Q3 2021 Cadence Design Systems Inc Earnings Call
And positioning do.
Due to known and unknown risks and actual uncertainties.
Results may differ materially from those projected or implied in today's discussion.
For information on factors that could cause a difference in our results. Please refer to our filings with the Securities and Exchange Commission.
These include.
Cadences. Most recent reports on Form 10-K, and Form 10-Q, and the cautionary comments regarding forward looking statements in today's earnings press release.
You should not rely on our forward looking statements as predictions of future events. All such statements are based on estimates and information available to us 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 with generally accepted accounting principles or GAAP.
We will also present certain non financial or non-GAAP financial measures today.
Cadence management believes that in addition to using GAAP results in evaluating our business. It can also be useful to reviews results using certain non-GAAP financial measures.
These non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP results.
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.
Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures.
Their most direct comparable GAAP financial results in today's earnings press release.
Copies of today's earnings press release dated October 25th 2021 for the quarter ended October 2nd in 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.
Cadence delivered strong financial results for the third quarter.
Driven by accelerating customer demand for our innovative solutions and.
And continued strong execution by the team.
Driven by the broad based strength of our business well.
We are raising our financial outlook.
Third time this year.
And I expecting.
11% revenue growth.
And 37% non-GAAP operating margin for 2021.
John will provide the details in a moment, but both our Q3 results and the updated outlook once a year.
The data driven era is being fueled by generation trends by five G Hyperscale computing autonomous driving and industrial Iot.
Accelerating the digital transformation of silver industries.
This requires continued innovation in key areas such as compute.
Connectivity storage and data analysis, which is in turn driving secular.
My conductor growth and design activity across a wide range of end markets.
Before I ask I know relative growth throughout our business and product highlights for the quarter.
I would like to remind you that I'll be transitioning with the role of executive Chairman.
December 15.
But undergrowth, becoming our president and CEO at that time.
It has truly been on a leading cadence for the past 13 years.
I'm very proud of the team's accomplishments and grateful for the confidence and trust that our customers and shareholders have placed in us.
800 is extremely well positioned.
Si.
And the a ton over to on the road.
I can think of no other better.
The company to next phase of growth.
Eagerly looking forward to him taking cadence to new heights.
Well I will remain engaged with the customer with shareholders.
But my guess would be my last earnings call.
So very much for your continued support.
I will now turn the call over to Ruth.
Ideally booth.
Our intelligent system design strategy Leverages, our strong competition and software expertise.
As we expand beyond <unk> into new markets.
And we are uniquely positioned to capture the exciting opportunity.
You talked about.
As we execute to our strategy, we are especially pleased to see.
Our EDA IP and system solutions be increasingly adopted.
By growing number of system companies.
For instance, <unk>.
Slow utilize the broad set of guidance EDA software solution.
And hardware platforms.
To enable the successful delivery of the.
Dow Jones system.
Delighting customers and accelerating growth requires a relentless commitment to innovation.
This quarter, we launched the integrity <unk> platform.
And until he got AI platform Midas.
Safety platform.
And the helium virtual and hybrid studio.
We have now introduced <unk> significant product this year.
Across all of our business groups.
And these will be key drivers of our future growth.
Let me share some of the business highlights starting with digital and sign off.
Which had another strong quarter with <unk>.
18% year over year revenue growth.
Our digital full flow delivering industry, leading quality.
Our results at the most advanced nodes.
Do you need to proliferate with market shaping customers.
And was adopted by 13 new customers.
We are very pleased with the growing momentum of our drugs for me to cadence City bridge solution.
That incorporates unique reinforcement learning AI ml technology.
To deliver significant PPA power performance and area and.
And productivity gains.
In addition to Samsung in Venezuela endorsement at the time of launch.
A real market shaping customers have added cadence <unk>.
So their production flows and realizing great benefit.
As an example, the global mobile semiconductor companies.
Use gaydon citigroup.
On the manually to CPU design to reduce total power by almost 10%.
And improved timing by over 25%.
Automatically in only eight days.
Additionally gave.
<unk> enabled a marquee mobile system company.
To reduce the power consumption of their four nanometer design by over 25%.
And get or would that mix improvement in productivity.
We continued growing our business with Hyperscale customers.
Including a broad expansion of EDA software.
With a marquee hyper scalar that included a significant commitment to our digital products.
Next I will talk about our verification business.
Which had a strong quarter with 13% year over year revenue growth.
Growing system design complexity and need to get first time guide Silicon continues to drive strong demand for our verification suite.
Which provides a comprehensive solution across IP and Soc.
And system verification.
<unk> software integration.
And early software development.
This momentum, especially noticeable in our hardware business.
When customers are deploying a significant additional capacity.
