Cadence Design Systems, Inc.

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cajun second quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. Thank you. I will now turn the call over to Alan Lindstrom. Senior Group Director of Investor Relations for Cadence. Please go ahead.

Thank you, Mike, and I would like to welcome everyone to our second quarter 2020 earnings conference call. I am joined today by Lipu Tan, Chief Executive Officer, 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 September 11, 2020. A copy of today's prepared remarks will also be available on our website at the conclusion of today's call. Please note that the discussion today will contain forward-looking statements and that actual results may differ materially from those expectations. 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, including the company's future filings and the cautionary comments regarding forward-looking statements in the earnings press release we issued today. 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 and evaluating our business, it can also be useful to review certain results using non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial measures. The reconciliations are available at the Investor Relations section of Cadence.com. Copies of today's press release dated July 20, 2020, for the quarter ended June 27, 2020. Related financial tables and the CFO commentary are also available on our website. Note that Cadence is continuing to adhere to social distancing practices, and therefore we are conducting today's earnings call from our respective remote locations. Apologies in advance if there are any glitches or handoffs that take a little longer than usual. And now I'll turn the call over to Lipu.

Good afternoon, everyone, and thank you for joining us today. I'm very pleased to report that in the environment of continual uncertainty, we achieved excellent financial results for the second quarter of 2020. We exceeded our financial outlook on all key metrics. as a team successfully navigate through challenges posed by the pandemic. In view of continuing strong broad-based demand for our innovative solutions, combined with a robust design environment, we are raising our financial outlook for the year. John will provide more details on our Q3 and annual financial outlook shortly. We are all going through unprecedented times, and I hope that you and your family are staying safe and healthy. In this environment, our top priority continues to be ensuring the safety and well-being of our employees, customers, and communities. Our employee base has adapted well to working from home, which appears to be the new normal. at least for the foreseeable future. Our R&D and customer deliverables are tracking well, and our sales and application engineering teams continue to engage effectively with our customers by increasing our investment in infrastructure and collaboration platforms in order to maintain high level of employee productivity. Fueled by the generational drivers such as 5G, AI, and hyperscale computing, the data-centric revolution is accelerating semiconductor demand and design activity. As a result, we are seeing widespread demand for our EDA software, IP, and hardware solutions. And our intelligent system design strategy has us very well positioned to benefit from these trends. Now let us look at some of our design excellence highlights for the quarter. We deepen our partnership with Renesys to accelerate their innovation to a wide-ranging expansion of our EDA and hardware solutions. Our new digital full-floor with the innovative iSpecial technology continues its momentum with 10 new full-flow wins during the quarter. We expanded our partnership with Micron to a broader proliferation of our EDA solutions, including the deployment of our digital full-flow for the development of their next-generation products. Cadence collaborated with TSMC and Microsoft to ensure customers to accelerate design, timing sign-off using cadence sign-off solutions in TSMC technology on Microsoft Azure. Our cadence verification suite delivers the best verification throughput and has several wins across mobile, networking, and medical verticals. We deepen our relationships with the leading medical technology company as they expanded usage of our verification suite, digital, and custom analog solutions. Our Exelium simulator has been steadily proliferating with multiple migrations from competitive simulators underway. We have another outstanding hardware quarter with the compelling value proposition of the integrated Z1 and X1 combinations being increasingly attractive to customers. The Palladium Z1 emulator with its unique custom chip-based architecture continue to win new customers and significantly expanded capacity at existing key customers. Our Proteum X1 prototyping platform has ramped strongly based on the differentiated ability to provide very fast bring-up time and high performance. The growth of analog, mixed signal, and RF designs is driving the need for high performance and accurate circuit simulations. Our massively parallel SpectreX circuit simulator continues proofreading at multiple customers like Skyworks and won several competitive displacements, including at a market-shipping hyperscaler. Q2 was an especially strong quarter for our IP business, as it again delivered double-digit revenue growth. Our refined strategy of focusing on star IP at the most advanced nodes continue to pay off. Robust demand continues for high-speed SIRDI and DDR IP. And Tensirica has particular strength in hi-fi through wireless studio and vision application, as well as strong loyalties. Our system innovation sector executes very well, delivering double-digit revenue growth. Several market shipping customers across multiple verticals have successfully used our 2.5D and 3D IC advanced packaging solutions on production design. Integration of AWR and integrant is progressing well, with the teams working on developing a comprehensive high-frequency RF platform. Business momentum was strong, and AWR added six new customers in Q2. The new system analysis tools continue to gain momentum, with over 125 engagements underway, multiple new wins, and expansions at several existing customers. New Clarity customers included a market-shaping hyperscaler and new Celsius customers include a SUSE tax. Now, I would like to take a moment and talk about inequality and racial intolerance. These significant societal issues have led to heartbreaking events over the past few months are very close to my heart. At Cadence, embracing diversity and fostering Inclusion are key tenants of our culture. We believe that by being open to different views and perspectives, we learn from one another, and together we become stronger as one team. We have several related initiatives underway, including training, pay equity, community donations, recruiting, and career advancement support. among others. We are committed to treating each other with respect and dignity and are proud to take stand against racism, prejudice, intolerance and violence. Now I will turn it over to John.

