Cadence Design Systems Q1 2025 Earnings Call Transcript

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Operator

Good afternoon. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence First Quarter twenty twenty five 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

Thank you. I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead.

Richard Gu
Richard Gu
Vice President, Investor Relations at Cadence Design Systems

Thank you, operator. I would like to welcome everyone to our first quarter of twenty twenty five earnings conference call. I'm joined today by Anir 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.

Richard Gu
Richard Gu
Vice President, Investor Relations at Cadence Design Systems

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 ks 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, all financial measures discussed on this call are non GAAP unless otherwise specified. The non GAAP measures should not be considered in isolation from or as a substitute for GAAP results.

Richard Gu
Richard Gu
Vice President, Investor Relations at Cadence Design Systems

Reconciliations of GAAP to non GAAP measures are included in today's earnings release. For the Q and A session today, we would ask that you observe a limit of one question only. If time permits, you can re queue with additional questions. Now I'll turn the call over to Anirud.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that Cadence delivered excellent results for the first quarter of twenty twenty five, with robust ongoing customer demand for innovative technologies. We exceeded our guidance on all key financial metrics, achieving 23% year over year revenue growth and 34% increase in non GAAP EPS. Given this outperformance and the continued strength of our business, we are raising our financial outlook for the year.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

John will provide more details in a moment. Before diving in, I would like to share my perspective on the prevailing macroeconomic uncertainty. Semiconductors remain foundational to realizing transformative technologies such as hyperscale computing, five gs, and autonomous systems, all fueled by the AI megatrend. We haven't seen any shifts in customer behavior at this time as they continue investing in their next generation designs, recognizing that today's r and d efforts are critical to deliver their groundbreaking products of tomorrow. Additionally, our ratable software business model, strong q and exit backlog, and a predominantly recurring revenue mix provide resilience and excellent visibility.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Customers are increasingly relying on our product. As we execute our intelligent system design strategy and expand our differentiated end to end portfolio to serve a growing and diversified customer base. As the fast evolving AI landscape expands the market opportunities and reshapes the entire chip and system development process, our Cadence AI portfolio delivers unparalleled PPA, productivity, and time to market benefits. At GTC, we announced an expanded partnership with NVIDIA on their latest Grace Blackwell architecture. In addition to enabling up to an 80 x acceleration of cadence solvers, we are collaborating on developing a full stack agentic AI solution for engineering and science using the new LAMA Neutron reasoning model.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

We are also one of the first adopters of NVIDIA Omniverse Blueprint for AI factory digital twins, advancing data center design and operational efficiency. In q one, we expanded our footprint at several top tier customers and furthered our relationship with key ecosystem partners. Last quarter, we announced a collaboration with Rapidas on two nanometer IP development. And this quarter, we are pleased to share that Rapidas has made a wide ranging commitment to our core EDA software portfolio across digital, custom analog, and verification solutions. In q one, we deepened our partnership with Socionext through a broad expansion of our EDS software, particularly AI driven digital solutions along with our system software.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

We furthered our partnership with the Marquee hyperscaler through a broad proliferation of our digital and verification software, particularly our AI driven Cadence Cerebras and Vericium solutions. We expanded our collaboration with Intel Foundry by officially joining the Intel Foundry Accelerator Design Services Alliance. From systems on chip to advanced IP for AI and HPC applications, Cadence's inclusion in the alliance helps Intel foundry customer remain at the forefront of innovation. Now let's talk about key product highlights for q one. Our IP business grew 40% year over year in q one as we continue to benefit from the strong market opportunities offered by AI, chiplet based architectures, and the foundry ecosystem build out.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

