Cadence Design Systems Inc

NASDAQ:CDNS

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon. My name is Chanelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I will now turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence. Please go ahead.

[Alan Lindstrom, Senior Group Director, IR]

Thank you, Chanelle. And I would like to welcome everyone to our first quarter 2019 earnings conference call. I am joined by Lip-Bu Tan, CEO; and John Wall, Senior VP and CFO. The webcast of this call is available through our website, cadence.com and will be archived through June 14, 2019. A copy of today’s prepared remarks will also be made available on our website at the conclusion of today’s call.

Please note that today’s discussion will contain forward-looking statements and that 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 we issued today. And by the way, we just filed our first quarter Q a few minutes ago. So, it's now available.

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 April 22, 2019 for the quarter ended March 30, 2019, related financial tables and the CFO Commentary are also available on our website.

And now, I will turn the call over to Lip-Bu.

[Lip-Bu Tan, CEO]

Good afternoon, everyone, and thank you for joining us today. Cadence achieved excellent operating results for the first quarter of 2019, delivering 11% year-over-year revenue growth and 32% non-GAAP operating margin with broad-based strength across our product line. As a result, we are increasing our outlook for the year, and John will provide more details shortly.

While there is some uncertainty in the overall macro environment, we are confident about the multiple trends that are continuing to drive strong design activity. In addition to technology trends, like AI and 5G, design activity is being fueled by workload specific computing, system companies building custom silicon, new silicon startups and digital transformation of industries such as automotive, aerospace, medical and other industrial applications.

Our business is mission critical to silicon development, which is cornerstone of our design activity. As we have stated, our system design enablement or SDE strategy drives growth in our core EDA and IP business, broadens our reach in system companies and targeted verticals, and guides our expansion into newer adjacent areas. We executed well on this strategy. And today I want to highlight its next phase, which we’re calling Intelligent System Design. The foundation of this strategy continues to be delivering design excellence via our core EDA and IP business. In addition, we are building upon our core competency in computational software to expand into two new areas, system innovation where we are expanding into new system domains; and pervasive intelligence where we will apply AI and our algorithm knowhow to our core business and specific verticals.

Our Intelligent System Design strategy will enable us to provide more capabilities and value to our customers, while also expanding our current total addressable market from about $10 billion to estimated $30 billion over the next five years.

To highlight some of this -- some of our recent activities in the system innovation space, in Q1 we announced a strategic partnership with Green Hills Software, which opens new opportunities in the estimated more than $3 billion embedded system, safety and security space.

And earlier this month, we entered the system analysis market an estimated $4.5 billion total addressable market opportunity by introducing our first product Clarity3D Solver, a next generation solution for electromagnetic field simulation. Clarity is a true 3D Solver, which delivers up to 10x faster simulation performance while virtually unlimited capacity without compromising accuracy. Clarity uses state of the art distributed multiprocessing technology, making it uniquely optimized for the cloud and on-premise distributed computing, and has been endorsed by Teradyne, and HiSilicon.

Turning to our core business. Our digital input -- Digital and Signoff business achieved 12% year-over-year revenue growth, driven by strong adoption by new customers, and proliferation by existing customers at advanced nodes. To date, more than 100 7-nanometer designs have taped-out using our digital solutions, and multiple 5-nanometer designs are underway using our solutions as well.

Our hardware-assisted verification products, an important part of our verification suite, had another good quarter. Palladium Z1, our flagship emulation platform, added two new customers that are doing machine learning designs including SambaNova Systems. We also had 13 repeat orders, including three significant expansions, one of which was at Annapurna Labs, an Amazon Company.

Our Protium S1 prototyping platform which enables early software development, also added two new customers, and received seven repeat orders. Palladium Cloud continued its steady momentum, and now has more than 10 customers, several of which have made repeat orders.

Our IP business also showed double digit growth year-over-year. Tensilica continued to win sockets for machine learning, vision and audio applications in the automotive, consumer and surveillance segments, adding eight new customers in the quarter.

In the design IP space, our new 112 gig long-reach SerDes IP was adopted by a marquee semiconductor company, and we launched the industry’s first complete silicon-proven LPDDR5 solution.

As I said earlier, our strategy broadens our reach in system companies and targeted verticals. One of our most successful targeted verticals is aerospace and defense, where we recently announced that we are working with Northrop Grumman, where our EDA, IP solutions have supported a shortened product development cycle and advanced node tape-outs.

