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    Cadence Design Systems Inc (CDNS)

    Q1 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$269.16January 1, 2024
    Final Price$312.13April 1, 2024
    Price Change$42.97
    % Change+15.96%

    What went well

    • Strong Demand for New Hardware Products: Cadence is experiencing significant demand for their new hardware verification systems, Palladium Z3 and Protium X3, which are now available and will ramp in Q3 and Q4. The company expects strong revenue growth in the second half of 2024 and is preparing for scale, anticipating that these systems will contribute to growth not just this year but in the following years. , ,
    • Accelerating Design Activity among AI and Hyperscaler Customers: There is an increasing design activity in AI accelerators from both semiconductor companies and hyperscalers, such as NVIDIA, Google, Microsoft, Amazon, and Meta. Cadence is involved with all major players and expects their business with system companies developing their own silicon to grow faster than the company average.
    • Strong Momentum in IP Business Driven by AI Applications and Partnerships: Cadence's IP business had a strong bookings quarter in Q1, is on track for a very strong growth year in 2024, and is preparing to scale for deliveries in the second half. This growth is driven by high demand for AI-related IP, such as HBM technology, and is bolstered by new partnerships, including with Intel Foundry Services. , ,

    What went wrong

    • Potential impact of geopolitical risks and export controls on China revenues: The company expects China revenue to be flat to down in 2024 due to tough comparisons from a strong prior year and is attempting to derisk China exposure amidst geopolitical uncertainties and export controls. ,
    • Lower recurring revenue growth expectations: The company forecasts recurring revenue growth of above 10%, compared to approximately 13% in previous years, partly due to customers adopting AI tools not purchasing add-ons as frequently. ,
    • Uncertainty around hardware revenue due to product transition: The transition to new hardware systems (Z3 and X3) may cause customers to delay purchases, potentially impacting hardware revenue in Q2 and requiring another quarter to assess demand. ,

    Q&A Summary

    1. Revenue Outlook and Upfront Revenue Shift
      Q: How is the revenue outlook affected by delivery schedules and upfront product revenue?
      A: Management expects upfront revenue to be 15-20% of total revenue this year, consistent with previous expectations. However, revenue will be more second-half weighted due to shifts in hardware revenue and the launch of new systems. Upfront revenue is projected to be around $250 million in the first half and $550 million in the second half, compared to $350 million and $300 million respectively last year. This shift is driven by substantial backlog in IP and the expected strong demand for new hardware systems.

    2. Impact of AI on Business Growth
      Q: How is AI affecting customer engagement and business growth?
      A: AI has a profound impact on the business in three main areas: building AI infrastructure, applying AI to products, and opening new markets. Applying AI to Cadence's own products has led to significant improvements, with customers like MediaTek achieving 6% power improvement and others getting 8-10% power improvement. The AI run rate on a trailing 12-month basis is up 3x. This is leading to increased deployment of the AI portfolio and accelerated adoption among customers.

    3. China Revenue Trends and Geopolitical Risks
      Q: How did China revenue perform, and are export controls impacting business?
      A: China revenue in Q1 decreased to 12% of total revenue, down from 20% in Q1 last year, primarily due to lower upfront revenue and hardware deliveries. Management expects China revenue to be flat to down this year, factoring in tough comparisons and geopolitical risks. Despite this, design activity in China remains strong , and the company anticipates the China percentage to increase with more upfront revenue in the second half.

    4. New Hardware Products Demand and Revenue Impact
      Q: What is the demand outlook for the new Z3 and X3 hardware systems?
      A: The new systems offer a significant leap in capacity and performance, with Z3 providing 4x to 5x more capacity than Z2. Demand is expected to be strong, driven by the need to design larger AI chips and systems. The transition to new systems may impact quarter-to-quarter results but is beneficial in the long run. Hardware revenue is expected to be second-half weighted, with ramp-up in Q3 and Q4.

    5. IP Business Growth and Second-Half Contributions
      Q: How is the IP business performing, and what are expectations for the year?
      A: IP bookings were ahead of expectations in Q1, setting the stage for a very strong growth year in 2024. Timing of revenue recognition depends on deliveries, which are scheduled for the second half. The acquisition of Rambus IP assets and partnership with Intel Foundry Services are contributing to growth, with notable demand for HBM technology critical for AI.

    6. M&A Strategy and BETA CAE Acquisition
      Q: What is the company's approach to M&A, and how does the BETA CAE acquisition fit?
      A: The company remains focused on its core business of EDA and IP, with a primary focus on organic development. They engage in opportunistic, tuck-in acquisitions that add to the portfolio, such as the acquisition of Rambus IP assets for HBM technology. The acquisition of BETA CAE, a leader in structural simulation for automotive and aerospace, is aligned with this strategy and will be integrated over time.

    7. Recurring Revenue Growth Expectations
      Q: What are the expectations for recurring revenue growth going forward?
      A: Recurring revenue is guided to grow at about 10% this year, compared to past growth rates of around 13%. The company is focusing on proliferating AI tools into accounts and may not expect significant add-ons to increase this growth further. However, any additional uptake could provide upside to the guidance.

    8. Margin Expectations and M&A Impact
      Q: How is the greater mix of hardware and M&A affecting incremental EBIT margins?
      A: The company aims for over 50% incremental margins and has achieved this for seven consecutive years. This year, incremental margins are expected to be in the high 40% range, around 47%, partly due to the short-term dilutive effects of M&A transactions like the BETA CAE acquisition. Management is striving to achieve the 50% incremental margin target despite these challenges.

    9. Bookings Trends and Second-Half Expectations
      Q: What are the bookings trends for the balance of the year?
      A: Management expects bookings to be weighted 40% in the first half and 60% in the second half of the year. Q2 is anticipated to be the lightest quarter for software renewals. Demand for new hardware systems like Z3 and X3 will contribute to bookings, but the extent will be clearer after another quarter.

    10. Partnership with Arm and Market Expansion
      Q: How is the partnership with Arm contributing to business growth?
      A: The company has a strong and growing partnership with Arm, collaborating on projects like Total Compute and supporting Arm's expansion into HPC server and automotive markets. This partnership requires more collaboration in back-end digital flow and verification, leading to increased business opportunities.

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