Q1 2023 Cadence Design Systems Inc Earnings Call
Speaker 1: 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.
Speaker 1: For information on factors that could cause actual results to differ, please refer to our FCC filings, including our most recent forms 10-K and 10-Q, and today's earnings release.
Speaker 1: 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 1: In addition, we will present certain non-GAAP measures which should not be considered in isolation from, or as a substitute for, GAAP results. Education of GAAP to non-GAAP measures are included in today's earnings release.
Speaker 1: For the Q&A session today, we would ask that you observe a limit of one question and one follow-up. Now, I'll turn the call over to Anirudh.
Speaker 2: Thank you, Richard.
Speaker 2: Good afternoon, everyone, and thank you for joining us today.
Speaker 2: I'm pleased to report that Cadence delivered strong results for the first quarter of 2023.
Speaker 2: with ongoing robust demand for essential and innovative solutions driving solid double digit growth.
Speaker 2: in view of the strong start to the year.
Speaker 2: and the continuing momentum of our business. We are raising our financial outlook for the year.
Speaker 2: Dawn will provide more details in a moment.
Speaker 2: Generative AI design tools are revolutionizing
Speaker 2: and system development by delivering unprecedented optimization and productivity benefits.
Speaker 2: Customers have already been benefiting for our groundbreaking generative AI solutions in the digital, verification and system areas.
Speaker 2: And with the recent introductions of Virtuoso Studio.
Speaker 2: and Allegro XAI
Speaker 2: We now have an unmatched chip to package to board the system's generative AI portfolio.
Speaker 2: Leveraging 30 years of industry leadership, Virtuoso Studio accelerates heterogeneous system design and through AI-powered layout automation and optimization provides an average 3x productivity boost for design in the notably complex analog domain.
Speaker 2: Several customers including MediaTek, Renesas, Analog Devices, and TSMC provided testimonials for the launch.
Speaker 2: Allegro XAI technology utilizes the latest innovations in generative AI to accelerate PCB design with more than a 10x reduction in turnaround time.
Speaker 2: And at a recent launch, it was endorsed by Schneider Electric and Keilshoe.
Speaker 2: All of these powerful engines are fueled by our unique, differentiated, big data analytics Jedi platform that unifies massive amount of design and verification data to carry forward learnings and insights to future designs.
Speaker 2: Our rapidly proliferated generative AI solutions are enabling customers to reach significant power performance and area benefit.
Speaker 2: through better optimized design while greatly improving engineering productivity and accelerating design closure.
Speaker 2: Along with AI, other generational trends such as hyperscale computing, 5G,
Speaker 2: and the digital transformation across multiple verticals continue to propel thriving design activity across semi and system companies.
Speaker 2: creating rich market opportunities for differentiated end-to-end EDA, IP, and system solutions.
Speaker 2: I'm pleased with the momentum in our core EDA business.
Speaker 2: as well as our continued expansion into systems area that provides us both revenue and margin opportunity.
Speaker 2: Now let's talk about our key highlights for Q1.
Speaker 2: In Q1, we deepened our collaboration with MediaTek.
Speaker 2: which includes a broad base of our digital analog verification and system design and analysis solutions.
Speaker 2: We significantly expanded our collaboration with the Marque Aerospace and Defense Systems Company that included the proliferation of our digital full flow.
Speaker 2: custom verification products
Speaker 2: as well as RF and system analysis solutions.
Speaker 2: And Cadence expanded its collaboration with TSMC and Microsoft.
Speaker 2: as we leverage our Pegasus verification system and CloudBus platform to accelerate gigascale physical verification in the cloud.
Speaker 2: Ever increasing complexities in system verification and software bring up.
Speaker 2: Continue to propel our verification business.
Speaker 2: to a 31% year-over-year revenue growth.
Speaker 2: Hardware based verification
Speaker 2: has become a must-have part of the customer's design flow.
Speaker 2: And on the heels of a record year are palladium z2 and proteome x2 hardware platforms.
Speaker 2: Delivered a record Q1.
Speaker 2: as market demand remains strong for these best-in-class solutions.
Speaker 2: With 14 new customers and nearly 30 repeat customers, more than 50% of the orders during the quarter included both platforms.
Speaker 2: Demand for hardware was broad-based, with particular strengths seen in the aerospace and defense and automotive segments.
Speaker 2: Our new VeriCM platform leverages big data and AI to optimize verification workloads.
Speaker 2: Boost coverage and accelerate root cause analysis of bugs.
Speaker 2: Customers are realizing significant efficiency gain.
Speaker 2: with Reneses seeing up to a 6x improvement in debug productivity, shortening the time to market for its R-Card design.
Speaker 2: Our digital IT business had another solid quarter.
Speaker 2: with our digital full flow continuing to drive growth, especially at the most advanced nodes at market shaping customers.
Speaker 2: Our innovative cadence cerebrus solution.
Speaker 2: provides customers an AI-driven cockpit.
Speaker 2: by applying generative AI to explore the entire design space.
Speaker 2: and intelligently optimizing the digital full flow in a fully automated manner.
Speaker 2: Cadence Cerebrus now has well over 180 tape outs.
Speaker 2: and at last week's Cadence Live event.
Speaker 2: several leading customers including TI, Renesas, Broadcom, Canon
Speaker 2: ARM describe the remarkable benefits they realized with cadence cerebras.
Speaker 2: Our system design and analysis business which is driving our expansion beyond EDA.
Speaker 2: Continued its strong momentum in Q1.
Speaker 2: delivering 27% year-over-year revenue growth.
