Thank you, Jesse. I would like to welcome everyone to our fourth quarter 2019 earnings conference call. I am joined today by Lip-Bu 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 March 13th, 2020. 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. The actual results may differ materially from those expectations. For information on the 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 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 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 the 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 12th, 2020, for the quarter ended December 28th, 2019, related financial tables, and the CFO commentary are also available on our website.
Now I'll turn the call over to Lip-Bu.
Good afternoon, everyone. Thank you for joining us today. I'm pleased to report that Cadence delivered a strong Q4, achieved excellent operating results for the year. For 2019, amid environmental headwinds, we delivered 9% year-over-year revenue growth and 32% non-GAAP operating margin, with strength across our product lines. John will provide more details shortly. Macro uncertainty and geopolitical headwinds persist into 2020, strong design activity continues at both advanced nodes as well as More than Moore front. This is being driven by generational technology drivers, 5G, AI and machine learning, hyperscale computing, industrial IoT, and autonomous vehicles, which all have semiconductors at their foundation and are propelling the need for next-generation computing, connectivity, and storage.
I believe these trends, in addition to system companies developing custom silicon, domain-specific processing, computing, silicon startups, and digital transformation of vertical segments like industrial and aerospace and defense, will continue to fuel silicon renaissance over the next few years. In 2019, we unveiled our Intelligent System Design Strategy that will enable us to maximize these opportunities while tripling our TAM through proliferation in foundational Design Excellence segment and expanding beyond EDA into System Innovation and Pervasive Intelligence. We achieved strong growth in Design Excellence, which is comprised of core EDA and IP, fueled by the launch of several innovative products, as well as wide-ranging expansion of our solutions, particularly at market shipping customers. Our Digital and Sign-off business achieved double-digit revenue growth for the year as strong proliferation continued, driven by customer demand for solutions offering best in class performance, power, area, and time to market capabilities.
A market-shipping global mobile company expanded their partnership with us through a large and comprehensive EDA software booking, which included a significant expansion of our digital footprint. Building upon successful 7 nm designs, Cadence and Broadcom expanded their collaborations to include the creation of 5 nm designs using Cadence digital implementation solutions. We have about 50 new full-floor wins in 2019, including a recent full-floor competitive win for new advanced node designs with a leading maker of FPGA chips. During the year, we announced successes in our digital business with customers such as MediaTek, Samsung, Innovium, Mellanox, and Ondas. Verification is one of the top challenges of our customers. Our verification suite had several wins across multiple vertical segments in 2019. Our Xcelium parallel simulator, with its innovative Rocketick technology, continues to proliferate and recently had a noteworthy win at the leading U.S. computing company.
Our hardware family, comprised of Palladium Z1 emulator and recently introduced Protium X1 FPGA-based prototyping platform, provide a comprehensive solution across IP and SoC verification, hardware-software regressions, and earlier software development. Due to a common front-end compiler, these complementary platforms, when working in tandem, deliver even more compelling value to our customers. We are getting strong traction with Protium X1 being deployed at Palladium accounts. Hardware had a record year, with significant expansion at several customers, while adding 19 new Z1 and 11 new X1 customers over the year, including a global marquee customer that placed one of the largest hardware orders ever for Cadence. 2019 was an outstanding year for our IP business, with 16% year-over-year revenue growth as our focus strategy and strong portfolio leveraged the continuing IP outsourcing trend, while enabling customer to accelerate their innovation and time to market.
It was an especially strong quarter and year for our Tensilica products, with wins in audio, imaging, computer vision, and machine learning. Loyalty growth was strong, particularly in the audio market, where Tensilica Hi-Fi DSP processors are increasingly proliferating in True Wireless Stereo based earbuds and in the next-generation smart speakers. Design IP had a great year as well, with strength in DDR, PCIe, and our 112G SerDes products as we proliferate with customers in AI, 5G, and cloud computing. Early in the year, we augmented our partnership with a marquee U.S. semiconductor company through our largest IP arrangements ever, which included Tensilica processor IP, 112G SerDes IP, as well as additional memory and interface IPs products. Let us move on to the system innovation segment of our intelligent system design strategy.