We secured a major expansion at a global marquee system company for our AI HPC design IP and deepened our partnership with a major foundry through their commitment to our memory and interface IP. Following our pending acquisition of Secure IC last quarter, we continue to build out our design IP portfolio and earlier this month, we entered into a definite agreement to acquire Arms Artisan Foundation IP business. At Tensilica DSP is the de facto choice for automotive ADAS and infotainment systems and continued being widely integrated into vision, radar, lidar, and audio systems for the autonomous driving as well as emerging robotics use cases. Our core EDA revenue grew 16% year over year in q one with further proliferation of our digital full flow at the most advanced nodes. Cadence Cerberus AI solution continued its strong momentum with nearly 50 new logos in q one and well over thousand tape outs till date.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Engineering change orders or ECOs are critical part of any design process. AI is particularly suitable to dramatically improve ECOs. Using the new Cadence Conformal AI ECO flows, MediaTek saw early positive results, generating 83% smaller ECO patches in nearly half the run time. MediaTek also improved run time and memory by hundred x through its deployment of conformal AI low power. Our collection of new smart ECO technologies has spread up Renesas' automated functional ECO run times by more than 50% while improving quality.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Our flagship Virtuoso platform, the industry's gold standard for advanced node, custom, analog and mixed signal design continue to expand into new areas such as photonics and circuit and yield optimization. Ever increasing complexities in system verification and software bring up continue to drive secular demand for our market leading Palladium Z3 and Protium X3 platforms. Demand for hardware was broad based with particular strength driven by AI, HPC and hyperscaler customers. Our hardware products continue to proliferate at existing customers, especially top hyperscalers, while gaining notable competitive wins, including a market shaping semiconductor company. Our verification software suite that includes Vericium, Accellium, and Jasper leverages big data and AI to optimize verification workloads and saw continued expansion across aerospace and defense, electronics, and automotive segments.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Our system design and analysis business delivered more than 50% year over year revenue growth in Q1. As our AI driven optimization solutions integrated with our physics based simulation platforms continue to deliver superior results across multiple end markets. Our digital twin reality data center product gained momentum, signing multiple deals with large hyperscaler and cloud service providers in q one. Beta CAE delivered a strong quarter and is opening up tremendous opportunities for us in the automotive vertical. Allegro X's omnibus integration was highlighted at GTC with photorealistic three d views of a full multi board system designed in Allegro X.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Our AI driven substrate router, the industry's premier solution for full package routing of complex three d IC designs, saw strong customer interest and engagement during the early adopter program. In summary, I'm pleased with our Q1 results and the continued momentum of our business. The growing complexity of chip and system design coupled with the transformative potential of AI driven automation creates significant opportunities for our product to enable and empower our customers. In addition to our strong business results, I'm proud of our high performance inclusive culture and thrilled that Cadence was recently named by Fortune and Great Place to Work yet again as one of the hundred best companies to work for, ranking number 11. Now I will turn it over to John to provide more details on the Q1 results and our updated 2025 outlook.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Thanks, Anarud, and good afternoon, everyone. I'm pleased to report that Cadence delivered excellent results for the first quarter of twenty twenty five with broad based strength across all of our businesses. Robust design activity and customer demand drove 23% year over year revenue growth and 42% non GAAP operating margin for Q1. And we are tracking ahead of our original forecast for 2025. We repurchased more Cadence shares than initially planned in Q1, which reduced our share count.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Here are some of the financial highlights from the first quarter starting with the P and L. Total revenue was $1,242,000,000 dollars GAAP operating margin was 29.1% and non GAAP operating margin was 41.7%. And GAAP EPS was $1 with non GAAP EPS $1.57 Next turning to the balance sheet and cash flow. Cash balance at quarter end was $2,778,000,000 while the principal value of debt outstanding was $2,500,000,000 Operating cash flow was $487,000,000 DSOs were forty four days and we used $350,000,000 to repurchase Cadence shares. Before I provide our updated outlook, I'd like to share the assumption that is embedded.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

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 2025 is revenue in the range of $5.15 to $5,230,000,000 GAAP operating margin in the range of 30.25% to 31.25% non GAAP operating margin in the range of 43.25% to 44.25%, GAAP EPS in the range of $4.21 to $4.31 non GAAP EPS in the range of $6.73 to $6.83 operating cash flow in the range of $1,600,000,000 to $1,700,000,000 and we expect to use at least 50% of our annual free cash flow to repurchase Cadence shares. With that in mind, for Q2, we expect revenue in the range of $1,250,000,000 to $1,270,000,000 GAAP operating margin in the range of 27.5% to 28.5% non GAAP operating margin in the range of 41.5% to 42.5% GAAP EPS in the range of $0.89 to $0.95 and non GAAP EPS in the range of $1.55 to $1.61 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, Cadence is off to a strong start to the year.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

We are raising our 2025 revenue and EPS outlook. Our technology platform is essential to customers' R and D investment and our resilient software model positions us well in navigating today's dynamic macro environment. 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

Your first question comes from Harlan Sur with JPMorgan. Please go ahead.

Harlan Sur
Executive Director - Equity Research at JP Morgan Chase & Co

Good afternoon. Thank you for taking my question. Good to see the strong mid teens percentage year over year growth in the core EDA business. On your China business in particular, the team did continue to see year over year growth acceleration, right, to plus 13% in the March versus 10%, back in the December. On top of this, you know, tariff, trade, regulatory dynamics are, I think, driving more focus on domestic China chip design programs, especially in AI.

Harlan Sur
Executive Director - Equity Research at JP Morgan Chase & Co

Like, we've heard, for example, ByteDance engaging on new custom AI chip programs. We've heard Alibaba as well in automotive. You know, there continues to be more domestic China design programs firing both analog, power management, and digital. So is this domestic focus and design activity a potential tailwind for your China business? Are you getting more optimistic on a growth profile for your China business this year versus the team's prior view of flattish?

