益華電腦 (CDNS) 2021 Q3 法說會逐字稿

Good afternoon.

My name is Jamyria, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Cadence Third Quarter 2021 Earnings Conference Call.

(Operator Instructions)

I will now turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence.

Please go ahead.

Thank you, Jamyria.

I would like to welcome everyone to our third quarter 2021 earnings conference call.

I'm joined today by Lip-Bu Tan, Chief Executive Officer; Anirudh Devgan, President; and John Wall, Senior Vice President and Chief Financial Officer.

The webcast of this call is available through our website, cadence.com, and will be archived through December 17, 2021.

A copy of today's prepared remarks will also be available on our website at the conclusion of the call today.

Please note that the discussion today will contain forward-looking statements.

Forward-looking statements include, but are not limited to, statements about our business outlook, product development, business strategy and plans, industry and regulatory trends, market size opportunities and positioning.

Due to known and unknown risks and actual uncertainties, results may differ materially from those projected or implied in today's discussion.

For information on factors that could cause a difference in our results, please refer to our filings with the Securities and Exchange Commission.

These include Cadence's most recent reports on Form 10-K and Form 10-Q and the cautionary comments regarding forward-looking statements in today's earnings press release.

You should not rely on our forward-looking statements as predictions of future events.

All such statements are based on estimates and information available to us at this time, and Cadence disclaims any obligation to update any forward-looking statements, except as required by law.

In addition to financial results prepared in accordance with Generally Accepted Accounting Principles, or GAAP, we will also present certain non-GAAP financial measures today.

Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to review results using certain non-GAAP financial measures.

These non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP results.

These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and may not be comparable to similarly titled measures from other companies.

Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results in today's earnings press release.

Copies of today's earnings press release dated October 25, 2021, for the quarter ended October 2, 2021, related financial tables and the CFO commentary are also available on our website.

(Operator Instructions)

Now I'll turn the call over to Lip-Bu.

Good afternoon, everyone, and thank you for joining us today.

Cadence delivered strong financial results for the third quarter driven by accelerating customer demand for our innovative solutions and continued strong execution by the team.

Driven by the broad-based strength of our business, we are raising our financial outlook for the third time this year and are expecting about 11% revenue growth and 37% non-GAAP operating margin for 2021.

John will provide the details in a moment for both our Q3 results and the updated outlook for the year.

The data-driven era is being fueled by generation trends, by 5G, hyperscale computing, autonomous driving and industrial IoT, that are accelerating the digital transformation of several industries.

This requires continued innovation in key areas such as compute, connectivity, storage and data analysis which is, in turn, driving secular semiconductor growth and design activity across a wide range of end markets.

Before I ask Anirudh to go through the business and product highlights for the quarter, I would like to remind you that I will be transitioning to the role of Executive Chairman on December 15, with Anirudh becoming our President and CEO at that time.

It has truly been an honor leading Cadence for the past 13 years.

I'm very proud of the team's accomplishments and grateful for the confidence and trust that our customers and shareholders have placed in us.

Cadence is extremely well positioned.

And as I hand the baton over to Anirudh, I can't think of no other better to lead the company through next phase of growth.

And I eagerly looking forward to him taking Cadence to new heights.

While I will remain engaged with shareholders, this will be my last earnings call.

Thank you very much for your continued support.

And I will now turn the call over to Anirudh.

Thank you, Lip-Bu.

Our Intelligent System Design strategy leverages our strong computational software expertise as we expand beyond EDA into new markets.

And we are uniquely positioned to capture the exciting opportunity that Lip-Bu talked about.

As we execute to our strategy, we are especially pleased to see our EDA, IP and system solutions be increasingly adopted by a growing number of system companies.

For instance, Tesla utilized a broad set of Cadence EDA software solutions and hardware platforms to enable the successful delivery of their innovative Dojo system.

Delighting customers and accelerating growth requires a relentless commitment to innovation.

This quarter, we launched the Integrity 3D-IC Platform, Tensilica AI Platform, Midas Safety Platform and the Helium Virtual and Hybrid Studio.

We have now introduced 13 significant innovative products this year across all of our business groups, and these will be key drivers of our future growth.

Let me share some of the business highlights, starting with Digital and Signoff, which had another strong quarter with 18% year-over-year revenue growth.

Our digital full flow, delivering industry's leading quality of results at the most advanced nodes, continue to proliferate with market-shaping customers and was adopted by 13 new customers.

We are very pleased with the growing momentum of our transformative Cadence Cerebrus solution that incorporates unique reinforcement learning, AI/ML technology to deliver significant PPA, power performance and area, and productivity gains.

