Q3 2020 Cadence Design Systems Inc Earnings Call
[music].
Be your conference operator today.
This time I would like to welcome everyone to the cadence third quarter 2020 earnings conference call.
All lines have been placed on mute to prevent any background noise. After.
After the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. Thank you I will now turn the call over to Al Lindstrom Senior group director of Investor Relations for cadence. Please go ahead.
Thank you, Mike and I would like to welcome everyone to our third quarter 2020 earnings Conference call I am joined today by lift Futon, Chief Executive Officer, John Walsh, Senior Vice President and Chief Financial Officer. The webcast of this call is available through our website <unk> dot com and will be archived through December eight.
2020.
A copy of today's prepared remarks will also be available on our website at the conclusion of todays call.
Please note that 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 and.
In addition to financial results prepared in accordance with generally accepted accounting principles or GAAP. We will also present certain non-GAAP financial measures today.
Cadence management believes in addition to using GAAP results in evaluating our business. It can also be useful to review results using certain non-GAAP financial measures investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most directly comparable GAAP financial results.
Reconciliations are available at the Investor Relations section of cadence Dot com.
Copies of today's press release dated October 19th 2020 for the quarter ended September 26, Twentytwenty related financial tables, and the CFO commentary you are also available on our website note.
Note that cadence is continuing to adhere to social distancing practices and therefore, we are conducting todays earnings call from our respect remote locations apologies in advance if our glitches or handoffs to take a little more on the usual.
And now I'll turn the call Rahul.
Good afternoon, everyone and thank you for joining us today.
I'm pleased to report that cadence achieved outstanding financial results.
The quarter of 2020.
We exceeded our initial outlook on all key matrix.
At the cadence team continue.
[laughter] 40, dedicates rule challenges posed by the at that meeting.
We also raised our outlook for the year, John will provide more detail.
In a moment.
The data centric revolution that by AI.
Data analytics.
Hyperscale computing continues to fuel strong semiconductor and system design activity and.
And Ali intelligence system design that the Ti uniquely position us to enable our customers to accelerate.
Alright got innovation.
Now, let us move on.
Major highlights for the quarter.
Yes, I Exelon is.
It's the foundation to overlay, yet I'll sit that GE.
Encrypt.
Our Oh, you de chip design, so what you're saying.
IP portfolio.
We significantly deepen our partnership.
Global marquee customer.
Our wide ranging expansion all thought you'd be eight software and.
And hardware portfolio.
This customer is now accelerating that.
The roof ration of outage at those will flow across got design team.
Momentum continue well I'll, let digital final solution.
Nine full flow Wayne.
And major markets shipping automaker paid out a highly innovative.
Complex seven nanometer design.
Using our digital flow.
Although beautification suite.
Price offer best in class.
Engine across simulation.
All my analysis.
Emulation and prototyping is today.
It is particularly well suited to address our customers.
Voting verification challenges.
Hardware at its highest ever revenue quarter. The palladium Xinyuan had thought Kim X one continuing look at new design wins and.
And Sydney Picken expansion.
Particularly at AI and Hyperscale customers.
We introduced Excelian and al it use assumed vending to improve every question throughput of our Premia logic simulator by up to five.
On IP fun, the top vertical end markets.
But design IP in this quarter for Hyperscale enterprise.
From an automotive.
With a major hyperscale that adopting our T.I.E.
And high bandwidth memory IP for use in three nanometer design.
Tensilica have a strong loyalty and when bought through wireless stadium.
And functional safety applications.
And whats adopted.
Automotive company or eight up.
In system innovation I'm.
I'm very excited by the strong momentum of our new system products.
Both organically, if I look as well as those feel pain, Florida, it up to you all and integrating acquisitions earlier this year.
Earlier this month, we expanded our system and that's this portfolio with the addition of the coda T. Three D pension solvency.
Delivers up to 10, X. fastest systems Alba, yes, I stimulation.
Fairly t. and Celsius continue to ramp nicely.
Broadening adoption I think.
Particularly in verticals, such as mobile and Hyperscale segment.
System company type advertising and roughly automic.
Deploying although clearly carletti yen simulator for production use.
In the Fiveg and they'd be so wave area integration of our eight up you are and integrating acquisitions continues smoothly.
And that business is tracking ahead of our internal expectation.
In Q3, we added more than 15, new customers and end markets.
That included Fiveg automotive.
Aerospace and defense.
Peyton has a strong asset long successful history in that fund packaging.
Which has become a lynch pin technology for many system company.
Particularly automotive and hyper scale this will deliver complex system level chip design.
In Q3, our innovative Allegro technology, but youth.
Market shipping auto maker for the wafer salvo system packaging.
Now, let us turn it over to John to go over that.
The results in more detail and.
And to update our outlook.
Thanks lip Bu.
Good afternoon, everyone.
Im pleased to report we exceeded all of our key financial metrics for the quarter.
We had a strong revenue quarter in China, as a result of better than expected hardware and IP sales in the region.
This was the main driver of the improvement in our profitability for the quarter contributing approximately 2% to our non-GAAP operating margin.
