Q2 2020 Cadence Design Systems Inc Earnings Call
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Ladies and gentlemen, please standby.
This conference will begin momentarily until that time your lines will again be play sounds easy called Thank you for your patience.
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Good afternoon, My name is Mike.
And that will be your conference operator today at this time I would like to welcome everyone to keep in second quarter 2020 earnings Conference call. All lines have been placed on mute correcting background noise.
After the speaker's remarks, there'll be a question answer session.
If you'd like to ask a question. During this time since the press Star then the number one on your telephone keypad. Thank you I will now turn the call of acute elements from senior director of Investor Relations for cadence. Please go ahead.
Thank you, Mike and I would like to welcome everyone to our second quarter 2020 earnings Conference call.
I'm joined today by a 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 September 11th Twentytwenty.
Copy of today's prepared remarks, we'll also be available on our website at the conclusion of today's call.
Please note the discussion today will contain forward looking statements and that actual results may differ materially from those expectations.
More information on 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 in the earnings press release, we issued today.
In addition to financial results prepared in accordance with generally accepted accounting principles or gap. We will also present certain non-GAAP financial measures today.
Cadence management believes that in addition to using GAAP results in evaluating our business. It can also be useful to reviews certain results using 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 measures reconciliations are available at the Investor Relations section of cadence Dot com.
Copies of today's press release dated July 20th Twentytwenty for the quarter ended June 27th Twentytwenty.
Related financial tables, and the CFO commentary are also available on our website.
Note that cadence is continuing to adhere to social dispensing practices and therefore, we are conducting today's earnings call from our respective remote locations apologies in advance if there are any glitches or handoffs to take a little longer than usual and now I'll turn the call over to lift but.
Good afternoon, everyone and thank you for joining us today.
And they predicted report that and viral then I'll continue uncertainty.
We achieved excellent financial results for the second quarter of Twentytwenty.
We exceed that all financial outlook on all key metric.
At the team successfully navigate fool challenges posed by that and that means.
In view of continuing.
Tom broad based demand for all the innovative solution.
By with the robot design.
And by Roman.
Raising our financial outlook for the yet.
John will provide more details, but now that Q3 and annual financial outlook shopping.
We are all going through and that's it then at that time and I hope that you and your family I think safe and healthy.
In this environment <unk> continues to be ensuring.
That's safety and well being about employee.
Optimists and community.
Oh the employee base.
At adapted well, but working from home.
As a p. it to beat the new normal.
And if for the foreseeable future.
Oh, I N D and custom up you do both eye tracking well.
And our sales and application and conducting tending team.
Continues to engage effectively they talk customers.
By increasing our investment in infrastructure.
And collaboration I phone.
In order to maintain high level off and Paul you put up TV.
He will bite the generation no driver such as Fiveg.
Hi, and hyper scale computing.
The data centric evolution is accelerating semiconductor demand and design activity.
That's a result.
Seeing while spread the mine <unk> software IP and hardware solution.
And I'll intelligence system design to the tea.
That's also very well positioned to benefit from these trends.
I'll, let us look at some of thought design excellent highlights for the quarter.
We deepened our partnership but when necessary.
Accelerate innovation.
While arranging expansion of our E D and hardware solutions.
Our Neil they get the flow outflow flow with innovative I special technology continued its momentum.
But 10, new full flow wins during the quarter.
We expanded our partnership with Micron <unk>.
<unk> brought 12 brought that proliferation about Iot solutions.
Including the deployment of I teach it though full flow what that give alum and next generation products.
He does collaborated with TSMC and Microsoft.
Sure customers to accelerate design.
Timing sign off do think cadence signed off solutions.
And TSMC technology.
Microsoft Israel.
I will keep them, but if the kitchen suites, you live as Beth Buddy vacation to pool.
And had sobota wins across mobile networking and medical verticals.
With deepening our relationships, but the leading medical technology company.
They expand that you'll stage of our verification suite.
Digital and custom analog solutions.
Our Excelian simulator had been state elite photo freaking with multiple migrations from competitive simulate that's underway.
We had another outstanding hadaway quota picked up compelling value proposition up the integrated the one and X one combination.
Being increasingly attractive to customers.
The public M.D., one emulates it.
It gets you Nick custom chip faith.
Architecture continue to win new customers.
And significantly expanded.
Capacity at existing key customers.
Output Kim X one foot, though typing platform as rent comedy based on that differentiate that ability to provide very far off being uptime and high performance.
The growth of analog mixed signal and RF design is driving the need for high performance and accurate circuit simulations.
Although massively Hello sector Act.
The kit to simulate to continue perforating at multiple customers lights Skyworks.
And one so go to a competitive displacements in quoting a dumb luck is shipping I put killer.
Q2 was.
Especially strong quarter <unk> IP business.
It took a gain you live but I'll I'll put digit revenue growth.
I would responsibility of focusing on stock IP.
At the most advanced nodes.
We continue to pay off.
Robust demand continues well high speed city and de de our IP.
And Tensilica has particular strength.
In high fight through wireless studio and Vician application.
As well as strong loyalty.
And then.
Thank you very well delivering double digit revenue growth.
So photo Mcus shipping customers.
Across multiple verticals at successfully youth, although two and a hockey and Treaty I see advanced packaging solutions on production design.
Integration off it up you are and integration is progressing well.
The teams working on developing a comprehensive high frequency RF platform.
Business momentum was strong and it up you are added six new customers in Q2.
The new system analysis tools.
You know took in momentum.
With over 125 engagements underway.
