Tech Giants Cadence and IQVIA Report Strong Q2 Results, While Verizon Shows Mixed Performance

Earnings call: Cadence reports robust Q2 results, raises outlook By Investing.com

Cadence Design Systems, Inc. (NASDAQ:CDNS) announced strong financial performance in the second quarter of 2024, surpassing its own financial forecasts and signaling a positive outlook for the remainder of the year. CEO Anirudh Devgan attributed this success to the company's broad-based product momentum, particularly in AI-driven sectors such as hyperscale computing, 5G, and autonomous driving. Despite the challenges, including the dilutive impact of the recent BETA CAE (NYSE:CAE) acquisition and cautiousness about China revenue, Cadence is confident in its long-term strategy and the growing demand for its solutions. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Cadence Design Systems, Inc. (CDNS) continues to navigate a dynamic market landscape with a strong performance in the second quarter of 2024. The company's leadership remains optimistic about the future, bolstered by solid demand for its AI and hardware systems and strategic partnerships in the semiconductor industry. Despite some short-term financial impacts from its recent acquisition and market caution in China, Cadence's forward-looking guidance reflects confidence in its growth trajectory and the sustained demand for its comprehensive system design solutions. InvestingPro Insights Cadence Design Systems, Inc. (CDNS) has demonstrated resilience and strategic foresight in its Q2 2024 performance, with particular strength in AI-related sectors. To further understand Cadence's financial health and market position, let's delve into some key metrics and insights from InvestingPro. InvestingPro Data highlights Cadence's robust gross profit margin at 89.31% for the last twelve months as of Q1 2024, showcasing the company's efficiency in managing its cost of goods sold and its strong market positioning. This aligns with the company's reported success in AI-driven sectors, where high margins are often indicative of value-added products and services. The company's market capitalization stands at $78.99 billion, reflecting investor confidence and the scale of Cadence's operations within the tech industry. Despite a recent downturn, with a 1-week price total return of -7.91%, Cadence's year-to-date price total return of 5.4% and a 1-year price total return of 18.21% suggest longer-term investor optimism. An InvestingPro Tip points out that Cadence is trading at a high earnings multiple, with a P/E ratio of 74.38. This could indicate that the market has high expectations for Cadence's future earnings growth, despite some analysts revising their earnings estimates downwards for the upcoming period. Investors considering Cadence's stock should weigh these factors, including the potential for continued innovation and market expansion against the current valuation. For those interested in a deeper dive into Cadence's financials and future prospects, InvestingPro offers an additional 15 tips on their platform. Readers can use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, which could provide valuable insights for making informed investment decisions. Cadence's strategic initiatives, such as the acquisition of BETA CAE and its focus on AI, hyperscale computing, 5G, and autonomous driving, are pivotal to its long-term success. With a sound financial base and a clear vision for the future, Cadence is well-positioned to capitalize on the growing demand for its system design solutions. Full transcript - Cadence Design System Inc (CDNS) Q2 2024: Operator: Good afternoon. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Second Quarter 2024 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 Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead. Richard Gu: Thank you, operator. I'd like to welcome everyone to our second quarter of 2024 earnings conference call. I'm joined today by Anirudh Devgan, President and Chief Executive Officer; and John Wall, Senior Vice President, and Chief Financial Officer. The webcast of this call and a copy of today's prepared remarks will be available on our website, cadence.com. Today's discussion will contain forward-looking statements, including our outlook on future business and operating results. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion. For information on factors that could cause actual results to differ, please refer to our SEC filings, including our most recent Forms 10-K and 10-Q, CFO commentary and today's earnings release. All forward-looking statements during this call are based on estimates and information available to us as of today and we disclaim any obligation to update them. In addition, we'll present certain non-GAAP measures, which should not be considered in isolation from or as a substitute for GAAP results. Reconciliation of GAAP to non-GAAP measures are included in today's earnings release. For the Q&A session today, we will ask that you observe a limit of one question and one follow-up. Now, I'll turn the call over to Anirudh. Anirudh Devgan: Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. Cadence delivered strong financial results for the second quarter of 2024, with broad based momentum across our product portfolio. Bookings were stronger than expected, leading to a healthy backlog and underscoring the robust demand for our innovative technologies. We exceeded our outlook on all key metrics and are updating our revenue guidance for the year to over 13% year-over-year growth. John will provide more details on both our Q2 results and updated outlook for the year. Generational trends such as hyperscale computing, 5G and autonomous driving, all underpinned by the AI super cycle, are driving strong design activity across multiple verticals, particularly in data center and automotive. Along with increasing chip complexity and system companies building their own silicon, these trends are creating tremendous tailwinds for our differentiated solutions. We are steadfastly executing to our intelligent system design strategy, extending our leadership in core EDA, while steadily expanding our footprint in the new system design analysis area. Customers are ramping-up their R&D spend in AI driven automation. Our Cadence.AI portfolio offering unparalleled quality of results and productivity benefits continues to gain momentum with orders more than tripling over the last year. Our solutions are enabling the massive AI infrastructure build out across the semi and system space. Additionally, we continue embedding AI in our EDA, SDA and digital biology solutions. In Q2, our long-term development partner, NVIDIA (NASDAQ:NVDA), broadly deployed Palladium Z3 to deliver to its next generation AI product roadmap, further solidifying Cadence's leadership in the industry. A marquee hyperscaler meaningfully expanded its partnership with Cadence in Q2, through a broad proliferation of our Cadence.AI EDA, SDA and hardware portfolio. The growing foundry ecosystem is driving increased design activity and creating significant opportunities for our industry leading products. And in Q2, we expanded our collaboration with several leading foundry partners. We announced that Cadence.AI digital and analog tools were optimized for Samsung (KS:005930)'s advanced node SF2 gate all around process, driving enhanced quality of results and accelerating node migration. We extended our long standing collaboration with TSMC, through a very comprehensive and innovative technology advancement, ranging from 3D-IC to design IP and photonics and providing optimized digital and analog full flows for TSMC's latest N2 process technologies. Our integrity 3D-IC platform is the industry's leading unified design, analysis and sign-up platform for multi-chiplet architectures. Integrity has been certified for all of TSMC's latest 3D fabric offerings and now has enabled several new features like hierarchical 3D-IC design. We also announced that integrity has been enabled for all of Samsung foundry's multi-die integration offerings accelerating the designer assembly of stack chiplets. Additionally, we released a complete Intel (NASDAQ:INTC) Foundry EMIB advanced packaging reference flow that is optimized to work seamlessly with Intel 18A technology. We are also collaborating with multiple foundries to optimize our industry leading IP cores for AI, HPC, mobile and automotive applications for their advanced process technology, so as to ensure seamless integration into customer designs. We saw strong momentum in our IP business with a delivering 25% year-over-year growth in Q2. As we executed to our profitable and scalable growth strategy, AI use cases, HPC and heterogeneous integration were the primary drivers fueling the demand for our HBM, PCIe, DDDR, 112 gig SerDes and UCIe products. We expanded our system IP portfolio with the addition of Cadence Janus Network (LON:NETW) on a chip solution, that manages high speed communications effectively with minimum latency, enabling customers to achieve their PPA targets faster and with lower risk. Emulation and prototyping have become mission-critical elements of chip design and software bring of flows. Following the launch of our market leading Z3 and X3 platforms, there is robust demand for these best-in-class systems, particularly by AI, hyperscale and automotive companies and we continue to ramp-up our production capacity accordingly. Verisium, our AI-driven verification platform, continued seeing rapid customer adoption with several market shaping customers, including Qualcomm (NASDAQ:QCOM), successfully using Verisium Sim AI for coverage maximization and achieving up to a 20x reduction in verification workload time. Our system design and analysis business continued its strong momentum in Q2, delivering 20% year-over-year revenue growth. As chiplet based architectures gained traction, our industry-leading integrity 3D-IC platform had increased adoption and expansion from large deployments at 5G hyperscale, memory and consumer customers. Our AI enabled Allegro X design platform, which is being rapidly adopted and driving competitive displacement as multiple aerospace and defense hyperscalers and EV customers take advantage of the platform's productivity and next generation capabilities. Allegro X's in design analysis capabilities are also driving a pull through of our Multiphysics analysis solutions. In Q2, a leading EV auto company forged a strategic partnership with Cadence, making a significant investment across the breadth of our Multiphysics portfolio. With the close of BETA CAE in Q2, we now offer a comprehensive Multiphysics platform covering electromagnetics, electrothermal, CFD and structural analysis solutions. Our digital IC and custom businesses delivered another solid quarter. Proliferation of our digital full flow at the most advanced nodes continued with close to 40 full flow wins over the last 12 months, especially at hyperscalers. With over 400 tapeouts, customers are increasingly relying on Cadence Cerebrus, the leading AI tool in the industry as it continues to deliver amazing PPA and productivity benefits. For example, Cadence Cerebrus has been delivering up to a 10% PPA gain for a global marquee systems company and is now deployed as part of the default flow for their latest designs at the most advanced nodes. Samsung foundry leveraged Cadence Cerebrus in both DTCO and implementation to achieve more than a 10% leakage power reduction on their SF2 gate all around platform. Socionext utilized SerDes closure and temper sign-off to reduce timing closure time by 73% and doubled productivity while reducing memory cost by 90%. Our AI driven Virtuoso Studio is the leading automated solution for analog and RF designs. And its new AI features allow much more efficient migration from one process node to another. Virtuoso Studio added 35 new logos in Q2, led by top hyperscalers, aerospace and defense and automotive customers. In summary, I'm pleased with our Q2 results and the continuing momentum of our business. The AI driven automation era offers massive opportunities and the co-optimization of our comprehensive EDA and SDA portfolio with accelerated computing and AI orchestration uniquely positions us to provide disruptive solutions to multiple markets. Now I will turn it over to John to provide more details on the Q2 results and our updated 2024 outlook. John Wall: Thanks, Anirudh, and good afternoon, everyone. I'm pleased to report that Cadence delivered strong results for the second quarter of 2024, finishing the first half with backlog of approximately $6 billion. Also, we expanded our Multiphysics platform in Q2 by completing the acquisition of BETA CAE. Here are some of the financial highlights from the second quarter, starting with P&L. Total revenue was $1.061 billion. GAAP operating margin was 27.7% and non-GAAP operating margin was 40.1%, and GAAP EPS was $0.84 with non-GAAP EPS $1.28. Next, turning to the balance sheet and cash flow. Cash balance at quarter end was $1.059 billion, while the principal value of debt outstanding was $1.350 billion. Operating cash flow was $156 million. DSOs were 49 days and we used $125 million to repurchase Cadence shares in Q2. Before I provide our updated outlook, I'd like to share some assumptions that are embedded. Our updated outlook includes BETA CAE and it contains the usual assumption that export control regulations that exist today, remain substantially similar for the remainder of the year. Our updated outlook for 2024 is revenue in the range of $4.6 billion to $4.66 billion. GAAP operating margin in the range of 29.7% to 31.3%. Non-GAAP operating margin in the range of 41.7% to 43.3%. GAAP EPS in the range of $3.82 to $4.02. Non-GAAP EPS in the range of $5.77 to $5.97. Operating cash flow in the range of $1 billion to $1.2 billion and we expect to use approximately 50% of our annual free cash flow to repurchase Cadence shares. With that in mind, for Q3, we expect revenue in the range of $1.165 billion to $1.195 billion. GAAP operating margin in the range of 27.7% to 29.3%. Non-GAAP operating margin in the range of 40.7% to 42.3%. GAAP EPS in the range of $0.83 to $0.93 and non-GAAP EPS in the range of $1.39 to $1.49. And as usual, we published a CFO commentary document on our Investor Relations website, which includes our outlook for additional items, as well as further analysis and GAAP to non-GAAP reconciliations. In conclusion, I am pleased with our strong Q2 results. We exceeded our outlook on all key financial metrics, a good finish to the first half and ongoing demand for our solutions sets us up for strong growth in the second half of 2024. As always, I'd like to close by thanking our customers, partners and our employees for their continued support. And with that, operator, we will now take questions. Operator: Thank you. We will open the line for questions. [Operator Instructions] Your first question comes from Charles Shi with Needham & Company. Please go ahead. Charles Shi: Hi. Good afternoon. Thanks for taking my questions. Anirudh and John, maybe the first question, I do want to ask a fairly big question -- a big picture one. So, you did pick up your outlook for the year, but some of that really comes from BETA CAE. But the broader question is the semiconductor -- global semiconductor sales, it's on-track to grow a lot faster, let's say, compared with you and even your peers synopsis and -- but this seems to me kind of like a reversal of the trend of the last three years when you actually did outgrow the semiconductors. But with so much AI being a big driver for semiconductors, we do wonder whether it's either through pricing or through some other measures Cadence can actually gain a little bit bigger piece of the pie from overall semiconductor, especially from AI? I don't know if you can provide some thoughts today. I'm not necessarily asking how to change the trend in terms of the value capture, but any thoughts would be great. Thanks. Anirudh Devgan: Yeah. Hi, Charles. Thanks for the question. I mean, first of all, I'd like to say that overall we are pleased with how we are performing. If you step back -- because you asked a longer term question, right, if you step-back, we will deliver we expect more than 13% revenue growth and about 42.5% operating margin. So, I think that's a best-in-class combination of both revenue growth and operating margin. And then if you look at our CAGR over last three years, which is one of our kind of favorite metrics, that's also performing pretty well in terms of growth and margin expansion. And you mentioned semi-cycle, I mean, it's encouraging to see that there is going to be growth this year, which it was not there last year. But as you all know, Charles, we are tied to the R&D spend more than the revenue of our customers. And, of course, if the revenue goes up, they're more likely to spend on R&D, but in general, the -- our customers, both system and semi-companies continue to spend on R&D and these are long-term projects. So, we'll see how that goes as the semiconductor revenue improves, but this is not instantaneous effect on R&D spend. There is always some lag sometimes. And so we will -- but we are encouraged to see the improvement in semi spending overall in a semiconductor revenue. So, I would like to say -- and you can see in our backlog also, we maintain a pretty healthy backlog. So, overall, I think things are performing well and this AI is broadening out. I mean, you know this well. AI is broadening out beyond datacenter, which we are glad to have great partnerships, two automotive, two more edge consumer devices like phones and PCs. So overall I feel pretty good about the industry and, of course, our position in it as the essential provider of design software. Charles Shi: Got it. Maybe a quick follow up on China. It looks like China revenue is still pretty light in the second quarter. So, I recall you were thinking maybe China contribution is probably going to be slightly less than the mid-teens or 15% -- less than 15%. But even if -- let me assume the China revenue gets to like a 14%-ish, it still implies a little bit of a second half a reacceleration of the China revenue growth. Is that still the case or you think maybe compared with the three months ago, China actually may get a little bit weaker than you previously thought? Thanks. John Wall: Thanks for the question, Charles. And that's -- I mean, regional revenue is notoriously hard to predict. I will say that at the midpoint of our current revenue guide, we only need China to get to 13% of overall revenue to be able to hit that midpoint. I mean, when you look at performance in Q2 and the first half, we had a very strong bookings first half, very pleased with customers' response to our new hardware systems. The IP and SG&A businesses continue to grow strongly. Core businesses continue to scale really well and we're focused on profitable revenue growth. I know in your first question, you indicated that we hadn't raised the outlook, but we did raise non-GAAP EPS by $0.06. We're very pleased with the improvement in profitability. And when you look at the current guide, we're actually on track for 50% incremental margin excluding the impact of BETA CAE now. BETA CAE is in our guide, but it's in our guide at what we previously communicated in the press release is $40 million of revenue and about $0.12 dilution to non-GAAP EPS. There is an impact to OP cash as a result of BETA CAE as well. But overall, very, very pleased. We thought it was prudent to assume lower China revenue for this year at the midpoint of our guide puts the -- but that's it. We only need 13% to get to the midpoint of guidance. Charles Shi: Thanks, Anirudh and John for that additional color. I appreciate that. Gianmarco Conti: Yeah. Hi, there. Thank you so much for taking my questions. And so on my first one, could you talk a little bit about the implied Q4 ramp-up to 29% growth at the midpoint of guidance? And what is giving you the confidence in reaching the target? Is it mostly hardware visibility coming through or are there an unusually higher number of Q4 renewals that you're waiting for? Any color here would be great. Thank you. John Wall: Yes, Gianmarco. I mean, there's no real change from what we said last quarter. I mean, it's effectively the shape of the revenue curve for the year. We're expecting upfront revenue -- a lot more upfront revenue in the second half, it's just the timing of shipments really that's -- upfront revenue typically comes from IP, hardware and to a lesser extent some software on the SG&A side. With the hardware, it takes time to build the systems, we have higher revenue in Q4 versus Q3 as a result. But also from IP, there is -- IP is -- we recognize revenue and IP based on the timing of deliveries. We're confident in that guide. It's just the shape of the -- shape of Q3 and Q4 is what we have in the guide now. Gianmarco Conti: Okay. Great. So my follow up would be on hardware. And if you could talk a little bit about how much visibility you have actually in H2? And are you booking and delivering in the same quarter, hence, while we're not seeing a major uplift in backlog growth or is it -- is there a different dynamic to it? I'm trying to understand if you're booking manufacturing and delivering all in the same quarter for hardware essentially? Thank you. John Wall: Thanks for the question. Yes, in some cases, on the newer systems, there is a timeline, a lead time to building the systems. We have more bookings than our ability to actually fulfill those bookings. But we do have some inventory of the older systems, we're able to deliver those in the quarter. So I mean, there's always a mix. We did have a challenge in the past with getting inventory and building the inventory as fast as we could for the demand. I think we've dealt with a lot of that. You'll also see in the OP cash guide, there is -- we're planning to purchase a significant amount of raw materials for building inventory in Q3. That's the biggest portion of the change in OP cash guys. Anirudh Devgan: Also just to add on overall -- yeah, hey, just to add on the overall hardware cycle, as you remember, we launched new systems in April, just couple of months ago, few months ago now. And the response to them has been phenomenal. Actually, we -- these palladium, especially both palladium and protium, but these systems can design chips like I mentioned last time with capacity of 1 trillion transistors and the current's biggest chip is like 200 billion transistors, most of them are 100 billion or less. So we are 5x to 10x higher capacity than what is needed. So that should suit the industry well for next several years. And I'm also what pretty pleased about is that we delivered production deployments of our new systems to some very major customers. So we highlighted the NVIDIA, our development partner with a significant deployment of Z3, also one of the leading mobile system -- mobile companies in the world and one of the leading hyperscalers. So it's across multiple markets that we delivered our latest systems, which are performing exceedingly well. So that sets up very well for the future and also competitively. And we have a significant lead given the nature of our systems. It's a combination of -- protium is based on FPGA and then palladium is based on our own chip at advanced TSMC process. And Cadence is the only solution that does that and provides a unique value. So overall, I think hardware business is performing well. And as you know, these are multi-year upgrade cycles. So this is not all-in in '24. So we'll see how things go in '25 and '26. Vivek Arya: Thanks for taking my questions. So on an absolute basis in fiscal '24, organic sales growth rate is robust. But in terms of revisions, it has stalled, right, essentially no real movement since what you suggested at the start of the year. So I'm curious, Anirudh, how has the year transpired versus what you thought and how do you think about bookings and backlog trends into the second half? Should we expect that backlog stays around the $6 billion? Will it start to pick up? Just I'm trying to understand that should we be thinking about sales accelerating from here or this being kind of the sustainable growth rate for the company? Anirudh Devgan: Yeah. Hi, Vivek. Good question. So in general, what I would like to say is, like we mentioned last two times, the shape of the curve this year is unique to Cadence, given multiple factors. This is not what we expected last two years. So this time it's more back end loaded for the reasons we mentioned before. So the guide is a little different and we are also given that shape of the curve more prudent in our guide like we were in Q2 and then we rather overachieve and deliver that and give the team flexibility to do the right business for the long term. So I think that's the difference this year versus last few years is given the shape of the curve, we have more prudence in our revenue guide like John mentioned and John can comment on the backlog expectations, yeah. John Wall: Yeah. I mean we don't guide bookings, but we were very pleased with the strong bookings in the first half. And I get the question, Vivek. I mean, essentially, we're seeing a strong demand for our hardware systems. We're seeing strength across all our businesses. And I guess your question is that when you add in BETA CAE, you're not really taking the revenue guide up. I think essentially I mean if your question is what would we like to see improve, I think it's the China revenue percentage. It was 12% in Q1, 12% in Q2. It improved in Q2 over Q1 and we think it will continue to improve through the year. But right now, our guide only assumes -- only needs to get to 13% China to hit the midpoint of that guidance. Vivek Arya: Got it. And for my follow-up, you mentioned BETA CAE quite a drag to EPS. I think you mentioned $0.12 dilution. And almost, I think what is like a $300 million hit to operating cash flows. Can you describe that acquisition a little more? And when does it start to become accretive to your financials? Thank you. John Wall: So yes, Vivek. On the $300 million drop in operating cash, just to clarify that, about 40% of that $300 million drop is due to M&A. I mean, in things like BETA CAE, some of the purchase price, the geography of where the operating -- where the cash impact goes, it flows -- some of that payment flows through OP cash. The bigger portion of the impact on operating cash is our plan to purchase a lot of inventory raw materials for the hardware demand that we're seeing. We're pre-purchasing a lot of inventory. So you'll see our inventory spike in Q3 with all of the raw materials we're purchasing. We want to make sure that we have all the raw materials necessary to ramp-up the build out of our hardware systems. And then in relation to BETA CAE, there's -- I mean it's very recent acquisition. The -- it's no different to what we have in the press release. In fact, on the press release, we said we were expecting $40 million of revenue at the midpoint. That's embedded now in the guide. We're expecting $0.12 dilution on -- from our non-GAAP EPS, that's also in the guide now. And we expect it to be -- I mean, operationally, it will be accretive next year that there is some interest cost associated with the test that -- but we think it will be accretive next year. Anirudh Devgan: Also, a couple of things to clarify. So one thing, this purchase of inventory for the hardware systems. I mean, that will be used over multiple years. It's not just for '24. So I think it's a one-time investment that pays for several years and that's a prudent decision to make to get the right kind of parts for the future. And then on BETA, it completes our system analysis portfolio to add structural analysis and it also strengthens our position in automotive. Of course, data center is a big vertical with all the AI super cycles. But I think one of the other exciting verticals is automotive with all this electrification and also AI getting added in the self-driving or driver assistance. So we see a lot of design activity in automotive. Also, automotive is also moving through chiplets and 3D-IC. So I think automotive has all the three tenants of our IST strategy. It has silicon content that is increasing and more and more system design, of course, is needed for the design of automotive. And AI for all the data and computational software. So for that reason, BETA CAE is -- completes our portfolio in automotive and positions us well in the future. And this is not just with the semiconductor companies doing automotive, but also the system companies now. OEMs doing more and more chip design, doing more of our system solutions. And I also want to highlight and congratulate McLaren. There was a big news this weekend. McLaren got one and two in Hungarian F1 and we have been working with them for last few months and years and it's good to see them do well as we deploy. So I think the automotive solution that we are driving is a combination of silicon system and then AI and we are seeing the results of that through organic and inorganic expansion. Vivek Arya: Thank you. Operator: Our next question comes from Joshua Tilton with Wolfe Research. Please go ahead. Joshua Tilton: Great. The first one is just kind of more of a clarification. I know there's been a lot of questions around the mix in upfront first recurring. I guess what I'm just trying to understand is -- and I could be wrong with my math here, but it feels like it was -- the upfront component was still a little light in 2Q and now we're a little bit more second half weighted, more 4Q weighted because you need time to develop inventory. Am I thinking about that the right way? John Wall: That's fair, Josh. I would do the inverse on you in terms of bookings were stronger than we expected in Q2 and we got some uplift in recurring revenue. It took a bit of pressure off on the upfront side that -- and we are -- I mean, we're taking orders. We've got strong demand for the hardware and we're building those hardware systems as quickly as we can, particularly the newer hardware orders. IP is doing really well and system design and analysis is doing really well. And what we've reflected in the guide is our expectation of how much of that revenue will fall in Q3 and Q4. We took the opportunity, we really derisked the guide for the year by reducing our expectations for China. Upfront, we still expect to be in a range of 80% to 85%, but I think we might get slightly more recurring revenue as a result of the strong bookings in the first half. Joshua Tilton: That makes super clear. And then I guess just my follow up to that is and I guess it's another visibility question, but how much of what's baked into the guide from an upfront perspective? Do you feel like you have like good inventory levels to meet that guidance or does the guidance that you put out today still require you to build and develop inventory between now and shipping those boxes? John Wall: Yes. But it's -- we definitely need to build hardware and you'll see the impact on our inventory in Q3 with the amount of raw materials we're purchasing. But as Anirudh says, that's a one-time thing that we're doing to try and get raw materials and to build those systems quickly as we can. But the -- a lot of the upfront revenue in the second half comes from the strength in our IP business and we have those orders in backlog and it's just a case of executing against those. We also have some SD&A, our system design analysis upfront revenue that's scheduled to occur in Q3 and Q4. Again, most of that is from orders in the system. On the hardware side, it's kind of mid to high-single digits is what we were expecting the SPG Group to deliver to be able to hit the midpoint of that guidance. Joshua Tilton: Super helpful. And then just -- but just a quick follow up is, really often to see the recurring revenue growing sequentially this quarter. Is there any way you can maybe help us on what the expected recurring versus upfront mix is supposed to be in 3Q? And then I'll see the floor. John Wall: I don't have that to hand, but just let me come back to that. Let's see if I can dig it out here. Joshua Tilton: Thanks, guys. Congrats. Operator: Our next question comes from Ruben Roy with Stifel. Please go ahead. Ruben Roy: Yes. Thank you. John, just a very quick question and then I guess a follow up and then I'll ask a real question. But on the inventory purchases, is -- am I right in assuming that that's mostly for the Z3/X3? And has anything changed in terms of when you're thinking about general availability of those hardware products? John Wall: Yes, that's correct. But the vast majority of the purchases are to -- to get raw materials to help build those new systems. Ruben Roy: And then in terms of the time? Anirudh Devgan: Yeah. Just to clarify, I mean, also -- I mean, we have two systems, right? So, palladiums, we design ourselves and we manufacture the chip in TSMC and protium. We also design ourselves, but the silicon itself is primarily from AMD (NASDAQ:AMD) with Xilinx (NASDAQ:XLNX) FPGAs. So, a lot of this purchase is for X3s and the FPGAs and that should serve us for multiple years. On Z3, like we said, we are already shipping them and they already deployed in production this quarter. So, I think Z3 is slightly different than X3 in terms of the mix of the silicon content, just to clarify that. Ruben Roy: Yeah. Okay. I apologize, Anirudh. I thought they were going to sort of certain customers not generally available. But thank you for that. And then the real question just around -- some of your top customers have been accelerating the rhythm of bringing sort of their very complex chips to market. NVIDIA and AMD certainly have accelerated their roadmaps to sort of a one year rhythm. Are you seeing any changes in sort of the way your business is impacted or affected kind of by the acceleration of their product roadmaps yet? Anirudh Devgan: Yes, I would like to -- I think we're seeing more and more design activity like you said the rhythm or the Cadence of the products. And also different kind of chips. It's not just that big data center chips, but even within them, there is more and more customization. Of course, the hyperscalers doing their own silicon. And then now we talked about our partnership with, for example, Qualcomm and they are doing a consumer or edge laptop AI devices. So, the amount of AI is also spreading to other verticals, not just obvious, the big one on data center and data center design is accelerating. And I think when we look at it, we still see that the data center part of AI still should accelerate, at least the visibility we have for next couple of years, so we'll see how that goes. And therefore -- and the other thing is automotive -- automotive takes normally a little longer, but we're already seeing design activity and the deployment may be few years down, maybe after data center. And then consumer and PCs already starting with phones and laptops. So, overall we do see accelerating deployment of AI through the whole semiconductor ecosystem. And we are very proud of our position in it, whether it's 3D-IC, whether it is data center chips, whether it's our own AI products, we are winning almost all kind of engagements on all -- on our kind of Cadence.AI portfolio. So, overall we do see more and more design and deployment of AI infrastructure and our own AI product. Ruben Roy: Yeah. And if I could just come back to Josh's question, sorry, if I could just come back to Josh's question on the revenue mix for Q3 that for recurring revenue, we expect -- sorry, 80% to 85% of revenue to be recurring for the year and Q3 includes the middle of that range and then the balance is Q4, so you can do the math and work out what the upfront piece is. Operator: Our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead. Jay Vleeschhouwer: Thank you. Good evening. Anirudh, the question about the evolution of the product portfolio for EDA generally and perhaps for SG&A specifically. What I'd like to ask about is how you're thinking about packaging the products? Over the last year, you've introduced a couple of products with the term Studio in the name. And I'm wondering if you're thinking about more and more bundling or packaging of that kind via that nomenclature for the EDA products and then specifically for SG&A? And now that you do have multiple codes, how are you thinking about packaging or integrating across the various simulation codes that you've assembled now in acquisition? Then I'll ask my follow-up. Anirudh Devgan: Yeah. Hi, Jay. Good question. So, I mean, as you know, in EDA when we go to lower nodes, there is more integrated solutions which are required, whether it's digital or analog or verification. And that is further accelerated by use of AI. So, like Cerebrus, for example, in digital will integrate not just place and route, but also synthesis and sign-off. So, I think that trend is definitely there. And same thing with Verisium, our leading AI product for verification also integrates the four major verification platforms we have. So, it is more and more platform driven approach. And we can do that now with SD&A now that we have a complete portfolio. And we mentioned like a leading EV company like OEM, one of the leading -- the most advanced EV companies deployed our entire portfolio. So as we have a bigger portfolio in SD&A, it does let us do what we have always done in EDA, focus on solutions, not just on individual products and integrate solutions with our own kind of native integrations, whether it's analog, digital verification and now with SD&A. Jay Vleeschhouwer: All right. As follow up, I know it's still quite early in the propagation of AI and ML by you and your peers to the customers, but are you beginning to see any commonality or convergence towards a relatively small number of use cases that customers are mostly employing the tools for? And then relatedly, are you also seeing AIML adoption having any meaningful effect on your services revenue? Anirudh Devgan: Yes, Jay. So what I would like to say is that the number of use cases I see is increasing at this point. I mean, of course, one of the biggest use case that we started with was digital implementation since it is so kind of heavy kind of design process. So automating the digital implementation process was huge benefit. And we talked even this quarter Cerebrus being deployed at one of the leading system companies for the default flow also used by Samsung. Also you see verification be used by Qualcomm. So I think what is happening in that Cerebrus or the implementation use case, two things. One is that it is going not just for design, but also for DTCO, design technology co-optimization and also for higher level in the design process like floor planning and 3D-IC exploration. So it's all not just for implementation of the design, but also for architecture and exploration. And the other thing is like there is more workflow automation. As customers get used to Cerebrus, they are using it not just towards the end of the design process, they're using it right from the beginning throughout the design process. So it allows us to do more workflow automation. And Cerebrus has also evolved to allow much more of an entire workflow rather than a specific implementation use case. And then same thing is happening in terms of more and more use cases, for example, packaging. Allegro X is doing pretty well. And recently one of the leading customers in 3D-IC used its capability to automate, for example, routing for automating placement, which was not there before in PCB and package design. So overall, I do think it's maturing of the workflows. And then with this LLMs and Gen AI, we have kind of several workflows for taking spec to RTL and we highlighted some of them last quarter. So I actually do see finally that in the -- we are always kind of building out the AI infrastructure, these big companies designing chips. But I do see now there is a turning point in deployment of AI for the design process with the initial workflow being Cerebrus and digital implementation now to expanding to LLM based art, spec -- expanding to DTCO, expanding to 3D-IC, of course, expanding to analog, packaging, verification. And we do have the most comprehensive AI portfolio in terms of all five major kind of product lines. So actually, it's a pretty encouraging view compared to a year ago. Jay Vleeschhouwer: Thank you, Anirudh. Thank you, John. Operator: Our next question comes from Harlan Sur with J.P. Morgan. Please go ahead. Harlan Sur: Hi. Good afternoon. Thanks for taking my question. Is the bookings profile for the full year still expected to be 40% first half, 60% second half? Because if it is, then that would imply book-to-bill greater than 1 for the full year, total backlog up about 9% this year to about $6.5 billion. But, I guess, how much of that backlog is due to the BETA CAE acquisition? What I'm just trying to figure out is ex BETA CAE, if core cadence orders and backlog are expected to be up this year, which would continue the strong sort of six to seven year trend of increasing orders and backlog for the team? John Wall: Yes, it's hard. And again, like I say, it's -- we're not guiding bookings, but we were very, very pleased with the strong first half for bookings. The BETA CAE contribution to backlog is very, very small. It's immaterial because BETA CAE, their revenue is upfront. So that's the upfront piece of the business rather than the recurring revenue. But yeah, we're very pleased. I mean, you can typically expect us to always be driving for a book-to-bill of greater than 1, but we don't guide. We don't guide bookings though. Harlan Sur: Okay. Perfect. Thank you. Anirudh, there's a pretty interesting dynamic with your memory customers, right? They're big customers of your custom product family Virtuoso, but they are moving more and more to advanced digital design, right? The HBM control logic chip, for example, is moving to leading edge technologies and advanced chip design. Similarly, with some of your NAND customers, they're moving towards more of this sort of bonded CMOS periphery to array. The periphery chip again is also moving towards advanced digital design as well. So are you starting to see more adoption of your advanced digital implementation and verification products by your memory customers? And then does the leadership in memory via Virtuoso sort of give you an advantage as they bring on more advanced logic design capabilities? Anirudh Devgan: Yes, Harlan. That's a great observation and we are fortunate to have very deep and long standing partnership with all the major memory companies. At least there are three big ones and then maybe two the next level. But overall, we are -- given our strength, like you mentioned in Virtuoso, which is the platform for choice for all memory implementation. And yes, there is a lot more digital and implementation design happening at memory companies, primarily driven by HBM and other trends. And actually also there is some kind of -- I mean, they were always doing -- they were always doing digital, but it's lot more now. And there is trend of even integrating TSMC's technologies with kind of memory. And given our strong partnership with TSMC, that also helps us with the memory companies. And as you know, they are also doing a lot more 3D-IC, all the three big memory companies and these memory layers are going from -- they're actually one of the most advanced 3D-IC with the memory layers going from 8 to 12 and that also plays to our strengths. And even in my prepared remarks, I mentioned, for example, our partnership with Samsung and 3D-IC. And then so is true with the other kind of two major players in memory. So we are pleased in our position in memory and the emerging trends of HBM and 3D-IC integration and we'll see how that progresses. But I think memory is often overlooked in -- I don't need to tell you, but just in general, memory is often overlooked in the big AI super-cycle. It's not the big chips, logic chips, but memories play a very essential role and we are very well-positioned both with the leaders like NVIDIA on the logic side and then we highlighted Samsung and the other big memory players in general. Harlan Sur: Thank you for the insights. Operator: Our next question comes from Jason Celino with KeyBanc Capital Markets. Please go ahead. Jason Celino: Great. Thanks for taking my questions. So lots of questions so far on the hardware timing. But I think, John, on prior calls, you said that the hardware delivery times typically are like eight to 10 weeks, that's what it is for like a normal cycle. But are you saying the lead times for the Z3/X3 are longer than this because the demand is much better than what you're seeing? John Wall: Demand is strong. Demand is strong. What I was trying to point out was that we do have inventory of the older systems that we can deliver right away. The newer systems we're having to build them as quickly as we can because the orders are coming in faster than we can build them. So the lead times is a bit of a moving target in that respect. We are planning to purchase a lot of raw materials and build as quickly as we can in Q3. So you'll see a significant uptick in our inventory balance at the end of Q3. Jason Celino: Okay. No, that's helpful. And then just a clarification, I think you were saying like the SDA group to hit your guide needed to do like mid to high-single digit growth with -- I'm not familiar with FDG, is that the functional verification kind of guide for the year? And then if you're parsing out, like does that imply like what do we need to see on IP since that's the other upfront component to hit the guide? Thanks. John Wall: Yeah. That's fair. That's -- yeah, IP is having a really, really strong year as is system design analysis, that'll be our two fastest growers for the year. And then again, there's some upfront revenue from them. It's more weighted towards Q4 versus Q3. So, we have the shape of the curve is really driving our guide and I would clarify -- I would categorize it as prudent. Anirudh, would you add anything? Anirudh Devgan: No. That's right, John. And sorry for the acronym. SVG is System Verification Group. So, when we say SVG, that means verification. Yeah. So, I think that's what John was implying. Verification should grow, but right now, we are not assuming massive growth in verification for this year, but it should grow compared to last year. And then like you mentioned, some of the upfront revenue is also IP. If you remember, we highlighted in Q1, a new partnership with Intel and they are -- we are deploying our IP portfolio for the Intel process. So, it takes time to do that and deliver to that and some of it is in Q3 and Q4. And also this time, we talked about our expansion partnership with Intel on both on EMIB, their packaging and 3D-IC platform and 18A, just to clarify. Jason Celino: Very good stuff. And, yeah, thanks for the lingo acronym help, Anirudh. Very helpful. Operator: Thank you. Our next question comes from Lee Simpson with Morgan Stanley (NYSE:MS). Please go ahead. Lee Simpson: Great. Thanks for fitting me in and well done in a good quarter. Just wanted to get some clarification. I don't know if I heard correctly, but I think I heard you say that a mobile OEM had taken the Z3 platform. And if that's the case, do you have a sense for what the emulation work might be? Would it be for chips on device or would it be for chips both on device and perhaps in, let's say, a network situation? Thanks. Anirudh Devgan: Well, good question. We don't comment on individual customer or specific customer use cases, but in general, these hardware systems, as you know, are used both for chip design and for system software bring up. So, both use cases are there and we are the leading platform given Palladium and Protium and this is true for all -- even in the AI use case, even in the data center AI use case, lot of it is for software development. Actually Palladium is a platform for choice to even our AI chip customers to give a model to their customers because even before they have a chip, they can give a Palladium model to see how it performs. So, it's both for chip design and also for system design and system software. And that's true for multiple major verticals, data center, mobile, automotive, these things. Yes, thank you. Lee Simpson: Yeah. Thanks. Just on those multiple verticals, if we look at the incidence of 3D-ICs coming through, I get the sense that that's starting to hit the tape now in automotive. You have mentioned EV companies as a collaboration of late, but you have mentioned a number of chip makers also. I wonder if it's possible at this point or even if it's relevant to just maybe talk about the split between the customers? Are we talking system customers, i.e., OEMs and Tier-1s in the majority right now or is it still major semis, chip makers for the automotive work? Thanks. Anirudh Devgan: So, great question. So, first to -- yes, like you correctly pointed out, I think the 3D-IC is a lot more prevalent in automotive than, let's say, six to 12 months ago. And, of course, the original Genesis is HPC and data center AI, but now all these chiplets and 3D-IC platforms are moving to automotive, okay. And I think over-time, we'll move to other verticals like consumer. They already moved to laptop, for example. Several of the laptop chips are 3D-IC, but I think that will be the progression. It will gradually go to all verticals, but definitely active in automotive. Because, as you know, with the chiplet architecture, the customer doesn't have to redesign all the chips and also they can use some standard chips and have some specific chips which are more value added for them and that's particularly true in automotive as each OEM wants to differentiate versus the other OEM. So, this trend is not just for semi-companies to your question, it's also there in OEMs. And I think actually it'll be more -- I do think that the 3D-IC trend makes even more sense for end OEMs because then they're able to customize and differentiate versus the other. So, we are seeing that and we are seeing that in other geographies as well because as you know, China is pretty strong in EVs and then US and then Japan, there's a lot of activity. So, overall, I think automotive, there is more activity on 3D-IC, including both semi and end OEMs. Lee Simpson: Great. Thanks, Anirudh. Great color. Operator: Our next question comes from Clarke Jeffries with Piper Sandler. Please go ahead. Clarke Jeffries: Hello. Thank you for taking the question. My first question is, Anirudh, how do you expect the delivery of these third generation systems to translate to additional software consumption in the recurring revenue portfolio? These products are happening with verification acceleration software bring up, but how do you see that additional consumption panning out after the delivery of a new ZRX system? And then I have one follow-up. Anirudh Devgan: Yeah. Great question. I mean, like what John was saying, when we say SVG, System Verification Group, so hardware is part of that group. Even though hardware is a significant business, we organize as part of verification. And one of the big reasons for that is apart from -- in verification, apart from the hardware systems, we have a lot of other verification products which are doing pretty well like Jasper for formal verification, Xcelium for logic stimulation. And the customer is looking for an integrated solution on verification. To the earlier question that Jay had about what is happening in SDA, in EDA, we always have believed for last several years that it's going to be integrated solution in verification. So, the stronger our hardware products get, we do expect it should help our software verification products, things like Xcelium and Jasper and Verisium because lot of -- some of the hardware capacity is also used for what is called sim accel, simulation acceleration in which they use Palladium to accelerate logic simulation. So, there is a natural tie in between verification software products and verification hardware products. Now exactly how it pans out, we just have to see, but the strength in hardware should help us in our overall portfolio strength. Clarke Jeffries: Perfect. And then one follow-up for John. I think just to kind of finally put a cap on the whole discussion around timing. I guess, then is it fair to say that sort of $600 million odd of upfront revenue in the second half, maybe a majority of that is coming from IP and SG&A and not necessarily the Gen 3 systems and that maybe the interpretation is that there's going to be more of a demand curve in the beginning of '25 rather than this $600 million being strongly driven by third gen Palladium and Protium. Is that a fair takeaway? John Wall: No. I think that is, Clarke. Yeah. That's exactly right. I mean, we always knew that it would take time to build the hardware system. So, we originally included that in our guide in the first place. Clarke Jeffries: All right. Perfect. Thank you for taking the questions. Operator: Our final question comes from Joe Vruwink with Baird. Please go ahead. Joe Vruwink: Great. Thanks for fitting me in. I did want to follow up to stay with verification and just this raw material investment. So, the thing I'm trying to reconcile is, I would imagine you entered this year expecting the new platform, strong demand, meeting the scale production and therefore invest in inventory. So, I guess, I'm wondering what changed in the quarter that warranted this updated assumption for cash flow and raw material purchase? And really at the heart of the question, did something change about your hardware demand expectation, not necessarily for 2024, but maybe out into 2025 and we just happen to be getting that news now because of the need to update your cash from OPs forecast associated with the inventory input? John Wall: Yeah. That's a great question, Joe. I mean, the leaders of that business, I spent plenty of time with them this last quarter because they were monitoring what the demand was like for the new systems. Demand is quite strong. And then the key thing to highlight here is it's a one-time multi-year purchase of inventory raw materials. They feel very, very confident in the longevity of these systems and the longevity of that demand. And they wanted to pre-purchase multi-years of inventory in Q3. Now that was news to us, if you like. So we thought that one-time thing we wanted to include it all now in Q3 and not impact -- that doesn't impact next -- I mean, it will be favorable for next year's operating cash. Joe Vruwink: Okay. Great. Then lastly, you mentioned at the start, orders for Cadence.AI tripled year-over-year. I don't think that's possible without also getting a lift in the base business, both across EDA and SD&A. I guess, on an ACV run rate basis, what has the AI lineup meant for Cadence overall? And does this create a step up in value where as you start pulling these contracts from backlog in coming quarters, it will become more noticeable in revenue and we'll kind of see the AI contribution more than we have to this point? Anirudh Devgan: Yeah. Good question. I mean AI is adding the -- like I was mentioning before, I mean, it's almost become like table stakes now. So all our new contracts include our Cadence.AI portfolio as customers get more and more kind of used to using them. And once you start using the AI portfolio, it's difficult to go back to not using them. So without getting into like what happens exactly to future revenues and bookings, we are always cautious about that. But, in general, there is uptick with more customers deploying AI. And whenever we have new contracts, we are including them as it makes sense in them. Joe Vruwink: Okay. Thank you very much. Operator: I will now turn the call back to Anirudh Devgan for closing remarks. Anirudh Devgan: Thank you all for joining us this afternoon. It's an exciting time for Cadence with strong business momentum and growing opportunities with semiconductor and system customers. With a world class employee base, we continue in delivering to our innovative roadmap and working hard to delight our customers and partners. On behalf of our Board of Directors, we thank our customers, partners and investors for their continued trust and confidence in Cadence. Operator: Thank you for participating in today's Cadence second quarter 2024 earnings conference call. This concludes today's call. You may now disconnect.

