Cadence Design Systems Inc at Berenberg Design Software, Cybersecurity & DevOps Conference (Virtual) - Fireside Chat Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Anytime. And on that note, yes, I want to -- I got quite a few topics prepared for us today. And I think the first one is, which is the one that I'm very kind of passionate about. I'm being spoiled for choice sometimes when I look at my companies in coverage and really the amount of innovation and enablement of the next-generation development of the systems and electronics and everything that they do. And when I think about Cadence, I really put it at the forefront of that innovation. So for me, it doesn't get more complex. It doesn't get more cutting-edge than that, right? We cannot imagine anything. We cannot imagine a Zoom session today without Cadence. We cannot imagine our smartphones or the laptops without it, right? So this conference would not exist if you guys weren't part of the ecosystem in enabling it. So first thank you. And then secondly, there's a lot of trends that are helping you right now. It was interesting, I had a chat this morning with a couple of industry analysts, and one of those was from SimData as well. His observation was, he said, we just went through a pandemic, and it was interesting from his perspective that every company was affected in a negative way throughout that period of time, except for EDA companies, which just shows you how important it is and how much of a trend -- of a structural trend it is, I guess, as we go into this. So I'm going to stop rambling. I'm going to ask you some of the recent trends that you have mentioned that have supported your growth, have been the applications like artificial intelligence, the cloud computing, continued move to the cloud, 5G as well, we're starting to roll it out. Which of those drivers, maybe the ones I mentioned or the ones that I've missed out, are the ones that have kind of been the most incremental to your REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 11, 2021 / 6:00PM, CDNS.OQ - Cadence Design Systems Inc at Berenberg Design Software, Cybersecurity & DevOps Conference (Virtual) - Fireside Chat demand just in terms of mind share and maybe financially as well. And then how do you see those things play out over the next 3 to 5 years? Is it the same things? Or are we looking into some other areas as well?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Absolutely. And it seems like that. It sounds like that. And that also -- it's an industry that's fairly concentrated as well in terms of the mind share and being able to deliver those solutions, right? So it's kind of a sweet spot for investors, who like competitive advantage driven by R&D effectively, right, because that is unlikely to change anytime soon, I guess. So one thing that you touched on, and you said a few really important things that we're going to expand on a little bit. But one thing that maybe I'd like to start with is this constant -- I don't think it's a tug of war because it's a good thing. But the drive between the leading edge, the market-shaping customers that you referred to, who are more -- who are all about Moore's Law, right? Who are all about shrinking the chip, making it more powerful and more efficient. On the other side, you have the -- you mentioned systems companies, who are asking for different things. They are asking you for parts of IP that they can use in order to build the building blocks, but, again, with a special purpose in order to put it somewhere within their technology stack, let's say. Those 2 forces are interesting because on one side, it diversifies away a little bit of your exposure that you've had previously on the largest chip, leading-edge chip customers. But then at the same time, it also provides this long-lasting tail of growth. What have you been seeing over the last couple of years in terms of that balance between the core, let's call, core, the leading-edge customers, and then let's call the systems companies and maybe start-ups and smaller companies as the driver of that incremental demand? Which ones have been more powerful to you in terms of your performance? And where is your incremental maybe R&D spend going, which ones?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : That's really helpful. And that's probably a trend that kind of continues because there's -- it's just the power of these companies are still very, very large. But then at the same time, there's many of them, right?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Absolutely. And you mentioned -- so we also talked about some of the trends, and I want to make sure that I touch on that because you said autonomous vehicle is a good example of it. Vehicles, effectively are smartphones on wheels, on steroids as well, right? So smartphone cycle was a good cycle for you as a company. Your growth definitely corresponded to that, and it was a nice thing. But if we say that automotive becomes the next smartphone move over the next decade or so, that alone is one of the lasting drivers that kind of sustain, right? It's not just about the hyperscalers, even though like you said...

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : No, everyone has developed in their efforts, that's what I was saying.

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : One question I had is, when we think about that split between the systems and the leading-edge companies. When -- leading edge, when you're developing a new node, the whole set of tools effectively adjusted because they are not 100% out of the box. So you continue to innovate alongside with your customers, right? Because of that, historically, when most of the exposure was to the leading-edge companies, the margins kind of reflected that as well at the same time. On the other side, I wonder whether now that you see increased lasting demand to the systems. The interesting thing there would be that perhaps the R&D is more upfront, and then it's a lot more scalable in terms of the technology. Because like you said, there's many, many more customers that can utilize the same technology that you have developed. Is that the right way to think about it?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Yes. It definitely seems like a natural development, and it's almost like -- it's -- if the initial work was the hardest work, the incremental R&D dollar returns on much better scale, better yield than what historically has done.

