Q4 2024 Cadence Design Systems Inc Earnings Call
Speaker Change: Thank you operator.
Speaker Change: I would like to welcome everyone to our fourth quarter of 2024 earnings Conference call.
Speaker Change: I'm joined today by on your desk.
President and Chief Executive Officer, and John Wall, Senior Vice President and Chief Financial Officer.
Speaker Change: The webcast of this call and a copy of today's prepared remarks will be available on our website cadence dot com.
Speaker Change: Today's discussion will contain forward looking statements.
Speaker Change: Including our outlook on the 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.
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.
Speaker Change: CFO commentary and today's earnings release.
Speaker Change: All forward looking statements. During this call are based on estimates and information available to us as of today, and we disclaim any obligation to update them.
Speaker Change: In addition, all financial measures discussed on this call are non-GAAP, unless otherwise specified the non-GAAP measures should not be considered in isolation from or as a substitute for GAAP results.
Speaker Change: Reconciliations of GAAP to non-GAAP measures are included in today's earnings release.
Speaker Change: For the Q&A session today.
Speaker Change: We would ask that you observed a limit of one question only.
Speaker Change: If time permits you can re queue with additional questions.
Andi Ruud: Now I'll turn the call over to Andi Ruud.
Andi Ruud: Thank you Richard Good afternoon, everyone and thank you for joining us today.
Speaker Change: I'm pleased to report that cadence delivered exceptional results in the fourth quarter.
Speaker Change: Capping off a strong 2024.
Speaker Change: With <unk> and a 5% revenue growth.
And 45% non-GAAP operating margin for the year.
Speaker Change: We exited 2024 with a record backlog of $6 $8 billion.
Speaker Change: Which is a testament to our compelling AI driven chip two systems portfolio.
Speaker Change: And it's growing proliferation, among marquee system and semi customers.
Speaker Change: The AI Super cycle is entering a new phase.
Speaker Change: Regenerative AI agenda, Guy and physical AI.
Speaker Change: Fueling explosion in compute demand and semiconductor innovation.
Speaker Change: We see a adoption unfolding in multiple phases.
Speaker Change: Starting with the Buildout of the AI infrastructure wherever.
We are already deeply engaged.
Speaker Change: At the same time, we are actively integrating AI into our own product.
Speaker Change: And we are also exploring <unk> potential to create new markets.
Speaker Change: The infrastructure phase is well underway.
Speaker Change: And we have been closely collaborating with market leaders.
Speaker Change: On the next generation AI design across both training and inferencing.
Speaker Change: In Q4.
We advanced our long standing partnership with Nvidia.
Commitments across a range of R E D a hardware.
Speaker Change: B and system software solutions.
We are also using Nvidia is latest Nemo and then micro services.
Speaker Change: To build customized Jenny I applications.
Speaker Change: Delivering enhanced optimization and productivity.
Speaker Change: We deepened our collaboration with Qualcomm.
Speaker Change: Through a significant expansion of our EDA and system software solutions.
Speaker Change: Also we meaningfully expanded our strategic partnership with Marvell.
Speaker Change: Through our broad proliferation of our portfolio of products.
Speaker Change: Our cadence of a portfolio.
Speaker Change: Continued gaining.
Speaker Change: <unk> momentum with market shaping customers.
Speaker Change: Our AI powered products, such as Gaydon city-bred they.
Speaker Change: They may I, and Allegro X AI are proliferating at scale.
Speaker Change: And now a L. L M base design agents powered by J D I data platform.
Speaker Change: Promising results and early engagement.
Speaker Change: Gaydon zebras is rapidly becoming an essential part of the design flow as it continued to deliver transformative BPA benefits to customers.
Speaker Change: With more than 750 tape outs to date.
Speaker Change: And over 300 in Q4 alone.
Speaker Change: However, we do see them AI driven verification platform.
Speaker Change: But the semi and debug apps.
Speaker Change: Gained share at key competitive account as customers embrace the significant boost in verification quality and efficiency.
Speaker Change: Additionally, we are also applying AI to new market opportunities.
Speaker Change: Such as life Sciences.
Speaker Change: With our open eye drug discovery software.
Speaker Change: The growing foundry ecosystem is driving increased design activity and creating significant opportunities for our product.
Speaker Change: In 2024, we strengthened our collaboration with existing foundry partners and entered into new strategic engagement.
Speaker Change: We further our partnership with TSMC.
Speaker Change: With the optimized design flows certified for TSMC as entry.
Speaker Change: And to be technologies.
Speaker Change: We strengthened our collaboration with Globalfoundries and.
Speaker Change: In our partnering with Samsung on the S F to gate all around process.
Speaker Change: We also partnered with Intel foundry to provide design software and leading IP solutions at.
Speaker Change: At multiple Intel advanced nodes, and then Q4 entered into a strategic collaboration with rapid as well.
Speaker Change: But two nanometer enablement technology.
Speaker Change: We deepened our partnership with arm.
Speaker Change: We have a broad expansion of our IP hardware and AI driven design enablement solutions and in Q4 successfully taped out industry's first arm.
