Earnings Call Transcript - CDNS Q2 2020

Operator, Operator

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Second Quarter 2020 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, Investor Relations

Thank you, Mike. And I would like to welcome everyone to our second quarter 2020 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 June 12, 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 that actual results may differ materially from those expectations. For information on 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. 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 certain results using 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 July 20, 2020 for the quarter ended June 27, 2020, related financial tables and the CFO commentary are also available on our website. Note that Cadence is continuing to adhere to social distancing practices and therefore we are conducting today’s earnings call from our respective remote locations. Apologies in advance if there are any glitches or handoffs that take a little longer than usual. And now, I will turn the call over to Lip-Bu.

Lip-Bu Tan, Chief Executive Officer

Good afternoon, everyone and thank you for joining us today. I am very pleased to report that in an environment of continued uncertainty, we achieved excellent financial results for the second quarter of 2020. We exceeded our financial outlook on all key metrics, as the team successfully navigated through challenges posed by the pandemic. In view of continuing, strong broad-based demand for our innovative solutions, combined with a robust design environment, we are raising our financial outlook for the year. John will provide more details on our Q3 and annual financial outlook shortly. We are all going through unprecedented times and I hope that you and your families are staying safe and healthy. In this environment, our top priority continues to be ensuring the safety and well-being of our employees, customers and communities. Our employee base has adapted well to working from home, which appears to be the new normal, at least for the foreseeable future. Our R&D and customer deliverables are tracking well, and our sales and application engineering teams continue to engage effectively with our customers. We are increasing our investment in infrastructure and collaboration platforms in order to maintain high level of employee productivity. Fueled by the generational drivers such as 5G, AI and hyperscale computing, the data-centric revolution is accelerating semiconductor demand and design activity. As a result, we are seeing widespread demand for our EDA software, IP and hardware solutions and our Intelligent System Design strategy has us very well-positioned to benefit from these trends. Now, let us look at some of our Design Excellence highlights for the quarter. We have deepened our partnership with Renesas to accelerate their innovation, through a wide-ranging expansion of our EDA and hardware solutions. Our new digital full flow with the innovative iSpatial technology continued its momentum with 10 new full flow wins during the quarter. We expanded our partnership with Micron through a broader proliferation of our EDA solutions, including the deployment of our digital full flow for the development of their next generation products. Cadence collaborated with TSMC and Microsoft, to ensure customers accelerate designs and timing signoff, using Cadence signoff solutions in TSMC technology on Microsoft Azure. Our Cadence Verification Suite delivers the best verification throughput and had several wins across mobile, networking and medical verticals. We deepened our relationship with a leading medical technology company as they expanded usage of our Verification Suite, digital and custom analog solutions. Our Xcelium simulator has been steadily proliferating, with multiple migrations from competitive simulators underway. We had another outstanding hardware quarter, with the compelling value proposition of the integrated Palladium Z1 and Protium X1 combinations being increasingly attractive to customers. The Palladium Z1 emulator with its unique custom chip-based architecture continued to win new customers and significantly expand capacity at existing key customers. Our Protium X1 prototyping platform has ramped strongly based on the differentiated ability to provide very fast bring-up time and high performance. The growth of analog, mixed-signal and RF designs is driving the need for high performance and accurate circuit simulations. Our massively parallel Spectre X circuit simulator continued proliferating at multiple customers like Skyworks and won several competitive displacements, including at a market-shaping hyperscaler. Q2 was an especially strong quarter for our IP business as it again delivered double-digit revenue growth. Our refined strategy of focusing on Star IP at the most advanced nodes continues to pay off. Robust demand continues for high-speed SerDes and DDR IP and Tensilica had particular strength in Hi-Fi True Wireless stereo and vision applications, as well as strong royalties. Our System Innovation segment executed very well, delivering double-digit revenue growth. Several market-shaping customers across multiple verticals have successfully used our 2.5D and 3D IC advanced packaging solutions on production designs. Integration of AWR and Integrand is progressing well with the teams working on developing a comprehensive high-frequency RF platform. Business momentum was strong and AWR added 6 new customers in Q2. The new System Analysis tools continue to gain momentum, with over 125 engagements underway, multiple new wins and expansions at several existing customers. New Clarity customers included a market-shaping hyperscaler and new Celsius customers included ASUSTeK. Now, I would like to take a moment and talk about inequality and racial intolerance. These significant societal issues that have led to heartbreaking events over the past few months are very close to my heart. At Cadence, embracing diversity and fostering inclusion are key tenets of our culture. We believe that by being open to different views and perspectives, we learn from one another and together we become stronger as one team. We have several related initiatives underway, including training, pay equity, community donations, recruiting and career advancement support, among others. We are committed to treating each other with respect and dignity and are proud to take a stand against racism, prejudice, intolerance and violence. Now, I will turn it over to John.