I'll give a new wins and expansion at silver existing customers.
You could have a t. customers.
Included a market shipping type with Gilda.
And Neil Celsius customers in could assist <unk>.
Now I would like to take a moment and talk about into quality and ratios intolerance.
It's significant social Tal I issues after that cool heartbreaking events over the past few months.
Very close to my Huh.
At cadence embracing diversity.
And fostering inclusion I keep tenants of our culture.
We believe that by being open with different views and perspectives, we learn from one another and together we have become stronger as one team.
We have silver related initiatives underway, including training.
Hey equity, let me know Ti Vo nation.
Recruiting and Korea advance and vitamin support among others.
I committed to treating each other with respect and dignity.
And our politics, then again.
Racism.
But just if intolerance.
And violence.
Now I will take over to John.
Thanks, Andrew and good afternoon, everyone.
I'm pleased with our results for Q2 and updated outlook for fiscal 2020.
For Q2, we exceeded all of our key financial metrics for the quarter.
Back in April we were expecting that some Q2 revenue might shift to Q3 in part due to the pandemic related challenges that we thought would delay a number of our Q2 I P deliveries and hardware installations into July in Q3.
On reflection business was stronger than we expected and our team adapted well to the delivery challenges presented by the Qubic 19 pandemic.
Ultimately there was anticipated delivery challenges did not have the impact to our Q2 results that we originally feared.
I was with last quarter, our recurring revenue model gives a strong visibility into revenue for the remainder of fiscal 2020.
Based on our experience in Q2, we are much less concerned about our ability to substantially overcome any hardware and IP delivery challenges caused by the pandemic.
We factored that experience into our estimate of how much of our second half revenue, we expect to record in Q3 and the Q4.
I will share more on the assumptions embedded in our outlook in a moment, but first let's go through the key results for the second quarter, starting with the piano [noise].
Total revenue was $638 million.
Non-GAAP operating margin was approximately 35%.
Got Pts was 47 cents.
Non-GAAP, Yes were 66 cents [noise].
Next turning to the balance sheet and cash flow [noise].
Our cash balance was approximately $1.2 billion, while the principal value of debt outstanding was $700 million [noise].
Operating cash flow for Q2 was $345 million.
Dsos were 45 days.
And during Q2, we repurchased $75 million Hopkinton shares.
Before I provide our updated outlook for fiscal 2020.
What we expect for Q3 I'd like to take a moment to share the assumptions embedded in our outlook.
Our outlook continues to assume that the export limitations that exist today for certain customers remain in place for all of 2020.
Our outlook also assumes that the corporate 19 pandemic will remain a challenge for the remainder of the here.
As a result, we've taken steps to prepare our workforce to work from home for longer.
We are anticipating that a number of our smaller customers will experience liquidity challenges that will likely result in some of those customers being able to meet their contractual payments commitments.
We have taken the proportion of causing revenue recognition on bookings from customers, where we believe there is significant uncertainty surrounding our ability to collect payments.
The financial impact of non payment on those accounts has already been factored into our outlook for the remainder of the here.
And with that our updated outlook for fiscal 2020 is as follows.
Revenue in the range of $2.585 billion to $2.615 billion.
Non-GAAP operating margin of approximately 33%.
GAAP, yes in the range of $1.84 cents to $1.90 cents.
Non-GAAP, yes in the range of $2.50 to $2.56.
We expect operating cash flow to be in the range of 800 contained to $814 million.
And we expect to use approximately 50% of our free cash flow to repurchase kitten shares and 2020.
And here's how much of our annual outlook that we currently expect to record in Q3.
Revenue in the range of $630 million to $650 million.
Non-GAAP operating margin of approximately 32%.
Got P.S. in the range of 49 to 51 cents.
Non-GAAP EPS in the range of 59 to 61 cents a.
We expect repurchased $75 million, a kitten shares [noise].
It will find guidance for additional items.
I was further and Oh. This is the CFO commentary available on our website.
In summary, cadence delivered another quarter of strong revenue growth.
Spanning profitability I.
We're pleased to raise our outlook for the year.
Before the pandemic cadence operated from around 50 sites across the globe.
We're now effectively operating from a distributor network aboard and 8000 homes.
We're blessed to have many strong leaders located across the world and I'm very impressed and thankful for how our employees are not only rising to the challenge [laughter] positively thriving they remain intensely focused on delivering successful outcomes for our customers and partners.
Finally, I would like to close by thanking our customers partners and our hard working employees for all that they do.
I'd like to remind them all that their health and safety continues to be our first priority.
And with that operator, we'll now take questions.
[noise] at this time I would like to remind everyone who wants to ask a question. Two please press star then the number one on your telephone keypad now.
We will pause for a moment to compile the kuni roster.
Your first question comes from really really.
Benchmark.
Hi, Thank you for taking my questions and congrats for continuing to perform so well in such challenging times, John I want to start and just kind of drill into the commentary on that smart for customers and the liquidity challenges that you're talking about our these.
Ongoing conversations you're having with customers have you seen some of this in the numbers that you've reported in guided to for Q3 work is this more sort of anecdotal thinking as you think about the the the guidance for the full year. Thank you.
Thanks Rubin good question, but yeah, I mean always we said business was stronger than expected, particularly hardware and IP and at last quarter. We were concerned that compliance with some containment measures around the globe would impact everyone's day to day operations and we expected those measures to impact us in three ways. We thought if our customers office is remainco.
That would impact us on the on our ability to install hardware on the IP site access to all IP labs.
