They have a massive software stack. And that’s true for all the hyperscalers. So we see that trend continuing. And now we do use, you know, Nvidia’s products like InfiniBand in our systems on Z3 to your question, which is, because Z3 is a very unique architecture. So it requires very, very high speed interconnect. So it’s almost like a super computer. So then it requires optical and InfiniBand in Z3. Now in X3, we are using AMD FPGAs, which are fabulous, but it does not require that tight interconnect speed. So InfiniBand is more used in Z3 versus X3. But X3 is a great system too, we’re using the latest AMD FPGAs, it has 8x higher capacity than X2, and all kinds of innovation on the software side as well. So we are very pleased — I’m very confident that we have true leadership in these hardware platforms, both Palladium and Protium.
And we’re also pleased, like I said earlier, that we are able to refresh it much sooner than the market expected, given our track record. And then we are seeing a lot of demand for both of these systems together going forward.
Ruben Roy: That’s helpful. Thank you, Anirudh. And then a follow up for John. Anirudh mentioned HBM IP business, booked and shipping in second half. I was wondering if you can kind of give us a bigger picture update on how you’re viewing IP in general in terms of bookings relative to sort of ramps of those IP sales. Is it sort of the entire segment sort of a second half? Should we think about the second half ramping at a heavier weight than first half or any update there would be helpful?
John Wall: Yeah, thanks Ruben. I mean Q1 IP performance and bookings were ahead of our expectations. And everything remains on track there for a very strong growth year for 2024 for the IP business. Of course, the timing of revenue recognition depends on the timing of deliveries, but we had a tremendous bookings quarter in Q1 and we’re preparing to scale for a number of deliveries of IP in the second half, but we expect the IP to have a very strong year this year. We’re pleased with the overall business momentum, but we need to scale up some headcounts to prepare to deliver on some of the larger backlog orders.
Anirudh Devgan: Yeah, 1 thing, I want to highlight, I think you may have seen this, I just want to highlight our partnership with Intel and IFS. That was concluded in Q1. And so it’s really good to see, you know, [Pat] (ph) and Intel investing more in the foundry business and also working more closely with us. So that’s also a key contributor to IP, but like John said, we have to hire the people, do the — we need to port our portfolio to the Intel process, okay? And that takes some time. So that’s more will come towards the end of the year and next year. But we are pleased with that new partnership on IP.
Ruben Roy: Very helpful. Thanks, guys.
Operator: Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead.
Jay Vleeschhouwer: Thank you. For you — John, first, and then Anirudh. So for John, thinking back to a recent conversation we had, could you comment as a measure of EDA market health or dynamics, what you’re seeing or expecting in terms of intra-contract new or expansion business. You know, this is an ongoing phenomenon in EDA, maybe talk about what you’re seeing in that kind of business beyond the customer renewals schedule. And then relatedly, how are you thinking about pricing for this year given that EDA generally has substantially better pricing capacity than you might have had years past. And then my follow up for Anirudh.
John Wall: Sure, thanks, Jay. Great question. I think what you’re getting at there is what we would call add-ons. Typically, we have the very predictable software renewal business. And you’ll see in the recurring revenue part of our business, I think we’re at double digit revenue growth. But over the past few years, I think that’s been at low teens. But we’re seeing that a number of customers that have adopted AI tools are maybe not coming back and purchasing add-ons as frequently, but right now we’re focused on proliferating those AI tools into accounts. I think there’s an opportunity to increase pricing there, but maybe now is not the right time. I think we have such strong momentum on the upfront revenue business. We’re preparing for scale into the second half there.
But we’ll have plenty of revenue growth in the second half of the year. We can continue to focus on proliferating our AI tools and technology into accounts. And pricing is something certainly we can focus on more intently in future years, but right now the focus is on proliferation. Anirudh, do you have anything to add to that?
Anirudh Devgan: No.
Jay Vleeschhouwer: Okay, Anirudh so [piggyback] (ph) to your conference last week, particularly the Gen AI track, it was interesting of course to hear the adoption presentations by Renesas, Intel and so forth. But what seemed to be taking place is a heavy focus on Cerebrus which makes sense, it is the one longest end-market. So perhaps you could talk about how you are thinking about the adoption curve for the other brands aside from Cerebrus? And are there any critical parts of the design flow that might not necessarily be amenable to AI enablement. We hear a lot about implementation, analog, verification but we don’t hear a lot about AI as being applicable to synthesis, for example. So maybe talk about those areas where it makes a lot of sense and knows where perhaps it will remain more or less conventional technology.
Anirudh Devgan: Yes. Thanks, Jay for the question. So as you know, we have five major AI platforms with Cerebrus and Digital implementation being the one that has been out the longest and Cerebrus is doing quite well, like you noted. And we also commented on more than 350 tapeouts, lot of PPA improvement. But all the other ones are doing well, too. Sometimes we have like too many products, we don’t talk enough about the others, but like verification, like Verisium is doing quite well. And I mentioned Qualcomm last week talked about pretty impressive results because verification, as you know is an exponential problem, because as the chips get bigger, the verification task gets exponentially bigger. So the benefit of AI can be significant in verification.