Speaker 2: Accelerating hyperconvergence between system and silicon domains requires seamlessly integrated chip implementation, system design, and analysis solutions.
Speaker 2: Our integrity 3D IC platform exemplifies that by natively integrating all the required engines to provide a comprehensive multi-chiplet and advanced packaging flow.
Speaker 2: Additionally, the growing complexity of design
Speaker 2: as well as accelerating of virtual prototype trends.
Speaker 2: requires sophisticated multi physics solution.
Speaker 2: that not just provide higher capacity and performance but also result in more optimized design. Our system analysis portfolio couples our expertise in physics-based modeling with AI-driven optimization.
Speaker 2: and are delivering superior results to customers across multiple end markets.
Speaker 2: We are pleased with the new wind and growing repeat orders for organic clarity and Celsius products.
Speaker 2: as well as our CFD technology.
Speaker 2: during NVIDIA's GTC 2023.
Speaker 2: Nvidia CEO Jensen Wang
Speaker 2: talked about our joint partnership.
Speaker 2: and the throughput and energy efficiency benefits offered by Cadence's CSD offerings running on NVIDIA's accelerated computing platform.
Speaker 2: And last week, we announced a multi-year technology partnership with the San Francisco 49ers.
Speaker 2: that's focused on sustainability and based on our future facilities digital twin technology.
Speaker 2: In summary, I am pleased with our Q1 results.
Speaker 2: Exploding chip and system design complexity will drive a significant nonlinear growth in workload requirements, opening up a massive opportunity for computational software to help realize these innovative products by investing more of the R&D spend in automation.
Speaker 2: In addition to our strong business results.
Speaker 2: I'm proud of our high performance inclusive culture.
Speaker 2: and thrilled that we have been selected yet again.
Speaker 2: by fortune and great place to work as one of the 2023
Speaker 2: 100 best companies to work for.
Speaker 2: for the ninth consecutive year. Now I will turn it over to John to provide more details on the Q&A results and our updated 2023 outlook.
Speaker 3: Thanks, Ena Rood, and good afternoon, everyone.
Speaker 3: I'm pleased to report that we exceeded our key financial and operating metrics for the first quarter of 2023.
Speaker 3: As planned, we increased our hardware production capacity to improve delivery lead times, resulting from strong demand for our hardware solutions.
Speaker 3: Here are some of the financial highlights from the first quarter, starting with the P&L.
Speaker 3: Total revenue was $1,022,000,000.
Speaker 3: Gap operating margin was 31.6%, and non-gap operating margin was 42.1%.
Speaker 3: gap EPS was 89 cents and non-gap EPS was $1.29
Speaker 3: Next, turning to the balance sheet in Cash Flow, cash balance at quarter-end was $917 million.
Speaker 3: Operating cash flow was $267 million.
Speaker 3: And we repurchased $125 million worth of Cadence shares.
Speaker 3: Before I provide our outlook for Q2 and the year, I'd like to highlight that it contains our usual assumption that the export control regulations that exist today remain substantially similar for the remainder of the year.
Speaker 3: Also, for the year, we continue to expect our revenue mix to be consistent with the 15% upfront and 85% recurring revenue mix that we experienced in 2022.
Speaker 3: With that in mind, our updated outlook for fiscal 2023 is revenue in the range of $4.03 to $4.07 billion.
Speaker 3: Gap operating margin in the range of 30 to 31 percent.
Speaker 3: non-GAAP operating margin in the range of 41 to 42 percent.
Speaker 3: Gap EPS in the range of $3.26 to $3.34. Non-Gap EPS in the range of $4.96 to $5.04.
Speaker 3: operating cash flow in the range of $1.3 to $1.4 billion.
Speaker 3: And we expect to use approximately 50% of our free cash flow to repurchase Cadence shares.
Speaker 3: For Q2, we expect revenue in the range of $960 to $980 million.
Speaker 3: operating margin in the range of 29 to 30 percent.
Speaker 3: Non-gap operating margin in the range of 40-41%.
Speaker 3: Gap EPS in the range of 73 to 77 cents.
Speaker 3: Non-GAP EPS in the range of $1.15 to $1.19.
Speaker 3: And we expect to repurchase approximately $125 million worth of Caiden shares.
Speaker 3: As usual, we published a 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 reconciliations.
Speaker 3: In conclusion, we had a good start to the year. With the increase in our outlook at the midpoint, we now expect revenue growth for the year at approximately 14%.
Speaker 3: As always, I'd like to close by thanking our customers, partners, and our employees for their continued support.
Speaker 3: And with that operator, we will now take questions.
Speaker 4: At this time, I would like to remind everyone who wants to ask a question to press star, then the number one on your telephone keypad now.
Speaker 4: We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Gary Mobley with Wells Fargo. Your line is now open.
Speaker 1: Good afternoon, everybody. Thanks for taking my question. I wanted to ask about an observation that is your upfront revenue, your functional verification revenue, your China-related revenue. We're all very strong in the first quarter.
Speaker 1: So I'm curious to know if all those were related and relate specifically to maybe some pull forward of some customer deliveries or some customer orders or was it more so a function of having the ability to turn the hardware verification business around a little bit quicker than expected? Yes, Gary, great question. Thanks for your question.
Speaker 3: It benefited China. I think China is up to 17% of our revenue for Q1. That's mainly hardware driven. And again, we wanted to reiterate the fact that last year we did our recurring revenue mix with 85% of our total revenue, 15% upfront.
