Q1 2021 Cadence Design Systems Inc Earnings Call
Press release, following the financial statements.
Copies of today's press release dated April 26, 2021 for the quarter and year ended April three 2021 related financial tables, and the CFO commentary are also available on our website for the Q&A session. Today, we would ask that you observe a limit of one question and one follow up you may.
Re queue, if you would like to ask additional questions and time permits.
Now I will turn the call over to lip Bu.
Good afternoon, everyone and thank you for joining us today.
Im pleased to report that cadence.
Thanks for that year delivering outstanding financial results.
The first quarter.
Broad based demand for our innovative solution.
Driving strong revenue growth.
Visibility and cash flow.
John will provide the details in a moment.
Our updated outlook.
Generation plan.
Five G.
Hyperscale computing.
Autonomous driving and industrial Iot continue to propel the need for innovation and.
In compute.
Memory networking and storage from.
The ads with a crop with.
Massive amounts of data being generated every day.
AI ml and data analytics.
Helping transforming that data.
Intelligence.
Operating actionable insight.
And accelerating.
It's just the transformation of several industry.
These trends are continuing to drive strong semiconductor demand and design activity.
From a broad spectrum of end market.
And our intelligent system design strategy.
Really positions us to capture this.
<unk> opportunities.
Now, let me talk about the Q1 highlights.
Starting off with core EDA and IP.
In the design excellently.
Our Isd strategy.
We had ongoing strength in aerospace and defense and.
And we significantly expanded our collaboration with marquee Aerospace defense systems company.
Net included the proliferation of our digital full flow as well as our functional and custom simulation solutions.
Our digital sign off business at.
Had a strong revenue quarter.
With multiple market shipping customers.
Successfully shipping out at five nanometer and below process nodes.
Using our digital full flow.
Increasing design complexity.
10 years, driving a secular trend for hardware assisted verification.
In Q1 was a standout quarter.
While our palladium emulation and protium prototyping platform.
Significant expansions as well as multiple new wins.
Contributed to Q1.
In our best hardware.
Hardware revenue quarter ever.
Additionally.
We announced our new Palladium Z tool and.
And Protium X two platforms.
Delivering two X capacity.
And one five X higher performance than our current EBITDA.
During the one in X 100 systems.
This next generation systems.
In April the highest throughput hardware Deepak.
And pre silicon software validation.
Bob.
<unk>.
Multibillion inscape, sorry, multibillion gate Soc design.
And we're in Dos <unk>.
Nvidia.
PMT.
And up.
Our IP business also delivered double digit.
The over year revenue growth.
There was strong demand for our high speed <unk> IP.
Our market shaping customers.
For the next generation data center.
And networking environments.
As well as continued strength in our memory interface IP business.
And silica continues to expand its footprint.
In true wireless stereo Bluetooth headsets and.
And our vision T six and Hi Fi products for referred to in the wearable and smart speakers and market.
It was another exciting quarter for system design and analysis segment.
Delivering over 30%.
Year over year revenue growth.
Earlier this month, we acquire point wise.
A leader in mesh generation, while computational fluid dynamics.
The addition of <unk> technologies and experienced team further broaden our systems analysis portfolio.
Complementing our recent acquire new Mecca CFT technology.
And our organic multi physics product.
Volume wise.
Provides highly innovative mesh in Korea.
Generation technology.
Hi modality.
D analysis.
This solution is being used by several marquee customers.
Especially in the aerospace segment.
We want to congratulate our new Mac car team for the.
ROE debt product played in the design of the Emirates.
In New Zealand, raising both debt one American Cup for New Zealand for the.
Sure.
The winning team used our simulator base under new Mecca by Marine Cfd software for.
For the our computational fluid dynamic modeling.
And thanks to the unprecedented accuracy.
And.
Realism of simulators.
We're.
About to accurately test.
Ideas and concepts long before.
Both both.
I will touch the water.
We introduced <unk> Tx.
Our next generation <unk>.
