Q2 2024 Cadence Design Systems Inc Earnings Call

Participants

Richard Gu; Vice President, Investor Relations; Cadence Design Systems Inc

Anirudh Devgan; President, Chief Executive Officer, Director; Cadence Design Systems Inc

John Wall; Chief Financial Officer, Senior Vice President; Cadence Design Systems Inc

Charles Shi; Analyst; Needham & Company, LLC

Gianmarco Conti; Analyst; Deutsche Bank AG London

Vivek Arya; Analyst; BofA Global Research (US)

Joshua Tilton; Analyst; Wolfe Research, LLC

Ruben Roy; Analyst; Stifel, Nicolaus & Company, Incorporated

Jay Vleeschhouwer; Analyst; Griffin Securities, Inc

Harlan Sur; Analyst; J.P. Morgan Securities LLC

Jason Celino; Analyst; KeyBanc Capital Markets Inc.

Lee Simpson; Analyst; Morgan Stanley & Co. International Plc

Clarke Jeffries; Analyst; Piper Sandler & Co.

Joseph Vruwink; Analyst; Robert W. Baird & Co. Incorporated

Presentation

Operator

Good afternoon. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence second quarter 2024 earnings conference call. (Operator Instructions) I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead.

Richard Gu

Thank you, operator. I would like to welcome everyone to our second quarter of 2024 earnings conference call. I'm joined today by Anirudh Devgan, President and Chief Executive Officer, and John Wall, Senior Vice President and Chief Financial Officer. The webcast of this call and a copy of today's prepared remarks will be available on our website, cadence.com.
Today's discussion will contain forward-looking statements, including our outlook on future business and operating results. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion. For information on factors that could cause actual results to differ, please refer to our SEC filings, including our most recent Forms 10-K and 10-Q, CFO commentary, and today's earnings release.
All forward-looking statements during this call are based on estimates and information available to us as of today, and we disclaim any obligation to update them. In addition, we present certain non-GAAP measures, which should not be considered in isolation from or as a substitute for GAAP results. Reconciliation of GAAP to non-GAAP measures are included in today's earnings release.
(Event Instructions) Now I'll turn the call over to Anirudh.

Anirudh Devgan

Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. Cadence delivered strong financial results for the second quarter of 2024, with broad-based momentum across our product portfolio. Bookings were stronger than expected, leading to a healthy backlog and underscoring the robust demand for our innovative technologies. We exceeded our outlook on all key metrics and are updating our revenue guidance for the year to over 13% year-over-year growth. John will provide more details on both our Q2 results and updated outlook for the year.
Generational trends such as hyperscale computing, 5G, and autonomous driving, all underpinned by the AI supercycle, are driving strong design activity across multiple verticals, particularly in datacenter and automotive. Along with increasing chip complexity and system companies building their own silicon, these trends are creating tremendous tailwinds for our differentiated solutions.
We are steadfastly executing to our Intelligent System Design strategy, extending our leadership in core EDA, while steadily expanding our footprint in the new system design and analysis area.
Customers are ramping up their R&D spend in a AI-driven automation. Our Cadence.AI portfolio offering unparalleled quality of results and productivity benefits continues to gain momentum with orders more than tripling over the last year. Our solutions are enabling the massive air infrastructure build-out across the semi and systems space. Additionally, we continue embedding AI in our EDA, SDA, and digital biology solutions.
In Q2, our long-term development partner, NVIDIA, broadly deployed Palladium Z3 to deliver to its next-generation AI product roadmap, further solidifying Cadence's leadership in the industry. A marquee hyperscaler meaningfully expanded its partnership with Cadence in Q2 through a broad proliferation of our Cadence.AI EDA, SDA, and hardware portfolio.
The growing foundry ecosystem is driving increased design activity and creating significant opportunities for our industry leading products. And in Q2, we expanded our collaboration with several leading foundry partners.
We announced that Cadence.AI digital and analog tools for optimized for Samsung's advanced node SF2 gate-all-around process, driving enhanced quality of results and accelerating node migration. We extended our long-standing collaboration with TSMC through a very comprehensive and innovative technology advancement, ranging from 3D-IC to design IP and photonics, and providing optimized digital and analog full flows for TSMC's latest N2 process technologies.
Our integrity 3D-IC platinum is the industry's leading unified design, analysis, and signoff platform for multi-chiplet architectures. Integrity has been certified for all of TSMC's latest 3DFabric offerings and now has enabled several new features like hierarchical 3D-IC design. We also announced that Integrity has been enabled for all of Samsung Foundry's multi-die integration offerings, accelerating the design and assembly of stacked chiplets.
Additionally, we released the complete Intel Foundry EMIB advanced packaging reference flow, that is optimized to work seamlessly with Intel 18A technology. We are also collaborating with multiple foundries to optimize our industry-leading IP cores for AI, HPC, mobile and automotive applications for the advanced process technologies, so as to ensure seamless integration into customer designs.
We saw strong momentum in our IP business, with it delivering 25% year-over-year growth in Q2, as we executed to our profitable and scalable growth strategy. AI use cases, HPC, and heterogeneous integration were the primary drivers fueling the demand for our HBM, PCIe, GDDR, 112G SerDes, and UCle products.
We expanded our system IP portfolio with the addition of Cadence Janus Network-on-a-Chip solution that manages high-speed communications effectively with minimum latency, enabling customers to achieve their PPA targets faster and with lower risk.
Emulation and Prototyping have become mission critical elements of chip design and software bring-up flows. Following the launch of our market-leading Z3 and X3 platforms, there is robust demand for these best-in-class systems, particularly by AI, hyperscale, and automotive companies. And we continue to ramp up our production capacity accordingly.
Verisium, our AI-driven verification platform, continued seeing rapid customer adoption with several market-shaping customers, including Qualcomm successfully using Verisium SimAI for coverage maximization and achieving up to a 20x reduction in verification workload time.
Our system design and analysis business continued its strong momentum in Q2, delivering 20% year-over-year revenue growth.
As chiplet-based architectures gain traction, our industry-leading Integrity 3D-IC platform had increased adoption and expansion from large deployments at 5G, hyperscale, memory, and consumer customers. Our AI-enabled Allegro X design platform is being rapidly adopted and driving competitive displacement, as multiple aerospace and defense hyperscalers and EV customers take advantage of the platform's productivity and next-generation capabilities.
Allegro X's in-design and analysis capabilities are also driving a pull through of our multiphysics analysis solutions. In Q2, a leading EV auto company forged a strategic partnership with Cadence, making a significant investment across the breadth of our multiphysics portfolio.
With the close of Beta CAE in Q2, we now offer a comprehensive multiphysics platform covering electromagnetics, electrothermal, CFD, and structural analysis solutions.
Our digital IC and custom businesses delivered another solid quarter. Proliferation of our digital full flow at the most advanced nodes continued, with close to 40 full flow wins over the last 12 months, especially at hyperscalers. With over 400 tapeouts, customers are increasingly relying on Cadence Cerebrus, the leading AI tool in the industry, as it continues to deliver amazing PPA and productivity benefits.
For example, Cadence Cerebrus has been delivering up to a 10% PPA gain for a global marquee systems company and is now deployed as part of the default flow for their latest designs at the most advanced nodes. Samsung Foundry leveraged Cadence Cerebrus in both DTCO and implementation to achieve more than a 10% leakage power reduction on their SF2 Gate-All-Around platform.
Socionext utilized Certus Closure and Tempus Signoff to reduce timing closure time by 73% and doubled productivity while reducing memory cost by 90%.
Our AI-driven Virtuoso Studio is the leading automated solution for analog and RF designs. And it's new AI features allow much more efficient migration from one process node to another. Virtuoso Studio added 35 new logos in Q2, led by top hyperscalers, aerospace and defense and automotive customers.
In summary, I'm pleased with our Q2 results and the continuing momentum of our business. The AI-driven automation era offers massive opportunities and the co-optimization of our comprehensive EDA and SDA portfolio with accelerated computing and AI orchestration, uniquely positions us to provide disruptive solutions to multiple markets.
Now I will turn it over to John to provide more details on the Q2 results and our updated 2024 outlook.

