The conference call is being led by Brianna, the operator, and Richard Gu, the Vice President of Investor Relations for Cadence. The call will include forward-looking statements and non-GAAP measures, and a question and answer session will follow. Anirudh Devgan, the President and CEO of Cadence, will be discussing the company's second quarter earnings.

Cadence had a strong second quarter in 2024, with better than expected bookings and a healthy backlog. The demand for their innovative technologies is strong, driven by generational trends such as hyperscale computing, 5G, and autonomous driving. Their focus on intelligent system design and expansion into new areas is paying off, with orders for their Cadence.AI portfolio tripling in the last year. They are also embedding AI in their EDA, SDA, and digital biology solutions. Partnerships with companies like NVIDIA and a growing foundry ecosystem are creating even more opportunities for their products.

In the second quarter, Cadence continued to collaborate with leading foundry partners, including Samsung and TSMC. They optimized their tools for advanced node processes and expanded their offerings for 3D-IC and multi-die integration. They also released a reference flow for Intel's advanced packaging technology and worked with multiple foundries to optimize their IP cores for various applications. The IP business saw strong growth, driven by AI, HPC, and heterogeneous integration. A new network on a chip solution was also added to their system IP portfolio.

In the fourth paragraph, the company discusses the importance of emulation and prototyping in chip design and software development. They mention the success of their Z3 and X3 platforms, particularly in the AI, hyperscale, and automotive industries. They also highlight the rapid adoption of their Verisium AI verification platform by major customers like Qualcomm. The company's system design and analysis business saw strong growth in Q2, with increased adoption of their 3D-IC platform and AI-enabled Allegro X design platform. These platforms are also driving demand for their Multiphysics analysis solutions, with a leading EV auto company investing in their portfolio. The company's digital IC and custom businesses also had a solid quarter, with a significant number of full flow wins at advanced nodes, especially in the hyperscale industry.

In the second quarter of 2024, Cadence continued to see success with their AI-driven tool, Cerebrus, which has been utilized by major customers for significant PPA and productivity gains. The company's acquisition of BETA CAE also expanded their Multiphysics platform. Financial highlights include a total revenue of $1.061 billion, GAAP operating margin of 27.7%, and non-GAAP operating margin of 40.1%. GAAP EPS was $0.84 and non-GAAP EPS was $1.28.

The paragraph discusses Cadence's financial results for the second quarter of 2024. It mentions their cash balance, debt, and operating cash flow. The updated outlook for the year includes revenue, operating margin, EPS, and operating cash flow. The company expects strong growth in the second half of 2024. The paragraph also thanks customers, partners, and employees for their support. The line is now open for questions.

The speaker asks a question about Cadence's performance in the semiconductor industry, specifically in relation to AI. The speaker notes that Cadence's outlook for the year has improved, but wonders if they can capture a larger piece of the semiconductor market, given the expected growth in the industry. The speaker also acknowledges Cadence's strong performance and ties their success to the R&D spend of their customers.

The company's customers are continuing to spend on research and development, with a lag effect on revenue. The company is encouraged by the improvement in semiconductor spending and has a healthy backlog. The CEO also mentions the broadening of AI into different industries, such as automotive and consumer devices. The analyst asks about China revenue, and the CEO explains that regional revenue is hard to predict but they are on track to hit their midpoint guidance even if China revenue is only 13% of overall revenue.

Gianmarco Conti asks about the expected Q4 ramp-up to 29% growth at the midpoint of guidance. John Wall explains that there is no change from last quarter and that it is due to the shape of the revenue curve for the year, with more upfront revenue coming from IP, hardware, and some software on the SG&A side.

In the paragraph, the speaker explains that the company has higher revenue in Q4 compared to Q3 due to the time it takes to build hardware systems. Revenue from IP is also based on delivery timing. The company has confidence in their current guidance, but the shape of Q3 and Q4 may change. The speaker also mentions that the company has more bookings than their ability to fulfill them, but they do have some inventory of older systems that can be delivered in the quarter. They also plan to purchase raw materials in Q3 to build inventory. The company recently launched new systems in April and has received a great response.

Vivek Arya asks about the organic sales growth rate for fiscal year 2024, which has not seen much revision since the start of the year. He asks Anirudh about how the year has transpired compared to expectations and if there will be any changes in bookings and backlog trends in the second half.

An analyst asks if sales will continue to grow at the same rate or accelerate, and the CEO responds that this year's growth is unique due to various factors. They are being more conservative in their revenue guidance and are pleased with strong bookings. The acquisition of BETA CAE is expected to have a negative impact on EPS and operating cash flows, but the company expects it to improve in the future.

John Wall and Vivek discussed the $300 million drop in operating cash, with 40% of it being due to M&A and the rest being used to purchase inventory for hardware demand. The recent acquisition of BETA CAE is expected to generate $40 million in revenue and have a $0.12 dilution on non-GAAP EPS. It will be operationally accretive next year and strengthens the company's position in the data center and automotive industries. The purchase of inventory for hardware systems is a one-time investment that will be used over multiple years.

