Cadence Design Systems Inc (CDNS) — Q4 2019 Earnings Call Transcript

Thank you, Jessie, and I would like to welcome everyone to our fourth quarter 2019 earnings conference call. I am joined today by Lip-Bu Tan, Chief Executive Officer; and John Wall, Senior Vice President and Chief Financial Officer. The webcast of this call is available through our website cadence.com and will be archived through March 13, 2020. A copy of today's prepared remarks will also be available on our website at the conclusion of the call today. Please note that the discussion today will contain forward-looking statements and that the actual results may differ materially from those expectations. For information on the factors that could cause a difference in our results please refer to our filings with the Securities and Exchange Commission. These include Cadence's most recent reports on Form 10-K and Form 10-Q, including the company's future filings and the cautionary comments regarding forward-looking statements in the earnings press release issued today. In addition to financial results prepared in accordance with generally accepted accounting principles or GAAP, we will also present certain non-GAAP financial measures today. Cadence management believes that in addition to using GAAP results in evaluating our business, it can also be useful to review results using certain non-GAAP financial measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures with their most direct comparable GAAP financial results. The reconciliations are available at the Investor Relations section of cadence.com. Copies of today's press release dated February 12, 2020, for the quarter ended December 28, 2019, related financial tables and the CFO commentary are also available on our website. And now, I'll turn the call over to Lip-Bu.