Lastly, I want to highlight the new Cadence CloudBurst Platform, the latest addition to our Cloud portfolio which extends our cloud leadership in EDA and provides customers with very compelling productivity, flexibility and scalability benefits. CloudBurst enables hybrid cloud environments and is ideal for serving peak demand. It provides fast and easy access to pre-installed Cadence design tools in either AWS or Azure cloud environments. It was used by Barefoot Networks to achieve a 10x productivity improvement running Cadence Tempus Timing Signoff Solution on their 7-nanometer networking chips.

With that I will now turn the call over to John to review the financial results and provide our updated outlook.

[John Wall, SVP and CFO]

Thanks Lip-Bu, and good afternoon everyone.

Cadence achieved broad-based growth across all lines of our business during Q1 with demand for hardware and IP exceeding our original expectations. Revenue, operating margin and cash from operations were all strong in Q1, and as hardware and IP have become a larger part of our overall business, our recurring revenue mix percentage is now in the high 80s.

Now let’s go through the key results for the first quarter starting with the P&L.

Total revenue was $577 million. Non-GAAP operating margin was 32%. GAAP EPS was $0.43, and  Non-GAAP EPS was $0.54.

Turning to the balance sheet and cash flow. At quarter-end, cash totaled $539 million while the principal value of debt outstanding was $400 million. Operating cash flow for Q1 was $185 million. DSOs were 42 days. And during Q1, we repurchased $81 million of Cadence shares.

Now, I will provide our updated guidance. For Q2, we expect the following results: Revenue in the range of $575 to $585 million; non-GAAP operating margin in the range of 31% to 32%; GAAP EPS in the range of $0.34 to $0.36; and non-GAAP EPS in the range of $.052 to $.054.

Our updated guidance for fiscal 2019 is follows: Revenue in the range of $2.305 billion to $2.335 billion; non-GAAP operating margin of approximately 31%; GAAP EPS in the range of $1.39 to $1.47; non-GAAP EPS in the range of $2.04 to $2.12; operating cash flow in the range of $665 million to $705 million; and for the year, we expect to use approximately 50% of free cash flow to repurchase Cadence stock. You will find guidance for additional items as well as further analysis in the CFO Commentary available on our website.

In summary, I’m pleased with our performance in Q1. We achieved strong operating results, highlighted by o 11% year-over-year revenue growth, 32% operating margin on a non-GAAP basis, and the generation of $185 million of operating cash in the quarter.

And looking at our revised outlook for the year, I’m pleased to see improvements in operating income consistently flowing through to cash as illustrated by the increase in our operating cash flow guidance for the year.

We’d like to thank our customers, partners and of course our employees, for a solid start to 2019 and we look forward to updating you on our progress throughout the year.

And with that, operator, we’ll now take questions.

[Operator]

[Operator Instructions] Your first question comes from Rich Valera of Needham & Company.

[Rich Valera, Needham & Company]

[Technical difficulty] comments on your foray into the system analysis market. And obviously you started there with I guess, an electromagnetic-based solver. But there are obviously many solvers that you could potentially roll out there to have a complete portfolio for that market. So, just wondering how aggressively you plan to go after that market. Will you go after the mechanical and static side of it, as well as sort of the more electronic-centric solvers? Just any sort of sense of your real aspirations in that market? Thanks.

[Lip-Bu Tan, CEO]

Yes. Rich, Lip-Bu here. And we did not hear the first portion of your question, but I guess it’s about the 3D Solver that we announced. And we're delighted. And this first product, clarify (sic) [Clarity] is a truly 3D Solver and is a next generation solution that is for the electromagnetic field simulations. And this is our first entry to the system analysis. And clearly, we have other product we’re in the working on development. We're excited because couple of things. One, clearly, we look at our core competency that we have in the computational software, and that's what our EDA background from, and then also our 3D, some of our packaging technology that we have. That combination that gives us a very unique opportunity to really drive in the next generation disruptive; that's why we can claim up to 10 times the performance. And this is very cloud enabled, and then so that we can really provide a truly next generation, uniquely optimized for cloud and on-premise distributed computing, and so that we have something unique to offer. And stay tuned, and we're going to have more products coming up. This is our first entry to the system analysis market.

