Q4 2019 Earnings Call
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Good afternoon. My name is just see and I'll be your conference offered today.
Tom I want to welcome everyone to the cadence fourth quarter 2019 earnings conference call all on simply summit.
Got it.
After the speaker's remarks, it'd be a question to answer session.
That's a question during this time simply press Star then number one on your telephone keypad. Thank you.
Now, let's turn the call over to Al Lindstrom Senior group director of Investor Relations for Kate. Please go ahead.
Thank you Jesse and I would like to welcome everyone to our fourth quarter 2019 earnings Conference call.
Hi, I'm joined today by Futon, Chief Executive Officer, and John Walsh, Senior Vice President and Chief Financial Officer. The webcast of this call is available through our website <unk> Dot com.
And it will be archived through March 13th Twentytwenty.
A copy of today's prepared remarks, we'll also be available on our website at the conclusion of the call today.
Please note that discussion today will contain forward looking statements and that the actual results may differ materially from those expectations.
For information on the factors that could cause a difference in our results. Please refer to our filings with the Securities and Exchange Commission.
These include Cadences. Most recent reports on form 10-K, and form 10-Q, including the company's future filings and the cautionary comments regarding forward looking statements and the earnings press release issued today.
In addition to financial results prepared in accordance with generally accepted accounting principles where gap.
We will also presents certain non-GAAP financial measures today.
Cadence management believes in addition to using GAAP results in evaluating our business. You can also be useful to review results using certain non-GAAP financial measures.
Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most directly comparable GAAP financial results.
Reconciliations are available at the Investor Relations section of the cadence Dot com.
Copies of today's press release dated February 12, Twentytwenty for the quarter ended December 20, 829 team.
Related financial tables, and the CFO commentary are also available on our website.
And now I'll turn the call over to lip Bu.
Good afternoon, everyone. Thank you for joining us today.
I'm pleased to report that cadence delivered a strong Q4 achieved excellent operating results for the year.
For 2019, I admit to environmental headwinds.
Do you live but my perception.
Year over year old revenue growth.
And 32% non-GAAP operating margin with strength across our product line.
John will provide more details shortly.
Mechel uncertainty and geopolitical headwinds persist.
Until 2020.
But strong desire to be T. continue.
At both advanced notes as well that's more than more fun.
This is being driven by generational technology to drive us.
Fiveg.
Yeah, I and my shouldn't running.
Hyper scale computing industrial Aiotv and autonomous vehicle.
Which are all have somebody conductus at a foundation.
And not propelling the need for next generation computing connect TBT.
And storage.
I believe these trends.
In addition to system companies developing custom silicon.
Domain specific processing.
Computing.
Silicon startups.
And digital transformation of vertical segments.
Light industrial.
And aerospace and defense.
But continue to feel silicon Renaissance over the next few years.
In 2019, we unveiled our intelligence system design so duchy.
That will enable us to maximize these opportunities.
Well trip, putting all but Pam true proliferation in foundational design excellence segment.
And next spending beyond E D into a system innovation and pervasive intelligent.
We achieved strong growth in design excellence.
Just come price off caught you D and IP few bite the launch of several innovative products.
Well as wide ranging expansion off all the solutions particular, the at Mcus shipping customers.
How about digital and sign off business achieved double digit revenue growth for the year.
As strong proliferation continue.
Driven by customer demand for solutions offering best <unk> best in class.
Performance power area.
And time to market capabilities.
Mcus shipping global mobile company expand that partnership with us.
True a large and comprehensive E.D.A. software booking.
Which include a significant expansion all but digital footprint.
Building upon successful seven does not meet that design.
Cadence and Broadcom expenditure.
The our collaborations to include the creation of five not meet the design using cadence digital implementation solutions.
We have about 50, new full flow wins in 2019, including <unk> recent full floor competitive win.
For Neil advance note design.
With a leading maaco off at the GE chips.
During the year, we announced successful successes in digital business with cost that much yes, Mediatek Samsung.
Social net.
You know the M.
I know Nox and wouldn't Doug.
But if occasion is one off the top challenges off our customers.
And now the body the kitchen, Sweet had sobota wins across multiple verticals segments in 2019.
Although excelian Palo simulator.
This innovative rocket technology continues to prove freight.
And we suddenly had not worthy win.
At the leading U.S. computing company.
I will hop where family comprised of Palladium Xinyuan email data and recently introduced <unk> X one M.P.G.H. bass pro typing platform.
