Cadence Design Systems, Inc. (NASDAQ:CDNS) Q1 2023 Earnings Call Transcript

Cadence Design Systems, Inc. (NASDAQ:CDNS) Q1 2023 Earnings Call Transcript April 24, 2023

Operator: Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. 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, operator. I would like to welcome everyone to our first quarter of 2023 earnings conference call. I’m joined today by Anirudh Devgan, President and Chief Executive Officer; and John Wall, Senior Vice President and Chief Financial Officer. A webcast of this call and a copy of today’s prepared remarks will be available on our website at cadence.com. Today’s discussion will contain forward-looking statements, including our outlook on future business and operating results. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today’s discussion. 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 and today’s earnings release.

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. In addition, we will present certain non-GAAP measures, which should not be considered in isolation from, or as a substitute for, GAAP results. Reconciliations of GAAP to non-GAAP measures are included in today’s earnings release. For the Q&A session today, we’d ask that you observe a limit of one question and one follow-up. Now, I will turn the call over to Anirudh.

Anirudh Devgan: Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. I’m pleased to report that Cadence delivered strong results for the first quarter of 2023, with ongoing robust demand for essential and innovative solutions driving solid double-digit growth. In view of the strong start to the year and the continuing momentum of our business, we are raising our financial outlook for the year. John will provide more details in a moment. Generative AI design tools are revolutionizing chip and system development by delivering unprecedented optimization and productivity benefits. Customers have already been benefiting from our ground-breaking generative AI solutions in the digital, verification and systems areas, and with the recent introductions of Virtuoso Studio and Allegro X AI, we now have an unmatched chip to package to board to systems generative AI portfolio.

Leveraging 30 years of industry leadership Virtuoso Studio accelerates heterogenous system design, and through AI powered layout automation and optimization provides an average 3x productivity boost for designs in the notably complex analog domain. Several customers including MediaTek, Renesas, Analog Devices and TSMC provided testimonials for the launch. Allegro X AI technology utilizes the latest innovations in generative AI to accelerate PCB design with more than a 10x reduction in turnaround time, and at the recent launch, it was endorsed by Schneider Electric and Kioxia. All of these powerful engines are fueled by our unique, differentiated big data analytics JedAI platform that unifies massive amounts of design and verification data to carry forward learnings and insights to future designs.

Our rapidly proliferative generative AI solutions are enabling customers to reap significant power, performance and area benefits through better optimized designs while greatly improving engineering productivity and accelerating design closure. Along with AI, other generational trends such as hyperscale computing, 5G and the digital transformation across multiple verticals continue to propel thriving design activity across semi and systems companies, creating rich market opportunities for our differentiated end-to-end EDA, IP and systems solutions. I am pleased with the momentum in our core EDA business as well as our continued expansion into systems area that provides us both revenue and margin opportunities. Now let’s talk about our key highlights for Q1.

In Q1, we deepened our collaboration with MediaTek, which includes a broad base of our digital, analog, verification and systems design and analysis solutions. We significantly expanded our collaboration with a marquee aerospace and defense systems company, that included the proliferation of our digital full flow, custom, verification products, as well as our RF and system analysis solutions. And Cadence expanded its collaboration with TSMC and Microsoft, as we leveraged our Pegasus Verification System and Cloudburst platform to accelerate giga-scale physical verification in the cloud. Ever increasing complexities in system verification and software bring-up continued to propel our verification business, to a 31% year-over-year revenue growth.

Hardware-based verification has become a must have part of the customers design flow. And on the heels of a record year, our Palladium Z2 and Protium X2 hardware platforms delivered a record Q1 as market demand remained strong for these best-in-class solutions. With 14 new customers and nearly 30 repeat customers, more than 50% of the orders during the quarter included both platforms. Demand for hardware was broad-based, with particular strength seen in the aerospace and defense and automotive segments. Our new Verisium platform leverages big data and AI to optimize verification workloads, boost coverage and accelerate root cause analysis of bugs. Customers are realizing significant efficiency gains, with Renesas seeing up to a 6x improvement in debug productivity, shortening the time to market for its R-car designs.

Our digital IC business had another solid quarter, with our digital full flow continuing to drive growth especially at the most advanced nodes at market shaping customers. Our innovative Cadence Cerebrus solution provides customers an AI-driven cockpit by applying generative AI to explore the entire design space and intelligently optimizing the digital full flow in a fully automated manner. Cadence Cerebrus now has well over 180 tapeouts. And at last week’s CadenceLIVE event, several leading customers including TI, Renesas, Broadcom, Canon and arm described the remarkable benefits they realized with Cadence Cerebrus. Our system design and analysis business, which is driving our expansion beyond EDA, continued its strong momentum in Q1, delivering 27% year-over-year revenue growth.

Accelerating hyperconvergence between system and silicon domains requires seamlessly integrated chip implementation, system design and analysis solutions. Our Integrity 3D-IC platform exemplifies that by natively integrating all the required engines to provide a comprehensive multi-chiplet and advanced packaging flow. Additionally, the growing complexity of designs as well as accelerating of virtual prototype trends require sophisticated multi-physics solutions that not just provide higher capacity and performance but also result in more optimized designs. Our system analysis portfolio couples our expertise in physics-based modeling with AI-driven optimization and are delivering superior results to customers across multiple end-markets. We are pleased with the new wins and growing repeat orders for our organic Clarity and Celsius products, as well as our CFD technologies.

