Q2 2021 Cadence Design Systems Inc Earnings Call
And on our website and at the conclusion of the call today.
Please note that the discussion today will contain forward looking statements.
Forward looking statements include but are not limited to statements about our business outlook product development business strategy and plans industry and regulatory trends market size.
<unk> opportunities and positioning.
Due to known and unknown risks and uncertainties actual results may differ materially from those projected or implied and todays discussion.
For information on those factors that could cause the difference in our results. Please refer to our filings with the Securities and Exchange Commission.
These include cadence is most recent reports on form 10-K and form 10-Q.
And the cautionary comments regarding forward looking statements in today's earnings press release and.
And by the way on our second quarter 10-Q was filed about 1.415 eastern time today, So it's out there.
You should not rely on our forward looking statements as predictions of future events. All such statements are based on estimates and information available at this time and cadence disclaims any obligation to update any forward looking statements, except as required by law.
In addition to financial results prepared in accordance.
And with generally accepted accounting principles or GAAP, we will also present certain non-GAAP financial measures today.
<unk> management believes that in addition to using GAAP results and evaluating our business. It can also be useful to review results using certain non-GAAP financial measures.
These non-GAAP financial measures should.
Must be considered in isolation from or as a substitute for GAAP results and.
These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and may not be comparable to similarly titled measures from other companies and <unk>.
<unk> and potential investors or income.
Courage to review of the reconciliation of non-GAAP financial measures within the most direct comparable financial results GAAP financial results and today's earnings press release.
Copies of today's press release dated July 26, 2021 for the quarter ended July <unk> 2021 related.
And the related financial tables, and the CFO of commentary are also available on our website.
For the Q&A session of day, we would ask that you observe the limit of 1 question and 1 follow up and 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.
The got them.
And thank you for joining us today.
Cadence delivered outstanding financial results for the.
Second quarter.
And that's broad based customer demand for our innovative solutions growth.
Stronger and expected revenue growth profitability and cash flow.
If you want to add significantly raising our financial outlook for like a year.
Highlighted.
$14 million increase and revenue guidance.
While 10% year over year revenue growth.
John will provide the details and a moment of.
Both our Q2 results.
And the update at.
Outlook, but again.
Before I get into more details for the quarter about the quarter I would like to talk about CEO transition.
And we announced earlier this afternoon.
Now on the road Defcon hour.
And with take over as CEO on December 15, 2021 and.
And our transition to the role of executive chairman at that time.
It has been a privilege to serve as the CEO of cadence for the past 12 plus years.
Over the period.
And Im very pleased that we and skilled.
The soft tangible culture centered on the product innovation and customer delight.
<unk> very close partnership with our customers and partners and built and extremities talent the cadence team of.
Of over 9000 employees.
Okay, and then is now firmly established.
Just at the top end to end EBITDA provider of choice.
The company that is well on its way and expanding beyond EBITDA executing our exciting Isd strategy.
The key at Triple our Tam growth.
8 billion.
The board and I are very excited.
On the road will become CEO in December and.
And we cannot think of anyone more uniquely qualify.
Cadence.
And on higher height.
It is a proven leader with full set of <unk> vision of the Atlantis focus on innovation and execution and.
Passion for driving customer success.
Over the past 4 years.
The Cam precedent on.
Of note and I have jointly.
Of the company.
And the board and I think this is the right time.
The execute the next phase of our succession plan and.
And handover of the baton to him okay.
And I expect to see a lot of continuity going forward.
We view this transition of small of a formalization.
Of our current responsibilities.
As executive Chairman.
Our focus more on new market opportunities.
Key strategic initiatives and.
And deepening our relationship with customers and partners and on maximizing shareholder value.
And now let me.
Move on to the business highlights.
Generation trends such as <unk> <unk>.
The scalar and autonomous vehicles and.
Underpinning, the AI and machine lending and data analytics.
Celebrating the digital transformation.
And across multiple industries.
The semiconductors and this foundation is trends are driving strong design activity across a growing spectrum of semi and systems companies.
And we are very well positioned for this to be sustainable.
Long term growth drivers for us.
The lighting customers and accelerating growth requires relentless amendment to innovation.
With the launch of the new products.
And are now introduced 8 Sydney taken innovative product so far this.
Across all of the business groups and will contribute to future growth.
While we continue to expand our business with market shaping customers.
