Cadence Design Systems, Inc. (NASDAQ:CDNS)
May 03, 2013 4:00 pm ET
James J. Cowie - Senior Vice President, Secretary and General Counsel
Lip-Bu Tan - Chief Executive Officer, President and Director
Geoffrey G. Ribar - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
Nimish H. Modi - Senior Vice President of Research & Development of Cadence
Chi-Ping Hsu - Senior Vice President of Research and Development for Silicon Realization Group
John B. Shoven - Chairman, Member of Interim Office of The Chief Executive, Chairman of Compensation Committee, Member of Audit Committee, Member of Corporate Governance & Nominating Committee and Member of Finance Committee
James J. Cowie
Good afternoon, ladies and gentlemen. My name is Jim Cowie, a Senior Vice President, General Counsel and Corporate Secretary of Cadence. On behalf of our more than 5,500 employees worldwide, it's my pleasure to welcome you to the 2013 Annual Meeting of Cadence's Stockholders. As the company's bylaws provide, Lip-Bu Tan, our President and Chief Executive Officer, will act as chairman of this meeting. And I will act as secretary.
First, I'd like to introduce to you the members of Cadence's board who are here today and who are standing for election. Sue Bostrom, former Executive Vice President, Chief Marketing Officer, Worldwide Government Affairs of Cisco Systems; Jim Plummer, Professor of Electrical Engineering at Stanford and Dean of Stanford's School of Engineering ; Alberto Sangiovanni-Vincentelli, Professor of Electrical Engineering and Computer Science at the University of California, Berkeley; George Scalise, former President of the Semiconductor Industry Association; John Shoven, our Chairman of the Board and Professor of Economics at Stanford; Roger Siboni, an independent investor; Young Sohn, President and Chief Strategy Officer of Samsung Electronics; and of course, Lip-Bu Tan, our President and Chief Executive Officer.
I would also like to introduce you to the officers of Cadence who are with us here today. In addition to Lip-Bu Tan and me, the officers who are present are Chi-Ping Hsu, Senior Vice President of Research and Development for our Silicon Realization Group; Charlie Huang, Senior Vice President, Worldwide Field Operations; Tina Jones, Senior Vice President of Global Human Resources; Martin Lund, Senior Vice President, Research and Development for the SoC Realization Group; Nimish Modi, Senior Vice President, Research and Development for our System and Software Realization Group; Pankaj Mayor, Vice President of Marketing; and Geoff Ribar, Senior Vice President and Chief Financial Officer.
After the business portion of today's meeting, our executive team will be available to answer questions. But now at the request of the Board of Directors, I will conduct the business portion of this meeting. Today's annual meeting is being webcast. The webcast will be archived on the Cadence website and available for replay through 5:00 Pacific Time, 8:00 Eastern, on Friday, May 31, 2013.
In addition to the directors and officers I already introduced, I would like to point out several other important people who are here with us today. Richard Emersec [ph] and Chantal Adam, representatives of KPMG LLP, Cadence's independent registered public accounting firm, are here with us and will be available to respond to appropriate questions. And Computershare, Cadence's transfer agent, will tabulate the proxies again this year. And Rene del Real of Computershare also joins us today as Inspector of Elections. The 2013 Annual Meeting of Cadence's Stockholders will now come to order. We will proceed with the formal business of the meeting, as set forth in your Notice of Annual Meeting and Proxy Statement.
I have with me at this meeting a complete list of the holders of record of Cadence's common stock, as of the close of business on March 6, 2013, the record date set for this meeting by the Board of Directors. This list has been on file here at Cadence for the past 10 days, available for inspection by any stockholder and is available for examination at this meeting for any stockholder who wishes to do so.