John Wall, Senior Vice President and Chief Financial Officer

Thanks, Lip-Bu and good afternoon, everyone. I am pleased with our results for Q2 and updated outlook for fiscal 2020. For Q2, we exceeded all of our key financial metrics for the quarter. Back in April, we were expecting that some Q2 revenue might shift to Q3 in part due to the pandemic related challenges that we thought would delay a number of our Q2 IP deliveries and hardware installations into July and Q3. On reflection, business was stronger than we expected and our team adapted well to the delivery challenges presented by the COVID-19 pandemic. Ultimately, those anticipated delivery challenges did not have the impact to our Q2 results that we originally feared. As with last quarter, our recurring revenue model gives us strong visibility into revenue for the remainder of fiscal 2020. Based on our experience in Q2, we are much less concerned about our ability to substantially overcome any hardware and IP delivery challenges caused by the pandemic, and we have factored that experience into our estimate of how much of our second half revenue we expect to record in Q3 and Q4. I will share more on the assumptions embedded in our outlook in a moment, but first let’s go through the key results for the second quarter starting with the P&L. Total revenue was $638 million. Non-GAAP operating margin was approximately 35%. GAAP EPS was $0.47 and non-GAAP EPS was $0.66. Next, turning to the balance sheet and cash flow. Our cash balance was approximately $1.2 billion, while the principal value of debt outstanding was $700 million. Operating cash flow for Q2 was $345 million. DSOs were 45 days. And during Q2, we repurchased $75 million of Cadence shares. Before I provide our updated outlook for fiscal 2020 and what we expect for Q3, I would like to take a moment to share the assumptions embedded in our outlook. Our outlook continues to assume that the export limitations that exist today for certain customers remain in place for all of 2020. Our outlook also assumes that the COVID-19 pandemic will remain a challenge for the remainder of the year. As a result, we have taken steps to prepare our workforce to work from home for longer and we are anticipating that a number of our smaller customers will experience liquidity challenges that will likely result in some of those customers being unable to meet their contractual payment commitments. We have taken the precaution of pausing revenue recognition on bookings from customers, where we believe there is significant uncertainty surrounding our ability to collect payments. The financial impact of non-payment on those accounts has already been factored into our outlook for the remainder of the year. And with that, our updated outlook for fiscal 2020 is as follows: revenue in the range of $2.585 billion to $2.615 billion, non-GAAP operating margin of approximately 33%, GAAP EPS in the range of $1.84 to $1.90, non-GAAP EPS in the range of $2.50 to $2.56 and we expect operating cash flow to be in the range of $810 to $840 million and we expect to use approximately 50% of our free cash flow to repurchase Cadence shares in 2020. And here is how much of our annual outlook that we currently expect to record in Q3: revenue in the range of $630 million to $650 million; non-GAAP operating margin of approximately 32%; GAAP EPS in the range of $0.49 to $0.51; non-GAAP EPS in the range of $0.59 to $0.61; and we expect to repurchase $75 million of Cadence shares. You will find guidance for additional items as well as further analysis in the CFO commentary available on our website. In summary, Cadence delivered another quarter of strong revenue growth and expanding profitability and we are pleased to raise our outlook for the year. Before the pandemic, Cadence operated from around 50 sites across the globe. We are now effectively operating from a distributed network of more than 8,000 homes. We are blessed to have many strong leaders, located across the world and I am very impressed and thankful for how our employees are not only rising to the challenge, but positively thriving as they remain intensely focused on delivering successful outcomes for our customers and partners. Finally, I would like to close by thanking our customers, partners, and our hardworking employees for all that they do. And I would like to remind them all that their health and safety continues to be our first priority. And with that, operator, we will now take questions.

