Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence 4th Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer conference call.
Thank you. I would now like to turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence. Please go ahead.
Quarter. Thank you, Rob. I would like to welcome everyone to our Q4 2020 earnings conference call. I am joined today by Lip Bu Tan, Chief Executive Officer Anurag Devgan, President and John Wall, Senior Vice President and Chief Financial Officer. Quarter.
The webcast of this call is available through our website, cadence.com, and will be archived through March 19, 2021. 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. Quarter.
These include Cadence's most recent reports on Form 10 ks 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 quarters with Generally Accepted Accounting Principles or GAAP. We will also present certain non GAAP financial measures today. Call. 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.
Investors and potential investors are encouraged to review quarter. We are pleased to report that we will be conducting a reconciliation of non GAAP financial measures with their most direct comparable GAAP financial results. The reconciliations are available at the Investor Relations section of cadence.com. Copies of today's press release dated February 22, 2021 for the quarter year ended January 2, 2021. Related financial tables and the CFO commentary are also available on our website.
Questions as time permits. And now, I will turn the call over to Lip Bu. Good afternoon, everyone, and thank you for joining us today.
Quarter. In the year of unprecedented macro challenges, I'm pleased to report that Cadence achieved outstanding financial results quarter for both the Q4 2020. For the year, we achieved 15% revenue quarter and 35% on GAAP operating margin with strength across the board and all segments growing quarter by double digit. In a moment, John will present more information for Q4 results quarter and our 2021 outlook. The acceleration of digitization due to the pandemic, coupled quarter with exciting generational trends like 5 gs, AIML, data analytics and hyperscale computing continue to drive strong semiconductor demand.
Quarter. Leading hyperscaler mobile AI companies continue to aggressively pursue Moore's law, quarter. While 5 gs, wireless, industrial and automotive verticals are leading the charge quarter on the more than more front. Our intelligent system design strategy triples our TAM quarter and our broad compelling portfolio of chip, package, board and system design solution call that uniquely positions us to realize these exciting opportunities. In 2020, we accelerated quarter.
Our momentum at marquee accounts, while expanding our system portfolio through compelling acquisitions, quarter, enabling us to win new customers in our targeted vertical segments. Quarter. Of particular note was the strength of our Aerospace and Defense business as the digital transformation in this vertical continues, call. And we expanded and deepened our relationship with Northrop Grumman, which includes the use of our custom analog and digital full flow. Additionally, we are especially excited quarter by the momentum we have with the hyperscalers as they accelerate their chip and system design activity.
Call. Our engagements with the system companies have steadily deepened over the past few years, and revenue from system companies quarter. It's now closer to 45% of our total revenue. It was a great year for our Cadence Cloud, which now has more than 175 customers. And we further strengthened our partnership Cloud Infrastructure and Foundry Partners.
Now let us review Q4 highlights. Quarter. Design excellence is a foundational layer of our strategy and includes our core EDA chip design platforms and IP portfolio. Our design our digital sign off solutions offering superior quality of and faster convergence, continued growth rating at market shipping customers. Call.
We engaged in well over 100 projects at 5 nanometer and below process technologies, quarter, and we are in earlier collaborations on the 2 nanometer nodes. Quarter. Deployment of our full flow accelerated as more than 45 customer adopted quarter. Our Cadence digital proof roll at the most advanced nodes during the year, including MediaTek, Samsung, Micron, Nuvia and a global marquee customer. Based on the superior quality of results, quarter.
The market shaping hyperscaler significantly increased the usage of our digital solutions. Quarter. Earlier in the year, a market shipping automotive semiconductor customer committed to Cadence at its primary EDA vendor for Digital Design. Customers are faced with routing challenges in system verification and software bring up and is benefiting from our verification full flow solutions that deliver industry leading location throughput. Momentum continued on Axyleum, our digital simulator, quarter.
With several competitive replacements underway as well as expansions and new summer wins. Our hardware assembly of Palladium for emulation and Protium 4th question and earlier software development had a strong quarter to finish our best ever year for hardware. Quiz. For the year, Palladium Z1 had 24 new customers and 34 expansions, our Protium quarter at 13 new customers and 14 expansion. Demand was particularly strong at AI and hyperscaler customers.
Ericsson renewed their commitment to Cadence verification hardware, including both Allidium and Protium. A unique differentiator of the Protium X1 is the common front end compiler quarter with the Palladium Z1 that enabled significant faster bring up and about 40% of our hardware business quarter during the year, included both Z1 and X1. Our IP business had a strong year call. As our focused strategy and a compelling portfolio leverage on the ongoing IP outsourcing trend, quarter. We continue expanding the footprint of our leadership DDR and PCIe IP and have several design wins at the 5 nanometer and lower process nodes.
High Speed SerDes quarter. It's a critical component of hyperscaler infrastructure and several customers that adopted our 112 gig SerDes IP, including X Sight Labs, who has also demonstrated working silicon. Call. Tensilica has strong royalties and significant wins at the KeyTrue wireless studio and mobile application processor customers. Additionally, the automotive conference call.