Earnings call: IQVIA sees steady growth in Q2 2024, focuses on AI By Investing.com

In the second quarter of 2024, IQVIA (IQV) reported a revenue increase of 2.3% year-over-year, reaching $3,814 million, and an 8.6% growth in adjusted diluted earnings per share. Excluding foreign exchange and COVID-related impacts, revenue growth was 5%. The company's confidence in its business outlook remains strong, with a particular emphasis on mission-critical projects and new drug launches. Growth in biotech funding and acceleration in Evidence-Based Solutions (EBP) funding were also highlighted. IQVIA's Technology & Analytics Solutions (TAS) is forecasted to grow by 6% to 7% for the rest of the year, while the Research & Development Solutions (R&DS) segment has achieved a record backlog from robust net new bookings. IQVIA's steady performance in the second quarter of 2024 reflects the company's strategic focus on AI and analytics solutions in the healthcare industry, as well as its ability to adapt to market conditions and client needs. With a strong outlook for its TAS and R&DS segments and a commitment to leveraging acquisitions for growth, IQVIA is positioning itself for continued success in the evolving healthcare landscape. IQVIA's (IQV) second-quarter performance in 2024 underscores its robust position in the healthcare analytics and life sciences industry. As the company leverages artificial intelligence and analytics to drive growth, certain metrics and InvestingPro Tips offer additional insights into its financial health and stock performance. InvestingPro Data highlights a market capitalization of $43.76 billion, showcasing the company's significant presence in the market. The P/E ratio, a measure of a stock's valuation, stands at 31.81, aligning with IQVIA's growth narrative when considering its earnings expansion. Moreover, the company's revenue growth of 3.23% over the last twelve months as of Q2 2024 demonstrates a steady upward trajectory, aligning with the reported quarterly increase. InvestingPro Tips further enrich the outlook for IQVIA. Notably, the company's perfect Piotroski Score of 9 indicates strong financial health, which may reassure investors of its operational efficiency and profitability potential. Additionally, the stock's low price volatility suggests a stable investment option, which could be attractive for risk-averse investors. For readers seeking a deeper analysis, there are 14 additional InvestingPro Tips available, providing comprehensive insights into IQVIA's performance and potential. To access these tips and gain an edge in your investment decisions, visit https://www.investing.com/pro/IQV. Moreover, use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, offering valuable information to guide your investment strategy. IQVIA's continued focus on innovation in AI and analytics, coupled with a solid financial foundation, positions it well for future growth within the dynamic healthcare sector. The InvestingPro insights affirm the company's commitment to driving value for its clients and shareholders alike. Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA Second Quarter 2024 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] As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Kerri Joseph, Senior Vice President, Investor Relations and Treasury. Mr. Joseph, please begin your conference. Kerri Joseph: Thank you, operator. Good morning, everyone. Thank you for joining our second quarter 2024 earnings call. With me today are Ari Bousbib, Chairman and Chief Executive Officer; Ron Bruehlman, Executive Vice President and Chief Financial Officer; Mike Fedock, Senior Vice President, Financial Planning and Analysis; and Gustavo Perrone, Senior Director, Investor Relations. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call in the Events & Presentations section of our IQVIA Investor Relations website at ir.iqvia.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K and subsequent SEC filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. I would now like to turn the call over to our Chairman and CEO, Ari Bousbib. Ari Bousbib: Thank you, Kerri, and good morning, everyone. Thanks for joining us today to discuss our second quarter results. IQVIA delivered another quarter of strong operational results with 5% revenue growth, excluding the impact of foreign exchange and COVID related work, and 8.6% growth in adjusted diluted earnings per share. The fundamentals of the industry remain healthy, which supports our confidence in the outlook for our business. On the commercial side, things are starting to gradually improve, and while customers continue to exercise budgetary cautiousness, we see faster decisions and more focus on carrying out mission critical projects such as those associated with launching new drugs. As you recall, new FDA approvals for 2023 were 55, which was the second largest year since 2017. And in fact, year-to-date approvals are at 21, which is in line with the average for the last five years. In the quarter, TAS came in a little better than our expectations, consistent with the improving leading indicators that we cited earlier this year. Both Consulting and Analytics and real world revenue improved sequentially in the second quarter. We said TAS revenue growth for 2024 was going to be the mirror image of 2023. And in fact, TAS revenue growth was about 3% in the first quarter and it was 4% in the second quarter, excluding COVID and foreign exchange. At constant currency and based on looking -- on forward-looking indicators, we remain confident in our full year forecast for TAS. This implies 6% to 7% growth for the balance of the year, resulting in full year mid-single digit growth, again consistent with the target we established for TAS at the beginning of the year. On the clinical side, while we continue to see the trend we have observed over the past year with large pharma reprioritizing their portfolios of programs and reallocating money to the most attractive ones in response largely to the IRA, demand from our large pharma clients in R&DS remains solid. We are also encouraged by the continued acceleration of EBP funding. In fact, BioWorld reports emerging biotech funding for the second quarter was $22.9 billion, which is up 32% versus the prior year. For the first half, biotech funding is about $70 billion, essentially equal to the entire year of 2023. Obviously, it does take time for funding to translate into RFP flows, but certainly, it bodes well for mid-long term prospects in our EBP segment. In the quarter, R&DS recorded good net new bookings of approximately $2.7 billion, representing a book-to-bill of 127. Backlog reached a new record of $30.6 billion, which is growth of 7.7% versus prior year. And in fact, that's actually 8.1% when you remove the impact of foreign exchange. And of course, all of our usual forward-looking indicators RFP flows, overall pipeline, and qualified pipeline are up. Turning now to the results for the quarter. Revenue for the second quarter grew 2.3% on a reported basis and 3.5% at constant currency. Compared to last year and excluding COVID-related work from both periods, we grew the top line 5% at constant currency, including approximately 1.5% from acquisitions. Second quarter adjusted EBITDA increased 2.7%, driven by revenue growth and ongoing cost management discipline. Second quarter adjusted diluted EPS of $2.64 increased 8.66% year-over-year. Now I'd like to spend a bit of time on highlighting some of our business activities. Starting with us, IQVIA contracted with the Top 20 client to expand the implementation of our commercial technology ecosystem. IQVIA's AI/ML offerings, including analytics and OCE integrate seamlessly into the clients' technology infrastructure and allow our client to manage their data more effectively and to optimize their customer engagement. In the quarter, IQVIA won a multi-year contract with the top five clients to increase the effectiveness of the digital communication strategy. Here, our innovative solution enables targeted audience selection and custom content delivery. In our first quarter call, we shared a preview of a large deal awarded in April for our current OCE offering. This is a multi-year global implementation for a major division of a top five pharma client with 1,000 users, and it's displacing the incumbent. As you know, IQVIA has a rich history of developing AI for healthcare. For the last 10 years, we've invested heavily in artificial intelligence and machine learning algorithms that support our clients from clinical development through commercialization. Our AI offerings are specifically engineered to meet the demanding standards of precision, speed, privacy, and trust that are required in healthcare, whether it's in-patient support services or analytics or pharmacovigilance, our proprietary AI software solutions have become market leading. Let me share a few examples of AI wins and awards in TAS this last call. We launched a GenAI solution, which collects structured and unstructured survey inputs from over 30,000 HCPs across 36 countries in multiple languages and in minutes delivers analytics and insights to our clients on how their interactions and messages about their brand resonated. This work would normally take a week at least for human analysts using existing tools. A Top 10 client awarded IQVIA a contract to implement our centralized GenAI reporting and analytics solution across their entire U.S. sales force, consolidating different legacy tools. IQVIA's comprehensive GenAI solution enables users to ask questions and get contextual responses in the form of charts, graphs, and KPIs. This AI solution also proactively alerts the user of key trends, anomalies, and the changes that would be required. In another example, a U.S. Medtech client selected IQVIA to implement IQVIA's AI solution to onboard and train patients to utilize their medical device for diabetes. IQVIA's AI solution incorporates the real time sentiment analysis, provides automated transcription and smart engagement recommendations. It empowers patients to take more control of their treatment, which, of course, promotes better adherence to treatment protocols. Lastly, for AI in TAS, IQVIA won the award of Best Use of Artificial Intelligence in Healthcare out of 4,500 nominations in the 8th Annual MedTech Breakthrough Awards. IQVIA's leading AI solution here is called SmartSolve Enterprise Quality Management System, eQMS, which simplifies quality compliance and connects regulatory and quality processes for life sciences customers. Moving to real world. IQVIA won an effectiveness study with a mid-sized pharma client focusing on patients who have not responded well to their previous migraine treatments. We were selected due to our strong therapeutic expertise combined with our direct-to-patient approach to accelerate recruitment and reduce site burden. A U.S. EBP client awarded IQVIA a real-world post approval safety and efficacy study in Japan for their coronary intravascular therapy. The aim of the project is to demonstrate the safety and effectiveness of their device, which could potentially increase the clients' market share in Japan, as well as help the client register the device in other regions. Within the quarter, a Top 15 pharma client awarded IQVIA a significant contract to study the effectiveness of a therapy for schizophrenia. The study will use data tokenization to link multiple data sources and then apply AI to provide a comprehensive view of patients pre and post-therapy in real world settings to physicians, patients and caretakers. Finally, you may have seen that IQVIA was recognized by a respected independent third-party research organization as a leader in medical affairs and life sciences regulatory operations. IQVIA's global end-to-end solutions enable medical affairs customers to manage and curate the richness of data coming into the organization, transforming evidence into insights that can enable actionable initiatives. Let me now move to R&DS. Let's start with the trending therapeutic area, obesity treatment. A Top 15 pharma client selected IQVIA Labs to conduct globally harmonized high volume testing to ensure accelerated enrollment. It's expected this will result in a significant reduction of study timelines for this therapeutic area, where speed-to-market is key. Our strength in the vaccine development area led to another major role to conduct a Phase III trial for a new influenza vaccine that will enroll approximately 50,000 volunteers. Turning to oncology, which represents, once again our largest therapeutic area in R&DS bookings this quarter. I'll offer a few examples. A Top 20 client selected IQVIA to conduct a large Phase III oncology study focusing on small cell lung cancer, a disease with a high need for effective treatments. We won this study due to our strong therapeutic expertise, data and analytics capabilities as well as our proven delivery approach, which includes a dedicated delivery unit project staffing that is exclusively focused on the clients' study. By the way, for some time now, we've been deploying this unique delivery approach for large customers, who have an especially complex study portfolio across multiple therapeutic areas. A biotech client selected IQVIA to support a large scale global complex Phase III program to test and validate their innovative cell and gene therapy vaccine for colorectal cancer. Lastly, in oncology, a Top 25 pharma client awarded IQVIA a contract to develop an optimum clinical strategy and to execute a bladder cancer study in the U.S. They were awarded this engagement-based on IQVIA's AI enabled site selection and feasibility solutions that will help the clients meet aggressive timelines. We discussed AI initiatives in TAS and, in fact, AI enablement is also pervasive in RDS. A couple of other such examples; a U.S. biotech client awarded IQVIA for full service clinical trials, which are supported by IQVIA's AI enabled data and analytics, increasing the likelihood of success for each trial reducing the risk of protocol amendments as well as the need to add countries and sites after the trial starts. In another example, we were awarded a Pharmacovigilance Project by a large biotech client to manage all case processing work worldwide using our AI capabilities. The IQVIA AI enabled solution is designed to dramatically improve productivity, reduce cost, and enhance data quality and accuracy. We will continue to share more exciting AI initiatives across the businesses, hopefully, at future investor forums. I'll now turn it over to Ron for more details on our financial performance. Ron Bruehlman: Hey. Thanks, Ari, and good morning, everyone. Let's start by reviewing revenue. Second quarter revenue of $3,814 million, grew 2.3% on a reported basis and 3.5% at constant currency. In the quarter, COVID related revenues were approximately $45 million, which is down about $70 million versus the second quarter of 2023. Excluding all COVID related work from both this year and last, constant currency growth was 5%. Technology & Analytics Solutions revenue was $1,495 million, which was up 2.7% reported and 3.8% at constant currency. And if we exclude COVID work from both years, it was exactly 4% growth. As you may recall, Q1 2023 was the last quarter with meaningful COVID activity in TAS. R&D Solutions revenue of $2,147 million was up 2.4% reported and 3.3% at constant currency. Excluding all COVID-related work, growth at constant currency in R&DS was 6%. And lastly, Contract Sales & Medical Solutions revenue of $172 million, declined 2.3% reported, but grew 2.8% at constant currency. For the first half, total company revenues were $7,551 million, up 2.3% reported and 3.2% at constant currency. Excluding all COVID related work, growth at constant currency was 5.5%. Technology & Analytics Solutions revenue for the first half was $2,948 million, up 1.7% reported and 2.4% in constant currency, and excluding all COVID related work growth at constant currency in TAS in the first half was 3.5%. R&D Solutions' first half revenue of $4,242 million was up 2.9% at actual FX rates and 3.6% at constant currency. Excluding all COVID related work, growth at constant currency in R&DS was 7% for the half. And lastly, CSMS first half revenue of $361 million increased 0.8% reported and 5% at constant currency. Let's move down to P&L now. Our adjusted EBITDA was $887 million for the second quarter, representing growth of 2.7%, while first half adjusted EBITDA was $1,749 million, up 2% year-over-year. Second quarter GAAP net income was $363 million and GAAP diluted earnings per share was $1.97. For the first half, we had GAAP net income of $651 million or $3.53 of earnings per diluted share. Adjusted net income was $487 million for the second quarter and adjusted diluted earnings per share were $2.64. For the first half, adjusted net income was $955 million or $5.18 per share. Now, as Ari reviewed, R&D Solutions bookings were again strong in the quarter. Our backlog at June 30 was $30.6 billion, up 7.7% at actual currency and 8.1% at constant currency. Next 12 months revenue from backlog increased to $7.8 billion, growing 6.9% year-over-year. So let's turn now to the balance sheet. As of June 30th, cash-and-cash equivalents totaled $1,545 million and gross debt was $13,258 million, that results in net debt of $11,713 million. Our net leverage ratio ending the quarter was 3.25 times trailing 12 month adjusted EBITDA. Second quarter cash flow from operations was $588 million and capital expenditures were $143 million, and that resulted in free cash flow of $445 million. Okay. Turning to guidance. With the first half of the year now behind us and better forward visibility, we're refining our financial guidance for the balance of the year. For the year, we now expect revenue to be between $15,425 million and $15,525 million. Adjusted EBITDA should be between $3,705 million and $3,765 million and adjusted diluted earnings per share between $11.10 and $11.30. There is no material change to our previous assumptions about COVID related step down, acquisition impacts and foreign exchange impacts. By segment, at constant currency ex-COVID, our full year guidance remains the same and is unchanged versus what we gave you back in February, which is to say TAS will grow this year around 5% and R&DS in the 7% range. Moving now to third quarter guidance, we expect revenue to be between $3,830 million and $3,880 million. Adjusted EBITDA is expected to be between $925 million and $950 million and adjusted diluted EPS should be between $2.76 and $2.86. Now all our guidance assumes that foreign exchange rates as of July 18 continue for the balance of the year. So to summarize, we delivered another solid quarter of financial performance. R&DS had bookings of $2.7 billion with a strong book-to-bill of 1.27. TAS performed well against our expectations. Adjusted diluted earnings per share increased 8.6% year-over-year. We're now leaving behind the interest expense headwinds and are moving back towards resuming double-digit EPS growth. Free cash flow for the quarter and for the first half were strong, driven by strong collections performance, and we remain confident that both TAS and R&DS will achieve the full-year targets for revenue growth we provided at the beginning of the year. And with that, let me hand it back to the operator to open the session for Q&A. Operator: Thank you. [Operator Instructions] Your first question comes from the line of Shlomo Rosenbaum of Stifel. Your line is open. Shlomo Rosenbaum: Hi. Thank you very much for taking my questions. It looks like a very solid quarter and we're seeing the TAS improving, which is definitely heartening. A question I have, Ari and Ron, is just -- the guidance is raised for revenue and EPS at the midpoint, but if you look at the EBITDA guidance, it was lowered a little bit. Maybe you could talk about what's going on and the nature of the revenue that's coming through for the year. And maybe just a little bit also in terms of the kind of pacing, we got the third quarter, so we could imply the fourth quarter, and if you could talk a little bit about the ramp you expect in the fourth quarter? Thank you. Ari Bousbib: Yeah. Thanks, Shlomo. Look, I wouldn't read much into the tweaks in the guidance. It's -- we review all of our business unit forecast and we build all that up and it falls wherever it falls. The FX is slightly more favorable than it was last time we reported. So that kind of is driving a little bit in aggregate, the higher -- a little bit higher on revenue. Again, I wouldn't read much there. EBITDA, it's -- whatever the mix of business fell, okay? When you have a little bit more of certain offerings than others. And as a result, we've got the margin fell whatever it fell. But look, we're still delivering margin growth and even -- I mean, yeah, I see what you mean. I mean, frankly, I didn't even -- we don't focus on that. These are small tweaks, and I wouldn't -- it could vary again next quarter. So there is nothing other than wherever the mix of business fell, frankly. We're still delivering at this level, what's the margin expansion here, about 30 basis points at the midpoint and 50 at the high end. So that's very strong given the markets we've been navigating here from the -- for the first half. And on the EPS, I think it's largely better control of CapEx, which, in turn, more favorability on D&A. And so, it's below the line basically. That drives the EPS -- the higher point on EPS. Again, these are tweaks. I wouldn't pay much -- I wouldn't draw much conclusion on that. Operator: Thank you. Your next question comes from the line of David Windley of Jefferies. Your line is open. David Windley: Hi. Thanks for taking my question. Good morning. Ari, you've talked in some of your recent public commentary about price pressure or price expectations from customers in your opening remarks. You mentioned budget sensitivity, I think in the context of TAS. Could you just kind of bring us up to current on your assessment of the market environment in terms of customers' willingness to kind of pay your asking price? Ari Bousbib: A good question. I did talk about this and -- in the past, and there is no change there. It is true. Again, I mentioned in my introductory remarks, it's not like we've, all of a sudden, moved to a different bullish environment, clients, large pharma to focus on that segment first. It has announced, I mean, there is barely a large pharma company that has not announced a massive cost cutting program, multi-billion dollars, and often that comes first with a review of their procurement practices and their vendors and we are a top vendor to pharma. So there's no surprise here. What I said before is still valid. Those budgetary constraints persist, the cautiousness persists and, of course, we -- it's not like we can price whatever we want. Now clients still need to do some projects, many of them had been postponed and delayed. We see that improving. Our decision timeline had started to improve and now they have improved more dramatically. They're not where they were before this whole cautiousness begun. But they have improved significantly, which is why we feel more confident with the forecast. Pricing, yeah, I mean, look, large pharma clients are more disciplined in their spending and therefore, it's a tougher fight out there in terms of negotiations, no question about that. And it's true in TAS and it's true in R&DS, frankly. At the same time, you've got -- on the R&DS side, on the CRO side, you get really an industry that has kind of segmented itself in a way with three large players and a bunch of smaller ones, including some who are, sometimes desperate for business and becoming more undisciplined with respect to how they go about approaching their bids and so on and so forth and, obviously, clients, fully take -- you can expect clients fully taking advantage of that. So again, the answer to your question is pricing continues to be tough for all the reasons I just mentioned, both on the commercial and on the R&DS side. We, of course, respond with continued increase in our productivity programs, cost containment programs, as well as a lot of deployment of AI within our own operations. Those things take time, obviously, there is always a lag when we implement these solutions before we can get the full benefit. But that's what's happening on pricing. Thank you, David. Anne Samuel: Hi. Thanks for taking the question. I was hoping perhaps you could speak a little bit more about the performance of your different business segments within TAS and perhaps where you started to see some of that outperformance. Thank you. Ari Bousbib: Yeah. You mean within TAS, the different segments. Look, I mean the data business continues the same and there's no news there and the rest of the business has become -- begun to improve. Sequentially, we've seen improvements everywhere. Year-over-year, in aggregate, it's up. Again, excluding COVID and FX, the rest of the business, as you know, data is low-single digits, flattish, and the rest of the business, in aggregate, has started to grow mid to high-single digits overall. Real world, I would say, in particular -- real world, in particular, has picked up significantly this past quarter. Anne Samuel: That's great to hear. Thank you. Operator: Your next question comes from the line of Elizabeth Anderson of Evercore ISI. Your line is open. Elizabeth Anderson: Hi, guys. Thanks so much for the question this morning. Can you talk about the burn rate maybe in the back half of the year? Is that something you could sort of see based on the mix of business at this point that you think could creep up sequentially? How do you kind of view that as we progress through the back half? Ari Bousbib: Yeah. I mean, look, this fluctuates, first of all, I mean the reported revenue and even after excluding COVID and FX is -- sometimes it's hard to predict exactly where pass-throughs are going to come in. And so, some of that quarterly fluctuation, if you will, is pass-through the weeks of pass-throughs. That's essentially what we see this -- what we saw this quarter and probably next quarter and then on rebounding for the fourth quarter. But basically of R&DS, we see a growth exactly where we forecasted it at the beginning of the year, which is in the -- after you adjust for COVID and at constant-currency in the 7% plus percent range. With respect to the mix of products -- of our offerings, as you know, we do have a disproportionate share of the oncology programs out there. Again, not surprising. The critical decision factors here are therapeutic expertise and the ability to enroll patients, which is where our unique capabilities with data analytics and AI solutions come in. And as a result, the mix of our bookings and in our backlog continues to increase towards those more complex studies in oncology as well as rare diseases. So the burn rate is largely influenced by that. You can see, by the way, that this is a trend in the industry. If you look at the burn rate for our competitors, and they are also going down. Now in the first quarter, the first-quarter backlog burn was 7%, is that what I recall was 7% and Q2 backlog burn was about the same, a little bit higher, 7.1%. And for the balance of the year, we're expecting it to be very similar. We are encouraged that the next 12 months' bookings are up. I think, we say, it's -- next 12 months' booking -- next 12 months' revenue from backlog is $7.8 billion. That's up from what we reported first quarter in my recollections is growing, was it $7.3 billion? Yeah. It's up $7.3 billion last -- and then this quarter $7.8 billion, that's about 6.9% up. So we feel confident in our back -- in our conversion and is consequently on our burn of projects and revenue growth in the balance of the year and next year. Operator: Your next question comes from the line of Max Smock of William Blair. Your line is open. Max Smock: Hi. Good morning. Thanks for taking our questions. And apologies if I missed this, but within R&DS, did you quantify how much RFP flows in the qualified pipeline were up at the end of the second quarter? And then how are you thinking about the timeline for those to convert to potential uptick in bookings? Could we see an acceleration in book-to-bill above 1.3 times before the end of the year here or given kind of where we are in the year, are we now at a point where you think a more meaningful potential rebound in bookings is more of a 2025 event? Thank you. Ari Bousbib: Thank you, Max. I'm just -- we are laughing here because when did 1.3 become the benchmark? I mean, I know we reported amazing over 1.3 book-to-bill ratios in the past couple of years, largely because of the COVID studies and so on. But we're very happy with 1.27, we're happy with 1.2. We are happy with these book-to-bills. They are very, very strong. And you're talking about a rebound in bookings. We had excellent bookings. I don't know what -- we are happy with this performance. There's no rebound. It's very good. I think the bookings we reported this quarter are the first -- third highest ever, right. So I'm not sure what the question is with respect to bookings. Did you ask about conversion as well or no, I'm sorry, I didn't... Max Smock: Yeah. I'm sorry -- you set such a high bar, Ari. But yeah, in terms of the first part of the question. Ari Bousbib: That's true. We hand the price. Max Smock: Yeah. Sorry, victim of expectations. But my first part of the question was just around whether or not you can provide any sort of detail or more detail around just how much RFP flows in the qualified pipeline? Ari Bousbib: Yeah. I'm sorry. Yeah. So again, RFP flows, total pipeline and qualified pipeline in this area are up basically all around. The qualified pipeline, I think, it was up across the number of 12%, was up 12%. And total pipeline is up single digits. RFP grows as well, right, but mid-teens, right? Operator: Your next question comes from the line of Jailendra Singh of Truist Securities. Your line is open. Jailendra Singh: Thank you and thanks for taking my questions. I want to go back to the individual businesses you talked about in TAS -- RWE (LON:0HA0) and Consulting both improving in the second quarter. Last quarter you called out RWE, some recovery after some slowdown in Q4, Consulting taking a step down. How are you thinking about these individual businesses as you think about TAS expectations in second half considering that recovery in consulting remains relatively volatile? And is RWE back to mid to high-teens growth rate or is there still room for recovery there? Ari Bousbib: No. I mean, we see overall TAS in the second half in the 6% to 7% range at constant currency, okay? That's what we see after -- obviously, businesses are rolling up their forecasts and they are always higher than that, but we take some contingency, we evaluate the environment and we discount that and that's where we are now in the 6% to 7% range, in aggregate. And you could make the assumptions yourself, you could see that in order to get to that. If 30% of the business is essentially flattish, that's the data. So the 70% has to grow in the high-single-digits in aggregate in order to get us to those numbers. So that's where we see the forecast. And we feel, I should add, very confident based on the leading indicators that we look at. Ari Bousbib: No. Not high-teens. No. Maybe could be low-teens, but high-single to low-teens for the real world. Exactly. Thank you. Operator: Thank you. Your next question comes from the line of Justin Bowers of DB. Your line is open. Justin Bowers: Thank you, and good morning, everyone. So just in terms of the strength in TAS and the outlook for the rest of the year, how much of that is, in your sense the underlying market improving versus IQVIA winning its fair share of business with some of the tools that you have? And then, part two of that would be, what are some of the changes that you've made to manage the part of the business this year versus, let's say, last year at this time? Ari Bousbib: Well, thank you. First of all, it's not like the market is rebounding. I mentioned before that client cautiousness and budgetary discipline continues especially at large pharma. It's not -- didn't go away. But what we did say before was that within the portfolio of offerings that we have, there are certain things that are mission-critical for our clients. And what happened last time -- last year at this time is that we expected those things to happen and they were pushed to the right, okay? They were delayed. We said all along that at some point those things have to be done. And that is what is happening now, and what we see happening in the second half. So it's not like the market overall has grown is that the segments of the market that are -- must-do for our clients are finally happening, and they will be happening in the second half. So that's number one for the market. So from that sense, you could say that the market is a little better in the sense that the clients are willing to spend that money, but, again, I mentioned before, the negotiations are tougher. So to answer the second part of your question, what we are doing differently here is, obviously, being more responsive to our client needs. We are being more accommodating with their terms and we are commercially being more aggressive to make sure that we actually do win those projects that the markets are putting out there, the clients are putting out there for bid. Justin Bowers: Understood. One quick follow-up. In terms of the improving decision-making timelines that you referenced earlier too. Is that for -- is that around some of the stuff that was pushed out to the right or is that for some new opportunities as well or just something you're seeing more broadly? Ari Bousbib: Thank you. It's true. It's true broadly. Obviously, the mission-critical stuff is mission-critical and needs to be done. So yeah, that is improving the overall average, but even -- I would say, even for the rest, I think we've seen improved decision-making. Faster timelines. Thank you. Operator: Your next question comes from the line of Tejas Savant of Morgan Stanley (NYSE:MS). Your line is open. Tejas Savant: Hey guys. Good morning, and thanks for the time here. Ari, just following up on that line of questioning on TAS. I guess could you share a little bit of color around what gives you confidence to this improved decision-making timeline sort of dynamic continues here, particularly given the election cycle that sort of heating up as we speak? And then, on the analytics and consulting piece within TAS, are you starting to see the work related to those new drug approvals you talked about both year-to-date and last year starting to show up in the project backlog or is that still upside to come heading into year-end in '25? Thank you. Ari Bousbib: Thank you. Well, look, I don't think the election has much influence on the day-to-day decision-making with respect to launching of drugs. And in order to response to the second part of your question, the answer is yes. Those approvals, obviously, it's not common for a client to decide that they're not going to launch a drug that's been approved. So -- and there is usually a six months to -- six months to nine months' time lag before that leads to -- between the approval and the time at which the drug is actually launched, and the work associated with it comes to us, so not much. This was delayed a little bit longer versus what it should have been and some of these projects that should have happened earlier this year are happening in the second half of the year. Again, no surprises here. Thank you. Operator: Your next question comes from the line of Dan Leonard of UBS. Your line is open. Dan Leonard: Thank you. So I have a question on the guidance. It seems that the inferred Q4 sales ramp compared to Q3 is a bit greater than typical. Can you talk about the drivers of that and perhaps even elaborate further on your conviction in the recovery in TAS in the back half? Thank you. Ari Bousbib: Yeah. You want to answer that anyone here? I mean, look, first of all, there is recovery in TAS. We just talked about it at length in the past few questions. So that's understandable. Secondly, the compare is more favorable. We had a deterioration in the fourth quarter last year. It was the lowest quarter of the year, last year. And we said all along that there would be a mirror image in '24 versus '23, that is the first quarter will resemble the fourth quarter, the second quarter will resemble the third quarter, etc. So we do see fourth quarter up. But -- and it's not unusual by the way, there is a seasonality in Q4 that you can go back many years. It's always the case that Q4 is much stronger. So these are the three reasons; one, recovery in TAS accelerating; two, compares; and three, seasonality, which is not surprising. Anything else, guys, you want to... Operator: Your next question comes from the line of Charles Rhyee of TD Cowen. Your line is open. Charles Rhyee: Yeah. Thanks, Ari. I want to ask about M&A. I think so far you've spent maybe, was it $220 odd million of -- in terms of acquisitions so far in the first half. Can you talk about sort of what the revenue contribution has been because I think in the guide was about 150 basis points of revenue growth? And just curious, has that been in TAS or in RDS or both? And how much do you still need to maybe do for the back half of the year? Thanks. Ari Bousbib: Yeah. Thank you so much. Yeah. So look, we said all along that it will be -- acquisition would contribute to a better point to our growth this year. And we wish we would do more acquisitions, but valuations continue to be high and we are -- we have a big pipeline, but it's not always the case that we are able to close. So far for the year, it's a little bit more than a point and it's a little bit more entire than in RDS, but that's it. And look, just -- we haven't spent much so far, but we hope to spend more in the second half and we'll see what happens. Yeah. Operator: Your next question comes from the line of Michael Ryskin of Bank of America (NYSE:BAC). Your line is open. Michael Ryskin: Great. Thanks for taking the question. I'm not sure you addressed this before, but there have been a couple of prominent cancellations of clinical trials in the industry in the last couple of months. You called out one specifically on 1Q that impacted your performance then -- in your book-to-bill then. Just wondering if cancellations have trended any better recently. I know that the prominent ones always make the news, but just wondering what's happening behind below the surface on that trend. Ari Bousbib: Yeah. No. I mean, look, I mentioned in my commentary and we've said this every quarter in the past few quarters, and it's just not a secret. The world knows that large pharma -- largely in response to the IRA and hypothetical impacts down the line. Large pharma has been reprioritizing their programs. And they've taken off-the-shelf some programs that they felt were either too competitive with other existing drugs or that didn't have the same risk-return profiles that they had assumed pre-IRA when those programs were launched. So as a result of that, there have been a little bit more cancellations than usual really for the past few quarters. I think, in general, look, we don't tell you what the cancellations are. We report the net bookings. Our average quarterly cancellations are in the $0.5 billion range that has been the case for a long time and that's kind of $500 million plus or minus, whatever, $100 million to $200 million. So some quarters it's less. It could be $300 million or $400 million, some quarters, it could be more $600 million to $700 million or more. Most of these cancellations are $10 million, $15 million, $20 million, $25 million programs. That last quarter, because it was well-publicized and because it was a huge one-time number, we chose to let you know about it. We had had questions. Everyone knew that we were the ones doing that program and pre-call, we had had questions. So we decided to let you know about it. Yes, that's what it was. It was -- I don't remember the exact number in the quarter $4 billion in one shot. But that could happen. We have no -- companies are now usually when they terminate a program. It's partly this reprioritization that I just discussed and sometimes it's simply because of the data. And in the case of the program that we disclosed last quarter, it wasn't a reprioritization, it was simply that the data wasn't supporting a continuation of the program, and essentially the program failed as it often happens in this industry. Operator: Your next question comes from the line of Jack Wallace of Guggenheim Securities. Your line is open. Jack Wallace: Hey. Thanks for taking my questions. I just wanted to go back and ask a follow-up to the EBITDA guidance questions from earlier. Ari, you called out that there was some mix-shift impacting margins in the back half of the year, and with the TAS guidance largely reiterated in strong second quarter, I was wondering if you could help us get a better understanding for the mix-shift, which sounds like its intra-segment? Thank you. Ari Bousbib: Yeah. I don't think I can give you much more color than that. It's just what the chips fail, okay? So [Technical Difficulty] and I know that this would have attracted two questions. We would have to look at it again at this range, it's just -- we just build up our forecast and that's where the most appropriate range fell. It could be also -- we did a little bit more acquisitions this quarter and generally, acquisitions come in at very low margin in the first year. So that could have impacted. It's not a big different number, frankly. So in the grand scheme of things. So I can't give you much more color than that. Jack Wallace: Fair enough. And then on the positive side here, right, in those CE, you won a sizable chunk of a top-five client. Can you just give us a better understanding for the one or handful of reasons that led that client to switch from the long-time incumbent? Thank you. Ari Bousbib: I think they liked our solution better. I think it gave them more ability to achieve their goals. I can't go into the details of the program, and that's -- yeah, they just like it better. Thank you. Operator: Your next question comes from the line of Patrick Donnelly of Citi. Your line is open. Patrick Donnelly: Hey, guys. Thanks for taking the questions. Ari, you talked a little bit on the capital deployment side about wanting to do more in M&A. Maybe the environment is not too friendly at the moment. But how are you thinking about priorities there? I know you guys have bought back some stock. You seem pretty comfortable with the leverage ratio. So maybe just talk through your priorities, M&A landscape, and then again, I mean, any targets on the leverage side with the debt would be helpful. Ari Bousbib: Yeah. I -- you came -- the line came across not a little bit blurry, but if I understand you asked about capital deployment and acquisitions. Look, you saw that our cash flow performance was actually very strong in the quarter and that obviously helped continue to reduce our leverage. I think we have on a 12-month trailing basis, we ended the quarter at 3.25 times EBITDA, which is very good. I remind you, we were not too long ago in the high 4s, and we said that we were continuing to deliver naturally as EBITDA grows. Acquisitions, yeah, we would -- look, our long-term guidance always contemplates a couple of points of contribution from acquisitions to continue to boost our top line. So far, we've been able to do just over a point. Obviously, we have a rich pipeline and it's hard for me to predict what acquisition will be the second half or in the years to come. It's a binary outcome. So I don't know. I'm not sure if that was your question, but that's what I heard. Operator: Understood. Your last question comes from the line of Matt Sykes of Goldman Sachs (NYSE:GS). Your line is open. Matt Sykes: Hi. Good morning. Thanks for taking my questions. Ari, you mentioned the strong funding trends in the EBP segment at the same time you're still seeing some caution from large pharma. How should we think about the potential revenue mix-shift to VBP versus large pharma and would there be any implications for FSP versus full-service mix in that? Thank you. Ari Bousbib: Thank you. Well, look, first of all, when there is a timeline between funding and -- on RFP and then the timeline between an RFP and a booking. So if -- this is a business that has long cycles. So it's good that we have just as we were cautioning you not to panic when funding declines, and we said it's not going to affect us for a while. We don't get excited because funding this quarter was very strong. Yeah. It's good for our midterm and long-term prospects, but it's not like it's going to affect the mix. Also, we have a very large backlog, the largest in the industry. And it's not going to meaningfully change the mix of what we do in the next few quarters and what's large pharma, what's EBP, what's full-service versus what FSP. But you are correct that the more EBP, the more full-service, and that certainly helps mitigate the recent trend we've seen where, as we discussed in the past, large pharma has been swinging the pendulum a little bit more towards FSP as it has happened many times in the history of this industry. So you are correct, from that standpoint, that -- as more EBP funding is there, there'll be more EBP work in the quarters to come. And therefore, when that backlog converts into revenue, there'll be a higher mix of full-service versus FSP relative to what it is now. Thank you. Operator: With no further time for questions, I now turn the call back over to Mr. Joseph. Kerri Joseph: Thank you. Thank you for taking the time to join us today, and we look forward to speaking with you again in our third-quarter 2024 earnings call. The team will be available for the rest of the day to take any follow-up questions you might have. Thank you. Have a good day. Operator: This concludes today's conference call. You may now disconnect.

