Delighted to have the team from Cadence join us. John Wall, the Chief Financial Officer; and Richard Gu from the investor relations team. Richard said that he will make an exciting announcement before we start. We will get on to the Q&A part of the session. Welcome, John. Welcome, Richard. Thank you, Vivek. I'll be quick. Today's discussion will contain forward-looking statements. We'll make use of certain non-GAAP financial measures. Please see Cadence's most recent 10-K, 10-Q, and our website for discussion of risk factors and the use of non-GAAP financial measures. With that. Excellent. Back to you. Very exciting. Thank you. Appreciate it. Maybe, would be good, I think, to just to get everyone on the same page, right? Yeah. You reported very strong results recently. There were some questions about, you know, booking strength and so forth. Yeah. Maybe we can start with just kind of the near term and then get on to, I think, the more important kind of longer-term structural advantages of the company. Cadence, I mean, it's a computational software company, for those of you that don't know it. It's fundamental technology that you need to design any kind of microchips or electronic systems. About 85% of our revenue is recurring in nature. The other 15% comes from a small amount of hardware and IP that we sell. Like I say, mainly a computational software company that has significant cash flows. I think we've revenue just is the guidance right now is $4.05 billion for this year for revenue, 41.5% operating margins. We've generated 50%+ incremental margins over the last six years consistently. You know, every dollar of revenue growth at Cadence tends to flow through in the kind of mid-50s, about $0.55 of every dollar of revenue growth drops to the bottom line for us, on a non-GAAP basis. We spend about $0.08 of those dollars on share-based compensation. That's. So, I mean, it's a great business. Most of our customers are on three-year baseline contracts, and then they'll purchase add-ons throughout the three-year duration. When they purchase add-ons, the add-ons co-terminate with the underlying baseline contract. Typically, a customer will come back between four and seven times and purchase additional technology over the three-year contract. As a result, the average duration of our back, of the bookings in any one year typically ranges 2.4-2.6 years, averages about 2.5. That's because you've the three-year baseline, and every add-on is less than three years because they co-terminate. Then we see the, in terms of booking timing, because of the nature of our model, the timing of bookings doesn't matter a great deal. It's the annual value of those bookings, because we're always trying to grow the annuity, the annual value that we're extracting from each customer. Our top 40 customers at Cadence, we generate 55%-60% of our revenue from just those 40 names. The top 40 is a bit like the Dow. It changes all the time. The top 40 for this year will be very different. I mean, there's maybe 50% of those names were in the top 40, 10 years ago, but it was still generating 55%-60% of the revenue back then. So we tend to win with the winners. We have individual strategies to grow our top 500 accounts. We have very broad coverage in terms of having individual strategies to grow the accounts. Our focus is mainly on profitability, more so than revenue growth. Generally, we aim for double-digit revenue growth, which, with improving margins, tends to turn into kind of low to mid-teen operating income growth. We use half of our cash to buy back shares, which results in EPS in the high teens, low twenties, every year with strong cash flows. Very nice. Yeah. One thing I like, John, is, you know, in your CFO commentary, you give that kind of three-year view of, right, of the trend, which is, I think, the right way to look at, the business also, as you just alluded to. When I look at that trajectory, Cadence used to grow at 7%-8% CAGR, then it stepped up to 10%-11%. Yeah. Now it's kind of in the mid-teens. Yeah. Walk us through what has led to that acceleration of growth? when I look at the broader semiconductor industry, that has not accelerated. Yeah. In the same way. What has driven the acceleration in your business? We've been very data driven. I remember. I moved, I've been with the company a long time, 26 years at Cadence. Only? Yeah, 26. I took the job like a one-year, two-year gig, thinking, "I'll go find something else." Nobody knew who Cadence was then. They still don't know who they are. So 26 years there, but I moved to California in 2015, and when I arrived, we were at the sales kickoff, and my CEO at the time was Lip-Bu Tan. Lip-Bu was on stage handing a blank check to the head of our IP business. Blank checks scare me anyway, but, I was a bit freaked out by the blank check, and I went to talk with him afterwards, and I just asked, "What's the problem?" Most of my conversations at Cadence start with, "What's the problem you're trying to solve?" The problem he was trying to solve was that revenue growth had been decelerating. Because revenue growth, if