Good afternoon, everyone. Thank you for joining us today. I'm pleased to report that Cadence delivered a strong Q4, achieving excellent operating results for the year. For 2019, amidst environmental headwinds, we delivered 9% year-over-year revenue growth and 32% non-GAAP operating margin with strength across our product lines. John will provide more details shortly. Macro uncertainty and geopolitical headwinds persist into 2020, but strong design activity continues at both advanced nodes as well as More-than-Moore fronts. This is driven by generational technology trends: 5G, AI and machine learning, hyperscale computing, industrial IoT, and autonomous vehicles, all of which are bolstering the need for next-generation computing, connectivity, and storage. I believe these trends, along with system companies developing custom silicon, domain-specific processing, silicon start-ups, and the digital transformation of vertical segments like industrial, aerospace, and defense, will continue to fuel a silicon renaissance over the next few years. In 2019, we unveiled our Intelligent System Design strategy that will enable us to maximize these opportunities while tripling our Total Addressable Market (TAM) through proliferation in foundational design excellence segments and expanding beyond EDA into system innovation and pervasive intelligence. We achieved strong growth in design excellence, comprised of core EDA and IP, fueled by the launch of several innovative products, as well as a broad expansion of our solutions particularly at market shipping customers. Our digital and signoff business achieved double-digit revenue growth for the year, driven by strong proliferation resulting from customer demand for solutions offering best-in-class performance, power, area, and time to market capabilities. Our market shipping global mobile company expanded their partnership with us through a large and comprehensive EDA software booking, which included a significant expansion of our digital footprint. Building upon successful 7-nanometer designs, Cadence and Broadcom expanded their collaborations to include the creation of 5-nanometer designs using Cadence digital implementation solutions. We have about 50 new full flow wins in 2019, including a recent full flow competitive win for new advanced node designs with a leading maker of FPGA chips. During the year, we announced successes in our digital business with customers such as MediaTek, Samsung, Socionext, Innovium, Mellanox, and Uhnder. Verification is one of the top challenges of our customers. Our verification suite had several wins across multiple vertical segments in 2019. Our Xcelium parallel simulator with its innovative rocket technology continues to proliferate and recently had a noteworthy win at a leading U.S. computing company. Our hardware family, comprised of Palladium Z1 emulator and the recently introduced Protium X1 FPGA-based prototyping platform, provides a comprehensive solution across IP and SoC verification, hardware-software regressions, and earlier software development. Due to a common front-end compiler, this complementary platform, when working in tandem, delivers even more compelling value to our customers. We are gaining strong traction with Protium X1 being deployed at Palladium accounts. Hardware had a record year with a significant expansion at several customers, adding 19 new Z1 and 11 new X1 customers over the year, including a global marquee customer that placed one of the largest hardware orders ever for Cadence. In 2019, our IP business achieved outstanding results, with 16% year-over-year revenue growth as our focused strategy and strong portfolio leveraged the continuing IP outsourcing trend, while enabling customers to accelerate their innovation and time to market. It was an especially strong quarter and year for our Tensilica products with wins in audio, imaging, computer vision, and machine learning. Loyalty growth was strong, particularly in the audio market where Tensilica HiFi DSP processors are increasingly proliferating in true wireless studio-based earbuds and next-generation smart speakers. Design IP also had a great year with strength in DDR, PCIe, and our 112-Gig SerDes products, as we fully proliferated with customers in AI, 5G, and cloud computing. Early in the year, we augmented our partnership with a marquee U.S. semiconductor company through our largest IP agreements ever, which included Tensilica processor IP, 112-Gig SerDes IP, as well as additional memory and interface IP products. Now let us move on to the system innovation segment of our Intelligent System Design strategy. In 2019, we entered the system analysis market, an estimated $5 billion TAM opportunity, by introducing two new exciting products: The Clarity 3D Solver, the next-generation solution for electromagnetic field simulations; and Celsius Thermal Solver, the industry's first complete electro-thermal co-simulation solution. Increasing system complexity and time-to-market pressures are driving the need for far more engineering simulations while underscoring the significant performance and capacity limitations of existing industry solutions. Both Clarity and Celsius are based on proven massive parallel architectures that deliver up to 10 times faster performance while maintaining gold standard accuracy. We are extremely pleased with the ramp of these innovative products with well over 90 evaluations underway and more than 20 customers to date, including Micron, STMicro, TÜV SÜD, Realtek, and Ambarella. Generational industry trends are driving the need for increased heterogeneous integration, coupled with a slowing down of Moore's Law, which is leading to strong demand for our advanced packaging solutions and double-digit year-over-year growth. There are growing challenges in designing products for complex high-frequency RF applications, especially in the 5G wireless, aerospace, defense, and automotive segments. To that end, we acquired AWR, a leader in high-frequency RF solutions. We also acquired Integrand Software, which provides a leading RF solution for analysis and extraction. Integrating these technologies with our Virtuoso and Allegro platforms will enable us to offer a comprehensive platform for RF millimeter wave products from initial design to simulation, implementation, verification, and manufacturing. We entered into a strategic alliance agreement with National Instruments focused on the design to test flow, enabling customers to improve quality and reduce time to market. Lastly, we extended our cloud leadership in EDA, providing customers with compelling productivity, flexibility, and scalability benefits. Adoption of our cloud portfolio accelerated and we passed the 100 customer mark. TSMC partnered with Cadence and Microsoft on the first TSMC IC layout contest. Cadence delivered CloudBurst space Azuro environment that allows several hundred students to simultaneously compete using Cadence layout tools. With that, I will now turn the call over to John to review the financial results and provide our updated outlook.

