Q4 2020 Cadence Design Systems Inc Earnings Call
And as Ralph and I will be your conference operator today.
At this time I would like to welcome everyone to the cadence fourth quarter 2020 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply.
<unk> and the number one on your telephone keypad. Thank you I would now like to turn the call over to Alan Lindstrom Senior Group director of Investor Relations for cadence. Please go ahead.
Thank you, Rob I would like to welcome everyone to our fourth quarter 2020 earnings Conference call I am joined today by.
Bhutan, Chief Executive Officer, <unk>, <unk>, President and John Wall, Senior Vice President and Chief Financial Officer, and webcast of this call is available through our website cadence dot com and will be archived through March 19th 2021.
A copy of today's prepared remarks will also.
I will be available on our website at the conclusion of today's call.
Please note that the discussion today will contain forward looking statements and the <unk>.
<unk> results may differ materially from those expectations.
For information on factors that could cause a difference and our results. Please refer to our filings with the securities and exchange.
Also it should be.
These include cadence is most recent reports on form 10-K and form 10-Q <unk>.
Including the company's future filings and the cautionary comments regarding forward looking statements and the earnings press release, we issued today and.
In addition to financial results prepared in accordance with generally accepted accounting principle.
Principles or GAAP, we will also present certain non-GAAP financial measures today.
Cadence management believes and in addition to using GAAP results and are evaluating our business and can also be useful to review results using certain non-GAAP financial measures.
Investors and potential investors.
And are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results and reconciliations are available at the Investor Relations section of cadence Dot Com com.
Copies of today's press release dated February 22nd and 2021.
And the quarter and year ended January 2nd and 2021 related financial tables, and the CFO commentary are also available on our website.
Note that again today, we are conducting the earnings call from our respective remote locations for the Q&A session and today, we would like to ask you to observe a limit.
One question and one follow up.
You may re queue. If you would like to ask additional questions and time permits and now I will turn the call over to lip Bu.
Good afternoon, everyone and thank you for joining us today.
And the year of unprecedented macro challenges.
I am pleased to report that cadence achieved outstanding financial results.
For both the fourth quarter.
And 2020.
For the year, we achieved 15.
And revenue growth and 35% on GAAP operating margin.
And then just strength across the board and.
And all segments growing.
T J.
And a moment John will be then more information while Q4 results.
And our 2021 outlook.
The acceleration of Digitization.
The pandemic.
Hap, both with exciting generational trends like <unk>.
I am al and data analytics, and Hyperscale computing continued to drive strong semiconductor demand.
Leading hyper scalar.
And <unk> AI companies continue to aggressively pursue more snow plow.
Cloud <unk> wireless industrial and automotive verticals.
Leading the charge.
And more and more fun.
Our intelligent system design strategy free.
<unk>.
Pam.
And our broad compelling portfolio of chip <unk>.
<unk> Board and system design solution uniquely positions us to realize this exciting opportunities.
In 2020, we accelerated.
Momentum and Mark Kaye.
Count.
While expanding our system portfolio, who will compelling acquisitions.
Enabling us to win new customers and.
Our targeted vertical segments.
Of particular note was the strength.
All of our aerospace and defense business.
Digital transformation and this particular continue.
And we expanded and deepened our leadership chip with sub growth parameters.
<unk> could the use of our custom analog and digital full flow.
Additionally, we are especially excited by the momentum we have with the hyper scaler STI.
<unk> accelerated our chip and system design activity.
Our engagements with the system companies.
Ideally over the past few years.
And revenue from systems companies is now closer to 45% of our total revenue.
And what a great year.
Cadence crowd.
And now has more than 175 customers.
And we further strengthen our wealth.
Partnership with cloud infrastructure and foundry partners.
Now, let US review Q4 highlights.
Design excellence is a foundational layer of our strategy and.
And includes our core EBITDA chip design platforms and IP portfolio.
Our design.
Our digital find our solutions offering superior quality of results and faster convergence continue proliferating at market shipping customers.
We engage in well over 100.
Projects at five nanometer and below process technologies.
And we are in earlier.
And operations on the two nanometer nodes.
Deployment of our full flow accelerated.
More than 45 customer.
Adopted our cadence.
It'll flow through at the most advanced nodes.
During the year, including Mediatek, Samsung Micron, and <unk> and a global marquee customer.
Based on the superior quality of results from <unk>.
Market shaping.
And Hyperscale and significantly increased usage of our digital solutions.
Earlier in the year.
Market shaping automotive semiconductor customer.
And the cadence and his primary EDA vendor.
Digital design.
Customers are faced with mounting challenges and system verification.
And software bring up.
And is benefiting from our verification flow flow solutions that deliver industry, leading verification throughput.
Momentum continued.
<unk> our digital simulator.
Several competitive replacement.
Underway as far as expansions and new customer wins.
Our hardware family of Palladium for emulation, and protium for regression and.
Our software development.
<unk>.
Strong quarter to finish our best ever.
For hardware.
For the year Palladium zone, one at 24, new customers and 34 expansions.
Protium at 13, new customers.
And 40 and expansion.
Demand was particularly strong and AI and Hyperscale customers.
Ericsson.
Renewed commitment to cadence verification hardware, including both the ATM and protium.
Our unique differentiator.