And our differentiated solution.
Net to a broad based expansion of our partnership with Samsung.
Including proliferation of a picture of full flow.
It was the outstanding quarter.
Our digital and sign off business.
And with revenue growing 16% year over year.
Our digital full flow delivering industry, leading quality.
The old results at the most advanced nodes.
Adding 13, new customers that included.
Key competitive displacements.
And our expanding significantly at the server market shaping customers.
Noteworthy among them.
Quality of large U S data infrastructure company.
Further expansion of our marquee U S aerospace and defense firm.
A major Asia Pacific Hyper scalar.
And the exciting AI startup.
We had been steadily.
Operating.
Cutting edge AI ml technology into our solutions.
And we significantly advance that with last week's introduction of new sales robust intelligence chip explorer.
<unk> the unique reinforcement.
And CRO model increase the effectiveness.
Each of us.
And and enables us to 20% Tpa improve.
The improvement and 10 X productivity gains.
Developers was and daus by Samsung and Renesys.
And silver.
Lending customers and realized.
Sydney.
Meaningful benefits across multiple process nodes.
And and applications.
It was also of great quarter, while the ability of vacation business.
The 23% year over year revenue growth.
Growth our verification suite on.
The pricing of.
The best in class engines, and delivering the best verification throughput so.
Continued strong customer adoption and expansion at several of our leading customers.
Thank you.
Silver to the demand for our hardware continue.
And abated, leading to the best Q2 EBITDA.
And our palladium and protium platforms.
There is a robust customer interest and the new <unk> tool and X 2 systems.
Thank you with the sales ramping nicely.
Our sales of the 1 and ex 1 remains strong.
Our hardware family at 15, new orders.
And over 65 repeat orders in the quarter.
With the 3 largest transactions.
And with Hyperscale.
And included.
Our largest protium.
Transaction to date, which was for Nu X too.
Strong momentum continue for our system design and analysis segment.
With 20.
The year over year revenue growth.
We expanded our system footprint with multiple vertical and.
Including aerospace and defense.
<unk> wireless and communications.
Growing system complexity for HIFU.
The frequency application is driving the needs.
And integrator platform solution across system design simulation and analysis.
As we continue building our system portfolio.
We are pleased to see earlier indication of customer.
<unk> chosen a broader set of our solution across his domains.
For instance, and Q2, a large U S data infrastructure company because of significant commitment to our PCB IC packaging.
Yes.
<unk> system analysis solution.
We introduced our next generation PCB and IC packaging.
The <unk> platform led growth ex <unk>.
That provides a unified.
Engineering platform incorporating innovative.
<unk> and <unk>.
Lending techniques.
And delivering up to 4 time improvement and overall design team productivity.
<unk>, you are an integral and half of record quarter.
And the integration of our recent <unk>.
<unk> and <unk>.
Most of the Houston is progressing well.
We have assets over 100.
System customers as we enhance our go to market and channel organization to help accelerate our business.
Next I want to make the few macro.
The level of men's.
We continue to monitor.
The ongoing semiconductor supply chain situation.
As I reported last quarter. So far we are not seeing any slowdown and design activity across our customer base.
Unfortunately, the COVID-19 pandemic continues to evolve and all.
And predictable mental and.
And unpredictable of mental with overall progress being trusted on new variants.
As always.
And the health and safety of our employees.
After my and partners is Paramount.
And we will continue doing but it's in the past interest while working closely with local regulatory agencies.
Now ill turn it over to <unk>, the say a few words.
Okay.
Thank you Luke.
I'm very honored and humbled to be appointed as the next CEO of cadence.
And I am deeply grateful to the board and lip Bu for the confidence.
I am also very times will deliberate and for his mentorship and guidance.
Over the years and I'm excited to continue and partnering.
And with him and our new roads.
Generational industry drivers and.
And rapidly unfolding digital transformation.
Across several industry presents an enormous opportunity for cadence.
And I strongly believe the couldnt be better positioned to seize this.
And this opportunity.
Our intelligent system design strategy lays out the very exciting growth.
As we enhance our portfolio and so.
Growing set of question.
Bruce.
Our highly innovative solutions and.
Led to a very strong foundation.
And core EDA and IP.
And to our early success.
And the system and AI ml segment top line strategy and.
We expand into large fast growing the adjacency.
I enthusiastically look forward to working with our talented team.