Thanks, Lip-Bu, and good afternoon everyone. I am pleased with our financial performance for Q4 and 2019. Despite some macro headwinds, we grew revenue across all business groups and our focus on delivering profitable revenue growth resulted in 9% revenue growth and 32% non-GAAP operating margin for the year. Turning to the numbers for the fourth quarter and the year, starting with the P&L, total revenue was $600 million for the quarter and $2.336 billion for the year. Non-GAAP operating margin was approximately 31% for the quarter and 32% for the year. GAAP EPS was $2.36 for the quarter and $3.53 for the year. GAAP EPS includes a one-time GAAP-only tax benefit of $2.06 for the quarter and $2.05 for the year. This tax benefit related to intercompany transfers of certain intellectual property rights to Cadence's Irish subsidiary. Excluding the one-time GAAP-only tax benefit, GAAP EPS were $0.30 for the quarter and $1.48 for the year. Non-GAAP EPS was $0.54 for the quarter and $2.20 for the year. Looking at the balance sheet and cash flow, our cash balance totaled $705 million at year-end. Operating cash flow in the fourth quarter was $159 million and $730 million for the full year. DSOs were 47 days, and we repurchased $75 million of Cadence shares during Q4 for a total of $306 million for the year. During 2019, we grew revenue by $198 million, with over $100 million of that incremental revenue growth dropping through into non-GAAP operating income. That means, we have now grown our annual revenue by around $520 million since 2016, with around $280 million of that incremental revenue growth dropping through into non-GAAP operating income. Now moving on to our fiscal guidance for Q1 2020, we expect revenue in the range of $610 million to $620 million, non-GAAP operating margin of approximately 30%; GAAP EPS in the range of $0.32 to $0.34; and non-GAAP EPS in the range of $0.53 to $0.55. For the full year fiscal 2020, we expect revenue in the range of $2.545 billion to $2.585 billion, non-GAAP operating margin of 32% to 33%; GAAP EPS in the range of $1.46 to $1.56; non-GAAP EPS in the range of $2.40 to $2.50. We expect operating cash flow to be in the range of $775 million to $825 million, and we expect to use approximately 50% of our free cash flow to purchase Cadence shares in 2020. Our guidance assumes that the export limitations that exist today for certain customers will remain in place for all of 2020. We recently completed two acquisitions and we've included the impact of those acquisitions in our guidance. Finally, please note that fiscal 2020 will be a 53-week year for Cadence. You will find guidance and additional items, as well as further analysis in the CFO commentary available on our website. In conclusion, Cadence delivered another year of strong revenue growth and expanding profitability. Our focus on delivering profitable revenue growth has resulted in a large portion of our revenue growth flowing through to operating income over the past three years. Excluding the impact of the 53rd week and recent acquisitions, our guidance assumes that trend will continue with approximately half of revenue growth in 2020 flowing through to operating income. I would like to thank our customers, partners, and our hardworking employees for their continued support, and I look forward to updating you on our progress for 2020. And with that, operator, we'll now take questions.

Thank you. Good evening and congratulations on a nice finish to the year. First question on your new system products. It sounds like you had some nice success there gaining some wins. And wanted to maybe see if you could contrast or compare how the typical engagement with the system products compares with that in the digital space where you've obviously had some success proliferating over the years. Do you think it could have the same type of pattern in terms of initial engagement one seat and then proliferation over time? And just how you're thinking about the runway of these products as you continue to go after this market?

Yes, Rick. This is Lip-Bu. Let me try to answer your questions. First of all, we are excited about entering the system analysis space that we are pursuing as part of our system innovation strategy. There is about a $5 billion TAM opportunity for us, and we are initially moving in with two new products: the Clarity 3D Solver and Celsius Thermal Solver. Both are developed organically, with Clarity being an EM field solver simulator and Celsius being the electro-thermal co-simulation software. Both products were launched in the later part of last year and utilize proven massive parallel architecture that delivers 10 times the performance, and we are excited to see that the response has been very positive, with over 90 evaluations and already 20 customers. I think this is just the early stage of our entry, and these two products are addressing a $700 million market opportunity. We are optimistic and believe in our core competencies in computation and software as we expand from EDA to system-level solutions. We take this step-by-step; gradually, we can proliferate from customer to customer based on their feedback. We remain humble, learning from our customers and driving innovation within the company. Overall, stay tuned. It's still very early in the game.

Great. And then John, a quick question for you on your acquisition of AWR. Can you say if there was much of a deferred revenue haircut as you blended that into the model?

Yes. Sure, Rich. Yes, purchase accounting rules significantly limit the revenue we can recognize from both AWR and Integrand in 2020. Combined, we've added $20 million to annual revenue in our guidance for 2020, almost all of that from AWR. We expect both acquisitions to be dilutive to earnings in 2020, but we expect them to be accretive in 2021.

Perfect. Thank you very much, gentlemen.

Thanks.

Hey, can you hear me okay? Hello.

Yes, Mitch. We can hear you.