Speaker 3: We still expect that to be the case for this year, but in Q1 because of the increased hardware deliveries, the mix was 80% recurring and 20% upfront for the quarter. We wouldn't expect that to repeat for the rest of the year. Related to that, John , if I'm not mistaken, 2.5 months ago when you gave the initial fiscal year 2020, we were able to get the initial fiscal year 2020.
Speaker 3: bookings again in Q1. We didn't take up the second half of the year. I want to wait until the summer to have a look at the pipeline because hardware is very much a pipeline business. However, we did take up the year by 20 million and part of that is the beast in Q1, which was some hardware.
Speaker 3: But the rest of that was, you know, strength on the software side, probably predominantly in the system design analysis space. And we raised that for the year. And that's kind of recurring throughout the year. But we haven't taken up the second half of the year for hardware. I'd like to wait until the middle of the year for that. We still expect, I mean, we expect all the businesses to go strongly this year.
Speaker 4: Thank you. Your next question comes from the line of Jay Fleeshauer with Griffin Securities. Your line is now open.
Speaker 3: Thank you. John , for you first on RPO, according to the 10Q, it looks like you had about a $400 million sequential decline from Q4, and also a sequential decline in the next 12-month expected revenue from RPO. Please like, Subscribe, Share, and comment, Thank you much.
Speaker 3: can move around of course with hardware and contract timing and so forth but let me just talk about the magnitude of that sequential decline in RPO and perhaps any expectations for that the remainder of the year and then my follow-up.
Speaker 3: Yeah, sure Jay. The second half of this year is very heavily weighted for bookings for the total year. We're very light in the first half of the year for software renewals. The second half of the year Q3 and Q4 are very strong for software renewals this year, unlike last year. Last year I think the first half was...
Speaker 3: we had a number of big software renewals in the first half. We don't have that this year. And when you look at the second half, of course, I mean, any big renewal you have in Q3, you know, at the end of last year, we had like nine months in CRPO for that. And now it's only six months at the end of this quarter. So it's really just the function of renewal timing.
Speaker 3: and the fact that the first half of the year is light for renewal timing. I'd remind you as well that you know in terms of renewal timing that the Q1 and Q2 are the are the two quarters that's kind of are like three years after the uh the breakout of the the pandemic back in in 2020. So so those were life.
Speaker 3: for us anyway in terms of light renewals. So the second half of the year, much more heavily weighted towards the second half of the year for software renewals. And you see that impact on the RPO and CRPO. To a lesser extent, there was some, you know, a drop off on hardware because we deliver so much hardware in Q1, but it's mainly the timing of renewals.
Speaker 3: Okay understood. Anurad for you on AI, the product launches the last couple of weeks including last week and the customer presentation was certainly very interesting. But just wanted to ask you about management comment at the conference last week that you were making quote.
Speaker 3: per product or per group, but not necessarily very large percentage of your R&D headcount. So when you say massive investment, in what other ways perhaps do you mean that?
Speaker 2: Jay, good question. So I think the first thing I would like to say just to add on to what John was saying earlier. The Ik param, right?
Speaker 2: I mean, yeah, there could be some fluctuations in, you know, renewal timing.
Speaker 2: But the great thing about our business is we are not sensitive to that, right? I mean, it's mostly a rideable business and
Speaker 2: But what I'm pleased to see is that both in system and semi companies that design activity is very strong. Because a lot of these products are, I mean we are resilient to the overall kind of macro environment so resilient because the products are critical and essential.
Speaker 2: And then, you know, we are mostly a rideable business and then we are very diversified, as you know, both geographically and markets. Now, in terms of AI, I mean, this is having, of course, having a significant effect in terms of amount of automation we can provide and the increased automation we can provide.
Speaker 2: So we are embedding that, as we mentioned in our Cadence Live conference last year, in all products. And it will be pervasive throughout the product line. So I'm actually pretty pleased.
Speaker 2: to see not only our base kind of Jedi platform, which is, you know, you need a data analytics platform to really do AI in an intelligent, comprehensive way, but also, you know, there are five big platforms on top of Jedi. So from Chip. may
Speaker 2: to package, to board, to system. So we always had Cerebras, which is doing phenomenal with more than 180 tape outs, very simple verification. Now studio, you know, which was a studio for analog with layout migration and, you know, design centering using AI and then XAI for, for a light growth, you know PCB and packaging and optimality for.
Speaker 2: system design and analysis. So it's a very comprehensive portfolio and you know amount of R&D investment just depends on different products and you know sometimes we have it within the product sometimes we have outside but it will be it will be pervasive through the product portfolio and like I have mentioned before you know our strength in computational software you know naturally allows our regular even lego R&D to do a lot of AI you know.
Speaker 2: We of course have AI specific R&D, but our regular R&D, given the rich history of EDA and computational software, we can embed that in our product. So the real value is to really do it comprehensively and make a big difference in terms of productivity, in terms of automation, in terms of PPA benefits that we are delivering to the customers.
Speaker 5: Thank you both.
Speaker 4: Your next question comes from the line of Charles Shee with Needham & Company. Your line is now open.
Speaker 3: Good afternoon. Thank you for letting me ask a question or two. So really just want to go back to the second half EDA renewal, the expected strength.
Speaker 6: May I ask those expected renewals, are they already in the backlog or not? Or are they not in the backlog? You expect to sign a renewal in the second half of the year. That's my first question.
Speaker 3: Yeah, so Charles, yes, just for clarification, all of our renewals will already be in backlog. But if there's, let's say you have a renewal that's coming up in September , you would have had nine months of backlog left on that renewal at the end of Q4 last year. Now you have six months left in backlog.
