Q1 2020 Earnings Call
[music].
Good afternoon, My name is Josh and I will be a conference operator today at this time I would like to welcome everyone to the cadence first quarter 2020 earnings conference call. All lines have been placed I'm used to prevent any background noise. After the speaker's remarks, there will be a question answer session. If you'd like to ask a question. During this time simply press Star then then.
But one on your telephone keypad.
Well now turn the call over to Alan Lindstrom Senior director of Investor Relations for cadence. Please go ahead.
Thank you, Josh and I would like to welcome everyone to our first quarter 2020 earnings conference call.
I'm joined today by lift Futon, Chief Executive Officer, and John Walsh, Senior Vice President and Chief Financial Officer.
A webcast of this call is available through our website cadence dot com and will be archived through June 12 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 the discussion today will contain forward looking statements and 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 cadence. This 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 in the earnings press release issued today.
In addition to financial results prepared in accordance with generally accepted accounting principles or go up we will also present certain non-GAAP financial measures today.
Cadence management believes that an addition to using GAAP results in a valuation or business. It can also be useful to review results using certain non-GAAP financial measures.
Investors and potential investors are encouraged because a reconciliation of non-GAAP financial measures would their most directly comparable GAAP financial results.
Reconciliations are available at the Investor Relations section Oh, the cadence Dot com.
Copies of today's press release dated April 20, or 2020 for the quarter ended March 28 2020.
Related financial tables, and the CFO commentary are also available on our website I.
I would also like you did note that we are adhering to social dispensing practices and therefore conducting today's earnings call from remote locations apologies in advance if there are glitches or handoffs and take a little longer than usual and now I'll turn it over to lip Bu.
Got it on everyone and thanks for joining us today.
I'm pleased to report that difficult environment.
I'm not sure excellent financial results.
First quarter of what thoughts on trend.
Well, all going to 40 unprecedented crime.
And I hope that you and go family.
Safe and healthy.
I will stop by commenting on got rapidly evolving.
The United situation.
Our first priority continues to be ensuring.
A safety and well being off all the employees.
Mhm and communities.
At this time, the vast majority of our global employee base, it's working from home.
And that transition has gone very smoothly.
Bumped up you're supposed to continue with your perspective.
Oh, well infrastructure well operation platform.
And tight communication.
Okay and April.
Ben tend a high level productivity.
<unk> R&D innovation projects and customer do people continue to track well.
Oh, it feels an application engineering team.
That's helpful adapted well, but just Neil what model.
And have continue engaging productively.
With that much underpin the painting.
And so <unk> fun.
As I stated earlier.
It's been a silicon venison and the industry.
Strong desire to be T being driven by generational I know a lot you try but such as Fiveg.
Hi.
I put steel computing and industrial <unk>.
So far if any in the current environment.
I used to not to see any slowdown design activity.
And I do believe just curious disappear.
<unk> opportunity.
So they fall monkeys shipping customers.
So Doug investing in R&D.
Accelerate innovation.
Oh, what piece that's predominantly.
Hi to semiconductor R&D.
In addition.
Broadly diversified customer base.
Well, what $3.7 billion affect law.
And I view about the focus this model also to highlight.
Sure.
Sorry, I jumped up this was particularly in challenging times.
What do you really have pockets that particular, each other to time LNG.
After careful accessing the situation.
At this time, we feel comfortable.
We are funding all the revenue guidance.
Yes.
And a few moments John will provide more details.
And come in Korea.
How about Q1 results.
And guidance for Q2 and the yes.
I'll walk in college and system design strategy enable us to maximize.
These opportunities are tripling I'll, let him.
Refrigeration and all the foundation design Excellence Heckman.
And expanding beyond E into a system innovation and pervasive intelligent.
Now, let us look at some multi device excellent highlight.
Well, the Quantico, I think with digital and final.
Okay. Some digital <unk> rule, which has been proven hundreds all fed funds no tape outs.
That's significantly enhance.
The optimize.
Oh, well performance and area.
All TP he's out.
Well I'll do fall application.
<unk>.
A new full flow decoding hallway innovative I special technology.
Could you only five placements and physical optimization engine.
Slot machine learning capabilities, you leave us up to three times faster truthful and Upto, 20% in pool.
The new full flow.
Thank you.
I ciber leading customers.
And Watson dog fight, he got tech and Samsung electronics.
Additional picture, it, though and signed off highlights for the quarter crude.
A major Asian Hyperscale company.
40 use he's done speech at the full flow.
To follow a machine gardening conferencing chip.
And just deploying <unk> role at seven and five nanometers.
I'm not T. issue, you got 20 system company.
I'm pretty took its first production he's done feature tofu fraud tape outs on Fivenine, Anita locale will push that.
Eating how well okay.
And our market stripping semiconductor automotive customer.
Let me put to Caden.
Yes, its primary he offender what teach it though design.
Okay, that's good indication suite.
We didn't end up marketplace, because it delivers the best modification <unk>.
If I'm fights for vessel class engine.
Axiall him.
Yes, that's a VTM and protium.
In Q1, we have multiple notification wins across various verticals.