Speaker Change: DSA standard base system chip lit.
Speaker Change: Now, let's talk about some of the specific barak level highlights.
Speaker Change: Q4 and 2024.
Speaker Change: Our system design and analysis business.
Speaker Change: Delivered strong results.
Speaker Change: Achieving over 40% growth in 2024.
Our multi physics analysis platform with AI, driven optimization is delivering superior results to our rapidly expanding customer base across multiple verticals.
Speaker Change: Especially aerospace and defense and automotive.
Speaker Change: Our millennium Cfd simulation platform ramped up over the year.
Closing tool meaningful deals in Q4 and.
Speaker Change: In the aerospace and defense and energy verticals.
Speaker Change: With beta CAE, we now provide a comprehensive multi physics platform.
Speaker Change: Covering electromagnetics electric terminal.
Speaker Change: Cfd and structural analysis.
Speaker Change: Beta CAE performed ahead of our expectations.
Speaker Change: With major expansion at several marquee automakers.
Speaker Change: Including at some of the fastest growing EV companies.
Speaker Change: Our Allegro X design platform.
Speaker Change: There's significant productivity and next generation capabilities.
Speaker Change: Continued its momentum.
Speaker Change: Especially at aerospace and defense Hyperscale and <unk> customers.
Speaker Change: Allegro X AI.
Speaker Change: <unk> first fully automated P.
Speaker Change: PCB design engine.
Speaker Change: Is enabling customers to realize up to a 10 X productivity gain.
Speaker Change: Our integrity <unk> platform.
Speaker Change: But this unified design analysis and sign off capabilities, well multi chip led architectures expanded its footprint at hyperscale and memory customers all sides and foundries.
Speaker Change: Our IP business drove a strong finish to the year.
Speaker Change: Growing 28% year over year in Q4.
Speaker Change: Our AI HBC protocols, including our flagship H B M DDR, Pcie and UCI E solutions propel our business with significant expansions and competitive displacement at top tier customers.
Speaker Change: We continue to broaden our IP portfolio.
Speaker Change: With high growth Star IP products and last month, we entered into a definite agreement to acquire a secure IC.
Speaker Change: The addition of the embedded security IP product.
Speaker Change: <unk> been rapidly expanding portfolio of leading edge silicon proven IP, including interface memory.
Speaker Change: And DSP solutions.
Speaker Change: We announced a collaboration with rapid.
Speaker Change: To provide a broad set of advanced memory and interface IP.
Speaker Change: Or are they two nanometer backside father process node.
Speaker Change: And ASD space mobile.
Speaker Change: Committed to our AI, driven IP solutions and EDA tools.
Speaker Change: On the <unk> 5000, a stick.
Speaker Change: A custom low power architecture.
Speaker Change: While global space based cellular broadband services.
Our core EDA business.
Speaker Change: <unk>, our digital custom analog and verification portfolios.
Speaker Change: Grew 15% year over year in Q4.
Speaker Change: In Satiable demand for more compute along with system complexity and the need for first time right silicon.
Speaker Change: Continued to drive strong demand for our best in class Palladium zone, three and Protium X three systems.
Speaker Change: Our hardware family delivered yet another record year.
Speaker Change: Adding over 30 new customers.
Speaker Change: And almost 200 repeat customers in 2024.
Speaker Change: With particularly strong demand from AI and Hyperscale customers.
Speaker Change: Our digital portfolio had another strong year, gaining 36, new full flow customers in 2024, including 17 in Q4.
Speaker Change: Cadence partner with equal one on the development of its alpha.
Quantum edge Soc.
Speaker Change: That runs at cryogenic temperatures.
Speaker Change: With our design and implementation tools being central to this revolutionary design.
Speaker Change: Our virtuoso inspected franchise solutions tackle the most complex design and simulation challenges in analog mixed signal and RF design.
Speaker Change: Virtuoso studio.
Speaker Change: Delivering industry, leading AI powered lay out automation and optimization.
Speaker Change: <unk> strong Ram and is now deployed at over 450 customers.
Speaker Change: Mediatek.
Speaker Change: Adopted Spectre X running on Nvidia is Harper Gpus.
Speaker Change: It's two nanometer designs.
Speaker Change: <unk> up to a six ex performance boost.
Speaker Change: Maintaining full accuracy.
Speaker Change: Factor FX phosphate.
Speaker Change: It is now in production usage and more than 75 customers.
Speaker Change: Including top memory vendors as well as our Soc and mixed signal companies.
Speaker Change: In closing.
Speaker Change: I am pleased with our outstanding performance in 2024 and.
Speaker Change: And excited about the business momentum and opportunities ahead.
Speaker Change: As the AI era continues to unfold.
Speaker Change: Our AI, driven EBITDA SDA and IP portfolio.
Speaker Change: Followed by Jenny I agent and accelerated computing.
Speaker Change: Is delivering transformative results uniquely positioning us to capitalize on these massive opportunities.
Speaker Change: Now I will turn it over to Jon to provide more details on the Q4 results and our 2025 outlook.
Jon: Thanks, Andrew and good afternoon, everyone.