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : That makes sense. The other topic I wanted to focus on is kind of a continuation of what we just talked about is just specialty systems companies are way more open to using some IP building blocks, the technology that you have developed in sometimes in cooperation with them and then resell to many other customers in the space. You entered the market, you've been extremely successful. It continues to outgrow the overall EDA segment as well. Even though as we talked, EDA is a healthy growth business today. How penetrated is the IP market today? And what I mean by REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 11, 2021 / 6:00PM, CDNS.OQ - Cadence Design Systems Inc at Berenberg Design Software, Cybersecurity & DevOps Conference (Virtual) - Fireside Chat that is people always develop their own tools, they always develop their own solutions. But at the same time, they will have a trade-off between developing and reusing something that perhaps is not their competitive advantage. So do you think there's a lot more room for IP to continue to outgrow that EDA part by a few percentage points per year?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : I think that's an important point because some people might say, oh, if it's an IP, if it's a building block, why doesn't someone else come and just do it, commoditize it, do it cheaper or something. But the point is, it's still very, very -- the moat is still there. It's still very differentiated and complex. It's just -- it's not a driver of differentiation for that customer itself because they want to focus their limited resources on differentiating in other areas. Is that fair?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Okay. Awesome. Why -- so I guess answers that -- well, in part answers my last question on the IP side, which is why do customers decide to outsource part of R&D? At what stage are they at the risk of basically losing that competitive edge, competitive advantage versus doing it in-house? How much can they outsource in order to still have that competitive advantage?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Awesome. And what you alluded to is that IP does not come just on the digital side, it comes from both the digital and the analog side as well, right? So -- and your business is today very well mixed in terms of both in terms of the exposure, right? Okay. So shifting a little bit into the other area, which is something that we and some of our investors would be very familiar with. Cadence specifically has been investing over the last couple of years a lot more into that systems area, especially from the physics perspective. You've been effectively doing simulation, but let's call it full flow, right, digital flow from design to verification on the chip level for a very long period of time. And you can only do that virtually. Now you're looking into the area of the system engineering, where a lot of the physical properties are still being tested in real life with mechanics, right? They're still labs that don't exist in electric design. So my question there is, do you see the convergence of that EDA approach more into the -- through simulation into the mechanical space as well? And is that the reason why you've taken steps recently for -- first for verification of the EDA tools, specifically for your solvers that you introduced, I think it was 1.5 years ago when you first introduced the portfolio there? And now even with the recent acquisition of NUMECA, which puts you more into other types of physics, which is computation of fluid dynamics. Is that because you see that conversion happening?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : That makes sense. I mean we do have data points that kind of prove that as well. And I guess my observation to that would be that because there's still a lot of replacement of physical testing going on, the market can gradually grow into itself much more than if it were just a completely penetrated market today to start with. So I guess you also shared that view that we're just in the first stage of that simulation.

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : You didn't buy it because you want to be in $6 billion market. Right. You didn't want to be in $6 billion market. You obviously believe that the market goes from $6 billion to something else. Is that the point?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Nimish, your focus on go-to-market as well, obviously, based on your title. And my question there is how does NUMECA and having Clarity and Celsius and how does that augment your go-to-market approach from what you were doing previously, where I guess it already changed when you were going more into the systems companies to start with. You didn't have to -- I don't think Intel needs an introduction into who Cadence is and what they do and the same with AMD and all that stuff. But when you go into the Teslas of the world, the Volkswagens of the world, it's a little bit different. It's a different discussion, right? So my question there again is how are you adjusting to that life in making sure that you're addressing those opportunities?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Yes. And so you said you're addressing about almost half of the market. CFD is a huge area, obviously, of the whole CAE market. Are you -- what's the plan? Are you stopping there? Do you think those are the key applications, you think about other types of physics over time as well? What's the end game for Cadence?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Got you. Nimish, one of the -- when we talk about the market, obviously, one of the markets that's been very, very hard for you, even though we've had trade restrictions in place, has been China. I can't even imagine what it would have been if you didn't have restrictions of selling to particular customers. But this historically has been high single-digit revenue contributor to your business. Now it's high-teens, kind of becoming mid- to high-teens, let's call it, mid-teens for the full year last year. I guess my question there is as China continues to develop their own semi strategy and the know-how, is this a new normal? Is this a new normal where China should be spending a fraction of U.S., where the U.S. is spending? However, it shouldn't be 1/10 of what U.S. is spending, it should be probably a little bit more and as such, it's just a normal development of the market maturity? Or is there anything specific to that?

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : That makes sense. Yes, it's interesting what you mentioned then. Is there an argument when you see trend? Because that's been happening as well in the other areas, not just in China, specifically. But what we've seen is when you see strength in upfront, especially the hardware purchases, software tends to follow on the back of it, right? It's almost like it's a platform to do more design starts in the future as well. So whilst I completely understand it because it's upfront revenue, it's a little bit more volatile, it's a bit more lumpy. But it does reiterate that someone is investing CapEx REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 11, 2021 / 6:00PM, CDNS.OQ - Cadence Design Systems Inc at Berenberg Design Software, Cybersecurity & DevOps Conference (Virtual) - Fireside Chat in order to do more ongoing development going forward, right? So from that perspective, it should be a proof point of the design activity is there to stay.

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Got you. Awesome. We're pretty much coming to the end of our time. So I'm going to squeeze one last question in, and I'm going to try to be very specific. And it's one thing that we've talked a lot about throughout the day today, even within the Cadence simulation and mechanical simulation about the adoption of cloud. And the general feedback has been that customers today when you almost are segmented to start-ups, they don't want to have the upfront purchases of hardware that are necessary in order to do some of that. So they utilize more of a cloud technologies, cloud-based workflows as well earlier on. But the other side, we're hearing that to high end, you would call them leading edge, but some other companies have exposure to, let's say, large OEMs or whatever, they tend to not utilize as much cloud unless the -- it's a one-off demand for kind of burst capacity. Is that the same driver in the EDA market as well? Because you have had a very, very clear, I'd call it, a cloud strategy, if your products are cloud ready, but it almost feels like that the market will be cloud ready as they grow up into the market because a lot of them still have their own infrastructure that they run stuff on.

Question: Gal Munda - Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst : Yes, nice to see another driver. Perfect. Thank you so much, Nimish. We're out of time, unfortunately. But again, I appreciate your time as always. I'm a looking forward then to the next debate. Cheers. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 11, 2021 / 6:00PM, CDNS.OQ - Cadence Design Systems Inc at Berenberg Design Software, Cybersecurity & DevOps Conference (Virtual) - Fireside Chat