Cadence Design Systems Inc Q3 2024 Earnings Call Transcript

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

Question: Joe Vruwink - Robert W. Baird - Analyst : Great. Hi, everyone. I appreciate the nature of your relationships with customers means you typically know well in advance what product road maps might be, you're typically not learning new information off of public calls. But just given the number of headlines off late around advanced foundry efforts or maybe demand from China, I wanted to ask, have you learned anything over the past three months or so that you would point out as maybe being something worth considering either good or bad as investors think about the 2025 opportunity for Cadence?

Question: Joe Vruwink - Robert W. Baird - Analyst : Okay. And then, John, you don't normally give backlog guidance, but you did comment on bookings pipeline and 4Q and that stands out. Are you maybe able to go into a bit more color on what you might expect or what you would be looking for as kind of the forerunners to your 2025 performance? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 28, 2024 / 9:00PM, CDNS.OQ - Q3 2024 Cadence Design Systems Inc Earnings Call

Question: Joe Vruwink - Robert W. Baird - Analyst : Great. Thank you very much.

Question: Jason Celino - KeyBanc Capital Markets - Analyst : Hey, thanks for taking my questions, maybe just following up on Joe's backlog question. So understand that the pipeline looks quite large. Is it fair to say that the composition of that pipeline is mostly being hardware driven? I guess curious what you're seeing from a new order pipeline perspective on kind of the Z3, X3.

Question: Jason Celino - KeyBanc Capital Markets - Analyst : Okay. Perfect. And then just one really quick one on China. I think last quarter, I think you were trying to derisk some of your assumptions. Obviously, this quarter, there were some incremental worries that the region might be taking another leg down. But obviously, Cadence and EDA see very different purchasing habits and demand drivers from semi cap and some of the smaller point solution providers. But do you still expect to see 13% of your revenues come from China this year? I guess what else can you tell us about the overall demand environment there?

Question: Jason Celino - KeyBanc Capital Markets - Analyst : Okay, thank you very.

Question: Gianmarco Conti - Deutsche Bank - Analyst : Yeah. Hi. Thank you very much for taking my questions and congrats again for a great quarter. Maybe perhaps if you could touch a little bit on the Cadence.AI suites if you're seeing incremental appetite there. And is it going to be material for 2025 growth? If you could give us any data points or qualitative anecdotes that will be amazing. Thank you.

Question: Gianmarco Conti - Deutsche Bank - Analyst : Amazing. If I could just ask a quick follow-up. Is it fair to say that in Q4, we should see the air pocket of hardware kind of closing out? And if you could share sort of any commentary around 2025 visibility, particularly from your overordering of the FPGAs and the raw materials. I'm just kind of curious how does that translate into backlog? I know you think you don't specifically guide on backlog, but obviously, backlog was a little bit down sequentially. And so any commentary there, that will be amazing. Thank you.

Question: Gianmarco Conti - Deutsche Bank - Analyst : Okay. Thank you very much.

Question: Lee Simpson - Morgan Stanley - Analyst : Great, good evening everyone. So a couple of quick ones from me actually. Just looking at the Millennium platform, following on from the last question there, could you maybe characterize what is the interest beyond NVIDIA. When, who and how big do we think the demand will be for that platform? And maybe as a follow-on question, I'm just interested on the timing of the impact from new collaboration with ARM on CSS. Does that have any specific vertical to it? Is that autos? Or is it maybe the aerospace stuff that you were talking about there? Thanks.

Question: Lee Simpson - Morgan Stanley - Analyst : That's great. Thanks so much.

Question: Charles Shi - Needham & Company, LLC - Analyst : Hi, good afternoon. I want to ask another question about the Intel and Samsung. But from another perspective, I mean, despite all the headlines, which were not so positive, we know that those two customers will wear your market share historically has been a little bit underrepresented, but largely because they are still using the internal EDA tools. So I mean, given all the challenges, those two customers seems to be facing, although it doesn't sound like you're seeing any immediate changes. Is it possible that it can be a net positive for you guys? And if there is more dependence of those two customers on the commercial EDA tools, meaning more of the EDA development work being outsourced to the merchant EDA companies like Cadence I want to get some thoughts and what could be, let's say, an inflection point for that to happen if it happens? Thanks.

Question: Charles Shi - Needham & Company, LLC - Analyst : Got it. Thanks. Maybe the other question I want to ask is hopefully, you can clarify because it has been the news that Cadence maybe acquiring Altera or maybe looking to acquire Altera Engineering Systems, and if you provide some comments here.

