U.S. Markets closed

Cadence Design Systems Inc (CDNS) Q1 2019 Earnings Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Cadence Design Systems Inc (NASDAQ: CDNS)
Q1 2019 Earnings Call
April 22, 2019 , 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Sheryl 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, Investor Relations

Thank you, Sheryl, 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 31, 2019, related financial tables and the CFO commentary are also available on our website.

And now I'll turn the call over to Lip-Bu.

Lip-Bu Tan -- Chief Executive Officer

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 lines. 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 continue 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 start ups and digital transformation of industries such as automotive, aerospace, medical and other industry -- industrial applications.

Our business is mission critical to silicon development, which is cornerstone of all 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 intelligence 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 know-how 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 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 and estimated $4.5 billion total addressable market opportunity. By introducing our first product, Clarity 3D Solver, our 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 use state-of-the-art distributed multi-processing 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 into -- Digital and Signoff business achieved 12% year-over-year revenue growth, driven by strong adoption by new customers, and perforation of by existing customers at advanced nodes. Today more than 100, 7-nanometer designs have tape-out using our digital solutions. And multiple 5 nanometer designs are under way using our solution 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 earlier 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 make repeat orders.

Our IP business also showed double-digit growth year-over-year. Tensilica continue to win sockets for machine learning, vision and audio applications in the automotive consumer and civilian segments, adding eight new customers in the quarter. In the design IP space, our 112-gig long-reach SerDes IP was adopted by a marquee semiconductor company and we launched the industry first complete silicon-proven LPDDR5 silicon.

As I had to say earlier, our strategy broaden 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 has supported a shorten product development cycle and advanced notes 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 customer with very compelling productivity, flexibility and scalability benefits. CloudBurst enables hybrid cloud environments, and its idea 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 chip.

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

John Wall -- Senior Vice President and Chief Financial Officer

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, a 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. DSO were 42 days. And during Q1, we repurchased $81 million of Cadence shares.

Now we will provide our updated guidance. For Q2, we expect the following results. Revenue in the range of $575 million 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 $0.52 to $0.54.

Our updated guidance for fiscal 2019 is as 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 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 will now take questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Rich Valera of Needham and Company.

Rich Valera -- Needham & Company -- Analyst

(Technical difficulty) interesting comments on your foray into the system analysis market and obviously you started there with -- 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. I'm 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 -- Chief Executive Officer

Yeah, Rich, Lip-Bu here. And we didn't hear the first portion of your question, but I guess it's about the 3D Solver that we announced. And we are delighted and this first product Clarify 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 well in the working on development.

We're excited because couple of things; one, clearly we look at our core competence. The core competency that we have in the computational software and that's what our EDA background from and also our 3D, there are some of our packaging technology that we have that combination that give us a very unique opportunity to really drive in our next-generation disruptive that's why we can claim, up doing a 10-time the performance. And then this is a very cloud-enable 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 then stay-tuned and we're going to have more product coming out. This is our first entry to the system analysis market.

Rich Valera -- Needham & Company -- Analyst

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

Lip-Bu Tan -- Chief Executive Officer

Yeah, I think we're excited about this marquee US semiconductor company, as I mentioned in the last earnings call, is a breakthrough and wide-ranging win. And we are very excited is the early days of partnering with this customer to expand the breadth of our engagement, it's across all of our different tools and we are excited about it. And clearly everything we know is already built into our guidance for that year. But overall clearly to support a very important customer, where (inaudible) to be our AE and R&D support and to really perforate across the requirements.

Rich Valera -- Needham & Company -- Analyst

Understood. Okay thank you, Lip-Bu.

Lip-Bu Tan -- Chief Executive Officer

Thank you.

Operator

Your next question comes from John Pitzer of Credit Suisse.

