Q4 2023 Cadence Design Systems Inc Earnings Call
Operator: Good afternoon. My name is Brianna, 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 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
Good afternoon. My name is Brianna 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 2023 earnings conference call.
All lines have been placed on mute to prevent any background noise.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then 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, sir.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
Speaker Change: Thank you.
Speaker Change: I will now turn the call over to Richard do Vice President of Investor Relations for cadence. Please go ahead Sir.
Richard Valera: Thank you, operators. I'd like to welcome everyone to our fourth quarter 2023 Earnings Conference Call. I'm joined today by an Honored Devotee.
Richard: Thank you operator.
Richard: I'd like to welcome everyone to our fourth quarter of 2023 earnings Conference call.
Richard: I'm joined today by honored definitely press.
Operator: President and Chief Executive Officer, and John Waugh, Senior Vice President and Chief Financial Officer. The webcast of this call and a copy of today's prepared remarks will be available on our website, cadence.com. Today's discussion will contain forward-looking statements, including our outlook on future business and operating results. However, due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion.
Richard: President and Chief Executive Officer, and John Wall, Senior Vice President and Chief Financial Officer.
Richard: Webcast of this call and a copy of today's prepared remarks will be available on our website cadence dot com.
Richard: Today's discussion will contain forward looking statements, including our outlook on future business and operating results.
Richard: Due to risks and uncertainties actual results may differ materially from those projected or implied in today's discussion.
Operator: For information on factors that could cause actual results to differ, please refer to our SEC filings, including our most recent Forms 10-K and 10-Q, CFO Commentary, and today's earnings release. All forelooking statements during this call are based on estimates and information available to us as of today, and we disclaim any obligation to update. In addition, we will present certain non-gap measures, which should not be considered in isolation from or as a substitute for GAP results.
Richard: Information on factors that could cause actual results to differ please refer to our SEC filings, including our most recent forms 10-K and 10-Q.
Richard: If a commentary and today's earnings release.
Richard: All forward looking statements. During this call are based on estimates and information available to us as of today and.
Richard: And we disclaim any obligation to update them in.
Richard: In addition, we will present certain non-GAAP measures, which should not be considered in isolation from or as a substitute for GAAP results reconciliation of GAAP to non-GAAP measures are included in today's earnings release.
Andrew (Incorrect Name in Context): Reconciliation of GAP to non-GAAP measures is included in today's earnings. 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 Andrew. Thank you, Richard. Good afternoon, everyone, and thank you for joining us today.
Richard: For the Q&A session today.
Richard: I'd ask that you observe a limit of one question and one follow up.
Honored: Now I'll turn the call over to honored.
Thank you Richard Good afternoon, everyone and thank you for joining us today.
Honored: I'm pleased to report that cadence delivered an outstanding Q4.
Andrew (Incorrect Name in Context): I'm pleased to report that Cadence delivered an outstanding Q4, wrapping up a record 2023, achieving 15% revenue growth, 42% non-GAAP operating margin, and over 20% non-GAAP EPS growth for the year. We exit 2023 with a record backlog of $6 billion, as customers increasingly commit to our chip-to-system integrated design and analysis platform. We expect our innovative solutions to continue driving broad-based business momentum in 2024. John will provide more details in a moment, secular trends of digital transformation, hyperscale computing, and autonomous driving, all bolstered by an AI super cycle, continue to fuel strong, broad-based design activity. We continue successfully executing on our intelligent system design strategy that triples our time opportunity while greatly expanding our portfolio. Our innovative engine has delivered several significant products, including, most recently, the revolutionary Millennium M1 platform, the industry's first accelerated multi-physics supercomputing platform. The platform tightly integrates our Fidelity CFD software with high-performance GPUs and combines AI, HPC, and digital twin technology to deliver an unprecedented 20x energy efficiency and up to 100x design impact.
Honored: Wrapping up a record 2023, achieving 15% revenue growth.
Honored: 42% non-GAAP operating margin and over 20% non-GAAP EPS growth for the year.
Speaker Change: We exited 2023 with a record backlog of $6 billion.
Speaker Change: As customers increasingly committed.
Speaker Change: Chip the system integrated design and analysis platforms.
Speaker Change: We expect our innovative solutions.
Speaker Change: Continue driving broad based business momentum in 2024.
John will provide more details in a moment.
Speaker Change: Yeah.
Speaker Change: Secondly trends of digital transformation, Hyperscale computing and autonomous driving all bolstered by an AI Super cycle.
Speaker Change: Continue to fuel strong broad based design activity.
Speaker Change: We continue successfully executing to our intelligent system design strategy that triples, our tam opportunity while greatly expanding our portfolio.
Speaker Change: Our innovative engine delivered several significant projects, including most recently the revolutionary Millennium and one platform.
Speaker Change: The industry's first accelerated multi physics supercomputing platform.
Speaker Change: The platform tightly integrates our fidelity Cfd software with high performance Gpus and combines AI HTC and digital twin technology to deliver unprecedented <unk> energy efficiency and up to 100 X design impact.
We were honored to have customers, including Honda Boeing and GE as.
Andrew (Incorrect Name in Context): We were honored to have customers including Honda, Boeing, and GE as speakers at our launch event. We substantially grew our footprint at market-shaping customers and expanded our relationships with key ecosystem partners. We further our partnership with Intel foundry through a strategic multi-year agreement on providing design software and leading IP at multiple Intel advanced nodes, thereby advancing Intel's IDM 2.0 strategy and accelerating mutual customer success. Cadence is at the forefront of the AI revolution, closely partnering with marquee companies on their trailblazing AI design for training and inference from cloud to the edge.
Speaker Change: Because at a launch event.
Speaker Change: We substantially grew our footprint and market shaping customers and expanded our relationships with key ecosystem partners.
Speaker Change: We further our partnership with Intel foundry through a strategic multiyear agreement on providing design software and leading IP at multiple Intel advanced nodes.
Speaker Change: Thereby advancing Intel's IDM to rado strategy and accelerating mutual customer success.
Speaker Change: Cadence is at the forefront of the AI Revolution.
Speaker Change: <unk> partnering with marquee companies on their Trailblazing AI design for training and inference from cloud to the edge.
Speaker Change: Nvidia and cadence have collaborated closely over several years and in Q4, we deepened our partnership through a meaningful expansion of our hardware solutions and EDA software.
Andrew (Incorrect Name in Context): NVIDIA and Cadence have collaborated closely for several years. And in Q4, we deepened our partnership through a meaningful expansion of our hardware solutions and EDA software. Earlier in the quarter, we announced our work on Cadence.ai with NVIDIA's NEMO Retriever, and now we are thrilled to deepen our partnership and extend it to the new Millennium Multiphysics Supercomputer and SAS solution, which is co-optimized with NVIDIA's Accelerated Computing and AI platform and as the exclusive EDA partner of Armtotal Design. Cadence and Arm are closely collaborating to accelerate the development of custom SLCs based on the NeoVerse Compute subsystem.
Speaker Change: Earlier in the quarter, we announced our work on <unk> with Nvidia Nemo Retriever and.
Speaker Change: And now we are thrilled to deepen our partnership and extended to the new millennium multi physics supercomputer and SaaS solution, which is go optimized with Nvidia accelerated computing and AI platform.
Speaker Change: And as the exclusive partner of armed older design.
Speaker Change: Cadence and are closely collaborating to accelerate the development of <unk> based on the neo versus compute subsystem.
Andrew (Incorrect Name in Context): Over the year, we have continued building out our generated Cadence.ai portfolio, the industry's broadest AI offering, spanning chip to board to system and delivering exceptional optimization and productivity benefits. Earlier in Q2, we introduced Virtuoso Studio and Allegro XAI, bringing AI to custom analog and PCB design. And in Q4, we added Voltus Insight AI for automatically addressing voltage drop violations. We also pioneered bringing LLM capabilities to chip design, successfully helping Renaissance accelerate functional specification to final design.
Speaker Change: For the year, we have continued building out our generated cadence our AI portfolio.
Speaker Change: The industry's broadest AI offering spanning chip to board the system and delivering exceptional optimization and productivity benefits.
Speaker Change: Earlier in Q2, we introduced virtuoso studio and Allegro ex <unk>.
Speaker Change: Bringing AI.
Speaker Change: <unk> analog and PCB designs.
Speaker Change: And in Q4, we added Walters insight AI, but automatically addressing voltage dropped violations.
Speaker Change: We also pioneered bringing L. L M capabilities to chip design.
Speaker Change: Successfully helping Renaissance.
Accelerated functional specification to final design.
Andrew (Incorrect Name in Context): The accelerating momentum of our Cadence.ai portfolio has led to an almost tenfold increase in the number of customers adopting our Gen AI solutions in 2023, as customers embrace the technology to develop optimized products much more efficiently. Now, let's talk about some of the product highlights for Q4 and 2023. Rising system complexity and challenges stemming from the growing hyperconvergence of the electrical, mechanical, and physical worlds are driving the need for a seamless platform solution across design, packaging, simulation, and analysis. We made this a core tenet of our intelligent system design growth strategy six years ago, and our system design and analysis business continued strong momentum, delivering 18% year-over-year growth in Q4 and 22% growth for the year. PCB and advanced packaging are linchpin technologies that sit at the crucial intersection of the mechanical and electrical domains.
Speaker Change: Accelerating momentum of our cadence our AI portfolio.
Speaker Change: And led to almost 10 fold increase in the number of customers adopting our gen AI solutions in 2023.
Speaker Change: As customers embrace the technology to develop optimized products much more efficiently.
Speaker Change: Yeah.
Speaker Change: Now, let's talk about some of the product highlights for Q4 and 2023.
Speaker Change: Rising system complexity and challenges stemming from the growing hyper convergence of the electrical mechanical and physical words dry.
Speaker Change: Driving the need for a seamless platform solution across design packaging simulation and analysis.
Speaker Change: We made this a core tenant of our intelligence system design growth strategy 60 years ago, and our system design and analysis business.
Continued its strong momentum delivering 18% year over year growth in Q4, and 22% growth for the year.
Speaker Change: PCB in advanced packaging, a lynchpin technologies that sit at the crucial intersection of mechanical and electrical domains and cadence is rich heritage and these areas remain a key strategic differentiator, especially in the emerging chip led era.
Andrew (Incorrect Name in Context): And Cadence's rich heritage in these areas remains a key strategic differentiator, especially in the emerging chiplet era. We continue advancing these technologies with Allegro X AI, providing greater than 10x acceleration in PCB design, and it was endorsed by Schneider Electric and Keosha at its launch. Our multi-physics analysis portfolio couples our expertise in physics-based modeling with AI-driven optimization and is delivering superior results to customers across multiple vertical segments, especially aerospace and defense and automotive. Recently, we launched Celsius Studios, the industry's first complete AI thermal design and analysis solution for electronic systems, delivering up to a 10x performance benefit over legacy systems with endorsement by Samsung and BAE Systems. Vistron, a leading technical services provider, uses Optimality's AI-driven optimization technology and clarity for fast, accurate electromigration in design analysis, improving design reliability while realizing a 2x improvement in turnaround time.
Speaker Change: We continue advancing these technologies with Allegro X.
Speaker Change: By providing greater than <unk> acceleration in PCB design.
Speaker Change: And endorsed by Schneider electric <unk> at its launch.
Speaker Change: Our multi physics analysis portfolio.
Speaker Change: Our expertise in physics based modeling with AI, driven optimization and is delivering superior results to customers across multiple vertical segments.
Especially aerospace and defense and automotive.
Speaker Change: Recently, we launched Celsius studios, the industry's first complete AI terminal design and analysis solution.
Speaker Change: Electronic systems, delivering up to <unk> performance benefit over legacy systems with endorsement by Samsung NBA systems.
Speaker Change: And restaurant, a leading technical services provider use optimality, AI, driven optimization technology and clarity for fast accurate electro migration in design and analysis.
Speaker Change: Improving design reliability, while realizing a two <unk> improvement and turnaround time.
Andrew (Incorrect Name in Context): Our digital IT business finished another strong year with 22% revenue growth in Q4. As our solutions continued gaining share at market-shaping customers, especially at the most advanced nodes. Our digital software is proliferating in all the top 20 semiconductor companies, and our digital full flow was adopted by 34 additional customers during the year. We are very pleased with the accelerating momentum of our flagship Cadence Cerebrus Gen-AI solution, whose transformative PPA and productivity benefits have led to its deployment in all our top 10 digital customers and used in well over 300 tape-outs. In Q4, Cadence cerebrus run rate more than quadrupled at several market-shaping customers, and they also drove significant digital full flow expansions at two top-tier semi-customers. Our Integrity 3DIC platform is the industry's only unified 3DIC design and analysis platform and ties our best-in-class SoC and package design technologies with system-level planning and analysis. In Q4, GUC successfully used integrity to tape out a complex 3D stagged die design with a wafer-on-wafer structure on an advanced spin-fed node.
Speaker Change: Our digital IC business finished another strong year with 22% revenue growth in Q4.
Speaker Change: As our solutions continued gaining share at market shaping customers.
Speaker Change: Especially at the most advanced nodes.
Speaker Change: Our digital software is proliferating in all top 20 semiconductor companies and our digital full flow was adopted by 34 additional customers during the year.
We are very pleased with the accelerating momentum of our flagship cadence <unk> Gen AI solution.
