The conference call operator welcomed everyone to the Cadence Second Quarter 2023 Earnings Conference Call, and then Richard Gu, Vice President of Investor Relations for Cadence, took over. He was joined by Anirudh Devgan, President and Chief Executive Officer, and John Wall, Senior Vice President and Chief Financial Officer. The call contained forward-looking statements and non-GAAP measures, and the Q&A session was limited to one question and one follow-up. Anirudh Devgan then thanked everyone for joining the call.

Cadence delivered strong financial results and exceeded their guidance, with 14% year-over-year revenue growth and 19% non-GAAP EPS growth. Their AI-driven design automation is enabling customers to realize their innovation potential and is opening up significant opportunities for Cadence. They are collaborating with companies such as Nvidia and Tesla to develop their next generation compute, networking, and memory products.

Cadence has extended its partnership with Tesla to leverage the power of their Cerebrus Generative AI technology. In Q2, they deepened their long standing partnership with a marquee electronic system company and saw a 27% year-over-year revenue growth due to an increased demand for their hardware platforms. The Z2 and X2 platforms had a record Q2 with 14 new customers and 45 repeat customers. The platforms were particularly popular in the AI, hyperscale computing, and automotive segments, with a global communication services leader successfully deploying the systems to accelerate the development of their data center chips.

Verisium, an AI-driven verification platform, is gaining traction with customers who are seeing improved identification of errors and increased productivity. The digital IC business had a solid quarter due to the proliferation of the digital full flow, especially at the most advanced node. Cadence Cerebrus is being adopted and used at eight of the top 10 customers, resulting in power reduction and better productivity. Lastly, IP is growing due to the outsourcing trend and the expanding foundry ecosystem.

In Q2, Cadence experienced strong demand for their design IP, leading to a multiyear agreement with Samsung Foundry and the acquisition of Rambus' five IT assets. They also saw growth in their system design and analysis business, and expanded their collaboration with Samsung Foundry. Additionally, their multi-physics solutions and AI-driven automation in chip and system design offer long-term opportunities for Cadence.

Cadence achieved strong results for the second quarter of 2023, with total revenue of $977 million, GAAP operating margin of 30.7%, non-GAAP operating margin of 41.8%, GAAP EPS of $0.81, and non-GAAP EPS of $1.22. Demand for their functional verification hardware solutions remain strong, and as a result, they are increasing their outlook for the second-half of the year with approximately 15% revenue growth compared to the second-half of last year. Their 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%, and non-GAAP operating margin in the range of 41.2% to 42.2%.

Cadence reported a strong second quarter and first half of the year, with revenue growth of 14% and non-GAAP EPS growth of 19%. For the third quarter, they expect revenue in the range of $990 million to $1.01 billion, GAAP EPS in the range of $0.76 to $0.80, and non-GAAP EPS in the range of $1.18 to $1.22. They also plan to use $125 million of cash to repurchase Cadence shares.

Anirudh Devgan and John Wall of a company spoke to investors about their record quarter, which saw a 27% increase in revenue. They are pleased with the performance and are continuing to work with customers and partners to deliver solutions. The operating cash is flat due to the company taking advantage of larger discounts for payment upfront, which will help with gross margins in future years. The IP acquisition from Rambus is included in the guidance, but is immaterial to the company for the year.

John Wall and Anirudh discussed the acquisition of Rambus and the IPs they acquired, such as HBM and GDDR. Wall also stated that bookings are expected to be higher in the second half of 2023 due to more contracts expiring. The backlog and RPO dropped from $5.4 billion and $5 billion at the end of Q1 to $5.3 billion and $4.9 billion, respectively, at the end of Q2.

John Wall explains that the company's current RPO is up from last quarter's $2.7 billion to $2.8 billion, which indicates an improvement in annual value. He confirms that Q1 was a low bookings quarter but that Q2 was stronger and that the bookings for the second half will be even better. Wall then reconciles the Q4 guidance of $1 billion in revenue with the expected strong bookings and additional hardware revenue, noting that the step-up from Q3 to Q4 is slightly exaggerated.

Anirudh Devgan explains that AI has multiple implications for the company, including enabling the development of AI systems and supplying tools and IP to all applications of AI. They are still in the beginning stages of monetization and build-out, and they are also applying AI to their own products.

JedAI has a comprehensive product portfolio for chip package system design, which they are using internally and providing to customers and partners. They are also laying the groundwork for applying AI to life sciences with OpenEye. In terms of revenue, the impact of AI is showing up quickly in the hardware space, but it will take a few contract cycles for it to flow through on the software side.

John Wall discussed the company's capital allocation policy, which includes using at least 50% of free cash flow to repurchase stock and offset dilution. He also noted that the company had used $325 million on stock repurchases in Q2, with $200 million of that being an accelerated share repurchase. Wall also mentioned that the company has discussed dividends with the Board, but prefers to use excess cash for stock repurchases.

Anirudh Devgan explains that semiconductor companies and systems customers are becoming increasingly alike, but there are still key differences that distinguish them. These include the need for hardware and software together in system companies, and the enablement of software for chip design, AI applications, and data companies. Additionally, there is a need for system design, analysis, thermal simulation, and electromagnetics for data centers and cars.

