Yahoo Finance Cadence Design Systems, Inc. (NASDAQ:CDNS) Q1 2024 Earnings Call Transcript
Cadence Design Systems, Inc. (NASDAQ:CDNS) Q1 2024 Earnings Call Transcript April 22, 2024
Cadence Design Systems, Inc. beats earnings expectations. Reported EPS is $1.17, expectations were $1.13. Cadence Design Systems, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence First Quarter 2024 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'd like to Welcome everyone to our First Quarter of 2024 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. The webcast of this call and a copy of today's prepared remarks will be available on our website 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'll present certain non-GAAP measures which should not be considered in isolation from or as a substitute for GAAP results. Reconciliation of GAAP to non-GAAP measures are included in today's earnings release. For the Q&A session today, We would ask that you observe a limit of one question and one follow-up. Now I'll turn the call over to Anirudh.
Anirudh Devgan : Thank you, Richard. Good afternoon, everyone. And thank you for joining us today. I'm pleased to report that Cadence had a strong start to the year delivering solid results for the first quarter of 2024. We came in at the upper end of our guidance range on all key financial metrics and are raising our financial outlook for the year. We exited Q1 with a better than expected record backlog of $6 billion, which sets us up nicely for the year and beyond. John will provide more details in a moment. Long-term trends of hyperscale computing, autonomous driving, and 5G, all turbocharged by AI super-cycle, are fueling strong broad-based design activity. We continue to execute our long-standing Intelligent system design strategy as we systematically build out our portfolio to deliver differentiated end-to-end solutions to our growing customer base.
Technology leadership is foundational to Cadence and we are excited by the momentum of our product advancement over the last few years, and the promise of our newly unveiled products. Generative AI is reshaping the entire chip and system development process. And our Cadence.AI portfolio provides customers with the most comprehensive and impactful solutions for chip-to-systems intelligent design acceleration. Built upon AI-enhanced core design engines, our GenAI solution boosted by foundational LLM co-pilot are delivering unparalleled productivity, quality of results and time to market benefit for our customers. Last week at CadenceLIVE Silicon Valley, several customers including Intel, Broadcom, Qualcomm, Juniper, and Arm shared their remarkable successes with solutions in our Cadence.AI portfolio.
Last week, we launched our third-generation dynamic duo, the Palladium Z3 emulation and Protium X3 prototyping platform to address the insatiable demand for higher performance and increased capacity hardware accelerated verification solutions. Building upon the successes of the industry leading Z2, X2 systems, this new platform set a new standard of excellence, delivering more than twice the capacity and 50% higher performance per rack than the previous generation. Palladium Z3 is powered by our next generation custom processor and was designed with Cadence AI tools and IP. The Z3 system is future proof with its massive 48 billion gate capacity, enabling emulation of the industry's largest design for the next several generations. The Z3 X3 systems have been deployed at select customers and were endorsed by Nvidia, Arm and AMD at launch.
We also introduced the Cadence Reality Digital Twin Platform which virtualizes the entire data center and uses AI, high-performance computing, and physics-based simulation to significantly improve data center energy efficiency by up to 30%. Additionally, Cadence's cloud native molecular design platform Orion will be supercharged with Nvidia's BioNemo and Nvidia microservices for drug discovery to broaden therapeutic design capabilities and shorten time to trusted results. In Q1, we expanded our footprint at several top tier customers and furthered our relationship with key ecosystem partners. We deepened our partnership with IBM across our core EDA and systems portfolio, including a broad proliferation of our digital, analog and verification software and expansion of our 3D-IC packaging and system analysis solutions.
We strengthened our collaboration with Global Foundry through a significant expansion of our EDA and system solutions that will enable GF to develop key digital analog RF/MM-Wave and silicon photonics design for aerospace and defense IoT and automotive end-markets. We announced a collaboration with Arm to develop a chiplet-based reference design and software development platform to accelerate software-defined vehicle innovation. We also further extended our strategic partnership with Dassault Systems, integrating our AI-driven PCB solution with Dassault's 3DEXPERIENCE Works portfolio, enabling up to a 5x reduction in design turnaround time for solid work customers. Now let's talk about our key highlights for Q1. Increasing system complexity and growing hyperconvergence between the electrical, mechanical, and physical domain is driving the need for tightly integrated co-design and analysis solutions.
Our System Design and Analysis business delivered steady growth as our AI-driven design optimization platforms integrated with our physics-based analysis solution, continued delivering superior results across multiple end markets. Over the past six years, we have methodically built out our system analysis portfolio. And with the signing of the definitive agreement to acquire BETA CAE, are now extending it to structural analysis, thereby unlocking a multi-billion dollar TAM opportunity. BETA CAE is leading solutions have a particularly strong footprint in the automotive and aerospace verticals, including at customers such as Stellantis, General Motors, Renault, and Lockheed Martin. Our Millennium supercomputing platform, delivering phenomenal performance and scalability for high fidelity simulation is ramping up nicely.
In Q1, a leading automaker expanded its production deployment of Millennium to multiple groups after a successful early access program in which it realized tremendous performance benefits. Allegro X continued its momentum and is now deployed at well over 300 customers. While Allegro X AI, the industry's first fully automated PCB design engine, is enabling customers to realize significant 4 times to 10 times productivity gain. Samsung used Celsius Studio to uncover early design and analysis insights to precise and rapid thermal simulation for 2.5D and 3D packages, attaining up to a 30% improvement in product development time. And a leading Asian mobile chip company use optimality intelligence system explorer AI technology and Clarity 3D Solver obtaining more than 20 times design productivity improvement.