Operator, Operator

Operator instructions. Your first question comes from Ruben Roy from Benchmark.

Ruben Roy, Analyst (Benchmark)

Hi, thank you for taking my questions and congrats for continuing to perform so well in such challenging times. John, I want to start and just kind of drill into the commentary on these more customers and the liquidity challenges that you are talking about, are these ongoing conversations you are having with customers, have you seen some of this in the numbers that you have reported and guided to for Q3 or is this more sort of anecdotal thinking as you think about the guidance for the full year? Thank you.

John Wall, Senior Vice President and Chief Financial Officer

Thanks, Ruben. Good question. But yes, I mean, as we said, business was stronger than expected, particularly in hardware and IP. And last quarter, we were concerned that compliance with some containment measures around the globe would impact everyone’s day-to-day operations. And we expected those measures to impact us in three ways. We thought if our customers’ offices remain closed that would impact us on our ability to install hardware. On the IP side, access to our own IP labs would impact and we were fearful that that would impact our ability to complete delivery in our IP. And then the other thing we were concerned about was that if the shelter-in-place restrictions were prolonged we were concerned that the pandemic would disrupt the normal business and operations of many of our smaller customers and that would impact their liquidity. And ultimately, we were preparing for collections challenges on those accounts in the event that some of those customers were unable to pay us for what they purchased. On reflection, as I said in the script, with Q2 behind us business was stronger than expected. Our team adapted well to the delivery challenges. The issue though on collections from smaller customers remains that the potential collections impact is a concern. We received a number of requests from customers to delay their payments to us. We have chosen to continue to provide services to those customers and some will eventually get back on track and pay us, but many, despite their and our best efforts, may not be able to get back on track and we will likely fail to collect on a number of accounts. And our best estimate of that is we have basically reserved for about $17 million worth of bookings. Right now, as of the end of Q2 to put that in context, over the 3-year period from 2017 to 2019, we didn’t collect on $36 million worth of orders. So we paused revenue now on $17 million worth of bookings. So we are covered for twice the experience we had over the previous 3 years.

Ruben Roy, Analyst (Benchmark)

Very helpful detail, John. I guess just for a quick follow-up, I was looking at the core IC design tool performance in the June quarter and down a little bit sequentially on the digital side, up a little bit on the custom IC side, it would seem that maybe that’s where you are seeing some of the near term issues. Is that the way to read into what is going on with those line items?

John Wall, Senior Vice President and Chief Financial Officer

Yes, absolutely, the impact on collections, particularly from smaller customers, is more heavily slanted towards our software business. So we paused revenue on a number of contracts where we think collections are challenging and that impacts the software business more than it would say hardware or IP in many cases. On the hardware side, because we get revenue upfront, we expect payment upfront, so you don’t have as much credit exposure there. On the IP side, much of our IP revenue is coming from royalties. And royalties are typically with customers, like our top 100 customers, which are very good credit customers, they have strong balance sheets, but this is really isolated to that group of customers that are outside our top 100. And it’s kind of the smaller customers.

Ruben Roy, Analyst (Benchmark)

Got it, okay. That’s very helpful. Thanks.

Operator, Operator

Your next question comes from Tom Diffely from D.A. Davidson. Your line is open.

Tom Diffely, Analyst (D.A. Davidson)

Yes, good afternoon. I guess first John just following up on the last question, is there a geographic bend to the small customers that you are worried about?

John Wall, Senior Vice President and Chief Financial Officer

Sorry, can you repeat that? Tom? I didn’t quite get that.

Tom Diffely, Analyst (D.A. Davidson)

Sorry. Yes. Is there a geographic bend towards the customers that you were concerned about, the smaller customers, or is it broad based across the world?

John Wall, Senior Vice President and Chief Financial Officer

No, not particularly. I mean, if there’s any particular demographic that’s been hit, it is smaller customers; it is right across the globe, but very much in smaller customers, and probably mostly in software over IP or hardware.