Jon: I am pleased to report that cadence delivered an outstanding Q4, and 2024 with broad based strength across all of our businesses.
Jon: Robust design activity and customer demand combined with our strong execution drove 13, 5% revenue growth and 42, 5% non-GAAP operating margin for the year.
Jon: Fourth quarter bookings were exceptionally strong and we ended the year with a record backlog of $6 8 billion.
Jon: <unk> of $3 4 billion.
Jon: Here are some of the financial highlights from the fourth quarter and the year.
Jon: With the P&L.
Jon: Total revenue was $1 billion and $356 million.
Jon: For the quarter and $4 billion and $641 million for the year.
Jon: GAAP operating margin was 33, 7% for the quarter.
Jon: And 29, 1% for the year.
Jon: non-GAAP operating margin was 46% for the quarter and 42, 5% for the year.
Jon: GAAP EPS was $1 24 for the quarter.
Jon: And $3 85 for the year.
Jon: And non-GAAP EPS was $1 88 for the quarter and $5 97 for the year.
Jon: Next turning to the balance sheet and cash flow, our cash balance was $2 billion and $644 million at year end.
Jon: The principal value of debt outstanding was $2 billion and $500 million.
Jon: Operating cash flow was $441 million in the fourth quarter and $1 billion and $261 million for the full year.
Dsos were 48 days, and we used $550 million to repurchase cadence shares during the year.
Jon: Before I provide our outlook for 2025 I'd like to share some assumptions that are embedded.
Jon: Our outlook is based on our usual assumption that export control regulations in place today remain substantially similar for the remainder of the year.
Jon: At the midpoint of revenue guidance, we're assuming 2025, China revenue will be flat year over year.
Jon: And our non-GAAP EPS outlook continues to be based on a tax rate of 16, 5%.
Jon: And our outlook for 2025, we expect revenue in the range of $5, one four to 522 billion.
Jon: GAAP operating margin in the range of 33 to 31, 3%.
Jon: non-GAAP operating margin in the range of $43 25 to $44 two 5%.
Jon: GAAP EPS in the range of $4 19.
Jon: To $4.29.
Jon: non-GAAP EPS in the range of $6 65.
Jon: To $6 75.
Jon: Operating cash flow in the range of one six to $1 7 billion.
Jon: And we expect to use approximately 50% of our free cash flow to repurchase cadence shares in 2025.
Jon: For Q1, we expect revenue in the range of 123 billion to $1 two 5 billion.
Jon: GAAP operating margin in the range of 27% to 28%.
Jon: non-GAAP operating margin in the range of 40% to 41%.
Jon: GAAP EPS in the range of 93 to 99.
Jon: Our non-GAAP EPS in the range of $1 46.
Jon: The $1 52.
Jon: And as usual, we published the CFO commentary document on our Investor Relations website, which includes our outlook for additional items as well as further analysis and <unk>.
Jon: GAAP to non-GAAP reconciliations.
Jon: In conclusion I'm pleased that we finished the year with record backlog and see our appeal.
Jon: We're starting 2025 with a very strong outlook for non-GAAP incremental margin.
Jon: As always I'd like to thank our customers partners and our employees for their continued support and with that operator, we will now take questions.
Speaker Change: Thank you and at this time I would like to remind everyone who wants to ask a question to please press star one on your telephone keypad.
Speaker Change: As a courtesy to all participants we ask that you. Please limit yourself to one question and we will pause for just a moment to compile the Q&A roster.
Speaker Change: And your first question comes from the line of Jason <unk> with Keybanc capital markets. Your line is open.
Jason: Hey, Thanks for taking my question.
Speaker Change: When we look at the backlog number the 1200 or the <unk>.
Jason: $1 2 billion of sequential.
Speaker Change: That's like the biggest.
Speaker Change: We've ever seen.
Speaker Change: Much higher than kind of I think all of us.
Speaker Change: We're expecting but then when we look at the guide for the full year 11, 5% starting point is a little lower than where you started.
Speaker Change: Other years in the past so maybe John can you help us just reconcile.
Speaker Change: Our confidence in the backlog and kind of how you are approaching guidance for 2025. Thank you.
John: Yeah sure Jason Thanks for the opportunity to clarify.
Speaker Change: Yes, we're very pleased with the strength and momentum that we carried.
Speaker Change: Into year end and into this year, we did allude to it on the call last time that we thought the pipeline looked extremely strong and we just wanted the team to focus on converting that we saw broad based strength across all of the businesses.
Speaker Change: On backlog.
Speaker Change: On bookings for Q4, but it was a strong renewal quarter Q4.
Speaker Change: In contrast, the.
Speaker Change: When you look at this year second half is probably stronger for renewals in the first half. So we're probably burn some of that backlog in the first half of the year, but it'll it'll come back in Q3, and Q4 and the duration of our backlog durations normally somewhere in the region of two four to two six years every year and we ended up at the high end of the of that range.
Speaker Change: For this year.
Speaker Change: When I look at the year in total for 2024, we're super pleased with with the strength ex China.
Speaker Change: Outside of China, It was high teens.