Including south datacenter automotive and networking.
Oh, well hardware family at the Fednat Quanta.
We have palladium Z, one heading for new customer and nine major expansion.
Oh, well protium at the chip based portrait typing platform continued its strong momentum, adding six new customers and six we've paid August.
The next one it's increasingly deployed in palladium call.
Well, Jim X one strong momentum is a result, obviously you unique differentiation.
Having a common fun and compiler picked up Palladium Z. One I'll also provide superior performance and a positive geared up ality earlier software development and hot way be question.
Both says you won an excellent platform showing particular strength at Hyperscale system company.
In addition to momentum at market shipping.
Mike from Dr. customer.
Oh I keep it that's still live Oh put teaches revenue growth that's all about compelling offerings.
You know to benefit from the ongoing I P outsourcing trend, we decide when an expansion at.
Total top tier customer company as well as caught up.
Absolutely did particularly well and what's involved it well multifold audio applications as well as by so varian.
And mobile customers.
In design IP that wasn't strong demand flaws TDR portfolio as well as how high Thirtys and T.I.E. IP.
It's too early in datacenter, Yeah, Hi, and high performance computing segment.
Now I will highlight our progress in system innovation Seckman, Oh, we intelligence system design strategy.
Oh, Yeah. This year, we completed the acquisition of it out to you out and into quick.
And we have received very positive response.
Acquisitions on many of our partner.
Potential new customers.
The integration is progressing well on all fronts.
We are combining these technology with our boat show so they grow platforms, which will enable us to offer a comprehensive platform well designing high frequency our S and led me to wait.
Oh, what system analysis tools every fall, but got strong momentum into their new area and we now has more than 30 customers.
Quoting benefits.
From an end frame.
In addition to providing significant better performance and a facility without compromising accuracy.
T and Celsius also provide a tighter integration, but I will affect ship, but you also and Allegro design I phone.
With that I will now turn the call well, but the John reviews, the financial results and provide an update that outlook.
Thanks.
Good afternoon, everyone.
Let me begin with a few comments on the cold at 19 pandemic.
Our first priority remains the health and safety of our employees partners and customers.
And while some of our employees in China or already back working from arc cadence offices in the region a vast majority of our global workforce are currently working in a remote environment.
Our team continues to be very effective.
Even though many are working from home for this we're very proud I'm very grateful.
Even with the global disruption and uncertainty created by the Cobot 19 pandemic I'm pleased to report, we met or exceeded all of our key operating metrics in Q1.
Now, let's review the key results for the first quarter beginning with the piano.
Total revenue was $618 billion.
Non-GAAP operating margin was 32.2%.
Got bps was 44 cents.
Non-GAAP EPS was 60 cents.
Next turning to the balance sheet and cash flow.
In mid March we borrowed $315 billion under our revolving credit facility.
Precautionary measure to provide additional liquidity in light of the recent global economic uncertainty caused by the Qubits 19 pandemic.
As a result at the ended the quarter, our cash balance totaled $946 million well the principal value of debt outstanding was $700 million.
Operating cash flow for Q1 was $218 billion.
Dsos were 42 days.
And during Q1, we repurchased $100 million of Kitten cheers.
Before I provide guidance for Q2 on fiscal 2020, I'd like to take a moment to address some points that I think are important to understanding the assumptions embedded in our outlook.
Our guidance continues to assume that the export limitations that exist today for certain customers.
Remain in place for all of Twentytwenty.
The shelter in place orders that are in effect today as a result of the Cupet 19 pandemic create some logistical challenges related to fulfilling some hardware and IP product orders for which we recognized upfront revenue upon completion of delivery.
At the low end of our revenue range for Q2.
We're assuming that the government mandated or recommended shelter in place orders in effect today, we remain in place for the remainder of the quarter.
And any hardware or IP products that we cannot deliver before the end about Q2 will be delivered in the second half of the here.
On the other hand, if starting sometime in May we can get sufficient physical access to compete hardware and IP deliveries.
We expect to be closer to the high end of our revenue range for Q2.
Assuming we have sufficient physical access to compete hardware and IP deliveries by the end of Q3, we do not expect any negative impact to our full year guidance from the delivery delays, we are assuming for Q2.
For Q2.
This is as follows.
Revenue in the range of 582 $600 million.
Non-GAAP operating margin of 30%.
GAAP Bts in the range of 28 to 32 cents.
Non-GAAP, yes in the range of 50 to 54 cents.
We expect repurchased $75 million of cadence years.
For fiscal 2020, our guidance is as follows.
Revenue in the range of 2.54 or $5 billion to $2.585 billion.
Non-GAAP operating margin of 32% to 33%.
GAAP bps in the range of one dollar and 58 cents to $1.68 cents.
Non-GAAP bps in the range of $2.40 to $2.50.
We expect operating cash flow to be in the range of $775 million to $825 million.
We expect to use approximately 50% about free cash flow to repurchase common shares in 2020.
You will find guidance for additional items as well as further analysis in the CFO commentary available on our website.