John Wall

Thanks, Anirudh, and good afternoon, everyone. I'm pleased to report that Cadence delivered strong results for the second quarter of 2024, finishing the first half with backlog of approximately $6 billion. Also, we expanded our multiphysics platform in Q2 by completing the acquisition of BETA CAE. Here are some of the financial highlights from the second quarter, starting with P&L.
Total revenue was $1.061 billion. GAAP operating margin was 27.7% and non-GAAP operating margin was 40.1%, and GAAP EPS was $0.84, with non-GAAP EPS $1.28. Next turning to the balance sheet and cash flow.
Cash balance at quarter end was $1.059 billion for the principal value of debt outstanding was $1.350 billion. Operating cash flow was $156 million. DSOs were 49 days and we used $125 million to repurchase Cadence shares in Q2.
Before I provide our updated outlook, I'd like to share some assumptions that are embedded. Our updated outlook includes BETA CAE, and it contains the usual assumption that export control regulations that exist today remains substantially similar for the remainder of year.
Our updated outlook for 2024 is revenue in the range of $4.60 billion to $4.66 billion; GAAP operating margin in the range of 29.7% to 31.3%; non-GAAP operating margin in the range of 41.7% to 43.3%; GAAP EPS in the range of $3.82 to $4.02; non-GAAP EPS in the range of $5.77 to $5.97; operating cash flow in the range of $1.0 billion to $1.2 billion, and we expect to use approximately 50% of our annual free cash flow to repurchase Cadence shares.
With that in mind, for Q3, we expect revenue in the range of $1.165 billion to $1.195 billion; GAAP operating margin in the range of 27.7% to 29.3%; non-GAAP operating margin in the range of 40.7% to 42.3%, GAAP EPS in the range of $0.83 to $0.93, and non-GAAP EPS in the range of $1.39 to $1.49.
And as usual, we published the CFO commentary document on our Investor Relations website, which includes our outlook for additional items as well as further analysis and GAAP to non-GAAP reconciliations.
In conclusion, I'm pleased with our strong Q2 results. We exceeded our outlook on all key financial metrics, a good finish to the first half and ongoing demand for our solutions sets us up for strong growth in the second half of 2024. As always, I'd like to close by thanking our customers, partners, and our employees for their continued support.
And with that, operator, we will now take questions.

Question and Answer Session

Operator

(Operator Instructions) Charles Shi, Needham & Company.