Provide a comprehensive solution across IP and associates notification.
Hardware software to be questions and earlier software development.
Due to a common.
And compiler this complimentary platforms when working and working in tandem do you do but even more compelling value to our customers.
And without getting strong attract traction with Protium X one being deployed at Palladium account.
Hardware had a record year with significant expansion at several customers.
While adding Nitin Neil do you won and 11, Neil X one customers.
But the yet.
Including global my key customer that place one not the largest hardware audits Alba fall cadence.
2019, Wassa outstanding year for our IP business.
With 16% year over year revenue growth.
Yes, I'll focus strategy and strong portfolio leveraged.
Does come you continuing I P outsourcing trend.
And you burning customer to accelerate innovation and time to market.
It was especially strong quarter and yeah.
For all but tensilica products.
With wins in audio imaging computer vision and mission lending.
Loyalty growth was strong, particularly in D. audio market.
Where tensilica wife, Hi, Fi D.S.P. Processa are increasingly proofreading intrude wireless studio.
Base, you know Bucks and in the next generation Smart speakers.
Design IP had done great, yes, well with strength in D.R.T.I.E. and our.
Hi, good into felt good so deep products.
As we prefer periphery with customers in AI, fiveg and crop computing.
Early in the year will be augmented our partnership with a marquee U.S. somebody semiconductor company.
Our largest IP agreements arrangements Abba, which include the Tensilica Processa IP hundred until it gets 30 IP. That's about that addition, the memory and interface IP products.
Now, let us move on to the system innovation Seckman, Although <unk> intelligence system design, so that GE.
In 2019, we enter that system analysis market.
An estimated $5 billion Tam opportunity by introducing tool.
Exciting new products.
Does.
The clarity three D. salva.
The next generation solution for your retro magnetic field simulations.
And Celsius come most salva the industry first complete.
Sexual tomo co simulation solution.
Increasing system complexity and time to market precious.
Driving the need for far more engine, noting simulations well underscoring the significant performance and capacity limitation of existing industry solutions.
Both quality and Celsius are based on proven.
Yes, it Pella architecture that delivers up to 10 times faster performance, while maintaining ghost and that actually Betsy.
We're extremely pleased with the ramp up this innovative products with well over 90.
Evaluations underway.
More than 20 customers to date encoding micron Sq micro kiosks Ya real tech.
I'm not an umbrella.
Generation no industry trends are driving the need for increasing increase heterogeneous integration, coupled with a slowing down off most law drove strong demand for advanced packaging solutions.
Leading to a double digit year over year growth.
They are come they are growing challenges in design products designing products for complex high frequency out after application, especially in the Fiveg wireless.
Aerospace and defense and automotive segments.
To that and we acquired it up you Uh huh.
Leader in high frequency RF solution.
We also acquire integrated software, which provide a leading I f. solution for analysis and obstruction.
Integrating these technologies with our virtuoso and illegal platforms will enable us to offer a comprehensive platform for <unk> millimeter wave products from initial design to simulation implementation modification and many.
Are you factoring.
We entered into so that you alliance agreement with National instruments.
Which is focus on the designed to test flow.
And he putting customers to improve quality and reduce time to market.
Lastly, we extended our workout leadership in E D, providing customers with compelling productivity flexibility and skilled ability benefits.
The option of our crop portfolio accelerate that and we passed the hundred customer Mark.
TSMC partner with cadence and Microsoft on the first TSMC ice Healy I'll contests cadence deliver kalberer space Zoo and bought Roman that allow sobra hundreds of students to see multi nestle compete using cadence layoff too.
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With that I will now turn the call over to John to review the financial results and provide our outdated updated outlook.
Thanks lip Bu and good afternoon, everyone.
I'm pleased with our financial performance for Q4 and 2019.
Despite some macro headwinds we grew revenue across all business groups and our focus on delivering profitable revenue growth resulted in 9% revenue growth and 32% non-GAAP operating margin for the year.
Turning to the numbers for the fourth quarter and the year, starting with the piano.
Total revenue was $600 million for the quarter and $2.336 billion for the year.
Non-GAAP operating margin was approximately 31%.
For the quarter and 32% for the year.
GAAP EPS was $2.36 for the quarter.
$3.53 for the year.
GAAP EPS included a one time GAAP only tax benefit of $2.06 for the quarter on $2.05 for the year.
This tax benefit related to intercompany transfers of certain intellectual property rights to cadences Irish subsidiary.