In summary, I'm pleased with the results we delivered in Q1 and I've been impressed by the resilience of our business model have you agility and capability of our global team at cadence to continue to operate so effectively in this environment.
The world is facing unprecedented times.
And we were all TP sympathetic to anyone who has been impacted by the Qubits 19 pandemic.
We are clearly all in this together so we'd like to close by thanking our customers partners.
And our hardworking employees for all that they do.
Please note that we are dealing to social dispensing practices and therefore are conducting today's earnings call from remote locations.
My apologies in advance if there are places or Handoffs, we'll take a little longer than usual.
And with that operator, we'll now take questions.
At this time, we'd like to remind everyone wants to ask the question to please press Star then the number one on your telephone keypad.
Your first question comes from Rich Valera with Needham and company. Please go ahead.
Thank you and congratulations to the cadence team for delivering some very solid result, and obviously challenging conditions.
With that I just wanted to ask about your China revenue in the quarter, which was actually up as a percentage of revenue year over year.
Despite a very tough comps since last year, you didn't have the entity list restrictions on while we are several other likely Chinese customers. So just wondering if you talk about what drove the strength in China. This quarter was it new customers with it should have a ramp into band for existing customers and if there's any color in terms of which products were in high demand there.
Gosh I mentioned, therefore here so let me stop I guess, that's enabled design or future tonys products.
I try not to be assessed remain quite good Clos Q1, well either by both hardware and IP, that's tough mostly outside revenue and drunken Fools I'm, all Carlos and detail.
Yeah, Mitch I would say this isn't unusual or trying to revenue over the past nine quarters has fluctuated between a loss of 8% back in Q2, 20 eating and a high of 13% both this quarter and in Q4 80.
Q1 revenue was higher due to both hardware and IP business, which are mostly upfront for revenue.
Great and then just a question on the new system product ramp I heard your new customer count sounds like that's up to 30, which is great. Just wondering if you can provide any anecdotal.
Evidence of a customer penetration I eat customers that have ordered you know a single license have have proved it out and then it will come back to water multiple license and if you've seen any customers sort of scaling up the way, presumably you'd like to see.
I think so far I think well they faced with our system analysts are now this is tool that carry momentum took into Q1.
Right you have already pointed out we have more than 30 customers undecorated tee and Celsius product line.
And clearly I think we providing yeah, hi problem and that does result, and ER and and scalability and then comp not compromising Andy accuracy.
Great and just quick one quick one for you John I noticed your non-GAAP EPS stay the same but your GAAP bps actually went up.
And he can you just a quick we explained that the delta there.
Yeah, just a slight difference in in our assumptions for the M&A integration.
Between what we had in the forecast at the start to the year and where we are now.
Got it okay. Thanks, very much gentlemen, thank you.
Your next question comes from JP showers listened Securities. Please go ahead.
Got it. Thank you a couple of questions.
First on China, and geographic mix generally according to the 10-Q. This evening your China revenues were a record at about 84 million you explain the reasons why it was sort of strong but looking out over the next number of years thinking about.
All the issues that surround did try and over the last year and where you as government policy May go how are you thinking about.
Perhaps geographic risk mitigation again, notwithstanding be very good results in China This quarter.
How do you think about perhaps mitigating the dependency there.
Perhaps focusing on other parts of the World Europe for instant had a very strong year in 29 team Freebie a.
So perhaps that would be a region to to think about refocusing on a as an example, so that's question number one question were too high you highlighted the newer products clarity and Celsius, how would you compare your experience thus far with those two products.
With the previous generation of Hudson I'm products, Tempus, Voltus, Pegasus, which we frankly haven't heard a great deal about is your experience in terms of customer adoption.
Meaningfully different or would you expect it to be different than the prior generation of up a proposed sign off tools that you introduced.
Yeah. So let me get started and then John can feel in more detail. So first of all I think we were expected to everything we can to support customer Bob you know complying with all the application law and regulation.
And we want to provide the best tool for <unk> global customer.
That includes a China Asia Pacific AMEA, and U.S., but that they saw philosophy, you tend to fast I pulled out and that's the whole down and got design.
And it all in talking about the or new products, and clearly I think where they faced with the system analysts. This put out a toward that came out and clearly shows that differentiation and Brad good life, that's not a hooked up I caught though we have more and more customer coming with that.
As a big 10 markets while.
Just to put out he knows the tenant is about 700 million I think well equivalent for so that kinda clearly we have to pick up on page one time of performing.
Some of the both us and pick a says it continues to do well and then we will continue to update you from time to time I'll pick a says that most important with the foundries I'll make sure that that have yet whats that no. It's 35 I came over the last few point, though we highlight oh process no at a different foundries have been.
And certified and now we are starting to really driving some with the customer success and then state Hill in the coming quarter.
Yeah, and yeah, I went out to that that I think you can see from our results and from our guidance for the year, but our business benefits from.
The diversification that we see across products and platforms and geographies that a as much as we encourage investors not to look at any one quarter. I mean, just trying to contributed 10% of our annual revenue in 2018, and 2019, and we're happy to get off to a strong start for 2020, but but hardware night p. or lumpy for revenue.