Charles Shi

Hi, good afternoon. Thanks for taking my questions. Anirudh and John, maybe the first question, I do want to ask a fairly big question -- a big picture one. So you did pick up your outlook for the year. But some of that really comes from BETA CAE. But the broader question is the semiconductor -- global conductor sales, it's on track to grow a lot faster, let's say, compared with you and given your peer synopsis.
But this seems to me kind of like a reversal of a trend of the last three years when you actually did outgrow the semi conductors. But with so much AI being a big driver for semiconductors, we do wonder whether it's either through pricing or through some other measures Cadence can actually gain a little bit bigger piece of the pie for overall semiconductor, especially from AI. s
I don't know if you can provide some thoughts today. I am not necessarily asking how to change that trend in terms of the value capture, but any thoughts would be great. Thanks.

Anirudh Devgan

Yeah. Hi, Charles. Thanks for the question. I mean, first of all, I'd like to say that overall, we are pleased with how we're performing in. If you step back -- because you asked a longer-term question, right? If you step back, we will deliver -- we expect more than 13% revenue growth and about 42.5% operating margin. So I think that's a best-in-class combination of both revenue growth and operating margin.
And then if you look at our CAGR over last three years, which is one of our favorite metrics, that's also performing pretty well in terms of growth and margin expansion. And you mentioned semi-cycle. It is encouraging to see that there is going to be growth this year, which -- it was not there last year.
But as you will know, Charles, we are tied to the R&D spend more than the revenue of our customers. And of course, if the revenue goes up, they're more likely to spend on R&D. But in general, our customers, both system and semi companies, continue to spend on R&D, and these are long-term projects.
So we'll see how that goes as the semiconductor revenue improves. But this is not instantaneous effect on R&D spend. There's always some lag sometimes. And so we really -- but we are encouraged to see the improvement in semi spending overall in the semiconductor revenue.
So I would like to say, and we can see in our backlog also, we maintain a pretty healthy backlog. So overall, I think things are performing well, and this AI is broadening out. You know this well; AI is broadening our beyond data center, which we are glad to have great partnerships to automotive, to more edge consumer devices like smartphones and PCs . So overall, I feel pretty good about the industry and of course, our position in it as the essential provider of design software.

Charles Shi

Got it. Maybe a quick follow-up on China. Looks like a China revenue is still pretty light in the second quarter. So I recall you were thinking maybe China contributions are probably going to be slightly less than the mid teens or 15% -- less than 15%. But even if -- let me assume the China revenue gets to like a 14%-ish, it still implies a little bit of a second half reacceleration of China revenue growth. Is that still the case, or you think maybe compare with the three months ago, China actually make get a little bit weaker as you previously thought? Thanks

John Wall

Thanks for the question, Charles. And that's -- regional revenue is notoriously hard to predict. I will say that at the midpoint of our current revenue guide, we only need China to get to 13% of overall revenue to be able to hit that midpoint. I mean when you look at performance in Q2 in the first half, we had a very strong bookings first half, very pleased with customers' response to our new hardware systems.
The IP and SD&A businesses continue to grow strongly. Core businesses continue to scale really well. And we're focused on profitable revenue growth. I know it's in your first question. You indicated that we hadn't raised the outlook, but we did raise non-GAAP EPS by $0.06. We're very pleased with the improvement in profitability.
And when you look at the current guide, we're actually on track for 50% incremental margin, excluding the impact BETA CAE now. BETA CAE is in our guide, but it's in our guide at what we've previously communicated in the press release -- it's $40 million of revenue and about $0.12 dilution to non-GAAP EPS. There is an impact to [op cash] as a result of BETA CAE as well.
But overall, very, very pleased. We thought it was prudent to assume lower China revenue for this year at the midpoint of our guide but that's it. We only 13% to get to the midpoint of guidance.

Operator

Gianmarco Conti, Deutsche Bank.

Gianmarco Conti

Yeah, hi there. Thank you so much for taking my questions. So on my first one, could you talk a little bit about the implied Q4 ramp up to 29% growth at the midpoint of guidance? And what is giving you the confidence in reaching that target? Is it mostly harder visibility coming through or are there an unusually high number of Q4 renewals that you're waiting for? Any color here would be great. Thank you.

John Wall

Yes, Gianmarco. There's no real change from what we said last quarter. I mean, it's effectively the shape of the revenue curve for the year. We're expecting upfront revenue -- more upfront revenue in the second half. It is just the timing of shipments really that -- upfront revenue typically comes from IP hardware and to a lesser extent, some software on the SG&A side.
With the hardware, it takes time to build the systems. We have higher revenue in Q4 versus Q3 as a result but also from IP. There's -- IP is -- we recognize revenue on IP based on the timing of deliveries. We're confident in that guide. It's shows the -- the shape of Q3 and Q4 is what we have in the guide now.

Gianmarco Conti

Okay, great. So my follow-up would be on Honda. If you could talk a little bit about how much visibility you have actually in H2. Are you booking and delivering in the same quarter, hence why we're not seeing major uplift in backlog growth? Or is there a different amount to it? I'm trying to understand if you're booking, manufacturing, and delivering, all in the same quarter for hardware essentially. Thank you.

John Wall

Thanks for the question. Yes, in some cases. On the newer systems, there is a timeline, a lead time to building the systems. We have more bookings than our ability to actually fulfill those bookings, but we do have some inventory of the older systems, where we deliver those in the quarter. So there's always a mix.
We did have a challenge in the past with getting inventory and building the inventory as fast as we could for the amount. And I think we've dealt with a lot of us. You'll also see in the op cash guide, we're planning to purchase a significant amount of raw materials for building inventory in Q3. That's the biggest portion of the change in op cash guide.