Excluding the onetime GAAP only tax benefit GAAP EPS was 30 cents for the quarter.
And $1.48 cents for the year.
Non-GAAP EPS was 54 cents for the quarter and $2.20 for the year.
Looking at the balance sheet and cash flow, our cash balance totaled $705 million at yearend.
Operating cash flow into fourth quarter was $159 million.
$730 million for the full year.
Dsos were 47 days.
We repurchased $75 million of cadence shares during Q4 for a total of $306 million for the year.
During 2019, we grew revenue by $198 million with over $100 million, if that incremental revenue growth.
Dropping through into non-GAAP operating income.
That means we have now grown our annual revenue by around $520 million since 2016.
With around $280 million of that incremental revenue growth dropping through into non-GAAP operating income.
Now moving onto our fiscal guidance for Q1 Twentytwenty.
We expect revenue in the range of $610 million to $620 million.
Non-GAAP operating margin of approximately 30%.
GAAP EPS in the range of 32 to 34 cents.
Non-GAAP EPS in the range of 53 to 55 cents.
For the full year fiscal Twentytwenty, we expect revenue in the range of 2.54 or $5 billion to $2.585 billion.
Non-GAAP operating margin of 32% to 33%.
GAAP EPS in the range of one dollar and 46 cents to $1.56 cents.
Non-GAAP EPS in the range of $2.40 to $2.50.
We expect operating cash flow to be in a range of $775 million to $825 million.
And we expect to use approximately 50% of our free cash flow to repurchase keeping shares in 2020.
Our guidance assumes that the export limitations that exist today for certain customers will remain in place for all of Twentytwenty.
We recently completed two acquisitions and we've included the impact of those acquisitions in our guidance.
And finally, please note that fiscal 2020 will be a 53 week year for cadence.
You will find guidance and additional items.
For additional items as well as further analysis in the CFO commentary available on our website.
In conclusion cadence delivered another year of strong revenue growth and expanding profitability.
Our focus on delivering profitable revenue growth has resulted in a large portion of our revenue growth flowing through to operating income over the past three years.
Excluding the impact of the 50 Threerd week and recent acquisitions, our guidance assumes that trend will continue with approximately half of revenue growth and twentytwenty flowing through to operating income.
I would like to thank our customers partners and our hard working employees for their continued support I look forward to updating you on our progress for Twentytwenty.
And with that operator, we'll now take questions.
Thank you as a reminder, I'd like to remind everyone in order to ask a question. Please press Star then one of your telephone.
I was just a couple of acuity roster.
Your first question goes from rich Valera with Needham and company. Your line is open.
Thank you a good evening congratulations on a nice finished the year first question on your new system products I'm sounds like you had some nice success. They are gaining some wins and wanted to maybe Steve you contrast, or compare how the typical engagement with the system products compares with that in the digital space not.
We had some success doing it.
Proliferating over the years do you think it could have the same type of pattern.
In terms of initial engagement one seat and then proliferation over time and just how you're thinking about the runway of these products as you continue to go after this market.
Yes, Rick this is a liberal let me try to answer your questions.
First of all the we're excited about this system analysis space that we're going in on our system innovation strategy and that's about $5 billion sub 10 market opportunity for us and we initially are moving in with the tone you pulled out organically to panel a killer T Tweedy and all.
So Celsius tomorrow, and one for the year M. I feel a salva simulator and Andy I know one is that you'd I told tomo a core simulation software and so both are launching out. The later part of last year and a and both are proven a massive palo alto.
Attach a 10 x. perform and and we were excited and not the restaurant had been very positive or more than 99 zero evaluations and we already have a 20 customers and I highlight a few Ah. So I think this is just early stage off entry and a and this too.
Product is that dressing up a 700 million up 10 market opportunity.
And and clearly we are excited about it and this really back into our call competition. A in terms of computation of software and also relate that to Iowa and now that you de an expanding to the system level and also our customer request us to move into that and that's what that we can really providing.
No more compelling solution to the customer and answer your question would that be like digital I know, we take one step at the time pick one ending at the time and and a and then gradually we can pull roof rate in our customer to customer and then beyond that then a customer going to tell us what are the area I will be interesting for.
And what about the feature perform and they're going to have a we still continue to be humble lending from a customer and then rodeo drive innovation within the company to do that so I think overall state you know this deal that they already in the in that game.
