Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Fourth Quarter 2020 Earnings Conference Call. Operator Instructions were provided. Thank you. I will now turn the call over to Alan Lindstrom, Senior Group Director of Investor Relations for Cadence. Please go ahead.

Thank you, Rob. I would like to welcome everyone to our fourth quarter 2020 earnings conference call. I am joined today by Lip-Bu Tan, Chief Executive Officer; Anirudh Devgan, President; 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 19th, 2020. A copy of today's prepared remarks will also be available on our website at the conclusion of today's call. Please note that the discussion today will contain forward-looking statements and actual results may differ materially from those expectations. For information on factors that could cause differences 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. 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 22, 2021 for the quarter and year ended January 2, 2021, related financial tables and the CFO commentary are also available on our website. Note that again today we are conducting the earnings call from our respective remote locations. For the Q&A session today we would like to ask you to observe a limit of one question and one follow up. You may requeue if you would like to ask additional questions and time permits. And now, I'll turn the call over to Lip-Bu.

Good afternoon everyone and thank you for joining us today. In a year of unprecedented macro challenges, I’m pleased to report that Cadence achieved outstanding financial results for both the fourth quarter and 2020. For the year, we achieved 15% revenue growth and 35% non-GAAP operating margin with strength across the board and all segments growing by double digits. In a moment, John will present more information for Q4 results and our 2021 outlook. The acceleration of digitization due to the pandemic, coupled with exciting generational trends like 5G, AI/ML, data analytics, and hyperscale computing continued to drive strong semiconductor demand. Leading hyperscaler, mobile and AI companies continue to aggressively pursue Moore’s law, while 5G/wireless, industrial, and automotive verticals are leading the charge on the More-than-Moore front. Our Intelligent System Design strategy triples our TAM, and our broad compelling portfolio of chip, package, board, and system design solutions uniquely positions us to realize these exciting opportunities. In 2020, we accelerated our momentum at marquee accounts, while expanding our systems portfolio through compelling acquisitions, enabling us to win new customers in our targeted vertical segments. Of particular note was the strength of our aerospace and defense business as the digital transformation in this vertical continues, and we expanded and deepened our relationship with Northrop Grumman, which includes the use of our custom-analog and digital full flow. Additionally, we are especially excited by the momentum we have with hyperscalers as they accelerate their chip and system design activity. Our engagements with the system companies have steadily deepened over the past few years and revenue from systems companies is now closer to 45% of our total revenue. It was a great year for our Cadence Cloud, which now has more than 175 customers, and we further strengthened our partnership with cloud infrastructure and foundry partners. Now let us review Q4 highlights. Design Excellence is the foundational layer of our strategy, and includes our Core EDA chip design platforms and IP portfolio. Our design, our Digital & Signoff solutions offering superior quality of results and faster convergence, continued proliferating at market-shaping customers. We are engaged in well over 100 projects at 5-nanometer and below process technologies, and we are in earlier collaborations on the 2-nanometer node. Deployment of our full flow accelerated as more than 45 customers adopted our Cadence digital full flow at the most advanced nodes during the year, including MediaTek, Samsung, Micron, Nuvia, and a global marquee customer. Based on the superior quality of results, a market-shaping hyperscaler significantly increased their usage of our digital solutions. Earlier in the year, a market-shaping automotive semiconductor customer committed to Cadence as its primary EDA vendor for digital design. Customers are faced with mounting challenges in system verification and software bring-up and are benefiting from our verification full flow solutions that deliver industry-leading verification throughput. Momentum continued for Xcelium, our digital simulator, with several competitive displacements under way as well as expansions and new customer wins. Our hardware family of Palladium for emulation and Protium for regressions and earlier software development had a strong quarter to finish our best ever year for hardware. For the year, Palladium Z1 had 24 new customers and 34 expansions, while Protium had 13 new customers and 14 expansions. Demand was particularly strong at AI and hyperscaler customers. Ericsson renewed their commitment to Cadence verification hardware, including both Palladium and Protium. A unique differentiator of the Protium X1 is the common front-end compiler with the Palladium Z1 that enables significantly faster bring-up, and about 40% of our hardware business during the year included both Z1 and X1. Our IP business had a strong year as our focused strategy and the compelling portfolio leveraged the ongoing IP outsourcing trend. We continued expanding the footprint of our leadership DDR and PCIe IP and had several design wins at the 5-nanometer and lower process nodes. High speed SerDes is a critical component of hyperscaler infrastructure, and several customers have adopted our 112 gig SerDes IP, including Xsight Labs, who has also demonstrated working silicon. Tensilica had strong royalties and significant wins at key true wireless stereo and mobile application processor customers. Additionally, the automotive segment had good momentum with wins in functional safety, radar, and digital radio, including an ADAS win at a leading self-driving car company. In System Innovation, we are very excited about our system design and analysis segment, which had a particularly strong year with greater than 25% revenue growth. Rising system complexity for advanced 5G, automotive, and HPC applications is driving the need for a seamless platform solution across design, simulation, and analysis. AWR and Integrand delivered great results in 2020, and there is strong customer interest in our integrated Virtuoso, Innovus, Allegro, and AWR Microwave Office solutions with in-design analysis. In System Analysis, we are executing our strategy of building out our multi-physics portfolio, offering best-in-class solutions and delivering superior results compared to legacy industry solutions. Strong market adoption continued for our System Analysis products, and we are particularly pleased with the growing number of repeat orders with customers including STMicroelectronics, Realtek, and a market-shaping hyperscaler. We tripled our System Analysis TAM by adding Computational Fluid Dynamics technology through the pending NUMECA acquisition, which will bring leading CFD technology and deep domain expertise of Dr. Charles Hirsch and his team to Cadence. NUMECA has over 450 customers, including NASA, Honda, and Ford, across multiple verticals such as aerospace, automotive, industrial, and marine. For Pervasive Intelligence, we continued to incorporate machine-learning technology in various tools for improved PPA and faster convergence. Xcelium-ML had successful engagements with several market-shaping customers, delivering up to a 5x improvement in regression throughput. We also progressed on providing IP specifically tuned for AI/machine-learning applications, especially edge inferencing applications. Cadence continues to invest in fostering innovation and advancing education through endowments at top universities. Building upon previous endowments at Stanford, the University of California at Berkeley, and Carnegie Mellon University, we announced a $5 million endowment at MIT’s Schwarzman College of Computing to promote research in the fields of artificial intelligence, machine-learning, and data analytics. Now, I will turn it over to John to go over Q4 results and present our 2021 outlook.