The leap the performance.
Quality and productivity benefits.
All of our investors leading hardware platforms.
Accelerating adoption of our new dynamic duo the Palladium zone, two and Protium X too.
Led by hyper scaler in global marquee customers draw.
<unk> drove the majority of hardware are those in this quarter.
In verification software excel email our machine learning optimize logic simulator.
Delivered up to five X faster regression was adopted by marquee customers in North America and Asia.
We launched the helium virtual and hybrid studio.
A new platform that accelerates the creation of hybrid and virtual prototypes of complex systems.
Enabling early software bring up.
Helium was endorsed by Nvidia and several other engagements with leading customers are underway.
We also announced the Midas safety platform, which is part of the comprehensive gave them safety solution featuring integrated digital and analog safety flows.
And engines for foster certification of safety critical automotive design.
Moving on to system design and analysis.
Really pleased that this segment, which is driving our market expansion beyond E D.
Continues to deliver strong double digit growth.
Leasing revenue by 17% year over year.
As we grow our footprint in several verticals, including aerospace and defense and fire <unk> Communications.
With five ml apt.
Applications, pushing silicon vertical limit and transistor scaling slowing down the accelerated move to.
To disaggregate FCC.
Into a heterogeneous set of discrete guys that can be integrated together with sophisticated packaging technology.
Leveraging over two decades of partnering packaging expertise.
We are very excited to have launched integrity <unk> IC.
The industry's first and only comprehensive platform that ties together, our best in class system planning implementation and thermal timing and poverty analysis technology.
Along with a multi technology database all in a unified cockpit.
This third generation <unk> solution enables designers to achieve.
System, driven PPA with reduced design complexity and faster time to market.
And we are engaged with several leading semi and system houses foundries and packaging company.
Our organically developed system analysis products continued to make good headway.
With clarity our electromagnetic preview simulator.
Displacing the incumbent solution.
And becoming plan of record at the Marquis Hyperscale.
And Celsius, our electric terminal <unk> simulator.
Is deployed at a global marquee system customer.
Our recently acquired <unk> solutions.
Also delivered strong results, winning new business with several automotive.
Aerospace and defense customers.
And now before I turn it over to John I wanted to say a few words about the upcoming CEO transition on December 15.
On behalf of the games board and employees.
I wanted to thank Lou for his outstanding leadership.
And as numerous illustrious accomplishments over the past 13 years.
That hasn't made a lasting impact on our industry and on occasion.
With this laser focus on creating a highly innovative and results based culture.
Drove a cultural transformation of cadence.
That was rooted in customer and shareholder success.
Good trusted partnerships with leading customers and delivering shareholder return.
Over 3500%.
I'm, especially grateful to <unk> for his mentorship and guidance and look forward to continuing our partnership and our new roles.
And along with our talented team.
Let's see drive to deliver strong business results.
And delight, our customers and shareholders.
Now I will turn it over to John to go through the Q zone and.
And present, our Q4 and updated 2021 okay.
Thank you Andrew and thank you.
They say values are like fingerprint nobody's are the same but you can leave them all over everything you do you.
Do you have an impact on cadence has been significant and will last for many many years to come and it's been a truly remarkable run over the past 13 years and I feel blessed to have had the chance to work so closely with you.
I've also heard it said that legacy is not something you do for yourself, but it's something to leave for the benefit of the next generation and on behalf of all Cadenced stakeholders I'd like to thank you both for conducting such a smooth CEO transition.
Haven't missed a beat.
Focused execution by the entire cadence team combined with broad based strength across our product portfolio and customer base drove another strong quarter of top and bottom line results.
We exceeded our expectations for all key financial metrics.
And we are raising our financial outlook for the year.
Now, let's go through the key results for the third quarter, beginning with the P&L.
Total revenue was $751 million.
Non-GAAP operating margin was 35, 7%.
GAAP EPS was <unk> 63.
Our non-GAAP EPS was <unk> 80 cents.
For the balance sheet and cash flow cash totaled $1.014 billion at quarter end.
The principal value of debt outstanding was $350 million.
Operating cash flow was $296 million.
Dsos were 40 days, and we repurchased $110 million of cadence shares.
During the quarter.
Next let's turn to our updated outlook.
Our outlook continues to assume that there will be no changes to the export limitations that exist today.
For fiscal 2021, we now expect revenue in the range of $2 96 to $2 $98 billion.
Non-GAAP operating margin of approximately 37%.
GAAP EPS.
And the range of $2 36 to $2.40.
Non-GAAP EPS in the range of $3.24 to $3 28.
And the operating cash flow in the range of 975 million to $1.0 billion to $5 billion.
For the fourth quarter, we expect revenue in the range of $745 million to $765 million.