Thanks Lipu and good afternoon everyone. I am pleased with our results for Q2 and updated outlook for fiscal 2020. For Q2, we exceeded all of our key financial metrics for the quarter. Back in April, we were expecting that some Q2 revenue might shift to Q3, in part due to the pandemic-related challenges that we thought would delay a number of our Q2 IP deliveries and hardware installations into July and Q3. On reflection, business was stronger than we expected, and our team adapted well to the delivery challenges presented by the COVID-19 pandemic. Ultimately, those anticipated delivery challenges did not have the impact to our Q2 results that we originally feared. As with last quarter, our recurring revenue model gives us strong visibility into revenue for the remainder of fiscal 2020. Based on our experience in Q2, we are much less concerned about our ability to substantially overcome any hardware and IP delivery challenges caused by the pandemic. And we factored that experience into our estimate of how much of our second half revenue we expect to record in Q3 and Q4. I will share more on the assumptions embedded in our outlook in a moment, but first, let's go through the key results for the second quarter, starting with the P&L. Total revenue was $638 million. Non-GAAP operating margin was approximately 35%. GAAP EPS was $0.47, and non-GAAP EPS was $0.66. Next, turning to the balance sheet and cash flow, our cash balance was approximately $1.2 billion, while the principal value of debt outstanding was $700 million. Operating cash flow for Q2 was $345 million. DSOs were 45 days. And during Q2, we repurchased $75 million of cadence shares. Before I provide our updated outlook for fiscal 2020 and what we expect for Q3, I'd like to take a moment to share the assumptions embedded in our outlook. Our outlook continues to assume that the export limitations that exist today for certain customers remain in place for all of 2020. Our outlook also assumes that the COVID-19 pandemic will remain a challenge for the remainder of the year. As a result, we have taken steps to prepare our workforce to work from home for longer, and we are anticipating that a number of our smaller customers will experience liquidity challenges that will likely result in some of those customers being unable to meet their contractual payment commitments. We have taken the precaution of pausing revenue recognition on bookings from customers where we believe there is significant uncertainty surrounding our ability to collect payments. The financial impact of non-payment on those accounts has already been factored into our outlook for the remainder of the year. And with that, our updated outlook for fiscal 2020 is as follows. Revenue in the range of $2.585 to $2.615 billion. non-GAAP operating margin of approximately 33%. GAAP EPS in the range of $1.84 to $1.90. Non-GAAP EPS in the range of $2.50 to $2.56. We expect operating cash flow to be in the range of $810 to $840 million. And we expect to use approximately 50% of our free cash flow to repurchase Kaden shares in 2020. And here's how much of our annual outlook that we currently expect to record in Q3. Revenue in the range of $630 to $650 million. Non-GAAP operating margin of approximately 32%. GAAP EPS in the range of 49 to 51 cents. Non-GAAP EPS in the range of 59 to 61 cents. And we expect to repurchase $75 million of KEDN shares. You will find guidance for additional items as well as further analysis in the CFO commentary available on our website. In summary, Cadence delivered another quarter of strong revenue growth and expanding profitability. And we're pleased to raise our outlook for the year. Before the pandemic, Cadence operated from around 50 sites across the globe. We are now effectively operating from a distributed network of more than 8,000 homes. We are blessed to have many strong leaders located across the world, and I'm very impressed and thankful for how our employees are not only rising to the challenge but positively thriving as they remain intensely focused on delivering successful outcomes for our customers and partners. Finally, I would like to close by thanking our customers, partners, and our hardworking employees for all that they do. And I'd like to remind them all that their health and safety continues to be our first priority. And with that, operator, we'll now take questions.