At a strong, have a good momentum, which wins in functional safety, quarter, and digital radio including an ADAS win at leading self driving car company. Quarter. In system innovation, we are very excited about our system design and analysis segment, quarter, which had a particular strong year with greater than 25% revenue growth. Rising system complexity for advanced 5 gs, automotive and quarter. HPC applications is driving the needs for seamless platform solution across design, Simulation and Analysis.
AWR and Integrin delivers strong great results in 2020, and there is a strong customer interest in our integrated Virtuoso, Innovus, Allegro and AWR Microwave Office Solutions with line analysis. In system analysis, we are executing to our strategy of building out quarter, our multi physics portfolio, offering best in class solutions and delivering superior results compared to legacy Industry Solutions. Strong market adoption continue for our system analysis products, call. And we are particularly pleased with the growing number of repeat orders with customers, call, including STMicroelectronics, Realtek and a market shipping hyperscaler. We tripled our system analysis TAM by adding computational fluid dynamic CFT technology quarter to the pending Pneumatica acquisition, which will bring leading CFD technology and deep domain the company's expertise of Doctor.
Charles Hirsch and his team to Cadence. Call. New Mecca has over 4 50 customers, including NASA, Honda and Ford across multiple verticals such as aerospace, automotive, industrial and marine. Call. For pervasive intelligence, we continue to incorporate machine learning technologies in various tools for improved PPA and faster convergence.
Xyleum ML has a successful engagements with several market shipping customers, delivering up to a 5 time improvement in regression throughput. Call. We also progressed on providing IP specifically tuned for AI machine learning applications, especially edge influencing applications. Cadence continues to invest in fostering Innovation and Advancing Education through endowments at top universities. Quarter.
Building upon previous endowments at Stanford, the University of California at Berkeley and Kennedy Mellon University. We announced a $5,000,000 endowment at MIT's Schwarzman College of computing to promote research in the fields of artificial intelligence, machine learning and data analytics. Call. Now I will turn it over to John to go over the Q4 results and present our 2021 outlook.
Thanks, Upu, and good afternoon, everyone. I'm pleased to report we exceeded all of key operating metrics for the Q4 fiscal year 2020. We achieved 50% on the Rule of 40 metric for the first time quarter through a combination of 15% revenue growth and 35% non GAAP operating margin. Consistent execution against our strategy and double digit growth across all product categories helped us achieve this landmark, quarter. But we also had the benefit of some tailwinds during the fiscal year, which included a 53rd week, a strong second half in China and the recovery of $26,000,000 that we previously thought to be uncollectible.
The pandemic brought many challenges, and I'm very proud of our Cadence team for their compassion the future. Their focus on innovation and customer success resulted in continued acceleration of Cadence's 3 year revenue growth CAGR, quarter, which is now into double digits. Let's go through the key results for the Q4 the year, starting with the P and L. Quarter. Total revenue was $760,000,000 for the quarter $2,683,000,000 for the year.
Call. Non GAAP operating margin was approximately 37% for the quarter and approximately 35% for the year. Quarter. GAAP EPS was $0.62 for the quarter $2.11 for the year and non GAAP EPS quarter was $0.83 for the quarter and $2.80 for the year. Next, turning to the balance sheet and cash flow.
Quarter. Our cash balance was $928,000,000 at year end, while the principal value of debt outstanding was 3 $50,000,000 Operating cash flow in the 4th quarter was $136,000,000 $905,000,000 for the full year. Quarter. DSOs were 44 days and we repurchased $380,000,000 of Cadence shares during the year. Quarter.
Before I provide commentary for Q1 and fiscal 2021, I'd like to take a moment to share the assumptions embedded in our outlook. Quarter. We expect strong revenue growth for the first half, followed by more muted second half growth as we lap some tough second half comps. Quarter. Our outlook further assumes the pandemic restrictions will gradually ease across the globe this year, resulting in higher T and E expense in 2021 compared to 2020.
Call. We've imputed the expected impact of the pending New Mecca acquisition in our 2021 outlook. And finally, quarter. As usual, our outlook assumes that the export limitations that exist today for certain customers will remain in place for all of 2021. Call.
Embedding these assumptions into our outlook for fiscal 2021, we expect revenue in the range of $2,860,000,000 to 2.92 $1,000,000,000 non GAAP operating margin of 34.5% to 36%. GAAP EPS in the range of $2.09 to $2.19 non GAAP EPS in the range of $2.95 to $3.05 operating cash flow in the range of $900,000,000 to $950,000,000 and quarter. We expect to use approximately 50% of our free cash flow to repurchase Cadence shares in 2021. Call. For Q1 2021, we expect revenue in the range of $710,000,000 to $730,000,000 non GAAP operating margin of approximately 35 percent GAAP EPS in the range of 0 point 5 5 $0.59 and non GAAP EPS in the range of $0.72 to 0 $0.76 And we expect to repurchase 110,000,000 of Cadence shares in Q1.
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, Cadence delivered another year of strong quarter results, achieving 50% on the rule of 4th metric for the very first time. We remain focused on driving profitable revenue growth. Quarter. And at the midpoint of our outlook for fiscal 2021, I'm pleased that we are on track to grow our annual revenue by over $1,000,000,000 since 2016, quarter with more than $0.50 of every dollar of revenue growth dropping through to non GAAP operating margin over that period.
