(CDNS)
(CDNS)
Alan Lindstrom - Senior Group Director, Investor Relations
Lip-Bu Tan - Chief Executive Officer
John Wall - Senior Vice President and Chief Financial Officer
Anirudh Devgan - President
Gary Mobley - Wells Fargo Securities - Analyst
Mitch Steves - RBC Capital Markets - Analyst
Pradeep Ramani - UBS - Analyst
Jason Celino - KeyBanc Capital Markets - Analyst
Jackson Ader - JPMorgan - Analyst
Joe Vruwink - Baird - Analyst
John Pitzer - Credit Suisse - Analyst
Tom Diffely - D.A. Davidson - Analyst
Gal Munda - Berenberg Capital - Analyst
Richard Valera - Needham - Analyst
Jay Vleeschhouwer - Griffin Securities - Analyst
Operator
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] 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, 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, 2021. 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 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's 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 re-queue if you would like to ask additional questions and time permits.
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. 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 customers 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 a 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 is benefiting from our verification full flow solutions that deliver industry-leading verification throughput. Momentum continued for Xcelium, our digital simulator with several competitive displacements underway 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 significant 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 strong - have 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 strong - great results in 2020 and there is a strong customer interest in our integrated Virtuoso, Innovus, Allegro and AWR Microwave Office solutions with in-design analysis.
In System Analysis, we are executing to 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, CFD, 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 5 times 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.
John Wall - Senior Vice President and Chief Financial Officer
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 fis1cal 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-GAA1P 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 cents, 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
[Operator Instructions] And your first question comes from the line of Gary Mobley from Wells Fargo Securities. Your line is open.
Gary Mobley - Wells Fargo Securities - Analyst
Good afternoon, everybody. Thanks for taking my question. 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're able to bring on employee and fast enough to operate and then, well, the extra week, how does that 35.25% operating margin guide this grew '21 compared to a level set fiscal year '20.
John Wall - Senior Vice President and Chief Financial Officer
Hey. Thanks for the question, Gary. It's probably a multi-part question. Yeah, 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. But - 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 reserve for those. And we help them out that 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. But - so that collections windfall kind of distorted maybe some of the revenue timing in the quarters during the year, but didn't really impact - that $26 million 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 like that $22 million of that $26 million collected 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, with a 2% tailwind for - in terms of helping us achieve 50% on the Rule of 40 in 2020. And what was the 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 step back from individual quarters and halves that I would say this, our business is very strong in all regions and across all of the product categories.
The three-year revenue CAGRs, they were up to 11% now in 2020. And at the midpoint, it's 11% at the midpoint of our outlook for '21, that's 11% too. So we're already off to a very strong start as well in the first half of 21, but it's too early really to see if that's sustainable in the longer term. So, the second half, we have kind of 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 '21, I've assumed we return to our usual recurring revenue mix in the region. And that, along with the fact that we won last week in the second half in 2021 versus the 2020, that's what contributes to the, like, conservative revenue growth outlook for the second half.
Gary Mobley - Wells Fargo Securities - Analyst
Okay. That's very, very helpful, John. I wanted to ask you about the materiality of the systems analysis product group, including the backup. I guess, there's perhaps various documentation that NUMECA had roughly $30 million in annual revenue. Is it a pretty good approximation? And for the overall systems analysis category, how material is this now? Is it somewhere in the ballpark of 1% or 2% of revenue now and how much is it contributing to your overall growth? Thank you.
John Wall - Senior Vice President and Chief Financial Officer
So, Gary. The - your system analysis is the business that's doing great. I mean, bookings and revenue grew strongly in 2020. The operating margin profile there is better than EDA, which allows us to invest in the business. 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 at '21 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 - I don't think we have anywhere near as much revenue in '21 as you're expecting.
Gary Mobley - Wells Fargo Securities - Analyst
Appreciate it. Thanks.
Operator
Your next question comes from the line of Mitch Steves from RBC Capital Markets. Your line is open.
Mitch Steves - RBC Capital Markets - Analyst
Hey, guys. Can you hear me?
Lip-Bu Tan - Chief Executive Officer
Yeah, loud and clear.
