Q4 2022 Cadence Design Systems Inc Earnings Call
Yeah.
Speaker 1: Thanks for watching!
Speaker 2: Good afternoon. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Fourth Quarter and Fiscal Year 2022 Earnings Conference call.
Speaker 2: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. Thank you. I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead. Thank you.
Speaker 3: Thank you, operator. I would like to welcome everyone to our fourth quarter of fiscal year 2022 earnings conference call.
Speaker 3: I'm joined today by Anuradh Devgan, President and Chief Executive Officer, and John Wall, Senior Vice President and Chief Financial Officer.
Speaker 3: The webcast of this call and a copy of today's prepared remarks will be available on our website cadence.com.
Speaker 3: Today's discussion will contain four looking statements.
Speaker 3: including our outlook on future business and operating results.
Speaker 3: Due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion.
Speaker 3: For information on factors that could cause actual results to differ, please refer to our SEC findings, including our most recent forms 10K and 10Q in today's earnings release.
Speaker 3: 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.
Speaker 3: In addition, we will present certain non-GAAP measures which should not be considered in isolation from, or as a substitute for, GAAP results.
Speaker 3: Reconciliation of gap to non- GAAP measures are included in today's earnings release.
Speaker 3: Today's earnings release for the fourth quarter of fiscal 2022, related financial tables and CFO commentary are also available on our website.
Speaker 3: For the Q&A session today, we would ask that you observe a limit of one question and one follow up.
Speaker 3: You may recue if you would like to ask additional questions and time permits.
Speaker 3: Now I turn it over to Honorhood.
Speaker 4: Thank you, Richard. Good afternoon, everyone, and thank you for joining us today.
Speaker 4: I'm pleased to report that Caden's delivered record results for 2022.
Speaker 4: As we exceeded our guidance yet again.
Speaker 4: achieving 19% revenue growth.
Speaker 4: and over 40% non-GAAP operating margin.
Speaker 4: Cadence's innovative solutions are essential and especially relevant in the current environment.
Speaker 4: enabling customers to achieve their increasingly challenging design goals.
Speaker 4: Zecular mega trend such as 5G, hyper scale computing and AIML that are driving sustained long term semiconductor and system growth remain unchanged.
Speaker 4: I mean ongoing macroeconomic uncertainty.
Speaker 4: companies continue making significant investment in their next generation product, resulting in robust design activity.
Speaker 4: We expect our pioneering solutions to continue fueling broad-based business momentum in 2023.
Speaker 4: driving strong revenue growth and profitability.
Speaker 4: John will provide more details in a moment.
Speaker 4: Our intelligent system design strategy greatly broadens our total available market.
Speaker 4: and leading end-to-end EDA IP hardware and expanding system analysis portfolio uniquely position us to capture a wide range of market opportunity.
Speaker 4: During the year, we introduced nine significant innovative products across all of our business groups and we expect these to be key drivers of our future growth.
Speaker 4: The age of AI is upon us.
Speaker 4: and Cadence provides several groundbreaking
Speaker 4: computational software driven generative AI technologies.
Speaker 4: at both the chip and system level unified by JEDI, our differentiated big data analytics platform.
Speaker 4: Our customers are seeing dramatic results with these solutions delivering highly optimized design and unprecedented efficiency gains.
Speaker 4: Additionally, by automating repetitive tasks and producing new ideas,
Speaker 4: Our generative AI frees up engineers to focus on more advanced, high-value activities, opening up more opportunities for innovation.
Speaker 4: During the year, we also materially expanded our core EDA, IP, and system solutions footprint at market shaping customers.
Speaker 4: In Q2, we extended our collaboration with AMD to a far-reaching commitment
Speaker 4: to our innovative Core EDA hardware design IP and system software solutions.
Speaker 4: In Q3, we deepen our partnership with BAE Systems.
Speaker 4: across our core EDA and systems portfolio, including proliferation of our digital full flow and analog products, and a broad expansion of our PCB and multi-physics system analysis solutions.
Speaker 4: And in Q4, we broaden our relationship with a global leader in memory and storage solutions.
Speaker 4: through extensive proliferation of our custom digital and system solutions.
Speaker 4: We also expanded our strategic partnership with a global leader in networking and telecommunication.
Speaker 4: through their renewed commitment to our core EDA, IP, and system solutions.
Speaker 4: In addition, we further our partnership with leading foundry, IP, and cloud service providers and won six Open Innovation Platform Partner of the Year awards from TSMC.
Speaker 4: Now let's talk about some of the product highlights for both Q4 and 2022.
Speaker 4: Our digital IT business finished another strong year with 17% revenue growth.
Speaker 4: Deployment of our digital full flow, delivering industry-leading quality of results at the most advanced nodes, continue to accelerate with nearly 50 additional customers adopting it during the year.
Speaker 4: Our digital software is now deployed in all top 20 semiconductor companies.
Speaker 4: We are pleased with the accelerating growth.
Speaker 4: of our front-end Janus and Jules tools and sign-off products such as Tempest and Qantas, complementing the broad proliferation of innovation.
Speaker 4: Our transformative cadence cerebras AI driven solution.
Speaker 4: Continue to deliver impressive PPA and productivity gains.
Speaker 4: across a wide range of designs.
Speaker 4: resulting in broader adoption and accelerating proliferation.
Speaker 4: Among others, it is now deployed at 10 of the top 20 semiconductor companies.
Speaker 4: including seven of the top ten semis and at several major hyperscalers.