And here so you should never focused on any one single quarter.
Okay. Just a quick detail question for you John or if I'm reading the Q correctly. It looks like you took some inventory reserve on hardware.
If so could you comment on that.
Hi, G.I. I presume, you're young you're referring to the section where we say we include inventory reserves in our hardware Cogs, but yes, we consistently do that I mean, I don't think there's any significant change in inventory reserves from quarter to quarter put but generally you know what if we have a hardware systems without being demoed around loan, we'll we'll take the.
Preciation or amortization for that into our Pinedale and include it in Cogs, even though we haven't sold it yes.
Very good thank you okay.
Your next question comes a Mitch Steves with RBC capital markets. Please go ahead.
Hey, guys say, taking my question I really had to.
The first thing a little more for lip Bu when I look at your comment about design activity tend to check. So these were picking up is that they're trying to actually accelerate the design activity. So can you maybe give us a little bit of a broad overview, what you're seeing in China in data centers in it I guess any sort of where are you in spite of the market in terms of what design and she's looking like cost.
The different end markets or however, you want to do the vertical.
So let me try to if you have become more color I mentioned earlier or we're going to do so silicon <unk> Uh huh.
Industry.
Today, we see strong design activity driven by a generational a thing although she's why though I like to Fiveg City now I have fun I know that he AI and machine learning Oh, if and I fall and then the Hyperscale no in this environment actually did you fall even mall.
And they all quietly building up the Allen Silicon team and then the hall with its just the transformation of the industrial schools, how we see a lot of Ah Ah. So I think clearly profile as we see today, we don't see I need a brought out in a TV.
<unk> I called it the market shifts in customer I picked up but I'll try to put down yeah, R&D I'm glad he likes it to a hold them and that's kind of Ah, we see had the opportunity and that these I see VC I mean, some way our business very much a he told me definitely hi, with the semiconductor Arnie.
That really benefit Duff and ER and then we I think they focus on the Mcus shipping customer and they have been really honestly I'm really excited to support them all at the I've got.
Got it and then it's going to sort of joined just a little more into financial so China up pretty significantly.
Any weight its good to talk about it that's just gonna be sustainable or if that some pulling from hardware I mean, what do you guys think about the China percentage of revenue I think I was little bit surprising, but maybe you can maybe give us maybe high level comment to what four years should look like if it should be around that type of revenue percentage or not.
Sure Yeah, I mean, we what's large into first quarter and it was mainly due to hardware and IP business I'd be revenue business I just started the quarter I mean, I think its IP that surprised me in Q1 or two the upside at the started the quarter. We thought that we were at a lower royalty revenue in the region and.
We were a bit too conservative in Q1, I think I'm. So it so I P outperformed based on my expectations for Q1, and then in terms of trying to for the year. Like you said you know, what's it's ranged by quarter.
From a low of 8% in Q2 18 to a high of 13% now this quarter and as well back in Q4 18, but a you know what we're happy to get off to a strong start for 2020 I'm thinking you know.
Seven digits in terms of hope you're continuing to at least double digits with the China contribution to our annual revenue it is reasonable.
Okay perfect. Thank you I don't know how are you guys, who couldn't do much better than that so a great quarter.
Thank you.
Your next question comes from John Pitzer from Credit Suisse. Please go ahead.
Yeah. Good afternoon, guys congratulation to solvents holds John you did a good job with the June quarter revenue guide kinda, helping us understand the puts and takes around Toby between the low end and the high end of the range, but I'm just kind of curious was there any absolutely impact should you revenues from Tobey, but you've all seen liquidity because even at the high.
And your coming in slightly.
Below where the street was and then when you look at the full year number would you have raised the full year revenue outlook had not been to crew, but I assure you build you get some cushion on an absolute dollar basis, there as well.
Thanks, Joe Thanks for the question. It's a great question. Thanks for the opportunity to clarify that a I guess when I sit and look at a Q2 I think it's fair to view our guidance for Q2 was being a little bit conservative and maybe more conservative than normal, but and we're not when I look at the impact of Cobot 19 on our revenue that's like for her.
Where we don't have our usual physical access to customer sites to deliver product and then it's hard to predict when we'll get that access books you know if we deliver some hardware in the last week of June It becomes Q2 revenue if we deliver hardware. If there was hardware products slipped to the first weeks of July. It's Q3 revenue you know in both.
Cases, there 2020 revenue. So you know I have more confidence in the year than I do for for Q2 in terms of you're making those deliveries in time to fit Q2 revenue. When we said that you know we're prioritizing the health and safety of our employees and our partners and our customers Oh, we don't want to try and drive.
Too early delivery and predict if we don't have physical access you know we can't control. If you don't have physical access to a customer site on the IP site. The physical access is to our own cadence sites, because that's where our lab sorry for IP and and IP revenue was generally determined by just how much IP, we can deliver in the quarter from our labs.
We're already little bit behind because we haven't had access to our labs.
It's it's not a like a demand issue was one of timing in terms of the delivery of remedy that.
And then so like say from Q2 was its I suppose the paradox of.
