Thank you, Olivia. I would like to welcome everyone to our Q1 2021 earnings conference call. I am joined today by Lip Bu Tan, Chief Executive Officer Anarud Devgan, President and John Wall, Senior Vice President and Chief Financial Officer. A webcast of this call is available through our website, cadence.com and will be archived through June 18, 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. These statements are subject to known and unknown risks and uncertainties that could cause actual results to 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 ks and Form 10 Q, which was just filed, and then also including the Monique's future filings and the cautionary comments regarding forward looking statements in the earnings press release that was issued today.
You should not rely on our forward looking statements as predictions of future events. All forward looking statements we make on this call are based on estimates and information available to us at the time of this discussion 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 So measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.
These non GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly measures presented by 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. A reconciliation between Each non GAAP financial measure and its nearest GAAP equivalent may be found in our earnings press release following the financial statements. Copies of today's press release dated April 26, 2021 for the quarter year ended April 3, 2021 Related financial tables and the CFO commentary are also available on our website. For the Q and A session today, we would ask that you And now I will turn the call over to Lip Bu.
Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that Cadence had a With broad based demand for our innovative solutions, driving strong revenue growth, profitability and cash flow. John will provide the details in a moment as well as our updated outlook. Generation trends With massive amounts of new data being generated every day, AI, ML And data analytics are helping transforming the data through intelligence, providing Actionable insights and accelerating digital transformation of several industry. These trends are continuing to drive strong semiconductor demand and design activity across a broad spectrum of end markets.
And our intelligent system design strategy ideally positions us to Now let me talk about the Q1 highlights. Starting off with core EDA in Aerospace and Defense, and we significantly expanded our collaboration with a marquee as well as our functional and custom simulation solutions. Our digital sign off business At a strong revenue quarter with multiple market shipping customers successfully tipping out Increasing design complexity continues driving a circular trend for hardware assisted verification. And Q1 was a standout quarter for our Palladium simulation and Protium prototyping platform. Significant expansions as well as multiple new wins contributed to Q1 being our best And Protium X2 platforms delivering 2x capacity and 1.5x higher performance and our current leading Z1 and X1 systems.
This next generation systems And we're endorsed by NVIDIA, AMD and ARM. Our IP business also delivered double digit year over year revenue growth. There was Strong demand for our high speed SerDes IP by market shipping customers for their next generation data Tensilica continues to expand its footprint in true wireless Stereo and Bluetooth headsets and our Vision P6 and Hi Fi products Our System Design and Analysis segment delivering over 30% Year over year revenue growth. Early this month, we acquired PointWise, a leader in mesh generation for Computational Fluid Dynamics. The addition of PointWise Technologies and Experian team further broadened Our system analysis portfolio complements our recent acquired Nomeca CFD Technology and our organic multi physics products.
Pointwise provides highly innovative mesh and grid generation technology to enable high fidelity CSD analysis and the solution are being used by several marquee customers, especially in the Aerospace segment. We want to congratulate our New Mecca team for the role their product played in the The winning team used a simulator base on the Numecca Pymarine CFD software for their computation of fluid dynamic modeling. And thanks to the unprecedented accuracy And really some of their simulators were about We introduced Securitx, our next With endorsements from Samsung, MediaTek and Renesys, this solution leveraged new simulation engines And massively parallel architecture to deliver over 10% up to 10% performance And capacity gain for system level simulation of the most demanding hyperscaler, 5 gs, Automotive and Aerospace Applications and Qualcomm expanded their usage of our flagship Virtuoso and AWR products for advanced RFIC Let me conclude with a few comments And so far, we are not seeing any slowdown in design activity across our customer base. Next, in regarding evolving state of the COVID-nineteen pandemic, While some countries are edging towards normalcy, there is a growing concern with the escalating number of cases In certain regions, especially in India, as always, the health and safety of our employees, customers while working closely with local regulatory agencies.
Lastly, So listening with empathy, the inclusive of different points of view and as a result, ensure Our diversity enhance our experience and our innovative spirit. Now I will turn it over to Sean to go over the Q1 results and present our Q2 and updated 2021 outlook.
