John Wall: Yeah, sure. Great questions again, Vivek. On the incremental margin front, we typically don’t start the year in the initial guide with over 50%. We tend to start lower than that and we build towards greater than 50% with growth through the year. As you know, we always like to under-promise and over-deliver. And if you look at our incremental margin over the last few years, it was slightly lower in 2023 compared to previous years. And that’s because on the organic side, we had incremental margins north of 55%, but we did some acquisitions. And typically, when you have an acquisition, it can be dilutive in the early year or two, and that’s a bit of a headwind for incremental margins. In relation to China, glad you asked me about that, China, the last four years for China, China has contributed 15% of our 2020 revenue, then followed that with 13% of ’21, 15% in ’22 and 17% in ’23.
Now, last year, I think China benefited from that large hardware backlog that we had. There was kind of an outsized portion of that backlog was for the China region. So, it was a boon year last year for China. I wouldn’t expect to repeat that this year. In fact, our guide would expect China to be flat or slightly down. So, we’ve kind of de-risked China into the 14% to 15% range for this year, which would be consistent with the previous three years.
Vivek Arya: Okay. Thanks very much.
Operator: Your next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
Gary Mobley: Hey, guys. Thanks for taking my question. Let me apologize in advance for the background noise. I wanted to ask about the disconnect between record levels of cRPO and what is assumed in your revenue outlook and as well your higher outlook for up-front revenue. And so, why the assumption that less of that cRPO translates into revenue in fiscal year ’24, especially considering the higher mix of up-front?
John Wall: Yeah, Gary, good questions. In terms of cRPO and the relationship between cRPO and this year’s revenue, if you recall last year, we had over six months of hardware backlog in cRPO at the end of 2022. So, a large portion of our hardware revenue in ’23 came out of backlog at the end of ’22. We ramped up production capacity and we’re back to more normal levels of about eight weeks lead time now for deliveries on hardware, which is really, really important for customers. Customers want to be able to purchase the hardware and feel like they’re going to get delivery of that hardware within a year. So, typically, your revenue on hardware is more correlated to your production capacity than it is to what’s coming out of backlog versus what’s coming out of new business in the year.
And as a result of addressing those hardware lead times, the revenue profile for this year takes a slightly different shape to 2023. In 2023, in Q1, we had a lot of hardware coming out of backlog. In 2024, we expect another record hardware revenue year and the business is planning to build more hardware each quarter throughout 2024 to meet that demand. But there’s kind of more of — I guess, hardware revenue is expected to grow quarter-over-quarter this year, whereas last year Q1 was our biggest hardware quarter.
Gary Mobley: Just to be clear, John, cRPO does not include hardware backlogs that RPO does?
John Wall: cRPO would include hardware. I mean, even when you have over six months hardware delivery lead time, it would all be expected to revenue in a year. So that’s — although it’s in your backlog, it’s also all in your cRPO. So, cRPO last year would have had a lot more hardware in it than cRPO this year, certainly on the product revenue side.
Gary Mobley: All right. And I want to circle back, Anirudh, on a metric you gave in your prepare remarks, that is a quadrupling of the Cerebrus run rate at several market shaping customers. So, should we take that to mean the annual contract value for those who took Cerebrus at market shaping customers quadrupled? Or maybe if you can just clarify that I’ve been missing that?
Anirudh Devgan: Yeah. Hi, Gary. So yeah, I think Cerebrus is doing very well. It’s deployed at all the top 10 customers. And actually, even AI, in general, we mentioned number of customers engagements are up like 10x in the last 12 months. And so, Cerebrus, run rate — as we have mentioned before, the Cerebrus business, first the customers will try some and then they will adopt more. So, I think what’s good to see in Q4 is what people were — what the customers were doing and then they have adopted that in a much bigger — at a much bigger rate. So, we are happy to see that. I think there is still room to go in that. Like we have always mentioned that we think it will take two contract cycles and we are like — that’s six years and we are like two years into it or two or three years into it.