The speaker believes that the automotive industry is an exciting vertical due to the increasing use of electrification and AI in self-driving and driver assistance. They see a lot of design activity in this field and believe that BETA CAE's portfolio in automotive positions them well for the future. They also mention working with McLaren and congratulate them on their recent success in F1. The automotive solution is a combination of silicon, system, and AI, and the company is seeing the results of this through organic and inorganic expansion. The mix between upfront and recurring revenue may be more second half and fourth quarter weighted due to the need for time to develop inventory.

The company had stronger than expected bookings in Q2 and an uplift in recurring revenue, which took pressure off the upfront side. They have strong demand for hardware and are building systems quickly. The guide reflects their expectations for revenue in Q3 and Q4, with a reduced expectation for China. They still expect 80-85% of revenue to be upfront, but may see more recurring revenue due to strong bookings. They will need to build hardware and raw materials in Q3, but most of the upfront revenue in the second half comes from their IP and system design analysis businesses.

The company expects mid to high-single digit growth in hardware sales and is aiming to hit the midpoint of its guidance. They have made inventory purchases for the Z3/X3 systems and have clarified that the majority of the purchases are for the X3 systems and the FPGAs. The Z3 systems are already shipping and have been deployed in production this quarter.

The speaker, Anirudh Devgan, discusses how the acceleration of product roadmaps by top customers like NVIDIA and AMD is impacting their business. He mentions that there is an increase in design activity and customization of chips, not just in data centers but also in other verticals such as automotive and consumer electronics. Devgan believes that the deployment of AI through the semiconductor ecosystem is accelerating and Cadence is well-positioned with their Cadence.AI portfolio. Ruben Roy agrees with this assessment.

The speaker responds to a question about the evolution of the company's product portfolio for EDA and SG&A. They mention the trend towards integrated solutions and platform-driven approaches, using examples such as Cerebrus and Verisium. They also note that a leading EV company has deployed their entire portfolio.

The speaker discusses the growth of their portfolio in SD&A and how it allows them to focus on solutions rather than individual products. They mention the increasing number of use cases for AI and ML tools, with digital implementation being a common one. They also mention that Cerebrus is being used for design technology co-optimization and workflow automation.

The company's bookings are expected to follow a 40% first half, 60% second half split, which would result in a book-to-bill ratio greater than 1 for the full year and a 9% increase in backlog to $6.5 billion. It is unclear how much of the backlog is due to the BETA CAE acquisition, but excluding it, core cadence orders and backlog are expected to continue their upward trend for the sixth or seventh year in a row.

The company is pleased with their strong first half bookings, but they do not provide guidance. The contribution to backlog from BETA CAE is insignificant because their revenue is upfront. The company has a good relationship with major memory companies and their Virtuoso platform is the preferred choice for memory implementation. Memory companies are moving towards more advanced digital design, which benefits the company.

The company's partnership with TSMC is helping them with the integration of their technologies with memory. The three big memory companies are also moving towards more advanced 3D-IC technology, which plays to the company's strengths. They have partnerships with Samsung and other major memory players, and they believe memory is often overlooked in the AI super-cycle. The demand for their newer systems is strong, and they are working to build them as quickly as possible due to high demand. Older systems are readily available for immediate delivery.

The lead times for purchasing raw materials and building in Q3 are a moving target. There will be a significant increase in inventory balance at the end of Q3. The company needs mid to high-single digit growth in both the System Design Analysis and System Verification groups to hit their guide for the year. The company is also seeing strong growth in IP and upfront revenue, particularly from a new partnership with Intel. This partnership involves deploying their IP portfolio for Intel's processes and expanding on EMIB and 3D-IC platforms. The company is being prudent in their guide and not assuming massive growth in verification for the year.

During a question and answer session, Lee Simpson from Morgan Stanley asks for clarification on whether a mobile OEM has taken the Z3 platform and what the emulation work might be for. Anirudh Devgan, the speaker, does not comment on specific customers but mentions that the hardware systems are used for both chip design and system software development in various industries such as data center, mobile, and automotive. He also mentions that 3D-ICs are starting to be used in automotive and that collaborations with EV companies and chip makers are taking place. Simpson inquires about the split between customers, and Devgan does not provide specific information but mentions that both OEMs and chip makers are involved in the automotive work.

Anirudh expects the delivery of the third generation systems to lead to increased software consumption in the recurring revenue portfolio. These systems will require verification acceleration software for bring up, and Anirudh believes that there will be continued consumption of this software even after the delivery of the new systems.

Anirudh Devgan and John Wall discuss the integration of hardware and software verification products within the System Verification Group. They believe that the strength in hardware products will benefit the overall portfolio and that a majority of the $600 million in upfront revenue in the second half will come from IP and SG&A, with a demand curve for third gen Palladium and Protium expected in the beginning of 2025.

The company originally included the time it would take to build the hardware system in their guide, and they always knew it would take time. They have seen strong demand for the new platform and have made a one-time multi-year purchase of inventory raw materials. This was news to them, but they wanted to include it all in Q3 and it will be favorable for next year's operating cash. Orders for Cadence.AI have tripled year-over-year, which is not possible without a lift in the base business across EDA and SD&A.

Anirudh Devgan, CEO of Cadence, discusses the impact of their AI lineup on the company's overall performance. He notes that AI has become a standard offering in new contracts and is expected to contribute to future revenues. He thanks customers, partners, and investors for their support and confidence in Cadence.

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