Thanks, Lip-Bu, and good afternoon, everyone. I’m pleased to report we exceeded all of our key operating metrics for the fourth quarter and fiscal year 2020. We achieved 50% on the Rule of 40 metric for the first time through a combination of 15% revenue growth and 35% non-GAAP operating margin. Consistent execution against our strategy and double-digit growth across all product categories helped us achieve this landmark, but we also had the benefit of some tailwinds during a fiscal year, which included a 53rd week, a strong second half in China, and the recovery of $26 million that we previously thought to be uncollectable. The pandemic brought many challenges and I’m very proud of our Cadence team for their compassion and resilience in the face of adversity. Their focus on innovation and customer success resulted in continued acceleration of Cadence’s three-year revenue growth CAGR, which is now into double-digits. Let’s go through the key results for the fourth quarter and the year, starting with the P&L. Total revenue was $760 million for the quarter and $2.683 billion for the year. Non-GAAP operating margin was approximately 37% for the quarter and approximately 35% for the year. GAAP EPS was $0.62 for the quarter and $2.11 for the year, and Non-GAAP EPS was $0.83 for the quarter and $2.80 for the year. Next, turning to the balance sheet and cash flow. Our cash balance was $928 million at year-end, while the principal value of debt outstanding was $350 million. Operating cash flow in the fourth quarter was $136 million and $905 million for the full year. DSOs were 44 days, and we repurchased $380 million of Cadence shares during the year. Before I provide commentary for Q1 and fiscal 2021, I’d like to take a moment to share the assumptions embedded in our outlook. We expect strong revenue growth for the first half, followed by more muted second half growth as we lap some tough second half comps. Our outlook further assumes the pandemic restrictions will gradually ease across the globe this year, resulting in higher T&E expense in 2021 compared to 2020. We’ve included the expected impact of the pending NUMECA acquisition in our 2021 outlook. And finally, as usual, our outlook assumes that the export limitations that exist today for certain customers will remain in place for all of 2021. Embedding these assumptions into our outlook for fiscal 2021, we expect revenue in the range of $2.86 billion to $2.92 billion, non-GAAP operating margin of 34.5% to 36%, GAAP EPS in the range of $2.09 to $2.19, non-GAAP EPS in the range of $2.95 to $3.05, operating cash flow in the range of $900 million to $950 million, and we expect to use approximately 50% of our free cash flow to repurchase Cadence shares in 2021. For Q1 2021, we expect revenue in the range of $710 million to $730 million, non-GAAP operating margin of approximately 35%, GAAP EPS in the range of $0.55 to $0.59 and non-GAAP EPS in the range of $0.72 to $0.76, and we expect to repurchase $110 million of Cadence shares in Q1. Our CFO commentary, which is available on our website, includes our outlook for additional items as well as further analysis and GAAP to non-GAAP reconciliations. In conclusion, Cadence delivered another year of strong operating results achieving 50% on the Rule of 40 metric for the very first time. We remain focused on driving profitable revenue growth and at the midpoint of our outlook for fiscal 2021; I’m pleased that we are on track to grow our annual revenue by over $1 billion since 2016 with more than $0.50 of every dollar of revenue growth dropping through to non-GAAP operating margin over that period. I would like to close by thanking our customers, partners and our hardworking employees for all that they do. And I’d like to remind them all that their health and safety continue to be our first priority. And with that, operator, we’ll now take questions.