Great and then John quick question for you on your acquisition of VW Art can you say if there was much of a deferred revenue haircut as you blended that into the model.
Sure Rich purchase accounting rules significantly limit the revenue we can recognize from both E.W.R. and into grant in 2020 combined.
We've added $20 million to annual revenue in our guidance for 2020, the almost all of that from it'll be war.
We expect both acquisitions to be dilutive to earnings in 2020, what we expect them to be accretive in 2021.
Perfect. Thank you very much gentlemen.
Thanks.
Your next question comes from Mitch Steves with RBC capital markets. Your line is open.
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Mitch Steve Your line is open.
Thank you hear me okay.
Yep.
Yes, Mitch we can hear you.
Okay. So yes, you questions for me the first one is actually more technical.
We're talking a lot more about kind of going to or space is due to the fact that when you go to chip design architectures in the future theyre going to have more complex or.
Am I thinking too complex, but down or is that kind of what are the reasons. Why are you guys are pushing in that space.
Yes, it's a very good question you know clearly we listening to the customer as you. All know Fiveg is deploying and then most attack challenging under Fiveg and somewhat the out the application market is the RF a high frequency RF and out. So we have been looking what is the best way to address this into.
I'm not the hydro genius integration and all the complexity or to put it together and so we are delighted and now we have been working with a national instrument delighted are able to acquire to eat up you are and then form a partnership with national instrument I income up Alliance partnership.
And our clearly the high frequency RF solution, they have and and a and then also we just add on and I've done you acquisition call integrated solution and that give us a very compelling RF solution for you now down for the design and then together with our but you also and Allegro pad.
Form that we provide very comprehensive platform for RF millimeter wave productive holloman auto away from design to simulation to verification and so we are really excited about this integration not the solution, providing and now that really needed.
Solution that the customer want to design and a and then to verify and that's why we are very excited about this acquisition.
Got it. Thank you very helpful. Then just for John or the quick just for the half on half operating margin you guys are starting at 30, we're talking to kind of work.
Pretty materially so.
Yes, it does that apply to you're exiting kind of at 30, 334% operating margin just trying to get any sort of help in terms of what the margin should look like half on half.
Yes, sure Mitch the Yeah, I guess you know in terms of certainly the back half of the year. It will have a higher margin profile than the first half of the year, partly that's due to the impact to the 50 Threerd week.
50, Threerd week in Q4 will add about 40 million to annual revenue that would you add the extra week of expense to of course, the upside to operating income was minimal there.
And then with the like combined impacted the 50, Threerd week and the acquisitions the.
Basically the impact of the purchase accounting rules on the acquisitions kind of is bigger in the first half in the first quarter and kind of gradually reduces overtime over the four quarters.
Perfect. Thank you.
Your next question, Tom Diffely with D.A. Davidson Your line is open.
Yes. Good afternoon, a quick question on the IP side of the business I felt like it grew 16% year over year wondering if that was all organic growth and then I was mostly driven by tensilica in the wireless earbuds.
Yes, Tom and not the as I mentioned that we grow very nicely and said, Greg outstanding year philosophy at IP business.
16% revenue a year over year growth and a pretty much across the board I mean, clearly that the past thought that is tensilica and may not have a strong quarter and also the whole year and especially in the audio in imaging and a computer vision and a and then do you.
The popped up we'd really like you just got loyalty growth, a very strong and especially in the audio site and I mentioned about de your box and also the smart Oh speaker.
That we have a very strong footprint there and then the other part that these IP also have a great yeah and a across a broad from DTR Pciethree and then our newly acquired or not too long ago. The 110 12 kick study.
That is a must have for all the hyperscale guy and the infrastructure roll out and that is for the AI machine learning and also we also delighted you not to my key U.S. semiconductor company, a with us in the largest IP agreement, we have across a different memory.
Tensilica and <unk>.
100, and traffic study and until your question is all get newly developed and nothing from acquisition.
Great and based on just the consumer component to that would you expect that to continue to be more heavily weighted to the third calendar quarter or is it two diversified to make that call.
I say again to question.
Yeah, just wondering if the IP or if you expect from a seasonality point of view for it to be largest on in the third calendar quarter or is it so diversified that it's tough to make that call.
Yeah, it's quite diversified but yes. The we went through a period back in 2016, where we refocused our IP and win for.
Profitable revenue growth right now, we're only guiding Q1 and the year, that's but but certainly IP. The has been doing very very well, we're very pleased with a with the growth that we're seeing.