Looking at the key results for the third quarter, starting with CNL.
Total revenue was $667 million.
Non-GAAP operating margin was approximately 36%.
GAAP EPS was 58 cents.
And non-GAAP EPS was 70 cents.
Next turning to the balance sheet and cash flow our cash balance was approximately $1.3 billion, while the principal value of debt outstanding was $700 million.
Operating cash flow for Q3 was 281 days during Q3, we repurchased $75 million of Kate and shares.
Before I provide our updated outlook for the remainder of fiscal 2020 I'd like.
I'd like to take a moment to share the assumptions embedded in our outlook.
Fiscal 2020 is a 53 week year.
And the extra week will add approximately $45 million of revenue to Q4.
We have seen higher than expected levels of hardware and IP sales activity in China. During Q3, and we have a sales. This will continue into the middle of Q4.
As a result, our outlook includes approximately $40 million for this increased level of hardware and IP sales activity in the second half.
You will recall that we had removed $70 million of bookings from our backlog at the end of Q2 due to COVID-19 related customer credit risk.
The credit situation slightly improved during Q3, and we revised that estimate down to $58 million.
And as usual our outlook continues to assume that the export limitations that exist today for certain customers remain in place for the remainder of Twentytwenty.
Embedding the aforementioned assumptions.
Our updated outlook for Q4 is as follows.
Revenue in the range of $720 million to $740 million.
Non-GAAP operating margin of 34% to 35%.
GAAP EPS in the range of 48 to 52 cents.
Non-GAAP EPS in the range of 72 to 76 cents.
And we expect to repurchase $130 million of Keating shares.
And for fiscal 2020 that means we now expect revenue in the range of $2.643 billion to $2.663 billion.
Non-GAAP operating margin of 34% to 35%.
GAAP EPS in the range of $1.97 cents to $2.01.
And non-GAAP EPS in the range of $2.68 to $2.72.
We expect operating cash flow to be in the range of $840 million to $870 million and we expect to use approximately 50% of our free cash flow to purchase repurchase common shares in 2020.
You will find guidance for additional items.
Well as further analysis in the CFO commentary available on our website.
In summary.
It is delivered another quarter of strong revenue growth and expanding profitability and naturally I'm pleased by this quarter's results, but we always recommend that you shouldn't focus too much on the results of any single quarter.
What I'm most pleased about is the improvement in our three year revenue growth CAGR.
The fact that our team continues to operate very effectively during a pandemic.
And we're on track to achieve greater than 50% non-GAAP incremental margin for the fourth year running.
I would like to close by thanking our customers.
Partners and our hard working employees for all that they do and I would like to remind them all but their health and safety continues to be our first priority.
And with that operator, we'll now take questions.
At this time I would like to remind everyone who wants to ask a question to please press Star then the number one on your telephone keypad now we will pause for a moment to compile the acuity roster.
Your first question comes from Gary Mobley from Wells Fargo.
Hey, guys. Let me first extend my congratulations on.
Strong second half progression.
Related to the second half of the year I wanted to ask about what seems to be about $65 million extraordinary China related revenue.
Maybe you didn't otherwise expect when the fiscal year started coming in the second half.
It extend is that influenced by some of the latest export restrictions.
Perhaps some customers over in China to try and you get under the wires speak and then related to some of the.
Arrow related to export restrictions have you further done.
Some top down analysis on your existing customers in the surface abilities as existing customers.
So let me continue.
Sorry, I was on mute.
That's a great question.
The yeah in terms of China, that's the strength in China, It was higher than expected we.
We we valued it at about $40 million.
We think the second half of the year benefits from like 40 45 million for the extra 50, Threerd week of revenue and probably $40 million.
For this kind of spike in China revenue that we believe is mostly nonrecurring revenue, but it.
It's a you saw that the China percentage is about 17% in Q3 that 4% higher than the previous record level.
I'd like say our valuation of US is a it is about 40 million to the second half sales.
Split about two thirds, one third between Q3 and Q4, but.
It's I understand the concern about is there a port forward from next year.
It's too early for us to say right now what we can say is that that extra revenue is.
It's generally in predominantly nonrecurring in nature that way, but I don't know.
But I won't know until early next year, when I look at the pipeline, whether whether it impacts 21.
And just to follow.
Oh, that's right yes.
And clearly had when I see it.
Good growth for us and again.
And again, we are complying with all the U.S.
Spoken for regulation.
And ER and then China semiconductor still a very strong growth engine.
Okay.
Turning to margins I mean, you guys you just killing it on the operating margin and I guess, it's contrary to what we would have thought given the higher mix of hardware related revenue.
What's sort of the I guess innerworkings there as it relates to hardware mix is the China related hardware mix.
That much more profitable than say domestically originating hardware sales.
Yes, Gary naturally when we were continuing to invest in R&D, but hiring was slower than expected in Q3.
And also the pandemic is helping margins with that with a little less teeny, we seem to be creeping up into the like 33% to 34% range. We're probably at the high end of that range for as long as the pandemic helps us to keep certain expenses lower but for Q3, we got an additional margin benefit of about 2% for that extra hardware and IP revenue in China.