Operator Instructions were provided. And your first question comes from a line of Gary Mobley from Wells Fargo Securities.

Good afternoon, everybody. Thanks for taking my question, and let me extend my congratulations to a strong start to the fiscal year and a strong execution relative to Rule of 40, exceeding that by 10 percentage points, and that leads me to my question, John. Could you help us level set what that 35% operating margin in 2020 may have been if you didn't have, I guess the reversal of the bad debt reserve or bad collectible reserve, the fact that you weren't able to bring on employees at a fast enough rate? And then as well, the extra week how does that 35.25% operating margin guide in the fiscal year 2021 compare to a level set fiscal year 2020.

Hey, thanks for the question. Gary, it's probably a multi part question. But yes, I guess in terms of the collections, we had collections windfall of $26 million in the second half, most of which came in Q4, and some of those invoices were very old, which meant that $22 million of the $26 million was recognized in revenue before the end of the year, and that was in relation to, if you recall, in the middle of the year, during the pandemic, we had some smaller customers that weren't able to pay us, and we reserved for those. And we helped them out; our engineers and team at Cadence were determined to help them out whether they were paying us or not, but some of those customers turned around and managed to survive, and we weren't sure if they would. So that collections windfall kind of distorted maybe some of the revenue timing in the quarters during the year, but it didn't really impact the year, because originally we had it in the year, then we took it out in the middle of the year, and then that $22 million of that $26 million got collected and got recognized. In relation to the extra week, we thought that was going to be $45 million, and it was, but the extra week, of course was a 2% tailwind for helping us achieve 50% on the Rule of 40 in 2020, and what was a 2% tailwind in 2020 is a 2% headwind now in 2021, when we go from a 53-week year to a 52-week year. And then, I guess we had a really strong second half in China. I mean when I stepped back from individual quarters and halves, I would say this, our business is very strong in all regions. And across all of the product categories, the three-year revenue CAGR is up to 11% now in 2020, and at the midpoint it's 11% for 2021 as well. So, we're already off to a very strong start, as well as in the first half of 2021, but it's too early really to say that it's not sustainable in the longer term. So for the second half, we have muted revenue guidance. When I looked at the second half of 2020 in China, what I noticed was that we had a higher-than-normal proportion of upfront revenue in our recurring revenue mix for the region in China. For our outlook in 2021, I've assumed we’d return to our usual recurring revenue mix in the region. And that, along with the fact that we won business in the second half in 2020 versus the second half in 2021, that’s what contributes to the conservative revenue growth outlook for the second half.

Okay, that's very, very helpful, John. I wanted to ask you about the materiality of the software from Systems Analysis product group, including the backup, I guess, there's that various documentation that NUMECA had roughly $30 million in annual revenue? Is that a pretty good approximation? And for the overall Systems Analysis category, how material is this now, is it somewhere in the ballpark of what 1% or 2% of revenue now and how much is it contributing to your overall growth? Thank you.