Okay, then to fall John when you look at the margins on a quarterly basis, what's the biggest determinant of the the range is that a product mix or is that specific customer mix.
It's probably more product mix and of course like the first the first part of the year were impacted by the purchase accounting rules on the two acquisitions in Q4 will get the benefit of that that 50 Threerd week.
Also on probably right now, we probably should take a moment to acknowledge the dynamic situation our employees and partners in China and Asia Pacific region are navigating a as health officials respond to the grown of ours.
Our focus is on our employee safety working with the authorities in dealing with your crisis and on the potential business impact.
Any impact to the kroner bars, we could quantify at this time is in our guidance that a large portion of my revenue courses recurring in nature and the impact we've seen to date is minimal an immaterial to our overall numbers, but but the EBIT that impact is more kind of front loaded to the to the early parts of the year.
Okay that helps thank you.
Your next question comes from Gary Mobley with Wells Fargo Securities. Your line is open.
Hey, guys congratulations to the strong finish the year in strong start. The this current year wanted to ask about your backlog I start red correctly that you cited a backlog increase is about 20%.
From the conclusion of 19 versus 2018 is apples to apples comparison adjusting for the way you Dow account for IP a commitments.
Hi, Jerry yes.
Hi backlog was $3.6 billion at yearend, which includes approximately 200 million Oh, noncancelable IP axis agreements.
Thats up from 3 billion at the into 2018, including 100 million of IP access agreement.
The now there.
Is impacted by the timing of renewals and our weighted average duration for 29 team was slightly higher because we did we really strong Q4, that's a weighted average duration between 19 was 2.7 years.
Now if I look at the average for 2018 and 29 team together a it within the usual 2.4 to 2.6 year range.
And if I look at 2017 through between 19. That's also in our typical 2.4 to 2.6 year range, but Q4 was a strong quarter for us and it took the weighted average duration for 2019.
Up to 2.7 years as you know IP is lumpier than software as is our hardware portion of functional verification and that had a slight impact also.
Okay. Okay. Thanks appreciate that.
No you guys have always try to manage the business new projects acquisitions whatnot based on the board 40, some of the revenue growth in the non-GAAP operating margin and you just concluded 2019 with about 41% you're guiding for 2020, 42% and I'm sure. The extra week has some impact on that and so therefore.
Are you willing to step out of your prior long term margin guide of 30% or where should we now as well also start to consider the cadence business.
Being a 10% topline growth.
So sorry, I don't think we gave a long term margin target of 30% in the past and you're right to point out the rule of 40, we kind of manage the businesses.
Using a rule of 40 metric I think in 2018. If you go back we achieved 20 or what is it 10% revenue growth and 30% non-GAAP operating margin.
In 2019 now that you are we just closed we just did 9% and 32, yes. So as a combined 41% on the route to 40 metric, but and for 2020 guidance I think you'll see that it's it's approximately 10% for revenue growth in about 32.5 or in a range of 32 to 33 or four for non-GAAP operating margin.
The piece that we've been focused on is driving profitable revenue growth.
And that's why I called out the.
That's it that's what was calling out the impact in my prepared remarks of the amount of our revenue growth. This that's flowing through to our non-GAAP operating income line I.
I think if you take the combined impact of the 50 Threerd week and the acquisitions I mean combined the at about 60 million a revenue to our fiscal 2020, but the impact to operating income is slightly negative in 2020 predominantly due to those purchase accounting the purchase accounting impact.
On those acquisitions.
Excluding the impact of the 50 Threerd week in the acquisitions our guidance assumes that's approximately half our revenue growth in 2020 flows through to operating income.
So we're very happy where we are but the because we're adding so much.
Incremental margin you're seeing the the operating margin increase year over year, but there's no near term ceiling that we can see because we have about 50% flow through to operating income.
But we haven't put out a long term target I think Gary tests at onto it yeah basically.
We continue to drive innovation continue to delight the customer with the fast products.
And then Meanwhile, I tried to efficiency.
In terms of through a 40 and we'd like to print and number. So we continue to execute and did the weather resulted to shareholders.
Okay last question on the cash it looks like you repatriate it some cash.
What quite substantial amount I'm just curious what the reasoning behind that is.
Yes, as we just preparing to complete the acquisitions. The two acquisitions, we completed at the start to the year.
At year end worldwide cash totaled just over 700 million $705 million of which about 400 million about within the U.S.
