Q2 2024 Cadence Design Systems Inc Earnings Call
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 Second Quarter 2024 Earnings Conference Call.
Operator: At this time, I would like to welcome everyone to the Cadence Second Quarter 2024 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.
Speaker Change: All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
Speaker Change: If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. Thank you. I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead.
Richard Gu: Thank you. I'd like to welcome everyone to our second quarter of 2024 earnings conference call. I'm joined today by Anirudh Devgan, President and Chief Executive Officer, and John Waugh, Senior Vice President and Chief Financial Officer.
Richard Gu: Thank you, operator.
Richard Gu: I'd like to welcome everyone to our second quarter of 2024 Earnings Conference Call.
Richard Gu: I'm joined today by Anirudh Devgan.
Speaker Change: President and Chief Executive Officer, and John Wall, Senior Vice President and Chief Financial Officer.
Richard Gu: 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 four 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.
Speaker Change: The webcast of this call and a copy of today's prepared remarks will be available on our website cadence.com.
Speaker Change: Today's discussion will contain four looking statements, including our outlook on future business and operating results.
Speaker Change: Due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion.
Richard Gu: 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 four forward-looking statements during this call are based on estimates and information available to us as of today, and we disclaim any obligation to update them. In addition, we'll present certain non-GAAP measures, which should not be considered in isolation from or as a substitute for GAP results.
Speaker Change: 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.
Speaker Change: All four looking statements during this call are based on estimates and information available to us as of today, and we disclaim any obligation to update them.
Speaker Change: In addition, we'll present certain non- GAAP measures , which should not be considered in isolation from, or as a substitute for, GAP results.
Speaker Change: Reconciliation of gap-to-non- GAAP measures are included in today's earnings release.
Speaker Change: For the Q&A session today, we would ask that you observe a limit of one question and one follow-up.
Richard Gu: Reconciliation of gap to non-gap measures is included in today's earnings release. For the Q&A session today, we will ask that you observe a limit of one question and one follow-up. Now, I'll turn the call over to honors.
Anirudh Devgan: Thank you, Richard, good afternoon, everyone, and thank you for joining us today. Cadence delivered strong financial results for the second quarter of 2024, with broad-based momentum across our product portfolio. Bookings were stronger than expected, leading to a healthy backlog and underscoring the robust demand for our innovative technology. We exceeded our outlook on all key metrics and are updating our revenue guidance for the year to over 13% year-over-year growth. John will provide more details on both our Q2 results and updated outlook for the year. Generational trends such as hyperscale computing, 5G, and autonomous driving, all underpinned by the AI super cycle, are driving strong design activity across multiple verticals, particularly in data center and automotive, along with increasing chip complexity and system companies building their own silicon.
Speaker Change: Now I'll turn the call over to Anirudh.
Anirudh Devgan: Thank you, Richard. Good afternoon, everyone, and thank you for joining us today.
Anirudh Devgan: Cadence delivered strong financial results for the second quarter of 2024.
Anirudh Devgan: with broad-based momentum across our product portfolio.
Speaker Change: Bookings were stronger than expected, leading to a healthy backlog and underscoring the robust demand for our innovative technologies.
Speaker Change: We exceeded our outlook on all key metrics.
Speaker Change: and are updating our revenue guidance for the year to over 13% year-over-year growth.
Speaker Change: John will provide more details on both our Q2 results and updated outlook for the year.
John M. Wall: Generational trends such as hyperscale computing, 5G, and autonomous driving, all underpinned by the AI super cycle.
John M. Wall: are driving strong design activity across multiple verticals.
John M. Wall: particularly in data center and automotive.
John M. Wall: along with increasing chip complexity and system companies building their own silicon.
Anirudh Devgan: These trends are creating tremendous tailwinds for our differentiated solutions. We are steadfastly executing on our intelligent system design strategy, extending our leadership in Core EDA while steadily expanding our footprint in the new system design and analysis area. Customers are ramping up their R&D spend on AI driven automation. Our Cadence.ai portfolio, offering unparalleled quality of results and productivity benefits, continues to gain momentum with orders more than tripling over the last year. Our solutions are enabling the massive AI infrastructure build-out across the semi- and system space. Additionally, we continue embedding AI in our EDA, SDA, and digital biology solutions.
John M. Wall: These trends are creating tremendous tailwinds for our differentiated solutions.
John M. Wall: We are steadfastly executing to our intelligent system design strategy.
John M. Wall: extending our leadership in Core EDA while steadily expanding our footprint in the new system design and analysis area.
John M. Wall: Customers are ramping up their R&D spend in AI-driven automation.
John M. Wall: Our Cadence.ai portfolio offering unparalleled quality of results and productivity benefits.
John M. Wall: continues to gain momentum with orders more than tripling over the last year.
John M. Wall: Our solutions are enabling the massive AI infrastructure build out across the semi and system space.
John M. Wall: Additionally, we continue embedding AI in our EDA, SDA, and digital biology solutions.
Anirudh Devgan: In Q2, our long-term development partner, NVIDIA, broadly deployed Palladium Z3 to deliver on its next-generation AI product roadmap, further solidifying Cadence's leadership in the industry. A marquee hyperscaler meaningfully expanded its partnership with Cadence in Q2, through a broad proliferation of our Cadence.ai EDA, SDA, and Hardware Portfolio.
John M. Wall: In Q2, our long-term development partner, NVIDIA, broadly deployed Palladium Z3 to deliver to its next-generation AI product roadmap.
John M. Wall: further solidifying Cadence's leadership in the industry.
John M. Wall: A marquee hyperscaler meaningfully expanded its partnership with Cadence in Q2, through a broad proliferation of our Cadence.ai EDA, SDA, and hardware portfolio.
Anirudh Devgan: The growing foundry ecosystem is driving increased design activity and creating significant opportunities for our industry-leading products. And in Q2, we expanded our collaboration with several leading foundry partners. We announce that Cadence.ai Digital and Analog Tools were optimized for Samsung's advanced node SF2 gate all-around process, driving enhanced quality of results and accelerating node migration. We extended our longstanding collaboration with TSMC through a very comprehensive and innovative technology advance, ranging from 3D IC to design IP and photonics and providing optimized digital and analog full flows for TSMC's latest N2 process technology, or Integrity 3D IC Platform, is the industry's leading unified design, analysis, and sign-off platform for Multi-Chip-Led Architects.
John M. Wall: The growing foundry ecosystem is driving increased design activity.
John M. Wall: and creating significant opportunities for our industry-leading products. And in Q2, we expanded our collaboration with several leading foundry partners.
John M. Wall: We announced that Cadence.AI digital and analog tools were optimized for Samsung's advanced node SF2 gate all-around process.
John M. Wall: driving enhanced quality of results and accelerating node migration.
John M. Wall: We extended our long-standing collaboration with TSMC.
John M. Wall: through a very comprehensive and innovative technology advancement.
John M. Wall: ranging from 3DIC to design IP and photonics and providing optimized digital and analog full flows for TSMC's latest N2 process technologies.
John M. Wall: Our Integrity 3D IC platform is the industry's leading unified design, analysis, and sign-off platform for multi-chiplet architectures.
Anirudh Devgan: Integrity has been certified for all of TSMC's latest 3D fabric offering and now has enabled several new features like hierarchical 3DIC design. We also announced that Integrity has been enabled for all of Samsung Foundry's multi-die integration offerings. Accelerating the Design Assembly of Stack Chip
John M. Wall: Integrity has been certified for all of TSMC's latest 3D fabric offerings.
John M. Wall: and now has enabled several new features like hierarchical 3DIC design.
John M. Wall: We also announced that Integrity has been enabled for all of Samsung Foundry's multi-die integration offerings.
John M. Wall: Accelerating the design and assembly of stacked chiplets.
Anirudh Devgan: Additionally, we released a complete Intel foundry EMIB advanced packaging reference flow that is optimized to work seamlessly with Intel 18A technology. We are also collaborating with multiple foundries to optimize our industry-leading IP cores for AI, HPC, mobile, and automotive applications for the advanced process technology, so as to ensure seamless integration into customer designs. We saw strong momentum in our IP business, with 25% year-over-year growth in Q2, as we executed it on our profitable and scalable growth strategy.
John M. Wall: Additionally, we released a complete Intel Foundry eMIB Advanced Packaging Reference Flow that is optimized to work seamlessly with Intel 18a technology.
John M. Wall: We are also collaborating with multiple foundries to optimize our industry-leading IP cores for AI, HPC, mobile, and automotive applications for their advanced process technologies.
John M. Wall: so as to ensure seamless integration into customer designs.
John M. Wall: We saw strong momentum in our IP business.
John M. Wall: for delivering 25% year-over-year growth in Q2.
John M. Wall: as we execute it to our profitable and scalable growth strategy.
Anirudh Devgan: AI use cases, HPC, and heterogeneous integration were the primary drivers fueling the demand for our HBM, PCIe, GDDR, 112-gig SerDes, and UCIe products. We expanded our system IP portfolio with the addition of Cadence Janus network on a chip solution, that manages high-speed communications effectively with minimum latency, enabling customers to achieve their PPA targets faster and with lower risk. Emulation and prototyping have become mission-critical elements of chip design and software developer flows following the launch of our market-leading Z3 and X3 platforms.
John M. Wall: AI use cases, HPC, and heterogeneous integration were the primary drivers fueling the demand for our HBM, PCIe, GDDR, 112G, CERDIs, and UCIe products.
John M. Wall: We expanded our system IP portfolio with the addition of Cadence Janus network-on-a-chip solution.
John M. Wall: that manages high-speed communications effectively with minimum latency.
John M. Wall: enabling customers to achieve their PPA targets faster and with lower risk.
John M. Wall: emulation and prototyping have become mission-critical elements of chip design and software bringer flows
John M. Wall: following the launch of our market-leading Z3 and X3 platforms.
Anirudh Devgan: There is robust demand for these best-in-class systems, particularly by AI, hyperscale, and automotive companies, and we continue to ramp up our production capacity accordingly. Verisium, our AI-driven verification platform, continues to see rapid customer adoption with several market-shaping customers, including Qualcomm, successfully using Verisim Sim AI for coverage maximization and achieving up to a 20x reduction in verification workload time.
John M. Wall: There is robust demand for these best-in-class systems.
John M. Wall: particularly by AI, hyperscale, and automotive companies.
John M. Wall: and we continue to ramp up our production capacity accordingly.
John M. Wall: Verisium, our AI-driven verification platform, continued seeing rapid customer adoption with several market-shaping customers.
John M. Wall: including Qualcomm, successfully using Verisim Sim AI.
John M. Wall: for coverage maximization and achieving up to a 20x reduction in verification workload time.
Anirudh Devgan: Our system design and analysis business continues its strong momentum in Q2, delivering 20% year-over-year revenue growth as chiplet-based architectures gain traction, and industry-leading integrated 3D IC platforms at increased adoption and expansion from large deployments at 5G Hyperscale Memory and Consumer Customers. Our AI-enabled Allegro X design platform is being rapidly adopted and driving competitive displacement as multiple aerospace and defense, hyperscalers, and EV customers take advantage of the platform's productivity and next-generation capability.
John M. Wall: Our system design and analysis business continued its strong momentum in Q2, delivering 20% year-over-year revenue growth.
John M. Wall: As chiplet-based architectures gain traction,
John M. Wall: Our industry-leading, integrated 3D IC platform.
John M. Wall: at increased adoption and expansion from large deployments at 5G hyperscale memory and consumer customers.
John M. Wall: Our AI-enabled Allegro X design platform.
John M. Wall: is being rapidly adopted and driving competitive displacement.
John M. Wall: as multiple aerospace and defense, hyperscalers, and EV customers take advantage of the platform's productivity and next-generation capabilities.
