Cadence Design Systems, Inc. (CDNS) Earnings Call Transcript
March 4, 2021
Earnings Call Speaker Segments
Good day, everybody. Thank you for joining us here on the last day of Morgan Stanley's Global Technology Telecom and Media Conference. Really appreciate you guys being with us here today. Before we start, I've just got one disclosure for you. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, it is my honor and pleasure to introduce Lip-Bu Tan, who is the CEO of Cadence. This is always one of my favorite portions of the conference. I've had the pleasure of doing the fireside chats with Lip-Bu for many years, and he has just incredible insight into what's happening in the broad technology sector, and obviously have done an incredible job leading Cadence to where it is today. So with that, let me turn to Lip-Bu to quickly go through a disclosure on his end, and then we can start in the Q&A.
Thanks, Mark. And just a quick one on the safe harbor. Before I begin, I want to mention about the safe harbor statement. Today's discussion will contain forward-looking statements and will use certain non-GAAP financial measures. Please see our most recent 10-K, 10-Q and website for a discussion of Risk Factors and our use of non-GAAP financial measures. With that, I think, Mark, back to you.
Okay. Great. Thanks, Lip-Bu. And for those of you that are joining us live, feel free to send in questions if you would like. I can keep Lip-Bu going all day with my questions. And maybe just to start at kind of a high level and then we'll sort of take it down as we go through. But Lip-Bu, you've been the CEO now for a dozen years, and I'm just amazed at the results you've been able to put up. It's been incredible. You're just a very well-positioned company. But maybe you can just kind of give us a sense -- it hasn't been a straight line for sure around strategy and how you've executed, so maybe just help us understand really what you've done to kind of evolve the strategy over the past dozen years and what you see as the most interesting opportunities ahead for Cadence.
Mark, thank you so much for the question, and thank you for this panel and fireside chat. I'm always delighted to talk to you. I still remember, I think, now 12 years plus ago, October, I was -- become the interim CEO and later on become the CEO. And clearly, it's an interesting journey in the last 12 years. And a couple of things when I started, and now we are more as a customer analog house. And then I decided that digital is the largest TAM market. I decided to really drive the leadership there, and in terms of the most advanced nodes. And then secondly, verification becomes a really big challenge for a lot of my customers, so I decided to really providing the whole verification switch and so that we can work on that. And then along the way, the last 12 years, we do a lot of innovations. And being a VC, when you are behind, you have to leapfrog. So I tried to recruit the best people I can get to completely rewrite some of our tool using massive parallelism, AI, machine learning, data analytics and right now cloud, and really drive that innovation. So we have almost more than 20 new products organically developed in the last 3 years to really drive the leadership and make sure that we can delight our customer. So one of the key thing for me is to really delight the customer and then satisfy their need and then think ahead of what they need and then be prepared to help them. And then along the way, I hear from customers, we need to have the IP strategy. So we -- through some acquisition and also organically developed, we've become very strong in the IP, providing some of the leading-edge industry standard IP to provide. And also the packaging, the PC board so that the packaging become more and more critical. And that part, we really have the full suite of product tool to provide. And then along the way, we also felt that from the customer feedback, we're kind of developing and implementing the -- we call it the Intelligent System Design. So from the design -- excellent design, I have included our core EDA IP, the next layer is system analysis because of our computation software expertise. It's a very nice adjacent to us. And then the customer really requests us to do that, so we organically develop products. And also through acquisition, we expand that, and hopefully, will be 10% revenue contributor for us, just like IP. So I think kind of step-by-step, building by listening to the customer. 'So I think along that way, we increased our TAM market by 3x, so from $10 billion TAM market to $30 billion TAM market. And then we have laser focused on executing innovation, delight the customer, and then using all the technology that we can use to really scale and providing the solution the customers want. And we want to be the long-term trusted partner for a lot of our customer from system, semiconductor service provider. So that's kind of a quick overview, and I'm very excited about this industry that I'm in.
Yes. And it's pretty clear that you've come a long way in that dozen years from, as you said, sort of a company that was really focused on analog to now having a much broader perspective and breadth. And quite frankly, just the value you can deliver to your customers. So when you kind of assess the product portfolio today and the overall strategy, with lots of direction that you can kind of head into, what do you see as kind of the most interesting and important near-term opportunities here as you're looking to drive growth and profitability?
