Cadence Design Systems, Inc.

After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star and then the number one on your telephone keypad. Thank you. And I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead.

Thank you, Operator. I would like to welcome everyone to our third quarter of 2025 earnings conference call. I'm joined today by Anirudh 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, all financial measures discussed on this call are non-GAAP unless otherwise specified. The non-GAAP measures 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, we would ask that you observe a limit of one question only. If time permits, you can re-queue with additional questions. Now, I'll turn the call over to Anirudh.

Thank you, Richard. Good afternoon, everyone. and thank you for joining us today. Cadence delivered excellent results for the third quarter of 2025 with strong operational and financial performance across all product categories and geographies as we continued the disciplined execution of our strategy. Bookings exceeded our expectations with backlog growing to over $7 billion. underscoring our continued technology leadership and reaffirming Cadence as the trusted partner enabling customer success. Given the ongoing strength of our business, we are raising our full year outlook to approximately 14% revenue growth and 18% EPS growth. John will provide more details on our financials shortly. The accelerating AI megatrend is fueling an unprecedented wave of design activity across industries ranging from hyperscaler infrastructure to fast-growing physical AI realm of autonomous driving, drones, and robotics to the emerging domain of sciences AI. As AI drives exponential design complexity and new system architectures, Cadence is uniquely positioned to capture this generational opportunity with a differentiated and comprehensive portfolio spanning EDA, IP, 3DIC, PCB, and system analysis. The Cadence.ai portfolio embodies our strategy of design for AI and AI for design, empowering customers to build out the global AI infrastructure. while we infuse AI into our own products to deliver breakthrough automation and productivity. With deep partnerships across AI innovators, foundries, and system leaders, and a comprehensive chip-to-systems portfolio, Cadence is driving transformative PPA and productivity gains, positioning us well for sustained growth in the AI era. In Q3, we meaningfully expanded our partnership with Samsung through a wide-ranging proliferation of our core EDA software, as well as system software across PCB, advanced packaging, and system analysis. We also deepened our long-standing partnership with a leading semiconductor company in Q3 through a broad proliferation of our core EDA IP and systems portfolio, and are closely collaborating on next-generation agentic AI EDS solutions. We expanded our long-standing partnership with TSMC to power next-gen AI flows supporting TSMC's N2 and A16 technologies. Our Integrity 3D IC solution provides comprehensive support for the latest TSMC 3D fabric die stacking configurations. And our design and ready IP, including HBM4 and LPDDR6 on N3P enable next generation AI infrastructure. At TSMC's OIP conference, Broadcom highlighted integrated 3D IC full flow deployment success for hyperscaler high-capacity ASICs. Our IP business maintains strong momentum in Q3, driven by global accelerating IP demand and increasing customer proliferation of our expanding IP portfolio. Our profitable, scalable IP strategy focused on AI, HPC, and automotive verticals positions as well for continued growth. Increasing complexity of interconnect protocols driven by AI and chiplet architectures, along with new foundry opportunities are providing strong tailwinds to our IP business. Bookings were strong and tracked ahead of our expectations. Our design IP portfolio secured several competitive wins at top AI and memory customers. For instance, we won a highly competitive engagement at a marquee memory company that embraced our HBM4 and DDR5 IP for its new AI design. The recently completed acquisition of the ARM Artisan Foundation IP further augments our design IP portfolio with standard cell libraries, memory compilers, and IOs optimized for advanced nodes at the leading foundries. Our Tensilica Audio and Vision DSPs and Neo AI Accelerator, NPUs, scored multiple design wins with leading customers in U.S. and Asia for mobile, automotive, and data center verticals. Our core EDA business delivered strong results, driven by growing adoption of our AI-driven design and verification solutions. In digital, Cadence Cerebras AI Studio, the industry's first agentic AI, multi-block, multi-user design platform, continues to deliver unparalleled PPA and productivity benefits. Samsung US taped out a SF2 design using Cadence Cerebrus AI Studio to achieve a 4X productivity improvement. In another instance, Samsung used Cadence Certus, Tempus, and Innovus to rapidly close and sign off a multi-billion instance AI design on SF4 with 22% power reduction and first-pass silicon success. Our virtuoso studio and Spectre platforms saw strong momentum with their AI-driven features and workflows gaining rapid traction as the customers leveraged the automated design migration and optimization capabilities. Our hardware verification platforms have become the de facto choice for AI designs, offering industry-leading performance, capacity, and scalability. Hardware had a record Q3 with several significant expansions, especially at AI and HPC customers. We deepened our overall collaboration with OpenAI as they expanded their commitment to our Palladium emulation platform in Q3. Verisim SimAI saw growing adoption as it delivered dramatic debug productivity, test bench efficiency, and accelerated coverage closure. Nvidia, Samsung, and Qualcomm all presented CMEI success stories at Cadence Live India, highlighting 5x to 10x improvement in verification throughput. Our system design and analysis business achieved another solid quarter, driven by expanding set of innovative solutions and growing adoption across a broadening customer base. In Q3, we significantly expanded our Cadence Reality digital twin platform library with NVIDIA DGX SuperPOD model and DGX GB200 systems to accelerate AI data center deployment and operations. Three major memory providers significantly increased their clarity and security usage. as they transition to a full cadence flow for advanced IC packaging, displacing competitive solutions. Beta CAE continued its momentum with multiple competitive displacements, underscoring its accuracy and performance advantages, including a significant competitive win at a large Tier 1 automotive company in China. In Q3, Infineon Technologies standardized its PCB design workflow on the Cadence AI-driven Allegro X platform for their future designs. Last month, we signed a definite agreement to acquire Hexagon's T&E business, including its MSC software business, to bring industry-leading structural analysis and multi-body dynamics technologies to cadence. Complementing our multiphysics portfolio, this will accelerate our expansion in SDA and put us at the forefront in unlocking new opportunities across automotive, aerospace, industrial, and the rapidly emerging world of physical AI. In summary, I'm pleased with our Q2 results. and the strong momentum across our businesses. The AI era offers massive market opportunities, and through the co-optimization of our entire portfolio with AI and accelerated computing, Cadence is uniquely positioned to be the trusted partner to deliver AI-centric transformational solutions across multiple industries. Now, I will turn it over to John to provide more details on the Q3 results and our updated 2025 outlook.

