10-QPeriod: Q2 FY2008

CADENCE DESIGN SYSTEMS INC Quarterly Report for Q2 Ended Jun 28, 2008

Filed July 29, 2008For Securities:CDNS

Summary

Cadence Design Systems Inc. reported a decline in revenue for the second quarter and first half of 2008 compared to the same periods in 2007. This downturn is attributed to a challenging economic environment, longer sales cycles, and customers seeking more flexible purchasing terms, leading to a shift towards a higher proportion of subscription-based licenses which recognize revenue ratably over time. This shift is expected to decrease future revenue recognition in the second half of 2008. The company is actively managing costs through initiatives like headcount reduction and discretionary spending cuts. Despite revenue pressures, Cadence is also pursuing strategic growth opportunities, notably a proposed $1.6 billion acquisition of Mentor Graphics Corporation, though financing and completion are not assured. The company ended the quarter with a healthy cash position but saw a decrease in net working capital. Investors should note the ongoing significant tax examination by the IRS concerning historical tax returns, which could result in substantial deficiencies and interest. The company is actively contesting these proposed adjustments. Additionally, the company has a substantial level of debt, including convertible senior notes, which could impact future financial flexibility.

Key Highlights

  • 1Total revenue decreased by 16% to $329.5 million for the three months ended June 28, 2008, compared to $391.0 million for the same period in 2007.
  • 2Product revenue saw a significant decline of 26% to $195.5 million for the three months ended June 28, 2008, compared to $263.8 million in the prior year period.
  • 3The company reported a net loss of $13.75 million for the six months ended June 28, 2008, a stark contrast to a net income of $104.0 million in the same period of 2007.
  • 4Cash and cash equivalents decreased to $836.5 million as of June 28, 2008, from $1,062.9 million as of December 29, 2007.
  • 5Cadence made a public offer to acquire Mentor Graphics Corporation for approximately $1.6 billion in May 2008, indicating a strategic growth initiative.
  • 6The company is actively repurchasing its common stock, with $412.1 million remaining authorization as of June 28, 2008.
  • 7A significant ongoing tax examination by the IRS proposes substantial deficiencies, which the company is contesting.

Frequently Asked Questions

The revenue decline is primarily attributed to a challenging economic environment, longer sales cycles, and customers seeking more flexible purchasing terms. This has led to a shift towards subscription-based licenses, which recognize revenue over multiple periods, impacting immediate revenue recognition.

Cadence made a $1.6 billion offer to acquire Mentor Graphics in May 2008. However, Mentor Graphics' board has indicated a desire to remain independent, and the acquisition is not assured. Cadence is exploring financing alternatives for this potential transaction.

The IRS completed an examination of Cadence's federal income tax returns for 2000-2002 and proposed significant tax deficiencies. The IRS is also examining returns for 2003-2005. Cadence believes the proposed adjustments are inconsistent with tax laws and is vigorously challenging them through the IRS Appeals Office.

Cadence has implemented cost-saving initiatives, including reducing headcount, decreasing employee bonuses, and cutting other discretionary spending to offset the impact of the expected decrease in revenue.