<unk> share of the Protium X one is the common fund and compiler with the Palladium zone.
That enables significant faster bring up and about 40% of our hardware business. During the year included both <unk> and X one.
Our IP business had a strong year.
Our focused strategy and a compelling portfolio leverage and the ongoing IP outsourcing trend.
We continue expanding the footprint of our leadership.
And Pcie IP and had served.
With design wins at the fine and Anita and lower process notes.
Hi speed 30, it's a critical component of hyper scaler infrastructure.
And several of our customers that adopted our 112 gig 30 IP, including.
Voters snaps.
<unk> also demonstrated working silicon.
<unk> has a strong royalties and significant wins at the key true wireless stereo and mobile application processor customers.
Additional.
Additionally.
The automotive sector.
And at a strong and.
Have a good momentum, which wins and functional safety.
Later, and digital radio, including and Adas wins at leading self driving car company.
X system innovation.
We are very excited about our system design and analysis segment.
<unk> had a particularly strong year with greater than 25% revenue growth.
Pricing system complexity for advanced <unk> automotive.
Motive and.
And.
HPT applications is driving the needs for a seamless platform solution across design simulation and analysis.
AWS and integrin and deliver strong great results in 'twenty and 'twenty.
And and day has a strong customer interest and our integrated virtuoso.
<unk> Allegro and EW, our microwave office solutions.
In design and analysis.
And system analysis, we are executing to offset.
They are building out.
Our multi physics portfolio offering best in class solutions, and delivering superior results compared to legacy industry solutions.
Strong market adoption continue for our system analysis products.
And we're particularly pleased with the growing number of repeat orders with customers and <unk>.
<unk> ft, micro electronics, biotech and a market shaping hyperscale net.
With Triple our system analysis Tan.
And adding computation.
Set of channel through a dynamic.
CFC technology through the pending dramatic cost.
Acquisition, which will bring leading cfd technology and deep domain experts expertise of Dr. Charles.
And his team.
Cadence.
<unk> has over 450 customers, including NASA under <unk>.
And Ford across multiple verticals, such as aerospace automotive industrial and marine.
For Covid.
Patient intelligence, we continue to incorporate machine learning technologies and various tools for.
Our improved PPA and faster convergence.
Cilium ml as a successful engagements with several market shaping customers.
And up to five time improvement and regression footprint.
We also progressed on providing IP, specifically tuned for AI and machine learning applications.
Especially etch influencing applications.
<unk> continues to invest in fostering innovation.
And advancing education through endowments and top universities.
Building upon previous and dominance at Stanford and <unk>.
Net of California at Berkeley.
And cash.
<unk> Mellon University.
We announced a $5 million and dahlman at and.
Keith <unk> College of computing.
Promote research in the field of artificial intelligence.
And as Jim learning and data analytics.
And I will turn it over to John will go over.
Q4 results and present, our 2021 outlook.
Thanks and.
Good afternoon, everyone.
I am pleased to report and we exceeded all of our key operating metrics for the fourth quarter and fiscal year 2020.
Now we achieved 50% on the rule of 40 metric for the first time through a combination of 15% revenue growth and 35% non-GAAP operating margin.
Consistent execution against our strategy and double digit growth across all product categories helped us achieve this landmark, but we also had the benefit of some tailwind.
During our fiscal year, which included a 50 <unk> week.
<unk> second half in China and.
The recovery of $26 million that we previously thought to be uncollectible.
The pandemic brought many challenges and I'm very proud of our cadence team for their compassion and resilience and the face of adversity.
<unk> focus on innovation and customer success resulted in continued acceleration of cadence is three year revenue growth CAGR, which is now into double digits.
Let's go through the key results for the fourth quarter and the year starting with the P&L.
Total revenue was $760 million for the quarter.
So every six to eight $3 billion for the year.
Non-GAAP operating margin was approximately 37% and for the quarter and approximately 35% for the year.
GAAP EPS was <unk> 62 for the quarter and $2 11, and for the year and non-GAAP EPS was <unk> 83.
<unk> for the quarter and $2 80 for the year.
Next turning to the balance sheet and cash flow.
Our cash balance was $928 million at year, and while the principal value of debt outstanding was $350 million.
Operating cash flow and the fourth quarter was 100.
And $6 million and.
$905 million for the full year.
Dsos were 44 days, and we repurchased $380 million of cadence shares during the year.
Before I provide commentary for Q1 and fiscal 'twenty and 'twenty one.
To take a moment to share the assumptions.
<unk> 33, and our outlook.
We expect strong revenue growth for the first half followed by more muted second half growth as we lap some tougher second half comps.
Our outlook further assumes the pandemic restrictions will gradually ease across the globe. This year, resulting in higher <unk> expense and 2021 compared to 2020.
And Beth.
We've included the expected impact of the pending new Mecca acquisition, and our 2021 outlook and.
And finally as usual our outlook assumes that the export limitations that exist today for certain customers will remain in place for all of 2021.
Embedding these assumptions into our outlook.
And <unk> 2021, we expect revenue and the range of $2 86 to $2 $92 billion.
Non-GAAP operating margin of 34, 5% to 36%.
GAAP EPS and the range of $2 nine to.
And to $2 19.
Non-GAAP EPS and the range of $2 and 95%.
And to $3 and <unk>.