So Gary, your system analysis business is doing great; bookings and revenue grew strongly in 2020. The operating margin profile is better than EDA, which allows us to invest in the business where we're generating strong incremental margins that improve our overall operating leverage. In relation to NUMECA, when we issued the original press release, we highlighted that the impact to 2021 is pretty immaterial; it's pending, we expect it to close; it's imminent in terms of close, I would expect it to close this week. And as usual, of course, we'd expect purchase accounting rules to initially limit the revenue that we can recognize on NUMECA in the first year, so we expect that to be temporarily dilutive to earnings in 2021, and that's already embedded in our outlook. So, from that perspective, we don't have anywhere near as much revenue in 2021 as you might be expecting.

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

Hey, guys. Can you hear me? Yes. So, the first one is just on the 45% systems exposure now. I'm just really curious about why that's trending up so quickly. About three years ago, I think it was closer to like low 40s or a 40% run rate but now we're suddenly at 45%. And it sounds as they might even go higher. So maybe can you help us understand what exactly is going on with that business that's causing it to spike up? And then secondarily, regarding your 50% flow through in the operating margin, including things you've been doing. But is there any difference between the systems and semis onboarding in terms of profitability for you guys? Those are my two questions. Thank you.

Mitch, maybe I can answer the first question first, about the system companies. We provide an end-to-end EDA portfolio. Also with our Intelligent System Design, we are moving up into the system analysis area and also the packaging side and then as you can tell, this generational wave in 5G, and also the hyperscale, and then autonomous driving, the system companies are actively engaging with us because we are providing a suite of solutions that they are looking for. So, I think it's an accumulation of the last 12 years of continued work. We are delighted and now getting closer to the 45% of the revenue. For them, clearly, packaging and not just silicon development is critical, and we can provide an integrated solution so that they can design the complex systems that they're looking for. And so, we are excited about this opportunity, and our strategy of investing behind it, and we are glad to see the performance.

Yes, Mitch, and to the second part of your question there, there's higher than normal profitability for us in the system analysis business, and it's been growing really fast for us. If I look at incremental margins, at the midpoint of our outlook for 2021, we're expecting our non-GAAP operating margin to grow by about $550 million over the five year period since 2016. That's about 51% of the revenue growth if you calculate the revenue growth over that period of time, and when I compare the midpoint outlook for 2021 against 2019, I did the same exercise and I got 51% again before the impact of NUMECA; with NUMECA it kind of takes it just down under 50%.

Okay, so just to clarify and make sure I understand this correctly, system analysis, it sounds to me and maybe I'm reading this too much into this, you're seeing like a step function in your Clarity 3D business, or am I reading too much into this?

I think we also have hyperscalers and some system company service providers that are quietly also building semiconductor custom silicon. Our entire suite from design excellence, from the EDA, IP, and then plus our system analysis and the acquisitions we make in AWR and Integrand provide a lot of system solutions for 5G and the industrial groups.

Your next question comes from the line of Pradeep Ramani from UBS.

Hi, thanks for taking my question. Congratulations on a great quarter and a very solid guide. I just had a couple of questions, maybe on China and then have a follow up. How are you thinking in terms of the mix you're seeing coming out of China versus the rest of the world? I mean last quarter it seemed a little bit more towards IP and hardware, but it feels like your growth is now increasingly becoming more broad based in China and driven by EDA and software as well. Is that a correct read?

Yes, let me answer that. It's Lip-Bu. Clearly APAC is a strong growth region for us. We have done well in China in Q3 and Q4. China is heavily investing in the semiconductor industry. We now have a broad portfolio of EDA to IP, and even system analysis, packaging, and 3D packaging, which becomes critical for them. We support customers globally, and China is especially strong and we will continue to comply with export control requirements, but so far, knock on wood, we see strong momentum there.

And Pradeep, if you step back from looking at any individual quarter or half, and you look at the three year CAGR, I think our growth is accelerating across all regions in our outlook for 2021.

Great. And for my follow up, you had a very strong year on IP. How do we think about the sustainability of growth in IP going forward? Given of course, there are longer term drivers, but just coming off of such a strong year?

Yes, so IP tends to be lumpy. We like the IP outsourcing trend. We have a strong portfolio in DDR, PCIe, and also SerDes, which is a must have for hyperscale. Tensilica is strong in audio and mobile, and automotive is also showing momentum. Overall we were delighted with last year, but as you know, it's a very lumpy upfront business. We will continue to focus on it.

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets.

Hi, sorry about that. Sorry, I was on mute. The first question on NUMECA acquisition. I know it's pending. But maybe can you speak to what is so attractive about that business? I know CFD is a multi-physics part of the market. And when you consider make versus buy there, what factors went into acquiring versus building in?