Anirudh Devgan discussed the importance of abstractions and parallelism in EDA productivity, which Cadence discussed at the DAC two weeks ago. He explained that EDA has moved up the abstraction layer from polygons to transistors, to gates, to RTL, and has also embraced parallelism with the use of cloud computing and CPUs. He concluded by noting the importance of both abstraction and parallelism in EDA productivity.

AI is becoming increasingly pervasive in the design of leading-edge products, with many of Anirudh Devgan's top 10 customers already using AI for SerDes and placement route. AI is being used to automate mundane tasks and improve productivity, as well as for floor planning, 3D-IC partitioning, and digital verification. Devgan believes that in a few years, all of his customers will be using AI tools.

EDA is investing heavily in Verisium to apply AI to verification, and Allegro X AI is being used to automate package and PCB design. Additionally, AI is being used to speed up system simulation, and can now be used to optimize the design of things like cars and wings. This is a huge opportunity, and is already showing promising results.

John Wall explains that the operating margin for the second half of the year is slightly lower than the first half due to the merit cycle, which includes pay increases and promotions for the majority of their engineers. He also notes that hardware systems scheduled to be delivered in late September may impact their Q3 guide.

Anirudh Devgan discussed the strong design activity and hardware business in China, mentioning mobile and EV automotive verticals in particular. John Wall then discussed the increased production capacity at the start of the year due to lead times exceeding 26 weeks.

The company has ramped up production capacity and is aiming to reduce lead times to 10-13 weeks, currently at 15 weeks. The Palladium Z2 and Protium X2 have been out for two years and the company is pleased with their performance, also improving the software and compile times on top of the systems. The team has had great support from customers and partners.

Cadence is proud of their 15% revenue growth rate and 19% EPS growth rate, and design activity and R&D intensity remain strong. They are tracking three-year CAGRs to measure their growth rate, which has been declining.

Anirudh Devgan states that the adoption curves for the new technologies they have introduced since last fall are similar to the adoption curve of Cerebrus. He specifically mentions Verisium, which is used for verification, as an example. He also notes that since customers have already seen the proof point with Cerebrus, it makes adoption of these new technologies easier.

Anirudh Devgan discussed the commercialization of the five different tools under the JedAI umbrella. These products are new and must be purchased either with a renewal or as an add-on. Different business models have been introduced and some of the tools have been deployed widely, such as with one hyperscaler.

Anirudh Devgan discussed the importance of IP in the company's five lines of business and their plans to make investments in all of them. He noted that the IP business had a great opportunity to get a right team and IP which was synergistic and useful for AI and 3D-IC. John Wall then noted that they were expecting more IP to be delivered in the second half compared to the first half.

John Wall expressed his confidence in the second half of the year's guidance, stating that all of the company's businesses are growing in the double digits. He also mentioned that reducing lead times on hardware, which would result in earlier deliveries, could help the company reach the higher end of the guidance range. He also noted that software revenue takes longer to play through due to its recurring revenue profile.

John Wall states that while the team does not guide bookings, it is reasonable to expect the backlog to increase in the second half of the year. The focus is on increasing the annual value of the backlog, such as taking a two-year software contract worth $12 million a year instead of a three-year contract worth $10 million a year. From Q1 to Q2, the backlog number dropped from 5.4 to 5.3, but the current RPO increased from $2.7 billion to $2.8 billion.

Harlan Sur asked Anirudh Devgan about the revenue contribution from advanced packaging and board design, simulation, and verification. Devgan responded that this growth is driven by 3D-IC and chiplet-based designs, which are being adopted by the leading foundries for high-performance computing and AI. This growth is reflected in their SD&A system design and analysis, thermal solutions, and electromagnetics solutions. Devgan believes this is still early innings and they will continue to see growth in their regular business.

Cadence is uniquely positioned to benefit from chiplet and 3D-IC technology due to their leading software for package design with Allegro and their thermal and system analysis tools. AI tools are being used in both horizontal and vertical components, with the horizontal component focusing on building out the AI infrastructure and the vertical component focusing on advanced node GPUs and system companies, such as Tesla.

This paragraph discusses the use of AI for various applications in the semiconductor industry, such as Dojo and self-driving cars, as well as customers who are building their own silicon for AI. It also talks about the five main product portfolios for AI, which can be applied across all nodes and have the potential to provide 10-15% PPA benefit. The paragraph concludes with a discussion about the renewal cycle for hardware, asking when customers are expected to come back and buy newer generations of Protium or Palladium.

Anirudh Devgan, John Wall, and John Marco Conti discussed the typical hardware purchase cycle, which is typically tied to the design size and not the new system introduction. They noted that hardware customers tend to buy new systems regularly due to strong demand and a secular trend of growth in emulation capacity. They concluded that the hardware business is less cyclical than it was a few years ago.

John Wall clarifies that the expectation for 15% growth in the second-half is comparing second-half versus second half or total revenue at Cadence. He then states that hardware demand has been strong for a couple of years and that Cadence has ramped up production capacity to address the lead times. Anirudh Devgan then adds that one trend driving full flow adoption is the move from 7nm to 5nm to 3nm to 2nm.

Cadence's Board of Directors thanked customers, partners, and investors for their trust and confidence in the company, as they have seen strong business momentum and growing opportunities in the semiconductor and systems industry. Cadence is continuing to deliver on their innovation road map, and are taking advantage of the trends of full flow, advanced nodes, and AI, which are accelerating the deployment of their products.

This summary was generated with AI and may contain some inaccuracies.