Anirudh Devgan

Also just added on our overall -- Hey, just to add on the overall hardware cycle, as you remember, we launched new systems in April, just a couple of months ago -- a few months ago now. And the response to them has been phenomenal. Actually, we -- these palladium, especially both palladium and protium -- but these systems can design chips, like I mentioned last time, with capacity of 1 trillion transistors. And the current biggest chip is like 200 billion transistor's. Most of them are in 100 billion or less.
So we are 5x to 10x higher capacity than what is needed. So that should suit the industry well for next several years. And I'm also -- what we're pretty pleased about is that we delivered production deployments of our system -- new systems to some very major customers. So we highlighted in NVIDIA, a development partner, this significant deployment of Z3; also one of the lead in mobile system -- mobile companies in the world and one of the leading hyperscalers.
So it's across multiple markets that we delivered our latest systems, which are performing exceedingly well. So that sets up very well for the future and also competitively. And we have a significant lead given the nature of our systems. It's a combination of -- protium is based on FPGA and then palladium is based on our own chip at advanced TSMC process. And Cadence is the only solution that does that and provides a unique value.
So overall, I think hardware business is performing well. And as you know, these are multi-year upgrade cycles. So this is not all in '24. So we'll see how things go in '25 and '26 here.

Operator

Vivek Arya, Bank of America Securities.

Vivek Arya

Thanks for taking my questions. So on an absolute basis in fiscal '24, organic sales growth rate as robust, but in terms of revisions, it has stalled, right? Essentially no real movement since what you suggested at the start of the year. So I'm curious, Anirudh, how has the year transpired versus what you thought?
And how do you think about bookings and backlog trends into the second half? Should we expect that backlog stays around the $6 billion. Will it start to pick up? Just I'm trying to understand that should we be thinking about sales accelerating from here or this being kind of the sustainable growth rate for the company?

Anirudh Devgan

Yeah. Hi, Vivek, good question. So in general, what I would like to say is, like we mentioned last two times, the shape of the curve this year is unique to Cadence, given multiple factors. This is not what we expected last two years. So this time is more back-end loaded for the reasons we mentioned before. So the guide is a little different.
And we are also, given that shape of the curve, more prudent in our guide like we were in Q2. And then we rather overachieve and deliver that and give the team flexibility to do the right business for the long term. So I think that's the different this year versus last few years is given the shape of the curve, we have more prudent in our revenue guide, like John mentioned. And John can comment on the backlog expectations.

John Wall

Yeah. We don't guide book things, but we were very pleased with the strong bookings in the first half. And I get the question, Vivek. Essentially, we're seeing strong demand for our hardware systems. We're seeing strength across all our businesses. And I guess your question is that when you add in BETA CAE, you're not really taken the revenue guide up.
I think, essentially, if your question is what would we like to see improve? I think it's the China revenue percentage. It was 12% in Q1, 12% in Q2. It improved in Q2 over Q1, and we think it will continue to improve through the year. But right now, our guide only need to get to 13% China to hit the midpoint of that guidance.

Vivek Arya

And for my follow-up, you mentioned BETA CAE quite a drag to EPS. I think you mentioned $0.12 dilution and almost I think what is like a $300 million hit to operating cash flows. Can you describe that acquisition a little more? And when does it start to become accretive to your financials? Thank you.

John Wall

So yes, Vivek. On the $300 million drop in operating cash, just to clarify that, about 40% of that $300 million drop is due to M&A. I mean, in things like BETA CAE, some of the purchase price, the geography of where the operating cash -- or where the cash impact goes, some of that payment flows through op cash.
The bigger portion of the impact on operating cash is our plan to purchase a lot of inventory raw materials for the hardware demand that we're seeing. We're pre-purchasing a lot of inventory. So you'll see our inventory spike in Q3 with all of the raw materials we're purchasing. We want to make sure that we have all the raw materials necessary to ramp up the build-out of our hardware systems.
And then in relation to BETA CAE, there's -- I mean, it's a very recent acquisition. It's no different to what we have in the press release. In fact, on the press release, we said we were expecting $40 million revenue at the midpoint. That's embedded now in the guide. We're expecting $0.12 dilution on non-GAAP EPS. That's also in the guide now.
And we expect it to be -- operationally, it'll be accretive next year, but there were some interest costs associated with the [test], but we think it will be accretive next year.

Anirudh Devgan

Also, a couple of things to clarify. So one thing, this purchase of inventory for the hardware systems, that will be used over multiple years. It's not just for '24. So I think it's a one-time investment that pays for several years, and that's a prudent decision to make together get the right kind of parts for the future.
And then on BETA, it completes our system analysis portfolio to add structural analysis. It also strengthens our position in automotive. Of course, you know data center is a big vertical with all the AI supercycle. But I think one of the other exciting verticals is automotive with all this electrification and also AI getting added in the self-driving car or driver assistance. So we see lot of design activity in automotive. Also, automotive is also moving through chiplets and 3D-IC.
So I think automotive has all the three tenants of our ISD strategy. It has silicon content that is increasing. And more and more system design, of course, is needed for the design of automotive, and AI for all the data and competition software. So for that reason, BETA CAE is -- completes our portfolio in automotive and positions us well in the future. And this is not just with the semiconductors company's doing automotive but also the system companies now. OEMs doing more and more chip design, doing more of our system solutions.
And I also want to highlight and congratulate McLaren. There was a big news this weekend. McLaren got one and two in Hungarian F1. And we have been working with them for the last few months and years, and it's good to see them do well as we deploy. So I think the automotive solution that we are driving is a combination of silicon system and then AI, and we are seeing the results of that through organic and inorganic expansion.