Oh, I'm, having a predictable revenue stream, it's very predictable for the year, but it's just less predictable in terms of what we can get done in June versus July and at the current moment.
No. That's helpful. And then maybe you can help me better understand a lot of this out here.
Trying to figure out how the next several quarters might play out for the overall semi industry in for better or worse, what kind of using the global global financial crisis, and as a starting point, but there are some significant differences, but when I go back and look at cadence is performance through the global financial crisis.
You know you were going through sort of an accounting change, which I think heightened sort of the volatility through that but you also saw a situation where things got bad enough, where customers were cutting sort of R&D and I guess, just given sort of the magnitude of the economic impact was expecting from Kobin why you shouldn't that be kind of a baseline assumptions would go into that.
Back half a year or are there enough sort of incremental drivers like hyperscale that really didnt exist back during the global financial crisis, or China that Didnt really exist that you think offsets that because right now at least how you're playing out. The year is June is sort of the trough in revenue and it's been it's a pretty shallow trough I understand.
No. The business is just a lot more predictable than the global financial crisis, but what other puts and takes do you see out there.
Yeah. So a couple of things I think clearly and out of.
I'm going to no unprecedented time and in term of Oh, you cannot me and a unemployment and and this virus across all the different region.
And so I think there now first of all I think most important losses to protect our way employee and customer safety, and ER and well being and not saying that I think clearly are offsetting the impact that they cannot me in the semiconductor is really range on productivity quota.
Clearly the hyper scale and no under a videoconference related area and E Commerce and a area I think is really benefit and somewhat the sector of what the Olympic hard to add a especially in the can show my area and also in some of it.
T automotive related area will be more challenging and so I think it's up not across the board I mean does some very exciting area and then clearly I think we out more tie in with the R&D, but yet and so I think wouldn't notice on all the hockey shifting customer in various.
A hyper scale player and in various Oh, Hi, computing ER area, how we see the benefit of it and expect that infrastructure side, and so I think that Todd we continue to benefit and we took it put dollars net and end up now clearly you cannot look at quarter by quarter or some autumn.
The Olympic more in China. Some yeah. We had made me feel classically a higher overall I think we are very very strong and not the resiliency of our business, especially to a ratable model and also the backlog and a very diverse customer base.
That really Oh, Okay, then into very well for she should supposed to them.
And then lastly, let me just as a follow on you know there was a couple earlier questions. The touched upon the strength in China and it was up nicely, albeit it seems to make sense relative to the ambition that the Chinese semiconductor industry has but I'm just kind of curious given the heightened the rhetoric.
Around U.S., China relations and the idea that the U.S. might actually makes boundaries.
The licenses to ship to certain customers is there risk that some of your Chinese customers are buying ahead and how do you how would you handicap that risk or how would you help us think about that.
Yes. Good question you know overall I would say that they know try not business remain quite good flat and then I like John mentioned earlier, we go Shoom export restrictions will remain.
And I'll be compliance with that and then Meanwhile, we are doing everything they can to support their customers globally, and then fall YOD, new innovating design and so I think over all in all I think Uh huh.
We know we have for capital access them off the situation, but we felt that they know we can reaffirms the whole yet because they saw ratable model and we have a you know very 3.7 could end up backlog and so we can many gets much better definitely and then again I honoring the customer deeply and then be down.
Yeah trusted partner and work with them and and a that is the best way to really try style success together.
John This is John here I was just like to add to that but you know, we only 85% to 90% about revenues recurring in nature, so any additional or kind of any pull forward buying wouldn't increase that revenue, but a good revenue is time based oh, the that would occur maybe on IP and hardware and there was no.
No evidence of that in Q1.
Perfect. Thanks, guys.
Yes.
Your next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
Hey, guys. Thanks for taking my question in the mixed in my congratulations on the strong results as well.
Wanted to start out or asking.
A follow up question that John's why the question about what's different this time versus the financial crisis, Oh wait no night.
And just thinking about how youve diversify your customer base to include system Oems I see see your backlog metrics continue to grow about 15% year over year much faster than revenue growth.
Is is it a new class assist millions who are taking control of their own IC designs, the leading driver of that growth in as well are the average deal sizes for system Oems materially different than what you would traditionally license to merchandise see customers.
Okay carry I think a quick question. So let me touch on the first and then John can keep your monkey chill on Wi Sys and not this and so I think overall, we are excited about this generation not that no one or two drivers.
Fiveg deploying and Andy I put skill and the infrastructure severity deploying and then the other part is also D. A high computing area for you I'm the shouldn't ending up either it's a start up all I'm not sure the company audio AUD typing in.
I think time into a whole bunch, a silly semiconductor silicon well, so theres a whole system level I suppose a packaging was sold we benefit from it and so I think all in all I think Oh, we see strong design activity. It doesn't so dollar at all and then clearly continue to feel that backlog because those rights.
Both business and that's what that would not be dependent authors to quote Oh, so far that most of that book out very well for us.
Actually I had question Oh, sorry I.