I also have affidavits certifying that, as of March 22, 2013, a notice of Internet availability of proxy materials, containing instructions on how to access and review the proxy materials on the Internet, including the proxy statement and annual report, was deposited in the United States mail, to the stockholders of record, as of the close of business on the record date, unless they previously requested paper delivery. And as of March 22, 2013, a notice of this Annual Meeting of Stockholders, proxy statement and proxy card was deposited in the United States mail, to the stockholders of record, as of the close of business on the record date, if they had previously requested paper delivery of the proxy materials. The affidavits of mailing will be filed with the minutes of this meeting.
In accordance with Cadence's bylaws, the Board of Directors has appointed Rene del Real of Computershare to act as Inspector of Elections, and he has taken his oath as Inspector.
I've been informed by the Inspector of Elections that proxies have been received for 260,166,980 shares of the 282,627,300 shares of common stock that were outstanding on the record date, which represents approximately 92% of the total number of issued and outstanding shares entitled to vote as of the record date. This constitutes a quorum. I hereby declare this meeting to be duly constituted for the transaction of all business.
If any stockholder or proxy holder has not registered his, her or its attendance, please do so now with the Inspector of Elections. This is necessary so that the Inspector can determine the exact number of shares present at this meeting for voting purposes.
Also, if you have not yet submitted your proxy, please do so now. If you need a ballot, please raise your hand, okay. If you've already submitted your proxy, you need a ballot only if you wish to change your vote. Properly completing and submitting your ballot to the Inspector of Elections of this meeting will have the effect of revoking any proxy that you previously submitted.
In order to expedite the flow of business at this meeting, we intend to adhere to the following protocol:
Each of the matters to be considered and acted upon by the shareholders of this meeting will be proposed in the order set forth in the proxy statement, but the actual vote on each item will be deferred until all matters to be acted upon have been discussed.
If there are any questions you have that don't relate to the matters being voted on, they should be deferred until after the business portion of the meeting is concluded.
All questions and any statements by the stockholders in attendance should be limited to 2 minutes. We want to give all individuals present the opportunity to speak, as appropriate. Before you ask your question or make a statement, we do ask that you state your name and whether you are a stockholder as of the record date, March 6, 2013, or whether you're representing an entity that was a stockholder as of the record date and the name of the entity you are representing.
The time is now 1:08 p.m. on May 3, 2013, and the polls are now open for voting on all matters to be presented. Polls will be closed to voting after we go through all the matters up for vote.
First order of business, Proposal #1, is the election of directors to serve until the 2014 Annual Meeting and until their successors are duly elected or qualified or until the director's earlier death, resignation or removal. At this meeting, directors are to be elected by a majority vote of the shares present or represented by proxy and entitled to vote. However, in a contested election, the directors must be elected by an affirmative plurality vote. The other proposals require a majority vote of the shares present or represented by proxy and entitled to vote. This proposal can be found on Page 15 of the Proxy Statement.
The board recommends the election of, and I hereby nominate the following individuals: Susan L. Bostrom, Dr. James D. Plummer, Dr. Alberto Sangiovanni-Vincentelli, George M. Scalise, Dr. John B. Shoven, Roger S. Siboni, Young K. Sohn and Lip-Bu Tan. This constitutes the slate of directors listed in the Proxy Statement. Is there any discussion?
Next item of business, Proposal #2, is the approval of an increase in the number of authorized shares of common stock reserved for issuance under the amended and restated Employee Stock Purchase Plan, from 66,500,000 to 74,000,000 shares. This proposal can be found on Page 20 of the Proxy Statement. The board recommends a vote in favor of this proposal, and I hereby propose the approval of an increase in the number of authorized shares of common stock reserved for issuance under the amended and restated Employee Stock Purchase Plan, from 66,500,000 to 74,000,000. Is there any discussion?
The next item up for business, Proposal #3, is the advisory vote to approve executive compensation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and Section 14(a) of the Securities Exchange Act of 1934, as amended, enable our stockholders to vote to approve, on a nonbinding advisory basis, the following resolution:
Resolved, that the compensation paid to Cadence's named executive officers, as disclosed, pursuant to Item 402 of Regulation S-K of the Exchange Act, including the compensation discussion and analysis, compensation tables and narrative discussion is hereby approved.
