Q2 2022 Cadence Design Systems Inc Earnings Call
Ladies and gentlemen, thank you for standing by good afternoon. My name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the cadence second quarter 2022 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
You would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Thank you I will.
I'll now turn the call over to Richard <unk>, Vice President of Investor Relations for cadence. Please go ahead.
Thank you operator, I would like to welcome everyone to our second quarter of fiscal year 2022 earnings Conference call.
I'm joined today by <unk>, President and Chief Executive Officer, and John Wall, Senior Vice President and Chief Financial Officer.
The webcast of this call and a copy of today's prepared remarks will be available on our website cadence dot com.
Today's discussion will contain forward looking statements, including our outlook on future business and operating results.
Due to risks and uncertainties actual results may differ materially from those projected or implied in today's discussion.
For information on factors that could cause actual results to differ please refer to our SEC filings, including our most recent forms 10-K, and 10-Q and today's earnings release.
All forward looking statements. During this call are based on estimates and information available to us as of today, and we disclaim any obligation to update them.
In addition, we will present certain non-GAAP measures, which should not be considered in isolation from or as a substitute for GAAP results.
A reconciliation of GAAP to non-GAAP measures are included in today's earnings release.
Today's earnings release for the second quarter of fiscal 2022.
The related financial tables, and CFO commentary are also available on our website.
A Q&A session today, we would ask that you observe a limit of one question and one follow up you.
You may re queue, if you would like to ask additional questions and time permits.
Now I'll turn the call over to honor it.
Thank you Richard.
Good afternoon, everyone and thank you for joining us today.
Cadence delivered outstanding financial results for the second quarter.
With accelerating broad based demand.
Our innovative solutions driving double digit growth across all our business groups.
We beat our guidance on all key metrics and our significantly raising our financial outlook for the year.
The resulting in 17% year over year revenue growth.
As well as exceeding the rule of 55.
Don will provide the details in a moment on both our Q2 results.
And the updated outlook for the year.
Generational trends such as five G hyperscale computing and autonomous vehicles.
Underpinned by AI ml and data analytics are accelerating their digital transformation.
Across multiple industries.
Notwithstanding the macroeconomic uncertainties, our customers continue relentlessly investing.
And the next generation innovation with semiconductor companies benefiting from increasing silicon content and system companies investing and building custom silicon.
These exciting trends are fueling robust design activity.
And driving a strong secular tailwind for end to end core EDA.
And expanding systems portfolio.
In Q2, we significantly accelerated our intelligent system design growth strategy.
Introduction of five new innovative products.
As well as through the transformation overnight scientific and future facility.
<unk>.
That expand our Tam and position us well for future growth.
This morning, we announced our intent to acquire open ice scientific.
Leader in computational molecular design space.
Over the past few years, we have successfully extended our multi decade chip level simulation expertise.
The system level first too finite element analysis.
And more recently two computational fluid dynamics.
With open eye, we are now expanding into molecular modeling and simulation and emerging area of growing interest as pharmaceutical and biotechnology company.
Accelerated with emphasis.
On software solutions for drug discovery.
The acquisition will allow us to leverage our solar and AI ml leadership, along with large data management infrastructure to.
To significantly enhance the speed and accuracy of Biosimilar <unk>.
This will drive disruptive innovation in the life science market through increasing the efficiency and success rate of traditionally long and complex.
Drug discovery process.
Additionally, open a market leading cloud native SaaS platform.
Capitalize on our cloud expertise, thereby benefiting highly computationally intensive biosimilar <unk>.
Open eyes scientifically proven innovative solutions are used by 19 of the top 20 pharma company <unk>.
Including Pfizer and Astrazeneca.
As well as leading biotech firms.
We excitedly look forward to Dr. Anthony Nichols and the open a team with a deep science expertise enriched domain knowledge joining cadence.
During the quarter, we also acquired future facility a pioneer in the datacenter digital twin space at.
That expands our CSD portfolio and extend it to data centers.
In addition to electronics cooling analysis future facilities innovative solutions.
Enable customers such as HP enterprise digital Rio and.
And Equinix.
Optimize the terminal in further efficiencies in the data center.
Using physics based three the digital twins.
By helping reduce their carbon footprint.
We're excited to welcome has done well easy and his talented team located.
Now moving onto Q2 product and customer highlights.