Call. I would like to close by thanking our customers, partners and our hardworking employees for all that they do. Quarter. And I'd like to remind them all that their health and safety continue to be our first priority. And with that, operator, we'll now take questions.
And the number 1 on your telephone keypad now. As a reminder, we ask that you please limit yourself to one question and one follow-up. And your first question comes from the line of Gary Mobley from Wells Fargo Securities. Your line is open.
Good afternoon, everybody. Thanks for taking my question. And let me extend my congratulations to a strong start to the fiscal year and strong execution relative to your Rule of 40 exceeding that by 10 percentage points and that leads me to my question, John. Quarter. Could you help us level set what that 35% operating margin in 2020 may have been if you didn't have, I guess the reversal of the bad debt reserve or bad collectible reserve, the fact that you weren't able to bring on employees at a Fast Enough Rate and then as well the extra week.
How does that 35.25 percent operating margin guide in fiscal year 'twenty one compared to a level set fiscal year 'twenty.
Hey, thanks for the question, Gary. The yes, it's a pretty it's probably a multipart question. But yes, I guess quarter. In terms of the collections, we had collections windfall of $26,000,000 in the second half, most of which came in Q4. And some of those invoices were very old, which quarter.
$22,000,000 of the $26,000,000 was recognized in revenue before the end of the year. But and that was in relation to, if you recall, in the middle of the year during the pandemic, quarter. We had some smaller customers that weren't able to pay us and we reserved for those. And we helped them out, Our engineers and team at Cadence were determined to help them out whether they were paying us or not. But Some of those customers turned around and managed to survive, and we weren't sure if they would.
But so that collections windfall kind of Distorted maybe some of the revenue timing in the quarters during the year, but didn't really impact that $26,000,000 didn't really impact the year because originally we had it in the year, We took it out in the middle of the year and then like that $22,000,000 of that $26,000,000 that got collected got recognized. In relation to the extra week, we thought that was going to be $45,000,000 and it was. But the extra week, of course, was a 2% tailwind for in services helping us achieve 50% under rule of 40 in 2020. And what was a 2% tailwind in 2020 is a 2% headwind now in 2021 when we go from a 53 week year to a 52 week year. Quarter.
And then I guess we had a really strong second half in China. I mean when I step back from individual quarters and halves I would say that our business is very strong in all regions and across all of the product categories. The 3 year revenue CAGRs, They're up to 11% now in 2020. And at the midpoint, it's 11% for 2020 at the midpoint of our outlook for 2021, that's 11% to 2%. So we're already off to a very strong start as well in the first half of twenty twenty one, but it's too early really to say If that's sustainable in the longer term.
So the second half, we have kind of muted revenue guidance. When I looked the second half of twenty twenty in China. What I noticed was that we had a higher than normal proportion of upfront revenue quarter in our recurring revenue mix for the region in China. For our outlook in 'twenty one, I've assumed we returned to our usual recurring revenue mix in the region. Quarter.
And that along with the fact that we won less week in the second half in 2021 versus the 2020, that's what contributes to the like conservative revenue growth outlook for the second half.
Okay. That's very, very helpful, John. I wanted to ask you about the materiality of the Software Systems Analysis Product Group, including Nabeka. I guess there's perhaps quarter. Various documentation that Neveco had roughly $30,000,000 in annual revenue.
Is that a pretty good approximation? And for the overall Systems Analysis category. How material is this now? Is it somewhere in the ballpark of what 1% or 2% of revenue now? And how much is it contributing to your overall growth?
Thank you.
So Gary, yes, the system analysis business is doing great. My focus in revenue grew strongly in 2020. The operating margin profile there is better than EDA, which allows us to invest in the business while we're generating strong incremental margins that our overall operating leverage. In relation to NIMECA, when we issued the original press release, we highlighted that the impact to 'twenty one is pretty immaterial. It's pending.
We expect it to close. It's imminent in terms of close. I would expect it to close this And as usual, of course, we'd expect purchase accounting rules to initially limit the revenue that we can recognize On the Omega in the 1st year, so we expect that to be temporarily dilutive to earnings in 2021, and that's already embedded in our outlook. Quarter. So from that perspective, we don't have I don't think we have anywhere near as much revenue in 'twenty one as you're expecting.
Call. Appreciate it. Thanks.
Your next question comes from the line of Mitch Steves from RBC Capital Markets. Your line is open.
Hey, guys. Can you hear me?
Yes. Loud in queue.
Okay. Yes. So the first one is just on the 45% systems exposure now. I'm just a little bit curious about why that's trending up so quickly. About 3 years ago, I think
it was closer to like
the low 40s or 40% was kind of metric, but now we're suddenly at 45%. And it sounds like that might even go higher. So maybe can Can you help us understand what exactly is going on with that business that's causing it to spike up? And then secondarily, regarding your 50% flow through in
the operating margin, clearly that's
what you've been doing. But is there any difference between the systems and Seni's onboarding in terms of profitability for you guys? Those are my two questions. Thank you. Call.