Which is mostly nonrecurring or onetime in nature.
I assume that continues into the middle of Q4, and we get about 1% extra benefit in Q4.
And the extra week is actually about 25% of the headwind to margins in Q4 that.
But you had the baseline for margins probably in the 33% to 34% range and there is some.
And there are some one time things that are helping us in Q3 and Q4.
All right. Thank you.
Your next question comes from John Pitzer from Credit Suisse.
Yeah. Good afternoon, guys. Thanks, Let me ask the question congratulations Bob.
Just to follow up on that can you help.
Okay, and how much of a tailwind.
The pad that make a dent in relative to opex naive when we get back to a more normal state how do we think about margins.
Yes, John Great question like I said, I think we're probably solidly into the 33% to 34% range for.
Operating margins right now, but with the pandemic related items kind of lower teeny and things like that are helping us to lend it at the higher end of that range. If we did.
If we didnt have a pandemic would probably be toward the lower end of that range.
And then when you when you look at the end of the bridge from our Q3, our Q3 performance at 36% margin, which had the benefit of like 2% for the extra trying to revenue.
For Q4, I'm, assuming 1% for the the extra trying to revenue and then about half a percent of a headwind because of the extra week, if you back out the extra week.
And Q4 was in a normal 52 week year, but we probably a 35%, but it'll come in at about 34 and a half we think.
The midpoint, including the extra week.
That's helpful and then.
Just going back to China I'm sure you saw I think on Thursday evening of last week the department of Commerce.
Came out with some new emerging technologies to put on the export list, it's often difficult to translate rubbermaid language into industry language, but there was some commentary around computational lithography software I'm. Just curious is there anything that came out.
That last week that would impact sort of DTA and I guess as you look out over the course of calendar year pretty wide.
What are the puts and takes at U.S., China attention can you get back.
Yes, just a quick question in out there as I mentioned earlier, we comply with all the export controls acquisition. Thanks.
And clearly the situation is very fluid.
Last week, and we continue with the monitoring closely about this computation, then and any impact with the EPA and clearly now we continue to drive.
Global customer success, and providing the best to an IP, but meanwhile, the complying with the regulation and pay for it we just monitoring closely with divesting and weekend.
Just a follow on is there any benefit from Chinese customers to order more than maybe now.
Yeah, they're concerned about potentially being cut off Peter or does that not really help the situation where the band Titan.
Hi, John you can certainly speculate on that but I mean, we can't really tell us what the motivation for our customers is for the additional purchases during Q3 at the moment, we can't retail with a high degree of certainty if the strength in China in the second half is the shift from 21 revenue into 20, I think you're right to be cautious about it but.
But but we can't tell if it's a shift or if it's just what I can tell you is that it is one.
One time generally in nature most of it is is onetime revenue.
Because it's coming from hardware sales and IP.
The put whether it impacts 21 or not I don't know.
We will know more in January.
Thanks, guys appreciate it.
Okay.
Your next question comes from Mitch Steves from RBC capital markets.
Hey, guys. Thanks for taking my question I got two I'm going to I'm going to start with the proverbial kind of M&A question.
Assuming that in video arm closes do you guys see any impact from that and maybe some comments on kind of the speculation on AMC and violent as well I think that.
As a big topic of points several years ago, but I just want to get to a rehash and any sort of impact you guys think from from the recent M&A transaction may occur.
Yeah, I think let me try to answer that and I'll first of all we are not able to comment on any speculation Sunday.
Nvidia and on and then clearly that Great company and omni is a very important partner for us well cadence and well positioned with him to sort of outcome in customer.
I think you know clearly and retail I know I'll get approval and so I think thats on the Nvidia and and then.
And then on the.
M.D. and guidance.
They are all very good company and we like them a lot.
And clearly you know over the years, we manage well, we'll consolidation and were very proactive engagement with a company and and then any consolidation Dell all unit that's back to the vendor.
Oh, Good company and I think I cannot go beyond the comment any beyond that.
Okay, maybe just to clarify that so I guess on the arm in video is in a scenario. So we'll just go through the scenario that risk we lose market share to arm does that impact at all the media space.
Yeah, and again not that we are supporting customer and then depending on whether they cope with Oh, we spy and but clearly in our omni is very well positioned with that ecosystem in place in the software and we continue to work closely with arm and then Meanwhile.
Keeping close eye, if a customer wants to have this fight and we will support the customer.
Okay Perfect and then my second one is just going back to kind of the three d. sober opportunity.
We've seen chip architectures continue to take off and and that requires a lot of RF and it.
It seems like you guys are very well positioned on that sorry, I guess why or why is it are more I guess more on marketing or more logos to talk about on that front. It seems like the product you guys have a significantly better than answers. So maybe you could talk about what you guys are seeing now or is it is October this year in terms of getting more sales or is it just not to be on a highlight yet.
Yeah, I think you notice that in our system.
And our system design analysis is a very important growth engine for us.
And you know clearly and now were excited about the system complexity on the advanced design like Fiveg automotive and HPC application and so clearly a system level analysis.