John Pitzer -- Credit Suisse -- Analyst

Yes guys, thanks. Let me ask the question. 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 are putting up. I'm just kind of curious to the extent that you guys continue to do better than expected and beaten raise. What do you think it is about your business it's allowing you to buck this trend? Is this just your ability to address non-traditional 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 -- Chief Executive Officer

Yeah, 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 somewhat the slowdown in some segment of the industrial and automotive and others. But we're excited on couple of drivers and especially AI and 5G and autonomous driving and also the industrial edge that something that I'm very passionate about and because we are moving into call it a Big Data environment is all about data and 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 workload have changed so the -- we call it the workload specific more application related and that 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 is new innovation of storage and some of you didn't hear about the NVMe controller, that is aggregation of the storage and because the massive, massive data that you need to be this aggregate, the storage and network.

And on also the other part is the high-speed connectivity that able to scale. And the connectivity speed that require in the hyperscale. So, all this 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 this opportunities.

John Pitzer -- Credit Suisse -- Analyst

That's helpful. And then John, just maybe the follow-up on the op margin guidance both for the fiscal second quarter and the full fiscal year. It's a slight down tick 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? Or, can you talk -- talk about some of the other puts and takes that might have op margins going down throughout the fiscal year? And what's going to be rising revenue?

John Wall -- Senior Vice President and Chief Financial Officer

Sure John. Great question. That I mean for the year -- looking at the year, our annual merit increases go into 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.

John Pitzer -- Credit Suisse -- Analyst

Well, great. Thanks guys. I appreciate it.

John Wall -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

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

Mitch Steves -- RBC Capital Markets -- Analyst

Hey guys, thanks for taking my question. I have two. So, the first one is kind of on the operating margin long-term target. I know you guys historically talk to 30%. Do 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 noted, again in your prepared commentary, you guys are now breaking out China as a separate geography. And it seems like the numbers there have a lot more volatility, I mean, that used to be kind of 8% of revenue, but then that was 13%. In December, now it's back down to 10%. So, you could talk about a little bit of why you guys are disclosing China now as a separate geography?

John Wall -- Senior Vice President and Chief Financial Officer

Hi, Mitch, I 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 our revenue by geography table in the CFO commentary and in our 10-Q. Here generally any lumpiness in the percentage of revenue was probably caused by our IP and hardware businesses that's -- that will -- our IP and hardware revenue is generally more lumpy than the rest of our business.

And then in relation to your first question, we're not really ready to put out a 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 giving guidance over the next three years? If you take a look over a longer time period and compare our current guidance for 2019 with say, our 2016 results, you'll get a perspective on how we've been able to scale the business in recent years.

Lip-Bu Tan -- Chief Executive Officer

Yeah, just to add to what John talking about on the China side, and if you look at historical 2016 about 8% and then in 2017 about 9%. And then the last year is about under 10% and this year is 10%. So, overall we have done well in China and now clearly China is very committed to build the domestic semiconductor industry and they're making great progress and we are very 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.

Alan Lindstrom -- Senior Group Director, Investor Relations

Operator?

Operator

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

Jay Vleeschhouwer -- Griffin Securities -- Analyst

Thank you. Good evening. Lip-Bu, a technology question first for you, regarding what you've 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 help you on the digital tool side.

The question is, with respect to the new intelligent system design target, how extensible or leverageable is that, that platform or architecture of 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, we've read some, what you're doing to better integrate Innovus from Genus? Is that something you could comment on as well.

Lip-Bu Tan -- Chief Executive Officer

Yeah, good question Jay, let me try to answer your question. So, I think that intelligence system design will break down into three pieces. One is that design excellence and that is our core EDA and IP. So, we are very laser-focus on make sure that our foundation are solid. We are best of two in every category and that's why we inspire to do. And so that we are delighted on the digital and the Signoff sector we grew in the last quarter 12%. Clearly in a way, we're continue to succeed in the new customers. And then right now in the some of the big proliferation on some of our current customer in the most advance note in the 7 to 5, we are moving on 3-nanometer. And so I think we're excited about continue to drive that.