Was impacted we were fearful that that would impact our ability to a complete delivery in our IP and then the other thing we were concerned about was that if the shelter in place restrictions were prolonged.
We were concerned that the pandemic would disrupt the normal business and operations of many of our smaller customers and that would impact their liquidity and ultimately we were preparing for collections challenges on those accounts in the event that some of those customers who are unable to pay us for what they purchase.
Are you on reflection as I said in the script, you know I'm on reflection or with Q2 behind this business was stronger than expected our team adapted well to the delivery challenges the to the issue, though on collections from smaller customers remains that's or the potential collections impact. He is a concern we receive.
The number requests from customers to delay their payments to us.
We've chosen to continue to provide services to those customers and some will eventually get back on track and pay us but many despite there is in our best efforts may not be able to get back on track and will likely fail to collect on a number of accounts and our best estimate of that is with basically reserved for about $70 million worth of bookings.
Right now at the end of Q2 to put that in context over the three year period from 2017 to 2019, we didn't collect on $36 million worth the borders.
So are we pause revenue now on $17 million worth of bookings so were covered for twice the the experience we had over the previous three years.
Very very helpful detail, John I guess just for a quick follow up I was looking at the core IC design.
Tool performance in the June quarter, and [noise] down a little bit sequentially on the digital side up a little bit on the cost that might decide it it would seem that maybe that's where you're seeing some of that.
The near term issues is that the way to read into what's going on with those line items, yes, absolutely. The so did the impact on on 'em collections with predict it was smaller customers is more heavily slanted towards our software business. So so we paused revenue on a number of Ah contracts, where we think collections.
There are challenging that and that impacts the software business more than it would say hardware or IP because in many cases on the hardware side.
Because we get revenue up front, we expect payment upfront. So you don't have as much credit exposure. There are on the I P site a much of our IP revenue is coming from royalties and royalties are typically with customers like with our top 100 customers, which are very good credits cost.
Summers they have strong balance sheets. That's a this is really isolated to that group of customers that are kind of outside or top 100, and it's the kind of the smaller customers.
Got it okay. That's very helpful. Thanks.
Your next question comes from I'm getting from D.A. Davidson Your line is open.
Yes. Good afternoon, I guess first John just following up in the last question their geographic bend to the this small customers that you're worried about.
So it could you repeat that comedy Oh, sorry, yes is there a geographic bend.
Ah towards the end of the customers that you are concerned about the smaller customers or is it broad based across the world.
No, particularly I mean that the if there's any particular demographic that's been hit it smaller customers.
Its its right across the globe, but very much in smaller customers and and probably mostly in software over a IP or hardware.
Okay sounds like your business is fairly strong across the board, but I was wondering if you are seeing any kind of bifurcation between your consumer driven customers and high performance compute customers that you seemingly are much stronger today.
Yeah.
Yeah, I think on the certainly on the royalty site that to I think royalties for the first half for like 25% higher than they were like for the first half of Oh.
Oh 2019 that.
And on the yeah, I, it's hard to that and hard to break it down in terms of where the their strength in different parts of the business I think it's kind of a across the board we've seen strength across the board the that the challenge in the credit side are quite random in the in this into smaller.
Total customers.
Okay. It sounds like a lot of customers are a lot of players out there we're seeing strength in high performance compute offsetting weakness in consumer but from what you say it sounds like you've you're continuing to see strength across the board. So it's kind of again, our royalty revenues related to the consumer electronics market, mainly that and I were seeing strength, there like I say 20.
5% up I mean, I think the royalties were around 21 million for the first half of the year compared to just under 70 million for the first half last year I T was strong.
On the design IP front, our refined strategy of focusing on star IP at the most advanced nodes continues to pay off a demand for high speed charities in PD or IP continues to be strong with deployments at leading mobile networking hyperscale in storage customers and then on the Tensilica side. The highlights there were a customizable scalable DSP IP, including to.
<unk> deployments into wireless stereo envision applications helped along with strong royalties to have a very strong performance for Q2 revenue and IP.
And then talking to add on this a simple I think could already be site, it's kind of a broad base I think you'll Christian on the datacenter cow Hyperscale, Oh, we see space strong demand because I thought the infrastructure I think people both them home Ah that's a lot of scaling so we feel it so very strong in that area too.
Okay. Thank you let them.
Your next question comes from John pitching from Credit Suisse.
Yeah. Good afternoon, guys from asked a question John maybe you know us different sides of the same coin and what have you. Just help me understand if you look into September quarter, what's driving gross more op margins down sequentially I I would've thought that perhaps in the current environment. There were some cost that you might have to incur around cold.
Mitigation actions that actually might dissipate as we go into the back half of the year and I guess similarly over the last several years. The the operating cash flow has been more front end loaded first half weighted than second half would just relative to your guide it feels like second half [noise] something about 30% of the all right. That's what I'm wondering what might be drive.
We now maybe to same thing maybe [noise].
Yeah, John the yeah. Good question that a in terms of on the op margin profile. There. There's a couple of things in that question. So let me on pocket a little bit that in terms of the op margin profile you know the the expectation that we had and when we give guidance for Q2 was we thought that some revenue might shift from Q2 into Q3, our experience was an actual.
Fact that the there was a net shift the other way you know we thought that maybe I mean, if you look at our Q2 guidance. We went out with the midpoint of Fiveninety, having followed Q1, which was 618. When typically you would expect you know cadence to be pretty much you know, let me 618, you'd expect exceeding 620 or something for Q2. So we were expecting about 30 million to push from.
