Thank you, Jesse, and I would like to welcome everyone to our Q4 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 13, 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 and that 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 ks 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.
Reconciliations are available at the Investor Relations section of cadence.com. Copies of today's press release dated February 12, 2020 for the quarter ended December 28, 2019, related financial tables and the CFO commentary are also available on our website.
And 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, but strong design activity continues at both advanced nodes as well as more than more front. This is being driven by generational technology drivers, 5 gs, AI and Machine Learning, Hyperscale Computing, Industrial IoT and autonomous vehicles, which have all helped 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 fill 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 nanometer designs, Cadence and Broadcom expanded their collaborations to include the creation of 5 nanometer designs using Kadant Digital implementation solutions. We have about 50 new full flow wins in 2019, including a recent full flow competitive win for new advanced node designs with a leading maker of FPGA chips.
During the year, we announced successful successes in our digital business with customers such as MediaTek, Samsung, SocialNet, Innovium, Menonox and Ounda. Verification is one of the top challenges of our customers and our verification suite had several wins across multiple vertical segments in 2019. Our Axyleum parallel simulator with its innovative ROCCATECH technology continues to proliferate and recently had a noteworthy win at a 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. And we are getting strong attractions with Proteum 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 focused 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 HiFi DSP Processor are increasingly proliferating in true wireless studio based earbuds and in the next generation smart speakers. Design IP had a great year as well with strength in DDR, PCIe and our 112 gig SerDes products. As we proliferate with customers in AI, 5 gs and cloud computing. Early in the year, we augmented our partnership with a marquee U.
S. Semiconductor company through our largest IP agreements arrangements ever, which included Tensilica Processor IP, 112 gig 30 IP as well as additional memory and interface IPs products. Now let us move on to the system innovation segment of our intelligent system design strategy. In 2019, we entered the system analysis market, an estimated $5,000,000,000 TAM opportunity by introducing 2 exciting new products, The Clarity 3 d Solver, the next generation solution for electromagnetic field simulations and Celsius Thermal Solver, the industry's 1st complete electrothermal 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're 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, Kyocia, Realtek, and Umbrella. Generational industry trends are driving the need for increasing 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 design products designing products for complex high frequency RF application, especially in the 5 gs wireless, aerospace and defense and automotive segments. To that end, we acquired AWR, a leader in high frequency RF solution.
We also acquired Integrin 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 partnered with Cadence and Microsoft on the 1st TSMC IC layout contest. Cadence delivered cloud 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 results and provide our updated outlook. Thanks, Lip Bu, and good afternoon, everyone. I'm 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 Q4 and the year, starting with the P and L. Total revenue was $600,000,000 for the quarter and $2,336,000,000 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 $3.53 for the year. GAAP EPS included a one time GAAP only tax benefit of $2.06 for the quarter $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 $2.20 for the year. Looking at the balance sheet and cash flow, our cash balance totaled $705,000,000 at year end. Operating cash flow in the 4th quarter was $159,000,000 $730,000,000 for the full year.
DSOs were 47 days and we repurchased $75,000,000 of Cadence shares during Q4 for a total of $306,000,000 for the year. During 2019, we grew revenue by $198,000,000 with over $100,000,000 of that incremental revenue growth dropping through into non GAAP operating income. That means we have now grown our annual revenue by around $520,000,000 since 2016 with around $280,000,000 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 $610,000,000 to 6 $20,000,000 non GAAP operating margin of approximately 30%, GAAP EPS in the range of $0.32 to 0.34 dollars and non GAAP EPS in the range of $0.53 to 0 $0.55 For the full year fiscal 2020, we expect revenue in the range of $2,545,000,000 to $2,585,000,000 non GAAP operating margin of 32% to 33 percent GAAP EPS in the range of $1.46 to $1.56 non GAAP EPS in the range of $2.40 to 2 $0.50 We expect operating cash flow to be in the range of $775,000,000 to $825,000,000 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 2 acquisitions and we've included the impact of those acquisitions in our guidance. And finally, please note that fiscal 2020 will be a 53 week year for Cadence. You will find guidance and additional items 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 3 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 hard working employees for their continued support and I look forward to updating you on our progress for 2020. And with that operator, we'll now take questions.
Thank you. Your first question comes from Rich Valera with Needham and Company. Your line is open.
Thank you. Good evening and congratulations on a nice finish to the year. First question on your new system products. It 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, 1 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?
Yes, Rick, 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. And that's about $5,000,000,000 ten market opportunity for us. And we initially are moving in with the 2 new product organically developed, Kirla T3D and also Celsius Thermal and one for the EM field solver simulator and then the other one is the electro thermal co simulations software.
