Cadence Reports Third Quarter 2023 Financial Results

GAAP to Non-GAAP Reconciliation

Non-GAAP financial measures should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with generally accepted accounting principles, or GAAP. Investors are encouraged to review the reconciliation of non-GAAP measures contained within this press release with their most directly comparable GAAP results. Investors are also encouraged to look at the GAAP results as the best measure of financial performance.

To supplement Cadence’s financial results presented on a GAAP basis, Cadence management uses non-GAAP measures that it believes are helpful in understanding Cadence’s performance. One such measure is non-GAAP net income, which is a financial measure not calculated under GAAP. Non-GAAP net income is calculated by Cadence management by taking GAAP net income and excluding, as applicable, amortization of intangible assets, stock-based compensation expense, acquisition and integration-related costs including retention expenses, investment gains or losses, income or expenses related to Cadence’s non-qualified deferred compensation plan, restructuring and other significant items not directly related to Cadence’s core business operations, and the income tax effect of non-GAAP pre-tax adjustments.

Cadence management uses non-GAAP net income because it excludes items that are generally not directly related to the performance of Cadence’s core business operations and therefore provides supplemental information to Cadence management and investors regarding the performance of the business operations, facilitates comparisons to the historical operating results and allows the review of Cadence's business from the same perspective as Cadence management, including forecasting and budgeting.

The following tables reconcile the specific items excluded from GAAP operating margin, GAAP net income and GAAP net income per diluted share in the calculation of non-GAAP operating margin, non-GAAP net income and non-GAAP net income per diluted share for the periods shown below:

Operating Margin Reconciliation		Three Months Ended
	September 30, 2023			October 1, 2022
		(unaudited)
GAAP operating margin as a percent of total revenue		29	%		29	%
Reconciling items to non-GAAP operating margin as a percent of total revenue:
Stock-based compensation expense		9	%		8	%
Amortization of acquired intangibles		1	%		1	%
Acquisition and integration-related costs		1	%		1	%
Restructuring		1	%		0	%
Non-qualified deferred compensation credits		0	%		0	%
Non-GAAP operating margin as a percent of total revenue		41	%		39	%

Net Income Reconciliation	Three Months Ended
	September 30, 2023			October 1, 2022
(in thousands)	(unaudited)
Net income on a GAAP basis	$	254,321		$	186,305
Stock-based compensation expense		88,032			73,451
Amortization of acquired intangibles		15,603			12,813
Acquisition and integration-related costs		14,213			11,418
Restructuring		11,582			14
Non-qualified deferred compensation credits		(1,749	)		(2,885	)
Other income or expense related to investments and non-qualified deferred compensation plan assets*		(11,755	)		4,539
Income tax effect of non-GAAP adjustments		(27,147	)		4,433
Net income on a non-GAAP basis	$	343,100		$	290,088

Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

Diluted Net Income Per Share Reconciliation	Three Months Ended
	September 30, 2023			October 1, 2022
(in thousands, except per share data)	(unaudited)
Diluted net income per share on a GAAP basis	$	0.93		$	0.68
Stock-based compensation expense		0.32			0.27
Amortization of acquired intangibles		0.06			0.05
Acquisition and integration-related costs		0.05			0.04
Restructuring		0.04			—
Non-qualified deferred compensation credits		—			(0.01	)
Other income or expense related to investments and non-qualified deferred compensation plan assets*		(0.04	)		0.02
Income tax effect of non-GAAP adjustments		(0.10	)		0.01
Diluted net income per share on a non-GAAP basis	$	1.26		$	1.06
Shares used in calculation of diluted net income per share		272,427			274,957

Cadence Design Systems, Inc.
Condensed Consolidated Balance Sheets
September 30, 2023 and December 31, 2022
(In thousands)
(Unaudited)

	September 30, 2023		December 31, 2022

Current assets:
Cash and cash equivalents	$	961,982	$	882,325
Receivables, net		426,505		486,710
Inventories		163,693		128,005
Prepaid expenses and other		272,283		209,727
Total current assets		1,824,463		1,706,767

Property, plant and equipment, net		379,776		371,451
Goodwill		1,500,442		1,374,268
Acquired intangibles, net		347,617		354,617
Deferred taxes		874,805		853,691
Other assets		504,272		476,277
Total assets	$	5,431,375	$	5,137,071