Speaker 3: And then when you get to September , you'll have nothing left in backlog and then you'll have the renewal will come through. Okay, okay. So those renewed contracts are not yet in your current backlog. That's what you're saying. Okay.
Speaker 3: Oh, so the new ones will not be until we do them in the second half of the year.
Speaker 3: Got it, got it, got it. So may I ask, yeah, go ahead please. So I just wanted to clarify that, yes. So the remainder of the existing bookings will be in backlog, but that will reduce until we get to the actual renewal date and then on the renewal date we'll have a new booking come through. So I just wanted to clarify that, yes, the new bookings will be in backlog, but that will reduce until we get to the actual renewal date and then on the renewal date we'll have
Speaker 6: Got it. And that will be added to the backup. Got it. So just want to really clear this up. I think another analyst just asked about the implied booking seems to be down into one. And I think you did provide some color, but I want to ask about another perspective. I think in March 20.
Speaker 6: weakness in bookings and not meaning much in terms of the broader industry trend. Is that the same case this time or are you seeing some other more like a trend indicative of the trend going on industry today? Thank you.
Speaker 3: Thanks for the opportunity to clarify there, Charles. Certainly, I didn't see any weakness in bookings in Q1. Bookings in Q1 were stronger than we were actually expecting at the start of the quarter. What I was trying to convey was that we had very few software renewals that came up for renewal in Q1, and therefore, bookings were expected to be light. But the beauty of the recurring revenue model that we have is that...
Speaker 3: You know, the timing of those renewals is not especially important, but it's the annual value of those renewals and that we continue to see growth in the annual value of those bookings and we see growth across all of the businesses.
Speaker 4: Thank you, John . Thanks. Your next question comes from the line of Harland Sir with J.P. Morgan. Your line is now open.
Speaker 6: Hi, good afternoon and nice job on the strong quarterly execution. You know, we had a call last week with one of the largest semiconductor companies, a very large customer of yours.
Speaker 6: that they've got chip design programs with many of the cloud and hyperscalers and they told us that they're seeing a pickup just over the last sort of 60 to 90 days.
Speaker 6: Just a meaningful pickup in design activity and design project pull-ins on their accelerated compute and AI SoC programs from their hyperscale customers. I guess it's not a surprise given the AI arms race amongst the cloud sections but have you seen this recent pickup in customer design activity program pull-ins reflected?
Speaker 6: in your recent discussions on upcoming renewals and or customer engagement? Yeah Harlan that's a great point.
Speaker 2: In general, like I mentioned earlier, I mean, there is a lot of strong design activity. You know, we see with our customers, you know, both on the semi and the system side. And when I talk to, you know, our ecosystem partners, right, the foundries and IP providers. So overall, I think design activity is very strong. Now, in particular, to your specific question on AI, I definitely see a lot more interest.
Speaker 2: And the reason is, I mean, you know, at least one of the reasons I think you, which we know, you may know already is, you know, this new kind of generative AI and all this talk about, you know, chat to PT is that, you know, traditionally, you know, search or this kind of AI, interesting the past was done on on.
Speaker 2: in a CPUs, but this new, generative AI tools, of course, the training is done on GPUs as always, but even inferencing, when you ask it a question, a lot of the inferences done on GPUs, which is traditionally, it's a great accelerating platform, but traditionally more expensive than CPU platform. So not only it will drive more and more adoption of GPU and excellent computing in the cloud.
Speaker 2: but also naturally look for customized silicon, you know, that can do it much more effectively and efficiently, both for performance and power. So we do see, you know, generative AI and adoption of this more reinforcement learning based kind of inference, you know, training and inference, especially the inference part of it.
Speaker 2: to drive more silicon demand and more customized silicon, and which you are correct in your observation. But in general, right, we have talked about for several years, the need for customized silicon, whether it is for generative AI now, or in general for self-driving, or variety of applications, is expected to continue, and we are pleased to see continued momentum in that space.
Speaker 6: No, I appreciate that. And then maybe as a follow on to that question, you know, many of your questions come as a learner."
Speaker 6: Cloud and OEM customers that historically have worked with these large ACIP companies.
Speaker 6: We're also hearing that some of them may be trying to go the extra distance and pull together the capability to do the entire chip design themselves, what we call a COT-based model, which I would think would mean further expansion of their design teams beyond just fun and design, which is a great thing.
Speaker 6: Again, would be maybe more market opportunity for things like your virtual also franchise and many of your back end physical implementation And verification tools. Are you guys seeing this trend as well?
Speaker 2: Yes, absolutely. So I think if you look at this kind of transition of system companies doing their own silicon.
Speaker 2: I think there are at least three phases of that, you know, and that's why I've commented in the past that we are still in the second inning of this. And you can look at other companies like in the mobile space when they started doing their own silicon. So the first phase is, you know, using a, you know, ASIC provider. And actually we have great relationship with almost all the.
Speaker 2: major ASIC providers. We have very deep partnership with all the, you know, in all geographies we're leading ASIC providers. But typically the system companies will start with ASIC provider but then typically go to a COT flow or customer-owned tooling.
Speaker 2: And in that, they will do more and more backend design and more and more. So usually that is more opportunity for Cadence.
Speaker 2: and so that the front end and back end can be optimized together. I mean, the AC provider can do that too, but typically the customer will go to a COT flow over time. So that's one thing that really has already happened in other system companies is happening in the newer one.