From Q2 into Q3 as it happened we about 10 billion has moved or maybe just less than 10 million has moved from Q2 into Q3. There was no tenant of Oh deliveries that we couldn't get done in the quarter that will now revenue in Q3, but we had approximately 20 million became the other direction and that was.
You know customers that you know as things lifted in June we had customers on a in new bookings in the second quarter that wanted to accelerate the the installation on on what they purchased that a and of course as our guys had time when they were trying to when they had some customers that they couldn't deliver to they just kept on going down through the list.
We typically at cadence you probably have you know maybe a two thirds of Oh, if your orders or bookings at any one quarter would fall into like the last month of each quarter. So it's it's unusual for such a high amount to get delivered in the quarter and but like I say, we are experiencing Q2 was there's probably some shift all of 'em [noise] revenue.
From Q3 into Q2 net nice maybe about 10 million 10 to 15 million from Q3, two to Q2 on the expense I used in contrast to that we you know because of the uncertainty in Q2, you know we held up some of the offers on hiring that to until late in the quarter. Once we got comp.
A couple that so you know what were good for revenue in the quarter and and that's it looked like you know customers were very resilient. Our team was that was very resilient in terms of overcoming the the challenges then we can we released the offer letters.
Hiring accelerated into the ended the quarter is continued at the started this quarter. So that's probably meant that you know some expenses shifted from Q2 to Q3 and some revenue shifted from Q3 to Q2 and you end up then with like a 35% operating margin in Q2 compared to our guidance at 30, and then Q3 is that.
32 also you mentioned operating cash flow I think that if you recall, let me last quarter [noise].
I mean, I hesitate to say, but like last quarter. We were we were mentioning that we had to live we had deliberately or close to some strategic business early in the year I'm. What you're seeing is a is we got paid for that business. So you've probably seen a an up tick in cash in an up tick in deferred revenue I wouldn't be surprised if my expectation.
Right now would be deferred revenue were burned off from this level through the end of the year, because we deliberately aim to get paid arty.
That's helpful. Then as my follow up would do it's nice to see that China as a percent of revenues as remained fairly stable over the last several quarters that kind of low double digits that doesn't prevent us from still worrying about the concern that perhaps there's some by forward going on in China, just given U.S., China relations and.
How critical you are to the overall semiconductor supply chain in China wondering if you could just handicap, what you're seeing in China. Today is there a risk theres pull forward and how do you try to manage through some of the ebbs and flows of the tensions between the governments of the U.S. in China.
Yes. Good question, so I think overall, but try not be a sensor I remain quite.
Good.
And then the Q1 Q2 I sat.
On mentioned I think clearly the hardware in IP.
Good job more upfront revenue and that help and Ah you think overall I think we providing.
To an IP globally to a customer and I mean, Bobby complying with the U.S. regulation and its way through it and very we're closely monitoring it by so fighting all the uncertainty and we already built into our estimate so I think overall, we are confident I think we continue.
I think drop a sand I think quite at the point that sometime you eat variance, but I think overall is a strong business a in Asia and China for us.
Perfect. Thanks, guys congratulations drops off thank you. Thanks.
Your next question comes from each stage from RBC capital markets [laughter].
Hey, guys. Thanks, taking my questions. The first want to kinda want to drill on it just kind of the geographic movement here. It looks at the U.S. up pretty significantly. So I know you guys are concerned about kind of the but I assume are the smaller players not being able to make payment in kind of rolling off some money for you guys. There, but is there any chance or maybe if they go out that incredibly any chance. It basically the larger players end of investing more.
I because we'll be picked up is that a lot of these larger companies actually pushing import the tech front with chip design to what did that actually offset and actually did benefit you guys have hit the larger customers then it spending more in EDA tools, while the smaller ones kind of kind of get press talk to the side.
Yeah, I think you're not damage that good question I think that geographically I think.
Well go right thing or the across the board Wes we see strong design activity, we don't see any slowdown I think there so silicon redness says in the industry with all the generation know driver <unk> Fiveg hyper scale and Ah you know decide when we move into this kind of a data centric I picked data out there.
Ice foodie driving a lot of silicon to give a woman and that design and I answer your question in talking about the.
Big Guy they must we called it market shipping customer I think you kind of Ah Ah you can ER.
Rate from like a transcript that you know clearly I highlighting oh this full flow and all this perforation, but a market shaping and goes out to lead a in got industry are we pay a lot attention and ER and this is a golden opportunity to topic to put down in R&D for the next generation products.
Okay, and this cycle a recover a there will be a much stronger lead us.
And Ah So I'd say no question that these I activity another slow down actually those big Guy are worried when you're driving the R&D and what you like that to beat that cross upon that to work with them.
Yeah, Let me just John World Here, I mean that just the fact that we've raised the year. Despite the fact that we had some we have some collection challenges at the smaller customer base a illustrates that larger customers are investing more in in R&D.
God I understood and then just kind of switching gears here much about three d. clarity, it's been a sort of you know maybe two quarters. So do you guys are talking more about cobalt and Korea <unk> can you maybe provide an update or what is going on with the three clarity product turned the customer win backlog interests anything like that I realize that the environment little bit strange, but I think maybe.
Interesting to hear what some what's happening with a three d. clarity product front.
Yeah, So I'm.
Happy to share with you I think cookie and now we have a very strong Oh. This is a good market for us. It 10 markets about 700 million out clearly I'll, Oh Dockets Ah, we mentioned earlier, yeah. It caught them I see no up to 10 time, performing and then continue providing the accuracy their time, we highlight.