Speaker 4: In Q4, GUC successfully delivered
Speaker 4: an advanced HPC design and a CPU design using our digital full flow and cadence cerebras on TSMC N5 process technology, delivering 8% reduced power and a 9% area improvement.
Speaker 4: while significantly improving engineering productivity.
Speaker 4: In 2022.
Speaker 4: Several market-shaping customers, including Intel, NVIDIA, Broadcom, Samsung, and Renesys, shared their remarkable successes with cadence cerebras at our Cadence Live user conferences.
Speaker 4: Escalating system and software bring up complexities combined with relentless first pass silicon requirement.
Speaker 4: continue to drive strong demand for our essential functional verification solutions.
Speaker 4: Our verification business grew 28% year over year, fueled by secular trend for hardware which had another record year.
Speaker 4: Our dynamic duo of Palladium Z2 and Proteome X2 platforms, providing best-in-class system verification and software bring-up solutions.
Speaker 4: saw accelerated growth and strong momentum across mobile, hyperscale, HPC, and increasingly auto EV segment.
Speaker 4: Our hardware family added 30 new customers and over 160 repeat orders during the year.
Speaker 4: Due to the compelling value offered by common frontend compiler, demand for the pair greatly exceeded our expectations.
Speaker 4: with more than two-thirds of the orders in the year, including both platforms.
Speaker 4: Our new Cadence Verisium AI verification platform enables dramatic improvements in debug productivity. And in early production usage at several market shipping customers, Verisium delivered up to a 30x improvement in efficient root cause analysis.
Speaker 4: Our custom IC Virtuoso Inspector franchise solutions.
Speaker 4: tackle the toughest challenges in analog, big signal,
Speaker 4: RF design, and circuit simulation.
Speaker 4: And as electrification and digital transformation trends gain momentum.
Speaker 4: They are becoming increasingly crucial to our customers.
Speaker 4: Building on our market leadership, our custom IC revenue grew 13% year over year in 2022.
Speaker 4: with virtuoso growth spurred by demand in advanced nodes, heterogeneous integration, and the emerging silicon photonics segment.
Speaker 4: We added 200 new Virtuoso logos and more than 150 logos per spectre.
Speaker 4: with SpectreFX making strong headway in fast-paced memory applications.
Speaker 4: Freezing usage of pre-configured IP blocks to reduce risk and time to market, coupled with our Star IP portfolio.
Speaker 4: led to a strong year for our IP business.
Speaker 4: which grew 12% year over year in 2022.
Speaker 4: Demand was particularly strong in HPC.
Speaker 4: 5G and automotive segments.
Speaker 4: with our silicon proven high performance PCIe Gen 5, LPDDR5 and Ethernet interfaces.
Speaker 4: helping secure key wins in advanced node design.
Speaker 4: Our Tenselliga DSP portfolio continued expanding its footprint in smart speakers and true wireless stereo headsets. Our Tenselliga DSP portfolio continued expanding its footprint in smart speakers and true wireless
Speaker 4: imaging and machine learning applications.
Speaker 4: Rising system complexity and challenges stemming from the growing hyperconvergence of the electrical, mechanical, and physical worlds are driving the strong need for a seamless platform solution across design, packaging, simulation, and analysis.
Speaker 4: our system design and analysis business that is
Speaker 4: Expanding our TAM beyond EDA continued its strong momentum, delivering 27% year-over-year growth.
Speaker 4: Industry interest in advanced packaging solutions notably spiked in 2022.
Speaker 4: With customers embracing our revolutionary integrity 3D IC solution, the industry's only comprehensive platform providing tightly integrated system planning, implementation, and analysis technologies.
Speaker 4: Our multi-physics portfolio comprising of leading electromagnetic, electrothermal, signal and power integrity and CFD solutions continued ramping strongly across multiple end markets.
Speaker 4: Our InDesign analysis solution had several significant wins with HPC and hyperscaler customers.
Speaker 4: while our CFD fidelity platform proliferated with market-shaping aerospace and defense customers.
Speaker 4: During the year, Fidelity CFD software machine capabilities were chosen by Toyota Motor Europe .
Speaker 4: to be the standard workflow for CFD pre-processing.
Speaker 4: And in numerous customer engagement, Optimality Explorer, the industry's first AI-driven, multidisciplinary system analysis and optimization solution, has demonstrated up to a 10x efficiency improvement in design space exploration, leading to faster time to results.
Speaker 4: Lastly, in keeping with our transition plan, Libhutan has notified the Cadence Board that he will not seek re-election at our upcoming 2023 annual stockholders meeting in May.
Speaker 4: He will continue to serve as an advisor to me. We will return to an independent chair structure.
Speaker 4: With ML Crackoyer becoming our next board chair following that meeting.
Speaker 4: The rest of the board and I look forward to working closely with ML in her new role.
Speaker 4: In closing, we are pleased with our strong execution in 2022 and are thrilled by the business momentum and market opportunities ahead of us in 2023.
Speaker 4: Now, I will turn it over to John to provide more details.
Speaker 4: on the Q4 results and our 2023 outlook.
Speaker 5: Thanks, Anirudh, and good afternoon, everyone.
Speaker 5: I'm pleased to report that we exceeded all of our key financial and operating metrics for the fourth quarter and 2022.
Speaker 5: Robust customer design activity and demand for our strong technology portfolio continue to drive growth across all of our businesses.
Speaker 5: Cadence had an excellent 2022 and we begin 2023 with a lot of confidence and strong momentum on the back of the stability and resilience you'd expect from a predominantly recurring revenue model.
Speaker 5: Here are some of the financial highlights from the fourth quarter and the year, starting with the P&L.