Thanks, Anirudh, and good afternoon, everyone. I'm pleased to report that Cadence delivered strong results for the third quarter of 2025 with broad-based momentum across all our businesses. We exceeded our guidance for Q3 revenue, operating margin, and EPS, and are raising the full-year outlook across these key metrics. With the updated outlook and at the midpoint, we now expect our 2025 revenue to grow approximately 14% year over year, on track to achieve double digit growth across all our product categories for the year. Third quarter bookings were strong, resulting in a backlog of $7 billion. Here are some of the financial highlights from the third quarter, starting with the P&L. Total revenue. was $1,339,000,000. GAAP operating margin was 31.8%, and non-GAAP operating margin was 47.6%. And GAAP EPS was $1.05, with non-GAAP EPS $1.93. Next, turning to the balance sheet and cash flow, Cash balance at quarter end was $2,753,000,000, while the principal value of debt outstanding was $2,500,000,000. Operating cash flow was $311,000,000. DSOs were 55 days, and we used $200,000,000 to repurchase cadence shares. Before I provide our updated outlook, I'd like to highlight that it contains the usual assumption that export control regulations that exist today remain substantially similar for the remainder of the year. With that in mind, for Q4, we now expect revenue in the range of $1,405,000,000 to $1,435,000,000. Gap operating margin in the range of 32.5 to 33.5%. Non-gap operating margin in the range of 44.5% to 45.5%, GAAP EPS in the range of $1.17 to $1.23, and non-GAAP EPS in the range of $1.88 to $1.94. As a result, our updated outlook for 2025 is revenue in the range of $5,262,000,000 and $5,292,000,000. Gap operating margin in the range of 27.9 to 28.9%. Non-gap operating margin in the range of 43.9 to 44.9%. Gap EPS in the range of $3.80 to $3.86. Non-GAAP EPS in the range of $7.02 to $7.08. Operating cash flow in the range of $1.65 to $1.75 billion. And we expect to use at least 50% of our annual free cash flow to repurchase cadence shares. As usual, we published a CFO commentary document on our investor relations website, which includes our outlook for additional items, as well as further analysis and gap to non-gap reconciliations. In conclusion, I'm pleased with our Q3 results. Strong 2025 as we continue to deepen strategic partnerships across the ecosystem. As always, I'd like to close by thanking our customers, partners, and our employees for their continued support. And with that, operator, we will now take questions.

Thank you. At this time, I would like to remind everyone who wants to ask a question to please press star and then the number one on your telephone keypad. As a courtesy to all participants, we ask that you please limit yourself to one question. And we will pause for just a moment to compile the Q&A roster. And our first question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.

Thanks for taking my question. Your IP business is now, I think, tracking to over 20% growth for the second year. I was just hoping you would give us some sense for what's driving this growth because your competitor expressed a lot of concerns about their IP business, whether it is in China or at Intel or just IP visibility in general. And I think they were talking about a new business model. So how do we square that in the growth? You are seeing how sustainable is this growth and what is your visibility in your IP business? Thank you.

Yeah, thanks, Vivek, for the question. I'm actually quite pleased with the performance of our IP business. And, you know, we don't look at, you know, any one quarter, but even if you look how we performed last year. Of course, this quarter was exceptional, but overall, how we performed this year and what we see, you know, backlog and activity going into next year, overall IP business is performing quite well. And there are multiple reasons for it. You know, first, our IP business is different. You know, I think it's much more profitable, even though the profitability is less than our EDA business, but I think it's more profitable and general IP business because we also have Tensilica, which is almost like software-like profitability. But a lot of the growth is coming in design IP. And the reason for that is our IP business is focused on AI and HPC at the most advanced nodes. Since we got started later in the IP business, we focused it where the future is going, which is AI, HPC, and chiplet-based architecture. So a lot of the like 30s and PCIe and HBM4 IPs. And that part of the market is doing well, actually, across the world. And then the second reason is, as you know, there is more and more foundries entering, and especially at advanced nodes. And we have a longstanding partnership with TSMC, but also Samsung, Intel, and now Rapidus. So there are at least four major foundries now at leading nodes. So that's, I think, a second reason for our IP business to be well positioned. And as the performance of our IP business has improved, the PPA and our PPA is competitively better in design IP, and a lot of customers want to shift over to cadence. So the customer demand, I think, is the third reason as our IP business strengthened that we are seeing strength in the IP business. Uh, so I think for these three main reasons, I'm pretty, pretty optimistic about the IP business and going to next year, we're not getting into next year, but just to give indication, I would be surprised if our IP business does not grow better than cadence average, you know, which it should given the profitability profile. We want that to happen. You know, if the profitability is slightly lower than EDA, then the growth should be higher than cadence average. So overall, I think that would make like three years trend. And overall, I'm pleased by our IP performance. Excellent.