In 2019, we enter the system analysis market, an estimated $5 billion TAM opportunity, by introducing two exciting new products. The Clarity 3D Solver, the next-generation solution for electromagnetic field simulations, and Celsius Thermal Solver, the industry's first complete electrical-thermal co-simulation solution. Increasing system complexity and time to market pressures are driving the need for far more engineering simulations while underscoring the significant performance and capacity limitation of existing industry solutions. Both Clarity and Celsius are based on proven massive parallel architecture that delivers up to 10 times faster performance while maintaining gold standard accuracy. We are extremely pleased with the ramp of these innovative products, with well over 90 evaluations underway and more than 20 customers to date, including Micron, STMicro, Kioxia, Realtek, and Ambarella.
Generational industry trends are driving the need for increased heterogeneous integration, coupled with the slowing down of Moore's law, drove strong demand for our advanced packaging solutions, leading to double-digit year-over-year growth. There are growing challenges in designing products for complex high-frequency RF application, especially in the 5G wireless, aerospace and defense, and automotive segments. To that end, we acquired AWR, a leader in high-frequency RF solution. We also acquire Integrand Software, which provide a leading RF solution for analysis and abstraction. Integrating these technologies with our Virtuoso and Allegro platforms will enable us to offer a comprehensive platform for RF millimeter wave products, from initial design to simulation, implementation, verification, and manufacturing. We enter into strategic alliance agreement with National Instruments, which is focused on the design to test flow, enabling customers to improve quality and reduce time to market.
Lastly, we extended our cloud leadership in EDA, providing customers with compelling productivity, flexibility, and scalability benefits. Adoption of our cloud portfolio accelerated, and we passed the 100 customer mark. TSMC partner with Cadence and Microsoft on the first TSMC IC layout contest. Cadence deliver CloudBurst-based Azure environment that allowed several hundreds of students to simultaneously compete using Cadence layout tools. With that, I will now turn the call over to John to review the financial result and provide our updated outlook.
Thanks, Lip-Bu, and good afternoon, everyone. I am pleased with our financial performance for Q4 and 2019. Despite some macro headwinds, we grew revenue across all business groups, and our focus on delivering profitable revenue growth resulted in 9% revenue growth and 32% non-GAAP operating margin for the year. Turning to the numbers for the fourth quarter and the year, starting with the P&L. Total revenue was $600 million for the quarter and $2.336 billion for the year. Non-GAAP operating margin was approximately 31% for the quarter and 32% for the year. GAAP EPS was $2.36 for the quarter and $3.53 for the year. GAAP EPS included a one-time, GAAP-only tax benefit of $2.06 for the quarter and $2.05 for the year. This tax benefit related to intercompany transfers of certain intellectual property rights to Cadence's Irish subsidiary.
Excluding the one-time, GAAP-only tax benefit, GAAP EPS was $0.30 for the quarter and $1.48 for the year. Non-GAAP EPS was $0.54 for the quarter and $2.20 for the year. Looking at the balance sheet and cash flow, our cash balance totaled $705 million at year-end. Operating cash flow in the fourth quarter was $159 million and $730 million for the full year. DSOs were 47 days, and we repurchased $75 million of Cadence shares during Q4, for a total of $306 million for the year. During 2019, we grew revenue by $198 million, with over $100 million of that incremental revenue growth dropping through into non-GAAP operating income. That means we have now grown our annual revenue by around $520 million since 2016, with around $280 million of that incremental revenue growth dropping through into non-GAAP operating income.
Now, moving on to our fiscal guidance for Q1 2020. We expect revenue in the range of $610 million- $620 million, non-GAAP operating margin of approximately 30%, GAAP EPS in the range of $0.32- $0.34, and non-GAAP EPS in the range of $0.53- $0.55. For the full year fiscal 2020, we expect revenue in the range of $2.545 billion- $2.585 billion, non-GAAP operating margin of 32%-33%, GAAP EPS in the range of $1.46- $1.56, non-GAAP EPS in the range of $2.40- $2.50. We expect operating cash flow to be in the range of $775 million- $825 million, and we expect to use approximately 50% of our free cash flow to repurchase Cadence shares in 2020. Our guidance assumes that the export limitations that exist today for certain customers will remain in place for all of 2020.