Mitch Steves - RBC Capital Markets - Analyst
Yeah. So, the first one is just on the 45% systems exposure now. I mean, I'm just curious about of why that's trending up so quickly. About three years ago, I think it's close to like low 40%s or a 40% return metric, but now we're suddenly at 45%. And it sounds like that might even go higher. So maybe you can - can you help us understand what exactly is going on with that business it's causing you to spike up?
And then, secondarily, regarding your 50% flow through in the operating margin included that you've been doing, but is there any difference between the systems and SMEs onboarding in terms of profitability for you guys? Those are my two questions. Thank you.
Lip-Bu Tan - Chief Executive Officer
Yeah. Mitch, maybe I can answer the first question first about the system company. And then we provide this end-to-end EDA portfolio. And 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 generation waves in the 5G and also the hyperscale and then the autonomous driving. And really the system companies starting to engage by actively with us, because we're providing a suite of solution that we're looking for. So I think it's kind of accumulation of last 12 years continue working on it, so we're delighted and now getting closer to the 45% of the revenue. And for them, clearly that system, the packaging - not just a silicon development is critical for them and we can provide a integrated solution for them so that they can design a complex system that they're looking for. And so, we are excited about this opportunity and our strategy of investing and behind it. And so, we are glad to see the performance.
John Wall - Senior Vice President and Chief Financial Officer
Yeah, Mitch. And to the second part of your question there. Like I say, there is a higher than normal profitability, I think, for us in the system analysis business and it's been growing really fast for us. I mean, if I look at incremental margins, I called out in my prepared remarks this, we're - 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 from - since 2016. And that's about 51% of the revenue growth, if you calculate the revenue growth over that period of time. And then, when I compare the midpoint of outlook for '21 against '19, I did the same exercise and I got 51% again before the impact of NUMECA, with NUMECA kind of takes it just down under 50%.
Mitch Steves - RBC Capital Markets - Analyst
Okay. So, I mean, just to clarify, make sure I understand this correctly system analysis. It sounds to me, maybe I'm reading so much in this, you're seeing like a step function in your 3D Clarity business or am I reading too much into this?
John Wall - Senior Vice President and Chief Financial Officer
[Speech Overlap] I think we also have audit hyperscale guy and some of the system company service provider, quietly also building up their semiconductor custom silicon design. And so our entire shift from the design excellence from he EDA, IT and then plus our system analysis, plus upon [Phonetic] acquisition, we make an AWR, an Integrand providing a lot of system for the 5G and also the industrial group.
Mitch Steves - RBC Capital Markets - Analyst
Very helpful. Really a pleasant quarter. Thank you.
Lip-Bu Tan - Chief Executive Officer
Thank you.
John Wall - Senior Vice President and Chief Financial Officer
Thanks.
Operator
Your next question comes from the line of Pradeep Ramani from UBS. Your line is open.
Pradeep Ramani - UBS - Analyst
Hi. thanks for taking my question. Congratulations on great quarter and a very solid guide. I just had couple of questions, maybe a last one 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 sounds 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?
Lip-Bu Tan - Chief Executive Officer
Yeah. Let me answer this. This is Lip-Bu. So clearly, APAC is a strong growth region for us. And then we've done well in China on Q3 and Q4. And as you know, China is heavily investing in semiconductor industry. So in some way, now we have broad portfolio of EDA to IP and even the system analysis and some of the packaging and then the tricky packaging and it become critical for them. And so I think overall we support this customer globally and then China explicitly strong and we will continue to comply with the order export control requirements, by meanwhile, so far up on what we see strong momentum over there.
John Wall - Senior Vice President and Chief Financial Officer
And then, Pradeep, if I would add there that - like if you step back from looking at any individual quarter half and you look at three-year CAGRs, I think our growth is accelerating across all regions in our outlook for '21.
Pradeep Ramani - UBS - Analyst
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 a core of this longer-term drivers, but just coming off of such a strong year?
John Wall - Senior Vice President and Chief Financial Officer
Yeah. So I think, it's a good question. I mean, IP tend to be lumpy. But so far we like in audit out - IP outsourcing trend and we have a strong portfolio in term of DDR, CIE and also the SerDes is a must-have for the hyperscale and also some of the Tensilica in terms of audio and also the automotive sector. So overall, we're delighted last year is a strong year, but as you know it's very lumpy upfront and so we continue to focus on that.
Pradeep Ramani - UBS - Analyst
Thank you.