Non-GAAP operating margin of approximately 35%.
GAAP EPS in the range of 49 to 53 cents.
Non-GAAP EPS in the range of 76 to 80 cents.
And we expect to repurchase $110 million of cadence stock in Q4.
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 closing I am pleased that revenue growth continues to accelerate with our three year revenue CAGR now approximately 11, 5% at the midpoint of guidance.
We were expecting approximately $1 billion of operating cash flow for 2021 at the midpoint and we are on track to deliver over 50% incremental operating margin for the year.
As always I want to thank our customers partners and of course, our employees for their continued support.
With that operator.
I will take questions.
At this time I would like to remind everyone who wants to ask a question. Please press star and the number one on your telephone keypad now as a reminder, please limit your questions to one question and one follow up.
Pause for a moment to compile the Q&A roster.
Your first question will come from the line of Jennifer week with Baird. Please proceed with your question.
Oh, Great Hi, everyone and let me just start by extending my best seller.
Maybe I'll I'll begin with the next generation hardware emulation and prototyping I'm wondering was component availability at all a factor and are either meeting demand in the corner or does component availability factor in at all to the forward outlook either and.
Good way catching up on Navy things that slipped this quarter or considering maybe yeah.
Yeah.
Some demand you know getting extended into next year.
Hi, Joe This is John Thanks for the question.
Yes, they were.
We're delighted with the demand for our hardware verification systems and we're filling the systems as quick as we tend to meet that demand.
Yeah, we're very very pleased with the customer reaction.
I'd like shipbuilding filling the systems as quickly as we can I I'd say, it's fair to say that demand is outstripping supply right now, but we're building as fast as we can and you can see it in the inventory number of inventories slightly up.
Okay. That's helpful and then maybe more of a product or or stir.
Strategy question, when thinking about <unk> and the co designed that needs to happen between package and chips being stacked is it as simple when you think about it the opportunity for cadence is.
Simple as customer is adopting the new integrity platform or is it maybe broader than that then and that's trend across the industry actually happens the impact in balance at multiple areas of the cadence product portfolio.
Yeah.
Yes, that's a great question, let me, let me take that so you know.
We believe so.
The <unk> is the future right. So the road to the feature goes through <unk> four.
Multiple reasons, which you know I mean, putting.
Putting multiple chips on that package.
I believe there are mixed technologies ability to be to be getting bigger systems.
And I do believe that cadence is uniquely positioned for that.
And it affects multiple technology now some of it is because of our history. So you haven't had a leading platform in packaging for a while with the Lego.
And a leading platform and analog with virtuoso for awhile and then over the last five years, we have done very well in digital and then if you remember over the last two three years.
We have done lot of investment and system analysis, you know like clarity and Celsius are also critical to the IC.
Given that terminal is a big challenge when you put these things together so.
So I believe cadence is uniquely positioned and and with integrity you put this altogether and it's not just integrity draws into the other parts of cadence like I've mentioned.
And then as a comparison you know when as we work with customers and leading Congress to do something similar in other products.
It's not even one company can bring you need a three or four companies to do the same thing, whereas if you come to gain and we have a comprehensive solution.
Multiple segments. So I think as <unk> takes more momentum going forward I believe we are well positioned.
Yeah.
That's right. Thank you very much.
Your next question will come from the line of Jason Selina from Keybanc. Please proceed with your question.
Great. Thanks for taking my question and let Bob it's been an absolute pleasure glad to have you on for one more earnings call.
So my question you know with the supply chain shortages, we've seen several different automakers like Honda and Volkswagen announced intention to design some of their own semiconductors, but we know that these design cycles are quite long and it's a multiyear investment. So how do we think about this as maybe an increase.
Rental dollar opportunity, but just you know market shift from customers, taking some of those workloads in house.
Okay.
Yes, Jason first of all thank you so much for the kind words.
In terms of the global supply change we are monitoring the.
Semiconductor growth was up by changed faith carefully so far we don't see any slowdown in design activity across our customer base and then as you know our product is very much focused on the R&D engineering deciding that chip system.
And so and this is a multi year approach and I mentioned earlier generations drivers.
<unk> been really driving a lot of increase in the design.
And then I'd say your question in terms of automotive.
I cycle, yes, you'll have to correct. Its a multiple year agreement and then lately because of more and more electronics.
In the automotive.
We see a lot of design activity light and autonomous driving and I think Andrew I mentioned about the Tesla and turmoil.
Driving yeah.
AI chips and using our broad base cadence tool. That's a one good example, and many more coming and so I think clearly we're excited about the automotive platform.
It will create opportunity the multi years to come.
Okay, and then yeah. Thanks for that and that was helpful and maybe my quick follow up as you know I think the automotive customers something maybe more vocal but are you seeing these type of trends in other industries as well in terms of the.