you go back from, like, the period 2012 through 2016, Cadence revenue growth, I think, was going, like, you know, 12, 11, 10, 9. Right. At the time, he was a bit worried because I think our forecast was 6.6% revenue growth, and he was like, "We've got to turn this around." He was, I think, looking at what Synopsys was doing and thought, well, their revenue growth was mainly coming from IP. We thought that was a good opportunity. If we want revenue growth, we'll do that. That was the problem he was trying to solve, revenue growth. I just dived into the data, pulled a bunch of data with my team, and what we looked was, and this is probably the most unintuitive thing about Cadence, although we're spending that, back then, we were probably spending closer to 40%, but generally, we spend 35%, 38% of our revenue on R&D. You won't find many companies spending that amount on R&D, but it's a very innovative space. That, and what I found at the time was just a rough straw poll of the leading engineers in the company. I found that about 2/3 of their time was being spent on products that were generating revenue today, and 1/3 was being spent on products that didn't offer any revenue in the current year. For me, I wanted to bifurcate between how much of your time is maintenance, how much of your time is real new product innovation? When I looked at why they were spending so much time, the reason they were doing that was, our customers are the greatest people on the planet. I mean, they're artists. They take our technology, and they design all this wonderful technology that we can't live without. When we have a solution to something, many of our customers, they don't care if it breaks down every 30 seconds. If you have something close to the solution, they'll take it the rest of the way themselves. Our engineers, trying to keep customers happy, we're too quick to want to release something. When you release it too quick, you've a lot of bugs. Customers are not all customers might have the same talent level. Customers are upset. Our engineers spend a lot of time doing bug fixes. What we did was we started capturing things like customer call center volume, customer change requests, to try and identify which of those products did we release too fast. When we identified those, the crazy answer I went back to Lip-Bu with was, I said, "Lip-Bu, I think I have the solution to your problem on how to turn around revenue growth, slow down product introduction." We did it. Like, he trusted the data, that we slowed down product introduction so that the engineers weren't spending time after the product release, maintaining those products or dealing with the bug fixes and everything, and they could spend more of their time doing new product innovation. Back then, if it was two-thirds maintenance, one-third new product innovation, it's flipped the other way now. It's probably two-thirds new product now. Despite the fact that we have 41.5% margin guidance for this year, with probably 35% of our spend is in R&D, 2/3 of that is not contributing $0.10 to that revenue this year. It's all generating revenue in the future. Once we turned that around, and we started increasing the pace of new product introduction, then we saw revenue growth come with that. Then you've seen that. We track a three-year revenue CAGR because we're looking at accounts. Sometimes you'll have accounts where, you know, it's hard to get the customer to see the value initially. We'll try to proliferate some of the technology into the account, maybe for one or two projects, and then leave room for customers to come back and purchase add-ons later. We did that, and you tend to get that growth that follows through. The other thing we did was we established these deal quality metrics. Again, very simply, we just did a calculation to figure out what's the average selling price for every product, and then we compared what a salesperson was getting on each account. Whatever your configuration was, we knew what the average selling price was for the annual value of those products. Then we could figure out a deal quality metric. If the annual value that everyone's paying us, the average price, was $10 million a year, and you were buying from us from $8 million a year, I would look at the sales guy that's selling to you and say, "Okay, you've got a deal quality metric of 80% here." It freaked the sales guys out a little bit. It's a bit like telling teachers, we're judging you based on the grades of your students. They would say, "That's not fair." What is fair is how does the grade improve while you have responsibility for the account? Right. Once we established that, this salesperson, you have an 80% DQM. The beauty of this was you could look at one account, you could look at one product, you could look at a portfolio of accounts, you could look at regional VPs that had thousands of accounts. As long as you were measuring the accounts they had in their control over a defined time period, you could tell which ones, whether they were improving or disimproving. When we did our individual strategies for each