Okay. Yes. So, two questions for me. The first one is actually a little more technical. You guys are talking a lot more about going into the RF space. Is this due to the fact that when you go to chip design architectures in the future, they're going to have more complex RFs? Am I thinking too complex about that or is that kind of one of the reasons why you guys are pushing in that space?

Yes, that's a very good question. Clearly, we are listening to our customers. As you all know, 5G is deploying, and many of the challenges in the 5G space and other application markets are focused on high-frequency RF. We have been looking at the best ways to address this complexity through heterogeneous integration. We are delighted to have acquired AWR and to form a partnership with National Instruments, which enhances our capabilities in providing RF solutions. This integration of solutions will allow us to offer a comprehensive platform for RF millimeter-wave product development, from design to simulation to verification, which we are very excited about.

Got it. That was very helpful. And then just for John really quick. Just for the half-on-half operating margin. You guys are starting at 30%, but you're talking to kind of work up pretty materially. So, does that imply that you're exiting kind of a 33%, 34% operating margin? Just trying to get any sort of help in terms of what the margin should look like half-on-half.

Certainly, Mitch. The latter half of the year is expected to have a higher margin profile compared to the first half. This is partly due to the 53rd week, which will contribute around $40 million to annual revenue in Q4. However, considering the additional week of expenses, the increase in operating income is limited. Overall, the combination of the 53rd week and the acquisitions leads to a bigger effect on the operating margins in the first half, with that effect gradually decreasing over the four quarters.

Perfect. Thank you.

Yes, good afternoon. A quick question on the IP side of the business. It sounds like it grew 16% year-over-year. Wondering if that was all organic growth? And was most of that driven by Tensilica and the wireless earbuds?

Yeah. Tom, as I mentioned, we grew very nicely. It was an outstanding year for our IP business, with 16% revenue year-over-year growth, and that was organic growth pretty much across the board. Clearly, the best results came from the Tensilica line, and we had a strong quarter and year particularly driven by audio, imaging, and computer vision. The loyalty growth was especially strong in the audio market with products proliferating in true wireless earbuds and smart speakers. Design IP also had a great year across various segments like DDR, PCIe, and our newly acquired 112-Gig SerDes products, which are crucial for hyperscale deployments in AI and machine learning. To answer your question, it was all organically developed, and we did not rely on acquisitions for this growth.

Great. And based on just the consumer component to that, would you expect that to continue to be more heavily weighted to the third calendar quarter? Or is it too diversified to make that call?

Yeah, it's quite diversified. But yeah, we went through a period back in 2016 where we refocused our IP and aimed for profitable revenue growth. Right now, we're only guiding Q1 and the year ahead. But certainly, the IP sector has been performing very well, and we're pleased with the growth we're seeing.

Okay. And then to follow-up John, when you look at the margins on a quarterly basis, what's the biggest determinant of the range? Is it product mix? Or is it with specific customer mix?

It's probably more product mix. Of course, the first part of the year gets impacted by the purchase accounting rules on the two acquisitions. In Q4, we'll benefit from the 53rd week. Also, right now, we should take a moment to acknowledge the dynamic situation our employees and partners in China and the Asia Pacific region are navigating as health officials respond to the coronavirus. Our focus is on our employee safety, working with the authorities and addressing the crisis and the potential business impact. Any quantified impact of the coronavirus that we could determine at this time is included in our guidance. A large portion of our revenue, of course, is recurring in nature, and so far, the impact we've seen is minimal and immaterial to our overall numbers. However, that impact is more front-loaded to the early part of the year.

Okay. That helps. Thank you.

Hey guys, congratulations on a strong finish to the year and a strong start to this current year. I wanted to ask about your backlog. If I read correctly, you cited a backlog increase of about 20% from the conclusion of 2019 versus 2018. Is that an apples-to-apples comparison adjusting for the way you now count for IPAA commitments?