Proposal #3, or the "say-on-pay" resolution, can be found on Page 25 of the Proxy Statement. The board recommends a vote for the approval of the nonbinding advisory resolution to approve executive compensation, and I hereby propose to approve the nonbinding advisory resolution to approve executive compensation. Is there any discussion?
Final item of business, Proposal # 4, is the ratification of the selection of KPMG LLP as Cadence's independent registered public accounting firm for the fiscal year ending December 28, 2013. This proposal can be found on Page 26 of the Proxy Statement. The board recommends a vote in favor of this proposal, and I hereby propose the ratification of the selection of KPMG LLP as Cadence's independent registered public accounting firm for its fiscal year ending December 28, 2013. Is there any discussion?
We will now vote on the previously discussed matters. The voting is by proxy and written ballot. It is not necessary to vote in person, if you've previously submitted or have, at this meeting, submitted your signed proxy. Does any stockholder as of the record date who was present at this meeting, whether or not you've submitted proxy now wish to vote in person?
James J. Cowie
Please hand in your ballots to the Inspector of Elections, if you have not done so already.
The time is now 1:12 p.m., and I declare the polls are now closed for voting for each matter voted on at this meeting and direct the Inspector of Elections to collect and tabulate the ballots.
According to the report of the Inspector of Elections, each person nominated as a director has been elected; an increase in the number of authorized shares of common stock reserved for issuance, under the amended and restated Employee Stock Plan has been approved; a nonbinding advisory resolution approving executive compensation has been approved; and the proposal to ratify KPMG LLP as Cadence's independent registered public accounting firm for its fiscal year ending December 28, 2013, has been also been approved.
The Inspector of Elections will furnish to me, as the Corporate Secretary, a written report of the final vote count with respect to the matters voted on today, which will be included in the minutes of the meeting. If there's no other business, this concludes the 2013 Annual Meeting of Cadence's Stockholders.
Again, on behalf of the Cadence team, I'd like to express our gratitude to all of the stockholders who attended this meeting in person, as well as to those of you who submitted your proxies but were not able to be with us here today.
The meeting is now adjourned. It's my pleasure now to begin the Q&A session. Before I do, I will go through the Safe Harbor statement and Regulation G reconciliation statement. The following discussion may contain forward-looking statements, and Cadence's actual results may differ materially from those expectations discussed here. Additional information concerning factors that could cause such a difference can be found in our Form 10-K for the year ended December 29, 2012, our form 10-Q for the quarter ended March 30, 2013, the company's future filings with the Securities and Exchange Commission and the cautionary statements regarding forward-looking statements in our April 24, 2013, earnings press release.
Today's remarks may also contain certain non-GAAP financial measures. You’re encouraged to review the reconciliation of any such non-GAAP financial measure 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 at www.cadence.com.
With that, I'd like to introduce our President and CEO, Lip-Bu Tan, who will preside over the Q&A session. Lip-Bu?
Okay, thank you. First of all, thank you so much, all of you, to come to the shareholder meeting, and I'm very blessed with a wonderful board members to work for and also very talented and committed executive team and -- that support me, and it's a great team to work with. And also we have 5,500 wonderful dedicated employees that does nothing but try to drive the best product and inspire to provide the best tool and software and IP for the customer and then, of course, driving the shareholder value.
With that, I'd like to open up for any question that you may have and feel free to ask. Again, 2 minutes, right, to ask a question and limit to that, and then we would try to answer your questions the best we can. And I want our Chairman and also our team to answer your questions. You have the first question?