So I think, you will see that in the next few quarters and years that verification will be as important as implementation in terms of benefits of AI. And then the other area I’d like to highlight is PCB and Allegro and Packaging because that area hasn’t seen that much automation. And PCB – and Allegro is a leading-platform for packaging and PCB, but really proud of Allegro X AI. And we talked about several customers, including Intel last week talked about 4x to 10x improvement using X AI in PCB. So apart from Digital, I think the next two ones, I feel are verification and Allegro and PCB and then the areas that haven’t done as well, I mean is more not in design optimization is like design generation. And I think, there — this LLM based models do provide a lot of promise.
So historically, we haven’t done as much design-generation, which is — this is like almost pre-RTL, right going from Spec to RTL. That’s the — truly the creative part of the design process. And then once you have RTL, it is more optimization part in digital and verification. So I think that’s where we have to see, but some initial results, which we haven’t talked but I think mentioned last week. But we work with a — but we have to see it still in early stages, but we work with one or two customers in which we took like a 40, 50 page Spec document, this English document, and able to automatically generate RTL from it, okay? And the RTL quality is pretty good. So again we have to see how that goes, but that requires these really advanced LLM capabilities.
So that’s something to be seen. But if that works well, that could be another kind of very interesting kind of application of Gen AI.
Jay Vleeschhouwer: Okay, very good. Thank you.
Operator: Your next question comes from the line of Gary Mobley with Wells Fargo Securities. Please go ahead.
Gary Mobley: Hi guys. Thanks so much for taking my questions. John, I appreciate the fact that China revenue in the first quarter was down against a tough year-ago comp on the hardware verification side as you work on backlog. And I assume that you still expect China to be dilutive to overall company growth in the fiscal year. Could you speak to whether or not you are starting to see US export controls begin to impact your ability to do business there, whether that be a function of restrictions around gate-all around or certain China customers added to the entity list.
John Wall: Hi, Gary, thanks for the question. And just to clarify, I think last quarter, I said I expected China revenue to be flat to down this year. I think, we still expect that. And that’s because last year was such a strong year and there was a lot of — there was kind of an oversized-portion of that hardware catch-up that we had that was delivered to China. So I think, it skewed the China number higher last year. So we are lapping pretty tough comps. But the design activity in China remains very strong, though. And — we have a lot of diversification. There is strength in other parts of the world — but we’re very comfortable with the 2024 outlook and we factored all the impact of geopolitical risk in there to the best we can and try to derisk China, as much as we can in our guide.
Gary Mobley: Okay. The follow up, I want to ask about bookings trends for the balance of the year. You obviously highlighted better than seasonal Q1 booking trends. How would you expect the bookings to play out for the balance of the year? And to what extent will Z3 and X3 factor into that for the balance of the year? Thank you.
John Wall: Yes. I mean, it’s hard to predict in terms of Z3 and X3 that we definitely need another quarter to see that. I expect — we expect strong demand and we expect strong revenue growth into the — that we are preparing for scale into the second half on the hardware side, but we need to at least see another quarter of demand. And normally with hardware, I don’t like taking up the year for hardware until I see the pipeline in the summer. So we are trying to be conservative there. But generally on the hardware side, yes we are basically preparing for scale we’re trying to build — we’ll build those systems as quickly as possible. We expect strong demand there.
Gary Mobley: Okay. Thank you.
Operator: Your next question comes from the line of Jason Celino with KeyBanc Capital Markets. Please go ahead.
Jason Celino: Hi, thanks for [heading] (ph) me. And Anirudh, congrats to your R&D team. [I] (ph) — Impressed that they reduced the cycle there, all while designing that among [box] (ph), too, right? So — maybe first, just how many of the — for the Z3 and X3, does it become available in Q3? I guess when can customers start putting orders in for that?
Anirudh Devgan: Yes. First of all, thanks. And yes, they become available now, okay? But it will ramp Q3 and then Q4. But we already have them running at several early customers. So I mean, normally when we announce something, as you know, like and one of our lead partners, they have been running for three months already and very stable. But in general, it will be more Q3 and then Q4 in terms of — because normally, in any system, there is like a three months to six months kind of overlap. So we will still sell Z2 X2, and then move to Z3 X3, so that’s a natural part. And that’s also contributing to this quarter-by-quarter variation a little bit, but it will ramp. And Q3 will be bigger and then Q4 should be bigger than that.
John Wall: Yeah, we try to derisk the guide — with the assumption that there is going to be strong demand for the newer systems. But it will give us the opportunity to put some of the older systems into the cloud because we have a large underserved community that want to use our emulation capacity. But we haven’t had a lot of capacity to share with them through our cloud offering. To the extent we do that, that will lead to ratable revenue though, because I think when it is used in the cloud, you get revenue over time, whereas when we deliver and they use it on-prem, we take revenue upfront.