Speaker Change: Whose transformative BPA and productivity benefits have led to its deployment in all our top 10 digital customers.
Speaker Change: And used in well over 300 tape outs.
Speaker Change: In Q4 cadence delivered run rate more than quadrupled at several market shaping customers.
And there are also drove significant digital full flow expansions.
And to top tier semi customers.
Andrew (Incorrect Name in Context): Next, I will talk about our functional verification business, which had another remarkable year, delivering 11% year over year revenue growth in Q4, and 22% growth for the full year. Escalating system and software challenges, along with the pressing need for first pass silicon success, continue driving strong demand for our functional verification solution. Our best-in-class dynamic duo of Palladium Z2 and Protium X2 platform delivered another record year, with strong momentum across AI, hyperscale, auto, and mobile. Virtually all of the top hyperscalers are Palladium customers, and the majority of them are also dynamic duo customers. Last month, we announced a new set of Palladium Z2 applications that included the industry's first four-state emulation and mixed-signal modeling capability, which will significantly accelerate SOC verification.
Speaker Change: Our integrity <unk> platform is the industry's only unified <unk> IC design and analysis platform and ties our best in class Soc and package design technologies.
Speaker Change: System level planning and analysis.
Speaker Change: In Q4 do you see successfully used integrity to tape out a complex three D stat <unk> design.
Speaker Change: With a wafer in wafer structure on advanced Finfet node.
Speaker Change: Next I will talk about our functional verification business.
Speaker Change: Which had another remarkable year.
Speaker Change: Delivering 11% year over year revenue growth in Q4.
Speaker Change: And 22% growth for the full year.
Speaker Change: Escalating system and software brings us challenges along the pressing need for first bus silicon success.
Speaker Change: Continued driving strong demand.
Andrew (Incorrect Name in Context): Key customers, including NVIDIA and Samsung, supported the announcement. Our hardware family added 26 new and over 110 repeat customers during the year, with the top three deals being with a global marquee system company, the leading AI system company, and the leading communication services company. Demand for the Duo greatly exceeded our expectations, with more than two-thirds of the orders in the year including both platforms. Our custom IC Virtuoso and Spectre franchise solutions tackle the most complex challenges in analog, mixed signal, RF design, and circuit simulation, and are increasingly crucial for our customers.
Speaker Change: External verification solutions.
Speaker Change: Okay.
Speaker Change: Our best in class dynamic duo Palladium Z, two and Protium Xtra platform.
Speaker Change: Delivered another record year.
Speaker Change: With strong momentum across AI, Hyperscale auto and mobile.
Speaker Change: Virtually all of the top Hyperscale is a palladium customers.
Speaker Change: And the majority of them are also dynamic duo customers.
Speaker Change: Last month, we announced a new set of Palladium Z two applications that.
Speaker Change: That included the industry's first four.
Speaker Change: State emulation and mixed signal modeling capabilities.
Andrew (Incorrect Name in Context): Building on our market leadership, our custom IC revenue grew 16% year-over-year in Q4. Customer interest in our recently announced Virtuoso Studio is strong, with over 2000 downloads so far, and adoption of our newer Spectre platform products continues to ramp. Virtuoso had a major win with a top global memory company, which replaced its internal tools with our technology. Our IP business drove a strong finish to the year, growing 36% year over year in Q4. We continue to sharpen our STAR IP strategy with targeted acquisitions such as Rambus PHY IP and Invicus to capture market opportunities offered by AI and heterogeneous integration. Customer interest in the Rambus PHY assets, especially HBM and GDDRIP, has been extremely positive, which have already been instrumental in closing some strategic deals. Our Nveeka acquisition is also highly synergistic to the strategy, adding a skilled engineering team with expertise in delivering custom solutions across design, product engineering, advanced packaging, and embedded software.
Speaker Change: That will significantly accelerate Soc verification.
Speaker Change: Marquee customers, including Nvidia and Samsung supported the announcement.
Speaker Change: Our hardware family added 26, new and over 110 repeat customers during the year.
Speaker Change: With the top three deals being with a global marquee system company.
Speaker Change: The leading AI system company, and the leading communication services company.
Speaker Change: Demand for the duo greatly exceeded our expectations with more than two third of the orders in the year, including both platform.
Speaker Change: Our custom IC virtuoso Inspector franchise solutions tackle the most complex challenges in analog mixed signal RF design and circuit simulation.
Speaker Change: And our increasingly crucial for our customers.
Speaker Change: Building on our market leadership, our custom IC revenue grew 16% year over year in Q4.
Speaker Change: Customer interest in our recently announced virtuoso studio is strong with over 2000 downloads, so far and adoption of our newer specter platform products continues to ramp.
Andrew (Incorrect Name in Context): In closing, we are pleased with our outstanding performance in 2023 and excited by the business momentum and market opportunities in 2024. Now I will turn it over to John to provide more details on the Q4 results and our 2024 outcome. Thanks, Anirudh, and good afternoon, everyone.
What you also had a major win with a top global memory company, which replaced as internal tools with our technology.
Speaker Change: Our IP business drove a strong finish to the year growing 36% year over year in Q4.
John: I'm pleased to report that Cadence delivered a strong Q4 and 2023, driven by growth across all of our businesses. Robust design activity and customer demand, coupled with our strong execution, helped us to achieve revenue growth of 15% and EPS growth of over 20% per year. Fourth quarter bookings were strong, and I'm pleased that we achieved record backlog and record current remaining performance obligation levels, finishing the year with approximately 6.0 billion dollars in backlog and approximately 3.2 billion dollars in CRPO. Here are some of the financial highlights from the fourth quarter and the year, starting with the P&L. Total revenue was $1,069,000,000 for the quarter and $4,090,000,000 for the year. Gap operating margin was 31.5% for the quarter and 30.6% for the year, and non-GAF operating margin was 42.9% for the quarter and 42.0% for the year.
Speaker Change: We continue to sharpen our star IP strategy with a targeted acquisition such as Rambus Phy IP and in VITAS to capture market opportunities offered by AI and heterogeneous integration.
Speaker Change: Customer interest in the Rambus vie assets, especially HBM and <unk> have been extremely positive which have already been instrumental in closing some strategic bids.
Speaker Change: Our <unk> acquisition is also highly synergistic to the strategy, adding a skilled engineering team with expertise in delivering custom solutions across design borrowed engineering advanced packaging and embedded software.
Speaker Change: In closing we.
Speaker Change: We are pleased with our outstanding performance in 2023 and are excited by the business momentum and market opportunities in 2024.
Now I will turn it over to Jon to provide more detail on the Q4 results and our 'twenty 'twenty four outlook.
John: Gap EPS was $1.19 for the quarter and $3.82 for the year; non-GAAP EPS was $1.38 for the quarter and $5.15 for the year. Next, turning to the balance sheet and cash flow, our cash balance was $1,00,008,000,000 at year end, while the principal value of debt outstanding was $650 million. Operating cash flow in the fourth quarter was $272 million and $1.35 billion for the full year.
Jon: Thanks, Anna and good afternoon, everyone.
Jon: I am pleased to report that cadence delivered a strong Q4, and 2023 driven by growth across all of our businesses.
Jon: Robust design activity and customer demand, coupled with our strong execution helped us to achieve revenue growth of 15% and EPS growth of over 20% for the year.
Jon: Fourth quarter bookings were strong and I'm pleased that we achieved record backlog and record current remaining performance obligation levels, finishing the year with approximately $6.0 billion in backlog and approximately $3 2 billion and see our appeal.
John: DSOs were 43 days, and we used $700 million to repurchase Cadence shares during the year. Before I provide our outlook for Q1 2024, I'd like to share some assumptions that are embedded in our outlook. In 2023, our upfront revenue mix increased to approximately 16%, largely due to strong hardware demand. In 2024, we expect another record hardware revenue year and strong IP growth. And as a result, at the midpoint, our outlook assumes that our upfront revenue mix for the year will increase to approximately 17.5 percent. In Q1 2023, our upfront revenue mix was approximately 20%, largely due to our effort to improve hardware delivery lead times at the start of last year. In Q1 2024, at the midpoint, our outlook assumes an upfront revenue mix of approximately 14%. Our non-GAAP EPS outlook is based on a tax rate of 16.5 percent.
Jon: Here are some of the financial highlights from the fourth quarter and the year starting with the P&L.
Jon: Total revenue was $1 billion and $69 million for the quarter and 4 billion of $19 million for the year.
Jon: GAAP operating margin was 31, 5% for the quarter and 36% for the year.
Jon: non-GAAP operating margin was 42, 9% for the quarter and 42.0% for the year.
GAAP EPS was $1 19 for the quarter and $3 82 for the year.
Jon: non-GAAP EPS was $1 38 for the quarter and $5 15 for the year.
Jon: Next turning to the balance sheet and cash flow, our cash balance was $1 billion and $8 million at year end.
Jon: While the principal value of debt outstanding was $650 million.
Jon: Operating cash flow in the fourth quarter with $272 million.
John: And finally, our outlook for Q1 2024 is based on our usual assumption that export control regulations in place today remain substantially similar for the remainder of the year. In our outlook for 2024, we expect revenue in the range of $4.55 to $4.61 billion, gap operating margin in the range of 32 to 33 percent, and non-GAAP operating margin in the range of 42 to 43 percent. Gap EPS in the range of $4.08 to $4.18. Non-GAAP EPS in the range of $5.87 to $5.97, and operating cash flow in the range of $1.35 to $1.45 billion.
Jon: And $135 billion for the full year.
Jon: Dsos were 43 days and.
Jon: And we use $700 million to repurchase cadence shares during the year.
Speaker Change: Before I provide our outlook for Q1 in 2024 I'd like to share some assumptions that are embedded in our outlook.
Speaker Change: In 2023 are upfront revenue mix increased to approximately 16% largely due to strong hardware demand.
Speaker Change: In 2024, we expect another record hardware revenue year, and strong IP growth and as a result at the midpoint our outlook assumes that our upfront revenue mix for the year will increase to approximately 17, 5%.
Speaker Change: In Q1 2023 are upfront revenue mix was approximately 20% largely due to our effort to improve hardware delivery lead times at the start of last year.
John: And we expect to use approximately 50% of our free cash flow to repurchase Cadence shares in 2025. For Q1, we expect revenue in the range of $990 million to $1.01 billion, gap operating margin in the range of 24.5 to 25.5 percent, and non-GAAP operating margin in the range of 36.5 to 37.5. Gap EPS was in the range of $0.74 to $0.78, and non-gap EPS was in the range of $1.10 to $1.14.
Speaker Change: In Q1 2024 at the midpoint of our outlook assumes an upfront revenue mix of approximately 14%.
Our non-GAAP EPS outlook is based on a tax rate of 16, 5% and finally, our outlook for Q1 in 2024 is based on our usual assumption that export control regulations in place today remain substantially similar for the remainder of the year.
John: 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 reconciliation. In conclusion, I am pleased that for 2023, we achieved revenue growth of 15% and EPS growth of over 20%. Additionally, we achieved the seventh consecutive year of over 50% incremental non-GAAP operating margins, resulting in non-GAAP operating margins of 4
Speaker Change: In our outlook for 2024, we expect revenue in the range of $4 five 5% to $4 six 1 billion.
Speaker Change: GAAP operating margin in the range of 32% to 33%.
Speaker Change: non-GAAP operating margin in the range of 42% to 43%.
Speaker Change: GAAP EPS in the range of $4 <unk> to $4 18.
non-GAAP EPS in the range of $5 87 to $5.97.
John: And we finished the year with record backlog and CRPO, setting ourselves up for a great 2020. As always, I'd like to thank our customers, partners, and our employees for their continued support. And with that, operator, we will now take. At this time, I would like to remind everyone who wants to ask a question to please press star, then the number one on your telephone keypad now. We ask that you please limit yourself to one question and one follow-up.
Speaker Change: Operating cash flow in the range of 135 to $1 $45 billion.
Speaker Change: And we expect to use approximately 50% of our free cash flow to repurchase cadence shares in 2024.
Speaker Change: For Q1, we expect revenue in the range of 990 million to $1.01 billion.
Speaker Change: GAAP operating margin in the range of $24 five to 25, 5%.
Speaker Change: non-GAAP operating margin in the range of 36, 5% to 37, 5%.
Operator: We will pause for a moment to compile the Q&A roster. Your first question comes from Jason Celino with KeyBank Capital Markets. Please go ahead. Hey, guys. Happy Monday.
Speaker Change: GAAP EPS in the range of 74 to 78.
Speaker Change: And non-GAAP EPS in the range of $1 10.
Speaker Change: Two $1 14.
Jason Celino: So maybe my first question on the backlog strength is really impressive, especially given the hard year-over-year comp. John or Anirudh, what's your strength here? It sounds like it's hardware-related, or maybe it's broad-based. Anything helpful? Jason, yes, it was very broad-based, broad-based across geographies and broad-based across all of the businesses. Actually, on the hardware front, you might recall this time last year, we finished with over six months of backlog for hardware. We addressed those lead times at the start of the year, and now we're down to a more normal eight weeks of hardware backlog. So when you compare the backlog at the end of 23 against the end of 22, I think it reflects strong bookings, broad-based bookings across all geographies, across all businesses.
And as usual, we published the CFO commentary document on our Investor Relations website, which includes our outlook for additional items as well as further analysis and GAAP to non-GAAP reconciliations.