A key element of our approach has been to partner closely with market shaping customers and win their confidence by providing leadership platform solution based on best in class engine.
In Q2, we deepened our long standing partnership with Samsung through a wide ranging expansion of our core EDA.
System software and hardware solutions.
And we are excited to have extended our collaboration with AMD Huawei.
<unk> commitment to innovative core EDA hardware design, IP and system software solutions.
Demand for our core EDA software remained strong and broad based.
Our digital business had another strong quarter.
With 14% year over year growth.
By key competitive displacement as well as significant expansions at several market shaping customers.
Adoption of our digital full flow delivering industry, leading quality of results at the most advanced nodes.
<unk> continued to accelerate with close to 25, new wins in the first half of the year.
Our innovative automated and scalable Gaydon city based solution.
This unique self learning capabilities allow users to explore the entire design space and intelligently optimize the digital full flow to meet their aggressive PPA schedule and productivity goals.
Guidance, our EBITDA continues to see accelerating proliferation.
Especially with market shaping customers as they realized transformative results across a broad range of complex production designs and getting as much as 30% reduction in leakage Butler and up to 30 ex productivity improvement with.
But designed tests ranging from design technology co optimization.
Automated floor plan implementation and final PPA push.
At our recent cadence like Silicon Valley user conference.
Key customers, including Intel Nvidia Broadcom.
So Andrew.
And Renaissance.
Presented their remarkable successes using cadence citigroup.
Functional verification is becoming a key differentiator as we enable our customers to improve.
System quality and speed up the time to market.
In Q2, our business grew 13% year over year led by strong growth in hardware and Jasper.
Strong secular demand for our industry, leading <unk> and proteomics two platforms.
Especially from hyper scale, AI ml and server customers.
Led to our best Q2 ever for hardware.
With 10, new customers and nearly 50 repeat orders.
More than two third of the orders during the quarter included both the platforms.
Our IP business had a very strong quarter growing 30% year over year as the continuing IP outsourcing trend drove strong design in foundry activity for our star IP.
Especially at the most advanced nodes.
Our leading DDR IP solution continues to proliferate strongly.
Actually it hyper scaler and memory customers.
While our pcie portfolio had significant wins with compute an automotive company.
In silica has continued to expand its footprint and true wireless stereo and Bluetooth headsets.
And had notable wins in automotive mobile and <unk> end markets.
Our system design and analysis business that is driving expansion beyond <unk>.
<unk> continued its strong momentum in Q2, delivering 29% year over year growth as we increase our footprint in several verticals.
Including high Tech electronics hyper scaler.
Aerospace and defense and <unk> communications.
In Q2, Sienna a leader in intelligent networking adopted our advanced node custom design photonics multi.
Multi physics analysis and to have these last three D packaging solutions or.
The next generation coherent optical solutions.
Exploring design complexity, coupled with rising product development Diamond cost is driving the need for innovative packaging solutions that can handle heterogeneous integration and a modular manner.
We are seeing accelerating growth for our integrity <unk> IC solution.
Which is the industry's only comprehensive platform with our in house technology.
That provides a truly tightly integrated optimized solution across system level floor planning implementation packaging and system analysis.
Our system analysis portfolio, delivering disruptive performance and capacity.
<unk> without compromising accuracy is proliferating nicely with both semiconductor and system companies.
For example.
In addition to multiple repeat orders.
<unk> solar was adopted by leading companies, including a marquee U S semiconductor company.
A market, leading U S company, providing RF and mobile communication chips, and a global marquee hyperscale.
We also announced a new multi year partnership with Mclaren racing.
We will use our fidelity cfd software to investigate airflow.
We're also very excited to have introduced optimality explorer, which brings the revolutionary AI technology implemented in Gaydon cerebral to the system space for the very first day.
This solution enables the delivery of optimized design of authentic faster on average than traditional manual methods with up to 100 X speed up having being seen on certain design.
Ophthalmology is quickly ramping up with early adopter customers as they realize these compelling results.
With Microsoft Media take Baidu, and Ambarella, having provided strong endorsement for the product.
As we innovate on our systems technology, we're also enhancing our go to market strategy.
In Q2, we launched our transformational on cloud SaaS and E Commerce platform.
Bailable solution offering instant access.
Flexible use models for companies adopting a cloud first approach.
This new E. Commerce platform is the industry's first and offers a consumption based use model.
Several customers, including Bombardier.