Thanks, Lip Bu, and good afternoon, everyone. I'm pleased to report that we exceeded all of our key operating metrics for the quarter. Broad based growth across many lines of our business combined with some earlier than anticipated hardware sales resulted in strong revenue growth in Q1. We continue to invest heavily in building out a multi physics platform for system design and analysis. We completed our 2nd acquisition of the year in the CFD space, who we acquired PointWise in April, a leader in CFD mesh generation.
The focus over the past few months on completing acquisitions contributed to some delays to our expected pace of hiring in Q1, but we expect to get hiring back on track by the second half of the year. Now let's go through the key results for the Q1, beginning with the P and L. Total revenue was $736,000,000 Non GAAP operating margin was approximately 38%. GAAP EPS was $0.67 and non GAAP EPS was $0.83 Next, turning to the balance sheet and cash flow. At quarter end, cash totaled $743,000,000 while the principal value of debt outstanding was $350,000,000 Operating cash flow for Q1 was $208,000,000 DSOs were 48 days And during Q1, we repurchased $172,000,000 of Cadence shares.
Before I provide our updated outlook for fiscal 2021 and what we expect for Q2, I'd like to take a moment to share the assumptions embedded in our outlook. The ongoing chip capacity constraints, along with the recent surge in COVID-nineteen cases in India, We expect expenses to increase in the second half of the year, primarily due to headcount growth as we continue to invest in our expanding multi We've included the PointWise acquisition in our 2021 outlook. And finally, Our outlook assumes that the export limitations that exist today for certain customers will remain in place for all of 2021. Embedding these assumptions into our outlook for fiscal 2021, we expect revenue in the range of 2.88 to $2,930,000,000 non GAAP operating margin in the range of 35% to 36%, GAAP EPS in the range of $2.01 to $2.09 non GAAP EPS in the range of $2.99 to 3.07 dollars Operating cash flow in the range of 900 to $950,000,000 And we expect to use at least 50% of our free cash flow to repurchase Cadence shares in 2021. For Q2 2021, we expect revenue in the range of $705,000,000 to 725,000,000 and non GAAP EPS in the range of $0.74 to 0 point 78 dollars 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 conclusion, the Cadence team delivered another quarter of strong operating results and remain focused on driving profitable revenue growth. We'd like to thank our customers, partners and of course our employees for a solid start to 2021. 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.
Thank you. And our first question comes from Jason Celino with KeyBanc, your line is open.
Hey, guys. Thanks for taking my questions. Maybe my first Historically, customers have gravitated toward the latest and greatest hardware products, especially on the emulation side. But Because emulation strength has been going on strong for several years now, how do you think the pace of uptake for the C2 and Protium products could be?
That's a great question, Jason. Yes, I mean, you might have noticed that we beat our the midpoint of guidance in Q1. Partly that was due to us trying to manage the Osborne effect on transitioning to our new Palladium Z2 and prototyping X2 system. Yes, we had an incentive plan in place To try and sell as many of the Z1s and X1s before we launch the new products. So we expect strong uptake for those new products, But the incentive plan worked really well and Q1 was a really strong hardware quarter for us.
It's a testament to the compelling value of our hardware solutions. They're providing both chip and system level customers across multiple use models.
Okay, great. And then for my follow-up, maybe just an I think John, you mentioned the chip capacity constraints and the COVID impact in India being a headwind for IP. Yes. Maybe coming from a maybe my software background, but maybe explain why this would be an impact and maybe you could Quantify the dollar amount for the percentage?
Yes, sure, Jason. That's yes, the on the COVID-nineteen, I mean the worst thing pandemic in India could have some impact The timing of delivery for certain hardened IPs that require testing in labs. And as we said on the in our prepared remarks, that's been factored into our updated outlook. India bailed us out last year. If you recall, we had similar challenges back in Q2 last year in North America.