In addition to Samsung and Renesas endorsement at the time of launch, several market-shaping customers have added Cadence Cerebrus to their production flows and are realizing great benefits.

As an example, a global mobile semiconductor company used Cadence Cerebrus on their manually-tuned CPU design to reduce total power by almost 10% and improve timing by over 25% automatically in only 8 days.

Additionally, Cadence Cerebrus enabled a marquee mobile system company to reduce the power consumption of their 4-nanometer design by over 25% and get over 10x improvement in productivity.

We continued growing our business with hyperscaler customers, including a broad expansion of our EDA software with a marquee hyperscaler that included a significant commitment to our digital products.

Next, I will talk about our verification business, which had a strong quarter with 13% year-over-year revenue growth.

Growing system design complexity and need to get first-time right silicon continues to drive strong demand for our verification suite, which provides a comprehensive solution across IP, SoC and system verification, hardware/software regressions and early software development.

This momentum is especially noticeable in our hardware business where customers are deploying a significant additional capacity as they reap the performance, quality and productivity benefits of our industry-leading hardware platform.

Accelerating adoption of our new dynamic duo, the Palladium Z2 and Protium X2, led by hyperscaler and global marquee customers drove the majority of hardware orders in this quarter.

In verification software, Xcelium ML, our machine learning optimized logic simulator, delivered up to 5x faster regression, was adopted by marquee customers in North America and Asia.

We launched the Helium Virtual and Hybrid Studio, a new platform that accelerates the creation of hybrid and virtual prototypes of complex systems, enabling early software bring-up.

Helium was endorsed by NVIDIA, and several other engagements with leading customers are underway.

We also announced the Midas Safety Platform, which is part of the comprehensive Cadence safety solution, featuring integrated digital and analog safety flows and engines for faster certification of safety critical automotive design.

Moving on to System Design and Analysis.

I'm particularly pleased that this segment, which is driving our market expansion beyond EDA, continues to deliver strong double-digit growth, increasing revenue by 17% year-over-year as we grow our footprint in several verticals, including aerospace and defense and 5G communications.

With 5G and AI/ML applications pushing silicon reticle limits and transistor scaling slowing down, there is an accelerated move to disaggregate SoC into a heterogeneous set of discrete dies that can be integrated together with sophisticated packaging technology.

Leveraging over 2 decades of pioneering packaging expertise, we are very excited to have launched Integrity 3D-IC, the industry's first and only comprehensive platform that ties together our best-in-class system planning, implementation and thermal timing and power analysis technology, along with a multi-technology database, all in a unified cockpit.

This third-generation 3D-IC solution enables designers to achieve system-driven PPA with reduced design complexity and faster time to market.

And we are engaged with several leading semi and system houses, foundries and packaging companies.

Our organically-developed system analysis products continued to make good headway.

With Clarity, our electromagnetic 3D simulator displacing the incumbent solution and becoming plan of record at a marquee hyperscaler.

And Celsius, our electrothermal 3D simulator, was deployed at a global marquee system customer.

Our recently acquired CFD solutions also delivered strong results, winning new business with several automotive and aerospace and defense customers.

And now before I turn it over to John, I want to say a few words about the upcoming CEO transition on December 15.

On behalf of the Cadence Board and our employees, I want to thank Lip-Bu for his outstanding leadership and his numerous illustrious accomplishments over the past 13 years that have made a lasting impact on our industry and on Cadence.

With his laser focus on creating a highly innovative and results-based culture, he drove a cultural transformation at Cadence that was rooted in customer and shareholder success, leading to trusted partnerships with leading customers and delivering shareholder return of over 3,500%.

I'm especially grateful to Lip-Bu for his mentorship and guidance and look forward to continuing our partnership in our new roles as, along with our talented team, we relentlessly drive to deliver strong business results and delight our customer and shareholders.

Now I will turn it over to John to go through the Q3 results and present our Q4 and updated 2021 outlook.

Thank you, Anirudh, and thank you, Lip-Bu.

They say values are like fingerprints.

Nobody's are the same, but you leave them all over everything you do.

Your impact on Cadence has been significant and will last for many, many years to come.

It's been a truly remarkable run over the past 13 years, and I feel blessed to have had the chance to work so closely with you.

I've also heard it said that legacy is not something you do for yourself, but it's something you leave for the benefit of the next generation.

And on behalf of all Cadence stakeholders, I'd like to thank you both for conducting such a smooth CEO transition.

We haven't missed a beat.

Focused execution by the entire Cadence team, combined with broad-based strength across our product portfolio and customer base, drove another strong quarter of top and bottom line results.

We exceeded our expectations for all key financial metrics, and we are raising our financial outlook for the year.

