Cadence Design Systems, Inc. Q2 FY2025 earnings call

• Cadence delivered exceptional Q2 results, exceeding revenue and EPS guidance due to broad-based strength in AI-driven portfolio. Bookings were stronger than expected. - Entered settlement with DOJ and BIS regarding certain China transactions between 2015-2021. - Launched Millennium M2000 AI supercomputer, Cadence Tensilica NeuroEdge 130 AI Co-Processor. - Strengthened partnerships with ADI, SK Hynix, TSMC. - Core EDA, IP, and system design businesses all had strong performances with product launches and customer wins.

Core EDA: Revenue grew 16% year-over-year in Q2, with proliferation of digital full flow at advanced nodes, launch of Cadence Cerebrus AI Studio, and hardware systems achieving best revenue quarter ever. IP: Delivered over 25% year-over-year growth in Q2, driven by AI and HPC use cases, and new offerings like LPDDR6 memory IP. System Design and Analysis: Recorded 35% year-over-year revenue growth, with strong customer uptake of 3D-IC technology, AI-driven Allegro X PCB design platform, and solver expansions.

• Raised 2025 revenue outlook to 13% growth and 16% EPS growth. 2025 revenue range: $5.21 billion to $5.27 billion, GAAP operating margin 28.5%-29.5%, non-GAAP operating margin 43.5%-44.5%, GAAP EPS $3.97-$4.07, non-GAAP EPS $6.85-$6.95. - Q3 2025 revenue guidance: $1.305 billion to $1.335 billion, GAAP operating margin 32%-33%, non-GAAP operating margin 45%-46%.

• Impact of export control regulations and geopolitical uncertainties, particularly related to China. - Potential material differences between projected results and actual results due to risks and uncertainties.

Q: I wanted to ask a question on physical AI. It seems like over the past quarter or so, many of your key development partners have had more to say around what they're doing with edge devices or even small language models maybe as a means to enabling physical AI. Is this factoring into the bookings strength you've seen recently? And is it maybe leading to more spend or different spend with Cadence just in terms of the tools that this is going to need versus what the initial build-out of AI infrastructure has meant?

A: Yes, Joe, it's a great question. And first of all, I'm very pleased by our results and our performance and the demand of our products, which is broad-based. And also, I think there is -- first of all, I believe there is overall optimism in the benefits of AI in our customers, both from what they can -- their own products and also how they can use AI internally. So therefore, they are investing more in their innovation and given the critical nature of our products, investing more in Cadence. Now it has several aspects to it. And I have been a big fan of physical AI for a long time because one unique advantage we have in Cadence is the privilege to work with all the top companies in the world. And we believe that, of course, AI infrastructure is huge, but physical AI has the potential of being even bigger and then follow that with sciences AI. That's why we have laid this 3-phase evolution of AI. And now if you look in the marketplace also with autonomous cars or robots and drones, it is becoming much more public. And our advantage is, even though some of these things come out later, the customers start investing in R&D before they come out in public. So -- but I think physical AI will play a very key role for our products because the silicon required, first of all, and physical AI will affect the whole three layers of that AI cake that I've talked about. So first of all, the silicon is different in the car or in the robot or in the edge devices is different than data center silicon. I mean it's still AI-driven, but it's more power optimized, runs on lower battery, as you know. So the silicon is different. The simulation and design is different. And of course, the AI models themselves are different. They are more word model than LLMs. But all these physical AIs still need to be trained. Even if the inference like for autonomous car runs on the car, the actual AI model is trained on the data center. So the beautiful thing of physical AI is not only it creates new opportunities for us, it also emphasizes the importance of AI infrastructure in the data centers. So it is helping both sides of that equation. And so we are benefiting from that. And we are, as you know, working with all the main AI data center players as they design chips and systems. So the impact is both on the data center side and the edge side. But there's still an evolving market. I think physical AI is still in the early innings. There's still like three to five years of more development to go. So -- but overall, I think what I would like to say is that the customer environment is, I feel personally is better than it was six months ago.

Q: I mean, firstly, congrats on another amazing quarter. Simply, what led to Cadence increase in the growth outlook, even though you could not recognize one month of China revenue? I guess the curiosity is whether there was a single stack of renewals across EDA or was this across all fronts? And maybe you can give us more comment on backlog and the development throughout the year.

A: Yes, Gianmarco, great question. I mean, yes, it's been an interesting quarter. I mean China was -- ended up being 9% of our revenue in Q2. That's down from 11% in Q1. But we've seen strong demand across all geographies. And strength in other regions more than offset any near-term softness related to China during Q2. We've spoken in the past about how well diversified our customer base is. And we're increasingly seeing growth, and we're seeing the growth in bookings from AI, HPC and system design workloads globally. But we're very, very pleased with the way backlog ended up at the end of Q2. It is stronger than we expected going into the quarter despite all of the restrictions. But -- and yes, we're very, very pleased with where we are halfway through the year. Anirudh, anything to add?

A: No, John, that's right. I mean, overall, I would like to say the demand is broad-based. You can see it in all the results of all the 3 main lines of business. I mean hardware is doing phenomenally well. We had a record quarter ever in terms of revenue. and we have a clear lead in hardware. And also, we are essential to all the major AI chips being designed using Palladium and our EDA software. And then all these agentic AI tools like Cerebrus AI Studio, I mean that's a phenomenal new product and then Verisium, Allegro X. So I think both the software and hardware business is doing well in core EDA. And then IP had a great quarter. I mean there's a lot of reasons behind that. One is the AI infrastructure build-out, but also there are at least four major companies doing advanced node foundries now with TSMC, our long-standing partner, Samsung, even today, there's a big announcement from Samsung Foundry, Intel with 18A, 14A and Rapidus in Japan. I just came back from Japan with this big opening of Rapidus. So there are at least four advanced node foundries that all require IP. So I think that's also driving strength in IP. And then system continues to do well because of our focus on 3D-IC, which is the fastest-growing part of the system market. And beta is providing us a good kind of integration with rest of the flow and new products like Millennium. So if I look at all the three main areas, I think I feel we are very well positioned and the market itself seems to be improving with the AI super cycle.