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Hey, Arlen. Great question. So first, I would like to say I'm pretty pleased by our performance in q one and the strength is coming in all the various product groups and also all the various geographies like you mentioned. And and the reason is, you know, even in this kind of dynamic macro environment, you know, the customers are investing for the future and these, you know, r and d investment takes months to years. And as you know, we are tied to the design activity, which is strong.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Now in in in China or actually in multiple countries, the the AI development is taking multiple, you know, cycles. I mean, not just as you know, just the development of data centers, but, you know, I've said for for a while now that also the development of of physical AI systems, which is autos and and, you know, robots and drones. And, you know, China is particularly strong in that as well. So overall, I think we are pleased with the with the silicon and system development driven for AI. I'm pleased with the performance of the China business and the start of the year, but we're still prudent assuming China flat for the whole year.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

John, you want to comment on that?

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

No, I think that's the important point. Design activity remains strong in China, but we're continuing to be prudent with the guide for the year and continue to assume that China revenue is flat year over year at the midpoint of that guidance.

Harlan Sur
Executive Director - Equity Research at JP Morgan Chase & Co

Thank you very much.

Operator

Next question comes from Lee Simpson with Morgan Stanley. Please go ahead.

Lee Simpson
Lee Simpson
Analyst at Morgan Stanley

Great. Thanks for putting me in and great quarter to everyone. Thanks. I mean, as we all know, your main offering is a software and services product, which may not have the same risk from reciprocal tariffing regimes that other parts of semiconductor ecosystem does. And I think if you look at your hardware chip, it's it's an ASIC fab at TSMC.

Lee Simpson
Lee Simpson
Analyst at Morgan Stanley

So I guess one assumes this is only limited exposure to tariffing into China. And I guess what I'm asking more generally is, you confirm if at all at this point where you think you do have any exposure to the tariffing regime announced by The U. S. Government, at least as you currently understand things? Thanks.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Yes. So with respect to tariffs, I mean, are two parts to it. Like, one is the customer behavior, which I mentioned we don't see any change at this time. The second is in our own product. And like you said correctly, you know, software and services are not, you know, subject to tariffs.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Now in terms of our hardware business, just to remind everyone, we do have multiple manufacturing lines in US and outside US and this was something we did at as part of COVID few years ago. So that's paying off well. So so at this point, we don't believe that, you know, given our diversified supply chain, the tariffs will have effect on our hardware business as well. Okay. Now on the other hand, we continue to monitor the situation, you know, as a dynamic situation.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

But I feel that we are more resilient for multiple reasons. One is one is that, you know, we are tied to the design cycle. We don't see that much change. Second is we are very diversified both in terms of products and geographies. And third, we have a, you know, our business model.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

It's a ratable business model. So even in this uncertain times, we feel that we have enough, you know, confident and visibility to to raise our outlook for 2025.

Lee Simpson
Lee Simpson
Analyst at Morgan Stanley

That's great. Thanks.

Operator

Your next question comes from the line of Gary Mobley with Loop Capital. Please go ahead.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Gary, you might be on mute.

Gary Mobley
Managing Director & Senior Equity Analyst at Loop Capital

Yep. Sorry, guys. Thanks for taking my question. This question might be more for Anirud. And, you know, the question is, you know, is more and more tools that you sell like simulation synthesis, place and route, etcetera, on generation based compute and run on GPU based servers.

Gary Mobley
Managing Director & Senior Equity Analyst at Loop Capital

How does this impact your licensing model? And more specifically, how does it, you know, potentially affect your annual contract value?

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Okay. That's a good question. I think you mean that as we as we enrich our hardware the the hardware that our software runs on, how does it affect our business model? So I think, first of all, you know, I've talked about this three layer cake for a while. Right?

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

It's the bottom leg bottom layer of the cake being tax rate compute. So in the old days, we used to run on CPUs, mostly x 86 CPUs. But now we run on all kinds of CPUs including ARM. And then, you know, GPUs, especially with our collaboration, you know, very strong collaboration with NVIDIA. And then, you know, for hardware, we have our own kind of boolean processor.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Because GPUs are excellent for numerical calculation, you know, like, circuit simulation or or CFD or electromagnetics. But for zero one kind of boolean calculation, you know, we make a special chip in palladium, right, which is a boolean supercomputer. So as a reason, we have a very rich kind of set of offerings of the hardware side. Now on this or how we go to market, you know, we maintain our previous, you know, model in which, you know, you you know, you can subscribe to our, you know, like, the traditional licensing model, which is typically yearly license over three year term. But also, we are offering more and more cloud solutions.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Okay? And there is a uptake in cloud offering. Now sometimes the cloud could be on on public clouds, so then, you know, the access to CPUs, you know, just like AWS has ARM CPUs and other cloud vendors and also GPUs. But we also have our own cloud offering to outsource data centers which are actually seeing good availability. So in our own cadence all the cloud, we also are packaging hardware and software together.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

You know, good example is Millennium, you know, just like we do with Palladium for our own chips. So I think this is a new kind of a business model to see how the customers will react. So we have the existing business model of software only, and then this cloud SaaS model especially as the hardware gets more rich in its offering.