[Rich Valera, Needham & Company]

Great. Thank you for that. And if I could just circle back to your last earnings call where you referenced a major win with a marquee semiconductor customer, you mentioned that you were pretty aggressively ramping up your AE hiring to support this customer. So, given that you've kind of given us some hint on the expense side for that customer, is there anything you’re willing to say about your revenue expectations, like when you might expect to generate incremental revenue from this customer, whether it’d be this year, next year or any color at all you could give on that? Thank you.

[Lip-Bu Tan, CEO]

Yes. I think, we're excited about this marquee U.S. semiconductor company. As I mentioned at the last earnings call, it’s a breakthrough and wide-ranging win. And we are very excited; it’s the early days of partnering with this customer to expand the breadth of our engagement. It’s across all our different tools. And we are excited about it. And clearly, everything we know is already built into our guidance for the year. But overall, clearly to support a very important customer we have to build out our AE and R&D support and to really proliferate across requirements.

[Operator]

The next question comes from John Pitzer of Credit Suisse.

[John Pitzer, Credit Suisse]

Lip-Bu, maybe first to you. In your prepared comments you did talk about some pockets of uncertainty out there in the environment which makes sense, given what some of your traditional semi customers were putting up. I'm just kind of curious, to the extent that you guys continue to do better than expected in beat-and-raise, what do you think it is about your business that's allowing you to buck these trend? Is this just your ability to address nontraditional customers? Is it the new large win that's offsetting this? Maybe you can just help us give us a sense as to why you seem to be bucking some of the uncertainty trends out there?

[Lip-Bu Tan, CEO]

John, it's a very good question. So, let me just talk about this uncertainty. I think, we all know from the marketplace, geopolitical and also some of the slowdown in some segments of the industry like automotive and others. But, we're excited on couple of drivers, and especially AI, and then 5G and autonomous driving, and also the industrial edge, that’s something that I'm very passionate about. And because we are moving into, I call it, big data environment, it's all about data and the data analytics. So, in a way, it’s driving a lot of new requirements for the semiconductor. So, one, I mentioned about the workload specific or you call it domain specific process computing, general purpose CPU, GPU, that's a good place for them. But right now, the workloads have changed. So the -- we call it a workload specific, more application related. And that’s also driving not just a computing and also the -- clearly a lot of more exciting about the memory, there's some new innovation on memory; there's a new innovation of storage. And some of you have heard about it, NVME controller, the disaggregation of the storage, and because the massive, massive data that you need to be -- disaggregate the storage and network. And then also the other part is the high speed connectivity that able to scale and the connectivity speeds that’s required in the hyperscale. So, all this is going to be driving a very strong design activity, and we are in the middle of it. We are well positioned to capture that. And that's why I think the -- from our point of view, the design activity is increased substantially. We are excited about to supporting some of our customers to really embark on some of these opportunities.

[John Pitzer, Credit Suisse]

That's helpful. And then, John, just maybe as a follow-up on the op margin guidance, both for the fiscal second quarter and the full fiscal year. It’s a slight downtick from what you just put up in the fiscal first quarter. Is that nothing more than the expense of onboarding the new large North American customer? Can you talk about some of the other points and takes that might have op margins going down throughout the fiscal year on what's going to be rising revenue?

[John Wall, SVP and CFO]

Sure, John, great question. I mean, for the year, looking at the year, our annual merit increase is going to effect in July. So that impacts the second half of the year. And of course, over the course of the year, we're investing in R&D and field resources to support proliferation of our solutions with market shaping customers. And I say customers plural, it's not all for one, one customer.

[Operator]

Your next question comes from Mitch Steves of RBC Capital Markets.

[Mitch Steves, RBC Capital Markets]

Hey, guys. Thanks for taking the question. I have two. So, the first one is kind of on the operating margin long-term target. I know you guys historically talked to 30%. But you guys are above that for three quarters in a row. And I'm wondering if you guys may provide sort of high level commentary on where you think that could go in three to five years? And then, secondly, I noticed in your prepared commentary you guys are now breaking out China as separate geography. And it seems like the numbers there have a lot more volatility. I mean, there used to be kind of 8% of revenue but then it was 13%; in December, now it’s back down to 10%. So, maybe you could talk about a little bit why you guys are disclosing China now as a separate geography.

[John Wall, SVP and CFO]

Hi, Mitch. I'll take the second part of that question first, if you don't mind. I mean, in terms of calling out China separately, yes, you'll see that in revenue by geography table in the CFO Commentary and in our 10-Q. Generally, any lumpiness in the percentage of revenue is probably caused by our IP and hardware businesses. That will -- our IP and hardware revenue is generally more lumpy than the than the rest of our business.