To accelerate our growth strategy.
And we are relentlessly driving to deliver strong business of zones and delight our customers with.
And with breakthrough innovation execution and on time and support.
I also look forward to furthering our collaborations with customers and ecosystem partners.
And deepening the engagement with you our valued shareholders.
Thank you and.
And I will now hand, it over to John to go over the financial highlights.
Thanks Hillary.
Congratulations to you and lip Bu and your new rules, because the great day for cadence.
Good afternoon, everyone.
I'm pleased to report the we exceeded all of our key financial metrics for the quarter with broad based demand for our innovative solutions driving stronger than expected revenue growth profitability and cash flow as the results, we're raising our financial outlook for the year across all key metrics.
Before getting into the numbers I'd like.
Say of particular, thank you to our India team.
As we all know India was particularly hard hit by the pandemic and Q2, and we are deeply grateful to our India leaders for going above and beyond the call of duty.
To put people first.
We commend them for the heroic work and helping the local relief efforts.
And its reissue.
Sure and to see the situation and India improve over the past few weeks.
Now, let's go through the key results for the second quarter, beginning with the P&L.
Total revenue was $728 million.
Non-GAAP operating margin was 39, 5%.
GAAP EPS was <unk> 56.
And non-GAAP EPS was <unk> 86 cents.
Next turning to the balance sheet and cash flow.
At quarter end cash totaling $847 million, while the principal cash.
Cash totaled 840.
$37 million while the.
<unk> value of debt outstanding was $350 million.
Operating cash flow from Q2 with $380 million.
Dsos were 49 days and.
During Q2, we repurchased $220 million of cadence shares.
Before I provide our updated outlook for fiscal 2021, I'd like to take a moment to share of the assumptions embedded in our outlook.
We continue to expect that our new Mecca and pointwise acquisitions will be slightly dilutive this year before becoming accretive next year.
Our hiring plans and the first half.
Half were delayed by the Covid situation in India, but our outlook currently assumes we catch up on much of that delayed hiring activity and the second half.
Our outlook for the second half and clearly the cost of salary and promotion increases for the broad employee base.
Those salary increases and promotions.
Generally affected from.
And from July 1st.
And finally, our outlook assumes there will be no changes to the export limitations that exist today.
Embedding these assumptions into our outlook for fiscal <unk>.
We expect revenue and the range of 2.
Since we are adding 2.5.
To 2.965 billion.
Non-GAAP operating margin and the range of 36 to 36, 75%.
GAAP EPS and the range of $2.15.
To $2.21.
Non.
Non-GAAP EPS and the range of $3.14.
The $3.20.
Operating cash flow.
And the range of $925 million to $975 million.
And we expect to use at least 50% of our free.
Flow to repurchase shares in 2021.
For Q3, 2021, we expect revenue and the range of $730 million to $750 million.
Non-GAAP operating margin of approximately 34%.
GAAP EPS in the range.
Free cash of 48 to 50.
And non-GAAP EPS in the range of 74 to 76.
Our CFO commentary, which is available on our website includes our outlook for additional items as well as further analysis and the GAAP to non-GAAP reconciliations.
And just in conclusion cadence delivered another quarter of strong revenue growth and expanding profitability and we're pleased to raise our outlook for the year.
I would like to close by thanking our customers partners and our hard working employees for all of that they do and I'd like to remind them of that their health and safety continues to be our first priority.
And.
And with that operator, we will now take questions.
At this time I would like to remind everyone who wants to ask a question. The please press Star then the number 1 on your telephone keypad now please limit your questions to 1 question and 1 follow up question again, please limit your questions to 1 question and 1 follow up.
And we will pause for Obama to compile the Q&A roster.
Your first question comes from James Lee Shower with Griffin Securities.
Thank you good evening.
Let me start with you and then my follow up for Rob lip Bu.
With regard to last week's product announcement on Siri.
The British.
Question on the application of AI and ml to EBITDA.
It would seem fair to say that that's perhaps the most significant methodological advance and EDI and since the day the synthesis place and route what kind of 20 years or so ago. The question I have for you is the rebirth extensible to either non.
The businesses such.
Such as custom and PCB and.
And your new computational software.
Ambitions and similarly to the extent that there's a growing design trend towards the specialty or the named specific designs.
So we just have to be tuned through and increase.
Digitally and specialty chip market.