Gary Mobley
Managing Director & Senior Equity Analyst at Loop Capital

Thank you.

Operator

Your next question comes from Vivek Arya with Bank of America. Please go ahead.

Vivek Arya
Vivek Arya
Managing Director at Bank of America

Tools. And, Anilud, I wanted to check what is share gain opportunity because when I look at your main peer, they have double digit sales exposure at Intel. And I'm curious, what is Cadence's exposure? You know, how soon can we start to see any potential share gains? Because, you know, these kind of relationships tend to be sticky.

Vivek Arya
Vivek Arya
Managing Director at Bank of America

Just how large is the opportunity and how soon can it start to show up tangibly for Cadence? Thank you.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

By the way, great question. I think your question is on Intel because I missed the beginning part of the question. But first of all, you know, I'm very pleased by Libbu's appointment as as CEO of Intel. And, you know, for Cadence, you know you know for a while, I think our you know, Intel has been a, I would say, you know, a weak spot relatively speaking for for Cadence. And this goes back, you know, ten, fifteen years.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

It's not an it's a new issue. And then the other thing has been, you know, our investment in IP. So in general, I'm pleased with the so both of these two areas has been the main kind of areas to improve for Cadence, IP and Intel. So IP, I think I'm pleased to see improvement last year and also in q one, and I feel good about our IP business in general. And on Intel, I mean, this is a great opportunity as they have to, of course, reformulate their strategy and how they work with, you know, their ecosystem partners.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And and we look forward to engaging with Intel in lot more detail. And those discussions have already started and we'll keep you updated as they progress.

Vivek Arya
Vivek Arya
Managing Director at Bank of America

Thank you.

Operator

Your next question comes from the line of Gian Marco Conti with Deutsche Bank. Please go ahead.

Gianmarco Conti
Gianmarco Conti
Director - Technology Equity Research at Deutsche Bank

Yes, thank you. Congratulations on another great quarter. I guess, could you perhaps share some detail into your hardwood deliveries this quarter and whether you're seeing the demand for the third generation in line with what was expected, especially on customers accepting the high pricing in this environment? And also, I know that you've briefly mentioned about it not having any impacts from tariffs, could

Gianmarco Conti
Gianmarco Conti
Director - Technology Equity Research at Deutsche Bank

you share a

Gianmarco Conti
Gianmarco Conti
Director - Technology Equity Research at Deutsche Bank

few words on your Mexico plans where you assemble your hardware and whether that could be a potential issue from a capacity production standpoint? And were tariffs being inactive on that front? Thank you.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Gian Marco. Great questions. Generally, hardware revenue is limited by our production capacity because demand continues to outstrip our ability to supply the hardware products. And as Andrew mentioned earlier, we have a very resilient and agile supply chain capability and that lessens the direct impact of tariffs. We produce and build hardware for The U.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

S. Market in The U. S. And for the international market outside The U. S.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

So that gives us kind of an optimized setup for hardware. So we're not seeing any real direct impact of tariffs in our numbers right now. Amazing. Thank you.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Also just to emphasize, we have multiple lines, right? Not just the one you mentioned.

Operator

Your next question comes from the line of Jay Gleeschhouwer with Griffin Securities. Please go ahead.

Jay Vleeschhouwer
Managing Director at Griffin Securities

Thank you. Good evening. Anirudh, what would you say are the two or three most important technical or product enhancement deliverables this year that may have already occurred or yet to occur this year, even if not with an immediate impact on revenue, but in terms of enhancing your overall technical capabilities or positioning? And then related to that, maybe you could talk about some of the investments you're making in some critical technology areas that may not get a lot of attention, one being, for example, physical verification, your physical verification, maybe the next generation silicon for hardware, Gen four. And then lastly, maybe talk about some of the incremental investments you're making in your acquired simulation solver products.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Jay, that's a great question, you know, and it's it's a multipart answer. But just to highlight few key things, you know, I mean, first of all, before I get into specifics, you know, I mean, you know this, but just to emphasize, we have a massive investment in r and d. Right? I mean, like, 35 to 40% of our revenue is going to r and d. So at a given point, we always have, you know, lot of exciting projects that are ongoing.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Now in terms of few teams that are critical so, of course, AI is super critical and applying AI to the chip and system design process. I think we are seeing lot of very good results. Actually, one thing on on something like like Cerebras or AI driven design tools, at this point, we expect that the majority of you know, more than 50% of the designs are now AI enabled. You know, our our tools are AI enabled in those designs. And the others, I'm sure, will will catch up as well.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