And power integrity solutions.
With endorsements from Samsung.
Mediatek and.
And Renaissance.
These solutions leverage.
New simulation engine and.
Massively parallel architecture.
Teva over.
10% up to 10% performance.
And capacity gain.
For system level simulation.
The most demanding hyper scalar.
Hi Chi automotive.
And aerospace applications.
And <unk> expanded their usage of our flagship virtuoso and AWS products for <unk>.
Advance.
IC design and clarity for system analysis.
Let me conclude with a few comments.
On some macro level.
Yes.
We continue to monitor the semiconductor supply chain situation.
And so far we are not seeing any slowdown in design activity across our customer base.
Next.
And regarding the evolving state of the COVID-19 pandemic.
For some countries are edging toward.
Pharmacy.
There is growing concern with the escalating number of cases.
Certain regions, especially in India.
As always.
<unk> 50 of our employees.
<unk> and partners.
If palomar and we will continue doing what is in the best interest while working closely with local regulatory agencies.
Lastly in.
In the past year has brought to light menu structure justice challenges in.
Including our recent acts of violence against Asian Americans.
I strongly believe that we have an obligation as individuals and as a company will take a stand against racism.
<unk> example for.
For inclusiveness and understanding.
At cadence, we are committed to designing with empathy.
Inclusive of different points of view.
And as a result, and sure that our diversity and hence our experience and our innovative spirit.
I will turn it over to John to go over the Q1 results.
And present, our Q2 and updated 2021 outlook.
Thanks lip Bu.
Good afternoon, everyone.
I am pleased to report that we exceeded all of our key operating metrics for the quarter.
Broad based growth across many lines of our business combined with some earlier than anticipated hardware sales resulted in strong revenue growth in Q1.
We continue to invest heavily in building out our multi physics platform for system design and analysis we.
We completed our second acquisition of the year and the CFT space, who we acquired point was it in April.
A leader in CFT mesh generation.
The focus over the past few months from completing acquisitions contributed to some delays to our expected pace of hiring in Q1, but we expect to get hiring back on track by the second half of the year.
Now, let's go through the key results for the first quarter beginning with the P&L.
Total revenue was $736 million.
Non-GAAP operating margin was approximately 38%.
GAAP EPS was <unk> 67.
Non-GAAP EPS was <unk> 83.
Next turning to the balance sheet and cash flow our quarter end cash totaled $743 million for.
For the principal value of debt outstanding was $350 million.
Operating cash flow for Q1 was $208 million.
Dsos were 48 days.
During Q1, we repurchased $172 million of cadence shares.
Before I provide our updated outlook for fiscal 2021.
What we expect for Q2.
To take a moment to share the assumptions embedded in our outlook.
The ongoing chip capacity constraints, along with the recent surge in COVID-19 cases in India are expected to create a headwind for IP revenue for the remainder of this year.
The revenue impact has been factored into our outlook.
We expect expenses to increase in the second half of the year, primarily due to head count growth as we continue to invest in our expanding multi physics platform.
We've included the <unk> acquisition in our 2021 outlook.
And finally, 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 for fiscal 2021, we expect revenue in the range of $2 88 to 2.93 billion.
Non-GAAP operating margin in the range of 35% to 36%.
GAAP EPS in the range of $2 from one to.
For $2 nine.
Non-GAAP EPS in the range of $2 99 to $3 seven.
Operating cash flow in the range of $900 million to $950 million.
And we expect to use at least 50% of our free cash flow to repurchase cadence shares in 2021.
For Q2, 2021, we expect revenue in the range of $705 million to $725 million.
Non-GAAP operating margin of approximately 36%.
GAAP EPS in the range of 44 to 48.
And non-GAAP EPS in the range of 74 to 78.
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 and.
In conclusion, the cadence team delivered another quarter of strong operating results and remain focused on driving profitable revenue growth wed.
We'd like to thank our customers partners and of course, our employees for a solid start to 2021.