At this time, I would like to remind everyone who wants to ask a question to please press star, then the number one on your telephone keypad now. We will pause for a moment to compile the Q&A roster. Your first question comes from Ruben Royd. benchmark.

Hi, thank you for taking my questions and congrats for continuing to perform so well in such challenging times. John, I want to start and just kind of drill into the commentary on the smaller customers and the liquidity challenges that you're talking about. Are these ongoing conversations you're having with customers? Have you seen some of this in the numbers that you've reported and guided to for Q3, or is this more sort of anecdotal thinking as you think about the guidance for the full year? Thank you.

Thanks, Ruben. Good question. But yeah, I mean, as we said, business was stronger than expected, particularly in hardware and IP. And last quarter, we were concerned that compliance with some containment measures around the globe would impact everyone's day-to-day operations. And we expected those measures to impact us in three ways. We thought if our customers' offices remained closed, that would impact us on our ability to install hardware. On the IP side, access to our own IP labs was impacted. We were fearful that that would impact our ability to complete delivery in our IP. And then the other thing we were concerned about was that if the shelter-in-place restrictions were prolonged, we were concerned that the pandemic would disrupt the normal business and operations of many of our smaller customers, and that would impact their liquidity, and ultimately, We were preparing for collections challenges on those accounts in the event that some of those customers were unable to pay us for what they purchased. On reflection, as I said in the script, on reflection with Q2 behind us, business was stronger than expected. Our team adapted well to the delivery challenges. The issue, though, on collections from smaller customers remains. The potential collections impact is a concern. We received a number of requests from customers to delay their payments to us. We've chosen to continue to provide services to those customers, and some will eventually get back on track and pay us. But many, despite theirs and our best efforts, may not be able to get back on track and will likely fail to collect on a number of accounts. And our best estimate of that is we've basically reserved for about $70 million worth of bookings right now at the end of Q2. To put that in context, Over the three-year period from 2017 to 2019, we didn't collect on $36 million worth of orders. So we've paused revenue now on $70 million worth of bookings. So we're covered for twice the experience we had over the previous three years.

Very, very helpful detail, John. I guess just for a quick follow-up, I was looking at the core IC design. tool performance in the June quarter and down a little bit sequentially on the digital side, up a little bit on the customized C-side. It would seem that maybe that's where you're seeing some of the near-term issues. Is that the way to read into what's going on with those line items?

Yes, absolutely. So the impact on collections, particularly with smaller customers, is more heavily slanted towards our software business. So we pause revenue on a number of contracts where we think collections are challenging, and that impacts the software business more than it would, say, hardware or IP. Because in many cases on the hardware side, because we get revenue up front, we expect payment up front. So you don't have as much credit exposure there. On the IP side, much of our IP revenue is coming from royalties, and royalties are typically with customers, like with our top 100 customers, which are very good credit customers. They have strong balance sheets. This is really isolated to that group of customers that are kind of outside our top 100, and it's kind of the smaller customers.

Got it. Okay. That's very helpful. Thanks. Our next question comes from Tom Diffie from DA Davidson.

Your line is open.

Yes, good afternoon. I guess first, John, just following up on the last question, is there a geographic bend to the small customers that you're worried about?