So but AI still has a long ways to go with all these new agentic features, and you will see us talk more about it throughout the year. So that's the the number one thing I would like to highlight and we have these five major platforms and all kinds of new models can be used in those. The second thing which is also a pretty broad team which make sure we always stay ahead is is three d IC. Okay. I mean, three d IC, you know, is is a big team, another team for next five, ten years.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And you can see that in Blackwell. But, you know, right now, the the the packages can handle, like, three times radical size, but they could easily go to 10 times radical size in the next few years. So there's massive investment in in three d IC in terms of the tool flow, in terms of analysis of these complex, you know, system, you know, thermal and electromagnetics warpage analysis. Of course, IP that is needed for high speed SerDes and UCI and other things. So three d IC remains as a as a critical focus for our both our chip business, system business, and IP business.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And and last thing is, like, I think I think Gary asked earlier is this rich hardware set, you know, this bottom layer of the cake, you know, with ARM CPUs, x 80 x 86 CPUs, palladium hardware, and GPUs. And we'll have some, you know, more developments next week at Cadence Live, you know, about that part. You know, this hardware software co optimization, I think, is gonna be critical for for our industry. So those are the three things I would highlight as as top critical r and d focus area.

Jay Vleeschhouwer
Managing Director at Griffin Securities

Okay. Thanks, Anurag.

Operator

Your next question comes from the line of Jason Celino with KeyBanc Capital Markets. Please go ahead.

Jason Celino
Jason Celino
Managing Director, Software Equity Research Analyst at KeyBanc Capital Markets

Great. Thank you. Keeping to this IP topic, I think you plan to acquire Arms Artisan IP asset. I know this hasn't closed yet. But when we think about the foundational IP market, just curious, you know, why hasn't this been a bigger focus in the past and, you know, what's changed to make this opportunity more attractive?

Jason Celino
Jason Celino
Managing Director, Software Equity Research Analyst at KeyBanc Capital Markets

And then just to clarify with John that this pending acquisition is not included in guidance? Thank you.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Yes. So let me take the second part first, Jason, just to clarify that, that yes, it's not in our current guide. It's not closed yet. So we we haven't put that into the guide.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And then, yeah, I'm actually pleased with with this partnership and acquisition. You know, foundation IP business has a very rich history as you may know. It started with Artisan long time ago and has very good credibility in the market. And and also as our IP position improve, you know, with our kind of performance over the last two years, we also have to expand our portfolio, you know. And we are I'm pleased with the performance and PP of the current portfolio, but we have to, you know, fill in the gaps in our portfolio and that's the reason we, you know, for example, acquired Rambus' IP business and then acquired SecureIC few months ago.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And this is a critical piece, you know, foundation IP. And it is becoming more and more critical versus, you know, five, seven years ago. Foundation IP became lot more critical, you know, especially the interaction with with the software, you know, with place and route. Also, there is a massive, as you know, foundry build out, you know, not just you know, there are multiple foundries in multiple countries and they all require foundation IP. So that's the other reason I feel that foundation IP is much more critical now.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

So it's a combination of foundation IP being more critical, need to broaden our IP portfolio work with our software tools. And this opportunity came along to acquire a, you know, leading product in that space because we didn't want to enter the space with with not a good product, but Arms, Artisan's business has a good history great product. So we we hope to finish that acquisition late, you know, later in the year and and talk to our customers about that.

Jason Celino
Jason Celino
Managing Director, Software Equity Research Analyst at KeyBanc Capital Markets

Thank you.

Operator

Your next question comes from the line of Joe Quatrochi with Wells Fargo. Please go ahead.