Operator
Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is open. Again your question comes from the line of Jason Celino. Your line is open.
Jason Celino - KeyBanc Capital Markets - Analyst
Hi. Sorry about that. Sorry I was on mute. The first question, NUMECA acquisition, I know it's pending, but maybe can you speak to the - what is so attractive about that business? I know CFD is a pillar, physics part of the market and then make versus buy there. I mean, what factors went into acquiring versus just building them?
Lip-Bu Tan - Chief Executive Officer
Anirudh, you want to take this one?
Anirudh Devgan - President
Yeah, definitely. Yeah, that's a good question. So, as you know, we are pretty excited about our move into system analysis, which is driven by our expertise in computation software. While numerical, mathematical software and we have lot of expertise in that organically, as we saw in the development of Clarity, which is the 3D Solver that had been generating lot of good result. And the second thing we are excited about is the customer synergy. A lot of customers, as we've discussed, we have a lot more system companies and they are asking for these system analysis capability, okay.
And then, the question becomes whether to organically develop or to acquire. And if you look at this space and in terms of system analysis, CFD is a very critical area. It's one of the largest market segments with a lot of vertical application and NUMECA has very good technology with more than 450 customers. So we are pleased to welcome them to Cadence with this pending acquisition. And I think that can be used as a basis to expand further, expand more in R&D with our computation software strength and expand more with our customer base. So we are very happy to use them with their expertise in CFD to expand into this very, very exciting area for us.
Jason Celino - KeyBanc Capital Markets - Analyst
Okay. And then, my quick follow-up. But this is - I think you mentioned that it was a 3 times TAM expansion with acquisition in the CFD. Does that 3 times TAM expansion also include other physics, like structurals or is that just CFD alone? Thank you.
Anirudh Devgan - President
So, in terms of system analysis, that's a pretty big segment. And it's about $6 billion we estimate. And the other good thing about it is that, it is growing rapidly. There is always more - need for more and more simulation. What we estimate is, Clarity and sales is about $800 million in addressable market, which is EM and thermal. And CFD is about 1.6, so CFD triples our time from $800 million to about 2.4.
Operator
Your next question comes from the line of Jackson Ader from JPMorgan. Your line is open.
Jackson Ader - JPMorgan - Analyst
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?
Anirudh Devgan - President
Yeah, we don't have a breakdown on that. Clearly we are very excited and our customer is clearly our solution provider flexibility and also different use model and either its a Cadence manage and so overall we're providing EDA software and Palladium platform are the most important in providing the productivity and scalability. So I think, overall, we are excited about 175 customers. We didn't breakdown in terms of semiconductor or system company, but overall both are strong for us.
Jackson Ader - JPMorgan - Analyst
Okay. And then, John, you mentioned that not expecting China to be as active in upfront revenue in 2021. So any particular reason? I mean, was it kind of politically driven, why that particular geography had a bigger mix of hardware and IP in 2020?
John Wall - Senior Vice President and Chief Financial Officer
Well, it's - 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. And we saw that with a strong Q3 for - in the functional verification space and a lot of that strengths within China. And when I was looking for signs of a pulling in Q3 and to trying to go do that - with their - some acceleration of purchasing that came out at '21 or did that come out of Q4 where people just preparing with the pandemic where they're just trying to get their hardware delivered earlier for fears of delays due to the pandemic.
And then, what we looked at, I was waiting for the view of the pipeline. Pipeline for '21 is very strong. And when I look at that and compared it to what had happened, what was different about the second half of 2020 for China, what I did notice is, because of that hardware that we had a higher mix of upfront revenue in the region in the second half than we would normally see.
I'm not sure if that's sustainable, I mean, it looks like we're off to a strong start again in Q1. But for the purposes of determining outlook for 2021, I assume that's all of the safest to assume a return to our usual recurring revenue mix, which could prove to be conservative for the second half. But I'd rather go with outlook, assuming that we return to the usual recurring revenue mix, then assume that that's growth that we saw in the second half of 2020 continues. I mean, if it does, when we have increased visibility into revenue in the second half, we can update our outlook at that time when we see it puts. I just - I didn't want to go with too strong second half right now until I have a clear visibility into the pipeline in the second half.
Jackson Ader - JPMorgan - Analyst
Sure. Okay. Thank you.