Sorry, can you repeat that, Tom? Oh, sorry.

Yeah, is there a geographic bend towards the customers that you are concerned about, the smaller customers, or is it broad-based across the world?

No, particularly. I mean, if there's any particular demographic that's been hit, it's smaller customers. It's right across the globe, but very much in smaller customers and probably mostly in software over IP or hardware.

Okay. It sounds like your business is fairly strong across the board, but I was wondering if you are seeing any kind of bifurcation between your consumer-driven customers and the high-performance compute customers that seemingly are much stronger today.

I think on the royalty side, I think royalties for the first half are like 25% higher than they were for the first half of 2019. It's hard to break it down in terms of where there's strength in different parts of the business. I think it's kind of across the board. We've seen strength across the board. The challenges on the credit side are quite random in the smaller pool of customers.

Okay. It sounds like a lot of customers or a lot of players out there are seeing strength in high-performance compute offsetting some weakness in consumer performance. But from what you say, it sounds like you're continuously seeing strength across the board.

Our royalty revenue is related to the consumer electronics market mainly. And we're seeing strength there, like you say, 25% up. I think the royalties were around $21 million for the first half of the year compared to just under $17 million for the first half last year. IP was strong. On the design IP front, our refined strategy of focusing on star IP at the most advanced nodes continues to pay off. Demand for high-speed SerDes and DDR IP continue to be strong, with deployments at leading mobile, networking, hyperscale, and storage customers. And then on the Tensilicus side, the highlights there were our customizable, scalable DSP IP, including deployments in true wireless stereo and vision applications, helped along with strong royalties to have very strong performance for Q2 revenue and IP.

And then Tom, just to add on this as a little, I think clearly it's kind of a broad-based But I think your question on the data center cloud hyperscale, we see very strong demand because of the infrastructure. When people work from home, there's a lot of scaling. So we see also very strong in that area, too.

Okay. Thank you, Upu. Your next question comes from John Pitzer from Credit Suisse.

Yeah, good afternoon, guys. Thanks for asking the questions. John, maybe, you know, different sides of the same coin. I want you to help me understand as you look into the September quarter, what's driving gross margins down sequentially? I would have thought that perhaps in the current environment, there were some costs that you might have to incur around COVID mitigation actions that actually might dissipate as we go into the back half of the year. And I guess similarly, Over the last several years, the operating cash flow has been more front-end loaded, first half weighted than second half. But just relative to your guide, it feels like second half is only about 30% of the operating cash flow. I'm wondering what might be driving that. Maybe it's the same thing. Maybe it's different.

Yeah, John, good question. In terms of on the off-margin profile, there's a couple of things in that question, so let me unpack it a little bit. that in terms of the op margin profile, you know, the expectation that we had when we gave guidance for Q2 was we thought that some revenue might shift from Q2 into Q3. Our experience was an actual fact that there was a net shift the other way. You know, we thought that maybe, I mean, if you look at our Q2 guidance, we went out with a midpoint of 590, having followed Q1, which was 618, when typically you would expect cadence to be pretty much, I mean, 618, you'd expect 618, 620 or something for Q2. So we were expecting about 30 million to push from Q2 into Q3. As it happened, about 10 million has moved, maybe just less than 10 million has moved from Q2 into Q3. There was about 10 million of deliveries that we couldn't get done in the quarter that will now revenue in Q3. But we had approximately 20 million that came the other direction. And that was, you know, customers that, you know, as things lifted in June, we had customers in new bookings in the second quarter that wanted to accelerate the installation on what they'd purchased. And, of course, as our guys had time when they were trying to, when they had some customers that they couldn't deliver to, they just kept on going down through the list. I mean, typically at Cadence, you probably have, you know, maybe two-thirds of your orders or bookings in any one quarter would fall into the, like the last month of each quarter. So it's unusual for such a high amount to get delivered in the quarter. But like I say, our experience in Q2 was there's probably some shift of revenue from Q3 into Q2. Net, maybe about $10 million, $10 to $15 million from Q3 to Q2. On the expense side, in contrast to that, because of the uncertainty in Q2, You know, we held up some of the offers on hiring until late in the quarter. Once we got comfortable that, you know what, we're good for revenue in the quarter and that it looked like, you know, customers were very resilient, our team was very resilient in terms of overcoming the challenges, then we released the offer letters and hiring accelerated into October. the end of the quarter has continued at the start of this quarter. So that's probably meant that, you know, some expenses shifted from Q2 to Q3 and some revenue shifted from Q3 to Q2, and you end up then with like a 35% operating margin in Q2 compared to our guidance at 30, and then Q3 is at 32. Also, you mentioned operating cash flow, I think, that if you recall, I mean, last quarter – I mean, I hesitate to say it, but last quarter we were mentioning that we had deliberately closed some strategic business early in the year. And what you're seeing is we got paid for that business. So you've probably seen an uptick in cash and an uptick in deferred revenue. I wouldn't be surprised if my expectation right now would be deferred revenue will burn off from this level through the end of the year because we deliberately aim to get paid early.