As a market shaping hyperacute I'd go with US and then we have thought well, but under 25 engagements a in this you not to get though with Celsius, and so I think a lot on momentum a lot on multiple you win and more important expansion all the at the existing customers. So I think overall.
So very excited what product, we have and we continue to really drive that differentiation and engaging with the leading customer I take it can see the value.
Okay, Great just one really small but should bookings continue to go up this year or are they going to be flattish kind of a three cents.
So to your question again.
Just really really small when it on the on the backlog is provide now on a quarterly basis should we expect that to be more stable or go up because they realize last year was up 20%. This year, it's pretty stable or three seven for a couple of quarters I'm just trying to understand what what we should expect for your backlog.
John you want to highlight that.
Yeah May tell me, we don't guide bookings, but you know given that we we close some business early in the year to Liberty close some business early into your and pulled out some business from later in the year you know I'm not surprised that a that are all up you always have kind of were flat from Q1 to Q2, but I wouldn't expect a dramatic change between now and the end.
It here.
Okay perfect. Thank you very much thank you.
Your next question comes from Gary Mobley from Wells Fargo.
Hey, guys.
Thanks for taking my question Congrats on a strong quarter I wanted to start out by digging a little bit deeper into they try to conversation and so I know we have thought this new bill Arrow rule as part of the news export restrictions and I know you guys had been working hard to try to insert some some of the topics on it and perhaps don't.
I have 100% clarity as we sit here today, but maybe if you can give us an update as you see it today, how it impacts maybe your fourth quarter or even looking at fiscal year 21 and beyond.
And Kevin a union Ah Ah Ah.
Talking about this new direct or forgot rule from that military and use a rule.
That's right. Okay. So I think overall oh, no in crude or they estimate on the impact on the trade.
Your next question.
You know that clearly a we we money turning back capital D., we comply to ought to requirement and I understood that all cost them a not you know a hold me to us it's not not sending to D.
And then the military use and so and all these.
I'm not a more work and then well booking they know what's that and compliance the number one part D flawed and a delay in support of custom is equally important I think we'd make sure that we complain to ought to be climate.
Okay, and carry any incremental him oh, the military and use or the direct product rules is already included in our guidance Yep. Okay.
Okay, but it's not mistaken it doesn't go into effect until September so not really much of an impact so much in fiscal year 20 right.
Again like say, we've reviewed the potential impact on our business and included everything we know today into a into our guidance.
For the remainder of the here.
Okay is it is my follow up over to shift gears and talk about you know switched to set up for skier 21, I realize you're not going to give any sort of preliminary revenue guidance for the year, but if they're not mistaken the extra week in some acquisitions, maybe contributing to roughly what 200 basis points or revenue growth. This year and so you know we get on the flip side of this year.
You should we think about an equal amount of perhaps a headwind looking into next year.
Yeah, I think it with the acquisition is a pretty small <unk>. The it's that 50 threerd week definitely needs to be a consideration. When you think about next year, Gary that I mean, what I think last quarter I said that I expect revenue impact for that extra week to be about 40 million right now I would say, it's probably closer to like 43 million, but a and then on the X.
Spend site you know the I would guess on a non-GAAP basis, maybe about 33. It's it's yeah. We got a full impact of full week of Ah of expense, but on the revenue sites it'll be that recording revenue a part of our business that we get the extra before so I think the the Empire.
Active that 50 Threerd week, you know my own modeling what I do it I kind of assume 43 million for for revenue about 33 million for expense I'm not sure you have to just for that if you're comparing a 53 week here to 52 week here, but like you say, we're not guiding 2021.
Gotcha Alright, thank you guys.
No worries.
Your next question comes from Rich Valera with Needham.
Thank you let me add my congratulations to the cadence team for another strong quarter in tough conditions.
John just wanted to follow up on the the questions around the strength in the quarter, which I understand I guess was driven by.
Less than feared dislocation in the hardware and IP businesses is that also what accounted for the increase in your overall annual guide her words. So there's some other product areas that contributed to the increase in the full year yet.
Yeah, I think yeah, we were very pleased with with how our IP business is doing I think it's mainly the functional verification.
Business that product category I think that's probably the one that's that's increased the most were just strong hardware a quarter outstanding hardware quarter I mean, the compelling it's a compelling value proposition with the integration of the want an X one as a combination that's increasingly attractive to customers that does he want emulator with its differentiated customer.
Chip based architecture, I mean, we're continuing to win new customers and significantly expand capacity at existing key customers and then with podium X. One you are the prototype platform. There has ramped up strongly on and it's got a unique ability to provide very fast bring uptime in high performance that the cross selling between you know as he want an X one and vice versa.
It was very very resilient and apparent in Q2 and its continue I mean, the already weeks of July we're already seeing that that strength continue but didn't know <unk> I gave a range of 20 million again for Q3 on revenue and that was partly because we did see a shift from Q3 to Q2 for revenue slide.
Shift that shift a lot worse or maybe on the hardware side. We saw that's you know customers looking for earlier delivery I'm not sure how much of the plant a pandemic is driving that behavior and customers are thinking that get the get the hardware in now that but Q3, a strong again and again we've included that in the guidance.
That's very helpful. Thank him for my follow up just wanted to ask another one on the system analysis product. She had been giving kind of a quarterly wins number I think it was 30 plus last quarter and you seem to maybe if pivoted towards engagement number is there an equivalent engagement number from Q1 that we could use to compare just.