Anirudh Devgan: Allegro X InDesign analysis capabilities are also driving a pull-through of our multi-physics analysis solution. In Q2, a leading EV auto company forged a strategic partnership with Cadence, making a significant investment across the breadth of our multiphysics portfolio. With the close of Beta CAE in Q2, we now offer a comprehensive multi-physics platform covering electromagnetics, electro-thermal, CFD, and Structural Analysis Solutions.
John M. Wall: Allegro X's in-design analysis capabilities are also driving a pull-through of our multi-physics analysis solutions.
John M. Wall: In Q2, a leading EV auto company forged a strategic partnership with Cadence, making a significant investment across the breadth of our multiphysics portfolio.
John M. Wall: With the close of Beta CAE in Q2, we now offer a comprehensive multi-physics platform covering electromagnetics, electro-thermal, CFD, and structural analysis solutions.
Anirudh Devgan: Our digital IC and custom businesses delivered another solid quarter. Proliferation of our digital full flow at the most advanced nodes continued with close to 40 full flow wins over the last 12 months, especially at hyperscalers. With over 400 tape outs, customers are increasingly relying on Cadence Cerebris, the leading AI tool in the industry, as it continues to deliver amazing PPA and productivity benefits. For example, Cadence Cerebrus has been delivering up to a 10% PPA gain for a global marquee systems company and is now deployed as part of the default flow for their latest designs at the most advanced node. Samsung Foundry leveraged Cadence Cerebrus in both DTCO and implementation to achieve more than a 10% leakage power reduction on their SF2 gate all-around platform.
John M. Wall: Our digital IC and custom businesses delivered another solid quarter.
John M. Wall: Proliferation of our digital full flow at the most advanced nodes continued, with close to 40 full flow wins over the last 12 months.
John M. Wall: especially at hyperscalers.
John M. Wall: With over 400 tape-outs, customers are increasingly relying on Cadence Cerebris.
John M. Wall: the leading AI tool in the industry.
John M. Wall: as it continues to deliver amazing PPA and productivity benefits.
John M. Wall: For example, Cadence Cerebrus has been delivering up to a 10% PPA gain for a global marquee systems company.
John M. Wall: and is now deployed as part of the default flow for their latest designs at the most advanced nodes.
Speaker Change: Samsung Foundry leveraged cadence cerebrus in both DTCO and implementation to achieve more than a 10% leakage power reduction on their SF2 gate all-around platform.
John M. Wall: Socionext utilized SIRTUS closure and TEMPUS sign-off to reduce closure time by 73% and double productivity while reducing memory cost by 90%. Our AI-driven virtuoso studio is the leading automated solution for analog and RF design, and its new AI features allow much more efficient migration from one process node to another. Virtuoso Studio added 35 new logos in Q2, led by top hyperscalers Aerospace and Defense, and Automotive Customs. In summary, I'm pleased with our Q2 results and the continuing momentum of our business.
Speaker Change: Socionext utilizes SIRTUS closure and TEMPUS sign-off to reduce timing closure time by 73% and double productivity while reducing memory cost by 90%.
Speaker Change: Our AI-driven virtuoso studio is the leading automated solution for analog and RF designs.
Speaker Change: and its new AI features allow much more efficient migration from one process node to another.
Speaker Change: Virtuoso Studio added 35 new logos in Q2.
Speaker Change: led by top hyperscalers, aerospace and defense, and automotive customers.
Speaker Change: In summary, I am pleased with our Q2 results and the continuing momentum of our business.
John M. Wall: The AI-driven automation era offers massive opportunities, and the co-optimization of our comprehensive EDA and SDA portfolio with accelerated computing and AI orchestration uniquely positions us to provide disruptive solutions to multiple challenges. Now, I will turn it over to John to provide more details on the Q2 results and our updated 2024 outlook. Thanks, Anirudh, and good afternoon, everyone.
Speaker Change: The AI-driven automation era offers massive opportunities.
Speaker Change: And the co-optimization of our comprehensive EDA and SDA portfolio with accelerated computing and AI orchestration uniquely positions us to provide disruptive solutions to multiple markets.
Speaker Change: Now I will turn it over to John to provide more details on the Q2 results and our updated 2024 outlook.
John M. Wall: I'm pleased to report that Cadence delivered strong results for the second quarter of 2024, finishing the first half with a backlog of approximately $6 billion. Also, we expanded our multiphysics platform in Q2 by completing the acquisition of Beta CAE. Here are some of the financial highlights from the second quarter, starting with P&L. Total revenue was $1,061,000,000.
John M. Wall: Thanks, Anirudh, and good afternoon, everyone.
John M. Wall: I am pleased to report that Cadence delivered strong results for the second quarter of 2024, finishing the first half with a backlog of approximately $6 billion.
Speaker Change: Also, we expanded our multiphysics platform in Q2 by completing the acquisition of Beta CAE.
John M. Wall: GAAP operating margin was 27.7% and non-GAAP operating margin was 40.1%, and Gap EPS was 84 cents, with non-GAAP EPS $1.28. Next, turning to the balance sheet and cash flow. The cash balance at quarter end was $1,059,000,000, while the principal value of debt outstanding was $1,350,000,000.
John M. Wall: Here are some of the financial highlights from the second quarter, starting with P&L.
John M. Wall: Total revenue was $1,061,000,000.
John M. Wall: Gap operating margin was 27.7% and non-gap operating margin was 40.1%.
John M. Wall: and Gap EPS was $0.84.
John M. Wall: with non-GAAP EPS, $1.28.
John M. Wall: Next, turning to the balance sheet and cash flow, cash balance at quarter end was $1,059,000,000.
John M. Wall: while the principal value of debt outstanding was $1,350,000,000.
John M. Wall: Operating cash flow was $156 million, DSOs for 49 days, and we used $125 million to repurchase Cadence shares in Q2. Before I provide our updated outlook, I'd like to share some assumptions that are in bed. Our updated outlook includes Beta CAE, and it contains the usual assumption that export control regulations that exist today will remain substantially similar for the remainder of time. Our updated outlook for 2024 is revenue in the range of $4.6 to $4.66 billion and a gap operating margin in the range of 29.7 to 31.3 percent.
John M. Wall: Operating cash flow was $156 million.
John M. Wall: DSOs were 49 days.
John M. Wall: and we used 125 million dollars to repurchase Cadence shares in Q2.
John M. Wall: Before I provide our updated outlook, I'd like to share some assumptions that are embedded.
John M. Wall: Our updated Outlook includes Beta CAE.
John M. Wall: And it contains the usual assumption that export control regulations that exist today remain substantially similar for the remainder of the year.
John M. Wall: Our updated outlook for 2024 is revenue in the range of $4.6 to $4.66 billion.
John M. Wall: Gap operating margin in the range of 29.7% to 31.3%.
John M. Wall: Non-GAAP Operating Margin in the range of 41.7 to 43.3%; Gap EPS in the range of $3.82 to $4.02, non-GAAP EPS in the range of $5.77 to $5.97, and operating cash flow in the range of 1 to 1.2 billion dollars.
John M. Wall: non-GAAP operating margin in the range of 41.7% to 43.3%.
John M. Wall: Gap EPS in the range of $3.82 to $4.02.
John M. Wall: Non-GAAP EPS in the range of $5.77 to $5.97.
John M. Wall: Operating cash flow in the range of $1 to $1.2 billion.
John M. Wall: And we expect to use approximately 50% of our annual free cash flow to repurchase Cadence. With that in mind, for Q3, we expect revenue in the range of $1 billion and $165 million to $1,195,000,000, gap operating margin in the range of 27.7 to 29.3%, and non-GAAP operating margin in the range of 40.7% to 42.3%. Gap EPS was in the range of 83 to 93 cents, and non-GAP EPS was in the range of $1.39 to $1.49.
John M. Wall: And we expect to use approximately 50% of our annual free cash flow to repurchase Cadence shares.
John M. Wall: With that in mind, for Q3 we expect revenue in the range of $1,165,000,000 to $1,195,000,000.
John M. Wall: Gap operating margin in the range of 27.7 to 29.3%.
John M. Wall: non-GAAP operating margin in the range of 40.7 to 42.3 percent.
John M. Wall: Gap EPS in the range of $0.83 to $0.93.
John M. Wall: and non-GAP EPS in the range of $1.39 to $1.49.
John M. Wall: And, as usual, we published a CFO commentary document on our investor relations website, which includes our outlet for additional items, as well as further analysis and gap to non-gap reconciliation. In conclusion, I'm pleased with our strong Q2 results. We exceeded our outlook on all key financial metrics, and a good finish for the first half and ongoing demand for our solutions set us up for strong growth in the second half of 2020. As always, I'd like to close by thanking our customers, partners, and our employees for their continued support.
Speaker Change: And as usual, we've published a CFO commentary document on our Investor Relations website, which includes our outlook for additional items, as well as further analysis, and gap to non-gap reconciliations.
Speaker Change: In conclusion, I am pleased with our strong Q2 results.
Speaker Change: We exceeded our outlook on all key financial metrics. A good finish for the first half and ongoing demand for our solutions sets us up for strong growth in the second half of 2024.
Speaker Change: As always, I'd like to close by thanking our customers, partners and our employees for their continued support.
Operator: And with that, Operator, we will now take your questions. 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: And with that, Operator, we will now take questions.
Speaker Change: Thank you.
Speaker Change: We will open the line for questions. 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.
Operator: We'll pause for a moment to compile the Q&A roster. Your first question comes from Charles Shee with Needham and Company. Please go ahead. Hey, good afternoon.
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 Charles Shih with Needham and Company. Please go ahead.
Charles Shee: Thanks for taking my questions. Anirudh and John, maybe the first question I would like to ask is a fairly big question, a big picture one. So you did pick up your outlook for the year, but some of that really comes from beta CAE. But the broader question is the semiconductor, global semiconductor sales, which is on track to grow a lot faster, let's say, compared with you and your peer synopsis. But this seems to me kind of like a reversal of the trend of the last three years, when you actually did outgrow semiconductors.
Charles Shih: Hey, good afternoon. Thanks for taking my questions. Anirudh and John , maybe the first question, I do want to ask a fairly big question, a big picture one.
Speaker Change: So, you did pick up your Outlook for the year, but some of that really comes from beta CAE, but...
Speaker Change: The broader question is the semiconductor, global semiconductor sales, it's on track to grow a lot faster.
Speaker Change: Let's say, compare with you and your peer synopsis, but this seems to me kind of like a reversal of the trend of the last three years when you actually did outgrow the semiconductors.
Charles Shee: But with so much AI being a big driver for semiconductors, we do wonder whether it's either through pricing or through some other measures, Cadence can actually gain a little bit bigger piece of the pie from overall semiconductors, especially from AI. I don't know if you can provide some thoughts today; I'm not necessarily asking how to change the trend in terms of value capture, but any thoughts would be great. Thanks. Yeah. Hi Charles.
Speaker Change: But with so much AI being a big driver for semiconductors, we do wonder whether it's either through pricing or through some other measures, Cadence can actually gain a little bit bigger piece of the pie from overall semiconductors, especially from AI.
Speaker Change: I don't know if you can provide some thoughts today. I'm not necessarily asking how to change the trend in terms of the value capture, but any thoughts would be great.
Anirudh Devgan: Thanks for the question. I mean, first of all, I like to say that, you know, overall, we are pleased with how we are performing. Now, if you step back, because you asked a longer-term question, right? If you step back, you know, we will deliver more than 13% revenue growth and about 42.5% operating margin. So I think that's a best-in-class combination of both revenue growth and operating margin.
Speaker Change: Hi Charles, thanks for the question.
Speaker Change: I mean, first of all, I'd like to say that, you know, overall, we are pleased with how we are performing, you know, if you step back.
