Cadence Design Systems, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Business Performance: Cadence delivered excellent Q3 2025 results with bookings exceeding expectations, backlog growing to over $7B. Raised full-year outlook to ~14% revenue growth and 18% EPS growth.
• AI Megatrend: Accelerating AI megatrend fueling design activity across industries. Cadence uniquely positioned with AI-centric portfolio spanning EDA, IP, 3D-IC, PCB and system analysis.
• Partnerships: Expanded partnerships with Samsung, leading semiconductor company, TSMC. Acquired Arm Artisan Foundation IP to augment design IP portfolio.
• IP Business Strength: IP business focused on AI, HPC at advanced nodes, profitable and scalable strategy. Secured competitive wins at top AI and memory customers.
• EDA and Hardware Innovations: AI-driven design and verification solutions driving core EDA growth. Hardware had record Q3 with expansions at AI and HPC customers.
• SDA Expansion: Acquisition of Hexagon's D&E business to enhance SDA for physical AI and 3D-IC, with run rate expected to cross $1B in 2026 if acquisition closes

Segment Performance

• IP Business: Maintained strong momentum in Q3, driven by global accelerating IP demand and increasing customer proliferation of expanding IP portfolio. Focused on AI, HPC and automotive verticals. Bookings strong, secured several competitive wins. Revenue contribution not explicitly stated but noted as a key growth driver.
• Core EDA Business: Delivered strong results with growing adoption of AI-driven design and verification solutions. Examples include Cadence Cerebrus AI Studio achieving 4x productivity improvement at Samsung and Virtuoso Studio/Spectre platforms gaining traction with AI-driven features. Revenue contribution not explicitly stated but a significant segment.
• Hardware: Had a record Q3 with significant expansions at AI and HPC customers. Deepened collaboration with OpenAI, Verisium SimAI seeing growing adoption. Revenue contribution not explicitly stated but a key segment.
• System Design and Analysis (SDA): Achieved solid quarter with expansion of Cadence Reality Digital Twin Platform library and acquisition of Hexagon's D&E business to strengthen SDA for physical AI and 3D-IC. Revenue contribution not explicitly stated but a growing segment

Guidance

• Raised full-year 2025 outlook to ~14% revenue growth and 18% EPS growth.
• Q4 2025 revenue expected in the range of $1.405 billion to $1.435 billion, GAAP operating margin 32.5% to 33.5%, non-GAAP operating margin 44.5% to 45.5%, GAAP EPS $1.17 to $1.23, non-GAAP EPS $1.88 to $1.94.
• 2025 revenue range $5.262 billion to $5.292 billion, GAAP operating margin 27.9% to 28.9%, non-GAAP operating margin 43.9% to 44.9%, GAAP EPS $3.80 to $3.86, non-GAAP EPS $7.02 to $7.08, operating cash flow $1.65 billion to $1.75 billion, with at least 50% of annual free cash flow to be used for share repurchases

Risks

• Geopolitical and regulatory risks, particularly related to export controls which could impact business in regions like China.
• Uncertainty in predicting future geopolitical environments and their potential impact on Cadence's operations and growth

Question and Answer

• Q: Your IP business is now tracking to over 20% growth for the second year. How sustainable is this growth?

A: IP business focused on AI, HPC at advanced nodes, strong customer demand, partnerships with foundries. Growth sustainable due to focus on future markets like AI, HPC and chiplet-based architecture, and strong customer demand across the world

• Q: Talk about China's performance A: China design activity back to normal, broad-based strength, export regulations lifted in early July, growth expected for fiscal '25
• Q: AI features in core EDA. How does it translate to revenue/adoption?

A: AI for design improves productivity, examples like SimAI showing 5x to 10x improvement in verification throughput, Cerebrus AI Studio achieving 4x productivity improvement. Adoption increasing as customers see benefits in PPA and productivity