Question: Charles Shi - Needham & Company, LLC - Analyst : Thanks so much Anirudh.

Question: Jay Vleeschhouwer - Griffin Securities - Analyst : Thank you. Good evening. Anirudh, you may recall that on the conference call a quarter ago, you spoke about various AI ML use cases that you're beginning to see -- and then separately, we also talked about how you might, over time, change your product packaging for different use cases or end markets. Maybe we can bring those two things together. And the question is do you see a likelihood of -- for AI ML applications, more and more vertical domain-specific packaging. I know you've got the branded apps right now. you're obviously selling into different verticals. But would you foresee taking any of those technologies and making them specifically packaged to specific end markets? And also before I get to my follow-up, could you also talk a little bit about your AI ML development road map. You've had customers speak at Cadence live about what they're looking for from you in that respect? And maybe you could talk about improvements you're going to be making in things like capacity, memory footprint, scenario proliferation, and so on and so forth. Then I'll ask my follow-up.

Question: Jay Vleeschhouwer - Griffin Securities - Analyst : Okay. Sorry about that. So, you noted the strength in SD&A generally including some upside for the first full quarter with BETA CAE. But from a larger perspective, the fact is since you did your first acquisition for the ISD strategy, you've done seven or eight acquisitions over $2.1 billion of cumulative value. But you're still very much the challenger in that market with a fraction of market share relative to the market leaders. So maybe you could talk about how you're thinking about more tightly coupling across the various applications you have in CFD and SD&A and talk about how you're thinking about ramping up in go-to-market, especially, which is also something that I think you need to do to supplement what you've done on the code acquisition side?

Question: Jay Vleeschhouwer - Griffin Securities - Analyst : Great. Thanks very much.

Question: Vivek Arya - Bank of America Securities - Analyst : Thanks for taking my question. So Anirudh, despite all the secular drivers, the stock has underperformed this year because of revenue lumpiness and we have seen the core EDA growth slip below 10%. And I know you're not guiding to '25, but do you think investors should be prepared for a smoother year? Or are there other lumpy effects in IT or hardware or anything else that we should keep in mind. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 28, 2024 / 9:00PM, CDNS.OQ - Q3 2024 Cadence Design Systems Inc Earnings Call And if I had to try to quantify it, if I look at this $1.3 billion kind of exiting run rate from Q4, is this sort of the trend line for next year? Just how would you suggest investors get a handle for 2025 because I think this lumpiness has really impacted the stock this year.

Question: Vivek Arya - Bank of America Securities - Analyst : Okay. And for my follow-up, I saw in the CFO commentary that you have something now called core EDA, You've always given the different segment sales, but if I'm not mistaken, you took SDA out and you have something called core EDA, I'm curious why you chose to do that? And do you have system design and analysis kind of growth CAGR in mind beyond just a generic kind of double digit. What is the organic growth rate that you think your SDA business can achieve over the next number of years?

Question: Vivek Arya - Bank of America Securities - Analyst : Thank you.

Question: Clarke Jeffries - Piper Sandler. - Analyst : Hello, thank you for taking the question. I wanted to more focus on fiscal '24 with my questioning around specifically what happened in the quarter versus the full year guide? I mean, there was great momentum in the IP business, 59% growth. I was wondering what -- if you could level set what you're expecting in terms of Q4 IP contribution? I know last quarter, we talked a lot about IP and systems leading upfront revenue in the second half and verification maybe being in the high single digits. Is that still fair or true? Just to the broader question of tightened the full year range, but a beat on Q3, what was happening behind the scenes that revenue landed differently than expected? And then one follow-up.

Question: Clarke Jeffries - Piper Sandler. - Analyst : Perfect. And just to clarify or follow-up on that. Just -- I think the number one question we're going to get from investors are there going to be remaining execution thresholds with some of the IP business you had anticipated in the second half. Does more of that come in Q4? Or did some of it land in Q3? And then just final point around margin outperformance. How would you attribute the margin outperformance that happened in the quarter, certainly, IP revenue may benefit the sort of optics of incremental margin, but anything to call out in terms of maybe how OpEx discipline came in compared to your expectations? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 28, 2024 / 9:00PM, CDNS.OQ - Q3 2024 Cadence Design Systems Inc Earnings Call

Question: Clarke Jeffries - Piper Sandler. - Analyst : Thank you very much.

