Cadence Design Systems, Inc.

Please stand by. We're about to begin. Good afternoon. My name is Beau, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then 1 on your telephone keypad. Thank you. I will now turn the call over to Richard Kueh, Vice President of Investor Relations for Cadence. Please go ahead, sir.

Thank you, operator. I would like to welcome everyone to our third quarter of 2023 earnings conference call. I'm joined today by Anur Devgn, 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. 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-K 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, we will present certain non-GAAP measures which should not be considered in isolation from or as a substitute for GAAP results. Reconciliations of GAAP to non-GAAP measures are included in today's earnings release. For the Q&A session today, would ask that you observe a limit of one question and one follow-up. Now, I'll turn the call over to Anirudh.

Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that Cadence delivered strong results for the third quarter of 2023. We exceeded our Q3 guidance on all key metrics and are raising our outlook for 2023. John will provide more details on our financials shortly. Notwithstanding the macro uncertainties, design activities remain strong, driven by transformative generational trends such as AI, hyperscale computing, 5G, and autonomous driving. Growing hyperconversions between electrical and mechanical domains, systems and semis, and hardware and software is driving the need for tightly integrated core design and analysis solutions. Additionally, trends such as growing number of 3D IC and chiplet design and system companies building custom silicon are accelerating. In this rapidly evolving design landscape, the relevance of AI-driven design automation cannot be overstated as it's enabling customers to accelerate their pace of innovation while enabling them to meet their targets more efficiently. Over the past few years, we focused initially on incorporating powerful AI algorithms in our core engines and then build our generative AI solutions on top of our software platforms. We are seeing growing momentum for our comprehensive JEDI generative AI platform with an increasing number of customers adopting these solutions and achieving exceptional quality of results and productivity gains. While still in the early stages, sales of our gen AI solutions have nearly tripled in the last year. Our solutions are enabling marquee AI infrastructure platform companies to deliver their next generation compute, networking, and memory products. Last quarter, we had referenced our successes with Nvidia and Tesla. And this quarter, we are pleased to announce that Broadcom has accelerated the adoption of Cadence Cerebrus across multiple business units, achieving impressive quality of results. In Q3, we pioneered leveraging GenAI's LLM capabilities to chip design, successfully collaborating with Renaissance on accelerating functional specification to final design. This is a key step in demonstrating the potential of LLMs to automate the translation of natural language specification to final chip design and verification tasks. thereby boosting their quality and efficiency. We also renewed and deepened collaboration with some large, semi, and system customers in the 5G, AI, hyperscale, and connectivity areas. For instance, we strengthened our longstanding partnership with a global marquee systems company through a significant expansion of our EDS software hardware, design IP, and system solutions. As the digital transformation in aerospace and defense accelerates, we continued our momentum by enhancing our core EDA and systems footprint with several customers, including two market-shaping companies. Now let me share some of the business highlights starting with digital IC. With 11 new wins, our digital full flow delivering industry's leading quality of results at the most advanced nodes continued proliferating with market shaping customers. We are very pleased with the accelerating momentum of our flagship Cadence Cerebrus GenAI solution whose transformative results have led to its deployment at all of our top 10 digital customers and in about 300 tape outs to date. Imagination Technologies use Cadence Cerebras and our digital full flow on its latest 5 nanometer GPU design in the cloud to achieve a 20% reduction in leakage power. I will talk about our functional verification business, which had another strong quarter with 18% year-over-year revenue growth. Ever-growing system design complexity coupled with the need for first-time right silicon continue to drive strong demand for our Palladium Z2 and Protium X2 hardware platforms that provide industry-leading system verification and software bring-up capabilities. Our hardware business had a record Q3 with close to half of the hardware orders, including both platforms. Highlights for the quarter include a major dynamic duo expansion with a top AI and automotive chip supplier and a significant deal with the market shaping data center chip company. Our flagship custom IC business continued to pave the way in analog innovation. delivering 15% year-over-year revenue growth. We are pleased with the reception of our AI-driven Virtuoso Studio solution as several marquee customers adopted for their N2 and N3 designs. And it has close to 1,000 downloads since its launch six months ago. And the Shimbo micro devices utilize the Virtuoso Studio custom IC design platform to gain a 30% reduction in turnaround time for routing analog blocks. In Q3, we continued investing in our IP business and closed the acquisition of the RAMBUS PHY IP assets. Customer reception has been overwhelmingly positive. to the addition of their HBM and GDDR IP to our Star Design IP portfolio. Design IP had a record booking quarter with strong AI and chiplet design activity, especially in the mobile, automotive, and hyperscaler verticals. In addition, we launched our Tensilica Neo NPU IP and NeuroWeave software tools