Speaker 5: Total revenue was $900 million for the quarter and $3.562 billion for the year.
Speaker 5: Gap operating margin was 23.5% for the quarter and 30.1% for the year.
Speaker 5: non-GAAP operating margin with 35.6% for the quarter and 40.3% for the year.
Speaker 5: gap EPS was 88 cents for the quarter and $3.09 for the year and non-gap EPS was 96 cents for the quarter and $4.27 for the year.
Speaker 5: Next, turning to the balance sheet and cash flow.
Speaker 5: Our cash balance was $882 million at year end.
Speaker 5: while the principal value of debt outstanding was $750 million.
Speaker 5: Operating cash flow in the fourth quarter was $264 million and $1.24 billion for the full year.
Speaker 5: ESOs were 49 days, and we repurchased $1.05 billion worth of Caiden shares during the year.
Speaker 5: Before I provide our outlook for Q1 and 2023, I'd like to share a few comments.
Speaker 5: Our most recent fiscal year ended on December 31, 2022.
Speaker 5: This fiscal year will also end on December 31st as we have now moved our fiscal year to a calendar year.
Speaker 5: Approximately 15% of our annual revenue for fiscal 2022 was upfront with 85% recurring.
Speaker 5: At the midpoint of our 2023 revenue outlook,
Speaker 5: We're expecting a similar revenue mix for the year.
Speaker 5: and our outlook for 2023 assumes export control regulations remain substantially similar for the remainder of the year.
Speaker 5: In our outlook for 2023, we expect revenue in the range of $4 to $4.06 billion.
Speaker 5: Gap operating margin of 30.5 to 32%.
Speaker 5: non-GAAP operating margin of 40.5 to 42 percent.
Speaker 5: Gap EPS in the range of $3.24.
Speaker 5: to $3.34.
Speaker 5: Non-gap EPS in the range of $4.90 to $5.
Speaker 5: Operating cash flow in the range of $1.3 to $1.4 billion.
Speaker 5: And we expect to use approximately 50% of our free cash flow to repurchase Cadence shares in 2023.
Speaker 5: For Q1, we expect revenue in the range of $1 to $1.02 billion.
Speaker 5: gap operating margin in the range of 31-32 percent.
Speaker 5: non-GAAP operating margin of 41 to 42 percent.
Speaker 5: Gap EPS in the range of 84 to 88 cents.
Speaker 5: non-GAAP EPS in the range of $1.23 to $1.27.
Speaker 5: And as usual, we publish the CFO commentary document on our investor relations website, which includes our outlook for additional items, as well as further analysis and gap-to-non-gap recommendations
Speaker 5: In conclusion, I'm pleased that we achieved double-digit revenue growth across all of our businesses.
Speaker 6: increased.
Speaker 5: three-year revenue category into the mid-teens.
Speaker 5: And I'm especially pleased that we continue to expand annual operating margins.
Speaker 5: As always, I'd like to thank our customers, partners, and our employees for their continued support.
Speaker 5: And with that operator, we'll now take questions.
Speaker 2: 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. We'll pause for just a moment to compile the Q&A roster.
Speaker 2: Our first question comes from Charles Shee from Needham and Company. Please go ahead, your line is open.
Speaker 5: Thank you for taking my questions. Maybe the first one is kind of like a two-part question. Maybe this is to John . John , your fiscal year and Q1 guidance seem to imply a relatively flat revenue profile through the year.
Speaker 5: just a matter of more conservatism on your side or is it a matter of a different end-market mix or proper mix? Maybe let me ask the second part, I think they are kind of related, I'll ask all at once.
Speaker 5: I think one quarter ago you were cautious your hardware sales into fiscal 23 because 2022 like you just said it's a record year for the hardware sales. So what is your assumption in the full year guidance for fiscal 23 on your hardware revenue profile through the year? Is it flat or are you assuming there's some...
Speaker 3: proving not to be discretionary at all for our customers. And hardware demand was outpacing our ability to produce the hardware. And that was the case for the entirety of last year. We were not able to keep up with demand. Demand is really, really strong as we head into the new year for 2023.
Speaker 3: what we've increased our production capacity. And we feel more confident in our ability to meet that demand for 2023. And as you can see from the outlook, we're expecting that last year, the 85-15 split in recurring revenue to upfront revenue mix. We expect that to continue.
Speaker 3: Now, the second half of the year is harder to predict for hardware, so typically I wait until the middle of the year. And if we see continued strength into the second half of the year, we can increase the second half later.
Speaker 3: And then I think that impacts the quarterly profile because you started your question with why the year felt a little bit flat. And that's because we expect to deliver a lot of hardware in the first half of the year. And in the second half of the year, we've kind of de-risked the second half of the year for hardware. And if we see continued demand at this pace, we'll see a lot of hardware in the next half of the year.
Speaker 5: We'll have to take the second half up. Thank you, that's excellent. Maybe my second question, maybe this is for Anirudh. I think some investors are
Speaker 5: worried about hyperscaler spending on EDA. I mean, both on near term and long term sense. I mean, in the near term, I mean, obviously the layoff in tech, while some people think it could mean reduce the chip design projects and lost the jobs for design engineers. And in the long term, I mean, there's a smaller portion of the investors that are kind of worried about.
Speaker 5: or any insights, the real demand coming from hyperscaler side, and what's your thought, what's your current outlook going into like a two, three year horizon? Thank you.
Speaker 4: Yeah, hi Charles, thanks for the question.
Speaker 4: Our demand is broad-based across both our semiconductor customers and our system customers. As I mentioned before, right now about 45% of our business is coming from system companies. That includes hyperscaler and other kind of system companies.