And then for lip Bu the follow up is.
And your keynote last month at a cadence of slide you listed on your market opportunities and it gets by G. I O T and so forth the intra.
The Stingley you referred to the Hyperscale of the market as quote the amongst.
Greetings and lighting.
And you explained why you said that and was that just circumstance with the Q2 or was that on an ongoing view of the world.
Jay Let me start the.
Thanks for the question and you know we are really truly excited about city Bruce.
And I believe city breath as a.
<unk> fundamental breakthrough.
Using the reinforcement learning to basically drive all of our digital flow. So I mean generally the same.
And as.
And the great quality of the zone, but the the design and still run them and you know based on the infusion run them again and they need to do the design badly and so the risk.
And do that in a much more into much more of a mathematically to explore the design options and parameters.
And you know and we announced and lots of you guys. You said and you know sort of some of the results of some of the endorsement for example, Samsung and said they got 8%.
The other improvement and.
And as can be done and days versus the button.
And then as that said that day, but 10% improvement and frequency.
So these are definitely you know the.
Promising the zones and then there's still early and continue to it and with more guests more and more customers, but so far the unhappy and how well the city.
And this for me.
And the user based on fundamental kind of new optimization methods.
And 1 thing I would like to remind you is the do you have lot of expertise and computational software and a lot of it can be applied to AI.
You know, it's still early days and I think these can be definitely.
But I think the other areas. So for example, the also announced and ignore Inc.
A couple of months ago, and that also has new machine learning technology to to try and.
More automate the place and route for PCB.
So I think it's still early days, but we are very pleased.
And what are the risks can do and the application of AI and then of general the EBITDA and to the stimulation and system design.
And the second question that you'll have some of my keynote on the.
And Doug we are very excited about this.
Generation ways.
But a lot of silicon design and activity and I call. It the systems.
And venison and.
Because I think clearly.
Despite generation on driving a lot of innovation and what particular of on that call out is our hyperscale and.
Because as you know the data Asics.
And the and then that type of scale this royalty.
So the type of scale with the infrastructure.
And on network storage and the workload has changed and move towards more and the domain specific at the application specific application. So there's a lot of day.
The 6 process of required and and that drive a lot of innovation a lot of design activity and thats feet and very well with our cadence.
The intelligent system design and strategy that besides of the silicon Besides of the IP and most of them into the system innovation that tie and very well the unusual.
And so and above this whole system modeling system analysis and in the eye on packaging and all of this is going to be a lot of new requirement and the.
So we are very well position to capture this opportunity and is the double digit growth opportunity for us.
Your next question is with Gary Mobley with Wells Fargo Securities.
Hey, everybody. Thanks for taking my question, let me start by congratulating. The do the main route for all of that you've accomplished and your careers and the cadence of the team.
And and it's 1 of your next role.
I wanted to start with the multipart.
Question on the backlog metric and it's nice to see the improvement.
And I think you were expecting an improvement from where it ended and the first quarter.
Might we see some further improvement for the balance of the year and that backlog metric into what extent was that backlog metric.
Helped or hurt by you know the average.
Average license terms or in other words, the duration adjusted backlog metric.
And to what extent has it been held back by some of the decision back in late 2019 early 2020 to renew.
Key accounts prior to exploration.
Gary I can take that on.
<unk> taken the last part of your question first but I don't think our decision to reduce some bits of surety.
Bucket.
The start of 2020 has an impact typically on our customers on our on like a 3 year renewal cycles for the based contract.
In relation to <unk> I think that's what you're referring to opioids bounce back a little bit.
As you recall Q1 was.
With the light renewals quarter for software Q2, with the heavier renewals quarter for software, but but the annual value of those contracts and Q2.
And and.
And that allowed us to.
To raise our guidance for revenue for the year, but yes. So all lines of business, we're performing really well and and I think I said on the last call of this we thought that the.
The decline and opioids and Q1 was the temporary phenomenon and we expect it to climb back and unimproved throughout the year.
Okay and my second question really.
The China, John and I think you mentioned last earnings call that you would expect.
Sort of a normalized level for the China and related revenue of about 12 percentage of this year's revenue, which would imply.
Really of low double digit percent year over year decline and your China business.
But the trend.
And did well on the.
And each quarter. So my question to you is are you still a little bit cautious with respect to your China revenue this year or is that 14%, China mix and the second quarter, perhaps indicative of where you might land for the full year.