Joe Quatrochi
Joe Quatrochi
Director & Equity Research Analyst at Wells Fargo

Yes. Thanks for taking the question. You mentioned that you were developing a full stack agentic AI solution. I was wondering if you could talk about just the areas of the design workflow you're you're targeting first with that.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Oh, great question. I mean, the you know, it could be applied to almost all the design process, but some that are super critical in terms of need, you know. Of course, verification is always critical because verification because we have great products with both hardware and software, but you never know when you're done with verification. It's like a NP complete problem. And so if you really look at now, you know, our semi eye offering, which is in works with a logic simulator, you know, can improve performance by five to 20 x.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

You know, we have all these several customer endorsement, public concern endorsements for applying semi eye to to verification. So I think verification to me is a is a great area for for AgenTeq AI. And then implementation is always a good area, like things like Cerebras can be further enhanced, and you will see more and more developments from us on digital design and agentic AI pretty soon. So that I would say that's the second area. And then one area that traditionally has not seen that much automation but is becoming more and more critical is package and PCB design, you know, Allegro and Allegro x and Allegro x AI.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Actually, I'm very optimistic that, you know, the aspect design becomes super critical and package is the is the critical thing in in a three d IC system, you know. It's a three d IC is another name for system in a package. So there is a more need for automation in packaging and automation in PCB design. So I'm actually pretty optimistic that AI can finally provide automation in packaging. And then I would say analog migration, another big area, and analog is like, you know, the art plus science, but AI can also help in analog.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

So so I think these are the three or four key areas that we will work on. But the scope of AgenTeq AI is is is is throughout the product spectrum.

Joe Quatrochi
Joe Quatrochi
Director & Equity Research Analyst at Wells Fargo

Very

Joe Quatrochi
Joe Quatrochi
Director & Equity Research Analyst at Wells Fargo

helpful. Thank you.

Operator

Your next question comes from the line of Joe Berwick with Baird. Please go ahead.

Joe Vruwink
Senior Research Analyst at Baird

Thank you. This might be an overly simplistic question relative to those before me, but your commentary and guidance range strikes me as having greater visibility into strength during the second half of this year than maybe what's apparent just in our seat when analyzing the size of the one q beat or even your quarter end backlog value. Can you maybe just speak to some of the things that changed for the better in the last sixty to ninety days that make you feel better about the 2025 outlook?

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Yes. Joe, yeah, I'll I'll take that one. The, yeah. I mean, we're we're tracking ahead of our original forecast for for 2025 with solid q one results. We only gave you the guide a few weeks ago for the year.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

So not a huge amount has changed. I think we have had a bit more strength in our recurring revenue. And of course, as you know, revenue any beat in recurring revenue feeds through the rest of the year. So a small beat in Q1 kind of follows through in Q2, Q3 and Q4. And we were like I say ahead of the original forecast even with including building in an expectation that that will pick up some slightly higher expenses on the tariff side, but we're still resilient on the tariff side.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Felt it was right to raise the price.

Joe Vruwink
Senior Research Analyst at Baird

Okay. Thank you.

Operator

Your next question comes from the line of Joshua Tilton with Wolfe Research. Please go ahead.

Joshua Tilton
Director at Wolfe Research LLC

Hey guys, can you hear me?

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Yes, loud and clear Josh.

Joshua Tilton
Director at Wolfe Research LLC

Great. Thank you for sneaking me in. I always love it when the guy before you kind of steals your question. But I guess just to put a finer point on things. I think, Anirud, you mentioned that the guidance still assumes that China is flat for the year.

Joshua Tilton
Director at Wolfe Research LLC

You guys are being prudent. I guess my question to that is, I understand there was an easier comp in 1Q, but year to date, are you guys seeing anything that suggests that China should actually grow flat for the year? Or I guess another way of saying it is, is the decision to keep China flat for the year in the guide prudent or more along the lines of your expectations of how things will shake out by the end of the year? Thanks.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Yes, Josh, I'll take that one as well. I think it's more prudent that we thought it's wise to remain prudent in the current macro environment. I think we're very resilient in this environment. I mean, a company with high gross margin and essential products should do well in this type of environment. But the bookings were really solid in Q1.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

We had stronger bookings than expected, kind of fed into with more recurring revenue bookings as well. But, and that fell into us tracking ahead of the original forecast for 2025. So we thought the right thing to do was raise the guide.

Joshua Tilton
Director at Wolfe Research LLC

Super helpful guys. Thank you.

Operator

Your next question comes from the line of Sikhi Panigrahi with Mizuho. Please go ahead.

Siti Panigrahi
Managing Director at Mizuho Securities

Thanks for taking my question. Anirudh, if you see there are a lot of news going around, we saw deep sick, you know, early this year. Wondering how that's impacting the design velocity or even how you see the compute capacity will change. But at the same time, also, you're seeing hyperscaler, you know, trying to pause their data center build out. Are you seeing any kind of impact there?

