Q4 2021 Cadence Design Systems Inc Earnings Call
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These include Cadences. Most recent reports on Form 10-K , and Form 10-Q , and the cautionary comments regarding forward looking statements.
Today's earnings press release, and please note that our 2021 Form 10-K .
Was.
Filled about 130 today specific type.
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In addition to the financial results prepared in accordance with generally accepted accounting principles or GAAP. We will also present certain non-GAAP financial measures today cadence management believes that in addition to using GAAP results in evaluating our business. It can also be useful to review results using certain non.
non-GAAP financial measures.
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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 reconciliations of non-GAAP financial measures with their most direct comparable GAAP financial results.
Today's earnings press release.
Copies of today's press release dated February 22022 for the quarter and fiscal year ended January one 2022 related financial tables, and the CFO commentary.
Also available on our website.
For the Q&A session to date, we had also asked 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 Andre.
Good afternoon, everyone and thank you for joining us today.
I am pleased to report that <unk> delivered outstanding financial results.
'twenty one.
As we exceeded our original growth target.
Achieving 11% revenue growth.
37% non-GAAP operating margin.
And operating cash flow of over $1 billion.
Generational trend that densify AG Hyperscale computing and.
In AI ml are propelling the digital transformation of multiple end market.
And fueling a golden era for semiconductor and electronic system.
The robust design activity, providing a strong tailwind.
We expect our innovative solution to continue driving broad based business momentum in 2021.
And 2020 to accelerating revenue growth and profitability.
John will provide more detail in a moment.
Our intelligent system design strategy tripled our total available market.
And our compelling portfolio of chip package.
And system design solution.
Leveraging our computational software expertise uniquely positions us to capture a wide range of exciting opportunity.
During the year, we significantly expanded our core EDA and IP solutions footprint with market shaping customers.
New customers accelerating their adoption of our expanding systems portfolio.
We deepened our partnership with leading foundry IP and cloud service provider and launched key.
Key strategic initiative.
Earlier today, we announced an exciting strategic partnership with <unk> systems.
That brings together cadence Lego and vessel <unk> experience platform to.
To provide virtual tours and experiences while optimizing the entire value chain.
Electro mechanical system modeling design simulation and product lifecycle management.
Central to our strategy as an investment commitment innovation.
And in 2021, we introduced 13 significant differentiated products.
Across our business groups.
That will be key to our future growth.
Now, let's talk about some of the product highlights for both Q4 and 2021.
Our digital and final business had another strong year with.
10% revenue growth.
Deployment of our digital control delivering industry, leading quality of the zone.
At the most advanced nodes continue to accelerate as more than 45 additional customers adopted during the year.
In 2021, we strengthen our relationship with Apple.
A leading mobile phone manufacturer in China, with our digital full flow and an expansion of our system design and analysis product.
We expanded our relationship with <unk>.
We used our digital full flow delivering the best quality of the zone.
To successfully tape out several advanced node automotive and Hyperscale of design.
Our transformation cadence <unk> solution and Godfrey sophisticated ml technology.
Explore the entire design speed and.
And intelligently optimize digital full flow.
Automated manner.
Several leading customers are increasingly deploying cadence <unk> and production design and getting exceptional power performance area and productivity benefits.
Including the market shaping U S automotive company that.
Reduce the power consumption of critical five nanometer.
Associate block by nearly 10% in just two weeks.
Additionally, a premier.
Asia Pacific system company reduce power of the four nanometer design by 10%.
With 100, and the effort of manual optimization.
And then applied the cadence or EBITDA trained animal model to other design further improving the power and productivity.
And cadence that it enabled a marquee U S semiconductor company.
To tape out the next generation SSD with the five X productivity improvement on several critical block.
Okay.
The rapidly escalating system verification and software brings us challenges continued to drive heavy demand for our <unk>.
Verification food fraud solutions.
Delivering industry, leading verification throughput.
Our verification business grew 20% year over year fueled by a record year for hardware.
Our next generation Palladium zone, two and Protium <unk> two platforms.
<unk> best in class solution to address system verification.
And software brings up challenges of complex multibillion Gabe design.
Demand for these platforms that will launch earlier last year.
Has greatly exceeded our expectation as customers quickly embraced this superior performance capacity and deeper capabilities.
The compelling value offered by the common front end compiler.
Led to more than half of our customers purchasing both the lithium as well as protein platforms during the year.
Our hardware family added over 30, new customers and over 100 repeat orders during the year.
With particular strength seen in hyper scaler mobile and networking vertical.
Our verification software product.
Include <unk> logic simulator, and Jasper formal verification platform continued to proliferate.