Now let's go through the key results for the third quarter, beginning with the P&L.

Total revenue was $751 million, non-GAAP operating margin was 35.7%, GAAP EPS was $0.63 and non-GAAP EPS was $0.80.

For the balance sheet and cash flow, cash totaled $1.014 billion at quarter end, while the principal value of debt outstanding was $350 million.

Operating cash flow was $296 million.

DSOs were 40 days, and we repurchased $110 million of Cadence shares during the quarter.

Next, let's turn to our updated outlook.

Our outlook continues to assume that there will be no changes to the export limitations that exist today.

For fiscal 2021, we now expect revenue in the range of $2.96 billion to $2.98 in billion, non-GAAP operating margin of approximately 37%, GAAP EPS in the range of $2.36 to $2.40, non-GAAP EPS in the range of $3.24 to $3.28 and operating cash flow in the range of $975 million to $1.025 billion.

For the fourth quarter, we expect revenue in the range of $745 million to $765 million, non-GAAP operating margin of approximately 35%, GAAP EPS in the range of $0.49 to $0.53, non-GAAP EPS in the range of $0.76 to $0.80 and we expect to repurchase $110 million of Cadence stock in Q4.

Our CFO commentary, which is available on our website, includes our outlook for additional items as well as further analysis and GAAP to non-GAAP reconciliations.

In closing, I am pleased that revenue growth continues to accelerate with our 3-year revenue CAGR now approximately 11.5% at the midpoint of guidance.

We are expecting approximately $1 billion of operating cash flow for 2021 at the midpoint, and we are on track to deliver over 50% incremental operating margin for the year.

As always, I want to thank our customers, partners and of course, our employees for their continued support.

And with that, operator, we will now take questions.

(Operator Instructions) Your first question will come from the line of Joe Vruwink with Baird.

Let me just start by extending my best to Lip-Bu.

Maybe I'll begin with the next-generation hardware with emulation and prototyping.

I'm wondering was component availability at all a factor in either meeting demand in the quarter?

Or does component availability factor in at all to the forward outlook, either in a good way, catching up on maybe things that slipped this quarter, or considering maybe some demand getting extended into next year?

Joe, this is John.

Thanks for the question.

Yes, we're delighted with the demand for our hardware verification systems.

And we're building the systems as quick as we can to meet that demand.

We're very, very pleased with the customer reaction and like building the systems as quickly as we can.

I would say it's fair to say that demand is outstripping supply right now, but we're building as fast as we can.

And you can see it in the inventory number, the inventory slightly up.

Okay.

That's helpful.

And then maybe more of a product or a strategy question.

When thinking about 3D-ICs and the co-design that needs to happen between package and chips being stacked, is it, when you think about the opportunity for Cadence, as simple as customers adopting the new Integrity platform?

Or is it maybe broader than that and this trend across the industry actually happens to impact and benefit multiple areas of the Cadence product portfolio?

Yes, that's a great question.

Let me take that.

This is Anirudh.

So we believe that 3D-IC is the future, right?

So the road to the future goes through 3D-IC for multiple reasons, which I mean putting multiple chips on a package, the ability to mix technology, ability to do bigger and bigger systems.

And I do believe that Cadence is uniquely positioned for that.

And it affects multiple technology.

Now some of it is because of our history.

So we have had a leading platform in packaging for a while with Allegro and a leading platform in analog with Virtuoso for a while.

And then over the last 5 years, we have done very well in digital.

And then if you remember, over the last 2, 3 years, we have done a lot of investment in system analysis.

Like Clarity and Celsius are also critical for 3D-IC given that thermal is a big challenge when you put these things together.

So I believe Cadence is uniquely positioned.

And with Integrity, we put this all together.

And it's not just Integrity, it draws into the other parts of Cadence, like I mentioned.

And then as a comparison, as we work with customers and leading foundries, to do something similar in other products, it's not even one company, you need 3 or 4 companies to do the same thing.

Whereas if you come to Cadence, we have a comprehensive solution across multiple segments.

So I think as 3D-IC takes more momentum going forward, I believe we are well positioned.

Your next question will come from the line of Jason Celino from KeyBanc.

Lip-Bu, it's been an absolute pleasure.

Glad to have you on for one more earnings call.

So my question, with the supply chain shortages, we've seen several different automakers, like Hyundai and Volkswagen, announce intentions to design some of their own semiconductors.

But we know that these design cycles are quite long and it's a multiyear investment.

So how do we think about this as maybe an incremental dollar opportunity versus just market shift from customers taking some of those workloads in-house?

Yes, Jason, first of all, thank you so much for the kind words.

In terms of the global supply chains, we're monitoring the semiconductor global supply chains very carefully.