Analysis is very critical for them, but delighted with the organic they follow and also the it up you are integrating acquisition that we have or we have a very nice our portfolio at a customer are delighted with that.
And clearly not the 50, new customer more than 50, new customers in this quarter applicability and Celsius, It's very exciting for US and then we also announced the currency Tweedy Hunton Salva that show 10, X. faster system level, Yeah, Hi.
Let me note that simulation. So I think all in all our we are excited about the opportunity and.
We'd like to be under promise over deliver and Meanwhile, in nobody thought.
Right that.
The marketing at the right time, but so far I think we we take one step at a time and then.
To support our customers get more important.
A major just like to add to that that we recognize revenue ratably on our systems analysis products, it's still early days.
Our plan is to win Mindshare first the mid market share will follow.
Yeah, we've got plenty of repeat orders from new system companies and more than 15 came from Asia beyond its current.
Okay purchased another great quarter, so I'll jump out of Kipp. Thank you.
Thank you.
Your next question comes from to that guidance from Bank of America.
Oh, Thanks for taking my question and congratulations on the strong results. So my first one.
I'm curious about how you think about your non China growth. This year, it's about 6% year on year up so far this year would you call that trend growth above trend below trend just how does that compare to what you park the non China growth would be at this point of the year just.
Anything that has surprised you in terms of the non China aspect versus what you thought before whether it as customers are on end markets or what have you.
Hi, Good back. This is this is John wall here I'll take that question, but certainly 2020 was always going to be a very unusual year may we have the the extra 50 Threerd week for revenue you know that we're operating in the middle of a pandemic you're seeing some China revenue spike in the second half of the year for us that we always tell people not to fall.
Yes, two intently on any one quarter, especially the way I look at it is I tend to track the three year CAGR.
If you look at our CFO commentary, you'll find on page two of the commentary.
I put the three year CAGR view on there because I find that few particularly helpful myself, but I mean adjusting for the impact of the occasional 50 Threerd week that impact your numbers you will see there that our three year revenue CAGR were showing a consistent level of about 8% revenue growth per year up to about 2018, it ticked up to 9% last year and 2090.
Yes, I mean based on our guidance for the remainder of this year 2020, now looks like it's going to be a solid 10% three.
Three year CAGR growth year.
Albeit with a China tailwind, but even if you assume that $40 million, China revenue Spike is onetime only add back that out of our second half or three year CAGR is still close to around 9%. So so I think you are typically contract cycle is two to three years. So if you stand back and take like a three year view of things that's it you're probably get a.
A more discernible trend in terms of what's happening with each line of business, but it's difficult to to look at any one quarter and extrapolate from that.
Right and I appreciate that and I was actually looking just year to date non China growth was about 6% and was 9% last year and what I'm trying to discern as you know is there some macro impact there if let's say next year.
Hopefully the global economy picks up does the non China growth also start to.
Reaccelerate that that's what I was trying to get a better sense for Oh, Yeah, We certainly see in strong design activity in China that.
I don't know that lip Bu you anything to add to that I think you know the big enough income of longer longer run I think I'm quite bullish about the semiconductor and system design and now clearly and out.
You know the opportunity and I call. It the five generation ways and they are going to increase the design activity.
And Meanwhile, we continue to work with the market shipping customer I will highlight this.
This quarter, we expanded and deep.
Spend and deeper our partnership with a group of marquee customer and.
In the proliferation of our.
I think at the school. So I think all in all I think we have to take a longer term view of that and look at quarter to quarter.
All right and just a follow up as you look at next year outside of hyper scale. What are the other two or three end markets that you are seeing the most level of a kind of.
Pleasing design activity outside of hyper scale. Thank you.
Yeah as I mentioned in my remarks, clearly AI.
Does it take into hyper scale out the good right.
Right engine.
For cadence.
And clearly he beside the hyperscale income on massive in size.
Infrastructure scaling and then the other parties to note, though some of this industrial automation and also the.
This automotive you know some of this as we highlight the hate us and the system level requirement I think those are all price for I mean, it's very hard to predict.
Quarter to quarter on next year, but I think in the long run and very excited about the opportunity and we are well positioned.
All right thanks very much.
Your next question comes from Joe really from Baird.
Great Hello, everyone I'll maybe.
I will maybe be guilty own analog.
Analyzing out one particular coronary, but it does look like a pretty meaningful acceleration and growth for systems analysis.
And I'm just wondering it sounds like that's all the new software products are moving in the right direction, but because of the ratable recognition, maybe not contributing as much to that number. So are we really just seeing kind of the broader secular trend in terms of companies spending more on their PCB model.
Thank you all then of course that but that's all I grow and you know as the other products start kicking in or.
Or as you continue to gain momentum on our made up you are you're looking at or above company rates of growth continuing is that the right way to think about recent performance.
Yeah, I think are very excited about it system design and analysis space and.
And this is one of the.
If you recall, we have it's a design alone as a foundation and and now we are moving up into this I call. It the intelligence system and well be delighted with.
Very delighted with the acquisition of it up you are at.
And the integration and end with integrating with some of our coding tool and make it very compelling to our customer intimacy.
