Cadence Design Systems, Inc (NASDAQ:CDNS)
Annual Shareholder Meeting Call
May 4, 2012 04:00 pm ET
Jim Cowie - SVP, General Counsel and Secretary
Lip-Bu Tan - President & CEO
John Shoven - Chairman of the Board
Good afternoon, ladies and gentlemen. My name is Jim Cowie. I am Senior Vice President, General Counsel and Secretary at Cadence. It's my pleasure to welcome you to the 2012 Annual Meeting of Cadence 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 as Secretary.
First I would like to introduce you to the members of Cadence' Board who are here today and are standing for election and reelection. They are Sue Bostrom, former Executive Vice President and Chief Marketing Officer, Worldwide Government Affairs, of Cisco Systems; Alberto Sangiovanni-Vincentelli Professor and Chair of Electrical engineering and Computer Sciences 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 University; Roger Siboni an Independent Investor and of course Lip-Bu Tan our President and CEO; Don Lucas; Private Venture Capital Investor and Jim Plummer; Professor of Electrical Engineering at Stanford University and Dean of Stanford School of Engineering could not be with us today.
I would also like to introduce you to the officers of Cadence who are with us here today. In addition to Lip-Bu Tan, those who are present are Tom Beckley Senior Vice President, Research and Development, Custom IC and Signoff; Chi-Ping Hsu here with us today? No, okay. Charlie Huang, Ph.D. Senior Vice President, Worldwide Field Operations; Tina Jones Senior Vice President, Global Human Resources; Martin Lund, Senior Vice President, Research and Development, the SoC Realization Group; Nimish Modi, Senior Vice President, Research and Development, System and Software Realization Group; Pankaj Mayor Vice President, Marketing; 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. Now at the request of the Board of Directors I will conduct the business portion of the meeting.
Today's annual meeting is being webcast. The webcast will be archived on the Cadence website and available for replay through 5 o'clock Pacific Time, 8 Eastern on Friday, June 1, 2012. In addition to the Directors and Officers I already introduced, I would like to point out several other important people here with us today. Richard [Imerseck], Sean [Adam] and Leo [Lynd] are representatives of KPMG LLP, our independent registered public accounting firm.
They are here and will be available to respond to appropriate questions today. Also from Computershare Shareowner Services, Cadence's transfer agent who will tabulate the proxies again this year, Renee [Delrial] of Computershare is with us today.
The 2012 Annual Meeting of Cadence's stockholders will 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 6th, 2012 which was the record date set for this meeting by the Board of Directors. As list of stockholders entitled to vote at this meeting 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 a stockholder wishing to do so.
I also have affidavits certifying that as of March 21, 2012 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 March 6, 2012 unless they previously requested paper delivery of the proxy materials.
Also as of March 21, 2012, 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 March 6, 2012, if they had previously requested paper delivery of the proxy material. The affidavits of mailing will be filed within minutes of this meeting. In accordance with Cadence's bylaws, the Board of Directors has appointed [Renee Delrial] of Computershare Shareowner Services to act as Inspector of Elections at this meeting. Mr. Delrial has previously taken his oath as Inspector of Elections.
I have been informed by the Inspector of Election that proxies have been received for 256,495,766 shares of 274,440,440 shares of common stock outstanding on the record day which represents approximately 93.46% of the total number of issued and outstanding shares entitled to vote. This constitutes quorum. I hereby declare this meeting to be duly constituted for the transaction of all business. If any stockholder or proxy holder is not registered his, her or its attendance please do so now with the Inspector of Election. This is necessary so that the Inspector or Elections 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. If 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 this meeting will have the effect of revoking any proxy that you previously submitted.
In order to expedite the flow of business of this meeting we intend to adhere the following schedule. Each of the matters to be considered and to act upon by the shareholders of the 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. There are questions you have which do not relate to the matters being voted on, they should be deferred until after the business portion of the meeting has been 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 ask that you state your name and whether you are a stockholder or were a stockholder as of March 6 2012 or whether you are representing an entity that was a stockholder as of March 6 2012 and if so the name of the entity or representative.