We recently completed two acquisitions, we've included the impact of those acquisitions in our guidance. Finally, please note that fiscal 2020 will be a 53-week year for Cadence. You will find guidance for additional items as well as further analysis in the CFO commentary available on our website. In conclusion, Cadence delivered another year of strong revenue growth and expanding profitability. Our focus on delivering profitable revenue growth has resulted in a large portion of our revenue growth flowing through to operating income over the past three years. Excluding the impact of the 53rd week and recent acquisitions, our guidance assumes that trend will continue, with approximately half of revenue growth in 2020 flowing through to operating income. I would like to thank our customers, partners, and our hardworking employees for their continued support, and I look forward to updating you on our progress for 2020.
With that, operator, we'll now take questions.
Thank you. As a reminder, I would like to remind everyone, in order to ask a question, please press star then one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Rich Valera with Needham & Company. Your line is open.
Thank you. Good evening. Congratulations on a nice finish to the year. First question on your new system products. Sounds like you had some nice success there, gaining some wins, and wanted to maybe see if you could contrast or compare how the typical engagement with the system products compares with that in the digital space where you've obviously had some success doing it, proliferating over the years. Do you think it could have the same type of pattern, in terms of initial engagement, one seat, and then proliferation over time, and just how you're thinking about the runway of these products as you continue to go after this market?
Yeah. Rich, this is Lip-Bu. Let me try to answer your questions. First of all, we are excited about the system analysis space that we are going in on our system innovation strategy. It's about $5 billion TAM market opportunity for us. We initially are moving in with the two new product organically developed, Clarity 3D and also Celsius Thermal. One for the EM field solver simulator, the other one is the electrothermal co-simulations software. Both are launching out the later part of last year. Both are proven massive parallel architecture, 10x performance. We are excited. The response has been very positive. More than 90 evaluations. We already have 20 customers. I highlight a few.
I think this is just an early stage of entry, and these two product is addressing about $700 million of TAM market opportunity. Clearly, we are excited about it, and it's really back into our core competence in term of computational software and also related to our EDA and expanding to the system level. Also, our customer request us to move into that, so that we can really providing a more compelling solution to the customer. Answer your question, would that be like digital? I know we take one step at a time, take one inning at a time, gradually we can proliferate in our customer to customer. Beyond that, the customer going to tell us what are the area will be interesting for them, what are the future performance they're going to have.
We still continue to be humble, learning from our customer and then really drive innovation within the company to do that. I think overall, stay tuned. It's still very early in the game.
Great. John, quick question for you on your acquisition of AWR. Can you say if there was much of a deferred revenue haircut as you blended that into the model?
Yeah, sure, Rich. Purchase accounting rules significantly limit the revenue we can recognize from both AWR and Integrand in 2020. Combined, we've added $20 million to annual revenue in our guidance for 2020, almost all of that from AWR. We expect both acquisitions to be dilutive to earnings in 2020, but we expect them to be accretive in 2021.
Perfect. Thank you very much, gentlemen.
Thank you.
Thanks.
Your next question comes from Mitch Steves with RBC Capital Markets. Your line is open. Mitch Steves, your line is open.
Hey, can you hear me okay? Hello?
Yes, Mitch, we can hear you.
Okay, yeah. Yeah, two questions from me. The first one is actually a little more technical. You guys are talking a lot more about kind of going into RF space. Is this due to the fact that when you go to chiplet design architectures, in the future, they're going to have more complex RFs? Am I thinking too complex about that, or is that kind of one of the reasons why you guys are pushing in that space?