In terms of driving some of the system analysis in the fall.
Roman yes, salva related area and thermal related in the design and.
Meanwhile, we continue to drive some multi organically to follow.
T. and Celsius, and able to show clearly differentiating performance and now we also now.
Mission all of the code at the Treaty Advancion Silva.
They're able to show the performance on that yet.
Now Ah, yes, I system level simulation. So I think all in all I think this is a go engine for us were excited about stating.
Okay, great. Thanks, and then one more question.
And thinking about kind of that the inner weaving tailwinds and headwinds and to maybe.
Maybe next year as environment, because it it sounds like China could see some normalization.
$40 million is 200 basis points worth of growth, but one one interesting thing that came out there was a seminar the end markets that are adopters of your IP on things like automotive aerospace our markets that obviously it had a pretty good but called 2020, so along the lines of an or.
Earlier question just in terms of maybe cyclical recoveries and some of your end market exposure do you think there is not there where you know while while China, perhaps normalizes, you actually get a bit of an improvement in other areas and it essentially is a wash. So we're still looking at kind of the target Ed.
High single digit growth profile.
Thanks, Don you want to answer.
Yes of course, yes, Joe extensive it is John the.
Generally if you don't get too dramatic a shift in our results given the ratable revenue model that we have and that most of our contracts or are time based in over two to three years.
That's that's why in Q2, the the three year CAGR view on page two of the CFO commentary because that's that tends to be weighted how I look at it I'm always looking to do.
I see can we improved about three year three year CAGR view, but the.
The you know I mean, if I'm looking out to 2021 and of course, we're not giving guidance that will be in a better position to give guidance for 2021.
In the year, when we have a better visibility into the pipeline.
But you know 23 has been a great year, it's been a bit weird, but wonderful that.
But I'd be more inclined to kind of extrapolate for 2021 off for prior year numbers and look at three year, CAGR and try to extrapolate anything off of.
2020 years, it's impacted by so many one time things that.
So that's that's kind of weird.
Okay, great. Thank you.
Your next question comes from cheese, and some you from Keybanc.
Hey, guys. Thanks for taking my question, one clarifying point on that marquee customer you talked about beginning you know it's been.
Full year HM we heard of another marquee customer expanding on the IP side you know.
This expansion today, what does that entail and.
Any other details maybe you could clarify.
Yeah sure. So I think you notice a total marquee customer.
Very excited this is why.
By linking expansion of thought media software and hardware portfolio and.
And accelerating a proliferation of what pitches to fulfil across the Nokia design team. So this is something we are very excited.
We are very excited about this partnership and ER and were delighted.
Clearly our product is really stand out in some of our performance and then the other part is also up clearly demonstrate.
Not the profit relationship, we have and Northrop and on LTE leadership of our key software and hardware solutions fourth yeah, I wasn't fun challenging design.
Okay, certainly back to add there that we have many marquee customers and this one is a different marquee customer to the one we talked about last year.
Great. Thank you for the clarification.
And then one question on the system analysis customer when you talked about you actually mentioned two end markets automotive and aerospace and defense and its the first time, you talked about those verticals for clarity and and sell him.
Is that a is this the case and then.
Are these are more of a new net new customers like the cadence.
Or are they.
Kind of cross selling cross selling.
Yeah, I think we mentioned two customer tantahuatay and roughly of Tony I'll give him a little colder T. M. A simulator and we also mentioned about clearly a fiveg automotive and aerospace.
We have traction.
Income of 15, new customer as you recall is that the new organically developed products. So we don't have a new product.
Product in the past. So this is exciting for us and.
We are you know this is just the beginning and so state you probably have more.
Okay, great. Thank you.
Your next question comes from Jackson Ader from JP Morgan.
Hi, guys. Thanks for taking my question just following up on the marquee customer win that you talked about and and look through I mean in your in your prepared remarks went through a number of.
Different digital full flow when then in customers and expansion.
And I guess I'm just curious.
What should we maybe be expecting from that digital design segment, because even even John if I look at your three year CAGR on that on the digital segment, yes.
Slowed down this year relative to 2019 and just seeing.
Seeing whether we should be expecting some acceleration as we head into 2021, given all the strength you've seen a digital flow.
Yeah. So I think you know let me kick start and then John can see OEM. So were delighted you know we have a.
Now I feel flowing and also this marquee outgrow.
Local market custom not proliferation and.
And the other party not only at parties here, we're talking about the innovative ice Cashel.
That you know provided 25, paceman and physical optimization engine at able to show the 20% improvement T P and free time faster throughput at those are good and then Meanwhile, we are very laser focus on that market shaping customer you know working with them.
Different.
Design group and then also different tool that way now pushing models.
Flow and we are very excited at the progress we've made and stating.
Yeah and Jackson the.
I think again, we wouldn't focus too heavily on any one quarter Q2 in Q3 for digital were particularly impacted by the the.
The customer credit situation that we had not slightly improved during Q3, where we had about $70 million of bookings at the end of Q2 that we we took out of our backlog because we didnt expect to get paid.