Speaker Change: because you asked a longer-term question right if you step back you know we will deliver we expect you know more than
Speaker Change: 13% revenue growth and about 42.5% operating margin. So I think that's a best-in-class combination of both revenue growth and operating margin.
Anirudh Devgan: And then if you look at our CAGR over the last three years, which is one of our kind of favorite metrics, that's also performing pretty well in terms of growth and Margin Expansion. And I, you mentioned the semi-cycle. It's encouraging to see that there is going to be growth this year, which was not there last year. But as you well know, Charles, we are tied to the R&D spend, you know, more than the revenue of our customers.
Speaker Change: And then if you look at our, you know, CAGR over the last three years, which is one of our kind of favorite metrics, you know, that's also performing, you know, pretty well in terms of growth and, you know, margin expansion.
Anirudh Devgan: And of course, if the revenue goes up, you know, they're more likely to spend on R&D. But in general, you know, our customers, you know, both system and semi-conductor companies, continue to spend on R&D. And these are in a long, long-term projects.
Speaker Change: And you mentioned semi-cycle. I mean, it's encouraging to see that there is going to be growth this year, which it was not there last year. But as you well know, Charles, we are tied to the R&D spend, you know, more than the revenue of our customers. And of course, if the revenue goes up,
Charles: You know, they're more likely to spend on R&D, but in general, you know, our customers, you know, both system and semi-companies continue to spend on R&D, and these are, you know, long-term projects.
John M. Wall: So we'll see how that goes, you know, as semiconductor revenue improves. But this is not an instantaneous effect on R&D spend. You know, there's always some lag sometimes.
Charles: So, we'll see how that goes, you know, as the semiconductor revenue improves, but this is not an instantaneous effect on R&D spend, you know, there is always some.
John M. Wall: And so we are really, but we are encouraged to see the improvement in semi-spending overall, you know, semiconductor revenue. So I would like to say, and you can see in our backlog also, we maintain a pretty healthy backlog. So overall, I think things are performing well, and this AI is broadening out. I mean, you know this well.
Charles: And we are encouraged to see the improvement in semi-spending overall in the semiconductor revenue. So I would like to say… and you can see in our backlog also, we maintain a pretty healthy backlog. So overall I think things are performing well and this AI…
Anirudh Devgan: You know, AI is broadening out beyond the data center, which we are glad to have great partnerships in the automotive industry to more edge consumer devices like phones and PCs. So overall, I feel pretty good about the industry and, of course, our position in it as the essential provider of design software.
Charles: is broadening out. I mean, you know this well.
Charles: You know, AI is broadening out beyond data center, which we are glad to have great partnerships, to automotive, to more edge consumer devices like phones and PCs.
Charles: So, overall, I feel pretty good about the industry and, of course, our position in it as the essential provider of design software.
Charles Shee: Maybe a quick follow-up on China. Looks like Chinese revenue is still pretty light in the second quarter. So I recall you were thinking maybe China contributions were probably going to be slightly less than the mid-teens or less than 15%. But even if, let me assume, the Chinese revenue gets to like 14%-ish, it still implies a little bit of a second half re-acceleration of Chinese revenue growth. Is that still the case, or do you think maybe, compared with three months ago, China actually may have become a little bit weaker than you previously thought? Thanks.
Speaker Change: Got it. Maybe a quick follow-up on China. Looks like China revenue is still pretty light in the second quarter.
Speaker Change: So, I recall you were thinking maybe China contributions were probably going to be slightly less than the mid-teens, or less than 15%.
Speaker Change: Even if, let me assume, the China revenue gets to like a 14%-ish, it still implies a little bit of a second half.
Speaker Change: re-acceleration of China revenue growth. Is that still the case, or you think maybe compared with the three months ago, China actually may get a little bit weaker as you previously thought? Thanks.
John M. Wall: Thanks for the question, Charles. And that's, I mean, regional revenue is notoriously hard to predict. I will say that at the midpoint of our current revenue guide, we only need China to get to 13% of overall revenue to be able to hit that midpoint. I mean, when you look at performance in Q2 in the first half, we had a very strong bookings first half, and we were very pleased with customers' response to our new hardware systems. The IP and SDNA businesses continue to grow strongly, and core businesses continue to scale really well.
Speaker Change: Thanks for the question, Charles, and that's...
Speaker Change: I mean, regional revenue is notoriously hard to predict.
Speaker Change: I will say that at the midpoint of our current Revenue Guide,
Speaker Change: We only need China to get to 13% of overall revenue to be able to hit that midpoint.
Speaker Change: performance in Q2 in the first half. We had a very strong bookings first half.
Speaker Change: Very pleased with customers' response to our new hardware systems. The IP and SDNA businesses continue to grow strongly. Core businesses continue to scale really well. And you know we're focused on profitable revenue growth. I know in your first question you indicated that we hadn't raised the outlook, but we did raise non-GAAP EPS by six cents.
John M. Wall: And you know, we're focused on profitable revenue growth. I know in your first question, you indicated that we hadn't raised the outlook, but we did raise non-GAAP EPS by 6 cents. We're very pleased with the improvement in profitability.
John M. Wall: And when you look at the current guide, we're actually on track for 50% incremental margin, excluding the impact of beta CE now. Beta CE is in our guide, but it's in our guide at what we previously communicated in the press release, $40 million of revenue and about 12 cents dilution to non-GAAP EPS. There is an impact on opcash as a result of beta CE as well, but overall, I am very, very pleased.
Speaker Change: We're very pleased with the improvement and profitability.
Speaker Change: And when you look at the current guide, we're actually on track for 50% incremental margin, excluding the impact of Beta CEE now. Beta CEE is in our guide.
Speaker Change: But it's in our guide at what we...
Speaker Change: previously communicated in the press release 40 million dollars of revenue and about 12 cents dilution to non-GAAP EPS there is an impact to Opcash as a result of beta CE as well, but but overall very very pleased, we thought it was prudent to
John M. Wall: We thought it was prudent to assume lower Chinese revenue for this year at the midpoint of our guide, but that's it. So we only need 13% to get to the midpoint of our guide. Thanks, Anirudh and John, for the additional color.
Speaker Change: to assume lower China revenue for this year at the midpoint of our guide, but that's it. We only need 13% to get to the midpoint of guidance.
Speaker Change: Thanks to Anirudh and John for the additional color. I appreciate it.
Gianmarco Paolo Conti: I appreciate it. Our next question comes from Gianmarco Conti with Deutsche Bank. Please go ahead.
Speaker Change: Our next question comes from Gianmarco Conti with Deutsche Bank. Please go ahead.
John M. Wall: Yeah, hi there, thank you so much for taking my question. So on my first one, could you talk a little bit about the implied Q4 ramp up to 29% growth at the midpoint of guidance and what has given you the confidence in reaching the target? Is it mostly hardware visibility coming through, or are there an unusually higher number of Q4 renewals that you're waiting for? Any color here would be great, thank you.
Gianmarco Paolo Conti: Yeah, hi there. Thank you so much for taking my questions.
Gianmarco Paolo Conti: So, on my first one, could you talk a little bit about the InPy Q4 ramp-up to 29% growth at the midpoint of guidance?
Gianmarco Paolo Conti: What has given you the confidence in reaching the target? Is it mostly hardware visibility coming through, or are there an unusually high number of Q4 renewals that you're waiting for? Any colour here would be great, thank you.
John M. Wall: Yes, Gianmarco, I mean, there's no real change from what we said last quarter. I mean, it's effectively the shape of the revenue curve for the year. We're expecting upfront revenue, a lot more upfront revenue in the second half. It's just the timing of shipments, really.
Gianmarco Paolo Conti: Yes, Gianmarco, I mean, there's no real change from what we said last quarter. I mean, it's effectively the shape of the revenue curve for the year.
Gianmarco Paolo Conti: We're expecting upfront revenue, a lot more upfront revenue in the second half, it's just the timing of shipments really. Upfront revenue typically comes from IP, hardware, and to a lesser extent, some software on the SDNA side.
John M. Wall: That's upfront revenue typically comes from IP hardware and, to a lesser extent, some software on the SDNA side. With hardware, it takes time to build the systems. We have higher revenue in Q4 versus Q3 as a result. But also from IP; we recognize revenue and IP based on the timing of deliveries. We're confident in that guide. It's just the shape of the shape of Q3 and Q4 is what we have in the guide.
Gianmarco Paolo Conti: With the hardware, it takes time to build the systems. We have higher revenue in Q4 versus Q3 as a result. But also from IP, we recognize revenue and IP based on the timing of deliveries.
Gianmarco Paolo Conti: We're confident in that guide. It's just the shape of Q3 and Q4 is what we have in the guide now.
John M. Wall: Okay, great. So my follow-up will be on hardware. If you could talk a little bit about how much visibility you actually have in H2?
Speaker Change: Okay, great. So, my follow-up will be on hardware. If you could talk a little bit about how much visibility you have actually in H2. Are you booking and delivering in the same quarter, hence why we're not seeing a major uplift in backlog growth?
John M. Wall: Are you booking and delivering in the same quarter, hence why we're not seeing a major uplift in backlog growth? Or is there a different dynamic to it? I'm trying to understand if you're booking, manufacturing, and delivering all in the same quarter for hardware, essentially. Thank you. Thanks for the question. Yes, in some cases, on the newer systems, there is a timeline, a lead time, for building the systems. We have more bookings than our ability to actually fulfill those bookings, but we do have some inventory of the older systems, and we're able to deliver those in the quarter. Yes, I mean, there's always a mix.
Speaker Change: I'm trying to understand if you're booking, manufacturing and delivering all in the same quarter for Harz essentially. Thank you.
Speaker Change: Thanks for the question. Yes, in some cases. On the newer systems, there is a timeline, a lead time to building the systems. We have more bookings than our ability to actually fulfill those.
Speaker Change: uh those bookings but we do have some inventory of the older systems we're able to deliver those in the quarter um uh yeah so i mean there's there's always a mix we did have a challenge in the past with um
John M. Wall: We did have a challenge in the past with getting inventory and building the inventory as fast as we could for demand, but I think we've dealt with a lot of that. You'll also see in the opcache guide that we're planning to purchase a significant amount of raw materials for building inventory in Q3. That's the biggest portion of the change in the opcache guide. Also, just to add on the overall... Yeah, hey, just to add on the overall hardware cycle. As you remember, we launched new systems in April, you know, just a couple of months ago, a few months ago now. And the response to them has been phenomenal.
Speaker Change: Anirudh Devgan, CEO Alphabet and Google
Speaker Change: significant amount of raw materials for building inventory in Q3. That's the biggest portion of the the change in OpCash guys.
Speaker Change: Also, just to add on the overall...
Speaker Change: Hey, just to add on the overall hardware.
Speaker Change: cycle as you remember we launched new systems in April you know just a couple of months ago few months ago now
Anirudh Devgan: Actually, we, you know, these Palladiums, especially both Palladium and Protium, but these systems can design chips, like I mentioned last time, with a capacity of 1 trillion transistors. And the current biggest chip is like 200 billion transistors. But most of them are, you know, 100 billion or less.
Speaker Change: And the response to them has been phenomenal. Actually, we, you know...
Speaker Change: These Palladium, especially both Palladium and Protium, but these systems can design chips, like I mentioned last time, with capacity of 1 trillion transistors, and the current's biggest chip
Anirudh Devgan: So we are 5 to 10x higher capacity than what is needed, you know. So that should suit the industry well for the next several years. And what I'm also pretty pleased about is that we delivered production deployment of our new systems to some very major customers. So we highlighted NVIDIA, our development partner, with a significant deployment of Z3, also one of the leading mobile system and mobile companies in the world, and one of the leading hyperscalers.
Speaker Change: It's like 200 billion transistors, most of them are, you know, 100 billion or less. So we are 5 to 10x higher capacity than what is needed, you know, so that should suit the industry well for, you know, next several years.