Yeah, it's a very good question. Clearly, we're listening to the customer. As you all know, 5G is deploying, and then most of the challenging on the 5G and some of the other application market is the RF, high-frequency RF. We have been looking what is the best way to address this in terms of the heterogeneous integration and all the complexity to put it together. We are delighted. We have been working with National Instruments, and we are delighted, able to acquire the AWR and then form a partnership with National Instruments in terms of alliance partnership. Clearly, the high-frequency RF solution they have, and then also we just now add on another new acquisition called Integrand Software. That give us a very compelling RF solution for the design.
Together with our Virtuoso and Allegro platform, that we provide a very comprehensive platform for RF millimeter wave product development, all the way from design to simulation to verification. We are really excited about this integration of the solution, providing the really needed solution that the customer want to design and then to verify. That's why we are very excited about this acquisition.
John, I think that was very helpful. Just for John, really quick, just for the half-on-half operating margin, you guys are starting at 30%, where you're talking to kind of working up pretty materially. Does that imply that you're exiting kind of at 33%, 34% operating margin? Just trying to get any sort of help in terms of what the margin should look like half-on-half.
Yes, sure, Mitch. I guess, in terms of certainly the back half of the year, it will have a higher margin profile than the first half of the year. Partly that's due to the impact of the 53rd week. 53rd week in Q4 will add about $40 million to annual revenue. When you add the extra week of expenses, of course, the upside to operating income is minimal there. Then with the combined impact of the 53rd week and the acquisitions, basically the impact of the purchase accounting rules on the acquisitions is bigger in the first half or in the first quarter and gradually reduces over time over the four quarters.
Perfect. Thank you.
Your next question comes from Tom Diffely with D.A. Davidson. Your line is open.
Yes, good afternoon. A quick question on the IP side of the business. It sound like it grew 16% year-over-year. Was most of that driven by Tensilica and the wireless earbuds?
Yeah, Tom, as I mentioned, we grew very nicely. It's a great outstanding year for us for the IP business. 16% revenue year-over-year growth and pretty much across the board. Clearly, the best of that is the Tensilica, and we have a strong quarter and also the whole year, and then especially in the audio, imaging, and computer vision. The other part that we really like is their loyalty growth, very strong and especially in the audio side. I mentioned about the earbuds and also the smart speakers, that we have a very strong footprint there. The other part, the design IP also have a great year and across the board from DDR, PCIe, and then our newly acquired, not too long ago, the 112G SerDes. That is a must-have for all the hyperscale guy and the infrastructure rollout.
That is for the AI machine learning. We're also delighted, the marquee U.S. semiconductor company with us in the largest IP agreement we have across different memory, Tensilica, and the 112G SerDes. Answer your question, it's all organically developed and nothing from acquisition.
Great. Based on just the consumer component to that, would you expect that to continue to be more heavily weighted to the third calendar quarter, or is it too diversified to make that call?
Say again the question.
Yeah, I was wondering if the IP, if you expect from a seasonality point of view for it to be largest in the third calendar quarter, or is it so diversified that it's tough to make that call?
Yeah, it's quite diversified. We went through a period back in 2016 where we refocused our IP and went for profitable revenue growth. Right now we're only guiding Q1 and the year. Certainly IP has been doing very well. We're very pleased with the growth that we're seeing.
Okay. Then to follow up, John, when you look at the margins on a quarterly basis, what's the biggest determinant of the range? Is it product mix or is it specific customer mix?
It's probably more product mix. Of course, like the first part of the year, we're impacted by the purchase accounting rules on the two acquisitions. In Q4, we'll get the benefit of that 53rd week. Also, right now we probably should take a moment to acknowledge the dynamic situation our employees and partners in China and the Asia Pacific region are navigating as health officials respond to the coronavirus. Our focus is on our employee safety, working with the authorities in dealing with the crisis and on the potential business impact. Any impact of the coronavirus that we could quantify at this time is in our guidance. A large portion of our revenue, of course, is recurring in nature, and the impact we've seen to date is minimal and immaterial to our overall numbers.
Any of that impact is more kind of front-loaded to the early part of the year.
Okay, that helps. Thank you.