Speaker 4: I am cautiously optimistic that this trend is continuing for a long time. It is because I think some of these trends are irreversible. System companies doing silicon design, they are already having
Speaker 4: a lot of success. If you look at whether they are social media companies or phone companies or data center companies or car companies, they have multiple design projects in different stages of development. And overall, we see strong design activity on the system side and on the semi-side. Google Analytics
Speaker 4: Now there's always some reports here and there, this is not a straight line, some customers may do more, some customers may do less, but overall there will be more and more designs done by system companies. And as you know, the other part of our interaction with system companies is also expanding our portfolio to include.
Speaker 4: system design and analysis product, you know, our SDA segment. So we are working with system companies not just on the silicon side, but on the system side, whether it's 3D IC or thermal simulation or CFD. And you can see that part of our business is also growing very strongly. So last year we reported
Speaker 4: about 27% growth in the system business, which is beyond our traditional EDA business. So overall, I'm pretty pleased.
Speaker 4: I think the design activity remains very strong, driven by 3 nanometers and other things, and expansion of our portfolio to system design and analysis.
Speaker 7: Thank you, Arnie, thank you John .
Speaker 2: Our next question comes from Jason Celino from KeyBank Capital Markets. Please go ahead. Your line is open.
Speaker 8: Great, thanks. And good quarter. You know, when I look at the guys and.
Speaker 8: you know, 12 to 14 percent growth to start the year. Best growth guidance I've seen and you invest last year's on a much tougher comp.
Speaker 8: You know John any change to philosophy in terms of how you set guidance?
Speaker 3: That's a great question, Jason. No, we've approached guidance the same way we normally do. Last year, if you recall, we wanted to wait until we had increased visibility into the hardware pipeline. So we were a bit more conservative about the second half for hardware. We're approaching this year very similarly.
Speaker 3: But we just finished with really, really strong momentum to the year. And the guide is the guide. I mean, there's so much of it coming out of backlog, we feel very confident in the year.
Speaker 8: Okay. And then I think you mentioned on the hardware side you increased capacity. How hard is it to toggle that up and down? I'm just trying to understand what this means in terms of confidence level and pipeline. Thanks.
Speaker 3: Yeah, Jason, we've got access to more production capacity now. We have added additional lines to build the hardware. For the last year, we couldn't build it fast enough. We did ramp up production capacity, I think 40% last year, but we sold more than that. So we didn't keep up with demand. So we've ramped up production capacity again.
Speaker 3: for 2023 and we feel very confident that we have access to the inventory and the components we need to meet that production demand. But also to the extent that we can produce extra systems, we have a number of...
Speaker 3: underserved or unserved customers that want access to our hardware in the cloud. So any excess capacity we can generate or any excess production we can generate we can put into the into the cloud for that offering.
Speaker 7: Thank you.
Speaker 2: Our next question comes from Gary Mobley from Wells Fargo Securities. Please go ahead. Your line is open.
Speaker 9: Hey guys, thanks for taking my question. I want to ask about JetAI and all the related machine learning and AI enabled tools.
Speaker 9: We've been getting a lot of questions from investors in terms of how to think about how that becomes accretive to your growth rate and how it becomes accretive to your average steel size.
Speaker 9: Maybe if you can just share with us where you're at in this price discovery phase and how you plan to I guess mass market price it and
Speaker 9: If I'm not mistaken, this will all be included in digital IC, which according to the finish to the year was diluted to your overall revenue growth. So how should we read into that? Is AI machine learning simply just not impacting that light on them yet?
Speaker 4: Hi Gary, great question.
Speaker 4: So first of all, I am very optimistic about AI and we always have talked about AI as a
Speaker 4: Applying AI for optimization.
Speaker 4: I mean in EDA or in chip design or system design, it's more about automating the design process and producing better results.
Speaker 4: So even if you look at, the way I look at it, even if you look at it right now, some of these chips have
Speaker 4: 100 billion transistors on one inch by one inch. If you look at by 2030,
Speaker 4: They will have one trillion transistors.
Speaker 4: So just in terms of size.
Speaker 4: it will be 10x more. And then the chips are more complicated, and then you add software on top of it. So the design complexity that our customers need to do will go up by at least 20-30x in the next 5-7 years. So the only way to meet that is by more automation.
Speaker 4: That's the history of our industry. And the best way to do more automation right now is using AI.
Speaker 4: And of course, we have done other ways to do automation in our industry. We started by doing more higher level design, moving from transistor level to gate level. Over the last 5-10 years, we have done a lot of massive parallelism, running things on more CPUs, using cloud.
Speaker 4: But going forward, one of the biggest ways to improve productivity is using AI. And you see that across our product portfolio. And the real benefit is that a lot of the mundane tasks can be done by, you know, the repetitive tasks and mundane tasks can be done by AI, so the designer can move to more higher value tasks, right?
Speaker 4: And so the way we approach it through is a very comprehensive, we built this Jedi data analytics because data is critical too, as you know, to a data analytics and AI platform. And then we have multiple applications on top of it.
Speaker 4: So Cerebros is a key one for implementation. We also launched a few months ago Verasium for verification, which is another very difficult and all-consuming problem for our customers.
Speaker 4: And then we are not only focused on the chip side, but also on the system side. So we have optimality, which is having great success on the system side. And typically the system customers are not used to optimization or this level of automation that the chip industry has seen.
Speaker 4: But we are getting dramatic improvements with the optimality as well.