So far, we don't see any slowdown in our design activity across our customer base.

And then as you know, our product is very much focused on the R&D engineering, designing the chip system.

And this is a multiyear approach.

And I mentioned earlier, the generations drivers have been really driving a lot of increase in the design activity.

And then to answer your question in terms of automotive design cycle, yes, you're absolutely correct.

It's a multiple-year increment.

And then lately because of more and more electronics in the automotive, so we see a lot of design activity like autonomous driving.

And I think Anirudh mentioned about Tesla in terms of driving their AI chips and using our broad-based Cadence tool.

That's one good example and many more coming.

And so I think clearly, we're excited about the automotive platform that will create opportunity in the multiyears to come.

Okay.

That was helpful.

And maybe my quick follow-up is, I think the automotive customers have been maybe more vocal, but are you seeing these type of trends in other industries as well in terms of that?

Yes.

I think it's a very interesting, challenging opportunity time in this whole supply chain.

Clearly, for the automotive industry, it's starting to become very -- realize the whole visibility to the supply chain and become very important for them.

And so in different automotive companies, they experience different challenges in the supply chain.

And we are here to help them in terms of the design, automation and the whole system level complexity of design and then time to market.

And then so we try to be available and be helpful to them as a design partner and also support them throughout this period.

So I think you're going to see more and more opportunity in the automotive.

It's a big platform for us.

Your next question comes from the line of Jackson Ader from JPMorgan.

And I'll just quickly echo all the kind words that have already been said about you, Lip-Bu.

Yes, congratulations and looking forward to continuing the relationship.

So Anirudh, you mentioned that in the last few years, digital tools have been driving a lot of growth.

And I think you also mentioned that a hyperscaler this past quarter significantly increased their digital footprint.

I'm just curious what tools or at least what parts of the digital design flow, just from a high level, of synthesis, place and route, what have you, are actually driving the increased uptick, maybe in the last 12 to 18 months in digital.

Yes.

Thanks, Jackson, for the question.

So I think as you know, like at lower nodes, we have always believed that integration of the whole digital full flow is critical.

So that's synthesis, place and route and signoff.

So what we are pleased to see, especially in the last, let's say 12 months, is wider deployment of our digital full flow.

So if we went back like a few years ago, the engagement would start with Innovus, and that was the leading kind of product that we would do well in.

But now I think overall market has accepted our full flow, and we see more and more signs of that.

So that includes synthesis and signoff along with Innovus.

And that is becoming more the norm than anything else.

So to answer your question, not only Innovus does well, but now synthesis and signoff, which is Genus and Tempus and Voltus.

We are pretty happy with the proliferation.

And I think that trend is here to stay.

All right.

Awesome.

And then a quick follow-up.

John, can we just get -- what is going on with backlog and the implied booking that's really swung around a bunch this year?

Just curious if there were any duration impacts.

Or what we should be reading into in terms of the implied bookings number this quarter?

Yes, Jackson, thanks for the question.

But I wouldn't read too much into it.

Again, it's like the timing of contract renewals.

We had a similar phenomenon in Q1.

We would expect to end the year with a higher backlog in RPO than we started the year.

And then that's reflected as well.

If you have a look at the margin guidance for Q4, margin guidance for Q4 is slightly down on what we achieved in Q3 because of the impact of some hiring and an expectation for higher sales commissions costs in Q4 because we expect a lot of bookings to come through in Q4.

Your next question comes from the line of Pradeep Ramani from UBS.

I just wanted to get some more insight on the verification piece.

It seems like the verification for September was flattish to down a little bit versus June.

And yet, hardware seems to be doing well.

So are we to sort of interpret that it's more on the software side that you're seeing maybe a little less growth than what might have been anticipated?

Or are you being constrained on the hardware side?

I just wanted to get a sense about the ramp on the hardware side as well.

Pradeep, this is John.

We're actually delighted with the customer reaction to our new hardware systems.

And we're building and installing inventory as fast as we can to meet their demands.

But I mean I'd remind you that Cadence is part of the design cycle.

So I mean, it hasn't really impacted us too much with our customers.

And then in relation to your comments on growth, we raised guidance for the year.

We're very happy with growth.

We were seeing accelerating growth.

When you look at the 3-year CAGR, and I've called them out in the CFO commentary, it's rounding up to 12% now.

It's approximately 11.5%.

And that seems to continue to increase year after year.

And that's reflecting strong demand across all lines of business.

Okay.

And for my follow-up, on the digital IC piece, I mean it has been very strong.

Are you seeing increasing competitive displacements?

Or is it more of a market being strong?

Can you speak maybe qualitatively on how you're sort of viewing digital IC going forward as well?