Your next question comes from Gary Mobley with Wells Fargo Securities. Your line is open.
Hey, guys. Congratulations to a strong finish to the year and strong start to this current year. I wanted to ask about your backlog. If I read correctly, you cited a backlog increase of about 20% from the conclusion of 2019 versus 2018. Is that apples to apples comparison, adjusting for the way you now account for IPAA commitments?
Hi, Gary. Yes. Backlog was $3.6 billion at year-end, which includes approximately $200 million of non-cancelable IP access agreements. That's up from $3 billion at the end of 2018, including $100 million of IP access agreements. It's impacted by the timing of renewals, and our weighted average duration for 2019 was slightly higher because we had a really strong Q4. Weighted average duration for 2019 was 2.7 years. If I look at the average for 2018 and 2019 together, it was in the usual 2.4-2.6 year range. If I look at 2017 through 2019, that's also in our typical 2.4-2.6 year range. Q4 was a strong quarter for us, and it took the weighted average duration for 2019 up to 2.7 years. As you know, IP is lumpier than software, as is our hardware portion of functional verification.
That had a slight impact also.
Okay, thanks. Appreciate that. I know you guys have always tried to manage the business, new projects, acquisitions, whatnot, based on the rule of 40, the sum of the revenue growth and the non-GAAP operating margin. You just concluded 2019 with about 41%. You're guiding for 2020 at 42%, and I'm sure the extra week has some impact on that. Therefore, are you willing to step out of your prior long-term op margin guide of 30%? Should we now as well also start to consider the Cadence business being a 10% top-line grower?
Gary, I don't think we gave a long-term margin target of 30% in the past. You're right to point out the rule of 40. We kind of manage the businesses using a rule of 40 metric. I think in 2018, if you go back, we achieved what is it? 10% revenue growth and 30% non-GAAP operating margin. In 2019, now the year we just closed, we just did 9% and 32%. A combined 41% on the rule of 40 metric. For 2020 guidance, I think you'll see that it's approximately 10% for revenue growth and about 32.5% or in a range of 32%-33% for non-GAAP operating margin.
The piece that we've been focused on is driving profitable revenue growth, and that's why I was calling out the impact in my prepared remarks of the amount of our revenue growth that's flowing through to our non-GAAP operating income line. If you take the combined impact of the 53rd week and the acquisitions, I mean, combined, they add about $60 million of revenue to our fiscal 2020. The impact to operating income is slightly negative in 2020, predominantly due to the purchase accounting impact on those acquisitions. Excluding the impact of the 53rd week and the acquisitions, our guidance assumes that approximately half our revenue growth in 2020 flows through to operating income. We're very happy where we are. Because we're adding so much incremental margin, you're seeing the operating margin increase year-over-year.
There's no near-term ceiling that we can see because we have about 50% flow-through to operating income, but we haven't put out a long-term target.
Yeah, I think, Gary, just to add on to it, basically, we continue to drive innovation, continue to delight the customer with the best products, and then meanwhile drive the efficiency in terms of rule of 40, and then we like to print the numbers. We continue to execute and deliver the result to the shareholders.
Okay. Last quick question on the cash. Looks like you repatriated some cash, a quite substantial amount. I'm just curious what the reasoning behind that is.
Yes. We're just preparing to complete the two acquisitions we completed at the start of the year. At year-end, worldwide cash totaled just over $700 million, $705 million, of which about $400 million of that was in the U.S.
Got you. Thank you, guys.
Your next question comes from Jay Vleeschhouwer with Griffin Securities. Your line is open.
Thank you. Good evening. An intermediate term question, and then a longer-term question. The first question is, in the long history of EDA, the requirements for applications engineers or AEs has typically been a pretty good coincidental or leading indicator of business conditions in EDA. In your case, starting in the second half of 2018 and through the first half of last year, you significantly ramped up your additions there. Obviously connected, I am sure, to the U.S. marquee customer and others. Now your openings there have tailed off. The question is, have you largely filled much of your requirements for AEs and you're now back to a more normal run rate of requirements for AEs? Maybe just talk about your thinking on what is generally your second-largest source of employment after R&D. Secondly, a longer-term question on computational software.