Speaker Change: In conclusion I am pleased that for 2023, we achieved revenue growth of 15% and EPS growth of over 20%.
Speaker Change: We achieved the seventh consecutive year of over 50% incremental non-GAAP operating margins, resulting in non-GAAP operating margin of 42%.
Speaker Change: And we finished the year with record backlog and <unk> setting ourselves up for a great 2024.
As always I'd like to thank our customers partners and our employees for their continued support and with that operator, we will now take questions.
Speaker Change: At this time I would like to remind everyone who wants to ask a question. Please press Star then the number one on your telephone keypad now.
Jason Celino: But on the hardware side, slightly less hardware or maybe less hardware, certainly, in backlog at the end of 23 versus the end of 22, program, and then, you know, when we think about 2024 as a whole, is it a big renewal year, or I guess how does 2024 look compared to other years, particularly when you think about renewal timing and things like that? Yeah, great question, Jason.
Speaker Change: We ask that you please limit yourself to one question and one follow up.
We will pause for a moment to compile the Q&A roster.
Speaker Change: Your first question comes from Jason <unk> with Keybanc capital markets. Please go ahead.
Jason: Hey, guys.
Jason: At the Monday.
Jason: So maybe my first question on the backlog strength really impressive, especially given the hard year over year comps.
John or Anirudh: Your last year was kind of very heavily weighted towards the second half of renewals. We don't expect it to be that heavily weighted in the second half this year. Looking at software renewals and when they come due, if you look at the annual value, it's probably weighted 40% first half to 60% second half. Thank you. Your next question comes from Charles. She is with Needham.
Jason: John and I read what drove the strength here it sounds like its hardware related or maybe it's broad based anything helpful.
Jason: Jason Yes.
Jason: It's very broad based broad based across geographies and broad based across all of the businesses.
Speaker Change: Actually on the hardware front you might recall this time last year, we finished.
With over six months of a backlog for hardware.
Charles: Please go ahead. Hi, good afternoon. I just pop up in the mind of many investors. Can you guys provide any thoughts on the Synopsys and Ansys merger, or whatever you call it? Especially now, Cadence probably needs to execute that intelligent system design strategy more in an organic way. Any thoughts would be great.
Speaker Change: We addressed those leads to lead times at the start of the year.
Speaker Change: Now we're down to a more normal eight weeks of hardware backlog. So when you compare the backlog at the end of 'twenty three against the end of 'twenty. Two I think it's it reflects strong bookings broad based bookings across all geographies across all businesses, but on the on the hardware side slightly less hardware or maybe.
Anirudh: Thanks. Yeah, hi, Charles, it's Anirudh. So, as you know, we have been executing on our intelligent system design strategy for six years now. You know, we started this in 2018. And we know for a while that there will be this convergence of, you know, the electrical and the mechanical domains. This convergence of system companies and semi-companies, you know, semi-companies becoming system companies, and system companies doing silicon, as you all know. And now we have commented that about 45% of our business is coming from system companies, but this is not, I mean, we have been working on this from 2018, and focusing on, of course, our core business, which is EDA, expanding into SDNA, which is what we call system design analysis, and of course, AI over the last, you know, five, six years. And if you look at our results on SDNA, you know, even in 2023, our business revenue is up 22% on SDNA. And it has been up more than 20% for the last several years, whereas that market is not really, you know, growing at that rate.
Speaker Change: Less hardware certainly in backlog at the end of 'twenty three versus the end of 'twenty two.
Speaker Change: Okay and then.
Speaker Change: When we think about 2024 as a whole is that.
Speaker Change: A big renewal year, or I guess, how how does 2024 look compared to other years.
Speaker Change: 'twenty three and when you think about.
Speaker Change: The old timing things like that.
Speaker Change: Yes, Great question, Jason that you last year was kind of pretty heavily weighted towards the second half for renewals, we don't expect it to be that heavily weighted in the second half this year.
Speaker Change: Looking at software renewals and when they when they come due.
Speaker Change: If you look at the annual value, it's probably weighted 40% first half to 60% second half.
Speaker Change: Yeah.
Speaker Change: Thank you.
Okay.
Your next question comes from Charles <unk> with Needham. Please go ahead.
Charles: Hi, Good afternoon, I guess the top of the mind of many investors can you guys provide any thoughts on the synopsys and assets.
Anirudh: So we are gaining a lot of share in SDNA. And this is primarily due to, you know, our products, right, and our customer response. So the customers have really, you know, embraced our strategy and embraced our product differentiation. So we first started with the finite element with clarity.
Charles: Merger.
Charles: Whatever you call it, especially now cadence probably needs to execute on.
Anirudh: And that is, you know, benchmarking very well, winning a lot of share, a lot of customers. And then recently, you must have seen our new product in CFD. You know, CFD is a big market. That's the, you know, there are two big simulation areas in SDNA. One is finite element, which we are already ahead in. And the other is CFD.
Charles: That intelligent system design strategy more mechanical way then.
Speaker Change: You got Nick away.
Speaker Change: It would be great. Thanks.
Speaker Change: Yeah, Hi, Charles as I noted so as you know we have been executing on our intelligence system design strategy.
For six years now.
Speaker Change: Started this in 2018.
Anirudh: And with Millennium, this is like one of the most revolutionary products in CFD in the last 10, in the last 30 years. And I can tell you more about Millennium later. So, and then the third thing in our SBA strategy is that we are the only company that has a, you know, very strong position in packaging and PCB, which is critical for chiplets and 3DIC. So overall, I feel very confident in terms of our market position. You know, the strategy we have implemented for six years, and I see a lot of growth and momentum going forward. Thanks, Banu.
Speaker Change: And we know for a while that there will be this convergence.
Speaker Change: Electrical and mechanical domains.
Speaker Change: This convergence of system and semi companies you know semi companies, becoming system companies and system companies doing doing silicon as you all know and and now we have commented that about 45% of our business.
Speaker Change: Business is coming from system companies.
Speaker Change: But this is not I mean, we have been executing on this from 2018.
Speaker Change: And focusing on of course, our core business, which is E. D E expanding into S. DNA, which is what we call system design and analysis and of course AI over the last you know five six years.
Charles: Maybe a follow-up. I do want to dig a little bit into your digital IC design and the sign-off revenue. You reported last quarter that it's exceeding $300 million when it has been bumping along $250 since, I think, the early part of 2022. But then it does seem to show some really good strength in the second half of 2023. You talk about the share gains, and I do understand this is the part where you have the most overlap with your direct competitor synopsis. I'm just really curious, how sustainable is the strength you saw in Q4, and is there any color you can provide us?
Speaker Change: And if you look at our results on S. DNA.
Speaker Change: You know even in 2023, our business revenue is up 22% and S. DNA and it has been up more than 20% for last several years.
Speaker Change: As that market is not really growing.
Speaker Change: Growing at that rate. So we are gaining a lot of share in SDN and.
Speaker Change: And this is primarily due to our.
Our products and our customer response, so the customers have really.
Anirudh: What's driving the revenue upside for that business in the fourth quarter? And how should people think about the sustainability of that bank? Yeah, hi Charles.
Speaker Change: Embraced our strategy and embraced our product differentiation.
Speaker Change: So we first started with a finite element with clarity.
Anirudh: That's a good question on digital. I mean, there are multiple reasons driving that. But I would say the main reason, and we had good growth in Q4 as we saw in our digital business. But, of course, the main reason that's driving that is the AI supercycle, you know, so there's a lot more design activity. You will notice some of our key partners, you know, increasing the cadence of their major kinds of product development. So there's AI. You know, in AI, we participate in several ways.
Speaker Change: And that is benchmarking very well winning lot of share a lot of customers.
Speaker Change: And then recently you must have seen our new product in Cfd CFT is a big market that's the.
Speaker Change: Two big stimulation areas in SG&A, one is finite element, which we are already ahead and the other is cfd and with millennium. This is like the one of the most.
Speaker Change: Revolutionary product in Cfd in the last in the last 30 years and I can tell you more about millennium later.
Anirudh: One is just the build out of the AI infrastructure, which is, you know, of course, a great partnership with NVIDIA and all the other hyperscalers. And then also, you know, our AI-enabled products like Cerebrus and Optimality and our overall AI portfolio. So, as I mentioned in my prepared remarks, you know, Cerebrus, which is the flagship product for digital, implementation using AI, you know, our business went to 4x. So that's also providing a lot of growth in terms of, you know, there's overall much more design activity, especially at the most advanced known, and then AI products, you know, provide for that. Thank you. Acceleration on top.
Speaker Change: And then the third thing in our SDA strategy is we are the only company that has a very strong position in packaging.
Speaker Change: And PCB, which is critical for <unk>.
Speaker Change: So overall I feel very confident in terms of our market position.
Speaker Change: This strategy, we have implemented for us for six years, and I see a lot of growth and momentum going forward.
Thanks, Bonnie maybe a follow up.
Speaker Change: I do want to.
Bonnie: Dig a little bit into your.
Bonnie: Digital IC design and to find out revenue you reported last quarter I think it's Rick exceeding $300 million away have been bumping along 250 since I think early part of 2022, but the.
Anirudh: And then the other thing that I mentioned before, but as people use Cerebris, which is the overall AI product in the digital implementation, it also has a pull-through of the full flow, not just place and route, but also synthesis and sign-off. So what I'm very pleased to see is one, AI products like Cerebris are doing well, but they're also pulling through synthesis. Our position has improved dramatically in synthesis in the last one year, and we've also had a lot of sign-off engagement. So overall, I'm pretty pleased with the technology progress, the AI progress, and also engagement with some big customers that traditionally were not using Cadence. And now, like we mentioned, all the top 20 customers are using Cadence solutions in digital.
Bonnie: It then it does seem to show some really good strength in the second half 'twenty three.
Bonnie: You talked about the share gains and I do understand this is the part where you have the most overlap.
Bonnie: With your direct competitor synopsis, and just really curious.
How sustainable is that.
Bonnie: The strength you saw in Q4.
Bonnie: Is there any color you can provide us on what's driving that.
Bonnie: The upside for that business in fourth quarter, how should people think about the sustainability of that thanks.
Anirudh: So we'll see how it progresses, but I think it is good progress on digital and I expect that to continue. Charles, I would just add to that that in Q4, we saw some very good cash collections from customers that were kind of lower credit-worthy customers but that we didn't think we would collect from those customers in cash. So it wasn't in our forecast, so we had some upside from that. Thank you. Your next question comes from Vivek Arya with Bank of America Securities. Please go ahead.
Speaker Change: Yeah, Hi, Charles that's a good question on digital.
Charles: I mean, there are multiple reasons driving that but I would say that the main reason and we had good growth in Q4 as you saw in our digital business.
Charles: But of course the main reason that's driving that is all the AI Super cycle.
Charles: So theres a lot more design activity.
Charles: Some of our key partners you know.
Charles: The cadence of their major kind of product development.
Charles: So there is AI.
Charles: We participated in several ways. One is just the build out of the AI infrastructure, which as you know of course, a great partnership with Nvidia and all the other hyperscale is.
Vivek Arya: Thanks for taking my question. I actually had a question on growth. First, on the segment side, IP growth has been more modest than the overall company growth. So, I was hoping you could give us some color on that, but then my bigger question is, you know, when I look at the overall sales growth for Cadence, right? So, 19% in 22, then 15% last year, and now 12% is what you're adding to for this year.
Charles: And then also.
Charles: Our AI enabled products like city burst in ophthalmology and the overall AI portfolio.
Charles: So as I mentioned in my prepared remarks, you know cerebral <unk>, which is the flagship product for digital.
Charles: Implementation using AI.
Charles: Business in window Forex right. So that's also providing.
Vivek Arya: I mean, these are impressive growth rates versus the semiconductor industry, but still, it shows a deceleration, right? For the last few years, which is very different from the acceleration that we see for a lot of other semiconductor companies that are exposed to the AI and generative AI team.
Charles: A lot of growth in terms of so there's one there's overall much more design activity, especially at the most advanced node and then AI products provide.
Charles: Acceleration on top of that.
And then the other thing that I had mentioned before but you know as people use their ebitdas, which is the overall AI product and digital implementation. It also has a pull through of the full flow you know not just place and route but also synthesis in China. So what I'm very pleased to see is one AI products like city those are doing well, but they're also.
Vivek Arya: What is the right way to interpret this, you know, deceleration in your sales? Like, should we be expecting acceleration back at some point as some of these AI initiatives get bigger? Or what is the right way to interpret and, you know, compare your growth rate versus the acceleration of growth and the number of AIs? Yeah, very good question.
Charles: Pulling through since this is our position has improved dramatically and since this is the last one year and also lot of sign of engagement. So overall I'm pretty pleased with the with the technology progress the air progress and also engagement with some big customers that traditionally were not using cadence and now like we mentioned all top 20 customers are using cadence.
Anirudh: So first on the IP part, you know, like in 23. I think the first three quarters we had, you know, the growth was much more challenged, primarily, you know, with the comparison to the previous year, but also with any and some of the macro uncertainties, but as you can see, in Q4, we had very strong growth in IP, more than 30% growth in IP. And also, this whole AI supercycle, as you know, is driving much more disaggregation, right? So the 3D IC is concentrated on HPC and AI applications. And that requires more IP, you know, like UCIE or 30s IP and then HBM and memory IP.