Anirudh, do you want to take this one?

Yes, definitely. That's a good question. We are excited about our move into system analysis, which is driven by our expertise in computational software and numerical mathematical solvers. We have a lot of expertise organically, as we saw in the development of Clarity, which is a 3D solver generating good results. Second, we are excited about the customer synergy; many of our customers are asking for system analysis capability. The question then becomes whether to organically develop or to acquire. We looked at the space. CFD is a very critical area and one of the largest market segments with vertical applications, and NUMECA has very good technology and more than 450 customers. We are pleased to welcome them to Cadence with this pending acquisition. I think that can be used as a basis to expand further in R&D with our computational software strengths, and expand with our customer base. So we are very happy to bring their expertise in CFD to expand into this area.

Okay, and then my quick follow up with this is I think you mentioned that it was a 3x TAM expansion with acquisition in the CFD. Does that 3x TAM expansion also include other physics like structural, or is that just CFD alone? Thank you.

So in terms of system analysis that's a pretty big segment, and it's about $6 billion we estimate and it is growing rapidly. Clarity and Celsius address about $800 million in the EM and thermal space. CFD is about $1.6 billion, so CFD triples our TAM from about $800 million to about $2.4 billion.

Next question comes from a line of Jason Ader from JPMorgan.

Great. Thanks for taking my questions, guys. The first question is on the 175 Cloud customers, what does that mix in terms of systems versus semiconductor companies look like?

Yes, we don't have a breakdown on that. Our solutions provide flexibility and different usage models, either Cadence-managed or customer-managed. Overall both semiconductor and system companies are strong for us in the cloud.

Okay, and then, John, you mentioned that you're not expecting China to be as active in upfront revenue in 2021. So, any particular reason? I mean, was it politically driven, why that particular geography had a bigger mix of hardware in IP in 2020?

When we have more hardware in any one quarter in any one region, you're going to have a higher mix of upfront revenue in that region in that quarter. We saw that with a strong Q3 in functional verification and a lot of that strength was within China. When I looked for signs of a pull-in into 2021, and to try and figure out whether there was some acceleration of purchasing, or whether customers were just trying to get hardware delivered earlier because of the pandemic, the pipeline for 2021 is very strong. When I compared it to what was different about the second half of 2020 in China, I noticed that because of that hardware, we had a higher mix of upfront revenue in the region than we would normally see. I'm not sure if that's sustainable. It looks like we're off to a strong start in Q1, but for purposes of determining an outlook for 2021, I assumed a return to our usual recurring revenue mix, which could prove to be conservative for the second half. We'll update our outlook when we have increased visibility into the second half.

Your next question comes from a line of Joe Vruwink from Baird.

Great. Hi, everyone. John, you've been referring to the tables in the release. I'm interested in the one that breaks down three year CAGR adjusted for the extra week by product group. If you think into 2021 and again, just adjusting for the week comparison, would you expect similar dynamics between the product segments where IP and system design should remain the fastest growers? Or are there any new developments at a product level to consider as 2021 goes on that might influence some of the trend we've seen?

Good question. We don't guide by individual product category, but if you look at the three year CAGR for 2018-2019-2020, you don't see dramatic year-over-year change, particularly on the three year CAGR view. IP and system design analysis are smaller dollar values so they can grow faster from smaller bases. The amount of innovation and new product releases from our R&D group hasn't slowed down; if anything, it's accelerating through the pandemic. New product announcements will typically start being visible around late March, April.

Okay, great. And then this next question might be product development related, but because if I heard Anirudh correctly, systems design is maybe a $6 billion total opportunity. Given the solvers you introduced or the new CFD being acquired, you're up to $2.4 billion. Are there other categories or additional things that you have in mind that we might expect you to grow into over the next few years?

Yes, that's a good point. We are building out a multi-physics platform. CFD is a large part of that market. We started with finite element and electromagnetics and now CFD. There are commonalities across these areas, and it presents opportunities to expand. We'll systematically expand into additional areas when it makes sense, but EM and CFD already represent a large market.

Your next question comes from a line of John Pitzer from Credit Suisse.

