In addition to using GAAP results in evaluating Cadence's business, management believes it is useful to measure results using a non-GAAP measure of net income, which excludes, as applicable, amortization of intangible assets, stock-based compensation expense, in-process research and development charges, certain termination and legal costs, integration and acquisition-related costs, gains or losses and expenses or credits related to non-qualified deferred compensation plan assets, executive severance payments, restructuring charges and credits, losses on extinguishment of debt and equity in losses (income) from investments. Non-GAAP net income is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company's tax liability. See "GAAP to non-GAAP Reconciliation" below for further information on the non-GAAP measure.
Using this non-GAAP measure, net income in the second quarter of 2008 was $38 million, or $0.14 per share on a diluted basis, as compared to $91 million, or $0.30 per share on a diluted basis, in the same period in 2007.
"Although we achieved our Q2 numbers, it was more difficult than we planned. Customers are demanding still more flexibility in when, what and how they purchase software and hardware," said Mike Fister, chief executive officer. "As a result we've made the decision to lower our outlook and transition to an approximately ninety-percent ratable license mix. We believe this transition will enable us to keep our focus on the value of our technology. This decision is the right one for our business over the long term and for building and sustaining strong customer relationships into the future."
Kevin Palatnik, chief financial officer added, "A key metric for us, particularly as we move through this transition, is cash flow from operations. We are projecting cash flow from operations of $175 million in 2008, and $250 million in 2009."
The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially. These statements do not include the impact of any mergers, acquisitions or other business combinations completed after June 28, 2008.
For the third quarter of 2008, the company expects total revenue in the range of $235 million to $245 million. Third quarter GAAP net loss per share is expected to be in the range of $(0.27) to $(0.25). Net loss per share using the non-GAAP measure defined below is expected to be in the range of $(0.11) to $(0.09).
For the full year 2008, the company expects total revenue in the range of $1.120 billion to $1.140 billion. On a GAAP basis, net loss per share for fiscal 2008 is expected to be in the range of $(0.54) to $(0.50). Using the non-GAAP measure defined below, diluted earnings per share for fiscal 2008 are expected to be in the range of $0.01 to $0.05.
A schedule showing a reconciliation of the business outlook from GAAP net income and diluted net income per share to the non-GAAP net income and diluted net income per share is included with this release.
Audio Webcast Scheduled
Mike Fister, Cadence's president and chief executive officer, and Kevin Palatnik, Cadence's senior vice president and chief financial officer, will host a second quarter 2008 financial results audio webcast today, July 23, 2008, at 2 p.m. (Pacific) / 5 p.m. (Eastern). Attendees are asked to register at the Web site at least 10 minutes prior to the scheduled webcast. An archive of the webcast will be available starting July 23, 2008 at 5 p.m. (Pacific) and ending July 30, 2008 at 5 p.m. (Pacific). Webcast access is available at www.cadence.com/company/investor_relations.
Cadence enables global electronic-design innovation and plays an essential role in the creation of today's integrated circuits and electronics. Customers use Cadence® software and hardware, methodologies, and services to design and verify advanced semiconductors, consumer electronics, networking and telecommunications equipment, and computer systems. Cadence reported 2007 revenues of approximately $1.6 billion, and has approximately 5,100 employees. The company is headquartered in San Jose, Calif., with sales offices, design centers, and research facilities around the world to serve the global electronics industry. More information about Cadence and its products and services is available at www.cadence.com.
Cadence is a registered trademark and the Cadence logo is a trademark of Cadence Design Systems, Inc. All other trademarks are the property of their respective owners.