Yes, Mitch, maybe I can answer the first question first about the system company. And then we provided end to end EDA portfolio and also with our intelligent system design, we are moving up into the system analysis area and then also the packaging side. And then as you can tell, this generation wave in the 5 gs and also the hyperscale and then autonomous driving. And really, the system company starting to engage quarter. I'm actively with us because we're providing a suite of solution that we're looking for.
So I think it's kind of accumulation of the last 12 years, quarter. So we're delighted, getting closer to the 45% of the revenue. And for them, Clearly, the system, the packaging, not just the silicon development is critical for them, quarter. And so we are excited about this opportunity and our strategy, investing and behind it. And so we are glad to see the call.
Yes, Mitch,
and to the second part of your question there that, like you say, there's a higher than normal profitability, I think, for us in the System Analysis business, and it's been growing really fast for us. I mean, if I look at incremental margins, I called out in my prepared remarks this, quarter. At the midpoint of our outlook for 2021, we're expecting our non GAAP operating margin to grow by about $550,000,000 over the 5 year period from quarter since 2016. And that's about 51% of the revenue growth if you calculate the revenue growth over that period of time. And then when I compare the midpoint of outlook for 'twenty one against 'nineteen, I did the same exercise and I got 51% again before the impact of Nubeqa.
With New Back, it kind of takes it just down under 50.
Okay. That's perfect. Just to clarify and make sure I understand this correctly, system analysis, it sounds to me and maybe I'm reading You're seeing like a step function in your 3 d Clarity business. Where am I reading too much into this?
Quarter. Yes, more than that.
I think we also have all these hyperscale guys and then some of the system company service provider. They are quietly also building up their semiconductor custom silicon design. And so our IS suite from the design excellence from the EDA, IT and then plus our system analysis plus Apple acquisition we make in AWR and Integraland providing a lot of system for the 5 gs and also the Industrial Group.
Very helpful. Very impressive quarter. Thank you. Thank you. Thanks.
Quarter. Your next question comes from the line of Pradeep Ramani from UBS. Your line is open.
Call. Hi. Thanks for taking my question. Congratulations on a great quarter and a very solid guide. I just had a couple of questions, maybe a last one and then have a follow-up.
How are you thinking in terms of the mix you're seeing coming out of China versus the rest of the world. I mean, last quarter, it felt a little bit more towards IP and hardware, but it feels like your growth is now increasingly becoming more broad based in China and driven by EDA and software as well. Is that a correct read? Quarter.
Yes. Let me answer that. This is Lip Bu. So clearly, APAC is a strong growth region for us. And then we've done well on China on Q3 and Q4.
And then as you know, China is heavily investing in Semiconductor Industry. So in some way, we have broad portfolio of EDA tool, IP and even the system analysis quarter and some of the packaging and then the 3 day packaging and it become critical for them. And so I think overall, we support the customer globally quarter and then China is particularly strong, and we will continue to comply with the order export control requirements. But meanwhile, so far,
quarter. And Puneet, if I would add there that, like if you step back from looking at individual quarter half. And you look at the 3 year CAGRs, I think our growth is accelerating across all regions in our outlook for 2021.
Call. Great. And for my follow-up, you had a very strong year on IP. How do we think about the sustainability of growth in IP going forward, given, of course, there's longer term drivers, but just coming off of such a strong year.
Call. Yes. So I think it's a good question. IP tends to be lumpy, but so far we like this IP outsourcing trend, and we have a strong portfolio in terms of DDR, CIE and also the 3rd is a must have for the hyperscale and also some of the Tensilica in terms of audio and also the automotive sector. So overall, quarter.
We are delighted last year is a strong year. But as you know, it's a very lumpy upfront. And so we will continue to focus on it. Thank you. Continuing to focus on it.
Thank you.
Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is open. The first question, the America acquisition,
I know it's pending, but maybe can you speak to
the what quarter. And then make versus buy there, I mean, what factors went into acquiring versus just building in?
Call. Anurag, do you want to take this one?
Yes, definitely. Yes, that's a good question. So as you know, we are pretty excited about our move ecosystem analysis, which is driven by our expertise in computation software, numerical mathematical software. Quarter. And we have a lot of expertise in that organically, as we saw in the development of Claroty, which is the 3 dm solver that has been generating a lot of good results.
And the second thing we are excited about is the customer synergy. Quarter. A lot of customers, as we've discussed, we have a lot more system companies and they are asking for the system analysis capability, okay? And then the question becomes whether to organically develop or to acquire. And we look at the space.
And in terms of system analysis, CFD is a very critical area. It's one of the largest market segments with lot of vertical applications. Call. And Yumeka has very good technology with more than 4 50 customers. So we are pleased to welcome them to Cadence of the Spending acquisition.
And I think that can be used as a basis to expand further, expand more in R and D with our competition software and expand more with our customer base. So we are very happy to use them with their expertise in CSD to expand into this very, very exciting area Group. Okay. And then my quick follow-up with this is,
I think you mentioned that it was a 3x expansion with the acquisition in the CFD. Does that 3x10 expansion also include other physics like structurals or is that
just CFP along. Thank you. So, in terms of system analysis, that's a pretty big segment and it's about $6,000,000,000 we estimate. Quarter. And the other good thing about it is that it is growing rapidly.