Speaker Change: And I'm also, what I'm pretty pleased about is that we delivered production deployments of our new systems to some very major customers. So we highlighted...
Speaker Change: You know, NVIDIA, our development partner with a significant deployment of Z3.
Speaker Change: also one of the leading mobile system, mobile companies in the world and one of the leading hyperscalers.
Anirudh Devgan: So it's across multiple markets that we delivered our latest systems, which are performing exceedingly well. So that sets us up very well for the future and also competitively. And we have a significant lead given the nature of our systems. You know, proteome is based on FPGA, and then Palladium is based on our own chip at Advanced DSMC Process. And Cadence is the only solution that does that and provides unique value.
Speaker Change: So it's across multiple...
Speaker Change: markets that we delivered our latest systems, which are performing exceedingly well.
Speaker Change: very well for the future and also competitively. And we have a significant lead given the nature of our systems. You know, it's a combination of proteome is based on FPGA.
Speaker Change: and then Palladium is based on our own chip at Advanced TSMC Process and you know Cadence is the only solution that does that and provides a unique value so overall I think hardware business is performing well and as you know these are multi-year upgrade cycles so you know this is not all in
Anirudh Devgan: So overall, I think the hardware business is performing well. And as you know, these are multi-year upgrade cycles, so this is not all in 24. So we'll see how things go in 25 and 26. You got it.
Speaker Change: and 24, so we'll see how things go in 25 and 26, yeah.
Vivek Arya: Thank you. Our next question comes from Vivek Arya with Bank of America Securities. Please go ahead.
Speaker Change: You got it. Thank you.
Speaker Change: Our next question comes from Vivek Arya with Bank of America Securities. Please go ahead.
Vivek Arya: Thanks for taking my question. So, on an absolute basis, in fiscal 24, you know, the organic sales growth rate is robust, but in terms of revisions, it has stalled, right? Essentially, no real movement since what you suggested at the start of the year. So, I'm curious, Anirudh, how has the year transpired versus what you thought, and what do you think about bookings and backlog trends in the second half? Should we expect that the backlog stays around 6 billion? Will it start to pick up?
Vivek Arya: Thanks for taking my question. So on an absolute basis in Fiscal 24, you know, organic sales growth rate is robust, but in terms of revisions...
Speaker Change: It has stalled, right? Essentially, no real movement since what you suggested at the start of the year.
Speaker Change: I'm curious, Anirudh, how has the year transpired versus what you thought, and how do you...
Speaker Change: think about bookings and backlog trends into the second half. Should we expect that backlog stays around the $6 billion? Will it start to pick up? Just I'm trying to understand that should we be thinking about sales accelerating from here or, you know, this being kind of the sustainable growth rate for the company?
Anirudh Devgan: Just I'm trying to understand whether we should be thinking about sales accelerating from here, or, you know, this being kind of the sustainable growth rate for. Yeah, I have a very good question. So in general, what I would like to say is, you know, like we mentioned the last two times, the shape of the curve. This year is unique to Cadence, given multiple factors, this is not what we expected the last two years.
Speaker Change: Yeah, I have a very good question. So in general, what I would like to say is, you know, like we mentioned last two times, you know, the the shape of the curve,
Speaker Change: This year is unique to Cadence, given multiple factors.
Anirudh Devgan: So this time it's more back and loaded for the reasons we mentioned before. So the guide is a little different, and we are also, given that shape of the curve, more prudent in our guide, like we were in Q2, and then we rather overachieve and deliver that and give the team flexibility to, you know, do the right business for the long term. So I think that's the difference this year versus the last few years is given the shape of the curve, we have more prudence in our revenue guide, like John mentioned, and John can comment on the backlog. Yeah, I mean, we don't guide bookings, but we were very pleased with the strong bookings in the first half.
Speaker Change: You know, this is not what we expected last two years, so this time it's more back and loaded for the reasons we mentioned before. So the guide is a little different, and we are also, you know, given that shape of the curve, more prudent.
Speaker Change: In our guide, like we were in Q2, and then we rather overachieve and deliver that.
Speaker Change: and give the team flexibility to, you know, do the right business for the long term. So, I think that's the difference this year versus last few years is, given the shape of the curve, we have more prudence in our revenue guide, like John mentioned, and John can comment on the backlog expectations.
John M. Wall: And I understand the question, Vivek. I mean, essentially, you know, that we're seeing strong, strong demand for our hardware systems; we're seeing strength across all our businesses. And I guess your question is that when you add in beta CE, you're not really taking the revenue guide up. I think, Essentially, if your question is what we would like to see improve, I think it's the China revenue percentage. It was 12% in Q1, and 12% in Q2.
John M. Wall: Yeah, I mean, we don't guide bookings, but we were very pleased with the strong bookings in the first half. And I get the question, Vivek, I mean, essentially, you know, we're seeing strong demand for our hardware systems, we're seeing strength across all our businesses.
Speaker Change: And I guess your question is that when you add in beta CE you're not really taking the revenue guide up.
Speaker Change: Essentially, if your question is, what would we like to see improve, I think it's the China revenue percentage. It was 12% in Q1, 12% in Q2. It improved in Q2 over Q1, and we think it'll continue to improve through the year. But right now, our guide only needs to get to 13% China to hit the midpoint of that guidance.
John M. Wall: It improved in Q2 over Q1, and we think it'll continue to improve through the year. But right now, our guide only needs to get to 13% China to hit the midpoint of that guide. And for my follow-up, you know, you mentioned beta CAE, quite a drag on EPS. I think you mentioned 12 cent dilution and almost, I think, what is like a $300 million hit to operating cash flows. Can you describe that acquisition a little more? And, you know, when does it start to become accretive to your financials?
Speaker Change: And for my follow-up, you know, you mentioned beta CAE, quite a drag to EPS, I think you mentioned 12 cent.
Speaker Change: A dilution and almost I think what is like a 300 million dollar hit to operating cash flows. Can you describe that acquisition a little more and you know when does it start to become accretive to your financials?
John M. Wall: Yes, Vivek, on the $300 million drop in operating cash, just to clarify that about 40% of that $300 million drop is due to M&A. I mean, in things like beta CAE, some of the purchase price, the geography of where the cash impact goes, some of that payment flows through opcash. The bigger portion of the impact on operating cash is our plan to purchase a lot of inventory raw materials because of the hardware demand that we're seeing.
Speaker Change: Thank you.
Speaker Change: Yes, Vivek, on the $300 million drop in operating cash, just to clarify that, about 40% of that $300 million drop is due to M&A. I mean, in things like beta CAE, some of the purchase price, the geography of where the cash impact goes, some of that payment flows through Opcash.
Speaker Change: The bigger portion of the impact on operating cash is our plan to purchase a lot of inventory raw materials for the hardware demand that we're seeing. We're pre-purchasing a lot of inventory, so you'll see our inventory spike.
John M. Wall: We're pre-purchasing a lot of inventory, so you'll see our inventory spike in Q3 with all of the raw materials we're purchasing. We want to make sure that we have all the raw materials necessary to ramp up the build-out of our hardware systems. And then, in relation to beta CAE, I mean, it's a very recent acquisition. It's no different to what we have in the press release effect. In the press release, we said we were expecting 40 million revenue at the midpoint, and that's embedded now in the guide. We're expecting 12 cents of dilution on non-GAAP EPS. That's also in the guide now.
Speaker Change: In Q3 with all of the raw materials we're purchasing. We want to make sure that we have all the raw materials necessary to ramp up the build out of our hardware systems. And then in relation to Beta C, I mean it's a very recent acquisition.
John M. Wall: And we expect it to be, I mean, operationally, it'll be accretive next year, that there are some interest costs associated with the debt, but we think it'll be accretive next year. Also, a couple of things to clarify. So one thing is this purchase of inventory for the hardware systems. I mean, that will be used over multiple years; it's not just for 24.
Speaker Change: It's no different to what we have in the press release. In fact, on the press release, we said we were expecting 40 million in revenue at the midpoint. That's embedded now in the guide. We're expecting 12 cents dilution.
Speaker Change: on Nongap EPS, that's also in the guide now. And we expect it to be, I mean, operationally it'll be accretive next year, but there are some interest costs associated with the debt, but we think it'll be accretive next year.
Speaker Change: Also a couple of things to clarify, so one thing this purchase of inventory for the hardware systems
Anirudh Devgan: So I think it's a one-time investment that pays for several years, and that's a prudent, you know, decision to make to get the right kind of parts for the future. And then on beta... It completes our, you know, system analysis portfolio to add structural analysis. It also strengthens our position in the automotive industry. You know, of course, data center is a big vertical with all the AI supercycle. But I think one of the other exciting verticals is automotive, with all this electrification and also AI getting added to self-driving or driver assistance.
Speaker Change: I mean, that will be used over multiple years. It's not just for 24. So I think it's a one-time investment that pays for several years. And that's a prudent decision to make to get the right kind of parts for the future. And then on beta,
Speaker Change: You know, it completes our system analysis portfolio to add structural analysis. It also strengthens our position in automotive.
Speaker Change: You know, of course, you know, data center is a big vertical with all the AI supercycle. But I think one of the other exciting verticals is automotive, with all this electrification and also AI getting added in.
Anirudh Devgan: So we see a lot of design activity in the automotive industry. Also, the automotive industry is also moving through chiplets and 3D IC. So I think the automotive industry has all the three tenets of our ISD strategy. You know, it has silicon content that is increasing.
Speaker Change: Self-driving or driver assistance. So we see a lot of design activity in automotive. Also automotive is...
Speaker Change: is also moving through chiplets and 3DIC. So I think automotive has all the three tenets of our ISD strategy. You know, it has silicon content that is increasing.
Anirudh Devgan: And more and more system design, of course, is needed for the design of cars and AI for all the data and computational software. So for that reason, you know, Beta CAE completes our portfolio in the automotive sector and positions us well for the future. And this is not just with the semiconductor companies doing automotive but also the system companies now, you know, OEMs doing more and more chip design, doing more of our system solutions. And I also want to highlight and congratulate you know McLaren, there's a big news this weekend. You know McLaren got one and two in Hungarian F1.
Speaker Change: And more and more system design, of course, is needed for the design of automotive, and AI for all the data and computational software. So for that reason, you know, Beta CAE completes our portfolio in automotive.
Speaker Change: and positions as well in the future. And this is not just with the semiconductor companies doing automotive, but also the system companies now. You know, OEMs doing more and more chip design, doing more of our system solutions.
Speaker Change: And I also want to highlight and congratulate, you know, McLaren, you know, it was a big news this weekend, you know, McLaren got one and two in Hungarian F1.
Anirudh Devgan: And we have been working with them for the last few months and years, and it's good to see them do well as we deploy. So I think the automotive solution that we are driving is a combination of silicon systems and then AI, and we are seeing the results of that through organic and inorganic expansion. Our next question comes from Joshua Tilton with Wolf Research. Please go ahead. Hey guys, can you hear me?
Speaker Change: And we have been working with them for the last, you know, few months and years and it's good to see them do well.
Speaker Change: So I think the automotive solution that we are driving is a combination of silicon system and then AI, and we are seeing the results of that through organic and inorganic expansion.
Joshua Alexander Tilton: I'm clear, Josh. Great. The first one is just kind of more of a clarification. I know there's been a lot of questions around the mix of upfront versus recurring. I guess what I'm just trying to understand is... And I could be wrong with my math here, but it feels like the upfront component was still a little light in 2Q, and now we're a little bit more second half weighted, more 4Q weighted, because you need time to develop inventory. Am I thinking about that the right way?
Speaker Change: Thank you.
Speaker Change: Our next question comes from Joshua Tilton with Wolf Research. Please go ahead.
Joshua Alexander Tilton: Hey, guys, can you hear me?
Speaker Change: Loud and clear, Josh.