Tom Diffely, Analyst (D.A. Davidson)

Okay, sounds like your business is fairly strong across the board. But I was wondering if you are seeing any kind of bifurcation between your consumer-driven customers and the high performance compute customers that you seemingly are much stronger with today?

John Wall, Senior Vice President and Chief Financial Officer

I think certainly on the royalty side, that revenue is related to the consumer electronics market mainly, and we are seeing strength there. Royalties for the first half are about 25% higher than the first half of 2019. It is hard to break it down cleanly in terms of where their strength lies in different parts of the business. I think it is kind of across the board. We have seen strength across the board. The challenge in the credit side is quite random in that smaller pool of customers.

Lip-Bu Tan, Chief Executive Officer

And then to add on, I think clearly, regarding data center, cloud and hyperscale, we see very strong demand because with people working from home there is a lot of scaling in infrastructure. We see very strong demand in that area as well.

Tom Diffely, Analyst (D.A. Davidson)

Okay. Thank you, Lip-Bu.

Operator, Operator

Your next question comes from John Pitzer from Credit Suisse.

John Pitzer, Analyst (Credit Suisse)

Yes, good afternoon guys. Thanks for letting me ask the questions. John, maybe different sides of the same coin, but why don’t you just help me understand as you look into the September quarter, what’s driving op margins down sequentially? I would have thought that perhaps in the current environment, there were some costs that you might have to incur around COVID mitigation actions that actually might dissipate as we go into the back half of the year. And I guess similarly, over the last several years, the operating cash flow has been more front-end loaded first half weighted than second half, which relative to your guide feels like second half is only about 30% of the operating cash flow. I am wondering what might be driving that — maybe it’s the same thing, maybe it’s different?

John Wall, Senior Vice President and Chief Financial Officer

Yes, John, good question. Let me unpack it a little bit. In terms of the operating margin profile, when we gave guidance for Q2 we thought some revenue might shift from Q2 into Q3. Our actual experience was a net shift the other way. We had expected about $30 million to push from Q2 into Q3. As it happened, about $10 million moved from Q3 into Q2 — there is about $10 million of deliveries that we couldn’t get done in Q2 that will now record in Q3, but we had approximately $20 million that came the other direction. That was customers who wanted to accelerate installations and deliveries. Also, because of uncertainty in Q2, we held up some hiring offers until late in the quarter. Once we got comfortable with revenue, we released offers and hiring accelerated into the end of the quarter and has continued at the start of this quarter. So, that likely caused some expenses to shift from Q2 to Q3 and some revenue to shift from Q3 to Q2, resulting in a 35% operating margin in Q2 versus our prior guidance of around 30%, and Q3 at 32%. Regarding operating cash flow, last quarter we deliberately closed some strategic business early in the year and got paid for that business. You’ve seen an uptick in cash and deferred revenue as a result, and you may see deferred revenue burn down from this level through the end of the year because we deliberately aimed to get paid early.

John Pitzer, Analyst (Credit Suisse)

That’s helpful. And then as my follow-up, it’s nice to see that China, as a percent of revenue, has remained fairly stable over the last several quarters at kind of low double-digits. That doesn’t prevent us from still worrying about the concern that perhaps there is some buy forward going on in China given U.S.-China relations and how critical you are to the overall semiconductor supply chain in China. Wondering if you could just handicap what you are seeing in China today? Is there a risk that there is pull forward and then how do you try to manage through some of the ebbs and flows of the tensions between the governments of the U.S. and China?

Lip-Bu Tan, Chief Executive Officer

So, I think overall our China business has remained quite good. In Q1 and Q2, hardware and IP, which are more upfront revenue, helped. We provide IP globally to our customers and we comply with U.S. regulations. The situation is fluid and we are closely monitoring it, but so far we have built the uncertainty into our estimates. Overall, we are confident and China remains a strong market for us. Quarter-to-quarter it varies, but overall it is a strong business in Asia and China for us.

John Pitzer, Analyst (Credit Suisse)

Perfect. Thanks, guys. Congratulations on the strong results.

Lip-Bu Tan, Chief Executive Officer

Thank you.

John Wall, Senior Vice President and Chief Financial Officer

Thanks.