Current liabilities:
Revolving credit facility	$	-	$	100,000
Accounts payable and accrued liabilities		598,261		557,158
Current portion of deferred revenue		665,906		690,538
Total current liabilities		1,264,167		1,347,696

Long-term liabilities:
Long-term portion of deferred revenue		100,609		91,524
Long-term debt		648,801		648,078
Other long-term liabilities		303,904		304,660
Total long-term liabilities		1,053,314		1,044,262

Stockholders' equity		3,113,894		2,745,113
Total liabilities and stockholders' equity	$	5,431,375	$	5,137,071


Cadence Design Systems, Inc.
Condensed Consolidated Income Statements
For the Three and Nine Months Ended September 30, 2023 and October 1, 2022
(In thousands, except per share amounts)
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30, 2023			October 1, 2022			September 30, 2023			October 1, 2022

Revenue:
Product and maintenance	$	965,840		$	845,788		$	2,852,372		$	2,494,317
Services		57,254			56,766			168,991			167,524

Total revenue		1,023,094			902,554			3,021,363			2,661,841

Costs and expenses:
Cost of product and maintenance		85,813			62,351			260,269			203,863
Cost of services		23,768			25,249			70,642			74,245
Marketing and sales		176,215			152,925			509,951			432,407
Research and development		369,642			323,629			1,074,353			901,121
General and administrative		58,556			73,688			166,688			174,051
Amortization of acquired intangibles		4,612			3,946			13,181			13,543
Restructuring		11,582			14			11,582			42

Total costs and expenses		730,188			641,802			2,106,666			1,799,272

Income from operations		292,906			260,752			914,697			862,569

Interest expense		(9,059	)		(5,463	)		(27,196	)		(13,852	)
Other income (expense), net		16,106			(3,017	)		32,363			(13,879	)

Income before provision for income taxes		299,953			252,272			919,864			834,838

Provision for income taxes		45,632			65,967			202,619			226,278

Net income	$	254,321		$	186,305		$	717,245		$	608,560


Net income per share - basic	$	0.94		$	0.69		$	2.66		$	2.24

Net income per share - diluted	$	0.93		$	0.68		$	2.63		$	2.21

Weighted average common shares outstanding - basic		269,229			271,131			269,480			271,694

Weighted average common shares outstanding - diluted		272,427			274,957			272,859			275,683

Cadence Design Systems, Inc.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2023 and October 1, 2022
(In thousands)
(Unaudited)


	Nine Months Ended
	September 30,			October 1,
		2023			2022

Cash and cash equivalents at beginning of period	$	882,325		$	1,088,940
Cash flows from operating activities:
Net income		717,245			608,560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		106,783			98,178
Amortization of debt discount and fees		942			810
Stock-based compensation		238,928			197,190
(Gain) loss on investments, net		(12,732	)		4,777
Deferred income taxes		(23,506	)		(49,834	)
Provisions for losses on receivables		1,692			471
ROU asset amortization and change in operating lease liabilities		(2,684	)		(883	)
Other non-cash items		1,962			158
Changes in operating assets and liabilities, net of effect of acquired businesses:
Receivables		50,024			(57,309	)
Inventories		(47,293	)		(8,020	)
Prepaid expenses and other		33,307			30,596
Other assets		(26,580	)		17,644
Accounts payable and accrued liabilities		43,111			24,514
Deferred revenue		(14,628	)		113,712
Other long-term liabilities		10,514			(2,305	)
Net cash provided by operating activities		1,077,085			978,259

Cash flows from investing activities:
Purchases of investments		(145,150	)		(1,000	)
Proceeds from the sale and maturity of investments		64,174			-
Purchases of property, plant and equipment		(68,634	)		(86,295	)
Purchases of intangible assets		-			(1,000	)
Cash paid in business combinations, net of cash acquired		(163,963	)		(586,163	)
Net cash used for investing activities		(313,573	)		(674,458	)

Cash flows from financing activities:
Proceeds from term loan		-			300,000
Proceeds from revolving credit facility		50,000			450,000
Payments on revolving credit facility		(150,000	)		(300,000	)
Payment of debt issuance costs		-			(425	)
Proceeds from issuance of common stock		131,341			103,682
Stock received for payment of employee taxes on vesting of restricted stock		(122,182	)		(103,093	)
Payments for repurchases of common stock		(575,127	)		(750,062	)
Net cash used for financing activities		(665,968	)		(299,898	)

Effect of exchange rate changes on cash and cash equivalents		(17,887	)		(66,792	)