Hum.
With that thank you.
Yeah I think this is a very interesting challenge and opportunity time and this whole supply chain.
Nearly enough at the automotive industry is starting to become a very.
Realize that and not the whole visibility into the supply chain and become very important for them.
So in different automotive companies they experience different challenges in the supply chain.
We are here to help them in terms of the design automation in the whole system level and the complexity of design and then time to market and then so we try to be available and be helpful to them.
My partner and then and also support them throughout this period, so I think you'll see more and more opportunity in the automotive is a big platform for us.
Great. Thank you.
Your next question comes from the line of Jackson Ader from Jpmorgan. Please proceed with your question.
Great. Good evening guys. Thanks for taking my questions and I'll just quickly echo all the all the kind words that have already been set about to with the yeah. Congratulations.
Looking forward to continuing the relationship.
So Andrew you mentioned that.
In the last few years digital tools and driving growth and I think you also mentioned that a hyper scaler.
This past.
Quarter significantly increase their digital footprint, so I'm just curious.
What what tools or at least what parts of the digital design flow just from a high level synthesis place and route what have you are actually driving the increased uptick maybe in the last 12 to 18 months in digital.
Yeah.
Yes. Thanks Jackson for the question. So I think as you know when I said lower nodes.
We have always believed that the integration of the whole digital full flow is critical so that said this is.
Our place and route and sign off so what we are pleased to see especially in the last let's say 12 months.
Is.
Wider deployment of digital so even back like a few years ago that the engagement would start with universe.
That was the leading kind of product that we would do well in but now I think the overall market has accepted our full flow.
And we see more and more signs of that so that include synthesis and time off along with the analysts.
And that is becoming more the norm than anything else. So to answer your question not only you noticed as well, but no synthesis and sign off which is Genesis tempus and bought it.
We're pretty happy with the proliferation.
And I think that's a trend to stay.
Yeah.
Alright awesome. Thank you and then.
A quick follow up John can we just.
Yeah, what what is going on with backlog and the implied bookings, it's really swung around a bunch of them.
So we're just curious if there were any duration impacts or what would you be reading them. So in terms of the implied bookings number this quarter.
Yes, Jackson, Thanks for the question, but I wouldn't read too much into it again, it's like the timing of contract renewals. We had a similar phenomenon in Q1, we would expect to end the year with a higher backlog in our appeal than we started the year and that's reflected as well if you ever look at the margin guidance for Q4, our March guidance for Q4.
Slightly down on what we achieved in Q3 because of the impact of some some hiring and an expectation for higher sales commission costs in Q4, because we expect a lot of bookings to come through in Q4.
Alright awesome. Thank you.
Your next question comes from the line of Pradeep Ramani from UBS. Please proceed with your question.
Alright, thank you.
Taking my question.
I just wanted to get.
But more important on the verification.
It seems like the verification.
September was flattish.
Flattish to down a little bit worse than June.
And Nick hardware, it seems to be doing well, so I read the sort of interpret that it's more on the software side that you've seen maybe then.
And then let go than what might have been anticipated or are you being constrained on the hardware side.
And I just wanted to get a comparable.
Ramp on the hardware side at this point.
Oh, Hi, this is John but we're absolutely delighted with the customer reaction to our new hardware systems that.
And we're building and installing inventory as fast as we can to meet their demand.
I'd remind you that cadence as part of their design cycle.
So I mean, it hasnt really impacted.
It impacted us too much concern with our customers.
And then as it relates to your comments on growth.
We raised guidance for the year, we were pretty happy with growth.
We're seeing accelerating growth.
When you look at the three year CAGR as I've called them out in the CFO commentary, it's rounding up to 12% now it's approximately 11, 5%.
And that seems to continue to to increase year after year, and that's that's reflecting strong demand across across all lines of business.
Okay and.
For my follow up.
On the digital licensees I mean, it has been very strong.
Are you seeing increasing competitive displacements.
Or is it.
More of a market being strong can you speak maybe qualitatively or.
How you doing.
Doing digital I think going forward as well.
Well it continues to do well.
You saw and I think it's a combination of things I mean, the market is definitely growing.
Because of all this design activity as you can see in these multiple domains.
So the market is growing and we believe that we are also taking market share. So I would say, it's a combination of both these themes driving our digital growth.
Thank you.
Yeah.
Your next question will come from the line of Jay Please Shah with Griffin Securities. Please proceed with your question.
Thank you and good evening.
Although both of my questions are for you, but first.
On a personal note the pool, it's been a pleasure working with you for the last.
13 years, and certainly look forward to continuing the dialog with the without a word.