The time is now 1:07 PM on May 4, 2012 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 of the vote. The first order of business proposal number one is the election of directors to serve until the 2013 Annual Meeting and until their successors are duly elected or qualified or until the Directors' 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 (inaudible) of the vote. The other proposal require a majority vote of the shares present or represented by proxy and entitled to vote. This proposal can be found on page 14 of the proxy statement. The board recommends the election of and I hereby nominate the following individuals. Susan L. Bostrom; Donald L. Lucas; Dr. James D, Plummer; Dr. Alberto Sangiovanni-Vincentelli, George Scalise, Dr. John B. Shoven, Roger S. Siboni and Lip-Bu Tan. This constitutes the slate of directors listed in the proxy statement. Is there any discussion? Proposal number two is the next item for business and it relates to the approval and amendment and restatement of the 1995 Director Stock Option plan which was renamed the Director Stock Incentive Plan and is referred to in this meeting as the Director’s Plan.
In this proposal, stockholders are being asked to approve the amendment and restatement of Director’s plan to permit grants of incentive stock and restricted stock units in addition to stock options, and allow the board discretion in the timing and type of grant. Stock holders are not being asked to increase the number of shares available for issuance under Director’s plan under this proposal number two. This proposal can be found on page 19 of the proxy statement. The board recommends a vote in favor of this proposal and I hereby propose the approval of an amendment and restatement of 1995 Director’s plan. Is there any discussion?
The next item of business, proposal number three is the approval of an increase in the number of authorized shares of common stock reserved for issuance under the Director’s plan from 3,050,000 to 3,550,000 shares. This proposal can be found on page 25 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 on the Director’s plan to 3,550,000. Is there any discussion?
The next item of business; Proposal number four, the Advisory Board on executive compensation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and Section 14A of the Securities Exchange Act of 1934 as amended enable our stockholders to vote to prove on an advisory, non-binding basis the following advisory resolution. Resolve, at the compensation page, Cadence’s named executive officers as disclosed resuming to item 4(ii) of Regulation S-K, including the compensation discussion analysis, compensation tables and narrative discussion is here by approved.
Proposal number four or say-on-pay can be found on page 26 of the proxy statement. The board recommends a vote for the approval of the advisory resolution on executive compensation and I here by propose to approve the non-binding advisory resolution regarding executive compensation.
Is there any discussion? Final item of business, proposal number five is the ratification of the selection of KPMG LLP as Cadence’s independent registered public accounting firm for our fiscal year ending December 29, 2012. This proposal can be found on page 27 of the proxy statement. The board recommends a vote in favor of this proposal and I here by propose the ratification of the selection. KPMG LLP as Cadence’s independent registered public accounting firm. Is there any discussion?
We will now vote on the previously discussed matters. Voting is by proxy and written ballot. It is not necessary to vote in person if you have previously submitted or have at this meeting submitted your signed proxy. Does any stockholder as of the record date is present at this meeting, whether or not you have submitted proxy, now wish to vote in person? So please raise your hand.
The time is now 1 12 pm and I declared the polls for each matter voted depend at this meeting now close for voting and direct the Inspector of election to collect and tabulate the balance. According to the report of the Inspector of election, each person nominated as a Director has been elected. An amendment in restatement of Directors plan has been approved. An increase in number of authorized shares of common stock reserved for issuance under Directors plan has also been approved. A non-binding advisory resolution regarding the executive compensation has been adopted and the proposal to ratify KPMG, LLP as our independent registered public accounting firm for the fiscal year ending December 29 2012 has been approved.
The Inspector of election will furnish the Secretary a written report of the final vote count with respect to matters voted on today, which will be included in the minutes of the meeting. If there is no other business, this concludes the 2012 Annual Meeting of Cadence’s stockholders. On behalf of the Cadence team, I would like to express our gratitude to stockholders, who attended this meeting in person as well as those who submitted their proxies but who were not able to be with us today.