Charles: Solutions and digital so.
Charles: So we'll see how it progresses, but I think it is good progress on digital and I expect that to continue and.
Speaker Change: Charles I would just add to that in Q4, we saw some very good cash collections from customers that were kind of lower creditworthy customers that we didn't think we would collect that cash so it wasn't in our forecast. So we had some upside from that.
Speaker Change: Thanks.
Speaker Change: Your next question comes from Vivek Arya with Bank of America Securities. Please go ahead.
Anirudh: And that's why we acquired assets of the five assets of Rambus and overall, our own portfolio in UCIE and DDR, and everything is doing pretty well. And then we did several acquisitions to improve our talent in IP. So overall, I think.
Vivek Arya: Thanks for taking my question I actually had a question on growth just just kind of first on the segment side IP growth has been more modest than the entire company growth. So I was hoping if you could give us some color.
Anirudh: Because of AI, because of our own actions, IP should do much better in 24, you know, that's our current modeling. And 23 had some, you know, you know, unusual challenges, like, as I mentioned, but going forward, you know, the IP business should improve, and we have focused on profitability over the last few years in our IP business. And I think I'm pleased to say that the profitability levels are what we are happy with now. Okay.
Vivek Arya: On that but then my bigger question is that.
Vivek Arya: When I look at the overall sales growth for cadence right to 19% in 'twenty two.
Vivek Arya: 15% last year around 12% is what you're guiding to for this year. I mean, these are impressive growth rates versus the semiconductor industry, but still it shows the deceleration right for the last few years, which is very different than the acceleration that we see for a lot of other semiconductor companies that are exposed to the AI and generative AI team. So.
John: So now I think we can, you know, focus more on growth and expanding our portfolio. And you may have also seen that, you know, there's all these other activities at the most advanced nodes and more foundries, and we're also pleased with our partnership with Inter Intel Foundry, which we just announced today, and also all the other major foundries. But we are very glad to do much more with IFS, and that should also help our IP business, you know, going forward. And Vivek, I'd just like to add, you asked about how to look at revenue growth. We tend to look at a three-year tagger because most of our customers are in three-year baseline contracts on the software side.
Vivek Arya: What is the right way to interpret this deceleration and yourselves like should we be expecting acceleration back at some point at some of these AI initiatives get bigger or what is the right way to interpret and compare your growth rate versus the acceleration of growth in the number of the items.
Yeah very good question, so first on the IP part.
Vivek Arya: Like in 'twenty three.
The first three quarters, we had.
Speaker Change: The growth was much more challenged.
Speaker Change: It was primarily the compare to the previous year, but some.
Speaker Change: Some of the macro uncertainties, but as you can see in Q4.
John: And if you look at, you know, since 2017, our three-year tagger has been accelerating, and it continues to accelerate. In 2022, we hit 15%. We actually exceeded 15% on a three-year tagger basis. For last year, we're very, very pleased that we were over 15% again. And then at the midpoint of the guide for 24, the three-year tagger is about 15.3%.
We had very strong growth in IP, and a more than 30% growth in IP.
Speaker Change: And also this whole AI Super cycle as you know is driving much more.
Speaker Change: Disaggregation right. So the <unk> is concentrated at HBC and AI application.
And that requires more IP like UCI E. R. <unk> D and then HBM and memory IP and that's why we acquired assets. So the assets of Rambus and overall all of our own portfolio and UCI and DDR and all it's doing pretty well.
Vivek Arya: So that would be three consecutive years of over 15% revenue growth on a three-year tagger basis. Now, from time to time, you can get some lumpiness in things like hardware timing or IP timing, and that can distort individual quarters or individual years. But we do think looking at it over a three-year tagger basis is probably the best way to look at it. That's how we look at it ourselves. And for my follow-up, maybe John, one or two clarifications.
Speaker Change: And then we did sell several acquisition to improve our talent and IP. So overall I do thing.
Speaker Change: Because of AI because of our own actions that IP should do much better in 'twenty four that's our current modeling.
Speaker Change: 23 had some.
John: What's the assumption for China's contribution in 2024? And then the incremental EBIT, I think from the guidance, it seems like it's below 50%, right? It's still impressive, but it is below what we have been used to in the last few years. If you could clarify that, that would be very helpful also. Thank you. Yeah, sure. Great questions again, Vivek.
Speaker Change: Unusual challenges like I mentioned, but going forward.
Speaker Change: The IP business should improve and we have focused on profitability over the last few years.
Speaker Change: Our IP business and I think I am pleased to say that the profitability levels.
Speaker Change: We're happy with now Okay. So now I think we again.
Speaker Change: Because more on growth and expanding our portfolio.
Speaker Change: And you May have also seen that there's all these other.
Activity is more the most advanced nodes and more foundries and we're also pleased with our partnership with the with India, and then foundry that we just announced today.
John: On the incremental margin front, we typically don't start the year in the initial guide with over 50%. We tend to start lower than that, and we build towards greater than 50% with growth through the year. As you know, we always like to under-promise and over-deliver.
Speaker Change: And and also all the other major foundries, but we are very glad to do much more with the RFS and that should also help our IP business going forward and Rebecca I'd just like to add I mean, you asked about how to look at.
John: And if you look at our incremental margin over the last few years, it was slightly lower in 2023 compared to previous years. And that's because on the organic side, we had incremental margins north of 55%. But we did some acquisitions, and typically, when you have an acquisition, it can be dilutive in the first year or two. And that's a bit of a headwind for incremental margins. In relation to China, I'm glad you asked me about that. China, in the last four years for China, China contributed 15% of our 2020 revenue, then followed that with 13% of 2021, 15% in 2022, and 17% in 2023.
Speaker Change: The revenue growth, we tend to look over a three year CAGR because most of our customers are on three year baseline contracts on the software side and.
Speaker Change: And if you look at.
Speaker Change: Since 2017, our three year CAGR has been accelerating and it continues to accelerate.
Speaker Change: In 2022, we hit 15%, we actually exceeded 15% on a three year cargo basis.
Speaker Change: For last year were very very pleased that we were over 15% again.
Speaker Change: And then you got the midpoint of the guide for 'twenty for the three year CAGR is about 15, 3% so that would be three consecutive years of over 15%.
Speaker Change: Revenue growth on a three year CAGR basis now from time to time, you can get some lumpiness and things like hardware timing or our IP timing.
Speaker Change: That can distort individual quarters or individual years, but we do think looking over a three year CAGR basis, it's probably the best way to look at it that's how we look at it ourselves.
John: Now last year, I think China benefited from that large hardware backlog that we had. There was kind of an outsized portion of that backlog was for the Chinese region. So it was a boon year last year for China. I wouldn't expect to repeat that this year.
Speaker Change: Got it and for my follow up maybe Don wanted to clarification whats the assumption for China contribution in 'twenty four and then.
Speaker Change: The incremental EBIT.
Speaker Change: I think from the guidance it seems like it's below.
John: In fact, using our guide, we'd expect China to be flat or slightly down. So we've kind of de-risked China into the 14% to 15% range for this year, which would be consistent with the previous three. Thanks very much.
Don: 50% right, it's still impressive but it is below what we have been used at the last few years that you could quantify that that would be very helpful. So thank you yeah sure great questions again, vivek on the incremental margin front, we typically don't start the year and the initial guide with with over 50%, we tend to start lower than that and we build.
Gary Mobley: Your next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead. Hey guys, thanks for taking my question. Let me apologize in advance for the background noise. I wanted to ask about the disconnect between record levels of CRPO and what is assumed in your revenue outlook and as well as your higher outlook for upfront revenue. And so, you know, why the assumption that less of that CRPO? This translates into revenue in fiscal year 24, especially considering the higher mix of upfront. Yeah, Gary.
Don: Towards greater than 50% with growth through the year as you know, we always like to under promise and over deliver.
Don: And if you look at our incremental margin over the last few years, but it was it was slightly lower in 2023 compared to previous years and that's because.
Don: On the organic side, we had incremental margins north of 55%, but we did some acquisitions and typically when you have an acquisition it can be dilutive in the in India or in a year or two but.
John: Good questions. In terms of CRPO and the relationship between CRPO and this year's revenue, if you recall last year, we had over six months of hardware backlog in CRPO at the end of 2022, so a large portion of our hardware revenue in 23 came out of backlog at the end of 22. We ramped up production capacity, and we're back to more normal levels of about eight weeks lead time now for deliveries on the hardware, which is really, really important for customers. Customers want to be able to purchase the hardware and feel like they're going to get delivery of that hardware within a year. So typically, your revenue and hardware are more correlated to your production capacity than it is to what's coming out of backlog versus what's coming out of new business in the year.
Don: A bit of a headwind for incremental margins in relation to China glad you asked me about that but.
Don: China the last four years for China.
Don: China's contributed 15% of our 22020 revenue then followed followed up with 13% or 21, 15% in 'twenty, two and 17% in 'twenty three.
Last year, I think China benefited from.
Don: That large hardware backlog that we had there was kind of an outsized portion of that backlog was for the China region. So it was a boon year last year for China, I wouldn't expect to repeat that this year. In fact, our guide we would expect China to be flat or slightly down. So we've kind of derisk, China into the 14% to 15% range.
For this year, which would be consistent with the previous three years.
Speaker Change: Okay. Thanks very much.
Speaker Change: Your next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
John: And as a result of addressing those hardware lead times, the revenue profile for this year takes a slightly different shape to 2023. In 2023, in Q1, we had a lot of hardware coming out of backlog. In 2024, we expect another record hardware revenue year, and the business is planning to build more hardware each quarter throughout 2024 to meet that demand. But there's kind of more of... um, I guess hardware revenue is expected to grow quarter over quarter this year, whereas last year, Q1 was our biggest hardware quarter. Just to be clear, John, CRPO does not include hardware backlogs, but RPO does. CRPO would include hardware.
Speaker Change: Yeah.
Hey, guys. Thanks for taking my question, let me apologize in advance for the background noise.
Gary Mobley: I wanted to ask about the disconnect between the record levels of CRP, Oh, and what is assumed in your revenue outlook and as well your.
Gary Mobley: Higher outlook for upfront revenue.
And so why the assumption that.
Gary Mobley: Lastly that CRP O sands.
Gary Mobley: Translates into into revenue in fiscal year 'twenty four.
Gary Mobley: Especially considering the higher mix of upfront.
Speaker Change: Yes, Gary Good question, Steve in terms of C. R. P O and the relationship between <unk> and this year's revenue.
Speaker Change: If you recall last year, we had over six months of hardware backlog.
Speaker Change: In <unk>.
John: I mean, even when you have over six months of hardware delivery lead time, it would all be expected to revenue in a year. So that's, although it's in your backlog, it's also all in your CRPO. So CRPO last year would have had a lot more hardware in it than CRPO this year, certainly on the product revenue side. All right, and I want to circle back, Anirudh, on a metric you gave in your prepared remarks, that is a quadrupling of the cerebrus run rate at several market-shaping customers. So should we take that to mean the annual contract value for those who took Cerebris at Market Shaping Customers quadrupled, or maybe if you could just clarify that in this? Yeah, hi, Gary.
Speaker Change: At the end of 2022, so a large portion of our hardware revenue in 'twenty three came out of backlog at the end of 'twenty two.
Speaker Change: We ramped up production capacity and we're back to more normal levels of about eight weeks lead time now for deliveries on the hardware.
Speaker Change: Which is really really important for customers customers want to be able to purchase the hardware.
Speaker Change: Feel like Theyre going to get delivery of that hardware within within a year. So typically your revenue and hardware is more correlated to your production capacity than it is to what's coming out of pocket versus versus whats coming.
Speaker Change: Coming out of new business in the year.
Anirudh: So, Yeah, I think Cerebra is doing very well, you know, it's deployed at all the top 10 customers. And actually, even AI in general, we mentioned the number of customer engagements are up like 10x in the last 12 months. And so Cerebris.
Speaker Change: As a results of addressing those hardware lead times.
Speaker Change: The revenue profile for this year takes a slightly different shape.
Speaker Change: 2023, and in 2023 in Q1, we had a lot of hardware coming out of backlog in.
Speaker Change: 2024.
Speaker Change: We expect.
Anirudh: You know, run rate, as we have mentioned before, the Cerebro business, first the customers, you know, will try some, and then they will adopt more. So I think what's good to see in Q4 is what people were doing, and then they have adopted that in a much bigger way, at a much bigger rate. So we are happy to see that. I think there is still, you know, room to go in that, like we have always mentioned that we think it will take two contract cycles and we are like that for six years, and we are like two years into it or two or three years into it. But that's good in our model, right?
Speaker Change: Another record hardware revenue year, and the business is planning to.
Speaker Change: Build more hardware each quarter throughout 2024 to meet that demand.
Speaker Change: But there's kind of more of.
Speaker Change: Hum.
Speaker Change: I guess I guess hardware revenue is expected to grow.
Speaker Change: Quarter over quarter, this year, whereas last year.
Speaker Change: Q1 was our biggest hardware quarter.
Speaker Change: Just just to be clear John C. CRP or does not include hardware backlog that RP O does.
Speaker Change: <unk> would include hardware.
Speaker Change: Even when you have over six months hardware delivery lead time, it would all be expected to revenue in a year. So that's although it's in your backlog. It's also all in your <unk>. So CRP over last year would have had a lot more hardware and has since the IPO this year and certainly on the product revenue side.
