The conference call is being led by Brianna, the operator, who introduces Richard Gu, Vice President of Investor Relations for Cadence. Richard welcomes everyone and introduces the speakers for the call, Anirudh Devgan, President and CEO, and John Wall, Senior Vice President and CFO. The webcast and prepared remarks are available on the company's website and the discussion may contain forward-looking statements. Non-GAAP measures will also be presented and there is a limit of one question and one follow-up during the Q&A session. Anirudh thanks everyone for joining the call.

In the second paragraph, the speaker expresses satisfaction with Cadence's performance in Q4 and throughout 2023, citing significant revenue growth, operating margin, and EPS growth. They also mention a record backlog and attribute the success to customers' commitment to their integrated design and analysis platforms. The company's focus on digital transformation, hyperscale computing, and autonomous driving, as well as their Intelligent System Design strategy, has led to strong design activity. They also highlight the launch of their Millennium M1 platform and partnerships with major companies in the AI industry.

NVIDIA and Cadence have expanded their partnership in Q4 to include hardware solutions and EDA software, with a focus on AI and custom SoCs. Cadence has also introduced new AI offerings for chip and PCB designs, as well as LLM capabilities for chip design. The increased adoption of GenAI solutions has led to a tenfold increase in customers in 2023. The growing complexity of systems is driving the need for a seamless platform solution across design, packaging, simulation, and analysis.

Cadence has made intelligent system design a core part of their growth strategy and has seen significant growth in their System Design and Analysis business. Their expertise in PCB and advanced packaging technology has been a key differentiator, especially in the emerging chiplet era. They have also launched new AI-driven solutions, such as Allegro X AI and Celsius Studio, which have been endorsed by major companies like Samsung and BAE Systems. Their digital IC business also saw strong growth, with their solutions being adopted by top semiconductor companies.

The company is pleased with the success of their Cadence Cerebrus GenAI solution, which has been deployed in top digital customers and used in over 300 tapeouts. Their Integrity 3D-IC platform has also been successful, with GUC using it for a complex 3D stacked die design. The Functional Verification business had a remarkable year, with 11% revenue growth in Q4 and 22% for the full year. The demand for their solutions has been driven by system and software challenges and the need for first-pass silicon success. Their Palladium Z2 and Protium X2 platforms have had strong momentum in various industries, and they recently announced new applications that will accelerate SoC verification. The company has gained new customers in their hardware family, with top deals from global systems, AI, and communications companies.

The demand for Cadence's Custom IC Virtuoso and Spectre franchise solutions exceeded expectations in 2023, with strong growth in revenue and customer interest. The company's IP business also saw significant growth, driven by strategic acquisitions. Overall, Cadence had an outstanding performance in 2023 and is optimistic about market opportunities in 2024. In Q4, the company achieved revenue growth of 15% and EPS growth of over 20%.

The company had a strong fourth quarter with record backlog and current remaining performance obligation levels. They achieved total revenue of $1.069 billion for the quarter and $4.090 billion for the year. Their GAAP operating margin was 31.5% for the quarter and 30.6% for the year, while their non-GAAP operating margin was 42.9% for the quarter and 42.0% for the year. They also had a strong cash balance and used $700 million to repurchase shares. The company's outlook for the first quarter and 2024 is based on assumptions such as an increase in up-front revenue mix and a tax rate of 16.5%. They also assume that export control regulations will remain similar for the rest of the year.

The company expects strong revenue and operating margin in 2024, with a focus on repurchasing shares. In 2023, they achieved a 15% revenue growth and 20% EPS growth, and record backlog and cRPO. The strength in backlog was driven by broad-based growth across geographies and businesses.

The speaker discusses the recent decrease in hardware backlog and strong bookings across all geographies and businesses. They also mention that 2024 is not expected to be as heavily weighted towards renewals in the second half as 2023 was. The speaker then addresses a recent merger between two competitors and how Cadence will continue to focus on their Intelligent System Design strategy.

Anirudh discusses the convergence of system and semi companies, with 45% of their business now coming from system companies. They have been executing this strategy since 2018, focusing on core business and expanding into SD&A and AI. Their SD&A revenue has been up more than 20% for several years, gaining share due to their products and customer response. They have a strong position in packaging and PCB, critical for chiplets and 3D-IC. Anirudh feels confident in their market position and sees a lot of growth and momentum going forward. Charles asks about their digital IC design and signoff revenue, which exceeded $300 million last quarter.