Yes, I think it's the latter of carry I think.
We saw a very solid.
The late second quarter on and uptake in China business.
I was cautious on the first quarter because last year, we benefited from higher than average upfront revenue mix and the second half and China and that contributed to <unk>.
Close to 70% growth last year, which is a really tough comp to lap so is being careful with it with the guide.
And second quick now having seen the strength and in Q2 I think 1 of the sales guys told me. The Q2 was the best Q4, we've ever had but and.
And we're really impressed with the strength of bookings that were coming through but I think we feel much more confident.
In the in the region and and there is broad based strength across all of the bookings activity and the in Q2.
So yes.
I think the year is probably going to be more of like.
Q2 and Q1.
Thanks for the color.
Thanks.
Your next question is with Gal Munda from Baron Berg.
Hi, Thank you for taking my questions.
For the fourth quarter.
And so a lot of.
And to so much of a little bit on the trends that you've seen on the digital and I, specifically mentioned that the new customers you mentioned, some competitive displacements and that's what.
And the kind of.
These new miles the little bit and think about.
What's really driving the growth there.
And between the competitive displacements and.
At the very very healthy.
And I design activity in terms of of the market could you help us from that.
Yeah. This is under the I'll take that question. So I think your question is regarding the digital and sign of growth right. So yes.
And so we immediately.
With the digital group performing well.
You know the the likelihood we mentioned it grew about 16% from.
<unk> Q2, and I believe faster than market.
And then as lot of the design activity, which continues to do.
And you know accelerated and especially at the advanced node in the way.
We do particularly well and so we see a lot of.
Design activity and increasing it and 5 and 3 and you know similarly.
In the world with foundries and too so I think the the whole trend of.
People moving to more advanced nodes is continuing and a strong base and I think that helps us and our digital business.
And also we are getting more full floor of adoption.
Non.
And just place and route the full flow.
And I mean synthesis place and go outside and all so customers on more and more comfortable and running our entire flow and thats again, the trend that we have worked on 'twenty 1 to get the full integrated flow of digital customers.
And then the other trend you know like <unk>.
See becoming more prevalent and of course mixed signal and we are always strong and mixed signal. So overall, we're confident and our digital position and they're on top of that.
The.
We can have cerebral 2 pro forma to give even better results than the.
Do you think of regular digital flow.
I think the summary is that the the design activity is strong and we are glad to work with our customers.
But these 2 points.
Gotcha.
And then maybe as a follow up and honor it.
And maybe even some of them.
When I think the board kind of the way Q2 came on.
The extremely strong and been able to use the kind of go above and beyond the beat.
The guidance for the year what gives you the.
It comes from.
Thanks.
And when they go through the rest of its Q1 because of the product.
So a lot of hardware.
And from last year and stuff.
Yes.
So it's another 3 months.
And I'm thinking more of it what's the harm and kind of the same thing to be a little bit more.
Kim to reflect.
And the outperformance in the quarter and beyond and the product that's a great question go.
And I can take that the.
Essentially the the annual value of the contracts that we booked in.
Q2.
And a lot of cases were significantly higher than the the contracts that were expiring and.
And that give us great confidence.
That along with of course, the visibility into the second half that we have now.
The becomes clearer and clearer as you get closer to the to the start of the second half of that.
That's <unk>.
Helps us the loss I would.
So I would advise anyone not to look at any 1 quarter, but maybe focus on the on the year's numbers.
Because of the quarter since the pandemic started the quarters can be distorted the digital was great growth. This quarter over last Q2, 2020, but I would like to remind you that in Q2.2020.
Pick.
Back out some revenue.
For expected bad debt, but that and.
Some of that we laid of recovered in Q4, so and so some of the.
The quarter shipped and of it distorts it so I think like the focus on the year and when we look at the year.
The annual value of contract says.
As <unk>.
Increased.
Considerably on and enough for us to raise the guidance by $40 million at the midpoint for revenue.
Very clear thank you.
Thanks.
Next question is with Jackson Ader from Jpmorgan.
Alright, thank you.
And we just touch on the Cortina and the disclosed.
And the 10-Q.
So the.
And just from reading the language of it sounds like you received in February and so.
I'm, just curious why work and something that was disclosed in this quarter and not and the previous Q and of that.
What kind of risk score.
