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Cadence Design Systems, Inc. (CDNS) Q2 2023 Earnings Call Transcript

Cadence Design Systems, Inc. (CDNS)

Q2 2023 Earnings Conference Call

Company Participants

Richard Gu - Vice President of Investor Relations

Anirudh Devgan - President & Chief Executive Officer

John Wall - Senior Vice President and Chief Financial Officer

Conference Call Participants

Jason Celino - KeyBanc Capital Markets

Charles Shi - Needham & Company

Jay Vleeschhouwer - Griffin Securities

Ruben Roy - Stifel

Blair Abernethy - Rosenblatt Securities

Joe Vruwink - Robert W. Baird

Gary Mobley - Wells Fargo

Andrew DeGasperi - Berenberg Capital Markets

Harlan Sur - JPMorgan

Marco Conti - Deutsche Bank

Joshua Tilton - Wolfe Research

Presentation

Operator

Good afternoon. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Second 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. [Operator Instructions] 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 second 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, CFO commentary 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.

Cadence delivered excellent financial results for the second quarter of 2023 with strong ongoing customer demand for our innovative technology. We exceeded our guidance on all key metrics and are raising our financial outlook for the year yet again, resulting in 14% year-over-year revenue growth and 19% non-GAAP EPS growth. John will provide more details shortly on both our Q2 results and the updated outlook for the year.

With its unparalleled promise, Generative AI is beginning to make a significant impact globally. Our dedicated focus on AI over the past several years combined with our computational software expertise and invaluable data that lies at the core of AI it uniquely positions us to deliver to this tremendous potential of this transformational knowledge.

With escalating design complexity, increasing design starts and a growing talent shortage, AI-driven design automation is crucial in empowering customers to fully realize their innovation potential. Our customers are increasingly adopting our chip, package, board, system, Generative AI portfolio, as they're achieving exceptional quality of results and productivity benefits with these solutions. Customers are ramping up their R&D spend in AI-driven automation, opening up significant opportunities for Cadence.

Our solutions are enabling marquee AI infrastructure platform companies to deliver their next generation-compute, networking and memory products. For instance, in his Computex keynote earlier this quarter, Jensen Huang of Nvidia noted that Nvidia is a big Cadence customer and commented on the expanding strategic partnership between Nvidia and Cadence to accelerate EDA, system analysis, AI and digital biology.

Cadence has successfully collaborated with Tesla on the development of their game changing DOJO AI supercomputer. Tesla utilized a broad array of Cadence solutions across digital, custom analog, verification, 2.5D and 3D IC and system analysis for developing DOJO chips and solutions. We are very excited to extend our partnership to Tesla's next generation DOJO and FSD platforms. Our customers like Tesla are able to leverage the power of revolutionary Cadence Cerebrus Generative AI technology to optimize the quality of results of their groundbreaking AI chips and related solutions.

And from a products perspective, we began by providing AI-driven solutions for core ED applications, then expanded our AI portfolio to include system design and analysis and plan to extend it to life sciences in the future. With AI as they're underpinning, other generational trends such as hyperscale computing, 5G, and autonomous driving, continue to spur robust design activity across semi and system companies, creating ample market opportunities for our differentiated technology portfolio.

Now let's talk about our key highlights for Q2. In Q2, we deepened our long standing partnership with a marquee electronic system company through a broad ranging expansion of our core EDA, hardware, IP and systems portfolio. Ambulation and prototyping have become a must have part of the chip tape out and software bring-up flows and secular demand for our hardware platforms drove our verification business in Q2 to a 27% year-over-year revenue growth.

Following a record 2022 and Q1 ‘23 are Palladium Z2 and Protium X2 hardware platforms delivered a record Q2 as market demand accelerated for these best-in-class solutions. With 14 new customers and 45 repeat customers, more than half the orders during the quarter included both platforms. Demand for our hardware solutions was broad based with particular strength seen in AI, hyperscale computing, and automotive segments.

A global communication services leader successfully deployed the Z2 and X2 systems to significantly accelerate the development of their data center chips for internal use, including those designed for AI applications. Our hardware platform enable them to accelerate their verification workload and software bring-up, enabling first-pass silicon and software success. Verisium, our AI-driven verification platform that's built upon the ZI database and natively integrated with our verification engines is gaining traction at market shaping customers.

For instance, a large mobile chip company is working with us on developing a new Verisium regression optimization app and a Japanese semi customer is actively deploying Verisium apps across his automotive SoC and already saw a 4 times improvement in the identification of erroneous source code check-ins. Our digital IC business had another solid quarter with 15% year-over-year revenue growth largely driven by proliferation of our digital full flow, especially at the most advanced node at market shaping customers.

Our Cadence Cerebrus solution leverages breakthrough AI-driven technology to explore the entire design space and automatically optimize the digital full flow to deliver transformational results. Adoption and proliferation of Cadence Cerebrus accelerated. And with multiple new marquee wins, is now deployed at eight of our top 10 customers. A leading hyperscaler doubled their run rate through a major expansion that included our digital full flow and Cadence Cerebrus.