Operator
Your next question comes from the line of Joe Vruwink from Baird. Your line is open.
Joe Vruwink - Baird - Analyst
Great. Hi, everyone. John, you've been referring to the tables and the release and I'm interested in the one that great sit down three-year CAGR adjusted for the extra week by a product group. If you think into 2021 and again just adjusting for the week comparison. Would you expect kind of similar dynamics between the product segments, where IT and system design should remain kind of 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 trends you've seen?
John Wall - Senior Vice President and Chief Financial Officer
Good question. I mean, we're not guiding by individual product category. But if you see - if you look at a three-year CAGR for '18, '19 and '20 on that if you see they don't change dramatically year-over-year, particularly on the three year CAGR view. That - but the ones you called out IP and system design analysis are kind of the smaller dollar values, so they have the benefit of growing from smaller numbers. And in the past, we've seen those grow faster. But in relation to new products, I think the amount of innovation that we've seen in new product releases and preparation we've seen from the R&D group, they haven't slowed down at all. If anything, they're accelerating in their new product development even through the pandemic, which has been fantastic. But typically on an earnings release, we wouldn't announce any new products. You'll see those at CDNLives, which probably start around late March/April time.
Joe Vruwink - Baird - Analyst
Okay. Okay, great. And then, this next question might be product development related. But if I heard Anirudh correctly, system design is maybe a $6 billion total opportunity. And given the solvers you introduced or the new CFD being acquired, you're up to $2.4 billion. And so, are there other categories or additional things that you have in mind that we can may be expect you growing into over the next few years?
Anirudh Devgan - President
Yeah, that's a good point. And first of all, I want to highlight that we are building out this multi-physics platform. And CFD is a pretty big segment of that market. So we started with finite element and electromagnetics and then now go to CFD and there is lot of commonality there. So I believe that itself presents a lot of opportunity to us, like we mentioned tripling our addressable market. There might be more in the future, we always look for that. But at the same time, the current electromagnetic and CFD already has a large market segment that we're busy addressing. So, the answer is yes. If some opportunities come, we will systematically expand, but already that's a good opportunity for us.
Joe Vruwink - Baird - Analyst
Okay. I'll leave it there. Thank you.
Operator
Your next question comes from the line of John Pitzer from Credit Suisse. Your line is open.
John Pitzer - Credit Suisse - Analyst
Yeah. Good afternoon guys. Thanks from me to ask the questions. Congrats on the solid results. John, as you directly pointed out in your preamble, if you adjust for the extra week and some of the unexpected revenue in '20, your initial guide for '21 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 guess 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 should driving that? Is that sort of specific to Cadence and your strategy? Do you think this is core EDA customers? Do you think it's the proliferation of customers into non-traditional areas like hyperscale, systems and autos? If you can give us a little bit of help on that would be appreciated.
Anirudh Devgan - President
So, John, I can take your - the first part of your question, then I'll pass it over to Lip-Bu. In relation to the strong first half guide and strong first quarter guide, most of our revenue is software and most of its recurring revenue. I mean, we expect recurring revenue to make up 85% to 90% of our revenue for the year. So it's very, very predictable and very, very predictable certainly in the near-term that - where I had some difficulty with projecting what upfront revenue might be out in Q3 and Q4. So, the outlook for the second half is more conservative than - the first half is very, very predictable in terms of great visibility into the pipeline. We're off to a really strong start in Q1 already on the upfront business. And so much of that revenue is recurring in the first half that's - yeah, we're seeing accelerating revenue growth. The challenge in the second half, of course, is we're lapping very tough comps against the second half of 2020. And I just don't have the visibility into the upfront pipeline for Q3 and Q4 yet.
Lip-Bu Tan - Chief Executive Officer
Yeah. On the second question, as Anirudh described, I think it's kind of exciting about it's renascence of semiconductor with the 5 Generation waves happening at the same time. AI, machine learning, all about data, data analytics, 5G and then the cloud infrastructure had to change because all this massive data coming in and then how do you address that net book scaling and then storage aggregation. So it's a lot of changes to the infrastructure and there is a lot of - fueling a lot of design activity. So that's why we see a lot of design activity not just from the semiconductor players. Now, the system players and then the whole industry 4.0, they all move into AI, machine learning, the digital transformation that drive a lot of semiconductor.