of the accounts, we started with the top 100. Bear in mind, top 40 is 55%-60% of revenue. You've got huge coverage. We did what we called the four Ps. Let's again, try to keep it simple for everybody. What we did was we looked at the people that were on the account, the products that were in an account, and the profitability of the account. Then what I asked them for was a plan to double profitability on the account in four years. In some cases, they came back, and looking at the deal quality metrics, customer was already paying more than average. We said, "Well, we need to play defense here." In other cases, "Customer is paying too little here. You need to be more aggressive and play offense." Just following the data and knowing whether you're playing offense or defense, I know it sounds silly, but that's the type of stuff we weren't doing six, seven years ago. We've adopted those, that strategy, and there's a lot more discipline in pricing. There's a lot more data-driven approach to everything now. What we've seen is that if you follow the three-year CAGR, like you say, we've gone from 7%, 8% up to mid-teens. Right. all the while, we've done that improving operating margin and improving operating cash flow. Got it. Is this mid-teens growth rate sustainable? Why or why not? Again, I focus on take-home pay rather than gross pay. You know, someone could tell you they'll double your gross pay, but if it means you're taking home less, you won't care, right? There's a lot of growth out there, and we have these new AI tools that we're launching. I mean, there's huge potential for growth there. We think that will turn up over maybe one to two contract cycles, though, 'cause the important thing at the initial stage is going to be proliferating that. Our model generally, when we talk to the board, when Andrew and I talk to the board, what we commit to them is the double digits. We wanna drive. Double digit could be like 10 or 99? Well, I would rather double-digit, more profitable, double-digit revenue growth. Right. Than, like there's a lot of business that's available. You could pretty much print any IP revenue growth you want at the moment. I mean, there's companies willing to outsource their IP to you. You know, I have a team of engineers that cost me $10 million for my own in-house IP. You guys take it on, I'll pay you $20 million now for the next three years. Saves me $10 million, you get $20 million revenue immediately, pretty much, because you've already delivered the IP. You're signing up to expense, a perpetual stream of expense. We don't do that well, we steer clear of that type of business. We always describe Cadence as being farmers, not hunters. That's we're better farmers than hunters. We basically plant now and harvest later, right? We will invest in R&D. Like I said, despite the fact we're spending 35% of our revenue on R&D, 2/3 of that is not generating any revenue right now. We're planting now for harvest later. We want to do things now in R&D that allow us to harvest cash flow and revenue into the company later. With some IP business, it's on offer, you can do the opposite. You can take revenue now, sign up for the expense over a period of time, that's a hunter mentality, and it doesn't suit us. We tend to focus on more profitable activity. What I like to do is measure the operating income per engineer, including the cost of stock. Everyone, a lot of our engineers will get share-based compensation. Now, if I go back to 2017, that was the first year I became CFO. Our competitor, Synopsys, had 40% more revenue than us and 33% more operating income than us on, if you include the cost of shares. When you look at it by engineer, I think we were generating 115%- 117% of the operating income per engineer that they were. That was because we had dedicated our engineers to higher margin activity like software development, as opposed to IP or services. Five years on, if you compare 2022 with 2017, the gap has widened on revenue. We were 40% behind, we're now 45% behind, and proud to be 45% behind. The, on the operating income side, it went from 33% behind to probably 3% behind. Right now, we're generating probably 175% of the operating income per engineer than our competitors, because we're very data driven and because we're focusing our attention. We think the scarce resource is engineers, and we need to focus that attention on the highest profitable activity for the benefit of our investors. When you look, John, at the new product pipeline and your investments. Yeah. Do you think this kind of mid-teens growth rate is sustainable? It's a trick. I mean, we're not guiding for next year. I think if you look over a longer time horizon, like if I look at the AI tools that we've launched, and we have a suite of AI tools now across all of our products. When you look at the benefit that that provides, that your typical semi company, if they're spending $10 million on R&D, they're spending $9 million on people and $1 million on tools. What I would tell another CFO is that, okay, if you don't change anything, you know, at some point, that $10 million becomes $20 million. You're spending $18 million on people, $2 million on tools. If you spend more with us, we can save you more. If you spend more with us, by the time you get, you can pay $16 million to get that $20 million of value, if you spend $4 million with us. I do think there is the potential for someone's spend, that's spending $10 million in R&D now, $9 million on people, $1 million on tools, might only have to spend $16 million to get double the value. They'll have to spend more on tools, 'cause you'll leverage AI to get more efficiency. It really is the pace at which that, we can get that adopted. It'll be certainly slower than NVIDIA, right? NVIDIA is, I mean, tremendous, I mean, great partners. I don't know if you saw the. Announcement, right. Yeah. So, we've always been very close collaborators with NVIDIA, and we generally follow where they lead. Like our emulation systems are super popular. We would collaborate with NVIDIA are a good partner of ours. They help us develop those systems. When you have, say, NVIDIA succeeding with a GPU, what tends to happen is our customers will use the GPU, they'll cast a broad net, they'll run a bunch of projects, they'll see value in a particular niche market, and then when they see that value, they'll look at how do they optimize for that, and they'll probably create a custom chip. That the solution to drill in further where there's opportunity for value is to create some custom silicon. When you need custom silicon, you're gonna need tools from a company like Cadence. So generally, their success tends to lead to more custom silicon. The more democratization there is of custom silicon development and the more startups, design startups that you have, that generally is a leading indicator for revenue growth for us. Like I say, I mean, some customers will adopt it quicker than others. Right. I mean, I've described it to some as, I think our pricing power gets better over time. The best analogy I can use is, if you go to a Warriors game and you stand up for a minute, your view of the court is amazing. Of course, if everyone else stands up, other CFOs have used this with me as well, if everyone else stands up, your view is back to the same as it was. You're just all a little bit more uncomfortable now. Other CFOs will tell me that, "I'll pay for AI tools, but then everyone will pay for AI tools, and I'll be no better off competitively, but you guys are getting all the AI dollars," right? The thing is, a couple of contract cycles in, imagine being told to sit down. We don't want to sell you AI tools anymore. The pricing power you have with customers kind of builds over time, because the more dependent they are on tools and the technology, and the more sticky those tools become. I think it's important, we have like a partnership relationship with our customers. We certainly don't price gouge anybody, but we do look for a fair return on the investment that we make. Our strategy normally, I mean, if someone doesn't want to pay, like, if someone is moaning or complaining about paying extra dollars upfront for the benefit, we believe that they'll derive. Typically, we will offer to invest alongside them. If you don't want to invest, if you can't afford to invest more than 80% on your R&D, maybe we'll invest another 20% with you, but we have to share in the outcome. If we invest alongside you, we share in the outcome in some kind of bonus element or royalty. Once you take it down that path, and they realize how much you want to get paid for investing alongside them, they bring the discussion back to, "Okay, well, what if we paid you the price, the, a bit more on price?" So the pricing discussions often take that path, but over the course of contract cycles, we just become stickier and stickier. Is there a simple way, John, to quantify the AI benefit to Cadence? Have you already seen it? I imagine that all the new products, right, whether it's the TPUs or the H100, GPUs, or what have you know, they started to get designed a few years ago. Yeah. Are we already seeing AI benefits kind of run rate in your business today? You think that benefit can drive further acceleration in your business over the next three-year cycle? There are certainly huge benefits that we've seen. I do think it's project by project base. That's, I think, like, take the H100 as an example, didn't we have, what, 9x faster speed up? Yeah. I think the way we think about the benefits from AI is both horizontal and vertical, right? Horizontally, you know, we're in the midst of supporting all the AI companies, right? Like infrastructure platform companies like NVIDIA, Qualcomm, NVIDIA, and, you know, Broadcom, you know, and, you know, Marvell, all these different companies. Importantly, also on a vertical level, we have five AI products, right? All woven together, running on one common JedAI platform, on an open source basis, right? All these AI products, obviously, they command a premium on pricing. Also, over time, it's gonna drive adoption curve and driving more quantities. The way we think about AI, we feel like