Anirudh: We want, we want consistent growth going forward, but yes, the uptake in Cerebris is very promising. And then, you know, the other products came a little after Cerebrisium, like Cerebrisium or Allegro XAI or Virtuoso Studio or Optibality, and they're also seeing good progression. So overall, in terms of AI, you know, what I'm very happy about is, you know, we have, I mentioned this before, also, in the last call, three big ways to benefit from AI. And this is true for any kind of new technology. You know, there are a lot of comparisons to AI, but if you compare it to the internet, you know, the first phase is infrastructure development.
Speaker Change: Alright, and I want to circle back and route on a auto metrics you gave in your prepared remarks that is a quadrupling of the <unk> run rate.
Speaker Change: Several market shaping customers.
Speaker Change: Should we take that to mean annual contract value.
Speaker Change: For those who took some reverse AD market shaping customers quadrupled or or maybe if you can just clarify that I'm missing that.
Speaker Change: Yeah.
Speaker Change: Yeah, Hi, Gary so.
Speaker Change: Yeah, I think that he was doing very well deployed at all of the top 10 customers and actually even in AI in general we mentioned number of customer engagements are up like <unk> and in the last 12 months.
Speaker Change: And so city risks.
In our run rate as we have mentioned before the cerebral business first the customers.
Speaker Change: We'll try something and then they will adopt more so I think that's what's good to see in Q4 as what people were you know what the customers were doing.
Anirudh: So, and this is our marquee partnership with NVIDIA, which we have had for more than a decade. And we talked about it today, you know, developing AI products with them, you know, them developing their own chips. You know, Palladium, we are a development partner with NVIDIA in Palladium for more than a decade.
Speaker Change: And then they have adopted that in a much bigger than.
Speaker Change: It's a much bigger right.
Speaker Change: So we are happy to see that I think there is still room to go in that.
Like we have always mentioned that we think it'll take to contract cycles. Then we are like that six years and we are like two years into it two or three years into it but that's good in our model right. We want we want consistent growth going forward, but yes. The uptick in theory, Bruce is very promising and then you know the other products are.
Anirudh: And that also puts Palladium in a very, you know, strong position with all the other AI developments. So that's the first phase of AI benefit, which is more the infrastructure. And then the second phase is like what you asked, which is our own products. And it started with Cerebrus on the digital side, but now we have five major kinds of co-pilot platforms in all the five businesses.
Speaker Change: Came a little after cerebral library cm or Allegro X AI, our virtuoso studio or optimality and Theyre also seeing good progression.
Anirudh: And those are progressing pretty well, moving from initial deployments to wider deployments. And that's the second phase of AI deployments, where AI will be adopted into existing products, you know, like chip design and system design. And one thing I want to point out is, you know, there's a lot of talk about what is a good application for AI. I believe one of the best applications for AI is chip design, because over the last 30 years, we have done so much work in automatic chip design.
Speaker Change: So overall in terms of AI, what I'm very happy about it.
Speaker Change: I've mentioned this before also in the last call we have three big ways too.
Speaker Change: To benefit from AI.
Speaker Change: And this is true for any kind of new technology. As you know there are a lot of comparisons do I, but if you compare it to like the Internet. The first phase is the infrastructure development, Okay. So and this R. R.
Speaker Change: Marquee partnership with Nvidia, which we've had for more than a decade, and we talked about today with developing AI products with them.
Speaker Change: Them developing their own chips.
Anirudh: You know, we have a language like RTL. We have all kinds of optimization we have built in. So, the chip process is already very automated. So, it's an ideal thing to apply AI on top of it, you know, for chip and system design, which is what we are seeing. And then the third phase of AI is new products that will enable it. And I have believed in this for several years, and that's why my investment in OpenAI. The OpenAI, the biggest new market that AI will enable will be life science, and Biosimulation and Biolife Sciences.
Speaker Change: Our palladium, we are a development partner with Nvidia and palladium for more than a decade and that also puts palladium in a very strong position with all the other kind of AI development. So that's the first phase of AI benefit which is more of the infrastructure.
Speaker Change: And then the second phases like what you asked which is in our own products and it started with cerebral and digital side, but now we have five major kind of copilot platforms in all the five businesses and those are progressing pretty well moving from like initial deployments to more wider deployment.
Anirudh: And I think you will see that in the years going forward. So there are these three phases of our AI activity. One is AI infrastructure, and two is applying AI to our own products for chip and system design. And third is AI in bio and life. So overall, I'm very pleased, very confident in our positioning in AI and the results we are delivering. Thanks for the detail. Your next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead. Thank you. Good afternoon,
Speaker Change: And Thats the second phase of AI deployments in which AI will be adopted into existing products like chip design and system design and one thing I want to point out as you know there is lot of talk about what is a good application for AI.
Speaker Change: I believe one of the best application for AI is chip design is.
Speaker Change: Is because over the last 30 years, we have done so much work in automated chip design, we haven't language like RTL.
Speaker Change: All kinds of optimization, we are building so the chip process already very automated.
Jay Vleeschhouwer: Anirudh, you noted the large number of new products you introduced just in the last year, Virtuoso Studio, Optimality, Electro-X, and so forth, and then, of course, Millennium just a couple of weeks ago. Could you talk about how you're thinking about the contribution of those incrementally, collectively this year as part of your guidance and perhaps even rank the ones that you think might be most incremental to your revenue growth this year over and above the pre-existing products, such as Enelgis and the sign-off products, and then my follow-up. Yeah, hi Jay.
Speaker Change: Ideal team to apply AI on top of it.
Speaker Change: Chip and system design, which is what we are seeing and then the third phase of AI is as new products that will enable and I believe for several years and that's why the investment in open AI.
The open either the biggest new market that AI will enable will be life sciences, okay in Biosimilars and Biolife science, and I think you will see that.
Speaker Change: Yes going forward. So there are these three phases of our activity. One is AI infrastructure two is applying AI to our own products, which has been system design and third is AI in bio in life Sciences. So overall I'm very pleased very confident in our positioning and AI and the results we're delivering.
Anirudh: Good question. I mean, as you know, we are a very innovative company. And we have done that for four years now. And we invest one of the highest percentages of revenue into R&D. And then it's good to have all these new products in multiple areas, you know, of course, the three big areas being like EDA, SDA, and AI. But we don't try to, you know, rank our children.
Extra detail.
Speaker Change: Your next question comes from Jay <unk> with Griffin Securities. Please go ahead.
Jay: Thank you good afternoon.
You noted that the large number of new products, you've introduced just in the last year, a virtuous of studio optimality electro X and so forth and then of course millennium just a couple of weeks ago.
Jay: Could you talk about how youre thinking about the contribution of those incrementally.
Anirudh: You know, we want all of them to do well, and it's also difficult to predict, you know, how it will do because these are all for the long run. Right. So there is, of course, a lot of momentum with the AI products. There's a lot of momentum with 3DIC and Chiplet, as you know. There's Millennium, which I'm super excited about.
Incrementally collectively this year.
Jay: As part of your guidance and perhaps even rank the ones that you think might be most incremental too.
Jay: Your revenue growth this year over and above.
Jay: The pre existing products such as in the office and on the side of our products and then my follow up.
Anirudh: I think this is the biggest, you know, innovation in CFD in the last 30 years. And, and, you know, I talked about the three-layer cake, right? You know, which is AI orchestration at the top layer, physical simulation, you know, physics-based modeling at the middle layer, and then accelerated computer at the bottom layer. And, you know, CFD needed to be disrupted in that context. Right. So, we have a, you know, and we didn't talk about it much when we made the acquisition about two years ago is this acquisition from Stanford Cascade, which is very, very high fidelity, very accurate CFD. So we had that at the heart of it, and then AI on top, and then Accelerate Compute at the bottom, together with, you know, NVIDIA. And this completely, you know, changes the game in CFD.
Speaker Change: Yes, Hi, Jay good question.
Speaker Change: As you know we are a very innovative company and we've done that for four years now and we invest one of the highest percentages of R&D of revenue into R&D.
And then it's good to have all these new products in multiple areas because the three big areas be like EAA SBA and AI.
But we don't try to like you know ranked our children. We want all the all of them to do well and it's also difficult to predict.
Speaker Change: How is because these are all for the long run rate. So there is of course, a lot of momentum with the AI products.
A lot of momentum with the with.
With <unk> and chip led as you know.
Speaker Change: Millennium I'm Super excited about I think this is the biggest.
Speaker Change: Innovation in CIB in the last 30 years.
Speaker Change: And you know I talked about the truly a three layer cake right, which is AI orchestration of the top layer of physical simulation physics based modeling at the middle layer and then accelerated computer at the bottom layer and cfd needed to be disrupted in that context right. So so we have had and we didn't talk about it much when we made.
Anirudh: For the first time, we are able to simulate entire cars and planes in a few hours. It's almost an emulation for, you know, systems that have never been possible before. So there's a lot of potential in Millennium. Now, because Millennium is a new product, we are offering both cloud and, you know, on-premise. You know, Palladium is mostly, as you know, in our chip business, Palladium is mostly on-prem, but Millennium is both in CFD. And right now, most of the customers are choosing the cloud version, which is great. It's more ratable.
Speaker Change: The acquisition about two years ago is this acquisition from Stanford Cascade, which is very very high fidelity very accuracy Cfd. So we had that at the heart of it and then AI on top.
Speaker Change: And then excellent debuted at the boredom together with.
Anirudh: So then Millennium, and then, you know, you must have seen today, we have this great partnership with Dassault. Actually, I'm also pretty happy about that. You know, Dassault is a leader in, you know, PLM and MCAD, and overall partnership. We have, you know, a broadening partnership with Dassault. And then we talked about our IP business, and how that could grow. And this new partnership with Intel and IFS, and hardware continues to do well. So I think it's good to have multiple engines, you know, contributing to growth. And then we always focus on margin at the same time. So we are well positioned going forward, but you know, it's difficult to predict which one will do better than the others. And we don't guide on a product basis anyway.
Speaker Change: And video and this completely changes the game in CFT for the first time, we are able to stimulate the entire cars and planes in few hours is almost emulation for systems that has never been possible before so theres a lot of potential in millennium now because millennium is a new product we are offering both cloud and.
Speaker Change: You know on Prem.
Speaker Change: Palladium is mostly as you know in our on our chip business Palladium is mostly on Prem, but millennium is both in Cfd and right now the the most of the customers are choosing the cloud version, which is great. It's more ratable okay.
Speaker Change: So then millennium and then you must have seen today, we have this great partnership with Dassault I say I'm also pretty.
Speaker Change: Happy about that.
Speaker Change: There's always a leader and BLM and M Guide in overall partnership we have broadening partnership with there. So and then we talked about our IP business how that can grow.
Anirudh: So that's a good segue to my follow-up question, and since you mentioned it, Cadence is actually quite visible here at the conference today, and so my question is, when you think about your ISD strategy generally, and perhaps CFD specifically, can you talk about the kind of resources and investments you're having to make to effectuate that strategy beyond or over and above the core EDA strategy, and what you know now about those markets that you might Yeah, Jay, that's a good question.
Speaker Change: And this new partnership with Intel and <unk>.
Speaker Change: And hardware continues to do well so I think it's good to have multiple engine contributing to the growth and then we always focus on margin at the same time. So we are well positioned going forward, but you know is difficult to predict which one will do better than the others and we don't guide on a product basis anyway.
Speaker Change: Right.
Speaker Change: So that's a good segue to my follow up.
Speaker Change: And since you mentioned or so.
Speaker Change: Cadence is actually quite visible here at the conference today and so my question is when you think about your Iot strategy generally and perhaps cft's specifically.
Could you talk about the kind of resources and investments you're having to make.
Jay Vleeschhouwer: I mean, one thing to point out, you know. Our SBA business is about 12% of revenue in 2023. It's already at a good pace. And also, it has enough scale now, you know, to apply significant R&D to that space. And also the simulation space, right?
Speaker Change: To effectuate that strategy.
Speaker Change: Beyond are over and above the core EDA strategy and what do you know now about those markets that you might not have known three four or five years ago. When you were much earlier in developing the strategy.
Speaker Change: Yes, Jay that's a good question I mean, one thing to point out.
Speaker Change: Our SBA business is about.
Anirudh: We know the simulation space pretty well, and there's a lot of high R&D synergy from our EDA R&D to SDNA R&D. So I'm pretty happy with how much R&D we have invested, and we'll continue to invest there. But at the same time, it is also very profitable, which is, you know, which our model always, right, is not just revenue growth but also profitability. And it, you know, which we thought should be more profitable when we started six years ago because simulation is more profitable in EDA. And so that's what is playing out in SDN. And it is pretty profitable.
Speaker Change: In 2023 is about 12% of revenue.
Speaker Change: So it's already at a good base.
Speaker Change: And also <unk>.
Speaker Change: Has enough scale now.
Speaker Change: To apply significant of R&D to that space.
Speaker Change: And also simulation space right, we know simulation space pretty well.
Speaker Change: And there's a lot of high R&D synergy from our EDA R&D to SG&A R&D, So I am pretty happy with how much R&D, we have invested and will continue to invest there but at the same time.
Speaker Change: Is also very profitable okay.
Speaker Change: It's all of our models always right. It's not just revenue growth, but also profitability in it which we really asked me what we thought it should be more profitable. When we started six years ago, because simulation is more profitable.