I'd like to remind them all that their health and safety continues to be our first priority and.
And with that operator, we'll now take questions.
Sure.
Thank you at this time I would like to remind everyone who wants to ask a question. Please press Star then the number one on your telephone keypad.
Please limit yourself to one question and one follow up.
Pause for a moment to compile the Q&A roster.
Our first question comes from.
Jason <unk> with Keybanc. Your line is now open.
Hey, guys. Thanks for taking my questions, maybe my first one historically customers from gravitating towards the latest and greatest hardware products, especially on the emulation side.
Because emulation strength has been going on strong for several years now how do you think the pace of uptake for the <unk>, two and protium products could be.
Charles.
Yes.
That's a great question Jason.
I mean, you might have noticed that we had.
We beat our the midpoint of guidance in Q1.
Partially that was due to.
Trying to manage the Osborne effect on.
Transitioning to our new Palladium day two.
Prototyping X two system.
Yes.
We had an incentive plan in place to it too.
To try and sell as many of those he won the next ones before we launched the new products.
So we expect strong uptake for those new products, but the Bonanza and the plan worked really well in Q1 was a really strong hardware quarter for us.
It's a testament to the compelling value of our hardware solutions, they're providing both chip and system level customers across multiple use models.
Okay, Great and then for my follow up maybe just for an explanation here I think John you mentioned the chip capacity constraints.
And then COVID-19 impact in India, being a headwind for IP.
Yes, maybe.
Coming from them.
My top of our background, but maybe explain why there's going to be an impact and maybe you could quantify the dollar amount for the percentage.
Yeah sure Jason.
The on the COVID-19, I mean, the worsening pandemic in India could have some impact to the timing of delivery for certain hardened ip's that require testing labs.
And as we said on the in our prepared remarks that is being factored into our updated outlook, India bailed us out last year. If you recall, we had similar challenges back in Q2 last year in North America.
We're hoping we can do the same for them now, but it could cause some fluctuation in revenue timing between quarters.
Impact from the year is probably in relation to chip capacity constraints.
Last quarter, when when we talked about that my expectation was royalties might be flat year over year, I now expect them to be slightly down.
So for.
Slight headwind built into the into the guide this quarter for that.
Great. Thank you I'll get back in queue.
Okay.
Yes.
Our next our next question comes from Jackson of Darrow with Jpmorgan. Your line is open.
Thanks for taking my questions guys.
So to start on <unk>.
Meaning performance obligations backlog and calculated bookings.
Yes, it's down a bunch in the quarter relative to a pretty tough compare but I was just wondering if you guys had any additional commentary on the bookings performance in the quarter.
Hi, This is John I think that's just a reflection of a low renewals quarter.
Debt, we'd expect the remaining performance obligations to ratchet back up before the end of the year.
Okay Fair enough and then.
On the mattress side.
We saw.
<unk> growth from from China in the second half of 2020, it looks like that.
<unk> kind of came back down to Earth here.
First quarter.
Any particular.
Product segment hardware software IP that would be impacted for that.
Thank you Andrea coming back down.
Yes, China is back coming charities back to more normal levels of business at the 12% levels.
<unk>, mainly because of the strength appears to be more broad based across geographies. This year.
If you recall in Q3 with a really strong hardware quarter.
And that within China, I mean, this quarter in Q1, a lot of the strength within North America and more balanced across all the regions across all the geographies.
<unk>.
And our outlook assumed a return to our usual recurring revenue mix in the region as well.
Along with the fact that we have one less week in the second half of fiscal 2021 kind of contributes for the conservative revenue outlook in the second half.
When we get to the summer will have increased visibility into the into revenue for the second half and the pipeline for the second half and we can update the outlook then at that time.
Okay alright, thank you.
Yeah.
Our next question coming from the line of Goldman now Lynn Bahrenburg. Your line is now open.
Hi, Thank you for taking my question.
The first one is just John maybe a little bit of expanding on what you just when I look at your historical trends.
Revenue from <unk>.