Just adding there, but I think the biggest difference between where we are now where we were back in a way to nine is that I mean, weve incredible visibility now into where our backlog I mean, we've got $3.7 billion, where the backlog, we're very very diversified we've a lot of visibility into the second half for 2020.
Okay.
And.
In the last the last time, you gave fiscal year 20 guidance I believe you mentioned that the extra week.
In this fiscal year and the two acquisitions recently closed on we're adding in some about 300 basis points to the 10% growth you were expecting I presume that the weaken extra weekend pack doesn't change, but are you still looking for the same amount of contribution from from the acquisitions.
Yes, so Gary it's about $40 million the extra week is worth about $40 million, but they still recording revenue to the year in twentytwenty.
And we're expecting about $20 million from the combination of eat up you are an integral and the two acquisitions, we completed in early Q1.
So yeah $60 million to the year.
Yeah, I'm, not expecting any more or less than not for the year right now.
Okay, Alright, thank you guys.
Your next question comes from Joe's ruling from Baird. Please go ahead.
[noise], great Hello, everyone Hot just in regards to some of the product and Scott Shannon and the new product offerings is it possible to say with things like full digital flow or maybe the case and adding simulation to allegro or virtuoso workflows.
How much this is increasing average contract value with a customer versus maybe a traditional nicer up say wallet share with your customers.
Yeah, it's very difficult to bifurcate.
Okay. So no no sense other than like on simulation. That's helpful. Then maybe define that as a 700 million dollar opportunity between clarity Intel's, yes, but other than that no somewhere down uplift guidance, maybe you can provide.
Well I think it's too early to tell right now, but but certainly I mean, it's it's pretty well come by our customers are <unk> customers are very happy with the products, we provided but it's very difficult to kinda bifurcate the value of one product versus versus others in a in an arrangement, where there's multiple products be provided to customers.
But the only thing again at onto that is basically what it to acquisition how could you give us a lot on mall, which in the T. A intimate with a more comprehensive solution to provide to sum up a key customer.
Okay, great or on your operating margin outlook for the year I believe the second half there's implied to be closer to the 34% level is that really just a reflection of the revenue guidance and maybe in a particular revenue men.
That you anticipate for the back half a year or are there maybe some other hop back sidearms or or costs that are more on your control that factor into that Steve as well.
Yeah, there's two real drivers there Joe one is the M&A that we lost some of the revenue in the purchase accounting. So lost some of the deferred revenue a purchase accounting it impacts the first half the year more than the second half of the year, So kind of skews film profitability towards the second half of the year on on the.
The the acquisitions, we brought in at the started the year and then I guess the the other impact is because we're assuming some deliveries that would normally happen in Q2 fall over into Q3, but you're going to have a slightly more backend loaded margin profile for the year. I mean, originally I was thinking it would probably work out something like 30.
One and a half and 33 and a half and now I know, we're guiding to 31 at 34.
Okay, Great. That's helpful. Thank you.
Your next question comes from Tom Diffely with D.A. Davidson. Please go ahead.
Yes. Good afternoon, So John you talked about how access to customers probably about a little bit of.
Corporatism and your second quarter outlook, but I'm curious what do you see on the actual many such read such says what's emulation are you seeing supply chain difficulties.
No not right now I mean, we have a a strategic sourcing group.
That have been working closely with <unk> with all our suppliers. We think we have ample inventory and we have good second source suppliers. The the issue we have with revenue and predicting revenue for Q2.
He is really down to whether we can have physical access to customer sites.
To be able to deliver the physical products I mean, that's that's where we've we've got some uncertainty on because of the uncertainty I'm, assuming some of that will naturally fall into the second half the year.
Yeah that makes sense.
Looking to I'm curious no through this crisis I hadn't seen where do your customers talking about acceleration to the cloud.
Yeah. So I think you know clearly Oh, you know we will provide oh, it told him well keep away and then probably is one of the big area that we focus on a where do you like that that they know we clearly extending our leadership.
The cow offering hope I think custom of a compelling you know productivity affects the plus he has killed a policy benefits and ER. So you know we ensured that we Pos Oh, that's customer off and so I think we're continuing to make progress on that.
Okay, instead bigger on the emulation side or on the design tool side.
I think you're not that across our multiple different products and will depend on the product offering a wave of provide.
Okay. Thank you. Thank you.
Your next question comes from Adam done Dentists with Bank of America Securities. Please go ahead.
Hi, guys. Congrats on some results and thanks for taking my question just wanted to follow up on some of the common some appears made on your China sales and how strongly they've grown can you talk about and availability of domestic substituting region and how far behind China is any D.A. in terms of being able to provide a complete a competitive full flow speakerphone.
Thanks.
Yeah, I think so far we see and all we monitoring closely.
In China. This a.
Couple of small top I'll point tool solution provider.
And no clearly enough I'm synopsis, and Kate and we will.
Oh, 25, 30 yourself are accumulating and nice being able to provide the full flow and most advanced nodes or by clearly we don't underestimate that because quality that gets a lot of government funding and so we keep a very close eye on dad and not only from Dallas our progress.
And also from Oh, do recruitment point of view and and make sure that our team is Oh, I mean, thats with US and then weekend Latinos driving die Andy I'll try not Beijing Shanghai site.