Speaker 4: So, taking together, I believe that we have the most comprehensive AI portfolio and we have always focused AI on optimization, which of course now is called generative AI. And we have been working on it for five years. I think the products introduced were about two years ago.
Speaker 4: And even for Saribras, I mentioned in my prepared remarks, you know, several leading companies, you know, like Intel, Nvidia, Samsung, Rannis, they all talked about
Speaker 4: the results they're seeing. We have more than 160 designs that we are tracking on cerebras. And if you include vericium and...
Speaker 4: optimality we have hundreds of designs being done by AI and because I believe in the next few years in almost all designs we'll have some AI components.
Speaker 4: and that is driving the growth that you're seeing in our business and the outlook.
Speaker 9: Thank you for that, Anirudh. And a quick follow-up for John . Backlog up again. Nice job on that. Up 32% of the year. Swellmuth backlog up 26% on the year.
Speaker 9: Was there a large deal or renewal that came into the fray in the fourth quarter or maybe you can just speak in terms of diversity at that growth?
Speaker 3: Yeah, Gary, great question. I mean, we had a really strong finish to the year. And as you know, I mean, contract timing typically impacts CRPO in any one quarter. But if you look over a typical contract cycle, you'll see that, you know, we're particularly pleased that the three year CAGR on CRPO is tracking to mid-teens growth now and that's very consistent.
Speaker 3: to the mid-teens' growth be achieved over the last three years to 2022, and the mid-teens' growth that's implied at the midpoint of our guidance for 2023.
Speaker 1: Thanks, John .
Speaker 2: Our next question comes from Jay Fleeshour from Griffin Securities. Please go ahead. Your line is open.
Speaker 3: Thank you. Anirudh, a wise man once said that silicon companies are becoming increasingly like systems companies and systems companies are becoming increasingly like semiconductor companies. You alluded earlier to some of the additional opportunities that systems companies represent for you. That is the scope of this featuring Chinese
Speaker 3: in CFD and so forth. In what other ways would you say that these two classes of customers do still remain different or different enough for you even though they are becoming more alike and in ways that perhaps influence your either your R&D or your go-to-market.
Speaker 3: And then the second question is if you could talk about where your R&D priorities go from here. The last number of years, you and for that matter Synopsys have significantly ramped up, for example, your investments in synthesis, verification.
Speaker 3: AI you mentioned, of course. And from here, how are you thinking about the R&D priorities in areas like custom and CFD and of course, in AI?
Speaker 4: Thanks Jay, very valid questions.
Speaker 4: And of course, great point that system companies are becoming semi companies and semi companies are becoming system companies and I like said before you know this is a reversible trend.
Speaker 4: And for us, we invest heavily in R&D as you know, about 35% of
Speaker 4: Our revenue is invested in R&D. That's one of the highest percentages of any S&P 500 company. Just for your reference, you may know this already, we have 10,000.
Speaker 4: people in the company, 9,000 are engineers or computer scientists. You know, either they are in customer support roles or in R&D.
Speaker 4: And we always make sure that the core is good, because the core has to be best in class. So whether that is synthesis, like you mentioned, place and route, circuit simulation, analog, verification, so that's a given, making sure that the core is best in class. And then on top of that, there are certain thematic things.
Speaker 4: that we are investing in. And then the three that I want to highlight, which I think will be thematic for years to come.
Speaker 4: One is of course AI, AI will have a big effect on like I mentioned the design work and that's true for both semi and system companies.
Speaker 4: Second is 3DIC, the emergence of chiplets and heterogeneous integration and Cadence is the best position to take advantage of this.
Speaker 4: And then the third area is just move to systems, you know, system design and analysis.
Speaker 4: And our engagement with system companies are similar to a lot of extent with semi-companies. Everybody wants to do more with less now, so the benefits of AI and productivity and better results are there in both set of customers. But of course, our emerging portfolio and system design and analysis provides unique value to our system.
Speaker 4: electrical and mechanical and there is no other company better positioned than Cadence to take advantage of this.
Speaker 4: So overall, you know, to answer your question, these are the three big themes. On top of the base, see the base is always important, the best in class of...
Speaker 4: of the basic algorithms, but AI, 3D IC and systems...
Speaker 4: will be with us for years to come.
Speaker 10: Thanks, Andrew.
Speaker 2: question comes from Harlan Sir from JP Morgan. Please go ahead. Your line is open.
Speaker 5: Yeah, good afternoon. Thanks for taking my question. On hardware verification,
Speaker 5: You guys have sounds like very good visibility to the first half of the year I know the team still has some concerns on maybe more discretionary type spending pullbacks here But we've also talked about how these hardware platforms are becoming a need to have right not a nice to have but a need to Have as it relates to these very complex digital SOC platforms
Speaker 5: We're well into this semiconductor industry downturn. I would have assumed that you would have already seen some cancellations in orders or push-outs in hardware shipments if customers were concerned. So has the team seen any of this type of activity? I'm just trying to figure out what's driving the conservatism here on hardware.
Speaker 4: Well, thanks for the question, Sanir. I think you said it. I think what we see is the hardware is no longer – I know it could be part of CAPEX, but it is no longer discretionary spend for our customers.
Speaker 4: I mean any chips that are designed today, any complex chips.
Speaker 4: you have to use these hardware platforms to verify them.
Speaker 4: And if you don't verify them properly, then you spend all this money, the chips come back and it doesn't work. I mean that's a big no-no, right? It delays the whole product and the expense. So hardware platforms, both palladium and proteum are no longer nice to have. You need to have them.
Speaker 4: We have also strengthened our portfolio by not just chip verification but software bring-up. Chip verification has been a traditional sense of palladium and now with software bring-up with Proteum we provide a unique. So far the demand is strong and we had a record year.