The Jasper, having an exceptional year, adding 40 new customers.
<unk> strength in compute and Hyperscale.
Today's complex memory and mixed signal high frequency design underscore the need for high performance.
And very accurate circuit simulation.
Our spectra platform has been long standing leader in simulation Tech solutions for analog and RF design.
And now with the recent addition of special effects.
Our next generation fast Spice simulator for memory and larger Soc design.
We provide the industry's most comprehensive cross domain so good simulation platform.
Several leading customers have already deployed spectre effect on their production design.
Such as SK Hynix has successfully evaluated and deployed the specter ethics emulation solution.
To improve the design methodology and productivity in DRAM verification.
And micron adapted adopted Specter FX simulator.
As it became very compelling for us by simulation performance for <unk>.
Accurate verification of the DRAM and flash design.
In 2021, our IP business grew in multiple vertical vertical markets, including mobile.
<unk> hyper scaler in automotive.
Okay.
Our leadership DDR and PCI IP portfolio.
Continue to proliferate and the five nanometer and lower process nodes.
And our design IP portfolio had several wins at top customers.
Including a significant expansion at a marquee U S semiconductor company.
Our 10 silica DSP portfolio.
<unk> continued to expanding its footprint in audio.
Imaging computer vision and ml application.
And during the year, we introduced the <unk> silica AI platform.
Delivering scalable and energy efficient on device to edge AI processor.
Rising system complexity for advanced <unk>.
Automotive and <unk> application is driving the need for a seamless platform solution across design simulation and analysis.
Our system design and analysis business that is driving our expansion beyond EDA <unk>.
Continued its strong momentum delivering 18%.
Your growth.
Got it.
It is the rapidly growing demand for sophisticated multi die integration packaging solutions and our evolutionary integrity <unk> solution.
The widening tightly integrated system planning and implementation and analysis technology.
Has been gaining strong customer traction.
Our integrity GIC platform was recognized at TSMC or IP ecosystem Forum.
By winning partner of the year Award for joint development of CD fabric design solutions.
As well as winning a customer choice award for <unk> IC design.
Okay.
Last year, we furthered our system analysis strategy.
Building out the disruptive comprehensive multi physics platform.
By expanding into Cfd domain through the acquisitions of new Mecca and point towards.
The integration has gone well and we have added nearly 100 new logos.
Including competitive wins across multiple end markets, notably in aerospace and defense.
We expanded our collaboration with Schneider electric a leader in digital transformation of energy management and industrial automation.
As the standardized on <unk> X platform for PCB design as well as adopting our clarity solution for system analysis.
Yes.
In Q4, we significantly strengthened our partnership with <unk>.
Hi.
With a wide ranging expansion of EDA product along with deployment of our system design and analysis solutions.
Which will enable them to develop more complete end to end solutions for their customers.
And butterfly Netflix leverage our clarity <unk> solver.
Advanced mobile ultrasound deadline.
Lastly usage of our cadence cloud portfolio continued to scale.
With over 250 customers using our solutions in the cloud.
Cadence cloud ready products are enabling our customers to realize meaningful scalability performance and productivity benefits.
Through the availability of several flexible use model.
Now I will turn it over to Jon to provide more detail on the Q4 result.
Our 2022.
Thanks Alan.
Good afternoon, everyone.
I am pleased to report we exceeded all of our key operating metrics for the fourth quarter and fiscal year 2021.
The underlying strength and demand for our essential technology and solutions continues to drive consistent growth across the business.
A strong finish to 2021 combined with a relentless focus on innovation customer success and inclusive employee culture and continued execution.
Helps cadence to achieve revenue growth of 11%.
And the fifth consecutive year of non-GAAP incremental margin of greater than 50%.
Which contributed.
Two an increase in our operating cash flow to $1 $1 billion for the year.
Here are some highlights from the fourth quarter of the year, starting with the P&L.
Total revenue was $773 million for the quarter and $2 $98 billion for the year.
non-GAAP operating margin was approximately 36% for the quarter.
37% for the year.
GAAP EPS was <unk> 63 for the quarter.
$2 50 for the year.
Our non-GAAP EPS was <unk> 82 for the quarter and $3 29 for the year.
Next turning to the balance sheet and cash flow.
Cash balance was $1.09 billion at year end, while the principal value of debt outstanding was $350 million.
Operating cash flow in the fourth quarter was $216 million and $1 one zero billion.
For the full year.
Dsos were 40 days and.
And we repurchased $612 million of cadence shares during the year.
Before I provide commentary for Q1 and fiscal 2022, I'd like to take a moment to share the assumptions embedded in our outlook.