Siti Panigrahi
Managing Director at Mizuho Securities

So would love to hear your views on this.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Yeah. Siri, that's a great question. I mean, that's a that's a big question. Let me try to, you know I mean, this is critical, thing for the whole industry. I mean, first of all, I mean, when I talk to customers, you know, DeepSeek is one advancement.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

I mean, a lot of customers expect multiple advancements like this. You know, the you know, AI will get more and more efficient, you know, as you know, and this happened if you look at even EDA's history. Right? When AI started off, it was more like dense computation. And if you look at EDA's history in the seventies, we started off with dense computation, and then we have sparse computation, we have partitioning, we have hierarchy, we have latency.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

There are all kinds of computer science methods that will be applied to AI. Okay. So I believe that there will be multiple deep seek moments, not just one deep seek moment. But at the same time, you know, the AI will get more and more prevalent in its use. Okay.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And this happened in CPUs. I I expect same thing to happen with AI and and GPUs. So in terms of when we talk to customers now first, have to remind you that we are on the design side, not on the on the production side. But in terms of design, we only see acceleration of more and more designs to do AI, even on the data center side. And, of course, NVIDIA is is a is is a great partner of ours, and I think NVIDIA is doing exceptionally well.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

But also a lot of the other hyperscalers, all the four or five major US hyperscalers and then companies in other countries are also investing heavily in their own designs, and we are glad to work with them. And then I mentioned before, you know, the physical AI part of it, which is cars, planes, and drones, is also there's a lot of design activity now. Even though the car market may not be as strong, but that's for current products. But they are designing for future products which will be AI enabled. And then the other thing, as AI gets more efficient, I think they will be more inference used.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

So there's a lot of design of inference chips to support that. So right now in terms of design activity, I feel pretty good. And and like I was mentioning before, you know, even on the data center side, the three d IC is gonna cause a massive change in in complexity. You know, right now we have Blackwell with, like, two kind of big dies with HPM. But the packaging road map is very aggressive by all foundries.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

So think that is also gonna drive new and new AI designs with putting more kind of big chips on in packages, and that should also drive AI performance and efficiency. So right now, we don't see any big change in terms of the design activity for AI.

Siti Panigrahi
Managing Director at Mizuho Securities

Okay. Thanks for that color.

Operator

Your next question comes from the line of Nayso Nang with Berenberg. Please go ahead.

Nay Soe Naing
Equity Research Analyst at Berenberg

Hi, thank you for giving me the question. Mine is on your SD and A segment, please. You had a very impressive quarter in Q1. And I'm just trying to understand if you could maybe share where the strength is coming from, especially when we put it against the product market and your peers. And so on the last three years, you've been growing at 2x to 3x what your competitors have been able to do.

Nay Soe Naing
Equity Research Analyst at Berenberg

So I was wondering if there were any competitive market wins that's driving your performance. If not, what are the reasons, please? And maybe if I could squeeze in a part a second part of this question. The solid performance we've had in the past, does it, any chance at all create any headwinds for you or tough comps for you going forward?

Nay Soe Naing
Equity Research Analyst at Berenberg

Thank you.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Thanks for the question. And you're right to raise the comps. I think one of the benefits for Q1 is that Q1 twenty twenty four was pretty easy comp for us on the SD and A side. I mean beta performed well in Q1 twenty twenty five, but we only acquired that in the middle of the year last year. So I think the first time beta turned up in our results was Q3 twenty twenty four.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

And then beta is providing a huge amount of pull through business for Cadence. So Cadence products are being sold alongside beta products and that's really helping us for growth. We're expanding reach to the longer tail customers through our e commerce model. And we've seen strength in automotive and air and defense. Don't know, Anurag, do want

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

to add anything about data?

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Oh, beta is performing great. And also it has a pull through to other parts of our portfolio. You know, one thing we are always confident and I think you've seen some benchmark in the industry in the past that our r and d products are are solid. You know, they are rewritten.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

They are, you know, they have no accuracy loss. They have much better performance because of massive parallelism, whether it is on CPUs or GPUs. So we are always confident on our product side and we continue to innovate there. I think what beta helps is is to increase the reach of those products because they are working with all the other companies. And so not only we can benefit from performance of beta, but also can sell our other products to those customers.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And then we also improved our cloud offering and go to market with indirect channel. So I think you're seeing some benefits of that better go to market operation on the system side.

John Wall
John Wall
Senior VP & CFO at Cadence Design Systems

Got it. Thank you.

Operator

And our next question comes from the line of Ruben Roy with Stifel. Please go ahead.

Ruben Roy
Ruben Roy
Managing Director - Equity Research at Stifel Financial Corp

Thank you for letting me ask a question. Anirud, I had a similar question to Jason's on IP. And you touched on this in your answer to that question, but just wanted to make sure I understood in terms of, you know, sort of these, I would say, accelerated pace of recent tuck ins on the IP side. Sounds like they're opportunistic rather than be and then, you know, customer driven. I wanted to make sure I got that right.