IQVIA Holdings Inc. (IQV) Q2 2024 Earnings Call Transcript

Shlomo Rosenbaum - Stifel David Windley - Jefferies Anne Samuel - JP Morgan Elizabeth Anderson - Evercore ISI Max Smock - William Blair Jailendra Singh - Truist Securities Justin Bowers - Deutsche Bank Dan Leonard - UBS Charles Rhyee - TD Cowen Michael Ryskin - Bank of America Jack Wallace - Guggenheim Securities Patrick Donnelly - Citi Matt Sykes - Goldman Sachs Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA Second Quarter 2024 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] As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Kerri Joseph, Senior Vice President, Investor Relations and Treasury. Mr. Joseph, please begin your conference. Kerri Joseph Thank you, operator. Good morning, everyone. Thank you for joining our second quarter 2024 earnings call. With me today are Ari Bousbib, Chairman and Chief Executive Officer; Ron Bruehlman, Executive Vice President and Chief Financial Officer; Mike Fedock, Senior Vice President, Financial Planning and Analysis; and Gustavo Perrone, Senior Director, Investor Relations. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call in the Events & Presentations section of our IQVIA Investor Relations website at ir.iqvia.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K and subsequent SEC filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. I would now like to turn the call over to our Chairman and CEO, Ari Bousbib. Ari Bousbib Thank you, Kerri, and good morning, everyone. Thanks for joining us today to discuss our second quarter results. IQVIA delivered another quarter of strong operational results with 5% revenue growth, excluding the impact of foreign exchange and COVID related work, and 8.6% growth in adjusted diluted earnings per share. The fundamentals of the industry remain healthy, which supports our confidence in the outlook for our business. On the commercial side, things are starting to gradually improve, and while customers continue to exercise budgetary cautiousness, we see faster decisions and more focus on carrying out mission critical projects such as those associated with launching new drugs. As you recall, new FDA approvals for 2023 were 55, which was the second largest year since 2017. And in fact, year-to-date approvals are at 21, which is in line with the average for the last five years. In the quarter, TAS came in a little better than our expectations, consistent with the improving leading indicators that we cited earlier this year. Both Consulting and Analytics and real world revenue improved sequentially in the second quarter. We said TAS revenue growth for 2024 was going to be the mirror image of 2023. And in fact, TAS revenue growth was about 3% in the first quarter and it was 4% in the second quarter, excluding COVID and foreign exchange. At constant currency and based on looking -- on forward-looking indicators, we remain confident in our full year forecast for TAS. This implies 6% to 7% growth for the balance of the year, resulting in full year mid-single digit growth, again consistent with the target we established for TAS at the beginning of the year. On the clinical side, while we continue to see the trend we have observed over the past year with large pharma reprioritizing their portfolios of programs and reallocating money to the most attractive ones in response largely to the IRA, demand from our large pharma clients in R&DS remains solid. We are also encouraged by the continued acceleration of EBP funding. In fact, BioWorld reports emerging biotech funding for the second quarter was $22.9 billion, which is up 32% versus the prior year. For the first half, biotech funding is about $70 billion, essentially equal to the entire year of 2023. Obviously, it does take time for funding to translate into RFP flows, but certainly, it bodes well for mid-long term prospects in our EBP segment. In the quarter, R&DS recorded good net new bookings of approximately $2.7 billion, representing a book-to-bill of 127. Backlog reached a new record of $30.6 billion, which is growth of 7.7% versus prior year. And in fact, that's actually 8.1% when you remove the impact of foreign exchange. And of course, all of our usual forward-looking indicators RFP flows, overall pipeline, and qualified pipeline are up. Turning now to the results for the quarter. Revenue for the second quarter grew 2.3% on a reported basis and 3.5% at constant currency. Compared to last year and excluding COVID-related work from both periods, we grew the top line 5% at constant currency, including approximately 1.5% from acquisitions. Second quarter adjusted EBITDA increased 2.7%, driven by revenue growth and ongoing cost management discipline. Second quarter adjusted diluted EPS of $2.64 increased 8.66% year-over-year. Now I'd like to spend a bit of time on highlighting some of our business activities. Starting with us, IQVIA contracted with the Top 20 client to expand the implementation of our commercial technology ecosystem. IQVIA's AI/ML offerings, including analytics and OCE integrate seamlessly into the clients' technology infrastructure and allow our client to manage their data more effectively and to optimize their customer engagement. In the quarter, IQVIA won a multi-year contract with the top five clients to increase the effectiveness of the digital communication strategy. Here, our innovative solution enables targeted audience selection and custom content delivery. In our first quarter call, we shared a preview of a large deal awarded in April for our current OCE offering. This is a multi-year global implementation for a major division of a top five pharma client with 1,000 users, and it's displacing the incumbent. As you know, IQVIA has a rich history of developing AI for healthcare. For the last 10 years, we've invested heavily in artificial intelligence and machine learning algorithms that support our clients from clinical development through commercialization. Our AI offerings are specifically engineered to meet the demanding standards of precision, speed, privacy, and trust that are required in healthcare, whether it's in-patient support services or analytics or pharmacovigilance, our proprietary AI software solutions have become market leading. Let me share a few examples of AI wins and awards in TAS this last call. We launched a GenAI solution, which collects structured and unstructured survey inputs from over 30,000 HCPs across 36 countries in multiple languages and in minutes delivers analytics and insights to our clients on how their interactions and messages about their brand resonated. This work would normally take a week at least for human analysts using existing tools. A Top 10 client awarded IQVIA a contract to implement our centralized GenAI reporting and analytics solution across their entire U.S. sales force, consolidating different legacy tools. IQVIA's comprehensive GenAI solution enables users to ask questions and get contextual responses in the form of charts, graphs, and KPIs. This AI solution also proactively alerts the user of key trends, anomalies, and the changes that would be required. In another example, a U.S. Medtech client selected IQVIA to implement IQVIA's AI solution to onboard and train patients to utilize their medical device for diabetes. IQVIA's AI solution incorporates the real time sentiment analysis, provides automated transcription and smart engagement recommendations. It empowers patients to take more control of their treatment, which, of course, promotes better adherence to treatment protocols. Lastly, for AI in TAS, IQVIA won the award of Best Use of Artificial Intelligence in Healthcare out of 4,500 nominations in the 8th Annual MedTech Breakthrough Awards. IQVIA's leading AI solution here is called SmartSolve Enterprise Quality Management System, eQMS, which simplifies quality compliance and connects regulatory and quality processes for life sciences customers. Moving to real world. IQVIA won an effectiveness study with a mid-sized pharma client focusing on patients who have not responded well to their previous migraine treatments. We were selected due to our strong therapeutic expertise combined with our direct-to-patient approach to accelerate recruitment and reduce site burden. A U.S. EBP client awarded IQVIA a real-world post approval safety and efficacy study in Japan for their coronary intravascular therapy. The aim of the project is to demonstrate the safety and effectiveness of their device, which could potentially increase the clients' market share in Japan, as well as help the client register the device in other regions. Within the quarter, a Top 15 pharma client awarded IQVIA a significant contract to study the effectiveness of a therapy for schizophrenia. The study will use data tokenization to link multiple data sources and then apply AI to provide a comprehensive view of patients pre and post-therapy in real world settings to physicians, patients and caretakers. Finally, you may have seen that IQVIA was recognized by a respected independent third-party research organization as a leader in medical affairs and life sciences regulatory operations. IQVIA's global end-to-end solutions enable medical affairs customers to manage and curate the richness of data coming into the organization, transforming evidence into insights that can enable actionable initiatives. Let me now move to R&DS. Let's start with the trending therapeutic area, obesity treatment. A Top 15 pharma client selected IQVIA Labs to conduct globally harmonized high volume testing to ensure accelerated enrollment. It's expected this will result in a significant reduction of study timelines for this therapeutic area, where speed-to-market is key. Our strength in the vaccine development area led to another major role to conduct a Phase III trial for a new influenza vaccine that will enroll approximately 50,000 volunteers. Turning to oncology, which represents, once again our largest therapeutic area in R&DS bookings this quarter. I'll offer a few examples. A Top 20 client selected IQVIA to conduct a large Phase III oncology study focusing on small cell lung cancer, a disease with a high need for effective treatments. We won this study due to our strong therapeutic expertise, data and analytics capabilities as well as our proven delivery approach, which includes a dedicated delivery unit project staffing that is exclusively focused on the clients' study. By the way, for some time now, we've been deploying this unique delivery approach for large customers, who have an especially complex study portfolio across multiple therapeutic areas. A biotech client selected IQVIA to support a large scale global complex Phase III program to test and validate their innovative cell and gene therapy vaccine for colorectal cancer. Lastly, in oncology, a Top 25 pharma client awarded IQVIA a contract to develop an optimum clinical strategy and to execute a bladder cancer study in the U.S. They were awarded this engagement-based on IQVIA's AI enabled site selection and feasibility solutions that will help the clients meet aggressive timelines. We discussed AI initiatives in TAS and, in fact, AI enablement is also pervasive in RDS. A couple of other such examples; a U.S. biotech client awarded IQVIA for full service clinical trials, which are supported by IQVIA's AI enabled data and analytics, increasing the likelihood of success for each trial reducing the risk of protocol amendments as well as the need to add countries and sites after the trial starts. In another example, we were awarded a Pharmacovigilance Project by a large biotech client to manage all case processing work worldwide using our AI capabilities. The IQVIA AI enabled solution is designed to dramatically improve productivity, reduce cost, and enhance data quality and accuracy. We will continue to share more exciting AI initiatives across the businesses, hopefully, at future investor forums. I'll now turn it over to Ron for more details on our financial performance. Ron Bruehlman Hey. Thanks, Ari, and good morning, everyone. Let's start by reviewing revenue. Second quarter revenue of $3,814 million, grew 2.3% on a reported basis and 3.5% at constant currency. In the quarter, COVID related revenues were approximately $45 million, which is down about $70 million versus the second quarter of 2023. Excluding all COVID related work from both this year and last, constant currency growth was 5%. Technology & Analytics Solutions revenue was $1,495 million, which was up 2.7% reported and 3.8% at constant currency. And if we exclude COVID work from both years, it was exactly 4% growth. As you may recall, Q1 2023 was the last quarter with meaningful COVID activity in TAS. R&D Solutions revenue of $2,147 million was up 2.4% reported and 3.3% at constant currency. Excluding all COVID-related work, growth at constant currency in R&DS was 6%. And lastly, Contract Sales & Medical Solutions revenue of $172 million, declined 2.3% reported, but grew 2.8% at constant currency. For the first half, total company revenues were $7,551 million, up 2.3% reported and 3.2% at constant currency. Excluding all COVID related work, growth at constant currency was 5.5%. Technology & Analytics Solutions revenue for the first half was $2,948 million, up 1.7% reported and 2.4% in constant currency, and excluding all COVID related work growth at constant currency in TAS in the first half was 3.5%. R&D Solutions' first half revenue of $4,242 million was up 2.9% at actual FX rates and 3.6% at constant currency. Excluding all COVID related work, growth at constant currency in R&DS was 7% for the half. And lastly, CSMS first half revenue of $361 million increased 0.8% reported and 5% at constant currency. Let's move down to P&L now. Our adjusted EBITDA was $887 million for the second quarter, representing growth of 2.7%, while first half adjusted EBITDA was $1,749 million, up 2% year-over-year. Second quarter GAAP net income was $363 million and GAAP diluted earnings per share was $1.97. For the first half, we had GAAP net income of $651 million or $3.53 of earnings per diluted share. Adjusted net income was $487 million for the second quarter and adjusted diluted earnings per share were $2.64. For the first half, adjusted net income was $955 million or $5.18 per share. Now, as Ari reviewed, R&D Solutions bookings were again strong in the quarter. Our backlog at June 30 was $30.6 billion, up 7.7% at actual currency and 8.1% at constant currency. Next 12 months revenue from backlog increased to $7.8 billion, growing 6.9% year-over-year. So let's turn now to the balance sheet. As of June 30th, cash-and-cash equivalents totaled $1,545 million and gross debt was $13,258 million, that results in net debt of $11,713 million. Our net leverage ratio ending the quarter was 3.25 times trailing 12 month adjusted EBITDA. Second quarter cash flow from operations was $588 million and capital expenditures were $143 million, and that resulted in free cash flow of $445 million. Okay. Turning to guidance. With the first half of the year now behind us and better forward visibility, we're refining our financial guidance for the balance of the year. For the year, we now expect revenue to be between $15,425 million and $15,525 million. Adjusted EBITDA should be between $3,705 million and $3,765 million and adjusted diluted earnings per share between $11.10 and $11.30. There is no material change to our previous assumptions about COVID related step down, acquisition impacts and foreign exchange impacts. By segment, at constant currency ex-COVID, our full year guidance remains the same and is unchanged versus what we gave you back in February, which is to say TAS will grow this year around 5% and R&DS in the 7% range. Moving now to third quarter guidance, we expect revenue to be between $3,830 million and $3,880 million. Adjusted EBITDA is expected to be between $925 million and $950 million and adjusted diluted EPS should be between $2.76 and $2.86. Now all our guidance assumes that foreign exchange rates as of July 18 continue for the balance of the year. So to summarize, we delivered another solid quarter of financial performance. R&DS had bookings of $2.7 billion with a strong book-to-bill of 1.27. TAS performed well against our expectations. Adjusted diluted earnings per share increased 8.6% year-over-year. We're now leaving behind the interest expense headwinds and are moving back towards resuming double-digit EPS growth. Free cash flow for the quarter and for the first half were strong, driven by strong collections performance, and we remain confident that both TAS and R&DS will achieve the full-year targets for revenue growth we provided at the beginning of the year. And with that, let me hand it back to the operator to open the session for Q&A. Thank you. [Operator Instructions] Your first question comes from the line of Shlomo Rosenbaum of Stifel. Your line is open. Shlomo Rosenbaum Hi. Thank you very much for taking my questions. It looks like a very solid quarter and we're seeing the TAS improving, which is definitely heartening. A question I have, Ari and Ron, is just -- the guidance is raised for revenue and EPS at the midpoint, but if you look at the EBITDA guidance, it was lowered a little bit. Maybe you could talk about what's going on and the nature of the revenue that's coming through for the year. And maybe just a little bit also in terms of the kind of pacing, we got the third quarter, so we could imply the fourth quarter, and if you could talk a little bit about the ramp you expect in the fourth quarter? Thank you. Ari Bousbib Yeah. Thanks, Shlomo. Look, I wouldn't read much into the tweaks in the guidance. It's -- we review all of our business unit forecast and we build all that up and it falls wherever it falls. The FX is slightly more favorable than it was last time we reported. So that kind of is driving a little bit in aggregate, the higher -- a little bit higher on revenue. Again, I wouldn't read much there. EBITDA, it's -- whatever the mix of business fell, okay? When you have a little bit more of certain offerings than others. And as a result, we've got the margin fell whatever it fell. But look, we're still delivering margin growth and even -- I mean, yeah, I see what you mean. I mean, frankly, I didn't even -- we don't focus on that. These are small tweaks, and I wouldn't -- it could vary again next quarter. So there is nothing other than wherever the mix of business fell, frankly. We're still delivering at this level, what's the margin expansion here, about 30 basis points at the midpoint and 50 at the high end. So that's very strong given the markets we've been navigating here from the -- for the first half. And on the EPS, I think it's largely better control of CapEx, which, in turn, more favorability on D&A. And so, it's below the line basically. That drives the EPS -- the higher point on EPS. Again, these are tweaks. I wouldn't pay much -- I wouldn't draw much conclusion on that. Thank you. Your next question comes from the line of David Windley of Jefferies. Your line is open. David Windley Hi. Thanks for taking my question. Good morning. Ari, you've talked in some of your recent public commentary about price pressure or price expectations from customers in your opening remarks. You mentioned budget sensitivity, I think in the context of TAS. Could you just kind of bring us up to current on your assessment of the market environment in terms of customers' willingness to kind of pay your asking price? Ari Bousbib A good question. I did talk about this and -- in the past, and there is no change there. It is true. Again, I mentioned in my introductory remarks, it's not like we've, all of a sudden, moved to a different bullish environment, clients, large pharma to focus on that segment first. It has announced, I mean, there is barely a large pharma company that has not announced a massive cost cutting program, multi-billion dollars, and often that comes first with a review of their procurement practices and their vendors and we are a top vendor to pharma. So there's no surprise here. What I said before is still valid. Those budgetary constraints persist, the cautiousness persists and, of course, we -- it's not like we can price whatever we want. Now clients still need to do some projects, many of them had been postponed and delayed. We see that improving. Our decision timeline had started to improve and now they have improved more dramatically. They're not where they were before this whole cautiousness begun. But they have improved significantly, which is why we feel more confident with the forecast. Pricing, yeah, I mean, look, large pharma clients are more disciplined in their spending and therefore, it's a tougher fight out there in terms of negotiations, no question about that. And it's true in TAS and it's true in R&DS, frankly. At the same time, you've got -- on the R&DS side, on the CRO side, you get really an industry that has kind of segmented itself in a way with three large players and a bunch of smaller ones, including some who are, sometimes desperate for business and becoming more undisciplined with respect to how they go about approaching their bids and so on and so forth and, obviously, clients, fully take -- you can expect clients fully taking advantage of that. So again, the answer to your question is pricing continues to be tough for all the reasons I just mentioned, both on the commercial and on the R&DS side. We, of course, respond with continued increase in our productivity programs, cost containment programs, as well as a lot of deployment of AI within our own operations. Those things take time, obviously, there is always a lag when we implement these solutions before we can get the full benefit. But that's what's happening on pricing. Thank you, David. Your next question comes from the line of Anne Samuel of JPMorgan. Your line is open. Anne Samuel Hi. Thanks for taking the question. I was hoping perhaps you could speak a little bit more about the performance of your different business segments within TAS and perhaps where you started to see some of that outperformance. Thank you. Ari Bousbib Yeah. You mean within TAS, the different segments. Look, I mean the data business continues the same and there's no news there and the rest of the business has become -- begun to improve. Sequentially, we've seen improvements everywhere. Year-over-year, in aggregate, it's up. Again, excluding COVID and FX, the rest of the business, as you know, data is low-single digits, flattish, and the rest of the business, in aggregate, has started to grow mid to high-single digits overall. Real world, I would say, in particular -- real world, in particular, has picked up significantly this past quarter. Your next question comes from the line of Elizabeth Anderson of Evercore ISI. Your line is open. Elizabeth Anderson Hi, guys. Thanks so much for the question this morning. Can you talk about the burn rate maybe in the back half of the year? Is that something you could sort of see based on the mix of business at this point that you think could creep up sequentially? How do you kind of view that as we progress through the back half? Yeah. I mean, look, this fluctuates, first of all, I mean the reported revenue and even after excluding COVID and FX is -- sometimes it's hard to predict exactly where pass-throughs are going to come in. And so, some of that quarterly fluctuation, if you will, is pass-through the weeks of pass-throughs. That's essentially what we see this -- what we saw this quarter and probably next quarter and then on rebounding for the fourth quarter. But basically of R&DS, we see a growth exactly where we forecasted it at the beginning of the year, which is in the -- after you adjust for COVID and at constant-currency in the 7% plus percent range. With respect to the mix of products -- of our offerings, as you know, we do have a disproportionate share of the oncology programs out there. Again, not surprising. The critical decision factors here are therapeutic expertise and the ability to enroll patients, which is where our unique capabilities with data analytics and AI solutions come in. And as a result, the mix of our bookings and in our backlog continues to increase towards those more complex studies in oncology as well as rare diseases. So the burn rate is largely influenced by that. You can see, by the way, that this is a trend in the industry. If you look at the burn rate for our competitors, and they are also going down. Now in the first quarter, the first-quarter backlog burn was 7%, is that what I recall was 7% and Q2 backlog burn was about the same, a little bit higher, 7.1%. And for the balance of the year, we're expecting it to be very similar. We are encouraged that the next 12 months' bookings are up. I think, we say, it's -- next 12 months' booking -- next 12 months' revenue from backlog is $7.8 billion. That's up from what we reported first quarter in my recollections is growing, was it $7.3 billion? Yeah. It's up $7.3 billion last -- and then this quarter $7.8 billion, that's about 6.9% up. So we feel confident in our back -- in our conversion and is consequently on our burn of projects and revenue growth in the balance of the year and next year. Your next question comes from the line of Max Smock of William Blair. Your line is open. Max Smock Hi. Good morning. Thanks for taking our questions. And apologies if I missed this, but within R&DS, did you quantify how much RFP flows in the qualified pipeline were up at the end of the second quarter? And then how are you thinking about the timeline for those to convert to potential uptick in bookings? Could we see an acceleration in book-to-bill above 1.3 times before the end of the year here or given kind of where we are in the year, are we now at a point where you think a more meaningful potential rebound in bookings is more of a 2025 event? Thank you. Ari Bousbib Thank you, Max. I'm just -- we are laughing here because when did 1.3 become the benchmark? I mean, I know we reported amazing over 1.3 book-to-bill ratios in the past couple of years, largely because of the COVID studies and so on. But we're very happy with 1.27, we're happy with 1.2. We are happy with these book-to-bills. They are very, very strong. And you're talking about a rebound in bookings. We had excellent bookings. I don't know what -- we are happy with this performance. There's no rebound. It's very good. I think the bookings we reported this quarter are the first -- third highest ever, right. So I'm not sure what the question is with respect to bookings. Did you ask about conversion as well or no, I'm sorry, I didn't... Max Smock Yeah. I'm sorry -- you set such a high bar, Ari. But yeah, in terms of the first part of the question. Yeah. Sorry, victim of expectations. But my first part of the question was just around whether or not you can provide any sort of detail or more detail around just how much RFP flows in the qualified pipeline? Ari Bousbib Yeah. I'm sorry. Yeah. So again, RFP flows, total pipeline and qualified pipeline in this area are up basically all around. The qualified pipeline, I think, it was up across the number of 12%, was up 12%. And total pipeline is up single digits. RFP grows as well, right, but mid-teens, right? Your next question comes from the line of Jailendra Singh of Truist Securities. Your line is open. Jailendra Singh Thank you and thanks for taking my questions. I want to go back to the individual businesses you talked about in TAS -- RWE and Consulting both improving in the second quarter. Last quarter you called out RWE, some recovery after some slowdown in Q4, Consulting taking a step down. How are you thinking about these individual businesses as you think about TAS expectations in second half considering that recovery in consulting remains relatively volatile? And is RWE back to mid to high-teens growth rate or is there still room for recovery there? Ari Bousbib No. I mean, we see overall TAS in the second half in the 6% to 7% range at constant currency, okay? That's what we see after -- obviously, businesses are rolling up their forecasts and they are always higher than that, but we take some contingency, we evaluate the environment and we discount that and that's where we are now in the 6% to 7% range, in aggregate. And you could make the assumptions yourself, you could see that in order to get to that. If 30% of the business is essentially flattish, that's the data. So the 70% has to grow in the high-single-digits in aggregate in order to get us to those numbers. So that's where we see the forecast. And we feel, I should add, very confident based on the leading indicators that we look at. No. Not high-teens. No. Maybe could be low-teens, but high-single to low-teens for the real world. Exactly. Thank you. Thank you. Your next question comes from the line of Justin Bowers of DB. Your line is open. Justin Bowers Thank you, and good morning, everyone. So just in terms of the strength in TAS and the outlook for the rest of the year, how much of that is, in your sense the underlying market improving versus IQVIA winning its fair share of business with some of the tools that you have? And then, part two of that would be, what are some of the changes that you've made to manage the part of the business this year versus, let's say, last year at this time? Ari Bousbib Well, thank you. First of all, it's not like the market is rebounding. I mentioned before that client cautiousness and budgetary discipline continues especially at large pharma. It's not -- didn't go away. But what we did say before was that within the portfolio of offerings that we have, there are certain things that are mission-critical for our clients. And what happened last time -- last year at this time is that we expected those things to happen and they were pushed to the right, okay? They were delayed. We said all along that at some point those things have to be done. And that is what is happening now, and what we see happening in the second half. So it's not like the market overall has grown is that the segments of the market that are -- must-do for our clients are finally happening, and they will be happening in the second half. So that's number one for the market. So from that sense, you could say that the market is a little better in the sense that the clients are willing to spend that money, but, again, I mentioned before, the negotiations are tougher. So to answer the second part of your question, what we are doing differently here is, obviously, being more responsive to our client needs. We are being more accommodating with their terms and we are commercially being more aggressive to make sure that we actually do win those projects that the markets are putting out there, the clients are putting out there for bid. Justin Bowers Understood. One quick follow-up. In terms of the improving decision-making timelines that you referenced earlier too. Is that for -- is that around some of the stuff that was pushed out to the right or is that for some new opportunities as well or just something you're seeing more broadly? Ari Bousbib Thank you. It's true. It's true broadly. Obviously, the mission-critical stuff is mission-critical and needs to be done. So yeah, that is improving the overall average, but even -- I would say, even for the rest, I think we've seen improved decision-making. Faster timelines. Thank you. Your next question comes from the line of Tejas Savant of Morgan Stanley. Your line is open. Tejas Savant Hey guys. Good morning, and thanks for the time here. Ari, just following up on that line of questioning on TAS. I guess could you share a little bit of color around what gives you confidence to this improved decision-making timeline sort of dynamic continues here, particularly given the election cycle that sort of heating up as we speak? And then, on the analytics and consulting piece within TAS, are you starting to see the work related to those new drug approvals you talked about both year-to-date and last year starting to show up in the project backlog or is that still upside to come heading into year-end in '25? Thank you. Ari Bousbib Thank you. Well, look, I don't think the election has much influence on the day-to-day decision-making with respect to launching of drugs. And in order to response to the second part of your question, the answer is yes. Those approvals, obviously, it's not common for a client to decide that they're not going to launch a drug that's been approved. So -- and there is usually a six months to -- six months to nine months' time lag before that leads to -- between the approval and the time at which the drug is actually launched, and the work associated with it comes to us, so not much. This was delayed a little bit longer versus what it should have been and some of these projects that should have happened earlier this year are happening in the second half of the year. Again, no surprises here. Thank you. Your next question comes from the line of Dan Leonard of UBS. Your line is open. Dan Leonard Thank you. So I have a question on the guidance. It seems that the inferred Q4 sales ramp compared to Q3 is a bit greater than typical. Can you talk about the drivers of that and perhaps even elaborate further on your conviction in the recovery in TAS in the back half? Thank you. Ari Bousbib Yeah. You want to answer that anyone here? I mean, look, first of all, there is recovery in TAS. We just talked about it at length in the past few questions. So that's understandable. Secondly, the compare is more favorable. We had a deterioration in the fourth quarter last year. It was the lowest quarter of the year, last year. And we said all along that there would be a mirror image in '24 versus '23, that is the first quarter will resemble the fourth quarter, the second quarter will resemble the third quarter, etc. So we do see fourth quarter up. But -- and it's not unusual by the way, there is a seasonality in Q4 that you can go back many years. It's always the case that Q4 is much stronger. So these are the three reasons; one, recovery in TAS accelerating; two, compares; and three, seasonality, which is not surprising. Anything else, guys, you want to... Your next question comes from the line of Charles Rhyee of TD Cowen. Your line is open. Charles Rhyee Yeah. Thanks, Ari. I want to ask about M&A. I think so far you've spent maybe, was it $220 odd million of -- in terms of acquisitions so far in the first half. Can you talk about sort of what the revenue contribution has been because I think in the guide was about 150 basis points of revenue growth? And just curious, has that been in TAS or in RDS or both? And how much do you still need to maybe do for the back half of the year? Thanks. Ari Bousbib Yeah. Thank you so much. Yeah. So look, we said all along that it will be -- acquisition would contribute to a better point to our growth this year. And we wish we would do more acquisitions, but valuations continue to be high and we are -- we have a big pipeline, but it's not always the case that we are able to close. So far for the year, it's a little bit more than a point and it's a little bit more entire than in RDS, but that's it. And look, just -- we haven't spent much so far, but we hope to spend more in the second half and we'll see what happens. Yeah. Your next question comes from the line of Michael Ryskin of Bank of America. Your line is open. Michael Ryskin Great. Thanks for taking the question. I'm not sure you addressed this before, but there have been a couple of prominent cancellations of clinical trials in the industry in the last couple of months. You called out one specifically on 1Q that impacted your performance then -- in your book-to-bill then. Just wondering if cancellations have trended any better recently. I know that the prominent ones always make the news, but just wondering what's happening behind below the surface on that trend. Ari Bousbib Yeah. No. I mean, look, I mentioned in my commentary and we've said this every quarter in the past few quarters, and it's just not a secret. The world knows that large pharma -- largely in response to the IRA and hypothetical impacts down the line. Large pharma has been reprioritizing their programs. And they've taken off-the-shelf some programs that they felt were either too competitive with other existing drugs or that didn't have the same risk-return profiles that they had assumed pre-IRA when those programs were launched. So as a result of that, there have been a little bit more cancellations than usual really for the past few quarters. I think, in general, look, we don't tell you what the cancellations are. We report the net bookings. Our average quarterly cancellations are in the $0.5 billion range that has been the case for a long time and that's kind of $500 million plus or minus, whatever, $100 million to $200 million. So some quarters it's less. It could be $300 million or $400 million, some quarters, it could be more $600 million to $700 million or more. Most of these cancellations are $10 million, $15 million, $20 million, $25 million programs. That last quarter, because it was well-publicized and because it was a huge one-time number, we chose to let you know about it. We had had questions. Everyone knew that we were the ones doing that program and pre-call, we had had questions. So we decided to let you know about it. Yes, that's what it was. It was -- I don't remember the exact number in the quarter $4 billion in one shot. But that could happen. We have no -- companies are now usually when they terminate a program. It's partly this reprioritization that I just discussed and sometimes it's simply because of the data. And in the case of the program that we disclosed last quarter, it wasn't a reprioritization, it was simply that the data wasn't supporting a continuation of the program, and essentially the program failed as it often happens in this industry. Your next question comes from the line of Jack Wallace of Guggenheim Securities. Your line is open. Jack Wallace Hey. Thanks for taking my questions. I just wanted to go back and ask a follow-up to the EBITDA guidance questions from earlier. Ari, you called out that there was some mix-shift impacting margins in the back half of the year, and with the TAS guidance largely reiterated in strong second quarter, I was wondering if you could help us get a better understanding for the mix-shift, which sounds like its intra-segment? Thank you. Ari Bousbib Yeah. I don't think I can give you much more color than that. It's just what the chips fail, okay? So [Technical Difficulty] and I know that this would have attracted two questions. We would have to look at it again at this range, it's just -- we just build up our forecast and that's where the most appropriate range fell. It could be also -- we did a little bit more acquisitions this quarter and generally, acquisitions come in at very low margin in the first year. So that could have impacted. It's not a big different number, frankly. So in the grand scheme of things. So I can't give you much more color than that. Jack Wallace Fair enough. And then on the positive side here, right, in those CE, you won a sizable chunk of a top-five client. Can you just give us a better understanding for the one or handful of reasons that led that client to switch from the long-time incumbent? Thank you. Ari Bousbib I think they liked our solution better. I think it gave them more ability to achieve their goals. I can't go into the details of the program, and that's -- yeah, they just like it better. Thank you. Your next question comes from the line of Patrick Donnelly of Citi. Your line is open. Patrick Donnelly Hey, guys. Thanks for taking the questions. Ari, you talked a little bit on the capital deployment side about wanting to do more in M&A. Maybe the environment is not too friendly at the moment. But how are you thinking about priorities there? I know you guys have bought back some stock. You seem pretty comfortable with the leverage ratio. So maybe just talk through your priorities, M&A landscape, and then again, I mean, any targets on the leverage side with the debt would be helpful. Ari Bousbib Yeah. I -- you came -- the line came across not a little bit blurry, but if I understand you asked about capital deployment and acquisitions. Look, you saw that our cash flow performance was actually very strong in the quarter and that obviously helped continue to reduce our leverage. I think we have on a 12-month trailing basis, we ended the quarter at 3.25 times EBITDA, which is very good. I remind you, we were not too long ago in the high 4s, and we said that we were continuing to deliver naturally as EBITDA grows. Acquisitions, yeah, we would -- look, our long-term guidance always contemplates a couple of points of contribution from acquisitions to continue to boost our top line. So far, we've been able to do just over a point. Obviously, we have a rich pipeline and it's hard for me to predict what acquisition will be the second half or in the years to come. It's a binary outcome. So I don't know. I'm not sure if that was your question, but that's what I heard. Understood. Your last question comes from the line of Matt Sykes of Goldman Sachs. Your line is open. Matt Sykes Hi. Good morning. Thanks for taking my questions. Ari, you mentioned the strong funding trends in the EBP segment at the same time you're still seeing some caution from large pharma. How should we think about the potential revenue mix-shift to VBP versus large pharma and would there be any implications for FSP versus full-service mix in that? Thank you. Ari Bousbib Thank you. Well, look, first of all, when there is a timeline between funding and -- on RFP and then the timeline between an RFP and a booking. So if -- this is a business that has long cycles. So it's good that we have just as we were cautioning you not to panic when funding declines, and we said it's not going to affect us for a while. We don't get excited because funding this quarter was very strong. Yeah. It's good for our midterm and long-term prospects, but it's not like it's going to affect the mix. Also, we have a very large backlog, the largest in the industry. And it's not going to meaningfully change the mix of what we do in the next few quarters and what's large pharma, what's EBP, what's full-service versus what FSP. But you are correct that the more EBP, the more full-service, and that certainly helps mitigate the recent trend we've seen where, as we discussed in the past, large pharma has been swinging the pendulum a little bit more towards FSP as it has happened many times in the history of this industry. So you are correct, from that standpoint, that -- as more EBP funding is there, there'll be more EBP work in the quarters to come. And therefore, when that backlog converts into revenue, there'll be a higher mix of full-service versus FSP relative to what it is now. Thank you. With no further time for questions, I now turn the call back over to Mr. Joseph. Kerri Joseph Thank you. Thank you for taking the time to join us today, and we look forward to speaking with you again in our third-quarter 2024 earnings call. The team will be available for the rest of the day to take any follow-up questions you might have. Thank you. Have a good day. This concludes today's conference call. You may now disconnect.

