To all: this is a recent Salomon Smith Barney report:
I will check with my broker to see if I can post these reports on a regular basis.
regards, Alfredo
04/21/99 Cadence Design Syste (CDN $20.81,3-H,Tgt $22.00) Ken McBride
--SUMMARY:--Cadence Design Systems--Technical Software
*We are reducing our EPS estimates (excl. goodwill amortization) for 1999 from $1.48 to $1.26,
our 2000 est. from $1.80 to $1.55, and reducing our rating from 1H to 3H. Our target price is
reduced to $22 from $43. Cadence has gone into backlog-building mode for the remainder of
1999, with a guided outlook of modest (we expect 5%) top line growth for the full year.
Although orders may continue to exhibit traditional EDA industry growth rates of
mid-to-high teens, with no visible evidence of that underlying growth, we expect the stock to
be stuck in a trading range in the high-teens to low-20s for two or more quarters.
*First quarter operating EPS was $0.31 vs. $0.25 last year (consensus was at $0.30), excluding
goodwill amortization and unusual items. Revenue 04/21/99 Cadence Design Syste (CDN
$20.81,3-H,Tgt $22.00) Ken McBride
was up 13% vs. last year, but North America showed an 18% decline.
--EARNINGS:-----------------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/98 EPS $0.25A $0.28A $0.30A $0.37E $1.20E
Previous 12/99 EPS $0.32E $0.35E $0.38E $0.45E $1.48E
Current 12/99 EPS $0.31A $0.28E $0.31E $0.35E $1.26E
Previous 12/00 EPS $N/A $N/A $N/A $N/A $1.80E
Current 12/00 EPS $N/A $N/A $N/A $N/A $1.55E
Previous 12/01 EPS $N/A $N/A $N/A $N/A $N/A Current 12/01 EPS $N/A $N/A $N/A $N/A
$N/A
Footnotes: EPS are fully diluted, excluding goodwill amortization.
04/21/99 Cadence Design Syste (CDN $20.81,3-H,Tgt $22.00) Ken McBride
--FUNDAMENTALS:-------------------------------------------------------------
Current Rank........:3-H Price 04/20/99......:$20.81
Prior Rank..........:1-H Target Price........:$22.00
P/E 12/99...........:16.5X 52 Wk Price Range...:38.00 - 19.18
P/E 12/00...........:13.4X Proj. 5yr EPS Grth..:18.0%
Return on Equity 98.:28.00% BookValue...........:$4.49
LT Debt-to-Capital..:11.19% Dividend............:$0.00
Revenue 1999........:$1480.00 mil Yield...............:N/A%
Shares Outstanding..:232.00 mil Convertible.........:No
Mkt. Capitalization.:$4827.92 mil Hedge Clause(s).....:
Comments............:
04/21/99 Cadence Design Syste (CDN $20.81,3-H,Tgt $22.00) Ken McBride
--OPINION:------------------------------------------------------------------
SUMMARY
Cadence's first quarter proved to be more challenging than anticipated. Although EPS was
generally in line with consensus (it wasn't clear how many EPS estimates had been adjusted
for the SEC restatements), revenue was below expectations, particularly in North America
where the company experienced a large negative surprise (revenue was down 18% in North
America). With this large negative surprise, Cadence did not build the kind of visibility (i.e.
backlog coverage for the following quarter) it had hoped to build in the quarter.
In order to give itself some breathing room to build the kind of visibility it needs to operate its
business--and with a backdrop of a semiconductor industry that from Cadence's perspective
does not appear to be improving--Cadence reduced its outlook for revenue growth for 1999 to
5% (our previous outlook was 21%). Since revenue grew 13% in the first quarter, all of the
remaining quarters are now expected to show flat revenue vs. 1998.
Cadence asserted that it believes the EDA industry will continue to suffer from tightened
semiconductor budgets, and that it expects the normal 2-3 quarter lag from semiconductor
turnaround to EDA industry uptick may actually take 3-4 quarters instead (putting the uptick
for EDA in 4Q99 or 1Q2000). Cadence also stated that it believes a delay in the deployment of
0.18 micron semiconductor processes would not provide the retooling driver it had hoped for.
While we agree that the EDA industry may continue to feel the budgetary pressure of the
semiconductor industry, we do not expect the rest of the EDA industry to experience the kind
of weakness that Cadence now expects for the remainder of 1999.
We believe Cadence's weakness will be exaggerated in 1999 because it aggressively recognized
product revenue in 1998. Faced with declining service gross margins, in order to meet bottom
line expectations Cadence recognized product revenue that led to a 31% growth in 1998.
Furthermore, perpetual and fixed-term licenses, which have the lion's share of revenue
recognized in the quarter shipped, were utilized to keep revenue growth up. Subscription
licenses, which are ratably recognized, were a small percentage (approximately 10%) of the
total licenses in 1998.
Part of the impetus for reducing expectations for revenue growth for the rest of 1999 is to
allow Cadence to build backlog, and part of the way Cadence plans to build that backlog is by
moving customers more aggressively to subscription licensing schemes. Clearly, having high
backlog coverage is the key to giving an EDA firm power in a negotiation with a large
semiconductor company.
We still believe Cadence is the premier company in EDA, with the best technology, strategy,
and market position. However, with flat revenue growth for the next 2-3 quarters, we expect
the stock to be stuck in a trading range in the high-teens to low-20s for that period. Thus, we
are downgrading to 3H from 1H.
FIRST QUARTER EARNINGS
Note about EPS numbers. We are now following Cadence on a cash earnings basis (excluding
goodwill amortization and unusual items).
Cadence reported first quarter operating EPS of $0.31, up 24% vs. last year's operating EPS of
$0.25, and modestly ahead of the consensus estimate of $0.30.
Although services top-line growth was below expectation at 35% vs. 1998, profitability was
better-than-expected at 34% for service gross margin (up 10% vs. last year).
Our 1999 model and EPS estimate does not include any contribution from Quickturn, which is
expected to close by May 1999.
FIRST QUARTER REVENUE
First quarter revenue was $305.2 million, up 13% on a constant currency basis (also on a
reported basis). North American revenue was down 18. We are currently projecting 1999
revenue of $1.27 billion, up 5% vs. 1998. First quarter revenue growth by major region was as
follows:
=============================================
Revenue Growth: Dollar Growth
North America (18)%
Europe 94
JPN 47% ==============================================
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