There is always more need for more and more simulation. Quarter. What we estimate is clarity in sales is about $800,000,000 in addressable market, which is EM and thermal and CFD is about 1.6. So CFD triples our TAM from 800 to about 2 quarter.
Your next question comes from the line of Jason Ader from JPMorgan. Your line is open. Great. Thanks for taking my questions, guys. The First question is on the 175 cloud customers.
What does that mix in terms of systems versus semiconductor companies look like.
Yes. We don't have a breakdown on that. But clearly, we are very excited. Our customer is clearly our solution provide that flexibility and different use model and either it's a Cadence managed. And so overall, we're providing EDA Software and Palladium platform.
The most important is providing the productivity and scalability. So I think overall, call. We are excited about 175 customers. We didn't break down in terms of semiconductor or system company,
quarter. Okay. And then John, you mentioned that not expecting China to be as active in upfront revenue in 2021. Quarter. So any particular reason?
I mean, was it kind of politically driven why that particular geography had a bigger mix of Hardware and IP in 2020.
No. Well, it's when we have more hardware in any one quarter, in any one region, you're going to have a higher mix upfront revenue in that region in that quarter. And we saw that we had a strong Q3 for in the functional verification space and a lot of that strength within China. And what I was looking for signs of a pull in in Q3 and to Trying to figure out, did that was there some acceleration of purchasing that came out of 2021? Or did it come out of Q4?
Were people just preparing with the pandemic where they're for And then what we looked at, I was waiting for the a view of the pipeline. Pipeline for 'twenty one is very strong. And when I look at that and compared it to what had happened, what was different about the second half of 2020 for China. What I did notice is because of that hardware that we had a higher mix of upfront revenue in the region in the second half than we would normally I'm not sure if that's sustainable. I mean, it looks like we're off to a strong start again in Q1.
But for the purposes of determining an outlook for 2021, I assumed I thought it was safest to assume a return to our usual recurring revenue mix, quarter, which could prove to be conservative for the second half. But I'd rather go out with outlook, Assuming that we return to the usual recurring revenue mix, then assume that, that growth that we saw in the second half of twenty twenty continues. I mean, if it does When we have increased visibility into revenue in the second half, we can update our outlook at that time when we see it. But I just I didn't want to Go with too strong a second half right now until I have a clearer visibility into the pipeline in the second half.
Sure. Okay. Thank you.
Quarter. Your next question comes from the line of Joe Bruey from Baird. Your line is open.
Call. Great. Hi, everyone. John, you've been referring to the tables in the release, and I'm interested in the one that quarter down 3 year CAGR adjusted for the extra week by product group. If you think into 2021 quarter.
And again, just adjusting for the weak comparison. Would you expect kind of similar dynamics between the product segments where IP and system design should remain kind of the fastest growers or are there any new developments at a product level to the quarter as 2021 goes on that might influence some of the trends you've seen.
Good question. I mean, quarter. We're not guiding by individual product category. But if you look at the 3 year CAGR for 'eighteen, 'nineteen and 'twenty on that table, See, they don't change dramatically year over year, particularly on the 3 year CAGR view. But the ones you call their IP the benefit of growing from smaller numbers.
And in the past, we've seen those grow faster. But in relation to new products, I think the amount of innovation that we've seen in new product releases and preparation that we've seen from the R and D group, they haven't slowed down at all. If anything, they're accelerating in their new product development, even through the pandemic, which has been fantastic. But typically, on an earnings release, we wouldn't announce any new products. You'll see those at CDN lives, Which probably start around late March, April time.
Okay. Okay, great. And then this quarter. Next question might be product development related, but if I heard Anurud correctly, systems design call. It's maybe a $6,000,000,000 total opportunity and given the solvers you've introduced or the new CFP being acquired.
You're up to $2,400,000,000 And so are there other categories or additional thing is that you have in mind that we can maybe expect you growing into over the next few years. Call.
Yes, that's a good point. And first of all, I want to highlight that we are building out this multi physics platform. Quarter. And CFD is a pretty big segment of that market. So we started with finite elements and Chromagnetics and then now go to CST and there's a lot of commonalities there.
So I believe that itself presents a lot of opportunities to us, like you mentioned, tripling our addressable market. There might be more in the future. We always look for that. Quarter. But at the same time, the current electromagnetics and CFD already has a large market segment that we're busy addressing.
So, call. The answer is yes. If opportunities come, we will systematically expand, but already that's a good opportunity for us.
Quarter. Okay. I'll leave it there. Thank you.
Your next question comes from the line of John Pitzer from Credit Suisse. Your line is open.
Yes, good afternoon, guys. Thanks for letting me ask questions. Congrats on the solid results. John, as you rightfully pointed out quarter. In your preamble, if you adjust for the extra week and some of the unexpected revenue in 2020, your initial guide for 2021 is already embedding sort of double digit growth.