And so both are launching out in the later part of last year and both are proven massive parallel architecture, 10x performance. And we are excited and now the response has been very positive, more than 90 evaluations. And we already have 20 customers and I highlight a few. So I think this is just an early stage of entry. And these two product is addressing about $700,000,000 of 10 market opportunity.
And 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 then expanding to the system level. And also our customer requests us to move into that and so that we can really providing a more compelling solution to the customer. And to answer your question, would that be like digital? I know we take one step at a time, take one ending at a time. And then gradually we can proliferate in our customer to customer.
And then beyond that, the customer is going to tell us what are the area will be interesting for them, what are the feature 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. So I think overall stay tuned, it's still very early in the game.
Great. And then 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?
Yes, sure, Rich. Yes, purchase accounting rules significantly limit the revenue we can recognize from both AWR and Intergrant in 2020. Combined, we've added $20,000,000 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. Thanks.
Your next question comes from Mitch Steep 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. Yes. So, yes, two questions for me. The first one is actually a little more technical. You guys are talking a lot more about kind of going to RF space.
Is this due to the fact that when you go to chip with design architectures in the future, they're going to have more complex RF? Am I thinking too complex about that? Or is kind of one of the reasons why you guys are pushing in that space?
Yes, it's a very good question. Clearly, we're listening to the customer. As you all know, 5 gs is deploying. And then most of the challenging on the 5 gs and some of the other application market is the RF, high frequency RF. And so we have been looking what is the best way to address this in terms of the hydrogenous integration and all the complexity to put it together.
And so 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. And clearly, the high frequency RF solution they have and then also we just add on another new acquisition called Integrin Solutions and that give us a very compelling RF solution for the design. And then 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. And so 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.
And that's why we are very excited about this acquisition.
Got it. I think that's very helpful. And then just for John real 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. So, does that imply that you're exiting kind of a 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. The yes, 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 £40,000,000 to annual revenue. But when you add the extra week of expenses, of course, the upside to operating income is minimal there.
And then with the like combined impact of the 53rd week and the acquisitions, basically the impact of the purchase accounting rules on the acquisitions kind of is bigger in the first half or in the first quarter and kind of gradually reduces over time over the 4 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 sounds like it grew 16% year over year. Wondering if that was all organic growth? And then was most of that driven by Tensilica and the wireless earbuds?
Yes. Tom, as I mentioned, we grew very nice and it's a great outstanding year for us for the IP business, 16% revenue year over year growth. And pretty much across the board, I mean, 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. And then the other part that we really like is their loyalty growth, very strong and especially in the audio side.
And I mentioned about the earbuds and also the smart speakers that we have a very strong footprint there. And then 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 112 gig 30, That is a must have for all the hyperscale guy and the infrastructure rollout. And then that is for the AI machine learning. And so we're also delighted the marquee U.
S. Semiconductor company with us in the largest IP agreement we have across different memory, Tensilica and I, I, the 112 gig 30. And answer your question, it's all organically developed and nothing from acquisition.
Great. And based on just the consumer component to that, would you expect that to continue to be more heavily wedded to the 3rd calendar quarter? Or is it too diversified to make that call?
Say again the question. Yes.
I was wondering if the IP, if you expect from a seasonality point of view for it to be largest on in the 3rd calendar quarter? Or is it so diversified that it's tough to make that call?
Yes. It's quite diversified. But yes, 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. But certainly, IP has been doing very, very well.
We're very pleased with the growth that we're seeing.
Okay. And 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 with specific customer mix?
It's probably more product mix. And of course, like the 1st part of the year, we're impacted by the purchase accounting rules on the 2 acquisitions. In Q4, we'll get the benefit of that 53rd week. Also, I'm probably 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 and 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 But 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. But 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 want 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 $3,600,000,000 at year end, which includes approximately 200,000,000 dollars of non cancelable IP access agreements. That's up from $3,000,000,000 at the end of 2018, including $100,000,000 of IP access agreements. Now it's impacted by the timing of renewals and our weighted average duration for 2019 was slightly higher because we had a really, really strong Q4.
But weighted average duration for 2019 was 2.7 years. Now if I look at the average for 2018 2019 together, it was in the usual 2.4 to 2.6 year range. And if I look at 2017 through 2019, that's also in our typical 2.4 to 2.6 year range. But 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 and that had a slight impact also.
Okay. Okay. Thanks. Appreciate that.