And in relation to your first question, we're not really ready to put out long-term targets right now. We're always looking at how to improve operating performance. And you mentioned, like over the next three years -- why we're not getting gains over the next three years. If you take a look over a longer time period and compare our current guidance for 2019, let's say our 2016 results, you've got a perspective on we’ve been able to scale the business in recent years.

[Lip-Bu Tan, CEO]

Yes. Just to add to what John is talking about on the China side. If you look at historical 2016, above 8%; and then, 2017, about 9%; and last year is about under 10% and this year is 10%. So overall, we have done well in China. And clearly, China is very committed to build the domestic semiconductor industry. And they're making great progress. And we are well positioned to support not just China, I mean globally in Asia and other places. And we want to be the trusted partner for them.

[Operator]

Your next question comes from line of Jay Vleeschhouwer of Griffin Securities.

[Jay Vleeschhouwer, Griffin Securities]

Thank you. Good evening. Lip-Bu, a technology question first for you regarding what you called now, your Intelligent System Design strategy. And the question is, over the last number of years, perhaps the most important thing you've done, particularly in digital, is to pursue your parallel architecture with a common data model across the portfolio, and that's obviously helped you on the digital tool side. The question is, with respect to the new Intelligent System Design target, how extensible or leverageable is that platform or architecture the last number of years for that new strategy or is there some additional rework or new technology you have to insert into the portfolio to pursue that. And in any case in the meantime, what additional opportunity do you have to further integrate the tools? For example, you’ve read some work you’re doing to better integrate Innovus and Genus, is that something you could containment on as well?

[Lip-Bu Tan, CEO]

Yes. Good question, Jay. Let me try to answer your questions. So, I think that intelligence system design, it breaks down into three pieces. One is the design excellence, and that is our core EDA and IP. So, we’re very laser-focused, make sure that our foundations are solid, we're the best of tool in every category, and that's what we inspire to do. And so that we're delighted on the digital and signoff sector we grew in the last quarter 12%. Clearly, we're continuing to succeed in the new customers and then right now in some of the proliferation on some of current customer in the most advance node, in the seven to five, we're moving on, 3 nanometer. And so I think we're excited about continuing to drive that.

And then, we move on to that system innovation that is moving to the system domains. And as I mentioned earlier, really using our -- and we went to a soul searching, we found that in our core competency and the computational software, and then the digital implementation that we have, and it can be scale into the system level. And that's why we're excited. So, I think to embark on that into this, I call it, the first mover, is basically is the embedded the system, safety and security space with Green Hills; we're very delighted in that strategic partnership with that. So, that we're starting to move into that space, and that’s about $3 billion market that we're excited about. Then, next thing that we’re looking at is the whole system we call it the analysis space and that’s about $4.5 billion and it's about time to have some innovation solution to able to provide -- provide cloud enabled and scalable and using our strength to apply, because if you recall, we also had the PCB business and also the 3D technology, so that we can really apply that into this 3D Solver, and that is as a beginning on the EM electro-magnetic field simulations area. And stay tuned, we have continued the development and investing in this space and it’s a big market, $4.5 billion and customers love it. And so far the initial feedback from our potential customers, and we highlight too that I endorse our approach and then see the benefit of the performance and we’re excited about it.

And then, finally, we are going to use that to the pervasive intelligence using the AI and machine learning, and basically, we're going to apply into, we call it, the inside and outside. Inside, basically using AI, machine learning to drive performance improvement, productivity, and performance improvement across all our product lines in terms of EDA tools. And we already see significant improvement on that. And then, finally, we’re also working with our leading customer, and using AI to optimize the flow and methodology, so that the customer can really drive the performance and machine learning, deep learning, and other applications. And that's kind of our approach.

[Jay Vleeschhouwer, Griffin Securities]

Lastly, geographically. There's been some interesting trends in Japan, which for years, as you know, was quite weak and lost share in terms of total EDA. But for you, you've now seen a few quarters in a row of sequential improvement in Japan and year-over-year improvement in Japan on both the quarterly and trailing 12 basis. The question therefore is, are you beginning to redirect or grow your investments in Japan and sustain that growth either with sales or AE or anything else?