Speaker Change: China of course declined just over $100 million in dollar terms.
Speaker Change: From from 2023 years 2024, and we did back test that I think I mentioned that on the last call as well we went back to 1999 and looked at the last 25 years of performance in China in dollar terms and we're only three years, where we had down years.
Speaker Change: 2024 was the third time, we experienced a down year in dollar terms in China, We've never had two consecutive down years in China.
Speaker Change: We thought it would be prudent to.
Speaker Change: Two assuming the guide for 2025 that China was flat because it is notoriously hard to predict and I don't want to manage an expense plan based on a prudent guide.
Speaker Change: Okay.
Speaker Change: And your next question comes from the line of Joe <unk> with Wells Fargo. Your line is open.
Speaker Change: Yes, thanks for taking the question I wanted to follow up on that note on the China piece.
Speaker Change: One was there any change to the <unk> balance in the export restrictions in there too.
Speaker Change: I guess on that flat kind of expectation for 2025 should we assume that the hardware cycle specifically in China is maybe more of a 2026th fiber then.
Speaker Change: Oh, yeah. Good good question.
Speaker Change: I was just trying to be prudent with the guide and make sure that we're managing.
Speaker Change: Expenses very effectively for 2025, but when I look at the booking activity for Q4, it was quite strong.
Speaker Change: I think we're seeing strong design activity in China, Andrew do you want to comment on any of that.
Speaker Change: Yeah.
Speaker Change: Actually it's good to see design activity across the board.
Speaker Change: And in all verticals now talking specifically about China actually I was there in November.
Speaker Change: And it's good to see design activity picking up right I think even our China results in 24 improved through the year from Q1 to Q2 to Q3 and Q4.
Speaker Change: And China, especially as you know there's a lot of design activity in for example, in automotive where at least five or six major auto companies.
Speaker Change: Driving the EV Revolution and <unk>.
Speaker Change: Almost all of them are are designing chips now.
Speaker Change: We are privileged to work with all the major auto companies, there and also with our new systems portfolio, especially including data.
Speaker Change: Not only we are engaged with them on the chip design side, but also on the packaging board and systems side.
Speaker Change: So overall I do think that the China activity is strong like it is strong in Florida.
Speaker Change: A lot of other regions I think in terms of the diet or just is it just best to be prudent.
Speaker Change: And then see how it goes given all these macro uncertainty.
Speaker Change: We thought it's better to be prudent on the guide, but the design activity seems to be actually picking up and we'll see you know it's difficult to predict how that goes through the year, but so far so good and Joe you mentioned the specific metrics in terms of <unk>, There's nothing no real material impact on any of that from what we're seeing in China that youre right to call. It hardware, though I mean, we had a strong hardware.
Speaker Change: Year end 2023.
Speaker Change: In China, and it was kind of weaker in 'twenty four.
Speaker Change: That's why the the.
Speaker Change: The year is down year over year.
Speaker Change: In China.
Speaker Change: I just didn't want to be predicting what would happen for 25 is just very very difficult for us to predict what happens in China for 25.
Speaker Change: And your next question comes from the line of Ruben Roy with Stifel. Your line is open.
Speaker Change: John.
Speaker Change: Hate to waste like one question.
Speaker Change: And another follow up on China.
Speaker Change: I am getting this question from investors and just around the entity list wondering if there had been any changes it seemed like there were additions to the list.
Speaker Change: Kind of going into the end of the year and is.
Speaker Change: That informing sort of your prudent view on China or is it really just kind of.
Speaker Change: Coming off of that down here and kind of assessing renewals and kind of timing of hardware ramp or has something changed I guess is the question around antitrust. Thank you.
Speaker Change: Yep. Thanks.
Speaker Change: Thanks Ruben.
Speaker Change: I think I would put it down to general Prudence.
Speaker Change: Nothing really changed in China, but we did see we had a down year or third down year in 'twenty five.
Speaker Change: In 25 years.
Speaker Change: We just thought it would be prudent to assume flattened that would de risk the guide for everybody.
Speaker Change: Okay.
Speaker Change: And your next question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.
Speaker Change: Okay.
Vivek Arya: Thanks for taking my question.
Vivek Arya: I'm trying to get a better handle on whats the right interpretation of the recurring revenue growth that is slowing down I assume obviously, China is one aspect of it but if I were to just take the 24.
Vivek Arya: Recurring revenue.
Vivek Arya: And then look at I think youre guiding 80% recurring revenue, but that does suggest a bit of a deceleration why is that when the market for AI and all these other products is improving so much why is the recurring revenue sales for decelerating.
Vivek Arya: So much.
Vivek Arya: Hi, Vivek thanks for the question.
Yes, when we look at our recurring revenue growth of course the.
Vivek Arya: The assumption that we have in for China being flat is a headwind for that recurring revenue growth because like if we look at the impact of China decelerating by like 100 million from 23 to 24.
Vivek Arya: The vast majority of that was was in core EDA and mainly on the hardware side.
Vivek Arya: But where we're seeing that impact the recurring revenue numbers.