Whether it's operationally or or any kind of penalties business really imply.
Yes, yes.
The that was really just the a bit of housework.
Really I guess in terms of.
The nature of the subpoena became more clear to us and the.
During the last quarter.
And we wanted to make sure that investors were aware of us.
We don't think its hugely significant but we wanted to document the end of Q and the interest and full time and the interest of full transparency.
Okay.
Here's the Mariner.
And then on the hardware side and the 2 out of those.
Was it 15, new orders and 65 repeat orders of <unk>.
And I'm sorry of <unk>.
Hardware orders, how many of those were moving on the X 1 versus <unk>.
We have that breakdown.
Yes, I think I will let <unk>.
And for that question and our chip and detail on.
Yes, Thanks lip Bu that's.
And good question, so and we're pretty pleased with the pro.
Appointment of <unk>, Palladium and Protium and.
And.
And more of our business is.
Transitioning to the new systems, which is the <unk>.
And we still have the <unk>.
And extra and still performed well and so we are continuing to sell them depending on the customer situation.
But more and more we are selling the new systems, which are performing well and.
And more and I think John mentioned last night and do you expect of about 6 months of.
Overlap with the 2 systems.
And we have a few months and do that so I think that trend will continue but more of it.
Is the new systems and it should be I would expect by and the view.
Most of it would be the new systems.
We're very happy with the X.
And I think to ramp and we're building inventories that we can to meet demand.
Yeah.
Great. Okay. Thank you.
Your next question will come from Joe <unk> with Baird.
Great.
And then Tim first of all best wishes and.
Congrats on the flip of.
And on road.
And just I wouldn't expect I suppose much.
Change and the strategy.
I think we went through a bunch and continuity of that that's right and they seems to be the case, but I'll still ask the question just given the the leadership changes and.
And maybe.
And you do see and opportunity in particular areas of the business to accelerate what growth has been certainly at the product announcement last week on.
And on AI, driven design and it seems to be a big trend not just for cadence, but the industry are there things like that where over the next day.
As you would expect to be used to be much bigger contributors and and ultimately help accelerate the growth profile of the company.
Yeah. Thank you, thank you, Joe and and I think I.
I would like to say that cadence is and the very strong position.
The thing is you guys see and and I worked closely with LIBOR over the last 4 years since I became president.
Of the company and Nino and so there is lot of and continue the going forward.
And we are very confident and our intelligent system design and strategy.
And the big believer of that.
Computational software and he's a growth trend EBITDA has done that for decades.
And this is the right time to not only do well and our core business of EDA and IP, but also expand it too.
2 other adjacency and 1 of them being system design and analysis and as you know we have a big.
And food and that.
And then the second 1 being AI and machine learning return and also inherently computational.
So on the EDA and IP has been a good business think.
And it will continue to be good business when added with the system design and analysis and AI and machine learning.
Other adjacencies.
Yeah.
Growing too.
So we are truly excited I think we are and a great position and we look going forward and look at all of the we looked very hard to accelerate on the strength and accelerate the growth and opportunity that you see and and day cadence to new Heights.
Yeah.
That's great and then just a follow up on the anticipated margin cadence and.
And the back half of it looks like the other.
Look implies maybe 34% to 35%.
Is that purely a reflection of our hiring accelerating is there any of it.
Because of any of that might be working back into the budgets or maybe it was what's the best way of saying just relative first half second half margin.
Yeah, Joe and I think the the first thing to note. There is as we completed our annual salary review on promotional cycle of jewelry and Q2, and that's part of the story.
But there are also some onetime things that.
Historic the margin picture of the second half as part of our succession planning efforts, we did of voluntary severance program at.
At the same time of the promotion round and there'll be some temporary overlap and expense in the second half is as you know the and painting retirees transition to the the rules to the replacements. So we kind of double up on.
And kind of just for 6 months there.
And that's a temporary phenomenon and Theres also the purchase accounting treatments.
Of the acquisitions, we had and the first half with him back and point wise. They of course, our second half margins to be lower than they would otherwise be.
And yes, we're planning to do a lot of hiring in the in the second half from out of a better balance of the guidance.
Expense team and I will review all of that and make sure it's absolutely necessary. So there could be some upside to.
To that margin outlook. Following a review of as I mentioned earlier the <unk>.
Fortunately of course.