this is a great thing, great tailwind for our business for many years to come. Are the, are the benefits still on the come, or you think they are represented in your current growth rates? I think it's just, literally just getting started on this, right? When you think about the H100, I think over time, you're gonna see AI chips, because it's not just compute, right? It's compute, networking, storage, applications. As those start to proliferate and disrupt these different industries, I think you're gonna see more and more of activities in that front. I think we, as a company, sits beautifully in the midst of all these activities and driving and supporting our customers on their AI journey. I think it's a very early stage, you know, for our growth. Yeah. Got it. One very kind of near-term question, John, which is, how is the visibility around the second half of the year, right, when you're supposed to, you know, start building up, right, your bookings and your backlog? Again, the annual value of our bookings has been increasing steadily. We did some record contracts with very, very large customers at the first half of last year. Of course, you know, they don't come up for renewal for another few years. Right. that you have some kind of headwind on RPO as a result of burning revenue on that every quarter. Right. The first half of this year, we didn't have a lot of contracts expiring, so you didn't have a lot of renewals happen in the first half of the year. From a profitability perspective and annual value perspective, anything we did renew, we renewed at a higher annual value than before. Right. That drives some growth. When you look at, I think when, in relation to the second half, typically, I hedge the second half for hardware, particularly. Our hardware emulation systems are super popular. The demand has been off the charts the last six, seven quarters. The, we ramped up production capacity last year and increased prices by 20% and still ended up with a longer lead time in backlog at the end of the year than we had at the start. We've pretty much doubled up capacity for production capacity at the start of this year. Q1 was a significantly high revenue record quarter for hardware. A big part of that was because every system that came off the production line went to a customer that had purchased it. Right. When you deliver those, you trigger immediate revenue on delivery of the hardware. The maintenance piece gets taken over time, the hardware gets taken immediately. When we produce hardware, we typically have four constituents that are waiting to receive it. The biggest one are customers that have purchased it and are waiting for delivery, that triggers upfront revenue. We also have our own hardware cloud infrastructure. We put it in the cloud for smaller customers, the price of this hardware is a bit like a big Ferrari or something. If you don't have a use case for a Ferrari all year round, that, you might only need it for a month, you'll rent it, typically people do that in the cloud. There's premium pricing for it, but that has been starved of hardware for a while because there's been such long lead times, from the customers that are purchasing. We have hardware systems that we go out and seed future business from. Like if a customer has the ability to purchase one but hasn't bought yet, that we will maybe put a system on site for them for one or two quarters, and then convert that into a sale later. There's our internal usage requirements as well. Now, in the first quarter, because all of the hardware systems that came off the line went to kind of eat into that lead time. We sold systems in Q4, in December, even though we told customers, "You might have to wait six or seven months for the hardware to be delivered." There's that much of a backlog. People were still buying them and prepared to wait. Now, most of the time, people, you'd only see the opportunities turn up in the pipeline about three to six months before a project starts. If we're telling them, "Wait six or seven months," we're pretty much asking them to delay a project to use our systems. They should go off and buy something else. They were still waiting for ours, still willing to wait for ours, which is great. That's not something that's sustainable. We had to ramp up production, that, we wanna eat through the lead times. We did that in Q1. Right. In Q2, We'll produce the same number of systems in Q2, but some of those systems will go to set up second half activity. It'll be demonstration machines. Right. There'll be some cloud infrastructure machines. We're trying to get down to, like, a 13-week lead time, for sales that happen at the end of Q2, beginning of Q3. What's the lead time on hardware right now? It was, like I say, it was six to seven months in December. trying to get that back to three months. It used to be. The lowest it was before, it was, like, about six weeks. I don't see it ever going back there. That's, I just don't think it's possible. It's but it'd be nice to get it into the 10-13 weeks, but right now we've targeted 13 weeks. When you say you