Hi, Gary. Yes, the backlog was $3.6 billion at year-end, which includes approximately $200 million of non-cancelable IP access agreements. That's up from $3 billion at the end of 2018, including $100 million of IP access agreements. This was impacted by the timing of renewals. The weighted average duration for 2019 was slightly higher because we had a really strong Q4. The weighted average duration for 2019 was 2.7 years. If I look at the average for 2018 and 2019 together, it was in the typical range of 2.4 to 2.6 years. If I look at 2017 through 2019, that's also in our usual range. But Q4 was a strong quarter for us and it took the weighted average duration for 2019 up to 2.7 years. As you know, IP is lumpier than software, as is our hardware portion of functional verification, and that had a slight impact as well.

Okay. I appreciate that. I know you guys have always tried to manage the business with new projects and acquisitions based on the Rule of 40, considering both revenue growth and non-GAAP operating margin, and you just concluded 2019 with about 41%. You're guiding for 2020 at 42%, and I'm sure the extra week has some impact on that. Are you willing to step out of your prior long-term margin guide of 30%, or should we also now consider the Cadence business as being a potential 10% top-line grower?

So, Gary, I don't think we gave a long-term margin target of 30% in the past. You are right that we manage the businesses using a Rule of 40 metric. In 2018, we achieved about 10% revenue growth and 30% non-GAAP operating margin. In the year we just closed, we achieved 9% and 32%. For 2020 guidance, you'll see that it's approximately 10% for revenue growth and about 32.5% or in the range of 32% to 33% for the non-GAAP operating margin. Our focus has been on driving profitable revenue growth. That's why I called out the amount of our revenue growth flowing through to our non-GAAP operating income. Considering the combined effect of the 53rd week and the acquisitions, they add about $60 million of total revenue to our fiscal 2020; however, the impact on operating income is slightly negative predominately due to the purchase accounting on these acquisitions. Excluding those impacts, our guidance assumes that approximately half of our revenue growth flows through to operating income. We are happy with where we are, and since we are adding so much incremental margin, you will see operating margins increase year-over-year. There’s no near-term ceiling that we can identify.

Yes. I think Gary, I'll just add on to that. We continue to drive innovation, delight our customers with the best products, and meanwhile, operate efficiently to achieve the Rule of 40. We will print numbers going forward. We will continue to execute and deliver strong results to our shareholders.

Okay. Last question on the cash. It looks like you repatriated quite a substantial amount of cash. I'm just curious about the reasoning behind that.

Yes. We repatriated cash in preparation for completing the two acquisitions we made at the start of the year. At year-end, our worldwide cash total was just over $700 million, $705 million, of which about $400 million was within the U.S.

Got you. Thank you, guys.

Thank you. Good evening. An intermediate-term question and then a longer-term question. So the first question is, in the long history of EDA, the requirements for applications engineers, or AEs, has typically been a good coincidental or leading indicator of business conditions in EDA. In your case, starting in the second half of 2018 and through the first half of last year, you significantly ramped up your additions there, obviously connected, I'm sure, to the U.S. marquee customer and others. But now your openings there have tailed off. So the question is, have you largely filled much of your requirements for AEs and are you now back to a more normal run rate of requirements for AEs? Could you talk about your thinking on what is generally your second-largest source of employees after R&D? And then, secondly, a longer-term question on computational software: How is the company committing resources to that? Is there a dedicated group structure within the company for that? And then a technical follow-up on that.

Yes. Good question, Jay. Let me try to answer, and then John can chime in. We are not guiding our hiring plan. However, we are always recruiting AEs, and we add-on AEs when we have clear signals from customers to drive successful proliferation. We continue to drive efficiency and look at balancing demand while monitoring projections and commitments. In terms of the system analysis space, customer interest is notably strong. We want to proliferate these products and build out our roadmap while augmenting existing teams as needed. So, far we will continue to hire top R&D and FAE talent as we see the demand grow and maintain high standards to select the right candidates who can drive overall efficiency and support our entry into the system analysis market.

Yes, and Jay, computational software is kind of Cadence's core competence. We manage our employees across five different business groups. We're happy with the way we're ramping up innovative products in the system analysis side, with over 90 evaluations underway and more than 20 customers today.