Got you think yes.
Your next question doesn't Jay please share with the Griffin Securities. Your line is open.
Thank you good evening, a intermediate term question and then in longer term question.
First question is right in the long history of.
E.D.A.
The requirements for applications Engineers are AG.
Has typically been a pretty good.
Then pull or lead indicator of business conditions in 88.
In your case, starting in second half of 18 in through the first half of last year.
Significantly ramped up Youre your decisions there.
Obviously connected I'm sure to the U.S. marquee customer and others.
Now you're you're opening there has tailed off sort of the question is.
Maybe largely filled much of your requirement for a even your now back to a more normal.
One way to requirements for AG, maybe just talk about your thinking on.
What is generally your second margins.
Source of employment.
After R&D.
Then secondly, a longer term fortune on computational software.
How is the company committing resources or organization to that is very dedicated group structure within the company for for that and then a tactical question for any follow up on that.
Yes. Good question that Jay let me try to answer and then John what chip in first of all I, we're not guiding d. in our hiring plan.
But clearly not D. A we always recording AG and add on AG. When we have a clear signal for the customer to drive success I'll put refrigeration, so and we continue to drive efficiency and so we know we look at a clear balance in talking about the demand and also Meanwhile, we also.
Right the efficiency and see where we can really drive down the highest return for the shareholders.
And so I went we continue to monitoring that and out so based on the project requiring and also continue to monitoring Oh, what the comp company commitment to us before we really roll out and in some of the system analysts. This space. So clearly customer interest in our product is very strong.
We ran to pull Refried, just put out and then view our roadmap and a along the way we will augment our needs for the existing team.
But so far we continue to to hiring top the R&D and EFI, when we see them and a and were very high bar. So we went to me shut that we picked the right one to really able to really drive the efficiency and and then to the whole system analysis marketed we tried to.
Go after.
Yes, and Jay I mean, computational software is kind of cadence is core competence.
You know, we manage the group across five different business groups or manage employees across five different business groups.
Enemy.
I'm sorry, the yeah, we managed the business the employees across both business groups, who got functional verification. The digital IC group customize see silicon package board and IP.
Yeah on the like say they were happy with the way, we're ramping up a innovative products on the system analysis size I mean, as the boosted we'd over 90 evaluations underway and more than 20 customers today.
A technical follow up on that thus far this with clarity and Celsius, you're taking very much at that point tool approach.
Computational software at least for simulation analysis.
Use cases, but you think about with customers do and simulation.
Engineering software more broadly it seems to me that you're also going to have to have.
I'm kind of a process or data management capability to unify across.
The multiple solvers, so how do you envision going beyond just a point tool by point pool product strategy towards a more comprehensive.
Flow war or.
This orientation.
Yes. Good question, Jay I think first of all when you started you had to address the the point to a solution and then drive the best point to a solution and then over time, Dan you have to integrate the platform are able to drive the platform strategy a little below our digital implementation we start with.
Great and route Innovus first that we started with did not then there's sentences to light. Janice then you'll have the up and not the pick us and then along the way it and you can really pushed for the whole.
Platform and then same thing it's our verification suite, we do that so this is just the beginning as I mentioned earlier. This is the initial move in and then along the way we have a planned off the other product lines and also through acquisitions. So that we can really creating a platform that we can't marching forward as a full court press.
And so right now we are taking very calculated and then get addressing the tool that's up big time market is 700 million. We can go. After then over that and now we have our game plan by developing a various other tool and stay tune and overtime, we will unfold. It and then create the platform and then we can push the platform like al what did you.
At the end verification.
But expert okay.
Thank you.
Your next question comes from Jackson with JP Morgan Your line is open.
Thanks, Hey, thanks for taking my questions guys.
First one just on the impacts in China from the virus.
How are those impacts I know John you mentioned they were minimal, but how are they actually manifesting themselves are orders being delayed our conversations being delayed or are the conversation like like you mentioned about that the safety of your employees are the conversations just not focused on business at the moment.
Yes, So let me start and then John can chip in so first of all wheel knowledge that dynamic situation, a way employee and partners in China, and Asia Pacific and we navigate through carefully.
And we monitoring kept 40 or so and then withheld Waukesha and then to make sure that you know we respond to that Corona virus and I'm involved. The first party is really focused on our employee safety and then looking with authority to deal with the crisis and we'll Han and also a man hour.