Ever-increasing complexities in the system verification and software bring-up continue to propel the demand of our functional verification products. With hardware accelerated verification, now a must have part of the customer design flow. On the heels of a record year, our hardware products continue to proliferate at existing customers, while also gaining some notable competitive wins, including at a leading networking company and at a major automotive semiconductor supplier. Demand for hardware was broad-based with the particular strengths seen at hyperscalers and over 85% of the orders during the quarter included both platforms. Our Verisium platform that leverages big data and AI to optimize verification workloads, boost coverage and accelerate root cause analysis of bugs saw accelerating customer adoption.
At CadenceLIVE Silicon Valley, Qualcomm said that they used Verisium [Stem AI] (ph) to increase total design coverage automatically while getting up to a 20x reduction in verification workload runtime. Our Digital IC business had another solid quarter as our digital full flow continued to proliferate at the most advanced nodes. We had strong growth at hyperscalers, and over 50 customers have deployed our digital solutions on three nanometer and below design. Cadence Cerebrus, which leverages Gen.AI to intelligently optimize the digital full flow in a fully automatic manner now has been used in well over 350 tapeouts. Delivering best in class PPA and productivity benefits, it's fast becoming integral part of the design flow at marquee customers, as well as in DTCO flows for new process nodes at multiple foundries.
In custom IC business, Virtuoso Studio, delivering AI-powered layout automation and optimization continued ramply, strongly, and 18 of the top 20 semi have migrated to this new release in its first year. Our IP business continued to benefit from market opportunities offered by AI and multi-chiplet based architecture. We are seeing strong momentum in interface IPs that are essential to AI use cases, especially HBM, DDR, UCIe, and PCIe at leading edge nodes. In Q1, we partnered with Intel Foundry to provide design software and leading IP solutions at multiple Intel-advanced nodes. Our TenSilica business reached a major milestone of 200 software partners in the Hi-Fi ecosystem, the de facto standard for automotive infotainment and home entertainment.
And we extended our partnership with one of the top hyperscalers in its custom silicon SOC design with our Xtensa NX controller. In summary, I'm pleased with our Q1 results and the continuing momentum of our business. [Piling] (ph) chip and system design complexity and the tremendous potential of AI-driven automation, offer massive opportunities for our computational software to help customer realize these benefits. In addition to our strong business results, I'm proud of our high-performance inclusive culture and thrilled that Cadence was named by Fortune and Great Place to Work as one of the 2024's 100 best companies to work for, ranking number 9. Now I will turn it over to John to provide more details on the Q1 results and our updated 2024 outlook.
John Wall : Thanks, Anirudh, and good afternoon, everyone. I am pleased to report that Cadence delivered strong results for the first quarter of 2024. First quarter bookings were a record for Q1 and we achieved record Q1 backlog of approximately $6 billion. A good start to the year coupled with some impressive new product launches, sets us up for strong growth momentum in the second half of 2024. Here are some of the financial highlights from the first quarter starting with the P&L. Total revenue was $1.009 billion. GAAP operating margin was 24.8% and non-GAAP operating margin was 37.8%. GAAP EPS was $0.91 and non-GAAP EPS was $1.17. Next, turning to the balance sheet and cash flow, cash balance at quarter end was [$1.012 billion] (ph).
While the principal value of debt outstanding was $650 million. Operating cash flow was $253 million. DSOs were 36 days and we used $125 million to repurchase Cadence shares in Q1. Before I provide our updated outlook, I'd like to share some assumptions that are embedded in our outlook. Given the recent launch of our new hardware systems, we expect the shape of hardware revenue in 2024 to weigh more toward the second half, as our team works to build inventory of the new system. Our updated outlook does not include the impact of our [pending] (ph) BETA CAE acquisition and it contains the usual assumption that export control regulations that exist today remain substantially similar for the remainder of the year. Our updated outlook for fiscal 2024 is revenue in the range of $4.56 billion to $4.62 billion.
GAAP operating margin in the range of 31% to 32%. Non-GAAP operating margin in the range of 42% to 43%. GAAP EPS in the range of $4.04 to $4.14. Non-GAAP EPS in the range of $5.88 to $5.98. Operating cash flow in the range of $1.35 billion to $1.45 billion. And we expect to use at least 50% of our annual free cash flow to repurchase Cadence shares. With that in mind, for Q2 we expect revenue in the range of $1,030 million to $1,050 million. GAAP operating margin in the range of 26.5% to 27.5%. Non-GAAP operating margin in the range of 38.5% to 39.5%. GAAP EPS in the range of $0.73 to $0.77. Non-GAAP EPS in the range of $1.20 to $1.24. And as usual, we've published a CFO commentary document on our investor relations website, which includes our outlook for additional items, as well as further analysis and GAAP to non-GAAP reconciliations.
In summary, Cadence continues to lead with innovation and is on track for a strong 2024 as we execute to our intelligent system design strategy. 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.
Operator: [Operator Instructions] Your first question comes from the line of Joe Vruwink with Baird. Please go ahead.
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