Updating that 70 million about 30 million of that has gone off the other 40 million. That's a that's left but we expect to recover about 12, and we still think there's about 28 bits that we won't recover.
So thats improve the situation slightly in Q3, but I'm expecting a strong Q4 and you can see that in the guidance.
Not just from the extra week as well and if you look at the entire year, we're expecting all of our product categories to grow high single digits or double digits.
Okay.
And how about just a follow up checking in on the cloud and cloud adoption any kind of either usage metric that you guys track or maybe a revenue contribution from from cloud usage. Given 2020 has been such a remote you yeah.
No we're not disclosing the cloud revenue separately, but we did book our largest cloud orders so far in Q3.
Good momentum with 150 customers that have adopted our cloud solutions now.
Okay awesome. Thank you.
Your next question comes from Tom Diffely from D.A. Davidson.
Yes. Good afternoon. Thanks for the question. So what bill just wanted to jump back to the assessor question earlier on this the fact that we're seeing you know the industry moves just from Intel based for all these other players. They indeed graphics chips arm based that has to be good news for you are you able to more designs you havent really much better I would assume is that correct.
That's correct and that clearly is not the general purpose that you keep hearing GPU will be continued to do well and now where you can reflect that in our India performance.
I think that what close have changed.
A lot into not just the compute.
A lot of application domain specific and optimization, so you'll see a different class of.
Processa, Indeed, AI and machine learning and training.
Influence and so there's a lot of new suite of development either from start up audit properties company and also the Hyperscale guys also an ability.
Right got it drives some of the process to optimize for their specific application and solution and the service it to try to drive so those out great news was that meant that we have more design activity and Oh on your thought to and also a hardware emulation because some of them are really complex design and then also some of the.
The system I know this is because of that system that or know how are we highlight in my remarks about the Hyperscale Guy plus.
Well, so tight that like a wafer level.
Packaging.
And then just so I can we are excited about this opportunity.
Okay, and then I also wanted to get your view on just consolidation in general what that means.
And over the last five years has been several high profile of customers of yours that have consolidated and it seems like it had very minimal impact on your ratable business with that I'm curious is that the way you think it is going forward as well, where you don't worry too much about consolidation among your customer base.
Yeah, I think you know consolidation always.
Hey attention to it and we tried to be proactive engagement or the acquirer or the.
Acquirer or to acquire a company and we missed it that way of creating a win win continue business and clear.
Clearly on all this consolidation and the R&D is the last place they want to cut so they're going to continue to drive innovation continues to drive efficiency profile, we manage well to consider that.
Station.
In our customer base that have been taken.
Okay, and then each consolidation has their own unique way.
Way in time with respect to Ben.
Spec thing of what they'd like to do and we try to be a great partner was a win win and then we are very proactive with them.
Okay. There's a final follow up here John when you talk about the extra week in the Soc is 43 or 45 million of revenue did I understand you correctly that the actual cost impact is.
No. It's it's got more quickly, but it is it.
He is a headwind for margins, though that the extra weeks about $45 billion to revenue and about $33 million to or not so.
So if you back those out.
You'll find that.
The margin for 52 weeks is higher but so we're kind of running at 33% to 34% kind of baseline for margin.
Look through to the high end of that.
Helping margins at the moment, but.
Were 2% higher than that 34, because of the benefit of that spike in revenue in China that we've seen but we expect that to continue into the middle of Q4, so at about 1% to that you can.
For it for a normal.
But when you add the 14 week, if you add in the 45 million revenue in that $33 million of of expense, you'll find that the margin impact backs it back down to a midpoint of 34 and a half okay.
Okay. Thanks.
Your next question is from GE flu shot from Griffin Securities.
Thank you good evening lip Bu, let me start with you in terms of a question about the long term implications of your intelligence system design and computational.
Sure. There's some question about hardware so live too.
You heard a good deal over the summer and again.
It's about.
Youre computational soccer strategy and cousins system design, you spoken of it and we would have spoken about it of course and.
And the question is threefold riches wood or.
You are.
R&D.
Sure no methodology of your R&D as you Orient cadence towards this new strategy you opportunity Similarly, even terms might be.
It might be for you too John and.
Last and certainly not least the role and competencies that you look for in applications Engineers, which I believe on your second largest part of head count.
After engineering visa be the new strategy.
Oh good okay. Thank you so much for the question. So a couple of things. So clearly you know our core competitive computation software.
And then.
That's the entire intelligence system design is something that we believe is the right thing flat and also adjacent to la and also customer need that so besides just providing that you de silicon development and now they've been looking at the whole system analysis.
In sum up yeah.
Thermal envelope and then as you correctly pointed out you know clearly enough.
Uh huh.
The application the domain specific optimization require and so those are things that fit in to our computation software really well and with that I'd like to gradually expand into that area that is Jason.
So in some of your first question, Tom All R&D met.
Methodology, clearly a way.
We are very laser focus on.
Initially focused on the tool that our ability.
It's important to our customers and I like the Celsius, and Coty, and we clearly have the advantage to able to show all people I'm improvement those high importance as a customer and we have other things that nobody is repeat customer repeat all does that mean that does it they like to buy more and then for <unk>.