And I know you said that it's too early to say if that's the new growth. And I know you said that it's too early to say if that's the new norm, but I guess I'm kind of curious, what are you looking at to be able to make that call that this might be the new normalized growth rate. And Lip Bu, as you talk about potentially a double digit secular growth rate, what do you think is driving that? Is that sort of Specific to Cadence and your strategy, do you think this is core EDA customers? Do you think it's the proliferation of customers into nontraditional areas like hyperscale systems and autos.
Could you give us a little bit of help on that? That would be appreciated.
Call. So John, I can take your the first part of your question, and then I'll pass it over to Lip Bu. In relation quarter. To the strong first half guide, strong first quarter guide, most of our revenue is software and most of it's recurring revenue. I mean, we expect recurring revenue to make up 85% to 90% of our revenue for the year.
So it's very, very predictable and very, very predictable Certainly in the near term, but where I had some difficulty was projecting what upfront revenue might be out in Q3 and Q4. So the outlook for the second half is more conservative than the I mean, the first half is very, very predictable in terms of great visibility into the pipeline. We're off to a really strong start in Q1 already on the upfront business. And so much of that revenue is recurring in the first half. Yes, we're seeing accelerating revenue growth.
The challenge in the second half, of course, is we're lapping very tough comps against the second half of 2020. I just don't have the visibility into the upfront pipeline for Q3 and Q4 yet.
Quarter. Yes. On the second question, let me describe. I think it's kind of exciting about this renaissance of semiconductor with the 5 generation the Q4 of 2020. The AI, machine learning, all about data, data analytics, 5 gs and then the cloud infrastructure has to change because all this massive data coming in and then how do you address that network scaling and then storage disaggregation.
So it's a lot of changes to infrastructure and there's a lot of fueling, a lot of design activity. So that's why we see a lot of design activity, not just from the semiconductor players, now the system player and then the whole Industry 4.0, they all move into AI machine learning, the digital transformation that Drive a Lot of Semiconductor. So overall, the industry is moving in the right direction to us. In the meanwhile, I think clearly Cadence with the Intelligent System line strategy really tie in really well from the design excellent at providing the tool and IP. Quarter.
Now we move to the next level of system innovation. Let Anurudu talk about the system analysis and of the CFD and physics and multi physics model. Then the next thing is move up into the pervasive intelligence that using AI machine learning, data analytics, 6 drive all the vertical industry that is major transformation going on. So I think we are well positioned to capture that opportunity.
And And then, guys, my second question is clearly when you look at China as a region, from Q4 of 'nineteen to the back half of last year, It almost doubled as a percent of revenue. And John, you clearly talked about potentially some one time that came in, in the back half of the year That you're not embedding sort of in the guide for 'twenty one. I'm just kind of curious as we think about currently China at about 17%, quarter. What's kind of core embedded as a percent of revenue in your 'twenty one guide realizing that that's subject to change? And if you think longer term quarter.
With China's aspiration, is this about the right level as a percent of revenue? Or would you expect this on a secular basis to continue to grow over time?
Quarter. Again, individual quarters, I wouldn't focus too heavily on any one quarter or even half. I mean it was a tremendous second half for us in China. 2020 was a strange year. I mean With the pandemic, we had the extra week in Q4.
I mean, you'll see in Q3, we had a lot of strength in our functional verification group. In Q4, you'll see the software business has performed really, really well. Of course, it had the core business has performed really, really well. Of course, it had the benefit of the extra week with a 14th week in your normal 13 week quarter. But And we have one less week in the second half of twenty twenty one, but we're very, very pleased with the growth we're seeing in China.
It looks like continuing on. We're seeing that strength continue on into Q1. The pipeline is strong. We've seen that in the first half. I just wanted to be conservative in the outlook for the second half until I have better visibility into second half upfront revenue pipeline.
Thank you.
Quarter. Your next question comes from the line of Tom Diffely from D. A. Davidson. Your line is open.
Q4. Yes. Good afternoon. Maybe first just a clarification for John. When you look at your expectations for 8% revenue growth and 8% OpEx growth and the lack of leverage there.
Did you say that was primarily due to just the Nemeka acquisition, the increased cost?
Quarter. No, no, it's not certainly not primarily due to the Nemak acquisition. I think in terms of expense growth, our headcount is up 8%. Our headcount increased about 8% during 2020. And we're investing heavily again in hiring in 2021.
New Mecca will come into the mix, we hope, through the second half of Q1 and then the remainder of the year for quarter. From an expense perspective, we expect merit to hit this in the merit increases will be July again, so that will be You'll see a slight uptick there in expense in Q3 and Q4. And the growth in expenses through the year that would typically come from that is being offset by some more efficient infrastructure spend quarter that we had planned as the year progresses. If you look at our 10 ks that we filed, you'll see that we initiated a restructuring plan in Q4 2020 to optimize our spend on infrastructure. But and the expense mix in 2021.
I think if you compare 2021 versus 2020, you'll probably see in 2021, we're spending more on people and less on places than we were in 2020. That's kind of driving some of the margin profile.