Vivek Arya:
Vivek Arya: Of course, the recurring revenue is the expected mix for this year is expected to go to 80% recurring 20% upfront, but that's more a reflection of the strength that we're seeing in our upfront revenue businesses they are growing faster than the.
Vivek Arya: Then the average cadence business, Andrew do you want to talk to any of us.
Andrew: Yeah, absolutely I mean.
Andrew: Of course, I think we are good to see strength across the board but.
Andrew: But especially hardware and IP is performed really well in 'twenty four.
Andrew: And I expect that they will do well in 25, there are multiple reasons driving that which we can get into but we have a phenomenal product and hardware you know what.
Andrew: We're well ahead of.
Andrew: You know what what the customers will need for several years and in terms of all our kind of engagements with the customers. They're very pleased with our hardware systems that we had a record 24 also.
Andrew: Strong demand hardware going forward.
Andrew: And same thing on IP.
Andrew: I think has been a weaker area for us over the years.
Andrew: But I think it did turn around you know of course, one year doesn't make a trend, but it did turn out significantly in 'twenty four so I think it is up Ips up roughly 30% and 24.
Andrew: And it is driven by multiple reasons. So one reason our portfolio is just better technically the PPA, especially at advanced nodes were delivering better power performance area for IP products.
Andrew: Also the customers are.
Andrew: We're engaged now with almost all the major customers in IP, we always engage with them on an on EDA and hardware at this point customers want more and more of our IP.
Andrew: And the third reason is as you know there is lot more.
Andrew: Foundry activity.
Andrew: Not just the leading foundry you know from Taiwan, but also in other parts of the world, whether it's Intel or Samsung rapid global foundries.
Andrew: So that also requires more and more like be in 88, so as a result.
Andrew: We are you know I am more confident in the IP business going forward I think it should have another good year in 'twenty five for what I can see right now.
Andrew: And also we are investing more in the IP business in terms of expanding the portfolio.
Andrew: So as you see we acquired late last year, we acquired <unk>.
Andrew: Well about a year ago.
Andrew: B products from Rambus, and then recently, we acquired security IP, which is another critical piece of the IP portfolio.
Andrew: Overall, I think Adas has been always very strong in EDA always very strong in <unk> IC always being very strong and hardware and IP has been one area that'd be wanting to do more and especially 'twenty four is the turning point for IP and together positions us well into the future.
B Simpson: And your next question comes from the line of B Simpson with Morgan Stanley. Your line is open.
Andrew: Great.
B Simpson: Thanks for squeezing me in here.
Andrew: I really just wanted to ask.
Andrew: Around the chocolate reference designs that you've clearly done very well with.
Andrew: In China with the EV makers.
Andrew: Is this is this the sole source of strength for for the triplet reference design.
Andrew: And maybe if we stop business out of China for this year, what does that do for the size of decline that we might see in China and fired in that flat number.
Andrew: Okay.
Speaker Change: That's a good question I mean, the first thing I would like to say that chip led design is happening across the globe and also in all verticals. It is not specific to a particular region or vertical of course, it started with <unk>.
Andrew: With high performance computing with all these big AI chips.
Andrew: And so our products, but now you know automotive and you know even lapdogs, they're all getting disaggregated. Okay. So we have always been focused on <unk> and chip lead with design from I don't know, maybe 15 years ago, maybe it was too early but I think our first reference law with TSMC on three D. IC was like 2007 2008, okay.
Andrew: But of course it has picked up steam in the last few years, and we are particularly well positioned given we have EDA products packaging products system products.
Andrew: And also IP.
Andrew: Needs to go that way. So we have you know what I would call IP to role is more focus now.
Andrew: Just on individual IP, but but silicon solutions and chip led architecture. So thats why youre seeing investment for us on chip, let's not just on the EDA side, but also on the IP side.
Andrew: But I think he is going to happen I believe and across all geographies across all verticals.
Andrew: And it's only going to accelerate going forward.
Speaker Change: And your next question comes from the line of Charles <unk> with Needham <unk> Company. Your line is open.
Hey, good afternoon.
Andrew: Yes.
And John I think I do want to ask a little bit about the core EDA looks like.
Andrew: Just on the segment information.
Andrew: Core EDA growth in 24 was somewhere in the high single digit range it seems like that.
Andrew: It had been growing at more like a double digit but that but at the same time, our system design and analysis continue to grow at very strong double digit growth.
Andrew: Wonder if you can give us a little bit about your long term view is this going to be the new normal going forward like in a more traditional EEA actually going to more like a high single digit grower, but as DNA is more like Oh.
Speaker Change: We're at that kind of contributor Takeda outperformance going forward, while I wanted to get some long term thoughts there. Thanks.
Speaker Change: Hi, Charles Thats generally in core EBITDA, I mean, we're always targeting double digit revenue growth and profitable and sustainable revenue growth is really important to us.
Speaker Change: It would be very very pleased with the progress we're.
Speaker Change: We're making with the hardware business over the last number of years.
Speaker Change: Of course, the down year, China from 23% to 24 impacts that core.
Speaker Change: Core EDA growth year over year from 23% to 24.