But that’s good in our model, right? We want consistent growth going forward, but yes, the uptake in Cerebrus is very promising. And then, the other products are — came a little after Cerebrus, like Verisium or Allegro X AI or Virtuoso Studio or Optimality, and they’re also seeing good progression. So, overall, in terms of AI, what I’m very happy about is, I mentioned this before also in the last call, we have three big ways to benefit from AI. And this is true for any kind of new technologies. There are a lot of comparisons to AI, but if you compare it to like the Internet, the first phase is the infrastructure development, okay? So — and this are marquee partnership with NVIDIA, which we have had for more than a decade. And we talked about it today, we’re developing AI products with them.
Them developing their own chips. Palladium, we are a development partner with NVIDIA in Palladium for more than a decade. And that also puts Palladium in a very strong position with all the other kind of AI developments. So that’s the first phase of AI benefit, which is more the infrastructure. And then, the second phase is like what you asked, which is our own products. And it started with Cerebrus in digital side, but now we have five major kind of co-pilot platforms in all the five businesses. And those are progressing pretty well moving from like initial deployments to more wider deployments. And that’s the second phase of AI deployments in which AI will be adopted into existing products, like chip design and system design. And one thing I want to point out is there’s a lot of talk of what is a good application for AI.
I believe one of the best applications for AI is chip design. It’s because over the last 30 years, we have done so much work in automatic chip design. We have a language like RTL. We have all kinds of optimization we have built in. So, the chip process is already very automated. So, it’s an ideal thing to apply AI on top of it for chip and systems design, which is what we are seeing. And then, the third phase of AI is new products that will enable. And I have believed for several years, and that’s why the investment in OpenAI — the OpenEye. The biggest new market that AI will enable will be life sciences, okay, and biosimulation and bio life sciences. And I think you will see that years going forward. So, there are these three phases of our AI activity: one is AI infrastructure, two is applying AI to our own products for chip and system design, and third is AI in bio and life sciences.
So, overall, I’m very pleased, very confident in our positioning in AI and the results we are delivering.
Gary Mobley: Thanks for the detail.
Operator: Your next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.
Jay Vleeschhouwer: Thank you. Good afternoon. Anirudh, you noted the large number of new products you’ve introduced just in the last year, Virtuoso Studio, Optimality, Allegro X and so forth, and then of course Millennium just a couple of weeks ago. Could you talk about how you’re thinking about the contribution of those incrementally, collectively this year as part of your guidance and perhaps even rank the ones that you think might be most incremental to your revenue growth this year over and above the pre-existing products, such as Innovus and the signoff products? Then, my follow-up.
Anirudh Devgan: Yeah, hi, Jay, good question. I mean, as you know, we are a very innovative company and we have done that for years now and we invest one of the highest percentages of R&D — of revenue into R&D. And then, it’s good to have all these new products in multiple areas. Of course, the three big areas being like EDA, SDA and AI. But we don’t try to like rank our children. We want all of them to do well. And it’s also difficult to predict how it will — because these are all for the long run, right? So, there is, of course, a lot of momentum with the AI products. There’s a lot of momentum with 3D-IC and chiplet, as you know. There’s Millennium, I’m super excited about. I think this is the biggest innovation in CFD in the last 30 years.
And I talked about the three-layer cake, right, which is AI orchestration at the top layer, the physical simulation physics-based modeling at the middle layer, and then accelerated computer at the bottom layer. And CFD needed to be disrupted in that context, right? So, we have it — and we didn’t talk about it much when we made the acquisition about two years ago, is this acquisition from Stanford Cascade, which is very, very high fidelity, very accurate to CFD. So, we had that at the heart of it, and then AI on top, and then accelerate compute at the bottom together with NVIDIA, and this completely changes the game in CFD. For the first time, we are able to simulate entire cars and planes in a few hours. It’s almost emulation for systems that have never been possible before.
So, there is a lot of potential in Millennium now, because Millennium is a new product. We are offering both cloud and on-prem. Palladium is mostly, as you know — on our chip business, Palladium is mostly on-prem, but Millennium is both in CFD. And right now, most of the customers are choosing the cloud version, which is great, it’s more ratable, okay? So then, Millennium. And then, you must have seen today, we have this great partnership with Dassault. Actually, I’m also pretty happy about that. Dassault is a leader in PLM and MCAD and overall partnership, we have broadening partnership with Dassault. And then, we talked about our IP business, how that can grow, and this new partnership with Intel and IFS, and hardware continues to do well.
