Cadence Design Systems, Inc. Q4 FY2025 earnings call

• Cadence delivered excellent results for Q4 and 2025 with 14% revenue growth and 45% operating margin for the year, ending 2025 with a record backlog of $7.8 billion.
• Emphasized the 3-layer cake framework of engineering software with AI as the top layer driving intelligent exploration and generation.
• Deploying Agentic AI workflows powered by intelligent agents to expand design exploration and accelerate time to market.
• On AI for design, launched ChipStack AI Super Agent and other AI products are proliferating; on design for AI, infrastructure AI phase is in full swing with close collaboration with market leaders.
• Furthered partnerships with leading foundries like TSMC, Intel Foundry, Rapidus, and Samsung Foundry.
• Product highlights for Q4 and 2025 include strong performance in core EDA, hardware, digital, custom and analog, IP, and System Design and Analysis businesses.

Core EDA business revenue grew 13% in 2025; recurring software business reaccelerated to double-digit growth in Q4; hardware business had another record year with over 30 new customers and higher repeat demand; digital portfolio had strong year with 25 new digital full flow logos added in 2025; custom and analog saw growth in Spectre circuit simulator and Virtuoso Studio; IP business revenue grew nearly 25% in 2025; System Design and Analysis business delivered 13% revenue growth in 2025

• 2026 outlook: revenue range $5.9B - $6B, GAAP operating margin range 31.75% - 32.75%, non-GAAP operating margin range 44.75% - 45.75%, GAAP EPS range $4.95 - $5.05, non-GAAP EPS range $8.05 - $8.15, operating cash flow ~$2B, expect to use ~50% of free cash flow to repurchase shares.
• Q1 2026 outlook: revenue range $1.420B - $1.460B, GAAP operating margin range 30% - 31%, non-GAAP operating margin range 44% - 45%, GAAP EPS range $1.16 - $1.22, non-GAAP EPS range $1.89 - $1.95

Q: Have you seen any disruption or change of thinking at customers in terms of using AI to reduce or eliminate demand for EDA or IP?

A: Absolutely no discussion with customers of reducing usage, on the contrary, AI tools are increasing usage of our tools Q: How are you approaching 2026 outlook, key contributors to recurring improvement?

A: Recurring revenue mix remains around 80% in 2026, beginning backlog gives strong visibility into multiyear recurring base Q: Verification and emulation hardware cycle, memory availability, margins?

A: Hardware demand strong, no difference vs last year, taking share in all segments Q: Quantify benefits of AI workflows, monetization?

A: Real benefits like 10x productivity improvement, monetization through virtual engineer pricing and base tool usage Q: SD&A customers, transition to 1-year license terms, Hexagon?

A: SD&A lapped tough comps, moving to annual subscriptions, Hexagon annualized revenue ~$200M but not guiding Q: Marquee hyperscaler adopting Cadence digital full flow, COT proliferation?

A: Trend of big customers doing own chips accelerating, multiple customers will do more COT Q: Robust design activity, traditional semi vs AI/automobile, physical AI traction?

A: Design activity accelerating for semi and system companies, physical AI in early stages but traction expected Q: ChipStack monetization, margin accretive?

A: Monetization through usage-based pricing and outcome-oriented packages, could be margin accretive Q: IP pipeline, visibility?

A: IP strong, new titles take time, but strong year expected Q: AI phenomenon, contract durations?

A: No change in contract durations, more opportunity with AI-driven add-ons Q: ChipStack vs Cerebrus, competition from startups, compute constraints?

A: Multiple AI Agentic flows needed, watch startups, compute needed for higher design scales Q: SD&A strategy, working with accelerated compute?

A: Focus on building core engines, work with accelerated compute platforms like Omniverse Q: Taking share across board, change relative to previous quarters?

A: Competitive position improved, growing faster than market in IP, hardware, etc.

Q: China revenue, sustainability?

A: Design activity good, first half more visible, second half more prudent Q: Growth mix, semis vs systems?

A: System companies doing more silicon, semi companies also growing rapidly, ratio moves slowly Q: Leveraging AI internally, incremental margins?

A: 2025 incremental margin 59%, 2026 guide prudent, AI used internally to get more value from R&D investments