How is the company committing resources or the organization to that? Is there a dedicated group or structure within the company for that? Then a practical question as a follow-up on that.
Yeah, good question, Jay. Let me try to answer, and then John will chip in. First of all, we're not guiding our hiring plan. Clearly, the AE, we're always recruiting AE and add-on AE when we have a clear signal for the customer to drive success proliferation. We continue to drive efficiency. Now we look at a clear balance in terms of the demand, and also meanwhile, we also drive the efficiency and see where we can really drive the highest return for the shareholders. We continue monitoring that, based on the project required and also continue monitoring what the company commitment to us before we really roll out. In terms of the system analysis space. Clearly, customer interest in our product is very strong.
We ran to proliferate this product and then build out our roadmap, and then along the way, we will augment our needs for the existing team. So far, we continue to hiring top R&D and FAE when we see them, and we're very high bar, so we want to make sure that we pick the right one to really able to really drive the efficiency and then to the whole system analysis market that we try to go after.
Yeah. Jay, computational software is kind of Cadence's core competence. We manage the group across five different business groups, or manage employees across five different business groups. Sorry. Yeah, we manage the business, the employees across five business groups. We've got functional verification, the digital IC group, custom IC, silicon package board, and IP. Yeah, like I say, we're happy with the way we're ramping up innovative products on the system analysis side. As Lip-Bu said, we had over 90 evaluations underway and more than 20 customers to date.
A technical follow-up on that. Thus far, at least with Clarity and Celsius, you're taking very much of a point tool approach to computational software, at least for simulation and analysis use cases. When you think about what customers do in simulation and engineering software more broadly, it seems to me that you're also going to have to have some kind of a process or data management capability to unify across the multiple solvers. How do you envision going beyond just a point tool by point tool product strategy towards a more comprehensive flow or process orientation?
Yeah, good question, Jay. I think first of all, when you started, you had to address the point tool solution and then drive the best point tool solution. Over time, then you have an integrated platform able to drive the platform strategy a little bit like our digital implementation. We start with our place and route Innovus first, then we start with then the synthesis tool like Genus, then you have the Pegasus. Along the way, then you can really push for the whole platform. Same thing with our verification suite, we do that. This is just the beginning, as I mentioned earlier.
This is the initial move in, and then along the way, we have a plan of the other product lines, and also through acquisitions, so that we can really creating a platform, then we can marching forward as a full court press. Right now we are taking very calculated and then addressing the tool that a big TAM market is $700 million we can go after. Over that, and now we have our game plan while developing various other tool and stay tuned, and over time we will unfold it and then create a platform, and then we can push the platform like our Digital and Verification.
Thanks very much.
Thank you.
Your next question comes from Jackson Ader with JPMorgan. Your line is open.
Thanks for taking my questions, guys. First one, just on the impacts in China from the virus. How are those impacts, I know, John, you mentioned they were minimal, but how are they actually manifesting themselves? Are orders being delayed? Are conversations being delayed? Are the conversations like you mentioned about the safety of your employees, are the conversations just not focused on business at the moment?
Let me start and then John can chip in. First of all, we acknowledge the dynamic situation our employee and partners in China and Asia Pacific, and we navigate through carefully, and we monitoring carefully also. With health official and then make sure that we respond to that coronavirus. Meanwhile, the first priority is really focused on our employee safety and then working with the authority to deal with the crisis and then Wuhan and also Manila this week, a lot of people coming back to work and then how we're going to be impacting. We getting closing on the monitoring on the supply chain and also the whole factory reopen and so at a different stage. Good news is our revenue is recurring in nature.
Meanwhile, we also monitoring the situation, check with all our key customer and partner, and so far that we already built into our whatever we forecast in the budget. Clearly the impact is minimum and immaterial overall number, and that's what John is highlighted as assumption that we receive and then we're closely monitoring. So far.