And our next question comes from the line of Jason Salino with KeyBank Capital Markets. Your line is open.

Great. Thank you. Last quarter, I think you mentioned the second half having good renewal opportunity with some of your large customers. With the uptick in backlog, I imagine some of that strength was from some of these renewals. But as we think about Q4, do you still have renewals on the docket?

Thank you.

Yeah, thanks for the question. I'll let John comment on the timing of the renewals. But overall, I do think that our performance in Q3 is better than we expected. And the primary reason, and this is true in all geographies, but I think the primary reason is that the AI infrastructure build-out as you know, is accelerating. And we are essential to the design and build out of the AI infrastructure. Of course, I have said publicly there are three big phases of AI in my mind, AI infrastructure being the first one, physical AI being the second one, and science AI being the third one. But most of our focus and investment is, of course, on the first one. And as you see in the last six months, it is accelerating. And also, we are privileged to work with all the Mag7s. And also, investment in internal chip design is accelerating, along with, of course, the big merchant silicon companies like NVIDIA and Broadcom and AMD. So I think that is coming through in our booking activity in Q3. And so far, we see that strong demand continuing in the future.

Yeah, Jason, I would just like to add that the mix as well is healthy across EDA. IP hardware and STA. And the core EDA and IP backlog is weighted towards multi-year recurring arrangements, and that supports durable double-digit growth. Awesome. Thank you.

And our next question comes from the line of Joe Verink with Baird. Your line is open.

Hi. Great. Thank you very much. I guess I'm struck by the number of times the word acceleration has already been used on the call so far. And I guess the third quarter bookings much stronger than we were expecting and it would support a future acceleration. I know it's atypical to kind of get 20, 26 comments, but on a route already disperse the IP business. I'm just wondering how, if you can maybe start to frame expectations for next year based on what you have in hand. And it certainly seems like things are setting up well. Do you have the type of visibility at this point to maybe comment on it?

Yeah, I think what I would like to say is that, you know, we always look at our business in terms of how well our products are doing. Okay. And we report like five lines of businesses, as you know. And I would say at this point, you know, all five lines of business are performing very well. And you can see that in this year, I think we will grow double digits in all five lines of business. And also we are performing well in all geographies. So in terms of products and geographies, which is our main focus, you know, are we aligned with the, you know, leading companies, you know, are we trusted partner of, of the, the market shaping companies. So if you look at, you know, products, geographies and customer alignment, I think we are well positioned. Of course, as you know, as we enter a new year, we are always prudent in our outlook. And we will give you an update about next year, you know, when we come to, you know, January, February timeframe. But I think Aiden's is very well positioned, you know, better position than it has been. I think compared to the last several years, and we look forward to working with our customers in the future.

Yeah, Joe, we won't guide FY26 today, but exiting FY25 with probably record backlog and broad-based momentum from deepening strategic and trusted partnerships across the ecosystem positions as well for next year. You can expect our framework will remain disciplined. We typically aim for double-digit top-line ambition. you know, continued operating leverage and balanced capital allocation. And that's all underpinned by secular AI demand across CHIPTA systems. Thank you.

And our next question comes from the line of Lee Simpson with Morgan Stanley. Your line is open.

Great. Thanks for fitting me in and congratulations on another great quarter. I just wanted to ask around about China, really. It looks as though you're up about 53% year-on-year, doing well in the mix, up to 18%. That feels more than just a sort of return of business post the restrictions on the BIS letter last quarter. It feels sort of genuine momentum there. So I wonder if you can talk me through what is driving this. Is it IP? Is it hardware? Is it core EDA? What are the vectors here? Thanks.

Thanks for the question, Lee. Yeah, I mean, we saw broad-based strength and China design activity remains very strong. The region returned to business as usual for us in the second half with the lifting of the export regulations that changed for EDA in early July. But Q3 really was only slightly better than we expected. And we now expect China to be up year over year for fiscal 25. Anurag, do you want to add anything to what's happening in China?

Yeah, Ali, that's a good question on China. I mean, overall, I would say the behavior in China, from what I can tell, is back to normal. You know, of course, there was disruption in Q2 for obvious reasons, you know, given, you know, the policy in Q2. But the behavior that we are seeing is back to normal in Q3. And And a lot of it was driven by us prioritizing hardware deliveries that we could not do in Q2 into Q3. But overall, design activity is strong in China. I mean, semiconductors are essential to every country, and China continues to invest in semis. But overall, I would say our strength is broad-based, not particularly tied to any one geography. And there was some makeup from Q2 to Q3. Now, it's difficult to predict the future, but what I see, I don't see any unusual activity in China. Like, you know, question maybe, like, is there any, you know, pull in from future quarters? We don't see that in terms of what we see. And we see overall broad-based trend in other geographies as well. Thanks so much.

And our next question comes from the line of Siti Panigrahi with Mizuho. Your line is open.

It's great. Congratulations on another strong education. Anirudh, I want to ask you about on your system design, mainly that simulation analysis, that market. Help us understand your strategy. You made acquisition last year, Beta CAE, and this year again, you announced MSC software. Help us understand how you are going to you know, position yourself against your competitor in that market. You know, this is definitely a growing market. I would appreciate any call on that.