Ruben Roy
Ruben Roy
Managing Director - Equity Research at Stifel Financial Corp

And then, second part of the question is just maybe if you can update, you know, sort of how you're thinking about IP, in terms of longer term growth from that segment, you know, given given all that's going on with foundry and and customers, etcetera. Thank you.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Yes. Great question. So I think in terms of IP, there are multiple factors. So one is our performance is better. You know, the portfolio we had especially, you know, the PPA, you know, power performance in the area for for for TSMC, you know, the most advanced foundry.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

The the IP is just much better quality and performance. So and that's driving customer demand. So the customers want us to want get IP from us and want us to have a bigger portfolio. Okay? So as a result, know, we do, of course, invest organically and we will do inorganic acquisition if we see a good fit.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Okay. But but it's both a combination of what is available, but the customers are definitely driving us to broaden our portfolio. So so that's one. Second thing is, you know, there's more and more foundry. So we are glad with our partnership with with TSMC, but we highlighted even this time, you know, like Rapidus is making massive investments.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And, of course, Samsung and Intel, and we are glad to. So there are at least four major foundries at advanced node along with all the foundries like like global and and, you know, UMC had more mainstream nodes. So I think the foundry ecosystem is rich and that provides more opportunities in IP. And then the third thing, of course, is AI and three d IC and all this, you know, intra in die to die IP. So for all these three years, I'm optimistic.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

You know, we are performing well. We are increasing our portfolio. The market wants more IP from us. So I expect IP to of course, we had a good year last year. We had a very good quarter q one.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

So I expect IP to grow better than cadence average going forward. Yeah.

Ruben Roy
Ruben Roy
Managing Director - Equity Research at Stifel Financial Corp

Perfect. Thank you.

Operator

Our final question comes from the line of Blair Abernethy with Rosenblatt Securities. Please go ahead.

Blair Abernethy
Managing Director, Sr. Research Analyst at Rosenblatt Securities

Thanks for squeezing me in guys and nice quarter. Anirudh, just wondering if you could give us sort of high level thoughts on the data center digital twins. You bought future facilities back in July 2022. It seems to be getting some traction out there. I just wanted to see how you feel about the size of the TAM or the size of the opportunity there with that asset?

Blair Abernethy
Managing Director, Sr. Research Analyst at Rosenblatt Securities

And sort of you know, are there expansion opportunities beyond data centers?

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Absolutely. You know, the two areas that that I have been very excited about, especially on the system side, one is, you know, which is very close to the package. Like I mentioned, you know, thermal, electromagnetics, you know, warpage because there's a massive transformation right next to the chip. And we are in a very strong position with Allegro and all the analysis tools. The second area is all the way at the data center level.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

That's why we acquired future facilities. And actually, it had a very strong q one. And we also have a great partnership with NVIDIA there. NVIDIA is designing their data centers with our real Cadence Reality Digital Twin and also working with the joint partners as we go to market with them together on on Cadence Reality. And that opportunity is is huge.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

I mean, even we applied it to our own IT group. For example. We have we have our own data centers. Right? So the the product is general enough to be used in any data center.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And we saw, like, a 10% improvement in in power, which is huge. And because typically, that's the area that has not seen lot of analysis and automation. Because typically done in like a typical construction kind of work, whereas, you know, chip design is very analytical mathematical. So that area needs more kind of optimization and simulation. So I am optimistic.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And then the way Cadence Reality works, there is a design side of it in which we help customers design the data center. And then there's the operation side of it in which we can, you know, analyze on the fly, use the digital tool to optimize their operation. So if you include both side, I mean, the opportunity is huge. So but we are still kind of prudent in our assumptions like we do in everything, but I'm very optimistic about these two extreme. One is all the way to data center, and second is all all the way very close to the chip on the package.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

And that's where you see us investing. Yeah.

Blair Abernethy
Managing Director, Sr. Research Analyst at Rosenblatt Securities

Great. Thanks very much for the color.

Operator

I will now turn the call back over to Anrud Devka for closing remarks.

Anirudh Devgan
Anirudh Devgan
President and CEO at Cadence Design Systems

Thank you all for joining us this afternoon. It's an exciting time for Cadence as our broad portfolio and product leadership ideally positions us to maximize the growing opportunities in the semiconductor and system industry. And on behalf of our employees and our Board of Directors, we thank our customers, partners and investors for your continued trust and confidence in Cadence.

Operator

Thank you for participating in today's Cadence First Quarter twenty twenty five Earnings Conference Call. This concludes today's call. You may now disconnect.

Operator

Goodbye.

Executives
Analysts
Earnings Conference Call
Cadence Design Systems Q1 2025
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