Yeah, Jackson, we're closely monitoring the situation in terms of what we've seen so far is we're picking up some extra expenses as we try to support our customers from remote regions, that we're paying some people over time. We have some of our revenue comes from royalties. We've ratcheted down our expectations of royalty revenue in Q1, because some of that royalty revenue comes out of China and Asia Pacific.
All is included in the guidance.
Yes, everything's in our guidance.
Okay. All right. Great. That's helpful. A more broad question on Clarity and Celsius or really just 3D solvers in general. Is there any reason or is there anything structural that you see in terms of the margin profile that would be different from your core EDA business relative to the 3D solver market?
Yeah, I think, clearly, the system analysis space is a good market. It's a good business. We are, again, mention it's very early in the game, and we continue to driving the opportunity and proliferating with our customer. I think the market is ready, and a lot of our customer request that.
Yes, the profitability profile is very similar to EDA. Our entry into system analysis is probably one of our drivers of increased op margin. I think if you look at our gross margin for 2018, it was 90%. In 2019, we achieved 90.6%. In our guidance, we're targeting 91% because of the growth we're seeing and because of all the evaluations that are underway on the system analysis space.
Well, okay. That's great. Thank you.
Thank you.
Your next question comes from John Pitzer with Credit Suisse. Your line is open.
Yeah, good evening, guys. Thanks for letting me ask the question. John, I just want to go back to the acquisitions and maybe understand a little bit better the impact they're having on op margins in the March quarter. I appreciate that you've talked about the impact kind of diminishing throughout the year. What kind of exit run rate should we think about on op margins relative to the acquisitions' influences?
Right. Like you say, combined, the two acquisitions add about $20 million of revenue in 2020. They're dilutive to earnings in 2020. I think if you look at the impact on the purchase accounting is kind of heavily weighted toward the first quarter, and it bleeds off kind of as we go through each of the four quarters. There's still a little bit that bleeds into 2021, but we expect to be accretive in 2021.
That's helpful.
Another driver of the op margin profile for Q1 is that I do want to kind of remind you that we've grown headcount significantly during 2019. We entered 2019 with less than 7,500 employees. We were up to 8,078, so up about 8% in headcount by the end of 2019 as we're investing in proliferation with market-shaping customers and these TAM expansion opportunities.
That's helpful. Then maybe as my follow-on, I'm kind of curious, when you think about the organic growth for 2020, especially kind of in the core EDA business, how should we think about kind of share gains at traditional customers versus sort of growth in new applications and new customers around AI? I'd be curious as you answer the question, clearly M&A has been a key theme in semis over the last kind of five to eight years, and I presume as larger companies bought smaller companies, they perhaps had better pricing on EDA tools just by function of scale. I'm curious if you look back over time, whether or not that was a meaningful headwind to revenue growth. Now that a lot of the big M&A is probably behind us, does that become sort of a tailwind to revenue growth?
John, it's a good question. First of all, I'm excited about this industry because very unusual to have five major waves happening at the same time. You have the AI machine learning wave, you have 5G is starting to deploy, you have the hyperscale guy, the really massively scaled infrastructure. We have autonomous driving, the whole digital transformation of the industry group. As I mentioned earlier, clearly, some of this big system company and a service provider, they are quietly building up the silicon capability. They're also reaching out to us to really expand beyond that to the system analysis space. I think we're excited about the opportunity in front of us.
So far, I think the core EDA, I think the proliferation from the leading customer, we still have a lot of opportunity in front of us. We are very excited and pursue aggressively on that in terms of share gain. The other part is clearly some of the new products that we are launching now. If you recall that one of the big strategies for Cadence is right away driving the innovation. Last year, we have seven new organically developed products. Besides those system analysis tools, we have the Protium X1, we have Spectre X product, and then we have the JasperGold and the CloudBurst. By the way, some of the new products, we try to move into the cloud.