Cadence Design Systems, Inc. (CDNS) Q2 2024 Earnings Call Transcript

Charles Shi - Needham & Company Gianmarco Conti - Deutsche Bank Vivek Arya - Bank of America Securities Joshua Tilton - Wolfe Research Ruben Roy - Stifel Jay Vleeschhouwer - Griffin Securities Harlan Sur - JPMorgan Jason Celino - KeyBanc Capital Markets Lee Simpson - Morgan Stanley Clarke Jeffries - Piper Sandler Joe Vruwink - Baird Good afternoon. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Second Quarter 2024 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 Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead. Richard Gu Thank you, operator. I'd like to welcome everyone to our second quarter of 2024 earnings conference call. I'm joined today by Anirudh Devgan, President and Chief Executive Officer; and John Wall, Senior Vice President, and Chief Financial Officer. The webcast of this call and a copy of today's prepared remarks will be available on our website, cadence.com. Today's discussion will contain forward-looking statements, including our outlook on future business and operating results. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion. For information on factors that could cause actual results to differ, please refer to our SEC filings, including our most recent Forms 10-K and 10-Q, CFO commentary and today's earnings release. All forward-looking statements during this call are based on estimates and information available to us as of today and we disclaim any obligation to update them. In addition, we'll present certain non-GAAP measures, which should not be considered in isolation from or as a substitute for GAAP results. Reconciliation of GAAP to non-GAAP measures are included in today's earnings release. For the Q&A session today, we will ask that you observe a limit of one question and one follow-up. Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. Cadence delivered strong financial results for the second quarter of 2024, with broad based momentum across our product portfolio. Bookings were stronger than expected, leading to a healthy backlog and underscoring the robust demand for our innovative technologies. We exceeded our outlook on all key metrics and are updating our revenue guidance for the year to over 13% year-over-year growth. John will provide more details on both our Q2 results and updated outlook for the year. Generational trends such as hyperscale computing, 5G and autonomous driving, all underpinned by the AI super cycle, are driving strong design activity across multiple verticals, particularly in data center and automotive. Along with increasing chip complexity and system companies building their own silicon, these trends are creating tremendous tailwinds for our differentiated solutions. We are steadfastly executing to our intelligent system design strategy, extending our leadership in core EDA, while steadily expanding our footprint in the new system design analysis area. Customers are ramping-up their R&D spend in AI driven automation. Our Cadence.AI portfolio offering unparalleled quality of results and productivity benefits continues to gain momentum with orders more than tripling over the last year. Our solutions are enabling the massive AI infrastructure build out across the semi and system space. Additionally, we continue embedding AI in our EDA, SDA and digital biology solutions. In Q2, our long-term development partner, NVIDIA, broadly deployed Palladium Z3 to deliver to its next generation AI product roadmap, further solidifying Cadence's leadership in the industry. A marquee hyperscaler meaningfully expanded its partnership with Cadence in Q2, through a broad proliferation of our Cadence.AI EDA, SDA and hardware portfolio. The growing foundry ecosystem is driving increased design activity and creating significant opportunities for our industry leading products. And in Q2, we expanded our collaboration with several leading foundry partners. We announced that Cadence.AI digital and analog tools were optimized for Samsung's advanced node SF2 gate all around process, driving enhanced quality of results and accelerating node migration. We extended our long standing collaboration with TSMC, through a very comprehensive and innovative technology advancement, ranging from 3D-IC to design IP and photonics and providing optimized digital and analog full flows for TSMC's latest N2 process technologies. Our integrity 3D-IC platform is the industry's leading unified design, analysis and sign-up platform for multi-chiplet architectures. Integrity has been certified for all of TSMC's latest 3D fabric offerings and now has enabled several new features like hierarchical 3D-IC design. We also announced that integrity has been enabled for all of Samsung foundry's multi-die integration offerings accelerating the designer assembly of stack chiplets. Additionally, we released a complete Intel Foundry EMIB advanced packaging reference flow that is optimized to work seamlessly with Intel 18A technology. We are also collaborating with multiple foundries to optimize our industry leading IP cores for AI, HPC, mobile and automotive applications for their advanced process technology, so as to ensure seamless integration into customer designs. We saw strong momentum in our IP business with a delivering 25% year-over-year growth in Q2. As we executed to our profitable and scalable growth strategy, AI use cases, HPC and heterogeneous integration were the primary drivers fueling the demand for our HBM, PCIe, DDDR, 112 gig SerDes and UCIe products. We expanded our system IP portfolio with the addition of Cadence Janus Network on a chip solution, that manages high speed communications effectively with minimum latency, enabling customers to achieve their PPA targets faster and with lower risk. Emulation and prototyping have become mission-critical elements of chip design and software bring of flows. Following the launch of our market leading Z3 and X3 platforms, there is robust demand for these best-in-class systems, particularly by AI, hyperscale and automotive companies and we continue to ramp-up our production capacity accordingly. Verisium, our AI-driven verification platform, continued seeing rapid customer adoption with several market shaping customers, including Qualcomm, successfully using Verisium Sim AI for coverage maximization and achieving up to a 20x reduction in verification workload time. Our system design and analysis business continued its strong momentum in Q2, delivering 20% year-over-year revenue growth. As chiplet based architectures gained traction, our industry-leading integrity 3D-IC platform had increased adoption and expansion from large deployments at 5G hyperscale, memory and consumer customers. Our AI enabled Allegro X design platform, which is being rapidly adopted and driving competitive displacement as multiple aerospace and defense hyperscalers and EV customers take advantage of the platform's productivity and next generation capabilities. Allegro X's in design analysis capabilities are also driving a pull through of our Multiphysics analysis solutions. In Q2, a leading EV auto company forged a strategic partnership with Cadence, making a significant investment across the breadth of our Multiphysics portfolio. With the close of BETA CAE in Q2, we now offer a comprehensive Multiphysics platform covering electromagnetics, electrothermal, CFD and structural analysis solutions. Our digital IC and custom businesses delivered another solid quarter. Proliferation of our digital full flow at the most advanced nodes continued with close to 40 full flow wins over the last 12 months, especially at hyperscalers. With over 400 tapeouts, customers are increasingly relying on Cadence Cerebrus, the leading AI tool in the industry as it continues to deliver amazing PPA and productivity benefits. For example, Cadence Cerebrus has been delivering up to a 10% PPA gain for a global marquee systems company and is now deployed as part of the default flow for their latest designs at the most advanced nodes. Samsung foundry leveraged Cadence Cerebrus in both DTCO and implementation to achieve more than a 10% leakage power reduction on their SF2 gate all around platform. Socionext utilized SerDes closure and temper sign-off to reduce timing closure time by 73% and doubled productivity while reducing memory cost by 90%. Our AI driven Virtuoso Studio is the leading automated solution for analog and RF designs. And its new AI features allow much more efficient migration from one process node to another. Virtuoso Studio added 35 new logos in Q2, led by top hyperscalers, aerospace and defense and automotive customers. In summary, I'm pleased with our Q2 results and the continuing momentum of our business. The AI driven automation era offers massive opportunities and the co-optimization of our comprehensive EDA and SDA portfolio with accelerated computing and AI orchestration uniquely positions us to provide disruptive solutions to multiple markets. Now I will turn it over to John to provide more details on the Q2 results and our updated 2024 outlook. John Wall Thanks, Anirudh, and good afternoon, everyone. I'm pleased to report that Cadence delivered strong results for the second quarter of 2024, finishing the first half with backlog of approximately $6 billion. Also, we expanded our Multiphysics platform in Q2 by completing the acquisition of BETA CAE. Here are some of the financial highlights from the second quarter, starting with P&L. Total revenue was $1.061 billion. GAAP operating margin was 27.7% and non-GAAP operating margin was 40.1%, and GAAP EPS was $0.84 with non-GAAP EPS $1.28. Next, turning to the balance sheet and cash flow. Cash balance at quarter end was $1.059 billion, while the principal value of debt outstanding was $1.350 billion. Operating cash flow was $156 million. DSOs were 49 days and we used $125 million to repurchase Cadence shares in Q2. Before I provide our updated outlook, I'd like to share some assumptions that are embedded. Our updated outlook includes BETA CAE and it contains the usual assumption that export control regulations that exist today, remain substantially similar for the remainder of the year. Our updated outlook for 2024 is revenue in the range of $4.6 billion to $4.66 billion. GAAP operating margin in the range of 29.7% to 31.3%. Non-GAAP operating margin in the range of 41.7% to 43.3%. GAAP EPS in the range of $3.82 to $4.02. Non-GAAP EPS in the range of $5.77 to $5.97. Operating cash flow in the range of $1 billion to $1.2 billion and we expect to use approximately 50% of our annual free cash flow to repurchase Cadence shares. With that in mind, for Q3, we expect revenue in the range of $1.165 billion to $1.195 billion. GAAP operating margin in the range of 27.7% to 29.3%. Non-GAAP operating margin in the range of 40.7% to 42.3%. GAAP EPS in the range of $0.83 to $0.93 and non-GAAP EPS in the range of $1.39 to $1.49. And as usual, we published a CFO commentary document on our Investor Relations website, which includes our outlook for additional items, as well as further analysis and GAAP to non-GAAP reconciliations. In conclusion, I am pleased with our strong Q2 results. We exceeded our outlook on all key financial metrics, a good finish to the first half and ongoing demand for our solutions sets us up for strong growth in the second half of 2024. As always, I'd like to close by thanking our customers, partners and our employees for their continued support. And with that, operator, we will now take questions. Thank you. We will open the line for questions. [Operator Instructions] Your first question comes from Charles Shi with Needham & Company. Please go ahead. Charles Shi Hi. Good afternoon. Thanks for taking my questions. Anirudh and John, maybe the first question, I do want to ask a fairly big question -- a big picture one. So, you did pick up your outlook for the year, but some of that really comes from BETA CAE. But the broader question is the semiconductor -- global semiconductor sales, it's on-track to grow a lot faster, let's say, compared with you and even your peers synopsis and -- but this seems to me kind of like a reversal of the trend of the last three years when you actually did outgrow the semiconductors. But with so much AI being a big driver for semiconductors, we do wonder whether it's either through pricing or through some other measures Cadence can actually gain a little bit bigger piece of the pie from overall semiconductor, especially from AI? I don't know if you can provide some thoughts today. I'm not necessarily asking how to change the trend in terms of the value capture, but any thoughts would be great. Thanks. Anirudh Devgan Yeah. Hi, Charles. Thanks for the question. I mean, first of all, I'd like to say that overall we are pleased with how we are performing. If you step back -- because you asked a longer term question, right, if you step-back, we will deliver we expect more than 13% revenue growth and about 42.5% operating margin. So, I think that's a best-in-class combination of both revenue growth and operating margin. And then if you look at our CAGR over last three years, which is one of our kind of favorite metrics, that's also performing pretty well in terms of growth and margin expansion. And you mentioned semi-cycle, I mean, it's encouraging to see that there is going to be growth this year, which it was not there last year. But as you all know, Charles, we are tied to the R&D spend more than the revenue of our customers. And, of course, if the revenue goes up, they're more likely to spend on R&D, but in general, the -- our customers, both system and semi-companies continue to spend on R&D and these are long-term projects. So, we'll see how that goes as the semiconductor revenue improves, but this is not instantaneous effect on R&D spend. There is always some lag sometimes. And so we will -- but we are encouraged to see the improvement in semi spending overall in a semiconductor revenue. So, I would like to say -- and you can see in our backlog also, we maintain a pretty healthy backlog. So, overall, I think things are performing well and this AI is broadening out. I mean, you know this well. AI is broadening out beyond datacenter, which we are glad to have great partnerships, two automotive, two more edge consumer devices like phones and PCs. So overall I feel pretty good about the industry and, of course, our position in it as the essential provider of design software. Charles Shi Got it. Maybe a quick follow up on China. It looks like China revenue is still pretty light in the second quarter. So, I recall you were thinking maybe China contribution is probably going to be slightly less than the mid-teens or 15% -- less than 15%. But even if -- let me assume the China revenue gets to like a 14%-ish, it still implies a little bit of a second half a reacceleration of the China revenue growth. Is that still the case or you think maybe compared with the three months ago, China actually may get a little bit weaker than you previously thought? Thanks. John Wall Thanks for the question, Charles. And that's -- I mean, regional revenue is notoriously hard to predict. I will say that at the midpoint of our current revenue guide, we only need China to get to 13% of overall revenue to be able to hit that midpoint. I mean, when you look at performance in Q2 and the first half, we had a very strong bookings first half, very pleased with customers' response to our new hardware systems. The IP and SG&A businesses continue to grow strongly. Core businesses continue to scale really well and we're focused on profitable revenue growth. I know in your first question, you indicated that we hadn't raised the outlook, but we did raise non-GAAP EPS by $0.06. We're very pleased with the improvement in profitability. And when you look at the current guide, we're actually on track for 50% incremental margin excluding the impact of BETA CAE now. BETA CAE is in our guide, but it's in our guide at what we previously communicated in the press release is $40 million of revenue and about $0.12 dilution to non-GAAP EPS. There is an impact to OP cash as a result of BETA CAE as well. But overall, very, very pleased. We thought it was prudent to assume lower China revenue for this year at the midpoint of our guide puts the -- but that's it. We only need 13% to get to the midpoint of guidance. Charles Shi Thanks, Anirudh and John for that additional color. I appreciate that. Our next question comes from Gianmarco Conti with Deutsche Bank. Please go ahead. Gianmarco Conti Yeah. Hi, there. Thank you so much for taking my questions. And so on my first one, could you talk a little bit about the implied Q4 ramp-up to 29% growth at the midpoint of guidance? And what is giving you the confidence in reaching the target? Is it mostly hardware visibility coming through or are there an unusually higher number of Q4 renewals that you're waiting for? Any color here would be great. Thank you. John Wall Yes, Gianmarco. I mean, there's no real change from what we said last quarter. I mean, it's effectively the shape of the revenue curve for the year. We're expecting upfront revenue -- a lot more upfront revenue in the second half, it's just the timing of shipments really that's -- upfront revenue typically comes from IP, hardware and to a lesser extent some software on the SG&A side. With the hardware, it takes time to build the systems, we have higher revenue in Q4 versus Q3 as a result. But also from IP, there is -- IP is -- we recognize revenue and IP based on the timing of deliveries. We're confident in that guide. It's just the shape of the -- shape of Q3 and Q4 is what we have in the guide now. Gianmarco Conti Okay. Great. So my follow up would be on hardware. And if you could talk a little bit about how much visibility you have actually in H2? And are you booking and delivering in the same quarter, hence, while we're not seeing a major uplift in backlog growth or is it -- is there a different dynamic to it? I'm trying to understand if you're booking manufacturing and delivering all in the same quarter for hardware essentially? Thank you. John Wall Thanks for the question. Yes, in some cases, on the newer systems, there is a timeline, a lead time to building the systems. We have more bookings than our ability to actually fulfill those bookings. But we do have some inventory of the older systems, we're able to deliver those in the quarter. So I mean, there's always a mix. We did have a challenge in the past with getting inventory and building the inventory as fast as we could for the demand. I think we've dealt with a lot of that. You'll also see in the OP cash guide, there is -- we're planning to purchase a significant amount of raw materials for building inventory in Q3. That's the biggest portion of the change in OP cash guys. Anirudh Devgan Also just to add on overall -- yeah, hey, just to add on the overall hardware cycle, as you remember, we launched new systems in April, just couple of months ago, few months ago now. And the response to them has been phenomenal. Actually, we -- these palladium, especially both palladium and protium, but these systems can design chips like I mentioned last time with capacity of 1 trillion transistors and the current's biggest chip is like 200 billion transistors, most of them are 100 billion or less. So we are 5x to 10x higher capacity than what is needed. So that should suit the industry well for next several years. And I'm also what pretty pleased about is that we delivered production deployments of our new systems to some very major customers. So we highlighted the NVIDIA, our development partner with a significant deployment of Z3, also one of the leading mobile system -- mobile companies in the world and one of the leading hyperscalers. So it's across multiple markets that we delivered our latest systems, which are performing exceedingly well. So that sets up very well for the future and also competitively. And we have a significant lead given the nature of our systems. It's a combination of -- protium is based on FPGA and then palladium is based on our own chip at advanced TSMC process. And Cadence is the only solution that does that and provides a unique value. So overall, I think hardware business is performing well. And as you know, these are multi-year upgrade cycles. So this is not all-in in '24. So we'll see how things go in '25 and '26. Our next question comes from Vivek Arya with Bank of America Securities. Please go ahead. Vivek Arya Thanks for taking my questions. So on an absolute basis in fiscal '24, organic sales growth rate is robust. But in terms of revisions, it has stalled, right, essentially no real movement since what you suggested at the start of the year. So I'm curious, Anirudh, how has the year transpired versus what you thought and how do you think about bookings and backlog trends into the second half? Should we expect that backlog stays around the $6 billion? Will it start to pick up? Just I'm trying to understand that should we be thinking about sales accelerating from here or this being kind of the sustainable growth rate for the company? Anirudh Devgan Yeah. Hi, Vivek. Good question. So in general, what I would like to say is, like we mentioned last two times, the shape of the curve this year is unique to Cadence, given multiple factors. This is not what we expected last two years. So this time it's more back end loaded for the reasons we mentioned before. So the guide is a little different and we are also given that shape of the curve more prudent in our guide like we were in Q2 and then we rather overachieve and deliver that and give the team flexibility to do the right business for the long term. So I think that's the difference this year versus last few years is given the shape of the curve, we have more prudence in our revenue guide like John mentioned and John can comment on the backlog expectations, yeah. John Wall Yeah. I mean we don't guide bookings, but we were very pleased with the strong bookings in the first half. And I get the question, Vivek. I mean, essentially, we're seeing a strong demand for our hardware systems. We're seeing strength across all our businesses. And I guess your question is that when you add in BETA CAE, you're not really taking the revenue guide up. I think essentially I mean if your question is what would we like to see improve, I think it's the China revenue percentage. It was 12% in Q1, 12% in Q2. It improved in Q2 over Q1 and we think it will continue to improve through the year. But right now, our guide only assumes -- only needs to get to 13% China to hit the midpoint of that guidance. Vivek Arya Got it. And for my follow-up, you mentioned BETA CAE quite a drag to EPS. I think you mentioned $0.12 dilution. And almost, I think what is like a $300 million hit to operating cash flows. Can you describe that acquisition a little more? And when does it start to become accretive to your financials? Thank you. John Wall So yes, Vivek. On the $300 million drop in operating cash, just to clarify that, about 40% of that $300 million drop is due to M&A. I mean, in things like BETA CAE, some of the purchase price, the geography of where the operating -- where the cash impact goes, it flows -- some of that payment flows through OP cash. The bigger portion of the impact on operating cash is our plan to purchase a lot of inventory raw materials for the hardware demand that we're seeing. We're pre-purchasing a lot of inventory. So you'll see our inventory spike in Q3 with all of the raw materials we're purchasing. We want to make sure that we have all the raw materials necessary to ramp-up the build out of our hardware systems. And then in relation to BETA CAE, there's -- I mean it's very recent acquisition. The -- it's no different to what we have in the press release. In fact, on the press release, we said we were expecting $40 million of revenue at the midpoint. That's embedded now in the guide. We're expecting $0.12 dilution on -- from our non-GAAP EPS, that's also in the guide now. And we expect it to be -- I mean, operationally, it will be accretive next year that there is some interest cost associated with the test that -- but we think it will be accretive next year. Anirudh Devgan Also, a couple of things to clarify. So one thing, this purchase of inventory for the hardware systems. I mean, that will be used over multiple years. It's not just for '24. So I think it's a one-time investment that pays for several years and that's a prudent decision to make to get the right kind of parts for the future. And then on BETA, it completes our system analysis portfolio to add structural analysis and it also strengthens our position in automotive. Of course, data center is a big vertical with all the AI super cycles. But I think one of the other exciting verticals is automotive with all this electrification and also AI getting added in the self-driving or driver assistance. So we see a lot of design activity in automotive. Also, automotive is also moving through chiplets and 3D-IC. So I think automotive has all the three tenants of our IST strategy. It has silicon content that is increasing and more and more system design, of course, is needed for the design of automotive. And AI for all the data and computational software. So for that reason, BETA CAE is -- completes our portfolio in automotive and positions us well in the future. And this is not just with the semiconductor companies doing automotive, but also the system companies now. OEMs doing more and more chip design, doing more of our system solutions. And I also want to highlight and congratulate McLaren. There was a big news this weekend. McLaren got one and two in Hungarian F1 and we have been working with them for last few months and years and it's good to see them do well as we deploy. So I think the automotive solution that we are driving is a combination of silicon system and then AI and we are seeing the results of that through organic and inorganic expansion. Our next question comes from Joshua Tilton with Wolfe Research. Please go ahead. Great. The first one is just kind of more of a clarification. I know there's been a lot of questions around the mix in upfront first recurring. I guess what I'm just trying to understand is -- and I could be wrong with my math here, but it feels like it was -- the upfront component was still a little light in 2Q and now we're a little bit more second half weighted, more 4Q weighted because you need time to develop inventory. Am I thinking about that the right way? John Wall That's fair, Josh. I would do the inverse on you in terms of bookings were stronger than we expected in Q2 and we got some uplift in recurring revenue. It took a bit of pressure off on the upfront side that -- and we are -- I mean, we're taking orders. We've got strong demand for the hardware and we're building those hardware systems as quickly as we can, particularly the newer hardware orders. IP is doing really well and system design and analysis is doing really well. And what we've reflected in the guide is our expectation of how much of that revenue will fall in Q3 and Q4. We took the opportunity, we really derisked the guide for the year by reducing our expectations for China. Upfront, we still expect to be in a range of 80% to 85%, but I think we might get slightly more recurring revenue as a result of the strong bookings in the first half. Joshua Tilton That makes super clear. And then I guess just my follow up to that is and I guess it's another visibility question, but how much of what's baked into the guide from an upfront perspective? Do you feel like you have like good inventory levels to meet that guidance or does the guidance that you put out today still require you to build and develop inventory between now and shipping those boxes? John Wall Yes. But it's -- we definitely need to build hardware and you'll see the impact on our inventory in Q3 with the amount of raw materials we're purchasing. But as Anirudh says, that's a one-time thing that we're doing to try and get raw materials and to build those systems quickly as we can. But the -- a lot of the upfront revenue in the second half comes from the strength in our IP business and we have those orders in backlog and it's just a case of executing against those. We also have some SD&A, our system design analysis upfront revenue that's scheduled to occur in Q3 and Q4. Again, most of that is from orders in the system. On the hardware side, it's kind of mid to high-single digits is what we were expecting the SPG Group to deliver to be able to hit the midpoint of that guidance. Joshua Tilton Super helpful. And then just -- but just a quick follow up is, really often to see the recurring revenue growing sequentially this quarter. Is there any way you can maybe help us on what the expected recurring versus upfront mix is supposed to be in 3Q? And then I'll see the floor. John Wall I don't have that to hand, but just let me come back to that. Let's see if I can dig it out here. Our next question comes from Ruben Roy with Stifel. Please go ahead. Ruben Roy Yes. Thank you. John, just a very quick question and then I guess a follow up and then I'll ask a real question. But on the inventory purchases, is -- am I right in assuming that that's mostly for the Z3/X3? And has anything changed in terms of when you're thinking about general availability of those hardware products? John Wall Yes, that's correct. But the vast majority of the purchases are to -- to get raw materials to help build those new systems. Yeah. Just to clarify, I mean, also -- I mean, we have two systems, right? So, palladiums, we design ourselves and we manufacture the chip in TSMC and protium. We also design ourselves, but the silicon itself is primarily from AMD with Xilinx FPGAs. So, a lot of this purchase is for X3s and the FPGAs and that should serve us for multiple years. On Z3, like we said, we are already shipping them and they already deployed in production this quarter. So, I think Z3 is slightly different than X3 in terms of the mix of the silicon content, just to clarify that. Ruben Roy Yeah. Okay. I apologize, Anirudh. I thought they were going to sort of certain customers not generally available. But thank you for that. And then the real question just around -- some of your top customers have been accelerating the rhythm of bringing sort of their very complex chips to market. NVIDIA and AMD certainly have accelerated their roadmaps to sort of a one year rhythm. Are you seeing any changes in sort of the way your business is impacted or affected kind of by the acceleration of their product roadmaps yet? Anirudh Devgan Yes, I would like to -- I think we're seeing more and more design activity like you said the rhythm or the Cadence of the products. And also different kind of chips. It's not just that big data center chips, but even within them, there is more and more customization. Of course, the hyperscalers doing their own silicon. And then now we talked about our partnership with, for example, Qualcomm and they are doing a consumer or edge laptop AI devices. So, the amount of AI is also spreading to other verticals, not just obvious, the big one on data center and data center design is accelerating. And I think when we look at it, we still see that the data center part of AI still should accelerate, at least the visibility we have for next couple of years, so we'll see how that goes. And therefore -- and the other thing is automotive -- automotive takes normally a little longer, but we're already seeing design activity and the deployment may be few years down, maybe after data center. And then consumer and PCs already starting with phones and laptops. So, overall we do see accelerating deployment of AI through the whole semiconductor ecosystem. And we are very proud of our position in it, whether it's 3D-IC, whether it is data center chips, whether it's our own AI products, we are winning almost all kind of engagements on all -- on our kind of Cadence.AI portfolio. So, overall we do see more and more design and deployment of AI infrastructure and our own AI product. Ruben Roy Yeah. And if I could just come back to Josh's question, sorry, if I could just come back to Josh's question on the revenue mix for Q3 that for recurring revenue, we expect -- sorry, 80% to 85% of revenue to be recurring for the year and Q3 includes the middle of that range and then the balance is Q4, so you can do the math and work out what the upfront piece is. Our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead. Jay Vleeschhouwer Thank you. Good evening. Anirudh, the question about the evolution of the product portfolio for EDA generally and perhaps for SG&A specifically. What I'd like to ask about is how you're thinking about packaging the products? Over the last year, you've introduced a couple of products with the term Studio in the name. And I'm wondering if you're thinking about more and more bundling or packaging of that kind via that nomenclature for the EDA products and then specifically for SG&A? And now that you do have multiple codes, how are you thinking about packaging or integrating across the various simulation codes that you've assembled now in acquisition? Then I'll ask my follow-up. Anirudh Devgan Yeah. Hi, Jay. Good question. So, I mean, as you know, in EDA when we go to lower nodes, there is more integrated solutions which are required, whether it's digital or analog or verification. And that is further accelerated by use of AI. So, like Cerebrus, for example, in digital will integrate not just place and route, but also synthesis and sign-off. So, I think that trend is definitely there. And same thing with Verisium, our leading AI product for verification also integrates the four major verification platforms we have. So, it is more and more platform driven approach. And we can do that now with SD&A now that we have a complete portfolio. And we mentioned like a leading EV company like OEM, one of the leading -- the most advanced EV companies deployed our entire portfolio. So as we have a bigger portfolio in SD&A, it does let us do what we have always done in EDA, focus on solutions, not just on individual products and integrate solutions with our own kind of native integrations, whether it's analog, digital verification and now with SD&A. Jay Vleeschhouwer All right. As follow up, I know it's still quite early in the propagation of AI and ML by you and your peers to the customers, but are you beginning to see any commonality or convergence towards a relatively small number of use cases that customers are mostly employing the tools for? And then relatedly, are you also seeing AIML adoption having any meaningful effect on your services revenue? Anirudh Devgan Yes, Jay. So what I would like to say is that the number of use cases I see is increasing at this point. I mean, of course, one of the biggest use case that we started with was digital implementation since it is so kind of heavy kind of design process. So automating the digital implementation process was huge benefit. And we talked even this quarter Cerebrus being deployed at one of the leading system companies for the default flow also used by Samsung. Also you see verification be used by Qualcomm. So I think what is happening in that Cerebrus or the implementation use case, two things. One is that it is going not just for design, but also for DTCO, design technology co-optimization and also for higher level in the design process like floor planning and 3D-IC exploration. So it's all not just for implementation of the design, but also for architecture and exploration. And the other thing is like there is more workflow automation. As customers get used to Cerebrus, they are using it not just towards the end of the design process, they're using it right from the beginning throughout the design process. So it allows us to do more workflow automation. And Cerebrus has also evolved to allow much more of an entire workflow rather than a specific implementation use case. And then same thing is happening in terms of more and more use cases, for example, packaging. Allegro X is doing pretty well. And recently one of the leading customers in 3D-IC used its capability to automate, for example, routing for automating placement, which was not there before in PCB and package design. So overall, I do think it's maturing of the workflows. And then with this LLMs and Gen AI, we have kind of several workflows for taking spec to RTL and we highlighted some of them last quarter. So I actually do see finally that in the -- we are always kind of building out the AI infrastructure, these big companies designing chips. But I do see now there is a turning point in deployment of AI for the design process with the initial workflow being Cerebrus and digital implementation now to expanding to LLM based art, spec -- expanding to DTCO, expanding to 3D-IC, of course, expanding to analog, packaging, verification. And we do have the most comprehensive AI portfolio in terms of all five major kind of product lines. So actually, it's a pretty encouraging view compared to a year ago. Our next question comes from Harlan Sur with J.P. Morgan. Please go ahead. Harlan Sur Hi. Good afternoon. Thanks for taking my question. Is the bookings profile for the full year still expected to be 40% first half, 60% second half? Because if it is, then that would imply book-to-bill greater than 1 for the full year, total backlog up about 9% this year to about $6.5 billion. But, I guess, how much of that backlog is due to the BETA CAE acquisition? What I'm just trying to figure out is ex BETA CAE, if core cadence orders and backlog are expected to be up this year, which would continue the strong sort of six to seven year trend of increasing orders and backlog for the team? John Wall Yes, it's hard. And again, like I say, it's -- we're not guiding bookings, but we were very, very pleased with the strong first half for bookings. The BETA CAE contribution to backlog is very, very small. It's immaterial because BETA CAE, their revenue is upfront. So that's the upfront piece of the business rather than the recurring revenue. But yeah, we're very pleased. I mean, you can typically expect us to always be driving for a book-to-bill of greater than 1, but we don't guide. We don't guide bookings though. Harlan Sur Okay. Perfect. Thank you. Anirudh, there's a pretty interesting dynamic with your memory customers, right? They're big customers of your custom product family Virtuoso, but they are moving more and more to advanced digital design, right? The HBM control logic chip, for example, is moving to leading edge technologies and advanced chip design. Similarly, with some of your NAND customers, they're moving towards more of this sort of bonded CMOS periphery to array. The periphery chip again is also moving towards advanced digital design as well. So are you starting to see more adoption of your advanced digital implementation and verification products by your memory customers? And then does the leadership in memory via Virtuoso sort of give you an advantage as they bring on more advanced logic design capabilities? Anirudh Devgan Yes, Harlan. That's a great observation and we are fortunate to have very deep and long standing partnership with all the major memory companies. At least there are three big ones and then maybe two the next level. But overall, we are -- given our strength, like you mentioned in Virtuoso, which is the platform for choice for all memory implementation. And yes, there is a lot more digital and implementation design happening at memory companies, primarily driven by HBM and other trends. And actually also there is some kind of -- I mean, they were always doing -- they were always doing digital, but it's lot more now. And there is trend of even integrating TSMC's technologies with kind of memory. And given our strong partnership with TSMC, that also helps us with the memory companies. And as you know, they are also doing a lot more 3D-IC, all the three big memory companies and these memory layers are going from -- they're actually one of the most advanced 3D-IC with the memory layers going from 8 to 12 and that also plays to our strengths. And even in my prepared remarks, I mentioned, for example, our partnership with Samsung and 3D-IC. And then so is true with the other kind of two major players in memory. So we are pleased in our position in memory and the emerging trends of HBM and 3D-IC integration and we'll see how that progresses. But I think memory is often overlooked in -- I don't need to tell you, but just in general, memory is often overlooked in the big AI super-cycle. It's not the big chips, logic chips, but memories play a very essential role and we are very well-positioned both with the leaders like NVIDIA on the logic side and then we highlighted Samsung and the other big memory players in general. Our next question comes from Jason Celino with KeyBanc Capital Markets. Please go ahead. Jason Celino Great. Thanks for taking my questions. So lots of questions so far on the hardware timing. But I think, John, on prior calls, you said that the hardware delivery times typically are like eight to 10 weeks, that's what it is for like a normal cycle. But are you saying the lead times for the Z3/X3 are longer than this because the demand is much better than what you're seeing? John Wall Demand is strong. Demand is strong. What I was trying to point out was that we do have inventory of the older systems that we can deliver right away. The newer systems we're having to build them as quickly as we can because the orders are coming in faster than we can build them. So the lead times is a bit of a moving target in that respect. We are planning to purchase a lot of raw materials and build as quickly as we can in Q3. So you'll see a significant uptick in our inventory balance at the end of Q3. Jason Celino Okay. No, that's helpful. And then just a clarification, I think you were saying like the SDA group to hit your guide needed to do like mid to high-single digit growth with -- I'm not familiar with FDG, is that the functional verification kind of guide for the year? And then if you're parsing out, like does that imply like what do we need to see on IP since that's the other upfront component to hit the guide? Thanks. John Wall Yeah. That's fair. That's -- yeah, IP is having a really, really strong year as is system design analysis, that'll be our two fastest growers for the year. And then again, there's some upfront revenue from them. It's more weighted towards Q4 versus Q3. So, we have the shape of the curve is really driving our guide and I would clarify -- I would categorize it as prudent. Anirudh, would you add anything? Anirudh Devgan No. That's right, John. And sorry for the acronym. SVG is System Verification Group. So, when we say SVG, that means verification. Yeah. So, I think that's what John was implying. Verification should grow, but right now, we are not assuming massive growth in verification for this year, but it should grow compared to last year. And then like you mentioned, some of the upfront revenue is also IP. If you remember, we highlighted in Q1, a new partnership with Intel and they are -- we are deploying our IP portfolio for the Intel process. So, it takes time to do that and deliver to that and some of it is in Q3 and Q4. And also this time, we talked about our expansion partnership with Intel on both on EMIB, their packaging and 3D-IC platform and 18A, just to clarify. Jason Celino Very good stuff. And, yeah, thanks for the lingo acronym help, Anirudh. Very helpful. Thank you. Our next question comes from Lee Simpson with Morgan Stanley. Please go ahead. Lee Simpson Great. Thanks for fitting me in and well done in a good quarter. Just wanted to get some clarification. I don't know if I heard correctly, but I think I heard you say that a mobile OEM had taken the Z3 platform. And if that's the case, do you have a sense for what the emulation work might be? Would it be for chips on device or would it be for chips both on device and perhaps in, let's say, a network situation? Thanks. Anirudh Devgan Well, good question. We don't comment on individual customer or specific customer use cases, but in general, these hardware systems, as you know, are used both for chip design and for system software bring up. So, both use cases are there and we are the leading platform given Palladium and Protium and this is true for all -- even in the AI use case, even in the data center AI use case, lot of it is for software development. Actually Palladium is a platform for choice to even our AI chip customers to give a model to their customers because even before they have a chip, they can give a Palladium model to see how it performs. So, it's both for chip design and also for system design and system software. And that's true for multiple major verticals, data center, mobile, automotive, these things. Yes, thank you. Lee Simpson Yeah. Thanks. Just on those multiple verticals, if we look at the incidence of 3D-ICs coming through, I get the sense that that's starting to hit the tape now in automotive. You have mentioned EV companies as a collaboration of late, but you have mentioned a number of chip makers also. I wonder if it's possible at this point or even if it's relevant to just maybe talk about the split between the customers? Are we talking system customers, i.e., OEMs and Tier-1s in the majority right now or is it still major semis, chip makers for the automotive work? Thanks. Anirudh Devgan So, great question. So, first to -- yes, like you correctly pointed out, I think the 3D-IC is a lot more prevalent in automotive than, let's say, six to 12 months ago. And, of course, the original Genesis is HPC and data center AI, but now all these chiplets and 3D-IC platforms are moving to automotive, okay. And I think over-time, we'll move to other verticals like consumer. They already moved to laptop, for example. Several of the laptop chips are 3D-IC, but I think that will be the progression. It will gradually go to all verticals, but definitely active in automotive. Because, as you know, with the chiplet architecture, the customer doesn't have to redesign all the chips and also they can use some standard chips and have some specific chips which are more value added for them and that's particularly true in automotive as each OEM wants to differentiate versus the other OEM. So, this trend is not just for semi-companies to your question, it's also there in OEMs. And I think actually it'll be more -- I do think that the 3D-IC trend makes even more sense for end OEMs because then they're able to customize and differentiate versus the other. So, we are seeing that and we are seeing that in other geographies as well because as you know, China is pretty strong in EVs and then US and then Japan, there's a lot of activity. So, overall, I think automotive, there is more activity on 3D-IC, including both semi and end OEMs. Our next question comes from Clarke Jeffries with Piper Sandler. Please go ahead. Clarke Jeffries Hello. Thank you for taking the question. My first question is, Anirudh, how do you expect the delivery of these third generation systems to translate to additional software consumption in the recurring revenue portfolio? These products are happening with verification acceleration software bring up, but how do you see that additional consumption panning out after the delivery of a new ZRX system? And then I have one follow-up. Anirudh Devgan Yeah. Great question. I mean, like what John was saying, when we say SVG, System Verification Group, so hardware is part of that group. Even though hardware is a significant business, we organize as part of verification. And one of the big reasons for that is apart from -- in verification, apart from the hardware systems, we have a lot of other verification products which are doing pretty well like Jasper for formal verification, Xcelium for logic stimulation. And the customer is looking for an integrated solution on verification. To the earlier question that Jay had about what is happening in SDA, in EDA, we always have believed for last several years that it's going to be integrated solution in verification. So, the stronger our hardware products get, we do expect it should help our software verification products, things like Xcelium and Jasper and Verisium because lot of -- some of the hardware capacity is also used for what is called sim accel, simulation acceleration in which they use Palladium to accelerate logic simulation. So, there is a natural tie in between verification software products and verification hardware products. Now exactly how it pans out, we just have to see, but the strength in hardware should help us in our overall portfolio strength. Clarke Jeffries Perfect. And then one follow-up for John. I think just to kind of finally put a cap on the whole discussion around timing. I guess, then is it fair to say that sort of $600 million odd of upfront revenue in the second half, maybe a majority of that is coming from IP and SG&A and not necessarily the Gen 3 systems and that maybe the interpretation is that there's going to be more of a demand curve in the beginning of '25 rather than this $600 million being strongly driven by third gen Palladium and Protium. Is that a fair takeaway? John Wall No. I think that is, Clarke. Yeah. That's exactly right. I mean, we always knew that it would take time to build the hardware system. So, we originally included that in our guide in the first place. Clarke Jeffries All right. Perfect. Thank you for taking the questions. Our final question comes from Joe Vruwink with Baird. Please go ahead. Joe Vruwink Great. Thanks for fitting me in. I did want to follow up to stay with verification and just this raw material investment. So, the thing I'm trying to reconcile is, I would imagine you entered this year expecting the new platform, strong demand, meeting the scale production and therefore invest in inventory. So, I guess, I'm wondering what changed in the quarter that warranted this updated assumption for cash flow and raw material purchase? And really at the heart of the question, did something change about your hardware demand expectation, not necessarily for 2024, but maybe out into 2025 and we just happen to be getting that news now because of the need to update your cash from OPs forecast associated with the inventory input? John Wall Yeah. That's a great question, Joe. I mean, the leaders of that business, I spent plenty of time with them this last quarter because they were monitoring what the demand was like for the new systems. Demand is quite strong. And then the key thing to highlight here is it's a one-time multi-year purchase of inventory raw materials. They feel very, very confident in the longevity of these systems and the longevity of that demand. And they wanted to pre-purchase multi-years of inventory in Q3. Now that was news to us, if you like. So we thought that one-time thing we wanted to include it all now in Q3 and not impact -- that doesn't impact next -- I mean, it will be favorable for next year's operating cash. Joe Vruwink Okay. Great. Then lastly, you mentioned at the start, orders for Cadence.AI tripled year-over-year. I don't think that's possible without also getting a lift in the base business, both across EDA and SD&A. I guess, on an ACV run rate basis, what has the AI lineup meant for Cadence overall? And does this create a step up in value where as you start pulling these contracts from backlog in coming quarters, it will become more noticeable in revenue and we'll kind of see the AI contribution more than we have to this point? Anirudh Devgan Yeah. Good question. I mean AI is adding the -- like I was mentioning before, I mean, it's almost become like table stakes now. So all our new contracts include our Cadence.AI portfolio as customers get more and more kind of used to using them. And once you start using the AI portfolio, it's difficult to go back to not using them. So without getting into like what happens exactly to future revenues and bookings, we are always cautious about that. But, in general, there is uptick with more customers deploying AI. And whenever we have new contracts, we are including them as it makes sense in them. I will now turn the call back to Anirudh Devgan for closing remarks. Anirudh Devgan Thank you all for joining us this afternoon. It's an exciting time for Cadence with strong business momentum and growing opportunities with semiconductor and system customers. With a world class employee base, we continue in delivering to our innovative roadmap and working hard to delight our customers and partners. On behalf of our Board of Directors, we thank our customers, partners and investors for their continued trust and confidence in Cadence. Thank you for participating in today's Cadence second quarter 2024 earnings conference call. This concludes today's call. You may now disconnect.