Anirudh Devgan: But the demand it — takes like one to two quarters to ramp…
Jason Celino: Okay. Because that’s kind of — what I was going to ask next is I think last time in 2021, you had like a six month period where you are selling both. And I think, you were trying to clear inventory for the Z1 and X1. It doesn’t sound like you will be trying to do that again. Because when I think, about this Q2 air pocket, is it a function of customers waiting for Z3 X3? Or is it a function of they might not want to buy the older version?
John Wall: Well, the guide — we’ve de-risk the guide on the assumption that many customers might wait. But we intend to sell them side by side. But to the extent the customers wait, it will shift some hardware revenue into the second half of the year. And we have anticipated that. So that’s within the guide. To the extent the customers continue to buy Z2. And we’re not putting those into the cloud, but selling those outright as well. Well, then that will change the profile of the shape of revenue. But we expect that this new system, the strength of this new system will trigger a lot of demand for it.
Jason Celino : Okay, perfect. Thank you both.
Operator: Your next question comes from the line of Vivek Arya with Bank of America Securities. Please go ahead.
Vivek Arya: Thank you for taking my questions. I think you mentioned second half growth will be driven a lot more by hardware. Do you think you will see all the benefit of the hardware refresh within this year? Will it be done? Will it continue into 2025. I guess my bigger question really is that if I exclude the upfront benefit from last year and this year, your recurring business is expected to grow about 10%. And I’m curious, Anirudh, is that in-line with the kind of recurring revenue growth you are expecting or we should be expecting going forward, right along with periodic hardware refreshes — or is that not the right way to interpret your core recurring part of your business?
Anirudh Devgan: Very good question. First of all in non-recurring, it’s not just hardware, but it’s also IP in terms of the second half because like we mentioned, we have new IP business driven by HPM and AI and also by Intel IFS. So that is also back-end loaded along with hardware. And then hardware, hardware normally when we launch a new system, it takes one years or two years for it to fully. So even though we are not commenting about next year, I would be surprised if this time, it’s only a six month impact. So I expect like these things is built for to be used in design for next five years, seven years. So the impact will be also not just this year but following years. And in terms of recurring revenue, I think the best way like we have said is to look at a three year CAGR basis because there could be some fluctuation in all. And overall, we are pleased with the recurring revenue growth and we go from there.
John Wall: Yes. And Vivek if I could — I’d like to kind of take — carry in some of Gary’s question earlier that I don’t think I addressed because he was asking about the bookings profile for the year. Q2 for software renewals, I think is our [latest] (ph) software renewals quarter for the year. But I think, we explained last quarter that we expect the weighting of bookings first half to second half to be about 40-60 this year. But the recurring revenue right now in the guide is about double digits — above 10%. And in the past, it’s been about 13%. Now we are not really anticipating a huge number of add-ons, but to grow that above 10%. To the extent that, that comes through, it will be upside to the guide. But what we try to do when we do the guide is de-risk for the risks that we can see.
Vivek Arya: Thank you. For my follow-up question on incremental EBIT margin. Do you think this greater mix of hardware is impacting the incremental EBIT margin. I think, if I calculate it correctly, the new guidance is still below the 50% incremental, right, or right about — which is lower than what you have had the last two years, three years. Is that the right interpretation? And what can change that?
John Wall: Yes, Vivek, I think what you are referring to really is that, I mean, for what, seven years in a row now, we think we’ve been achieving over 50% incremental margins. It’s a matter of pride here, we try to achieve that every year — we’ll certainly be trying to achieve that this year. I think we are in the high 40s. It’s probably about 47% when you look at this guide right now. I think, one of the biggest challenges with something like that is you know, we do small tuck-in M&A, but I don’t want to go over Lee Simpson – answer Anirudh gave to Lee Simpson, but organic is delicious here. At Cadence, we focus on innovation and growing with organically driven products and then with small tuck-in M&A. But to the extent that we do some larger M&A and of course, we have BETA CAE, which apparently is the gold standard in structural simulation.
So that’s a big acquisition for us. But — now I think the size of that probably still qualifies as a small tuck-in. But when you do something like that — that those M&A transactions typically are headwinds to that incremental margin calculation in the short-term, they will be beneficial in the long-term. But in the short-term, M&A can be — dilutive pretty much in the first year and then becomes accretive later. When we look at our incremental margin that’s a headwind. But we try to overcome that headwind because normally, all we do with these small tuck-in M&As So I haven’t given up on 50% incremental margin for this year. It’s a challenge, but we’ll do our best to achieve this.
Vivek Arya: Thank you.
Operator: Your final question will come from the line of Harlan Sur with JPMorgan. Please go ahead.
Harlan Sur: Good afternoon. Thanks for taking my question. After a strong 2023, SDA is starting the year relatively flattish and down about 5% to 6% sequentially. I think, like — it’s an unusual starting point for SDA, especially given all of the drivers that you guys have articulated. Is SDA expected to also be more second half loaded? And do you expect SDA, this is ex BETA CAE, but do you expect SDA to grow in-line or faster than your overall corporate growth target for the full year?