Our outlook assumes a non-GAAP tax rate of 17, 5%.
At the midpoint of our 2022 outlook, we are resuming our annual upfront revenue percentage will increase slightly from 2021% to 2022.
This is primarily due to higher upfront revenue in Q1, resulting from a very strong hardware bookings finished to 2021.
And finally, our outlook assumes that the export limitations that exist today will remain in place for all of 2022.
Embedding these assumptions into our outlook for fiscal 2022.
We expect revenue in the range of $3 32 to $3 38 billion.
non-GAAP operating margin of 37, 5% to 39%.
GAAP EPS in the range of $2 46 to $2 56.
non-GAAP EPS in the range of $3 70 to $3 80.
Operating cash flow in the range of 1.15 to 1.25 billion.
And we expect to use at least 50% of our free cash flow to repurchase cadence shares in 2022.
For Q1 2022, we expect revenue in the range of 852 $817 million.
non-GAAP operating margin of 40% to 41%.
GAAP EPS in the range of 70.
74 cents.
non-GAAP EPS in the range of $1 to $1 <unk>.
And we expect to repurchase approximately $250 million of cadence shares in Q1.
Our CFO commentary, which is available on our website includes our outlook for additional items as well as further analysis and GAAP to non-GAAP reconciliations.
In conclusion, I would like to take a moment to acknowledge the entire <unk> team.
Continuously improving our three year revenue growth CAGR.
And delivering over 50% incremental margin for five years in a row.
As a result of the compounding the compounding impact of all of their efforts I am pleased that at the.
Mid point of our outlook, we expect revenue growth of 12% and over 38% non-GAAP operating margin for 2022.
As always I'd like to close by thanking our customers partners and our employees for their continued support and with that operator, we'll now take questions.
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 now.
The company. Please limit your questions to one primary question and one follow up question, we will pause for just a moment to compile the Q&A roster.
Your first question will come from the line of Joe <unk> with Baird. Please proceed with your question.
Great Hi, everyone.
I wanted to start in the past cadence has alluded to certain products segments, maybe having a faster growth opportunity over the course of <unk>.
Coming here.
Curious if maybe you could give an updated rank ordering and I guess two questions, one where maybe the growth skew that.
More towards verification in 2022, given the ongoing new product cycle, you alluded to and then.
Maybe one day to this question is there any region that might contribute outsized growth for a cadence over the coming year.
Yes, Joe This is a great question and let me start and then John can comment more I think what I would like to say is that.
We feel that all business groups in all product areas.
All regions are performing well at this time so.
So we feel pretty good.
And the design activity, we see.
We are expecting good growth across our portfolio.
And I think the <unk> feel good there.
We are positioned.
Okay.
Yes, Joe I would add to that that.
If you look at the CFO commentary on page five we've outlined the three year revenue CAGR by product category.
I find that the most interesting view for me because it's typically one contract cycle with customers.
And if you look at how we finished 2021 you have kind of strong double digit growth across all lines of business with the exception of custom IC.
Which is high single digit growth looking at the guide that we have for 2022.
Expecting slight improvements on all of those.
For 2022 over 2021, the one I've hedged back a little bit with IP I've got low teens growth in the in the guide for IP.
For 2022.
There may be upside to that but right now I feel comfortable with low teens.
Okay, that's great and then.
Just on the outlook and maybe more of a mid term focus question, but if I leave <unk> side, given the elevated upfront product contribution.
<unk> like the rates of growth for the remainder of the are not too far from his three year CAGR as we're talking about 11, 12%.
<unk>.
As you kind of think mid term and we've gotten some mid term frameworks from some of your peers in the space would you expect the cadence to deviate much from Kennedy is 11 12, 13% rates of growth.
Did you say you seem to have quite a good degree of visibility. So it seems like it may be it sustainable but curious on your thoughts there.
Yes, I can take that Andrew.
So on that Joe.
Yes, I think youre right to assume that so we're expecting a very strong Q1.
We have a lot of visibility into core EDA.
We continue to expect double digit growth there I called out IP IP, we typically aim for.
Low teens, if you look at the three year CAGR, we've achieved mid teens in that but we typically aim for low teens, because we're looking for the highest level of sustainable profitable revenue growth there.
I don't want to give the team the opportunity to walk away from some business. If it's not if it's all of the profitable nature, we want.
And then on system analysis, we've typically driven to kind of high teens there.
Yes, I kind of expect that the challenge is probably be on.
In terms of visibility on the upfront business on the functional verification side on the hardware side, it's tough to have visibility into the second half of the year until we get to the summer.
Okay very helpful. Thank you.
Your next question will come from Charles <unk> with Needham <unk> Company. Please proceed with your question.