So overall, the industry is moving in the right direction to us. And then, meanwhile, I think clearly Cadence with the Intelligent System Design strategy really tie in really well from the design excellent that providing the tool in IP. Now we move to the next level of System Innovation, that Anirudh talked about, the system analysis, the CFD and the physics and multi-physics model. Then the next thing is move up into the Pervasive Intelligence that you note that using AI, machine learning, data analytics, drive all the vertical industry that is major transformation going on. So I think we are well positioned to capture that opportunity.
John Pitzer - Credit Suisse - Analyst
And then, guys, my second question is clearly when you look at China as a region from Q4 of '19 to the back half of last year, it almost doubled as a percent of revenue. And John, you clearly talked about potentially some one-times that came in, in back half of the year that you're not embedding sort of in the guide for '21. I'm just kind of curious, as we think about currently China at about 17%, what kind of core embedded as a percent of revenue when your '21 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?
Anirudh Devgan - President
Well, again individual quarters. I wouldn't focus too heavily on any one individual quarter or even half. I mean, it was a tremendous second half for us in China. Our 2020 was a strange year, I mean with pandemic, with extra week in Q4, I mean, you will see in Q3, we had a lot of strength in our functional verification group. In Q4, you'll see the software business has performed really, really well. Of course, you had the benefit of the extra week - was a 14th week in your normal 13-week quarter. And we have one last week in the second half of 2021. We're very, very pleased with the growth we're seeing in China. It looks like it's continuing on. We're seeing that strength continue on into Q1. The pipeline is strong, seeing that in the first half. I just wanted to be conservative in the outlook for the second half, until I have a better visibility into second half upfront revenue guideline.
John Pitzer - Credit Suisse - Analyst
Thank you.
Operator
Your next question comes from the line of Tom Diffely from D.A. Davidson. Your line is open.
Tom Diffely - D.A. Davidson - Analyst
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 the NUMECA acquisition increased costs?
Anirudh Devgan - President
No, it's not - certainly not primarily due to the NUMECA acquisition. I think, in terms of expense growth, our headcount is up 8%. Our headcount increased about 8% during 2020. And we're investing heavily again in hiring in 2021. NUMECA will come into the mix, we hope, second half of Q1 and then the remainder of the year from an expense perspective. We expect merit to hit this - the merit increases will be July again, so that will be - you'll see a slight uptick there in expense in Q3 and Q4. And the growth in expenses through the year that were typically come from that is being offset by some more efficient infrastructure spend that we have planned as the year progresses. If you look at our 10-K that we filed, you'll see that we initiated a restructuring plan in Q4 2020 to optimize our spend on infrastructure. But on the expense mix in 2021, I think if you compare '21 versus '20, you probably see in '21, we're spending more on people and less on places than we were in '20. That's kind of driving some of the margin profile.
Tom Diffely - D.A. Davidson - Analyst
Okay. That's very helpful. And then, a 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 majority to the cloud at some point? And if they do, what does that do to your cost structure?
Lip-Bu Tan - Chief Executive Officer
Yeah, very good questions. Now this is still a very early stage. We're very encouraged with 175 customers. And clearly we want to make sure that our initial product in term of system analysis we can be cloud native, because we start from scratch. And then some of the EDA tool, we have different stage of move into cloud native. And then, really the Holy Grail is basically drive the productivity, efficiency for our customer. And then our partnership with the hyperscale partners and then infrastructure partners and also the foundry partners are critical in this effort. And so, right now, we have across small, medium, large customer embracing on cloud. And truly, I think either can you imagine we have unlimited usage of machines, server at your exposure so that you can really drive the performance or productivity significantly.
So I think that's just a trend, we're just in the beginning early stage, but we are very encouraged with the customer support. In order to continue to grow, clearly our partnership with the hyperscale partners and also the foundry partners are critical because of the GDK or the different solution they have. We want to make sure that we work with them together and support our customer and also addressing the need of customers.
Tom Diffely - D.A. Davidson - Analyst
Okay. Thank you.
Lip-Bu Tan - Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Gal Munda from Berenberg Capital. Your line is open.