Anirudh: And, and, you know, it has played out roughly to the extent I thought it would. Simulation always is accuracy first, and then performance and capacity. And the market is always looking for new simulators, and that's how it has played out in electromagnetics. And then in CFD, now I'm much more confident with this disruption, this massive disruption with Millennium.
Speaker Change: In EDA.
Speaker Change: So that's what is playing out in SDN. So it is pretty profitable.
Speaker Change: And it has played out roughly to the extent I thought it would.
Simulation always is accuracy first and then performance and capacity.
Speaker Change: And the market is always looking for new simulators, new and that's how it is played out in electromagnetic.
Speaker Change: And then in Cfd now are much more confident.
Speaker Change: With this disruption this massive disruption with millennium.
Anirudh: And the key thing with Dasso, and we have mentioned this before, as we, you know, I'm very confident in SDNA, you know, you can see in terms of product synergy, product differentiation. But we have always said that we are a computational software company. So that also means what we will not do, right? So typically, things in the system space, which are not as computational, are things like PLM, things like, you know, implementation, and Mechanical CAD Platforms.
Speaker Change: And the key thing with the so and we have mentioned this before.
Speaker Change: Very confident SG&A you can see in terms of product synergy product differentiation, but we've always said that we are in competition software company. So that also means we will not do right. So typically things in the system space, which are not as computational are things like BLM thinks like implementation.
Speaker Change: Mmk mechanical CAD platform and so as the clear leader in those.
Anirudh: And Dassault is the clear leader in those. You know, they're great in PLM, they're great in, you know, with SOLIDWORKS, and CATIA at the high end. So it's a perfect partner for Cadence. You know, as we focus on computational software and EDA and SBA, you know, packaging, and PCB to partner with Dassault, and we're glad to see that expansion that was announced today. Thank you, honorees. Your next question comes from Harlan Sur with J.P. Morgan. Please go ahead. Hi, good afternoon.
Great and BLM Theyre, great and solid wood.
Speaker Change: Tia in the high end so it's the perfect partner for cadence you know as we focus on computational software in EDA and SBA packaging in PCB to partner with US and we are glad to see that expansion that was announced today.
Speaker Change: Okay.
Speaker Change: Thank you Robert.
Harlan Sur: Your next question comes from Harlan sur with J P. Morgan. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
Harlan Sur: Thanks for taking my question. Um, your IP business was up five percentage points last year, and I know that it was a relatively tough comp relative to 2022.
Back to your IP business. It was up four five percentage points last year and I know that it was a relatively tough comp relative to 2022, but I would've thought that.
Harlan Sur: But I would have thought that the growth in IP would have been closer to your overall growth, just, you know, given that higher chip design complexity does motivate your customers to license more IP in order to drive efficiencies in their chip design cycle time. So was there some customer push-back on IP into this year? Just maybe given the timing of customer programs, or was there some other dynamic that played in relative to your outlook for 12% total growth this year? How do you think your IP business will do this year? Yeah, a good question.
Harlan Sur: The growth in it would've been closer to your overall growth.
Harlan Sur: Given that higher chip design complexity.
Motivate your customers to license more IP in order to drive efficiencies in their chip design cycle time, so whether some customer push outs of IP into this year, just maybe given timing of customer programs or was there. Some other dynamic at play and then relative to your outlook for 12% total growth. This year, how do you think your IP.
Harlan Sur: Does this year.
Harlan Sur: Yes.
Speaker Change: Yeah. Good question I think the shape of the IP revenue last year was a little atypical I mean, I think the two reasons were.
Anirudh: I think the shape of the IP revenue last year was a little atypical. I mean, I think the two reasons were: Because last year, in 2023, we had a very, very strong Q4, but the first three quarters were not strong at all. So the overall year is, you know, in the single digits, like you mentioned, but a very strong Q4. So I think there are a couple of reasons for that.
Speaker Change: We had lost in 2023, we had very very strong.
Speaker Change: Q4.
Speaker Change: But first three quarters were not strong it also overall year is.
Speaker Change: As you know in the single digits like you mentioned, but a very strong Q4. So I think there are couple of reasons for that and is one is that there were some tough compares from 'twenty two 'twenty, three and IP, especially in the beginning of the year and then like we had mentioned and of course last couple of years the macro environment.
Anirudh: And one is that there were some tough comparisons from 22 to 23 in IP, especially in the beginning of the year. And then, like you mentioned, of course, in the last couple of years, the macro environment has been tough, though it is improving now. And then IP typically gets affected more than others, you know, in terms of a tough macro semiconductor environment. So as a combination of that, I think the first three quarters were more challenging.
Speaker Change: It has been tough, though it is improving now and then IP to Billy gets affected more than others.
Speaker Change: In terms of macro semiconductor environment. So as a combination of that I think the first three quarters were more challenging.
Anirudh: But Q4 and then going into this year, I'm pretty cautiously optimistic about IP. You know, one, our portfolio is better, and you know, is broader, and then this whole AI super cycle, like I mentioned. And then, you know, new engagements we have, like with IFS and other companies. So overall, I feel better about 24.
But Q4, and then going into this year I'm pretty cautiously.
Speaker Change: Cautiously optimistic about IP, one our portfolio is better.
Speaker Change: Is broader and then this whole AI super cycle like I mentioned.
Speaker Change: And then <unk>.
Speaker Change: New engagements, we have like with with IRS and other companies. So overall I feel better about 'twenty four John do you want to comment about the yes, yes of course it is at the heart and that as you know, we always focus on profitable and scalable revenue growth in the IP revenue contributes largely to our upfront revenue.
John: You know, John, you want to comment about the- Yes, yeah, of course, Harlan. As you know, we always focus on profitable and scalable revenue growth, and the IP revenue contributes largely to our upfront revenue percentage. But last year for 2023, our upfront revenue percentage increased from 15% to 16%, and that was on the back of a strong record hardware year.
John Wall: Percentage, but last year for 2023 are upfront revenue percentage increased from 15% to 16% that was on the back of a strong record hardware year, but as you say IP revenue growth was quite.
John: But as you say, IP revenue growth was quite low in comparison to prior years. This year, we're expecting the 16% to go to 17.5%. That's because we expect both of those to contribute significantly to improvement in upfront revenue this year. And then, you know, we expect the IP growth to be higher than the cadence average this year. We'll see how it plays out.
Quite low in comparison to prior years. This year, we're expecting the 16% to go to 17, 5% and Thats because we expect both of those to contribute significantly to <unk>.
John Wall: Improvements in upfront revenue this year.
John Wall: And then I.
John Wall: Growth do we need to be higher than cadence average this year, we'll see how it plays out okay. Perfect. Thank you for that and then.
Harlan Sur: Okay. Yeah, yeah. Perfect. No, thank you for that.
Gianmarco Conti: And then I'm good to see the strong outperformance of the SDA business right up 22% last year, certainly outperforming the overall market and your peers in that segment. The recent Millennium N1 supercomputer, I think it's a... Great example of the synergies between your chip design portfolio and your SDA portfolio, right? You're basically taking the success you've had in hardware-based verification and emulation, sort of bringing that same concept to your SDA portfolio.
John Wall: Good to see the strong outperformance on DSD able to also add up 22% last year, certainly outgrowing the overall market and your peers in that segment.
John Wall: The recent millennium, one supercomputer I think as well.
John Wall: Great example of the synergies between your chip design portfolio, where SBA portfolio basically kicking the success at.
John Wall: <unk> had in hardware based verification and emulation.
John Wall: Bringing that same concept to your SBA portfolio. It seems like there would be a lot of untapped demand for hardware acceleration within your SBA customer base like how big is this market opportunity for the team as you look out over the next several years.
Anirudh: Seems like there would be a lot of untapped demand for hardware acceleration within your SDA customer base. Like, how big is this market opportunity for the team as you look out over the next several years? Oh, absolutely. You know, even for 30 years, even when I was in grad school, I always believed that hardware acceleration is a massive opportunity for EDA and SDA in general. And you see that going out in Palladium.
Speaker Change: Oh, absolutely you know even for 30 years, even when I was in Grad School.
Speaker Change: I always believe that hardware acceleration is a massive opportunity for EDA and SDA and gender and you see that borne out in palladium. So we are always dreamed about hardware acceleration and Thats why these three layer cake hardware acceleration as the bottom layer and of course AI orchestration as the top player and a perfect example.
Anirudh: So we have always dreamed about hardware acceleration. And that's why this three-layer cake, you know; hardware acceleration is the bottom layer. And, of course, AI orchestration is the top layer. And a perfect example is Palladium.
Anirudh: Now in Palladium and hardware emulation, you know, what happened is, you know, if you look at overall function verification on the chip side, because, you know, it's more than a $2 billion business. I think if you look at all the software, and hardware, it became roughly 50% of that. So hardware-assisted verification became almost 50% of chip verification. Now, CFD is also a $2 billion business. And it needed this hardware-based acceleration along with AI. So I don't know whether it will play out the same way, but there's the potential for a big portion of CFD to go to hardware-based acceleration. Now, it will take a few years.
Speaker Change: Police palladium, non palladium and hardware emulation what happened is.
Speaker Change: If you look at overall functional verification on the chip side, because it is more than a $2 billion business.
Speaker Change: Okay. I think if you look at all the software and hardware became roughly 50% of that so hardware assisted verification became almost 50% of chip verification. Now Cfd is also a $2 billion business, okay and it needed this hardware based.
Acceleration along with AI.
Speaker Change: So I don't know whether it will play out the same way, but there is a potential of a big portion of Cfd to go to hardware based acceleration. Okay. Now it will take few years, Okay, and we are clearly leading in that and the other thing. It does the hardware based acceleration or emulation for CFB is it will improve the the area has really improved the <unk>.
Anirudh: And the other thing it does, hardware-based acceleration or emulation for CFD, is it will improve the area. It will improve the market size of CFD as well. Like I was talking to one of these big aerospace companies, and they said that current CFD, the current simulation, is only done to 20% of the flight envelope. Okay.
Market size of Cfd as well.
Speaker Change: Like I was talking to one of these big aerospace companies and and they said currency FD. The current simulation is only down to 20% of the flight envelope.
Speaker Change: Okay, which is unheard of in chip design Chip design, we simulate 99 point some percent of the update of the use cases or they've been the chip comes back at work, but if you look at the system demand because the accuracy is not there because the speed is not there the only covering 20% of.
Anirudh: Which is unheard of in chip design, right? In chip design, we simulate 99 point some percent of the use cases so that when the chip comes back, it works. But if you look at the system domain, because the accuracy is not there, because the speed is not there, they're only covering 20% of the use cases, and all of them are only in software. So the potential with Millennium is one that 20% goes much closer to, you know, much higher than 50%. And then a big portion of that can go to hardware-assisted, emulation, and verification. And by the way, the same thing can happen again. This three-layer cake can repeat itself again in bio, which is a few years out.
Speaker Change: The use cases and all of them only in software. So the potential the millennium is one that 20% goes to much closer to you know much higher than 50% and then a big portion of that can go to hardware assisted.
Speaker Change: Emulation and verification and by the way the same thing can repeat again this three layer cake and repeat again in bio which is few years out okay, but I think right now the opportunities there and system simulation and CSP, So I'm pretty optimistic, but if the new use case for that market and you know sometimes the new use cases can take some time to deploy.
Anirudh: But I think right now that the opportunity is there in system simulation and CSP. So I'm pretty optimistic, but it's a new use case for that market. And, you know, sometimes new use cases can take some time to deploy. You know, so we always have to be cautious about that.
Speaker Change: So we always have to be cautious about that but the response has been so far has been phenomenal and we build and because they were doing some of this themselves in other customers, but to have a combined solution with AI software and hardware and you are exactly right. It mimics our success, we have done on the chip side.
Anirudh: But the response so far has been phenomenal, and people, because they were doing some of this themselves, you know, the customers, but to have a combined solution with AI software and hardware, and you are exactly right. It mimics, you know, our success we have had on the chip side. Yeah, insightful. Thank you. Your next question comes from Gianmarco Conti with Deutsche Bank. Please go ahead.
Speaker Change: Oh I'm sorry, four thank you.
Speaker Change: Your next question comes from John Marco <unk> with Deutsche Bank. Please go ahead.
John W. Pitzer: Yeah, Hi, there. Thank you for taking my questions.
Gianmarco Conti: Yeah, hi there. Thank you for taking the time to answer my questions. So I know you've touched on this already, but could you run us again through the phasing of top line and margins for 2024 guidance, as well as provide some more color on what is causing the lower level of revenue seasonality in your Q1 guidance? Given Q1 implies 22% versus the median of 25% over the past seven years in terms of seasonality. Can we explain this perhaps by hardware and or IP timing, or is there something else?
John W. Pitzer: So I know you've touched on this already but could you run us again through the phasing the top line and margins through 2000, <unk> guidance as well as providing some more color on what is causing the lower level of revenue seasonality in your Q1 guidance.
Speaker Change: Given Q1 implies 22% versus the median of 25% over the past seven years in terms of the seasonality can we explain this perhaps by hardware and IP timing or is there something else. Thank you.
John: On the revenue side, we expect 2024 to take a slightly different shape to 2023. That's largely a function of the revenue mix by quarter. You'll recall last year in 2023, we had 20% upfront revenue in Q1, when the year ended up at 16%. But this year for Q1, we're expecting 14% in Q1, when the year is expected to be 17.5%.