A technical follow-up on that. Thus far, at least with Clarity and Celsius, you're taking a very much point-tool approach to computational software, particularly for simulation and analysis use cases. But when you think about what customers do in simulation and engineering software more broadly, do you expect you'll need some kind of process or data management capability to unify across the multiple solvers? How do you envision moving beyond just a point tool strategy towards a more comprehensive flow or process orientation?

Yes. Good question, Jay. First, we start by addressing specific point tool solutions and then ultimately drive towards an integrated platform. When we launched our digital implementation, for example, we began with our place and route Innovus, then included our synthesis tool like Genus, and then added Pegasus. Over time, we executed a platform integration, which was applied to our verification suite, and we plan to do the same with our system analysis products. As we establish our presence, we'll look at new product lines and stay tuned for upcoming announcements to enhance our platform strategy, which will enable us to move beyond individual point product offerings.

Thanks very much.

Thank you.

Thanks, guys. Thanks for taking my questions. First one, just on the impacts in China from the virus. How are those impacts? I know, John, you mentioned they were minimal, but how are they actually manifesting themselves? Are orders being delayed? Are conversations being delayed? Or are the conversations, like you mentioned about the safety of your employees, just not focused on business at the moment?

Yes. Let me start, and then John can add. First off, we acknowledge the dynamic situation our employee and partners in China and the Asia-Pacific region are navigating carefully. We are monitoring closely and prioritizing employee safety while working with authorities to deal with the crisis. This week, many employees are returning to work post-holiday, and we will soon gather more information on how this will impact supply chains and factory reopenings. The good news is that a significant portion of our revenue is recurring in nature, and we are also directly checking in with customers and partners. The overall impact is minimal and was built into our forecasts and budget. So far, these impacts have remained immaterial overall, which is what John highlighted in his earlier remarks.

Yes, Jackson. We are closely monitoring the situation. The impacts we've observed so far include some extra expenses as we try to support our customers remotely, with some individuals taking on overtime to assist. We have also adjusted our revenue expectations for Q1 as some of our royalty revenue comes from China and Asia Pacific.

And all of that is included in our guidance.

Okay. All right, great. That's helpful. And then a more broad question on Clarity and Celsius: Is there any reason or is there anything structural that you see in terms of the margin profile that would be different from your core EDA business relative to the 3D solver market?

Yes. The system analysis space is solidly positioned as a good market opportunity and presents strong business potential. As previously mentioned, we're early in the game and committed to driving opportunities and customer proliferation. The market is now ripe for this innovation, and our customers are requesting more support.

The profitability profile is similar to EDA. Our entry into system analysis potentially serves as a growth driver for increased operating margins. Looking back, our gross margin in 2018 was 90%, and in 2019, we achieved 90.6%. We're targeting around 91% due to our current growth trajectory and the evaluations underway in the system analysis space.

John, I just want to go back to the acquisitions and maybe understand a little better the impact they're having on operating margins in the March quarter. I appreciate that you've talked about the diminishing influence throughout the year. But what kind of exit run rate should we think about for operating margins relative to the acquisitions' influence?

Right. So the two acquisitions add about $20 million to revenue in 2020. They will be dilutive to earnings this year. The impact of purchase accounting will be heavily weighted toward Q1 and will lessen as we progress through the year. There will be some minor impact extending into 2021, but we expect net accretiveness by then.

That’s helpful. Another driver of the operating margin profile for Q1 is that, I do want to kindly remind you that we've significantly grown headcount. Towards the start of 2019, we had fewer than 7,500 employees; by the end of 2019, we had surpassed 8,078 employees, so that’s an increase of about 8% in total headcount to facilitate investment in our expansion.

Yes. For sure. Looking ahead to organic growth in 2020, particularly in the core EDA space, how do we parse share gains at traditional customers versus growth in new applications and new customers around AI? Additionally, M&A has presented a key theme in the semiconductor industry over the last 5 to 8 years; as larger companies acquired smaller companies, there likely resulted better pricing on EDA tools as a function of scale. Looking back, was this a meaningful headwind to revenue growth? Now that most major M&A activity seems to be behind us, could this turn into an advantage for revenue growth?