Oh, that's expanded over the last quarter and will you at some point, maybe revert giving out wind as opposed to engagements.
Yeah, I think and I didn't know what are your strong put up offering fly a that took pro docket been well received on the clarity and sales, yes, I would highlight up a wind up we have and had a and also we have over 125 engagement.
And in multiple new wins and a week I know.
Got it then give a boring you know number also wins that we have I think is significant enough that we just kind of fun landed into it just under 25 engagement and we have no more important data expansion at the existing.
You know customer demand that they see the value if they want to buy mall and that's very exciting.
Oh, that's great color. Thank you gentlemen.
Yeah.
Your next question comes from pretty firm on from you yes.
Hi, Thanks for taking my question I.
I had a couple of course is on China backhaul could be Youre, maybe 2021 are you feeling a little better or worse about design activity on the leading it especially in China.
There are any change in Oh, how people see that and secondly in terms of the medically and you do.
He did I did I understand you like when you said that you.
Already the guidance are you have you could then this determination not that well are you still sort of working through the club. Thank you.
Yeah. So let me answer the first question and then John can answer the second one Oh, no China scientific and have no. We continue to see a strong business or as a knock off I'm trying to accompany semiconductor company, a scaling and ER and then more and more into if he had fun people women and so yes.
Clearly as long as a indeed, yeah and that could leave a were not able to do business with them, but somewhat them on not yes.
At least supporting them globally, and I think overall, we ceased paying a and b am I couldn't doctor and a in China and the second half in next year end and I'm not talking next year and then them.
You made with its side, maybe John can highlight them.
Yeah, I predict but you know we've included a we've considered just like military end use and Drake product rules I basically all export in determining our outlook for the remainder of the year no. That's based on our existing customer base and the products that we we sell today that's to the extent that's here there's a pretty.
Actually a new customers in Q3 that we haven't dealt with before you know how well haven't taken that into consideration I don't know until we see that new customer how it how it impacts us or not but but based on everything we know today, we factored what we know today into the outlook.
Okay. Thanks.
And my follow up I, just wanted to drill into the I'd be lying sustainability into the back probably YOD.
Do you do you think IP is sort of sustainable in age do or any of it being driven by any specific geography or is it more broad based.
Yeah, I know well have to put get caught that the quota at because this up more fun and not lumpy, except the tensilica at weekends, but continued strong Lloyd he income coming in but clearly you know we are delighted in acute tool I have a strong add the IP business and then.
Clearly you know, how what Tensilica is really shine, and especially and Ah I fight and no tool wireless. So do you envision application and then Meanwhile, and they'll continue to really a vote at 80 novelist IP refine set the G. I in some of the no high speed 30, it's pretty for the high.
But kill Guy and then DDR and IP become more and more critical eye in some of these Ah Gen. Oregon, five fine no more opportunity. So we are pursuing that but it's a little bit lumpy quarter to quota.
Okay. Thank you.
Your next question comes from Jason shot from Securities.
Thank you good evening, John I'd like to follow up on two things that you mentioned in the conversation we had last month.
First of all you you noted that a there is very little difference for cadence in terms of the kinds of resource or a customer coverage requirements that you have a these are the semiconductor customers versus systems customers.
And it would seem to me it infrastructure.
For instance would seem to be not terribly different from a typical semiconductor company, but the question is are you thinking about that at all different.
Lead to the next numbered years in terms of perhaps changes in resource requirements resource intensity anything of that kind as between semiconductor reversing systems customers.
Typically as you try to drive your computational software strategy or analyze the second question as well you noted in that conversation that youre typically bring on applications engineers are a ease after you have customer.
For commitments in hand, or just number of openings. After R&D. We noted is that at the end of the quarter. You were a number of AG openings were lower than three months six months and 12 months ago. I is that because you had a surge your prior hiring and added capacity was it circumstantial based on.
What happened in Q2, or you know maybe reconcile that comment about it.
He capacity versus customer commitments.
Sure Jason Thanks for the question the I, let me take the second part of your question first if I may that I'm in terms of I know you do excellent analysis I read your you're a software standard regularly.
To keep track of what's happening on the hiring front, the but what we've seen with a with it in terms of a east we had a number of eight to higher and we paused, we probably took them off our openings because we had identified the candidates and then they are we released those offers.
This quarter I'm, so where there's a pig there'll be a pick up in hiring you'll see a pick up in headcount by the into Q3.
And then.
But all I mean, we continue to higher hi, raise its a their fundamental aero resource for us in terms of supporting our customers and I think in terms of <unk> resource acquiring requirements between system companies and semi companies.
We'd like say look we went with the winners we take on at the lower process nodes the toughest.
Designs, and the and ER design challenges of our our biggest customers and worked very very closely with them to solve those but I'm. So the.
You are resource requirements on the bigger accounts are very very heavy but ah, but those are very demanding customers on and as a result, our products get better and better and by the time, they cascade out to the broader.
Base of customers Theres theres less maintenance required a 'em, we found that that's the kind of sweet spot for us from a from a margin perspective that we put a lot of effort upfront at the lower process nodes and then make sure that the the products are very very robust when they go to a broad release.
[laughter] you said I think that you have about $70 million that you circle with regard to small customer bookings risk.
Would it be fair to say that that amount represents.
Nearly 3% of your total annual bookings with after the envelope of risk relative to total bookings.
Interesting I.
I don't think it the annual bookings is the right thing to measured against T. I would measured against total backlog because the bookings that we've identified the $70 million a bookings is out of that backlog. That's so so we won't that's not the 70 million is not an annual number it sits across that entire in in that.