Writing more and so we can adopt the Dol on that and were delighted with the addition of all the Treaty Ah you know cocaine tremendous improvement to our customer and that the lights up on that.
In some of the pricing I think John can talk to your mall, where very disciplined we want to make sure that we provide the best solution to the customer.
We want to price it correctly and then two to set the customer and so I think a internal talent where very late so.
We are very laser focus on some of the talent. That's another myself and the team are looking for the best talent in that space or you know clearly from the R&D and then also the happy that able to effectively serve the customer at those I'll, probably tea and then John back to you.
Yeah, I think the two you covered most of it there that or was there something that you were.
You were asking Jay the person who has already covered.
No no. That's that's fine so turning to you John the shorter term question.
Noted a record hardware for the quarter and then certainly substantiated by the increase in hardwood cost of revenues that you show in the 10-Q.
Interestingly, though your inventories increased from the second quarter, which I assume are most if not entirely hardware. So in spite of the revenue upside in hardware did you sustain an inventory build anticipating perhaps Q4, Q1 21 shift scheduling by one or both.
The marquee customers.
Jay I mean, we continue to maintain our inventory levels due to ongoing strong demand for the hardware products, we want to be caught short of inventory with the demand. That's out there that leaves you want emulators doing so well and so it was a pretty makes one platform.
Platform that prototype.
Prototype and platform, but so we're continuing to build inventory.
Okay, and lastly, if I may the physical verification and the yield optimization category has been doing very well for a number of years now obviously mentor is the market leader there and their numbers have been quite strong, but could you update us on what's going on with the Pegasus honestly.
It was quite definitive about that appear to be doing go look back when you talk about [noise].
Perspective changes in physical verification over the next number of years. So you know, what's what's actually happening for you though.
Yeah. So I think there let me try to answer that we are very excited about the Texas as a solution to play a few years for us to develop and the engine is really good and then first of all we want to make sure that in healthy.
Advanced node in the foundry.
Foundry partners are certified because this is a right until the manufacturing sites and make sure that the foundry partner certified this is a pool a day with support of our very delighted in up to a tier foundry partners are certified and that just.
Whole range of certification on the different puts ethanol into the most advanced process node and then now we also something to have multiple customers starting to embrace it and then starting to use it and at stake here I think.
Without mtwenty, one would be a very important year for us.
All the certification in place, but the most fun snow and then now customers can confident confidently you were saying that forget production design, So I think stadium.
Okay. Thank you very much.
Your next question comes from Preneed Freeman from you'd be yes.
Hi, Thanks for taking my question I had a couple of cause a dip in terms of your memory exposure.
How <unk> I guess in terms of your share.
Do you feel like you have more share in memory or what's his body or are they sort of comparable or.
And the reason I ask because a lot of M&A speculation going on then.
And this is not specifically with Baird.
The M&A question, but in general I'm trying to understand your exposure to memory.
Yeah, I think you're not a let me try to answer your question I think memory is more and more important in this whole data analytics and you want to be closer to memory and storage. So this is one that the big area for the hyper scale at the scale that and also the whole infrastructure play out.
So memory is very essential and so so they form and mens to HTM. So some of the new memory development and so clearly we have a very strong foot hole and then we looked at multiple off the memory customer I.
Being in the past we highlight some of the memory success, we have and not only on Betwo and authority Ocean and also in the IP or some of the Dickey.
Yeah, He memory controller, Inphi, and we are well positioned some of the key IP. We have so I think our state I'm in this area. We have good position, we're going to continue to expand on it.
Okay and my follow up.
My follow up is a little bit more on a system analysis, but I mean.
We are hearing positive feedback.
And clarity.
He wasn't competing tools.
But I guess so.
You are an integral acquisition.
One other thing you know Oh, your 700 million pounds, so like how much higher does it imply.
Two.
Well the with respect to the share gain on the organic side are you close to like five 5% share already or how should we think about share in that space as well.
Yeah. So I think you know first of all I think it's I think already point out for the Corinthian Celsius markets. We are addressing 10 market. It's about 700 million and we are just the beginning and ER and some of the big incumbent I think clearly first of all we have to demonstrate the performance is better.
I'm not sure that the customer really well they did a one off the T. Excitement for me is that repeat orders and when a customer using them and they're starting to come back and buy more that it's a very clear validation of the performance is good and like it and then now the customer starting to touch yes.
All of the tools that they require to have have while working closely with them and that's why we have the treaty trenchant salobo come out and the states. You know we have a more exciting things about working on internally developing and then John and I, we always have a basis a plane in somewhat investing de R&D up and we see that.
Customer interest there and then.
If I step back what they want and then we can really look at how sales. We can really developing that have cleared at differentiating opportunity and then lost at school ambitious and we may or may not the it up you are an integral and clear.
Clearly in the whole, Oh, fiveg and millimeter wave area and the system level, they starting to like automotive heartened to see that this is a really good value they want to have and we are delighted.
To help continue the delta.
He did.
I'll, let you kind of.
Patient that is very encouraging for me.
Okay, and a quick follow up I guess I just wanted to clarify that so.