Speaker 4: Last year, these days, I think we had the record year after that too. But we see continued growth in hardware. And we are very pleased with our competitive position in hardware. We are very pleased with the growth in hardware.
Speaker 4: The demand is no longer nice to have, is no longer discretionary, and also in multiple end markets. What happened is we talked about automotive. Automotive also has much higher complexity chips now.
Speaker 4: So, the other thing with hardware is it is also expanding to other end markets, whereas traditionally the big chips used to do it, like data center chips, but now even automotive chips are almost networking. Almost all kinds of chips will require the use of these hardware systems, and we are very well positioned to take advantage of that.
Speaker 10: Perfect. And then my follow-up.
Speaker 5: The team has done a great job on integrating machine learning based methods as a part of your customer's digital SOC designs and verification flows. Although different, but nevertheless still needing many iterations around many variables, is your custom cell and IP design and analog simulation and verification.
Speaker 5: Seems like the team could take advantage of your ML frameworks and apply it to your custom and analog franchise. Is the team working on integrating ML into Virtual also and other parts of the analog and custom portfolio?
Speaker 4: Oh, that's a very, very good point. So I mean, like I mentioned, you know, we have more than 30 projects in all aspects of AI. AI inherently is.
Speaker 4: is computational software, right? It's computer science plus math, which is what they're very good at. So you can assume that we are working throughout our design flow, and then we announce products in a more conservative way now. We want to make sure they're working with several customers, with different end markets, and then we announce them. So.
Speaker 4: The year before we talked about digital implementation, last year we talked about JEDI and verification. And I think this year you will hear more from us in other parts of the business. The analog custom business is ripe for more automation and packaging PCB.
Speaker 4: So, please stay tuned. But you can be rest assured, we are applying AI wherever it is possible and it is possible to apply it everywhere. Okay.
Speaker 11: Thank you.
Speaker 10: Thank you.
Speaker 10: Yes.
Speaker 2: Our next question comes from Joe Vruink from Baird. Please go ahead. Your line is open. You're on mute.
Speaker 8: Great. Hi everyone. I wanted to go back quickly to the current RPO topic. So fourth quarter was very good, finished north of 25% growth. And then even if I appreciate that probably there's some hardware in it, John , as you said.
Speaker 8: you know, the trend growth is closer to a mid-teens type number now. Can you just help reconcile that mid-teens growth with the implied outlook for recurring revenue? I think it would be more like 12 or 14 percent growth. It does seem like starting visibility to come from backlog is
Speaker 8: higher than usual. And so is there an implicit bookings assumption in 2023 that's factoring into this or does conservatism like it applies to hardware also maybe apply to software bookings on trendy or
Speaker 3: Great question, Joe. As Gary mentioned earlier, he was asking about the number of customers, whether any big customers. There wasn't one big customer in Q4. We just had a very strong finish to the year, very strong finish across all lines of business and particularly hardware was...
Speaker 3: was very strong as we closed out the year in terms of bookings. I think our hardware systems are just not discretionary spend, as Anru said earlier. They've become an indispensable part of our customer spend on the R&D side. And people wanted to get their orders in before the end of the year. So we have a lot of visibility into the next year. And as you know, CRPO is a very strong partner in the R&D side.
Speaker 3: look over three years for our revenue tagger that's mid-teens to 22 and we're guiding to mid-teens for 23. So I think you can take out some of the noise by looking over a three-year kind of average period.
Speaker 8: Okay, that's helpful. And then I guess I'll stay on the topic of AI. And obviously, Kayden is already using a lot of reinforcement learning and design flow and verification. I guess any thoughts on kind of the recent attention around large language models? You know, you've started to see, I think, some of the things that you've seen in the past. Okay.
Speaker 4: I mean one thing to mention is we always look at all the kind of AI technologies. You know we have pretty talented team
Speaker 4: And, like I mentioned, for us, the biggest application is simulation plus optimization because you can generate much better results for the customer. So we are using reinforcement learning and all kinds of other ML techniques for a while now. And, you know, to give you an example, like some of the results we are seeing.
Speaker 4: Some of the language models, there could be other applications, especially with the interface of our tools, for customer support, there could be applications. But the main customer-facing applications are when we give better results, better productivity, which we are already doing in multiple ways, as I mentioned, and we will continue to look at all possible ways to improve that.
Speaker 4: at the relative growth in your different segments, the system design and analysis seems to be the fastest growing segment, obviously of a lower base over the last five years. What do you think has driven that outperformance? And as you get bigger in that market, does the competitive landscape change? Can you continue to outgrow the market or just
Speaker 4: How do you think about that particular aspect of your growth drivers?
Speaker 4: I just want to point out first that all businesses are doing great.
Speaker 4: If you look at even our analog business, that grew 13%. That used to be a stable business a few years ago. Digital business, 17%. These are very remarkable numbers. Verification business, 28%. I mean, just to put that in context to what was happening.
Speaker 4: in EDA and chip design like five years ago to now. I mean, this is a remarkable growth in our business and at the same time, very good profitability. You know, we have more than 40% operating margin. So I think we focus on growth and profitability. And to come to your question on systems, I mean, that had a very strong year with 27.
Speaker 4: power analysis, thermal analysis. When you look at 3D IC, one of the biggest things I've mentioned before is thermal simulation. CADENCE is in the best position to provide that. Electromagnetic simulations, our products will run like 10, 20 times faster and higher performance because of our computational software trend. So I don't see anything...