Well, it continues to do well, like you saw.

And I think it's a combination of things.

I mean the market is definitely growing because of all this design activity, as you can see in these multiple domains.

So the market is growing, and we believe that we are also taking market share.

So I would say it's a combination of both these things driving our digital growth.

Your next question will come from the line of Jay Vleeschhouwer with Griffin Securities.

Anirudh, both of my questions are for you.

But first, on a personal note, Lip-Bu, it's been a pleasure working with you for the last 13 years and certainly look forward to continuing the dialogue with Anirudh.

So first question, Anirudh, at the Cadence Live Europe Conference a week or so ago, Cadence said, in one of your presentations, that Allegro had recently undergone a "major overhaul," which we certainly saw with Allegro X. The question is what's next in terms of anything you might be working on for an additional major overhaul?

We do see this periodically in EDA.

For example, Synopsys a few years ago significantly ramped up its internal investments in synthesis, and they launched their new version of DC.

And I'm wondering, based on what seems to be your internal investment patterns, if you're undergoing a rejuvenation or reinvestment cycle for your synthesis or what else you might be able to talk about in terms of any major overhauls.

Secondly, with regard to the ingredients you need to succeed with the computational software strategy, there was an interesting announcement 2 weeks ago of a relationship between Synopsys and Dassault.

And I'm wondering if you see you're having to partner more for both technical and channel expansion reasons to succeed in computational software.

Yes, Jay, those are both great questions.

I think in terms of new kind of -- you said new products or revamp of existing products, so we are continuously looking at that in all the time.

We want to make sure all our products are doing well.

As you can see this year, we have launched 13 new products.

Several of them are improvement of existing products like Allegro X or Sigrity X. So I think this is a continuous process.

As you know, we have a very high investment in R&D compared to our peers.

So we are constantly looking at that, and you will see more things come out, of course, as we go forward.

On the second one, we are confident in our computational software strategy.

That's delivering good results.

I think we have a lot of organic ability to innovate, which we demonstrated with Clarity and Celsius.

And at the same time, we are definitely looking at new partnerships that make sense, like you said, both on the product side and on the go-to-market side.

So I think we will talk about them when they're ready.

But Cadence always has a culture of partnering.

We partner, for example, with MATLAB.

That was a great partnership at the system level.

We partnered with National Instruments when we bought AWR from them.

We have a partnership with Green Hills.

So we are always looking for win-win partnerships, and that continues to be the case going forward.

Your next question will come from the line of Gal Munda from Berenberg.

Just the first one in terms of the strong margin outperformance again and then kind of thinking about for the rest of the year, maybe, John, to you.

You mentioned that a little bit has got to do with the timing, a little bit has got to do with investment.

But if we're thinking about kind of sustainability of the margin performance, how much is inability or maybe not being able to hire and invest as much as you'd like right now versus just the top line really driving the additional scale that you're seeing, if that makes sense?

Yes, great question, Gal.

And we're back on track with hiring.

I think our hiring performance has been really, really good.

And we're delighted to be recognized on so many of these top 100 places to work around the world.

That's certainly helping us with our hiring activity.

Yes, on the margin side, it's really outperformance on the revenue side like right across all our lines of business.

We thought IP would have a soft middle to the year and it would recover toward the end of the year, started recovering a bit earlier.

But they had a strong finish to Q3, and we're expecting good things for them in Q4.

On the hardware side, again, demand, customer reaction has been tremendous and demand is really strong there.

And on the software side, all lines of business are performing really, really well.

And like you say, if you look over our contract cycle, over a 3-year CAGR basis, that we're continuing to see accelerated revenue growth.

So on the operating leverage side, we're delighted with the operating margin performance.

Second half of the year includes some double-up on expenses.

We did an early retirement program.

But I think the overall business is pretty much -- I mean if you take out the onetime things, we're operating pretty much at the guide we've given for the year, which is about 37%.

Got you.

And then as a follow-up, just on the top line again, you touched a little bit on the supply chain issues in the semi.

And when you move kind of through the year, you said it's incrementally affecting the business on the royalties.

Now we're talking about the hardware demand being stronger than kind of the ability to supply.

Is there a way to kind of quantify that from your perspective in order to kind of understand the magnitude of the impact, that kind of demand is there but were kind of limited by the supply side?

Yes.

It's a very, very small impact to us.

Like I say, the majority of our revenue comes from part of the design cycle.

The chip capacity constraints that you're referring to has really impact the production side of the cycle.

And that's where it touches us in terms of royalty revenue.

I think last year, royalty revenue for Cadence was around $50 million.

But this year, it will be slightly lower than $50 million, but we expect that to recover again next year.