Yes, Siddhi, thanks for that question. I mean, I'm pretty pleased with the overall performance of SDNA. And, you know, I mean, just to remind everybody, you know, Cadence is the one started this whole thing in 2017, 2018. Now it is considered obvious that silicon and systems are going to come together. I mean, we have been talking about this for a very long time. Now, I think what the acquisition that we did this quarter is more forward-looking in the sense that, you know, like I mentioned, these three horizon technologies, horizon one being infrastructure AI, horizon two being physical AI, horizon three being sciences AI. And, you know, that's how we are focused. Most of our investment in horizon one, but of course, you know, like maybe 70, 80% is Horizon World, but 20% Horizon 2 and few percent Horizon 3. But Horizon 2 of cars, drones, and robots can be, you know, very, very big market in the future. And what happens is AI is going to change also for Horizon 2. As you see, there's a lot of reports that, you know, the world is going to move from LLM-based AI to a world model-based AI, you know, in which, you know, robots, you have to, it's no longer the text data that trains the robot. It is the physical, you know, movement and all that. And one of the key challenges in training robots or cars is that there is not enough data that is available. You know, when you train an LLM model, basically the data is available on the internet and as well, you know, language data is available. Whereas training a robot, the data is not available. Okay. So the data either has to be generated online, Manually, you know, like they put sensors on a human and the person picks up the object, you know, that could be data. But that's a very slow form of getting data. The best way to generate data for a word model is through simulation. And this is what we have talked about also for a very long time of the three-layer cake. So then the fundamental simulation of multibody dynamics becomes essential in Horizon 2 physical AI. And, you know, Hexagon had a leading, you know, simulator for multibody dynamics. along with structure simulation, you know, which helps in all kinds of electronics and automotive. So I think I'm pretty optimistic that this can position as well for the second horizon, you know, which is physical AI. And so what that will do for SDNA business, the way I look at it, our SDA business, you know, once we complete this acquisition, we'll have two strong pillars, you know, and it will actually, the run rate should cross a billion dollars in 2026 if the acquisition closes. And one pillar will be driven by 3D IC and chiplets. You know, Allegro is in our SDNA business. Allegro is a de facto standard for package design in the world. And so if you take Allegro, combine, you know, Segrity and Clarity and Celsius, our kind of electromagnetics and electrothermal tools, that's one key area of this merger of silicon and system. And we will be very, very strong in that, you know, and our partnership with With TSMC, our partnership with all the leading AI players like NVIDIA positions us very well with Allegro and 3DIC. So that will be roughly one half of our SDNA business because there's going to be a lot of growth in this chiplet-based architecture. And the second part will be this physical AI, you know, structural analysis and the combination of beta, which was the leader in pre-post-processing with Hexagon, which has a lot of solvers. like multibody dynamics, structural. And then, you know, we acquired a great new CFD solver from Stanford a couple of years ago. So if you put all the solvers together with beta, that will be roughly half of our SDNA business and really well positioned for the physical AI. So if you put it all together, the benefit of Hexagon is that it will give us two strong pillars in SDNA in the areas that are going to grow the most in the future. One is 3DIC and HPC. The other is physical AI. and connected technologies.

Great. Thanks for the call, Leonardo.

And our next question comes from the line of Jim Schneider with Goldman Sachs. Your line is open.

Good evening. Thanks for taking my question. I was wondering if you could maybe frame for us some of the tailwinds you expect you might see over the next couple of years as a result of inclusion of AI features into your products on the core EDA side. Maybe talk about any kind of productivity metrics you can give us in terms of time to market or developer productivity and how that might translate into either revenue or adoption rates of that technology and features. Thank you.

Absolutely. Great question. As we have said before, there are two parts to our AI strategy, which we call design for AI and then AI for design. I think the first part is the build out of the AI ecosystem, whether it's infrastructure or physical AI, and that we are very well positioned with all the leading players, all the Mac7 companies. Now, I think your question is on the second one, which is, of course, applying AI to design. So even this time, we highlighted several examples. So we have at least five major platforms. And some of the big examples are, for example, SIM AI, you know, which is using AI to accelerate verification. You know, verification is almost an exponential task in chip design. And we are seeing with SIM AI, you know, 5 to 10x improvement in logic simulation efficiency and coverage, which is one of the mostly heavily used tools in verification. And even in Cadence Live, you know, Samsung and Qualcomm and NVIDIA highlighted this. So these are demonstrated benefits at customer sites being highlighted by the customer themselves. Okay. But the other area is in, uh, in physical design, you know, the backend physical design with Cerebras AI studio. Again, we had Samsung code for X improvement in productivity and also 22% improvement in PPA. By the way, this is huge numbers because when you go from like five to three nanometer, three nanometer to two nanometer, typically. a node migration, which the industry is spending like, you know, billions and billions of dollars, will give like 10 to 20% PPA improvement. And if we can get that with better optimization, with better AI, that's a huge value for our customers. So the good news is that I think the adoption of AI tools is almost taken as a de facto. You know, all the big customers are adopting our AI tools. And I've said even before that the monetization of that takes some time. It always takes two contract cycles. And I think we should be able to do that or slightly better. But the productivity is huge by applying AI to EDA. And the reason I think it is different in EDA than other things is, first of all, there are multiple reasons. One is we have done automation for 30 years. The chip design process is highly complicated. automated, you know, about 80, 90% of is already automated. So we have a lot of history of automation and then AI is the next 10 X that automation that can happen. I mean, we have probably improved chip design a hundred X in the last 20 years and AI can give the next 10 X. And the other thing that is different in chip design versus other industries, I believe is because the workload is exponential, you know, the chips in five years from now. It'll be like five, 10 times bigger. The complexity will be 20, 30 times more given software and chiplets. So AI productivity is needed just to keep up. So our workload is exponential. It's very different than a workload is not exponential. So the customers are expecting us to deliver more productivity and are accepting of deploying that in their designs. Thank you.