Okay. That's very helpful. And then follow-up for when you look at the cloud, you talked about certified customers. What do you think the long term adoption is for EBA with the cloud? And do you think some of your really large customers will global majority to the cloud at some point.
And if they do, what does that do to your cost structure?
Yes, very good questions. This is still at a very early stage. Quarter. We are very encouraged with the 175 customers. And clearly, we want to make sure that our initial product in terms of system analysis, we can be cloud native because we start from scratch.
And then some of the EDA tool, we have different stage of moving to cloud native. And then really the Holy Grail is basically drive the productivity efficiency for our customer. And then our partnership with the hyperscale partners and infrastructure partners and also the foundry partners are critical in this effort. Quarter. And so right now, we have across small, medium, large customer embracing on cloud.
Quarter. And truly, I think you can imagine you have unlimited usage of machine server at your exposure and so that you can really drives the performance, the productivity significantly. So I think that is a trend. We are just in the inning early stage, but we are very encouraged with the customer support. In order to continue to grow, clearly, our partnership with the hyperscale partners and also the foundry partners are critical because of their DDK or the different solution they have.
We want the mission that we work with them together and support our customer and also in addressing the needs of customers.
Okay. Thank you.
Quarter. Thank you.
Your next question comes from the line of Gal Munda from Berenberg Capital. Your line is open.
Call. Hi. Thanks for taking my question. The first one, I just wanted to follow-up briefly on the Meta and more generally quarter on your ambitions within the kind of mechanical simulation space. If you think about the convergence that's happening quarter.
With Numeta now, you said you have a CFD, you have a finance element analysis as well. So like how far do you think your portfolio is quarter based on what you have to be able to take it where you want to be in R and D terms versus potentially doing more of those tuck ins in the CAE space.
Call. Yes, that's a good question. Let me take that. This is Anirudh. So, like I mentioned, this move is driven by 3 factors, Krayta strengthened competition software.
Our customers are asking for more and more system analysis, system design capabilities like Libro mentioned, quarter and the overall need for simulation. And I think we are still in the early innings, but we feel confident about this space quarter as demonstrated by our results in Clarity and other products. And CFD is a pretty important area. I mean, it's I think one of the biggest segments in system analysis. The good thing about CFD, it has a lot of vertical applications, all the way from automotive, quarter.
So I think that's a pretty significant expansion of our platform. And we are happy with this progress. We are patient and like John mentioned, this segment is profitable. So we will continue building across this and keep providing the best solution to our customers.
Quarter. And then just as a follow-up, maybe just expanding a little bit on the growth drivers of the businesses. Ligu, you mentioned there's Moore's Law based growth at the leading edge customers and there's more than Moore's quarter, which is kind of the system side. Considering the investments you're making in the system side, can you just comment a little bit on the growth, how it's maybe 2020, how it corresponded between the leading edge and the systems companies in terms of their contribution to get you whatever we want to say, 15% depending quarter. On which number we're looking at?
Thank you.
That's a very good question. And so I think we are very well positioned to be able to do both. Quarter. And then clearly, the hyperscale mobile and they are driving a lot into the most floor. Call.
And as I mentioned, we are very delighted. We have more than 100 projects on 5 nanometer and below process node development with quarter. And we have earlier collaborations on 2 nanometer process. So I think this is a very advanced quarter. And we're delighted and we are very honored to work with the marquee customers that are pushing the envelope, and we are really excited about that development.
On the other hand, we are so well positioned in our custom mixed signal analog and packaging and like the 5 gs, the wireless industrial group. They are really moving into this mixed signal call and clearly the most and more. And so that we are very well positioned and we doubled down with some of this AWR and then the Integrin acquisition driving some of the RF microwave requirements, especially in the antenna side of some of this 5 gs integrations. And then we have really good solution for that and customers see the benefit of working with us. So I think we are very well positioned on both sides.
That's why we highlight that from our portfolio point of view quarter. And those both engines are really taking off, and we are very excited engaging with the best company to work with us.
Quarter. That's great. Thank you so much. Thank you.
Your next question comes from the line of Rich Valera Crum Needham. Your line is open.
Thank you. Let me add my congratulations on the rule of 50 last year. Question. I think it's for Anurud on the system analysis go to market. Just wondering, to date, have you been doing that through the standard sales channel.
And what do you do you have any overlay sales and or specialized applications for system? And how are you thinking about scaling up any kind of dedicated system resources as you scale up that business.
Quarter. Thanks, Rich. That's a great question. And of course, one is developing great products and the other is go to market or helping our customers deploy those products. And the second part is as important as the first part.
Quarter. And especially for the system business, there are multiple facets to this. In the semiconductor business or the big large system companies. We operate mostly through a direct channel, okay? But if you remember, we also have our Allegro business, quarter, which is our packaging business.
We do quite well in PCB and packaging with Allegro. And Allegro does have a already we do have an indirect channel. And like Libu mentioned earlier, cloud quarter. So for the system business, I envision 3 channels. We are building 3 channels.
