So, I think it’s good to have multiple engine, contributing to the growth. And then, we always focus on margin at the same time. So, we are well positioned going forward, but it’s difficult to predict which one will do better than the others, and we don’t guide on a product basis anyway as of now.
Jay Vleeschhouwer: All right. So that’s a good segue to my follow-up. And since you mentioned Dassault, Cadence is actually quite visible here at the conference today, and so my question is when you think about your ISD strategy generally and perhaps CFD specifically, can you talk about the kind of resources and investments you’re having to make to effectuate that strategy beyond or over and above the core EDA strategy? And what do you know now about those markets that you might not have known three, four, five years ago when you were much earlier in developing the strategy?
Anirudh Devgan: Yeah, Jay, that’s a good question. I mean, one thing to point out, our SDA business is about — in 2023, is about 12% of revenue. It’s already at a good pace. And also, it has enough scale now to apply significant of R&D to that space. And also simulation space, right? We know simulation space pretty well. And there’s a lot of high R&D synergy from our EDA R&D to SD&A R&D. So, I’m pretty happy with how much R&D we have invested and we’ll continue to invest there. But at the same time, it is also very profitable, okay, which is — which our model always, right, is not just revenue growth, but also profitability. And which we — when you asked me what — we thought it should be more profitable when we started six years ago because simulation is more profitable in EDA.
So that’s what is playing out in SDA. So, it is pretty profitable. And it has played out roughly to the extent I thought it would. Simulation always is accuracy first and then performance and capacity. And the market is always looking for new simulators, and that’s how it has played out in electromagnetic. And then, in CFD now I’m much more confident with this disruption, this massive disruption with Millennium. And the key thing with Dassault, and we have mentioned this before, as we — I’m very confident in SD&A. You can see in terms of product synergy, product differentiation, but we have always said that we are a computational software company. So that also means what we will not do, right? So typically things in the system space, which are not as computational are things like PLM, things like implementation MCAD, mechanical CAD platforms, and Dassault is the clear leader in those.
They are great in PLM, they are great with SolidWorks, in CATIA, in the high end. So, it’s a perfect partner for Cadence, as we focus on computational software and EDA and SDA, packaging and PCB to partner with Dassault, and we’re glad to see that expansion that was announced today.
Jay Vleeschhouwer: Thank you, Anirudh.
Operator: Your next question comes from Harlan Sur with JPMorgan. Please go ahead.
Harlan Sur: Hi, good afternoon. Thanks for taking my question. Back to your IP business, it was up 4 percentage points, 5 percentage points last year. And I know that it was a relatively tough comp relative to 2022, but I would have thought that the growth in IP would have been closer to your overall growth, just given that higher chip design complexity does motivate your customers to license more IP in order to drive efficiencies in their chip design cycle time. So, was there some customer push-offs of IP into this year, just maybe given timing of customer programs, or was there some other dynamic that play into? And relative to your outlook for 12% total growth this year, how do you think your IP business does this year?
Anirudh Devgan: Yeah, good question. I think the shape of the IP revenue last year was a little atypical. I mean, I think the two reasons were in 2023 we had very, very strong Q4, but first three quarters were not strong at all. So overall year is in the single digits, like you mentioned, but a very strong Q4. So, I think there are a couple of reasons for that. One is that there were some tough compares from ’22 to ’23 in IP, especially in the beginning of the year. And then like I mentioned, of course, last couple of years, the macro environment has been tough, though it is improving now. And then, IP typically gets affected more than others, in terms of a tough macro semiconductor environment. So, as a combination of that, I think the first three quarters were more challenging.
But Q4 and then going into this year, I’m pretty cautiously optimistic about IP. One, our portfolio is better, is broader, and then this whole AI super-cycle, like I mentioned, and then, new engagements we have like with IFS and other companies. So overall, I feel better about ’24. John, you want to comment about the…
John Wall: Yeah, of course. Harlan, as you know, we always focus on profitable and scalable revenue growth, and the IP revenue contributes largely to our up-front revenue percentage. But last year for 2023 our up-front revenue percentage increased from 15% to 16%, that was on the back of a strong record hardware year. But as you say, IP revenue growth was quite low in comparison to prior years. This year, we’re expecting the 16% to go to 17.5%. That’s because we expect both of those to contribute significantly to improvement in up-front revenue this year.
Anirudh Devgan: And then, we expect the IP growth to be higher than Cadence average this year. We’ll see how it plays out. Okay? Yeah.
Harlan Sur: Perfect. No, thank you for that. And then, good to see the strong outperformance on the SDA business, right up 22% last year, certainly, outgrowing the overall marketing your peers in that segment. The recent Millennium M1 supercomputer, I think, is a great example of the synergies between your chip design portfolio, your SDA portfolio, right? You’re basically taking the success you’ve had in hardware-based verification and emulation, sort of bringing that same concept to your SDA portfolio. Seems like there would be a lot of untapped demand for hardware acceleration within your SDA customer base. Like, how big is this market opportunity for the team as you look out over the next several years?
Anirudh Devgan: Absolutely. Even for 30 years, even when I was in grad school, I always believed that hardware acceleration is a massive opportunity for EDA and SDA in general. And you see that borne out in Palladium. So, we have always dreamed about hardware acceleration. And that’s why this three-layer cake, hardware acceleration is the bottom layer. And of course, AI orchestration is the top layer. And a perfect example is Palladium. Now, in Palladium and hardware emulation, what happened is, if you look at overall function verification on the chip side first, it’s more than a $2 billion business, okay, I think if you look at all the software. And hardware became roughly 50% of that. So, hardware-assisted verification became almost 50% of chip verification.
Now, CFD is also a $2 billion business, okay, and it needed this hardware-based acceleration along with AI. So, I don’t know whether it will play out the same way, but there’s a potential of a big portion of CFD to go to hardware-based acceleration, okay? Now, it will take a few years, and we are clearly leading in that. And the other thing it does, hardware-based acceleration or emulation for CFD, is it will improve the market size of CFD as well. Like I was talking to one of these big aerospace companies and they said, current CFD, the current simulation is only done to 20% of the flight envelope, okay, which is unheard of in chip design, right? In chip design, we simulate 99-point-some percent of the use cases so that when the chip comes back it works.
But if you look at the system domain, because the accuracy is not there, because the speed is not there, they’re only covering 20% of the use cases and all of them only in software. So, the potential with Millennium is one that 20% goes to much closer to much higher than 50%, and then a big portion of that can go to hardware-assisted emulation and verification. And by the way, the same thing can repeat again, this three-layer cake can repeat again in bio, which is a few years out. But I think right now the opportunity is there in system simulation and CFD. So, I’m pretty optimistic, but it’s a new use case for that market. And sometimes the new use cases can take some time to deploy. So, we always have to be cautious about that. But the response so far has been phenomenal.
And because they were doing some of this themselves, the customers, but to have a combined solution with AI, software, and hardware. And you are exactly right. It mimics our success we have done on the chip side.
Harlan Sur: Yeah. Insightful. Thank you.
Operator: Your next question comes from Gianmarco Conti with Deutsche Bank. Please go ahead.
Gianmarco Conti: Yeah. Hi, there. Thank you for taking my questions. So, I know you’ve touched on this already, but could you run us again through the phasing of top-line and margins for 2024 guidance, as well as providing some more color on what is causing the lower level of revenue seasonality in your Q1 guidance, given Q1 implies 22% versus the median of 25% over the past seven years in terms of the seasonality? Can we explain this perhaps by hardware and/or IP timing, or is there something else? Thank you.