Another market shaping hyperscaler successfully used our digital full flow and Cadence Cerebrus to achieve a 16% leakage power reduction on their latest custom silicon. And [Indiscernible] achieved 2 times to 3 times better productivity with a new Joules RTL design studio. Through analysis, efficiency and significantly reduce iterations between RTL and implementation.

On IP, our scalable and profitable growth strategy continues benefiting from ongoing outsourcing trend, as well as the opportunities offered by expanding foundry ecosystem. Demand for our design IP was strong, led by our multiyear agreement with Samsung Foundry to expand the availability of our design IP portfolio for Samsung's advanced process technology. We signed a definitive agreement with Rambus to acquire their five IT asset along with the talented team. The addition of their leading HBM GDDR5 solutions, and SerDes IP enhances our established IP portfolio, providing complete subsystem solutions for demanding networking, hyperscaler, and AI application.

Our system design and analysis business continued its strong momentum in Q2, delivering 23% year-over-year revenue growth. With Moore's Law slowing down, and chip complexity and cost increasing, companies are looking to multi-die, 3D IC, and chiplet-based architectures to achieve better performance and greater cost savings.

In Q2, we expanded our collaboration with Samsung Foundry through the delivery of reference flows and package design kits based on our uniquely differentiated integrity 3D IC platform. The industry is only unified platform that includes system planning, packaging, and system level analysis in a single cockpit. Our multi-physics solutions boosted by our optimality Generative AI technology, leverage differentiated system simulation and optimization techniques to deliver superior results.

Our CFD portfolio that includes recently acquired high fidelity simulation technology, one large renewal and add-on business with top Aerospace and Defense company. We were pleased with the new win and growing repeat orders for our multi-physics portfolio from customers across multiple end markets.

In summary, I'm pleased with our Q2 results and the continuing momentum of our business. AI-driven automation in chip and system design offers massive opportunities for Cadence over the long-term. That seamlessly align with our computational software, core competence, and intelligent system design strategy. We continue to invest in our world-class EDA system design and analysis and AI capabilities to deliver cutting edge innovation to our customers and partners.

Now I will turn it over to John to provide more details on the Q2 results and our updated 2023 outlook.

John Wall

Thanks, Anirudh, and good afternoon, everyone. I'm pleased to report that Cadence achieved strong results for the second quarter of 2023, driven by the broad-based strength of our business. Our customers are increasingly adopting our Generative AI portfolio as they are achieving exceptional quality results and productivity benefits with these solutions.

Here are some of the financial highlights from the second quarter, starting with the P &L. Total revenue was $977 million. GAAP operating margin was 30.7% and non-GAAP operating margin was 41.8%. GAAP EPS was $0.81 and non-GAAP EPS was $1.22.

Next, turning to the balance sheet and cash flow. Cash balance at quarter end was $874 million, while the principal value of debt outstanding was $650 million. Operating cash flow was $414 million and we used $325 million to repurchase Cadence shares in Q2. We are increasing our outlook for the remainder of the year, due to continued broad-based strength across our technology portfolio. Demand for our functional verification hardware solutions remain particularly strong and as a result, our updated outlook for the second-half of the year reflects approximately 15% revenue growth, compared to the second-half of last year.

Before I provide our updated outlook for the year and our expectations for Q3 I'd like to highlight that our outlook contains our usual assumption that the export control regulations that exist today remain substantially similar for the remainder of the year. Our updated outlook for fiscal 2023 is revenue in the range of $4.05 billion to $4.09 billion.

GAAP operating margin in the range of 30.2% to 31.2%. Non-GAAP operating margin in the range of 41.2% to 42.2%. GAAP EPS in the range of $3.35 to $3.41, non-GAAP EPS in the range of $5.5 to $5.11.

Operating cash flow in the range of $1.3 billion to $1.4 billion and we expect to use at least 50% of our annual free cash flow to repurchase Cadence shares. A large number of hardware systems are slated for delivery in late September and early October. For the purposes of providing our outlook for Q3, which ends on September 30th, we thought it was prudent to assume that the vast majority of those hardware deliveries fall into October and Q4.

With that in mind, for Q3, we expect revenue in the range of $990 million to $1.01 billion. GAAP operating margin of approximately 29%, non-GAAP operating margin of approximately 40%. GAAP EPS in the range of $0.76 to $0.80. Non-GAAP EPS in the range of $1.18 to $1.22. And we expect to use approximately $125 million of cash to repurchase Cadence shares. As usual, we published a CFO commentary document on our Investor Relations website, which includes our outlook for additional items, as well as further analysis in GAAP to non-GAAP reconciliations.

In conclusion, we delivered a strong Q2 and first-half of the year. With the increase in our outlook, at the midpoint, we now expect revenue growth for the year to exceed 14%, which would take our three-year revenue CAGR to approximately 15%. And non-GAAP EPS growth of approximately 19%, which would result in an average annual growth rate of 22% over the past three years.

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.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Jason Celino with KeyBanc Capital Markets....

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