The scope and Amazon Web services have endorsed the significance of this game changing platform.
To summarize.
Semiconductor and system companies are relentlessly investing to accelerate their innovation.
And this continues to drive secular tailwind for our business.
Q2 was an outstanding quarter as we.
Erase the financial outlook for the year.
While advancing our intelligent system design strategy.
And setting us up well for future growth by expanding into new end markets with our open eye and future facilities acquisition.
Now I will turn it over to Jon to provide more details on the Q2 results and our updated 2022 outlook.
Thanks, Andrew and good afternoon, everyone.
Cadence achieved strong results for the second quarter of 2022, driven by broad based strength across our technology portfolio.
All of our product categories saw double digit year over year revenue growth and we exceeded all key financial and operational metrics in Q2.
Here are some of the financial highlights from the second quarter.
Total revenue was $858 million.
GAAP operating margin was 33% and non-GAAP operating margin was 42%.
GAAP EPS was <unk> 68.
And non-GAAP EPS was $1 <unk>.
Operating cash flow was $325 billion.
We used $350 million of cash to repurchase cadence shares and at the end of the quarter, our cash balance totaled $1.03 billion.
While the principal value of debt outstanding was $350 million.
Before I provide our updated outlook for fiscal 2022.
And what we expect for Q3.
I'd like to take a moment to share certain key assumptions embedded in our outlook.
We assume the export limitations that exist today will remain in place for the remainder of the year.
We have included the expected impact of both the future facilities.
The open eye acquisitions.
At the midpoint of our fiscal 2022 outlook. We have included the following for these acquisitions.
Revenue of $15 million Thats, one $515 million.
And an operating cash outflow of $60 million largely due to our expectation that some of the price paid for these acquisitions will flow through operating cash in the second half.
Embedding these assumptions into our updated outlook for fiscal 2022, we now expect.
Revenue in the range of $3 $47 billion to $351 billion.
GAAP operating margin in the range of $29, 25% to 35%.
non-GAAP operating margin of approximately $39 25 to 42, 5%.
GAAP EPS in the range of $2 59 to $2 65.
non-GAAP EPS in the range of $4 <unk> to.
To $4 12.
Operating cash flow of approximately $1 $2 billion.
And we expect to use our free cash flow to repurchase approximately $900 million of cadence shares in 2022.
For Q3, we expect revenue in the range of 862 $880 million.
GAAP operating margin in the range of 26% to 27%.
non-GAAP operating margin of 37% to 38%.
GAAP EPS in the range of 58 to 62.
non-GAAP EPS in the range of 94 to 98.
And we expect to use approximately $150 million of cash to repurchase cadence shares in Q3.
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, 2022 was shaping up to be another strong year for all of our businesses a cadence.
I am pleased that revenue growth and profitability continue to improve.
At the midpoint of our annual outlook, we now expect revenue growth of 16, 8%.
non-GAAP operating margin of 39, 75% and.
non-GAAP EPS growth of 24, 3%.
As always I'd like to close by thanking our customers partners and our employees and with that operator, we will 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 we will pause for a moment to compile the Q&A roster.
Your first question is from the line of Gary Mobley with Wells Fargo Securities. Your line is open.
Hey, guys. Thanks for taking my question and let me extend my congratulations to a strong first half to the fiscal year.
And I want to start off by asking if you could give us some additional detail as to the.
How material multi physics simulation software is becoming now as a portion of your systems analysis business.
And then along the same lines.
Given that you are now moving into areas like Aerospace life Sciences data center infrastructure and other non semiconductor end markets.
Maybe if you can share with us your view on how you need to build out your sales channel or your SaaS model to address these non traditional customers for cadence.
Yes, Hi, Gary.
Great question.
So first of all we are very pleased with our.
<unk> execution to the intelligent system design strategy.
And as you see we are doing well applying computational software expertise to our core and new areas. So all our businesses are doing well.
And as we expand into with the systems space.
We did with <unk>.
With finite element and then CSD.
I also think that it's very important to not just disrupt existing areas of stimulation, but also get into new areas is an emerging area of the stimulation.
We announced today with the molecular stimulation.
And that naturally adds to our customer base and expanding in.
The opportunities now.
Now in terms of open I it will operate as a as a.
When it closes later it will operate as a.
Independent business unit, but in general like we have talked about in the past that we are focused on expanding our go to market and if you look at that on cloud is in.