Pool of 3.7 billion all backlog orders I think we have 70 million of risk, where we have collections issues and were impact where we're anticipating that we won't be able to collect on that 70 million. That's a that's 70 million legacy to our experience from 2017 to 2019, we had a total experience of only 36 million that we couldn't collector.
What about 12 million here on average prices like 2008 to 2010, and we look at that pool ups.
[noise] between those three years 2000 agency that was contain it was about 17 million. Our experience was about 70 million for those smaller customers such as it at that time, So our reserve I feel comfortable that's that's.
The right level and that we've identified the.
The right pool of customers that we think that we're not going to collect on and I think thats the accurate number that's.
Understood Thanks very much.
Thanks.
Your next question comes from Joe <unk> from Baird.
[noise] right Hello, everyone I looked at I wanted to go back to your opening remarks, you called out five D.
Hey, I Hyperscale.
Maybe if we can broaden that it's also include things like automotive and industrial Internet of things all the new word grows back there is.
And your view has coal that cause the trajectory of any of those opportunities to maybe changed for for a good or bad odd. So for instance in industry like automotive going through the struggles. So that it is right now does that cause the automotive opportunity to change perhaps for the worse in contrast.
Something like Hyperscale computing or artificial intelligence that might actually be changing for the better just curious on your thoughts there.
Hi, Good question, Joe I'm, not a share my personal view.
In some automotive or you know clearly a desktop slow down and you can come up or are.
The industry shouldn't ending a dot deep on them and skill continue and ER. So bad delighted engaging with multiple lead us a working on debt and in this quarter, we highlight the.
Deep collaboration Yeah, we had been assist Ah that had been a great partnership for that.
Right that is on the automotive site.
Talking about the industry clearly they also get affected that Colby you know or so but meanwhile, they are very quietly did so digital transformation industrial full points you'd always continue and so a nice engage in Haiti leeway somewhat davita and net income also.
Right. Some of these are big data.
Implementations and no more software defined and engaging a very actively at the one that I'm. Most excited about is this a transformation not the AI machine learning and it's all about data how do you organize data how do you analyze the data how do I thought that data and a hyper scale.
Okay, I think big time on.
Nobody likes it not to beat that trusted partner, providing that too and I piece for them. So I think that part I think we see a tremendous oh increase of about <unk> He's I activity.
That's great and then one follow up I think you called out that there's coronary you secure 10, new win on your full digital flow product I think you called out that the.
Wins, there over the course of 29, he and I guess as you step back and looked at the broader EDA industry do you see more of the industry, rather news or certainly the incremental growth in E.D.A. revenues going towards a full flow type product and it yeah in the.
Contacts how would cadence maybe compare and thinking on the traditional EDA industry revenue growth profile I'll make cadence actually look in parents in the industry. It over the next few years in your view.
Yeah. Good question pictured, though is that because Tam a market for E D and that's something we pay.
Clearly you know well continues to innovate continue to drive success, a and they'll be highlight this ah I special Ah that make the whole digital and not that pace and Raul and synthesis I'm more effective integration.
And then go tried the productivity and performance and then well pushing very hard on to fulfill because each engine. We have to best of class a involved and then why not without basically got the customer when you moved on to John My treat the seven to five.
Hi between you know you cannot do that makes Max you know you want to really and now have a 40 into quicker. So you shouldn't that you can call on to try to perform and P.P. had run time and and Oh that is critical for that success, but time Pos is critical and we want to beat Atrocitie partner to work with them. So about the lights out too.
Hi light.
Are you not the Oh goodness says, we're highlighting the you know micron not expanding rough refracing for down next generation deep on them and are we going deep with TSMC and somewhat the key foundry partner Rodeo drive you had been snow and become a must have no stuff that is something that we.
Tied to drive so far a we'd not like we have had we continue to try to innovation cool massive parallelism no drive with AI machine learning, we have another data how to try to performance and we got some more aggressively into the cow.
I know somewhat the tool we moved into a cloud native whether we can try to perform and that can be like Uh huh.
Great. Thank you very much.
Yeah.
Your next question comes from Jackson in from JP Morgan.
Hi, Thanks for taking my questions opinion, guys given some of the announcement a the last couple of weeks on semiconductor one particular semiconductor merged right I thought it would be maybe worth 50 here in the two just.
Strategically you know how how does maybe the merger and she fasteners, how does that generally impact cadence in the short run.
And then in the long run does it impact decision, making and actually loan.
[laughter] no question, so far as you can count from our prospect of Oh, we manage fell to a consolidation and the customer base and in some cases, we also engaging activity on both sides still find there to the merger I'll, let you like to see that had a much stronger platform.
Oh, we can even do more with them and so both companies that are you alluded to and I are very good company, great companies and I'm you know so far I think the consolidations or it's one not unique and you know one way and I know, but we know tied to Pete I trust that partner to work with them and ER to continue.
Two cruel and then drive a bet that solutions for them to not have a pick a footprint for them.
Understood and then a follow up one of the one of the presentation next indicated that at virtual DAC was on cloud deployments and the increasing demand for club when it.
Just curious there when we see some other software businesses that have either our transitioning from on premise to cloud or have multiple offerings are multiple deployments the bond and nothing haul deployment, there's a pretty significant uplift in terms of revenue from Pos mercent have cloud deployments versus on Prem.
Hey, John we're looking just curious.
Do you see similar up less than revenue associated with cloud deployments write that down.