Good afternoon, and thank you for taking my question.
As we exit 2020 , one could management and kind of provide us an update on how much of your revenue coming from system companies versus semiconductor company. So how does that number stack up with the previous years.
Richard I think what.
What we say is that about 40% 45% of our revenue.
It's coming from.
System company versus semi companies and over the years that has increased maybe used to be 40% now trending towards 45.
As you know there is a.
More and more system companies doing silicon.
Semi companies are becoming more system companies and system companies, becoming more semi company. So that is a good trend for us and for the industry.
And the other thing is our product portfolio is also adding as you know more system design and analysis products.
That makes sense.
More of a system company. So that's a trend that is positive and I expect to be extra project work cadence for the future.
Got it got it so maybe the next question is really are.
John .
Your first quarter guidance operating margins well north of 40% I know you have this metric that caught out 50% flow through for the Bronx, New radar.
As your operating margin kind of get to that 40% plus at one point of margin expansion. If you don't change that.
That that target, 50% flow through it's going to moderate at some point I was just wondering any thoughts update our thinking here.
When do you think you want to raise that flow through rate. Thank you.
Yes, Charles good good observation there yes.
I mean, we're very pleased with the fact that operating our incremental margins have come through it over 50% for five years running now it's actually averaged 55% over those five years on.
And I'm delighted that the start for this year I think the incremental margin that we have included our embedded in our outlook on the initial guide is the highest at the record that incremental margin for cadence on our outlook.
So, we're certainly targeting to try and drive that up to 50% and higher again for for this year.
But naturally that's.
As long as we're driving incremental margins that are higher than the underlying margin will continue to see operating margin expand.
Got it thank you.
Your next question will come from the line of Jackson Ader with Jpmorgan. Please proceed with your question.
Great. Good evening guys. Thanks for taking my questions.
The on the system interconnect analysis.
Growth rate in that.
Product segment came down.
Pretty steadily in person, but its way through the year. So I'm just curious.
What gives you the confidence to kind of go from this fourth quarter growth rate in the low single digits back to that low double digits that might be embedded in the outlook.
Hi, Jackson this is John .
One of the easier ones to forecast given that we're mostly recurring revenue.
In that segment.
And like I say, we've embedded high teen growth into the into the guide there like I say most of that's coming from recurring revenue.
Okay great.
And then I.
I guess on the on the partnership with <unk>.
So.
Just curious what the commercial relationship will actually look like and then also I mean.
I guess I would've thought that maybe cadence was already trying to kind of go from your PCB business to three D electromagnetics and so how does.
With your own organic solvers that you've developed so I'm just curious how this all fits together and what your organic electromagnetics business the puzzle.
Yes, that's a great question.
What I would like to say that I'm really excited about this partnership with diesel because it's like too lean.
Our leaders in their respective spaces coming together to address the problem that I think are becoming more and more broader and that's where the industry growing so as.
As you know the market is moving towards the mechatronics.
Mechatronic combination of mechanical and electronic.
With.
Software and data in dog and then silicon driving you know all these engine.
And.
And then when you come from the mechanical side, whether it's a car or a washing machine or airplane.
First electronics Youll see is the PCB right and then.
The chip.
And the chip.
So with the Lego without positioning right through it.
<unk> platform.
And then of course, the chip and the pack.
Good solutions.
And then with the so they are the leader in three D mechanical design.
And with product lifecycle management.
So this is a natural combination of doing a seamless integration.
All of the data and also the application that spend now from all the way from concept to.
To design to manufacturing.
So it's truly a broad ranging partnership and it's a multi year partnership and we are at the beginning of it.
And to your specific question on <unk>.
Electromagnetic.
That's the one specific application that we have and we are developing but theres a lot of things that there is still it does reach out completely.
Ah.
Our toggle toward cadences, and our plans are things like <unk>.
<unk> mechanical design things like that.
Their leadership in product lifecycle management, So I think there's a good synergy between the two leaders coming together to address this whole space.
Mechanical plus electronic systems.
Alright, great. Thank you.
Your next question will come from the line of Jay <unk> with Griffin Securities. Please proceed with your question.
Thanks, Good evening.
Other road, we've seen over the last six months to 12 months.
Quite material increase in semiconductor R&D spending.
For a number of the large semiconductor companies.
Lots of great inflection in R&D, when we look at numbers from AMD, Intel Nvidia Qualcomm and so forth.
To the extent that EDA, perhaps as a percentage of semi R&D has held steady or even increased in recent years would it be fair to say that a good part of this inflection in R&D has already been reflected in your business, Hence your $500 million increase in backlog over the past year end.