And we're hoping we can do the same for them now, but it could cause some fluctuation in revenue timing The bigger impact on the year is probably in relation to chip capacity constraints. Last quarter when we talked about that, My expectation was royalties might be flat year over year. I now expect them to be slightly down. So there's a slight headwind built into
Our next question comes from Jackson Ader with JPMorgan. Your line is open.
Thanks for taking my questions, guys. I'd like to start on remaining performance outlook backlog and calculated bookings, Down a bunch in the quarter relative to a pretty tough compare, but I was just wondering if you guys had any additional commentary on the bookings performance in
Hi, this is John. I think that's just a reflection of a low renewals quarter. We'd expect the remaining performance obligations to ratchet back up before the end of the year.
Okay. Fair enough. And then On the geographic side, we saw remarkable growth from China in the second half 2020, looks like that geo kind of came back down to earth here in the Q1.
Any particular
Product segments, hardware, software, IP that would be impacted Is that geography coming back down?
Yes. I mean China is back, I mean clearly is back to more normal levels of business at the 12% level. That's mainly because the strength appears to be more broad based across geographies this year. If you recall, in Q3, we had a really strong hardware quarter and that was in China. I mean, this quarter in Q1, a lot of the strength within North America and more balanced across all the regions, across all the geographies.
In our outlook, I've assumed the return to our usual recurring revenue mix in the region as well. And that, along with the fact that we've won this week in the second half of fiscal twenty twenty one, It contributes to the conservative revenue outlook in the second half. When we get to the summer, we'll have increased visibility into revenue for the second half and the pipeline for the second half
Our next question coming from the line of Gal Mundo with Berenberg. Your line is open.
Hi, thank you for taking my question. The First one is
just, John, maybe a little bit expanding on what you just said. So when I look at your historical trends of revenues, it tends to be fairly Well, kind of equally split for other quarters and Q2 tends to be sequentially Slightly stronger than Q1. Is it because of this slight pull forward of hardware that you expect in Q2 potentially at the mid end of the guidance be And if you're in the lower this year?
Yes, Gal. We implemented an incentive We incentivized the sales force to try and close some Z1 and X1 business as early as possible in the year in preparation for the launch of our A new Z2 and X2 hardware systems. That was more successful than we originally thought. And About $10,000,000 of Q1's revenue, I had originally forecast to happen in Q2. So, off the $16,000,000 beat, I guess at the midpoint for Q1, there's probably $6,000,000 of that was a true beat and $10,000,000 was what we originally thought would fall into Q2 that happened a little bit earlier in Q1.
Got you. That's really helpful. Thank you. And then maybe just a little bit of a longer term strategic question around Building the CFP platform capabilities, which kind of adds to your clarity side and then thinking about Potentially other physics that you might be adding over time, is there a potential for that? Or do you guys think that Simulation is something that's kind of very applicable to the cooling and everything of the system.
So because of that, you kind Want to bring that in house and the other ones, maybe a partner, how are you thinking about it?
Yes, that's it. Thank you for
the question. Let me answer that. This is Anurag. So first of all, we are excited about CFD, like we mentioned last time. And It is a very big segment in system analysis, close to $1,500,000,000 $1,600,000,000 So we are excited focused on that.
And PointWise is a leader in meshing technology, so we are glad to work with them and Bring them in house. So we think combining PointWise with Dimeka Solver and our organic capability in parallel and distributed computing Ken, give a very, very state of the art solution for the CFD market. So we want to make sure we do well in CFD. And as you know, we are already in electromagnetics with clarity and thermal Celsius. So I think these are our focus areas for now and then We see how things go in these segments.
But so far, we are optimistic. And actually, if you look at our Q1 results, we had good growth versus Q1 of last year. So We are like John said, we are continuing to invest in this space and we are still early in CRD, but optimistic about it.
Got you. Thank you. That's really helpful.
Our next question coming from the line of Joe Vruwink with Baird. Your line is open.