Joshua Alexander Tilton: Great. The first one is just kind of more of a clarification. I know there's been a lot of questions around the mix in upfront versus recurring. I guess what I'm just trying to understand is
Speaker Change: And I could be wrong with my math here, but it feels like it was the upfront component was still a little light in 2Q, and now we're a little bit more second half weighted, more 4Q weighted, because you need time to develop inventory. Am I thinking about that the right way?
John M. Wall: That's fair. Josh, I would do the inverse on you in terms of bookings were stronger than we expected in Q2, and we got some uplift and recurring revenue. It took a bit of pressure off on the upfront side.
Speaker Change: That's fair, Josh, I would do the inverse on you in terms of bookings were stronger than we expected in Q2 and we got some uplift in recurring revenue.
John M. Wall: And we are, I mean, we're taking orders, we've got strong demand for the hardware, and we're building those hardware systems as quickly as we can, particularly the newer hardware orders. IP is doing really well, and system design analysis is doing really well. And what we've reflected in the guide is our expectation of how much of that revenue will fall in Q3 and Q4. We took the opportunity to de-risk the guide for the year by reducing our expectations for China.
Speaker Change: took a bit of pressure off on the upfront side. And we are, I mean, we're taking orders, we've got strong demand for the hardware and we're building those hardware systems as quickly as we can, particularly the newer hardware orders.
Speaker Change: IP is doing really well.
Speaker Change: and System Design Analysis is doing really well. And what we've reflected in the guide is our expectation of how much of that revenue will fall in Q3 and Q4. We took the opportunity, we really de-risked the guide for the year by reducing our expectations for China. Upfront, we still expect to be in a range of 80% to 85%.
John M. Wall: Upfront, we still expect to be in a range of 80% to 85%, but I think we might get slightly more recurring revenue as a result of the strong bookings in the first half. That makes it super clear.
Speaker Change: But I think we might get slightly more recurring revenue as a result of the strong bookings in the first half.
John M. Wall: And then I guess just my follow-up to that is, I guess it's another visibility question, but how much of what's based in the guide from an upfront perspective do you feel like you have, like, you know, good inventory levels to meet that guidance? Or does the guidance that you put out today still require you to build and develop inventory between now and shipping those boxes? Yes, but we definitely need to build it.
Speaker Change: That makes it super clear. And then I guess just my follow-up to that is...
Speaker Change: I guess it's another visibility question, but how much of what's baked into the guide from an upfront perspective, do you feel like you have, like, you know, good inventory levels to meet that guidance, or does the guidance that you put out today still require you to build and develop inventory between now and shipping those boxes?
John M. Wall: And you'll see the impact on our inventory in Q3 with the amount of raw materials we're purchasing. But, as Anirudh says, that's a one-time thing that we're doing to try and get raw materials and build those systems as quickly as we can. But a lot of the upfront revenue in the second half comes from the strength of our IP business, and we have those orders in the backlog. And it's just a case of executing those who are guilty.
Speaker Change: Yes, but it's...
Speaker Change: We definitely need to build. And you'll see the impact on our inventory in Q3 with the amount of raw materials we're purchasing. But as Anirudh says, that's a one-time thing that we're doing to try and get raw materials and to build those systems as quickly as we can.
Anirudh Devgan: But a lot of the up front revenue in the second half comes from the strength in our IP business and we have those orders in backlog.
John M. Wall: We also have some SDNA, our system design analysis, upfront revenue that's scheduled to occur in Q3 and Q4. Again, most of that is from orders in the system. On the hardware side, it's kind of mid to high single digits is what we were expecting the SVG group to deliver to be able to hit the midpoint. Super, super helpful.
Anirudh Devgan: And it's just a case of executing against those. We also have some SDNA, or system design analysis, up from revenue that's scheduled to occur in Q3 and Q4. Again, most of that is from orders in the system. On the hardware side...
Speaker Change: that it's kind of mid to high single digits is what we were expecting the SVG group to deliver to be able to hit the midpoint of that guidance.
John M. Wall: And then just a quick follow-up: it's really awesome to see the recurring revenue growing sequentially this quarter. Is there any way you can maybe help us with what the expected recurring versus upfront mix is supposed to be in 3Q? And then I'll lead the way.
Speaker Change: Super, super helpful and then just a quick follow-up is really awesome to see the recurring revenue growing sequentially this quarter. Is there any way you can maybe help us on what the expected recurring versus upfront mix is supposed to be in 3Q and then I'll feed the floor.
John M. Wall: Oh, I don't have that to hand. But let me come back to that. Let's see if I can dig it out here.
Speaker Change: Oh, I don't have that to hand, but let me come back to that. Let's see if I can dig it out here.
John M. Wall: Thanks, guys. Our next question comes from Ruben Roy with Stiefel. Please go ahead.
Speaker Change: Thanks, guys. Congrats.
Speaker Change: Our next question comes from Ruben Roy with CIFL. Please go ahead.
Ruben Roy: Yes, John, just a very quick question, and then I guess a follow-up question, and then I'll ask the real question. But on the inventory purchases, am I right in assuming that that's mostly for the Z3X3? And has anything changed in terms of when you're thinking about general availability of those hardware products? Yes, that's correct. But the vast majority of the purchases are to get raw materials to help build those new... and then in terms of the title. Yeah, just to clarify, I mean, also, I mean, we have two systems, right?
Ruben Roy: Yes, thank you. John , just a very quick question, and then I guess a follow-up, and then I'll ask the real question.
Ruben Roy: on the inventory purchases is.
Ruben Roy: Am I right in assuming that that's mostly for the Z3, X3, and has anything changed in terms of when you're thinking about general availability of those hardware products?
Speaker Change: Yes, that's correct. The vast majority of the purchases are to get raw materials to help build those new systems.
John M. Wall: So Palladiums, we design ourselves, and we manufacture the CHEP in TSMC and proteome. We also design ourselves, but the silicon itself is primarily from AMD with Xilinx FPGAs. So, a lot of this purchase is for X3s and FPGAs, and that should serve us for multiple years. On Z3, like we said, we're already shipping them, and they're already deployed in production this quarter. So I think Z3 is slightly different than X3 in terms of the mix of the silicon content, just to clarify that. Okay. I apologize. I thought they were going to, Thank you for that.
Speaker Change: and then in terms of the title.
Speaker Change: Yeah, just to clarify, I mean, also, I mean, we have two systems, right? So, Palladiums, we design ourselves, and we manufacture the CHEP in TSMC, and Protium. We also design ourselves, but the silicon itself is primarily from AMD with Xilinx FPGAs.
Speaker Change: So a lot of this purchase is for X3s and FPGAs, and that should serve us for multiple years.
Speaker Change: On Z3, like we said, we're already shipping them and they're already deployed in production this quarter.
Speaker Change: So I think Z3 is slightly different than X3 in terms of the mix of the silicon content just to clarify that.
Andrew: Okay, I apologize, Andrew. I thought they were going to, you know, sort of certain customers are not generally available, but thank you for that. And then the real question just around some of your top customers.
John M. Wall: And then the real question is just around some of your top customers have been accelerating the rhythm of bringing sort of their very complex chips to market. NVIDIA and AMD certainly have accelerated their roadmaps to sort of a one-year rhythm. Are you seeing any changes in the way your business is doing? is impacted or affected, you know, kind of by the acceleration of their product roadmaps. Yes, I would like to, I think we are seeing more and more design activity, you know, like, like you said, the rhythm or the cadence of the products, and also different kinds of chips. You know, it's not just the, it's not just that big data censorship.
Speaker Change: I've been accelerating the rhythm of bringing, you know, sort of their very complex ships to market, NVIDIA and AMD certainly, you know, have accelerated their roadmaps to, you know, sort of a one-year rhythm. Are you seeing any changes in sort of the way, you know, your business...
Speaker Change: is impacted or affected, you know, kind of by the acceleration of their product roadmaps, yeah.
Speaker Change: Yes, I would like to... I think we are seeing more and more design activity, you know, like you said, the rhythm or the cadence of the products.
Speaker Change: and also different kind of chips.
Speaker Change: You know, it's not just the big data center chips, but even within them, you know, there is more and more customization.
Anirudh Devgan: But even within them, you know, there is more and more customization. Of course, the hyperscale is doing its own silicon. And then now, you know, we talked about our partnership with, for example, Qualcomm, and they are doing, you know, consumer or edge, you know, laptop AI devices. So the amount of AI is also spreading to other verticals, not just obvious, the big one on data center. And data center design is accelerating, you know.
Speaker Change: And of course, the hyperscale is doing their own silicon. And then now, you know, we talked about our partnership with, for example, Qualcomm, and they are doing, you know, consumer or edge, you know, laptop AI devices. So the amount of AI...
Speaker Change: is also spreading to other verticals, not just the obvious, the big one on data center. And data center design is accelerating, you know. And I think when we look at it, we still see...
Anirudh Devgan: And I think when we look at it, we still see that the data center part of AI should accelerate at least the visibility we have for the next couple of years. So we'll see how that goes.
Anirudh Devgan: And therefore, and the other thing is automotive. Now automotive takes normally a little longer, but we are already seeing design activity, and the deployment may be a few years down the road, you know, maybe after the data center, and then consumer and PC are already starting with phones and laptops. So overall, we do see the accelerating deployment of AI in the whole semiconductor ecosystem. And we are very proud of our position in it, whether it's 3DIC, whether it's data center chips, whether it's our own AI products, we are winning almost all kinds of engagements on our Cadence.ai portfolio.
Speaker Change: That the data center part of AI still should accelerate at least the visibility we have for the next couple of years, so we'll see how that goes. And therefore, and the other thing is automotive, now automotive takes normally a little longer, but it's already seeing design activity, and the deployment maybe a few years down, you know, maybe after data center.
Speaker Change: and then consumer and PCs already starting with, you know, phones and laptops.
Speaker Change: So, overall, we do see accelerating deployment of AI into the whole semiconductor ecosystem. And we are very proud of our position in it, you know, whether it's 3DIC, you know, whether it is data center chips, whether it's our own AI products.
Speaker Change: You know, we are winning almost all kind of engagements on our Cadence.ai portfolio.
Anirudh Devgan: So overall, we do see more and more design and deployment of AI infrastructure and our own AI. And if I could just come back to Josh's question on the revenue mix for Q3, we expect 80 to 85% of revenue to be recurring for the year, and Q3 includes the mid-middle of that range. And then the balance is Q4. So you can do the math and work out what the upfront is. Our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead. Thank you. Good evening.
Speaker Change: So overall, we do see more and more design and deployment of AI infrastructure and our own AI product.
Speaker Change: And if I could just come back to Josh's question.
Speaker Change: Sorry, if I could just come back to Josh's question on the revenue mix for Q3, that for recurring revenue...
Speaker Change: We expect...
Speaker Change: Sorry 80 to 85 percent of revenue should be recurring for the year, and Q3 includes the middle of that range, and then the balance is Q4. So you can do the math and work out what the upfront piece is.
Speaker Change: Our next question comes from Jay Vleeschhouwer with Griffin Securities.
Jay Vleeschhouwer: Anirudh, a question about the evolution of the product portfolio for EDA generally and perhaps for SDMA specifically. What I'd like to ask you is how you're thinking about packaging the products. Over the last year, you've introduced a couple of products with the term studio in the name, and I'm wondering if you're thinking about more and more bundling or packaging of that kind via that nomenclature for the EDA products and then specifically for SDMA. Now that you do have multiple codes, how are you thinking about packaging or integrating across the various simulation codes that you've assembled now in acquisition? Then I'll ask my follow-up question. Yeah, hi, Jay.
Speaker Change: Please go ahead.
Jay Vleeschhouwer: Thank you. Good evening. Anirudh...
Jay Vleeschhouwer: Question about the evolution of the product portfolio for EDA generally and perhaps for STMA specifically.