And our next question comes from the line of Harlan Sir with JP Morgan. Your line is open.

Good afternoon, guys. Great job on the quarterly execution as always. On the third generation upgrade cycle on your emulation and prototyping platforms, you're about five quarters into the upgrade cycle. So record revenues in Q3. If I rewind back to your second generation launch, right, the team drove three years of record revenues post-launch. you still have the same drivers in place, right? Design, software complexity increasing exponentially, the cadence of new chip program introductions, accelerating addition of new customers like OpenAI, as you mentioned on the call today, and proliferation of all of these challenges into new markets like automotive and software-defined vehicle. Given the lead times for your Proteum and Palladium systems, I assume you're already booking into next year. What's the demand curve look like and

you anticipate continuing momentum and growth uh in 2026 for the hardware platform yeah harlem uh yeah as always you're always very perceptive in the overall trends in the market yes hardware is doing phenomenally well and i expect the trend to continue so will 26 be better than 25 that's what you know we would think now how much better you know we are always prudent in that because you know hardware you don't have like a full year visibility like we would have in the software business so when we go into any given year you know we only have a six month visibility so we are always prudent in a hardware guide and then you know if the if the business comes in as expected and just like this year we can you know improve our guide for the rest of the year but that's on the you know that's more on the you know guiding discipline which we want to be we want to de-risk Our guide for our investors now in terms of fundamental technology trends and market trends. I mean, this is, this is a great setup for hardware because first of all, we are the only company that builds our own systems. You know, we build our own chips at TSMC that are full radical chips. You know, you should see these things, you know, these racks have 144 liquid cool chips connected by infinity band and optical, and the customers will connect like 16 racks together. I mean, that can emulate like 1 trillion transistor designs. I mean, there is no other platform that can compete with that. And also the demand for hardware is increasing, not just because of there are more AI designs, but as we go from 3 nanometer to 2 nanometer to 1.4 to 1, which will take next 7, 10 years, the size of the chips only increases. And so there is more and more demand for hardware. So overall, competitively and market trend-wise, I think we are well positioned in hardware. But of course, for any given year, we are prudent in the guide. John, I don't know if you want to add.

Yes, yeah, yeah. Harlan, what I'd add there is demand remains very strong, particularly across AI, HPC, and auto markets. We've been scaling manufacturing capacity and trying to improve lead times. We've also had hardware gross margins become more healthy. We remain focused on throughput to meet the elevated need from AI designs. And if you look at our financials this quarter, you'll see that we've been building inventory to try and meet the demand that's reflected in the pipeline for the next six months.

Insightful. Thank you very much.

Thanks. And our next question comes from the line of Jay Fleecehour with Griffin Securities. Your line is open.

Thank you. Anirudh, you gave several examples of customer activity, customer engagements, and so forth. And I would like to ask you about the recent announcement of the joint work that NVIDIA and Intel are going to be doing. Would it be fair to presume that combined GPU and CPU work would necessarily lift up demand and capacity requirements for multiple types of EDA tools? Also, IP, probably hardware as well. So there would be a general uplift as a result of that combined work. But at the same time, would it also necessitate your increasing your investments, for example, in AEs, as you did when you had that breakthrough with Intel several years ago?

Yeah. Hi, Jay. That's a good observation in terms of CPU, GPU together. By the way, I've said this for almost 15, 20 years. that the CPU GPUs need to work together because you know, EDA is a very well optimized workload and you know, it is computational software, you know, mathematical software, which is very similar to AI. And you know, what happened in the history of EDA is that of course there are a lot of SIMD tasks, you know, like which can be done in a GPU kind of machine, but there are also a lot of conditional tasks which need to be done on a CPU kind of machine. So we always wanted both CPU and GPU. And we also wanted CPU and GPU to be close to each other. And actually to NVIDIA's credit and Jensen's credit of Grace Hopper and then Grace Blackwell, I mean, they are one of the first people to track, to kind of watch this trend. And now, if you look at all the major designs from other companies too, there is a combination of CPU and GPU together. And that's the reason for last several years, we're already working on porting our workload to CPU plus GPU. And a perfect example was when we announced Millennium earlier in the year. So we are moving not just, you know, system analysis workload, which are more GPU friendly, but also EDA workload, you know, which are critical for accelerating EDA and 3D IC to CPU-GPU combination. So what I would like to say is I'm actually very pleased to see that the whole industry now, you know, is going toward this combination of CPU-GPU plus GPU, whether you look at Apple's chips or AMD chips, and of course, NVIDIA, amazing platform. And this partnership with NVIDIA and Intel is good for us in terms of it gives us a new kind of x86 plus GPU. And also, we have a longstanding partnership with NVIDIA. And then as Intel does more work with NVIDIA, it's also good for our overall discussions with Intel, which I think are proceeding well. And I think Intel has to invest both you know, in its ecosystem for foundry and also its own products. And I think Libu knows that and it's good to see the investment on both sides.