Yes. I think, Mark, I have been in this semiconductor industry for a long time. And I'm very excited to have this 5 generations ways happening at the same time, the 5G deployment and the AI, machine learning massively across all the vertical, and then the hyperscale scale-out because of the data, a lot of their infrastructure, network, storage and -- really need to scale and a new technology needed. And then the other part is now clearly the digital transformation for the Industry 4.0. They have so much data and they need to transform. And then finally, the autonomous driving with ADAS and then a lot of AI applications. So it's all about data. So I think this very massive transformation really drive the renaissance of semiconductor. So from the EDA point of view, we have so much design activity going on. We are very excited about able to help and supporting them. So I think clearly, a couple of major trends. The workloads have changed instead of just computing. And so it's kind of more application-specific, domain-specific, data flow-specific architecture. And then the other part is all the system company, from hyperscale to some of these system companies, they're all quietly building up the silicon capability to address some of the workload they'd require in a timely fashion. So in a way, there's a lot of custom silicon are developing, and we are delighted to see that. And that's a long suite of a start-up company. As you know, I'm very passionate about start-up. And so there's a lot of disruptive breakthrough technology starting to developing. And I mentioned earlier, the digital transformation on some of these major giants and industrial giants and automotive and aerospace and defense and now the medical. And so I think this is fascinating for me. And then did you ask me specifically, I will say the hyperscale. The -- it's a great opportunity. It's the double-digit revenue growth for us. They design the most advanced node. Packaging is very important to them. And also, they want to outsource all the IP industry standard, leading edge will be good. And then one part is Cadence is so well positioned in term of the -- some of the aggressive pursuing the Moore's Law, like the AI, machine learning, hyperscale computing. And then the other part is the 5G wireless industrial automotive are doing more than more front. And then we are so well positioned in that kind of mixed signal analog that really help us a lot. And that's why I think this whole Intelligent System Design strategy that we put in place is exactly addressing this 5 generation of waves and also the whole data platform that is transforming all the industry, all the vertical market, and this is a very exciting time.
Yes. No doubt. The Intelligent System Design strategy seems like it is exactly what the industry needs now to sort of pull everything together that you can deliver to customers to make them more successful in the marketplace. When you think about where you're positioned today in that vision, what else do you need from either technology capabilities, people to see that vision continue to sort of move forward?
Yes. A couple of things. One is clearly the advanced nodes, continue the advanced nodes. As I mentioned in my earnings remarks, we have more than 100 projects in the 5-nanometer and below process node. And then we're already engaging starting under 2-nanometer development with our foundry partner and customer. So that is continue that Moore's Law driving and so that we are in the frontier of the technology. And then the other part is clearly the verification become very challenging because the chip getting more and more complex, and then there's a lot of interference. And so I think we are excited about our verification full flows and so that we can really provide solution to customer from function verification to the hardware emulation, prototyping. And so the whole suite of verification is very important to them, and we continue to do that. Then the other part I'm very excited about is the system analysis area. And this is very fast growing for us, this whole system innovation. Last quarter, I mentioned that we are growing the year over 25%. And so this is going to be our next 10% revenue contributor. Initially, we have 2 products organically developed, Celsius and then Clarity. And then now with the new acquisition of NUMECA and basically driving that whole computation now through dynamic. And this is, again, back to our computational software capability and expertise. And then we really apply and also because customer request that, and then we are very excited. The one thing that I'm always monitoring is the repeat orders. I mean the customer try a few tool, and they love this so much, they double down and triple down to buy more from us. That mean that we have something really good that they really like and they really encourage us to do more. So I think stay tuned. System analysis, system innovation, they're going to be very exciting for us to grow. Then the other part is, I call it the pervasive intelligence that using AI, machine learning. Now we have a big effort on the data analytics because we have so much data. And so in the way, we can help customers to drive PPA, converging the time faster. And then with that and also with our packaging, our RF, and then we acquired the AWR and Integrand to triple down on some of this 5G antenna RF design so that we can provide them really the best-of-breed products, best-of-class product so that they can really design better and faster and more accurate. And that's something that we are excited about.