Yes. Good afternoon, guys. Thanks for taking my questions. Congrats on the solid results. John, as you rightfully pointed out in your preamble, if you adjust for the extra week and some of the unexpected revenue in 2020, your initial guide for 2021 is already embedding sort of double digit growth. I know you said that it's too early to say if that's the new norm, but I'm kind of curious what are you looking at to be able to make that call that this might be the new normalized growth rate and Lip-Bu, as you talk about potentially a double digit secular growth rate, what do you think is driving that? Is that specific to Cadence and your strategy? Is it core EDA customers? Is it proliferation of customers into non-traditional areas like hyperscale systems and autos? Could you give us a little bit of help on that?

I can take the first part and then I'll pass to Lip-Bu. Most of our revenue is software and most of it's recurring revenue; we expect recurring revenue to make up 85% to 90% of our revenue for the year. So it's very predictable in the near term, particularly the first half where we have visibility into the pipeline and upfront business. The challenge for the second half is the tough comps from the second half of 2020. I don't have the visibility into upfront pipeline for Q3 and Q4 yet, so the second half outlook is more conservative until we see more visibility.

Let me describe why we see the opportunity. There is a renaissance in semiconductors with several generational waves happening at the same time: AI, machine learning, data analytics, 5G, and cloud infrastructure changes because of massive data. This fuels design activity not just from traditional semiconductor players but also from system companies and industrial companies moving into AI/ML. Cadence's Intelligent System Design strategy ties in from design excellence to system innovation and pervasive intelligence. We are well positioned to capture these opportunities.

And then my second question is, when you look at China's region from Q4 of 2019 to the back half of last year, it almost doubled as a percent of revenue. John, you clearly talked about potentially some one-time items that came in the back half of the year that you're not embedding in the guide for 2021. I'm just curious as we think about China currently at about 17% of revenue, what's kind of core embedded as a percent of revenue in your 2021 guide realizing that that's subject to change. And if you think longer term with China's aspiration, is this about the right level as a percent of revenue? Or would you expect this on a secular basis to continue to grow over time?

Again, I wouldn't focus too heavily on any one quarter. 2020 was a strange year with the pandemic and the extra week in Q4. You'll see Q3 strength in functional verification and Q4 where software businesses performed well. We are very pleased with growth in China and the strength looks like it's continuing into Q1; pipeline is strong for the first half. I wanted to be conservative on the second half until I have better visibility into second half upfront revenue pipeline.

Your next question comes from a line of Tom Diffely of D.A. Davidson.

Yes. Good afternoon. Maybe first just a clarification for John. When you look at your expectations for 8% revenue growth and 8% OpEx growth and the lack of leverage there, did you say that was primarily due to just NUMECA acquisition increased cost?

No, it's not primarily due to the NUMECA acquisition. Our headcount is up 8% and we're investing heavily in hiring in 2021. NUMECA will come into the mix, expected in Q1 and the remainder of the year. Merit increases will hit in July, so you'll see a slight uptick in expense in Q3 and Q4. We initiated a restructuring plan in Q4 2020 to optimize infrastructure spend. In 2021, compared to 2020, we're spending more on people and less on places, which is driving some of the margin profile.

Okay, that's very helpful. And then follow up for Lip-Bu, when you look at the cloud, you talked about 175 customers, what do you think the long-term adoption is for EDA with the cloud and do you think some of your really large customers will move the majority to the cloud at some point? And if they do, what does that do to your cost structure?

Very good question. This is still early stage but we are encouraged by 175 customers. For system analysis we can be cloud native starting from scratch; some EDA tools are in different stages of moving to cloud native. The goal is to drive productivity and efficiency for our customers. Partnerships with hyperscalers, infrastructure providers, and foundry partners are critical. We have small, medium, and large customers embracing cloud. With cloud you have scalable compute resources which can drive performance and productivity significantly. We're in the early stages but encouraged and will continue to grow cloud adoption while working closely with hyperscalers and foundry partners to support customers' needs.

Your next question comes from a line of Gal Munda from Berenberg Capital.

Hi, thanks for taking my question. The first one, I just wanted to follow-up briefly on NUMECA and more generally on your ambitions within the mechanical simulation space. If you think about the convergence that's happening with NUMECA, you now have CFD and finite element analysis as well. How far do you think your portfolio needs to be based on what you have to be able to take it where you want it to be in R&D terms versus potentially doing more tuck-ins in the CFD/CAE space?

Yes, that's a good question. This move is driven by three factors: our strength in computational software, our customers asking for more system analysis capabilities, and the overall need for simulation. We are still in the early innings but feel confident about this space as demonstrated by our results in Clarity and other products. CFD is an important and large segment with many vertical applications. We're patient and will continue building out this platform and providing best-in-class solutions to customers.