Last week, a lot people coming back to work and then how we cannot be impacting how are we getting closing on the monitoring on the supply chain and also the whole factories.
You open and so at the different stage and good news is you know we are revenue is recurring in nature and end up and then Meanwhile, we also monitoring the situation checked with all the key customer and partner and so far that you know we already built into our enough whatever we forecast in the budget.
And and then clearly the impact is minimum mum and and immaterial overall number and that's what that John. It's highlight this is a assumption that we receive and then we closely monitoring.
And so far yes, Jackson I mean, we're closely monitoring the situation in terms of what we what we've seen so far as we pick it up some.
Yeah extra expenses as we try to support our customers from remote regions that we're paying some people overtime. We have some of our revenue comes from royalties.
Weve ratcheted down our expectations of royalty revenue in Q1, because some of that royalty revenue comes out of the China and Asia Pacific and always it included into guidance, Yes, everything is in our guidance.
Okay, Alright, great. That's helpful. And then Oh more broad question on Unclarity in Celsius, or or really just three solvers in general there is there any reason or is there anything structural you see in terms of the margin profile that would be different from your core EDA.
Miss relative to.
The Threed solver market.
Yeah, I think you know clearly indicate a.
System analysts this space in now is so it's a good market is a good business and.
Again mentioned, it's a very early in the game and ER and now we continue to Oh, we note that driving D opportunity and proliferating without customer and I think the market is ready and a lot of a customer requested.
Yes, the profile as a profitability profile is very similar to E D I.
And it's probably.
Our entry into system analysis.
It's probably one of our drivers of increased out margin I think if you look at our gross margin for 2018. It was 90% in 2019, we achieved 90.6% and in our guidance we're targeting 91%.
Because of the growth we're seeing.
And because of all the valuations that are underway on the system analysis based.
Okay. That's great. Thank you.
Thank you.
Your next question comes from John.
Yes, good evening guys. Thanks, So let me ask the question John I, just want to go back to the acquisition.
I understand a little bit better the impact are having on op margins in the March quarter, and I appreciate that you've talked about the impact kind of diminishing throughout the year.
What kind of exit run rate should we think about on op margins relative to the acquisitions influences.
Right. So like you say combined the two acquisitions.
At about $20 million of revenue in Twentytwenty.
And they are dilutive to earnings in.
In 2020.
I think if you look at the impact on the purchase accounting is.
It's kinda heavily weighted towards the first quarter and it kind of it it's bleeds off kind of as we go through each of the four quarters, there's still a little bit that the bleed into 2021, but we expect to be accretive in 2021.
That's helpful and another driver sorry, just another driver of the op margin profile for Q1 is that I do want to kind of remind you that we've we've grown headcount significantly during 29 2019, we entered 2019 less than seven and a half thousand employees. We were up to we were up to 8078.
So so up about 8% in head count by the end between 19.
We're investing in proliferation with market keeping customers and on these time expansion opportunities.
That's helpful. Then maybe as my follow on looking at kind of curious when you think about the organic growth for 2020, especially kind of in the core EDA business. How should we think about kind of share gains that that traditional customers versus sort of growth in new application to new customers around.
Hi, and I'd be curious as to answer the question clearly M&A has been a key theme and semi is over the last kind of five to eight years and I presume is larger companies, but smaller companies. They perhaps had better pricing on EPA tool just by function of scale I'm curious if you look back over time, whether or not.
That was a meaningful headwind to revenue growth and now that a lot of the big M&A is probably behind us how does that become sort of a tailwind to revenue growth.
Yeah. John is a good question first of all I'm excited about this industry because you know.
Very unusual to have five major waves happing ending at same time and now you have de AI and machine learning wave and you have fiveg is starting to deploy and then you add the hyper scale Guy note that really massively scale does infrastructure and then we have autonomous driving and then the whole digital transformation.
One of the industry group and ER and then as I mentioned earlier.
Clearly somewhat this big system company and the service provider the acquired a building up the silicon capability. They also reaching out to us to really expand beyond that to the system analysis space and so I think we're excited about the opportunity in front of us and so so far I think the call you D.
I think.
The proliferation from the leading customer we still have a lot of both opportunity in front of us and we are very excited they not pursuing aggressively on that in some of share gain and then the other part is clearly somebody new put out that we are launching now and I shouldn't even recording I wonder what the picks up that GE for cadence is why.
<unk> driving the innovation. So we have last year, we have seven new organically developed products. Besides those system at analysis tool, we have the proteomics, one we have spectra X.