Great and my follow up because on the digital IC design sign off segment I saw there's been a deceleration you're on your sales growth for the last three or four quarters I don't know if that's just rounding error with the percentage of sales that you get what is the acceleration just a function of tough got tougher comps or is it the timing of bookings.
Are you expecting or that the trends not segment to turnaround in the near term. Thanks. So I don't know one thing I'd point out is certainly for Q1 in Q2. This year, we're lapping very tough comps because Q1 Q2 last year were not impacted by the export limitations. We currently have a in China.
Oh, I make sense and if I can sneak in one last question. You know you talked about the Q2 outlook and how it really reflects just a few different scenarios and how you know how long you have ER wasn't all your doctor customer facilities. If these nino work from home orders were can be put in place longer than people. Currently think is there a chance.
The customers might switch their consumption of these hardware products more to cloud based model.
Oh <unk> I think it's too early to tell we were quite happy that we had a really solid bookings quarter in Q1 with particular strength in Japan.
And I think we've had 15, new cadence cloud customers in Q1, including several larger customers, but books I think it's too early to tell right now, but yeah I think that's as much of it can say.
Okay. Thank you.
Your next question comes from Jackson at her with JP Morgan. Please go ahead.
Hi, guys. Thanks for taking my question.
First is.
I realized that the impact on revenue, that's just about logistically getting on site, but what about.
The difficulties or maybe some execution challenges you pad on X on getting deals across the finish line maybe for more software deals I would expect or and make a lot of people expected. It would be more moving pieces for larger deals I'm just moving around the internally at your customers that everybody working.
Oh, I'm curious to hear whether whether you've seen any impacts on that side.
So Jack is our ability to close business hasn't changed that yeah. We have very very close contacts with our customers very customer driven company I'm always stay close to our clients, but and also I think we got a little bit Lucky I mean toward the end of last year lip Bu when I talk with the management team and we looked at when.
It was a yield carbon version.
Back in August we looked at the data.
For previous recessions and the data suggested that's a recession often happens within eight to 14 months. Following a yield carbon version. So at the end of last year, we made it up business to try and close as much a strategic account business already in here as possible and we managed to do that.
Excellent. Thanks.
Then the follow up question on.
This is impossible, but there could be maybe any trickle down that's from the delayed either hardware or IP do agree it would that change maybe activity later in the year if people aren't able do you get their tools in time.
So basically that deliberate what I'd only we have any had any problem with closing business. The challenge is being in a executing and delivering the completing the delivery Oh on the business demand continues to be strong the and it's just really getting access to a customer.
Facility to be able to deliver hardware and in our case in the IP case getting access to our own facility into the cadence labs to complete our VIP deliveries that we've already got contractually signed up.
Okay. Thank you.
Your next question comes some Ruben Roy benchmark. Please go ahead.
Hi, Thanks for taking my questions, John you've had a lot of questions on.
China, and I think I understand the near term dynamics, but I was wondering if he could refresh my memory on export restrictions obviously, there's been some chatter in recent weeks around potentially tightening rules for some sorts of high technology product shipments into not just current entity list.
Companies in China, but potentially to a broader swath of Chinese firms and I'm wondering if he could remind us.
What portions of your product line up are subject to export rich restrictions are the hardware and IP.
Products, some or all subject to those restrictions or if you've heard anything new on potentially tighter rules for your products specifically, thanks, well most of our products are U.S. origin. So they are impacted by by the export limitations, our ability to deliver products and services to certain customers to answer the list.
Is limited so so therefore, we would expect our revenue in China to be higher if we didnt have those export limitations, but for the purposes of guidance.
We just state our assumptions that we assume nothing will change I'm right now like I say, because most of our technologies U.S. origin, we are impacted by those export limitations across the board.
Right Okay.
Okay, and then just a quick follow up John on on sort of the assumptions you walk through the assumptions on you know how to think about Q2.
Got it slow into high end on potential I'm getting back to work I would how are you thinking about your own.
Operating expenses and margins.
Obviously, you've kept your full year guidance static, but do you have any embedded assumptions and sort of when you expect things to.
Normalized if it won't be a normalize coming up embedded in those assumptions for the year.
Yeah, I'm sure I mean, that's effectively we're continuing to higher.
The although hiring has slowed because it's it's more difficult to complete the whole interview process and the onboarding process, but but we're continuing to harden typically we hire after getting contractual commitments from customers that are the <unk>, let me when I very careful about.
Adding investment dollars until we see the commitment from customers.
So in our guidance. The a there is impact of course with its hardware falls into the second half from the first half the cost to goods sold associated with those well with those hardware products will also fall into the second half originally I was expecting like 3100% margin in the first half of the year, followed by 33 and Uh Huh.
Percent margin in the second half that's more skewed now towards 31 first top 34 second half because of an unexpected shift of some hardware and IP revenue from Q2 into Q3 really.
Got it it's very helpful. Thanks, John.
Your next question comes from Jason So you know with Keybanc. Please go ahead.