Good day.
Well kind of equally split throughout the quarter.
Q2 tends to be sequentially.
Slide six non group is stronger than Q1.
Is it because of debt slide.
Slide for Puerto Rico hardware that you're expecting Q2 potentially for the dividend guidance.
Materially lower debt.
Yes.
<unk> implemented a.
And incentive.
Incentivize the sales force to try and close some day you wanted X one business as early as possible in the year in preparation for the launch of our new <unk> and X two hardware systems.
That was more successful than we originally thought.
About $10 billion of Q1's revenue.
I had originally forecast to happen in Q2 so.
The 16 million beat.
I guess at the midpoint for Q1, there's probably 6 million for that was a true between $10 billion was what we originally thought would fall into Q2 that happened a little bit earlier in Q1.
Gotcha.
Thank you and then maybe just a little bit of <unk>.
Longer term strategic question around building, the CFT platform capability, which kind of clarity and then thinking about potentially.
Thanks for the other businesses that you might be ending over.
I think over time is that is that a Brian for you guys think debt.
Good day simulation is something thats kind of very applicable to the cooling that everything on the systems side because of that.
We want to bring that in house and the other ones maybe a partner how are you thinking about it.
Yeah. That's it. Thank you for the question, let me answer that.
So Paul we are excited about the CMV like we mentioned last time, Inc.
It is a very big segment into some analysis.
Close to one 5 billion $1 6 billion until we are excited to focus on debt.
And boy noises.
As a leader in machine technology, we'll be glad to work with them.
Bring them in house. So we think combining point why is the numerical solver.
Nick.
Capability in Battle in distributed computing Ken.
Ken.
When are you ready state of the art solution for the CSD market.
So we want to make sure when we do well in CSD and <unk>.
Electromagnetics with clarity and Paramount Cynthia So I think these are our focus areas for now and then you see how things go.
But so far we are optimistic.
Actually if you look at Q1 results, we had good growth since Q1 of last year. So we.
Like John said, we are continuing to invest in this space.
And we are still early in CMV, but optimistic about it.
Okay. Thank you that's really helpful.
Our next question coming from the line of Joe from Lake with Baird. Your line is open.
Alright, great and hi, everyone I was hoping just to talk about the product cycle for the new emulation and prototyping.
Yes.
Two platforms launching at the same time that have new silicon behind each I think that's a pretty unique of that so.
Can I get kind of the timing and be incentivizing the older generation, but could it be possible that just the performance on the new generation means that the net demand ultimately is maybe higher than being forecasted or do you think.
That's a possibility, but maybe timing wise, it's probably more of a second half driver for you.
Yes, I think thats a good observation Joe for building the systems as quickly as we can there is plenty of demand there.
Hope the systems, but dynamic duo for the tight integration with our unified compiler and interfaces. The palladium situ in proteomics. Two systems are designed to address the challenges faced by those designing for the most advanced electronic applications, including mobile consumer and Hyperscale computing design. So should we expect demand to be very strong.
The.
They have I mean for customers can achieve up to two times capacity and one five times performance improvements with each platform.
They work, so well together like I say the team call them. The dynamic duo so it was important for us to launch them together.
But we're building them as quickly as we can.
Demand for them.
Like I say by the time, we havent built and everything its it might impact the second half of the year more than the first.
Okay. That's helpful. And then just a follow up on the margin guidance for the year design and thank you ended up being in your forecast and <unk> bye.
$28 million and the full year it moves higher by 12 or 13 million net.
That is purely just a function of hiring being back half weighted or are there other things like product mix or some other investments to consider as well.
No that's exactly right Joe.
Basically what youre seeing is the the compounded effect of revenue happening a little bit earlier than originally forecast because of the success of that incentive program.
The success of the sales of <unk> and X one in Q1.
Then hiring getting delayed a little bit later in the year as we focused on closing some acquisitions for the CSP space.
Okay great.
Great. Thank you very much.
Alright.
Yeah.
