John Wall: Thanks, Gianni, for the question. Yeah, on the revenue side, we expect 2024 to take a slightly different shape to 2023. That’s largely a function of the revenue mix by quarter. You’ll recall last year, in 2023, we had 20% up-front revenue in Q1 when the year ended up at 16%. But this year for Q1, we’re expecting 14% in Q1 when the year is expected to be 17.5%. So, clearly from that you expect that — we’d expect that up-front revenue to increase quarter after quarter this year, whereas last year Q1 was really the high watermark for up-front revenue. And then, on the expense side, we’ve invested heavily. We have about 1,000 extra heads this year. And that’s for continued innovation and we’re launching new products all the time.
But so that — but that expense on some of the acquisitions is more front loaded for the year. And as a result, that’s kind of feeding into lower margins for Q1 in comparison to the rest of the year. For Q2, Q3 and Q4, we’d expect margins to be similar or higher than last year. Yeah, I think that’s — those are probably the main things to get across.
Gianmarco Conti: Yeah, that was really good. Thank you. Really helpful. And perhaps just one last follow-up on commentary around expectations of operating cash flow into next year. I mean, the lower end kind of seems flat. So perhaps what are the moving levers there? And also, how can 70% of the backlog is flowing into 2024 compared to 75% in ’23? Thank you.
John Wall: Yeah, Gianni, let me take the second part first, and I’ll come back to the cash question. So, last year we had over six months of lead times for — hardware delivery lead times. So there was a lot of last year’s hardware revenue came out of backlog. The 5% shift can pretty much all be allocated to less hardware coming out of backlog for this year. Now, hardware revenue for the year will probably be more a reflection like it has been the last few years of just how much hardware we’re able to produce in the year. And we expect to increase hardware production each quarter for this year to meet the demand that we’re expecting. Last year, the operating cash flow was kind of muted. It was less than, although we beat on all our metrics, we came in just under the midpoint of $1,350 million.
I think it was $1,349 million for operating cash flow. But that included us investing, spending a lot to ramp up on purchase — advanced purchase of raw materials to build that inventory that we believe we need for hardware this year. We intend to do that again in Q1. So, we’ve already included that in our operating cash guide. So, we’re investing some of that operating cash to improve gross margins by pre-purchasing a bunch of raw materials that we believe we need for — to keep up with the demand on the hardware side. The other thing I wanted to highlight is that the business’ forecast for hardware is again for another record hardware revenue year and for hardware demand to continue to accelerate quarter after quarter this year. Normally, I wouldn’t include some of their expected demand for the second half, but until I see that, it’s a pipeline business.
So, we look at lead times. We look at the pipeline kind of closer to the summer before taking up the second half of the year. So, the guide does not include the full forecast from the business. I like to hedge that back in the second half until we get to the summer. I’d prefer to see the pipeline come through and then, there is potential to take the second half higher when we see that pipeline.
Gianmarco Conti: That’s fantastic. Thank you. Very clear.
Operator: Your next question comes from Josh Tilton with Wolfe Research. Please go ahead.
Josh Tilton: Hi guys, thanks for taking my question. John, you kind of anticipated what I was going to ask with your last comment there. So, I just want to clarify very simply, is what you — should we just interpret what you said is that even this strong up-front revenue guide, which I think implies another year of 20%-plus growth, would still fall under the motto of under-promise and over-deliver?
John Wall: Yeah, I think that’s fair. That’s fair. But I didn’t include the full forecast. The guide would have been higher. Of course, we have strong IP as well this year. I mean, certainly compared to last year, IP didn’t contribute a huge amount. I mean, it’s been great business for us. But we’re much more confident going into ’24 of the IP contribution to 2024 revenue. But hardware is going to be strong. Again, I mean, by nature, we always like to kind of hold back on the second half guide for hardware until we see the pipeline around summertime. So I haven’t included the full forecast from the business in the guide.
Josh Tilton: Super helpful. And then just my follow up is, how do you see the competition, maybe specifically in digital, changing if at all, if Synopsys can indeed close this Ansys acquisition and fully integrate Ansys’ toolset into their design flow?