So first question on the mood at the cadence lives Europe conference a week or so ago.
Cadence said in one of your presentation.
<unk> that.
Led grow has recently undergone a quote major overhaul, which we certainly saw with Allegro X are.
The question is what's next in terms of anything you might be working on for an additional major overhaul we do see this periodically.
In EMEA our pool.
Example, synopsis a few years ago was significantly ramped up its internal investments.
Synthesis and they launched their new version of D C and I'm wondering.
Based on what seemed to be your internal investment patterns.
If you were undergoing a.
Did you the nation or reinvestment cycle for your synthesis or what else you might be able to talk about in terms of any major overhauls.
Secondly, with regard to be ingredients, you need to succeed with the computational software strategy.
There was an interesting announcement two weeks ago, a relationship between synopsys into so and I'm wondering if you see.
You're having to partner more.
For both technical and channel expansion reasons.
Two to succeed and computational software.
Yeah, Jay this is a great question.
I think in terms of what you kind of you said new products or revamp of existing products.
But we are continuously looking at that all the time you want to make sure all our products are doing well.
As you can see this year, we have launched two new products several of them are.
Our improvement of existing products like the legwork so.
<unk>. So I think this is a continuous process.
As you know we have a very high investment in R&D compared to our peers. So we are constantly looking at that and you know you won't see more things come out of course as we go forward.
On the second one.
Confident in our computational software strategy, that's delivering good results I think we have a lot of organic ability to in a way, which we demonstrated.
With clarity and Celsius and at the same time, you are definitely looking at a new partnerships that make sense.
You said, both on the product side and on the go to market side. So I think we will talk about them.
When they are ready, but you know Kate has always had a culture of partnering partner for example, with MATLAB.
You know that was a great partnership.
The system level, we partnered with national instruments.
We bought AWS from them, we have partnership with Greenhill.
So we're always looking for a win win partnerships and that continues to be the case.
Going forward.
Alright, Thanks Robert.
Thank you.
Your next question will come from the line of Gal Munda from Banbury. Please proceed with your question.
Yeah, Hi, thanks for taking my questions.
First one in terms of the strong margin performance again, and then kind of thinking about for the rest of the year, maybe John for you you.
You mentioned that.
<unk> got to do with the timing a little bit to do with investment, but if we're thinking about kind of sustainability of the margin performance.
How much of that kind of inability or maybe not being able to hire and invest as much as you'd like right now versus.
Just the topline really driving the additional scale that youre seeing if that makes sense.
Yeah, Great Great question.
Where.
We're back on track with hiring I think are hurting performance has been really pretty good and we're delighted to be recognized on so many of these top 100 places to work.
The world, that's certainly helping us with with our hiring activity.
Yeah on the margin side, it's really outperformance on the revenue side on like a right across all our lines of business.
We thought it would have a soft middle to the year end.
It would recover towards the end of the year started recovering a bit earlier.
They had a strong finish to Q3 and we're expecting good things for them in Q4.
On the hardware side Kim demands customer reaction has been tremendous demand is really strong there and Honda.
Off course, right all lines of business are performing really really well and I like to say over if you look over a contract cycle over a three year.
CAGR basis that we're continuing to see accelerated revenue growth so on the operating leverage side.
We're delighted with the operating margin performance second half of the year include some double up on expenses, we did an early retirement program, but.
But I think the overall businesses is pretty much all I mean, if you take out the one time things were operating pretty much at the.
The guide we've given for the year, which is about 37%.
Gotcha.
And then as a follow up just on the topline again, we mentioned touched a little bit on the supply chain issues.
And when you when you move tenants through the year you said it's incrementally.
Affecting the business.
The royalties now we're talking about the hardware demand being stronger than kind of your ability to supply.
A way to kind of quantify that for.
From your perspective are.
In order to kind of understand the magnitude of the impact that kind of demand.
Is there, but we're kind of limited by the supply side.
Yeah. So it's very very small impact to us like I say the majority of our revenue comes from part of the design cycle.
Chip.
The chip capacity constraints that you're referring to is really impacted production side of the cycle and that's where it touches off in terms of royalty revenue I think last year royalty revenue for cadence was around $50 million, but this year will be slightly lower than $50 million.
But we'd expect that to recover again next year.
So the impact is pretty small on the.
Same thing on the on the hardware side.
You know, where we're happy with our supply chain.
Do you see inventory growing a little bit we talked a couple of years ago about moving from just in time to just in case in terms of our inventory management, So where we carry a lot of inventory. So we're I think we're well protected.
Certainly for the next few quarters on the supply chain side.
But yeah, we're very happy with where we're positioned right now.
Right and just to clarify on the royalty is nothing thats changed over the last couple of quarters. Once you kind of.
