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, deferred compensation, in-process research and development charges, integration and other acquisition-related expenses, gains and expenses related to non-qualified deferred compensation plan assets, restructuring charges 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 first quarter 2006 was $66 million, or $0.21 per share, on a diluted basis as compared to $45 million, or $0.15 per share, on a diluted basis in the same period in 2005.
"Consumer electronics, wireless and networking are driving the market. All of these require our customers to rapidly develop analog mixed-signal and system validation expertise," said Mike Fister, president and CEO of Cadence Design Systems, Inc. "The performance of our custom IC and verification businesses this quarter clearly demonstrates our market leadership."
Bill Porter, executive vice president and chief financial officer added, "We had a good quarter across all geographies, especially in Japan, and we continued to make progress on our objectives to demonstrate growth, execute consistently and achieve our operating targets."
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 April 1, 2006.
For the second quarter of 2006, the company expects total revenue in the range of $340 million to $350 million. Second quarter GAAP earnings per diluted share are expected to be in the range of $0.09 to $0.11. Diluted earnings per share using the non-GAAP measure defined below are expected to be in the range of $0.21 to $0.23.
For the full year 2006, the company expects total revenue in the range of $1.41 billion to $1.46 billion. On a GAAP basis, net income per diluted share for fiscal 2006 is expected in the range of $0.47 to $0.55. Using the non-GAAP measure defined below, diluted earnings per share for fiscal 2006 are expected to be in the range of $0.97 to $1.05.
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
Fister and Porter will host a first quarter 2006 financial results audio webcast today, April 26, 2006, 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 April 26, 2006, at 5 p.m. Pacific time and ending at 5 p.m. Pacific time on May 3, 2006. 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 2005 revenues of approximately $1.3 billion, and has approximately 5,000 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 the company, its products, and services is available at www.cadence.com.
Cadence and the Cadence logo are registered trademarks of Cadence Design Systems, Inc. All other trademarks are the property of their respective owners.
The statements contained above regarding the company's first quarter 2006 results, those contained in the Business Outlook section above and the statements by Mike Fister and Bill Porter 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 uncertainties and other factors, many of which are outside Cadence's control, including, among others: Cadence's ability to compete successfully in the design automation product and the commercial electronic design and methodology services industries; the mix of products and services sold and the timing of significant orders for its products; economic uncertainty; fluctuations in rates of exchange between the U.S. dollar and the currencies of other countries in which Cadence does business; and the acquisition of other companies or the failure to successfully integrate those it acquires.
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 Dec. 31, 2005.
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 (loss), which is a non-GAAP financial measure under Section 101 of Regulation G under the Securities Exchange Act of 1934, as amended. This measure consists of GAAP net income (loss) excluding, as applicable, amortization of intangible assets, stock-based compensation, deferred compensation, in-process research and development charges, integration and other acquisition-related expenses, restructuring charges (severance and benefits, excess facilities and asset-related restructuring charges), gains and expenses related to non-qualified deferred compensation plan assets and equity in losses (income) from investments. Intangible assets consist primarily of purchased technology, backlog, patents, trademarks, distribution rights, customer contracts and related relationships and non-compete agreements. Non-GAAP net income (loss) 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.
Management believes it is useful in measuring Cadence's operations to exclude amortization of intangibles, deferred compensation, in-process research and development and acquisition-related expenses because these costs are primarily fixed at the time of an acquisition and generally cannot be changed by management in the short term. In addition, management believes it is useful to exclude stock-based compensation 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. Management also believes that it is useful to exclude restructuring costs. Cadence has dramatically reduced the size of its design services business and portions of its product and maintenance businesses over the past several years. As a result, in 2001, 2002 and 2003, Cadence's GAAP statements of operations have included significant charges relating to such restructurings. Management believes that in measuring its operations it is useful to exclude such restructuring costs because the company's level of restructuring activities is expected to significantly decrease in the foreseeable future. Finally, management also believes it is useful to exclude the equity in losses (income) from investments and investment write-downs, as these items are not part of the company'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.
Management believes that non-GAAP net income (loss) provides useful supplemental information to management and investors regarding the performance of the company's business operations and facilitates comparisons to our historical operating results. Management also uses this information internally for forecasting and budgeting. Non-GAAP financial measures should not be considered as a substitute for measures of financial performance prepared in accordance with GAAP. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with their most directly comparable GAAP financial results.
The following tables reconcile the specific items excluded from GAAP net income in the calculation of non-GAAP net income for the periods shown below:
Net Income Reconciliation Quarters Ended ------------------------ April 1, April 2, 2006 2005 ----------- ----------- (In thousands) (unaudited) Net income on a GAAP basis $ 21,779 $ 1,023 Amortization of acquired intangibles 20,715 25,661 Stock-based compensation expense 29,665 - Non-qualified deferred compensation expense 2,348 - Deferred compensation - 11,357 Restructuring and other charges (430) 17,489 Write-off of acquired in-process technology 900 - Integration and acquisition-related costs 512 660 Equity in losses from investments, gain on non-qualified deferred compensation plan assets (2,530) 4,097 Income tax effect of non-GAAP adjustments (6,600) (15,318) Cumulative effect of change in accounting principle (418) - ----------- ----------- Net income on a non-GAAP basis $ 65,941 $ 44,969 =========== =========== Diluted Net Income per Share Reconciliation Quarters Ended ------------------------ April 1, April 2, 2006 2005 ----------- ----------- (In thousands, except per share data) (unaudited) Diluted net income per share on a GAAP basis $ 0.07 $ 0.00 Amortization of acquired intangibles 0.07 0.08 Stock-based compensation expense 0.09 - Non-qualified deferred compensation expense 0.01 - Deferred compensation - 0.04 Restructuring and other charges - 0.06 Write-off of acquired in-process technology - - Integration and acquisition-related costs - - Equity in losses from investments, gain on non-qualified deferred compensation plan assets (0.01) 0.01 Income tax effect of non-GAAP adjustments (0.02) (0.04) Cumulative effect of change in accounting principle - - ----------- ----------- Diluted net income per share on a non-GAAP basis $ 0.21 $ 0.15 =========== =========== Shares used in calculation of diluted net income per share - GAAP 315,354 307,354 Shares used in calculation of diluted net income per share - non-GAAP (A) 315,354 307,354 (A) Shares used in the calcuation of GAAP earnings per share are expected to be the same as shares used in the calculation of non-GAAP earnings per share except when the company reports a GAAP loss and non-GAAP income, or GAAP income and a non-GAAP loss.Investors are encouraged to look at GAAP results as the best measure of financial performance. For example, amortization of intangibles, deferred compensation or in-process technology are important to consider because they may represent initial expenditures that under GAAP are reported across future fiscal periods. Likewise, deferred compensation and stock-based compensation expenses are obligations of the company that should be considered. Restructuring charges can be triggered by acquisitions or product adjustments as well as overall company performance within a given business environment. All of these metrics are important to financial performance generally.