Jay Vleeschhouwer: What I'd like to ask about is how you're thinking about packaging the products. Over the last year you've introduced a couple of products.
Speaker Change: with the term studio in the name. And I'm wondering if you're thinking about.
Speaker Change: more and more bundling or packaging of that kind.
Speaker Change: via that nomenclature for the EDA products and then specifically for SB&A.
Speaker Change: Now that you do have multiple codes, how are you thinking about packaging or integrating across the various simulation codes that you've assembled now in acquisition? Then I'll ask my follow-up.
Anirudh Devgan: Good question. So, I mean, as you know, in EDA, when we go to lower nodes, there are more integrated solutions, which are required, you know, with digital or analog, or verification, and that is further accelerated by the use of AI. So, you know, like Cerebros, for example, in digital will integrate not just, but also Synthesis and Sinov. So I think that trend is definitely there.
Speaker Change: Yeah, hi Jay, good question. So, I mean, as you know, in EDA, when we go to lower nodes,
Speaker Change: There is more integrated solutions which are required, whether it's digital or analog, or verification, and that is further accelerated by use of AI. So, like Cerebrus, for example, in digital will integrate, you know, not just...
Speaker Change: but also Synthesis and Sinov, so I think that trend is definitely there. And same thing with Verisium, our leading AI product for verification, also integrates the four major verification platforms we have. So it is more and more a platform-driven approach.
Anirudh Devgan: And same thing with Verisium, our leading AI product for verification, also integrates the four major verification platforms we have. So it is a more and more platform-driven approach. And we can do that now with SDNA now that we have a complete portfolio. And we mentioned a leading EV company, like OEM, one of the leading, most advanced EV companies deployed across our entire portfolio. So as we have a bigger portfolio in SDNA, it does let us do what we have always done in EDA, focus on solutions, not just on individual products, and integrate solutions with our own kind of native integration, whether it's analog, digital, verification, and now with SDN.
Speaker Change: And we can do that now with SDNA, now that we have a complete portfolio. And we mentioned like a leading EV company, you know, like OEM, one of the leading.
Speaker Change: The most advanced EV companies deployed our entire portfolio. So as we have a bigger portfolio in SDNA, it does let us do what we have always done in EDA, you know, focus on solutions.
Speaker Change: not just on individual products, and integrate solutions with our own kind of native integration, whether it's analog, digital, verification, and now with SDNA.
Anirudh Devgan: All right, as a follow-up, I know it's still quite early in the propagation of AI and ML by you and your peers to customers, but are you beginning to see any commonality or convergence towards a relatively small number of use cases that customers are mostly employing the tools for? And then, relatedly, are you also seeing AI and ML adoption having any meaningful effect on your services revenue? Yes, Jay.
Speaker Change: All right, as follow-up, I know it's still quite early in the propagation of AI and ML by you and your peers to the customers.
Speaker Change: Are you beginning to see any commonality or convergence towards a relatively small number of...
Speaker Change: use cases, you know, that customers are mostly employing the tools for, and then relatedly, are you also seeing AI ML adoption having any meaningful effect on your services revenue?
Jay Vleeschhouwer: So what I would like to say is that the number of use cases I see is increasing at this point. I mean, of course, one of the biggest use cases that we started with was digital implementation, since it is so kind of. So automating the digital implementation process was a huge benefit. And we talked even this quarter about Cerebrus being deployed at one of the leading system companies for the default flow, also used by Samsung, and you see verification being used by Qualcomm. So I think what is happening in that Cerebrus, or the implementation use case, two things.
Speaker Change: Yes, Jay, so what I would like to say is that the number of use cases I see is increasing at this point. I mean, of course, one of the, you know, one of the biggest use case that we started with was digital implementation since it is so kind of
Speaker Change: Heavy kind of design process, so automating the digital implementation process.
Speaker Change: was a huge benefit and we talked even this quarter Cerebrus being deployed at one of the
Speaker Change: Leading system companies for the default flow also used by Samsung. Also you see verification be used by Qualcomm. So I think what is happening in that Cerebrus or the implementation use case, two things. One is that it is...
Anirudh Devgan: One is that it is going on, not just for design, but also for DTCO, you know, design technology, co-optimization, and also for higher levels in the design process, like floor planning and 3D IC exploration. So it's all not just for implementation of the design but also for architecture and exploration. And the other thing is that there's more workflow automation. As customers get used to Cerebrus, they're using it not just towards the end of the design process; they're using it right from the beginning, throughout the design process. So it allows us to do more workflow automation, and Cerebrus has also evolved to allow much more of an entire workflow rather than a specific implementation use case.
Speaker Change: going not just for design but also for DTCO, you know, Design Technology Co-Optimization, and also for higher level in the design process like floor planning and 3D IC exploration.
Speaker Change: So it's all not just for implementation of the design, but also for architecture and exploration.
Speaker Change: And the other thing is like there's more workflow automation. As customers get used to Cerebras, they're using it not just towards the end of the design process, they're using it right from the beginning, you know, throughout the design process. So it allows us to do more workflow.
Speaker Change: automation, and Cerebros has also evolved to allow much more of a entire workflow rather than a specific implementation use case. And then same thing is happening in terms of, you know, more and more use cases. For example, packaging, you know, Allegro X.
Anirudh Devgan: And then same thing is happening in terms of, you know, more and more use cases, for example, packaging. Allegro X is doing pretty well, and recently, one of the leading customers in 3DIC used this capability to automate, for example, routing for automating, you know, placement, which was not there before in PCB and package design. So, overall, I do think it's maturing the workflows, and then with these LLMs and Gen AI, you know, we have kind of several workflows for taking spec to RTL, and we highlighted some of them last quarter.
Speaker Change: is doing pretty well and you know recently one of the leading customers in 3DIC used this capability to automate for example routing for automating you know placement
Speaker Change: which was not there before in PCB and package design. So, overall, I do think it's maturing of the workflows.
Speaker Change: And then with this LLMs and Gen AI, you know, we have several workflows for taking spec to RTL, and we highlighted some of them last quarter.
Anirudh Devgan: So I actually do see that in the, you know, we are always kind of building out the AI infrastructure. You know, there's big companies designing chips, but I do see now there's a turning point in the deployment of AI for the design process. With the initial workflow being Cerebrus and digital implementation, now expanding to, you know, LLM-based art, you know, spec, you know, expanding to DTCO, expanding to 3DIC, of course, expanding to analog, packaging, verification, and we do have the most comprehensive AI portfolio in terms of all five major product lines. So actually, it's a pretty encouraging view compared to a year ago. Thank you, Anirudh. Thank you, John. Our next question comes from Harlan Sur with J.P. Morgan. Please go ahead. Hi, good afternoon.
Speaker Change: So, I actually do see finally that in the, you know, we are always kind of building out the AI infrastructure, you know, these big companies designing chips, but I do see now there's a turning point in deployment of AI for the design process.
Speaker Change: With the initial workflow being Cerebrus and digital implementation, now to expanding to...
Speaker Change: you know, LLM-based art, you know, spec.
Speaker Change: You know, expanding to DTCO, expanding to 3DIC.
Speaker Change: Of course, expanding to analog, packaging, verification, and we do have the most comprehensive AI portfolio in terms of all five major product lines. So actually, it's a pretty encouraging view compared to a year ago.
Harlan L. Sur: Thanks for taking my question. Is the bookings profile for the full year still expected to be 40 percent first half, 60 percent second half? Because if it is, then that would imply a book-to-bill greater than one for the full year, total backlog, you know, up about nine percent this year to about six and a half billion. But I guess how much of that backlog is due to the beta CAE acquisition? What I'm just trying to figure out is X beta CAE if core cadence orders and backlog are expected to be up this year, which would continue the strong sort of six to seven year trend of increasing orders and backlog for the team. Yes, Harlan, again, like I say, we're not guiding bookings. But we were very, very pleased with a strong first half for bookings.
Speaker Change #100: Thank you, Anirudh. Thank you, John .
Speaker Change #100: Our next question comes from Harlan Sur with J.P. Morgan. Please go ahead.
Harlan L. Sur: Hi, good afternoon. Thanks for taking my question.
Harlan L. Sur: Is the bookings profile for the full year still expected to be 40% first half, 60% second half? Because if it is...
Speaker Change #102: And that would imply book-to-bill greater than one for the full year, total backlog.
Speaker Change #103: You know, up about 9% this year to about $6.5 billion.
Speaker Change #104: But I guess, how much of that backlog is due to the beta CAE acquisition? What I'm just trying to figure out is X beta CAE, if core cadence orders and backlog are expected to be up this year, which would continue the strong sort of six to seven year trend of increasing orders and backlog for the team.
John M. Wall: The beta CE contribution to backlog is very, very small. It's immature because beta CE's revenue is upfront. So that's the upfront piece of the business rather than the recurring revenue. But yeah, we're very pleased. I mean, you can typically expect us to always be driving for a book to bill of greater than one, but we don't guide bookings. Okay, perfect. Thank you.
Speaker Change #104: Yes, Harlan, again, like I say, we're not guiding bookings, but we were very, very pleased with a strong first half for bookings.
Speaker Change #105: The beta CEE contribution to backlog is very very small, it's immaterial, because beta CEE, their revenue is up front, so that's the up front piece of the business, rather than the recurring revenue.
Speaker Change #104: We're very pleased. You can typically expect us to always be driving for a book-to-bill of greater than one, but we don't guide bookings, though.
Harlan L. Sur: Anirudh, there's a pretty interesting dynamic with your memory customers, right? They're big customers of your custom product family, Virtuoso, but they are moving more and more to advanced digital design, right? The HBM control logic chip, for example, is moving to leading-edge technologies and advanced chip design.
Anirudh Devgan: Okay, perfect. Thank you. Anirudh, there's a pretty interesting dynamic with your memory customers, right?
Speaker Change #106: They're big customers of your custom product family Virtuoso, but they are moving more and more to advanced digital design, right? The HBM ControlLogic chip, for example, is moving to leading-edge technologies and advanced chip design. Similarly, with some of your NAND customers.
Anirudh Devgan: Similarly, with some of your NAND customers, they're moving towards more of this sort of bonded CMOS periphery to array. The peripheral chip, again, is also moving towards advanced visual design as well. So are you starting to see more adoption of your advanced digital implementation and verification products by your memory customers? And then does your leadership in memory via Virtuoso sort of give you an advantage as they bring on more advanced logic design capabilities? Yes, Harlan, that's a great observation.
Speaker Change #107: They're moving towards more of this sort of bonded CMOS periphery-to-array. The periphery chip, again, is also moving towards advanced visual design as well. So, are you starting to see more adoption of your advanced digital implementation and verification products?
Anirudh Devgan: Anirudh Devgan
Anirudh Devgan: And, and we are fortunate to have very deep and long-term partnership with all the major memory companies, you know, at least there are three big ones, and then, you know, maybe two at the next level. But overall, we are, you know, given our strength, like you mentioned, in Virtuoso, which is the platform of choice for all memory implementations. And yes, there is a lot more digital and implementation design happening at memory companies, you know, primarily driven by HBM and other trends.
Anirudh Devgan: Yes, Harlan, that's a great observation and we are fortunate to have a very deep and long-standing partnership with all the major memory companies. You know, at least there are three big ones.
Anirudh Devgan: [inaudible]
Anirudh Devgan: And actually, you know, also, there is some kind of a I mean, they were always doing digital, but it's a lot more now, and there is a trend of even integrating TSMC's technologies with some kind of memory.
Anirudh Devgan: HBM and other trends and actually you know also there is some kind of
Speaker Change #108: I mean, they were always doing digital, but it's a lot more now. And there is a trend of even integrating, you know, TSMC technologies with kind of memory.
