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    Cadence Design Systems Inc (CDNS)

    Q4 2023 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$235.44October 1, 2023
    Final Price$272.37December 31, 2023
    Price Change$36.93
    % Change+15.69%

    What went well

    • Consistent Revenue Growth with 15%+ CAGR, demonstrating strong demand for Cadence's solutions and market share gains. John Wall stated, "we tend to look over a 3-year CAGR... and if you look at... our 3-year CAGR has been accelerating... at the midpoint of the guide for '24, the 3-year CAGR is about 15.3%."
    • Leadership in AI and System Design & Analysis (SDA) Innovations, with new products like Millennium and Cerebrus gaining significant traction, addressing the AI super cycle and hardware acceleration in system simulation and CFD, positioning Cadence for future growth. Anirudh Devgan mentioned, "I think this is the biggest innovation in CFD in the last 30 years."
    • Strong Broad-Based Demand across Geographies and Product Segments, with normalized hardware lead times and great confidence in customer plans, suggesting healthy and diversified demand. John Wall noted, "it's broad-based across geographies and broad-based across all of the businesses."

    What went wrong

    • Projected deceleration in sales growth, guiding for 12% revenue growth in 2024, down from 15% in 2023 and 19% in 2022, indicating a potential slowdown in growth rate.
    • Lower margins expected in Q1 2024 due to increased expenses, including about 1,000 extra hires and front-loaded acquisition costs, leading to lower margins in Q1 compared to the rest of the year.
    • Expected decrease in revenue from China, with contributions anticipated to drop from 17% in 2023 to 14%-15% in 2024, potentially impacting overall revenue growth.

    Q&A Summary

    1. Sales Growth Outlook
      Q: Why is sales growth decelerating despite AI tailwinds?
      A: Anirudh explained that while overall sales growth guidance is 12% for 2024 compared to 15% last year, they view growth over a 3-year CAGR basis, which remains strong at over 15%. The deceleration is due to tough comparisons and their ratable business model, where AI contributions take time to manifest in revenue. They expect continued momentum as AI adoption grows.

    2. IP Business Growth
      Q: Why was IP growth modest, and what's the outlook?
      A: The IP business had single-digit growth due to tough comparisons and macro uncertainties, but saw over 30% growth in Q4. Anirudh anticipates IP growth to be higher than Cadence's average in 2024, driven by the AI super cycle and an expanded portfolio.

    3. Hardware Revenue and Backlog
      Q: How did hardware backlog and revenue shape outlook?
      A: Last year, hardware lead times were over 6 months, leading to a large backlog. Now, lead times are normalized to about 8 weeks, so 2024 hardware revenue will rely more on production capacity than backlog. They expect another record hardware revenue year, with production increasing each quarter to meet demand.

    4. China Revenue Expectations
      Q: What's the assumption for China revenue in 2024?
      A: China contributed 17% of revenue in 2023 due to strong hardware backlog, but they expect it to be flat or slightly down to 14-15% in 2024, reflecting normalized hardware lead times and derisking the guide.

    5. Incremental Margins Outlook
      Q: Why are incremental EBIT margins below 50%?
      A: Incremental margins start lower than 50% and build over the year. Last year's margins were slightly lower due to acquisitions, which can be dilutive initially. For 2024, investments and front-loaded expenses contribute to lower margins in Q1, but margins are expected to improve in subsequent quarters.

    6. AI Contribution to Revenue Growth
      Q: How is AI impacting revenue growth and outlook?
      A: AI is contributing through increased design activity and their AI-enabled products. Cerebrus business grew 4x, but as revenue is ratable, AI's impact will manifest over multiple years. They are in early stages of AI adoption, with significant potential ahead.

    7. Competition with Synopsys-ANSYS Merger
      Q: Any thoughts on the Synopsys and ANSYS merger's impact?
      A: Anirudh believes it won't change the competitive landscape. Cadence has been executing its strategy for six years, gaining market share in SD&A, and feels confident in their product differentiation and partnerships.

    8. Digital IC Design Revenue Sustainability
      Q: Is the strength in digital IC design revenue sustainable?
      A: Anirudh attributes the growth to the AI super cycle, with increased design activity at advanced nodes. Cerebrus is seeing strong adoption, pulling through other products like synthesis and signoff. He is confident this momentum will continue.

    9. Operating Cash Flow Expectations
      Q: What are the expectations for operating cash flow?
      A: Operating cash flow was slightly muted last year due to investments in inventory for hardware production. They plan similar investments in Q1 2024, which is included in the operating cash guide.

    10. Phasing of Revenue and Margins
      Q: How will revenue and margins phase in 2024 guidance?
      A: Revenue mix differs from last year; expecting 14% upfront revenue in Q1 and 17.5% for the year. Expenses are more front-loaded due to investments, leading to lower Q1 margins, but margins are expected to improve in later quarters.

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