Cadence Design Systems, Inc. (CDNS) Earnings Call Transcript & Summary

Hello, and welcome to the Cadence Design Systems 2020 Annual Meeting of Stockholders. [Operator Instructions] The use of recording devices during this meeting is prohibited. It is now my pleasure to turn the conference over to Mr. Jim Cowie, Senior Vice President, General Counsel and Corporate Secretary of Cadence. Mr. Cowie, the floor is yours.

Good afternoon, and welcome. I'm Jim Cowie, Senior Vice President, General Counsel and Corporate Secretary of Cadence. On behalf of our Board of Directors and our more than 8,000 employees, I'd like to welcome you to Cadence's 2020 Annual Meeting of Stockholders. Lip-Bu Tan, our Chief Executive Officer, will chair the meeting, and I will act as Secretary. Due to the public health impact of the COVID-19 pandemic, we are holding Cadence's 2020 Annual Meeting today in a virtual-only live audio webcast format. Our first priority is the health and safety of our employees, stockholders, customers and communities. We have not conducted our annual meeting this way before, and I ask you to please bear with us if we have any technical glitches or delays during the meeting. In addition to holding today's meeting virtually, we've changed other aspects of our operations to assist with containment efforts. And at this time, the vast majority of our global employee base is working from home. We thank everyone who is attending our virtual meeting. We're conducting this meeting in accordance with our bylaws and the meeting rules of conduct. The rules of conduct, annual report, proxy statement and the agenda for this meeting are available on the meeting website, on the left side of your screen. Now I'd like to introduce you to our Board nominees who are virtually with us. They are Mark Adams; Sue Bostrom; Ita Brennan; Lewis Chew; James Plummer; Alberto Sangiovanni-Vincentelli; John Shoven, who is our Chairman; Young Sohn; and Lip-Bu Tan. Also virtually with us are Kristian Gusmer and Kevin Healy, representatives of PricewaterhouseCoopers, Cadence's independent auditor. As a reminder, stockholders attending the virtual meeting can vote their shares or change their votes online from now through the closing of the polls by logging into the meeting website as a stockholder and clicking the link provided on their screen. If you've previously voted by proxy and do not wish to change your vote, your vote will be cast as previously instructed and no further action is required. In order to log in as a stockholder, you'll need to input the 15-digit control number that you received from Computershare with your proxy materials or, if you're a beneficial stockholder, upon advanced registration with Computershare with a legal proxy from your broker, bank or other nominee. We'll begin by attending to the formal business of the meeting. After the formal meeting is adjourned, we will conclude with a general question-and-answer session. Participants who are logged into the meeting website as a stockholder will be able to submit questions online for the general Q&A session by clicking on the messages icon at the top of the meeting center screen. I call your attention to the rules of conduct for today's meeting, which can be accessed by clicking on the link on the left side of the screen. In order to conduct an orderly meeting, we ask that you abide by these rules. Now at the request of the Board, I will conduct the business portion of this meeting. The 2020 Annual Meeting of Cadence's Stockholders will now 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. A list of the holders of record of Cadence's common stock as of the close of business on March 2, 2020, which is the record date set for this meeting, has been available for inspection by stockholders for the past 10 days and is currently available for inspection by stockholders using the registered stockholder list link found on the meeting center website. I also have affidavits certifying that, as of March 20, 2020, notices of this meeting and Internet availability of proxy materials were deposited in the U.S. Mail to stockholders as of the record date, in accordance with SEC rules and Delaware law. A representative from Computershare, who will be acting as the inspector of elections for this meeting, is also in attendance and has taken his customary oath. I now ask the inspector of election to advise whether quorum has been reached for this meeting.

We have present in person or by proxy shares representing approximately 88.9% of Cadence outstanding common stock, which constitutes a quorum for the conduct of business.

As I indicated in the meeting introduction, the polls are open for voting on all matters to be presented and will be closed after we go through all of the matters up for vote. After the business of the meeting is concluded and the meeting is adjourned, a question-and-answer session will follow to address questions that have been submitted to the company during this meeting. First order of business is the election of directors as described beginning on Page 16 of the proxy statement. The Board recommends the election of the following individuals: Mark Adams, Sue Bostrom, Ita Brennan, Lewis Chew, James Plummer, Alberto Sangiovanni-Vincentelli, John Shoven, Young Sohn and Lip-Bu Tan. In accordance with Cadence's bylaws, stockholders are required to provide advanced notice of their intent to nominate candidates for directors. No such notice was received this year. The next item of business is the amendment of the Omnibus Equity Incentive Plan to increase the number of shares of common stock reserved for issuance and to extend the expiration date of the plan, as discussed beginning on Page 25 of the proxy statement. The Board recommends a vote in favor of this proposal. The next item of business is the approval of the following advisory resolution: resolved, that the compensation paid to Cadence's named executive officers as disclosed pursuant to Item 402 of Regulation S-K of the Exchange Act, including the compensation discussion and analysis, compensation tables and narrative discussion in the proxy statement, is hereby approved. This proposal is discussed beginning on Page 34 of the proxy statement. The Board recommends stockholders vote for the resolution. Next item of business is the ratification of the selection PricewaterhouseCoopers LLP as Cadence's independent registered public accounting firm for the fiscal year ending January 2, 2021, as described beginning on Page 35 of the proxy statement. The Board recommends a vote in favor of this proposal. The fifth and last item business is the stockholder proposal submitted by John Shoven regarding special stockholder meeting improvement. In accordance with the meeting rules of conduct, Mr. Shoven will now have 4 minutes to present this proposal. Operator, please connect Mr. Shoven now.