Another way to reach the long tail and expanding customer base.
And overall structure, our go to market to be.
Slightly different in these new areas, that's only natural because it's not just the direct channel, but also the indirect channel and now the cloud cloud and SaaS offerings.
Okay I appreciate that Andrew.
If I could just add some.
Yes.
Maybe said differently doubleclick on the backlog metric that $5 6 billion.
The notable changes to the average license duration and maybe if you can speak to the diversity of the backlog growth.
Yeah sure Gary Great question.
Yes of course, there is an element of time in that backlog number I think if you look at the <unk> number.
That excludes the 171 million from other arrangements with noncancelable commitments, it's about $5 4 billion in <unk>.
Of which.
About 51% of that is.
Is backlog Thats expected to revenue in the next 12 months. So it's your 12 month backlog I think the annual value.
Of that backlog.
I mean, your backlog number of five for our European number five four is a mix of your annual value and time.
<unk>.
And we're very pleased.
We paid.
Roughly $2 75 billion in one year backlog now very pleased with us.
The systems business itself is about 12% of revenue and probably a similar percent of that's one year backlog.
Okay, and just to be clear there wasn't one or two particular customers that drove the increase in the backlog.
For the first half was very strong for us and we had some big renewals in the first half as you recall last quarter, we talked about our U S. Marquee semiconductor company in which we had a record contract.
We had big renewals again in the in the second quarter, but I think the thing to focus on when you look at the backlog is.
Certainly the one year backlog I think reflects.
The quality of the backlog and then the $5 4 billion reflects the amount of time that we booked with customers.
Got it thank you guys.
Your next question is from the line of Vivek Arya with Bank of America Securities. Your line is open.
Thank you for taking my question.
I go back to the start of the year when you reported Q4.
It suggested that 12% growth rate for the year and now you're guiding to 17% and I'm curious what.
Created this big 500 point Delta.
I don't remember the same kind of pace of upgrades of revenue.
For the year, especially if the business has such a recurring elements I'm. Just curious what is driving this space of upside surprise and I guess part B of this is.
What is the sustainable growth rate of our cadence is it but 10, 11%, which is where what your exit Q4.
Revenue implies or is that now have this new baseline of mid teens growth or so.
Hi, Vivek all great questions.
I'll take that.
Thanks.
Essentially get the start to the year, we were we were guiding to 12% with an expectation that.
I think we expected, 87%, 88% of our revenue to be recurring in nature, but it's been a great year certainly great first half for our functional verification, particularly the hardware business there.
IP has done quite well in the first half.
So we've had a higher mix of upfront revenue in the first half and that's driven up the percentage to it.
Certain extent I know, you're rounding up to 17% I think if you if you extract the impact of.
Inorganic revenue that we've included in our outlook for the remainder of the year. The 15, if you take the 15 million, it's up to 16 five.
<unk> now.
And thats largely due to growth across all of our business lines. Our business lines are all performing really really well.
But theres also a higher mix of upfront revenue this year compared to what we expected at the start of the year and compared to last year.
Thanks, John but I guess, then the part B of.
This mid teens growth, whether it is 15 or 16 or 17 is this the new baseline of growth for cadence has something changed.
To get you into the higher tier of growth or is the 11% right that you had previously and the three year CAGR basis, it's still the right way to think about cadence from a longer term.
Perspective, and if I could just sneak in.
When did that what happens if there is a downturn I know your business model is fairly resilient, but if there is a downturn in semi is which part of your business will see its first.
Okay Vivek did a number of questions in there, let me unpack it a little bit.
Yes.
I think if youre looking at the underlying growth rate in the business I think a good way to look at it is to look at the three year CAGR.
Because that reflects how well the business has done over one contract cycle typically our customers sign up to three year contracts with US now there has been.
More upfront revenue business this year and if you look at our Q, we disclosed that in quite some detail I think if you unpack that youll find that the.
Our recurring revenue business is probably growing at 12% 13%.
<unk> revenue business. This year are upfront revenue this year compared to last year is up considerably.
The recurring revenue was much more sustainable going forward.
Uh huh.
And then let me let me hand, you over to Andrew can talk about.
The impact to our business if there's a if there's a downturn I think the recurring revenue is very very.
Sustainable.
Yes, Hi, Greg.
A great point, but as you know our business is resilient and I would say that's probably.
The main reasons one is.