Yeah.
And our next question coming from the line of Keith <unk> with Griffin Securities. Your line is open.
Thank you and good evening, a couple of per technical and financial questions for auto route for John.
First.
For auto route on the fourth quarter call three months ago as you may recall.
We talked about how customers design flows and methodologies are evolving.
The follow up there for to that observation you made at the time is.
How might that affect as that takes place cadence as pricing and or product packaging.
Commensurate with customers' evolution of their of their methodologies could there be any effect.
How do you price and where package.
Your software or for anything else and then secondly, with.
With respect to system design strategy and the overall computational software strategy.
How would you compare the R&D and E intensity or requirements.
System analysis, particularly as you add more in CFT and other physics versus core or classical EBITDA. So I can simply say its implementation RTL simulation and the like do you expect any.
Any meaningful differences in between those two.
Parts of the business expense.
Alright, Thanks, Jay for the question does a very good question, let me take the second one for us.
So as you May know Jay you know even in our EMEA business of EDA software business.
Maybe one for Don maybe there's more simulation base.
In relation and simulation.
So invariably those simulation based businesses are more profitable than overall EBITDA.
So like spectrum, usually more profitable place to drive breakdown.
So I expect the singular thing to happen and system analysis system analysis by nature and stimulation base.
Clarity electromagnetics our cfd.
In steady state I do expect that interim analysis.
More profitable than core EBITDA.
Baby scale revenue from.
<unk> Nathan but instead, he said I do expect debt to be the case day and so far we are pleased that the.
Adjusted revenue growth.
Even the margin performance system analysis.
And on your first question I think we are looking at is gateway.
So packaging and pricing discipline in debt and I think one big thing like I mentioned last time, they more than morphine flow use that Lord notes as you know already.
So we are selling all of these things together.
So we just continue to monitor it.
Well disciplined with our customers and geographies.
John do you want to add anything on Brian.
Yeah, well, what I would add is that's.
Gee I mean, you're exactly right I mean, you look at the tools.
We create on the software side Theres a lot of R&D in AE intensity in terms of supporting those tools.
And if you look at the software that we're selling you can really bifurcate all the licenses into two groups. There is for interactive tools, where every license need a driver and then there's like simulation tools, where theyre kind of batch process tools.
One engineer can kick off like thousands stimulations, if they want.
And that's partly why the system analysis parts of the business or the simulation product businesses. The most profitable parts of our software business.
Because in all cases, our expenses are generally tethered to the R&D engineers required to support the software, but the revenue is not tethered in relation dissemination.
It's not tethered to the number of engineers.
The intimidation licenses and I think.
That's why you that's why we see that being more profitable.
Understood Thanks very much.
Our next question coming from the line of Gary Mobley with Wells Fargo. Your line is now open.
Hey, everyone. Good afternoon, Thanks for taking my question.
You ask about the newest round of export restrictions.
From the U S Commerce Department targeting China and <unk>.
And about half a dozen supercomputer companies.
I realize not all those are specifically focusing on developing processors, but presumably a handful of those companies or a cadence of customers.
With respect to those specific customers or any other export restrictions what way has that impacted your ability to do business in China.
Yes. This is our lip bowl NHS.
And so that for US and then John I know those can add onto it. So first of all we clearly we have and will continue to comply with all the exports.
Our control regulations, Inc.
Clothing, the military end user and to enter the list that you mentioned.
But we clearly were not going to comment on something specific company, but everything we know we already built into our guidance.
Okay.
And John can you confirm that debt roughly $190 million as reported in your cash flow statement was the amount paid for tobacco.
In the first quarter and how much you would expect from both point why from tobacco contributor to 2021.
Hi, Gerry nice try.
Not.
Disclosing those separately, but.
But we're very very pleased with with both acquisitions and delighted to have them.
As part of the cadence family.
Alright, Thank you guys.
Our next question coming from the line of John Pitzer with Credit Suisse. Your line is open.