Great. Hi, everyone. I was hoping just to talk about the product cycle for the new emulation of prototyping. To get Two platforms launching at the same time that have new silicon behind each, I think that's a pretty unique event. Jan, I get kind of the timing and the incentivizing of the older generation, but could it be possible that just the Performance on the new generation means that the net demand ultimately is maybe higher than being forecasted or
Do you
think that's a possibility, but maybe timing wise, it's probably more of a second half driver for you?
Yes, I think that's a good observation, Joe. We're building the systems as quickly as we can. There's plenty of demand there. We doped the systems, the dynamic duo for the tight integration with unified compiler and interfaces. The Palladium Z2 and Proteum X2 So we expect demand to be very strong.
And they have I mean the customers can achieve up to 2 times Capacity and 1.5 times performance improvements with each platform. And they work so well together. Like you say, the team call them the dynamic duo. So it was Important for us to launch them together. But yes, we're building them as quickly as we can and there's plenty of demand for them.
But like I say, by the time we haven't built in everything, it might impact the second half of the year more than the first.
Okay. That's helpful. And then just Follow-up on the margin guidance for the year because I think you ended up beating your forecast in 1Q by $28,000,000 and the full year moved higher by $12,000,000 or $13,000,000 Is that purely just a function of hiring being back half Weighted or are there other things like product mix or some other investments to consider as well?
No, that's exactly right, Joe. It's basically what Seeing as the compounded effect of revenue happening a little bit earlier than originally forecast because of the success of that incentive program and the success The sales of Z1 and X1 in Q1 and then hiring getting delayed a little bit to later in the year as we focused on closing some
Our next question comes from the line of Jay Fuschow with Griffin Securities. Your line is open.
Thank you. Good evening.
A couple of paired technical and financial questions for Anurud and for John. First, for Anirud, on the Q4 call 3 months ago, as you may recall, we You talked about how customers' design flows and methodologies are evolving. The follow-up therefore to that observation you made The time is, how might that affect as that takes place, cadence of pricing and or product packaging Commensurate with customers' evolution of their methodologies, could there be any effect on how you price and or package your software or anything else. And then secondly, with respect to system design strategy and the overall As you add more in CFD and other physics versus core or classical EDA, such as Syncrasys, implementation, RTL simulation and the like, Do you expect any meaningful differences between those two
parts of the business? Thanks.
Thanks, Jay, for the question. Those are very good questions. Let me take the second one first. So as you may know, Jay, even in our EDA business or EDA software business, maybe 1 fourth of it is more simulation based, like Circulation and logic simulation. So invariably, those simulation based businesses are more profitable than overall EDA.
So like Spector usually is more profitable than Place and Route, for example. So I expect a similar trend to happen in system analysis. The system analysis by nature is simulation based, whether it's clarity, it's electromagnetics or CRP. So in steady state, I do expect that system analysis to be more profitable than core ETA. Now as we build up and we Scale revenue, there are some transient natures.
But in steady state, I do expect that to be the case. And so far, we are pleased with the Not just the revenue growth, but actually even the margin performance of System Analysis business. And On your first question, I think we are looking at it carefully in terms of packaging and pricing, we have pretty disciplined in that. I think one big trend like I mentioned last time, there's more and more full flow use at Lower North as you know already. So we are selling a lot of these tools together.
So we just continue to monitor it and work disciplined with our customers and internal teams. John, do you want
to add anything on pricing? Yes.
What I
would add is that, Jay, I mean, you're exactly right. I mean, you look at the tools that we On the software side, there's a lot of warranty and AE intensity in terms of supporting those tools. And if you look at the That we're selling, you could nearly bifurcate all the licenses into 2 groups. There's the interactive tools where every license needs a driver and then there's Like simulation tools where they're kind of batch process tools where one engineer can kick off like 1,000 simulations if they want. And that's partly why the system analysis part of the business or the simulation part of the business is the most profitable part of our software business Because in all cases, our expenses are generally tethered to the R and D and AE engineers required to support the software.
But the revenue is not tethered in relation to simulation. It's not tethered to the number of engineers Insemination licenses. And I think that's why we see that being more profitable.
Understood. Thanks very much.