Operator

Joshua Tilton, Wolfe Research.

Joshua Tilton

Great. The first one is just kind of more of a clarification. I know there's been a lot of questions around the mix in upfront versus recurring. I guess what I'm just trying to understand is -- and I could be wrong with my math here -- but it feels like the upfront component was still a little light in 2Q and now we're a little bit more second-half-weighted, more 4Q-weighted, because you need time to develop inventory. Am I thinking about that the right way?

John Wall

That's fair, Josh. I would do the inverse on here in terms of bookings were stronger than we expected in Q2, and we got some uplift on recurring revenue -- took a bit of pressure off on the upfront side. And we are taking orders. We've got strong demand for the hardware, and we're building those hardware systems as quickly as we can, particularly, the newer hardware orders.
IP is doing really well, and system design and analysis is doing really well. And what we reflected in the guide is our expectation of how much that revenue will fall in in Q3 and Q4. We took the opportunity. We've really derisked the guide for the year by reducing our expectations for China. Upfront, we still expect to be in a range of 80% to 85%, but I think we might be slightly more recurring revenue as a result of the strong bookings in the first half.

Joshua Tilton

That is super clear. And then I guess, just my follow-up to that is -- it's another visibility question, but how much of what's baked into the guide from an upfront perspective do you feel like you have like good inventory level to meet that guidance? Or did the guidance that you put out today still require you to build and develop inventory between now and shipping those boxes?

John Wall

Yes, but it's -- we definitely need to build hardware, and you'll see the impact on our inventory in Q3 with the amount of raw materials we're purchasing. But as Anirudh says, here, that's a one-time thing that we're doing to trying to get raw materials and to build our systems as quickly as we can.
But the a lot of the upfront revenue in the second half comes from the strength in our IP business, and we have those orders in backlog and it's just the case of executing against those. We also have some SD&A or system design analysis upfront revenue that's scheduled to occur in Q3 and Q4. Again, most of that is from orders in the system. On the hardware side, it's kind of mid- to high-single-digits is what we were expecting the SVG Group to deliver to be able to hit the midpoint of that guidance.

Joshua Tilton

Super helpful. And then just a quick follow-up is, really awesome to see the recurring revenue growing sequentially this quarter. Is there any way you can maybe help us on what the expected recurring versus upfront mix is supposed to be in 3Q? And then I'll cede the floor.

John Wall

Oh, I don't have that to hand, but let me come back to that. I'll see if I can dig it out here.

Operator

Ruben Roy, Stifel.

Ruben Roy

Yes. Thank you. John, just a very quick question and then, I guess a follow-up and then I'll ask a real question. But on the inventory purchases, am I right in assuming that that's mostly for the Z3, X3? Has anything changed in terms of when you're thinking about general availability of those hardware products?

John Wall

Yes. That's correct. But the vast majority of the purchases are to get raw materials to help build those new systems.

Ruben Roy

And then in terms of the type --

Anirudh Devgan

See -- Yeah, just to clarify, also, we have two systems, right? So palladiums, we design ourselves. And we manufacture the chip in TSMC. And protium -- we also designed ourselves. But the silicon itself is primarily from AMD with Xilinx's FPGAs. So a lot of this purchase is for X3s and the FPGAs, and that should serve us for multiple years.
On Z3, like you said, we are already shipping them, and they're already deployed in production this quarter. So I think Z3 is slightly different than X3 in terms of the mix of the silicon content, just to clarify that.

Ruben Roy

Okay. I apologize, Anirudh. I thought they are going to sort of certain customers and not generally available. But thank you for that.
And then the real question is just around, some of your top customers have been accelerating the rhythm of bringing their very complex chips to market. NVIDIA and AMD certainly have accelerated their roadmaps to sort of a one-year rhythm. Are you seeing any changes in sort of the way your business is impacted or affected by the acceleration of their product roadmaps yet?

Anirudh Devgan

Yes, I would like to -- I think we're seeing more and more design activity -- like you said, the rhythm or the cadence of the products and also different kind of chips. It is not just the big data center chips, but even within them, there is more and more customization. Of course, the hyperscaler is doing their own silicon. And then now, we talked about our partnership with, for example, Qualcomm, and they are doing consumer or edge laptop AI devices.
So the amount AI is also spreading to other verticals, not just the obvious -- the big one on data center. And data center design is accelerating. And I think than when we look at it, we still see that the data center part of AI still should accelerate, at least the visibility we have for next couple of years. So we'll see how that goes.
And therefore -- and the other thing is automotive -- automotive takes normally a little longer, but there is -- already seeing design activity and the deployment maybe few years down -- maybe after data center. And then consumer and PC is already starting with phones and laptops.
So overall, we do see accelerating deployment of AI into the whole semiconductor ecosystem. And we are very proud of our position in it, whether it's 3D-IC, whether it is data center chips, whether it's our own AI products, we are winning almost all engagements on all -- on our kind of cadence.ai portfolio. So overall, we do see more and more design and deployment of AI infrastructure and our own AI products.

John Wall

And if I could just come back to Josh's question -- sorry -- if I could just come back to Josh's question on the revenue mix for Q3, for a recurring revenue, we expect -- sorry -- 80% to 85% of revenue to be recurring for the year. And Q3 includes the middle of that range. And then the balance is a Q4. So you can do the math work out what the upfront piece is.

