CADENCE DESIGN SYSTEMS INC Q1 FY2025 earnings call

• Anirudh Devgan reported excellent Q1 results with 23% year-over-year revenue growth and 34% increase in non-GAAP EPS, and raised the financial outlook for the year.
• Semiconductors remain foundational to transformative technologies like hyperscale computing, 5G, and autonomous systems fueled by the AI megatrend.
• Cadence.AI portfolio delivers PPA, productivity, and time-to-market benefits. Announced expanded partnership with NVIDIA on Grace Blackwell architecture and collaboration on full stack agentic AI solution.
• Expanded partnerships with Rapidus, Socionext, and Intel Foundry. Key product highlights: IP growth, core EDA growth, AI-driven ECO flows, verification platform strength, system design and analysis growth, Digital Twin Reality Data Center momentum, and BETA CAE's strong performance.

Cadence delivered excellent results for the first quarter of 2025. The IP business grew 40% year-over-year in Q1. Core EDA revenue grew 16% year-over-year. The system design and analysis business delivered more than 50% year-over-year revenue growth in Q1. Hardware products saw broad-based demand, particularly driven by AI, HPC, and hyperscaler customers. The ratable software business model, strong Q1 exit backlog, and predominantly recurring revenue mix provide resilience and excellent visibility. IP business contributed significantly with 40% YOY growth, core EDA with 16% YOY growth, and system design and analysis with over 50% YOY growth.

• 2025 revenue outlook: $5.15 billion to $5.23 billion. GAAP operating margin: 30.25% to 31.25%, non-GAAP operating margin: 43.25% to 44.25%. GAAP EPS: $4.21 to $4.31, non-GAAP EPS: $6.73 to $6.83. Operating cash flow: $1.6 billion to $1.7 billion, with at least 50% of annual free cash flow used for share repurchases.
• Q2 2025 guidance: Revenue $1,250 million to $1,270 million. GAAP operating margin: 27.5% to 28.5%, non-GAAP operating margin: 41.5% to 42.5%. GAAP EPS: $0.89 to $0.95, non-GAAP EPS: $1.55 to $1.61.

• Risks related to export control regulations that could impact business. - Dynamic macroeconomic uncertainties affecting the semiconductor industry. - Tariffs, trade, and regulatory dynamics, with prudence maintained in China business outlook due to these factors.

Q: Good afternoon. Thank you for taking my question. Good to see the strong mid-teens percentage year over year growth in the core EDA business. On your China business in particular, the team did continue to see year-over-year growth acceleration, right, to plus 13% in the March versus 10%, back in the December. On top of this, you know, tariff, trade, regulatory dynamics are, I think driving more focus on domestic China chip design programs, especially in AI. Like we've heard, for example, ByteDance engaging on new custom AI chip programs. We've heard Alibaba as well in automotive, there continues to be more domestic China design programs firing both analog, power management and digital. So is this domestic focus and design activity, a potential tailwind for your China business? Are you getting more optimistic on a growth profile for your China business this year versus the team's prior view of flattish?

A: Hi, Harlan, great question. So first, I would like to say I'm pretty pleased by our performance in Q1. And the strength is coming in all the various product groups and also all the various geographies, like you mentioned. And the reason is even in this kind of dynamic macro environment, the customers are investing for the future and these R&D investment takes months to years. And as you know, we are tied to the design activity, which is strong. Now in China or actually in multiple countries, the AI development is taking multiple cycles. I mean not just -- as you know, not just the development of data centers, but I've said for a while now that also the development of physical AI systems which is autos and robots and drones. And China is particularly strong in that as well. So overall, I think we are pleased with the silicon and system development driven for AI. I'm pleased with the performance of the China business and the start of the year, but we are still prudent assuming China flat for the whole year. John, do you want to comment on that?

Q: Great. Thanks for putting me and great quarter to everyone. Thanks. I mean, as we all know, your main offering is a software and services product, which may not have the same risk from reciprocal tariffing regimes that other parts of semiconductor ecosystem does. And I think if you look at your hardware chip, it's an ASIC fab TSMC. So I guess one assumes this is only a limited exposure to tariffing into China. I guess what I'm asking more generally is, can you confirm if at all, at this point, where you think you do have any exposure to the tariffing regime announced by the U.S. government, at least as you currently understand things? Thanks.

A: Yes. So with respect to tariffs, I mean, there are 2 parts to it, like, one is the customer behavior, which I mentioned, we don't see any change at this time. The second is in our own products, and like you said correctly, software and services are not subject to tariffs. Now in terms of our hardware business, just to remind everyone, we do have multiple manufacturing lines in U.S. and outside U.S. And this was something we did as part of COVID a few years ago. So that's paying off well. So at this point, we don't believe that given our diversified supply chain, the tariffs will have effect on our hardware business as well, okay? Now on the other hand, we continue to monitor the situation. It is a dynamic situation. But I feel that we are more resilient for multiple reasons. One is that we are tied to the design cycle, we don't see that much change. Second is we are very diversified, both in terms of products and geographies. And third, we have our business model, it is a ratable business model. So even in these uncertain times, we feel that we have enough confidence and visibility to raise our outlook for 2025.

Q: Thank you. tools. And Anirudh I wanted to check what is Cadence's share gain opportunity because when I look at your main peer, they have double-digit sales exposure at Intel. And I'm curious, what is Cadence's share gain opportunity because when I look at your main peer, they have double-digit sales exposure at Intel. And I'm curious, what is Cadence's share gain opportunity? And how soon can we start to see any potential share gains? Because these kind of relationships tend to be sticky. Just how large is the opportunity? And how soon can it start to show up tangibly for Cadence? Thank you.

A: Hi, Vivek. Great question. I think your question is on Intel because I missed the beginning part of the question. But first of all, I'm very pleased by Lip-Bu's appointment as CEO of Intel. And for Cadence, you know for a while, I think our Intel has been a -- I would say, a weak spot, relatively speaking, for Cadence. And this goes back 10, 15 years, it's a new issue. And then the other thing has been our investment in IP. So in general, I'm pleased with the -- so both of these 2 areas has been the main kind of areas to improve for Cadence IP and Intel. So IP, I think I'm pleased to see improvement last year and also in Q1, and I feel good about our IP business in general. And on Intel, I mean, this is a great opportunity as they have to, of course, reformulate their strategy and how they work with their ecosystem partners, and we look forward to engaging with Intel in a lot more detail. And those discussions have already started, and we'll keep you updated as they progress.