Gal Munda - Berenberg Capital - Analyst
Hi. Thanks for taking my question. The first one I just wanted to follow-up briefly on NUMECA, more generally on your ambitions within kind of mechanical simulation space. If you think about the convergence that's happening with NUMECA, I know you said you have a CFD, you have a finite element analysis as well. So, like how far do you think your portfolio is based on what you have to be able to take that where you want to be in R&D terms versus potentially doing more of those tuck-ins in the CAE space?
Anirudh Devgan - President
Yeah, that's a good question. Let me take that. This is Anirudh. So, like I mentioned, this move is driven by three factors, right; our strength in computation software, our customers asking for more and more system analysis, system design capabilities, like Lip-Bu mentioned, and the overall need for simulation. And I think we are still in the early innings, but we feel confident about the space as demonstrated by our results in Clarity and other products. And CFD is a pretty important area, I think one of the biggest segments in system analysis. The good thing about CFD, it has a lot of vertical applications in all the way from automotive, Aero and defense, all the way to medical. So I think that's a pretty significant expansion of our platform. And we are happy with this progress. We are patient and, like John mentioned, this segment is profitable. So we will continue building across this and keep providing the best solution to our customers.
Gal Munda - Berenberg Capital - Analyst
Thanks. 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 is Moore's Law-based growth at the leading edge customers and there is more than Moore's Law, which is kind of the system side, continuing the investments you're making in the system side. Can you just comment a little bit on the growth, how it may be 2020? How it corresponded between the leading edge and the systems companies in terms of that contribution to get you whatever we want to say, 13% to 15% depending on which number we look at? Thank you.
Lip-Bu Tan - Chief Executive Officer
That's a very good question. And so, I think we are very well positioned to be able to do both. And then, clearly the hyperscale, mobile and they are driving a lot into the Moore's Law. And as I mentioned, we are very delighted. We have more than 100 projects on 5-nanometer and below process node development with our customers. And we have earlier collaborations on 2-nanometer process. So I think this is a very advanced and we're delighted and we are very honored to work with the marquee customers that are pushing the envelope and we are really excited about that development.
On the other hand, we are so well positioned in our custom mixed signal analog and packaging and like the 5G, wireless, industrial group. They are really moving into this mixed signal and clearly the most in Moore's, and so that we are very well positioned and we doubled down with some of this AWR and then the Integrand acquisition driving some of the RIF microwave requirement, especially in antenna side of some of this 5G integrations. And then we have really good solution for that. And customers see the benefit of working with us. So I think we are very positioned on both side. That's why we highlight that from our portfolio point of view and those both engine are really taking off. And we are very excited engaging with the best company to work with us.
Gal Munda - Berenberg Capital - Analyst
That's great. Thank you so much.
Lip-Bu Tan - Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Rich Valera from Needham. Your line is open.
Richard Valera - Needham - Analyst
Thank you. Let me add my congratulations on the Rule of 50 last year. A question, I think it's for Anirudh on the system analysis go to market. Just wondering today the data you've been doing that through the standard sales channel and what do you - can you have any overlay sales into a specialized applications for system and how you're thinking about scaling up any kind of dedicated system resources as you scale up that business?
Anirudh Devgan - President
Yeah. Thanks, Rich. That's a great question. And of course, one is developing great products and the other is go-to-market or helping our customers deploy those products. And the second part is as important as the first part. And especially for the system business, there are multiple facets to it. In the semiconductor business, the big large system companies, we operate mostly through a direct channel, okay. But if you remember, we also have our Allegro business, which is our packaging business. We do quite well in PCB and packaging with Allegro. And Allegro does have - already we do have an indirect channel.
And like Lip-Bu mentioned earlier, cloud is the ball going forward. So for the system business, I envision three channels. We will - we are building three channels. One is the direct channel, because a lot of the big companies and big system and semi companies anyway want system tools like you mentioned. And expanding our indirect channel, like we have for Allegro and expanding it to overall system design analysis. And then the SaaS channel or cloud-based channel, especially for smaller companies that don't have a lot of data centers and are more attractive to use on the cloud. So as we go to this system design and analysis, we do have to build out these three facets of our go-to-market. And we are working all of them in different stages. But the strength of our direct channel helps us with our big customers. And then indirect and SaaS can help us with some of the smaller long-tail customers. So that's a very important part of the overall go-to-market strategy.