Speaker 2: And the other trend of course is that they will do more and more designs also. Initially they start with one or two designs. You can see these examples in all the public ones like Amazon doing in the beginning a networking chip. And once that networking chip is successful they move to Graviton which is a compute server. And then once that's successful they go to an AI chip.
Speaker 2: for a while because there is companies moving from part of the flow in house to full flow in house, which is moving to COT from ASIC. More and more designs being done. And thirdly, more and more companies doing silicate.
Speaker 2: So all these three trends are positive for cadence and the products that we supply.
Speaker 4: Yep, insightful. Thank you. Your next question comes from the line of Jason Salino with KeyBank. Your line is now open.
Speaker 6: Hey, thanks, guys. Just two questions from me. Maybe my first one, John , you mentioned taking up the full year guidance based on some strengths in system analysis. I'm curious, you know, was this driven more from your existing business there or was it from OpenEye? I guess how is OpenEye doing relative to expectations?
Speaker 3: Yeah, Jason, so we took up the year by about 20 million, but half of that was with hardware from Q1 because that was a big portion of the beaten Q1. And the other half of that was spread across our software business, mostly in the system design analysis space. The mostly organic, but there was some inorganic contribution as well.
Speaker 7: Okay, and then I second.
Speaker 7: Sorry, go ahead, Henry. Go ahead, Jason. Yeah....
Speaker 8: Oh, sorry, yeah. And then my second question on the guide. It looks like second quarter is going to decline sequentially by about 5%. Consistent with what we saw last year, too. So maybe just a quick refresher on what's driving the seasonality here. I've got lots more opportunities, though, to focus more on topics I
Speaker 3: Yeah, Jason, when you look at it, it'll show up in the functional verification number next quarter. I think when I look at Q1 was great. I mean, functional verification was up 30% year over year. The quarter was up low teens. When I look at Q2, Q2 also looks great. It's going to be up low teens again compared to Q1, 22, but functional verification will be up.
Speaker 3: probably closer to 20% rather than 30%. But so it's our expectation that, like in our guide, we're assuming that the recurring revenue mix for the year stays at 85%, 15%, 85% recurring 15% upfront, same as what we experienced last year. Now in Q1, it was 80%.
Speaker 3: 20% so there was a lot of open revenue for the hardware deliveries that went out in Q1. In Q2, we expect Q2, Q3, Q4 to be less than the 80-20 and it'll average 85-15 for the year. So you're seeing that in the Q2 guys.
Speaker 7: Okay.
Speaker 2: If you look at the Q2 guide, it's still up nicely from Q2 of last year.
Speaker 8: Thanks for the clarification.
Speaker 4: Your next question comes from the line of Vivek Arya with Bank of America. Your line is now open.
Speaker 8: Thanks for taking my question. I had a near term and then kind of a bigger picture question. So near term, your IP sales have slowed down, I think for three quarters. Now, I think they're actually down. I'm curious on what's driving the slowdown.
Speaker 8: and do you expect IP to grow in line with the 14% sales growth for the entire company? What will help those sales reaccelerate in the backup?
Speaker 2: So we're very good in general, you know, the we, you know, IP is still the good business and we expect in 2023, you know, IP business to grow in the low teens compared to last year.
Speaker 3: So there is some quarter by quarter fluctuation, but in general, we expect IP business to perform well in 2023. And so, yeah, and what I would add to that is that, you know, IP revenue generally can be lumpy because some of it's upfront and it's based on the timing of deliveries. Now, last year, our IP revenue, we had more deliveries that fell into the first half compared to the second half.
Speaker 8: business and we're on track for that. And then my bigger picture question is, what is the right kind of public metric to gauge how much benefit you're getting from AI? Is it accretive to your pricing, to your growth rate? So just what is the best public metric to…
Speaker 8: you know, appreciate how much benefit you're getting from AI. And is there a scenario where just the improved productivity, right, or accuracy that AI provides, could it even cannibalize some of your hardware or software part of the business? Or do you think it's kind of net accretive, longer term, just given the larger time size and the greater customer engagement? So just, what have you seen so far from AI? What is the best way for us to track?
Speaker 2: how much incremental benefit and do you expect it to be net accretive over time? Yeah Vivek, you know what I would say qualify AI as another way of providing you know dramatic automation. You know that's the end of this history of our industry is to provide more and more automation and I would say AI is like third wave of massive automation and productivity.
Speaker 2: whether it's on-prem or on the cloud. And, you know, starting from 2013, we have a lot of parallel products. And then now the third wave of productivity and automation is using AI or, you know, what I always call AI for optimization now called, you know, reinforcement learning or generative AI.
Speaker 2: So we have a history over the last 20, 30 years of doing this kind of, and in all cases, you know, it doesn't cannibalize. Actually, the activity increases and amount of software use and amount of optimization that happens, you know, more and more designs are done, you know, with the, with the available, you know, resource headcount.
Speaker 2: So I expect AI to do that. I mean, in general, the benefit is so huge that when you get this new capabilities, you use it to do much more efficient design. Okay, I'll give you example, starting to some very senior people in our industry. And one comment has been that, oh, the Moore's law has slowed in terms of...
Speaker 2: actual improvement you're getting from one node to another node. When you went from 65 to 40 nanometer, you get X amount improvement. Now when you go to 5 to 3, that used to be 20 percent, now it's went to 50, now maybe it's like 10 percent improvement. Even our tools like Cerebras or a lot of the other things look like I don't have definitely effective development. Now I look for 2, 100 AHUs. Now the X amount of 3,500 AHUs is around 6,500 arrival. We're one hundred percent accurate for the multiple metal, and it's pretty much a diffusing growth map
Speaker 2: AI based tools can provide easily 5 to 10 percent improvement in PPA. So you are getting improvement from better algorithms which are similar to half or full node of a process technology improvement.