Operator

Jay Vleeschhouwer, Griffin Securities.

Jay Vleeschhouwer

Thank you. Good evening. Anirudh, a question about the evolution of the product portfolio for EDA generally and perhaps for SD&A, specifically. What I'd like to ask about is how you're thinking about packaging products. Over the last year, you've introduced a couple of products with the term studio in the name, and I'm wondering if you're thinking about more and more bundling or packaging of our that kind via that nomenclature for the EDA products?
And then specifically for SD&A, now that you do have multiple codes, how are you thinking about packaging or integrating across the various simulation codes that you've assembled now in acquisition? Then I'll ask my follow-up.

Anirudh Devgan

Yeah, hi, Jay. Good question. So as you know, in EDA, when we go to lower nodes, there is more integrated solutions which are required, whether it's innovative digital or analog or verification. And that is further accelerated by use of AI. So like Cerebrus, for example, in digital, we'll integrate not just place-and-route, but also synthesis and sign-offs. So I think that trend is definitely there.
And same thing with Verisium, our leading AI product for verification also integrate the four major verification platforms we have. So it is more and more platform-driven approach, and we can do that now with SD&A, now that we have a complete portfolio. And we mentioned like a leading EV company like OEM, one of the leading -- the most advanced EV companies deployed our entire portfolio.
So as we have a bigger portfolio in SD&A, it does lead us do what we have always done in EDA -- focus on solutions, not just on individual products and indicate solutions with our kind of native integration, whether it's analog, digital verification and now with SD&A.

Jay Vleeschhouwer

All right. As follow-up, I know it's still quite early in the propagation of AI and ML by you and your peers to the customers. But are you beginning to see any commonality or convergence towards a relatively small number of use cases that customers are mostly employing the tools for? And then relatedly, are you also seem AI/ML adoption having any meaningful effect on your services revenue?

Anirudh Devgan

Yes, Jay, so what I would like to say is that the number of use cases I see is increasing at this point. I mean, the -- of course, one of the biggest use case that we started with was digital implementation, since it is so kind of -- a heavy kind of design process. So automating the digital implementation process was huge benefit. Ans we thought even this quarter, Cerebrus, being deployed as one of the leading system companies for the default flow also used by Samsung, also, you see verification being used by Qualcomm.
So I think what is happening in that Cerebrus or the implementation use case -- two things -- one is that it is going not just for design but also for DTCO -- design technology co-optimization and also for higher level in the design process like floor planning and 3D-IC exploration. So it's not just for implementation of the design but also for architecture and exploration.
And the other thing is like there is more workflow automation. As customers get used to Cerebrus, they are using it not just towards the end of the design process. They're using it right from the beginning throughout the design process. So it allows us to do more workflow automation, and Cerebrus has also evolved to allow much more of a entire workflow rather than a specific implementation use case.
And then same thing is happening in terms of more and more use cases. For example, packaging; Allegro X is doing pretty well. And recently, one of the leading customers in 3D-IC used this capability to automate, for example, routing, for automating, placement, which was not there before in PCB and package design.
So overall, I do think it is maturing of the workflows. And then with this LLMs and GenAI, we have several workflows for taking spec to RTL, and we highlighted some of them last quarter. So I actually do see finally that in the -- we were always kind of building out the AI infrastructure, these big companies designing chips.
But I do see now there's a turning point and deployment of AI for the design process. With the initial work flow being Cerebrus and digital implementation now to -- expanding LLM-based spec, expanding to the DTCO, expanding to 3D-IC, of course, expanding to analog, packaging, verification. And we do have the most comprehensive a portfolio in terms of all five major center product lines. So actually, it's a pretty encouraging view compared to a year ago.

Operator

Harlan Sur, JPMorgan.

Harlan Sur

Hi, good afternoon. Thanks for taking my question. The bookings will fall for the full year still expected to be 40% first half, 60% second half, because if it is, then that would imply book to bill greater than 1 for the full year, total backlog up about 9% this year to about $6.5 billion. But I guess how much of that backlog this due to the BETA CAE acquisition. What I'm just trying to figure out is ex- BETA CAE, if core cadence orders and backlog are expected to be up this year, which will continue the strong sort of six to seven year trend of increasing orders and backlog for the team?

John Wall

Yes, Harlan, again like we're not guiding bookings, but we were very, very pleased with the strong first half for bookings. BETA CAE contribution to backlog is very, very small. It's immaterial. Because BETA CAE, their revenues upfront. So that's the upfront piece of business rather than the recurring revenue. But yeah, we're very pleased. I mean, you can typically expect us to always be driving for a book-to-bill of greater than 1. But we don't guide bookings though.

Harlan Sur

Okay, perfect. Thank you. Anirudh, there's a pretty interesting dynamic with your memory customers. Well, the big customers of your custom product family, Virtuoso. But there are moving more and more to advanced digital design. The HDL console logic chip, for example, is moving to leading-edge technologies and advanced chip design. Similarly, with some of the nan customers, they're moving towards more of this sort of bonded CMOS periphery to array.
The periphery chip again, is also moving towards advanced digital design as well. So are you starting to see more adoption of your vast digital implementation and verification products by your memory customers and then does the leadership in memory via virtual also sort of give you an advantage as they bring on more advanced logic design capabilities?