Yes. Good afternoon, guys. Thanks for let me ask the question gentlemen, I just want to go back to your commentary about some of the headwinds that you see this year I think I understand.
The COVID-19 issue.
I'm still a little bit confused by the royalty because even though we're in a very tight chip capacity market.
Volume and revenue should be up pretty significantly year over year for the industry can you help me better understand what's causing the royalty kind of headwinds and kind of your volume based businesses.
Yes, John Good question.
Last quarter I thought for the year I thought we'd be flat because of unit volumes, we weren't expecting any improvement in unit volumes and in fact in Q1.
Our royalty revenue for Q1 was flat on Q1.
2020, but the forecast looking out over the next three quarters and my team goes through a detailed analysis. It depends on I guess the mix of customers that we have on the unit volumes that they have put their forecast suggests that there will be slightly down now.
Headwinds building being built into the into our forecast. So I don't mean that to be a commentary on the entire industry. It's just in relation to the customers that we generate royalty revenue from we expect their unit volume to be down.
And is there any way to characterize sort of end market.
Customers play into or is that a level of detail you're not willing to give.
No we can't give that.
No. That's helpful. And then my follow up maybe another way to ask sort of Gary's question.
About restrictions just kind of curious when you think about the full year guidance, what's embedded for China, and I'm, clearly asking because while I understand sort of the geographic mix broadened out in the current quarter, China was down significantly and there are some investor concerns that maybe the back half of last year represented a pull forward as you think.
The full year guide is there any sort of broad strokes you can give us on how you feel like China has been the trend for the rest of the year within that guidance.
Yeah, John I backed into the guidance for China, basically expecting us to mean revert back to our normal mix of business between upfront and recurring revenue in the second half of last year, we had more upfront revenue than average and particularly in China.
I wasn't happy that are working.
Happy to extrapolate that for all of 2021.
The second half it looks like an anomaly.
So I thought for guidance purposes to be conservative, we would assume that we mean revert back to a normal recurring revenue mix right in the middle of that 85%, 90% range that we normally have for the company, even though China is probably slightly more upfront.
And that would kind of my expectation is for China, it's pretty hard to predict but somewhere in the 12% to 13% range for revenue I think that's where it came out for for Q1.
So that's what we've embedded into the guide you'll have better visibility once we get to the middle of the year and we'll update then.
But we're kind of assuming we revert back to me that I thought that was the best way to Derisk the year for China.
Perfect very helpful. Thank you John Okay.
Okay.
Our next question coming from the line of Thomas Wei with D. A Davidson your line is open.
Yeah. Thank you good afternoon, maybe John just one more question on the really strong quarter for hardware.
The incentives in.
Impact your margins at all in the quarter in any meaningful way.
I would say.
Naturally the extra revenue would've would've boosted margins in Q1 at the expenses for Q2.
But that would only be a shift between one quarter and the other day.
Day in hiring would've benefited Q1 and also benefited the year.
We expect to catch up with the hiring but of course, because we didn't hire in Q1.
As we towards those savings reported in Q1 and the year.
But I was wondering more.
Centres, including discounts.
Pricing went down for the first quarter for the incentives did I'm sorry, let me clarify the incentives I was talking about where more sales incentives for our sales team.
Okay non incentives for customers.
Alright, and then longer term question for maybe animator lip Bu.
When you look at the node transitions in the industry and.
Whether it goes between every two years or every three years, how impactful is that duration between niche for you if the underlying demand is still strong.
I can start for us and then under can chip in.
Clearly I think the complexity in D C.
Debt dynamic of the demand is very strong on debt five generation of phase <unk>.
So we're excited we don't see any slowdown on the design in from that process node.
Migration clearly are marching forward down to five and now in production and free and design, who is engaging right now and but clearly there's a lot of demand on debt. We're very heavily investing in that because every notes is that it's a new opportunity for us and we are very excited about it.
In terms of the technology and process may be underwritten update you where we are.
Yes, Thank you Lou and I just wanted to add.