The impact is big.
Likely down from last year, that's kind of consistent to what you said.
That's right that's right.
Our IP business is a mix of licensing and royalty business.
Any capacity constraints from last year could feed into unit production.
This year bronchial <unk> are slightly down, but it's it's it's very very small in terms of the impact of cadence on our overall numbers.
Thank you so much.
Your next question will come from the line of Gary Mobley from Wells Fargo Securities. Please proceed with your question.
Hey, guys.
For different reasons, let me extend my congratulations for the next chapter for intermodal.
I wanted to start out by asking about the excuse me too products and B.
Step function increase in processing power that these new tools facilitate.
And the way I understand it it allows customers to not only bring up hardware, but also in parallel bring up software and so my question is.
Can you give us a sense of the magnitude of how this increases the potential dollar opportunity with each customer engagement.
Or.
How it improves your served available market with this new software bring up our capability. Thank you.
And a follow up.
Yes, Gary that's a good that's a great question.
Totally right I mean, the reason for doing.
So protium next to the <unk>.
Having the same content as palladium is to expand our reach to more and more software brings up.
And if you as you know this quarter when we launch helium.
The same reason so he not only we can run RTL, but then helium weekend brunch hybrid Martin you know high level margins with ideal all of this is for socket lingo and historically I think cadence has done well in the RTL bring though the lithium but not as well you know the market is growing more into software brings up and now we are doing pretty well.
Yeah.
With palladium with the combination of Palladium and rhodium in the helium plus Washington.
So I think in terms of the market of course, it's difficult to quantify but at a high level I think the market.
Opportunity.
Maybe one and a half to two X larger once you combine the softwood and hardwood bring up together of course it takes several years to fully realize all this but I think the market opportunity for cadence.
With protium palladium and helium as much expanded because of the software.
I appreciate the en route and perhaps this is for John but I wanted to ask about.
Navigating the China export restrictions and maybe if you can give us a sense of whether it's any more difficult or any easier to obtain.
License is to serve service those customers based in China, and and then maybe give us a sense of what the various puts and takes are there for China revenue growth or lack thereof, as we sit here.
Half of our fiscal year 'twenty one.
Yeah, Gary good question.
When I look at China revenue I think it's probably easier to look at.
China over a two year period, because last year.
With the pandemic impacting the 50 <unk> week.
The impact in Q4, I think if you look at where we are on track for 2021 is probably a 30% CAGR in terms of growth in China since 2019.
You know what we're working our way through all the export controls and everything that we and all the complaints that's required and we have and we will continue to comply with all export control regulations, it's situations fluid.
We have to continuously monitor it but.
Our outlook assumes everything that exists today remains in place today that we haven't we.
We haven't predicted any changes but of course, if there are changes we would have to take another look at our outlook.
But essentially for the sake of it.
It ticked up guidance, we just assume that our.
But all export limitations that exist today for certain customers will remain in place for the remainder of the year.
Then for 2022, we'll update you all in 2022, when we give you our year end results in February.
Thanks, John.
Thanks.
Yeah.
Your next question will come from the line of Tom <unk> from D. A Davidson. Please proceed with your question.
Yes, good afternoon, and thanks for taking my question. So a little I guess I've only been around for the last 12 years, but since then the stock has gone from $6 to $1 67.
Obviously very impressive, but I look forward to we haven't really taken into 4000 over the next 12 or 15 years.
So.
I guess the question on the supply chain from a maybe it's a little different angle. What are you seeing in terms of capacity at the foundries and just curious if you are taking steps to diversify our foundry activity from either geographic or company specific reasons.
Well, let me yes. That's a good question I think we you know like a liberal and John mentioned via more on the on the design side.
So we are trying to make sure that we can sell all our customers as they continue to do all these design.
And in that process.
Well with all the foundries all the major foundries are of course in the U S and Asia in different parts of the world. So we have a pretty healthy relationship with all the major ones and.
We are encouraged to see you know more investment in the U S.
So with our overall position you know Tom we are pretty active with all the major countries and hope to continue that.
I was wondering more on just the manufacturing of your chips.
I would be able to put in your.
Your palladium and what have you.
Okay got it yeah. So I think the current set of Palladium chips I mean palladium has the big system. So you've had a lot of chips that goes into it.
All of them, we buy and some of them we make ourselves.
So the once you make ourselves are made by you know TSMC one of the leading foundries and and we continue to work with them and where we are designing new system. The next generation of the two.
And we always looked at all of the funding, but but overall, we are really happy with the foundry partners for the Palladium is ecosystem.
Okay, Great and then I'm curious.
Have you seen an impact from Covid and any of the kind of mini region that you participate in and around the world.
I'm just wondering yeah.
Our point of view.