Anirudh Devgan

Yes, Harlan. That's a great observation. And we are fortunate to have very deep and long-standing partnership with all the major primary companies. At least, there are three big ones. And then, maybe two the next level. But overall, we are -- given our strength, like you mentioned in Virtuoso, which is the platform for choice for all memory implementation. And yes, there is a lot more digital and implementation design happening at memory companies, primarily driven by HBM and other trends.
And actually, also there is some kind of -- I mean, they were always doing digital, but it's a lot more now. And there is a trend of integrating TSMCs technologies with kind of memory. And given our strong partnership with TSMC, that also helps us with the memory companies. And as you know, they are also doing a lot more 3D-IC, all the three big memory companies. And these memory layers are going from -- they're actually one of the most advanced 3D-IC with the memory layers going from 8 to 12. And that also plays to our strengths. And even in my prepared remarks, I mentioned, for example, our partnership with Samsung and 3D-IC.
And then so it's true with the other kind of two major players in memory. So we are pleased in our position in memory and emerging trends of HBM and 3D-IC integration. And we will see how that how that progresses. But I think memory is often overlooked in -- I don't need to tell you but just in general, memory is often overlooked in the big AI super cycle. It's not the big chips logics, but memories play very essential role. And we are very well-positioned both with the leaders like NVIDIA on the logic side, and then we highlighted Samsung and the other big memory plays in general so.

Harlan Sur

Thank you for the insights.

Operator

Jason Celino, KeyBanc Capital Markets.

Jason Celino

Great. Thanks for taking my questions. So lots of questions upon hardware timing. But I think, John, on prior calls, you said that hardware delivery time typically are like 8 to 10 weeks. That's what it is for like a normal cycle. But are you saying the lead times for the Z3, X3 are longer than this because the demand is much better than what you're seeing?

John Wall

Demand is strong, demand is strong. What I was trying to point out was that we do have inventory of the older systems that we can deliver right away. The newer systems we're having to build them as quickly as we can because the orders are coming in faster than we can build them. So the lead times is a bit of a moving target in that respect. We are planning to purchase a lot of raw materials and builders quickly we can in Q3. So you'll see a significant uptick in our inventory balance at the end of Q3.

Jason Celino

Okay. No, that's helpful. And then just a clarification. I think you were saying like the FDA group to hit your guide needed to do like mid to high single-digit growth. I'm not familiar with SVG? Is that the functional verification kind of guide for the year and then if you're parsing out like does that imply -- what do we need to see on IP since that the other upfront component to hit the guide? Thanks.

John Wall

Yeah, that's fair. Yeah, IP is having a really strong year as a system design analysis. There will be our two fastest growers for the year, And then again, there's some upfront revenue from them. It's more weighted towards Q4 versus Q3. So we have -- the shape of the curve is really driving our guide. And I would categorize it as prudent. Anirudh, would you add anything?

Anirudh Devgan

No, that's, as I said John and sorry, for the acronym, SVG, system verification group. So when we say, SVG, that means verification. So I think that's what John was implying. Verification should grow. But right now, we are not assuming massive growth in verification for this year, but it should grow compared to last year.
And then like you mentioned some of the upfront revenues also IP, if you remember, we highlighted in Q1 a new partnership with Intel and they're -- are deploying our IP portfolio for the Intel process. So it takes time to do that and deliver to that. And some of it is in Q3 and Q4.
And also this time, we talked about our expansion partnership with Intel both on EMIB, packaging and 3D-IC. platform. And 18A, just to clarify the --

Jason Celino

Yes, thanks for the lingo acronym help. Very helpful.

Operator

Lee Simpson, Morgan Stanley.

Lee Simpson

Thanks for fitting in and well done on a good quarter. Just wanted to get some clarification. I don't know if I heard correctly, but I think I heard you say that, a mobile OEM has taken the Z3 platform. And if that's the case, do you have a sense for what the emulation work might be? Would it be for chips on device or would it be for chips both on device and perhaps in let's say a network situation? Thanks.

Anirudh Devgan

Well, good question. We don't comment on individual or a customer specific customer use cases. But in general, these hardware systems, as you know, are used both for chip design and for system software bring up. So both use cases are there. And we are the leading platform given Palladium and Protium. And this is true for all -- even in AI use case, even the data center AI use case, lot of it is for software development.
Actually Palladium is a platform for choice to even lower AI chip customers to give you a model to their customers because even before they have a chip, they can give a Palladium model to see how it performs. So it's both for chip design and also for system design and system software. And that's true for multiple major verticals, data center, mobile, automotive, these things.

Lee Simpson

Yes. Thanks. Just on those multiple verticals, if we look at the incidence of 3D-ICs coming through, I get the sense that that's starting to hit the tape now in automotive. You have mentioned EV companies as collaboration of late. You have mentioned a number of chip makers also.
I wonder if it's possible at this point or even if it's relevant to just maybe talk about the split between the customers. Are we talking system customers, i.e., OEMs in Tier 1 and the majority right now? Or is it still major semi chip makers for the automotive work? Thanks.