I know you guys
have always tried to manage the business, new projects, acquisitions and whatnot based on the below 40, some of the revenue growth in the non GAAP operating margin and you just concluded 2019 with about 41%. You're guiding for 2020 at 42%. I'm sure the extra week has some impact on that. And so therefore, are you willing to step out of your prior long term margin guide of 30% or should we now as well also start to consider the Cadence business being a 10% top line grower?
So Gary, I don't think we gave a long term margin target of 30% in the past. And 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 20%, what is it, 10% revenue growth and 30% non GAAP operating margin. In 2019.
Now the year we just closed, we just did 9% 32%, yes, so a combined 41% on the rule of 40 metric. But and 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% to 33 percent for non GAAP operating margin. The piece that we've been focused on is driving profitable revenue growth. And that's why I called out the 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. I think if you take the combined impact of the 53rd week and the acquisitions, I mean combined they add about £60,000,000 of revenue to our fiscal 2020, but the impact to operating income is slightly negative in 2020, predominantly due to those purchase accounting impact on those acquisitions.
Excluding the impact of the 53rd week in the acquisitions, our guidance assumes that approximately half of our revenue growth in 2020 flows through to operating income. So we're very happy where we are. But 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.
Yes. 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. So we continue to execute and deliver the results to the shareholders.
Okay. Last quick question on the cash. It looks like you repatriated some cash, quite substantial amount. I'm just curious what the reasoning behind that is?
Yes. As we're just preparing to complete the acquisitions, the 2 acquisitions we completed at the start of the year. At year end, worldwide cash totals just over $700,000,000 $705,000,000 of which about $400,000,000 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. A intermediate term question and then a longer term question. So 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 a leading indicator of business conditions in EDA. In your case, starting in the second half of twenty eighteen and through the first half of last year, you significantly ramped up your additions there, obviously connected I'm sure to the U.
S. Marquee customer and others. But now your openings there have tailed off. So 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? And maybe just talk about your thinking on what is generally your 2nd largest source of employment after R and D?
And then 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? And then a tactical question as a follow-up on that.
Yes. Good question, Jay. Let me try to answer and then John will chip in. First of all, we're not guiding the our hiring plan. But 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.
So and we continue to drive efficiency. And so 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. And so I think we continue to monitoring that. And so based on the project required and also continue to monitoring what the company commitment to us before we really roll out.
And in terms of the system analysis space, so 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. But so far, we continue to hiring top R and 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.
Yes. And Jay, I mean, computational software is kind of Cadence's core competence. We manage the group across 5 different business groups or manage employees across 5 different business groups. And let me sorry, sorry. Yes, we manage the business, the employees across 5 business groups.
We've got functional verification, the digital IC group, custom IC, silicon package board and IP. Yes, and like I say, we're happy with the way we're ramping up innovative products on the system analysis side. I mean, as Lebout said, we had over 90 evaluations underway and more than 20 customers today.
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. But 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. So how do you envision going beyond just a point tool by point tool product strategy towards a more comprehensive flow or process orientation?
Yes, good question, Jay. I think first of all, when you started, you had to address the 0.2 solution and then drive the best 0.2 solution. And then 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 to like Janus, then you have the Pegasus and then along the way then you can really push for the whole platform and then same thing as our verification suite, we do that. So 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 that we can marching forward as a full court press. And so right now, we are taking very calculated and then get addressing the 2 that the big TAM market is €700,000,000 we can go after. Then over that we have our game plan by 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? Or are the conversations like you mentioned about the safety of your employees, are the conversations just not focused on business at the moment?
Yes. So let me start and then John can chip in. So first of all, we acknowledge the dynamic situation, our employee and partners in China and Asia Pacific, and we navigate through carefully and we're monitoring carefully also and then with health officials and then make sure that we respond to that coronavirus. And then 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 Manao this week, a lot of people coming back to work.
And then how we're going to be impacting, we're getting closing on the monitoring on the supply chain and also the whole factories reopen and so at a different stage. And good news is, our revenue is recurring in nature. And then meanwhile, we're 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. And then clearly, the impact is minimum and immaterial overall number.
And that's what John has highlighted. This is an assumption that we receive and then we're closely monitoring and so far. Yes.
Jackson, I mean, 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 the China and Asia Pacific. And also included in the guidance? Yes, everything's in our guidance.
Okay.
All right, great. That's helpful. And then a more broad question on clariti and Celsius or really just 3 d 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 3 d solver market?
Yes. I think clearly the system analysis space is a good market, is a good business. And we are again mentioning it's very early in the game and we continue to driving the opportunity and proliferating with our customer. And I think the market is ready and a lot of our customer request that.