Verizon Communications Inc. (VZ) Q2 2024 Earnings Call Transcript

John Hodulik - UBS Simon Flannery - Morgan Stanley Jim Schneider - Goldman Sachs Sebastiano Petti - J.P. Morgan Michael Rollins - Citi David Barden - Bank of America Peter Supino - Wolfe Research Craig Moffett - MoffettNathanson Frank Louthan - Raymond James Timothy Horan - Oppenheimer Walter Piecyk - LightShed Sam McHugh - BNP Paribas Bryan Kraft - Deutsche Bank Good morning and welcome to the Verizon Second Quarter 2024 Earnings Conference Call. At this time all participants have been placed in a listen-only mode, and the floor will be opened for questions following the presentation. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to your host, Mr. Brady Connor, Senior Vice President, Investor Relations. Brady Connor Thanks, Brad. Good morning, everyone, and welcome to our Second Quarter Earnings Conference Call. I'm Brady Connor, and I'm joined by our Chairman and Chief Executive Officer, Hans Vestberg, as well as our Chief Financial Officer, Tony Skiadas. Before we begin, I'd like to draw your attention to our Safe Harbor statement, which can be found on Slide 2 of the presentation. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussions of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our Investor Relations website. This presentation contains certain non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are included in the financial materials posted on our website. Earlier this morning we posted to our Invest Relations website a detailed review of our second quarter results. You'll find additional details in the earnings materials on our website. Thank you Brady. Good morning and welcome to Verizon's second quarter 2024 earnings call. This quarter marks the beginning of Verizon's next chapter. We have launched a comprehensive brand refresh that goes far beyond the new logo. This transformation embodies our commitment to bringing choice, value, and control to our customers' lives, reflecting our evolution and vision for the future of connectivity. We refreshed our brand as our strategy continues to deliver strong results. The three pillars of our performance, wireless service revenue growth, adjusted EBITDA, expansion and increased free cash flow remain solid, showing both sequential and year-over-year improvements. In the second quarter, we saw wireless service revenue climb 3.5% year-over-year, adjusted EBITDA rise by 2.8%, and free cash flow increased 3% compared to last year. Our improving operations and results build on our first quarter momentum, keep us on track to meet our 2024 financial guidance and are paving the way for a sustained growth. Our progress comes from innovation that deeply resonates with customers, including the most personalized offerings in the industry. These initiatives align perfectly with our core strategy to strengthen and grow customer relationships while delivering the best return on invested capital. We launched myPlan in 2023 and it delighted our customers. In just over a year, over 30% of our subscribers are using it. That is an incredible adoption rate and now we're bringing these features to Home Internet with myHome. We're building and expanding on our strengths and successes and you can expect that to continue. For businesses we launched Verizon Business Complete, the industry's only end-to-end smartphone management system. We cover everything from selecting the first phone to upgrades with 24-hour service and same-day equipment replacement. These initiatives, combined with our strong network performance and extensive distribution, are reinforcing our leadership position and driving our industry forward. Turning to the second quarter, we had a strong operational performance across mobility, broadband and our network. Our overall execution in consumer mobility has been improving quarter-after-quarter since early last year. And our momentum continues. Consumer postpaid phone gross adds are up 12% year-over-year, which is amazing. Total postpaid phone net adds of 148,000 is a big improvement year-over-year and sequentially. And we expect to have positive postpaid phone net adds in consumer for the year. Choice is at the core of our approach. And we're constantly working on new partnerships that give our customers more options and value. one example is our addition of YouTube Premium and Peacock subscriptions which makes us the only provider offering our customers savings on 10 of the top streaming services. These content partnerships give our customers compelling reasons to shop with us. We also had a very strong quarter for postpaid phone net adds in Verizon Business at 156,000. This is a sharp improvement from the first quarter and shows how important we are to small, mid-sized and large businesses. Our business customers continue to invest in mobility and we offer them the widest range of choices. In the consumer value market we are applying the same customer-centric discipline and rigor as we do in the post-paid market and are seeing significant net add improvements excluding SafeLink. We recently relaunched Total by Verizon as Total Wireless and enhanced our offerings with price guarantees, upgrade credits and other features. In broadband, we're still taking share with 391,000 net adds in the second quarter. Fixed wireless access remains a key driver with higher net adds than in the first quarter. We continue to grow our broadband base ending the quarter with more than 11.5 million broadband subscribers. We're also continuing to add business from large customers like government agencies. We're very proud that we were awarded a new contract from the U.S. Department of the Navy to provide wireless devices and device management building on our previous work together. For first responders Verizon frontline delivers mission critical connectivity and advanced solution to more than 40,000 public safety agencies across the United States. Serving them with everything from device and network management to digital transformation. Verizon is there when people need us most. From protecting the front-lines to natural disaster response. In fact, recent FCC data show us that overall our network outperformed our peers in areas affected by the Hurricane Beryl. I could not be proud of that. It's one of the reasons we're so committed to the network superiority. And we're continuing to expand C-Band in suburban and rural areas. Our initial C-Band markets outperform with better gross add growth, higher uptake of premium services, and lower churn. We now have nearly half of our network traffic running on ultra-wideband, up from 36% a year ago. That number will continue to grow as we expand C-band reach. We're also working to enhance our network coverage by partnering with AST SpaceMobile to provide satellite to device connectivity using the 850 megahertz spectrum. This will bring our network to unserved communities, as we target 100% coverage from coast to coast. Our portfolio of high performance spectrum, the capacity of our fiber and our ability to deploy and support mobile edge compute, make us as the backbone of the AI economy and the partner of choice for players in the space. We will power the best AI services for our customers. What set us apart with AI is our network's mobile edge computing capabilities and deep fiber footprint. By processing data closer to the source, we enable real-time AI application that requires security, ultra-low latency, and high bandwidth. This is where our network shines, opening up possibilities that simply weren't feasible before. We're already seeing the benefits of AI in our operations. For example, we use AI to route customer support calls to agents best-suited to help. We analyze more than 800 data points per call to save our customers time and spare them frustration. It takes the best network to power these applications and today RootMetrics awarded us an outright win for national overall wireless network performance. Verizon also won the most national, state, and metro awards, including outright wins for accessibility, data performance, and streaming video performance. This is a kind of superior network performance that our customers deserve and expect from us. I'm pleased with our first half-year performance on how well our team is executing our strategy. I always say there's more work to do and there always is. We are seeing improving postpaid phone net adds in consumer, performing extremely well in business and taking share in broadband. We are achieving growth in a disciplined, balanced way and have built great momentum heading into the second half of the year and into 2025. Now I would hand over the call to Tony for a deeper dive into our performance. Tony Skiadas Thanks Hans and good morning. Our second quarter results reflected accelerated growth in wireless service revenue and adjusted EBITDA, as we continue to generate strong free cash flow. These results were driven by strong operational execution in both consumer and business, which led to sequential net add improvements in postpaid phones, fixed wireless access, and prepaid excluding SafeLink. Within consumer, postpaid phone gross adds were approximately 1.8 million in the second quarter, a 12% year-over-year increase. This marks the sixth consecutive quarter with year-over-year growth. Excluding our second number offering, consumer post-paid phone gross adds grew 5% year-over-year. Consumer post-paid phone churn was 0.79% in the second quarter, up slightly from the prior year period. This was in-line with our expectations as we recently implemented several price increases that are expected to generate well over $1 billion in annualized wireless service revenue. We believe the majority of the pricing churn is now behind us and we continue to expect full-year consumer postpaid phone churn to be flat or slightly better than last year. Consumer postpaid phone net losses were 8,000 for the second quarter, which marks a significant improvement both sequentially and year-over-year. For the full year, we expect to deliver positive consumer postpaid phone net adds without the contribution from our second number offering. Moving to prepaid, we continue to make progress with our core brands while navigating the conclusion of the ACP program. Overall prepaid net losses were 624,000, including 410,000 losses related to the ACP shutdown, the vast majority of which are in our SafeLink brand. Excluding SafeLink, prepaid net losses were 12,000, a substantial improvement compared to the prior year period. Visible and total wireless continue to expand and perform well, while our operational execution with Straight Talk continues to improve. We exited the quarter with good momentum and prepaid, setting the stage for a stronger performance in the second half of 2024 and positioning us well for 2025. On the business side, postpaid phone net adds were 156,000 in the second quarter, the best performance in the last six quarters. We saw a strong sequential improvement of phone net adds across small and medium businesses, as well as enterprise and public sector customers. Turning to broadband, our total broadband net additions were 391,000 for the quarter, representing the eighth consecutive quarter with over 375,000 broadband net adds. In fixed wireless access, we continue to focus on building a long-term sustainable business. Total fixed wireless net adds were 378,000 in the quarter, up sequentially. This brings our base above 3.8 million subscribers, up nearly 69% year-over-year. Consumer fixed wireless net adds were 218,000, a 15,000 sequential increase as we continue to see healthy demand for reliable broadband even in a seasonally softer quarter. Verizon business continued strong execution with 160,000 fixed wireless access net adds, a quarterly record. Demand for the service is strengthening as small businesses and enterprises continue to trust the reliability of the product and speed and ease of deployment. Overall, Fios Internet net adds totaled 28,000 for the quarter. We are pleased with the continuous growth of Fios, even with the effects of the ACP shutdown and lower move activity. We ended the quarter with over 11.5 million broadband subscribers, a 17% increase from a year ago. Our broadband growth continues to significantly outpace that of the broader market, given our superior network experience and strong execution. Moving to the financials, we delivered another solid quarter and remain on track to meet our full year financial guidance. Consolidated revenue for the second quarter totaled $32.8 billion, a 0.6% increase year-over-year. That growth was driven by service and other revenue which grew 1.8% year-over-year, partially offset by declines in wireless equipment revenue, as total upgrades were down nearly 13% year-over-year. Wireless service revenue totaled $19.8 billion, a sequential increase of more than $250 million, and year-over-year growth of 3.5% or $660 million. The increase was primarily driven by consumer wireless service revenue, which grew 3.7% year-over-year to $16.3 billion. Consumer postpaid ARPA grew 5% year-over-year, reflecting the benefits of pricing actions and fixed wireless growth. In addition, myPlan helps to drive ARPA growth through premium mix adoption and [Perk] (ph) revenue. As Hans said, we now have over 30% of our consumer phone lines on myPlan and expect this to expand meaningfully going forward. FWA revenue which is included in wireless service revenue was $514 million for the quarter, up more than $200 million versus the prior year period. Launched at scale in 2021, our FWA business is expected to generate more than $2 billion in revenue this year with prospects for continued healthy growth. Prepaid revenue for the quarter declined $162 million versus the prior year period. The headwind to wireless service revenue growth from the ACP shutdown was approximately 30 basis points within the range we provided last quarter, and the margin impact was insignificant. With the majority of ACP disconnects now behind us and the momentum growing in our core prepaid brand, we are better positioned for the remainder of the year and heading into 2025. Consolidated adjusted EBITDA for the second quarter totaled $12.3 billion an increase of 2.8% year-over-year. The improved operating leverage reflects the lower upgrade activity and our disciplined approach to growth. We are making progress in our ongoing cost efficiency program and recently introduced new measures to improve our operating efficiency, including a voluntary separation program announced in June. Adjusted EPS in the quarter was $1.15, down 5% compared to the prior year period. Growth in adjusted EBITDA was offset by below-the-line items, including higher interest expense, predominantly due to lower capitalized interest as we put more C-band spectrum into service. Cash flow from operating activities totaled $16.6 billion for the first half of the year compared to $18 billion in the prior year period. The results reflect higher cash taxes of approximately $1.7 billion, predominantly due to the unwind of bonus depreciation, as well as higher interest expense primarily driven by the decrease in capitalized interest. Capital spending for the first half of the year totaled $8.1 billion. This was $2 billion less than the same period last year as we have returned to historical levels of capital intensity. The network build remains ahead of schedule with C-band deployed on nearly 60% of our planned sites. Our full year guidance for CapEx spending remains unchanged at a range of $17 billion to $17.5 billion. The net result of cash flow from operations and capital spending is free cash flow of $8.5 billion for the first half of 2024. This represents an increase of nearly 7% or approximately $550 million from the prior year period, despite higher cash taxes and interest expense. We expect to generate strong cash flow in the back half of the year that will support paying down debt. Net unsecured debt at the end of the quarter was $122.8 billion, an improvement of $3.2 billion compared to the previous quarter and $3.7 billion lower year-over-year. Our net unsecured debt to a consolidated adjusted EBITDA ratio was 2.5 times, an improvement from 2.6 times last quarter. The strength of our results and momentum in our business put us in a great position to execute on our capital allocation priorities. In particular, we remain on track to further reduce the leverage on our balance sheet in the second half of the year. In summary with 2024, reaching its midpoint, the team's strong execution and operating momentum is translating into results. We have good momentum in mobility as reflected by the strong gross add growth and continue to take share in broadband through fixed wireless access and Fios. Importantly, we are accomplishing this with a disciplined approach, balancing growth and profitability providing the confidence to deliver on our 2024 financial guidance. With that, I will turn it back to Hans for his final remarks before opening the call to your questions. Hans Vestberg Thank you, Tony. Our focus for the second half of the year remains clear to drive growth in wireless service revenue, expand adjusted EBITDA and generate strong free cash flow. We are evolving our broadband strategy as we approach 4 million to 5 million fixed wireless access subscribers, and we'll continue to scale the business along with the private networks while driving mobility growth. Our ongoing C-band expansion will be crucial in supporting these efforts, enhancing our network performance and opening new opportunities across markets. Our commitment to a differentiated customer experience and operational excellence remains firm. The success of myPlan and our brand refresh are proof of our ability to meet evolving customer needs. We will build on these successes in the quarters ahead, as we work to deliver value to all of our stakeholders. We will continue to execute on our capital allocation priorities by investing in the business, supporting our dividend and paying down debt. As AI continues to reshape our industry, Verizon is well-positioned to enable and benefit from it. Our reliable, secure and powerful network will be at the forefront of AI and mobile edge compute applications. This is an exciting time for us at Verizon. Mobility, broadband and cloud, our essential services and their value has never been higher. We power and empower how people live, work and play. We are in a great business and there's so much more to come. We have the right assets and the strategy in place for success this year and beyond. I'm more excited than ever about what lies ahead of us. Now Brady, we are ready to take questions. Brady Connor Thanks Hans. Brad, we're ready for the first question. Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from John Hodulik of UBS. Your line is open sir. John Hodulik Great. Thank you and good morning guys. Two questions, if I can. First, on ACP, was there any impact on the broadband side in the quarter? And do you expect any lingering impact from ACP, either in prepaid or postpaid or broadband, as we look out into the second half? And then second on upgrades, obviously another strong quarter with record. I think record low upgrades. Given the AI phones coming out in the second, third quarter, how do you expect that to trend? And what do you expect the impact to be on the financials of the wireless business as we look out into the second half? Hans Vestberg Thanks, John. On the ACP, Tony will give you the details. But yes, we had some impact on the prepaid brand as was expected, and also a little bit on Fios. Looking forward I see this is a great opportunity. I mean 21 million people having ACP and the importance of mobility and broadband today is so important. And our offerings, but all the way from broadband with Verizon forward, fixed wireless access, both very efficient and then on the prepaid brands. So I see that as an opportunity going forward, but some slight impact on volumes this quarter. On the upgrades, as you have seen the upgrades has been a little bit low for a while. It is two things. First of all, the quality of the phones has continued to go up. But secondly, I think even more important is the discipline that we have shown over the years right now, I think for the last 1.5 years, how we do the promotions, how we look at the customer investment bucket and see that we are actually distributing our money. We are going to see what's going to happen in this cycle. I don't feel very worried about it. I feel that we are in a great position to handle it, and it's all in our guide what we are expecting. So I don't see any major things happening here. Tony? Tony Skiadas Yeah, thanks. Good morning John. In terms of ACP updates, let me give you a couple of things here. So as we said previously, the majority of the ACP exposure is in our prepaid business. And as we said last time, we had about 1.1 million prepaid subs that benefited from the ACP program. In the quarter -- in the second quarter, we saw about 400,000 prepaid disconnects. This is the vast majority of what we expected. There is minimal impact on the postpaid side as I think was part of your question. We saw some pressure in Fios in terms of gross add opportunity. If we look ahead in the third quarter, we expect some disconnects in prepaid and a small number across other products. In terms of revenue, we also said that any impact that we would see we'd see on service revenue up to 50 basis points of headwind and we're tracking inside of that number right now. And even with the disconnects, the margin exposure from ACP was insignificant in the second quarter. So we will continue to keep everyone updated as we progress here. Yeah, great. Thanks John. Brad we are ready for the next question. The next question will come from Simon Flannery of Morgan Stanley. Your line is open sir. Simon Flannery Great. Thank you very much. On fixed wireless, you talked about the strong momentum. You obviously have a lot of C-band still to build out would expand your addressable market. I guess you're going to hit the $4 million, the low end of your guide probably in the August timeframe. So help us think about what's the potential beyond the $4 million to $5 million. And when you can give us more clarity on your opportunity there? I think you've talked before about plenty of excess capacity. And then there were media reports the other day about you looking potentially to monetize towers. Could you just talk about how you're thinking about tower sales or other real estate, other asset monetization? Thank you. Hans Vestberg Thank you Simon. On fixed wireless access, you are rightfully say it. We have good momentum came into this quarter with 378,000 new net adds on fixed wireless access doing strong, both on consumer, as well as on a business. And we are now expanding our C-band to suburban and rural, which is another type of opportunity, less penetrated, but also more vastly distributed. So we are gearing for getting to our target between 4 million and 5 million fixed wireless access broadband customers. And as soon as we get there as I've said before, I will come back and see how we see the opportunity going forward. But clearly, we have a great network that can ingest more customers over time. But let me come back on the exact details of that when we reach the target. On the towers, I mean, or any rumor I wouldn't comment on any rumor. What you should know is that Tony and I are very committed to improve our cash flow, whatever we can see to see that we optimize our assets, we will do that but I have no comments or rumors in the market. But the focus on cash flow is extremely important because it goes straight into our capital priorities. That's why we've been so focused on for the last couple of years, and we did yet again in this quarter, good progress on them. Yeah. Great, thanks Simon. Brad we are ready for the next question. The next question comes from Jim Schneider of Goldman Sachs. Your line is open sir. Jim Schneider Good morning. Thanks for taking my questions. Two, if I may. First, on broadband. Could you comment on sort of the overall health of the broadband market that you are seeing? And then maybe any more quantitative guidance you can give us on the amount of headroom you see in your overall network capacity relative to fixed wireless subscribers? And then secondly, on the wireless side. In terms of the service revenue growth, what's your level of confidence that you can drive more volume growth and still maintain the same level of pricing power over the next 12 months or so? And how do you expect that volume price split to work out for you over the next year or so? Hans Vestberg So on the broadband, I think again we are between 375,000 to 400,000 net adds in broadband this quarter, been it for quite a while. So we see it as a very healthy. I think also we have a really good offering. And now with myHome that we just announced, I think we are going to be even stronger on it. So we see it healthy. Of course, Fios is by far the best fiber product in the market. And then fixed wireless access, the differentiation of the product, how we deploy it, how the customer provision it so different. And with all the streaming agreements we have right now, we can scale that horizontally to all our customers. So I see it is a very healthy business for us today. When it comes to our capacity on fixed wireless access -- yet again, I mean as we said, less than -- around 50% of all the traffic is now on C-band. So we have a way to go and we have deployed only a portion. So as we deploy more, we of course open up more opportunities. Finally, and maybe Tony has some addition. On the volume growth, I'm excited of what we have done in the consumer side with myPlan, and all the new innovations were done with our customers, and we see it resonate with the market. And clearly, quarter-by-quarter, we have improved both our revenue but also operation volumes on postpaid. Prepaid you saw it yourself, a big step forward on prepaid this quarter. And then our business side, I mean Kyle and the team has been now for I'm not sure how many quarters been around 125, up to 150 net adds on wireless. So all-in-all, I see that with the offerings that we put into the market, the refresh of the brand that is supporting that we are in a good position going into the second half of this year. Tony, any additions to that? Tony Skiadas Yeah. Thanks, Hans. So very comfortable with the revenue guide for the year. As Hans said, the performance and execution is very much on track, and we continue to find a better balance of P&Q. And you see the progress on volumes, as Hans said, B2 mobility and SWA. And maybe just a few additional points to consider. First we expect to see sequential growth in service revenue in the second half of the year. Also, I would say the year-over-year comps are a little more challenging in the second half as we lap the pricing changes from 2023. The wildcard obviously, is the promotional environment and the level of upgrades we'll have to see where that goes. But having said all that, the assumptions that we have in the service revenue guide have not changed. So overall, we feel good about our revenue performance and the momentum in the business, and we're not going to guide on '25 at this time, but I would tell you that those assumptions will carry forward as well. The next question comes from Sebastiano Petti of JPMorgan. Your line is open sir. Sebastiano Petti Hi, thanks for taking the question. Just wanted to follow up on the 2024 consumer postpaid phone expectations to report positive net adds for the year, excluding the second-line. If you could perhaps maybe help us think about the pace or expectations for the second-line contribution in the back half of the year? Obviously, a pretty healthy run rate here in the second quarter on a full quarterly basis relative to the first quarter. So just how should we think about that in terms of trying to unpack the underlying benefit relative to the second-line benefit? And then, Tony another quick question, just helpful color there on service revenue expectations, quarterly growth over the balance of the year. But can you perhaps help us think about margins? Obviously, decent -- nice growth here in the second quarter in business. How should we think about the contribution or perhaps from the HCL Tech Managed Services savings coming through? And I think you also mentioned there was a voluntary separation program in the market. I think we had seen headlines to that intra-quarter. How should we think about maybe the contributions from those two items impacting margin and maybe EBITDA growth expectations or how you're thinking about the phasing of those in the back half. Thank you. Hans Vestberg Thank you. I'll start and Tony will give you the details. As we said before, I mean the second-line offering is straight into our strategy. The strategy is to build the network ones and have as many profitable connections on top of it in order to get the best return on invested capital. And you can see that is really happening, and that's been a very big focus for us. Tony will give you some more details on how it looks in the second half here. On the programs of cost, we put in last year a couple of really large programs all the way from agreement with HL together with large customer care changes. Many of those are now coming into the base, and that's why you see the leverage. But we also have quite a lot of new things coming up. And as you rightfully mentioned, we have a voluntary separation program that is ongoing right now. We also have all the efficiencies with AI that is coming through. And of course we continue with our disciplined approach on investments. So all-in-all, there is more things to come. And -- but we have gotten leverage from some of the things we did last year, Tony. Tony Skiadas Thanks. Hi, Sebastiano. On the second number, just a few points, Hans touched on this upfront, but this is a great business. We are providing customers options and flexibility. It is a very profitable connection and we would do it every day of the week. In terms of the market for this, we'll see how the TAM evolves. We shared the gross add impact you can assume some level of churn in the quarter. Looking ahead, we expect less of a contribution from second number in the back half of the year. It is high-margin business comparable to ARPU [add-a-line] (ph) offerings. The ARPU is very good and very comparable to add-a-line, without the device subsidy. And as we said in the prepared remarks, we expect to have positive phone net adds in consumer for the year without the contribution from second number. And the results in the quarter reflect the strength of our core business. And then on your question on EBITDA and cost transformation, we're very comfortable with the EBITDA guide. We made a lot of progress. You saw the 80 basis points of margin expansion in the quarter. And the program in terms of delivering cost transformation is on track. Hans talked about some of the work we are doing, and we did last year with customer care and with managed services. We have a lot of work going on right now between IT and real estate, and network decommissioning. In addition, Hans mentioned the voluntary separation program. And some of that savings will start manifesting in the back end of this year and into 2025. And then lastly AI is an enabler of efficiencies. You can think about customer care, you can think about the personalization with myPlan. And we see efficiencies coming from there as well. But we're very much on track. We are operating differently. And we feel good about the progress on cost actions that are driving the improvements in EBITDA that you see in the first half of the year. Yeah, thanks Sebastiano. Brad we are ready for the next question please. The next question comes from Michael Rollins of Citi. Your line is open. Michael Rollins Thanks and good morning. I'm curious on the pricing front, where does in wireless postpaid the back book sit on average relative to your front book offers? And do you think the pricing environment in the postpaid wireless category can start to look more like fixed broadband or the video product categories where those products have tended to see some kind of pricing actions on a somewhat annual basis? Hans Vestberg Thank you Mike. I think in general, when we see the value accretion we have done recently, very much about new offerings to see that our customers are getting more value from the offerings we have. We have done some price adjustments historically. I think that Sampath in the consumer side has said that he would get better balance between volume and value increases. So that's what you see right now. And then on the business side, we have constantly done a great job. I mean Kyle and his team has constantly continue with a really high market share, continue to gain in every area like government, large enterprise and SMBs. So in the quarter you saw that the offerings we're doing with myHome and the additions on myPlan. And of course, with also the new offerings in business, Business Complete which is a new way to serve our SMBs. All of them are accretive and value but also giving our customers better services. So that's how we continue to work. And we are in sort of the third-phase of wireless where wireless is so important for our customers, and we see it also as an opportunity with the largest direct-to-consumer business in the country to actually add support with them with new services and layering on. Tony? Tony Skiadas Yes. Just a couple of other things to add. I mean as we said upfront, we said we need to find a better balance of P&Q in 2024, and we are doing that. We are very confident, Mike in our back book. We've been very consistent, as Hans said, about evaluating pricing opportunities, aligning the price with the value proposition for customers. We did take pricing actions in the first half of the year that provide a good tailwind to service revenue, and those pricing actions were contemplated in the guide, but it wouldn't be appropriate to comment on what we might do in the future. Thanks Mike. Brad we are ready for the next question. The next question comes from David Barden of Bank of America. Please go ahead with your question sir. David Barden Hi guys. Thanks so much. So Tony, yes, you guys had real demonstrable success on the P side of the equation and it helps to be the industry upward. Can we talk a little bit more about the Q -- the account number that you reported this quarter, I think it's the lowest that we've seen since the data I have going back from 2016. And so the way that the queue is growing is by kind of a shrinking number of accounts, but putting more and more into those accounts. I'm guessing the second-line strategy is one of those strategies. But can you talk a little bit about what kind of duration, durability this approach to growth has and -- or do we need to see accounts grow in order to believe that Verizon is really on the right growth path? Thanks. Hans Vestberg Hi, David. Good morning. So look as we said before, finding the right balance of P&Q. And I think you've heard Sampath and I talk about something like 80-20 price-volume mix last year was more like 100, so clearly making progress on that. And keep in mind, we have a very high-quality customer base, and we see it in the results quarter-after-quarter. And I think you see the momentum in both gross adds and in net adds in the quarter, and it is very high-quality growth, both on the consumer and the business side. Business had a very strong quarter as well on volumes. And you also see the growth in fixed wireless access. We did 378,000 fixed wireless access net adds that continue to provide a tailwind to service revenue. So we are trying to find that right balance of P&Q, and I think the results reflect that. Thanks Dave. Brad we are ready for the next question. The next question comes from Peter Supino of Wolfe Research. Your line is open sir. Peter Supino Good morning. Thanks. A question about capital allocation. As we approach 2025 and your leverage target, I'm wondering how you would encourage us to think or how you do think about the possibility of building more fiber as opportunity costing that against share repurchases. I wonder how you think about the returns on each of those projects. And separately, to the extent that capital is scarce, is there an argument for maintaining leverage at a constant level and even more of above? Thank you. Hans Vestberg Hi, Peter. When it comes to our capital allocation priorities, they haven't changed. I mean first of all, we put the money in the business. And this year, we have the guide between [$17 billion and $17.5 billion] (ph). So -- but of course, if we see opportunities to gain more revenue and grow business, we will always look into the business side. Secondly, the dividend is very important. I mean we have now been growing our dividend for 17 consecutive quarters. And Tony and my job of -- years, not quarters. And Tony and I are committed to continue to put the Board in a position to do that. And you see on our pay ratio, we're well inside that ratio doing well. And then we're paying down our debt. We paid down debt this quarter. Second half, we're going to continue with that. We will not consider any conversation about buybacks until we get to 225. And after that there is a lot of factors in the market, the priorities but also where is the interest rates, where is share price and all of that. So let us focus on the priority in the order we have said, and that's how we are going to continue for the next foreseeable future. Brady Connor Thanks Peter. Brad, we are ready for the next question. The next question comes from Craig Moffett of MoffettNathanson. Please go ahead with your question sir. Craig Moffett Thanks. I want to return to the upgrade cycle. Apple is obviously betting that they can drive a significant upgrade cycle with AI. I wonder if you could just talk about the percentage of phones in your base that are, I believe Apple's requirement will be 8 gigabytes of RAM and -- meaning it's going to be the iPhone 15 Pro or Pro Max. What percentage of your phones are already of that level? And how many would presumably require upgrades? And then how you just -- how do you think about how quickly that upgrade cycle comes and what that might mean in terms of the cost and margins for your wireless business? Hans Vestberg Thank you, Craig. I don't have the exact number, but I know that we have a fair amount of new phones, of course in the base because with our high quality customer base on postpaid, many of our customers are already on later versions of the iPhones. Again looking into this cycle, I mean, -- of course, we are going to see some excitement around AI. I don't think that it is going to be any particular at this time. It will be over time, maybe. We have a very disciplined model when it comes to a approach expectations for promotion, et cetera. We will stick to that. we believe that we have such a great network, great offerings. So we can actually manage that, and we will continue to do so. And then talking about the AI. I mean I think where I'm most excited is, of course that we have built sort of the Verizon Intelligent edge network which will be the platform for the GenAI economy because you are going to have to have a lot more compute storage at the edge of the network, and that's how we built the network already 2018 with fiber to all our main hubs and between our main subcenters. And then on top of that, we have cooling and power at those edges. And I think as we go from the LLMs and we go into sort of doing commercial products for enterprises. Our network is set up for that. And so I'm very excited for that opportunity going forward together with private networks. So - there is a lot of things coming into GenAI devices, our efficiencies but also a business opportunity for us when it comes to AI. Brady Connor Great, thanks Craig. Brad, we are ready for the next question. The next question comes from Frank Louthan of Raymond James. Your line is open sir. Frank Louthan Great. Thank you. To what extent do you think that fixed mobile conversion will be more of the norm in the US? And given your smaller wireline footprint, do you think you need to expand your fiber-to-the-home assets? Or how would you address that? And then want to clarify the target leverage you are looking for, is that 2.2 times total leverage or 2.2 times unsecured? Thanks. Hans Vestberg On the mobile convergence fixed mobile convergence, we see some uptick on that. As I said before, we will follow the customers. We have all these economics on wireless and on broadband. And we will see that if our customer wants to have a converged product, we will do that. I don't believe in sort of discounting products to get there. But of course, our efficiency if one customer has both mobility and broadband from us, and we will see that we share that with our customers as an opportunity. So I don't think we are going to see the European levels here because of the nature of the market. But as we move further into convergence, we will be very well positioned with the products we have. Tony, on the leverage? Tony Skiadas Yes. So Frank, on the leverage metric, the long-term goal is 1.75 to 2 on the unsecured. And then we said we would consider buybacks when we got to 2.25, again unsecured. Yeah, thanks Frank. We are ready for the next question. The next question comes from Tim Horan of Oppenheimer. Your line is open sir. Timothy Horan Hi, guys. Focusing back on the network. I know the C-band initial deployments were just for a portion of the spectrum and they weren't used in the full range of technologies. And I know you said 60%. Can you talk about -- where are you with kind of upgrading to the entire C-band level of spectrum and to Massive MIMO and also then to stand-alone? And kind of related to this, I know you saw some major network improvements with the initial upgrades or build out to C-band. Can you talk about what you're seeing when you go back with the second upgrade? And I have a follow-up on what you do with AI? Thank you. Hans Vestberg On the C-band, you are right. We almost have now 50% of our traffic on the C-band, but we still have some deployment to be done in suburban and rural. Many of those sites are prepared for it, so we are just rolling out as we speak right now. So we are going to see that continue. Joe and his team in technology, very much focused on customer satisfaction when it comes to the rollout and revenue generation right now. That's the main focus we have at Verizon. And the same trend as we saw in the beginning where we have better upgrades, lower churn, whereas C-band and of course also getting fixed wireless access opportunity. The same goes for where we are enhancing or continuing to new areas. Secondly you asked about all the new features coming into 5G advance with SA, Massive MIMO, all of that is just expanding our capacity and bringing even more opportunities for us for revenue and seeing that we create the customer expectations on the best network in the nation. So -- and that's just -- we're just in the beginning of that. So I'm very pleased with what I see. The team is running as fast as we can and we get good feedback on C-band. Tony? Tony Skiadas Yes. Thanks, Hans. So just a couple of other points. On C-band, we are seeing good improvements in churn 3 basis points. On gross adds, we see about 9 basis points gross add strength. And as we deploy suburban and rural gross adds are up threefold in those markets. And then premium mix continues to be stronger as well of about 10%. And we do have now at this point nearly 60% of our planned sites are now deployed with C-band. So really making really good progress. Timothy Horan And I'm assuming you need stand-alone to enable some of these AI/MEC applications you're talking about, and I can be wrong about that, but any upgrade on the timing of when standalone gets deployed nationwide? And do you have any of these AI/MEC applications that are up and running now? Thanks. Hans Vestberg We can do mobile edge compute without SA. We have done that for five years. Then there are some efficiencies on especially private networks and deployment with SA. But again, you need a full ecosystem all the way from the devices and the network features and the core in order to do that. So it is a little bit of a holistic thinking again when we work it, but we can already deliver that right now. When it comes to GenAI in mobile edge compute, that -- we don't have that to our customers right now. But the conversation with many of both the cloud players as well as enterprises of doing that when they have commercial products, and not only training large language modules. And that's how we designed our network. So that's why I'm excited of it. At the same time, we already have four GenAI products in the market that is deployed on 40,000 agents to all our stores, et cetera personalization, more efficiency for customer and employee experience. And we see a great opportunity for that. So there are multiple opportunities with AI for us and we have been on to it for a long time. Thanks Tim. Brad we are ready for the next question. The next question comes from Walter Piecyk of LightShed. Your line is open sir. Walter Piecyk Thanks. Tony, I think in the prepared remarks, you referenced voluntary separation program in June. I wonder if you can give us a sense of -- I mean I know you've done these in the past potential EBITDA benefit. And just remind us, does this result like in, I guess, onetime charges relative to the severance or the separation payments that are made and just kind of quantify that a bit, if you can? Tony Skiadas Sure. Hi Walt. So a couple of things. We announced the program in early June for a portion of our workforce. The process is not going to be fully completed until the back end of August. So I don't have numbers at this point. It was contemplated in their full year guide. And we do expect to see savings towards the back end of 2024 and into 2025, and we'll come back with disclosures on the program once it is finalized. We'll file an 8-K similar to how we did it last time. Walter Piecyk Okay. And then Hans, it is not a reported number, but you can kind of calculate what wholesale revenue looks like and we know who the principal driver of that is. It seemed like that was kind of strong this quarter sequentially. I don't know, if there is some seasonality there. I'm looking last year and the year before, it doesn't seem like that. So is this a good thing or a bad thing, obviously, because it could imply stronger growth at a wholesale customer at the expense of your retail business. And just can you give us a sense in general of your outlook for that line. There has been some discussion and debate about how some terms can change or other offloading activities can occur for that customer. So just if you can comment on the quarter and just generally your outlook for wholesale in terms of a component of your sectors of growth, like how important is wholesale in terms of meeting the growth targets that you promised the Board? Hans Vestberg I don't have any comments on the quarter on the numbers. We try to have our Chinese [Walls] (ph) here, so I don't have it. But in general, we see these partnership has imported enterprise customers. And it goes back to the strategy we have, meaning we build the network once. And we have -- want to have as many profitable connections on top of the network in order to get the best return on invested capital. So that's where we are. And we have a good relationship with the [MVNO] (ph) customers, and we have many of them, and it will continue. Tony? Tony Skiadas Yes. Look, I mean the - it is very profitable business, as Hans said and is a great contribution to revenue and EBITDA consistent with the strategy to monetize the network, and we are very comfortable with the arrangements we have, but that's as far as we can go. Walter Piecyk Can I just pivot and just -- then just ask one related but kind of high level question. There has been some reports of T-Mobile doing some additional fiber asset joint partnerships. If the administration changes, maybe there's opportunities for some additional vertical integration. But I guess the big question is, at least for me, how important is it in the long-term for you to have a vertical solution for customers, meaning that the consumer can buy their home broadband and their wireless services from you or -- and if you're not doing that obviously, outside of the Fios markets, is that a risk if others put together that vertical solution? Hans Vestberg We are well positioned in that area. And again if the market go convergence between mobility and broadband, we will be there to serve our customers either with Fios and fixed wireless access. And right now, that's working really good for us. So we are happy with our assets we have and how we're deploying them right now. We're looking into how we can continue to meet our customer demands. And now we also launched, as you saw in the quarter on the consumer side, myHome where we have all the benefits we had from myPlan. We are moving over to myHome. I feel good about what our consumer division is doing on broadband and mobility at the moment with the product. We are Number One in the market, so we just need to continue to keep the lead and continue to keep innovating, and I feel good about the consumer team doing that. Thanks Walt. Brad, we are ready for the next question. The next question comes from Sam McHugh of BNP Paribas. Your line is open sir. Sam McHugh Good morning guys. Two quick questions. In the last few years, you've gone through quite a big reinvestment phase, I guess in the consumer division with the launch of myPlan, the refresh of the brand this quarter. As we look out kind of the next two or three years and take a big step back, should we think you are now at a place where EBITDA can sustainably grow ahead of service revenues? Yes, that's question one. And the second part just a clarification. Tony, you mentioned something about 2H wireless service revenue trends versus the first half. If you wouldn't mind just repeating it, that would be very helpful. Thank you. Hans Vestberg When it comes to continue to have leverage on our EBITDA together with our service revenue, I think it is clear for us that the KPIs that we are measured on as a management team and me, myself is on the growth on the service revenue, wireless service revenue expansion as well as EBITDA and cash flow. And that's how we are working holistically. So yes, we -- our goal is to see that we have the leverage on our service revenue growth right now. We have great products. We work with efficiency. There are of course, pressures in our business as and the business, but that's what we strive for. But we don't guide for '25 or something like that at this moment, we will come back on that. But our work and our KPIs are set up for that. Tony? Tony Skiadas Thanks. Hi, Sam. So on the service revenue for the second half, what we said is we expect to see sequential growth in service revenue in the second half. And when we talked about the assumptions that we had in the guide, we said, look we had pricing actions that we've already taken and you see that well over $1 billion. We also said we have an improving volume profile in consumer and you see that progress. Fixed wireless access continues to scale. And we have over $500 million now in fixed wireless access revenue on a run rate of over $2 billion and that base of business continues to grow. We also said we had headwinds in prepaid, and that's improving, and we will see that improving as time goes on and then from our amortization. And the promo discipline continues to be encouraging, and we say we see a similar level year-over-year. So those assumptions haven't changed and we feel really good about the performance on service revenue, and the momentum we have in the business heading into the second half. Great. Thanks Sam. Brad, we have time for one last question, please. Your last question will come from Bryan Kraft of Deutsche Bank. Your line is open sir. Bryan Kraft Thanks good morning. I have one for Tony and one for Hans. Tony, regarding free cash flow, it's up, I think, about 12% year-over-year in the first half. do you anticipate being able to grow free cash flow this year? Or is the year-to-date growth we've seen more a function of favorable timing in the first half with higher CapEx and working capital usage coming in the second half? And then Hans, you had talked quite a bit about Verizon's strong position for AI and enterprise. Is there anything you can share on what you're seeing in 5G enterprise adoption and also on the sales pipeline activity that you are seeing? Thank you. Hans Vestberg I'll start with the first one, and then I can hand it over to Tony on the cash flow. Yes, what we see is private networks continue to grow in volume and -- which is a prelude, you start with the private network then you start adding on applications on it. And of course ultimately, you put in mobile edge compute. We have all that set up since 2018, 2019, and we start seeing more and more business case for logistics centers, for factories, et cetera where we can do it. And then GenAI will only sort of capitalize that and do it even faster. That is going to take some time because right now, many corporation enterprises are in the learning process, meaning they are training their data sets. So it is going to take some time. But I don't think that anyone is even close to be as well-positioned as we are in GenAI and the [GenAI economy] (ph), both for taking advantage of it efficiency-wise, internally but definitely from a revenue point of view over time. Tony Skiadas Thanks. Hi Bryan. So on free cash flow, overall the cash generation of the business continues to be very strong. In the first half of the year, free cash flow was $8.5 billion, up 7% and we were able to grow cash flow in the second quarter, even with an incremental $1.7 billion in cash taxes. And as we said in April, we expect free cash flow to have a similar shape to last year and build throughout the year. And we still see the same puts and takes on free cash flow for the full year, as we described back in January. And within that framework, we see slightly more incremental pressure from cash taxes. And offsetting that is the lower upgrades, and we'll have to see where that goes. But overall, the strong position and cash flow puts us in a position to pay down debt in the second half of 2024, and we are on track to do so. This concludes the conference call for today. Thank you for your participation and for using Verizon Conference Services. You may now disconnect.