This is what it accounts for at least part of your accelerated growth expectation.
For 2020 to second question.
You've had a recurring theme.
In your technology development for the last number of years.
Commonality and.
Integrations across the product line did.
Did you mentioned, perhaps Richard the integrations, whether organic or organic and acquisition.
Might have been the most meaningful for you in terms of incremental business.
For example, AWS and Allegro or anything else you might.
You might care to mention.
Yes, Jay I mean, as you know I think we are likely.
Like you said, the R&D spending, including semi and and the other thing.
Just to point out is all the system companies doing semi design okay.
You know is also adding to that.
And also our portfolio is increasing beyond traditional semi to system design and analysis like we discussed.
So I think all of these factors are contributing to this trend.
And I don't see any.
We see a lot of design activity continuing to be very very strong across.
Multiple region across multiple vertical so we feel pretty good where.
Where we are and where the market is growing.
On the second part of your question on in terms of integration.
We always believe that you have to provide a complete solution.
The industry has to move beyond point tools that used to happen.
10 years ago to more of these comprehensive solution and we have driven that across all segments.
Digital implementation starting from 2015.
Verification announced system design and analysis and also at the same time partner with the right leaders as it makes sense like we did with MATLAB few years ago and now the distance.
Now in terms of return I think there are a lot of areas.
Our growing the whole.
<unk> and chip led based design.
I think thats growing nicely and the whole notion of integrity in the overall solution together.
Analysis and implementation and provide a good vector.
<unk>.
There's a whole hardware platform vanadium and protium with a common compiler.
And then integration with the rest of the verification suite I think there's still a lot of legs to grow loan growth after that.
And then the third area I would highlight it's truly excited as the cadence of rebates and this integration of AI driving.
Design I think we are still in the early innings and the results are phenomenal and I think that's going to provide an order of growth going forward. So just a quick like these III ducting J to highlight.
With <unk> IC design being one of them the whole verification and software bring up being another one and then AI based design and city, but it's been good.
Good.
Okay.
A clarification on that relationship would it be fair to say that it pertains to both your direct and indirect channels and then perhaps both their direct and indirect channels.
Yeah.
Yes. So Jay this is a wide ranging arrangement like you said and it will start with the enterprise and then go to the other parts of the market.
Okay, great. Thanks, Andrew Thanks, Chuck.
Your next question will come from the line of Pradeep Ramani with UBS. Please proceed with your question.
Hi, Thanks for taking my question congratulations on the strong results.
I have a question about the trajectory of margins through the year it feels like.
What is strong guidance in Q1 despite.
What is what are you could argue either way.
Big hardware quarter.
And yet the full year margin guide.
The point is roughly 38, 5%. So is there something going on with the mix, maybe it's a big IP backhaul.
Or you guys are just way too conservative I mean can you help us sort of understand that trajectory and I have a follow up.
Yes sure for deep this is John .
I mean, effectively what I've got in the first half versus second half is probably 50% revenue first half versus second half, but on the expense side is probably $40 million 51, because we've got we typically do our pay increases and our promotion cycle effective July one so you probably see something similar to last year, where.
Margins are probably higher than the first half compared to the second half and then we can continue to improve efficiency through the year. So that we start the next year higher than where we started the previous year.
On the hardware side on the upfront piece I mean thats certainly.
Benefiting Q1.
It's a pipeline business. So it's tough to see answer the second half of the second half of the year. So the second half of the year may be conservative right now I don't know.
Thanks, and for my follow up on hardware.
Can you speak to maybe where you are with respect to penetration I mean, I get it that maybe visibility.
Yeah.
The second half is not clear, but just in terms of penetration with respect to the installed base and maybe even youre growing customer base, where do you think we are.
As ill call it Q1.
Yes, let me take that on.
The hardware business.
I think there are two big trends that I would say that are helping us.
And as the market is growing.
I think the need for more and more hardware based verification and software bring up is increasing and this is.
True for multiple vertical.
Because.
As he said like more semi companies become system company than most system companies becomes semi company.
Of course, the reason there are system companies is they have a software stack right. So you have to develop the chip and also bring up software. So I think one thing is that the overall market.
Is increasing.
The segment being I think our competitive position is improving tremendously on top of that so.
The old days, we wouldn't participate that much in the prototyping side and we were more on the palladium side, but now with the combination of vanadium and Protium and these brand new system.
And we feel pretty strongly in terms of.
How well we're positioned in the market. So I think the market is growing and our position with vanadium and protium together with the new system.
It's pretty good so I think that.
It's difficult to predict in terms of.
Like your exact question of how far into it but it still appears to me that both of these are new.