Anirudh Devgan: And given our strong partnership with TSMC, that also helps us with the memory companies. And as you know, they are also doing a lot more 3DIC in all the three big memory companies. And these memory layers are going from, you know, they're actually one of the most advanced 3DIC systems, with the memory layers going from 8 to 12. And that also plays to our strengths. And even in my prepared remarks, I mentioned, for example, our partnership with Samsung and 3DIC. And then so is true with the other kind of two major players in memory.
Speaker Change #108: and given our strong partnership with TSMC, that also helps us with the memory companies.
Speaker Change #108: And as you know, they are also doing a lot more 3DIC, you know, all the three big memory companies.
Speaker Change #108: And these memory layers are going from, you know, they're actually one of the most advanced 3D IC with the memory layers going from 8 to 12, and that also...
Speaker Change #108: You know, plays to our strengths. And even in my prepared remarks, I mentioned, for example, our partnership with Samsung and 3DIC. And then so is true with the other kind of two major players in memory.
Anirudh Devgan: So we are pleased with our position in memory and the emerging trends of, you know, HBM and 3DIC integration. And we'll see, you know, how that progresses. But I think memory is often overlooked in, you know, I don't need to tell you, but just in general, memory is often overlooked in the big AI super cycle. It's not the big chips, logic chips, but memories play a very essential role. And we are very well positioned both with the leaders, like NVIDIA on the logic side, and then we highlighted Samsung and the other big memory players, in general. Well, thank you for the insight. Our next question comes from Jason Celino with KeyBank Capital Markets. Please go ahead.
Speaker Change #108: So we are pleased in our position in memory and the emerging trends of, you know, HBM and 3DIC integration, and we'll see, you know, how that progresses.
Speaker Change #108: But I think memory is often overlooked in, you know, I don't need to tell you, but just in general, memory is often overlooked in the big AI super cycle. It's not the big chips, logic chips, but memories play a very essential role.
Speaker Change #108: And we are very well positioned, both with the leaders like NVIDIA on the logic side, and then we highlighted Samsung and the other big memory players in general.
Speaker Change #109: Thank you for the insight.
Speaker Change #110: Our next question comes from Jason Celino with KeyBank Capital Markets. Please go ahead.
Jason Vincent Celino: Great. Thanks for taking my questions. So, lots of questions so far on the hardware timing, but I think, John, on prior calls, you said that the hardware delivery times typically are like eight to 10 weeks. That's what it is for like a normal cycle.
Jason Vincent Celino: Great, thanks for taking my questions. There were lots of questions so far on the hardware timing, but I think, John , on prior calls, you said that the hardware delivery times typically are like 8 to 10 weeks. That's what it is for like a normal cycle. But are you saying the lead times for
John M. Wall: The Z3, X3 are longer than this because the demand is much better than what you're seeing.
John M. Wall: But are you saying the lead times for the Z3, X3 are longer than this because demand is much better than what you're seeing? Demand is strong. Demand is strong. What I was trying to point out was that we do have inventory of the older systems that we can deliver right away. The newer systems, we're having to build them as quickly as we can because the orders are coming in faster than we can build them.
Speaker Change #112: Demand is strong. Demand is strong. What I was trying to point out was that we do have inventory of the older systems that we can deliver right away. The newer systems, we're having to build them as quickly as we can because the orders are coming in faster than we can build them.
John M. Wall: So the lead times are a bit of a moving target in that respect. We are planning to purchase a lot of raw materials and build as quickly as we can in Q3, so you'll see a significant uptick in our inventory balance at the end of Q3. Okay, now that's helpful. And then just a clarification, I think you were saying that the SDA group to hit your guide needed to do like mid to high single-digit growth. I'm not familiar with the SDG.
Speaker Change #112: So the lead times is a bit of a moving target in that respect. We are planning to purchase a lot of raw materials and build as quickly as we can in Q3, so you'll see a significant uptick in our inventory balance at the end of Q3.
John M. Wall: Is that the functional verification kind of guide for the year? And then, you know, if you're parsing out, like, does that imply, like, what do we need to see on IP since that's the other upfront component to hit the guide? Yeah, that's fair. IP is having a really, really strong year as is system design analysis. They'll be our two fastest growers for the year.
Speaker Change #113: Okay, now that's helpful. And then, just a clarification, I think...
Speaker Change #114: I think you were saying, like, the SDA group to hit your guide needed to do, like, mid to high single-digit growth. I'm not familiar with SDG. Is that the functional verification kind of guide for the year? And then...
Speaker Change #114: Yeah, if you're parsing out, like, does that imply, like, what do we need to see on IP since that's the other upfront component to hit the guide? Thanks.
Speaker Change #115: Yeah, that's fair. IP is having a really, really strong year as is system design analysis. They'll be our two fastest growers for the year. And then again, there's some upfront revenue from them. It's more weighted towards Q4 versus Q3.
John M. Wall: And then again, there's some upfront revenue from them, but it's more weighted towards Q4 versus Q3. So we have the, You know, the shape of the curve is really driving our guide, and I would categorize it as prudent. Anirudh, would you add anything?
Speaker Change #115: You know, the shape of the curve is really driving our guide, and I would categorize it as prudent. Anirudh, would you add anything?
Anirudh Devgan: Oh, that's right, John. And sorry for the acronym SVG: System Verification Group. So when we say SVG, that means verification. So I think that's what John was implying, you know, verification should grow, but right now, we are not assuming massive growth in verification for this year, but it should grow compared to last year. And then, like you mentioned, some of the upfront revenue is also IP. You know, if you remember, we highlighted in Q1 a new partnership with Intel, and they are, you know, we are deploying our IP portfolio for the Intel process. So it takes time to do that and deliver on that, and some of it is in Q3 and Q4.
Anirudh Devgan: Oh, that's right, John . And sorry for the acronym. SVG is System Verification Group. So when we say SVG, that means verification.
Anirudh Devgan: So I think that's what John was implying, you know, verification should grow, but right now we are not assuming massive growth in verification for this year, but it should grow compared to last year.
Speaker Change #116: And then, like you mentioned, some of the upfront revenue is also IP. If you remember, we highlighted in Q1,
Speaker Change #116: new partnership with Intel, you know, and they are, you know, we are deploying our IP portfolio for the Intel process.
Speaker Change #116: So it takes time to do that and deliver to that, and some of it is in Q3 and Q4. And also this time we talked about our expansion, you know, partnership with Intel on both on EMIP, you know, their packaging and 3DIC platform, and 18A.
Anirudh Devgan: And also this time, we talked about our expansion, you know, partnership with Intel on both EMIP and 18A. Thanks for the LINGO acronym help, Anirudh, very helpful. Our next question comes from Lee Simpson with Morgan Stanley. Please go ahead.
Speaker Change #116: Thanks for the LINGO acronym help, Anirudh, very helpful.
Speaker Change #117: Our next question comes from Lee Simpson with Morgan Stanley . Please go ahead.
Lee John Simpson: Great, thanks for fitting me in and well done and a good quarter. I just want to get some clarification. I don't know if I heard you correctly, but I think I heard you say that a mobile OEM had taken the Z3 platform. And if that's the case, do you have a sense for what the emulation work might be like? Would it be for chips on the device, or would it be for chips both on the device and perhaps in, let's say, a network situation? Thanks.
Lee John Simpson: Great. Thanks for fitting in and well done and a good quarter. Just want to get some clarification.
Lee John Simpson: I don't know if I heard correctly, but I think I heard you say that...
Lee John Simpson: A mobile OEM had taken the Z3 platform, and if that's the case, do you have a sense for what the emulation work might be? Would it be for chips on-device or would it be for chips...
Speaker Change #119: both on-device and perhaps in, let's say, a network situation. Thanks.
Anirudh Devgan: Well, good question. You know, we don't comment on individual customer or specific customer use cases. But, in general, you know, these hardware systems, as you know, are used both for chip design and for system software development. So both use cases are there. And, and, you know, we are the leading platform given Palladium and Proteum.
Speaker Change #120: Well, good question. You know, we don't comment on individual customer or specific customer use cases, but in general, you know, these hardware systems, as you know, are used both for chip design and for system software bring up.
Speaker Change #120: So both use cases are there, and we are the leading platform given Palladium and Proteum. And this is true for all, even in the AI use case, even in the data center AI use case, a lot of it is for software development. Actually, Palladium is a platform for choice.
Lee John Simpson: And this is true for all even in the AI use case, you know, even the data center AI use case, a lot of it is for software development. Actually, Palladium is a platform for choice. Even our AI chip customers can give a model to their customers, you know, because even before they have a chip, they can give a Palladium model to see how it performs. So it's both for chip design and also for system, system design, and system software. And that's true for multiple, multiple major verticals, data center, mobile, automotive. Yes, thank you. Yeah, thanks.
Speaker Change #120: Even our AI chip customers to give a model to their customers, you know, because even before they have a chip, they can give a palladium model to see how it performs. So it's both for chip design and also for system.
Speaker Change #120: System Design and System Software. And that's true for multiple, multiple major verticals, data center, mobile, automotive.
Anirudh Devgan: Just on those multiple verticals, if we look at the incidence of 3DICs coming through, I get the sense that that's starting to hit the tape now in the automotive sector. You have mentioned EV companies as a collaboration of late, but you have mentioned a number of chipmakers also. I wonder if it's possible at this point, or even if it's relevant, to just maybe talk about the split between the customers.
Speaker Change #120: Yes, thank you.
Speaker Change #121: Yeah, thanks. Just on those multiple verticals, if we look at the incidence of 3D ICs coming through, I get the sense that that's starting to hit the tape now in automotive.
Speaker Change #122: You have mentioned EV companies as a collaboration of late, but you have mentioned a number of chip makers also. I wonder if it's possible at this point...
Lee John Simpson: Are we talking system customers, i.e., OEMs and Tier 1s in the majority right now, or is it still major semi-chipmakers for the automotive work? Thanks.
Speaker Change #123: or even if it's relevant, to just maybe talk about the split between the customers. Are we talking system customers, i.e. OEMs and Tier 1s in the majority right now, or is it still major semi-chipmakers for the automotive work? Thanks.
Anirudh Devgan: Great question. So first, like you correctly pointed out, I think this 3DIC is a lot more prevalent in the automotive industry than, let's say, six to 12 months ago. And of course, the original genesis was HPC and data center AI. But now, all these chiplets and 3D IC platforms are moving to the automotive industry. And I think over time, we'll move to other verticals, like consumer electronics. You know, they have already moved to laptops, for example. You know, several of the laptop chips are 3DIC, but I think that will be the progression. It will gradually go to all verticals, but it's definitely active in the automotive industry.
Speaker Change #124: So, great question. So, first to, yes, like you correctly pointed out, I think this 3DIC is
Speaker Change #124: A lot more prevalent in automotive than, let's say, 6 to 12 months ago. And of course, the original genesis is HPC and data center AI, but now all these chiplets and 3D IC platforms are moving to automotive.
Speaker Change #124: And I think over time, we'll move to other verticals like consumer, you know, they already moved to laptop, for example, you know, the several of the laptop chips are 3DIC, but I think that will be the progression, it will gradually go to all verticals, but definitely active and automotive.
Anirudh Devgan: Because, as you know, with the chiplet architecture, the customer doesn't have to redesign all the chips. And also, they can use some standard chips and have some specific chips which are more value-added for them. And that's particularly true in the automotive industry as each OEM wants to differentiate versus the other OEM. So this trend is not just for... for semi-companies, to your question; it's also there in OEMs. And actually, even more, I do think that the 3D IC trend makes even more sense for end OEMs because then they're able to customize and differentiate versus the competition.
Speaker Change #124: Because as you know, you know, with the chip-led architecture, you know, the customer doesn't have to redesign all the chips.
Speaker Change #124: And also they can use some standard chips and have some specific chips which are more value-added for them. And that's particularly true in automotive as each OEM wants to differentiate versus the other OEM. So this trend is not just for automotive.