Yes, so the impact is pretty small.

And the same then on the hardware side, we're happy with our supply chain, and you see inventory growing a little bit.

We talked a couple of years ago about moving from just in time to just in case in terms of our inventory management.

So we carry a lot of inventory.

So I think we're well protected, certainly for the next few quarters, on the supply chain side.

But yes, we're very happy with where we're positioned right now.

Right.

I mean just to clarify, on the royalties, nothing has changed over the last couple of quarters, once you kind of said that the impact has been slightly down from last year, that's kind of consistent to what you see.

That's right.

I mean our IP business is a mix of licensing and royalty business.

And chip capacity constraints from last year could feed into unit production this year and royalties are slightly down.

But it's very, very small in terms of the impact to Cadence on our overall numbers.

Your next question will come from the line of Gary Mobley from Wells Fargo Securities.

For different reasons, let me extend my congratulations for the next chapter for Anirudh and Lip-Bu.

I wanted to start out by asking about the X2, Z2 products and the step function increase in processing power that these new tools facilitate.

And the way I understand it, it allows customers to not only bring up hardware but also, in parallel, bring up software.

And so my question is, can you give us a sense of the magnitude of how this increases the potential dollar opportunity with each customer engagement or how it improves your sort of available market with this new software bring-up capability?

And I have a follow-up.

Yes, Gary, that's a great question.

And you're absolutely right.

I mean the reason for doing also Protium X2 with having the same front end as Palladium is to expand our reach to more and more software build-up.

And this quarter, when we launched Helium, it's for the same reason.

So not only we can run RTL, but with Helium, we can run hybrid models, higher-level models with RTL.

All this is for software bring-up.

And historically, I think Cadence has done well in RTL bring-up with Palladium, but not as well.

The market is growing more in the software bring-up.

And now we are doing pretty well with the combination of Palladium and Protium and Helium for software bring-up.

So I think in terms of the market, of course, it's difficult to quantify.

But at a high level, I think the market opportunity is maybe 1.5 to 2x larger once you combine the software and the hardware bring-up together.

Of course, it takes several years to fully realize all this.

But I think the market opportunity for Cadence with Protium, Palladium and Helium is much expanded because of the software.

I appreciate that, Anirudh.

And perhaps this is for John, but I want to ask about navigating the China export restrictions.

And maybe if you can give us a sense of whether it's any more difficult or any easier to obtain licenses to service those customers based in China.

And then maybe give us a sense of what the various puts and takes are there for China revenue growth, or lack thereof, as we sit here in the second half of fiscal year '21.

Yes, Gary, yes, good question.

Yes, when I look at China revenue, I think it's probably easier to look at China over a 2-year period because last year, with the pandemic impact and the 53rd week impact in Q4, I think if you look at where we're on track for 2021, it's probably a 30% CAGR in terms of growth in China since 2019.

We're working our way through all the export controls and everything and all the compliance that's required, and we have and we will continue to comply with all export control regulations.

But the situation is fluid, and we have to continuously monitor it.

But our outlook assumes everything that exists today remains in place today.

We haven't predicted any changes.

Of course, if there are changes, we would have to take another look at our outlook.

But essentially, for the sake of guidance, we just assumed that all export limitations that exist today for certain customers will remain in place for the remainder of the year.

And then for 2022, we'll update you all in 2022 when we give you our year-end results in February.

Your next question will come from the line of Tom Diffely from D.A. Davidson.

Yes.

So Lip-Bu, I guess I've only been around for the last 12 years.

But since then, the stock has gone from $6 to $167.

So obviously, very impressive, but I look forward to Anirudh taking it to $4,000 over the next 12, 13 years.

So I guess a question on the supply chain from maybe a little different angle.

What are you seeing in terms of capacity at the foundries?

And just curious if you're taking steps to diversify foundry activity from either geographic or company-specific reasons.

Well, yes, that's a good question.

I think, like Lip-Bu and John mentioned, we are more on the design side.

So we are trying to make sure that we can serve all our customers as they continue to do all these designs.

And in that process, we work with all the foundries, all the major foundries, of course, in U.S. and Asia and different parts of the world.

So we have a pretty healthy relationship with all the major ones, and we are encouraged to see more investment in the U.S. So with our overall position, Tom, we are pretty active with all the major foundries, and we hope to continue that.

I was wondering more on just the manufacturing of your chips that you design and build and put in your Palladiums and what have you.

Okay.

Got it.

Yes.

So I think the current set of Palladium chips, I mean the Palladium is a big system, so it has a lot of chips that goes into it.

Some of them we buy, and some of them we make ourselves.