Increase (decrease) in cash and cash equivalents		79,657			(62,889	)

Cash and cash equivalents at end of period	$	961,982		$	1,026,051

Cadence Design Systems, Inc.
(Unaudited)

Revenue Mix by Geography (% of Total Revenue)
	2022					2023
GEOGRAPHY	Q1	Q2	Q3	Q4	Year	Q1	Q2	Q3

Americas	47%	45%	45%	46%	46%	44%	41%	43%
China	16%	13%	17%	13%	15%	17%	18%	17%
Other Asia	18%	18%	17%	18%	18%	18%	18%	19%
Europe, Middle East and Africa	14%	18%	16%	17%	16%	15%	17%	15%
Japan	5%	6%	5%	6%	5%	6%	6%	6%
Total	100%	100%	100%	100%	100%	100%	100%	100%


Revenue Mix by Product Category (% of Total Revenue)
	2022					2023
PRODUCT CATEGORY	Q1	Q2	Q3	Q4	Year	Q1	Q2	Q3

Custom IC Design and Simulation	22%	23%	22%	22%	22%	20%	22%	22%
Digital IC Design and Signoff	27%	27%	29%	28%	28%	25%	27%	28%
Functional Verification, including Emulation and Prototyping Hardware	28%	24%	25%	25%	26%	32%	27%	26%
IP	13%	14%	12%	12%	12%	11%	11%	11%
System Design and Analysis	10%	12%	12%	13%	12%	12%	13%	13%
Total	100%	100%	100%	100%	100%	100%	100%	100%

Cadence Design Systems, Inc.
Impact of Non-GAAP Adjustments on Forward Looking Operating Margin
As of October 23, 2023
(Unaudited)

	Three Months Ending	Year Ending
	December 31, 2023	December 31, 2023
	Forecast	Forecast

GAAP operating margin as a percent of total revenue	~31%	30.5% - 31.0%

Reconciling items to non-GAAP operating margin as a percent of total revenue:
Stock-based compensation expense	8%	8%
Amortization of acquired intangibles	2%	2%
Acquisition and integration-related costs	1%	1%
Restructuring	0%	0%
Non-qualified deferred compensation expenses	0%	0%

Non-GAAP operating margin as a percent of total revenue�nbsp;	~42%	41.5% - 42.0%

�nbsp;The non-GAAP measures presented in the table above should not be considered a substitute for financial results and measures determined or calculated in accordance with GAAP.

Cadence Design Systems, Inc. Impact of Non-GAAP Adjustments on Forward Looking Diluted Net Income Per Share As of October 23, 2023 (Unaudited)

	Three Months Ending	Year Ending
	December 31, 2023	December 31, 2023
	Forecast	Forecast

Diluted net income per share on a GAAP basis	$0.85 to $0.91	$3.48 to $3.54

Stock-based compensation expense	0.32	1.20
Amortization of acquired intangibles	0.06	0.22
Acquisition and integration-related costs	0.04	0.20
Restructuring	-	0.04
Non-qualified deferred compensation expenses	-	0.02
Other income or expense related to investments and non-qualified deferred compensation plan assets*	-	(0.06)
Income tax effect of non-GAAP adjustments	0.03	(0.03)

Diluted net income per share on a non-GAAP basis�nbsp;	$1.30 to $1.36	$5.07 to $5.13


Cadence Design Systems, Inc. Impact of Non-GAAP Adjustments on Forward Looking Net Income As of October 23, 2023 (Unaudited)

	Three Months Ending	Year Ending
	December 31, 2023	December 31, 2023
($ in millions)	Forecast	Forecast

Net income on a GAAP basis	$232 to $248	$949 to $965

Stock-based compensation expense	88	327
Amortization of acquired intangibles	16	61
Acquisition and integration-related costs	10	54
Restructuring	-	12
Non-qualified deferred compensation expenses	-	5
Other income or expense related to investments and non-qualified deferred compensation plan assets*	-	(18)
Income tax effect of non-GAAP adjustments	9	(7)

Net income on a non-GAAP basis�nbsp;	$355 to $371	$1,383 to $1,399


�nbsp;The non-GAAP measures presented in the table above should not be considered a substitute for financial results and measures determined or calculated in accordance with GAAP.

* Includes, as applicable, equity in losses or income from investments, write-down of investments, gains or losses on investments and gains or losses on non-qualified deferred compensation plan assets recorded in other income or expense.

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