Anirudh Devgan

Great question. So first to -- like you correctly pointed out, I think the 3D-IC is a lot more prevalent in automotive than, let's say, 6 to 12 months ago. And of course, the original genesis is HPC and data center AI. But now all these chiplets and 3D-IC platforms are moving to automotive. And I think over time, we'll move to other verticals like consumer. They already moved to laptop for example. The several of the laptop chips are 3D-IC, but I think that will be the progression. It will gradually go to all verticals, but it definitely active in automotive.
Because as you know, with the chiplet architecture, the customer doesn't have to redesign all the chips and also they can use some standard chips and have some specific which are more value added for them. And that's particularly true in automotive as each OEM wants to differentiate versus the other OEM. So this trend is not just for semi companies to your question, it's also there in OEMs.
And I think that's using more -- I do think that the 3D-IC trend makes even more sense for end OEMs because then they are able to customize and differentiate versus the other. So we are seeing that and we are seeing that in other geographies as well. Because as you know China is particularly strong in EV and then US and then Japan, there's a lot of activity. So overall, I think automotive, there is more activity on 3D-IC, including both semi and ODMs.

Lee Simpson

Thanks, Anirudh. Great color.

Operator

Clarke Jeffries, Piper Sandler.

Clarke Jeffries

Thank you for taking the question. My first question is yes, Anirudh, how do you expect the delivery of these third generation systems translate to additional software consumption in the recurring revenue portfolio? These products are happening with verification acceleration, software bring up, but how do you see that additional consumption panning out after the delivery of a new ZRX System? And then I will follow.

Anirudh Devgan

Yeah, great question. Like what John was saying as when we say SVG, system verification group, so hardware is part of that group. Even though hardware is a significant business, we organized as part of verification. And one of the big reasons for that is apart from in verification, apart from the hardware systems, we have lot of other verification product which are doing pretty well. Like Jasper for formal verification, Xcelium for logics simulation. And the customer is looking for a integrated solution on verification.
To the earlier question that Jay had about what is happening and SDA. In EDA, we always have believed for last several years that it's going to be integrated solution in verification. So the stronger our hardware products get, we do expect it should help our software verification products, things like Xcelium and Jasper and Verisium.
Because a lot of -- some of the hardware capacity is also used for what is called SimAccel, simulation acceleration in which they use palladium to accelerate logic simulation. So there is no natural tie-in between verification software products and verification hardware products. Now exactly how it pans out, we just have to see. But the trend in hardware should help us in our overall portfolio strength.

Clarke Jeffries

Perfect. And then one follow-up for John. I think just to kind of finally put a cap on the whole discussion around timing. I guess is it fair to say that that sort of $600 million-odd of upfront revenue in the second half -- maybe a majority of that is coming from IP and SD&A. and not necessarily the Gen 3 systems and that maybe the interpretation that there is going to be more of a demand curve in the beginning of '25 rather than this $600 million being strongly driven by 3rd-gen Palladium and Protium. Is that? Is that a fair takeaway?

John Wall

I think that is, Clarke. Yes, that's exactly right, this. I mean, we always knew that it would take time to build the hardware system. So we originally included that in our guide in the first place.

Clarke Jeffries

Right. Thank you for taking my questions.

Operator

Joe Vruwink, Baird.

Joseph Vruwink

Great. Thanks for fitting me in. I did want to follow up that stay with verification and just this raw material investment. So the thing I'm trying to reconcile is, I would imagine you entered this year expecting the new platform, strong demand is meeting the scale production and therefore invest in inventory. So I guess I'm wondering what changed in the quarter that warranted this -- updated this assumption for cash flow and raw material purchase?
And really at the heart of the question, did something change about your hardware demand expectation, not necessarily for 2024, but maybe out into 2025? And we just happened to be getting that news now because of the need to update your cash from ops forecasts associated with the inventory input.

John Wall

Yes, great question. Joe. I mean, the leaders of that business spent plenty of time with them this last quarter because they were monitoring what the demand was like for the new systems. Demand is quite strong. And then the key thing to highlight here is it's a one-time multi-tier purchase of inventory raw materials. They feel very, very confident in the longevity of the systems and the longevity of that demand. And they wanted to prepurchase multi-years of inventory gain in Q3.
Now that was news to us, if you like, so we thought that onetime things we want to include at all now in Q3 and not impact -- that doesn't impact next -- I mean, it will be a favorable for next year's operating cash.

Joseph Vruwink

Okay, great. Then lastly, you mentioned at the start, quarters for cadence.ai tripled year over year. I don't think that's possible without also getting a less than the base business, both across CDA and SD&A. I guess on an ACV run rate basis, what has the AI lineup meant for Cadence overall?
And does this create a step-up in value where as you start pulling these contracts from backlog and coming quarters, it will become more noticeable in revenue and we'll kind of see a contribution and more than we have to, at this point?

Anirudh Devgan

Yeah. Good question. I mean, AI is adding -- like I was mentioning before, it's almost become like table stakes now. So all our new contracts include our cadence.ai portfolio as customers get more and more kind of used to using them. And once you start using the AI portfolio, it's difficult to go back to not using them. So without getting into like what happened exactly to future revenue and bookings, we are always cautious about that. But in general, there is uptick with more customers deploying AI. And whenever we have new contracts, we are including them as it makes sense in them.

Joseph Vruwink

Okay. Thank you, very much.

Operator

I will now turn the call back to Anirudh Devgan for closing remarks.

Anirudh Devgan

Thank you all for joining us this afternoon. It's an exciting time for Cadence with strong business momentum and growing opportunities with semiconductor and system customers. With a world-class employee base, we continue in delivering to our innovative roadmap and working hard to delight their customers and partners. On behalf of our Board of Directors, we thank our customers, partners, and investors for their continued trust and confidence in Cadence.

Operator

Thank you for participating in today's Cadence second quarter 2024 earnings conference call. This concludes today's call. You may now disconnect.