Operating cash flow and the range of $900 million to $950 million.
And we expect to use approximately 50% of our free cash flow to repurchase cadence shares and 2021.
For Q1, and 2021, we expect revenue and the range of $710 million to $730 million.
Non-GAAP operating margin of approximately 35%.
GAAP EPS and the range of 55 to 59.
And non-GAAP EPS and the range of 72 to 70.
Makes sense and.
And we expect to repurchase $110 million of cadence shares in Q1.
Our CFO commentary, which is available on our website includes our outlook for additional items as well as further analysis and GAAP to non-GAAP reconciliations.
In conclusion.
17th Street has delivered another year of strong operating results achieving 50% on the rule of 40 metric for the very first time.
We remain focused on driving profitable revenue growth and.
And at the midpoint of our outlook for fiscal 2021, and I'm pleased that we are on track to grow our annual revenue by over $1 billion since 2016.
And with more than 50 cents of every dollar of revenue growth dropping through to non-GAAP operating margin over that period.
I would like to close by thanking our customers partners and our hard working employees for all that they do and I'd 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 you. Please press Star then the number one on your telephone keypad now.
As a reminder, we ask that you. Please limit yourself to one question and one follow on and we will pause for a moment to compile.
Thank you and a roster.
And your first question comes from the line of Gary Mobley from Wells Fargo Securities. Your line is open.
Good afternoon, everybody and thanks for taking my question and let me extend my congratulations to a strong start to the fiscal year.
And a strong.
Strong execution relative to your World 40 C. D map by 10 percentage points and that leads me to my question John.
Could you help us level set what that 35% operating margin in 2020 may have been if you didn't have.
And the reversal of the bad debt reserve or bag collectible.
And <unk>.
The fact that you were and weren't able to bring on employees and a fast enough rate.
And and then as well the extra week.
How does that 35% to 5% operating margin guide and fiscal year, 'twenty, one compared to a level set fiscal year 'twenty.
Hey, Thanks for the question Gary.
Yes.
And it's probably a multi part question but.
And I guess in terms of the collections.
We had collections windfall of $26 million and the second half most of which came in Q4 and some of those invoices were already which meant that $22 million or 26, when he was.
Recognizing revenue before the end of the year.
And that was in relation to if you recall and the middle of the year during the pandemic.
We had from smaller customers, but weren't able to pay offs and we reserve for those.
And we help them out, but our engineers and and.
Team at cadence we're determined.
And to help them out whether they were paying us and us, but some of those customers turned around and and.
And managed to survive and we weren't sure if they would but so that collections went for kind of historically and maybe some of the.
Revenue timing in the quarters during the year, but didn't really impact that 26 million didn't really impact the year.
And if you had it in the year, then we took it out and the middle of the year and then like that 20 22 million of that 26 million like afflicted got recognized.
And in relation to the extra week, we thought that was going to be $45 million and it was but the extra week of course.
And a 2% tailwind for.
Because it and.
In terms of helping us achieve 50% on the rule of 40, and 2020 and what was a 2% tailwind in 2020 is a.
2% headwind now and in 2021, when we go from a 53 week year to a 52 week year.
And then.
I guess, we had a really strong second half and.
Sure.
I mean, when I step back from individual quarters and halves, but I would say this you know our business is very strong and all regions and across all of the product categories.
The three year revenue CAGR.
They are up to 11%.
And now in 'twenty, and 'twenty and at the midpoint it's.
And China and per cent for 'twenty and 'twenty at the midpoint of.
Our outlook for 'twenty, one that's at 11% too.
So we're already off to a very strong start as well and the and the first half of 'twenty, one, but it's it's too early really to say if that.
If that's sustainable and the longer channel so the second half.
We have kind of music revenue guidance.
When I looked at the second half of <unk>.
2020 and China.
Notice that we had a higher than normal proportion of upfront revenue and AOI.
Our recurring revenue mix for the region and China.
For outlook and 21, I've assumed we return to our usual recurring revenue mix and the region.
And that along with the fact.
And last week and the second half and 2021 versus the 2020, that's what contributes to the conservative revenue growth outlook for the second half.
Okay, that's fair.
Very helpful.
I wanted to.
Ask you about the materiality of the software systems analysis product group.
That we want and the backup I guess there is.
That varies documentation and tobacco had roughly $30 million and and annual revenue is that a pretty good approximation and for the overall systems analysis category. How material is this now is it somewhere.
Somewhere in the ballpark of what.
And clear 2% of revenue now and how much is how much is it contributing to your overall growth. Thank you.
So Gary yes.
And your system analysis business is doing great bookings and revenue grew strongly in 2020.
The operating margin profile, there is better than EBITDA, which allows us to invest and the business.
And while we're generating strong incremental margins that improve our overall operating leverage.
In relation to new market when we issued the original price of the press release, we highlighted that the impact to 'twenty. One is it's pretty immaterial. It's pending we expect it to close its eminent in terms of clothes I would expect it to close this week.
And as usual and of course, we'd expect purchase accounting rules to initially limit the revenue that we can recognize on the market and the first year. So should we expect that to be temporarily dilutive to earnings in 2021, and that's already embedded and our outlook.
So from that perspective, we don't have I don't think we have any great to hear.
As much revenue and 21 as you as you were expecting.