Thanks, Jeremy for the question.
Speaker Change: On the revenue side.
Speaker Change: We expect 2024 to take a slightly different shape to 2023, that's largely a function of the revenue mix by quarter.
Speaker Change: You'll recall last year in 2023, we had 20% upfront revenue in Q1, when the year ended up at 16%, but this year for Q1, we're expecting 14% in Q1 when the year is expected to be 17, 5%. So clearly from that you expect that we would expect that upfront revenue to increase quarter after quarter.
John: So clearly from that, we'd expect that upfront revenue to increase quarter after quarter this year, whereas last year, Q1 was really the high watermark for upfront revenue. And then on the expense side, you know, we've invested heavily; we have about 1000 extra heads this year. And that's for continued innovation. And, you know, we're launching new products all the time. But that expense on some of the acquisitions is more front loaders for the year.
Speaker Change: This year, whereas last year Q1 was really the high watermark for upfront revenue.
Speaker Change: And then on the expense side, we've we've invested heavily with about 1000 extra heads this year.
Speaker Change: Stats for continued innovation and we're launching new products all the time, but.
Speaker Change: That expense on some of the acquisitions is more frontloaded for the year.
John: And as a result, that's kind of feeding into lower margins for Q1 in comparison to the rest of the year. For Q2, Q3, and Q4, we'd expect margins to be similar or higher than last year. Yeah, I think those are probably the main things to get across. Yeah, that was really good.
Speaker Change: And as a results thats kind of feeding into lower margins for Q1 in comparison to the rest of the year for Q2, Q3, and Q4, we would expect margins to be similar or higher than it's been last year.
Speaker Change: Yes, I think that's those are probably the main thing to get across.
Speaker Change: Yes that would that work.
Gianmarco Conti: Thank you. Really helpful. And perhaps just one last follow-up on the commentary around expectations of operating cash flow into next year. I mean, the lower end kind of seems flat. So perhaps what are the moving levers there?
Speaker Change: Good thank you really helpful.
Speaker Change: Perhaps just one.
Speaker Change: One last follow up on commentary around expectations.
Operating cash flow into next year I mean, the the lower end kind of assumes flat and perhaps what the need is there and and also and how can <unk> 70%.
John: And also, how can 70% of the backlog be flown into 2024 compared to 75% in 2023? Thank you. Yeah, let me take the second part first.
Speaker Change: The backlog is flowing into 2024 compared to 10, 75% and 23.
Speaker Change: Yes, Janet yeah.
Janet: Let me take the second part first and I'll come back to the cash question.
John: I'll come back to the cash question. So last year, we had over six months of lead times for hardware delivery. So a lot of last year's hardware revenue came out of backlog. The 5% shift can pretty much all be allocated to less hardware coming out of backlog for this year. Now, hardware revenue for the year will probably be more of a reflection, like it has been for the last few years, of just how much hardware we're able to produce in the year. And we expect to increase hardware production each quarter for this year to meet the demand that we're expecting. But last year, the operating cash flow was kind of muted. It was less than, although we beat on all our metrics, we came in just under the midpoint of $13.50. I think it was $13.49 for operating cash flow.
Janet: So last year, we had just over six months of of lead times for hardware.
Janet: For our hardware delivery lead times. So there was a lot of last years hardware revenue came out of backlog.
The 5% shift in pretty much all be allocated to less hardware coming out of backlog for this year no hardware revenue for the year will probably be more of a reflection like it has been the last few years of just how much hardware, we're able to produce in the year and we expect to increase our hardware production each quarter for this.
Janet: Year.
Janet: To meet the demand that we're expecting.
Janet: Last year, the operating cash flow was.
Janet: Was kind of muted it was less than that although we beat on all our metrics. We came in just under the midpoint of 13 50, everything was $13 49 for operating cash flow with that included us investing spending a lot to ramp up on purchase so advanced purchase of raw materials.
John: But that included us investing, spending a lot to ramp up on the purchase, so advanced purchase of raw materials to build that inventory that we believe we need for hardware this year. We intend to do that again in Q1. So we've already included that in our operating cash guide. So we're investing some of that operating cash to improve gross margins by pre-purchasing a bunch of raw materials that we believe we need to keep up with the demand on the hardware side. Now, the other thing I wanted to highlight is that the business's forecast for hardware is again for another record hardware revenue year and for hardware demand to continue to accelerate quarter after quarter this year. Normally, I wouldn't include some of their expected demand for the second half until I see that, you know, it's a pipeline business. So we look at lead times; we look at the pipeline kind of closer to the summer before taking up the second half of the year. So this guide does not include the full forecast from the business.
Janet: Buildup inventory that we believe we need for for hardware this year.
Janet: We intend to do that again in Q1.
Janet: So we've already included that in our operating cash guide. So we're we're investing some of that operating cash to improve gross margins by pre purchasing a bunch of raw materials that we believe we need four four to keep up with the demand on the on the hardware side.
Janet: The thing I wanted to highlight is this.
Janet: The business is forecast for hardware is again for another record hardware revenue core revenue year.
Janet: For hardware demand to continue to accelerate quarter after quarter. This year normally I wouldn't include.
Janet: So some of their expected demand for the second half.
Janet: Until I see the.
Janet: It's a pipeline business. So we look at lead times.
Janet: We look at the pipeline kind of closer to the summer before taking up the second half of the year.
The guide does not include the full forecast from the business I'd like to hedge that back in the second half until we get to the summer.
John: I like to hedge that back in the second half until we get to summer. I prefer to see the pipeline come through, and then there is potential to take the second half higher when we see that pipeline. That was fantastic. Thank you.
Janet: To see the pipeline come through and then there is potential to take the second half higher.
Janet: When we see that pipeline.
Speaker Change: That's fantastic. Thank you okay.
John: Very clear. Your next question comes from Josh Tilton with Wolf Research. Please go ahead.
Speaker Change: Your next question comes from Josh Tilton with Wolfe Research. Please go ahead.
Josh Tilton: Hi guys, thanks for taking my question. John, you kind of anticipated what I was going to ask with your last comment there. So I just want to clarify very simply, is what we should just interpret what you said is that even this, The Bulletproof Executive 2013, Yeah, I think that's fair. That's fair.
Josh Tilton: Hi, guys. Thanks for taking my question.
Josh Tilton: John you kind of anticipated when I was going to ask you.
Josh Tilton: Your last comment there so I just wanted to clarify very simply.
Josh Tilton: Should we just interpret what you said is that even this strong upfront revenue guide, which I think implies another year of 20% plus growth.
Speaker Change: Will fall under the motto of under promise over deliver.
John: Yes, I think that's fair that's fair.
John: But if I didn't include the full forecast, the guide would have been higher. Of course, we have strong IP as well this year. I mean, certainly compared to last year, IP didn't contribute a huge amount.
John: But I didn't include the full forecast the guide would have been higher of course, we have a strong IP as well this year I mean, certainly compared to last year IP didn't contribute a huge amount I mean, it's been great business for us, but we're much more confident going into 24 of the IP contribution to 2020 for revenue, but hardware is going to be strong.
John: I mean, it's been great business for us, but we're much more confident going into 2024 about the IP contribution to 2024 revenue. But hardware is going to be strong. Again, by nature, we always like to kind of hold back on the second half guide for hardware until we see the pipeline and around summertime. So I haven't included the full forecast from the business in the guide, which is super helpful. And then my follow-up question is, how do you see the competition, maybe specifically in digital, changing, if at all, if Synopsys can indeed close this ANSYS acquisition and fully integrate ANSYS's tool set into their. Well, I don't think that will change the competitive landscape at all. That's my assessment in digital or even in SDNA.
John: Again, I mean by nature, we always like to kind of hold back on the second half guide.
John: <unk> for hardware until we see the pipeline around summertime.
John: So I haven't included the full forecast from the business in the guide.
Speaker Change: Super Helpful. And then just my follow up is.
Speaker Change: How do you see the competition, maybe specifically in digital changing if at all.
Speaker Change: If synopsys can indeed, close the sensus acquisition and fully integrate.
Speaker Change: Hence the toolset into their design flow.
Well I don't think that will change the competitive landscape at all.
The assessment in digital or even an S DNA.
John: Because of digital, anyway, we are competing very effectively in the marketplace. And with this AI, you know, it is pulling us into a full digital, full flow position. I think your comment may be more tied to, you know, part of digital, which is like 3DIC. But with 3DIC, we have always talked about how there are three big portions of 3DIC. You know, there are the actual chip implementation tools, which is, I mean, digital is much bigger than that, right? Digital, we have a very big business, which is growing at all the top 20 customers. But 3DIC has these three components to it. One is the chip design tools.
Speaker Change: Because digital anyway, we are competing very effectively in the marketplace and with this AI. It is pulling in a full digital full flow position I think your comment and may be more tied to part of digital which is like <unk>.
But if it <unk> always talked about there are three big portions of <unk>. You know there is the actual chip implementation tools, which is when digital is much bigger than that right digital we have a very big business, which is growing at all of the top 20 customers, but <unk> has these three components to it one is the chip design tools. So in chip design tools.
Anirudh: So in chip design tools, you know, we are the only company that has both analog and digital chip implementation, okay? And the second part of 3DIC is package design. And Cadence is the leader in package design. And that thing is still a very strong differentiation, no matter what the M&A news is outside. And then the third part is the simulation tools, like thermal and electromagnetic.
We are the only company that has both analog and digital chip implementation, Okay and the second part into the IC is package design and cadence as the leader in vector design and that that thing is still.
Speaker Change: Very strong differentiation no matter, what the M&A and uses outside and then the third part is the stimulation tools like thermal and electromagnetic and there we're already doing pretty well, so I'm very confident in our product positioning and competitive advantage no matter what happens on the M&A side, because anyway, we are competing very effectively.
Anirudh: And there we are already doing pretty well. So I'm very confident in our product positioning and competitive advantage, no matter what happens on the M&A side. Because anyway, we are competing very effectively. And then the other thing that is good about Cadence is that we also form very strong partnerships in the ecosystem. You know, we talked about Dassault on the SDNA side.
Speaker Change: Actively.
Speaker Change: Then.
Speaker Change: The other thing that is good about cadences. We also formed very strong partnerships in the ecosystem, we talked about so on the SG&A side.
Anirudh: But the other one that I want to highlight, you know, we have a lot of news today, but one of the things I want to highlight is our partnership with Arm. You know, Arm is also expanding into what they call total design, you know, going more towards silicon, more towards custom solutions. And we are the exclusive partner with Arm as they go to implement that. And that really also helps our digital business. So overall, I feel pretty confident in our digital position, including 3DiG. Super helpful, thank you guys. Your next question comes from Ruben Roy with Cecil. Please go ahead.
Speaker Change: But the other one that I want to highlight.
Speaker Change: A lot of news today, but one of the things I want to highlight is our partnership with arm.
Speaker Change: Arm is also expanding into what they call total design going into more towards silicon more towards custom solutions and we are the exclusive partner with arm as they go implement that and that really also helps our digital business.
Speaker Change: <unk>.
Speaker Change: So overall I feel pretty confident in our digital position include.
Speaker Change: Including <unk>.
Speaker Change: Super helpful. Thank you guys.
Speaker Change: Your next question it comes from Ruben Roy with Stifel. Please go ahead.
Ruben Roy: Yeah, thank you. Anirudh, I just had a quick question, I guess, to go back to Vivek's question on growth rates. I understand the three-year category; it's been excellent. It's been growing, and that's really nice to see. But, you know, when you think about these phases of AI at this point, is it too early to start thinking about contribution from AI as you go through these renewals? I mean, can you talk about, you know, how, if there is, if you're seeing an impact yet, or what that impact is, or how we should think about AI as, you know, sort of, you think about the next three years, or AI's contribution to growth Yeah, I think AI is definitely helping us already.
Ruben Roy: Yes. Thank you.
I just had a quick question I guess.
Go back to the next question on growth rates I understand that the three year CAGR. It's been excellent it's been growing and that's really nice to see but you know when you think about these phases of AI at this point.
Ruben Roy: Is it too early to start thinking about contribution from AI as you go through these renewals I mean can you talk about.
Ruben Roy: How if there is if you're seeing an impact yet or what that impact is or how we should think about AI.
Ruben Roy: Sort of if you think about the next three years or contribution to growth looking forward.
Speaker Change: Yes, I think he is definitely helping us already like you mentioned about a dollar.
Ruben Roy: Like you mentioned about our AI, tools by themselves, have gone up by 3x, and then Cerebrus is even higher than that, and then also AI, itself is the infrastructure part of AI, like our partnership with NVIDIA and all the hyperscalers. So overall, we are pretty pleased with that. But of course, we are mostly a ratable business. So these things take multiple years to bleed in.
Ruben Roy: No.
Ruben Roy: Tools by itself.
Ruben Roy: <unk> has gone up by three eggs, and then reverse more higher than that.
Ruben Roy: And then also here.
Ruben Roy: Itself is.
Speaker Change: The infrastructure part of AI like our partnership with Nvidia and all the Hyperscale is so so overall, we are pretty pleased with that but of course, you know we are mostly a ratable business. So these things take multiple years to bleed in.