Mr. Shoven, you are now on the line.

Hello. This is John Shoven. Can you hear me okay?

Yes, John, we can hear you just fine.

Proposal 5, special shareholder meeting improvement. Shareholders ask our Board to take the steps necessary to amend the appropriate company governing documents to give the owners of a combined 10% of our outstanding common stock the power to call a special shareholder meeting. Special meetings allow shareholders to vote on important matters such as electing new directors that can arise between annual meetings. This proposal does not call for a 1-year holding period for the percent of shares that are currently needed to be marshaled to call a special meeting. Currently, we have an impossible form of a right to call a special meeting. Since any shares held for less than 1 year are now disqualified, it could be necessary to contact the owners of a formidable 50% of all the company stock in existence to simply meet the 25% requirement. And even if we did have a 25% stock ownership threshold for shareholders to call a meeting without the current disqualifier for all shares not held continuously for 1 year, the 25% stock ownership threshold could be unreachable due to time constraints and the detailed technical requirements that can trip up half of shareholders who want a special shareholder meeting. Thus, a 25% stock ownership threshold to call a special meeting can really be a 50% stock ownership threshold to call a special meeting for all practical purposes if we did not have the current 1 year of stock ownership disqualifier. Thus, under the current double-barrel restrictions of a 1-year stock holding period and the bureaucratic pitfalls of our dense bylaw text, it may be necessary to contact 75% of all shares in existence for shareholders to call for a special meeting. If shareholders have any doubt about the dense text in our bylaws that restrict the shareholder right to call a special meeting, they can easily look up our bylaws on EDGAR and do a command 5 for 5.03 on the first EDGAR page for our company. There in our bylaws the 2 words together, special meeting, appear 89 times. That is a good indicator of the dense surrounding text that supposedly gives shareholders a right to call a special meeting. Under the current double-barrel bylaw restrictions, it is all but impossible for shareholders to call for a special meeting. This proposal will make it less difficult for shareholders to call a special meeting. This proposal topic won 78% support at a Sprint annual meeting with 1.7 billion yes votes. This 78% support might have been even higher if more shareholders had access to independent proxy voting advice. Making the right to call a special meeting more accessible to shareholders is showing increased support. For instance, this proposal topic won 51% support at O'Reilly Automotive in 2019, up from 41% the year before. Please vote yes to at least make it less than impossible for shareholders to call a special meeting, proposal 5.

Thank you, Mr. Shoven, for presenting your proposal. We will now proceed with the remainder of the items on the agenda, in accordance with the rules of conduct of the meeting. Operator, please mute Mr. Shoven's line.

Certainly, sir.

As stated in our proxy statement, after careful review, our Board recommends a vote against the proposal because the proposal is not in the best interest of Cadence or its stockholders. Stockholders already have a right to call special meetings, and existing governance practices of the company provide for Board accountability and give stockholders multiple avenues to communicate with the Board. In addition, lower ownership thresholds may advance narrow or special interests to pursue matters that do not require immediate attention, and special meetings require substantial time and expenses. Accordingly and respectfully, our Board recommends a vote against proposal 5. That concludes the matter to be voted on as outlined in the notice of the annual meeting. I propose that the foregoing matters be put to a vote at this meeting. If you have not voted or wish to change your vote, you may do so now by clicking on the link provided on the meeting center website. Any stockholder who has already voted and does not want to change their vote need not take any further action. Will the common stockholders and proxies, please, conclude their voting. [Voting]

It is now 1:13 Pacific time on April 30, 2020, and every stockholders had the opportunity to vote. As of this date and time, which the Secretary shall record in the minutes, and in accordance with our bylaws, I hereby declare the polls for online voting at our 2020 annual meeting closed. The inspector of election will complete his tabulation of the voting results after the close of this meeting. I will now turn the call over to the inspector of election to announce the preliminary results of the voting.

Based on preliminary review of the votes cast, each person nominated as a director has been elected. The amendment of the Omnibus Equity Incentive Plan has been approved. The advisory resolution to approve named executive officer compensation has been approved. The proposal to ratify the appointment of PricewaterhouseCoopers has been approved. And a stockholder proposal regarding special shareholder meeting improvement has been approved.

The final vote count with respect to the matters voted on today will be reported on a Form 8-K as required by the SEC. This concludes the 2020 Annual Meeting of Cadence Stockholders. Again, on behalf of the entire Cadence Board and management team, I'd like to express our gratitude to all of our stockholders for their continued support. The meeting is now adjourned. We had made arrangements for a Q&A session to follow the meeting, but we have no questions posed by stockholders at this time. So I'd like to close by thanking everyone who participated in this virtual meeting. On behalf of the Board of Directors and employees of Cadence, thank you for your interest. And thank you very much for your support of our company. Have a great day.

Thank you for your participation in Cadence 2020 Annual Meeting of Stockholders. The webcast will now end, and you may disconnect.