The meeting is now adjourned. It’s my pleasure now to begin the Q&A session. Before I do, I’ll go to the Safe Harbor statement and regulation G reconciliation. Following discussion may contain forward-looking statement and Cadence’s actual results may differ materially from those expectations discussed here. Additional information concerning factors that could cause the difference can be found in our Form 10-K for the period ended December 31, 2011, our Form 10-Q for the period ended March 31, 2012, the company’s future filings with the Securities and Exchange Commission and the cautionary statements regarding forward-looking statements in our earnings press release of April 25, 2012.
In addition to financial results prepared accordingly, generally accepted accounting principles or GAAP, today's remarks may contain certain non-GAAP financial measures. You are encouraged to review a reconciliation of any such non-GAAP financial measures with their most direct comparable GAAP financial results, which can be found in the quarterly earning section of our investor relations portion of our website at www.cadence.com. With that, I would like to introduce our President and CEO, Lip-Bu Tan who will preside over the Q&A session. Lip-Bu?
Thank you, Tim. Before I open up the Q&A, I just want to let you note that our board and our management team are doing the best we can and look as hard as we can to enhance and protect the shareholder value and clearly last year was a good year. We grew 23% revenue-wise and an operating margin of 18% and we generated about $214 million and in Q1 we had a good start this year, and we also raised our guidance. So with that I think its time to answer any questions or any comments that you may have.
In the last three years, if you add the SG&A and the R&D and calculate it as a percent of revenue, your numbers have been basically 90%, 81% and 71% and to your credit the number have dropped about 11% from 2010 to 2011. The question I have is this, while that's a great improvement your key competitors at 63% and Oracle who is also in services and software is under 35%. What is your goal in the next year or two to continue to improve that?
Yeah, I think it’s very important in our EDA industry. We have to continue investing in R&D especially in the advanced notes, complex chip design, the mixed signal and also hardware and at some level application.
So I think we had to continue to investing in R&D and then secondly, I think is a free organization especially the (inaudible) I think clearly we need to continue to invest and in the last three years is a not an easy period because it’s a very competitive market and we have to compete and we have to win and we have to invest. So I think overall, like you already pointed out, we are continue to drive the efficiency, the operating margin and we indicate in 2013 operating margin.
So we are going to continue and be very determined to drive that. We are very different from Oracle and other companies, you know EDA needs a lot of support in a few organizations and also every advanced note, process note for opportunity for us to win in the marketplace and we have to invest to help the customer to support that. So I think the data that you show didn't have those, I think you have done a lot of analysis and love to see that number but I think we continue to drive our efficiency and operating margin.
Any other questions?
Can anyone tell me what R&D spending has been for the last 15 years? Any board member, officer, R&D, VPs and (inaudible) for instance. Chi-Ping is not here I think so?
Chi-Ping is at the back.
He is here and that question, I don't think I can answer. I only have the last three and a half years, and there someone will have to help me.
Unidentified Company Representative
So you know R&D spending on a non-GAAP basis I think the numbers you recorded earlier were on a GAAP basis, right. So they are materially different, but our non-GAAP basis R&D spending in the past year end of last year at 30% of revenue which I think is substantial progress over the last couple of years as you highlighted. I don’t have the 15 year number.
Okay. The quick answer is $5 billion. And the reason I bring this up is because since the beginning of 2008, January 2008, shareholders equity was $2 billion and last year it ended at $411 million, so it’s roughly a drop of 80% in shareholders equity. I us that as a metric to look at the efficiency of the invested R&D dollar, so the question is how do you increase the efficiencies of that invested dollar. And you know for your day job hire you VC would you invest in a company like this?
Good question. So first of all the last three years I think you will keep track of the price from $2.61, today I think it close at the $11.25 and so we look good from that. And as the VC, I totally invest in the last three years in the company shares and such is the marketplace because I believe in what we have.
The exciting part is you know having a digital device, semiconductor is the heart of it and I am very passionate if you look at, any device you look Cadence is there for all the components, and key components inside and it’s something I am excited of. The industry is growing and clearly a lot of habitation driven design from the system level, you know like Yahoo!, the Google, (inaudible) and we are so well positioned, in the last three year we’ve been investing so the customer and shareholder well.
