Some info from Goldman, Sachs on CDN today
Goldman, Sachs & Co.
Equity Research Web - Documents
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Goldman, Sachs & Co. Investment Research
Cadence Design Systems, Inc.
* * String of Strong Quarters Remains Unbroken; RL * *
Laura Conigliaro (New York) 1-212 902-5926 - NY Equity Research
Cadence reported a strong December quarter, with product revenue growth,
at 45%, dramatically higher than our 28% growth forecast. Overall
revenue growth of 34% would have been 39% excluding the impact of
currency. Although operating earnings of $0.29 were only slightly
higher than our $0.28 estimate, the number seemed controlled and we
believe Cadence exited 1997 in what is probably its strongest position
of the year. We are adjusting our growth assumptions for 1998 and
raising our estimate from $1.10 to $1.15 with a high confidence level
and a continuing belief that visibility and upside potential remain
intact. Our preliminary estimate for 1999 is $1.45.
* Cadence's product strength can be seen across most of its divisions,
with its Custom IC and Deep Submicron business units the key product
revenue drivers, each showing revenue growth well in excess of 50% and
bookings growth even higher than that. Even the weaker divisions, such
as design verification, systems design, and the ALTA Group, were much
stronger than their reported revenues implied, given strong bookings and
Cadence's ability to modulate what went out the door.
* Cadence is running counter to trend in most of Asia, with the company
seeing no impact on product revenues to date in Japan. Revenues grew by
50% in Japan and by 64% in Asia (with bookings growth even higher),
despite a significant Korean downturn for Cadence.
* Visibility is at an all time high. Some of this - such as very strong
product revenues, large orders (the recently announced Asian order, the
Scottish enterprise award, orders from Philips and Thomson in Europe
during the quarter, and others), extremely high sales and marketing
expenses in the quarter (implying very high bookings)- we can see.
Other parts of the visibility equation, though less open to our
analysis, still remain strong, with backlog, now in its 19th consecutive
quarter of growth, apparently at very high levels both on the product
and services side.
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*REPORTED RESULTS INCLUDED SOME CHARGES. Although operating earnings were
$0.29, reported results were $0.21, causing some confusion when the numbers
were first announced. The difference came from write-offs mostly
associated with acquisitions and the adoption of a new accounting method
for information systems re-engineering costs as a result of an SEC task
force ruling.
*THE STRING OF SOLID QUARTERS CONTINUES UNBROKEN. Although there were a
number of key variances between our model and actual results, the theme was
still the same - Cadence's performance was very strong, with reported
software license revenues considerably higher than we had been
anticipating. The heavier than expected proportion of product revenues
drove gross margin higher than our model, despite lower services and
maintenance gross margins. Services margins are being pulled down by
Cadence's decision to position itself for the large deals it has already
booked and the sizable pipeline, now totaling around $1 billion according
to management, that it sees ahead of it. Our model assumes that services
margins will gradually move up as Cadence increasingly fills out its
additional capacity.
*OPERATING EXPENSES WERE ALSO HIGHER THAN EXPECTED, WITH SALES & MARKETING
PROVIDING EVIDENCE OF UNDERLYING ORDER STRENGTH. The difference between
our operating expense assumptions and actual results was $11 million, with
most of the added spending coming in the crucial Sales & Marketing
category. Since Cadence's commissions are based largely on its bookings,
we can only assume that this well-above trendline expense was another
manifestation of the order strength that Cadence continued to refer to
throughout its conference call.
*CADENCE'S VISIBILITY IS DEFINED BY ITS BACKLOG, ITS ORDER BALANCE, ITS
LAYERS OF LONGER TERM BUSINESS, AND ITS UNIQUE SERVICES CAPABILITY.
Although the expectation had been that services growth would begin to be
the premier driver for overall revenues, product revenues remaining
extremely strong. In the December quarter, product bookings were even
stronger than services orders, with Place & Route revenues, which is the
area where Cadence and Avant! compete most often, up over 200%. Our guess
is that Cadence's product and services 12-month backlog climbed by well
more than the company normally sees in a strong Q4, with this only
representing the tip of the iceberg. Not included in bookings was the $150
million Scottish enterprise award as well as much of the $117 million Asian
award. These two awards, plus many others, are part of the layers of
visibility that Cadence has been building for itself over the course of the
last few years, with many of these awards extending out beyond 12 months
and, therefore, not included in a traditional look at backlog.
*GEOGRAPHICALLY, CADENCE IS SHOWING SOME COUNTERCYCLICAL ASPECTS, WITH
JAPAN SEEING NO SIGNS OF SLOWING AND EUROPE VERY STRONG. The respectable
24% revenue growth from North America was far eclipsed by Cadence's other
regions. Europe saw the strongest growth, coming in at 89%, due in part to
large deals from Philips and Thomson. Surprisingly, Asia (excluding Japan)
was able to deliver 64% revenue growth despite slowing in some key
geographies, with strength in Taiwan, Hong Kong, and China driving the
December quarter. Japan is also running counter to trend, delivering 50%
growth and, in fact, Cadence has not yet seen a negative impact from the
economic issues in the region on its Japanese product revenues. Still, it
is impossible to ignore the data coming from many companies that do
business in the troubled Asian regions and, as such, Cadence is
conservatively managing its Asia business, indicating that it has reduced
its product revenue plans for Korea to zero for the next 6 months and moved
one of its more successful managers in Japan into the position of managing
the rest of Asia.
*CADENCE'S PRODUCTS CONTINUE TO BUILD MOMENTUM. Cadence is seeing selling
opportunities not only in its more traditional customer base of computer
and semiconductor companies, but also in the rapidly changing consumer
products marketplace, with the company's dual pronged service and tools
offerings particularly attractive to companies for which chip design is not
a core competency. Its largest businesses, Custom IC and Deep Submicron
(which together comprised 47% of total December quarter revenues and about
75% of product revenues) continue to experience growth well in excess of
50%. Even the 'weaker' divisions, design verification, systems design, and
the ALTA Group, were much stronger than the reported revenues implied, with
Q4 bookings in each of these divisions in the 50%+ range. In the much
debated place and route area, Cadence is not only benefiting from the
organic growth of the market segment, but is also capturing share from its
competition, as its Silicon Ensemble DSM product gains mind and market
share. |