Yeah I can start first and then John can feel in mall are clearly a crossover vision for <unk> to the customer are very important we went to provide that flexibility off on that different range all to use model.
It does a customer manage all cadence manage and that you you anything to call you know for the software and then die in your opinion quota hardware platform and that's what can we provide them a compelling productivity and that's geared up on the t. benefit and youre, adding that they really want to try to productivity and performance.
And then if your cap on limit that soba not by theory, you should really drive to fulfillment better and and a and also more cost effective for the customer and so we went to create flexibility for them to do that and what do you like that you know we highlight the key point Oakland operation with TSMC.
A soft or to have to cope with a sign off tool.
Listen Quanta and then you were saying how long you know Columbus I get them the flexibility and you can optimize a tool food and the cost and I think that is that a way to go I didn't we're going to be a very cautious city, you know moving towards the call, especially the new product like the Oh the system analysis.
Oh, we develop ethical native and so it would be much easier and people cut them I can see that benefit are you willing to call and that's what the old you know you eat tools, we kinda talk to buy to try to move into optimizing the call and taking them. So far were making great progress.
And we highlight that over under 25 customer adopted our cross solution. So that does increase back in like that.
Great. Thank you.
Your next question comes from Jason something from Keybanc.
Hi, everyone. Thanks for fitting me in you know just one for me most of the reference customers. The you've announced for clarity you have been semiconductor companies than other electronics ecosystem company, but today you kinda talk about a new hyperscaler. When you know one wasn't as hyperscale customer already it goes from an expanded.
And then also if you think about.
With with with.
Some of the expansion.
You know are are they adding you know that the southeast product for UNFI spanning.
If there.
A quick question. So I think anoka clearly this is our new product class I totally agree and Ah. So any out then you'll put out new customer we highlight on new to us in the way that there are no. We don't have that business before so like United to highlight not a high but.
At the scale market shaping hi, the skillful it oh, the tea and assist tech for the south with the Celsius and then we are delighted we have been 125 engagement multiple new wins I think most important oh, that's tough the must see that benefit and a using our performance you know.
Up to 10 times, better then incumbent and a I think down most important thing to highlight is not the you know expansions at the existing optimists and that is the body, but at the nation Alt, a while who is really good and use it and then they like it by mall and that is the validation topical.
Products.
Yeah, Jason for clarity, specifically I think a in relation to your question, but one of our new customers for clarity a this quarter included a market shaping hyperscaler. We didn't have that no. It's not a a new hyperscaler for us, but but do for clarity for us right. Okay.
And then you know one quick follow up with its hyperscale customer using it to some supplement their simulation processor.
Or more and more of like adopting it for kind of all their needs on the electromagnetic side.
Yeah, I think that what they know again, it's a.
The thing cut them up but I think it just continues to expand amongst the pulled out usage.
Okay, great. Thanks, I appreciate the time.
Thank you thanks.
Our final question comes from Adam Gonzalez from Bank of America.
Hi, guys. Congrats on solid results and thanks for squeezing me in I'm, just a minor clarification question, but on the collection issue that you're experiencing with some of your smaller customers. It's it's concentrated I customers that have a particular end market or application exposure or get more broad based.
It's more broad based Adam Yeah, I mean, it's broad based not just across the customer base, but across the globe.
But the thing that's consistent is that it's typically smaller a smaller value orders and smaller value customers. What we're trying to do there is that we continue to provide services to those customers even though in some cases I don't think we'll get paid but what we've done as we paused revenue on about $70 million a bookings I'd say, it's low.
Okay that we won't get paid so there won't be a a P.L. impact because we're not taking the revenue, but Ah I will continue to to help those customers for a as long as we can that and hopefully that a you know that we won't lose good companies as part of this pandemic.
Got it that's helpful. Thank you and then.
My second question apologies. If this was asked before they can actually cut off for me in the middle of the call, but the implied in second half revenue guidance on the split between Q3 Q4, it seems to be heavily favorite towards Q4 is that really just the extra weak in the fiscal year, that's driving that.
Yeah. The extra week is a big part of that I know also of course, I mean, I'm trying to estimate learning from starting from Q2, what do we expect to to fall or what we thought would we expect to record in Q3 versus Q4, that's why I get slightly wider range for Q3, we went with 630 to 60 50, if we see it and experienced similar to Q2, where there was a shift.
We have some revenue from Q3 into Q2, if we see that again, there may be a shift from Q4 into Q3, which means that will be up at the higher into that range, that's up what but I'm not fixed there's the I don't have any doubt about the the the remainder of the year really it's just what falls into Q3 versus Q4, it's our best guess right now based on the experience so far off Q2.
Got it helpful. Thanks, so much.
Okay.
I'll now turn call back to live in time for closing remarks.
Thank you all for joining us this afternoon, probably intelligence system design. So that GE is playing out very nicely as we benefit from new opportunities in design excellence system innovation and probation pervasive intelligent.
Now to expand that total addressable market.
I'm very impressed and profile of the dedication and commitment shown by our way employees continue innovating and delighting our customers.
Especially during this uncertain time.
Well I mean, what does that together and I'm convinced that we will collect if they come out.
This a unfortunate situation stronger it's a company, it's a community and lastly on behalf of on employees at the bought directors, who want to keep a heartfelt things, we extremity brave and courageous healthcare workers and Oddo under fine line.
They will it continue to work tirelessly fight this pent dynamic. Thank you all for joining us do something.
Thank you for participating in todays cadence second quarter 2020 earnings Conference call. This concludes today's call you may now disconnect.
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