Yes. The profile is profitability profile is very similar to EDA. And it's probably 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%.
And 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.
Okay. That's great. Thank you.
Thank you.
Your next question comes from John Pitzer with Credit Suisse. Your line is open.
Yes. 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. And I appreciate that you've talked about the impact kind of diminishing throughout the year.
But what kind of exit run rate should we think about on op margins relative to the acquisitions influences?
Right. So like you say, combined the 2 acquisitions at about $20,000,000 of revenue in 2020 and 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 Q1 and it kind of it bleeds off kind of as we go through each of the 4 quarters. There's still a little bit that bleeds into 2021, but we expect to be accretive in 2021.
That's helpful. And
then Another driver sorry, just 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 shipping customers and these TAM expansion opportunities.
That's helpful. And then maybe as my follow on, look, 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? And I'd be curious as you answer the question, clearly M and A has been a key theme in semis over the last kind of 5 to 8 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 could look back over time whether or not that was a meaningful headwind to revenue growth.
And now that a lot of the big M and A is probably behind us, does that become sort of a tailwind to revenue
growth? Yes, John, it's
a good question. First of all, I'm excited about this industry because very unusual to have 5 major waves happening at the same time. You have the AI machine learning wave and you have 5 gs starting to deploy and then you have the hyperscale guy that really massively scaled the infrastructure and then we have autonomous driving and then the whole digital transformation of the industry group. And then 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.
And so I think we're excited about the opportunity in front of us. And 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 and we are very excited and pursue aggressively on that in terms of share gain. And then the other part is clearly some of the new product that we are launching now. And as you recall that one of the big strategy for cadence is driving the innovation. So we have last year, we have 7 new organically developed products.
Beside those system analysis tool, we have the Proteum X1, we have Spectra X product and then we have the Jasper, SmartGo and the Cloudburst. And by the way, some of the new product, we try to move into the cloud. We take the leadership in the cloud and then basically cloud native tool that really drive the performance and scalability for our customer and they love it. And so I think in terms of pricing wise, value about the value. We don't want to price it and then 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 and then in return, we get the value that we want. And when you move down to 5 nanometer, 3 nanometer, that's we have become very important to them to drive some of this design success and then we're exciting to be partner and 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 $5,000,000,000 market opportunity in system analysis. But I think in the past, you've talked about a $30,000,000,000 market versus the $10,000,000,000 market that you serve and that's inclusive of EDA IP. Can you help me reconcile the difference between the $10,000,000,000 EDA and IP market you serve plus the $5,000,000,000 system analysis market?
How are you guys getting the 30,000,000,000 dollars
What am I missing? Thanks.
Sure. So let me just draw the picture for you. Beside the we have this we call it, intelligent 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. And then 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. And then you have embedded software security that is overlay on that. And then the 3rd layer is we call it the pervasive intelligence and as 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.
And then that total together is basically from the $10,000,000,000 from the design excellence that's 2 other layer that will add up another $20,000,000,000 to really drive and some of the vertical market that we are serving in the next 5 years.
Okay. Next 5 years. Got it. And then following up on the clarity in 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?
And in that $700,000,000 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.
Yes. So I think we mentioned earlier about this 5 $1,000,000,000 TAM market. Initially, we target on that $700,000,000 that is in the EM solver and also the thermal co simulation area. And then we are quietly building some other product and stay tuned when we are ready we will launch that. And so 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.
And we're excited to validate that with 90 evaluation and 20 customers sign up and more is coming. So 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. And then 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. And again, I say that this is just the beginning and so we're in the early ending.
Great. Thank
you. Thank you.
Your last question comes from Tom Diffely with D. A. Davidson. Your line is open.
Yes. Hi. Just a quick follow-up. John, when you look at the 53 week year, does that have a bigger impact on your cost structure than it will on revenues?
Yes. So essentially the if you look at the 53rd week, it's a holiday week kind of between Christmas and New Year. It adds about $40,000,000 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. But for on the expense side, we can pick up the full week of expenses. So the upside to operating income is minimal for that 50 3rd week.
Yes. Okay. Just wanted
to make sure. No worries. Okay. Thanks.
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 and an expanded total addressable market. We are capitalizing on multiple technology trend 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. And in November, Cadence was named to Investor Business Daily First Ever Top 50 Environmental, Social, Corporate, Governance, we call it the ESG company list.
List. This list ranks the company with regarding to sustainability and ethical impact, ranked Cadence number 1 in technology category and number 5 overall. In closing, I would like to thanks all our shareholders, customer and partners and the Board of Directors and our hardworking employees for their continuous