Speaker 2: Okay. And that's just huge. You know, the amount of improvements you can get from this third wave of automation, you know using generative AI is huge. So, and I think that's one metric that we have published a lot in terms of how much PPA and product improvements we are getting. And that's what we closely monitor with our customers. And I think another thing is to apply that across.
Speaker 2: across other things, not just digital implementation, to apply to package design, to board design, to simulation. And what I think the opportunity it gives us is over time, we can get higher share of R&D invested in automation.
Speaker 2: Because the complexity of these things is going up exponentially, so the headcount can't go up exponentially. So the headcount I expect still will grow 5-10 years from now in terms of R&D spend in our customers. But we can get a bigger share of that R&D spend applied to automation.
Speaker 2: things is going up exponentially, so the headcount can't go up exponentially. So the headcount I expect still will grow you know five, ten years from now in terms of R&D spend in our customers, but we can get a bigger share of that R&D spend applied to automation. Thanks Aayog.
Speaker 4: Your next question comes from the line of John Marco Conte with Deutsche Bank. Your line is now open.
Speaker 6: Hi there. Hi, Anna Rose and John . Thanks for taking my questions. So on my first one, I just want to touch base again on the AI suite piece, especially whether you're entering a more mature phase of the price discovery mode as you're accelerating volumes. And secondly, I I've looked at the
Speaker 9: Perhaps thinking about the specifics of what are the AI demand drivers here, whether those are correlated to increased design at the lower loads, or are there other trends that we should be aware of other than the increase in complexity, i.e. some specific trends in the industry that you're seeing beyond the semi-players.
Speaker 9: Particularly, as you've mentioned, of course, optimality in SDNA. Is there anything that we can sort of like track or understand what's going on behind the bonnet? Ask a follow-up question, Asma. Thank you. It's a great question, Sh Baba Melbourne.
Speaker 2: Absolutely. I think we talked about chip, right, and how AI can help this third wave of automation.
Speaker 2: But the same thing can be applied at package and system levels. I do want to highlight that. We have talked for a few years on importance of merging of system and semi and how system companies are doing semi and then we can also provide solutions for system design and analysis like thermal stimulation.
Speaker 2: you know, electromagnetic simulation, you know, fluid dynamics. And traditionally, you know, those areas were...
Speaker 2: First of all, the simulation capabilities could be improved. Just the raw simulation speed. So for example, clarity for electromagnetic. We got order of magnitude improvement versus traditional methods because applying our computational software expertise, we can do a lot more simulation.
But on top of that, there are two other things that can jump start system design and analysis. And you're seeing that even our growth that you're seeing. So one thing is use of GPU acceleration. And we talked about this in my prepared remark. And I think GPU acceleration is significant for system design and analysis.
And the other thing is applying AI on top of simulation. So EDA has a long history of optimization, not just simulation. And AI for optimization of generative AI is really new for system design and analysis, because they are barely, even the simulation capabilities were not keeping up, but they didn't really have that much optimization capability. So the response we are getting from Allegro XAI and optimality is huge.
because not only simulation is possible for the first time, but the optimization of simulation. You know, because in general, if you're doing some thermal design or, you know, design of the data center, yes, you want to simulate or, you know, of a car, but you want to optimize, you know, whether it's the shape of the wing or placement of the racks in the data centers. And all this is really now possible with generative AI. So I think the impact on this SDNA.
will be profound apart from the impact on chip design. And we are the company that can combine those two things and apply AI to both of these areas.
Great, thank you. Just my second one is on M&A. Whether there's any M&A in sight or plan on increasing the portfolio, perhaps in the system design analysis, or is 2023 consistent with the plan of distributing cash to shareholders via buybacks?
Yeah, I mean, in general, you know, we want to start with the strategy and we feel we have a very, very strong strategy with intelligent system design, you know, this combination of silicon system and data. And we are very pleased with our progress. And we continue to grow, you know, organically and perform well both in terms of revenue growth and margin.
So, you know, that's our base, you know, strategy, base outlook. Now, we always evaluate M&A as it comes up and if it's a good return.
for our shareholders and good return in terms of R&D. But in general, we are pleased with our strategy and our organic execution.
Got it, thank you. Your next question comes from the line of Blair Abernathy with Rosenblatt Securities. Your line is now open. Your next question comes from the line of Blair Abernathy with Rosenblatt Securities.
Thank you. Just a quick question on the multi physics side of things, the system design, the growth, I think you call it was around 27% year over year, just want to clarify, was that including the acquisitions or is that organic? And then secondly, just, you know, on the multi physics side of things, how are you?
doing in terms of you know you go to market strategy and scaling the business up it looks like it's getting close to a 500 million dollar run rate just want to see how you're here
doing in the in the go-to-market side of things. Yes, absolutely. The growth rate is a combination of organic and inorganic right the acquisitions we made in the past.