Our next question coming from the line of Gary Mobley with Wells Fargo. Your line is open.
Hey, everyone. Good afternoon. Thanks for taking my question. I wanted to ask about the newest round of export restrictions from the U. S.
Commerce Department targeting China and about half a dozen super compute companies. I realize not all those are specifically focusing on Developing Processors, but presumably a handful of those companies are Cadence customers. With respect to those Specific customers or any other export restrictions, what way has that impacted your ability to do business in China?
Yes, this is Lip Bu. Let me just have answer that first and then John or Anurag can add on to it. So first of all, we clearly we have and We'll continue to comply with all the export control regulations, including the military end user and the entity list that you And but we clearly, we are not going to comment on Sony specific companies, but everything we know, we already built in With our guidance.
Okay. And John, can you confirm that roughly $190,000,000 as Reported in your cash flow statement was the amount paid for Nameka in the Q1 and how much you would expect from both
Hi, Gary. Nice try. I mean, we're not Disclosing those separately, but we're very, very pleased with both acquisitions and delighted to have them as part of the Cadence family.
All right. Thank you, guys.
Our next question coming from the line of John Pitzer with Credit Suisse. Your line is open.
Yes. Good afternoon, guys. Thanks for letting me ask the question. John, I just want to go back to your commentary about some of the headwinds that you see this year. I think I understand the COVID In the issue, I'm still a little bit confused by the royalty because even though we're in a very tight chip capacity market, Unit volumes and revenue should be up pretty significantly year over year for the industry.
So can you help me better understand what's causing the royalty kind of the headwind in In kind
of your volume based businesses? Yes, John, good question. It's like last quarter, I thought for the year, I thought we'd be flat Because of unit volumes, we weren't expecting any improvement in unit volumes. And in fact, in Q1, I think our royalty revenue for Q1 was flat on Q1 2020. But the forecast looking out over the next three quarters and my team goes through a detailed analysis, It depends on, I guess, the mix of customers that we have and the unit volumes that they have.
But their forecast suggests that we'll be slightly down now and that's headwinds Being built into our forecast. So I don't mean that to be a commentary on the entire industry. It's just in relation to the customers that we generate Royalty revenue from, we expect their unit volume to be down.
And is there any way to characterize sort of end market that those customers play into? Or is that About restrictions, I'm just kind of curious, when you think about the full year guide, what's embedded for China? And I'm clearly asking because while I understand sort of the geographic mix broadened out in the current quarter. China was down significantly and there are some investor concerns that maybe the back half of last year Representative, pull forward. As you think about the full year guide, is there any sort of broad strokes you can give us on how you feel like China is going to trend for the rest of the year within that guide?
Yes, John, I backed into the guide for China basically expecting us to mean revert back to
our normal mix of business
In the second half of last year, we had more upfront revenue than average, and particularly in China. And I wasn't happy But I wouldn't happy to extrapolate that for all of 2021 because I felt that the second half looked like an anomaly. So I thought for guidance purposes and to be conservative, we would assume that we mean revert back to our normal recurring revenue mix right in the middle of that 85% to 90% range We normally have for the company, even though China is probably slightly more upfront than that. And that would kind of my expectation then is that China is it's very hard to But somewhere in the 12% to 13% range for revenue and that's where it came out for Q1. So that's what we've embedded into the guide.
We'll have better visibility once we get And we'll update then. But we're kind of assuming we revert back to Mead and I thought that was the best way to derisk the year for China.
Perfect. Very helpful. Thank you, John.
Okay.
Our next question coming from the line of Tom Nissrey with Your line is open.
Yes. Thank you and good afternoon. Maybe, John, just one more question on the really John, quarter 4 hardware. Did the incentives impact your margins at all in the quarter in any meaningful way?
I would say it did naturally, the extra revenue would have boosted margins in Q1 at the Q2, but that would only be a shift between 1 quarter and the other. The delay in hiring would have benefited Q1 and also benefited the year. We expect to catch up with the hiring, but of course, because we didn't hire in Q1 as quickly as we thought, those savings are both in Q1 and the year.