SAP SE (SAP) Q2 2024 Earnings Call Transcript

Alexandra Steiger - Global Head of Investor Relations Christian Klein - Chief Executive Officer Dominik Asam - Chief Financial Officer Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the SAP Q2 2024 Earnings Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Alexandra Steiger, Global Head of Investor Relations. Please go ahead. Alexandra Steiger Good evening, everyone, and welcome. Thank you for joining us. With me today are CEO, Christian Klein; and CFO, Dominik Asam. On this call, we will discuss SAP's Second Quarter '24 Results. You can find the deck supplementing this call, as well as our quarterly statement on our Investor Relations website. During this call, we will make forward-looking statements which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to differ materially. Additional information regarding these risks and uncertainties may be found in our filings with the SEC, including but not limited to the Risk Factors section of our Annual Report on Form 20-F for 2023. Unless otherwise stated, all numbers on this call are non-IFRS, and growth rates and percentage point changes are non-IFRS year-on-year at constant currencies. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. Yes. Thank you, Alexandra, and welcome to the SAP family as our new Global Head of Investor Relations. It's great to have you on board. A warm welcome also to everyone on the line. My main message to you in this call, we continue to deliver. Despite the volatile environment in the software industry, our growth momentum remained strong in Q2. More and more customers are moving to the cloud, and our portfolio is becoming ever more attractive, thanks to SAP's business AI capabilities. In Q2, we also significantly increased our profitability. We continued to execute on our transformation program with great discipline with rehiring only for the skill sets we need. As you have seen, we are increasing the volume of the program. That's why we are able to announce an upgrade of roughly EUR200 million on the bottom line of our Ambition 2025. SAP's strong momentum was already evident a few weeks ago at Sapphire. Our customers and partners have never before shared so much positive feedback about SAP's innovative best-of-suite portfolio and position in the market. Business AI was, of course, at the center. And there is no doubt that everyone perceives SAP as a major AI player, given how well we are positioned to embed AI in the operating systems of our customers. This perception manifested itself now also in our Q2 numbers. In every ERP and LOB deal we closed, our AI strategy played a key role. And AI had a direct impact on our bookings. In the second quarter, almost 20% of all deals included premium AI use cases. And this is just the beginning. Customers have clear plans to expand their AI consumption on their RISE and GROW transformation journeys. Let me give you some quick updates on our key items in business AI. Joule is quickly becoming our new user experience, our one front end. We are making our AI Copilot an incredible productivity engine for the 300 million people worldwide using our cloud software. Q2 examples include the Indian automotive leader, Mahindra and Mahindra, and the Belgian manufacturing company, Besides the Joule innovations, we continue to release embedded AI use cases across our portfolio. In Q2, customers selected our CX AI toolkit to boost the productivity of sales teams by up to 10% and e-commerce teams by up to 50%. Our gen AI features in [Concur] (ph) were very popular, too. 150,000 users every week now use these features, processing nearly 1 million hotel bills per month. Overall, we have published over 60 gen AI use cases to date and are on track to deliver more than 100 scenarios by the end of this year. Last but not least, our gen AI on BTP is buzzing with activity. Since Sapphire, we have seen a lot of additional interest from big customers. Over 90 partner use cases are now in co-innovation, including use cases with big systems integrators. One example is Smart Dispute Management developed by Ernst & Young. The use case streamlines the returns management process, reducing manual effort and minimizing hours. Sapphire also helped to significantly boost our RISE pipeline. RISE is not just a lift and shift to the cloud. It's a holistic offering to increase competitiveness through a deep business transformation, to replace the legacy ERP with our modular cloud ERP, and to increase agility and infuse innovation every quarter. The evolution of RISE will include 1 dedicated enterprise architect for each customer. And it will rely on an integrated business transformation suite. With Signavio, we cover the process layer. With LeanIX, we cover enterprise architecture. And once the WalkMe acquisition is closed, we will also cover the end user and guide and enable them to get the best out of our solutions. Together with NVIDIA, we also bring AI capabilities into our RISE journey via Joule for consultants and Joule for developers. With the latter, for example, users can generate, understand, and test modern cloud code and boost productivity in coding by up to 30%, so our customers benefit from a significant increase in time to value. And SAP benefits, too, as every successful RISE journey is an opportunity to cross sell and generate revenue across the portfolio. Customers will spend less on implementation and custom code, and they will spend more on building innovative applications on BTP. The momentum, so evident at Sapphire in Orlando and Barcelona carried us throughout the whole quarter. Let's see how far in concrete numbers. Current cloud backlog rose 28% and came in at EUR14.8 billion. Cloud revenue expanded 25% to EUR4.2 billion. This expansion was driven by the cloud ERP suite, which came in 33% higher year-over-year and reached EUR3.4 billion. Thanks to the increasing share of cloud revenue, total revenue growth ended double-digit territory for the first time since Q1 2019. We also performed extremely well on the bottom line. Our operating profit jumped 35% to EUR1.9 billion year-over-year. And the operating margin was 4.4 percentage points higher. The diligent and speedy implementation of our transformation program to date was a key factor here. Let me now share some of the customer stories behind these great numbers. ExxonMobil, a leader in the energy sector has entered a long-term partnership with us to leverage RISE. The deal marks the next chapter in a multiphase transformation journey with tangible business value in each phase. The overarching goal is to enhance ExxonMobil's operational efficiency and agility. As for GROW, about 60% of customers in Q2 were net new. Among the GROW deals were the international beverage company, Campari Group and Forterra, a Silicon Valley firm working on cement production with zero emissions. GROW with SAP is driven by our fantastic reseller partners. To date, we have won almost 1,500 customers. Many of them started their journey with S/4 public cloud finance and are now expanding their SAP ERP footprint. Let's now look at an example for business AI and the BTP. Lenovo is using business AI to identify supply chain and finance risk, reduce repetitive tasks, and optimize supply chain management. And with the BTP, Lenovo will integrate SAP and non-SAP solutions. As for our SAP business transformation suite, BASF, the world's largest chemical company, is adopting SAP Signavio. The strategic move underlines BASF's commitment to complete its massive ERP transformation quickly and confidently. Beyond these customer wins, we put our partnership with the global HR services leader, ADP, on a new footing just yesterday. Together, we will shift ADP's entire SAP on-premise payroll offering to a cloud-based solution. As always, you can find a summary of major customer wins in the quarterly statement. They all speak one language, SAP is the operating system of the global economy. Looking at the larger picture, our GROW formula is clearly working. We have the right ingredients in place in our cloud ERP suite. Just to reiterate, RISE brings best-of-suite ERP to our installed base, enabling large enterprises to transform deeply. GROW is the perfect choice for greenfield projects for net new customers and subsidiaries of large companies, always in the public cloud. The BTP brings everything together as the leading platform for B2B transformation. Once we have landed with RISE, GROW, and BTP, we go into the expand mode with our line of business solutions. Finally, business AI is infused everywhere and lifts the whole portfolio to a new level. All of these are SAP SaaS opportunities. They will allow us to massively increase market share. Side-by-side with our GROW story, the transformation we launched earlier this year is gaining traction. In the second-half of 2024, we are strongly focusing on simplifying our go-to-market even further. The goal is to strengthen our channel business and to promote our land-and-expand motions. At the same time, we are making major progress with the automation of internal processes through AI, using the gen AI hub on the BTP. The expected savings are in the triple-digit million range. Given the increased scope of our transformation program, we are confidently raising the operating profit ambition for 2025. In summary, our growth momentum in the cloud remains strong in Q2, and we continue to execute our transformation program with great discipline. Business AI is embedded in all our solutions and will boost success across the portfolio with more powerful use cases on their way. Given our progress and our exciting product pipeline, we are confident that we will be able to achieve accelerating top line growth through 2027. Thank you, Christian, and thank you all for joining us this evening. As you can see from the financial results Christian just shared, our strong performance continued into the second quarter. In the first-half of the year, we have delivered impressive results, further reinforcing our confidence in the trajectory of the business. We continue to enjoy a robust demand for our solutions in Q2, driven by both net new customers and our broad installed base. This demand was fueled by a healthy pipeline, cloud conversions of existing customers, and substantial upselling and cross-selling opportunities. Our business AI strategy is making progress, playing a key role in these opportunities and customer interactions and is helping to drive pipeline growth. SAP's solutions are an integral part of our global customers' core operations, and we're seeing a strong unabated shift from on-prem to cloud. Our building blocks are firmly in place as evidenced by the growth of our current cloud backlog and cloud revenue as well as the strong expansion of our non-IFRS operating profit. The company-wide transformation program we initiated in January continues to progress well, further enhancing our operational efficiencies and laying the groundwork for sustained long-term growth. All of this has paved the way for positive trend towards larger cloud transactions with deals greater than EUR5 million in volume, yet again contributing more than half of our cloud order entry. Now let me go into further details regarding our financial highlights. We are on track to achieve our fiscal year 2024 top line outlook and fiscal year 2025 Ambition as demonstrated by current cloud backlog reaching EUR14.8 billion, growing by 28% year-over-year. Cloud revenue grew 25%, mainly driven by the continued strength of cloud ERP suite. Specifically, cloud ERP suite grew by 33% in Q2, its tenth consecutive quarter of growth in the 30s. This ongoing momentum reinforces our belief that cloud ERP plays a pivotal role in our customers' digital transformation journey. Software licenses revenue decreased by 27% compared to the same period last year, demonstrating the continued shift towards cloud solutions. Finally, total revenue was EUR8.3 billion in Q2, up 10% year-over-year, demonstrating the resilience of our overall business in the face of evolving market dynamics. Now let's take a brief look at our regional performance. In the second quarter, SAP's cloud revenue performance was particularly strong in APJ and EMEA and robust in the Americas region. Brazil, Canada, Germany, India, Japan, and South Korea all had outstanding performances in the cloud revenue growth, while China, the U.S., and Saudi Arabia were particularly strong. Now moving on to the bottom line. Our cloud gross profit grew by 29%, driven by cloud revenue growth and further efficiency gains. This resulted in cloud gross margin improving from the year ago period, expanding by 2 percentage points to 73.3%. IFRS operating profit in the second quarter was down 11% to EUR1.22 -- sorry, to EUR1.22 billion. This increase was driven by approximately -- sorry, this decrease was driven by approximately EUR600 million in incremental restructuring expenses associated with the transformation program initiated at the beginning of this year. These additional expenses primarily resulted from the positive reception of the voluntary leave programs. While restructuring expenses recorded in the first-half of 2024 totaled EUR2.9 billion, the overall expenses associated with the program are currently expected to be approximately EUR3 billion. Finally, non-IFRS operating profit grew by 35% to EUR1.94 billion, supported by strong revenue growth, continued operational efficiency as well as disciplined execution of the 2024 transformation program. Non-IFRS earnings per share basic in the quarter increased 59% to EUR1.10. The IFRS effective tax rate for Q2 was 33.8% and the non-IFRS tax rate was 33.6%. Now on to our cash generation. Free cash flow in the second quarter increased by 114% to EUR1.3 billion. The improvement was primarily attributable to increased non-IFRS profitability and enhanced working capital management. Additionally, there was a timing benefit that contributed to the strong performance. While we paid out approximately EUR500 million for restructuring this quarter, we expect the majority of payouts associated with the restructuring to occur in the second-half of the year due to the phasing of the underlying programs. Now let's move on to the outlook. As you've seen in today's release, we keep our 2024 financial outlook unchanged. While we had a very good first-half of 2024, Q4 is typically our largest quarter. Our Q4 performance will be crucial in achieving our full-year targets and our 2025 ambitions. So we continue to be prudent and vigilant in terms of observing the evolving market dynamics, executing our strategic initiatives, and driving operational efficiencies. Where we intend to make some adjustments, though, is on our transformation program and its impact on our financial performance. We now estimate that between 9,000 and 10,000 positions will be affected with the corresponding impact on restructuring provisions, cash out and run rate savings after completion of the program. As compared to what we had indicated in the first quarter, we added about EUR800 million of restructuring expenses and cash out. Now expecting a total of EUR3 billion. This is expected to yield additional run rate savings of approximately EUR200 million. A mid-triple-digit million amount of incremental cash out is expected to spill over into the year 2025, more than offsetting the cash contribution from the additional savings. It's important to note that the increase in the number of affected positions does not imply complete elimination of these roles but allows us to refine our setup in terms of skills and locations. But now we've also made some progress on working capital measures and do see a path to nevertheless deliver the EUR8 billion of free cash flow we've previously announced in our 2025 Ambition. For the detailed outlook in Ambition 2025, please refer to our quarterly statement published earlier today on our Investor Relations website. So to sum it up, we have demonstrated strong momentum in the first-half of the year, underpinned by unabated growth momentum for our solutions and great progress on strategic transformation initiatives. This puts us into a strong starting position for the second-half of 2024, thereby solidifying the bridge into our Ambition 2025. Thank you, and we will now be happy to take your questions. Alexandra Steiger Thank you very much, Dominik. And with that, we will now take your questions. I would like to kindly remind you to only ask one question when prompted. Operator, please open the line. [Operator Instructions] We'll take our first question from Mark Moerdler with Sanford C. Bernstein & Co. LLC. Please go ahead. Mark Moerdler Thank you very much. Alexandra, welcome onboard. Dominik, why do you think that you are not showing any signs of macro impact that others are calling out? Could this be a timing issue in terms of the flow through the pipeline? And could it be a worry for next year? Or is it just simply the way you're executing for the business model? Any color would be appreciated. Christian Klein Yes. I mean, I can go first, and then please, Dominik, also share your feedback. I mean, Mark, indeed, I mean, we have seen a fantastic performance in half year one and now entering half year two, we see a very healthy pipeline. And pipeline means sales pipeline, but also I see a very strong innovation pipeline. When you sit together with our product owners and see what we are delivering on GenAI use cases and the customers who are sharing their feedback early on, it's pretty exciting. I mean, they see a ton of value. And you have seen now in Q2 already the first impact of Business AI on our numbers. And then second, what I also see clearly working now is the best of suite. I mean, four years back, we were rightfully criticized for having a bunch of best-of-breed solutions. But when you want to have high-quality AI, when you want to steer your business end to end when you want to connect your commerce and your omnichannel with supply chain, and when you want to connect your procurement with the warehousing, I mean, that all comes together on BTP. And I would say we are also just at the beginning. I mean, please don't forget, when customers are using their ECC solutions or their on-premise monolithic ERP solution today, that doesn't mean that they use all the modules, you know, in the past. And now with our land and expand strategy, we have really, I mean, emotion. The customers are really lending, and then they get that they have to connect the different parts of their company and the different parts of the supply chain. And that's why we also stay confident for the second-half of the year. Dominik? Dominik Asam Maybe just to add some numbers. I mean, you have heard us talk and comment about this Cloud ERP Suite growth now at 33% in Q2, above 30% for 10-quarters in a row. What I want to call out is that the dilutive effect of both the extension suite and infrastructure as a service is going down just from a mix point of view. A year ago, these two items in the cloud revenue mix represented about 23%, now that's only 18%. And if you then look at the kind of delta and growth between the two, you will see that the dilutive effect last year -- sorry, for this year with the mix we had last year, if you do a year-on-year comparison, you have to start with the mix last year and then look at the different growth rates. So the dilutive effect on past year's mix is 8 percentage points. Now, if you just apply to the same delta in growth between Cloud ERP Suite and just assume that the rest would continue to be in a similar growth rate on the other -- now 18%, this dilutive effect would go down to 6%. So what you see here is that the mix is really playing in our favor. And then combined with all the factors Christian has mentioned and that very unique feature that we can convert all this installed base, which is really scrambling now for productivity, and sees AI and the offering we have as a big driver for that. The next question comes from the line of Adam Wood with Morgan Stanley. Please go ahead. Adam Wood Hey, Christian. Hi, Dominik. Thanks for the question and congratulations on the mid-quarter. Maybe just on the Business AI side, Christian, you've clearly flagged this as a big driver. Is this a general desire of the customer base to be able to adopt the technologies that you deliver, given they're going to have to migrate every few years, they want to start that now, and that's accelerating the escort move. Or are you seeing a couple of key use cases that are really resonating with the base? And if so, could you talk us through what they are, please? Thank you. Christian Klein As -- I mean, Adam, what we clearly see resonating very well, I mean, we have now the first use cases live for Joule and the HR and the finance, and the supply chain space. Everything what we do in order management is already enabled via Joule. And the end users will benefit a lot from efficiency gains. They do a lot of content search, no matter if it's HR content or actually travel or supply chain-related content. That is also, of course, a massive efficiency booster. And then last but not least, also what we see everything around document management, I mentioned the Concur example, where 150,000 end users already benefit today from embedded AI, but really by itemizing the hotel bills and processing it real-time automatically in the system. And then second everything what you do around supplier contract management, employee contract, customer contract, I mean, we by ourselves, I mean, I mentioned it, we see already now, massive efficiency gains because all the customer contracts are coming in and there are many which is positive. I mean, they are getting screened via our system. So we need way less people on all these compliance checks, the checks, the document checks, closing the books will become more easier. And these are the typical use cases. So document content analytics and of course, just by taking over certain tasks which are pretty manual today, these are the GenAI use cases which resonate really well, Adam. Our next question comes from the line of Michael Briest with UBS Limited. Please go ahead, sir. Michael Briest Thanks. Good evening. Just in terms of the restructuring, I think at Sapphire dominantly suggested was higher take-up in the U.S. But just looking at the increased expense, it's EUR1 billion for 1,000 to 2,000 employees, that feels more like a European program. Can you give some sense of where the people will be leaving from? And looking at the second-half, you've banked a very strong profit performance and you're just beginning to see people leave now. Is there upside risk, you'd say, to 2024 profits as well as '25, given the expanded program? Thanks. Christian Klein I mean, the phasing, as we mentioned, has been very positive in Q2. Q2 is a little bit of a kind of abnormal quarter because we've seen a lot of reduction, and you're right, especially in those countries where we had either fast voluntary measures like in the U.S., but also non-voluntary measures, frankly. So these people have been on average leaving early May. So we have been seeing big relief for May, June, two months out of three in the quarter, while the hiring has been more gradual. And now you'll see the hiring actually accelerate because these kind of initiatives to hire are a little bit more back-end loaded, they'll take some time. You might have noticed that while we increase the reductions by 1,000 to 2,000 and positions being affected, we are still keeping the target for the full-year in constant. So that means there is a significant ramp-up in headcount. So from that perspective, what we do see is that we have been, of course, seeing more departures on the relatively expensive German voluntary early retirement programs. But these are also expensive resources and we also use the opportunity to think about skill mix, location mix, to improve the profitability. And based on that, we have increased now the ambition for 2025 by these EUR200 million, you have seen in the press release. So that's the story. We feel pretty confident about our profitability this year. Yes, they remain to do doesn't look overwhelming, so maybe prudent. I just want to call out one thing, we had a reasonably still okay-ish decline in software, 27% decline in Q2, which was 24% by the way, last year. So the comps have been kind of similar. Now, we had extremely favorable software mix last year with 10% decline, and we anticipate that to decelerate. So now, of course, it's always hard to bring software revenue, as you know. But I think we don't want to kind of bet our guidance on a very frothy development there. So that gives us certainly some protection for this year. And it also puts us in a strong position to negotiate with customers and software to be commercially robust and to really push our strategic direction into the cloud. Christian Klein And maybe, Michael, on the program, overall, I mean, we are very diligent, we are also on the future workforce planning of SAP. We really want to use this moment now to invest very targeted in future growth areas. We are bringing onboard data scientists, we are bringing on toward all of these architectures to further enrich the WISE journey for our customers. While of course, also like Dominik mentioned, we are optimizing our location mix. I mean, for many years we worked on that, and now we have a unique chance to really optimize also the location and the skill mix. And so far the program is really a success and we are very happy with the execution so far. We'll move to our next question from Mohammed Moawalla with Goldman Sachs. Please go ahead. Mohammed Moawalla Good evening. Thank you. Hi, Christian. Hi, Dominik. My question, Dominik, is -- you alluded to some working capital savings that you started to see as well. I'm curious on -- as you look at the kind of free cash flow development, you've obviously been able to reiterate the EUR8 billion despite the additional restructuring charges, but also some of the improved EBIT improvements. I'm just curious to understand where we are. Are we still kind of early in that and the longevity around that and what are the specific initiatives? And then sort of linked to that, also as you look to kind of reinvest and you talk about kind of reskilling, how do you look at sort of savings dropping to the bottom line versus the quantum of kind of reinvestment back into business over the next two years? Thank you. Dominik Asam I think with regards to free cash flow, yes, you have seen that the payouts for restructuring have increased, so to EUR3 billion approximately, if everything is kind of added up for this wave. And we've done, and nevertheless, we keep both our outlook for 2024 and the ambition for '25. The restructuring has also some benefits, so that doesn't explain everything. And you're right, there were also some working capital improvements. So we made good progress, maybe a little faster than what we thought. And now I would caution that beyond '25, the cash conversion is hard to improve rapidly because we are really benefiting a lot from '24, '25 from a change on stock-based compensation. That gives us a big boost on cash conversion. And then we are actually converting at a very, very good level. And from there on, we actually need some gradual further improvement on working capital to compensate. The fact that this kind of tailwind from stock-based compensation as percent of revenues will actually be diluted a little bit over time due to the strong growth. And we don't think that stock-based compensation will grow at the same rate as the top line. So that's the story on the cash flow. Now, the second posed question was the skilling and how it's going with the cost. I mean, you recall that we said, the big heavy lifting in terms of catch-up is to get to '25. The run rate savings we believe will be there pretty much January 1, 2025. There is some later restructuring, but it's really moderate. We've accrued EUR2.9 billion, so this means these offers are out to people. We've made commitments. There is a certain narrow range around it because we still don't have the firm commitment from all people. There are expectation values in there, but it's not a huge variance we expect. So lion's share will be done, for instance in the largest country the way it will work is that a lot of people will still be on payroll through end of this year, so December 31st. And on that basis, we will have that flat headcount. But January 1st, there will be a lot of people exiting. So that gives us that big lift in 2025. So you see a lion's share of run-rate savings in '25 from that program. And then it will be a more gradual grinding, leveraging economies of scale, coming to a ratio of cost increase, total expenses increase to revenue increase, which is more in line with our competitors at about 80% to 90%. That's the way we think about it. So don't expect that we can repeat that every year. It's really then a more gradual and slower increase. But come 2025, we think we've already made big strides in terms of closing the gap to where we see competition in terms of free cash flow and margin, and also growth, frankly. For our next question, we'll move to the line of Jackson Ader with KeyBanc Capital Markets. Please go ahead. Jackson Ader All right. Thanks for taking our questions, guys. Mine is really about the cloud migration activity. Christian, you mentioned, I think earlier in the year that some customers were actually looking to pull forward their move to the Cloud ERP Suite. Maybe thinking about going in 2025, trying to go in 2024, and I'm just curious whether that type of pull-forward demand is still holding up here as kind of some other software companies have seen the macro environment cool. Christian Klein Yes. I mean, I already mentioned the very positive pipeline momentum we have and that actually includes both. I mean, we see the install base moving to the cloud. Sapphire helped, I have to say, in my -- Sapphire experienced at SAP, there was never a better feedback from our customers about the product, the product itself, the best of suite, how everything comes together, and then also how SAP has now more skin in the game when it comes to the transformation. I mean, we are not sitting anymore on the sideline. We are actively helping and that resonates extremely well. And then when you see the channel, and I guess, there is even much more room to grow going forward, SAP has a very solid channel business. This is also a highly profitable sales channel, but we see no way more opportunities to further expand that channel. There are a lot of resellers knocking on our door because they see this modular best of suite. This is also a highly profitable business for them. And so we are also expanding our partner territories. We will do that also throughout 2025. So both from an installed base move and further to also accelerate our net new customer growth, we remain very optimistic for the year and for 2025. The next question is from the line of Toby Ogg with JPMorgan. Please go ahead. Toby Ogg Yes. Hi. Hi. Thanks. Thanks for the question. Just coming back on the backlog growth of 28% in the quarter, previously as we've talked about, that there is obviously a difficult macro environment in software. And I know there are other factors like migration credits in the mix for you as well. So did you see any sort of incremental headwinds from the macro in the quarter? And did you see any tailwinds from the migration credits? And then just on the backlog for the second-half, what are the drivers of your confidence around the backlog growth into the second-half and particularly into Q4, where the comps start to get a little bit more difficult? Thank you. Christian Klein I mean, as every quarter, I mean, you win a few upside deals and you have a few slippages, but all of these slippages were not macro-related. Actually, we had a good start in July. We saw that some of the deals slipped were already signed now. So we didn't see any kind of macroeconomic impacts. Now you are mentioning a good point, and the cloud backlog is super strong, but this also then gives us another opportunity. In the cloud backlog, it's a ramp of RISE deals. First-year, 10%, 20% consumption, then we are going up to 40% and then we do the rest in year three, year four. And what we typically also do is to upsell. I mean, these customers ideally are growing their business, so we of course will onboard more users. But what we also do, what I mentioned, and that's now really coming together under Thomas Saueressig's leadership with the RISE methodology. So take Exxon, we start with success factors, hundreds of thousands of users, we modernize payroll, we modernize the commission system, we go finance, then we go downstream. And then we are working our way through the supply chain. And what you see in such a transformation journey, if we explain it right, and if we lead them, if we guide them together with our SI partners, you can see that suddenly we are talking about transportation. We are talking about warehousing, we are talking about demand and supply capabilities, which were all used in the on-premise days. And so we see this land and expand, that's for the LE, for the large enterprise space. And now when we talk about the SME, we are putting a lot of emphasis now in this transformation also on our channel. Because when you look at our sales ratio, the channel is key. We need more channel business in the mid-market. And there we are now just enabling our customers to not only sell finance and sell HR, you say, let's do procurement. And then because of the great integration capabilities, we have a seeding a commercial model where we see it in a few units, for entering the procurement space, for entering the travel space. And then we can actually provision the system on the fly, so mid-market customers can be live after they land it with finance. They can be live on travel in two weeks from now in procurement. And then we going to move our way to expand our footprint. And that's the same module. And this is where we are massively also now expanding our partner channel. And that works. And this is also somehow not yet reflected in the cloud backlog, because clearly of course there is way more business to also to gain during such a transformation journey. And maybe one thing on the cloud backlog, I mean, we always talk about renewal rates and the health of a business. I mean, you can rely on this statement that once a customer made this move to the cloud and you're running the most mission-critical systems of your company in the cloud, of course, this business is sticky. It was sticky in the on-premise days and you see it in the support revenue and it will be also sticky on the cloud side of the house, despite, of course, it's now a very modular stack. We'll move to our next question from Charles Brennan with Jefferies. Please go ahead. Charles Brennan Yes. Hi. Thanks for taking my question. Can I ask two if I can? Firstly, just a question on the enterprise architects that you're going to be allocating to your customers. There is some concern in the channel that you don't have enough of them. Can you give us some numbers around how many you've got today and how many you think you're going to need and how are you going to close that gap? And then secondly, just as a financial follow-up, Dominik, you've given us some moving parts on the cash flow. If I think about your comments that it's going to be hard to improve cash conversion going into 2026. Is there any reason that we don't take the EUR8 billion starting number from EUR25 billion, add operating profit after tax, add some assumption for this mid-triple-digit millions restructuring spend in '25 to get us to our '26 number? Thank you. Christian Klein I can start with the question on the enterprise architects. I mean, important to mention is, we don't start from zero. Now when you look into our MaxAttention offering, we had architects, now we need to reskill them. Yes, so with BTP, our enterprise architect at the data layer, with data sphere, the modular stack, we have to do reskilling and upskilling but that works. And we already have also enterprise architects in our services team, so we are now moving them to our RISE customers. Second, we have very, we have great academies for sales, for services, for product engineering, and there especially on the product academy and the services academy, we are now doubling down especially on this enterprise architect skills. So there will be further resources now coming out of our academies, plus we are doing external hiring, and there the program of course helps a lot that we see higher attrition in places where we don't need the skills anymore in the future. And now we can lift and shift and further invest into the skills what we need. And one of those is of course the enterprise architect. And what is so important with the enterprise architect, of course, Accenture, Deloitte, EY, PwC they are delivering and they are doing the migration itself. But it's so, so important for us with regard to land and expand, that we are guiding the customer on how to build a semantic layer with SAP, on how to connect the dots on the business processes, and how to infuse workflow automation with SAP on the BTP, how to use the integration suite, and the customers are so excited. I mean, the feedback was so, so good. And that also helps to make our RISE offer more attractive. Because others are hearing that and say, hey, SAP is really doing a business transformation. They are not only doing a technical migration. And so that was a great move. And the hiring machine is on. And we will further increase the coverage of our RISE customer base in the next month. Dominik? Dominik Asam Yes. On the bridge from '25 into '26, your logic is certainly quite straightforward. Makes sense. But don't forget, if you take EUR8.5 billion, so I add back basically the mid-triple-digit million restructuring cash out, if you add, kind of depolluted for that EUR8.5 billion free cash flow in '25, and you divide that by EUR10.2, you come actually to 83% cash conversion. And of course, your math, the increment of operating profit has to be tax-affected, and just the tax affecting gives you a lower cash conversion on that increment. And that's the challenge that you basically need to find other sources for that, not to see the cash conversion being actually diluted, so to speak. So that's the math. So your approach is actually a prudent approach, I would say. Our next question comes from Frederic Boulan with Bank of America. Please go ahead. Frederic Boulan Hi. Good evening, Christian, Dominik, and Alexandra. If I can come back on the commentary in the release about Q4 being decisive to -- for cloud revenue growth in 2025. Can you clarify a little bit what you mean by that? Is there a specific caveat around that quarter? You will face a tougher comp in Q4, but the rest of the commentary is very bullish. So it would be great to hear a bit more what you're trying to say here in that message around decisive. Thank you. Christian Klein Yes. Look, I mean, Q4 is always our biggest order with regard to order entry, so also for cloud bookings, and of course, our pipeline looks good. I mean, when I compare the pipeline coverage this year compared to last year and last year we had a very strong half year, too. It looks really good. But now we have to execute, and we want to see this execution now coming. And we executed really well in half year two, in half year one, and now let's do it again in half year two. But this is, of course, still up, and so we have to do it. And that is comment-related. Dominik Asam More acknowledging from our perspective that all of you tell us how difficult the market is out there. And we just want to acknowledge that we will really watch the market. But for the time being, there is nothing that should come in our way, we think. But if we don't want to skin the bear before we really killed it, it's clear that mathematically, there is an impact of what we do in Q4 '25 and the full-year. Actually still the full-year, not much, but also for '24. But it's just to recognize that we don't want to come across as being completely carried away and thinking nothing can happen to us. We just want to be very cautious and prudent about what the environment is doing. But so far, we don't see these bumps in the road that so many others are talking about. We'll move to our next question from Sven Merkt with Barclays Capital. Please go ahead. Sven Merkt Thanks. Good evening. Thank you for taking my question. I was wondering if you can comment on the growth of transaction-related cloud revenues in the quarter and the outlook for H2. And I'm particularly interested if there is anything in terms of comps we should consider for the second-half. Thank you. Yes. The comps between half year one and half year two. I mean, what we are seeing in the forecast is actually U.S. -- we have a minus 2% growth in Q2 on transactional cloud revenue. So far we see actually a similar trend in half year two, slightly better. What we see in the rest of the Concur business is actually really good on the subscription side. I mentioned the GenAI use cases. So Concur business subscription is doing well on the transaction. It also depends a little bit on the economy. I mean, what do our customers do? How much do they travel? How much will they rely on contingent workers for field class? So far, what you can expect is more or less a similar, slightly better performance in half year two. That's what the current forecast says. Dominik Asam And the good news is, by the way, that business -- sorry, let me just add that, please. The good news is the transactional revenues as a percent of revenues, given what Christian just described, are continuously diluted. So the impact in the bridge from current cloud backlog to cloud revenues is getting smaller and smaller. You see that already in the first-half of this year compared to last year's impact. And now moving to second-half, it's getting smaller. And then of course in '25 it's getting even smaller because if you're not really kicking back into significant growth there, it becomes a smaller and smaller part. And I also want to highlight, at the risk of stating the obvious, these kind of slightly down numbers in transaction revenues, they are within Cloud ERP Suite growth. So the 33% we print there is already absorbing that. Our next question comes from Balajee Tirupati with Citi Investment Research. Your line is now open. Balajee Tirupati Hi. Thank you. Two questions from my side. Firstly, on the ongoing transformation program, given the program would conclude in first-half of 2025, would all the benefit of program be already visible in the year? Or would it be fair to assume that some of the benefits will also move to 2026 and 2026 will be the year -- first year where the full benefit of the program will be visible? And second question on AI side. We have seen some of the other global software peers have used indicate that there has been some delay plan as they have been weighing options with regards to AI development. Are you seeing any such signs from customer side as well? Thank you. Christian Klein The connection was not very good but let me try to answer your question. I mean, first, I guess your question was around, is there any kind of restructuring left in 2025? And as Dominik said, the bulk of the program will be executed in 2024. Yes, some pieces are left but this is a smaller share of the overall program. On the run rate savings, what you're going to see is, of course, also the bulk of the run rate savings will be realized in 2025. But it's very important that this is not just a one-off program for one year. What we are doing with this program is also optimizing the cost base of SAP. We are reducing a lot of skills, we are optimizing our location base, and we are reallocating some, some, not all, some of the investments to our strategic growth areas. So that will also then lead in 2026 to come also in a better and more cost-efficient structure in our P&L. And then second, of course, also it will help us to fuel further, the growth on the top line. And the second question was really hard to understand. Can you repeat it? Balajee Tirupati Yes, please. The second question was more on clients' decision-making process in wake of development around GenAI business AI use cases. Some of your global peers have alluded that there has been some delaying decision-making process on account of these developments, while you are seeing some acceleration or tailwind on -- because of embedding GenAI in your offering. So how should we see that and what is working for SAP versus some of the other global software companies? Thank you. Christian Klein Okay. Okay. I guess, I got the question now. I mean, first, when we are deciding on our AI roadmap on -- especially also for GenAI now, what we are looking at is, first off on the telemetry data and the activities of our customers, of our end users in the cloud, and we have a lot of insights. That's why a lot of the roadmap, what we are having for our AI copilot, Joule, is really built on. What do our end users do? How much efficiency gains can we do if we put Joule on top? What can we do on the analytics? Where do we see a lot of analytical requests in the system? Second, on the embedded AI use cases, and before we start coding it, we always test it. We have industry consortiums and we then test it for what kind of use cases work for energy, for oil & gas. What kind of use cases work for retail? I mean, I mentioned, for example, returns claims management. It's actually a big cost driver for many retailers. And there we can help. There we can actually embed it in the order management, in the channel solutions of SAP. And so this is embedded. And then we actually do with Accenture, EY, and Deloitte, and others, we have our GenAI hub where especially large customers are coming to us and say, hey, in this part of the supply chain we could see a high value for a GenAI use case. And then we do a prototyping and then we build it via the GenAI hub. We give them native access to our data. We give them native access also to our data sources across our base. And then last but not least, of course, they can also benefit from the identity in the security layer. And there we do build together very individual use cases. So that's in a nutshell, how we decide and develop our GenAI use cases. We'll move to our next question from Ben Castillo-Bernaus with Exane BNP Paribas. Please go ahead. Ben Castillo-Bernaus Good evening. Thanks very much for taking my question. Just on the headcount, just coming back to your comments there, obviously, an additional 1,000 to 2,000 impacted roles here, and you seem to be inferring that headcount will still end roughly flat. So more hiring -- rehiring than initially planned. Curious, what prompts that decision to hire more versus to drive further cost savings, given this is effectively a free pass within the existing restructuring plan. And in terms of where you are hiring on those additional roles, could you talk about where those incremental hires are? Is this in the same areas that you initially planned, or is this in different areas? Thank you. Christian Klein I mean, the way it works on the voluntary programs is in Germany at least, that employees register their interest in participating and then we can decide whether we accept it or not. And then again, the employee has a right to say, okay, I ultimately take it or not. We have some quite good precedent information on how that should pan out. We've seen higher adoption, so to speak, than initially planned on voluntary program, also to some degree on voluntary early departure programs. And then on any of these cases, what we basically had to do is to judge whether there would be certain critical skills leaving and they would simply need to rehire one for one, in which case we would of course decline because there is no business case. If however, we could combine it with the reskilling that we say, okay, maybe I can reduce that headcount, now that I have a big opportunity but put it in a different skillset where you have even more scarcity or consolidate certain teams in regions which are frankly more cost-effective. We can use these, of course, the efficiency of that kind of rehiring is not as high as not replacing at all, but it's still there. And a couple of hundred million we added are basically the kind of partial derivative of saying more restructuring costs, but also more savings. So the factor is a kind of ForEx factor, which is pretty similar to the overall package. It's not super quick because of the high cost of these restructuring programs and because we need to rehire in some areas. But we still have a business case on these incremental headcount reductions. Even if we rehire because we do it in a more cost-effective way than what was the status before and sometimes we don't rehire at all. We'll move to our last question from Johannes Schaller with Deutsche Bank. Please go ahead. Johannes Schaller Yes. Thanks for taking my -- yes, thanks for taking my question. Another one on the efficiency program, I'm afraid I wanted to understand a little bit better how you're thinking about this kind of more medium-term. And conceptually, I mean, I guess, the increased number of people affected now is probably not that surprising. I think Christian already alluded maybe to that a little bit after Q1, that there may be some more areas of efficiency. But would you say we're really done now or how should we think about this going forward? I mean, we're in a scenario where your required skillset keeps on changing in the workforce probably you're introducing more AI tools within SAP becoming more effective. Is there scope to do more? Or how should we think about this on a maybe five year view? Christian Klein I would say, I mean, yes, thanks first of all for the question, Johannes. And I mean, the good piece is, I mean, we are never running out of ideas, also not on efficiency. I mean, when you look at what we did at the beginning of the year, we combined all these decentral COO teams in SAP, we centralized our cloud operations. And what we are going to see when you take, for example, the headcount out of the equation for a second, what we see, of course, we can gain huge synergies. I mean, when you see how we can streamline our operations, we can expand our digital marketing channel connected to our reseller channel in sales, or we can connect it to our back office function. I mean, that will actually just unveil a lot of additional synergies just by really running SAP more end-to-end, and then we're going to infuse, of course, automation. When we talk about AI coding development, we'll see a huge productivity gain. When you look into our supporter ticketing, of course, we going to apply GenAI, we will automate a lot of the ticketing. Ticket solving will be done of course also via our copilot. And then as I already mentioned in contracting, we going to apply it, we are now rolling it out. So overall, in inside SAP, we are rolling out currently 30 AI use cases and that's the way to go. And on a cloud cost margin as we centralized our cloud operations under Thomas Saueressig now, what we can do is we can harmonize the patching, we can harmonize the onboarding, we can harmonize all the different steps in the cloud lifecycle management. And when you see that, when you see that we have 20 different core ERP products, that is of course also giving us more efficiency gains over the time. And so these are the things which are already in the making next to of course the whole transformation on the headcount side with also the rehiring then in the strategic growth areas. Alexandra Steiger Great. Thank you very much, Christian and Dominik. And this concludes our call for today. Thank you very much for joining. Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.