And so I think in all in all I think we made good progress and it is a good beginning and in the year to come we are going to continue to work very hard, the management team work really hard to enhance the shareholder value. Three and a half years before, you know I am not here so I can’t comment, but I think I lead this have been on building value and focused on shareholder value.
In 2010 as part of EDA 360 you purchased them all like paid approximately 4300 million for it. When I look back at the numbers on Denali I found that in the last fiscal year that they reported prior to the acquisition, they had $12 million in revenue. Unfortunately, it took them $28.5 million to generate the $12 million in revenue.
Can you give us an update on whether that is paying off; in other words when you borrow $300 million to acquire $12 million in revenue you are expecting very significant almost exponential growth in that market. Can you give us an update on what’s happened in the past two years and what do you expect from Denali in future presumably you still have the debt to pay out?
Yeah, so I think that Denali is a very good acquisition for us and you know as such as I know they have no venture backing, they are (inaudible) and to what they have and in term of the revenue the time that we portray. And so far Denali integration has been great and we have been very happy with our acquisition. Some portion of the business is VIT, verification IT, together with Cadence IT. We’ve become the leader in the marketplace and now we grow in a 40% and so it’s quite significant.
And then the other part we believe they are leader in the memory modeling and BlackBerry IP and as we expand that we continue to take a lead on the leadership there. And in the DDR2, DDR3 and now even the 3D-IC, so why IO has become the effective standard for the high memory interface.
So I think overall, we are very happy with the acquisition. I think even though it’s a 300 plus million acquisition. We have been very well integrated in the company and give us a lot of competitive advantage. And so all-in-all look back you know this is a major investment acquisition under my watch. We are quite happy with that acquisition. Any other questions?
Normally there's at least two or three. We are of course blessed to have among us not just an academic, but an academic who ran a department and it would be remiss if he wasn’t asked to give us a macro economic indicator for Q2, sorry the second half of the year and into 2013. And I am especially curious about his part on with reference to the fact that this is an election year, Europe appears to be down turning and job growth in the US and the private sector based on the report this morning appears to be slowing as well.
Great; and John is a fabulous Chairman for us and John you are wonderful.
Thank you. Well, of course today's job numbers you may know are quite disappointing. I think it was 115,000 jobs created in April which is not enough to bring down unemployment. The unemployment came down, but that was actually quite a technicality in a sense that quite a few workers got so discouraged that they are no longer looking for jobs.
Now forecasting the second half or 12 months out, it’s a very precarious occupation. Let me say, just in the last week or so I was meeting with Ken Rogoff and some of you may know Ken, he wrote book called, This Time Its Different, and what he finds in that books which is very impressive is that the length of the softness in the economy, but following a financial crisis of the sort we had is much, much longer than the ordinary business cycle. And he predicts and I think I would endorse this prediction of a very slow climb out or take-up of the slack in the economy.
So you know in traditional business cycles, after you’ve had a sharp downturn you could have 4%, 5%, 6% real growth and you bounce, the economy bounces back. But after this financial crisis, the sort that Japan had, the sort that we had in the great depression, these things are not so common, but certainly Ken classifies what we experienced in 2008 and 2009 as a financial crisis it obviously was headquartered in housing, in banking and so forth. But he is predicting, and I guess I am implicitly endorsing his prediction, that this is going to be a long climb out.
And so we’re talking not in terms of second half of the year or 12 months, but I think what Ken is thinking is maybe the rest of the decade climbing back before we see 5% or 6% full employment kind of conditions. And so he is thinking more of this 2.5% growth which doesn’t get you a full recovery rapidly.
I would point out one thing which is that Cadence you know serves sort of a global economy and not just the American economy and so there are rapidly growing economies that we are benefitting from; some of those rapidly growing economies are slowing a bit, but China I think it slowdown when its growth is only 7.5% and we are benefitting from some of the more rapidly growing economies as well. I guess implicitly I have given you my forecast which is I don’t think that things are going to get, in a macro sense lot better quickly.
Thanks John. Any other question? If not thank you so much for your support and we continue to try the shareholder value. And with that thank you so much and we adjourn this meeting.