That's helpful. And then as my follow-up, it's nice to see that China, as a percent of revenue, has remained fairly stable over the last several quarters at kind of low double digits. That doesn't prevent us from still worrying about the concern that perhaps there's some buy-forward going on in China, just given U.S.-China relations and how critical you are to the overall semiconductor supply chain in China. Wondering if you could just handicap what you're seeing in China today and Is there a risk that there's pull forward? And how do you try to manage through some of the ebbs and flows of the tensions between the governments of the U.S. and China?

Yeah, good question. So I think overall, our China business remains quite good. And then the Q1, Q2, as Don mentioned, I think clearly the hardware and IP, which are more upfront revenue and that help. And I think overall, I think we're providing the tool and IP globally to our customer. And meanwhile, we're complying with the U.S. regulations. And it's very fluid, and we're closely monitoring it. But so far, I think all the uncertainty, and we already built into our estimates. So I think overall, we are confident. I think we'll continue. I think 12%, I think quarter to quarter, sometimes it varies. But I think overall, it's a strong business in Asia and China for us.

Perfect. Thanks, guys. Congratulations on the strong results.

Thank you. Thanks.

Your next question comes from Mitch Steeves from RBC Capital Markets.

Hey, guys. Thanks for taking my question. So the first one I kind of want to drill on is just kind of the geographic movement here. It looks like the U.S. stuff pretty significantly. So I know you guys are concerned about kind of what I assume are the smaller players not being able to make payments and kind of rolling off some money for you guys there. But is there any chance, or maybe I'm thinking about this incorrectly, any chance that basically the larger players end up investing more? Because what we picked up is that a lot of these larger companies are actually pushing forward on the tech front with chip design. So wouldn't that actually offset and actually be a benefit to you guys if the larger customers ended up spending more on EDA tools while the smaller ones kind of get brushed off to the side?

Yeah, I think, Mitch, a good question. I think that geographically, I think Overall, I think across the board, we see strong design activity. We don't see any slowdown. I think this silicon renaissance in the industry with all the generational drivers like AI, 5G, hyperscale, and we move into this kind of data-centric, big data that is really driving a lot of silicon development and the design. And to answer your question in terms of the The big guy, we call it market shipping customer. I think you can read from my transcript that clearly I'm highlighting all this full flow and all this proliferation with market shipping, and those are the leader in that industry. We pay a lot of attention, and this is a golden opportunity to double, triple down in R&D for the next generation products. So in this cycle... recover, they will be much stronger leaders. And so, to answer your question, the design activity doesn't slow down. Actually, those big guys are really, really driving the R&D, and we're delighted to be their trusted partner to work with them.

Yeah, and Mitch, John Wall here. I mean, just the fact that we raised the year despite the fact that we had some collection challenges at the smaller customer base illustrates that larger customers are investing more in R&D.