Makes sense. Thank you. And then just as a follow-up, maybe just expanding a little bit on the growth drivers of the businesses, Lip-Bu, you mentioned there's Moore's Law-based growth at the leading edge customers, and there is more-than-Moore on the system side. Considering the investments you're making on the system side, can you comment on how 2020 growth corresponded between leading edge and system companies' contributions to your overall growth?

We are well positioned to do both. Hyperscale, mobile, and others drive Moore's Law activity — we have more than 100 projects at 5nm and below and collaborations on 2nm. At the same time, our strengths in custom mixed-signal, analog, and packaging address More-than-Moore needs such as 5G wireless and industrial. Acquisitions like AWR and Integrand support RF and antenna requirements. Both engines are taking off and we are excited to engage with marquee customers.

Next question comes from a line of Rich Valera from Needham.

Thank you. Let me add my congratulations on the rule of 50 last year. Question for Anirudh on system analysis go-to-market: are you selling through the standard sales channel? Do you have any overlay sales or specialized application sales for system analysis? How are you thinking about scaling dedicated system resources as you scale that business?

Thanks, Rich. Go-to-market is critical. For large semiconductor and system companies we operate mostly via direct channels. Allegro, our PCB and packaging business, uses an indirect channel, and we will expand indirect channels for system design analysis as appropriate. Cloud/SaaS channels will serve smaller customers who prefer not to run on-premise. So we envision three channels: direct for big customers, indirect for broader reach, and SaaS for long-tail customers. We're building all three in different stages.

Understood, and thanks for those details. And then John, follow up for you. You're given a backlog reserve number last quarter of $58 million, which I think came down from $70 million originally, and I'm assuming that came down materially in the fourth quarter, can you tell us where that is today?

Yes, Rich. We collected a $26 million windfall in the second half out of that $70 million, but the majority of the balance of the $70 million is lost — many of those customers have closed their doors. I think we're in single digits of millions left that could potentially be recoverable. Right now in my outlook, I'm assuming it's not recoverable. You're talking maybe $9 million to $10 million left over that $70 million that could possibly be recovered, but I'm assuming it doesn't get recovered.

Your final question comes from a line of Jay Vleeschhouwer from Griffin Securities.

Thank you. I'd like to direct both of my questions to Anirudh. First, we've heard for years from EDA companies about ongoing design activity among your customers that remains robust. We've also heard about the shift from general purpose chips to more specialized designs. What we don't often hear about is how customers' design methodology may be evolving, e.g., hierarchical versus flat design approaches. Are there any new methodology trends that might affect your EDA tools or new technologies such as AI spatial or design space exploration? Second, on computational software and data platforms, we see a trend toward unified data platforms for data management. You have multiple stacks for different functional areas; how are you thinking about unifying or moving to a common data platform?

Hey, Jay. Great questions. First, best-in-class products are essential; both best product and a unified platform are important. We built digital implementation and verification with that in mind. There are opportunities to combine tools around a unified data platform and analytics. We're focused on best-in-class products across finite element, electromagnetics, and CFD, and there are opportunities to unify data. In terms of methodologies, one big trend is the move to 3D-IC, which significantly changes methodologies. 3D-IC affects thermal considerations and hierarchical reuse; for example, if you have multiple chips on a package you can reuse designs at higher levels. Cadence is uniquely positioned because of historical strength in analog and packaging, leadership in Innovus for advanced node digital, and new strengths in system analysis. So 3D-IC integration is a significant trend and we are well positioned for it.

I will now turn the call over to Mr. Lip-Bu Tan for some closing remarks.

Thank you all for joining us this afternoon. I'm very excited about the growing market opportunities and business momentum going into 2021. Our Intelligent System Design strategy is playing out very nicely, as we benefit from new opportunities in design excellence, system innovation, and pervasive intelligence and an expanded total addressable market. We excelled in the challenging year, thanks to the deep partnership with our customers and our partners and the strong commitment of the outstanding Cadence team. Lastly, on behalf of all our employees and the Board of Directors, we give heartfelt thanks to those on the front lines who continue to work tirelessly in their effort to put this pandemic behind us. Thank you all for joining us this afternoon.

Thank you for participating in today's Cadence Fourth Quarter 2020 Earnings Conference Call. This concludes today's call. You may now disconnect.