And the numbers can be a little bit distorted joined the it depends on if it gets better to look at the of the annual view and I think when I look at the annual guidance.
36 to 36, 7 and 5% that's closer to.
<unk> to the.
The margin levels of which the business is currently performing.
That's helpful. Thank you.
And.
Your next question is with Chase and somebody you know from Keybanc capital markets.
But thanks for taking my question for lip Bu.
And the room.
And that's on the walls of their promotions.
Maybe from my my first question.
And.
And <unk> being bigger and May see me being bigger and it might be indicative of the customer budget and spend.
John when we think about the guidance range.
Are you able to provide any more segment color on where you and you've seen the uptick it sounds like from a geo perspective, China thickness of corner, but what else can you Oh and.
Yeah, It was pretty much pretty broad based I would say, China I'm sorry, the fifth.
And Asia, and then China within Asia.
And as part of the US and then of course, North America I thought they were probably the stronger performing regions, but.
But it was pretty broad based strength across all lines of business.
I think the kind of recurring revenue profile, we have right now and what we've projected and the guide for the second half of the year as is our typical average profile.
And I think it sets us really sets us up really well for growth for next year.
Okay, Great and then maybe diving down on that a little bit.
The growing mid single digits and the quarter non entirely a surprise given the call outs from from last call, but how are you feeling about the IP for the remainder of the year.
With of today versus maybe 3 months ago. Thank you well I'll, let Andrew talk to the IP business I think it's performing really well, but I mean, when I look at the numbers of kind of similar to China last year of IP groups 25 percentage for the lapping of some really really tough comps and we did highlight last quarter that we thought.
The Q2, and Q3 might be a little bit light.
And because of those comps, but but Q4, we thought we would power back in Q4 and set ourselves up for growth for next year and it's.
With another quarter under our belt on.
And we're confident that that's what the outlook looks like.
And a review of what you want to say anything about the IP business generally.
Yes, Thanks, John that's the that's a good summary, and some of that.
That's true 1 thing I would just like to add as the.
Overall, we are pretty happy with the idea of business like Don mentioned.
Some seasonality to it which you know and then is the lumpy business and also the IP purchases on.
And based on projects of this is just a little bit of Lumpiness, but overall the trends are.
Strong you know the whole outsourcing trend for IP continues and we would expect.
And that is more and more of a design activity more foundry activities. So we are pleased with the MBR and diabetes.
Moroseness and make sure we have the right kind of star IP.
To serve the customers.
Excellent. Thank you.
Your next question is with part D Romani from UBS.
Hi, Thanks for taking my question from there.
And so on either of the lip Bu.
It'd be the on I think and you mentioned that the ACD and the.
Q2 was higher.
What is driving.
Right and that our customers buying up the stack or is it a function of the new bi.
The different customers.
What is driving that higher ATV and <unk>.
The sustainability, how how do you feel the sustainable going forward and just be.
John.
Sure, Yes, great question.
Yes, what we saw I guess with the design activity was very strong and.
And the volume of licenses the repurchase were higher.
In terms of the previous contracts expiring contracts and also pricing and a proof of a little bit but.
And generally I mean, when I look at like if I look at the business on a very high level of tomo and I like to look at the 3 year Packers and I put them on the second page of the CFO commentary and and over the last few years, we've seen consistently accelerating revenue growth year over year.
When you look at the 3 year, CAGR and and we're on track again for that for this year.
To improve on last year.
So generally I think with all of the.
And with all of our accounts, where we keep providing.
The greater value for our customers.
And more products, it's the virtuous cycle so to speak of I think of few years ago, We often talk.
About we released 20 significant new products and the previous 3 years, we've launched 8 new products and the last 6 months, but I think the pace of innovation on the.
On the release of new significant product that cadence has accelerated and that's helped us improve our ACP across.
But on a very.
Very broad based across our customers.
Okay and.
And my follow up.
On the verification and Boyd.
You mentioned on some we do on day, 1 but in the.
The just thinking about it.
The about whether it be other independent question cycle. Thank you.
Would you say that.
Very early days and but you still had significant contribution from BP and Q2.
Sure.
1 of the part of each of the detail.
Slide decks and sort of.
Pretty negligible and kidney.
Oh, I think it's a significant contribution.
I don't know whether it's the if you don't mind me using and Olympic style analogy, it's a bit like a relay race in terms of handing over the baton.