Got it, understood. And then just kind of switching gears, I didn't hear much about 3D Clarity. It's been maybe two quarters or so, so you guys have talked more about COVID and Core ADA. Can you maybe provide an update of what is going on with the 3D Clarity product in terms of customer wins, backlog, interest, anything like that? I realize that the environment is a little bit strange, but I think it would be interesting to hear what's happening with the 3D Clarity product front.

Yeah, so happy to share with you. I think currently we have a very strong This is a good market for us. 10 markets, about $700 million. Clearly, our product, as we mentioned earlier, customers see up to 10 times performance and then continue providing the accuracy. This time, we highlight market-shaping hyperscalers go with us. And then we have over 125 engagements in this, together with Celsius. And so I think a lot of momentum, a lot of multiple new wins, and more important, expansion of the existing customers. So I think overall, we are very excited with the product we have, and we continue to really drive the differentiation and engaging with the leading customer that can see the value.

Okay, great. Just one really small one. Should bookings continue to go up this year, or are they going to be flattish, kind of a 3-7? Sorry, your question again? Just a really small one on the backlog you guys provide now on a quarterly basis. Should we expect that to be more stable or go up? Because I realize last year it was up 20%. This year it's pretty stable at 3.7 for a couple quarters. I'm just trying to understand what we should expect from your backlog.

John, you want to highlight that?

Yeah, Mitch, I mean, we don't guide bookings, but, you know, given that we closed some business early in the year, deliberately closed some business early in the year and pulled out some business from later in the year, you know, I'm not surprised that our RPOs have kind of were flat from Q1 to Q2. But I wouldn't expect a dramatic change between now and the end of the year.

Okay, perfect. Thank you very much. Thank you.

Your next question comes from Gary Mobley from Wells Fargo.

Hey, guys. Thanks for taking the question, and congrats on a strong quarter. I wanted to start out by digging a little bit deeper into the China conversation. And so I know we have this new middle arrow rule as part of the newest export restrictions, and I know you guys have been working hard to try to answer some of the topics on it. and perhaps don't have 100% clarity as we see here today, but maybe if you can give us an update as you see it today, how it impacts maybe your fourth quarter or even, you know, looking at fiscal year 21 and beyond.

And Gary, are you asking about this new direct product rule from the military end-user use rule?

That's right.

Okay, so I think overall, our outlook included all the estimates on the impact on the trade restriction. Clearly, we're monitoring very carefully. We're complying to all the requirements and make sure that our customer not commit to us, is not sending to the military use. And so it's a It's a lot of more work, and we're working towards that, and compliance is the number one priority for us. And the delight and support of the customer is equally important, but I think we make sure that we're complying to all the requirements.

Okay. And, Gary, any incremental impact of the military end use or the direct product rules is already included in our guidance. Yep.

Okay. But if I'm not mistaken, it doesn't go into effect until September, so not really much of an impact so much into fiscal year 20, right?

Again, like I said, we've reviewed the potential impact on our business and included everything we know today into our guidance for the remainder of the year.

Okay. As my follow-up, I wanted to shift gears and talk about sort of the setup for fiscal year 2021. I realize you're not going to give any sort of preliminary revenue guidance for the year. But if I'm not mistaken, the extra week and some acquisitions may be contributing to roughly, what, 200 basis points of revenue growth this year. And so we get on the flip side of this year. Should we think about an equal amount of perhaps a headwind looking into next year?

Yeah, I think the acquisitions are pretty small. It's that 53rd week definitely needs to be a consideration when you think about next year, Gary. I think last quarter I said that I expect revenue impact for that extra week to be about $40 million. Right now, I would say it's probably closer to like $43 million. And then on the expense side, I would guess on a non-GAAP basis, maybe about $33. It's we'll get a full impact, a full week of expense. But on the revenue side, it'll be that recurring revenue part of our business that we get the extra revenue for. So I think the impact of that 53rd week, my own modeling, when I do it, I kind of assume $43 million for revenue, about $33 million for expense. And naturally, you have to adjust for that if you're comparing a 53-week year to a 52-week year. But like you say, we're not guiding 2021. Gotcha.