Speaker Change: And then our assumption for 25, obviously impacts that as well, but but we're delighted with the value we're providing to customers.
Speaker Change: Hum.
Speaker Change: With the just the sheer demand for our products right across the core EDA space.
Speaker Change: Do you want to add anything in terms of product portfolio I think we are better.
Speaker Change: Better position than we ever have been and if you look at analog digi.
Speaker Change: Digital verification in terms of core EDA and then design activity is strong of course in 'twenty. Four there are two issues like John mentioned, one of the China and then also hardware had a transition.
Speaker Change: Transition year, so even though Q4 was phenomenally strong and hardware we went through the transition in Q2 and Q3. So that's of course part of quality. So we'll see how it proceeds going forward, but.
Speaker Change: We're well positioned we are you know, we're doing very well with customers.
Speaker Change: All of these evaluations and new design starts so, let's see how things progress going forward.
Jan Marko: And your next question comes from the line of Jan Marko <unk> with Deutsche Bank. Your line is open.
Jan Marko: Yeah, Hi, Thank you for taking my questions.
Speaker Change: Congrats on another fantastic quarter.
Speaker Change: Just a follow up question on glass.
Speaker Change: Given again the impressive increase from revenue. We saw this quarter is it fair to assume that <unk> is being adopted at a faster pace and that the mix of volume and pricing is what's driving the strong Q1 guide.
Speaker Change: Going forward is it fair to assume an exploration Olson from revenue given the closing of the air pocket I think faster than that so looking at strong hard around I'm wondering if there is much of a inside that $6 8 billion backlog number any color on that would be great. Thank you.
Speaker Change: Yes, Jim Mako is a tremendously strong bookings quarter for hardware in Q4.
Speaker Change: We're seeing huge demand across all of our our function.
Speaker Change: Functional verification platform, but so we were delighted with the progress that we've made there.
Speaker Change: <unk>.
Speaker Change: We have strong backlog bleeding into into the first quarter. So, yes, I mean, youre seeing a more normal kind of shape to revenue. This year for cadence, we expect about 24% of the revenue in two to come in Q1. Similarly for 24% in Q2 second half of the year is going to be hard or would you expect Q4 to be higher than Q3.
Speaker Change: But we'll be able to tell you more about that in the second half when we see the pipeline for hardware in the middle of the year.
Speaker Change: Right, Yeah hardware demand is phenomenal.
Speaker Change: Of course Q4 trend is not based on just hardware, even though it was phenomenal.
Speaker Change: <unk> is doing is doing fabulous and overall <unk> overall, our complete EDA portfolio systems growth as you saw in Q4, but specifically on hardware I mean as you know we have now both new systems. The <unk> III they have been in full production.
Speaker Change: We gained several competitive wins in Q3 and Q4.
Speaker Change: And is the strength of our portfolio, which is a custom.
Speaker Change: Chip that we make which is <unk> three and FPGA system for four protium and almost all like large design, especially all large AI designs are using palladium as the platform of choice and.
Speaker Change: And I do expect that this trend will increase overtime. So because we are the only company that designs his own chip.
Speaker Change: To do emulation. So if you look at this some of the biggest.
Speaker Change: Chips in the World are designed to palladium and we have more than 100 chips in one rack, which are liquid cooled connected optically and then you can connect 16 of these drags together so it's like more than 2000 full radical TSMC chips.
He used to emulate the world's most complicated designs and there is no other system that even comes close to the nearest competitor to Palladium Z three is actually Palladium Z.
Speaker Change: And then I think going forward.
Speaker Change: This is the nature of the architecture also the inherent advantages. It has over FPGA is and we like FPGA, that's useful for some software workloads and protium, but the gap between custom ASIC and FPGA is only going to increase in the future because even though <unk> III the more advanced node than FPGA and you can see that in other workloads to not just.
And emulation you know all the AI workloads, all acceleration custom ASIC is very superior to FPGA and going forward that that will continue and in terms of.
Speaker Change: Or at least a 10 year lead in designing these custom asics for emulation, so hardware was phenomenal.
Speaker Change: And we expect that to continue now of course the actual.
Speaker Change: Second half will have more update.
Speaker Change: We have good good backlog for the first half and depending on what happens in the first half we can update the rest of the year in the middle of the year.
Speaker Change: Yeah.
Speaker Change: And your next question comes from the line of Jay <unk> with Griffin Securities. Your line is open.
Speaker Change: Thank you good evening.
John Your backlog came in at about a half billion above where we were for the quarter.
Speaker Change: So I assume that video alone could certainly have accounted for a large portion of that but.
Speaker Change: Your current <unk> year over year growth progressively slowed over the course of the year from 14% year over year in Q1, 11% and seven 6% year over year as of Q4, maybe you can dissect that in terms of the composition of software versus hardware.
Speaker Change: We're in it.
Speaker Change: And then maybe on the <unk> side.
Speaker Change: What the current RP of growth might look like if you were to exclude China.
Speaker Change: Yeah.
Speaker Change: Oh.
Speaker Change: Yes, Jay Thanks for the question I think what what are you focused on there is the annual value of the backlog.