We are critical to our customers' R&D are essential products for their current and future Roadmaps.
And then second reason is we are highly ratable business as you know as John explained, so which gives some higher visibility and also traditionally historically strong renewal rates.
And the third thing I would like to highlight is that we are very diversified.
Both in terms of geographies.
End markets. So I mean, we are carefully watching the macroeconomic environment.
But overall I feel we are in a good position to weather.
Whatever uncertainty isn't is in front of us and the generational trends are intact right. So we always talk about the three big drivers for our business.
One is the semiconductors and the growing need for semiconductors, and Digitization of all verticals.
Second thing is the system companies doing more silicon and our growing relationship with the system company.
And then the third big Mega trend being our own move beyond EDA into Tam expansion to system design and analysis through different kind of stimulation and optimization.
And that also brings more customers and more diversification so overall.
Feel good about where we are and what we are watching the environment very closely.
Thanks very much.
Your next question is from the line of Jay Felicia <unk> with Griffin Securities. Your line is open.
Thank you Tidjane.
Let me start with you.
Referring back to a couple of important points.
You made in your keynote addresses both the cadence like two months ago.
That two weeks ago. So you've said two things that are I think important one is that.
AI based EDA is in effect the next big thing in EMEA and the question there is.
What are the implications for you in terms of.
Your services model and specifically the kind of a.
<unk> capacity that you need to provide over time to support that for both semi and systems customers and then Relatedly you said two weeks ago very interesting point.
That <unk> needs a framework for optimizing multiple runs.
The single volume history EBITDA. So the question. There is do you in fact have that now or are you still working on getting to that point and then second question for John .
Excluding the acquisitions, how are you thinking about head count additions for.
For the balance of the year use interestingly as compared to other tech companies.
We maintained a fairly high level of open positions.
So how are you thinking again ex acquisitions about your ability to bring on both R&D and <unk> for the rest of the year.
Yes, Hi, Jay first of all thank you for attending the keynotes.
Great.
Now in terms of like I always say in our strength is in computational software and.
I want to highlight computational software as you know is not just simulation because we have big expertise in simulation.
But it is also optimization and design.
<unk> has a rich history of writing one of the most complicated optimization of design software I mean for example, things like pacings out in digital implementation of probably the most complex.
<unk> software that's available.
And what I'm really excited about use of AI is not just in simulation, but more importantly in optimization and you can see that in cerebral cerebral coupled with.
With our digital flow with Nols can provide dramatic results. So I think this combination of.
Inside out our simulation based or in a science based physics based simulation whether it is in.
And chip design, a system level combined with outside in AI for optimization is a huge mega trend that.
So the simulation plus AI combination of analysis, plus optimization and of course, we applied it to.
Two.
Chip design with Cerberus, and then recently I am also very excited about optimality, but we have dramatically well because similar technologies can be applied to system simulation.
And to your point.
<unk> and <unk> based on reinforcement learning requires this multi run kind of.
Optimization, which traditionally EDA hasnt done so we were pretty pleased with the progress I mean, there is another area. As you can note, which is like verification that also requires multi run. So we will we are tying all these things together and applying this kind of <unk>.
Multi around data analytics, and AI across our product portfolio and the benefit of that to our customers is of course, they can do more with our software and what I expect is that over time, we should be able to get more and more.
Spend of their R&D to automation with things like city, Bruce Optimality and overall automation.
John you can comment on this.
Yes, yes, Jay in relation to head count I think if you notice the second half, where our margins ticked down a little bit in comparison to the first half that's all due to employee costs really.
Our merit cycle kicks in on July 1st so pay increases impact us in the second half of the year and we expect to continue hiring at pace in the second half of the year Chip design activity has been very strong books with semiconductor and systems companies.
And the market for talent as is.
It's very competitive.
With how we performed on the great place to work survey for the last six seven years I think we've had no issues with attracting talent and we're not slowing down our hiring activity and of course as you mentioned, we're bringing in head count through through M&A as well.
Okay.
Thank you both.
Your next question is from the line of Charles <unk> with Needham <unk> Company. Your line is open.
Hi, good afternoon, and thank you for.
Joining me to ask a couple of questions.
And John I would like to add.
Ask.
How much of your business is kind of exposed to startups.
The reason why I want to ask this.
Is that over the last two or three years.
C funding going into semiconductor startups has been picking up very significantly and I believe that probably benefit your business.