And then we move on to the system innovation, that is moving to the system domain. And as I mentioned earlier, it really using our -- and we ventured into our soul searching, we found out our core competency and the computational software and the digital implementation that we have and it can be scale into the system level. And that's why we're excited I think to embark on that into this high quality first mover is basically is the embedded this system safety and security space we finished here. We are 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.

The next thing that we're looking at is the whole, we call it a system analysis space and that's about $4.5 billion. And then it's about time to have some innovation solution able to provide -- that provide a cloud enable and it's scalable. And then 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 just a beginning on EM, electromagnetic field simulation area. And then stay-tuned, we have continued the development and investing in this space and is a big market $4.5 billion and customer love it. And so far the initial feedback from our potential customer and we highlight, too, that I endorse our approach and then to see the benefit of the performance and we're excited about it.

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

Jay Vleeschhouwer -- Griffin Securities -- Analyst

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 a quarterly and trailing 12 basis. The question therefore is, are you beginning to redirect or grow your investments in Japan to sustain that growth, either with sales or AE or anything else?

Lip-Bu Tan -- Chief Executive Officer

Yeah, good question. I think Japan is important market for us. In a couple of area, Japan is very strong and I just name a few, automotive they are very, very strong. And also I mentioned earlier that edged to industrial IoT, the microcontroller and there is a lot of controller collecting data. And then couple of key player in Japan that we are really excited to team up with them. And now also the whole videos surveillance consumer related area. And that AI machine learning can really play a role in it. And so I think that is a very important market and they are recovering very nicely. And then we're right now, we are engaging heavily with couple of key customer that we want to be the trusted partner going forward.

Jay Vleeschhouwer -- Griffin Securities -- Analyst

Thanks, Lip-Bu.

Lip-Bu Tan -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Sterling Auty of JPMorgan.

Jackson Ader -- JP Morgan -- Analyst

Hey guys. This is Jackson Ader on for Sterling today. A couple of questions from our side. The first would be, so looking at the outperformance here in the quarter, seems like it's coming from the two areas that you called out were 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? That there's 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 -- Chief Executive Officer

Yeah, I think Jackson, let me start first and then John will fill in. First of all, I kind of highlight that it's a very broad base strength across our product lines. And even though we highlight the hardware, we highlight the IP, we also highlight the digit growth 12%. And the other part is also very exciting for us is the custom analog system connect area and also it's a nice growth about 8% percent. And then we are excited about that we're investing in this whole system analysis is part of this analog custom interconnect system level and that area have been doing well. And so I think overall, I were to say that is 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 -- Senior Vice President and Chief Financial Officer

Hi, Jackson this is John. Yes, we had a very pleasing Q1 performance for IP, but of course IP is lumpy and probably benefits against a 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 now behind us and with better visibility into the hardware pipeline, we are now expecting modest growth in our functional verification segment, 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 -- Analyst

Okay great. That's helpful. Follow-up question is kind of a two parter. So, the first being you've mentioned though the $30 billion TAM over the next few years, right? An 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 -- Chief Executive Officer

Good questions. 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 -- that we call it the intelligent system design. And first of all I think clearly, our foundation continued to grow in term of design excellence all our EDA tools continue to drive the growth with the 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 now clearly the opportunity in front of us is not this whole embedded system safety and security and our partnership with the Green Hill is very important part of our strategy. And then now we're starting to move into this system analysis space, so embedded space about $3 billion and market analysis is above now the -- clearly is a system analysis is about $4.5 billion. And so I think overall, we continue to marching forward, stay tuned and we're going to be -- over time, we're going to be highlight to you some of the success we have.

And then clearly on the competition side, on the system analysis, there are a couple of them, I think, you're quite well-known. They have the more legacy solutions. And then but the customer over time, require increase on the system capacity and also ship less approach that mean that doing more simulation. And then larger design and that will require solutions that need more capacity and also higher performance and that really play into our strength in term of algorithm, expertise and massive distributing multiprocessing capability. And so I think those are the things that really we find a unique opportunity, a unique qualification we have to play in this market.