I was wondering more if the incentives included discounts, so the pricing went down in the Q1 of 2019.
So the incentives that I'm sorry, Let me clarify. The incentives that we're talking about were more sales incentives for our sales team.
Okay.
Non incentives for customers.
All right.
And then longer term question for maybe Anurag or Lip Bu. When you look at the node transitions in the industry And whether it goes between every 2 years or every 3 years, how impactful is that duration between those for you If the underlying demand is still strong.
I can start first and then Anurag can chip in. Clearly, I think the complexity and The dynamic of the demand is very strong on that 5th generation of waves. And so we are excited. We don't see any Slow down on the design. In terms of process node migrations, clearly, I'm marching forward down to 5 in production and 3 in design, who is engaging right now.
But clearly, there's a lot of And on that, we are very heavily investing in that because every note is a new opportunity for us and we are very excited about it. In terms of the Technology and process, maybe Anurag can update you where we are.
Yes. Thank you, Lubu. And I just want to add that, I mean, the one exciting thing is not only the I believe the node transitions are continuing. In terms of R and D, we are mostly We are 2 nanometer now, 3 nanometer is an early kind of design activity. But what is also promising, which You already know is that there are multiple foundries during these advanced load.
So I think overall, the industry seems pretty healthy. So not just there are several key foundries all working on advanced nodes. So we are optimistic and like Lebo said, we see a lot of activity at these advanced nodes. And that coupled with 3 d IC at these advanced nodes, I think there is a lot of design activity
that we see. So when a fab comes out with a new flavor of the same node that's almost as helpful to you as a new node would be?
That I think that just depends on the customer adoption. I mean, there is some work we do from R and D standpoint to get ready for a new node or Variant of the same node, now the variant work on variant of the same node is less than R and D work for a new node. So it just depends on from a work standpoint. But in terms of customer adoption, depends which nodes the customers will adopt and we would like to work with them And whichever flavor they choose based on their requirement. Okay.
Thank you.
Our next question coming from the line of Pradeep Ramani with UBS. Your line is open.
Hi, thanks for taking the question. I have a couple of questions on system analysis. Maybe the first question is now that you have the MEKA and Point wise, do you feel like you have more or less the solutions that you need to sort of scale both Nomeca and Point wise together? Do you feel like it has to be finally bolted on to a core cadence platform and integrated more? And if so, what does sort of the R and D investment environment and even maybe the go to market Does that environment look like, time horizon look like?
Is it sort of a 1 year thing or is it a longer duration sort of an investment cycle?
Yes, that's a great question. So first of all, we do feel pretty good about Point 5 and NEMECA, like I mentioned. And they are good technologies. They already have some scale and we can scale them more with our sales force and customer connections. At the same time, we will enhance them with our organically our organic technologies of parallel and distributed computing.
So we will definitely enhance them further. And like Lagu and John mentioned, I think all these investments are built into our guidance and we feel good Alrighty. So we at this point, we already have significant scale R and D investment in system analysis, okay, so because of Clarity and other products. So we feel good in terms of the amount of R and D we have already invested and go from there. But I think bottom We feel that the point was Nimeca and our organic development, we have a lot of capabilities to scale it in the CFD market.
Okay. And as my follow-up, in terms of sort of AWR, can you sort of Update us on how AWR is doing? Is there more customer tracking and sort of maybe year over year growth As part of your system analysis business?
Yes, definitely. So as you know, our system analysis business, If you compare from Q1 last year to Q1 this year, it's up significantly, right, close to 30% and AWR is a key There is some part of it that is M and A. But organically also or after acquisition, both AWR and EMX Integrand are Growing well. And if you see in Libbu's prepared comments, we mentioned Qualcomm is expanded use of AWR and Clarity. So we don't break it out separately, these different products, but overall they're growing well We are happy of AWR and Intergrand growth after acquisition by us.
And because we can provide a more complete solution along with virtual, so clarity, The overall Allegro's overall System Design and Analysis solution.
Thank you.