I think Q2 and Q3 of these middle quarters of the year on.
Where you see that transition where we're selling.
The X 1 and do you want alongside X to NZ too I think by the end of.
For the year by the time, we get the Q4 will be off and sprinting with them with the newer systems and with a very little of the older systems left to sell.
Thank you.
Our final question comes from John Mcpeak with Rosenblatt Securities.
Thanks for squeezing me in guys can you hear me okay.
Yes, yes.
Hey, guys, congratulations lip Bu and Andrew it's it's been quite a run with the amazing.
And I guess it would be on some more calls, but I just wanted to mention that so the first first question I have is about.
You know the high level.
Level.
Trends in the semiconductor industry.
And they're getting more competitive than they've ever been I mean, youre seeing some share shifts you're seeing some historically significant companies are seeing major.
<unk> thinks about their strategy and and I'm wondering.
During if that potentially is freeing up budget.
And those companies to try new things that they historically may not have done with the.
The prior.
Management regimes that were in place.
Because it seems like it could be kind of significant.
For cadence.
That's the that's my first 1 and then I have a follow up.
Yes, I think the let me answer that John and thank you so much and.
And so clearly we see this.
The industry change.
And the fight generation wave and a lot of.
And our data and candidly.
And the races and on less than 2% of data being analyzed so I think there's a humongous opportunity.
And some of the Hyperscale, the and all of the autonomous driving industrial automation for the industrial growth and.
And then and autonomous driving and that is and other parts I think those 5 areas.
Area kind of be driving a lot of new applications and and news. So you shouldn't need it so a lot of innovation needed and so in some way and not.
Our Isd strategy of really playing very well from the silicon or the weight of the system and how to provide some of this.
So do you share.
Especially in the workload has changed a lot and so not just the CPU computing and it's a lot of new domain specific applications driving the solution and that create a lot of our new design. So thats why we don't see any slowdown in design and the contrary actually we see a lot of the increase.
Recent design activity and that gives me a lot of hope going forward.
Right and then I guess specifically.
And it seems like when you get to 3 and under.
Potentially we're going the gate, all around and I'm curious as to what.
What that might do for.
The place and route and and your digital strategy. There I think you've made some announcements of 3 on some tape outs already maybe you guys could talk about that a little bit.
Okay.
Yes, John maybe let me take that and see on it.
So we have quite a bit of activity.
And 3 nanometer as you could imagine and a lot of customers are.
Already designing the largest 3 nanometer and.
And so we're happy to work with the major foundries. So we do have a solution, which are being optimized for a gate on the ROE and.
And we are happy with the <unk>.
And it's there.
And and like I said earlier, we'll soon and starting work on and to so I think the stood for the industry. You know today, you should be a really really strong node and also you know and 2 of tobacco the 2 nanometer node after that.
And the 1 key thing is the 3 nanometer would be.
Just is that.
The good news for core EDA and cadence of the roll of tools and methodologies becomes even more critical than let's say 7 or 5 nanometer because there is a little bit of.
Slowing of fuel.
The old perform and scaling from Moore's law I mean, most of those still giving lot of areas of scaling.
<unk>.
The number of transistors, and keep going up but the performance you get from Easter understood is not as much as before so then the theres more demand for it.
Well the cadence to the media solutions and IP solutions to deliver that that performance.
I think the role of EDA and it'll become more and more critical.
And that lower nodes and then combined with other advances like city, Bruce and machine learning. So overall, we are pretty pleased with our position of these advanced nodes and I think and do the overall good news from <unk>.
True.
Thank you I mean, it would just seem like a.
Because of shortage of engineers, and you guys of the ones, making them more.
More productive so thank you.
The strength.
And I'd like to turn the call back over to lip Bu Tan for closing remarks at this time.
In closing thank you all for joining us this afternoon I'm very excited of part of growing market opportunities.
And the business momentum so far in 2021.
Our intelligent system design strategy is playing out very nicely as we benefit from new opportunities and design excellence system innovation and pervasive intelligence and the expanded total addressable market.
And lastly on behalf of our employees and our product directors.
And thanks, all of our customers and partners for their continued trust and confidence during this on.
Precedent times.
The 4 day.
Thank you for participating entities cadence second quarter.
And once you on earnings Conference call. This concludes today's call you may now disconnect.
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The majority of it.
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Moving on that.
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