Earnings call: Sandvik Q2 2024 shows mixed sector demand, strategic progress By Investing.com

Sandvik AB (SAND), a global engineering group, reported a mixed performance in the second quarter of 2024, with stable development overall but varied sector demand. The company saw increased order intake and robust demand in mining and aerospace, while general engineering and automotive sectors experienced a decline. Despite strategic acquisitions aimed at strengthening its market position and double-digit growth in software businesses, Sandvik's adjusted EBITDA fell by 7% compared to the previous year. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Sandvik's financial results reflect both the challenges and opportunities the company faces in a fluctuating global market. Despite a decline in some sectors, the company's strategic acquisitions and growth in software and powder businesses highlight its adaptability and commitment to innovation. With a focus on digital and sustainability solutions, Sandvik is positioning itself for future growth while managing the current economic headwinds. The company's leadership remains optimistic about the gradual normalization of margins and the potential returns from their strategic investments. Sandvik's ticker, SAND, will continue to be watched closely by investors as the company navigates through the evolving industry landscape. Full transcript - None (SDVKF) Q2 2024: Louise Tjeder: Hello, everyone, and a warm welcome to Sandvik's presentation of the second quarter results 2024. My name is Louise Tjeder, Head of Investor Relations here at Sandvik. And beside me, I have our CEO, Stefan Widing, and CFO, Cecilia Felton. We will start with the presentation. Stefan and Cecilia will take you through the highlights of the quarter and, after that, we will move on to the Q&A session. And with this short introduction, I will hand over the word to you, Stefan. Stefan Widing: Thank you, Louise. And also from my side, welcome to the second quarter report for Sandvik in 2024. If we summarize the quarter, we saw a stable development in the quarter, but the demand picture was mixed. We saw robust demand in mining and aerospace, while general engineering and automotive declined and also infrastructure remained weak, but with some regional variations that I will come back to. Order intake growth was 2% in total. With that, we had 3% positive organic growth. Revenues declined by 3% in total. And of that, organic was a negative 2%. The margin, we believe, is resilient on the current challenging volumes that we have in some parts of our business. Adjusted EBITDA decreased by 7% versus last year, corresponding to a margin of 19.6%. This puts our rolling 12 months at 19.4%. Savings from our restructuring programs is starting to come through. They amounted to SEK 275 million in the quarter. And from a bridge point of view versus the same period of last year, they were increasing by SEK 243 million. Adjusted profit for the period came in at SEK 3.9 billion. We also continue to see very good strategic progress. We expanded in the local premium market in China with an acquisition of Suzhou Ahno. I will come back to that. And also, the acquisitions in the US with PDQ that strengthens our offering in the important North American market. We also see good momentum with double-digit growth in our software businesses. This applies both on the mining side as well as in manufacturing solutions. And we have also launched several new solutions that is linked to our strategic focus on both digital and sustainability shift. One of these solutions is something I want to highlight as the innovation this quarter. We have collaborated with Microsoft (NASDAQ:MSFT) to incorporate the latest AI technologies into several of our software solutions. This is a solution called the Manufacturing Copilot. It's been trained on our proprietary knowledge and is unique also for each of the brands. And we have pre-launched this and it will be available on the market in September for three of our software brands - Cimatron, GibbsCAM and SigmaNEST. And this will help our customers further increase their productivity and efficiency in component manufacturing. Going then to the overall market development, starting with a regional view. We saw a flat growth in Europe, 0% in the quarter. Looking at SMM specifically, we saw plus 1%. Of that, cutting tools were down in the mid-single-digits, but that was offset by strong growth in powder, in particular, and also some support from software. In North America, we were at minus 4%. SMM were at plus 2%. Here, cutting tools were down in the low-single-digits and this was offset by strong growth then in the software businesses. Asia up 25%. In SMM, China up 14%. But this was partly driven then by pre-buying effects in one of our Chinese brands that increased prices at the end of the quarter. And if we neutralize for that effect, the cutting tool business in China was more in the mid-single-digits. So still a positive growth in the country. Then we have the mining regions, which, as you know, can vary quite a lot between the quarters. So we will not comment specifically on them. Overall, mining demand remained stable at the high level, as you could see also in the numbers. I will comment more when we get to that. Looking at general engineering, we saw continued weakness. We had a low-single-digit decline overall in SMM here. This was driven by a particularly weak Europe with high-single-digit declines. A bit stronger in North America, but still weaker with low-single-digit declines, but offset by strong performance in China, double-digit growth, although part of that then is again related to this pre-buy effect that I talked about. Infrastructure remains weak. Europe is down. North America a bit more stable. We started to see some greenshoots there. I'll come back to that. And then if we look at Asia, Asia overall is down. We saw good growth in India, but it was offset by a negative China. Automotive, weak in the quarter, down high-single-digits. Here in particular, Europe was weak, down high-single-digits. North America a bit better, but down mid-single, offset a bit by growth in Asia with China up low-single-digits. Aerospace continued strong momentum, mid-single-digits growth, strong Europe with double-digit growth. However, North America in our quarter was down mid-single-digits, but as you can see here, we still consider the market momentum to be strong. This was related to timing of larger orders that we can get in the aerospace sector. Asia, flattish here, but aerospace China SMM down low-single-digits. If you look at the other segments, we have a flattish development. Europe down mid-single-digits, offset by high-single-digit growth in both North America and China. And then, Asia overall more on the stable side. This sums to an order intake of SEK 32.4 billion. As you can see on the graph, the second highest order intake we have had as a group in the quarter. Revenues SEK 31.4 billion, giving us a book-to-bill of 103%, which, of course, we see as a positive in this time of the year. If you look at this from a different angle, we can see that, after three quarters in a row with negative organic order intake, we now turn positive. And we do, however, still have now two quarters in a row with a negative organic revenue decline, even though we improved in this quarter versus Q1. This also leads to an adjusted EBITDA of 19.6%, SEK 6.1 billion approximately, down 7% versus the same period last year. Here we have lower volumes in our businesses, partly offset by savings and good cost control. We also have an effect where, from a year-over-year point of view, we have some dilution from cost inflation versus pricing. Overall, we are offsetting and continue to offset inflation, but we were accretive last year. So, from a bridge effect, this becomes a negative in this quarter. And then, we have a slight support also from currency of 20 basis points. Going into the business areas, Mining and Rock Solutions, continued solid demand. Here, quarter again, the second highest order intake we have had in SMR, which speaks to a good demand situation. We have good momentum in automation, double-digit growth in our digital mining technologies division. We also see strong growth in parts and services, underground drilling and surface drilling. If you look at orders, they grew organically by 4%. Here we saw a very good performance again in the service business, up double-digits. That was a bit offset by less growth than in the consumable side. So, overall, aftermarket up in the high-single-digits. Equipment down 4%, but some really good major orders in the quarter of in total SEK 1.5 billion. If you look at the margin, came in at 20.8%. Overall, I would say a solid performance, but a little bit impacted by the lower volumes in the quarter. We do see savings coming in, SEK 64 million in the quarter as a bridge effect. And also a bit of support here with 40 basis points from the currencies. We have launched two new important features for our AutoMine solutions in this quarter that will further strengthen our position here. We have also started a collaboration with a large customer and this has been press released. So, I can mention it's Glencore (OTC:GLNCY), which relate to deploying our batteries that we have in our BEVs in a second life application where they are being used as energy storage and a backup energy for the mines. So this is part of our circularity ambitions and we're looking forward to seeing this collaboration take shape. An important innovation launch in the quarter is also our launch of our first electric rotary blasthole drill rigs. This is part of our ambition to grow our market share on the surface. This is a product offering we have not had. It's only been one supplier for these type of solutions in the market. So this fills a gap for us and allows us to compete in the part of the market that we have not been able to compete in in the past. So a really important product launch. Rock Processing Solutions. Also here, continued stable demand in mining. Infrastructure, as I mentioned, remained weak, but with some regional variations. Overall, organic decline of 8%. But here we saw growth in North America up 3%. It's a mixed picture, though. We do see dealers continue to have high inventory levels and that's impacting the business. But we have seen the OEM customers with lower inventory levels and have started to place more orders, especially for attachment tools in the quarter. So a bit more positive in North America here. Continued decrease in Europe. Here we see inventory levels have come down. But customers are satisfied with that and have not used that as an opportunity to put more orders yet at least, considering the general uncertainty of the economy. Asia, down 4%. We saw really good and strong growth in India, but it was offset then by also a decline in China. Good margin, 15.1% versus 13.7% last year, considering they get no support from the market as of yet. Strong cost control savings coming in SEK 41 million in the quarter. And also, they had, of course, some extra costs last year that you are aware of that they did not have this year. Also some headwind from currencies here of 10 basis points. As part of our sustainability ambitions here as well, a new solution, a magnetic drum separator for mobile screens means we can extract metals from demolition materials. That is both valuable and helps us reduce our wear and tear of the equipment. So a good launch as well here. Coming down into Manufacturing and Machining Solutions. A highlight was, of course, strong momentum in the software business that grew double-digits in the quarter. Same, we can say, for the powder business, which had a strong development, of course, partly on the back of low comparison the prior year, while cutting tools then declined by 1% in the quarter. We see solid demand in aerospace, as I mentioned, while automotive and general engineering were on the weaker side. Total order intake increased 5%. Of that, the organic increase was 4%. And as mentioned, minus 1% for cutting tools, offset them by good growth in software and powder. We can say, if we look at the quarter overall, that the demand picture has been stable throughout the quarter, month over month and at the same level if we look at daily orders as we saw in Q1. So the first half of the year has been stable from a daily order intake point of view and we see the same thing continuing so far into July. The margin was weaker than last year, 20.5% versus 22.3%. Here, we have, of course, lower volumes impacting the margin negatively and then the dynamic I mentioned around cost inflation and pricing in the quarter where we do offset in the quarter, but we have a negative bridge effect from being accretive last year due to the timing of when price increases have occurred. A good effect from restructuring and savings programs here with SEK 139 million as a bridge effect on the positive side in the quarter and then some headwind from currency as well diluting by 20 basis points. Very important strategic progress here in the quarter with the acquisition of Suzhou Ahno. This is one of the leading players in the Chinese local premium market segment. We have had a strong position in China or have a strong position in the international premium segment, but the bulk of the growth in the Chinese markets in the past years has been in what we define as the local premium segment and we really have not had a play in that segment. We have had Yongpu since a few years, but that's a smaller company. Now we take a really important step with this acquisition, gives us a play in the local premium segment in China. So super happy with that acquisition. Then we also have a decent acquisition in terms of size in the US with PDQ, which is a fixtures and work holding and tool company, strengthens our position in terms of offering a total product range on the important US market and also strengthens our partnership with the machine tool builders that is working a lot with this company. So good progress here on that front. Now I will hand over to Cecilia and will come back for conclusions and Q&A. Cecilia Felton: Thank you, Stefan. All right. So, let's take a closer look at the numbers then together. And as usual, let's start with the growth bridge here on this slide. You can see that, organically, order intake grew by 3%, while revenues were down by 2%. Structure did not have a material impact in the quarter, whilst currency had a negative impact of 1% on orders. And that brings total order intake growth to 2%, while revenues were down 3%. And as Stefan mentioned, adjusted EBITDA came in at SEK 6.1 billion, corresponding then to a margin of 19.6%. Net financial items improved year-over-year and I will show you a more detailed table in a few minutes, showing the development there. Tax rate excluding items affecting comparability and also on a normalized basis was in line with guidance, 23.9%. Net working capital on a 12-months rolling basis came in at 30.2%. Free operating cash flow, SEK 4.2 billion in the quarter, corresponding to a cash conversion of 74%. Returns at 14.1% and adjusted EPS came down year-over-year, driven by the lower earnings. If we continue with the bridge then and starting with the organic column, here you can see that revenues came down by SEK 775 million, which resulted in a reduction of EBITDA by SEK 485 million, and that gives a leverage of minus 63% and a year-over-year dilution of the margin of 1 percentage point. Currency was slightly accretive, 0.2 percentage points, and structure was neutral to the margin. And that brings us from a margin last year of 20.5% to 19.6% this year. We see good progress on the execution of the restructuring programs. For the 2022 program, we have now realized savings of SEK 139 million. The year-over-year bridge effect is a little bit smaller as we also had some savings last year. And for this year's program, we have now realized SEK 136 million of savings, and this corresponds to annualized run rates of 71% and 44%. If we continue down in the P&L with the finance net, starting with the interest net here. You can see that it came down slightly year-over-year and this is despite the higher yield cost and is driven by lower borrowed volumes. Then at the bottom, you see here in FX and other asset classes, we had a big negative impact last year. And as I think most of you remember, this is due to temporary revelations on orders, currency hedges on orders not yet invoiced, but from 1st of January this year, these temporary revelations are now booked in equity. And that's the main driver of the year-over-year improvement here. The reported tax rate in the quarter was high at 30.6% and this was impacted by a provision for a tax audit related to transfer pricing for the years 2018 and 2019. This is an impact - a one-off impact in this quarter and we are not expecting any further charges here going forward. Adjusting for this, the tax rate was in line with guidance. Net working capital, if we start with the graph on the left, you can see that, in absolute terms, it's increased sequentially. This is driven by higher accounts receivables and also a little bit less prepayments from customers. Inventory volumes in the quarter came down a little bit as opposed to the normal seasonal build-up that we have in the second quarter normally. And on a relative basis, you can see, on a 12-month rolling basis, we increased sequentially to a little bit just above 30%, whereas on a quarterly basis, we came down slightly versus the first quarter. Free operating cash flow was SEK 4.2 billion in the quarter and corresponding to a cash conversion of 74%. On a 12-month rolling basis, cash conversion was 84%. And if we now look at the year-over-year development, you can see here that EBITDA adjusted for non-cash and other items was largely in line, slightly lower. CapEx was a little bit lower, but the net working capital build-up in volume was higher. And as I mentioned, mainly driven by higher accounts receivables. Financial net debt increased sequentially, driven by the dividend payment, and reached SEK 41 billion. Capitalized leases and the pension liability was largely unchanged which brought net debt to SEK 49 billion. And also, our balance sheet target, financial net debt over EBITDA increased to 1.5 and normally we see a seasonal increase in the second quarter, as I mentioned, as a result of the dividend payment. Looking then at outcome versus guidance, the currency effect came in at SEK 22 million for the second quarter. And then, for the items where we provide annual guidance, you can see that CapEx is now at SEK 2.3 billion, interest net at SEK 0.8 million and the normalized tax rate is right in the middle of the guided range. And then, looking ahead at the third quarter and the full year, here you can see that the currency effect for the third quarter is expected to land at SEK 250 million. We have left CapEx and tax rate unchanged, but we've increased the interest net a little bit to SEK 1.5 billion. And with that, I will hand over to Stefan for summary and conclusions. Stefan Widing: Thank you, Cecilia. So if we conclude again, it was a good quarter with a stable financial performance. We do have a mixed demand picture, though, in the quarter that we have to manage. And that's why we do see - we think we have a solid performance despite the volume challenges that exist in some parts of our business. We have a good momentum when it comes to driving our strategic agenda as exemplified many times during this presentation. So, we made good progress in the repositioning of Sandvik, launched several important innovations and partnerships linked to both our digital and our sustainability ambitions. We do this in close collaboration with our customers to make sure that we provide value to them and that our innovations are relevant in the market. We have also seen, this quarter, further expansion into faster growing regions and segments through the three acquisitions we have made. If we look forward, we continue to have strong focus on execution. We do have an uncertain macroeconomic and geopolitical backdrop to manage. But we have a solid financial platform, we have strong market positions, and we will be persistent in focusing on delivering our strategic agenda and our financial performance and the targets we have set. Thank you for listening and let's go into Q&A. Louise Tjeder: Yes, indeed. Thank you, Stefan. And thank you, Cecilia. It's time for the Q&A session. And operator, please, we can have the first question. Operator: [Operator Instructions]. The first question comes from the line of Kuenne, Sebastian with RBC. Sebastian Kuenne: I have two. The first is regarding the operating leverage, which you show very nicely in your bridge analysis of minus 63%. I recall that, in Q1, it was also a fairly high number and the explanation was that the SMR is running at full capacity, but the revenue recognition will happen later this year. It now appears that this revenue recognition for equipment is not happening or hasn't happened in Q2, and I was wondering if you could give us an update when those sales will be made. That would be my first question. Cecilia Felton: Do you want to talk about the revenue recognition? I can talk a bit about leverage. Stefan Widing: Yes. When it comes to sales and revenues for SMR in the quarter, I think they were solid. They were up sequentially by SEK 1.8 billion or 13% versus Q1. It's true they are organically slightly down, but I don't think there is any drama in that. We had record high deliveries in the same quarter of last year. With a solid order intake as well, we will gradually see - continue to see deliveries to be at a good level. So, i.e., the leverage we're talking about here is not driven by the same dynamics as we saw in Q1 in that regard. You can comment on that, Cecilia. Cecilia Felton: Yes, of course. The main reason for the low leverage in the quarter is the dynamics around price normalization. Last year, Stefan mentioned price versus inflation was accretive. This is driven by the timing of the price increases versus the pace of inflation. In Q2 of last year, price was overcompensating for the current inflation in the quarter. Whereas this year, what we see now is that price offsets inflation. But in the year-over-year bridge, this is a dilutive impact and also the main reason for why leverage is so low in the quarter. Sebastian Kuenne: Second question would be on the issue in Asia and the high growth in China, 40%, due to the pre-buying of some of your distributors, I assume. Could you just give us a number in Swedish kroner, how big that impact is? It seems to really change the growth dynamics for the tooling business and whether you expect a reversal of that effect in Q3? Stefan Widing: I mentioned, from an organic point of view, it was 14% in China and underlying more mid-single. So, talking about an impact on maybe 10 percentage points in the quarter. I don't honestly have that translated into SEK, but Louise can maybe come back to you on that after the call. We will, of course, gradually see a reversal. It should not come all in Q3. That, we don't expect. But throughout the rest of the year, of course, if it's a pre-buy, we will have to give that gradually back. That's clear. Operator: The next question comes from the line of Bergelind, Klas with Citi. Klas Bergelind: My first one is on SMM. Stefan, on powder and software, you said that powder was strong. I'm not sure if I heard the impact there on the growth. Was it perhaps 1% of the COVID. It was 2%, but probably because of more restocking at the time, if 1% was the right number. And then on the double digit growth in the software business, it seems to be accelerating which is good to see. Can we say sort of what verticals, end markets and how much is software now of orders and sales in both in SMM, if any difference between each. Stefan Widing: Let's see. Just try to remember all the questions here. On powder, I don't know, Louise, if we have given a specific contribution in terms of percentage on the growth. So cutting tool, minus 1%. SMM, plus 4%. And have we split it out further? Louise Tjeder: Not really. Stefan Widing: But again, what we can say is double-digit growth in software and then you can say the rest is powder and powder is more than normal double-digits. I would say probably - I'm guessing now, we will - a little bit - three quarters of that is on the powder side and maybe one quarter on the software side, something along those lines. It gives a little bit as well on that. On the software growth, it was a strong quarter. I wouldn't say - we are not counting on that this is going to happen every quarter. We have said we think this is a high-single-digit growth business over time. Then, of course, some quarters might be stronger than others. So, yeah, I wouldn't count on continued double digit every quarter just because we see it now. But strong performance in this quarter. When it comes to percentage, we have the target by the end of next year. This should be a SEK 4 billion business. And then we have some growth that needs to happen to get there, both organically and through some additional M&A. So it is it's not yet hitting the 10% - high-single-digit 10% that we aim for, that target. So lower than that, more around the 5%, 6% currently. Klas Bergelind: My second one is on your stable comment on daily sales into July. And obviously, we had this China pre-buy, which was 10% due to China growth roughly. Do you sort of adjust for that or is there anything else getting stronger here offsetting that hangover, if you see what I mean. Stefan Widing: I would say, there are always a little bit of puts and takes in a quarter. So, when we say it's stable, it doesn't mean that you should think that that was the China effect and otherwise it was weakening. In this context, I would say, that's in the noise of that comment. So we saw a stable - when we say stable, it's not that it's on the tenth of a percent the same because there are always some type of variations. But, overall, same daily pace on average month. Max Yates: I just wanted to ask on the mining business. And I guess sort of it's been a very good quarter of equipment orders. So I just wanted to understand kind of - is there any way, particularly, you'd call out that you think you're taking market share? And then the extension of that question, I guess the aftermarket, I was quite sort of pleasantly surprised with 8% order growth. That's quite a bit better than I think what others are generating. So could you just talk a little bit about kind of what's driven that? Are you seeing acceleration? Was it any kind of specific rebuild or midlife projects that were happening this quarter? Just talk about those two items, please, would be helpful. Stefan Widing: On the equipment order side, I would not, based on this quarter, call out sort of market share gains in a specific area. I think this is within the margin of, let's call it, the normal lumpiness we can see on equipment orders. We were happy with a strong intake and SEK 1.5 billion of major orders, but it was not - I can't say it was in any new areas that we were not expecting in that sense. But we won big order in automation, in surface, also underground. So it was across the board. And more I think an indication of a solid demand picture and that we have strong product offers out there. On the aftermarket side, I think there are some specific drivers. First of all, we see high activity with our customers because of high metal prices. So they are running the machines as much as they can. Machines are on average older than they have been in the past and we can see that that the older machines, of course, have a need for more service and spare parts. So that helps the aftermarket business. On top of this, we are seeing that the improvements in fleet size and market share that we have gained on surface in the past years, those machines are now getting a little bit older and we can now see that that's generating increased aftermarket sales on the surface side as a consequence of a bigger fleet, which is very positive, of course. So those would be the things I would call out. Max Yates: If I was to summarize, it's much more kind of underlying kind of market trends and work that's been done in the past rather than anything specific to this quarter or a large rebuild order or anything like that. Stefan Widing: Yes, I would say so. Yes. Operator: The next question comes from the line of Andrew Wilson with J.P. Morgan. Andrew Wilson: Just around the powder development and maybe just picking up on where Klaus was, is there anything we need to think about in terms of the timing of those orders? I might be misremembering, but I know that there's certain periods where the powder orders tend to be pretty good and I know you've talked about kind of comp effects. Is there anything in the second half to be aware of on powder, just so we kind of - we don't get in the wrong place on that? Stefan Widing: The high growth this quarter is partly driven by good underlying orders demand, but also to a big extent by very low comps in Q2 of last year. And I don't remember the exact figures, but we will have low comps also in Q3. I think we mentioned something around that in the Q3 report. So you can probably go back to that and you will -yeah, you can probably sort of normalize for that versus Q3 of this year. Andrew Wilson: Maybe just two super quick clarifications. None of the comments you've made around pricing seem to me that you're worried about pricing dynamics in the market. But I just wanted to confirm that. And I guess very simply in terms of the daily order intake comments, and I know there's obviously lots of moving parts, if we just look at the typical seasonality in the business in terms of SMM Q3 versus Q2, given what you're saying, it would seem to me that that would be a pretty good starting point, all else equal, for where we should see Q3 orders. Maybe if we just confirm those two that I'm not making a mistake in how I'm interpreting the comments. Stefan Widing: If I start with the latter one, it's, of course, a little bit complicated in the sense that what we can see now in July, we are seeing a stable daily order intake. And there is seasonality over the vacation or holiday periods here. How that will be impacted by what we see now is of course very difficult to say. But I guess what we're saying is that the underlying market sentiment from what we can see is so far stable. It should imply, let's call it, normal seasonality for the rest of the quarter as well. If nothing else changes, which of course it might. Did that answer your question? Andrew Wilson: Yeah. That's very clear. And just on the pricing, just to check that I'm right, that there's no change of market conditions there. Stefan Widing: What Cecilia explained the dynamics in this quarter and so on. This is more sort of residual effects of the dynamic pricing situation we have gone through in the past years. We are seeing that we are converging sort of towards that. When we go into next year, pricing, cost inflation should be, I would say, normal again. And now, we have some quarters with some bridge effect that we have to manage through. We are going towards a more normal or normal price situation. That's what I would say we see right now. Then there are some pockets where there might be some challenges, driven by current inventory levels and so on. We have seen that on where parts on the infrastructure side where too high inventory levels has been discounting and campaigns and so on. We have on ground support driven by lower Chinese steel prices. There are some pricing challenges because of companies selling, trying to take business at lower prices and so on. So there's plenty to manage. But our philosophy is quite clear that we stick to our value based pricing. And in some cases, we rather sacrifice a few deals, if we have to, to maintain a good pricing level. Operator: The next question comes from the line of John Kim with Deutsche Bank (ETR:DBKGn). John Kim: Just wanted to check whether the discussion or the guidance you gave previously in Q1 about seasonality and sequencing is tracking, i.e. did Q2 deliver the way you thought it would, given your equipment pipeline. I know you're value-based pricing, but given stronger copper prices and tight production, is there not an opportunity to make more here or maybe I'm missing something? Stefan Widing: On the first point, yes, we are tracking, in that sense. Sales in SMR has continued to develop in line with what we saw at the beginning of the year. Value-based higher copper price on - yeah, in the short term, you might be able to capture more. But on the other hand, we are in this for the long term. And we have in general built a lot of trust with our customers, many of them being the larger mining companies and taking advantage of a short - potentially fluctuating, let's say, commodity prices in our own pricing strategy. I don't think that is wise. Then suddenly, if things turn south, we will have to give things back, and potentially more, if you start to tie pricing to commodity prices. So I'd say we stick to our value-based pricing approach that served us well long term in the past and I think it will continue to do so. Operator: The next question comes from the line of Vlad Sergievskii with Barclays (LON:BARC). Vlad Sergievskii: Two questions please. First one, how do you see demand momentum for your battery electric machines offering developing in perhaps coming next few years? Any changes in the outlook here at all? And second one is more nuanced and related to the inventory position. Could you comment on how close do you think your inventory position to a level which you would consider optimal for this part of the cycle and maybe discuss if there are any differences in inventory positions across different business lines? Stefan Widing: If you take the second one. Start with the BEVs then in mining. I would say, so far this year, it's been a fairly muted, let's say, deal for orders in terms of the BEVs. We have not had any of the bigger fleet orders that we saw some last year. I would say the interest is still very high. The interest is there, but I would call it a little bit of a wait and see in the industry where there are a number of these larger fleet orders being delivered right now and I think the industry is a little bit waiting to see how that will go, how it will perform. We know we can prove performance on individual machines, on three four machines. Now it's the first time where you have more or less greenfield mines or large brownfield expansions that will go fully electric. And I think that's in a way the next proof point on the journey towards more scaled up, more fully scaled up electrified mines. So, yeah, a little bit of a plateau right now in terms of the demand picture. On the other hand, I want to say we set the target a few years ago that we thought around 50% will be electric or non-diesel by 2030 and that target we set before the significant uptick we saw in the past years. So in that sense, I think it may be the growth in the past two years that's sticking out a bit and we are maybe coming back to a more sensible sort of growth path here now. So that's where we are right now. If you take the inventories. Cecilia Felton: Yes, sure. So on the inventory side, we are still at elevated levels. Last year, from June onwards, sequentially, we started to be able to bring inventory levels down. Now in the first half of this year, the first half of this year, it's been largely flat, a small reduction in volume in the second quarter. I would say that, typically, during the first half of the year, we build inventory and particularly in the second quarter ahead of the summer period. In terms of the different business areas, I would say that SMM is at a good level where we have more work to do, particularly in the SMR business area, but also still in some divisions in in Rock Processing. And before, we've had an informal net working capital target or ambition of around 25%. And we will see inventory and net working capitals levels gradually start to come down. We will not reach the 25% this year. That work will continue into next year, but we should see a gradual improvement. Operator: The next question comes from the line of Ben Heelan with Bank of America (NYSE:BAC). Ben Heelan: I just wanted to ask one around your area of expertise. I just wanted to ask one around your aerospace exposure and we've seen a couple of warnings at some of the large OEMs and whether you'd seen any impact from that through the supply chain so far? And then, you've pointed to some weakness in automotive. Can you also help us understand just a little bit about how auto has been performing through Q2 and how you see that in the second half of the year? Stefan Widing: Aerospace, yeah, I've noted as well, there's been some - there are challenges in production ramp up, in particular, in some areas. We haven't really seen that in the momentum in our business, at least not so far. I think it's worth noting that it's still a very positive mid to long term demand picture in the forecast also from these OEMs. And this more relates to the next year or two and how they think they can ramp up their supply chain to manage and increase demand. So I think it's still fundamentally positive and it's more about how - what kind of growth momentum that we can see rather than I think risk of a decline. As I said, we did see timing of orders in the North America in Q2 Turning us negative, but we don't believe that has to do with underlying momentum. We tend to get larger orders, frame orders in this space and they can shift between quarters. So, yeah, I wouldn't call out any negative signs for us at this point in time, at least. On automotive, yeah, as mentioned, I think Europe was weak. It was down high-single-digits. and overall, if we look geographically, we see a weak Germany. We see weakness in the surrounding industrial regions as well. Northern Italy and also a bit into central Europe and automotive supply chain there. So, clearly, that is - there is an impact there. North America was a little bit better, but also down in the quarter, but China a little bit more positive than with some growth. If we look at the forecast going forward, I guess we can read the same reports. It points to decent demand picture, but auto production levels will be slightly down this year versus previous year and even more down if we take out China from the equation. So it is a bit of softness around auto right now, I think, IS the view we have. Operator: The next question comes from the line of Andreas Koski with BNP Paribas (OTC:BNPQY). Andreas Koski: Firstly, on aftermarket in SMR, it was very strong organic growth of 8%. And I think this should have been a record high quarter for aftermarket orders. So did you have any large orders or similar driving that or was it driven by the underlying business? Stefan Widing: I haven't looked at that specifically actually, but I think you're right that it was a record high if f I look at some of the numbers there. No specific larger things to call out. It is the drivers I mentioned earlier, high utilization of the equipment, older equipment, starting to gain benefits from a larger fleet on the surface. Those are the three things I would call out. Andreas Koski: And then on cutting tools, I don't know if you have done the exercise, but if I look at growth in Q2 last year, the cutting tools business grew, while in Q3 it was down mid-single-digit levels. So if daily sales rates are unchanged during the third quarter compared to the second quarter this year, I would guess that translates into quite solid growth year-over-year in the third quarter. Would you agree with that? Stefan Widing: I think you can do the math yourself. Because I don't want to guide further than what we have. We don't guide, so I cannot comment on that. But you can do the math if you assume stable demand, which, of course - and I want to emphasize that again, a stable start of the quarter does not mean it will not change throughout the quarter. But that's the data point we have at the moment. Andreas Koski: Lastly, I just want to better understand your comments about price increases and cost inflation and how that dilutes the margin year-over-year. Does it mean that cost inflation has now been stronger than your price increases over the past 12 months? And because of that, we see this dilution. And how long will this dilution continue? Is it for the next three quarters or how to think about that? Cecilia Felton: I would say that, of course, when we make the price increases, we take into consideration how we think the inflation will develop going forward. Last year, we had the impact from the normal price increases in the beginning of the year, but we also still carried with us some of the impact from the price increases, the extra price increases that we did in 2022. So that means that, in Q2 of last year, price was running a little bit ahead of the inflation. And we also mentioned on the call of the Q2 call last year that price versus inflation was accretive. This year, it offsets, but, year-over-year, then it's a dilutive impact. When we look at Q3, price versus inflation was also accretive last year for the same reasons, the same dynamics. And then, over time, this will gradually come down. And as Stefan said, it should be pretty much normalized beginning of next year. Stefan Widing: Another way of saying it in the words used here is that we were running ahead with price increases in Q1 last year, now inflation has caught up. So we believe we are now in balance, but we get a bridge effect that's dilutive. Operator: The next question comes from the line of Daniela Costa with Goldman Sachs (NYSE:GS). Daniela Costa: It relates to both the return on capital employed and the free cash flow conversion. I think if we look back at just before pandemic, you were running return on capital employed above 20%, cash conversion around 100%. We're now, obviously, seeing this at low teams and around 80% for the cash conversion. So how sort of do you plan to get - is it possible to get back to those levels? Or do you think the business has sort of structurally changed? What are the normalized figures that you view over the medium term for these metrics? Cecilia Felton: I would say if we start with ROCE, I think what's changed in particular are all the acquisitions that we made over the last few years, impacting, of course, building up goodwill in the balance sheet. Then on the BA level, when you look at returns, it's impacted by the net working capital build up. At a group level, that's largely offset by decreasing excess cash in the balance sheet. So the main driver is the acquisitions that we've been making over the last few years. Cash conversion, it tends to be over 100% in drastic downturns. Normally, we are between 80% to 90% over time. Daniela Costa: And just following up on the point on the acquisitions. I guess, over time, sort of you do expect to generate the returns from those acquisitions or do you think the business configuration changed and 20 plus in the medium term, is it possible? Cecilia Felton: Over time, yes, but in the first few years, it has a negative impact on ROCE. And we also said for - when we make acquisitions, we want a return higher than WACC at least five years out. But it means that there's a negative impact in the first few years when we make these acquisitions. Operator: [Operator Instructions]. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the conference back over to management for any closing remarks. Thank you. Louise Tjeder: Thank you. And thank you, Stefan and Cecilia. It seems that we are finished earlier than usual. Summer is calling. And indeed, we are looking forward to it. And before we say goodbye, we want to wish you all a good summer. And of course, thank you for calling in. Goodbye.