During Nvidia’s GTC2023, Nvidia CEO Jensen Huang talked about our joint partnership, and the throughput and energy efficiency benefits offered by Cadence’s CFD offerings running on Nvidia’s accelerated computing platform. And last week, we announced a multi-year technology partnership with the San Francisco 49ers that’s focused on sustainability and based on our Future Facilities digital twin technology. In summary, I’m pleased with our Q1 results. Exploding chip and system design complexity will drive a significant non-linear growth in the workload requirements, opening up a massive opportunity for computational software to help realize these innovative products by investing more of the R&D spend in automation. In addition to our strong business results, I am proud of our high-performance inclusive culture and thrilled that we have been selected yet again by Fortune and Great Place to Work as one of the 2023 100 Best Companies to Work For, for the ninth consecutive year.

Now, I will turn it over to John to provide more details on the Q1 results and our updated 2023 outlook.

John Wall: Thanks, Anirudh, and good afternoon, everyone. I am pleased to report that we exceeded our key financial and operating metrics for the first quarter of 2023. As planned, we increased our hardware production capacity to improve delivery lead times, resulting from strong demand for our hardware solutions. Here are some of the financial highlights from the first quarter, starting with the P&L. Total revenue was $1.022 billion. GAAP operating margin was 31.6% and non-GAAP operating margin was 42.1%. GAAP EPS was $0.89 and non-GAAP EPS was $1.29. Next, turning to the balance sheet and cash flow. Cash balance at quarter-end was $917 million. Operating cash flow was $267 million. And we repurchased $125 million worth of Cadence shares.

Before I provide our outlook for Q2 and the year, I’d like to highlight that it contains our usual assumption that the export control regulations that exist today remain substantially similar for the remainder of the year. Also, for the year, we continue to expect our revenue mix to be consistent with the 15% upfront and 85% recurring revenue mix that we experienced in 2022. With that in mind, our updated outlook for fiscal 2023 is: revenue in the range of $4.03 billion to $4.07 billion; GAAP operating margin in the range of 30% to 31%; non-GAAP operating margin in the range of 41% to 42%; GAAP EPS in the range of $3.26 to $3.34; non-GAAP EPS in the range of $4.96 to $5.04; operating cash flow in the range of $1.3 billion to $1.4 billion; and we expect to use approximately 50% of our free cash flow to repurchase Cadence shares.

For Q2, we expect: revenue in the range of $960 million to $980 million; GAAP operating margin in the range of 29% to 30%; non-GAAP operating margin in the range of 40% to 41%; GAAP EPS in the range of $0.73 to $0.77; non-GAAP EPS in the range of $1.15 to $1.19; and we expect to repurchase approximately $125 million worth of Cadence shares. 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 GAAP to Non-GAAP reconciliations. In conclusion, we had a good start to the year. With the increase in our outlook, at the midpoint, we now expect revenue growth for the year at approximately 14%. As always, I’d like to close by thanking our customers, partners and our employees for their continued support.

And with that, operator, we will now take questions.

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Q&A Session

Operator: Your first question comes from the line of Gary Mobley with Wells Fargo. Your line is now open.

Gary Mobley: Good afternoon, everybody. Thanks for taking my question. I wanted to ask about an observation that is your upfront revenue, your functional verification revenue and your China-related revenue were all very strong in the first quarter. So, I’m curious to know if all those were related and relate specifically to maybe some pull-forward of some customer deliveries or some customer orders, or was it more so a function of having the ability to turn the hardware verification business around a little bit quicker than expected?

John Wall: Yes, Gary, great question. And, yes, they’re all related. We were very pleased to be able to ramp up the production of our hardware because we had such strong demand for hardware solutions in the functional verification business. We successfully ramped that up in Q1 and the subsequent upfront revenue benefited functional verification, it benefited China. I think China is up to 17% of our revenue for Q1, that’s mainly hardware driven. And again, we wanted to reiterate the fact that last year we did — our recurring revenue mix was 85% of our total revenue, 15% upfront. We still expect that to be the case for this year. But in Q1, because of the increased hardware deliveries, the mix was 80% recurring and 20% upfront for the quarter. We wouldn’t expect that to repeat for the rest of the year.

Gary Mobley: Okay. And related to that, John, if I’m not mistaken two-and-a-half months ago, when you gave the initial fiscal year ’23 revenue guide, you were expecting maybe the hardware-related business to tail off into the second half of the year. Is that still the expectation? Or are you still running near record backlog for that hardware verification business? And that’s it from me. Thank you.

John Wall: Great question again, Gary. Yeah, we were very pleased with hardware bookings again in Q1. We didn’t take up the second half of the year. I want to wait until the summer to have a look at the pipelines, because hardware is very much a pipeline business. However, we did take up the year by $20 million, and part of that is the beat in Q1, which was some hardware. But the rest of that was strength on the software side, probably predominantly in the system design analysis space. And we raised that for the year, and that’s kind of recurring throughout the year. But we haven’t taken up second half of the year for hardware. I’d like to wait until the middle of the year for that. We still expect — I mean, we expect all the businesses to grow strongly this year.

Gary Mobley: Thank you.

Operator: Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Your line is now open.