Edward Bromchik [ph], individual shareholder. I'd like to better understand your business model. I noticed that your R&D and SG&A combined, as a percent of revenue, right now is at 78.5% of revenue. To your credit, since you arrived in 2009, you've taken that down from 89.5%, so that's an impressive decrease there. But if you look at your gross margin, essentially at 85%, your cost of goods sold is 15%. So R&D plus SG&A, roughly added on, is 85%, that means your pre-tax margin is 15%. And so that sets a ceiling. Assuming that you don't have any tax refunds that are coming, like you did last year, and as a percent of revenue, the tax refund was 19%, and that took your net margin up to 33%. So can you look forward for 2013 and 2014 and tell us what your plan is and what can we expect in terms of net margin? What's going to be the impact of all the tax refunds? I did read the notes in the financial, in the 10-K.
Sure. So let me try to answer your question the best I can, and then Geoff will be happy to help you in terms of financial model. So far, in our -- as we -- Q1, we had earnings call, we guide the Street in term of operating margin. And the volume will really drive the business in term of revenue growth and also driving the operating margin, 24% to 25% this year is what we guide. And then secondly, we now continue to generate cash. I think last year, we generate $360 million cash. This year, I think, the midpoint about $375 million in term of cash. So I think continue to drive cash. I think our business has a lot to do with R&D, development leading-edge advanced nodes. And recently, we have a very big push into the SoC, IP-related business. It's very strong and a very -- coming up very attractive, customers really love it. And then we also have a System Realization group that Nimish is driving. So I think, all in all, we try to find 3 or 4 growing engines, profitable engines, continue to drive. But in terms of percentage, R&D continue to be very important because the guys will continue driving the R&D for the leading-edge Cadence advanced node, for regular tool [ph] that help our customers who design the best product in the marketplace. Geoff, you may want to kind of highlight some of the financials that's...
Geoffrey G. Ribar
Sure. So I think one of the big differences over there, of course, is we tend to look at the business on a GAAP versus the non-GAAP basis. We tend to look at our non-GAAP basis, you're quoting largely GAAP basis numbers. So I think the big difference there, for us, is shareholder -- ours or in stock, right? In stock compensation, which is noncash. I think the other part is also some of the expenses related to M&A over a period of time. We tend to be judged by the Street and tend to be judged by our investors largely on a non-GAAP basis. If you look it on a non-GAAP basis, our R&D is about 32%. Our SG&A is about 30%, a little bit more than 30%. Net-net, we're at 25%, 24% last quarter, on an operating margin basis, which I guess, is really how the Street looks at it. We also, then, for non-GAAP basis, apply a 26% tax rate, which is we think is appropriate, based on our long-term look at our -- how our taxes will be paid. And that gets us to the operating -- or our net income that the Street actually looks at. And I think, from that perspective, we're doing quite well. The tax refunds, or the tax things that you see sometimes coming through, are usually related to history and not related directly to the operations, which is why we use the 26%.
Geoffrey G. Ribar
So obviously, we don't project tax refunds or changes in tax going forward. We use the 26% tax rate when we give our guidance.
Any other questions? The one behind you.
Yes, on the back page of the annual report, you list all your locations. And I noticed you have one in Japan and 2 in Israel. So many locations means lots of people in each one. Why do we need so many -- like 4 in New York State? Why do we need so many offices?
That's a good question. I think some of the offices we have through acquisitions and some of the offices because closer to the customer and also some of the talent that we have to recruit. And I think, all in all, I think you didn't notice the last 2 to 3 years we're doing consolidating the offices to have critical mass offices. So I think we're going to continue that effort and is that optimized? Always room for optimize. So I think we are reviewing it. Geoff is very passionately review and in couple of places, we consolidate 2 into 1. And so that we should have -- we have a critical mass in terms of driving the efficiency, the productivity. So I think, all in all, it's a good observation, we'll continue to drive that. Anything specific on the 4 offices in New York, Geoff? You want to comment?
Geoffrey G. Ribar
Sure. The offices in New York are largely, and most they run are related to where we have people and where we have customers, right? And sometimes, they're part of acquisitions that we've previously done. What?