Yes. John, great question. I’m very excited about this industry, as we face a rare situation, where multiple significant technology waves are occurring simultaneously. We have AI and machine learning, 5G deployment, hyperscale infrastructures, autonomous driving, and overall digital transformation compelling a wide array of innovations. We see large system companies and service providers building up silicon capabilities, which indicates we have a significant opportunity to gain market share in EDA. In addition, new products being launched further support this growth, and we are amplifying our R&D focus to drive innovation, as seen in the seven new products introduced last year. These innovations, moving to the cloud, position us as leaders in performance and scalability that our customers value highly. We aim to be the trusted partner really driving design success in advanced process nodes.

Perfect. Thanks, guys. Congratulations.

Thank you.

Hi, guys. Thanks for taking my questions. First, I just wanted to take a step back. You're talking about this $5 billion market opportunity in system analysis. But I think in the past, you've talked about a $30 billion market versus the $10 billion market you serve, and that's inclusive of EDA and IP. Can you help me reconcile the difference between the $10 billion EDA and IP market you serve, plus the $5 billion system analysis market? What am I missing? Thanks.

Certainly. Let me clarify that for you. The $10 billion market consists of our Intelligent System Design strategy, which includes the ground level of design excellence, incorporating both EDA and IP. There exists substantial room for growth due to the innovations we are driving in core products. Subsequently, as we build into system and innovation, we tap into that $5 billion TAM market with the system analysis segment for our two new products: Clarity 3D Solver and Celsius Thermal Solver, which are the initial offerings in this space. Beyond all of this, add layers such as embedded software and security on top of all elements to visualize more potential vertical market opportunities in line with our long-term goals. Our target goal is moving from safely managing core services to evolving and addressing those additional segments aimed at capturing the overall $30 billion opportunity within the next few years.

Okay. Next five years. Got it. And then following up on Clarity and Celsius: good job with the cost momentum you've built up so far. Can you give us an overview of the competitive landscape and what differentiates you? Also, in the $700 million TAM that you're addressing so far, is there a next point tool solution or market that you're looking to target perhaps in the near future? Thanks.

Yes. We're targeting that $700 million market within the system analysis space. Initial projections indicate that we'd be competitive due to our emphasis on providing the expansive best-performing solution without diluting the quality. In relation to our rivals, the advantages stem from precise performance metrics we can deliver, particularly the validated claims for a 10x performance increase. They demonstrate clear eagerness from potential customers with over 90 evaluations occurring which leads to our already-gained traction from 20 signed-up customers. Furthermore, as we work to continue leading and expanding within the system analysis market, we will maintain progress monitored closely in collaboration with customer needs to gain insights on future products or relevant acquisitions as needed to enrich the overall platform strategy.

Thank you.

Thank you.

Hi, just a quick follow-up. John, when you look at the 53-week year, does that have a bigger impact on your cost structure than it will on revenues?

Yes. If you look at the 53rd week, it's a holiday week that adds about $40 million to annual recurring revenue. However, we incur the full expenses associated with that week, so the overall influence on operating income is minimal.

Okay. Thanks.

Thank you all for joining us this afternoon. The next phase of our strategy, Intelligent System Design, brings new opportunities in design excellence, system innovation, and pervasive intelligence within an expanded total addressable market. We are capitalizing on multiple technology trends and further proliferating our solutions with a broader base of customers. Culture is a crucial component of our success and defines us as a company within the community. In November, Cadence was named to Investor's Business Daily's first-ever Top 50 environmental, social, and corporate governance, ESG company list. This list ranks companies concerning sustainability and ethical impacts, and Cadence was ranked number 1 in the technology category and number 5 overall. In closing, I would like to extend my gratitude to all our shareholders, customers, partners, the Board of Directors, and our hardworking employees for their continued support.