I think it's fair to say that the impact was more like a few months ago. I mean, you still have an impact.
They are still mostly of course working from home in several parts of the world.
And then you slowly opening some offices as you know.
No.
But in terms of you know we had a big impact in India. A few months ago I think that has thankfully you know improved.
And so it's become more of the norm now that'd be just just continue to work through it so no no new things.
I think in the last three months.
Right.
The world was delayed a little bit because of the delta. So we hope to take that up early next year.
Isn't that we're working through the Covid issues.
Great. Okay. Thank you Henry.
Thank you Ken.
Okay.
Your next question will come from the line of John Pitzer with Credit Suisse. Please proceed with your questions. Yeah. Good afternoon, guys. Thanks for let me ask the question and I'll add my thanks, and congratulation for lip Bu.
My first question, Jonathan antibody was really on that three year CAGR acceleration and John I know, we've got to wait another 90 days before you give us a full outlook for calendar year 'twenty two but it.
It's impressive that you guys have seen this acceleration over the last two years in the midst of sort of a global pandemic.
Look at Street consensus numbers for next year.
Growth that goes back to that high single digits and yet you talked earlier about demand outstripping supply. Just wondering if you think these double digit CAGR or sort of here to stay and if so to what extent is this sort of the fruits of your labor and some of your Sam expansion efforts versus some of the dynamics in the core business.
John That's a great question, but I think the nature of our revenue model is such that I wouldn't expect any dramatic changes in our three year revenue CAGR, because 85% to 90% of the revenue is recurring in nature.
So I mean, when we calculate three year CAGR is by the end of 'twenty, two we'll be including 2020, one and that and that I'm, sorry, So you're not going to Oh, you shouldn't really have a dramatic change I think.
You have to look at the to.
The CFO commentary, you'll see the kind of step function that we've seen over the last few years, it's been slowly accelerating but it's pleasing to see that it continues to accelerate.
We're just up over 11, 5% now so rounding up to 12% this year.
So yeah, very very pleased with our with the way the business is going up again, we will refrain im talking any more about 'twenty 212.
We need another 90 days just to get through.
Just to get through Q4 for us, but they are very very pleased with the way, it's going in and because of the recurring revenue.
Nature up so much of our business I wouldn't expect a three year CAGR to change pretty much.
That's helpful and I never thought I'd love to get your thoughts.
Clearly the U S and Europe had to have I guess rediscovered how strategically important semiconductor businesses and youre seeing sort of this pushed the regionalization of supply, but but it's not just about manufacturing I think that that world governments are going to incentivize sort of IP domestic.
As well and so I'm kind of curious if you guys have kind of thought through when it could help us think through what you think the impact to your business would be from things like the chip to act and similar legislation that is trying to make its way through the EU right now.
Yeah, that's a good point and you know.
We are eagerly eagerly awaiting you know all the details.
But if you as you know in the chip side, there is funding for our manufacturing, but there's also funding for R&D and then it's.
You said, it's not just the.
The hardware.
Manufacturing, but it's also the IP and the software that enables all of these things.
So I think we are we are optimistic about.
All this investment in different parts of the word.
But I think the details as you know we still have to be sorted out but overall you know we have a strong portfolio.
Multiple geographies. So you know as there is more investment in the U S and Europe I think that.
That is.
So as to make a positive.
Well Jonathan did.
Any indication Oh, sorry.
Okay, Great. That's a great indication of all the design activity, that's going on I mean, we're seeing strong secular demand.
Across all these generational drivers.
We have a great strategy, a great portfolio and solid execution.
Every everything you mentioned kind of just indicates more design activity globally and thats good for kittens.
Perfect. Thanks, guys.
Your next question will come from the line of child, She from Needham and company. Please proceed with your question.
Hi, Good afternoon. Thank you for taking my question.
So I wanted to go back to your prepared remarks, you mentioned about integrity <unk> C being the industry's first and only comprehensive platform for.
<unk> I see that a few days ago your competitor put out the press release.
They said their product is a complete end to end solution.
I just wonder how do I reconcile the two different comments.
Around these two competing products and in addition, we'll competitor synopsis that they announced a strategic collaboration with TSMC.
Folks, obviously did not see any stimulus press release coming from you guys write about TSMC.
Innovation platform for them, which will start tomorrow, so kind of kind of wonder what how are you positioning and what's the progress.
Integrity <unk> versus from a competing platform. Thank you.
Yeah. Thank you that's a good question so it dumps of integrity.
Like I said in my remarks, I think we are pretty confident of our position.
And a lot of the <unk> thing, it's not one thing it's a combination of a lot of things right now.
<unk> systems are more package base.
Some of them are more been a practice technology based some of them more in deposit base, which is a more digital technology.