Yes. It's just -- it's amazing the value that Cadence can really bring to the marketplace. And I've been doing this over 30 years, as you know, Lip-Bu, and I've always looked at Cadence as a company that can just punch well above its weight. And I used to say that the entire semicon industry basically rested on your shoulders to innovate and grow. But I think you can expand that out quite a bit further now. And I would submit that as technology just continues to become so much more pervasive in the global economy that, in fact, it is largely the global economy resting on your guys' shoulders in terms of innovation and execution. And so when you think about it from that perspective, and you think about all the capabilities that you bring to bear, and you just highlighted many of those exciting ones you're going forward, what do you think that means for your growth rate? If you just look over the next sort of 5 years or so, think about your growth rate and profitability. And put it in the context of some of these hyperscalers that are massive today, and they're still growing at incredible rates. So when you kind of pull it all together, where do you think Cadence could be growing in the next 5 years? And where could the profitability go?
Yes. Good questions. So I think clearly, as you already pointed out, a lot of customer from semiconductor system company really depend on us. So more is given, more is expected. So we continue to put in 38%, 40% of our revenue to the innovation, R&D and support the customer with FAE to drive some of this design success because it's a lot of responsibility depend on us. We want to be the long-term trusted partner, so I think that we're going to continue that. So I think top priority for our team is basically, first of all, I mentioned earlier, to expand the TAM, providing more solution to our customer. And then secondly, I think, clearly, if you look back 3-year revenue CAGR. And then clearly, 2016 is about 8%. 2020, I think it's 11%. And then this year, 2021, we're guiding, again, double-digit revenue growth is our goal. So I think, as I mentioned, this 5 generation of wave and the data and the scaling of infrastructure for the cloud, and I think that drives a lot of design activity. And in some way, our 2-n IP is related to the design activity. So if there's so much design happening and we are very disciplined in terms of providing the value to our customer, and so in a way, I think we are aiming for, again, double-digit revenue growth and something we call out for. And then Q4, I think we demonstrate 15% growth. And of course, there are some maybe onetime and some of them is a little bit more unpredictable in China. And that's a new experience we are facing. And then meanwhile, we continue to drive efficiency for the company. And almost every business unit leader when they want to do investment -- and then John Wall, my partner as a CFO, we really work hard and review with them if we're going to invest, what kind of return, what kind of success you're going to define, and we're going to measure that. So in a way, hold them accountable. Very disciplined in terms of deal quality to our customer and also disciplined with our product quality and innovation. And so with that, we can now continue to drive the operating margin, and we are very delighted. We -- now this 12-year step-by-step, increasing the operating margin while still investing in the new innovation. We are delighted last quarter, Q4, we have, that's last year, the whole year, 35% operating margin. Again, we're going to continue driving that. As you know, shareholder return is the #1 priority for me, and we're going to continue to execute and deliver the best result for the customer and then best result for our shareholders. And then the -- and then we're -- of course, we're taking care of the employee safety and healthy. And then we continue to have the best of the place to work 7 years in a row. And that's something we are very proud of. And it's a place that when the employees are excited and motivated and then we care about them, then we can continue to drive the innovation and then serve the industry well.
Yes. Fantastic. And congratulations on becoming a Rule of 50 company last quarter, which is really impressive. When you combine the growth with the profitability, you guys are in a very unique position. So maybe just shifting gears for a moment. You highlighted China, and there's no doubt that we've had a number of kind of significant geopolitical issues to work through. And you sit in an interesting place. Clearly, you're global in terms of what you deliver and then just given your other things that you focus on above and beyond just Cadence, you've got some very unique insights into what's happening in the broader kind of landscape. So given that, maybe you can share your insights first on just kind of your early assessment of how the Biden administration appears to be addressing China and what that means for Cadence in the future.