Positive market will continue to expand over the next few years and we feel pretty good about our market position there.
Thank you.
Okay.
Your next question will come from the line of Gary Mobley with Wells Fargo Securities. Please proceed with your question.
Hey, guys hope all is well thanks for taking my question and congrats on a strong finish to the year and strong start to the fiscal year 'twenty two.
I wanted to give a little bit of a pushback on your fiscal year 'twenty. Two guidance is a first class pushed back too so don't take it the wrong way.
If I look at your next 12 month backlog as disclosed in your 10.
10-K, it's up about 18, 5%.
If you back out the extra week from fiscal year 'twenty, two just grew 13, 3%.
So how do the assumption that the backlog Didnt increase as a result of the hardware sales you are expecting in the first quarter why why the conservative view on fiscal year 'twenty two revenue growth.
So Gary.
Great question.
I'm not sure I, followed the logic on the backlog growth but.
<unk>.
Theres nothing unusual about the structure of backlog I think we have about 75% of of the guide for next year's guide coming out of backlog.
Our backlog includes or Poe plus.
The IP access arrangements.
Sure if youre looking at the <unk> only if you're looking at the full backlog number but essentially.
In round numbers about $2 5 billion of the three 350 is coming out of backlog.
Is that what youre getting at.
Yes, I mean thats helpful and we can talk more about it offline but.
A related note.
Going way back to the end of 2019 I think.
<unk>.
Sat down for whatever reason your trajectory in a recession.
The right for the wrong reasons, perhaps putting some license renewals in that late 2019 timeframe and.
Now, we're about two and a half years pass that mark.
And so should we are we seeing now or should we expect to see some higher level of renewal activity given that we're kind of at the two and a half year Mark.
Oh, yes, good question Kevin.
Generally in terms of duration. It was it was typically within our normal range. We typically have most of our customers are predominantly on a three year baseline contract and then they'll do add ons throughout the contract that co terminate that generally results in roughly two and a half year kind of average duration.
And if you look over a contract cycle I think we're always in and around the two and a half years on a weighted average over a three year booking timeframe.
Yes <unk>.
I mean, very very strong finish to the year. We ended up at $4 4 billion and the only thing that was unusual I called out in my prepared remarks, because I wanted to make sure that you're under.
There was slightly higher kind of upfront revenue percentage in that guide than in the prior year typically I mean, we say what 85% to 90% of our revenue is recurring.
Generally which means that's what 10% to 15% is upfront last year. It was 88% was recurring 12% was upfront in the three to $3 50, it's actually 87% recurring and 13% Upfronts at 1% higher.
Front revenue, but a lot of thats falling into Q1 and Thats why we have a strong Q1.
Got it that's helpful. Thank John Thank you.
Thanks.
Your next question will come from John Pitzer with Credit Suisse. Please proceed with your question.
Yes, guys. Thanks for let me ask the question congratulation on the solid results John maybe just to follow up on Gary's question, and maybe to ask it a little bit differently, but.
If Q1 and the full year plays out as guided today Q1 will be about 25, 6% of full year guide, which is I go back in history would be the highest ever and I know the linearity of some of the hardware stuff is falling in Q1, but is the SKU really so.
Such that this could be a historic year and I guess as you think about visibility.
Into the back half of the year, especially around some of the hardware sales.
When would that start to materialize, one way or the other.
Jeff do you think it's going to be an historic year. I mean, you can see from the guide and the.
And the CFO commentary that the three year CAGR continues to accelerate I think with the 12% revenue growth embedded in the guide for 2022 or three year CAGR is naturally rounding up to 13%.
When we achieved 12% this year.
It's off of the back of a strong Q1.
The second half of the year, it's tougher to predict for hardware. So that's why that's why I kind of model it out at 50% of our revenue falling in the first half versus second half if we see the demand continue to flow through into the second half then.
We will take the guide up but it's but it's tough to see that right now because typically our visibility and hardware and the pipeline is about six months.
So that's basically how we constructed the outlook.
That's helpful and then as my follow up I'm wondering if you could.
Me better understand the impact of AI in the design process a couple of questions.
What percent of the designs out there are utilizing AI and at the endpoint, what's the intended impact of having more AI functionality embedded in design is it higher velocity higher variety is it bringing down the entry costs for new customers.
It would be the longer term impact you see on the design business and the growth rate there.
Yeah. That's a good question and you're already has several key observations.
Question. So I think we are still.
In the early inning.
But the demand for cadence very brisk and solutions.
Nominal nicely at this point, we are engaged with almost all of our major customers.
I think if you look forward like 12 to 24 months, it's not a question of not great question.