Operator, Operator

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

Mitch Steves, Analyst (RBC Capital Markets)

Hey, guys. Thanks for taking my questions. So the first one I kind of want to drill on just kind of the geographic movements here, it looks like the U.S. is up pretty significantly. So, I know you guys are concerned about kind of what I assume are the smaller players not being able to make payments and kind of rolling off some money for you guys there. But is there any chance or maybe I am thinking about this incorrectly, any chance that basically the larger players end up investing more, because what we picked up is that a lot of these larger companies are actually pushing forward on the tech front with chip design. So when does that actually offset and actually be a benefit to you guys, if the larger customers end up spending more in EDA tools, while the smaller ones kind of get pushed off to the side?

Lip-Bu Tan, Chief Executive Officer

I think geographically overall we see strong design activity and we don’t see any slowdown. Silicon companies like Renesas and market-shaping customers are doubling down on R&D driven by generational drivers like AI, 5G, hyperscale and the data-centric revolution. These market-shaping customers are leaders in the industry and this is a golden opportunity to double or triple down in R&D for next-generation products. The design activity does not slow down; the big customers are really driving R&D and we are delighted to be their trusted partner.

John Wall, Senior Vice President and Chief Financial Officer

And Mitch, just to add, the fact that we raised the year despite some collection challenges illustrates that larger customers are investing more in R&D.

Mitch Steves, Analyst (RBC Capital Markets)

Got it. Understood. And then just kind of switching gears if you hear much about Clarity, it’s been sort of maybe two quarters or so since you highlighted it, so you guys are talking more about COVID and core EDA, can you maybe provide an update on what is going on with the Clarity products or the customer wins, backlog interest, anything like that? I realize that the environment is a little bit strange, but I think it will be interesting to hear what’s happening with the Clarity product front.

John Wall, Senior Vice President and Chief Financial Officer

Happy to share. Clarity has strong momentum. In markets where it addresses about a $700 million opportunity, customers see up to 10x performance improvements while maintaining accuracy. We highlighted a market-shaping hyperscaler win. We have over 125 engagements with Clarity and Celsius combined, multiple new wins, and importantly expansions at existing customers. There is strong validation from customers expanding usage.

Mitch Steves, Analyst (RBC Capital Markets)

Okay, great. Just one really small one: should bookings continue to go up this year or are they going to be flattish? I realize last year it was up 20%. This year it’s been pretty stable around 37 for a couple quarters and just trying to understand what we should expect from your backlog?

Lip-Bu Tan, Chief Executive Officer

Sorry, your question again?

Mitch Steves, Analyst (RBC Capital Markets)

Just really small on the backlog you guys provide on a quarterly basis, should we expect that to be more stable or go up because last year it was up 20%? This year it’s pretty stable around 37 for a couple quarters and I’m trying to understand what to expect from your backlog?

John Wall, Senior Vice President and Chief Financial Officer

We don’t guide bookings. Given that we closed some business early in the year deliberately, I’m not surprised our RPOs were flat from Q1 to Q2. I wouldn’t expect a dramatic change between now and the end of the year.

Mitch Steves, Analyst (RBC Capital Markets)

Okay, perfect. Thank you very much.

John Wall, Senior Vice President and Chief Financial Officer

Thank you.

Operator, Operator

Your next question comes from Gary Mobley from Wells Fargo.

Gary Mobley, Analyst (Wells Fargo)

Hey, guys. Thanks for taking my question. Congrats on a strong quarter. I wanted to start out by digging a little bit deeper into the China conversation. And so I know we have this new direct product rule as part of the newest export restrictions. And I know you guys have been working hard to try to answer some of the topics on it and perhaps don’t have 100% clarity as we see here today, but maybe if you can give us an update, as you see it today, how it impacts maybe your fourth quarter or even looking at fiscal year 2021 and beyond?

Lip-Bu Tan, Chief Executive Officer

I think overall our outlook included our estimates on the impact of the trade restrictions. We are monitoring carefully, complying with all requirements and ensuring our customers are not committing to military end-use in ways that would violate the rules. It’s more work and we are working through that now. Compliance is our number one priority and supporting the customer is equally important. We have made sure we are complying with all the requirements.