I know we're going to start [indiscernible].
Geoffrey G. Ribar
Yes. So we've had a series of acquisitions. We also want to be close to our customers and close to really talented execs and so that's -- and scientists. So that's why we have a situation where we do.
Any other questions? Yes, please.
Edward Bromchik [ph] again. I want to understand your R&D as a percent of revenue model a little bit better. Now since you've arrived, the numbers for the 4 years are roughly just rounded to the nearest million, $354 million in 2009, $376 million in 2010, $401 million in 2011, and last year, $454 million. Since we have Chi-Ping and Messrs. Lund and Modi here, I was wondering, if you want, it'll also be great to hear from you and them on your thoughts on when will this monetize. Is this a 3- to 5-year schedule? Or is this more like a hedge fund or venture capital fund, looking at 10 to 13 years? When are you looking at? And as an example, in 2009, $354 million, how much of that is monetized? And what kind of ROI?
Right. Good question. So I think, first of all, R&D, as I mentioned earlier, is very important for this company because we're providing the tools and IP for the customer and ahead of the customer needs. So in some way, you'd have move into 20-nanometer, 16-nanometer, 14-nanometer FinFET. And so I think it's very important to get the best tool to help our customers to design first-time parts and then that successful in the marketplace. So it's a lot of handholding a lot of design. And 4 years ago, I took over, I mean, a couple of areas we're lagging behind. So we had to continue to investing. And now we're starting to see that we're winning and we're taking market share from our customer because of the hard work of the team and really drive leading-edge design tools and IP. So I think, all in all, I think we'll continue to investing. Is that efficient and productive enough? We're really looking at quality improvement, we're looking at productivity improvement. So under my watch and our new team, we'll continue to drive that, our whole lot's accountable. And I think, in some ways, the results speak for itself. I think 2011, we grew about 23%. Last year, we grew 15%. We continue to drive and then take the leadership in terms of market share gain. But clearly, technology is very key to drive those that impact success and also market share improvement. I think, more important, like Geoff mentioned earlier, the revenue growth, the operating margin, the cash generating and then the DSO, and then so, all those are the metrics I watch very closely. And then most important, shareholder return. I think that since I took over, as the CEO and then to lead the company and now with the great support from our board, from $2.61, by now almost $14. So I think continue to drive shareholder value to the shareholder like yourself and then myself, as a shareholder, and all our board member and management team is also shareholders. And we are committed to drive shareholder value. So I think, specific on the number, I think, Geoff, if you want to shed any light?
Geoffrey G. Ribar
[indiscernible] but I think...
Do you want Chi-Ping or Nimish? And then you'll -- okay.
Nimish H. Modi
I probably cannot say too much about the financial side, I can update a little bit on the investment that we make on the technology. I think it's very strategically important we stay at the leading edge to differentiate because this tech -- this area, once you become commoditized, then you lose your pricing power and et cetera. So most recently, we had 3 consecutive press releases. One is October last year, we did the test chip together with ARM. The IBM SOI 14-nanometer FinFET, which is the latest technology that's out there. And we did the ARM M0 core on their test chip. And the following that, we have a December release that we did another test chip together with ARM, that's ARM A7, that's using Samsung's 14-nanometer FinFET technology as well. And latest is April, we did the test chip together with ARM and TSMC, their 16-nanometer FinFET and, this time, it's ARM A57, which is the latest, most complex processor out there. So these are the type of things where our Tier 1 customers really looking after. And we set our niche and leadership position with these kind of activities.
Not much to add. In terms of the motivation, we're here because our customers are coming out with products which are anywhere between 1 to 4 years out there. And we need to be ready prior to those customers' design cycles begin. So we got to invest ahead of the curve on the next-generation stuff, say, the leading edge. And so that's one aspect of it. I think what Lip-Bu also alluded to is the quality piece of it, which is we're putting a lot of focus on quality, which will end up enabling us to deliver better products, which are not going to require as much support from the R&D team. And in this sense -- and we can then more efficiently utilize those resources into other areas of development. And so we are continually pressing on the efficiency and productivity, but our #1 driver is to make sure that we stay ahead of our customers' needs.