Who is using AI driven design is like who is not here, but I think most of our top customers.
Are moving towards that.
And we are seeing you know phenomenon, Doug I mean, some of the numbers that you mentioned.
10% power savings.
20% timing. These are numbers that you typically get when.
When you move from one process node to another process node.
And we are able to get these kind of improvement purely on results of better algorithms and you know.
AI and mathematics, so I think the value proposition is.
Very well understood and recognized but all our customers.
The engagement.
They're across all regions and across all verticals.
And I think it is just like to give you an analogy to driving a car once you get used to more automated cars.
People are not going back to driving cars the old way, so I think that new wave will be.
AI and cerebral as being the primary driver of how people, who design chips and the benefits are significant.
And mostly in productivity.
Because the customers can do more things with the same number of engineers.
In BPA and also geographically, sometimes they have different skill level in different geographies and all that can be kind of.
Made better with these cities.
<unk> Bruce kind of solutions, so I'm very optimistic I think the demand is.
It is through the roof.
The solutions are providing real meaningful there's also actually I expect almost all customers will move towards this.
Two growing our digital and the other thing I would like to add is that even though we started say versus digital.
<unk> technologies can be applied to other parts of the design flow. So so overall I think that can provide a pretty big benefit to the industry.
Not at the risk of getting too far over your skis against the three year CAGR. That's been accelerating the does the addition of AI allow you to maintain the gains you've made or does it actually open the promise of even a faster growth rate ahead.
I think the promise is there you just have to see.
How how much of the design process is taken over by AI and.
The other thing is that the good thing with <unk> is that when we run these things when the human is running at their unlike one like one <unk>.
Ceramide at a time typically when <unk> done it mathematically we typically run 10 20 machines in bad loans and each of them, we have like 16 Cpus.
So we had only one hundreds of Cpus out thousands of Cpus and multiple design.
Iterations and battle, but it's not like driving one car automatically it's like driving tank car automatically parallel and finding.
What is the best.
Way to get 1.8 viewpoint, so that naturally consumes more licenses and I think it's good.
The value that our customers are getting now in terms of.
The guidance and all we just have to see I mean, I think it's a.
It's promising we just have to see and we don't want to project too much until we actually see what it's doing to the license count and utilization and what percentage of design teams are moving to a purely AI driven flows. So I think we will update you more over the next.
12 to 24 months.
But the progress is there, but we have to see the uptick.
Perfect. Thanks, guys.
Okay.
Your next question will come from the line of Gal Munda with Baron Baird. Please proceed with your question.
Yes.
Good afternoon. Thanks for taking my questions. The first one is just let me piggyback on the Cerberus.
Obviously.
Like you said early innings, but just to try to understand how you capitalize on that in terms of contract.
<unk> does it increase or just contract size and negotiations of a lucrative pricing or do you actually include it as a new SKU that goes in and and it's a direct uplift to existing contracts or it helps them the contract renewals. So like when do you usually engage customers on that.
Yes.
So this is a new product so of.
Of course, we have to make sure that the base products are good and best in class right. So the <unk> platform in general.
Full digital flow.
And then <unk> is the additional.
Capability and broaden it.
But we provide to our customers and so it's the add on sales.
On top of that but wanted to make sure not just the AI part is the base tool is also good and typically the customers will when they will run so your risk there on multiple copies like I mentioned.
Sure.
Our digital my question would it would it increase the usage of the core products actually because that could be more.
Is this in the past you were limited by the number of engineers.
Companies had say if it expense does it widen the bottleneck and potentially they need the more of the basic products as well that's what I was thinking kind of does it gets lumped together.
Yes, absolutely thats a great observation, so because when you answered even just mathematically it is running like 10 or 20 experiments in parallel and really when you're running it manually youre running one or two experiment. So so nicely really it is increasing the use of the base product.
Awesome. Thank you and then just as a follow up obviously been talking and seeing the system.
Segment growing outbreak the other segment.
The posted great.
Great performance.
What kind of if you think about the verticals that you made the comment around the open hyper scaler like what is the what is the growth you're seeing on the OTA for example, and in that area and Mike maybe if you can give us an idea of how important <unk> is for you today versus.
Other vertical.
Yeah. That's a good question in general auto has multiple aspects to it right the semiconductor design.
And I think.
<unk> historically, because we have both.
<unk> analog mixed signal and digital verification, we have traditionally done well with the auto companies.
Semiconductor ecosystem of the auto company.
Because we always had the broadest portfolio in auto chips are naturally mixed signal.
Now I think as we have more of these new products like <unk>.
Cfd or our system analysis auto is a very important segment for that too which is beyond.