I appreciate it thanks.
Your next question comes from the line of Mitch Steves from RBC capital markets. Your line is open.
Okay.
Hey, guys can you hear me.
Yes sure.
Okay, Yes, so and so the first one is just on the 45% systems exposure now I'm just really curious about why that's trending up so quickly.
Three years ago, it was closer to like low forty's or a 40% return metrics and our suddenly at 45 and it sounds like that might even go higher and so maybe you can.
Can you help us understand what exactly is going on with that business, that's causing it to spike up and then secondarily regarding your 50% flow through and the operating margin clearly that's what <unk> been doing but is there any difference between the systems and semi is onboarding in terms of.
Profitability for you guys. There was my two questions. Thank you.
Yes, maybe I can answer the first.
First question first about the system company and then we provide this end to end.
DDA portfolio and also with our intelligent system design, we are moving up into the system and analysis.
And area and also the packaging side and then as you can tell.
This January.
And waves and the <unk> and also the Hyperscale and and then the autonomous driving and really the system company starting to engage actively with us because we are providing a suite of solution that we were looking for so I think it's kind of a accumulation of a loss of 12.
<unk> continue booking on it so we're delighted and are getting closer to the 45% of revenue and for them clearly.
And the packaging.
And not just the silicon development is critical for them and we can provide an integrated solution for them.
So that they can.
And design a complex systems that they're looking for and so we're excited about this opportunity and our strategy.
And are investing and behind it and so we are glad to see the performance.
Yes, and so the second part of your question there that like you say that Theres a higher.
And the normal.
Profitability I think for us and the system analysis business and it's been growing really fast growth. So I mean, if I look at incremental margins I called out in my prepared remarks.
And where.
At the midpoint of our outlook for 2021, and we're expecting our non-GAAP operating margin to grow by about.
$150 million over the five year period from since 2016 and.
And that's about 51% of the revenue growth. If you are if you calculate the revenue growth over that period of time, and then when I compare the midpoint about that for 'twenty one against 19.
Did the same exercise and I got 51% again before the impact of opening back up.
And with new back and it kind of takes it just down under 50.
Okay. That's perfect just just to clarify and make sure I understand this correctly system analysis and it sounds to me and maybe I'm reading too much into it. If you are seeing like a step function and your three D clarity, there and that's where am I reading too much into this.
Well, yes modest our net I think we also have audits.
And this hyperscale Guy and and then somewhat the system company service provider and.
Quietly and let's look good and up yet.
Semiconductor has.
Mm silicon design, and so our entire suite from and.
The design excellence from the EDA IP, and then plus our.
System analysis, plus upload and pushes and we're making it up you are an integral and and providing a lot of the system for the <unk> and also the industrial growth.
Very helpful very price quarter. Thank you.
Yes.
Thanks.
Yeah.
Your next question.
Question comes from the line of per day per month from UBS. Your line is open.
Hi, Thanks for taking my question and congratulations on great quarter, and a very solid guide.
Okay.
A couple of questions maybe on <unk>.
Last one and then have a follow up.
How are you thinking.
In terms of the mix, you'll see and coming out of the China versus the rest of the world.
And last quarter, it sounds a little bit more towards IP and hardware, but it feels like your growth is now increasingly becoming more broad based in China and driven by E. D E and software as well is that a correct read.
Yes, let me answer that just lip Bu.
And so clearly.
Yes.
Strong growth region for us and and we've done well and China on Q3, and Q4 and then as you know China is heavily investing and semiconductor industry. So in some way now where our broad portfolio.
EDA tool IP and even the system analysis and some of the packaging and.
And then the tweak the packaging and it become critical for them and so I think overall with support and customer globally, and then China specific is strong and we will continue to really complying with their audience.
And all the export control the client.
But meanwhile, so far up and would we see strong momentum over there.
And I'm pretty private out there that's the like if you step back from looking at any individual quarter half and you look at the three year CAGR.
I think our growth is accelerating and across all regions and our outlook.
One.
Great and momentum.
Paula.
You you had a very strong year on IP.
How do we think about the and.
Sustainability of growth in <unk>.
IP going forward.
Given of course, the longer term drivers, but just coming off.
For 'twenty I'm, telling you.
Yeah. So I think it's a quick question.
IP tend to be lumpy.
But so far with Nike and artists.
Outsourcing trend and we have a strong portfolio.
In terms of DDR Pcie and also the 30 and it's a must have for the Hyperscale.
The scale.
And also some of the pencil it.
And some of the audio and also the automotive sector. So overall, we're delighted last year, it's a strong year.
No, it's a very lumpy upfront and so you know we and others.
And that will continue to.
And we're focused on that.
Thank you.
Okay.
Your next question comes from the line of Jason <unk> from Keybanc capital markets. Your line is open.
And again your question comes from the line of Jason.
Your line is open and sorry about that sorry, I was on mute.
The first question the America acquisition I know, it's pending but maybe can you speak to the and now what is so attractive about that business I don't see a few of the pillar physics.
Part of the market.
And then.
So we can make versus buy there and you get what factors went into <unk>.
Acquiring nurses.
Just build again.
And you want to take this one.
Yes, definitely yes, that's a good question. So as you know we are pretty excited about moving into system analysis, which is driven by.
Experts.
Computation software, while numerical mathematical software.
