		1,044,262
Stockholders' equity		3,113,894		2,745,113
Total liabilities and stockholders' equity	$	5,431,375	$	5,137,071

Cadence Design Systems, Inc.
Condensed Consolidated Income Statements
For the Three and Nine Months Ended September 30, 2023 and October 1, 2022
(In thousands, except per share amounts)
(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30, 2023			October 1, 2022			September 30, 2023			October 1, 2022
Revenue:
Product and maintenance	$	965,840		$	845,788		$	2,852,372		$	2,494,317
Services		57,254			56,766			168,991			167,524
Total revenue		1,023,094			902,554			3,021,363			2,661,841
Costs and expenses:
Cost of product and maintenance		85,813			62,351			260,269			203,863
Cost of services		23,768			25,249			70,642			74,245
Marketing and sales		176,215			152,925			509,951			432,407
Research and development		369,642			323,629			1,074,353			901,121
General and administrative		58,556			73,688			166,688			174,051
Amortization of acquired intangibles		4,612			3,946			13,181			13,543
Restructuring		11,582			14			11,582			42
Total costs and expenses		730,188			641,802			2,106,666			1,799,272
Income from operations		292,906			260,752			914,697			862,569
Interest expense		(9,059	)		(5,463	)		(27,196	)		(13,852	)
Other income (expense), net		16,106			(3,017	)		32,363			(13,879	)
Income before provision for income taxes		299,953			252,272			919,864			834,838
Provision for income taxes		45,632			65,967			202,619			226,278
Net income	$	254,321		$	186,305		$	717,245		$	608,560
Net income per share - basic	$	0.94		$	0.69		$	2.66		$	2.24
Net income per share - diluted	$	0.93		$	0.68		$	2.63		$	2.21
Weighted average common shares outstanding - basic		269,229			271,131			269,480			271,694
Weighted average common shares outstanding - diluted		272,427			274,957			272,859			275,683

Cadence Design Systems, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2023 and October 1, 2022
(In thousands)
(Unaudited)
	Nine Months Ended
	September 30,			October 1,
		2023			2022
Cash and cash equivalents at beginning of period	$	882,325		$	1,088,940
Cash flows from operating activities:
Net income		717,245			608,560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		106,783			98,178
Amortization of debt discount and fees		942			810
Stock-based compensation		238,928			197,190
(Gain) loss on investments, net		(12,732	)		4,777
Deferred income taxes		(23,506	)		(49,834	)
Provisions for losses on receivables		1,692			471
ROU asset amortization and change in operating lease liabilities		(2,684	)		(883	)
Other non-cash items		1,962			158
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables		50,024			(57,309	)
Inventories		(47,293	)		(8,020	)
Prepaid expenses and other		33,307			30,596
Other assets		(26,580	)		17,644
Accounts payable and accrued liabilities		43,111			24,514
Deferred revenue		(14,628	)		113,712
Other long-term liabilities		10,514			(2,305	)
Net cash provided by operating activities		1,077,085			978,259
Cash flows from investing activities:
Purchases of investments		(145,150	)		(1,000	)
Proceeds from the sale and maturity of investments		64,174			-
Purchases of property, plant and equipment		(68,634	)		(86,295	)
Purchases of intangible assets		-			(1,000	)
Cash paid in business combinations, net of cash acquired		(163,963	)		(586,163	)
Net cash used for investing activities		(313,573	)		(674,458	)
Cash flows from financing activities:
Proceeds from term loan		-			300,000
Proceeds from revolving credit facility		50,000			450,000
Payments on revolving credit facility		(150,000	)		(300,000	)
Payment of debt issuance costs		-			(425	)
Proceeds from issuance of common stock		131,341			103,682
Stock received for payment of employee taxes on vesting of restricted stock		(122,182	)		(103,093	)
Payments for repurchases of common stock		(575,127	)		(750,062	)
Net cash used for financing activities		(665,968	)		(299,898	)
Effect of exchange rate changes on cash and cash equivalents		(17,887	)		(66,792	)
Increase (decrease) in cash and cash equivalents		79,657			(62,889	)
Cash and cash equivalents at end of period	$	961,982		$	1,026,051