Speaker 4: in the near term, that will change that. I mean, this is going to continue, right? So we are pretty confident where we are.
Speaker 4: And as you know, we are expanding to other areas using the expertise, whether it's computational fluid dynamics or bio-simulation. And I think this is another irreversible trend, the need of simulation. And the other thing that we're investing heavily in that space, which I mentioned in my prepared remarks, is AI and optimization. You know, that area still.
Speaker 4: You know, they could barely simulate things in that, you know, you could barely simulate a wing or a car properly, right? Forget about optimization. But with optimality, not only we can simulate, we can put that in the inner loop of a reinforcement based AI engine to give results automatically that that space has not seen. So I'm actually very optimistic about AI driven optimization in the system space.
Speaker 4: And I think there's a lot of room to grow there.
Speaker 4: For my follow-up, John , not complaining at all, but when I look at the implied incremental EBIT margin for this year, it seems somewhat lower than the average incremental margins that you managed to achieve over the last few years.
Speaker 12: Just wanted to make sure we are not missing anything from a cost perspective that could restrain incremental event leverage this year.
Speaker 3: That's a great question, Vivek, and thanks for pointing out incremental margins. As you know, we focus very carefully on those. Over the last, and we were very pleased, that I think 2022, I think it was the sixth year in a row, we achieved over 50% incremental margins. And the range that we've achieved over that period of time, we've ranged from 52%, I think, to
Speaker 3: to 58% incremental margin over the last six years. So very, very pleased with that. And we're starting this year with slightly less in the guide. I think it's 48.5 is what is implied in the guide. But that is the largest and strongest, the largest initial guide and the strongest start to any of the seven years, of the last seven years.
Speaker 3: So I'm very, very pleased to be in this position starting off the year. And as you know, throughout the year, we try to find profitable and sustainable revenue growth to improve that through the year. And we've managed to achieve that six years running. And I feel confident about doing that for a seventh year.
Speaker 2: Thank you very much. Our next question comes from Blair Abernethy from Rosenblatt Securities. Please go ahead. Your line is open....
Speaker 13: Thanks very much and great quarter guys. Just wanted to see if there was anything to update on the future facilities acquisition last summer. You've had it for a couple of quarters now. How is that trending? Are you?
Speaker 4: Are you seeing opportunities to cross-sell your other simulation software into that space? Yes, great point. I am very excited about future facilities because I think that the way to differentiate
Speaker 4: opportunities to cross-cell your other simulation software into that space? Yes, great point. I'm very excited about future facilities because I think that the way to differentiate in the system space.
Speaker 4: is also through differentiated vertical offering. Because if you look at the simulation space, there are only few like kind of well-known algorithms. You know, there's finite element, there is CFD, and now we are doing molecular simulation. But there are a lot of end markets.
Speaker 4: And the one way to even further differentiate CFD, you know, one way we differentiate CFD is by our compute power, right? You know, doing things, bigger things and faster. But the other way to differentiate it is building a vertical kind of end market. And CFD, one of the biggest thing is this, you know, data centers and smart...
Speaker 4: whether they're AC vents or AC systems and racks and all that. So the customers can get very, very accurate digital twin, you know, for the data center. And that technology can be actually applied to any building, not just a data center. Now we started with data center because that's a big market and
Speaker 4: As you know, they consume a lot of power. So right now, you know, data centers consume as much energy as like the whole airline industry. Okay, so that's a lot of energy that they're consuming. And we have a lot of engagement that I've picked up since we, you know, because they are now in a bigger home.
Speaker 4: with the whole cadence reach. So we have a lot of engagements which are picked up with the hyperscalers and with other companies, even in other industries, because a lot of companies have big data centers, whether they're internal or on the cloud. So you will see more of that from us and I'm pretty optimistic about, that's why we made that acquisition.
Speaker 14: open. Thank you. Anirudh, you got a bunch of questions on hardware and I think Carlin's question hit on most of the things that I wanted to ask about, but I guess one thing that stood out to me from your commentary was the two-thirds of your...
Speaker 14: I think new orders in 22 were for both palladium and protean. And that was interesting to me because it seems like as we're moving to more SSD designs, more firmware and software on those designs, that that sort of selling palladium and protean together is likely to move up. I guess you just comment on that and how you're thinking about it.
Speaker 4: products. That's why the addition of palladium and proteome that are complementary but address different parts which both of them are growing, also provides more predictable growth for our business. So, even though we had a record year last year, we still see growth this year and in the future because of this product mix. So, that's why we have a software bring up.
Speaker 4: I don't need to tell you, most of the designs now are software defined hardware design. Software is what is driving the requirements for the hardware design. So initially, they actually start with the software model and that is run on Proteum to figure out what kind of architecture to do. And then once you do the chip design, then...
Speaker 4: But I also believe that, you know, just like our customers have different
Speaker 4: silicon platforms, we need to do that too. So Palladium, the reason it is well differentiated is we use our own cadence silicon. You know, we design it ourselves, build with one of our foundry partners, and that gives the advantage in terms of compile time that is unmatched.
Speaker 4: But for software bring up, FPGA is good. So we use FPGA platforms, and then we have built a differentiated offering with Proteum. And same thing on regular verification systems like Formal with Jasper and Excelium logic simulation. We also offer multiple hardware platforms. Of course, x86.
Speaker 4: that has been traditional, but we have also ported all our software platforms, especially in verification, to ARM-based systems because they can offer price performance.
Speaker 4: So not only do we have multiple products, but we also have multiple products that are
Speaker 4: with palladium and proteome, we are always looking at the right hardware to run them on. So in case of palladium, it's a custom silicon. In case of proteome, it's FPGA. And then in logic simulation and formal, we look at both x86 and ARM. So to give a full variety of options to our customers. Thanks for all that detail, Anurudh.