One exciting thing is not only the I believe the node.
That transitions are continuing you know in terms of R&D. We are mostly working on two nanometer now three nanometer. It is in the early kind of design activity.
But what is also promising that you already know is that there are multiple foundries lately the gladstone.
For all the industry seems pretty healthy for.
Not just those.
Several key foundries all working on that line. So we are optimistic and likely boost that you see lot of activity at these advanced nodes.
And that coupled with <unk> at these advanced nodes I think there is a lot of design activity.
So for Fab comes out with a new flavor of the same day, that's almost since.
Helpful to you as <unk>.
D.
That I think that just depends on the customer adoption I mean, there is some work we do from an R&D standpoint to get ready for a new node on EBITDA and at the same node. The variant work on variant of the same noted less than R&D.
No.
So it just depends on.
From an <unk> standpoint, but it done some customer adoption depends which towards the customers will adopt and we'd like to work with them.
Same with flavor they choose based on data growth.
Okay. Thank you.
Ladies and gentlemen, Mr. Your line is ask a question. Please press star one on your telephone keypad.
Our next question coming from the line of Pradeep Ramani with UBS. Your line is now open.
Hi, Thanks for taking my question.
I have a couple of questions on from someone else maybe the first question.
Is now that you've had Michael line point why.
Do you feel like you have more or less information that you need to total scale.
Both of them like one point of life together or do you feel like it has to be finally bolted onto a <unk>.
Cadence platform and integrated more and if so what sort of the R&D investment environment, and even maybe they'll go to market investing environment looked like.
The time horizon looked like you had sort of one other thing or is it for longer durations that open enrollment cycle.
Yes, that's a great question so.
First of all we do feel pretty good about point and then the maker like I mentioned.
And they are good technology, they already have some scale and we can scale them more dollars.
Same stores and customer connection.
At the same time, we will enhance them without organically and organic technology, rather than distribute computing. So we will definitely enhance them further.
And.
And John mentioned I think all of these investments are built into our guidance.
And we feel good already.
At this point, we already have significant scale R&D investment and system analysis, okay. So because I've.
Got it you know the product so we feel good in terms of the amount of R&D, we have already investing.
And then go from there.
Bottom line, we are we feel that the point was Jamaica and our organic development.
Have a lot of capabilities and scale it.
Sure.
Okay.
As my follow Inc.
Sure.
So AWS can you sort of update us on how AWS moving more customer tracking net total maybe year over year growth.
Product.
The EBITDA.
Yes, definitely so as you know our system analysis business. If you compare from Q1 last year to Q1 this year.
It was up significantly that it'd be close to 30% and AWS is a key part of that debt is some part of it that is M&A, but organically also are after acquisition, both <unk> and <unk>.
Doing well.
Growing well and.
She's been in the booth.
Gerald comments, we mentioned Broadcom is expanded use of <unk>.
Kw are.
<unk>.
Clarity.
So we don't break it out separately these different product, but overall, they're growing well and get happy up AWS integrated growth.
Oscar acquisition debt.
And because we can provide a more complete solution along the virtuoso glad it you know the overall.
The growth overall system design and analysis.
Thank you.
Yes.
Our next question coming from the line of revenue line with West Park Capital. Your line is open.
Thank you John a quick follow up on the chip supply situation obviously.
Obviously, you're talking about impacts on on your full year and you have you ever given us for your guidance for 2021.
The commentary from the industry has been sort of all over the place in terms of when we might see some improvement with some folks thinking it soon in the second half and I'm. Just wondering if you have any perspective on when.
How youre thinking about seeing some improvement in supply and when that might impact your <unk>.
The business is it a 2022 event.
Yes sure.
The forecast for my team provided May looked like there was softness in Q2 and Q3 for the particular mix of customers, but we generates IP royalty revenue from and it looked like it was recovering in Q4, but I think that gets to your point, but again I don't mean for this to be any commentary on the industry in any way. It's a it's just the mix of customers.