The digital business of the company has shown strong growth in the fourth quarter of 2023, mainly driven by the AI super-cycle. The increase in design activity and the use of AI products like Cerebrus and Optimality have contributed to this growth. The company's partnership with NVIDIA and other hyperscalers for AI infrastructure has also played a role. Additionally, the use of Cerebrus has led to growth in the full flow, including place and route, synthesis, and signoff.

Analysts are questioning the growth rate of Cadence, as it has shown a deceleration over the past few years despite being exposed to the AI and generative AI theme. The company's IP growth has been more modest compared to its overall growth, and there is speculation about when and if there will be a potential acceleration in sales as their AI initiatives grow.

Anirudh Devgan, CEO of Cadence Design Systems, discusses the growth rate and acceleration of growth in the company's IP business, which has been challenged in the first three quarters of 2023 due to macro uncertainties. However, in Q4, there was strong growth in IP, driven by the AI super-cycle and the acquisition of assets from Rambus. The company expects the IP business to improve in 2024 and has focused on profitability in recent years. They also have partnerships with major foundries, including a new one with Intel, which should further support their IP business. The company looks at a three-year CAGR to gauge revenue growth due to their three-year baseline contracts with customers.

The company's three-year CAGR has been accelerating since 2017 and is expected to exceed 15% in 2022. The company has achieved over 15% revenue growth for the past two years and is projected to have a three-year CAGR of 15.3% in 2024. While there may be some fluctuations due to hardware and IP timing, the company believes that looking at the three-year CAGR is the best way to evaluate its growth. The incremental margin for the upcoming year is expected to be below 50%, but the company typically starts lower and builds towards over 50% throughout the year. This is due to recent acquisitions, which can be dilutive in the early years.

The speaker discusses the contribution of China to the company's revenue in the last four years, stating that it was 15% in 2020, 13% in 2021, 15% in 2022, and 17% in 2023. They mention that China benefited from a large hardware backlog in the previous year but do not expect the same level of growth this year. The speaker also addresses the disconnect between record levels of cRPO and the revenue outlook, attributing it to a large portion of hardware revenue coming from backlog in the previous year and a return to normal production capacity.

The company's revenue profile for this year will be different from 2023 due to addressing hardware lead times. In 2023, they expect a record year for hardware revenue, and they plan to build more hardware each quarter in 2024 to meet demand. The cRPO metric includes hardware and last year's cRPO had more hardware than this year. The Cerebrus run rate at market shaping customers has quadrupled, indicating strong growth in the AI business.

The company is optimistic about the growth potential of its AI products, with initial success seen in Cerebrus and other products such as Verisium, Allegro X AI, Virtuoso Studio, and Optimality. The company has three main ways to benefit from AI, including infrastructure development through partnerships with NVIDIA, and the adoption of AI into existing products such as chip design. The company believes that chip design is one of the best applications for AI due to its extensive work in automatic chip design over the past 30 years.

The speaker discusses the company's recent introduction of multiple new products, including Virtuoso Studio, Optimality, Allegro X, and Millennium, and their potential impact on revenue growth. They emphasize the company's focus on innovation and investment in research and development, and express confidence in the success of all new products in various areas such as EDA, SDA, and AI.

The paragraph discusses the potential for growth in the long run for various products, including AI, 3D-IC and chiplet, Millennium, and CFD. The acquisition of Stanford Cascade has allowed for high-fidelity and accurate CFD simulations, and the partnership with Dassault is expected to further expand the company's reach. Additionally, the IP business and hardware are also expected to contribute to growth.

The company is focused on both revenue growth and profitability, but it is difficult to predict which products will do better. The company's SDA business, which includes simulation and CFD, is about 12% of revenue and has enough scale to invest in R&D. There are significant synergies between EDA and SDA R&D. The company is happy with the amount of R&D invested and the profitability of the SDA business. Simulation is a profitable market and the company's products have been successful in terms of accuracy, performance, and capacity.

Anirudh Devgan discusses the growth of the CFD industry and the partnership with Dassault. He also talks about the growth of Cadence's IP business, which was not as strong as expected due to a strong Q4 in 2023 but weaker performance in the first three quarters. The company is expecting 12% total growth in 2022.