The statements contained above regarding the company's second quarter 2008 results and in the Business Outlook section and the statements by Mike Fister and Kevin Palatnik include forward-looking statements based on current expectations or beliefs, as well as a number of preliminary assumptions about future events that are subject to factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Readers are cautioned not to put undue reliance on these forward-looking statements, which are not a guarantee of future performance and are subject to a number of risks, uncertainties and other factors, many of which are outside Cadence's control, including, among others: (i) Cadence's ability to compete successfully in the design automation product and the commercial electronic design and methodology services industries; (ii) the mix of products and services sold and the timing of significant orders for its products, including the possibility that the announcement of Cadence's proposal to acquire Mentor Graphics Corporation and our shift to a ratable license structure may result in changes in the mix of license types; (iii) change in customer demands, including the possibility that the announcement of the Mentor Graphics proposal may result in delays in customers' purchases of products and services; (iv) economic and industry conditions in regions in which Cadence does business; (v) fluctuations in rates of exchange between the U.S. dollar and the currencies of other countries in which Cadence does business; (vi) capital expenditure requirements; legislative or regulatory requirements; interest rates and Cadence's ability to access capital and debt markets; and (vii) the effects of the announcement of the Mentor Graphics proposal on Cadence's business, including its strategic and customer relationships, ability to retain key employees and stock prices; the acquisition of other companies or technologies or the failure to successfully integrate and operate these companies or technologies Cadence acquires, including the potential acquisition of Mentor Graphics and its technologies.
For a detailed discussion of these and other cautionary statements, please refer to the company's filings with the Securities and Exchange Commission. These include the company's Annual Report on Form 10-K for the year ended December 29, 2007 and the company's Quarterly Report on Form 10-Q for the quarter ended March 29, 2008.
GAAP to non-GAAP Reconciliation
Cadence management evaluates and makes operating decisions using various operating measures. These measures are generally based on the revenues of its product, maintenance and services business operations and certain costs of those operations, such as cost of revenues, research and development, sales and marketing and general and administrative expenses. One such measure is non-GAAP net income, which is a non-GAAP financial measure under Section 101 of Regulation G under the Securities Exchange Act of 1934, as amended, and is GAAP net income or net loss excluding, as applicable, amortization of intangible assets, stock-based compensation expense, in-process research and development charges, certain termination and legal costs, integration and acquisition-related costs, gains or losses and expenses or credits related to non-qualified deferred compensation plan assets, executive severance payments, restructuring charges and credits (primarily related to excess facilities), losses on extinguishment of debt and equity in losses (income) from investments. Intangible assets consist primarily of purchased or licensed technology, backlog, patents, trademarks, distribution rights, customer contracts and related relationships and non-compete agreements. Non-GAAP net income is adjusted by the amount of additional taxes or tax benefit that the company would accrue if it used non-GAAP results instead of GAAP results to calculate the company's tax liability.
Cadence's management believes it is useful in measuring Cadence's operations to exclude amortization of intangible assets, in-process research and development charges and integration and acquisition-related costs because these costs are primarily fixed at the time of an acquisition and generally cannot be changed by Cadence's management in the short term. In addition, Cadence's management believes it is useful to exclude stock-based compensation expense because it enhances investors' ability to review Cadence's business from the same perspective as Cadence's management, which believes that stock-based compensation expense is not directly attributable to the underlying performance of the company's business operations. Cadence's management also believes that it is useful to exclude restructuring charges and credits. Cadence has dramatically reduced the size of its design services business and portions of its product and maintenance businesses over the past several years. Cadence's management believes that in measuring the company's operations, it is useful to exclude any such restructuring charges and credits because the level of restructuring activities has significantly decreased. Cadence's management also believes it is useful to exclude executive severance costs and certain termination and legal costs as these costs do not occur frequently. Cadence's management believes it is useful to exclude gains or losses and expenses or credits related to the non-qualified deferred compensation plan assets as these gains and expenses are not part of Cadence's direct costs of operations, but reflect changes in the value of assets held in the non-qualified deferred compensation plan. Finally, Cadence's management believes it is useful to exclude the equity in losses (income) from investments, as these items are not part of Cadence's direct cost of operations. Rather, these are non-operating items that are included in other income (expense) and are part of the company's investment activities.