Thank you. John, I had
a quick follow-up on the chip supply situation. Obviously, you are talking about impacts on your full year and you have given us full year guidance for 2021. The commentary from the industry has been sort of all over the place in terms of when we might see some improvement with some folks thinking in the second half. Just wondering if you have any perspective on when and how you're thinking about seeing some improvement in supply and when that might impact your Business, is it a 2022 event?
Yes. Sure, Ruben. The forecast that my team provided me looked like There was softness in Q2 and Q3 for the particular mix of customers that we generate IP royalty revenue from. And it looked like it was recovering in Q4. I think that gets your point.
But again, I don't mean for this to be any commentary on the industry Anyway, it's just the mix of customers that we recognize royalty revenue from.
Okay. Yes, I appreciate that. We're not seeing any
slowdown in supply and activity
Right, right. Okay. Thanks for that. Bill, trying to get as many data points as I can. And I guess just a quick follow-up for Anarudu or Lip Buer.
Just on sort of your customers, you talked about Foundry, a little bit here, but a large North American customer obviously is getting back again into the foundry business and has cited Early partnerships with you and your competitor, just wondering if you have any perspective to add What's going on here with that customer and if you're seeing any benefits coming from things like U. S. ChipSact or things like that
Yes, I think in that more manufacturing in U. S. Is fairly welcome and of Any new foundry or expansion is always good for us in terms of tool and IP enablement. And so we're excited And then it will increase the design activity and also meet the customer requirement for the advanced notes and So and packaging also. So I think overall, we think it's a positive development and we welcome that opportunity to provide the
Thank you. And our last question coming from the line of Vivek Arya with Bank of America. Your line is open.
Lip Bu, I just wanted to kind of follow-up on your last Commentary about U. S. Manufacturing. I'm curious if there is more U. S.-based manufacturing and packaging and other activities, Is that incremental to your business or is that just a substitute for what you're doing in other regions?
Yes, it's very hard to tell, but I think overall it should be a That increase, because clearly, we are very excited. We have a deep partnership with TSMC Samsung of the world. Anything new, they need a lot of more IP in terms of optimizing and also they have their own Process and PDK and then so I think overall, on my point of view, I think it would be a net increase. And then We're happy to help. And at the end of the day, it's in the foundry, the EDA and then how to meet our customer requirement When they want to move into a new foundry, they need a lot of different tool and optimization and process and Rybry.
And overall, I think will be a net Improvement loss.
Got it. Very helpful. And then John, maybe one for you on operating margin. So Q1, I think at about 38, I think Q2 you're guiding to 36, if my model is right. But for the full year, you're guiding to 35 to So suggesting back half will be lower, right?
And back half of this year could even be lower than what you had in second half of last year. Obviously, you had the one extra week of last year. But I'm just curious, how are you thinking about leverage in the model? And more importantly, when you think you can get back to this rule of 50 that you were able to achieve before?
Yes. Good question, Vivek. I mean, we don't see any near I'm sealing on operating margins. I was glad to see that even with the outlook at 35.5% at the midpoint that I think we're now at 50% incremental margins comparing 2021 to 2019. As long as we're delivering incremental margins of 50%, but Well, clearly, there's operating leverage in the model.
But what you're seeing in the impact, the reason that operating margins are slightly lower in the second half, it's The combination of 2 acquisitions and delayed hiring activity into the second half. That's also we have a merit cycle that kicks in, in July But with all that said, we're heavily investing in building out our multi physics platform for the future. Like I say, there's no near term ceiling to that operating leverage.
Got it. Thank you. No worries.
Ladies and gentlemen, that's all the time we have for questions today. I would now like to turn the
As we benefit from the new opportunities in design excellence, system innovation and pervasive intelligence and an expanded total addressable market. I'm very pleased also to share that fortune and which marks Hayden's 7th year in the role being named in this prestigious list. Hayden was recognized as one of the best company to work for, thanks to our outstanding people first culture and the history of innovation. And lastly, on behalf of our employees and our Board of Directors, we want to thank our customers and partners