In some way over the last few years might have added to your growth.
With now.
The macro economic condition, and kind of worsening and financial conditions kind of tightening.
I think some investors are starting to worry about the startup fundings and potentially impact their EDA spending.
Wanted to ask you your thoughts can you first quantify to us how much of your exposure.
Two the startups and specialty it that was a pre revenue and secondly, what do you think.
In terms of impact to our business over the next 12 months.
After the segment. Thank you.
Hi, Charles Yes, Great question as I mentioned two to J, a few moments ago chip chip design activity is very strong I mean, I think within the startup community, we've probably observed more caution in spending but demand is there right across the board.
In terms of quantifying our exposure our exposure is quite small on the startup side. If you recall back in I think it was Q2 2020.
At the highest of the original outbreak of Covid and that pandemic.
I think at the peak, we reserved $70 million of bookings for and they were mainly small customers and at that we collected we've probably collected half of that eventually but.
So I don't think there is I don't think we have any significant exposure on the startup community.
And like I say, although they're being cautious demand is there right across all our businesses.
Got it everything else also charged everything we know is in the guidance, we have already I mean to the extent that there's been any.
Impact in our in our pipeline that's already included in the guidance.
Got it got it thank you.
Maybe a second question on the <unk> IC solutions congrats on some of the new traction certainly, including the adoption by the U S marquee customer.
I wanted to ask.
A little bit high level question.
I believe it was TSMC, who recently.
Kind of introduced something called <unk> blocks and one of the things.
In there I think the blocks or platform is the interoperability of data.
The EIC designed towards across different vendors and honors and John I know you guys have been working on this full flow solutions all under one roof for three GIC and obviously it doesn't mean that they are not operable with other vendors towards buyback.
My question is whether your foundry customer what they are trying to do with that diminish some of your product differentiation, there or what do you see.
What does that mean to you what's their GIC strategy. Thank you.
Yeah, Hi, Charles.
Good point.
First of all we are very happy like you said with the progress in <unk> IC.
And then we are glad to work with all the leading foundries and we have a strong partnership given our position in the market.
No I think this is not any different than traditional EDA, though I mean typically the customer always has a choice to put flows together by multiple tools.
But even if you look at traditional EDA because of advanced node and can design competent laxity integrated solution gives better results.
But even our traditional EDA tools can be run as a mixture of other tools if the customer. So chooses so we will allow that flexibility in all our our domains, but we always believed that a fully integrated solution with verification.
Vacation products, our digital products and same thing with <unk> gives the best results the best PPA and that's what we're all about we wanted to deliver the best PPA and productivity to our customers and work with the leading foundries to provide that.
So I don't see any different from other areas, but at the same time to focus on.
The.
The benefit of the full flow is is even more critical.
Thank you.
Your next question is from the line of Harlan sur with Jpmorgan. Your line is open.
Good afternoon, and congrats on the solid results and execution. We think dynamic that you are semiconductor companies are focused on and their customers are focused on given geopolitical national defense continuity of supply risk.
Suffocation of manufacturing partners right.
Currently.
Particular foundry, but are now putting in place.
Support one or more.
Partners. So this is going to entail new library development, new IP blocks, but theyre purchased organically developed and even flawlessly I think for both leading edge analog.
That the chip companies have to add design engineers every time, the new foundry partner so.
It is this focus on manufacturing diversification of revenue.
Revenue EDA and IP businesses as well I would think so but wanted to get your views.
Yeah, that's a goodbye.
Sure.
We are.
Very diversified.
Across all segments and geographies and also.
Have the great privilege of working with all the leading foundries in the world through the strength of our products.
<unk>.
And we are more focused on the design side than the manufacturing side, because all our products are used on the design side, but that having been said as there is more onshoring our investment.
By by several governments now bye bye to improve manufacturing it does require.
More tool enablement, EDA enablement and IP work at all of these foundries, so I think that drives more demand for our products in.
And we are glad to work with all of these.
Partners as we move forward.
At the macro level, we are focused on the design side and our end customers to build their solutions, but any kind of manufacturing driven uptake and enablement is good for our business.
Yes, exactly okay, and then on your IP business and on compute I think you mentioned isn't familiar.
<unk> spring continue.
Intel and AMD Rolling out new processor platforms right supporting next generation memory storage interfaces, we've got DDR pcie.
Pcie Gen five EXL.