[Lip-Bu Tan, CEO]

Yes. Good question. I think, Japan is important market for us. A couple areas Japan is very strong, and I’ll just name a few. Now, automotive, they are very, very strong. And also, I mentioned earlier the edge industrial IoT, the microcontroller. And there's a lot of controller collecting data, and then, couple of key prayer in Japan that we're very excited to team up with them. And also, the whole video surveillance, consumer related areas, and that AI machine learning can really play a role in it. And so, I think, this is a very important market, and then they are recovering very nicely. And then, right now, we’re engaging heavily with a couple of key customer that we want to be that trusted partner going forward.

[Operator]

Your next question comes from Sterling Auty of JP Morgan.

[Jackson Ader, JP Morgan]

Hey, guys. This is Jackson Ader on for Sterling tonight. Couple of questions from our side. The first would be, so looking at the outperformance here in the quarter, it seems like it's coming from the two areas that you called out, IP and hardware, which are typically the two more volatile areas for revenue. So, what is giving you the confidence then to raise the full year guide above just this quarter's upside? Is there something in time-based licenses that came in ahead of what you thought or is the pipeline building better than what you thought?

[Lip-Bu Tan, CEO]

I think, Jackson, let me start first, and then, John fill in. First of all, I kind of highlighted that it's a very broad-based strength across our product lines. And even though, we highlight the hardware, we highlight the IP, we also highlight the digital growth 112%. And then the other part is also very exciting for us is the custom and system connect areas and also the nice growth above 8%. And then we are excited about -- that is why we’re investing in this whole system analysis is part of this analog custom interconnect system level. And that area has been doing well. And so, I think overall, I want to say that it’s across the board and then also some of the new -- newly developed products and that we already built into our guidance for the year.

[John Wall, SVP and CFO]

Yes, we had very pleasing Q1 performance for IP, but of course IP is lumpy and probably benefits against the better compare against Q1 2018. On the hardware side, if you recall, our functional verification revenue grew in the high-teens in 2018. And the last time we spoke to you, we were expecting functional verification revenue in 2019 to be approximately flat year-over-year. With Q1 behind us and with better visibility into the hardware pipeline, we are now expecting modest growth in our functional verification segments, despite the difficult compare. We saw a pickup in demand in Q1 for our hardware products and we expect that to continue into Q2.

[Jackson Ader, JP Morgan]

Okay, great. That's helpful. Follow-up question is kind of a two-parter. So, the first being, you've mentioned, Lip-Bu, the $30 billion TAM over the next few years, right, and expansion from the 10 billion that you've seen kind of in the past. What would you say you currently I guess address of the incremental 20? And then, secondly, obviously part of this is going to be the Clarity 3D Solver that was announced a couple of weeks ago. What do you see as the main or who I guess, would you see as the main competitors for this Clarity 3D Solver? Thank you.

[Lip-Bu Tan, CEO]

Good question. And we're excited about this TAM expansion. That's one of the very important focus for Cadence. And so, that's why we have this strategy on the -- we call it the Intelligent System Design. And, first of all, I think clearly, our foundation continued to grow in terms of design excellent, all our EDA tools continue to drive the growth with semiconductor company and also system company to drive differentiation. And then second part, we’re starting to address -- begin to address is that system innovation. And so, clearly, the opportunity in front of us is this whole embedded system, safety and security, our partnership with Green Hills is a very important part of our strategy. And then, now, we're starting to move into the system analysis space, and the embedded space, about 3 billion and then market analysis is above -- clearly is -- system analysis about 4.5 billion. And so, I think overall, we continue to matching forward, stay tuned, and we're going to be -- over time, we're going to be -- highlight for you some of the success we have.

And then clearly, on the competition side, on the system analysis, there are couple of them, I think are quite well known that have some more legacy solutions. And the customers over time require increase on the system complexity, and also ship less approach and doing more simulation, and then larger design and that will require solution that needs more capacity and also higher performance. And that will play into our strength in terms of algorithm, expertise and method distributing multi-processing capability. And so, I think those are the things that really we find a unique opportunity or unique qualification we have to play in this market.

[Operator]

[Operator Instructions] The next question comes from Jason Celino of KeyBanc.

[Jason Celino, KeyBanc]

Hey, guys, thanks for taking my questions. Can you hear me all right?

[Lip-Bu Tan, CEO]

Yes, very well.

[Jason Celino, KeyBanc]

Yes. So, good raise to the full. First half of 2019 guidance assumes kind of 11.7% growth, and then decelerates kind of to the 6.7% for the second half. I appreciate your comments on kind of the updated hardware outlook. But, how conservative is guidance still for 2019?