Cadence Design Systems, Inc.
(Unaudited)
Revenue Mix by Geography (% of Total Revenue)
	2022					2023
GEOGRAPHY	Q1	Q2	Q3	Q4	Year	Q1	Q2	Q3
Americas	47%	45%	45%	46%	46%	44%	41%	43%
China	16%	13%	17%	13%	15%	17%	18%	17%
Other Asia	18%	18%	17%	18%	18%	18%	18%	19%
Europe, Middle East and Africa	14%	18%	16%	17%	16%	15%	17%	15%
Japan	5%	6%	5%	6%	5%	6%	6%	6%
Total	100%	100%	100%	100%	100%	100%	100%	100%
Revenue Mix by Product Category (% of Total Revenue)
	2022					2023
PRODUCT CATEGORY	Q1	Q2	Q3	Q4	Year	Q1	Q2	Q3
Custom IC Design and Simulation	22%	23%	22%	22%	22%	20%	22%	22%
Digital IC Design and Signoff	27%	27%	29%	28%	28%	25%	27%	28%
Functional Verification, including Emulation and Prototyping Hardware	28%	24%	25%	25%	26%	32%	27%	26%
IP	13%	14%	12%	12%	12%	11%	11%	11%
System Design and Analysis	10%	12%	12%	13%	12%	12%	13%	13%
Total	100%	100%	100%	100%	100%	100%	100%	100%

Cadence Design Systems, Inc.
Impact of Non-GAAP Adjustments on Forward Looking Operating Margin
As of October 23, 2023
(Unaudited)
	Three Months Ending	Year Ending
	December 31, 2023	December 31, 2023
	Forecast	Forecast
GAAP operating margin as a percent of total revenue	~31%	30.5% - 31.0%
Reconciling items to non-GAAP operating margin as a percent of total revenue:
Stock-based compensation expense	8%	8%
Amortization of acquired intangibles	2%	2%
Acquisition and integration-related costs	1%	1%
Restructuring	0%	0%
Non-qualified deferred compensation expenses	0%	0%
Non-GAAP operating margin as a percent of total revenue†	~42%	41.5% - 42.0%
†The non-GAAP measures presented in the table above should not be considered a substitute for financial results and measures determined or calculated in accordance with GAAP.

Cadence Design Systems, Inc. Impact of Non-GAAP Adjustments on Forward Looking Diluted Net Income Per Share As of October 23, 2023 (Unaudited)
	Three Months Ending	Year Ending
	December 31, 2023	December 31, 2023
	Forecast	Forecast
Diluted net income per share on a GAAP basis	$0.85 to $0.91	$3.48 to $3.54
Stock-based compensation expense	0.32	1.20
Amortization of acquired intangibles	0.06	0.22
Acquisition and integration-related costs	0.04	0.20
Restructuring	-	0.04
Non-qualified deferred compensation expenses	-	0.02
Other income or expense related to investments and non-qualified deferred compensation plan assets*	-	(0.06)
Income tax effect of non-GAAP adjustments	0.03	(0.03)
Diluted net income per share on a non-GAAP basis†	$1.30 to $1.36	$5.07 to $5.13
Cadence Design Systems, Inc. Impact of Non-GAAP Adjustments on Forward Looking Net Income As of October 23, 2023 (Unaudited)
	Three Months Ending	Year Ending
	December 31, 2023	December 31, 2023
($ in millions)	Forecast	Forecast
Net income on a GAAP basis	$232 to $248	$949 to $965
Stock-based compensation expense	88	327
Amortization of acquired intangibles	16	61
Acquisition and integration-related costs	10	54
Restructuring	-	12
Non-qualified deferred compensation expenses	-	5
Other income or expense related to investments and non-qualified deferred compensation plan assets*	-	(18)
Income tax effect of non-GAAP adjustments	9	(7)
Net income on a non-GAAP basis†	$355 to $371	$1,383 to $1,399
†The non-GAAP measures presented in the table above should not be considered a substitute for financial results and measures determined or calculated in accordance with GAAP.
* Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

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