Anirudh: And, and I think that's fine. You know, our model is always to have, you know, strong revenue growth and margin growth. So I think this thing will still take multiple years to come into our model, but I think that's a good thing. It provides multiple years of growth. I think it's in the very early innings right now in the AI adoption.
Speaker Change: And I think that's fine in our model all of it has to have strong revenue growth and margin growth.
Speaker Change: So I think this thing will still take multiple years to come into the model, but that's I think that's a good thing it provides multiple years of growth.
Speaker Change: I think it's very early innings right now AI adoption, we've been focused mainly on proliferation.
John: We've been focused mainly on proliferation, and we're very, very pleased with the uptake of our AI tools and just how strongly they're growing on the booking side. It is starting to feed into the P&L already, but as Andrew says, because it's rateable, that takes time to show up in total. But it's in the very, very early innings in the adoption of AI tools right now. I think there's a lot more to go. Right, right. Okay, that's very helpful.
Speaker Change: And we're very very pleased with the uptake of our AI tools and just how strongly they're growing on the bookings side. It is starting to feed into the P&L already but whereas on our returns because it's ratable that takes time to show up in total but put very very early innings in adoption of AI tools right. Now I think there is a lot more to go.
Speaker Change: Right right. Okay. That's very helpful. Thanks, guys and then just quickly John.
Ruben Roy: Thanks, guys. And then just quickly, John, you talked a lot about the hardware. And I think it's pretty clear at this point. But just to make sure I understand, sounds like lead times have normalized. Is that correct? And also, in terms of, you know, sort of the visibility you get from your, you know, customer base, that hasn't changed, right? Is that what you're saying?
Speaker Change: Talked a lot about the hardware.
And I think it's pretty clear at this point, but just to make sure I understand it sounds like lead times, a normalized is that correct and and also in terms of sort of the visibility you get from your customer base that hasn't changed right is that what youre, saying in terms of.
John: And in terms of, you know, Kyle, how far out your customers are ordering it? I mean, I guess it would be just a, you know, kind of a function of increased attached rates, which is giving you the confidence that you're going to have another big growth here in hardware. Just wanted to make sure I'm thinking about that correctly. I think you are.
Speaker Change: How far out your customers are ordering it and then I guess it would be just that kind of a function of increased attach rates, which is giving you the confidence that you're going to have another big growth here and hardware just want to make sure I'm thinking about that correctly.
Speaker Change: I think you are yes, yes.
Ruben Roy: Yes, yeah. I mean, the business has great confidence in terms of what they're hearing from customers and their plans and budget plans. But, you know, I push back on the forecast. And, as you know, I mean, the hardware itself, from a purchasing perspective, has some degree of seasonality in it. But like a Q4 would always be bigger for purchasing activity from customers than a Q1. And now that we're down to more normal lead times, you kind of have that growth quarter over quarter built into the forecast. Now, again, I've been conservative in the second half of that forecast. But still, even with my conservatism, I still have the second half being higher than the first half for hardware. Got it. Okay. Thank you. Your final question comes from Joe Vruwink with Baird. Please go ahead.
Speaker Change: This has great confidence in terms of what they're hearing from customers in customers' plans and budget plans, but.
Speaker Change: I pushed back on the forecast.
And as you know I mean, the hardware itself from a purchasing perspective has some degree of seasonality in it but like Q4 will always be bigger for purchasing activity from customers than a Q1 and now that we're down to more normal lead times, you kind of have that growth quarter over quarter built into the forecast now again I have been conservative in the second half on that forecast, but still even with my <unk>.
Speaker Change: Separatism the.
Speaker Change: Second half being higher than the first half of hardware.
Speaker Change: Got it okay. Thank you.
Speaker Change: Your final question comes from Joe <unk> with Baird. Please go ahead.
Joseph D. Vruwink: Great. Thanks for squeezing me in. Just to follow up on some of the earlier questions. So I think of your growth as being tied to the R&D budgets at your customers, not the revenue at your customers. And certainly R&D budgets, they tend to move around more steadily, perhaps. And then, Anurad, you mentioned earlier, you know, a lot of your revenue is ratable at the same time. So basically, changes can take some time to work through the system.
Joe: Great. Thanks for squeezing me in.
Joe: Just a follow up on some of the earlier questions. So I think of your growth is being tied to.
Joe: The R&D budgets at your customers not the revenue at your customers and certainly R&D budget.
Joe: They tend to move around more steadily perhaps and then Andres you mentioned earlier.
Joe: Out of your revenue is ratable at the same time, so basically changes can take some time to work through the model I just wanted to ask though because I think 2024 has the potential to see a pretty big inflection in R&D spending within the semi customer base.
Anirudh: I just wanted to ask, though, because I think 2024 has the potential to see a pretty big inflection in R&D spending within the semi-customer base. If you are maybe seeing that, you know, A, is it included in your outlook for the year? And then B, if it does end up moving higher and influencing kind of renewals and purchasing decisions, does that actually manifest in a bigger way, probably more in 2025 than it really would in 2024? Yeah, Joe, that's a very good observation.
Joe: If you are maybe seeing that.
Joe: Included in your outlook, starting the year and then B. If it does end up moving higher and influencing kind of renewals on purchasing decisions does that actually manifest in a bigger way probably more in 2025 than it really was in 2024.
Speaker Change: Yes, Joe that's a very good observation.
Joseph D. Vruwink: I mean, definitely the, you know, we are like, you know, we are very diversified, we are very rideable, we are tied to R&D, which are all, you know, good things in our model. And then the mood seems to be changing a little bit. You know, 23, as we have mentioned before, was a tough environment, though we kind of grew very well. And there was some change, I feel, in Q4, in the overall macro sentiment, and maybe there will be more investment, you know, in 24 and 25. But I think we based our outlook, and John can comment more on the backlog that we see, rather than guessing what will happen in 24 and 25.
Speaker Change: Definitely the we are like you know we are very diversified we are very ratable, we are tied to R&D, which are all.
Speaker Change: Good things in our model.
Speaker Change: And then the mood seems to be changing a little bit 23, as we had mentioned before was a tough environment, though we kind of grew very well and there was some change I feel in Q4 and the overall I mean, you guys know that as well in the overall macro sand demand and maybe there will be more investment in <unk>.
<unk> thousand 425.
Speaker Change: But I think we based our outlook and John can comment more on the backlog that we see rather than guessing what will happen in 'twenty four and 'twenty five but if there is an improvement in R&D and that's good for our business, but we do see that there's a lot of design activity and you know and then we see our position improving the EDA and IP, especially this year end.
Joseph D. Vruwink: But if there is improvement in R&D, then that's good for our business. But we do see that there is a lot of design activity, and you know, and then we see our position in EDA, and IP, especially this year, and we will continue expanding in SD and AI. Yeah, certainly everyone seems to be more optimistic this time of year compared to this time last year. This time last year, everyone was asking me when the recession was going to happen.
Speaker Change: D&A extending an SDN are yes, certainly everyone's field seems to be more optimistic. This time this year compared to this time last year. This time last year, everyone was asking me when with the recession going to happen.
Anirudh: But this year, you know, design activity seems to be strong. You know, even when we talk about China, we're still seeing strong design activity in China, but I do risk the guide for that. Because, you know, part of the large outperformance in China last year in achieving 17% of our revenue was because of that hardware backlog. And now that we're back to more normal lead times, I think it's prudent to assume that the Chinese revenue drops back to prior levels of between kind of 14, 15%. But so that's embedded in the guide, I thought the right approach this time of year is always to try to de-risk the guide for the things that we think people might be concerned about, but then have the business focus on doing the best business with customers for the long term, which we always feel are our cadence employees do the best business when they're not chasing. Okay, yeah, I think that's all very smart.
Speaker Change: But this your design activity seems to be strong.
Speaker Change: Even when we talk about China, we are still seeing strong design activity in China, but derisk the guide for that because part of the.
Speaker Change: The large outperformance in China last year, and achieving 17% of our revenue was because of that hardware backlog and now that we're back to more normal lead times, we thought its prudent to assume that the China revenue drops back to prior levels of between 14 and 15%.
Speaker Change: So thats embedded in the guide I thought the right thing I mean, we always take the approach. This time of the year is always trying to derisk the guidance for the things that we think people might be concerned about that.
Speaker Change: And then have the business focused on doing the best.
Speaker Change: <unk> business with customers for the long term that we always feel are our cadence employees do the best business when they're not chasing.
Speaker Change: Okay, Yes, I think Thats, all smart and then.
John: And then, I guess, John, just on kind of your approach to forecasting the upfront revenues, you know, I think in 3Q, you were kind of intimating that, look, we're running at kind of an elevated share of total; we haven't typically been 15% coming from upfront products. So maybe it normalizes, and now it's changing, and suddenly it's going to remain a higher share of total. Can you just go into what changed in 4Q?
Speaker Change: I guess, John just on kind of your approach to forecasting the upfront revenues, yes, I think in <unk> you were kind of intimating that look we're running at kind of an elevated share of total we haven't typically been 15% coming from upfront products. So maybe it.
Normalizes.
John: And now it's changing and suddenly it's going to remain a higher share of total.
John: Can you just go into what changed and <unk> and is any of that kind of a obviously verification hardware I mean, these AI designs basically need the cutting edge AI acutely <unk> and the strength of your hardware order activity.
John: And is any of that kind of AI, obviously, verification hardware, I mean, these AI designs basically need the cutting edge; is AI acutely being seen in the strength of your hardware order activity? Yes, yeah, of course, and partly it's that I mean, if you've seen over the last number of years, we've seen the upfront contribution to our revenue mix has been increasing, and it went from 15% in 22 to 16% last year. And I think what you're referring to is it's expected to go to 17% this year.
Speaker Change: Yes, yes of course.
Partly it's there I mean have you seen over the last number of years, we've seen the upfront contribution to our revenue mix.
Speaker Change: Has been increasing and it went from 15% and 22% to 16%.
Speaker Change: Last year, and I think what you're referring to is we expect it to go to 17, 5% this year.
John: That's, that's a virtue of expectation that we're going to have another record hardware revenue year, that we expect stronger IP growth this year compared to last, and we feel much more confident in contribution from IP growth. And, of course, we're launching new products all the time. Now, in relation to things like Millennium, we expect a large part of Millennium sales to be cloud-based, but maybe not all of them will be cloud-based. I think that's another tailwind potentially for upfront revenue for the year, but I've hedged back slightly what I expect in the second half because I'd like to see the pipeline in the summer before we take that up even higher. But the forecast is higher than 17.5%, but I'm only comfortable with going out with a guide of 17.5% for upfront revenue for this year.
Speaker Change: That's a virtue of an expectation that we're going to have another record hardware revenue year.
Speaker Change: We expect stronger IP growth this year compared to last we feel much more confident in the contribution from <unk> and of course, we're launching new products. All the time now in relation to things like millennium, We expect a large part of millennium sales to be cloud based but but maybe not all of them will be will be cloud based I think that's another tailwind.
Speaker Change: <unk> four four upfront revenue for the year, but I've had.
Speaker Change: <unk> slightly what I expect in the second half because I'd like to see the pipeline in the summer before we before we take that up even higher but the forecast is higher than 17, 5%, but I'm only comfortable with going out with.
Speaker Change: Our guide of 17, 5% for upfront revenue for this year.
Joseph D. Vruwink: Great, thank you very much. And just to add, I mean, AI contributes to — AI design activity, as you know, contributes to harvest, given our strong position. And also, AI is more HPC and chiplet-based, and it does help our IP business as well. And then there are all the comments on Millennium. So, but let's see how it progresses. But yeah, I mean, the IP is also strong this year, along with hardware and millennium. Okay, thank you.
Yeah.
Speaker Change: Great. Thank you very much.
Speaker Change: And just to add I mean, AI contributes to M&A I design activity as you know contributes to hardware strength, given our strong position and also AI is more HBC and chip led based and it does help our <unk>.
Speaker Change: Business as well and then I'll comment on millennium, So, but let's see how it progresses.
Speaker Change: But yes, I mean, the IP is also strong this year along with hardware in Bolivia.
Speaker Change: Okay. Thank you.
Anirudh: I will now turn it back to Anirudh Devgan for closing remarks. Yeah, thank you all for joining us this afternoon. It's an exciting time for Cadence as we enter 2024 with product leadership and strong business momentum. Our continued execution of the intelligent 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. Fortune and Great Place to Work named Cadence as one of the world's best workplaces in 2023, ranking it number nine. 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 fourth quarter and fiscal year 2023 earnings conference call. This concludes today's call. You may now disconnect. The Ultimate Parody Site! www.circlelineartschool.com www.microsoft.com www.microsoft.com
Speaker Change: I will now turn it back to <unk> for closing remarks.
Yes. Thank you all for joining us this afternoon.
Speaker Change: It's an exciting time for cadence as we enter 2024 with product leadership and strong business momentum.
Speaker Change: Our continued execution of the intelligent system design strategy.
Speaker Change: Customer first mindset.
Speaker Change: And our high performance and inclusive culture are driving accelerating growth as.
As we grow our core EDA business, while expanding our portfolio.
Fortune and great place to work named <unk> as one of the words best workplaces in 2023 ranking at number nine.
Speaker Change: 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 guidance.
Speaker Change: Thank you for participating in today's cadence fourth quarter and fiscal year 2023 earnings Conference call. This concludes today's call you may now disconnect.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Yeah.
Yeah.
Speaker Change: Yeah.
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