Cadence Design Systems at the dawn of the era of AI (artificial intelligence)
As anyone who knows me knows it doesn’t take much to get me excited and I am getting very excited about artificial intelligence (AI). The term has been bandied about so much that we are already becoming blasé about it but maybe it really is going to be huge and life changing for Homo Sapiens. It seems to me that it easily could be.
Before I talk more about that there is another important thing happening in the world. Technology companies, not Cadence as it happens, which overhired during the lockdown, e-commerce, work from home, technology boom are laying off people even faster than they hired them. Some 154,000 people were laid off in 2022 and that number is already fast being approached in 2023.
This is classic late stage bear market behaviour. Companies cut their costs dramatically to meet lower demand or lower than expected growth in demand which means that eventually when demand finally recovers which it always does that higher sales across a much reduced cost base lead to an explosion in profits. It is important to be aware that all these layoffs are bullish, not bearish and probably not even too alarming for the people being laid off because they have good skills and will soon find other jobs.
Back to AI, which involves things like machine learning and the ability of computers and anything with a chip inside (Internet of Things) to recognise and use natural language. I saw a film, I think it was called She, where a guy fell in love with the seductively voiced virtual female created by his computer. I have just fallen in love with a female character created in a book so if she started talking to me and really engaging with me I am sure I would be just as susceptible as this guy and it’s coming; that and many other marvels.
Think of this in 3G terms of which incidentally CDNS is a perfect example. We have a company with great growth and a great chart; that would be enough for many people to want to buy the shares but now we add a really exciting story. In an interview one of their top executives said that increasingly the company is about software and not just EDA or electronic design automation, the activity for which it is normally characterised.
He said that systems on chips and everything that goes into creating them is becoming ever more important, so much so that more and more companies don’t buy in chips but design and make their own thus keeping this vital intellectual property (IP) in house. In order to do that they need Cadence Design Systems, which he said was involved somewhere along the line with almost every chip on the planet.
That sounds like a fantastic story and makes me very excited about the prospects for Cadence Design Systems. which also has a wonderful chart. I am presently reading a white paper published on their web site to try to understand a little more about what they do. It is more about an impression than anything else because most of what they say is way over my head. I can barely operate the remote for my smart TV, which my six year old grandson does with ease.
It is almost amusing reading this white paper; it is so baffling. Below is an example.
One particular high-value area is solving large numbers of simultaneous linear equations, such as Maxwell’s equations for electromagnetic analysis. The algorithms involve partitioning of very large, sparse matrices across CPU cores, and then solving each sub-matrix individually while managing just the right amount of communication among the CPU cores. 3D analysis, finite element analysis, circuit simulation, signal integrity, and even the training of neural networks all use sparse matrices. Techniques to efficiently parallelize and solve sparse matrices across many CPU cores are a core competency of computational software organizations.White paper, CDNS web site
I guess part of the point that the company is trying to make is why their customers need their help. Convinced me!
So what is the bottom line of all this.
Cadence has evolved to address key industry changes and has formulated its Intelligent System DesignTM strategy for delivering world-class computational software capabilities for the design of intelligent electronic systems. We’ve created a culture of innovation in computational software—hiring top talent, nurturing growth, inspiring creativity, and rewarding results—to realize our vision.
Our goal is to empower engineers at semiconductor and systems companies to create innovative, intelligent, and highly differentiated electronic products that transform the world. We enable designers to unleash their imagination by addressing the complex computing demands of artificial intelligence, 5G, and high-performance computing, resulting in pervasive intelligence across autonomous vehicles, industrial IoT, advanced data centers, health, aerospace, and more.White paper
I think the above qualifies as an important ‘something new’ relative to what the company was doing before.
The business is in great shape.
I am pleased to report that Cadence delivered record results for 2022 as we exceeded our guidance yet again, achieving 19pc revenue growth and over 40pc non-GAAP operating margin. Cadence’s innovative solutions are essential and especially relevant in the current environment, enabling customers to achieve their increasingly challenging design goals.
Secular megatrends such as 5G, hyperscale computing and AI/ML that are driving sustained long-term semiconductor and system growth remain unchanged. Amid ongoing macroeconomic uncertainty, companies continue making significant investment in their next-generation products, resulting in robust design activity. We expect our pioneering solutions to continue fuelling broad-based business momentum in 2023, driving strong revenue growth and profitability.Q4 2022, 13 February 2023
AI is increasingly critical to what is happening.
Our Intelligent System Design strategy greatly broadens our total available market and leading end-to-end EDA IP, hardware and an expanding system analysis portfolio uniquely position us to capture a wide range of market opportunities. During the year, we introduced 9 significant innovative products across all of our business groups and we expect these to be key drivers of our future growth. The age of AI is upon us and Cadence provides several groundbreaking computational software-driven generative AI technologies at both the chip and system level unified by JedAI, our differentiated big data analytics platform. Our customers are seeing dramatic results, with these solutions delivering highly optimized designs and unprecedented efficiency gains. Additionally, by automating repetitive tasks and producing new ideas, our generative AI frees up engineers to focus on more advanced high-value activities, opening up more opportunities for innovation.Q4 2022, 13 February 2023
It doesn’t get much more exciting.
In closing, we are pleased with our strong execution in 2022 and are thrilled by the business momentum and market opportunities ahead of us in 2023.Q4 2022, 13 February 2023
In relation to AI below is something CEO, Anirudh Devgan, said in answer to a question at the analysts’ meeting.
So taken together, I believe that we have the most comprehensive AI portfolio. And we have always focused AI on optimisation, which is now called generative AI. We have been working on it for 5 years. I think the products introduced were about 2 years ago. And even for Cerebrus, I mentioned in my prepared remarks, several leading companies like Intel, NVIDIA, Samsung, Renesas, they all talked about the results they are seeing. We have more than 160 designs that we are tracking on Cerebrus. And if you include Verisium and optimality, we have hundreds of designs being done by AI. I believe in the next few years, almost all designs will have some AI component and that is driving the growth that you’re seeing in our business and the outlook.Q4 2022, 13 February 2023
While I’m writing this we still have an unfolding banking crisis with Credit Suisse the third bank to turn out to be in difficulties. Their shares have almost totally collapsed. The corporate sector is mostly in great financial shape with strong balance sheets. CDNS has no debt and is rapidly piling up cash.
In the light of what is happening you could say that the Nasdaq 100 is holding up well and behaving in a way consistent with the idea that the stock market is bottoming out. Bank shares may look dodgy but then I have not been in favour of investing in old school banks for a very long time. They still seem like dinosaurs stumbling across the plains of a fast-changing world.
Cadence Design Systems CDNS. Buy @ $200.50