So the ones we make ourselves are made by TSMC, which is one of the leading foundries, and we continue to work with them.

And we are designing new systems, the next generation of Z2 and all, and we always look at all the foundries.

But overall, we are very happy with our foundry partners for the Palladium Z2 system.

Okay.

Great.

And then curious, are you seeing an impact from COVID in any of the kind of many regions that you participate in around the world from just more of a manpower point of view?

I think it's fair to say that the impact was more like a few months ago.

I mean we still have an impact and we are still mostly, of course, working from home in several parts of the world and we're slowly opening some offices.

But in terms of -- we had a big impact in India a few months ago.

I think that has thankfully improved.

And so it's become more of the norm now, and we just continue to work through it.

So no new things, I think, in the last 3 months.

Our return to work was delayed a little bit because of Delta, so we hope to take that up early next year.

But other than that, we are working through all the COVID issues.

Your next question will come from the line of John Pitzer with Credit Suisse.

I'll add my thanks and congratulations to Lip-Bu.

My first question, John or Anirudh, is really on that 3-year CAGR acceleration.

And John, I know we've got to wait another 90 days before you give us a full outlook for calendar year '22.

But it's impressive that you guys have seen this acceleration over the last 2 years in the midst of sort of a global pandemic.

And if you look at Street consensus numbers for next year, they've got growth that goes back to that high-single digits.

And yet you talked earlier about demand outstripping supply.

Just wondering if you think these double-digit CAGRs are sort of here to stay.

And if so, to what extent is this sort of the fruits of your labor and some of your SAM expansion efforts versus some of the dynamics on the core business?

John, that's a great question.

But yes, I think the nature of our revenue model is such that I wouldn't expect any dramatic changes in our 3-year revenue CAGRs because 85% to 90% of the revenue is recurring in nature.

So I mean when we calculate 3-year CAGRs, by the end of '22, we'll be including '20 and '21 in that.

So you're not going to -- you shouldn't really have a dramatic change.

And I think if you have a look at the CFO commentary, you'll see the kind of step function that we've seen over the last few years.

It's been slowly accelerating, but it's pleasing to see that it continues to accelerate.

And that we're just up over 11.5% now, so rounding up to 12% this year.

So yes, very pleased with the way the business is going.

Again, we will refrain from talking anymore about '22.

We need another 90 days just to get through Q4 for that.

But yes, very, very pleased with the way it's going.

And because of the recurring revenue nature of so much of our business, I wouldn't expect the 3-year CAGR to change pretty much.

That's helpful.

And Anirudh, I'd love to get your thoughts.

Clearly, the U.S. and Europe have, I guess, rediscovered how strategically important the semiconductor business is.

And you're seeing sort of this push to regionalization of supply.

But it's not just about manufacturing, I think that world governments are going to incentivize sort of IP domestically as well.

And so I'm kind of curious if you guys have kind of thought through or could help us think through what you think the impact to your business will be from things like the CHIPS Act and similar legislation that's trying to make its way through the EU right now?

Yes, that's a great point.

And we are eagerly awaiting all the details.

But if you -- as you know, in the CHIPS Act, there is funding for manufacturing, but there's also funding for R&D.

And then as you said, it's not just the hardware or the manufacturing movement, it's also the IP and the software that enables all these things.

So I think we are optimistic about all this investment in different parts of the world.

But I think the details, as you know, still have to be sorted out.

But overall, we have a strong portfolio in multiple geographies.

So as there is more investment in U.S. and Europe, I think that is systemically positive.

Yes, John, that's a great indication of all the design activity that's going on.

I mean we're seeing strong secular demand across all these generational drivers.

We have a great strategy, great portfolio and solid execution.

And hence, everything you mentioned kind of just indicates more design activity globally, and that's good for Cadence.

Your next question will come from the line of Charles Shi from Needham & Company.

So I want to go back to your prepared remarks, you mentioned about Integrity 3D-IC being the industry's first and only comprehensive platform for 3D-IC.

But a few days ago, your competitor put out a press release.

They said their product is a complete end-to-end solution.

I just wonder, how do I kind of reconcile the 2 different comments around these 2 competing products?

And in addition, your competitor, Synopsys, they announced a strategic collaboration with TSMC.

Yet folks obviously did not see a similar press release coming from you guys right ahead of TSMC opening their Innovation Platform Forum which will start tomorrow.

So kind of wondered how you're positioning and what's the progress of Integrity 3D versus your computing platform?

Yes.

That's a good question.

So in terms of Integrity, like I said in my remarks, I think we are pretty confident of our position.

And a lot of the 3D-IC thing, it's not one thing, it's a combination of a lot of things.

So for example, some 3D-IC systems are more package-based.