Just to be clear, aside from the porting that you have to do internally for your own tools, you are presuming that in terms of demand that this customer activity would necessarily increase the consumption of EDA.

The customer activity should, I mean, I think first of all, if the EDS tools get better because of, uh, uh, you know, CPU, GPU system being optimized, typically the customers will adopt, you know, we always looking at ways to improve our, uh, our tools and this gives another vehicle to improve the performance of our tools. So that's good for all customers. And then I think in this particular partnership, there are specific design activity that needs to be done, you know, without getting into too much detail, you know, NVLake-based IP. So, yeah, we are working with the particular companies on design to make this design happen, just like we would work with any of the leading designs. So, yeah, there is a specific customer activity connected to NVIDIA and Intel. And in general, there is customer benefit if our tools are optimized better on this platform.

Okay. Thank you, Anurag.

And our next question comes from the line of Gianmarco Conti with Deutsche Bank. Your line is open.

Yeah. Hi there. Thank you for taking my questions again. Congrats on another great quarter. Maybe just going back towards China, especially given the amazing quarter you guys have had. Of course, part of it was recouped from Q2. But how should we think about a sustainable growth rate in the region beyond what was recouped last quarter? And potentially, If you could give some color on if there's any real risk from yet another ban in the region. Obviously, there was some news flow going on, and I think investors will want to be a bit wary about what was real in terms of potential risk to EDA or what is sort of like a broader macro level impact. Any commentary, that would be great. Thank you.

Yeah, I think China, like I said, the design activity seems back to normal to me. And I think we mentioned, of course, when we started the year, we were very prudent because I said before, when I went to China last year, I mean, they were expecting very tough kind of macro environment, geopolitical environment, which turned out to be true in 25. So we were very prudent in our guide of China in the beginning of the year, which turned out to be correct. Now, I think at this point, like John also mentioned last time and this time, we expect China to grow. How much it grows will depend. We'll have a better idea. It's very difficult to predict. We'll have a better idea end of the year. But I do expect China to grow this year. And then it's good to see, I mean, it's very difficult to predict the geopolitical environment, and I definitely don't want to do that. But it's good to see that there is a lot of discussions between the two kind of presidents and do big economies. So any stability there and certainty is good for our business. So we look forward to that. But I do expect that design activity is strong. And if there is no unforeseen development and the environment is stable, it should help our business. And I just want to remind you that our strength in Q3 is held by performance in China, but it's very broad based given You know, like all the reasons you mentioned of the build out of the AI infrastructure, the emerging design of physical AI, you know, the overall AI mega trend. So we are pleased. So we are not indexed to any particular country, but it's good to see that the environment is improving in China.

Yeah. And Gianni, I'd like to remind you that our Q4 and full year outlook assumes today's export regime remains substantially similar and we always incorporate prudence for regulatory variability. And we'll continue to comply rigorously while supporting customers globally. And as Anirudh says, we're seeing strength right across all businesses and across all geographies.

Great. Thank you.

And our next question comes from the line of Joe Quattrocchi with Wells Fargo. Your line is open.

Yeah. Thanks for taking the question. I was wondering if you could just maybe help us understand the OpEx dynamics. I think 3Q is a bit better than expected, but 4Q is a bit worse than expected. Is that related to just the Artisan deal timing of closing that, or just any sort of help there would be helpful?

Sure, yeah. But yeah, I mean, it's really just the timing of some hardware delivery shifting between Q3 and Q4. But overall, the year is slightly ahead of what we were expecting, and we're pleased by the broad-based execution, strong demand across all product categories. Core EDA software is performing very well. Hardware continues to be strong. We're continuing to make progress in STA, and we've continued IP momentum and healthy renewals set up for Q4.

I guess maybe not EPS. The OPEX.

Sorry. Can you repeat the question?

The question was on the OpEx side, like the OpEx timing.

Oh, yes. So on the OpEx side, we did a small restructure that benefited Q3. The hardware gross margins were very healthy in Q3. And then it's offset a little in Q4 by some new expenses we're picking up from new acquisitions.

Perfect. Thank you.

Thanks.

And our next question comes from the line of Charles Shi with Needham. Your line is open.

Thanks for taking my question. Anirudh, congrats on the nice results, and John, similarly here. I look at the growth rate of the overall company for the last few years. It has been maintaining around that 40%-ish plus minus range. Truly remarkable. It feels like you didn't really skip a bit at all. But when I look under the hood, the loss of moving parts, right? Like, let's compare last year versus this year. Last year, China was bad. Hardware was kind of decelerating. I think that was largely due to your hardware transition into the Z3X3. I mean, I'm looking at the upfront revenue to inform me about your hardware growth. But this year, both things kind of turned out much more positive. um uh your upfront revenue probably gonna grow somewhere closer to 50 percent uh china looks like it at least it's gonna grow above the corporate average so wonder when we look at think about next year do you think both uh hardware and china can maintain the current momentum um maybe especially on hardware um Based on the observation of the V2X2 cycle, I believe that was somewhere in between 21 and 24. When you go into like a third year-ish, the growth rate in the V2X2 cycle, it kind of decelerated a little bit. So my question is, is this time can be a little bit different in terms of the hardware growth rate going forward? Could any fear from your customers regarding hardware transition to, let's say, Z4, X4 in maybe the next one to two years causing some of the deceleration of hardware revenue? I know this is a long question, but I think that this is the most important when we think about the cadence outperformance going into next year. Thank you.