Speaker Change: Yes, we were very focused that we need to grow that annual value.
Speaker Change:
Speaker Change: I think that would be an important focus point for us for 2025, we're very pleased with the amount of bookings that we recorded with.
Speaker Change: With customers in Q4, very very strong pipeline got converted.
Speaker Change: But we know we can do better on the annual value and we're going to work on that for 2025.
Speaker Change: Okay.
Speaker Change: Ex China of course, China is as a headwind to that number.
Speaker Change: We would expect the <unk> to improve naturally.
Speaker Change: In 2025.
Speaker Change: But I would expect the.
Speaker Change: Backlog number to decline a little bit in the first half we will burn some of it in the first half just because of the timing of when renewals come up in the year Q4, 2024 was the strong renewals quarter Q3, and Q4, the kind of the strongest renewals quarters for for 2025.
Gary Mobley: And your next question comes from the line of Gary Mobley with loop capital. Your line is open.
Gary Mobley: Hi, guys. Thanks for taking my question, John you seem to imply that revenue will be split 48%, 52% first half versus second half of the year, but your Opex guide or your operating margin guide seems too.
Gary Mobley: Slide the opposite direction directional change for for non-GAAP Opex.
Gary Mobley: Normally you would see a second half increase versus first half, which what's the dynamic there in the opex for the second half versus the first half.
Gary Mobley: Hey, Gary.
Gary Mobley: Thanks for spotting that and give me the opportunity to explain we change too.
Gary Mobley: We don't really have a midyear merit cycle, where we increase salaries in July we've moved that to January.
Gary Mobley: And started in 2025, so so the.
Gary Mobley: The profile for the year typically in the past you would have seen.
Gary Mobley: Also improving margin Q1 to Q2, and then typically taking a drop off from Q2 to Q3. This year, we would expect the profitability profile to improve right throughout the year with Q2 margins exceeding Q1, Q3 exiting Q2 and Q4 exceeding Q3.
Gary Mobley: We thought that was the it was it was better to move to an annual cycle from the start to the year, so as not to cause that kind of disruption in the in the quarter over quarter numbers from Q2 to Q3 going forward.
Gary Mobley: Okay.
Speaker Change: And your next question comes from the line of Harlan sur with Jpmorgan. Your line is open.
Harlan Sur: Good afternoon. Thanks for taking my question on the full year guidance, if you drive within the upper range of the guidance for this year. Your three year revenue CAGR is going to drop below 15% to be more specific.
Harlan Sur: 13, 5% for the first time in a number of years.
Harlan Sur: I look at the.
Harlan Sur: Environment right, you've got AI, leading edge design starts and activity alright, an all time high going through a strong upgrade cycle on your hardware business.
Harlan Sur: So you're taking a more conservative view on China, which I think is prudent but outside of China, We know auto and industrial semiconductor trends are still fairly muted. We also know a couple of your large leading edge IDM customers continue to face competitive difficulties. So outside of China can you guys just help us understand like where.
I'll start and you're taking a more cautious view on the 2025 outlook.
Harlan Sur: Yes, I think what you're referring to is that I mean, when you look ex China I mean, if we exclude China.
Harlan Sur: Last year, we were high teen year over year growth.
Harlan Sur: What's implied in the guide is low teen year over year growth I mean normally we start the year prudently anyway.
Harlan Sur: And I think what you're highlighting is we believe we provide tremendous value to our customers.
Harlan Sur: It's important for our customers to extract that value.
Harlan Sur: From what we're providing today, we focus on proliferation and adoption of our technology.
Harlan Sur: We're confident we will extract that value from customers over time.
Harlan Sur: But essentially.
Harlan Sur:
Harlan Sur: That's all that's always in the guide is China is the kind of headwind I guess it would be assumption that that's flat.
Harlan Sur: But we're pleased with with low teen growth across the rest of the business.
Harlan Sur: Okay.
Harlan Sur: And just to point out.
Harlan Sur: Yeah, one thing to point out of course, we're always looking at both revenue growth and profitability.
Harlan Sur: So and I think we expect not only.
Harlan Sur: What I would consider good revenue growth and 25, but also good improvement in profitability.
Harlan Sur: If we add them together like rule of 40 I think this is the first time, we are guiding more than 55 in the beginning of the year, Australia is very important to focus on both those things like we have done for years now.
Harlan Sur: Okay.
And your next question comes from the line of SCP Panic Rocky with Mizuho. Your line is open.
Harlan Sur: Yeah.
Speaker Change: Taking my question can you hear me.
Harlan Sur: Yes, yes.
Harlan Sur: Okay, great. So I know you talked about some of your AI product area for us. He may I, let go all that are getting traction.
Harlan Sur: Help us understand how is that driving your HCV uplift right now what are you seeing more impact.
Harlan Sur: Which segment I did it.
Harlan Sur: Digital design and verification or any of that and in the same context also could you talk about I know you talk about it.
Harlan Sur: Design going into more edge devices is another.
Harlan Sur: ADR growth when do you think that's going to where you're going to see that inflection point.
Harlan Sur: Yeah. Those are two good good question.