And in terms of go to market, you know, we have, of course there is a lot of overlap with our current customers too. And then of course some of the customers are new customers. So we try to leverage both our existing channel and then we also have set up a, you know, a system kind of sales team that targeted, you know, new customers that we traditionally haven't
But one thing to remember in SDNA, you know, as this overlap of system and semi companies, a lot of the leading companies in SDNA are companies that Cadence already has a very deep relationships. So and we are still selling to the engineering organizations. And it's just the good part is both the EDA and SDA are engineering.
like we do for our EDA business. And that, we have great relationship with the top customers in the world, which are consuming both EDA and SDA. And then I think in SDNA, there is a bigger portion of indirect or channel. So, we had a strong channel for our Allegro and Orcat businesses, which is PCB and package.
and especially in the system space, they are much more able to direct SaaS kind of cloud offering. So overall, this is an ongoing progression. As you said, now the business is getting to a good scale. And especially in SDNA, we want this three-prong approach of direct, indirect plus cloud.
But one thing to remember is a lot of the top customers in SDNA are already existing EDA customers and that really helps us as we go to market.
to remember is a lot of the top customers in SDNA are already existing EDA customers, and that really helps us as we go to market.
Your next question comes from the line of Ruben Roy with Stifle. Your line is now open. Thank you. Thanks for taking my question. John , I had a question on the commentary around renewal. And just thinking back to the pandemic and how you guys thoughtfully took into account some of your smaller customers and how that might impact some of your software renewal. My question requires you to look across the hi-fi box if you can find it on a smaller platform. The first time we use the ever-vousing format of a wild countries i've seen, I suppose deserted Auditorium.
with really large, very, very highly creditworthy customers. But we did see some softness in the lower creditworthy tier of customers like startups in Q1. And we have already factored that into our guidance for the year, for both Q2 and for the year. But generally at the high end, with the big renewals are with.
like the strongest credit worthy customers in the industry.
Right. Got it. Thank you, John . And then a quick follow-up for Anurag on the hardware. It's come up now a few times, Anurag, on your call, which is nice to see that the take rate of – or attach rate, I should say – of hardware continues to move up. The numbers have been quite strong, obviously. Is there a way to think about the percentage of your customers now that are on the call?
about the longer term mix for the company? I mean, the good thing with the hardware is that, like you mentioned in the past, it has become almost essential part of the design process. So,
And it's almost, it's virtually impossible to design these complex chips without use of the hardware platforms. So I would say, you know, all the major customers, especially all the big major customers that drive most of our revenue, are using, you know, hardware anyway. Now, there is, so there's always room for, you know.
refresh of that, you know, of the hardware they're using. And also, as the chips, as they go to different nodes, I mean, we are at like five nanometer going to three to two to 1.4 to one, because there is at least, you know, 10 years of node refresh ahead of us. So every time you go to a new node, you know, the size of the chip increases, you know, the number of gates that are on a chip increases. So you typically need more and more hardware. So the capacity requirement for hardware increases.
So that's why I think that for long term, you know, hardware is going to be in a, in a secular growth period. Not only is it critical, but you need more and more, and that's going to last for, you know, at least for the next 10 years, if not more. And then sometimes there's opportunities for some of the smaller customers to add hardware. And we look at that also, and we have a variety of business models to help.
the smaller customers, but at this point most of our big customers are using hardware but still there is growth because the chip size increases or if they're using palladium they can use more proteome and vice versa. I would just add to that Ruben that I think your question emanates from the fact that back in 2021 I think our recurring revenue to upfront mix was 8812 and of course that grew the the upper and hardware was so strong last year it went
on the 15 rather than the under.
That's really helpful, John . Thanks. I guess just really quick, I know I'm only allowed one follow-up, but just on that point, have lead times normalized, would you say, or is there more work to be done on the production side? We should get back to more normal lead times by the middle of the year, but we thought it was really important in the first half to prioritize deliveries to customers that have been waiting the longest for the hardware. I mean, as you know, we have multiple uses for the hardware.
question comes from the line of Joe Vruink with Baird. Your line is now open.
Great, thanks for squeezing me in. I wanted to take another crack at the topic of AI and adoption. So when you think about maybe the best example is cerebras.
Within an implementation effort, if you think about the total block engineers at an account, what share of those engineers are typically using the product at this point? In your mind, is that something as we enter the next round of renewals, it could get more widely
And then we are engaged with all the top customers, and then five hyperscalers are using. And I think, but still, you know, it's not, I think, you know, there's still a lot of opportunity for growth there. Because the way I look at it is, you know, especially Cerebras or JEDI, all these platforms.
with all the top customers, and then five hyperscalers are using. And I think, but still, you know, it's not, I think, uh, you know, there's still a lot of opportunity for growth there because the way I look at it is, you know, especially Cerebras or Jedi, all these platforms that
I think over time, they will become the cockpit. So in the old days, in case of digital implementation, Inovus was the cockpit. So the customers would run Inovus or try different experiments with Inovus. But now, Cerebras can do that mathematically with AI, and then you can still combine that with the...
You can still do manual experiments on top of that. So I think overall, I would expect in three to five years, almost all designers would be using cerebras what they were using in the past.
And same thing with optimality, same thing with Allegro XAI. So we are still away from that. So there is still this progression that has to happen. So I think we are engaged with all the customers. We are, you know, they are using it.
But I think over time, it will become the dominant way of running products will be using the Terebras are then using, you know, the old way it's like going from, you know, manual cars to automatic cars, you know, some people may still want to drive manual, but more and more people will drive automatically using Terebras. So I think in that we are still in the early evening.
So it's still like years to go in that and and that's good. You know, we are in our business, you know Like we mentioned earlier we're looking at you know annual contract value and let the natural adoption happen Okay, that's great And then on the system design segment can you I don't think I heard it just an update on where you expect growth to be in 2023
And then in reflecting on the developments here and kind of the upside you're seeing in bookings, is it possible to pinpoint it? You know, something like you talked about the repeat orders on the organic solvers. You've obviously built a bigger CFD business. There's some new channel initiatives. Are any of these things more important than others in terms of driving the other...