All in all you know data is the most unique platform, we have leadership in packaging with Allegro.
Analog and virtually so the digital and analytics and all the analysis tools that clarity and Celsius.
And they are all integrated has been best of class solutions I think so.
So we are pretty confident of our position and the response we are getting.
To your question that TSMC TSMC is a great partner off cadence and we are working with them on a variety of things.
<unk> integrity three D C and I seem to give you example, one of the leading.
Mobile customers did it <unk> IC.
Solution with that with us in TSMC and one of the key things there was the terminal profile and they use Celsius to do silicon validation that Celsius absolute floor.
Or a three D. Icy temperatures simulation. So I think GIC is going to be big and it requires multiple products and multiple implementation flows and we are pretty confident in our position.
Thank you.
Maybe a second question not sure. If this has been asked before since I recently just been started following you guys I wanted to ask a question about <unk>.
But the entire IBM 2.0 strategy I know you probably don't want to be too customer specific about that that turnaround after by Intel.
It's too materially more in my opinion and your thoughts.
How cadence can do to support in house Grand turnaround efforts over the coming years, and if you don't want to comment specific maybe maybe give us some color at the industry level. Thank you.
Yes. Thank you for the question.
Until we are glad to do more of it until actually you know they have the Intel foundry announcement and also some new programs you know like Ramsay with the government.
And I'll just go through what is already public bye bye.
But Randy Who's our head of Intel foundry.
Along with our customers and ecosystem partners.
Including IBM cadence Synopsys and others, we will bolster the domestic semiconductor supply chain.
So this is the official government from Intel and I think we let them speak for their strategy, but we would like to do more of it and bill.
Thank you.
Thank you.
Our final question will come from the line of Vivek Arya from Bank of America. Please proceed with your question.
Thanks for taking my question and congrats and best wishes to Nip Glenn on the road for my sentence Ryan.
So my first one on your new Mecca and point twice acquisition, and just kind of a general expansion into system analysis, and Cfd could you give us a sense how big is it today.
How big can it be over the next one two years.
Importantly, when does that start becoming accretive to.
Do the 11 11, 5% kind of growth model that you have.
Yeah, we're very picky, I think see Oh I'm sorry.
Oh go ahead John.
I'm, just saying, we're very pleased with the <unk>.
M&A integration for anybody can put in place.
Hugely significant from a revenue standpoint, right now, but we would expect them to be accretive next year.
Got it.
And then maybe as a follow up I think John you mentioned some higher costs in Q4 are they one off costs or do they become kind of the baseline as we start to think about opex for next year.
Yeah, Great question, I mean, sure slightly expect slightly higher cost in Q4 versus Q3, partly due to we did a bit of catch up in hiring in Q3 and of course anyone we hired in the second half of Q3, we will have a full quarter of that expense in Q4.
Where you didn't have a full quarter of expense in Q3, so slight uptick for that and then secondly, I expect a little bit more on commission costs.
Costs, because we expect bookings to be stronger in Q4, because I would anticipate that we will finish the year with a stronger.
Or appeal than we started the year.
So we're expecting a good bookings quarter in Q4, which will add a little bit of commissions expense and then also we have slightly higher TV.
Hum.
Yes.
That continued into Q1, I know youre, not giving Q1 guidance, but all else being equal does that become kind of a baseline for going into Q1.
So I feel very good about the continuing operating leverage I don't think there's any near term ceiling on operating leverage I mean, you'll see the word up to 37% now, but it's the fifth year in a row that we've delivered.
More than 50% incremental margins. So you know every dollar of revenue growth from 2017 until now we're dropping through more than 50 cents of that revenue growth through to operating income.
So as long as we're delivering incremental margins of over 50%.
Operating leverage should continue to rise.
Got it thanks very much.
Thanks.
And that concludes our question and answer session I would now like to turn it back over to Lindsey Tan for closing remarks.
Thank you all for joining us this afternoon.
Is that the exciting time for cadence.
Growing market opportunities and strong business momentum.
Our intelligent system design strategy is paying off.
Very nicely.
We benefit from new opportunities in design excellence.
System innovation and pervasive.
<unk> and then expanded total addressable market.
We are proud of the innovative and inclusive culture that we've built at cadence.
We're grateful for the recognitions that we've received over the years.
Clothing, most recently being named as one of the world's best workplace for the sixth time by Fortune.
And a great place to work as far as being named to Newsweek's list of most loved workplaces.
The 2021.
And lastly on behalf of our employees and our product direct us.
Thanks, our customers and partners for that.
Continued trust and confidence during this unprecedented times.
Thank you for participating entities cadence third quarter 2021 earnings conference call. This concludes today's call you may now disconnect.
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