And we have a lot of expertise and that organically.
As we saw in the development of clarity <unk> solver.
Generating a good result.
And the second thing we are excited about is the customer synergy.
And a lot of customers.
And as discussed we have.
A lot more systems companies and they are asking for these system analysis capability okay.
And then the question becomes do organically develop or to acquire and we.
Look at this space and and.
Terms of system analysis.
<unk> is a very critical area.
And of the largest.
Market segments with Lauder vertical application.
And you make that has very good technology.
More than 450 customers.
We are pleased to welcome them to cadence and the spending acquisition and.
And I think that can be used as a basis to expand further.
And they expand more than RMB, EBITDA and competition software strength.
And expand more with our customer base. So we're very happy to use them.
<unk> expertise and CSD to expand into this very very exciting area for us.
Okay and then my quick follow up but this is I think you mentioned that it was a three act.
And <unk>.
Pension with the acquisition and the CFT does that three and expansion also include other physics like structural or is that just.
CFT alone. Thank you.
So in terms of system analysis, that's a pretty big segment and it's.
About $6 billion, we estimate and.
And the other good thing about it and that it is growing rapidly.
And more need for more and more simulation.
What we estimate there's clarity and sales gives us about $800 million and.
Addressable market, which is M and thermal and CND and about one six.
So cfd triples, our tan.
From 800 to about two point pool.
Your next question comes from the line of Jason <unk> from Jpmorgan. Your line is open.
Great.
Thanks for taking my questions guys.
First question and the 175.
And bad customers.
What does that mix in terms of systems versus semiconductor companies look like.
Yes, we don't have a breakdown on that but clearly we are very excited and.
And our customer and obvious.
Clearly our affiliation.
<unk> provides that flexibility and also different use model and either a cadence and manage.
And and <unk>.
So overall, we are providing eda's software and palladium platform are the most important is providing the productivity and scalability. So I think overall we are in.
Saturday.
175 customer.
We didnt breakdown in terms of.
And our semiconductor our system company, but overall both are strong for us.
Okay, and then John you mentioned that that not expecting China to be.
Yeah.
As active.
<unk> been in upfront revenue and 2021.
And any any particular reason I mean was it.
And politically driven why that particular geography had a bigger mix of hardware and IP and 2020.
No.
And when we have more hardware and any one quarter and any one region.
Youre going to have a higher mix of upfront revenue in that region, and a quarter and and we saw that we had a strong Q3, four and the functional verification space and.
A lot of that strength within within China, and what I was looking for signs of a pull in in Q3 and and to try and figure out and do that with.
Was there some acceleration of purchasing purchasing that came out of 'twenty, one or did it come out of Q4, where people just preparing with the pandemic, where you're just trying to get their their hardware delivered earlier for fears of delays due to the pandemic.
And then what we looked at I was waiting for the view of the pipeline pipeline for 'twenty one is very strong.
Region.
And when I look at that.
Compare that to what had happened and what was different about the second half of 'twenty and 'twenty for China, and what I did notice was because of that hardware.
We had a higher mix of upfront revenue and the region and the second half than we would normally see.
I'm not sure if that's sustainable.
Well I mean, it looks like we're off to a strong start again in Q1.
But for the purposes of.
And determining and outlook for 2021, I assume that's one of the safest to assume a return to our usual recurring revenue mix, which could prove to be conservative for the second half but.
But.
And I'd, rather go out with outlook.
Assuming that we return to the usual recurring revenue mix.
And that that growth that we saw in the second half of 2020 continues I mean, if it does and when we have increased visibility into revenue and the second half. We can have we can update our outlook at that time and when we see it books.
I didn't want to.
With two strong and second half right now and feel our until they have a clear visibility into the pipeline and the second half.
Okay. Thank you.
Yeah.
Your next question comes from the line of Joe <unk> from Baird. Your line is open.
Okay.
Great Hi, everyone.
And John you've been referring to the day tables and I and the.
The release and I'm interested in and the one that Greg and sit down three year CAGR are adjusted for the extra week by product group and if you think into 'twenty and 'twenty, one and again just adjusting for that the weak comparison.
Would you expect kind of similar dynamics between the product segments, where IP and system design should remain kind of the fastest growers or are there any new development and set up product level to consider as 'twenty and 'twenty. One goes on that might influence some of the trends you've seen.
Oh good good question I mean, we don't we're not guiding by individual.
Hum product category, but if you see if you look at the three year CAGR for 18, 19, and 20 on that type of and you see that don't change dramatically year over year, particularly on the three year CAGR view, but.
But the ones, who called out IP and systems design.
He'll assist our kind of our.
The smaller dollar values.
So they have the benefit of growing from smaller numbers.
And in the past we've seen those go faster.
In relation to new products that I think that the.
The amount of.
And like we've seen and new product releases and and preparation that we've seen from the R&D group and.
We haven't slowed down and at all if anything they're accelerating and their new product development, even through the pandemic, which has been fantastic, but typically on our earnings release, we wouldn't announce any new products you'll see.
Okay.
Okay, Okay, great and.
And then this next question might be product development related but.
And I heard on a rig correctly a system design.
And dollar total opportunity and given <unk>.
Stores are the new CFPB and of course.
Wired.
Two.
<unk> four 1 billion and so is.