All right. Thank you, guys.

Noice.

Our next question comes from Rich Valera from Needham.

Thank you. Let me add my congratulations to the cadence team for another strong quarter in tough conditions. So, John, just wanted to follow up on the questions around the strength in the quarter, which I understand, I guess, was driven by less than feared dislocation in the hardware and IP businesses. Is that also what accounted for the increase in your overall annual guide, or were there some other product areas that contributed to the increase in the full-year guide?

Yeah, I think we were very pleased with how our IP business is doing. I think it's mainly the functional verification business, that product category. I think that's probably the one that's increased the most with a strong hardware quarter, outstanding hardware quarter. I mean, it's a compelling value proposition with the integration of Z1 and X1 as a combination that's increasingly attractive to customers. The Z1 emulator with its differentiated custom chip-based architecture, I mean, we're continuing to win new customers and significantly expand capacity at existing key customers. And then with Proteum X1, the prototyping platform there has ramped up strongly, and it's got a unique ability to provide very fast bring-up time and high performance. The cross-selling between Z1 and X1 and vice versa was very, very resilient and apparent in Q2. And it's continued. I mean, the early weeks of July, we're already seeing that strength continue. Now, I gave a range of $20 million again for Q3 on revenue, and that was partly because we did see a shift from Q3 to Q2 for revenue, slight shift, net shift. And that was mainly on the hardware side. We saw that customers looking for earlier delivery are not sure how much of the pandemic is driving that behavior and customers are thinking that get the hardware in now, but Q3 is strong again. And again, we've included that in the guidance.

That's very helpful. Well, thank you.

And for my follow-up, just wanted to ask another one on the system analysis products. You've been giving kind of a quarterly wins number. I think it was 30-plus last quarter, and you seem to maybe have pivoted towards an engagement number. Is there an equivalent engagement number from Q1 that we could use to compare to sort of how that's expanded over the last quarter? And will you at some point maybe revert to giving out wind as opposed to engagements?

Yeah, I think this is a very strong product offering for us. The two products have been well received on the clarity and Celsius. We highlight a couple of wind that we have.

and also we have over 125 much stronger platform.

We can even do more with them. And so both companies that you alert to are very good companies, great companies. And so far, I think the consolidations, each one are unique and in their own way. But we now try to be the trusted partner to work with them and then to continue to grow and then drive better solutions for them to have a bigger footprint for them to be successful.

Understood. And then a quick follow-up. One of the presentations today from Cadence at the virtual DAC was on cloud deployments and the increasing demand for cloud deployments. And I was just curious, when we see some other software businesses that have either are transitioning from on-premise to the cloud or have multiple offerings or multiple deployments of on-premise and cloud deployments, there's a pretty significant uplift in terms of revenue from customers that have cloud deployments versus on-premise. So, you know, John or Lapu, you know, I was just curious, Do you see a similar uplift in revenue associated with cloud deployments relative to on-premise?

Yeah, I can start first, and then John can fill in more. Clearly, the cloud solution for EDA to the customer are very important. We want to provide the flexibility from the different range of use model, either the customer-managed or cadence-managed. And then you're using the cloud for the software and even include hardware platforms so that we provide them a compelling productivity and a scalability benefit. And at the end of the day, we really want to drive the productivity and performance. And then if you have unlimited server, by theory, you should really drive the performance better and also more cost-effective for the customer. And so we want to create the flexibility for them to do that. And we're delighted and we highlight a key point of collaboration with TSMC, Microsoft, to have the cloud for the sign-off tool, campus and Qantas, and then using our, you know, cloud bus, I give them the flexibility and they can optimize the throughput and the cost. And I think that is the way to go. I think we're going to be very cautiously, you know, moving towards the cloud. Especially the new product like the system analysis tool, we develop as a cloud native. And so it will be much easier and the customer can see the benefit using the cloud. And then for the old EDA tools, we kind of two by two try to move it into optimizing the cloud and stay tuned. So far, we are making great progress. And we highlight that it's over 125 customers adopted our cloud solution. So that is increasing.