Yes. I think -- first of all, I think it's too early to tell in terms of the new administrations, but we -- basically, we assume nothing significant change in terms of our assumption, in terms of -- for this year. And so that's how we kind of plan that way. If there's any change, it would be great for us. And so I think that's kind of our strategy. And then clearly, Asia Pacific is a very fast-growing area for us. Not just China, Taiwan also doing really well. And then same thing with Korea and Japan also, the system company are doing really well. And then the China -- as you know, China government want to be self-sufficient. They put a lot of money into it. There's a lot of investment in that. And then the other part, the STAR Market, the equivalent to our Nasdaq market, is very vibrant. A lot of semiconductor company went public. And so I think overall, we are a U.S. company. We're complying with the U.S. export regulations. Meanwhile, we continue to serve global company, include China, include Taiwan, Japan, Korea and Europe and Israel. So I think overall, we like that the -- and meanwhile, the administration seemed like very focused on semiconductor. It's kind of nice to see the semiconductor ecosystem become so important for automotive, for aerospace, defense. And then the semiconductor become top priority for the Biden administrations. And I'm delighted that importance of semiconductor play a very big role in it. But the responsibility for us that we have to enable our customer to continue the innovation and then support them.
Yes. And if we just kind of illuminate China a little bit, it is what percentage of the business today? And if things stay on the current course, where do you think that goes in the future?
Yes. It's very hard to predict. Clearly, with all this, a lot of semiconductor going in IPO at Nasdaq, and there's still another pipeline or company like GalaxyCore, AMC -- or no, ACM and many others are planning to go IPO. So there's going to be a lot of money they have. And clearly, they want to buy our hardware emulation, clearly like to buy our IP, clearly like to buy our tool. So I think we are very well positioned to support them as long as we continue to comply with the U.S. regulations. So I think overall, it's a new phenomenon for us. And that my partner, John Wall, is very conservative. This is a new phenomenon. And initially, he called out in Q4, we're not too sure it will repeat. But meanwhile, we already see the repeat in Q1. We are excited about that. And then we just had to stay tuned. Always the -- in our philosophy is underpromise, deliver and print the result, and that's kind of our strategy and our philosophy for Cadence.
Right. Wonderful. Well, you talked earlier about just a pretty massive TAM expansion as you have broadened out the scope of the company's strategy and overall product portfolio. Can you just highlight for us today what percentage of your business is coming from true semicon companies versus systems companies? And then how do you think that is going to change in the future as well?
Good news is our semiconductor customers are growing, and at the same time, the system and service provider also growing. But relatively, the system and service provider growing faster. So I think we are delighted to mention in my earning remarks that it's close to 45% of our customers is a system and service provider. For a couple of reasons, I mean one thing is clearly the renaissance of silicon, a lot of strong design activities happening. The other part I call out is hyperscalers, and we are delighted to work with them and support them as a true partner and a trusted partner. They are really driving a lot of advanced node development and then also a lot of silicon development like, for example, in the Annapurna Labs part of U.S., they are very proudly and then just you talk about the Graviton tool and then some of the training chip is coming up in the most advanced node and then many of the hyperscale guys can also follow suit. And then the other part, very important to them is the packaging. And then we have our entire packaging solutions, and they are really delighted to work with us. And then the other part is also some of this technology that we are driving in the AI, machine learning, and we are big time into the cloud, Cadence Clouds. And then we highlight 175 customers are using our cloud. And then -- so that's something it's just the beginning. We are focused on 2 by 2, expected the new tool to be cloud native, not just another delivery, really able to drive the performance, scalability, efficiency for our customer. That is the holy grail, the hyperscale partners are working with us and also the foundry partner to enable that. So I think that is just the beginning of it. We are really excited about it. And then finally, we also call out the aerospace, defense. It's become a very good contributor for us. And then we highlight last quarter, one of them is Northrop Grumman and decided to proliferate and broader. And with us in the verification, there's a lot of challenges they have. We want to be a true partner, working in the most advanced node to help them. So all in all, I think we're excited about this, tool engines are working really well. And just like our tool side, we have the Moore's Law chasing the 2-nanometer or 3-nanometer. We have the more than more in the analog mixed signal that's for the 5G, the wireless, and that's why we tripled down in some of the wireless RF capability, microwave capability so that we can intercept and be supporting to our customer in the 5G and potentially looking at the 6G, how can we work with them to help them to fulfill the goal of deployment.