1 is the direct channel because a lot of the big companies and big system and semi companies anyway want system tools like you mentioned. And expanding our indirect channel like we have for Allegro and expanding it to overall system design and analysis. Quarter. And then the SaaS channel, which or cloud based channel for especially for smaller companies that don't have a lot of data centers and are more attractive to use on the cloud. So as we go to the system design and analysis, we do have to build out these three facets of our go to market and we are working all of them in different stages.
Quarter. The strength of our direct channel helps us with our big customers and then indirect and SaaS can help us with some of the smaller long tail customers. Quarter. That's a very important part of the overall go to market strategy.
Understood. And thanks for those details. And then, John, quarter. And follow-up for you. You've given a backlog reserve number last quarter of $58,000,000 which I think had come down from $70,000,000 originally.
I'm assuming that came down materially in the Q4. Can you tell us where that is today?
Yes, of course, Rich. Yes, we collected we had a collections win for $26,000,000 in the second half out of that $70,000,000 that I think the majority of The balance of the $70,000,000 is lost. I mean, those customers have many of those customers have closed their doors. I think we're in single digits and 1,000,000 in terms of the ones we're left That could potentially be recoverable. But right now in my outlook, I'm assuming it's not recoverable, but you're talking maybe $9,000,000 $10,000,000 left out of that 70 that could possibly be recovered.
But like I say, right now, I'm assuming it doesn't get recovered. We recovered 26 of the other 60.
Quarter. Got it. Okay. Thanks very much, John.
Your final question comes from the line of Jay Vleeschhouwer our firm Griffin Securities. Your line is open.
All right. Thank you. I'd like to direct both of my questions to Anurud. First, we've heard for years, of course, from the EDA companies of ongoing design activity among your customers that that's remained robust. We've also heard of the general direction of design style or types from general purpose chips more to specialty kinds of designs.
What we don't often hear about is how customers design methodology may be evolving. And I'm wondering if there are any issues that we might want to talk about regarding, for example, the hierarchical versus flat, which has been consideration for chip design now for 2 decades or more. Are there any new implications or issues for that As it might pertain to or affect any of your EDA tools or new technologies such as ispatial or design space exploration. And then relatively, there were a number of questions this evening already regarding system analysis and your broader ambitions in computational software. One thing we see on the other side of engineering software, the world you're approaching towards our unified data platforms and common platforms for data management and the like, quarter, which you don't really seem to have.
You do have multiple stacks for your various functional areas. Could you Talk about how you're thinking about unifying or moving to a more common platform of that kind. Call.
Yes, Jay, these are great questions. First of all, we want to make sure that we have best in class products, quarter. Right. So, whether that's digital design or verification and system analysis. So, we always quarter.
As you know, this is technology business, best product wins, and at the same time, have a unified platform to go with it. And this is how we did digital implementation. This is how we did verification. So both parts are important to have best in class products, whether that's in finite element, electromagnetics RCFD. And then there are opportunities to combine them in a much more unified way, especially around data, like you mentioned.
Quarter. So I completely agree that the need for unification, but we also at the same time want to make sure first that the products are best class. You want a unified team, but each player has to be a strong player. But there are a lot of opportunities for data platforms and analytics like Lebru also mentioned earlier. Now in terms of your first question of new methodologies, I mean there are several things happening.
If I have to pick 1 or 2 key things that are happening, what we see with the customers. So one big trend, which you probably already know is this move to 3DIC. I think this is going to be significant for the next several years. And it just changed a lot of methodologies in our customer base. And this is multiple high end digital chips or even analog RF chips on a package.
And that I think is driving a lot of change, especially in cloud, hyperscaler company all the way to consumer company. And we do have historically a lot of strength in package, Packaging with Allegro. Of course, we have a leadership platform and advanced node with Innovus. And then now the analysis tools with Claroty and Celsius, Because thermal is a big thing for 3 d IC. So I think this whole methodology of 3 d IC integration is one significant change call that we do see in the customer base.
And we are very excited about that because I think Cadence is in a unique position quarter. Because of historical strength in analog and packaging and digital and the new strength in system analysis. Call. And hierarchical, you mentioned, I think that's always a big thing as things get bigger. And if you look at 3 d IC, this is another way to do hierarchical, CECO.
Because if you have 4 chips on a package, you don't have to redesign all 4 of them. This is reused at a much higher level. So call. But I do think 3 d IC is a significant trend that is going to happen and we are well positioned for it.
Quarter. Thanks,
Henry. Thanks.
I will now turn the call over to Mr. Lip Bu Tan for some closing remarks.
Call. Thank you all for joining us this afternoon. I'm very excited about the growing market opportunities quarter and business momentum going into 2021. Our intelligent system design strategy is playing out very nicely as we benefit from new opportunities in design excellence, system innovation and Pervasive Intelligence, an expanded photo addressable market. We excelled in the challenging year.
Thanks to the deep partnership with our customers and our partners and the strong commitment of the outstanding Cadence team. Quarter. And lastly, on behalf of all our employees and the Board of Directors, we give heartfelt thanks to those on the frontlines, who will continue to work tirelessly in their effort to put this pandemic behind us. Thank you all for joining us this afternoon.
Quarter. Thank you for participating in today's Cadence Third Quarter 2020 Earnings Conference Call. This concludes today's call. You may now disconnect.