Cadence Design Systems Inc (NASDAQ:CDNS) Q3 2020 Earnings Conference Call - Final Transcript
Oct 19, 2020 • 05:00 pm ET
[Operator Instructions] Your first question comes from Gary Mobley from Wells Fargo.
Hey, guys. Let me first extend my congratulations on the strong second half progression. Related to the second half of the year, I wanted to ask about what seems to be about $65 million in extraordinary China-related revenue that maybe you didn't otherwise expect when the fiscal year started coming in the second half. To what extent is that influenced by some of the latest export restrictions and perhaps some customers over in China trying to get under the wire, so to speak. And then, related to some of the mil aero related export restrictions, have you further done some top-down analysis on your existing customers in the serviceability of those existing customers?
John, we can't hear you.
Sorry. I was on mute. Hi, Gary. That's a great question. Yeah, in terms of China, the strength in China was higher than expected. We valued it at about $40 million. We think the second half of the year benefits from like $45 million for the extra 53rd week of revenue and probably $40 million for this kind of spike in China revenue that we believe is mostly non-recurring revenue. But it's -- you saw that the China percentage is about 17% in Q3, that's 4% higher than the previous record level.
I'd like to say, our valuation of that is about $40 million to the second half. Split about two-thirds, one-third between Q3 and Q4 that's, I understand the concern about, is there a pull-forward from next year. It's too early for us to say right now. What we can say is that, that's extra revenue is generally and predominantly non-recurring in nature. But I won't know until early next year when I look at the pipeline, whether it impacts '21.
And clearly, hardware and IP are the growth for us. And again, we're complying with all the US export control regulations and then China semi-conductor is still a very strong growth engine.
Okay. And related to the margins, I mean, you guys are just killing on the operating margin. And I guess, it's contrary of what we would have thought given the higher mix of hardware-related revenue. What's sort of the, I guess, inner workings there as it relates to hardware mix, is the China related to hardware mix, that much more profitable than, say, domestically originated hardware sales?
Yeah, Gary, naturally when we were continuing to invest in R&D but hiring was slower-than-expected in Q3 and also the pandemic is helping margins with a little less teeny, we seem to be creeping up into that like 33% to 34% range. We're probably at the high-end of that range for as long as the pandemic helps us to keep certain expenses lower. But for Q3, we got an additional margin benefit of about 2% for that extra hardware and IP revenue in China, which is mostly non-recurring and one-time in nature. I've assumed that continues into the middle of