You said there were 15 greater than 15 customers for clarity and sales in this quarter and that independent from the team customers for interviewing into that it'll be on it's going to be the same or I just want to understand.
Yeah, I think we mentioned above 50, new customers you know clearly.
I think that we are very proud of and clearly.
Clearly, it's opportunity and as you know we add on on this.
End market that we go after and this is oh altogether and on this whole system and then.
Okay. Thank you.
Your next question comes from Rich Valera from Needham.
[noise]. Thank you.
Wanted to ask a question on your during your prepared remarks, John you mentioned that system design and analysis was one of the drivers of your increased full year guidance and I was wondering if you could say was it the the new system inorganic system simulation tools or the DWR in a grand.
Acquisitions that was driving that.
Oh, it's it's the combination of both and the comment you really stem from the fact that we expect that to be our fastest growing segment for the year now.
Got it Thats helpful. And then you mentioned that you were actually behind plan in terms of hiring in Q3, but yet it looks like you added about 300 heads which is the most you've added in the wilds just want to try to understand.
That that dichotomy there.
Yeah, we're continuing to invest in R&D and not a lot of that investment is in headcount.
The reason I called out slower than expected hiring was that that was part of the reason why we had such a strong operating margin in the in Q3 in comparison to what we guided.
We're just slightly slower and higher on hiring topic. There was a part of the contribution to to lower expenses in the quarter can we expect.
Got it makes sense, okay. Thanks very much.
Your next question comes from Josh were children from Berenberg.
Yeah, Hi, guys. Thanks for taking my question.
I just wanted to follow up on the systems are not designed in and out the segment maybe from a different perspective.
Given that clarity its Lps are still in very early inning. When we look five years out how should we think about this segment as a percentage of revenue.
Yeah, I don't think we we had disclosed that but clearly were excited about this opportunity.
So you mentioned this it's kind of early ending and then we have some encouraging from our customer repeat orders and then we'll look to real time will appeal.
Broader portfolio and so that we have a whole solutions to provide tobey I just beginning so.
We are excited about the very nice growth area, and we're going to continue to innovate and continue organically to follow and through acquisition to be up this opportunity I think it's a system design and analysts it's something that's part of our Intel.
Intelligent system design study.
That was helpful and then I kinda.
I kind of just wanted to follow up.
In terms of the clarity and sell these went to date are you seeing them being more competitive replacements or are your customers the allocating incremental budget to supplement their existing simulation capabilities.
Yeah, I think this is a new business for us and we always excited to see that you know all this new opportunity and a design win it's new to us and the fall just category of products and I think it's really important that there's a lot of repeat orders from the customer John.
Yeah, I agree with your lip Bu, it's a I mean, given it's such a new business for us it's hard for us to tell in terms of what budgets coming out of from from customer space.
I suspect, it's additional budget, but but it's pretty very difficult to tell if it's it's difficult for us to speculate on that.
Thanks, guys.
Our final question comes from Krish Sankar from Cowen.
Hi, Thanks for taking my question I have two of them first one lip Bu I think Oh, you know there was some questions on consolidation and clearly your customer consolidation is not really impacted you or what have been some offices for that matter. How much of that is inside that your customers I'd be consolidated did not cut media budget, but even read.
The India budget words.
Hi, this is actually a customer's consolidated into some players consolidated between you.
Synopsys and mentor will depend on what the feeling that you had.
Yes, a good question you know we're monitoring very closely as I mentioned on the consolidation and you are correct. We managed well on all this consolidation, but one thing is now clearly I mentioned no R&D at the last say should add.
And then you're certainly like I mentioned earlier is five generation of ways and there's so much design activity, we don't see any slow down and then some of the talent when they consolidate it.
It becomes somewhere else and then they showed up then so up in R&D is that nobody is.
Now clearly yeah topology computer science ice vapor that they need that you know in some of your necessity, we love to see more.
Because a lot of design activity and we don't see any slow down at all.
Got it that's really helpful. And then a follow up I look good if we can answer that do the liberal or John can you disclose it to garden any.
Letter from the government declaring a license to ship 30 Chinese customer.
Yeah, Don you want to answer I don't thing right.
So krish where were doing everything we can to support our customers that.
Where we're not disclosing any specific.
Communications with government.
Yeah, Hi, John Thanks for the.
Now I will turn the call back over to lift the task for closing remarks.
Thank you all for joining us this afternoon.
Well the intelligence system designed for that she is playing out very nicely as they benefit from new opportunities in design excellence system innovation and pervasive intelligent and an expanded total addressable market.
I'm very delighted to share that cadence has been recognized by fourth fortune and a great place to work Institute.
That's one of the world's best workplace for its time.
This recognition is a result of our local employees commitment and dedication to innovation delighting, our customers and to taking care of our community and each other and lastly on behalf of all our employees and our board of directors like.
Keep our heartfelt thanks photos all of them on the front line.
Continue to work tirelessly, we'll fight this dynamic thank you.
Thank you all for joining us this afternoon.
Thank you for participating in todays cadence third quarter 2020 earnings Conference call. This concludes today's call you may now disconnect.
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