Just a semiconductor component this is actual physical car in.
And then electromagnetics and the turmoil.
Nymex up that and in the last last quarter, we talked about for example, Tesla being one of them.
Key customers. So I think auto for overall system analysis market is a very important market I mean, I think the three big markets, there are auto and Aero and defense and high Tech electronics, which includes of course the semiconductor in the Hyperscale. It. So I think all of these three markets are important and as the.
Expand our system portfolio do you want to make sure we do well.
Three of them.
For example, likewise acquisition, we made is particularly strong in Aero and defense.
So I think the to answer your question, we have been traditionally strong in the semi part of the auto and now with the expanded product we have opportunity to engage on the overall are too, including the mechanical and the system design and also this partnership with DSO amplifies that connection beyond semi to more system and software.
Okay. That's very helpful. Thank you so much.
Okay.
Your next question will come from Vivek Arya with Bank of America. Please proceed with your question.
Thanks for taking my question I'm.
I'm curious if this increase that a lot of the foundries are putting at the leading edge is it pricing some EDA customers, perhaps part of the market are maybe making some customer stay at the end minus one node or be more judicious about the use of the most leading edge because given the expense going to it just what is the core.
Relation if any between the cost inflation right from the foundry side and the customer's willingness to engage with designs at the leading edge.
And so I think the way I would.
Is that I think.
<unk> always wanted to make sure we address the whole.
Range of process technology. So we always are.
Looking at the most advanced node and I think thats going very well and more and more investment in demand for that.
And we are looking at three nanometer and most of the R&D that two nanometer.
Always worth more than more.
Traditional legacy nodes.
And then now with RF.
And and <unk>.
<unk> and tablet based design one of the key things is that.
As you know the customers and mix can mixed process not everything has to be at three nanometer maybe some chips are at three nanometer somewhat at seven nanometer.
So I think the key thing from from cadence standpoint is to have a very broad solution that addresses the chip led and <unk>. The most advanced digital part and the mainstream.
Legacy nodes.
And as the customers make different choices, which is best for their end market.
And economics, we are in a position to support them.
So what I would like to say is that.
There is more and more divergence of how the customers put the systems together.
The advanced node and legacy nodes and chip led and I think we are in the best position to provide the solutions for the entire set and that the customers choose how they want to use it and we'll be there to support them in whatever choices to make in terms of process node and foundries and design methodologies.
That's very helpful and maybe a follow up if I may for John kind of two related questions. So John the earnings growth you're guiding to this year is 14%, but free cash flow growth very modest on only 4% I guess capex is doubling but very modest free cash flow growth and kind of related to that.
You're essentially spending on half of the buyback allocation in Q1 does it mean buyback activity kind of modest on the rest of the year.
No Sir.
Okay.
Yes, so on the buyback side.
Our first priority for cash is investment in organic R&D, and then to a lesser extent, it's kind of smaller tuck in M&A that gives us an opportunity to accelerate our roadmap.
But when we after that we look at repurchasing shares and we look to use our free cash flow traditionally we've been using over 50% of around 50% of free cash flow to repurchase shares every year I expect that we'll do at least 50%. This year as I said in the prepared remarks, we're planning to repurchase $250 million worth of shares in Q1.
And that's a lot more than 50% and that's just we're taking the opportunity to repurchase shares at the prices.
That we see today.
In relation to your observation on the free cash flow I mean, some of that is the timing of cash we received a lot of cash in the last week of last year, but also in 2022, we're picking up some additional extra cash taxes.
There was a as a result of there was a provision of the tax cuts and jobs Act of 2017 that went into effect on January one.
2022 that requires companies to capitalize and amortize R&D cost rather than expense those costs as occurred.
Encourage.
That creates.
A bit of an extra cash tax burden for us in.
In 2022, and we've embedded that into the guidance.
Okay. Thank you.
We have reached the end of the allotted time for questions and answers I would now like to turn the call back over to <unk> for closing remarks.
Thank you all for joining us this afternoon.
It's exciting time for cadence as we enter 2022.
<unk> business momentum and are driving semiconductor and system industry.
Tremendous market opportunity.
Our intelligent system design strategy.
<unk> execution and customer first mindset.
Driving accelerating growth as we continue to expanding our portfolio with new innovative solutions.
We are proud of the innovative and inclusive culture, we have built at cadence.
And are grateful for the recognition we have received over the year.
And on behalf of our employees and board of directors.
Our customers and partners.
Their continued trust and confidence in Canada.
Thank you.
Okay.
Thank you for participating in today's cadence fourth quarter 2021 earnings Conference call. This concludes today's call you may now disconnect.
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