[John Wall, SVP and CFO]

Hi, Jason. This is John. Everything we know is in our guidance. You're right, the first half does look kind of flat compared to the second half. And that's mainly because of functional verification, which includes both software and hardware products. But, that's quite lumpy, and our visibility into demand for Q2 looks good. Q4 is a very tough comparable.

[Jason Celino, KeyBanc]

Okay. And then as far as IP revenue for the quarter, I mean, you guys did post strong quarter. I mean, how should we think about IP as a whole growth wise for the full-year?

[John Wall, SVP and CFO]

We're very pleased with our IP results in Q1. But IP in Q1 benefits from a relatively easy compare versus Q1 2018. We're not guiding the individual product groups, but we're very pleased with our with our IP results for the first quarter.

[Lip-Bu Tan, CEO]

Yes, a couple of things we’re kind of positive about is a Tensilica, the proliferation adoption for the machine learning, vision, audio, and also automotive consumer surveillance. We added 8 new customers. On the design IP side, clearly, we have the 112 gig long reach SerDes IP, and this is a must have for the hyperscale infrastructure. And we are just at the beginning of it and we are delighted, marquee semiconductor companies adopt it, and more to come and stay tuned, and we'll have more updates for you.

[Operator]

Your last question comes from Gal Munda of Berenberg.

[Gal Munda, Berenberg]

Hi, guys, thanks for taking my question. The first one is just, John maybe to clarify in terms of the guidance, one thing that has kind of changed is the recognized revenue that’s kind of estimated come over time, that ratable revenue is saying that it’s the new guidance, it’s 85% to 90% versus previous around 90% is the main delta in the hardware products, it's a way that you’ve seen Q2 demand kind of turn out. Is that the reasons perhaps?

[Lip-Bu Tan, CEO]

Yes, Gal. Our upfront revenue comes predominantly from two main sources, IP and the hardware part of our functional verification group. The expectation for better functional verification growth leads directly to that revision of our outlook for the recurring revenue mix. We're now expecting high-80s for 2019.

[Gal Munda, Berenberg]

And then, the second question is just linked to your cloud offering. And in the past, your customers kind of liked to mix and match different parts of the processes. And when you move to the cloud, especially when you start doing design in the cloud, my question is, can tools still be matched as easily as previously requirements? And if not, does that mean that potentially tools can be more sticky or do you not expect any change into workflows, the way they're being managed in terms of vendors side?

[John Wall, SVP and CFO]

So Cadence Cloud does not change our business model, it just offers our customers another way to optimize their investment in Cadence tools. We're not really expecting any difference in how our customers use our tools.

[Lip-Bu Tan, CEO]

And in some way, we try to drive the performance and productivity for our customers by moving to the cloud, so that you can address the peak load and you can parallel the distributor to the unlimited server that the cloud infrastructure provides and that is tremendous value to our customers.

[Gal Munda, Berenberg]

And just as a follow-up on that. Would you say that when you are seeing the adoption of the cloud in the future, would you expect majority of it coming for adverse capacity, like you mentioned from existing customers that potentially will invest less in their own infrastructure, or do you think that the new customer, the system companies or even the startups will account for a larger portion of that adoption in the future?

[Lip-Bu Tan, CEO]

It really depends on the customers. And they can use hybrid, using the on-premise, and address peak load with the cloud or they want to from scratch, some of the startup, they want to be all cloud, we are also open to that. So I think there are a lot of different models. And we basically want to make it available to our customer, whatever they chose and make sure that is secure and make sure can drive performance and productivity for them and that is our main driver for using the cloud and then basically we are supporting them and they have option either customer managed, using the Cadence managed or Palladium Cloud.

[Operator]

We will now turn the call over to Lip-Bu Tan, for closing remarks.

[Lip-Bu Tan, CEO]

Thank you all for joining us this afternoon. In summary, our business is mission critical to silicon development, which is the cornerstone of all design activity. Through our strategy, we are capitalizing on multiple technology waves and further proliferating our solutions with a broader base of customers. Next phase of our strategy, Intelligent System Design, brings new opportunities in the design excellence, system innovation and pervasive intelligence, and an expanded total addressable market.

In closing, I would like to thank all our shareholders, customers and partners, Board of Directors and our hardworking employees for their continued support.

[Operator]

Thank you for participating in today’s Cadence first quarter 2019 earnings conference call. This concludes today’s call. You may now disconnect.