So that's the most important thing. If the products are differentiated, the customers always use it. And all these channel initiatives help and awareness of our products with marketing helps. But in the end, we're always focused on developing and supporting, making best in class products. So on that, I'll stop there.
We made a lot of progress and benefits. I mean, recently, I talked about in my prepared remarks, but one thing I think in system design and analysis, like I mentioned, I'm very optimistic about use of GPUs. And GPUs have done wonders in AI, right? By accelerating AI computation.
And traditionally GPUs haven't worked that well in EDA, you know, they do help EDA, but it can dramatically help SDA because SDA is a more kind of the, it's more physics based simulation. So it's more kind of matrix multiplier, which is similar to, in spirit to AI. So recently with our collaboration with NVIDIA, Jensen talked about
that cadence CFD on GPU for the same cost is giving a 9X improvement in speed up and 17X improvement in power efficiency. And you know, GPUs are slightly more expensive than CPUs. I mean, typically I would guess, you know, at least three to five X. So you're getting 30 to 50 X speed up on GPUs that normalized for cost, you're still getting 10X or 9X improvement in speed. So that's a huge improvement, you know, based on our special algorithms, you know, because we have a long history of massive parallelism.
But we're always focused on best in class first. Yeah.
Your next question comes from the line of Andrew D'Egas-Berry with Berenberg. Your line is now open.
Thanks for fitting me in. I guess one question I had is, and I know you've talked a lot about AI on this call, but just wondering if you think this could potentially lead to more pronounced market share shifts.
in the future. I know historically there's not been a lot of market share changes in EDA. I'm just wondering if within portfolio that you have relative in your investments that you made relative to your competitors, do you think that could change? Yeah, that's a good point. I mean in general, like I mentioned, we're always focused on best in class. So and that AI can play a big role in that.
But I do think that the real opportunity for the industry, you know, both for EDA, SDNA, you know, is more and more share of R&D going to automation. I think that will be good for all players. Of course, we invest heavily. We want to have best in class solutions in R.
products, but I think the bigger trend will also be, you know, these things are getting so complex, there's not going to be enough headcount to design these things, you know, five, seven years from now. So the bigger opportunity for the entire industry is more shift to automation.
And that's, I think, good for everyone. That's helpful. And I think the way we look at... Sorry, go ahead. Yes, please. No, go ahead. I mean, yeah, the other thing I think, the way we are unique is not just apply, you know, test-in-class products in EDA, but we combine, you know, chip and system.
I think that also provides us unique differentiation with our customers and our market position. And that's the strategy we have been implementing for the last four or five years. And applying AI improves our EDA solution, but also the combination of EDA plus SDA and computational software, that also improves our comparative position in the market. That's helpful. And then maybe on just general...
of trends this quarter. I'm just wondering in terms of the systems business, have you seen any change particularly in the data center side in terms of demand or is it making it kind of consistent relative to the previous quarters? I think that, I mean, you know, the news is, I mean, it's a tough environment for our, you know, in general.
you know, with the, all the news is, but in general, like I said, the design activity is strong. Okay. And, uh, and so, and our, you know, results are strong. I think that the data center customer is still, you know, invest heavily in automation and, you know, R and D and the new uptake, like the beginning of the call, we talked about the new uptake, I think is more.
to the infrastructure to serve generative AI. I think that's definitely a very active area for the big data center companies because these things are really complicated and complex, you know, to serve this whole generative AI base. So that will require use of specialized hardware.
also different kind of hardware mix in the infrastructure. So I think that's going to be a change and that's good for our opportunities for us.
hardware mix in the infrastructure. So I think that's going to be a change and that's good for our opportunities for us. So great, thank you.
Your next question comes from the line of Arseniy Matovic with Wolf Research. Your line is now open. Hi, this is Arseniy on for Josh. So just to double click on the systems company strength, and I wanted to see if there was any kind of call outs in particular end markets and how many of the shifts in end markets have changed relative to the end market.
year or any kind of outlook changing in terms of market demand within those companies. Thanks and then a quick follow up.
Well, I would say that in system companies data centers always a lot of activity driven by generative AI. And I think we mentioned also in our prepared remarks automotive and A&D are definitely be seeing a lot of design activity.
So I would, if you have to pick like a few verticals, so definitely data centers with AI and then automotive AI in general, but also electrification and more A and D. And we are seeing that in our own engagements with customers.
And then if we could kind of think about some of the strength in hardware, how much of that is driven from refresh from existing large semi-customers versus maybe new purchases from systems companies, if we kind of like quantify that from a high level, would be helpful. I think it's a combination of both.
It's both, you know, like the system companies, the semi companies as you know, more designs and newer designs require more and more hardware and system companies by nature.
also have software, otherwise there wouldn't be system companies. So in system companies, our dual dynamic deal of Proteum and Palladium really helps because Proteum is more for software bring up and then Palladium for chip bring up. So I would say both are strong but there is more software content by nature in the system companies.
Thank you. I will now turn the call back over to Anirudh Dukkhen for closing remarks. Thank you all for joining us this afternoon. It's an exciting time for Cadence with strong business momentum.
and growing opportunities in the semiconductor and systems industry. We are proud of the innovative and inclusive culture we have built at Cadence.
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. Thank you for participating in today's Cadence first quarter 2023 earnings conference call.
This concludes today's call. You may now disconnect.