No doubt and and we have the Jasper Smart go and a call burst and by the way somewhat the new put up we tied to move into the crowd. We take the leadership in the crowd and then basically crowd native.
Our tool that really drive to perform and scalability for our customer and they love it and so I think you know the income up pricing wise.
Value about the value.
We don't want to price it and then we'd really drive quality and now we want to beat the trusted partner for the customer they can count on us to really drive to performance and then in return.
We get the value that we won and when you move down to find nanometer three nanometer idesa, we have become very important to them.
To drive somewhat this design success, and then weve exciting to be partner and supporting them.
Perfect. Thanks, guys congratulations.
Thank you.
Your next question comes from Adam consoles with Bank of America. Your line is open.
Hi, guys. Thanks for taking my questions.
First I just wanted to take a step back and you're talking about this 5 billion dollar market opportunity and system analysis, but I think in the past you've talked about a $30 billion market versus the $10 billion market you serve and that's inclusive EPA IP.
Can you help me reconcile.
The dip the difference between the 10 billion EDA and IP market you serve plus the 5 billion dollar.
System analysis market. How are you guys getting the 30 billion what am I missing. Thanks.
Sure. So let me test and that don't the picture for you.
Site D.
Now we have this we call it a intelligence system design, so that GE.
Firstly on the ground flaw is we called it that design excellent. That's it's a call you de in IP. This still a lot of room to grow in tumble proliferation of Proto, especially some of the innovating products that we are really driving and then secondly, we are moving into the next level I caught the system and innovation.
In some of system analysis and it just a portion of it and then you have embedded software security.
That is overlay on that and then that they is we called it a pervasive intelligent and thus we are applying to AI I'll go read them know how to really address our core business and also somewhat the specific vertical down about going after and then that totaled together.
Basically on the 10 billion fund that these I exelon, that's two other Leah definitely add up and not the 20 billion to really drive and somewhat the vertical market Delaware serving.
In the next five years.
Okay next five years got it and then following up on clarity and Celsius. Good job at the customer momentum you built so far can you give me an overview or give us an overview of the competitive landscape and what your differentiators are there and.
In that $700 million family or dressing. So far is there a next point tool solution or market that you're looking to target perhaps in the near future. Thanks.
Yes. So I think you know we mentioned earlier about this 5 billion 10 market.
Initially we are targeting on that 700 million a that is in the M. Salva and also D. Tomo co simulation area and then we are quite a bit in some odd to put out can state you know when we are ready we will launch that and so initially we can get a few.
We called it a low hanging fruit clearly drive to the computation software differentiation that we can show 10 next performance and we're excited to validate that you know with 90 evaluation and 20 customer sign up and moist coming so we will keep you update on that clearly I think people see the pro forma enough 10 X. performance.
And it can really.
That performance driven and excited to see that they want to get the best too and then over time different tell us what are the new till we had to go in and we're going to bill and acquire and then build up the platform.
Really drive the success in that system analysis, and again I said that this is just beginning and so when the only ending.
Great. Thank you.
Thank you.
And your last question comes from Tom.
Davidson Your line is open.
Hi, just a quick follow up John when you look at the 53 week year does have a bigger impact on your cost structure that will and revenues.
Yeah. So essentially the if you look at the 50 Threerd week, it's a holiday week kind of between Christmas and new year.
It adds about 40 million to annual revenue because it's really the recurring piece of our revenue that is daily subscription based.
That we at the extra revenue for but for on the expense side, we can a pickup the full week of expenses.
So the upside to operating income is minimal for that 50 Threerd week.
Yes, Okay, just wanted to nature.
Okay. Thanks.
Thank you and I will turn the call back to lift Bhutan for any closing remarks.
Thank you all for joining US. This afternoon next face off I was set at GE intelligence system design bring new opportunities in design excellence system innovation and pervasive intelligent and then expanded total addressable market.
We are capitalizing a multiple technology trend.
And further proliferating our solution with a broader base of customers.
Culture is a very important component of our success and who we are as a company in the community and in November Caden was named to invest a business daily first Alba top 50, and volatile mental social corporate governance, we call it the.
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The lease displace ranks the company with regarding to sustain double the tea and Atico impact.
Ran cadence number one in technology category and number five overall.
In closing I would like to things all our shareholders customers and partners and that bought directors and our hardworking employees for their continued support.
This concludes today's conference call you may now disconnect.
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