Hi, Thanks for taking my questions you know in terms of operations in China. You know obviously those were impacted from kind of kind of mris first when you're growing workforce and what types of learnings, we're able to apply to your other segments and North American Europe onto some of those restrictions put in place.
Well so one thing I learned is I mean like last quarter I thought there would have been a bigger impact to to our royalty revenue.
It turned out but it wasn't as big as him Unimpacted they thought because in some cases here some products.
Do better and some products do worse, but and I think we benefit from a diversification across our products and platforms. I know the thing. We learned is that there's theres a lead time I guess you know in terms of hardware orders that we were able to complete hardware orders in the latter part of the quarter in China because.
Is the hardware was already on site and being demos by the customer. So we didn't have any additional physical delivery to to complete the the revenue cycle to be able to take revenue, whereas you know if we haven't got the the hardware on site for the customer we have to wait for the customer sites to open so that was the third earnings.
We had a and therefore the impact to our Q2, you see that in our Q2 guidance, we're expecting that some revenue that we would normally be taking in Q2, we're expecting to fall into Q3 now.
Gotcha, Okay. So from you know a progress standpoint, and customer engagement standpoint, or is there anything else that mirrors in or differs from what you saw in China customers versus.
North America Europe.
I I don't think so I think you know where we're a company that operates in like into technology or industry and yeah, we can ever predict the future but.
But but we always assume we wont work and industry, but we always assume that tomorrow, we'll be very different from today and so we operate very very closely with our customers and.
I'm not close client relationship allows us to be you know Brazilian flexible and agile island and very very effective in times of change I think we were also very diverse you know we have people in 47 sites across 22 countries, all very very close with the customers.
So so we're able to.
Navigate with change were able to move with change pretty easily I don't I'm delighted with how effective the teams have been.
Okay. Thanks, John I appreciate it.
Your last questions come from Krish Sankar with Cowen and company. Please go ahead.
Hi, Thanks for taking my question I had a couple of them mainly for John John Thanks for all the color on the on the China sales was just trying to figure. It out you said some of the outperformance was an IP in China, but Tonight, because you see it was it more on the cloud data Center was it mobile was it ought to any color would be helpful.
Oh It was certainly on the I.P., sorry, but I don't think we we give any further color in terms of which part of IP, but I P was very strong in Q1, we were delighted with us.
Got it got it and then you know obviously some of <unk> emulation, and prototyping hardgoods assembled and tested by the subcontractors.
Which specific geography that your subcons and right now.
So so.
Most of our hardware is made in the U.S. a in the Americas, but yeah, we were very close relationships with our suppliers. We second source suppliers. We also have ample inventory I don't think we have any supply chain issues.
Got it got it and then just a final question I'm guessing, it's not an issue, but if you look across the whole customer spectrum. If you look at some of the smaller customers do you worry about a potential payment issues for them into second half was so if a you know the economy goes into recession.
That's a very good points in our guidance, we're anticipating some natural credit deterioration, yeah, I, particularly in the longer tail of customers. Yeah. We've said many times in the past that our top 40 customers, we generates a 55% to 60% of my revenue from from those customers and thankfully there and a very strong position you know many of them read like a who's who the strongest balance sheets and the work.
It was put into longer tail, either naturally we would be concerned about some credit deterioration.
So we built in so many dissipation for natural credit deterioration in the long tail.
But no if the shelter in place order remains in place for for much longer than the into Q2.
We don't see improvement in the second half that could impact the businesses over our customers and our customers customers and of course critical issue did deteriorate more than we're currently anticipating I haven't got that you know I havent anticipated, a great depression or anything, but but we have assumed that there may be some credit. It's your credit deterioration if this last.
Through the into June.
That's all I mean, we if we if we can't predict the future I can we shared with you what's in our assumptions.
Got it got can you quantify that put a deterioration or oh.
Oh, it's a it's only slight like I say, it's it's a you know maybe kind of 5% to 10%.
Slower payments because it does that could impact our revenue timing because you you become more.
Variable you have variable consideration. So we do have a typical recording revenue pool, but and if you assume everyone's credit worthy that's very even every quarter. If there's any credit deterioration that can cause a little bit of a delay because you have to wait until you collect cash recognized revenue.
Got it thanks, a lot jumped to give noise.
No further questions I'll turn the call back to listen for closing remarks.
Thank you all for joining us this afternoon.
Well, we encounter 10 systems the as I said that she is paying out very nicely espeed benefit from your opportunities in design excellence system innovation and pervasive intelligent and then expanded.
Addressable market.
And this time of Fiveseventy I'm very impressed and hold off the dedication and commitment shown by all employees continue innovating and delight delighting our customers.
Well all in this together and I'm convinced that we will collect if they come out of this unfortunate situation stronger. It's a company. It's a community and lastly on behalf of all all the employees and I will point out director.
If I have a heartfelt thanks with extremity brief and courageous healthcare workers and others on the front line.
And they are tirelessly working well fight this dynamic.
Wonderful day.
Thank you for participating in todays cadence first quarter 2020 earnings Conference call. This concludes the calling you may now disconnect.
[music].