Or are there other.
And there.
Additional thing is that you have and mines that we can maybe expect you're growing into over the next few years.
It's a good point and first of all I wanted.
To highlight that we are building out.
Multi physics.
And C and B is it.
That market. So we started pre COVID-19.
It's finite element and electromagnetic and then now goes from CFT and there are a lot of commonality and cyber.
So I believe that itself represents a lot of opportunity to do it.
And like we mentioned tripling of addressable market.
They might be you know more and the future.
And look for that.
But at the same time, the current electromagnetic and C and D already has a large market segment.
Yeah.
The address.
So.
The answer is there still some opportunities come even systematically expand but already.
That's a good opportunity for us.
Okay I'll leave it there thank you.
Sure.
Your next question comes from the line of John Pitzer from Credit Suisse from me ask questions. Congrats on the solid results John as you rightfully pointed out and your preamble if you adjust for the extra week and some of the unexpected revenue and 20 <unk>.
Our initial guide for 'twenty, one is already embedding sort of double digit growth and I know you said that it's too early.
Just to say if thats, the new norm, but I guess I'm kind of curious what are you looking at to be able to make that call that this might be the new normalized growth rate and lip Bu and as you talk about potentially a double digit secular growth rate.
Do you think sort of driving that and is that sort of specific to cadence and your strategy. Do you think this is core.
<unk> customers do you think it's the proliferation of customers into non traditional areas like Hyperscale systems and autos. If you can give us a little bit and help them that would be appreciated.
So John I can take your the first part of your question and then I'll pass it over to lip Bu.
And in relation to.
The strong first half guide.
First quarter guide you most of our revenue is software and most of its recurring revenue and we expect recurring revenue to make up 85% and 90% of our revenue for the year.
So it's just very very predictable and very very predictable certainly in the near term.
<unk> had some difficulty was projecting what upfront revenue might be in Q3 and Q4.
And so the outlook for the second half is more conservative and.
The first half has been very very predictable in terms of great visibility into the pipeline we're off to a really strong start from Q1 already on the upfront.
Fund business and.
And so much of that revenue is recurring and the first half.
We're seeing the accelerating revenue growth.
The challenge and the second half of course, if we're lapping very tough comps against the second half of <unk>.
2020.
Don't have the visibility into the upfront pipeline for Q3 and Q4, yes.
And the second question.
Described and I think it's kind of exciting about this renaissance of semiconductor.
With the five generation waves happening and the same time.
AI and machine learning.
All about data and data analytics.
And then the crowd and.
Infrastructure has to change because.
This massive data coming in and then how do you address that net book scaling and then storage is application. So it's a lot of changes to the infrastructure and Thats a lot of fueling a lot of design.
Design activity. So that's why we see.
A lot of design activity and not just from the semiconductor players out of the system player and then and now.
The whole industry for zero, they all moved into AI and machine learning.
Digital transformation that drive a lot of semiconductor. So overall the industry is moving and the right direction to us.
And Meanwhile, I think clearly a cadence with the intelligent system design strategy really high and really well from.
And note that design excellent net providing the true and IP now we most of the next level systems and innovation and <unk> talked about the system analysis and not the cfd and a physics.
And our multi physics model standard.
Next thing is move up into the pervasive and intelligent person using AI and machine learning data and analytics drive auto vertical industry that is a major transformation going on so I think we are well positioned to capture that opportunity.
And then guys.
Second question is clearly when you look at China as a region from Q4 of <unk> 19 to the back half of last year. It almost doubled as a percentage of revenue and John you clearly talked about potentially some one times that came in and the back half of the year that you're not embedding sort of in the guide for 'twenty One I'm just.
Just kind of curious as we think about currently China and about 17%, what's kind of core embedded as a percentage of revenue and your 'twenty. One guide realizing that that's subject to change and if you think longer term with China's aspiration is this about the right level as a percent of revenue where would you expect this on a secular basis to continue to grow over.
Mike.
Well again.
Individual quarters, but I wouldn't focus too heavily on any one individual quarter or even half I mean, it was it was a tremendous second half for us and China.
2020 was a strange year, I mean, with the pandemic with the extra week and Q4.
And Youll see and Q3.
And a lot of strength and our functional verification group and in Q4, you'll see the software business has performed really really well of course it had the benefit of the extra week was 14, a 14th week and in there and your normal 13 week quarter, but and we.
We have one last week and the second half.
Half of two.
2021, but we're very very pleased with the growth, we're seeing and China. It looks like it's continuing on.
And we're seeing that strength continue on into Q1, and the pipeline is strong and seeing that and the first half.
I just wanted to be conservative and the outlook for the second half until I have better visibility into into second half upfront revenue.
Pipeline.
Yeah.
Thank you.
Our next question comes from the line of Tom <unk> from D. A Davidson your line is open.
Yes. Good afternoon, maybe first just a clarification for John.
And you look at your expectations for 8% revenue growth.
And that 8% Opex growth and.
And the lack of leverage there did you say that was primarily due to just the Mega acquisition increased.
No it's not certainly not primarily due to the <unk> acquisition I think.
In terms of expense growth, our head count is up 8%.
Our headcount increased about 8% during 2020.
And we're investing heavily again and and hiring and 2021.
New Mega will come into the mix right and we hope for the second half of Q1 and then the.