We are delighted at that. Great. Thank you. Your next question comes from Jason Salim from KeyBank.

Hey, everyone. Thanks for fitting me in. Just one for me. Most of the reference customers that you've announced for Clarity have been semiconductor companies and other electronics ecosystem companies, but today you kind of talked about a new hyperscaler win. One, was this hyperscale customer already a customer, and they expanded? And then also, if you think about... With some of the expansions, are they adding the Celsius product or are they expanding that to do with their ?

Good question. So I think clearly this is a new product for us currently. And so any of the new product, new customer we highlight are new to us in the way that they are. We don't have that business before. We're delighted to highlight the hyperscale market shaping, hyperscale for the Verity and the SUSETEC for the Celsius. And then we are delighted we have 125 engagements, multiple new wins. I think most important, our customers see the benefit and using our performance up to 10 times better than incumbents. And I think the most important thing to highlight is the expansions at the existing customers. And that is a very validation of who is really good, they use it, and then they like it, they buy more. And that is the good validation of a good product.

Yeah, Jason, for Clarity specifically, I think in relation to your question, one of our new customers for Clarity this quarter included a market-shaping hyperscaler. We didn't have that. It's not a new hyperscaler for us, but new for clarity for us.

Okay. And then, you know, one quick follow-up. Was this hyperscale customer using it to supplement their simulation processes or more of like adopting it for kind of all their needs on the electromagnetic side?

Yeah, I think that one, again, is... existing customer, but I think it just continues to expand some of the product usage.

Okay, great. Thanks. I appreciate the time.

Thank you. Thanks.

Our final question comes from Adam Gonzalez from Bank of America.

Hi, guys. Congrats on the solid results, and thanks for squeezing me in. Just a minor clarification question, but on the collection issue that you're experiencing with some of your smaller customers, Is this concentrated at customers that have a particular end market or application exposure, or is it more broad-based?

It's more broad-based, Adam. Yeah, I mean, it's broad-based not just across the customer base but across the globe. But the thing that's consistent is that it's typically smaller value orders and smaller value customers. And what we're trying to do there is that we continue to provide services to those customers, even though in some cases I don't think we'll get paid. But what we've done is we've paused revenue on about $70 million of bookings. And it's likely that we won't get paid, so there won't be a P&L impact because we're not taking the revenue. And we'll continue to help those customers for as long as we can. And hopefully that we won't lose good companies as part of this pandemic.

Got it. That's helpful. Thank you. My second question, and apologies if this was asked before, the connection cut off for me in the middle of the call, but the implied second half revenue guidance, the split between Q3 and Q4, it seems to be heavily favored towards Q4. Is that really just the extra week in the fiscal year that's driving that?

Yeah, the extra week is a big part of that. And also, of course, I mean, I'm trying to estimate learning from Q2, what do we expect to fall or what would we expect to record in Q3 versus Q4? That's where I get a slightly wider range for Q3. We went with 630 to 650. If we see an experience similar to Q2 where there was a shift of some revenue from Q3 into Q2, if we see that again, there may be a shift from Q4 into Q3, which means we'll be up at the higher end of that range. But I don't have any doubt about the remainder of the year, really. It's just what falls into Q3 versus Q4. It's our best guess right now based on the experience of Q2.

Got it. Helpful. Thanks so much. I will now turn the call back to Lupe Tan for closing remarks.

Thank you all for joining us this afternoon. 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. I'm very impressed and proud of the dedication and commitment shown by our employees continue innovating and delighting our customers, especially during these uncertain times. We are all in to this together, and I'm convinced that we will collectively come out of this unfortunate situation stronger as a company, as a community. And lastly, on behalf of all our employees at the Board of Directors, we want to give our heartfelt thanks to extremely brave and courageous health care workers, and others on the front lines. And they continue to work tirelessly to fight this pandemic.

Thank you all for joining us this afternoon.

Thank you for participating in today's Cadence Second Quarter 2020 Earnings Conference Call. This concludes today's call. You may now disconnect.