Wonderful. Having spent the vast majority of my career focused on semiconductors, I'm obviously somewhat biased in terms of how I see the industry. But my perspective is that the semi industry has done more to kind of change the world than maybe anything else that we've seen in history. But when I think about the industry going forward and the complexity of what we see, it seems to me that the most successful companies are going to see semiconductors as really a core competency. And they're going to extract more value from the marketplace by going to market as more of a systems or services-oriented company. And so NVIDIA and Apple might be 2 really good examples of that. Just based on your kind of perspective, what's your view of that? Because when I see those companies or a number of the start-ups, especially in AI, they're not just component companies anymore. They're much broader. And therefore, I think the impact on Cadence is that much more significant in terms of verification, system analysis, all those kinds of things. So maybe your kind of broad perspective on that sort of trend here that we'll see in the next decade.
Yes. I think this is a very good question. Clearly, you mentioned about NVIDIA, Apple, I'm a big admirer of them, and they've done a fabulous job and then the -- changing the world and providing more solution for all of us to be working better. And so clearly, this phenomenas are continue. In terms I mentioned earlier, the workload have changed. And then the -- how the U.S. able to support some of the workload and optimize. And so there are some of the changes. And then that's why we highlight about pervasive intelligence. That's part of our Intelligent System Design. And so that we're able to provide that AI algorithm know-how to our core business, our EDA, plus helping our customer and in terms of -- and they embark on the AI, machine learning, data analytics, data mining and some of this big effort in terms of like -- it's kind of very happy to see that only 2% -- less than 2% of the data are being utilized today. And that's so much potential going out and in terms of all the different verticals that we can support. And then Cadence want to be the key partner, key ingredient component to drive some of this productivity change. And then the -- I think something I'm very excited about in terms of driving that.
Okay. Great. So as you were kind of talking through your product portfolio and strategy, you highlighted 2 of the very significant secular trends happening everywhere. But to focus on those 2 from a Cadence perspective, so take AI and ML as well as cloud, how do you see that playing out from your product portfolio and overall strategy here going forward?
Yes. It's a very major focus for Cadence. Right now, AI, machine learning, we apply that to across all our tools. And I think you will see some of the -- and our benefit customers really enjoy that because they are really excited about what we are doing. And then we highlight recently about the Xcelium ML, able to drive 5x time performance improvement for the customer. And that's significant. 5x is a very big improvement. And likewise, with the digital, we're also using a lot of our AI to integrate some of our tools. Because we have so much data and then how can we drive faster, better performance in PPA and run time and also converge faster so that they can go to the market faster? That's a huge, huge beneficial for them. And that's something that we continue to drive some of this AI, machine learning across all our product line. Then the other part is also we have that adaptive learning. We learn with our customer. And some of the customers are changing the world in terms of the AI, not just the silicon, but the whole compiler, the algorithm to provide the full stack and then follow the data and then optimize for the data. And we learned a lot by working with them and then from our tools so that we can improve even further to provide the customer better solutions. So that's something we are very excited. And then now we have pervasive intelligence. We approach all the vertical and ranging from hyperscale. They have so much data, how can we provide them the tool that can optimize for their data and the workload? Same thing for the aerospace and defense. And then how can they really drive efficiency, drive development and so that we can provide them on that. Even more exciting for -- personally, is the medical, and then the drug discovery, drug development and also some of the data analytics. Can you imagine, when you have the data from hospital or some of the pharmaceutic company, 12 million, 15 million of patient data, and then -- so that you can -- really, before you treat your patient, you can look at what are the side effects, what are the interactions with different patients. And then you can more intelligently prescribe the right dosage for cancer, for any of the diseases. And so in that way, it really game-changing for the medical development and faster and quicker and also move towards kind of personal medicine and then how each person cancer are different and then what kind of pattern recognition able to provide accurate diagnostic and an accurate treatment. That is tremendous for all of us. And so something that I'm very passionate about, as you can tell.
Yes. Well, it's wonderful to see just how bright the future is for Cadence and the impact that you've had and will continue to have on the global economy going forward as technology becomes more and more pervasive, and you guys can basically make that happen and deliver it for everybody that uses your technologies. So Lip-Bu, I could do this all day long with you because you've got such great perspective. I do appreciate you spending time with us here and very much looking forward to doing this next year in person in San Francisco Palace Hotel as we normally would. So thank you again for being with us here at the conference.
Yes. Thank you so much for inviting me.
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