Some are more packaged technology-based.

Some are more interposer-based, which is a more digital technology.

But all in all, Cadence is the most unique platform.

We have leadership in packaging with Allegro, with analog in Virtuoso, with digital in Innovus and all the analysis tools with Clarity and Celsius.

And they're all integrated and best-of-class solutions, okay?

So we are pretty confident of our position and the response we are getting.

And to your question with TSMC, TSMC is a great partner of Cadence.

And we are working with them on a variety of things, including Integrity 3D-IC.

And actually, to give you example, one of the leading mobile customers did a 3D-IC solution with us and TSMC.

And one of the key things there was the thermal profile, and they use Celsius to do silicon validation that Celsius is accurate for, for 3D-IC temperature simulation.

So I think 3D-IC is going to be big, and it requires multiple products and multiple implementation flows, and we are pretty confident in our position.

And maybe a second question, I'm not sure if this has been asked before since I recently just started following you guys.

I want to ask a question about Intel IDM 2.0 strategy.

I know you probably don't want to be too customer-specific, but the turnaround effort by Intel is too material to ignore, in my opinion.

Any thoughts on how Cadence can do to support Intel's grand turnaround efforts over the coming years?

And if you don't want to comment Cadence-specific, maybe give us some color at the industry level.

Yes.

Thank you for the question.

I think we are glad to do more with Intel.

Actually, they have the Intel foundry announcement and also some new programs like RAMP-C with the government.

And I'll just quote you what is already public by Randhir, who is the Head of Intel Foundry, he said, "Along with our customers and ecosystem partners, including IBM, Cadence, Synopsys and others, we will bolster the domestic semiconductor supply chain." So this is the official comment from Intel.

And I think we let them speak for their strategy, but we are glad to do more with Intel.

Thank you.

Our final question will come from the line of Vivek Arya from Bank of America.

Congrats and best wishes to Lip-Bu and Anirudh from my side as well.

For my first one, on your NUMECA and Pointwise acquisition and just kind of the general expansion into system analysis and CFD, could you give us a sense how big is it today?

How big can it be over the next 1, 2 years?

And importantly, when does that start becoming accretive, right, to the 11%, 11.5% kind of growth model that you have?

Yes, we're very pleased with the M&A integration for NUMECA and Pointwise.

They're not hugely significant from a revenue standpoint right now.

We would expect them to be accretive next year.

Got it.

And then maybe as a follow-up, I think, John, you mentioned some higher costs in Q4.

Are they one-off costs?

Or do they become kind of the baseline as we start thinking about OpEx for next year?

Yes.

Great question.

I mean I expect slightly higher cost in Q4 versus Q3, partly due to -- we did a bit of catch-up in hiring in Q3.

And of course, anyone we hired in the second half of Q3, we'll have a full quarter of their expense in Q4 where you didn't have a full quarter of expense in Q3.

So there's slight uptick to that.

And then secondly, I expect a little bit more on commission cost because we expect bookings to be stronger in Q4 because I would anticipate that we will finish the year with a stronger RPO than we started the year.

So expect a good bookings quarter in Q4, which will add a little bit of commissions expense.

And then also, we have slightly higher T&E embedded in the forecast.

That continues into Q1?

I know you're not giving Q1 guidance, but all else being equal, does that become kind of the baseline for going into Q1?

Yes.

I feel very good about the continuing operating leverage that, sorry, I don't think there's any near-term ceiling on operating leverage.

I mean you'll see that we're up to 37% now, but it's the fifth year in a row that we've delivered more than 50% incremental margins.

So every dollar of revenue growth from 2017 until now, we're dropping through more than $0.50 of that revenue growth through to operating income.

So as long as we're delivering incremental margins of over 50%, that operating leverage should continue to rise.

And that concludes our question-and-answer session.

I would now like to turn it back over to Lip-Bu Tan for closing remarks.

Thank you all for joining us this afternoon.

It is an exciting time for Cadence with the growing market opportunities and strong business momentum.

Our Intelligent System Design strategy is playing out very nicely as we benefit from new opportunities in design excellence, system innovation and pervasive intelligence and an expanded total addressable market.

We are proud of the innovative and inclusive culture that we built at Cadence.

We are grateful for the recognitions that we received over the years, including most recently being named as one of the World's Best Workplace for the sixth time by Fortune and Great Place to Work, as well as being named to Newsweek's List of Most Loved Workplaces for 2021.

And lastly, on behalf of our employees and our Board of Directors, we thank our customers and partners for their continued trust and confidence during these unprecedented times.

Thank you for participating in today's Cadence Third Quarter 2021 Earnings Conference Call.

This concludes today's call.

You may now disconnect.