And then all of these processors are rolling out at the end of this year. Additionally in networking, we're kind of still early days and the adoption of 100 gig <unk> for 204 hundred gig optical you guys. Obviously have a strong position here as well are in all of these segments. So with all of these trials is firing in customers looking to adopt these next gen Stanley.
Interfaces on the chip designs.
The IP business continued sustained strong year over year growth from here.
Yeah, that's a good point I think.
Our IP business is doing well.
As you saw in our results, even Q2 results and and we always focus on Star IP.
And we.
We have design IP portfolio like you mentioned with DDR Pcie and a high speed <unk> with the legal platform. So right now we are seeing strength across those.
All of those segments.
We are pleased with that and like I said design activity is strong and it is a key part of the design activity.
And.
So we're happy with the progress there, but I would say that the strength is broad based across not only our different product lines, but also different customer segment.
And this overall trend.
I just wanted to say IP also benefits from the trend of outsourcing as customers focus on their core expertise as you know they will outsource AP. So yes overall I think is a good business and also our.
Our focus on Star IP has improved the profitability of our IV business in the last few years and we're pleased with that trend.
Yes, Thank you Oliver.
Your next question is from the line of Blair Abernethy with Rosenblatt Securities. Your line is open.
Yes, thank you and nice quarter gentlemen.
Just wanted to dig in a little more on the open eye acquisition honored.
It looks like this is.
More almost a platform play in the health care vertical is that the right way to be looking at it looks like this has a number of partnerships.
And a bunch of different areas I Wonder if you can just.
And that's sort of where you see yourselves going with this with this product.
Yes, that's a good question I mean first of all.
I said, we believe we are.
Best in class combination software right that includes stimulation and design simulation optimization.
Ed.
When we go into simulation.
Space in our system simulation.
We wanted to existing areas, which are well established markets like finite element in cfd and we've talked a lot about it over the last year.
But also new areas.
Each are emerging and will be important for the next 10 years and I can't think of a better emerging area then molecular stimulation.
And now it has multiple applications to materials and plastics and other things, but one of the exciting applications is of course life Sciences in Biosimilars.
So the thing I liked about it is not only is it stimulation and should have all the property the system simulation like SCA and CMV. It has application to a very important vertical.
And companies in the Cfd area, which is again system simulation.
In the data center vertical which is a huge thing for sustainability and power consumption that don't need to tell you how important cloud and data center. It. So both of these acquisitions have inherent strength, which ties to our core traditional software expertise, but also.
Sure.
Good and important growing verticals and they have strong positions in those talking about open either used by 19 of the top 20 pharma company.
And also very broad portfolio and leadership in molecular design and simulation and also a very good go to market with SaaS and they are the first company in that space to go to SaaS and cloud native applications. So it has multiple characteristics that we like and at the same time, having a talented team and the same thing is true.
For future facility. So that gives you the idea of we want to go into strong horizontal capabilities and stimulation, but also an exciting verticals.
That's great thanks very much.
Your next question comes from the line of Joe <unk> with Baird. Your line is open.
Okay.
Great Hi, everyone I wanted to go back to the discussion on current RPI.
If I did on my math correctly it looks like.
<unk> growth has accelerated from the teens to this quarter was north of 30% and John If I look at that $2 7 billion number just again.
Next 12 month revenue estimates.
Your visibility on those MTN estimates is extremely high right now or the MTN estimates are far too low.
So I guess I'll just put that question to you whether based on the level of bookings activity year to date, you do feel like your visibility looking ahead is particularly good and whether you might be able to actually say, yes. At this point in time, so early on that recurring revenue growth.
Actually even accelerate as you think about the next 12 months.
Yes, Joe Great question, a great observation, yes, we're very very pleased the fact that.
The current backlog are the kind of one year backlog has gone up to about $2 75 billion.
That reflects strength across all of our businesses, but also reflects the amount of hardware business, we've signed up in the.
In the last few quarters.
You might see that the second half of the year.
We've taken up the second half of the year, I think $52 million and compare compared to where we thought we'd be this time last quarter.
And a lot of that has been in the functional verification side, because the amount of hardware business that we've signed up I think in the Q as well Youll see some new disclosures for raw materials and finished goods in our inventory we're building the systems as fast as we can to deliver to customers, but the.
The $2 75 billion of current black backlog, our one year backlog.
