CADENCE DESIGN SYSTEMS INC Q4 FY2024 earnings call

• AI supercycle impact: Generative AI, Agentic AI, and Physical AI are fueling compute demand and semiconductor innovation. Cadence is engaged in the Infrastructure AI phase, collaborating with market leaders on next-gen AI design.
• Partnerships: Deepened with NVIDIA, Qualcomm, and Marvell, advancing solutions in EDA, hardware, IP, and system software.
• Cadence.ai portfolio: Gaining momentum with products like Cerebrus, SimAI, and Allegro X AI proliferating at scale. LLM-based Design Agents show promising results.
• Foundry collaborations: Strengthened with TSMC, GlobalFoundries, Samsung, Intel Foundry, and Rapidus, with AI-optimized design flows and strategic engagements.

System Design & Analysis: Delivered strong results, achieving over 40% growth in 2024. Its multi-physics analysis platform with AI-driven optimization is expanding across multiple verticals. IP: Drove a strong finish to the year, growing 28% year-over-year in Q4. AI HPC protocols and new acquisitions like Secure-IC augmented the portfolio. Core EDA: Comprising digital, custom analog, and verification portfolios, grew 15% year-over-year in Q4. Hardware: Had another record year in 2024, adding over 30 new customers and almost 200 repeat customers, with strong demand from AI and hyperscale customers.

• 2025 revenue expected in the range of $5.14 billion to $5.22 billion, GAAP operating margin 30.3%-31.3%, non-GAAP operating margin 43.25%-44.25%, GAAP EPS $4.19-$4.29, non-GAAP EPS $6.65-$6.75, operating cash flow $1.6 billion-$1.7 billion.
• Q1 2025 revenue expected $1.23 billion-$1.25 billion, GAAP operating margin 27%-28%, non-GAAP operating margin 40%-41%, GAAP EPS $0.93-$0.99, non-GAAP EPS $1.46-$1.52.
• Assumes China revenue flat year-over-year, non-GAAP EPS based on 16.5% tax rate, and 50% of free cash flow for share repurchase in 2025.

• Export control regulations: Outlook based on current regulations remaining similar, but uncertainty exists.
• China market uncertainty: Prudent to assume flat China revenue in 2025 due to macroeconomic uncertainties and difficulty in predicting the market.

Q: When looking at the backlog number and the guide for 2025, how to reconcile confidence in backlog and guidance?

A: John Wall mentioned backlog strength and momentum, but pipeline conversion was emphasized, with China being a prudent assumption for guidance due to uncertainty.

Q: Any change in RPO balance from export restrictions and thoughts on China hardware cycle?

A: John Wall stated no material impact on cRPO from China, and Anirudh Devgan noted strong design activity in China, especially in automotive EV revolution.

Q: Interpretation of slowing recurring revenue growth?

A: John Wall said China deceleration impacted recurring revenue, and Anirudh Devgan highlighted strong performance in hardware and IP with future growth potential.

Q: Thoughts on chiplet design and its role in backlog?

A: John Wall said chiplet design is global and across verticals, Cadence well-positioned with EDA, packaging, system, and IP solutions for chiplets.

Q: Long-term view on core EDA and SD&A growth?

A: John Wall and Anirudh Devgan noted core EDA targets double-digit growth, with SD&A contributing to outperformance, and strong customer engagements in evaluations and new design starts.

Q: Hardware adoption and backlog color?

A: John Wall said strong hardware bookings in Q4, with RPO expected to improve, and Anirudh Devgan emphasized phenomenal hardware demand and competitive wins in Q3-Q4.

Q: Revenue split and OpEx dynamic?

A: John Wall explained revenue split expectations and OpEx dynamic due to moving mid-year merit cycle to January, improving profitability profile throughout 2025.

Q: Full-year guidance and China impact?

A: John Wall and Anirudh Devgan discussed full-year guidance considering China prudence, with strong design activity in China and focus on proliferation and adoption.

Q: AI products traction and edge device inflection?

A: Anirudh Devgan talked about AI product adoption across platforms and physical AI's impact on edge devices, with design activity starting and Cadence's position in mixed signal.

Q: China conviction and hardware visibility?

A: John Wall said prudence in China guidance due to visibility challenges, and similar approach to hardware visibility with two quarters' pipeline visibility.