Speaker Change #124: For semi-companies, to your question, it's also there in OEMs.
Speaker Change #124: And I think actually even more, I do think that the 3D IC trend makes even more sense for end OEMs because then they're able to customize and differentiate versus the other.
Anirudh Devgan: So we are seeing that, and we are seeing that in other geographies as well, because, as you know, China is pretty strong in EVs, and then the US, and then Japan, there's a lot of activity. So overall, I think there is more activity on 3D IC, including both semi- and end OEM. Great. Thanks, Anirudh.
Speaker Change #124: So we are seeing that and we are seeing that in other geographies as well, you know.
Speaker Change #124: Because, as you know, China is pretty strong in EVs, and then US, and then Japan, there's a lot of activity. So, overall, I think automotive, there is more activity on 3DIC, including both semi and OEMs.
Speaker Change #125: Great. Thanks, Anirudh. Great color.
William Clarke Jeffries: Our next question comes from Clark Jeffries with Piper Sandler. Please go ahead. Hello, thank you for taking the question. My first question is, you know, Anirudh, how do you expect the delivery of these third-generation systems to translate to additional software consumption in the recurring revenue portfolio? You know, these products are happening with verification, acceleration, and software introduction, but, you know, how do you see that additional consumption panning out after the delivery of a new ZRX system? And then I have one follow-up.
Speaker Change #126: Our next question comes from Clark Jeffries with Piper Sandler. Please go ahead.
Clark Jeffries: Hello, thank you for taking the question. My first question is, you know, Anirudh, how do you expect the delivery of these third generation systems to translate to
Clark Jeffries: Additional software consumption in the recurring revenue portfolio, you know, these products are happening with verification acceleration software bring up, but, you know, how do you see that additional consumption panning out after the delivery of a new ZRX system? And then I have one follow-up.
Anirudh Devgan: Yeah, great question. I mean, like what John was saying, yes, when we say SVG, you know, the system verification group. So hardware is part of that. You know, even though hardware is a significant business, we organize it as part of verification. And one of the big reasons for that is, apart from, in verification, apart from the hardware systems, we have a lot of other verification products which are doing pretty well, like Jasper for formal verification, and Excelium for logic simulation.
Speaker Change #128: Yeah, great question.
Speaker Change #128: I mean, like what John was saying, when we say SVG, you know, System Verification Group, so hardware is part of that group.
Speaker Change #128: You know, even though hardware is a significant business, we organize it as part of verification. And one of the big reasons for that is, apart from in verification, apart from the hardware systems,
Speaker Change #128: We have a lot of other verification products, you know, which are doing pretty well, like Jasper for formal verification, Excelium for logic simulation.
Anirudh Devgan: And the customer is looking for an integrated solution in verification. To the earlier question that Jay had, you know, about, you know, what is happening in SDA, you know, in EDA, we always have believed for the last several years that it's going to be an integrated solution in verification. So the stronger our hardware products get, we do expect it should help our software verification products, you know, things like Xellium and Jasper and Verisium, because a lot of the hardware capacity is also used for what is called SimXL, simulation acceleration, in which they use Palladium to accelerate logic simulation. So there is a natural tie-in between verification software products and, you know, verification hardware products. Now, exactly how it pans out, you know, we just have to see.
Speaker Change #128: And the customer is looking for an integrated solution on verification. To the earlier question that Jay had, you know, about, you know, what is happening in SDA, you know, in EDA we always have believed for the last several years that
Speaker Change #128: It's going to be an integrated solution in verification. So, the stronger our hardware products get, we do expect it should help our software verification products, you know, things like Excellium and Jasper and Verisium.
Speaker Change #128: Because a lot of, some of the hardware capacity is also used for what is called SimXL, Simulation Acceleration, in which they use Palladium to accelerate logic simulation. So there is a natural tie-in between verification software products and, you know, verification hardware products.
William Clarke Jeffries: But the strength in hardware should, should help us in our overall portfolio strength. Perfect, and then one follow-up for John, I think just to kind of finally put a cap on the whole discussion around timing, I guess then it is fair to say that that sort of $600 million of upfront revenue in the second half, maybe a majority of that is coming from IP and SCNA and not necessarily the Gen 3 systems, and maybe the interpretation is that there's going to be more of a demand curve in the beginning of 2025 rather than this Is that a fair takeaway? I think that is Clark.
Speaker Change #128: Now, exactly how it pans out, you know, we just have to see, but the strength in hardware should...
Speaker Change #128: should help us in our overall portfolio strength.
Speaker Change #129: Perfect. And then one follow-up for John . I think just to kind of finally put a cap on the whole discussion around timing.
John M. Wall: I guess then is it fair to say that that sort of 600 odd million dollars of upfront revenue in the second half
Speaker Change #130: Maybe a majority of that is coming from IP and SC&A, and not necessarily the Gen 3 systems and that.
Speaker Change #131: Maybe the interpretation is that there's going to be more of a demand curve in the beginning of 2025 rather than this $600 million being strongly driven by third-gen plenium and proteum. Is that a fair takeaway?
William Clarke Jeffries: Yeah, that's exactly right. I mean, we always knew that it would take time to build a hardware system. So we originally included that in our guide at the first, All right, perfect. Thank you for taking the question. Our final question comes from Joe Vruwink with Baird. Please go ahead.
Speaker Change #133: I think that is Clark. Yeah, that's exactly right. I mean, we always knew that it would take time to build a hardware system, so we originally included that in our guide in the first place.
Speaker Change #132: All right, perfect. Thank you for taking the questions.
Joseph D. Vruwink: Great, thanks for fitting me in. I did want to follow up and stay with verification and just this raw material investment. So the thing I'm trying to reconcile is, I would imagine you entered this year expecting the new platform, strong demand, needing to scale production, and therefore investing in inventory. So I guess I'm wondering, what changed in the quarter that warranted this updated assumption for cash flow and raw material purchase? And really, at the heart of the question, did something change about your hardware demand expectation, not necessarily for 2024, but maybe out into 2025, and we just happen to be getting that news now because of the need to update your cash and operations forecast associated with the inventory input? Yeah, that's a great question, Joe.
Speaker Change #132: Our final question comes from Joe Vruwink with Baird. Please go ahead.
Joseph D. Vruwink: Great, thanks for fitting me in. I did want to follow up and stay with verification and just this raw material investment.
Joseph D. Vruwink: The thing I'm trying to reconcile is, I would imagine you entered this year expecting the new platform, strong demand, needing to scale production, and therefore invest in inventory.
Joseph D. Vruwink: So I guess I'm wondering what changed in the quarter that warranted this updated assumption for cash flow and raw material purchase and really at the heart of the question.
Speaker Change #135: Did something change about your hardware demand expectation?
Speaker Change #136: not necessarily for 2024, but maybe out into 2025. And we just happen to be getting that news now because of the need to update your cash-from-ops forecast associated with the inventory input.
John M. Wall: I mean, the leaders of that business, I spent plenty of time with them this last quarter because they were monitoring what the demand was like for the new systems. Demand is quite strong. And then the key thing to highlight here is it's a one-time, multi-year purchase of inventory raw materials. They feel very, very confident in the longevity of these systems and the longevity of that demand. And they wanted to pre-purchase multi-years of inventory in Q3.
Speaker Change #137: Yeah, it's a great question, Joe. I mean, the leaders of that business, I spent plenty of time with them this last quarter, because they were monitoring what the demand was like for the new systems. Demand is quite strong. And then the key thing to highlight here is it's a one-time, multi-year purchase of inventory raw materials. They feel very, very confident in the longevity of these systems and the longevity of that demand, and they wanted to pre-purchase multi-years of inventory in Q3. Now, that was news to us, if you like, so we thought that one-time thing, we wanted to include it all now in Q3 and not impact
John M. Wall: Now, that was news to us, if you like, so we thought that one-time thing, we wanted to include it all now in Q3 and not impact. That doesn't impact next year. I mean, it'll be favorable for next year's operating capital. Okay, great. Then lastly, as you mentioned at the start, orders for cadence.ai tripled year over year. But I don't think that's possible without also getting a lift in the base business, both across EDA and SDNA.
Speaker Change #138: That doesn't impact next year. I mean, it'll be favorable for next year's operating cash.
Speaker Change #138: Then lastly, you mentioned at the start, orders for Cadence.ai tripled year-over-year. I don't think that's possible without also getting a lift in the base business, both across EDA and SDNA.
Anirudh Devgan: I guess on an ACV run rate basis, what has the AI lineup meant for Cadence overall? And does this create a step up in value where as you start pulling these contracts from backlog and coming quarters, it'll become more noticeable in revenue, and we'll kind of see the AI contribution more than we have to this point? Yeah, good question.
Speaker Change #139: I guess on an ACV run rate basis, what has the AI lineup meant for Cadence overall?
Speaker Change #140: And does this create a step up in value where, as you start pulling these contracts from backlog and come in quarters, it'll become more noticeable in revenue and we'll kind of see the AI contribution more than we have to this point?
Anirudh Devgan: I mean, AI is adding, you know, like I was mentioning before, it's almost like table stakes now. So all our new contracts include our Cadence.ai portfolio, as customers get more and more kind of used to using them. And once you start using the AI portfolio, it's difficult to go back to not using them. So without getting into what happens exactly to future revenues and bookings, you know, we are always cautious about that. But in general, there is an uptick with more customers deploying AI. And whenever we have new contracts, you know, we include them as it makes sense in them. Okay, thank you very much.
Speaker Change #141: Yeah, good question.
Speaker Change #142: I mean, AI is adding, you know, like I was mentioning before, I mean, it's almost become like table stakes now. So all our new contracts include our cadence.ai portfolio.
Speaker Change #142: as customers get more and more kind of used to using them. And once you start using the AI portfolio, it's difficult to go back to not using them.
Speaker Change #142: So without getting into like what happens exactly to future revenues and bookings, you know, we are always cautious about that. But in general there is uptick with more customers deploying AI and whenever we have new contracts, you know, we are including them as it makes sense in them.
Operator: Thank you very much.
Speaker Change #143: Okay, thank you very much.
Anirudh Devgan: I will now turn the call back to Anirudh Devgan for closing remarks.
Anirudh Devgan: I will now turn the call back to Anirudh Devgan for his closing remarks. Thank you all for joining us this afternoon. It's an exciting time for Cadence with strong business momentum and growing opportunities with semiconductor and system customers. With a world-class employee base, we continue delivering on our innovative road map and working hard to delight our customers and partners. On behalf of 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 Second Quarter 2024 Earnings Conference Call. This concludes today's call. You may now disconnect.
Speaker Change #143: I will now turn the call back to Anirudh Devgan for closing remarks.
Anirudh Devgan: Thank you all for joining us this afternoon. It's an exciting time for Cadence with strong business momentum and growing opportunities with semiconductor and system customers. With the word class employee base, we continue delivering to our innovative roadmap and working hard to delight our customers and partners.
Anirudh Devgan: Thank you all for joining us this afternoon.
Anirudh Devgan: It's an exciting time for Cadence with strong business momentum and growing opportunities with semiconductor and system customers.
Anirudh Devgan: With a world-class employee base, we continue delivering to our innovative road map and working hard to delight our customers and partners.
Anirudh Devgan: On behalf of our Board of Directors, we thank our customers, partners, and investors for their continued trust and confidence in Cadence.
Speaker Change #144: On behalf of our Board of Directors, we thank our customers, partners, and investors for their continued trust and confidence in Cadence.
Operator: Thank you for participating in today's Cadence second quarter 2024 earnings conference call.
Speaker Change #145: Thank you for participating in today's Cadence Second Quarter 2024 Earnings Conference Call. This concludes today's call. You may now disconnect.
Operator: This concludes today's call. You may now disconnect.