have a conservative outlook on hardware for the second half? Well. Does it mean like flattish half on half? Well. Does it mean down half on half as part of your outlook? The issue there is, the thing that was hard to predict for the second half is that when you have long lead times like that, I know how I reacted when there was supply chain challenges. That, you know, if you wanted two of something, and you found out it's a year? Start hoarding, right. Order four, right? We had huge demand and a big backlog, but I didn't know how much of that, when we start meeting all of that demand. Right. will we have taken some of second half demand forward or not? I don't know. The other thing that I was cautious of, was that with every system coming off the production line, going to customers that have purchased it, we're selling a lot of hardware to customers that already have 10, 12, 15 systems, you know. Those new adopters that we typically put out a demonstration machine for a quarter before converting it into a sale, for the last kind of five, six quarters, there's not been a lot of opportunity to put demo machines out there. We want to get to the point to have those demo machines out there so that you can trigger demands in the second half. I mean, we've done all the things that we need to do to improve the second half. As part of the outlook that you have already given. Yeah. do you think hardware as, what is reflected in that outlook that's been already given? Is hardware a flattish half on half, or is it? Oh, no, no. First half. First half. Is much higher than second half in our outlook. Okay. There is definitely room to take up the second half with more hardware demand. The tricky bit is how long will it take to get those the hardware installed? We really have to eat into the lead times. If I can eat into the lead times, get some demo machines out there's room to take up the second half. Got it. We'll, I mean, we'll tell you more about that in July. Of course. Yeah. Do you think the industry has kind of addressed this China restriction risk adequately? Like, when we look at the last set of restrictions that were put on. Yeah. On the industry, right? I think they were fairly benign, but to the extent there were restrictions, were you informed, you know, three months before, six months before, a year before? Like, how long of, you know early warning system do you have? We were informed with everybody else. We had a subpoena on our China business, 'cause the government wanted to understand what we were selling and to who. Thankfully, it was very straightforward because our sales into China are, basically, you have a contract or a product quote, an invoice, and then delivery. Right. It's all very, very straightforward. There were no joint venture structures or anything like that. It was all straightforward. That they came in, they looked at that. They were trying to understand what our, what our customers were using for. I think what we learned from the government was, they were very focused on military end-use capability. I know you say the activity's been benign, probably benign to us, but I wouldn't say so, it's not as benign to, say, equipment manufacturers. Right. They seem to be focused on equipment manufacturing, mainly. They seem to be happy with design activity, as long as the design activity results in tape-out outside of China. That you take it to Samsung. Right. Take it to TSMC or Intel or whatever, GlobalFoundries. They didn't want the activity happening in China. So it seems that, I mean, we've got 1,500, 1,600 customers in China now. A lot of design activity going on out there. Most of it is getting taped out at probably TSMC. I see. Just a question. Yeah. Please, thank you. Why do they care? I mean, surely if they're trying to keep it out of military hands. Yeah. They care about the design of that product. Where it gets made is irrelevant, isn't it? I can't, I won't claim to understand the workings of government and what the motivation is behind this. I do know that, like, on the design side, what we've seen is some restrictions on being able to help lower process node design and manufacturing in China. We saw that GaN FET. There's a restriction on this GaN FET technology that really applies at probably, like, 2nm design at TSMC. The good news for us, I mean, we've always been telling the government this: "If you're imposing rules, and you want us to stop selling certain technology, tell us plenty of time in advance. Don't tell us about something that we made 10 years ago." With GaN FET, we have new products that are. It's kinda like Diet Coke and regular Coke that you can have. There's a version of the product that has GaN FET in it. There's a version of the product that doesn't have GaN FET in it, so that we're able to at least service both markets. I mean, we're free market people. We would like to service all of our customers as much as we can within the boundaries of the law. Terrific. I think with that, we have run out of our time, but thank you so much, John. Thank you, Richard, for participation. Thanks. Thank you.