Speaker 14: pricing in the context of the guidance that you're given for 23. Thank you.
Speaker 3: Thanks the yes, I mean we're very focused and disciplined on driving value for brocadence and for our customers theas.
Speaker 3: Like I said, on our hardware side, we don't believe that, and very much on the software side too, that a lot of our customers spend with us is not really discretionary. So it's quite indispensable tools that they need from us and everybody these days wants to focus on improving productivity and
Speaker 3: and all the tools we provide help our customers to drive that. So I think we're in a sweet spot at the moment. So we're disciplined on pricing, but the pricing that we're extracting for our tools has come from the increased value that our customers are getting.
Speaker 4: from the use of our tools. Makes sense. Thanks, John . Yeah, one thing to add to what John said, I think you know this already, but one thing to emphasize, like typically when people move from one node to another, right? So we are at 5 nanometers, a lot of the designs at 3, then 2, you know, 1.41. So we have like 10 years of node migration ahead of us.
Speaker 4: So anytime you go from one node to the next node, the number of transistors effectively doubles in the chip.
Speaker 4: So number of blocks effectively doubles and complexity doubles. So for the same, you know, chip being done, it has more things in it. So that normally requires more use of our software.
Speaker 4: So that's one thing just to emphasize to our investors is that whenever there's a node transition and this is happening in the past but this will continue to happen for the next ten years. So that also requires more hardware capacity, that requires more simulators, that requires more place and route runs to be done. And of course with AI we can make that even more productive. So
Speaker 4: and more so I'm not slowing down for at least 10 years okay and on top of that you add 3d I see you know that adds another 10 years of so we have lot of sustain growth that the customers will build amazing products and they need more and more of a software hard way to do that
Speaker 14: Thanks, Anirudh. I guess that's where I was going with the question. I mean, obviously with Farib, we're going and running on top of Inovis. And I'm just kind of trying to think about how it seems, and you guys have talked about this greater portion of R&D budgets from both center-conditional systems companies are going into kind of the suite of tools that you offer. Anyway.
Speaker 2: Thank you very much and congrats on a great day. Our final question will come from Andrew DeGaspary from Berenberg. Please go ahead, your line is open.
Speaker 13: Thanks for taking my question. I guess first in terms of the analytics products that you mentioned, I was just wondering in terms of your customers, how steep of a learning curve is it for them to adopt this and what is the kind of timeline that it typically takes from when you introduce it to when they are kind of using it in terms of their day-to-day processes?
Speaker 7: Yes, that is a very good point.
Speaker 4: So I think there's something like like cerebrus AI our use model is very similar to what they are doing right now
Speaker 4: Because we don't change any of the interfaces and if they are used to running in a worse then Syrie Brist will run on top of it almost like a cockpit but it will do those experiments that they are doing manually they will do it in an automatic way. But the interfaces are similar the commands they are used to running are similar.
Speaker 4: But instead of manually running and trying different things, you know, Cerebras will do that automatically. So, typically we have seen, that's why you have seen a lot of kind of uptake to Cerebras and these AI based tools because they don't fundamentally require a new working model. It's all a very inviting feature.
Speaker 4: takes away some of the mundane tasks that the customers were doing.
Speaker 4: And similar things are true for optimality, similar things are true for verisium. There is always some learning gap, but our customers are very smart users anyway, right? They are designing all these complex chips. So this is nothing that they can't pick up in a…
Speaker 4: Similarly, similar things are true for barricium. There is always some learning gap, but our customers are very smart users anywhere. They are designing all these complex chips. So this is nothing that they can't pick up in a pretty quickly.
Speaker 13: Then one question from John , in terms of the share rate purchases, I think you bought a billion or so last year. This year, you're guiding for a bit below that. I was just wondering, what was the thinking behind that? Is it a function of investing in the R&D in terms of the three different themes you mentioned earlier, or is it potentially for additional M&A that you're planning for the year?
Speaker 3: an accelerated share repurchase last year to offset dilution from the general stock refresh in the middle of the year because we do merit in the middle of the year. But also we have an opportunistic repurchase program that kicks in when certain price levels are met and last year that kicked in Q1, Q2 and Q4. So we bought back shares when the prices were lower.
Speaker 3: We typically don't guide to that right now, but we assume using at least 50% of free cash flow to repurchase shares this year, if our opportunistic repurchase program kicks in, we'll buy back more.
Speaker 3: We typically don't guide to that right now, but we assume using at least 50% of free cash flow to repurchase shares this year. If our opportunity repurchase program kicks in, we'll buy back more. Great, thank you.
Speaker 2: I will now turn the call back over to Anurudh Devgan for closing remarks.
Thank you all for joining us this afternoon. It's an exciting time for Cadence as we enter 2023 with strong business momentum and robust design activity offering tremendous market opportunities. Our exceptional execution of the intelligence system design strategy.
Customer first mindset and a high performance and inclusive culture are driving accelerating growth as we grow our core EDA business while expanding our portfolio with new innovative solutions.
Fostering sustainable innovation is a top priority and we are thrilled to have been included in the newly released 2023 top rated ESG company list, ranking number 18 out of over a thousand companies in the software and services group.
And on behalf of our employees and our Board of Directors, we thank our customers, partners, and investors for their continued trust and confidence in Cadence.
Cadence 4th Quarter and Fiscal Year 2022 Earnings Conference Call. This concludes today's call. You may now disconnect.