John Wall, Senior Vice President and Chief Financial Officer

Gary, any material impact of the military end-use or direct product rules is already included in our guidance.

Gary Mobley, Analyst (Wells Fargo)

Okay, but it's my understanding it doesn't go into effect until September so not really much of an impact in fiscal year 2020, right?

John Wall, Senior Vice President and Chief Financial Officer

Again, we have reviewed potential impact on our business and included everything we know today into our guidance for the remainder of the year.

Gary Mobley, Analyst (Wells Fargo)

Okay. As my follow up, I wanted to shift gears and talk about setups for fiscal year 2021. I realize you are not going to give any sort of preliminary revenue guidance for the year. But if I'm not mistaken, the extra week and some acquisitions may be contributing to roughly what, 200 basis points of revenue growth this year. And so when we get on the flipside of this year, should we think about an equal amount of perhaps a headwind looking into next year?

John Wall, Senior Vice President and Chief Financial Officer

Yes, the 53rd week definitely needs to be a consideration when you think about next year, Gary. Last quarter I said the extra week impact would be about $40 million; I would say it’s probably closer to $43 million now for revenue. On the expense side, on a non-GAAP basis, maybe about $33 million of expense. When comparing a 53-week year to a 52-week year you should adjust for that, but we are not guiding 2021.

Gary Mobley, Analyst (Wells Fargo)

Got it. Alright. Thank you guys.

Operator, Operator

Your next question comes from Rich Valera from Needham.

Rich Valera, Analyst (Needham)

Thank you. Let me add my congratulations to the Cadence team for another strong quarter in tough conditions. So John, just wanted to follow up on the questions around the strength in the quarter, which I understand was driven by less than feared dislocation in the hardware and IP businesses. Is that also what accounted for the increase in your overall annual guide or are there some other product areas that contributed to the increase in the full year guide?

John Wall, Senior Vice President and Chief Financial Officer

We were pleased with IP performance which was strong; functional verification products showed strength. We had an outstanding hardware quarter — the integrated value proposition of Z1 and X1 drove customer interest. The Palladium Z1 emulator is winning customers and expanding capacity, and Protium X1 ramped strongly. Cross-selling between Z1 and X1 was apparent in Q2. Early weeks of July show that strength continuing. When I gave a range for Q3, that partly reflected some shifting of revenue between quarters; overall Q3 is strong and we included that in guidance.

Rich Valera, Analyst (Needham)

That’s very helpful. And for my follow-up, I wanted to ask another one on the system analysis products, you have been giving a quarterly wins number, I think it was 30 plus last quarter and you seem to maybe have pivoted towards an engagement number. Is there an equivalent engagement number from Q1 that we could use to compare to how that’s expanded over the last quarter and will you at some point maybe revert to giving out wins as opposed to engagements?

Lip-Bu Tan, Chief Executive Officer

This is a very strong product offering for us. For Clarity and Celsius we have highlighted wins and engagements; overall we have over 125 engagements. Many of these are new wins and expansions at existing customers, and customers are seeing the differentiated value. We are focused on continuing to drive differentiation and engage with leading customers so they can see the value and expand usage.

Rich Valera, Analyst (Needham)

Understood. And then I have a quick follow-up. One of the presentations today from Cadence at the virtual DAC was on cloud deployments and the increasing demand for cloud deployments. When we see other software businesses transitioning from on-premise to cloud or having both, there is often a significant uplift in revenue from customers that have cloud deployments versus on-premise. Do you see a similar uplift in revenue associated with cloud deployments relative to on-premise?

Lip-Bu Tan, Chief Executive Officer

The cloud solution for EDA is important. We want to provide flexibility for different usage models, either customer-managed or Cadence-managed, and include the hardware platform when appropriate. The cloud offers scalability and productivity benefits; with more compute you can improve throughput and cost efficiency. We are collaborating with TSMC and Microsoft to enable signoff workflows on Azure, which gives customers flexibility to optimize throughput and cost. We are moving tools to be cloud-optimized and some new products like our System Analysis tools are developed as cloud-native, making it easier for customers to adopt the cloud. Adoption is increasing; over 25 customers have adopted our cloud solutions so far.