Question: Harlan Sur - JP Morgan - Analyst : Good afternoon. Thanks for taking my question. Your inventories are up 70% sequentially, that's an all-time high. I think it's implying a very strong demand profile and backlog for your new Z3 and X3 hardware systems. Is demand exceeding your near-term supply and manufacturing capabilities? In other words, is the Q4 shipment profile for your hardware system supply or manufacturing constraint? I'm just trying to get a sense on how many quarters, the strong upgrade cycle can extend into next year?

Question: Harlan Sur - JP Morgan - Analyst : Perfect. Okay. Thank you for that. And then back to the China business. So as you think about 2025 and anniversary in a more normalized business environment for your China business this year. There's a lot of puts and takes where you've got the hardware upgrade cycle, you've got the potential direct or indirect headwinds from maybe more US regulatory actions. You've got the macro environment, which in extreme cases, maybe does impact your design activity. So kind of a lot of moving pieces, right, but I think that the best leading indicator over the next few quarters on growth is design starts and planned design starts, right? So Anirudh you track design starts in China you track some of the upcoming programs. How does the design activity funnel look? Is it increasing? Is it staying flat? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 28, 2024 / 9:00PM, CDNS.OQ - Q3 2024 Cadence Design Systems Inc Earnings Call And then when you overlay your hardware upgrade cycle on top of this, what's the early sort of qualitative view on China as you look into next

Question: Harlan Sur - JP Morgan - Analyst : No, I appreciate that. Thank you for the insight.

Question: Ruben Roy - Stifel Financial Corp - Analyst : Thank you. John, I wanted to ask a quick question, returning to the bookings pipeline and the strength there, great to hear that. But I know you said it was broad-based. Just wondering if we could drill into the hardware part of it, just a little bit more. I think historically, you've said that hardware visibility is a little limited relative to the rest of your business. I'm just wondering given that you have this new ramp, has that changed at all? Is your visibility on kind of hardware bookings extending at this point? Or is it kind of similar to the previous systems?

Question: Ruben Roy - Stifel Financial Corp - Analyst : Understood. Thanks John and then a quick one, I hope for Anirudh. Just kind of thinking through what you said on some of the new AI kind of areas that you're working on, you mentioned NVIDIA and NIM NeMo and I think your competitors talked a little bit about that. I imagine you would characterize that as a later phase AI revenue opportunity, but just wondering if you could maybe talk through how we should think about timing of when we might see some of those types of products at the market. And Also, you said that you're building custom applications. Are you getting inbound requests from customers like hyperscalers or otherwise for that type of AI feature set?

Question: Ruben Roy - Stifel Financial Corp - Analyst : Thank you.

Question: Siti Panigrahi - Mizuho Securities - Analyst : Thanks for squeezing me in. And Anirudh, it's good to be on the call, it just initiated coverage. So I want to keep it at a high level and really just for the interest of time, one question here. When I look at your three years revenue CAGR trend, it has been accelerating from single digit to now mid-teens. And Anirudh, you talked about so many growth drivers and even products, new products coming to market. I'm wondering how would you rank order this growth opportunity and product when you think about the growth in the foreseeable future? And what gives you that confidence to sustain this kind of double-digit revenue growth?

Question: Siti Panigrahi - Mizuho Securities - Analyst : Great. Thank you.

Question: Joshua Tilton - Wolfe Research. - Analyst : Hey guys, thanks for thanks for squeezing mine in. I want to start with a bit of a nuanced question, although I think it is important. John, you talked to how previously you have seen down years in China, but you've never seen two down years in a row. And I guess you mentioned your data driven, you looked at the historical numbers. But can you give us any sense of what helps to drive the recovery a year after you had a down year? And what I'm trying to get at is, do I have to believe in some type of bigger hardware demand or more upfront contribution or something along the lines of things that may not be recurring? Or is it just more a function of we had a weak year and there was a return to normal demand environment going forward? I guess, I'm just trying to understand outside of history, what is similar this year versus the previous years where you've seen down years and why you don't expect to once again not see two down years and up.

Question: Joshua Tilton - Wolfe Research. - Analyst : Super helpful. And then just maybe one very quick follow-up. Any updates on what you guys are -- or just in general, what the contribution from BETA was in the quarter and if you're still on track or expecting $40 million for the full year or if we should expect more from your original?

Question: Joshua Tilton - Wolfe Research. - Analyst : Got it. Super helpful guys. Thank you so much for choosing me.