Harlan Sur: So.
Harlan Sur: In terms of AI product itself.
Harlan Sur: We have mentioned in the past week.
Harlan Sur: We have these five major platforms, which now at this point, we are engaged with all our major customers on the.
Harlan Sur: The.
Harlan Sur: A few years ago, we started with digital implementation, which is cadence rebase I think at this point, we are cadence here versus the doctor with all our major customers.
Harlan Sur: And then verification with where ACM and Allegro eggs and optimality virtuoso studio and these are all platforms, which are.
Harlan Sur: Something you have to add to your base can figure right. So we are seeing customer adopt more and more of these.
Harlan Sur: Of these solutions.
Harlan Sur: Now in terms of your question on edge.
Harlan Sur: <unk> always believed that said so many times in.
Harlan Sur: In the past that.
Harlan Sur: I will have multiple phases to it of course, the first phase was more infrastructure more on the.
On the datacenter side.
Harlan Sur: But I believe I know the biggest phases will be what we have called for a long time as physical AI, which will be more in the physical world.
Harlan Sur: More edge devices more.
Harlan Sur: Cars and robots and drones and then also signed to the eye if things like life Sciences and material science. So it will go through this at least these three big horizon. So the good thing with the physical layer, which is more on the agile more is there more power constrained applications.
Harlan Sur: We are already seeing lot of design activity starting on that some of the projects may come out in a few years later, but just like on the data center side, we saw products in 'twenty two 'twenty three but the design activity was there a few years before that.
Harlan Sur: And especially in physical AI. They are by nature edge and also more mixed signal and which cadence is very well positioned.
Harlan Sur: So that's why I was saying you know even though there is weakness right now in the in the autos in terms of semi revenue, but in terms of investment in R&D is a lot of investment in R&D with Evs and sell driving same thing with drones and reward which is independent of humanoid robots industrial application in Aero and defense applications.
Harlan Sur: There will be huge for those things. So I think that will drive a different kind of AI and and require even more domain specific silicon for AI on those devices.
Speaker Change: And your final question comes from the line of Joshua Tilton with Wolfe Research. Your line is open.
Joshua Tilton: Hey, guys. Thanks for sneaking me in at the end here.
Speaker Change: I'm just going to keep it to two quick clarifications.
Speaker Change: My first one is on China, I know, there's been a lot of questions, but I guess, John I'm, just trying to understand has anything changed since last quarter, that's either increasing or decreasing your conviction that China won't have two down years in a row.
Speaker Change: And then on the hardware side.
Speaker Change: If I remember correctly historically, you talk to how you tend to only guide like six months of visibility.
Speaker Change: Specifically for hardware are you taking a similar approach.
Speaker Change: This year as you set the guidance for 2025.
Speaker Change: Thanks, Josh Yes, so taking the second question first yes, exactly the same approach that hardware is a pipeline business. We typically have a good visibility into the pipeline about two quarters out.
Speaker Change: We finished with.
Speaker Change: Very very strong kind of hardware bookings quarter in Q4.
Speaker Change: Plenty of backlog to deliver against in the first half of the year, but.
Speaker Change: The pipeline still looks strong but visibility into the pipeline at this time of the year is more difficult.
Speaker Change: The we'll have more visibility into hardware in the second half by the time, we get to the summer.
Speaker Change: So exactly the same approach that you've seen us do.
Speaker Change: In previous years.
Speaker Change: And then your your your question on China can you repeat it again.
Has anything changed since last quarter, thats, either increasing or decreasing your conviction that China would have to down years in a row.
Speaker Change: Oh, just I'm just worried about my ability to predict what China revenue would be I mean, I was very pleased that like.
Speaker Change: Like all through last year Q1 was the low quarter Q2 was higher than Q1 Q3 was hired in Q2 Q4 ended up higher than Q3 for China revenue.
Speaker Change: But.
Speaker Change: It's tough to have visibility into the pipeline for Q1, because quarters are only getting a signs now salespeople tend to keep their cards pretty close to their chest. This time of the year.
Speaker Change: So in the absence of any other information that's the prudent thing would be to Derisk, the guide and assume flat.
Speaker Change: For China, and then as you know.
Speaker Change: If our experience is better than that we'll take the guide up through the year.
Speaker Change: Okay.
And I will now turn the call back to Duncan for closing remarks.
Duncan: Thank you all for joining us this afternoon.
Duncan: It's exciting time for cadence as we enter 2025 with product leadership and strong business momentum.
Duncan: Our continued execution of the intelligent system design strategy customer first mindset and our high performance culture are driving growth and profitability.
Duncan: Fortune and great place to work name cadence is one of the world's best workplaces in 'twenty 'twenty four.
Duncan: Banking at number nine.
Speaker Change: And on behalf of our employees and our board of directors, we think our customers.
Speaker Change: <unk> and investors for their continued trust and confidence in cadence.
Speaker Change: And ladies and gentlemen, thank you for participating in today's cadence fourth quarter and fiscal year 2024 earnings Conference call. This concludes today's call and you may now disconnect.
Speaker Change: Okay.
Speaker Change:
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [noise].