Earnings call: Telenor shows growth and digital security focus in Q2 By Investing.com

Telenor ASA (OTC:TELNY) (TEL.OL), the Norwegian multinational telecommunications company, has reported strong performance in the second quarter with significant growth in service revenue and EBITDA. The company has made considerable progress in its Nordic transformation efforts and has seen solid cash flows from its Asian subsidiaries. Despite the challenges like increased energy costs in Asia and competition in Scandinavia, Telenor remains committed to improving its digital security offerings and is exploring potential partnerships and structures in Asia, including a possible IPO. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights In conclusion, Telenor's second-quarter results demonstrate a strong performance with growth in key financial areas and a strategic focus on digital security and efficiency improvements. The company's Nordic transformation and achievements in Asia, along with a robust balance sheet, position it well for future growth. However, challenges such as competition in Scandinavia and the potential impact of regulatory changes in Norway will be closely monitored by Telenor as it navigates through the upcoming quarters. InvestingPro Insights As Telenor ASA (TEL.OL) continues to navigate the competitive telecommunications landscape and regulatory environments, the company's financial health and strategic moves are closely watched by investors. According to InvestingPro data, Telenor's market capitalization stands at a robust 15.86 billion USD. The company's commitment to shareholder returns is evident, as it boasts a significant dividend to shareholders and has maintained dividend payments for 15 consecutive years, a testament to its financial discipline and investor-friendly approach. This is further supported by the fact that Telenor has raised its dividend for 5 consecutive years, aligning with its positive outlook on service revenue growth. InvestingPro Tips highlight Telenor's low price volatility and status as a prominent player in the Diversified Telecommunication Services industry. Additionally, analysts predict the company will be profitable this year, with net income expected to grow, reflecting the company's solid fundamentals and potential for sustained earnings. InvestingPro's real-time metrics provide a deeper dive into the company's valuation and profitability. Telenor's P/E ratio is currently at 18.47, which may appeal to value-oriented investors seeking stable earnings. The company's revenue growth over the last twelve months as of Q2 2024 stands at 2.32%, indicating a steady upward trajectory. Moreover, the gross profit margin during the same period is a healthy 65.32%, showcasing the company's ability to maintain profitability amidst market fluctuations. For investors seeking more in-depth analysis and additional insights, InvestingPro offers a range of tips and metrics. By using the coupon code PRONEWS24, readers can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, providing access to an extensive list of 10 additional InvestingPro Tips for Telenor, which could further inform investment decisions. In summary, Telenor's consistent dividend payments, low price volatility, and solid growth prospects make it a noteworthy consideration for investors. With the added insights from InvestingPro, stakeholders can gain a comprehensive understanding of the company's financial health and strategic positioning. Full transcript - Telenor Asa Ord (TELNF) Q2 2024: Frank Maao: Good morning, and welcome to Telenor's Second Quarter Results Call. My name is Frank Maao, Head of Investor Relations. And with me today, I have Sigve Brekke, our CEO; and also acting CFO, Kasper Wold Kaarbo. As usual, within the presentation material today, all the references we make to growth rates are made on an organic like-for-like currency basis. So today, Sigve will give an update on how the Nordic transformation process is going and also give a few comments on progress in Asia. And after this, Kasper will go through our financials and outlook. Then Sigve will sum it all up and open up for questions. Now on an especially hectic earnings day with overlapping calls, we'll try to keep the session today a bit shorter and make sure everyone has a chance to ask their questions. So given this, we would really appreciate if you could limit yourself to one question today, please, restraining yourself through a clarification on the follow-ups. So Sigve, the floor is yours. Sigve Brekke: Thank you, Frank. And thanks for tuning in everyone. I'm pleased with the performance of the second quarter. We continue to deliver on our strategy. And this quarter's growth on topline, EBITDA end at NOK2.2 billion free cash flow, I see that as yet another proof point that our strategy works. In the Nordics, it is encouraging to see how the Nordic transformation is progressing in line with our ambitions. We are delivering yet another quarter with flat OpEx, and now the transformation program is approaching an inflection point, and I will come back to this in a few seconds. Cash flow in Asia is a key part of our strategy, both Grameenphone and CelcomDigi already have solid cash flows. But to reach our ambition, True in Thailand will be the key. I visited True a few weeks ago and meeting our colleagues there, I continue to be impressed by how far they have come since the merger last year. True has really been gaining traction with growth picking up as well as synergies being ahead of plan. In line with our strategy, and we have talked about it before, on focusing on near core services, and what we call on top of connectivity services, we continue to focus on strengthening our offerings and capabilities within digital security. By the products, we have developed both in the B2C segment and in the B2B, we have been able to build a leading market position across the Nordics on a growing security demand for our customers. This quarter, we successfully launched a new security offering to our customers in the business market in Norway. Hence, to further build on our capabilities and serve our business customers, we are also setting up a new cybersecurity company in our business area, Amp. Then coming back to the Nordics. As you know, June was marked by the tragic passing of Jørgen Rostrup, our leader of the Nordic business area. I miss him deeply. But in Jørgen's spirit, we continue to focus on business. And as I mentioned in the first quarter, we would, in this quarter, give an update on the Nordic transformation. So let me turn into that. I'm very pleased that Jon Omund Revhaug has taken a new top role acting as a new Head of Nordics. We have a strong pool of experienced and passionate employees and senior leaders in Telenor, and Jon Omund is one of them. His team together with the business units are planning and executing on, what I call, a fairly radical improvements in terms of customer benefits and operating efficiencies. We are driving this within the four functional areas you seen on this slide and also across the four Nordic operations. It's in within Network (LON:NETW) and IT, within Shared Services, in the Commercial area and when it comes to Working Capital. So let me now in this quarter, give a few examples and showing you some tangible results of what we have achieved so far. Starting with Network and IT. In this domain, we have an AI-first and cloud-first strategy. We are now migrating operations to the cloud, shutting down legacy platforms and systems and planning to scale up the use of generative AI. For this year, 2024, we have set an ambition to shut down 200 legacy systems. And so far, we have done 98 of them. We are also building a common Nordic platform within areas such as cloud enablement, analytics, and software-defined networks, SDX, which will provide the basis for use of AI and transformed customer experiences going forward. Regarding the Shared Services. We are off to a good start, but we have just started in this area. A new Shared Services hub in Portugal has been established, and we are now lifting transactional activities within finance, enterprise IT, and HR functions into a common Nordic organization. We have captured so far this year around NOK100 million in OpEx savings. And we have a full-year ambitions of almost NOK200 million for this year. We plan for this effect to ramp up significantly in the coming years. In the Commercial area, unified Nordic organizations have been set up and within TV, managed services and also large enterprise sales. This will be a key area for us both to capture cost efficiencies, but also to enhance the customer experience over time. And the fourth area on the Working Capital. As mentioned last quarter, we have a common program in place focused on improving capital tie-up. This program has already started to yield some results, and Kasper will come back to that later. So I will say we have taken a systematic approach to structuring and executing these initiatives, which will yield progressive benefits over the medium term and beyond. And as you can see from this illustration on the left-hand side of the slide, we have the road map of both short-term and long-term initiatives. The majority part of the impact in the beginning is coming from the four individual business units. But over time, more impact will also be generated from the common Nordic activities. The continued modernization and digitalization of the way we work have also led to FTE reductions, averaging 4% in the Nordics over the last eight years. And as an example, we reduced FTEs by 8% in Norway last year. Given the scope of the transformation efforts we now are currently doing, I expect that the level of workforce optimization in the years ahead will be at least on the level that we have seen historically. So when you take all this together, how will this affect our OpEx? Well, for several quarters now, we have been very clear on our ambition of having a stable OpEx for 2024 and then a reduction going into 2025. However, as I mentioned initially, we have now delivered yet another quarter with flat OpEx in the Nordics. And we see additional effects from the transformation will come in later this year. We do, therefore, expect now to see a slight reduction in OpEx that, that could be reached already within this year. Then moving to Asia. In the last quarterly report, True reported a continued pickup in growth and synergy realizations. We are even more confident now that we will receive payment of dividends from True in 2025. CelcomDigi is also well on track with synergy realization and the company recently announced that around 50% of the new integrated and modernized network has been completed. This is on plan. This being said, I see room for further financial improvements in Malaysia, especially on the revenue growth. And we also expect a transparent process for the dual 5G network structure, the Malaysian authorities have initiated. Moving to Bangladesh. In Grameenphone, we had, I would call a relatively slow start of the year. However, growth is now slowly picking up, and I do expect an improved performance into the second half of the year. Although the country was severely hit by extreme weather in the second quarter, Grameenphone added 2.3 million customers during the quarter. We also expect a closing of our Pakistan divestment towards the end of the year, although there is some uncertainty around the exact timing, which could also slide into 2025. And with this, I hand over to Kasper to take us through the financials. Kasper Kaarbo: Thank you, Sigve, and good morning, all. So we grew group service revenues by 4.5% and EBITDA by almost 4% in the second quarter. Group CapEx on sales was 15%, while we generated NOK2.2 billion in free cash flow, adding up to NOK5.5 billion year-to-date before M&A. I'm happy that we once again are able to report a set of numbers that supports our medium-term ambitions. Let's take a closer look at how we are performing at the group level. In Q2, service revenue growth was quite in line with the trend from recent quarters. Nordics is the main driver of growth due to size, but Asia also contributes with more than 6% growth. Then let's take a look at group operating expenses. OpEx was up 3.7% year-over-year on the back of continued energy cost increases in Asia, which reached 25% this quarter. Higher energy tariffs in Pakistan continues to be the main issue. We saw a broad-based increase in sales and marketing expenses after a bit of a light first quarter. On an overall region level, Nordics continued to deliver on flat OpEx, which they also did in Q1. The mentioned increase in sales and marketing expenses were offset by continued strong performance on the operations and maintenance side due to our operational efficiency and technology agenda. Moving to group EBITDA. We continue to see Nordics being the main contributor with 4% organic growth. Asia's EBITDA growth was held back by inflation, particularly in Pakistan as well as growth costs this quarter, while infrastructure was stable. The soft trend in Amp continues, causing a 0.8 percentage points drag on the group level. Amp is facing gross margin headwinds and growth cost in several business units. While we expect a similar EBITDA in Amp in the second half of the year compared to the first, I expect a relative drag on the group growth to diminish over the next few quarters. Lastly, we see that other and eliminations had an unusually large contribution this quarter. This is mainly explained by increased revenues coming from Telenor Procurement Company now also providing service to CelcomDigi and True. This sums up to an overall growth of 3.8% for the group. Stooping further in on the Nordics, where we see solid topline performance across all business units. The growth of 3.7% was mainly driven by consumer mobile and ARPU growth coming from our more for more price increase execution. G&A was again the main contributor to the topline growth, delivering another strong quarter and mobile service revenue growth of 10%. In general, we see that the small enterprise segment as a contributor to the growth within B2B. However, we see increasing competition within the large enterprise and public segment in Scandinavia, with some ARPU erosion in the quarter. That being said, as we heard Sigve mentioning, we are establishing a common Nordic B2B product efforts and sales organization. This will strengthen our resource pool and ensure that we are commercially set up to meet the demand of large enterprises. All this led to an EBITDA growth of 4% this quarter. As you can see, the strong topline results in D&A trickles through to EBITDA, given modest cost growth and fueling an EBITDA growth of 9%. In addition, Denmark posted 10% growth. However, note that this was largely due to improved gross margin following the lower handset sales and somewhat lower energy costs. Then a few words on Asia. Overall, we continue to see progress on growth in Asia as well as on the synergy realization in the two associated companies that are a result of two large mergers in 2022 and 2023. We continue to see headwinds from energy subsegments in Grameenphone and Telenor Pakistan, in line with what we talked about in previous calls this year. Inflation remains an issue in these markets. Grameenphone grew its customer base nicely in Q2. The performance was held back by energy outages relating to the cyclone Remal and increased supplementary duty. EBITDA grew only by 1.5% due to a bit of a catch-up effect on cost inflation in Pakistan, following two years of high price growth in the country. In Bangladesh, full effect of lower energy subsidies in Q1 and increased costs relating to the solid supply growth of 2.3 million weighted on EBITDA. As to our associated companies, which we report with one quarter lag, we were quite pleased with True, which saw continued strong effects from its synergy and integration efforts as well as a nice return to topline growth in Q1. With EBITDA growth of 21%, I see True as well placed to deliver on this ambitious full-year and medium-term goals. For CelcomDigi, the dividend continues to be paid on a quarterly basis. As for performance, we expect the company to work actively on revenue growth and get improving net benefits of the synergies post integration costs going forward. Next, let me highlight the most notable items affecting the profit and loss statement as well as our balance sheet and cash flows. Looking at the P&L, we have a quite clean quarter with only a few items to comment on. The EBITDA before other income and expenses landed at NOK8.8 billion in Q2. On the net financial income and expense line, we have a loss of NOK0.4 billion this quarter. This was positively impacted by a change in the fair value of the funding arrangement related to the indirect part of our investment in True Corporation, which had a strong share price development in the quarter. For the same reason, we saw an impairment on the second quarter last year, which was also affected by interest costs related to the legal disputes in Bangladesh. Earnings per share came in at NOK1.83 this quarter, which is more than 3x higher than for the comparable period last year when EPS was unusually low. With our Nordic transformation and synergy benefits in our Asian associates, set to have significant effect over time, we continue working to improve also this metric going forward. We generated free cash flow of NOK5.5 billion in the first half of the year, roughly NOK2.2 billion in the second quarter. Although we will still see variations between quarters also going forward, we continue to work to obtain a more balanced cash flow profile through the year. As we talked about last time, we have seasonally higher interest payments in Q2 and Q4 and lower in the two other quarters. On the working capital side, we saw a NOK0.8 billion improvement in the quarter with around 1/4 of this coming from third-party handset financing and some net structural improvements. But the majority is other timing effects with some major payments happening in July rather than June. We also saw later unusual CapEx payments where there was a similar phasing into Q3. Of course, it's hard to know precisely how much, as interior, there could be similar effects towards the end of Q3. On spectrum, we paid NOK0.5 billion in Pakistan, and some smaller payments in Bangladesh and Denmark. There was a minority leakage of NOK0.7 billion in Bangladesh as we repatriated about 50% of the 2023 net profits as dividends in Q2. Note that for Q3, Grameenphone has declared interim dividend of close to 100% of its net profit for the first half of 2024. This will cause our total cash outflow of NOK1 billion in the third quarter. This sums up to the total of NOK2.2 billion in free cash flow. The balance sheet of the group remains strong with NOK83 billion in net interest-bearing debt and a net leverage ratio of 2.3x. Leverage was impacted by the payment of NOK6.9 billion in dividend and the completion of the 2023 share buyback program, where we bought back the government's portion amounting to NOK1.9 billion and canceled 31 million shares. On the other hand, we saw a favorable FX impact of NOK2.3 billion on the net debt due to the NOK strengthening quarter-over-quarter and the NOK2.2 billion free cash flow generation we talked about. As always, macro FX and seasonality factors can lead to a net leverage fluctuations between quarters, including to a level above the leverage range as happened in Q2 last year. This brings us to the financial outlook. After a solid first half, we remained confident in our overall outlook. Based on service revenue growth of 4.5% for the full period, we slightly raised our 2024 service revenue outlook to low to mid-single-digit growth from low single digits previously. This being said, we do expect the continued tapering of service revenue growth in the Nordics with lower year-over-year numbers in the second half as we meet tougher comparables. We reconfirm the other elements of the 2024 outlook as well as the midterm financial ambition that we provided at the Capital Markets Day almost two years back. We continue to expect mid-single-digit EBITDA growth for the group despite continued headwinds in Amp as we expect performance in Grameenphone to improve in the second half. On free cash flow, we reiterate the NOK9 billion to NOK10 billion target. This despite the announced interim dividends in Grameenphone that I mentioned earlier. We repatriate dividends early, leading to a near NOK1 billion minority leakage that we did not have last year and which was not in the original outlook assumptions. With that, I hand over back to you, Sigve, for some concluding remarks. Sigve Brekke: Yes. Thank you, Kasper. And I would just like to conclude with saying three things: First, we continue to deliver constantly in line with our strategy, and our operational and financial performance is the proof point that our strategy really works. And based on this, we also continue to deliver on both our growth ambition and the ambition of increased cash flow. Second, despite changes in management, the whole organization is systematically working to deliver on our strategy and to meet our financial targets. This is also backed by our Board of Directors. And thirdly, we have over the nine last years, worked successfully on transforming Telenor for the future. I think it's fair to say that we have a solid track record for CapEx discipline and OpEx reduction. And the ongoing Nordic transformation is another proof point of our focused approach and execution capabilities. This is now also coupled with a continued topline growth in the Nordics, which is a solid foundation for a stronger company with a better customer experiences and services and a significant leaner cost structure. So with that Kasper, I think we are ready for questions. So operator, please let in the first question. Operator: Sure, thank you. [Operator Instructions] We will take the first question from line Andrew Lee from Goldman Sachs (NYSE:GS). The line is open now. Please go ahead. Andrew Lee: Good morning everyone and just wanted to offer our condolences for Jørgen. He's really respected by all of the financial community, so I just wanted to send our condolences to all of you at Telenor. I had a question and a follow-up. Just a question, Sigve, on your comments towards the end there that you continue to execute on the strategy of the company and, obviously, that's borne fruit in results today. But one key question remains around where you go with your Asian ownership. And you've obviously talked about looking to find partners and to do different things in terms of your ownership structure there. I wonder if that's still an ambition that you could shift that ownership position within 2024. And just as a follow-up question. Obviously, you've adjusted your free cash flow guidance this year, still the same range, but you've included a Bangladeshi cash outflow within that. Given consensus still clearly doesn't buy into the NOK13 billion free cash flow guide for 2025, are there any other kind of one-offs or puts and takes in terms of risk factors to that free cash flow that the market should be aware of similar to Bangladeshi cash repatriation? Thank you. Sigve Brekke: Yes. Let me start with thanking you for your concern and condolences. He will be dearly missed, Jørgen, as a friend and a colleague. Let me try to address the first one, and then you can take the cash flow question, Kasper. Well, we think we - our main focus in Asia now is to deliver on the synergy ambitions we have in Malaysia and in Thailand, and then to finalize the exit in Pakistan. In addition, as I said, to play in the data growth we see in Bangladesh. So that is what we are focusing on now. But as we also talked about, we are also looking for structures in Asia, which can increase our optionalities going forward. So we continue to have dialogues with potential partners that we can combine our assets together with. We are also looking at the potential of bringing in partners to what we have ourselves. And this could potentially lead into an IPO in Asia going forward to increase optionality for us in years to come. So that is not stopping up, and I'm spending quite a significant time on that myself. But as you know, this takes time to figure out what is the right value creation for us. So I don't have any more updates on that, but you would be the first one to know when we have something more concrete. Kasper Kaarbo: Yes. Thanks, Sigve. And as to the cash flow, so you're right, we are maintaining the cash flow outlook for the year despite this NOK1 billion additional leakage due to minorities in Bangladesh. Seeing the NOK5.5 billion we have now year-to-date in cash flow, we are obviously much more comfortable with the outlook for the year. And we believe we have sufficient momentum to reach that full-year target. But also in 2025, I think we have a fairly good line of sight into the ambition of having a dividend coverage in 2025. It's really three key elements to that. It's the CapEx ambition that we have been very explicit about on reducing the Nordic CapEx by NOK2 billion into next year, is really about maintaining the momentum that we see in the Nordics, both on topline, but also with the transformation effects that Sigve talked about, but also continued EBITDA growth in the Asian entities. And then as also Sigve mentioned, we have the dividends coming from True, which will be another important element into the 2025 cash flow. Andrew Lee: Thank you. Operator: Thank you. We will take the next question from line Siyi He from Citi. The line is open now. Please go ahead. Siyi He: Hi. Thank you for taking my questions. My question is really focused on Norway. I think at the beginning of this year, you indicated that when we look at Norway, we should expect more nuanced growth especially coming to EBITDA. But I think year-to-date, you do show like 2% to 3% EBITDA growth for the first half. I just wonder if you can elaborate why Norway is performing better? And do you expect this kind of performance to continue for the rest of this year? And also, I wanted - just a small follow-up on the free cash flow guidance. I think the free cash flow guidance in Q1 results, you mentioned that you expect that to compensate the NOK500 million outflows in Pakistan spectrum, but which could actually recoup whilst you sell the business. But now with you - with potentially the Pakistan sales could move to first half of 2025, I was just wondering how should we think about the impact on your free cash flow guidance, this NOK500 million? Thank you. Sigve Brekke: I think we do the same. I'll take the first one and you take the cash flow. I'm very pleased with the performance in our Norwegian business units. They are doing exactly what we plan to do when the year started, which is twofold. One is to continue to grow revenue on the more-for-more concept. We really now see that not only we are differentiating ourselves on the network quality, we also do it when it comes to security. And we have built up a position here where we can play on both to strength. And that's why we are then moving prices up, but at the same time, giving customers more and we did that in the second quarter as well, both in the main brand, but also in Talkmore, which is the more price-sensitive market that we have. At the same time, we are transforming the business. And that's why you see that we continue to take out costs. So that's a combination of those two things that you will now see into the first quarter, second quarter, and I expect to continue in the quarters to come. Kasper Kaarbo: Good. Then the cash flow question. So if I understood correctly, the question was about the impact from Pakistan into the target for full-year. So as we have said before, the cash flow contribution from Pakistan is included in the 2024 guidance. So that's part of the NOK9 billion to NOK10 billion that we have indicated. For 2025, as I think, I also said before, the contribution from Pakistan is fairly limited. So the closing of the transaction will not make a lot of difference due to what we have communicated previously in terms of the 2025 cash flow. Sigve Brekke: Okay. Please, next one. Operator: Thank you. We will take the next question from line Nick Lyall from Bernstein. The line is open now. Please go ahead. Nick Lyall: Good morning, everybody. Just again on the cash flow if possible, Sigve. I'm surprised you've not raised the cash flow guidance for the full-year. You've done - I mean your guidance at the moment implies about NOK4 billion for the second half versus NOK9 billion last year. And I understand the point about the Bangladesh dividend, but at the same time, that's quite a big gap. So could you help us a little bit with the effects on things like timing with tax, working cap and the CapEx into third and fourth quarter just to explain that big gap to last year, please? Thank you. Kasper Kaarbo: Okay. Thank you, Sigve. Yes. So let me point to some elements. So I mean, as we said, we have already seen NOK5.5 billion in the first half of this year. And that is significantly up from the same period last year. And as both, me and Sigve, said, we have been fairly focused on this year having a more balanced profile of the cash flow during the year. So that's one important element. And then I also mentioned some of the timing effects on both CapEx and working capital. We see fairly significant effect of that in the first half. We believe that will be phased into the second half, both in terms of working capital and also CapEx being more heavy in the second half than the first half. And then, there are some smaller also items both on lease payments and tax payments more at the back end of the year compared to the first half. Sigve Brekke: Let me just add one comment to what Kasper said. I appreciate all the cash flow questions here because that is exactly what we are focusing on with our business units as well. Cash flow is what we want to have back from Asia and cash flow is what we are asking our Nordic business units to do as well. So the focus in the company has really shifted from revenue, EBITDA down to the cash flow part in the P&L. So it's good that, that is realized. Nick Lyall: Sorry to push you on the numbers, if possible. I think you mentioned about NOK0.5 billion of CapEx timing, I think, into Q3 possibly, if I've not misunderstood that. We've got NOK1 billion from the Bangladesh. What's the effect on tax and working cap as well for the second half? Because it looks like tax was very low for second quarter and also you've mentioned in working capital also. Could you maybe give us a little bit of an idea of the size of those numbers, please? Kasper Kaarbo: Yes, so maybe just to add a bit on the CapEx part. So what I said was that there is some timing effects from the first half that will go into Q3, but also the fact that we are still maintaining the 17% capital sales in Nordics, means that it will be more CapEx booked and paid already also in second half in addition to some of these time effects, as mentioned for the first half. So that's also an important element, which will weight on the cash flow in the second half. I won't put any, call it, precise numbers to the tax and lease payments, but what I can say is that there will be slightly more of these payments in the second half than the first half. Nick Lyall: Okay. Thanks very much. Operator: Thank you. We will take the next question from line Jakob Bluestone from BNP Exane Paribas. The line is open now. Please go ahead. Jakob Bluestone: Hi. Thanks for taking the question. I had a question on your Nordic guidance. You raised your revenue guidance from low-single digit to low to mid single-digit and you also said during the call that you expect OpEx to be down this year versus your previous expectation of flat. So my question is, why didn't you change the EBITDA guidance for the Nordic business? Thank you. Kasper Kaarbo: What we said on the Nordics is that on the EBITDA, we maintain the mid single-digit guidance. So that's still what we believe is the outcome. We'll probably be more precise in that later in the year. But I mean, given also the trends that we see on revenues, as I said, coming slightly down in the second half, but then supported by the OpEx effects that we talked about. We are even more comfortable now with that mid single-digit range on the EBITDA. Jakob Bluestone: Is it fair to say your growth maybe at the low end and mid to the high end, is that kind of the way to think about it? Kasper Kaarbo: Sorry, I didn't get that. Jakob Bluestone: So I mean, just mechanically, the fact that you haven't changed the guidance, does that just mean that you were kind of bottom end of mid-single digit and you've kind of moved out? Is that the way to interpret it? Kasper Kaarbo: Yes. I won't guide within the range. I think that's the mid single-digit range is where we will see the outcome and then we'll just have to come back later in the year with a more precise aspect on that. Jakob Bluestone: Okay. Fair enough. Operator: Thank you. We will take the next question from line Ajay Soni from JPMorgan (NYSE:JPM). The line is open now. Please go ahead. Ajay Soni: Hi there. Thanks for taking the question. I just had a quick one on the Nordics and specifically Norway. So obviously, outside Norway, I think we're seeing pretty good trends, pretty stable, I think. Within Norway, there is maybe a slight slowdown in the service revenue and EBITDA growth in Q2. And they both been kind of accelerating nicely over the last year. So what drove this maybe change in momentum in Q2? And should we expect these growth rates to kind of maintain at this level within Norway specifically? Thank you. Sigve Brekke: Yes, I think I can address that one. There, most of the change in the Q2 versus the quarters is driven by IoT revenues. So if you look at the mobile revenues as such, we had a very healthy ARPU growth in the main brand. We also are quite happy with how our Talkmore companies are doing in the lower brand. So I don't see any change in competition landscape here. It is quite competitive in the enterprise segment, SME. We are also doing quite well with ARPU growth. But other than that, I don't see that is changing a lot. And a 6% ARPU growth in the mobile, I think, we are very pleased by that. So it's mainly explained actually with IoT revenues that changed during the quarter. Ajay Soni: Yes, that makes sense. And then just on that mobile, I think previously, you've mentioned you're doing a forced migration to unlimited and you've obviously talked about security quite a lot. So how has that forced migration - how is that forced migration going? Because I think previously, you said there's been a pretty benign impact on your churn, so do you continue to see those trends in Q2? Sigve Brekke: Yes, we did acquire large forced migration in Q2. I think we migrated 800,000 customers in that range. That went even better than what we planned for. So we see again that our customers are appreciating the security and the network position we have in the market. We also did some price increases in our low end segment in the Talkmore segment, and which is also appreciated by our customers. But of course, in the price-sensitive segment, there is a competition, has been, is, and will be. So we need to stay competitive there as well. Ajay Soni: Thank you very much. Operator: Thank you. We will take next question from line Usman Ghazi from Berenberg. The line is open now. Please go ahead. Usman Ghazi: Well, thank you very much for the opportunity. I just wanted to ask with regards to the two pieces of potentially regulatory upside for you in Norway. One related to the regulation of computing fiber networks. And then the second one on the kind of equalization of lease charges on the towers. I was just wondering if you're in a position to perhaps give an update on what's happening there and then the financial upside, what timeframe would you expect this to materialize? Thank you. Sigve Brekke: Yes. On the tower - the change in tower charging, I don't have any upside, and that is going to happen. And as I've said before, I don't really know how that is playing out. It's either playing out that we can start charging higher rental prices when people are using our towers or that we will be charged lower when we are using others. So either way, it's going to be positive for us, but the financial impact of that, I don't know. On the fiber side, that regulation is also ongoing. It may slip into the first quarter next year. I think the original timeline was end of this year, but it could take some more month. And now we are looking at what does that really mean when it comes to could it reduce overbuilt out in more remote areas and also what is the opportunity for us then to sell our products and other's fiber. But we don't have any financial impact on that. We are preparing ourselves for what it really means. Usman Ghazi: All right. Thank you. Operator: Thank you. It appears no further questions at this time. I'll hand it back over to your host for closing remarks. Sigve Brekke: And thanks to all of you for listening in and also for good questions. Thank you. Operator: Thank you for joining today's call. You may now disconnect.