Thanks for the question, Charles. We're trying to unpack it. So I think I wouldn't focus too much on any one quarter or even any one half in terms of results. If you recall last year, the shape of the revenue curve was kind of back in loaded and Q3 over Q3 comps can be a bit skewed, particularly as well with China, given that we had that temporary restriction in China from May to the early July. But generally, when you're talking about hardware, demand is very, very strong. And we're seeing a secular trend in hardware demand for many years now because the growth in complexity continues unabated. But we're seeing a very strong pipeline for the next six months. And we're ramping up on inventory for some large orders that we have to fill in the next couple of quarters. So we're seeing lots of momentum. And we expect to, if I go back, I think the last five, six years, and it's typical of cadence, Q4 bookings would exceed Q4 revenue. So we just finished with $7 billion of backlog at the end of Q3, which is a new record for us. You know, given renewal timing in Q4 and the visibility we have, we'd expect to end 25 at a fresh high. And with that mix being so healthy across all of the different businesses, I think it bodes well for next year.

So, maybe a quick follow-up. So, from your perspective, the current hardware, Z3X3, enough to support 1 trillion transistors, but with AI really like moving really fast, do you foresee like when you have, when you probably need to like do another hardware refresh, and is there any light you can shed on this? Thank you.

Yeah. Hi, John. Yeah, I'm very confident in the hardware position. You know, we talked about Palladium. We're the only company that designs our own chips. And also Proteum with FPGA systems. And that's also doing well with the dynamic deal. And like John said, you know, we see good demand. Now, I just want to remind you that, you know, when we guide, we always are prudent, given hardware is not as predictable as software. But it is almost, even though we reported kind of upfront revenue, but what has happened is that all these big customers are almost buying every year. It's not that they're buying, you know, so the buying behavior is different than four or five years ago, because they're doing so much design that all the really big customers, it has always almost become like an annual kind of subscription, even though financially it is reported, of course, as upfront. So, so now will the hardware trend continue? I mean, right now I don't see any reason that it won't. And so I think 26 will be stronger than 25, how much stronger we'll have a better idea. Now, in terms of our next generation, we are always investing in R and D you know, we have a huge investment in R and D as you know, 35% of our revenue is invested in R and D. And, but if you look at our expense side, almost 65% of our expenses invested in R and D and about 25% is invested in application engineering. So more than 90% of our. investment and headcount is in engineering, you know, customer support and R&D. And that's true for hardware. So we are, you know, we don't want to get into all the details, but you can assume we are well in our way designing the next generation of hardware systems. And they will come in time. You know, one thing, good thing is about our current systems already support 1 trillion transistor design. And that is supposed to happen by 2030. But before 2030, we will have a next generation of hardware, which will support it for next, you know, five years. So I think I'm pretty confident in our hardware roadmap. And the demand itself, I think because, you know, Harlem, you know all this area well. I mean, AI, the chips are only getting bigger. And also what's happening is like even with like Blackwell, it's not just one chip now. You have multiple chips and then graced together. So the customers are also not emulating just one chip, which is growing 2x every node. They're emulating systems of chips. You know, like grace and blackwell together, or if you have to play with their architectures, so the demands of hardware may move faster than. Just more slow or technology scaling because of this 3D I see, but again, we will see that we are well positioned we'll see how it progresses. But systemically, there is no issue in demand for hardware in our competitive position.

Charles, there was a lot in your question. I think you referred to upfront recurring revenue as well. I mean, we continue to frame 25 around 80-20 recurring to upfront on a rolling four-quarter basis. And I think, as you mentioned in your question, the variability quarter to quarter is driven mainly by strong upfront businesses like hardware and IP and the timing of China rateable revenue earlier in the year. But with core EDA growing so well, we're comfortable that 80-20 is probably the right kind of mix of business for the foreseeable future.

Thanks for the insights.

And our next question comes from the line of Gary Mobley with Loop Capital. Your line is open.

Hi, guys. Thanks so much for squeezing me in, and let me extend my congratulations. I really just had a clarification or a question to get to a clarification. So if I recall correctly, given the timing of the export control repeal, which I believe is July 2nd, your China backlog was not in your June quarter ending backlog, but I presume now that it is. So given that 600 million revenue or 600 million delta in your backlog, how much of that was a function of the inclusion of China backlog versus the prior quarter.

Yeah. Hi. Let me take a crack at it. And then I think you're right. Our backlog grew from 6.4 to 7 billion. So there's a growth of 600 million. So I think about, I would say about 25% of that, about 150 million is catch up from Q2 to Q3. And the rest growth is growth strength across our business. Yeah, that's right. That's exactly right.

Appreciate it. So good numbers. Thank you.

And our next question comes from the line of Clark Jeffries with Piper Sandler. Your line is open.

Thank you for taking the question. Anna Root, appreciate the comments on the mechanics of the strength in the IP business and specifically the demand for design IP you're seeing for AI projects. I wanted to follow up with just how the wallet opportunity is changing with those AI projects. Specifically, do you see any potential for growing pains or lower profitability to serve the industry as they make more customer bespoke technologies with chiplet or custom memory designs incorporated into those AI and HPC designs? Has Cadence changed its investment plan or selling motion to serve that more custom nature required by the industry, or is that even needed at all? Thank you.