The article discusses the performance of Cadence Design Systems in 2023, with a strong Q4 and cautious optimism for 2024. The company's IP revenue was low compared to previous years, but is expected to improve in 2024 due to a broader portfolio and new engagements. The SDA business outperformed and the recent Millennium M1 supercomputer is an example of the synergies between Cadence's chip design and SDA portfolios.

Anirudh Devgan discusses the potential for hardware acceleration in the SDA market, drawing on the success of hardware-based verification and emulation in the chip design industry. He believes that there is a large untapped demand for hardware acceleration within the SDA customer base and that it has the potential to significantly increase the market size for CFD. Devgan also mentions that hardware acceleration could improve the accuracy of CFD simulations, as it has done in chip design.

In 2024, the company expects a different revenue mix compared to 2023, with the first quarter having lower seasonality due to the timing of hardware and IP. The company had 20% up-front revenue in Q1 of 2023, but the year ended up at 16%.

The company is expecting lower margins in Q1 due to increased expenses and front-loaded acquisitions, but they expect margins to be similar or higher in Q2, Q3, and Q4. They also anticipate flat operating cash flow for the next year, with a shift in backlog resulting in less hardware revenue coming out of backlog. The company plans to increase hardware production each quarter to meet demand. Last year's operating cash flow was lower than expected, but the company still beat their metrics.

John Wall, the speaker, revealed that the operating cash flow for the company was $1,349 million, which included investments to ramp up on purchasing raw materials for hardware. This investment is expected to improve gross margins. The business is forecasting another record year for hardware revenue and expects demand to continue to accelerate. However, the speaker mentioned that the guide does not include the full forecast for the second half of the year, as they prefer to wait for the pipeline to come through before adjusting the guide. He also stated that the company has strong IP this year and the guide may have been even higher if the full forecast was included.

The speaker discusses the contribution of IP to the company's revenue, stating that it will have a larger impact in 2024. They also mention that hardware is expected to be strong, but they do not include the full forecast in their guide. The speaker also addresses the potential impact of the Synopsys-Ansys acquisition on competition in the digital market, stating that it will not change the competitive landscape. They clarify that Cadence is the only company with both analog and digital chip implementation, and they are a leader in package design. They also mention their success in simulation tools.

The speaker expresses confidence in the company's product positioning and competitive advantage, highlighting partnerships with Dassault and Arm. They also mention the growth of their AI tools and partnerships, but note that the impact on growth may take several years to fully materialize due to the company's ratable business model.

The company's model focuses on strong revenue and margin growth, which will take multiple years to fully come into effect. The adoption of AI tools is in its early stages and has already shown promising results in the booking side, but it will take time to fully impact the P&L. Lead times for hardware have normalized and the company has confidence in customer orders and plans, leading to a forecast of continued growth in hardware sales. However, the forecast is conservative due to seasonality and the company's cautious approach.

The speaker, Anirudh Devgan, responds to a question about the company's growth being tied to R&D budgets of customers and mentions that their revenue is ratable and changes take time to work through the model. They also state that 2024 may see an inflection in R&D spending within the semiconductor customer base, but the company's outlook is based on current backlog rather than speculation about future R&D investment.

The speaker discusses the increase in design activity and the company's strong position in EDA, IP, SDA, and AI. They note that last year, there was concern about a recession, but this year, design activity remains strong. They also mention that they de-risked their guide for China revenue due to a backlog. The speaker emphasizes the importance of not chasing revenue and instead focusing on long-term business with customers. They also discuss the increase in upfront revenues and the potential impact of AI designs on hardware order activity.

Cadence is experiencing strong business growth, with an increasing contribution from up-front revenue. This is due to a record hardware revenue year, expected IP growth, and new product launches. The company is also expecting a large portion of sales for their Millennium product to be cloud-based. AI design activity is also contributing to hardware and IP strength. The company is confident in their forecast for up-front revenue to increase to 17.5% this year, but will wait to see the pipeline before raising it further. Overall, Cadence is in a strong position and has product leadership as they enter 2024.

Cadence's Intelligent System Design strategy, customer-first mindset, and high-performance and inclusive culture have led to accelerating growth and recognition as one of the World's Best Workplaces in 2023 by Fortune and Great Place to Work. The company thanks its customers, partners, and investors for their trust and confidence. The conference call has now ended.

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