Rich Valera, Analyst (Needham)

Great. Thank you.

Operator, Operator

Your next question comes from Jason Celino from KeyBanc.

Jason Celino, Analyst (KeyBanc)

Hi everyone. Thanks for fitting me in. Just one for me, most of the reference customers that you have announced for Clarity have been semiconductor companies and other electronics ecosystem companies, but today you mentioned a new hyperscaler win. Was this hyperscaler already a Cadence customer and they expanded usage for Clarity, and are some of these expansions adding the Celsius product as well?

Lip-Bu Tan, Chief Executive Officer

Clarity is a new product for which we are adding new customers. Any new customer we highlight is new to that product for us. The hyperscaler win was a new Clarity customer — this hyperscaler was new for Clarity though not necessarily new to Cadence overall. We also highlighted ASUSTeK as a new Celsius customer. The important point is many customers are expanding product usage, which validates product value.

John Wall, Senior Vice President and Chief Financial Officer

To clarify, one of our new Clarity customers this quarter included a market-shaping hyperscaler; Clarity was new to that customer.

Jason Celino, Analyst (KeyBanc)

Okay. And then, one quick follow-up: is this hyperscaler using Clarity to supplement their simulation processes or adopting it for a broader set of electromagnetic needs?

Lip-Bu Tan, Chief Executive Officer

It is an existing customer expanding usage; they are continuing to expand the amount of product usage.

Jason Celino, Analyst (KeyBanc)

Okay, great. Thanks. Appreciate the time.

John Wall, Senior Vice President and Chief Financial Officer

Thank you.

Operator, Operator

Our final question comes from Adam Gonzalez from Bank of America.

Adam Gonzalez, Analyst (Bank of America)

Hi, guys. Congrats on the solid results and thanks for squeezing me in. Just a minor clarification question: on the collection issue that you are experiencing with some of your smaller customers, is this concentrated among customers that have a particular end market or application exposure or is it more broad-based?

John Wall, Senior Vice President and Chief Financial Officer

It’s more broad-based, Adam. It’s broad-based across the customer base and across the globe, but the consistent factor is that it’s typically smaller orders and smaller customers. We continue to provide services to those customers even though in some cases we may not be paid. We have paused revenue on about $17 million of bookings where collection is uncertain. It’s likely we won’t get paid on some of those, but because we paused revenue there won’t be a P&L impact. We will continue to help those customers as long as possible, and hopefully we won’t lose good companies because of the pandemic.

Adam Gonzalez, Analyst (Bank of America)

Got it. That’s helpful. Thank you. And then my second question — apologies if this was asked earlier but the implied second half revenue guidance split between Q3 and Q4 seems to be heavily favored towards Q4. Is that really just the extra week in the fiscal year that’s driving that?

John Wall, Senior Vice President and Chief Financial Officer

Yes, the extra week is a big part of that. I’m estimating, learning from Q2, what we expect to record in Q3 versus Q4. That’s why we have a slightly wider range for Q3, 630 to 650. If we see an experience similar to Q2 where revenue shifts into Q2, we may see some shift between Q3 and Q4, but the remainder of the year is solid; it’s just our best guess right now as to what falls into Q3 versus Q4.

Adam Gonzalez, Analyst (Bank of America)

Got it. Helpful. Thanks so much.

Operator, Operator

I will now turn the call back to Lip-Bu Tan for closing remarks.

Lip-Bu Tan, Chief Executive Officer

Thank you all for joining us this afternoon. 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. I am very impressed and proud of the dedication and commitment shown by our employees to continue innovating and delighting our customers, especially during these uncertain times. We are all in this together and I am convinced that we will collectively come out of this unfortunate situation stronger as a company and as a community. And lastly, on behalf of all our employees and our Board of Directors, we want to give our heartfelt thanks to the extremely brave and courageous healthcare workers and others on the frontlines. They continue to work tirelessly to fight this pandemic. Thank you all for joining us this afternoon.

Operator, Operator

Thank you for participating in today’s Cadence second quarter 2020 earnings conference call. This concludes today’s call. You may now disconnect.