The remainder of the year for from an expense perspective, we expect Merritt to hit and.
We have merit increases will be July again, and so that will be.
And you'll see a slight uptick there and expense in Q3, and Q4 and the growth and expenses through the year that would typically come from that is being offset by some more efficient infrastructure spend.
And that we have planned as the year progresses. We if you look at our 10-K that we filed you'll see.
And the restructuring plan and Q4 2022 to optimize our spend on infrastructure, but.
And the and expense mix in <unk> and.
And 2021, I think if you compare 'twenty, one versus 2000, and you've probably seen in 'twenty. One we are spending more on people and less on places and we weren't in 'twenty.
That's kind.
And are driving some of the some of the margin profile okay.
Okay. That's very helpful. And then followed from the when you look at the cloud and you talked about 175 customers. What do you think the long term adoption is for EMEA with the cash.
Cloud and you think some of your really large customers will move and majority to the cloud at some point.
And if they do what does that day to your cost structure.
Yes, very good question and now this is still very early stage and we're very encouraged with and the 175 customer.
And.
Clearly, we want to make sure that in our initial.
Initial product in terms of system analysis that can be compensated.
Because we start from scratch and then somewhat the EDA tool, we have different stage of moving to cloud Native and then really the Holy Grail is basically drive the productivity efficiency for our customers and then our partnership with the Hyperscale.
Partners and and infrastructure partners.
And also the foundry partners.
And this effort and so right now we have across small medium and large customer embracing and crowd and truly I think he took and you imagine you have unlimited usage of machines.
And Youll.
Exposal.
And then so that you can really drive the performance and productivity significantly. So I think this is a trend where that from the beginning early stage and we are very encouraged with the customer support in order to continue to grow our clearly our partnership with the Hyperscale partners and.
And also the foundry partners are critical because of the TDK or the different solution. They have we want to Michelle that we worked with them together and support our customer and also addressing the needs of customers.
Okay. Thank you.
Yeah.
Your next question comes from the line of Gal Munda from Bahrenburg capital. Your line is open.
Oh, hi, Thanks for taking my question.
And I just wanted to follow up briefly and then.
More generally on your ankle simulation space. If you think about the convergence that's happening with the macro and now you said you have.
If you have a finite element analysis and.
And based on what you have.
To be able to take it where you want it be pay and R&D time versus potentially doing more of those tuck ins and the.
Yeah that's.
The question, let me take this design.
And so like I mentioned.
And is driven by three factors strength and computation software.
And consumers are asking for more and more system analysis.
And the system design capability and the Blue mentioned.
And the overall need for stimulation.
And I think we are still in the early innings, but we feel confident about.
This space and.
Demonstrated by Amazon and <unk>.
Adobe and other products.
And Cfd is.
And they're pretty important area and then I think one of the biggest segment and system analysis and then.
Good thing about C and D. It has lot of vertical applicant.
And defend elevated medical.
So I think thats a pretty significant.
Spansion and of our platform.
And we are real happy with this progress.
We are patient and like John mentioned this segment is and it's profitable. So we will continue building across this.
And you know keep providing timing sense and care.
And then just.
Follow up maybe just expanding a little bit on and the growth drivers with the businesses.
At Nichols.
And so you mentioned and others.
Theres more slow paced growth.
At the leading edge customers and there is more and more.
And just kind of the systems side, considering the investments, you're making and the system side.
Can you just.
Comment a little bit on the growth.
Maybe 'twenty and 'twenty, how it corresponded between the leading edge and the systems companies in terms of that contribution to get you on.
So I think we are very well position.
So able to evolve and then clearly.
Hyperscale.
Paul and I.
As I mentioned.
And we're very delighted we have more than 100 projects on financing.
Earlier.
Operator.
Patients on two nanometer process, so I think and notice.
So Barry and science and we're delighted and we are very on.
And look with marquee.
Key customers they are pushing the envelope and we are really excited about that development.
And the other hand, we're also well positioned and our cut costs and mixed signal analog and.
This is hedging and.
And in our like the <unk>.
Wireless industrial group.
It's really a moving and toward this mixed signal and and are clearly.
Clearly the more and more with some of this.
You are and then the integral.
And acquisition are driving some of the RF microwave requirement study and.
And cannot Si are somewhat <unk>.
And with US So I think and now we are.
Very well push and on both side Thats why we highlight that from outperform.
And <unk> point of view and dose.
Both engine are really taking off and we are very excited and engaging with.
But the best company to work with us.
That's great. Thank you so much.
Your next question comes open.
Thank you Tony and Mike Congratulations on.
And the rule of 50 last year.
And I think its for and rude on the system analysis go to market just.
Just wondering today, David you've been doing that.
Portfolio standard sales channel.
Dedicated systems.
These sources as you as you scale up that day.
Yes, Thanks Richard.
Question and of.
Of course, one is developing great products.
Go to market are helping our.
Deploy those products and.
And the second part is as important as the first part.
And especially for the system business.
And as there are multiple facets to it and the semiconductor business.
Okay.
Our.
Custom glide system companies.
Great mostly to a direct channel okay.
If you remember we also have our allegro business, which is.
And our packaging business, we do quite well and and.
PCB and packaging with Allegro and <unk>.
But it does have already if you do have and indirect channel.