We take the leadership in the cloud. Basically cloud native tool that really drive the performance and the scalability for our customer, and they love it. I think, in term of pricing-wise, value about the value. We don't want to price it. We really drive quality, and we want to be the trusted partner for the customer. They can count on us to really drive the performance. In return, we get the value that we want. When you move down to 5 nm, 3 nm, we have become very important to them to drive some of this design success. We exciting to be partner in supporting them.
Perfect. Thanks, guys. Congratulations.
Thank you.
Your next question comes from Adam Gonzalez with Bank of America. Your line is open.
Hi, guys. Thanks for taking my questions. First, I just wanted to take a step back and, you're talking about this $5 billion market opportunity in system analysis, but I think in the past, you've talked about a $30 billion market versus the $10 billion market that you serve, and that's inclusive of EDA IP. Can you help me reconcile the difference between the $10 billion EDA and IP market you serve, plus the $5 billion system analysis market? How are you guys getting the $30 billion? What am I missing? Thanks.
Sure. Let me just draw the picture for you. We have this, we call it the intelligence system design strategy. The first layer on the ground floor is we call it the design excellence. That is a core EDA and IP. There's still a lot of room to grow in terms of proliferation of product, especially some of the innovating products that we are really driving. Secondly, we are moving into the next level, we call the system and innovation, in terms of system analysis, and it's just a portion of it. You have embedded software security that is overlay on that. The third layer is, we call it the pervasive intelligence, and that we are applying the AI algorithm know-how to really address our core business and also some of the specific vertical that we are going after.
That total together, it's basically from the $10 billion from the design excellence, that's two other layer that will add up another $20 billion to really drive in some of the vertical market that we are serving in the next five years.
Okay, next five years. Got it. Following up on Clarity and Celsius, good job with the customer momentum you've built so far. Can you give me an overview or give us an overview of the competitive landscape and what your differentiators are there? In that $700 million TAM that you're addressing so far, is there a next point tool solution or market that you're looking to target perhaps in the near future? Thanks.
I think we mentioned earlier about this $5 billion TAM market. Initially, we target on that $700 million. That is in the EM solver and also the thermal co-simulation area. We are quietly building some other product, and stay tuned. When we are ready, we will launch that. Initially, we can get a few, we call it the low-hanging fruit, clearly drive the computation software differentiation that we can show 10X performance. We're excited to validate that with 90 evaluation and 20 customers signed up, and more is coming. We will keep you updated on that. Clearly, I think people see the performance of 10X performance, and they can really have that performance driven, and they are excited to see that. They want to get the best tool.
Over time, they're going to tell us what are the new tool we have to go in, and we're going to build and acquire and then build up the platform to really drive the success in that system analysis. Again, I say that this is just the beginning, so we're in the early innings.
Great. Thank you.
Thank you.
Your last question comes from Tom Diffely with D.A. Davidson. Your line is open.
Yeah, hi. Just a quick follow-up. John, when you look at that 53-week year, does that have a bigger impact on your cost structure than it will on revenues?
Yeah. Essentially, if you look at the 53rd week, it's a holiday week, kind of between Christmas and New Year. It adds about $40 million to annual revenue because it's really the recurring piece of our revenue that is daily subscription-based that we get the extra revenue for. On the expense side, we kind of pick up the full week of expenses. The upside to operating income is minimal for that 53rd week.
Yeah. Okay. Just wanted to make sure. Thank you.
No worries. Okay, thanks.
Thank you, and I will turn the call back to Lip-Bu Tan for any closing remarks.
Thank you all for joining us this afternoon. Next phase of our strategy, intelligent system design, brings new opportunities in design excellence, system innovation, and pervasive intelligence, an expanded total addressable market. We are capitalizing on multiple technology trends and further proliferating our solution with a broader base of customers. Culture is a very important component of our success and who we are as a company in the community. In November, Cadence was named to Investor's Business Daily first ever Top 50 Environmental, Social, Corporate Governance, we call it the ESG, company list. This list ranks the company with regarding to sustainability and ethical impact, rank Cadence number one in technology category and number five overall. In closing, I would like to thank all our shareholders, customer and partners, and the board of directors and our hardworking employees for their continuous