We.
Recognize royalty revenue from <unk>.
Okay, I appreciate not having any sales.
Design activity.
Our cadence.
Right right, Okay. Thanks for that.
Trying to get as many data points that I can and I guess, just a quick follow up for <unk> or they're just done.
Sorry for your customers and you talked about foundry, a little bit here, but large.
North American customer, obviously, you're getting back again into the foundry business and excited.
In early partnerships with you and your competitor just wondering.
If you have any perspective to add on.
What's going on here with that customer and if youre seeing any benefits coming from things like chips or things like that on your business as you look over the next several years.
Yes, I think in that debt.
Manufacturing in U S.
Kelly of outcome and of course the.
Without any new foundry our expansion is always good for us in terms of tool in IP enablement and so we're excited opportunity and then.
It will increase the design activity and also meet the customer requirement.
And so in packaging also so I think overall.
We think thats, a positive development and we welcome that opportunity to provide service and design tools and IP.
To enable them.
Alright, thank you.
Yeah.
Thank you and our last question coming from the line of Vivek Arya with Bank of America. Your line is now open.
Lip Bu I just wanted to kind of follow up on your last commentary about U S. Manufacturing I'm curious if there is more U S based manufacturing and packaging and other activities.
Is that incremental to your business or is that just a substitute for what youre doing in other regions.
Yes, it's very hard to tell but I think overall it should be a net increase because clearly now we have we're excited we have a deep partnership with TSMC Samsung of the world.
Anything new there.
More IP.
Optimizing and also they have their own.
In our process and PDK and then.
So I think overall from my point of view I think it would be a net increase.
And then.
We're happy to help and then at the end of the day, if another foundry the EBITDA and then how to meet our customer requirement for I don't want to move into a new foundry they need a lot of different tool and optimization and process and library and overall I think it will be a net improvement for us.
Got it very helpful. And then John maybe one for you on operating margins. So Q1, I think at about 38, I think Q2, you're guiding to 36, if my model is right, but for the full year, you're guiding for 35% to 36 for suggesting back half will be lower right.
Right and back half of this year could even be lower than what you had in second half of last year.
Obviously, you had the one extra week of last year, but I'm. Just curious how are you thinking about leverage in the model and more importantly, when do you think you can get back to this June.
For the 50 that you were able to achieve before.
Yes, good question Vivek.
We don't see any near term ceiling on operating margins.
I was glad to see that even with the outlook at 35, 5% at the midpoint.
I think we're now at 50% incremental margins comparing 2021 to 2019.
As long as we're delivering incremental margins of 50%, but we're.
Clearly, there's operating leverage in the model.
Are you seeing in the impact of the reason that our operating margins are slightly lower in the second half. It's the combination of two acquisitions and delayed hiring activity and for the second half.
So we have a merit cycle that kicks in on July 1st but for us.
But with all that said, we're heavily investing in building out our multi physics platform for the future.
Like I say, there is nowhere near term ceiling to that operating leverage.
Alright, thank you.
Alright.
Ladies and gentlemen, that's all the time, we have for questions today I would now like to turn the call back over to Mr. <unk> for closing remarks.
Thank you all for joining us this afternoon.
Very excited about the growing market opportunity and the business momentum so far in 2021.
Our intelligent system design strategy is playing out very nicely.
As we benefit from the new opportunities in design excellence system innovation and pervasive intelligence.
An expanded total addressable market.
I am very pleased also to share that fortune and great place to work at <unk> is one of the 2000 2100 best companies to work for benchmarks cadence seventh yeah in the rule being named in this prestigious list.
Cadence was recognized as one of the best company to work for thanks to our outstanding people first culture and history of innovation.
And lastly on behalf of our employees and our board of directors.
Want to thank our customers and partners for their continued trust and confidence during this.
Precedented times.
Ladies and gentlemen, thank you for participating in today's cadence first quarter 2021 earnings conference call.
This concludes today's call you may now disconnect.
Yeah.
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