Richard Valera - Needham - Analyst
Understood. Thanks for those details. And then, John, follow-up for you. You had given a backlog reserve number last quarter of $58 million, which I think it come 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?
John Wall - Senior Vice President and Chief Financial Officer
Yes, of course, Rich. We collected - we had a collections win for $26 million in the second half, out of that $70 million. That I think the majority of the balance of the $70 million is lost. I mean those customers have - many of those customers have closed their doors. I think we're in single-digit in millions in terms of the ones we're left tracking. That could potentially be recoverable, but right now in my outlook, I'm assuming it's not recoverable. But you're talking maybe $9 million, $10 million left out of that $70 million. That could possibly be recovered. But like I say, right now I'm assuming it doesn't get recovered. We've recovered $26 million of the other $60 million.
Richard Valera - Needham - Analyst
Got it. Okay. Thanks very much, John.
Operator
Your final question comes from the line of Jay Vleeschhouwer from Griffin Securities. Your line is open.
Jay Vleeschhouwer - Griffin Securities - Analyst
All right. Thank you. I'd like to direct both of my questions to Anirudh. First, we've heard for years, of course, from the EDA companies for ongoing design activity among your customers, that's remained robust. We've also heard of the general direction of design style or types from general purpose chips more to specialty kinds of designs. What we don't often hear about is how customers design methodology and may be evolving. And I'm wondering, if there are any issues that we might want to talk about regarding, for example, the higher article versus flat, which has been consideration for a chip design now for two decades or more, are there any new implications or issues for that as it might pertain to or affect any of your EDA tools or new technologies such as like iSpatial or Design Space Exploration?
And then relatedly, there were a number of questions this evening already regarding system analysis and your broader ambitions in computational software. One thing we see on the other side of engineering software, the world you're encroaching towards are unified data platforms and common platforms for data management and the like, which you don't really seem to have. You do have multiple stacks for your various functional areas. Could you talk about how you're thinking about unifying or moving to a more common platform of that kind?
Anirudh Devgan - President
Yes, Jay. These are great questions. First of all, we want to make sure that we have best-in-class products, right. So whether that's digital design or verification and system analysis. So we always, as you know, this is technology business, best product wins and at the same time have a unified platform to go with it. And this is how we did digital implementation. This is how we did verification. So both parts are important to have best-in-class products, whether that's a finite element, electromagnetics or CFD.
And then, there are opportunities to combine them in a much more unified way, especially around data like you mentioned. So I completely agree that the need for unification, but we also, at the same time, want to make sure first that the products are best-in-class. You want a unified team but each player has to be a strong player. But there are a lot of opportunities for data platforms and analytics like Lip-Bu also mentioned earlier.
Now, in terms of your first question of new methodologies, I mean, there are several things happening. If I had to pick one or two key things that are happening what we see with the customers. So one big trend which you probably already know is this move to 3D IC. I think this is going to be significant for next several years. And it just changed a lot of methodologies in our customer base. And this is multiple high-end digital chips or even analog RF chips on a package. And that, I think, is driving a lot of change, especially in cloud, hyperscaler company, all the way to consumer company. And we do have historically a lot of strength in packaging with Allegro. Of course, we have a leadership platform at advanced node with Innovus, and then now the analysis tools with Clarity and Celsius. Because thermal in the big theme for 3D IC. So I think this whole methodology of 3D IC integration is one significant change that we do see in the customer base. Then we are very excited about that, because I think Cadence is in a unique position because of historical strength in analog and packaging and digital and the new strength in system analysis.
So - and hierarchical, you mentioned, I think that's always a big thing as things get bigger. And if you look at 3D IC, this is another way to do hierarchical. Because if you have four chips on a package, you don't have to redesign all four of that. This is reuse at a much higher level. So, what I do think 3D IC is a significant trend that is going to happen and we are well positioned for it.
Jay Vleeschhouwer - Griffin Securities - Analyst
Thanks, Anirudh.
Anirudh Devgan - President
Thanks.
Operator
I will now turn the call over to Mr. Lip-Bu Tan for some closing remarks.
Lip-Bu Tan - Chief Executive Officer
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 then 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. And lastly, on behalf of all our employees and the Board of Directors, we give heartfelt thanks to those on the front line who continue to work tirelessly in their effort to put this pandemic behind us. Thank you all for joining us this afternoon.
Operator