Nimish H. Modi
And then in some way, I think R&D ratio, I think the best is to compare it both to our -- compare it to Synopsys and Mentor. And we're in the same business and then we continue to drive the operating margin and gross margin. But I think compared with other software company, it would be different because this is a little more complex. And then also our sales and need lot more handholding with our customers. And so -- and then support is very critical. So I think, the closer comparable, I think, would be, I highly recommend a Synopsys and Mentor, and that would be a more similar comparable.
Great. Any other question you may have? Okay. And Jim, we have time and...
On the question of the price of the equity, I'm just curious, we have 4 board members that actually go back to this time period. Does anyone in the audience, in the officers and directors remember what the peak price was and the date that the peak price was achieved?
That's before my time, so...
I think, in fairness, it's to the 4 directors that served in that time period. $36?
Peak price. The peak price was actually reached on May 28, 1998, and it was $39. And actually, in 1998, the company had $1.3 billion in revenue, when it first accomplished that metric. And just to put it in historical perspective.
Okay, I've a very brief question for you, Lip-Bu. Your bio at Cadence indicates that you founded Walden International in 1987. Your photo and bio in the Walden International website indicates that you started it in 1989. Which one is correct?
'89? Say again, the question?
Well, the Cadence bio indicates Walden International was founded in '87, and your Walden International bio says '89.
I have to look at it and -- but I recall, it's about that time frame. I've been so focused on Cadence, I forgot about the date I started at Walden.
I have one last question, last question. We're blessed to have a Stanford faculty member who not only has served with distinction on the faculty, but has also been in management. And so I think it would behoove us to tap his expertise for how we're going to do in the second half. So John, can you tell us it'll be better in the second half or next year?
Wonderful, John. The question is for you. By the way, he's a wonderful Chairman, so...
John B. Shoven
Yes. You want the second half of 2013? Or you're asking about 2014?
John B. Shoven
Well, I was actually talking to you before the shareholder meeting, and I guess I have become convinced that the U.S. economy is strengthening, and I actually think that we have Ben Bernanke to thank for that largely. When interest rates are so incredibly low to both the short run and the long run, it does drive people into risky assets. It create a tremendous, what you could call, wealth effect. When the people are wealthier, they consume more and it gets the economy going. The rest of the government is not doing much to help, to be honest. But I think the Federal Reserve's been pretty aggressive. And so I think the U.S. economy is looking pretty strong. I would guess, I'd hate to use the word "guess" that we might see 3% growth in the second half, at an annual rate, obviously. Second half of this year, which by Chinese standards would be poor, but by U.S. standards that would be pretty good. What I'm less sure about, I mean Cadence is not purely U.S. company. We are a global company and so we depend on not only the U.S. growth rate, but the European growth rate, the Japanese growth rate, the Chinese growth rate and everything else. And some of those are harder to predict. You can predict that China is going to do far north of 3%, but they still appear to be slowing some. And that's a little bit of a concern, although if we were slowing to 7.5%, we'd be pretty happy. Europe, I don't know. Hopefully, they're at the bottom, but I don't know. And I think, there's some signs that Japan might be coming out of its 25-year poor performance. I -- that they're not in great shape, either. Worldwide, the world economy is not going to be growing that robustly in 2013. But I'm optimistic about the U.S. economy. If you think 3% is optimistic, I think, certainly, today's numbers were quite favorable. The jobs number was favorable. And -- I don't want to repeat, but I actually give the monetary authorities a lot of credit for getting this -- making this great recession a little less great than it otherwise would have been.
Well, with that, I want to adjourn this meeting and thank you, all of you, for shareholders and the support and your patience. And we do the best to enhance shareholder value. Thank you.
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