Probably has a bigger proportion of hardware in it this quarter than last quarter.
Okay, Great that's helpful and then.
Just on the topic of macro.
And I think backlog is the answer so that I can see.
Like design starts are just how your customers are thinking about the next two to three years that is changing for the worse at all but yes.
Yes.
Any any details on that next level like.
Maybe engineering seats at customers.
The ACB opportunity per seats.
Talking on this call a lot about the advanced design solutions, which I think actually I guess cadence more revenue leverage per seat than maybe it was true in the past is there anything there that.
That might give you pause just in thinking about macro our customer spending or.
I hate to make this title is different argument.
Some of the things you're seeing truly different relative to the past down cycles.
So Joe I wouldn't tell you at this time is different at all I think what I would highlight though.
I would like to distinguish that were part of the design cycle not the manufacturing cycle and production cycle and design continues unabated.
I have seen among the smaller kind of startup companies a bit more caution on spending but demand is still there across the board I mean, there may be cautious there might be slightly longer lead times, but we're still seeing really strong demand across all lines of business.
But that's again, we're in the design cycle.
Typically what we've seen in the past as people double down on design.
At times like this.
Great. Thank you very much.
Your next question is from the line of Jason <unk> with Keybanc capital markets. Your line is open.
Great. Thank you for fitting me in.
I wanted to ask about the new E Commerce, our E store capability that you've discussed in the prepared remarks.
What products are available.
In that channel today, and then who are you specifically targeting to use this.
Yes, good question.
We are pretty good.
So busy quarter right, we have a lot of exciting innovations this time and one of them is.
Is on cloud and we've been working on it for a while as you know.
We've been doing SaaS and cloud for a while.
For several years now, but I think the word we see opportunity with on cloud is combining SaaS with e-commerce.
And this is especially true for and it was built for the long tail of the market. So that the reach can be higher.
Our go to market strategy now we are surprised that even some of the big customers wanted to use it like you saw some of the big customers like Cisco and Bombardier and Amazon Web services will reference in our announcement, but the goal is to reach the long tail and for that reason the initial set of products.
The systems product.
Our system analysis tools.
Fidelity clarity and Celsius.
<unk> with our debt and Allegra, so thats the initial focus and we'll see how that goes because these those products traditionally have much higher number of customers than.
Traditional EDA products and so therefore in a cloud and SaaS E. Commerce platform is is good for.
For these kind of customers and then we rolled it out to certain geography, then we'll expand that over time. So so far we have lot of users over there and we are closely monitoring how it goes but so far so good.
And just to remind you. We also have the hardware cloud for palladium and protein, but the on cloud focus is mostly for the system projects.
Into the long tail, Dolby or positively centralized by some big customers.
Yes.
Yes.
It's an interesting development.
And then maybe just a quick one for John just to clarify.
Nice race through the second half when we think about visibility into the last six months.
Hardware and IP strength that you talked about is that expected to continue at the same pace as the first half, perhaps how should we think about that.
Yeah. So great question I would say when I got it.
I would characterize the second half raise has been very much driven by strength across all lines of business.
There has been probably more of it for functional verification because of strength in the hardware business on the IP side I still maintained.
Low teens growth in the outlook. Despite the fact that we had a really strong Q2 and part of that was because.
The boost for Q2 revenue that we saw I think we landed at like 30% revenue growth year over year for IP in Q2.
He was expecting mid teens.
But about <unk> $13 billion of IP revenue in Q2, I had originally forecast to happen later in the year in Q4.
And that happened in Q2, but so I haven't taken the year up for that.
But I mean, we're seeing we're seeing strength right across all lines of business and puts the race I would say most of it is is hardware, but then the rest is split across all the other lines of business and maybe IP is the smallest amount of the race.
And Theres 15 billion for the M&A of course right.
Okay, Yes, yes, that's right.
Perfect. That's all from me.
Okay.
There are no further questions at this time I would now like to turn the call back over to the CEO and a route Dev Ken.
Thank you everyone for joining us this afternoon.
We are excited about our business momentum and the tremendous market opportunities ahead of us.
On behalf of our employees and our board of directors.
Thank our customers partners and investors for their continued trust and confidence in cadence.
We look forward to speaking with you again.
Q3.
'twenty two earnings call.
And have a great evening.
Thank you for participating in today's cadence second quarter 2022 earnings conference call.
This concludes today's call you may now disconnect.
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