Anirudh Devgan: Well, I don’t think that will change the competitive landscape at all, is my assessment, in digital or even in SD&A. Because digital anyway, we are competing very effectively in the marketplace. And with this AI, it is pulling in a full — digital full-flow position. I think your comment may be more tied to part of digital, which is like 3D-IC. But with 3D-IC, we’ve always talked about there are three big portions of 3D-IC. There is actual chip implementation tools, which is — I mean, digital is much bigger than that, right? Digital, we have a very big business, which is growing at all the top 20 customers. But 3D-IC has these three components to it. One is the chip design tools. So, in chip design tools, we are the only company that has both analog and digital chip implementation, okay?
And the second part in 3D-IC is package design. And Cadence is the leader in package design, and that thing is still the very strong differentiation, no matter what the M&A news is outside. And then, the third part is the simulation tools like thermal and electromagnetic, and there we are already doing pretty well. So, I’m very confident in our product positioning and competitive advantage, no matter what happens on the M&A side, because anyway, we are competing very effectively. And then, the other thing that is good about Cadence is we also form very strong partnership in the ecosystem. We talked about Dassault on the SD&A side. But the other one that I want to highlight, we have a lot of news today, but one of the things I want to highlight is our partnership with Arm.
Arm is also expanding into what they call Total Design, going into more towards silicon, more towards custom solutions. And we are the exclusive partner with Arm as they go implement that. And that really also helps our digital business. And so, overall, I feel pretty confident in our digital position, including 3D-IC.
Josh Tilton: Super helpful. Thank you, guys.
Operator: Your next question comes from Ruben Roy with Stifel. Please go ahead.
Ruben Roy: Yeah, thank you. Anirudh, I just had a quick question. I guess, to go back to Vivek’s question on growth rates, I understand the three-year category, it’s been excellent. It’s been growing, and that’s really nice to see. But when you think about these phases of AI at this point, is it too early to start thinking about contribution from AI as you go through these renewals? I mean, can you talk about how — if there is — if you’re seeing an impact yet or what that impact is or how we should think about AI as sort of you think about the next three years or contribution to growth looking forward?
Anirudh Devgan: Yeah. I think AI is definitely helping us already. Like you mentioned about our AI tools by itself has gone up by 3x and then Cerebrus more — higher than that, and then also AI itself is — the infrastructure part of AI, like our partnership with NVIDIA and all the hyperscalers. So, overall, we are pretty pleased with that. But of course, we are mostly a ratable business. So, these things take like multiple years to bleed in. And I think that’s fine. Our model always is to have strong revenue growth and margin growth. So, I think this thing will still take multiple years to come into our model, but I think that’s a good thing. It provides multiple years of growth.
John Wall: I think it’s very early innings right now on the AI adoption. We’ve been focused mainly on proliferation, and we’re very, very pleased with the uptake of our AI tools and just how strongly they’re growing on the booking side. It is starting to feed into the P&L already, but as Anirudh said, because it’s ratable, that takes time to show up in total. But very, very early innings in adoption of AI tools right now. I think, there’s a lot more to go.
Ruben Roy: Right. Okay, that’s very helpful. Thanks, guys. And then just quickly, John, you talked a lot about the hardware, and I think it’s pretty clear at this point. But just to make sure I understand, it sounds like lead times have normalized. Is that correct? And also, in terms of sort of the visibility you get from your customer base, that hasn’t changed, right? Is that what you’re saying in terms of how far out your customers are ordering it? I guess it would be just kind of a function of increased attach rates, which is giving you the confidence that you’re going to have another big growth year in hardware. I just want to make sure I’m thinking about that correctly.
John Wall: I think you are, yes. Yeah, I mean the business has great confidence in terms of what they’re hearing from customers and customers’ plans and budget plans. But I pushed back on the forecast. And as you know I mean hardware itself from a purchasing perspective has some degree of seasonality in it, but like a Q4 would always be bigger for purchasing activity from customers than a Q1. And now that we’re down to more normal lead times, you kind of have that growth quarter-over-quarter built into the forecast. Now, again, I’ve been conservative in the second half on that forecast. But still even with my conservatism, I still have second half being higher than the first half of hardware.
Ruben Roy: Got it. Okay. Thank you.
Operator: Your final question comes from Joe Vruwink with Baird. Please go ahead.