Yeah, great question. I mean, this is a big trend, right? Design of custom silicon. I mean, we have talked about it for years, you know, system companies doing silicon. And, you know, as you know, about 45% of our business is coming from system companies and 55 is coming from semi-companies. And so with this, especially with AI, there is acceleration of custom silicon. And I think one difference from six months ago or one year ago to now is When I look at these big, you know, system companies, they are, they are more and more committed to custom Silicon. And, and of course we have great partnership in media and Nvidia is going to do phenomenally well, but so we'll, you know, custom Silicon and we can see from Broadcom results. And, and we also work very closely with, with Broadcom and the customers themselves. So, and there's opportunities because the demand is so high in terms of, you look at all these big customers. They're projecting AI compute demand to grow like 2x every year for next several years. So I think there is growth for everyone involved in that. And the benefit of doing custom silicon, at least for the inference part, can be so high that they are willing to invest in EDA and internal chip design. So I think the financial and the customization benefit for our customers. And these are, of course, the biggest companies in the world. It's significant doing custom silicon. You can look at all the big ones like Google and Meta and all the others like Microsoft, Amazon, Tesla. So I think there's going to be acceleration of that. And as they do more internal design, of course, they need to invest in ED and IP and hardware. So I think the trend is healthy there. Profitability questions are similar. We want to have discipline in our pricing. So our profitability is similar, but the benefit to our system companies is high as they do their own chips. Thank you very much.

And our next question comes from the line of Ruben Roy with Stifel. Your line is open.

Thank you. I had a quick question, I hope, on a comment you made during your prepared remarks about collaborating. with a customer on next generation agentic AI solutions. I'm wondering, is that something that you're seeing across a wide swath of your end customers? And if so, just wondering if you could walk through maybe some implications of that, whether it's how some of those collaborative efforts on that type of solution might be monetized longer term and how you're thinking about agentic AI overall relative to specific It almost sounds like custom solutions by customer versus a broader agentic AI solution set that Cadence might offer to the broader ecosystem. Thank you.

Yeah, it's a great question. We could talk for a while on this one. And we are privileged to have deep partnership with several companies on AI. I mean, not just the design of AI, but AI for design in our solutions, and especially on agentic AI. because this is a new emerging area. We have like five major AI platforms, but what is unique about agentic AI is, of course, all the gen AI stuff. And if you look at even one of the biggest applications of AI, you know, is kind of vibe coding or, you know, software development. But if you look at it, part of the chip design is also coding. You know, we have automated, like I mentioned earlier, 90% of the workflow for chip design. But one part of workflow which is not automated is the customers still have to write RTL. RTL is like a language, registered transfer language that describes the chip. And this happens in the very beginning part of the chip design process. So that process is still manual. But the algorithm that is helping wipe coding or C++ coding for general software development kind of these agenting methods can also help for RTL development. And it can provide a lot of benefit to this 10% of the workflow that is not automated. So therefore, we have a massive investment in agentic AI, which you will see as we announce more products going forward. And we already have several partnerships in there, and we are highlighting one of them. And the way we are going to market there is, you know, this is longer is through Jedi. I've talked about Jedi before. So Jedi is joint enterprise data and AI platform. So it does have some standardized components. You know, the, the, the, the database is standard. All the models are available. AI models has interface to all our AI tools. So part of Jedi is, is standard across all customers. And we work with foundries and all to kind of train our models. Now, part of it could be customer specific. Okay. And in that case, the data is held at the customer side and that's where we architect Jedi from the very beginning to be both on-prem and cloud-based. Because sometimes the customers wanted cloud-based, but sometimes if they want data to be localized, they wanted on-prem. So that's why for years we have invested in this kind of a unique platform Jedi that allows us not just to build unique solutions like RTL development and verification plan development. but also deploy it either in a general way or more specialized to a particular big customer. But I'm pretty optimistic in how agentic AI can automate the remaining kind of part that was manual and, again, focus our customers to do higher-level tasks and remove some of the mundane tasks of RTL coding, verification plan generation, things like that.

It's very helpful. Thank you, Anirudh.

And our final question comes from the line of Joshua Tilton with Wolf Research. Your line is open.

Thank you so much, guys, for sneaking me in here and congrats on a very strong quarter. Given the time, I'm just going to actually ask a pretty direct clarification question. John, I think it's pretty much for you. In the event that that you do see some impacts in the China region given the ongoing tariff negotiations this coming quarter. Do you feel or can you help us understand how you kind of handicap the updated guidance for some, if any, potential negativity in the region?

Hi, Josh. I mean, that's a great question. I'd love to be able to tell the future. I mean, as always, we incorporate prudence. for all kinds of regulatory variability. And we base our guidance assuming that today's export regime remains substantially similar going forward through the end of 2025. But it's very, very hard to predict what's going to happen. But by all reports that we've heard, we believe that geopolitical tensions are lower than people expect.

Thank you guys again for sneaking in, and congrats again on a good quarter.

No worries. Thank you.

And I will now turn the call back to Anirudh Devgn for closing remarks.

Thank you all for joining us this afternoon. It's an exciting time for Cadence with strong business momentum and growing opportunities with semiconductor and system customers. With a world-class employee base, we continue delivering to our innovation roadmap and working hard to delight our customers and partners. On behalf of our board of directors, we thank our customers, partners, and investors for their continued trust and confidence in Cadence.

And ladies and gentlemen, thank you for participating in today's Cadence Third Quarter 2025 Earnings Conference Call. This concludes today's call, and you may now disconnect.