And like <unk> mentioned earlier in a cloud and big systems and semi companies.
And he may want system tools, like you mentioned and expanding our indirect channel.
We have from our lead growth and expanding it to overall system design and Alex.
And then the SaaS channel reach and cloud based channel and Florida, especially for smaller companies that don't have lot of data centers and.
And.
More attractive to use on the cloud so as we go into the system design and analysis.
We do have to build out these three facets of our go.
And to market.
And we are working all of them in different stages.
The strength of our direct channel.
And that's very important part of the world.
From go to market strength.
And thanks for those details and then John.
And the follow up for you you'd given a backlog reserve number last quarter of 15.
$8 million, which I think could come down from 70, originally and I'm, assuming that came down materially in the fourth quarter can you tell us where that is today.
Yes of course rich that we collected.
And the collections went from 26 billion and the second half of it about $17 million.
Surety of the the balance of the $17 billion is lost I mean, those customers many of those customers have closed their doors.
I think we are and single digit and billions in terms of the ones we're left tracking.
And that could potentially be recoverable, but right.
And my outlook Im assuming it is not recoverable.
And what you are talking and maybe 90 10.
$10 million left out about 70, but that could.
No I'm, assuming it doesn't get recovered.
26 of the other 60, okay. Thanks very much John.
Yeah.
Your final question comes from the line of Jason and shattered from Griffin Securities. Your line is open.
Alright, thank you.
And I'd like to direct both of my questions to honor route.
First we heard from years of course from the the EDA companies.
Ongoing design activity among your customers.
Or is that that's remains robust.
We've also heard of the general.
Direction of.
Design style or types from general purpose chips more can specialty.
Kinds of design here about is how customer.
From a design methodology.
It would be evolving and I'm wondering if there are any.
The issues that you might want to talk about regarding for example.
Hierarchical versus flat, which has been <unk>.
Iteration for Cage and more is are there any.
New implications or issues.
Well from that.
Mike pertained to or affect any.
Or new technologies, such as ice space show or design space exploration and then Relatedly Irina.
And remember a questions. This evening already regarding system analysis, and your broader ambitions and.
And computational software.
And for one thing we see on the other side of engineering software. The World you are.
And with approaching towards.
Our unified data platforms and.
And and common platforms.
And for data management, and the like which you don't really seem to have.
You do have.
Ah stacks from the various functional.
And thinking about unifying our moving.
Moving to a more common.
Thanks, Jay and he is a great question.
First of all we want to make sure that we have.
Best in class product.
Digital design on it.
And if vacation and system analysis, so we always.
As you know this and technology business best product wins and at the same time have a.
And when you fly platform to go with it and this is al.
Well we did.
Multiple dual implementation design and we did verification. So both bugs are unimportant to have best in class products, whether that's and finite element electromagnetics are.
Our Cfd and then there are opportunities to combine them and a much more unified way, especially around data and like you mentioned.
So I completely.
Thinking about the need for unification and but we also had the same then wanted to make sure first that the.
Our products are best in class you wanted a unifying theme, but each player has to be and it's strong.
But there are a lot of opportunities photos from our data platform and analytics like.
<unk> you mentioned earlier.
In terms of your first.
Just a question of new methodologies.
And several things happening if I had to pick.
One or two key things that are happening and what you see with the customers. So one big trend, which you probably already know is this move to <unk> I think this is going to be significant for next several years.
First and it just changed Lauder and methodologies and our customer base and this is multiple high and digital chips part of you and analog and RF chips on and package.
And that I think is driving a lot of strength, especially in the <unk>.
Cloud.
Hyperscale companies.
Moving to consumer company.
And we do have historically a lot of strength and.
Package packaging with Allegro, because we have a leadership platform and advanced node.
And then now the analysis tools and clarity and Celsius, because terminal and the big thing for <unk>. So I.
And although methodologies and <unk> integration.
And one significant change.
And that we do see the customers and extend we are very excited about that because I think cadence is and a unique position.
Because of historical strength, and analog and packaging and digital and the new strength and system announced.
Brazil and hierarchy and tell you mentioned I think that's always the big thing is as things get bigger.
And if you look at <unk> I see this as another way to do hierarchy growth because if you have four chips and the package you don't have to redesign all four of them. This is the reuse that day and.
And a much higher level, so, but I do think <unk> is a significant trend.
It's going to happen and we are well positioned for it.
Thanks, Eric.
Thanks.
I will now turn the call over to Mr. Lip Bu Tan for some closing remarks.
Thank you all for joining us this afternoon.
I'm very excited about.
The growing market opportunities.
And business momentum going into 2021.
And our intelligent system design and strategy is playing out very nicely.
We benefit from new opportunities and design excellence.
System innovation and <unk>.
And that if intelligence and then expanded total addressable market.
Excel and the challenging year, thanks to the deep partnership with our customers and our partners and our strong commitment of the outstanding cadence team.
And lastly on behalf of <unk>.
All our employees and our board of directors, but give our heartfelt thanks to those on the frontline.
We will continue to work tirelessly and effort to put this pandemic behind us.
And you all for joining us this afternoon.
Thank you for participating in today's.
Cadence third quarter 2020 earnings conference call and this concludes today's call you may now disconnect.
And.
[music].
And then.
[music].