Jackson Ader -- JP Morgan -- Analyst

All right. Thank you.

Lip-Bu Tan -- Chief Executive Officer

Thank you.

Operator

(Operator Instructions) The next question comes from Jason Celino of KeyBanc.

Jason Celino -- KeyBanc Capital Markets -- Analyst

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

Lip-Bu Tan -- Chief Executive Officer

Yeah, quite well.

John Wall -- Senior Vice President and Chief Financial Officer

Yeah.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Yeah, so good raise to the full year -- 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 -- Senior Vice President and Chief Financial Officer

I Jason, this is John. I mean everything we know is in our guidance. You're right, that 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 compare though.

Jason Celino -- KeyBanc Capital Markets -- Analyst

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 -- Senior Vice President and Chief Financial Officer

Well, 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 IP results for the first quarter.

Lip-Bu Tan -- Chief Executive Officer

Yeah, couple of things we kind of positive about is Tensilica. The perforation adoption for the machine learning, vision, audio and also automotive consumer surveillance. We add new -- eight new customer. On the design IP said, 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 company adopted. And then more to come and stay tuned and we'll have more update for you.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Okay, thanks. Yeah, that answers all my questions.

Lip-Bu Tan -- Chief Executive Officer

Great. Thank you.

Operator

Your last question comes from Gal Munda of Berenberg.

Gal Munda -- Berenberg Bank -- Analyst

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

John Wall -- Senior Vice President and Chief Financial Officer

Yes, Gal. Our often 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 recording revenue mix. We're now expecting high 80s for 2019.

Gal Munda -- Berenberg Bank -- Analyst

And then the second question is just linked to your cloud offering, you know, in the past your customers kind of like to mix and match different parts of the process. 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 easy as previously promised? And if not, does that mean that potentially tools can -- can be more sticky? Or do you not expect any change in the workflows the way that have been managed in terms of the vendor side?

John Wall -- Senior Vice President and Chief Financial Officer

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, any difference in how our customers use our tools.

Lip-Bu Tan -- Chief Executive Officer

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

Gal Munda -- Berenberg Bank -- Analyst

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

Lip-Bu Tan -- Chief Executive Officer

It really depend on the customers, and they can use a hybrid, using their on-premise. And then when they address a peak load with the cloud, or they want to from scratch some other start-up, they want to be all cloud, we're also open to that. So, I think that's a lot of different models. And then we basically want to make it available to our customer, whatever they choose and make sure that is secure. And then make sure that can drive performance and productivity for them, that is our main driver for using the cloud. And basically, we are supporting them and they have option either customer manage, or you know, using the Cadence manage or the Palladium cloud.

Gal Munda -- Berenberg Bank -- Analyst

Okay. Thank you so much.

Lip-Bu Tan -- Chief Executive Officer

Thank you.

John Wall -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

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

Lip-Bu Tan -- Chief Executive Officer

Thank you all for joining us this afternoon. In summary, our business is mission-critical to assist to silicon development, which is a cornerstone of all these high activity. Through our strategy, we are capitalizing on multiple technology waves and further proliferating our solution 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's first quarter 2019 earnings conference call. This concludes today's call. You may now disconnect.

Duration: 44 minutes

Call participants:

Alan Lindstrom -- Senior Group Director, Investor Relations

Lip-Bu Tan -- Chief Executive Officer

John Wall -- Senior Vice President and Chief Financial Officer

Rich Valera -- Needham & Company -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Mitch Steves -- RBC Capital Markets -- Analyst

Jay Vleeschhouwer -- Griffin Securities -- Analyst

Jackson Ader -- JP Morgan -- Analyst

Jason Celino -- KeyBanc Capital Markets -- Analyst

Gal Munda -- Berenberg Bank -- Analyst

More CDNS analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

More From The Motley Fool

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .