Q2 2025 Cadence Design Systems Inc Earnings Call
Ladies and gentlemen, good afternoon. My name is Abby, and I'll be your conference operator today.
At this time, I would like to welcome everyone to the Cadence second quarter 2025 earnings conference call.
All lines have been placed on mute to prevent any background noise.
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, then the number 1 on your telephone keypad.
Thank you. And I will now turn the call over to Richard. Goo vice president of investor relations for Cadence. Please. Go ahead.
Thank you, operator.
I'd like to welcome everyone to our second quarter of 2025 earnings conference call.
I'm joined today by Anirudh Devgan.
President and Chief Executive Officer Anirudh Devgan 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 four looking statements, including our outlook on future business and operating results, as well as the impact of our DOJ and BIS settlements.
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 four 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. 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 reach out with additional questions.
Now, I'll turn the call over to an
Thank you, Richard. Good afternoon, everyone.
And thank you for joining us today.
Cadence delivered exceptional Financial results.
25.
Exceeding our Q2 revenue and EPS guidance.
Driven by an ongoing broad-based trend across our AI-driven product portfolio.
Bookings were stronger than expected.
Highlighting the strategic relevance of our AI-driven portfolio and the depth of our customer relationships.
Demand for our technologies continues to grow.
Driven by customers embracing our products at scale.
And we are raising our financial outlook for the year to 13% revenue growth.
And 16% EPS growth for 2025.
John will provide more details.
On both our Q2 results.
And the updated Outlook.
we continue executing to our intelligent system design, strategy, initiated in 2018,
which remains a clear differentiator in a rapidly evolving landscape.
Our early Investments.
Delivering on our vision of unified EDA: IP, 3D IC, PCB.
And system analysis is paying off.
These capabilities are enabling us to lead.
Through the accelerating waves.
Of the AI super cycle.
From AI infrastructure, buildout.
To physical AI in autonomous systems.
To the emerging frontier of sciences, AI.
Customer R&D Investments. Remain robust.
Particularly, as AI drives.
Exponential design complexity.
Such as in advanced node design.
And complex system, architectures.
And this is translating into broad-based demand.
Across our portfolio.
Embedding agentic, AI.
Into our design platforms.
Across core Eda.
System design and system simulation workflows.
Enables the evolution from a traditional tool-based flow.
To autonomous gold driven agents.
Our Cadence AI portfolio is powered by multiple autonomous silicon agents.
And built on our unified Jedi platform.
With Nvidia accelerated compute.
Is delivering optimized design.
And massive efficiency gains for our customers.
At Cadence, live 2025.
We introduced the new millennium: M2000 AI supercomputer.
Featuring Nvidia, Blackwell.
Delivering, AI accelerated simulation.
At unprecedented speed and scale.
Across engineering and science workloads.
This tightly co-optim.
Hardware software full system stack.
Delivers up to 80% higher performance.
And up to 20x lower power.
What is this traditional CPU-based system?
Multiple customers provided endorsements.
Including Ascendant Media Tech and Treeline Biosciences.
In Q2.
We further our long-standing partnership with Adi.
Through a broad proliferation of our core Eda software.
Including AI-driven Cadence Cerebras and very similar solutions.
As well as system software across PCB, advanced packaging, and system analysis.
Also, in Q2.
We deepened our partnership with SK hinex.
Through a broad expansion.
Of our EDA software system software and design IP solutions.
And a major Semiconductor Company.
Meaningfully expanded, its relationship with cadence in Q2.
Through a broad proliferation of our EDA IP and SDA portfolio.
Be further our long-standing collaboration with TSMC.
To accelerate time to Silicon.
For customer designs.
Using 3D IC and advanced node technologies.
Such as TSMC's, A16, and N2P.
Through certified design flows.
Silicon, proven IP, and ongoing technology collaboration.
We continue the strong momentum in our IP business.
Delivering more than 25%.
Year-over-year growth in Q2.
Driven by product strength.
And a broadening Silicon Solutions portfolio.
Ai and HPC use cases.
Spearheaded the strong demand for our IP offerings.
With advanced technologies such as HBM4.
And 224 gig 30s.
Launching key wins for scale-up and scale-out in the AI infrastructure space.
We built on our strategic collaboration with the emerging Advanced Foundry.
As they awarded us, a large deal in Q2.
For our leading HBM, Ford solution.
We introduced the industry's first LPDDR memory IP.
Offering up to 50% higher performance to meet the growing memory and capacity needs of AI LLMs and agentic AI workloads.
At Cadence, live 2025.
We launched the Cadence 10, Silica Neuro Edge.
130, AI co-processor.
To accelerate physical AI applications.
And in Q2,
A market shaping, Wireless technology company.
Selected 10 silica Hi-Fi 5 5S.
As the standardized audio solution for its music and voice platforms.
Our core Eda Revenue.
Grew 16% year-over-year in Q2.
Further proliferation of our digital full flow.
At the most advanced nodes, continued.
And more than 50% of advanced node designs.
Using our implementation Solutions.
are now using
Cadence cerebras.
In Q2.
We launch Cadence cerebrus, AI Studio.
The industry's first agentic AI multilog and multi-user SOC design platform.
This technology is delivering up to 20% PPA improvements.
While accelerating chip delivery time by 5 to 10 times.
Was endorsed by Samsung and STMicroelectronics at launch.
And Renault.
Successfully used our Pegasus physical verification solutions.
To sign off an advanced node SOC.
After it demonstrated a significant throughput advantage.
Our industry-leading Palladium Z3.
And protein X3 platforms.
Accelerated. Their momentum is delivering outstanding results.
With Q2 being the best revenue quarter ever for our hardware systems,
Demand for hardware was strong and broad-based.
Driven by AI, HPC, and automotive customers.
Our verification software suite.
That includes very similar and Jasper.
And leverages big data and AI to optimize verification workloads.
Stock continued expansion with 27 new logos in Q2.
Building upon 30 years of industrial leadership.
We launched the virtual Source Studio.
25.1 release.
Offering broad support for RF.
Photonics.
Mixed signal and advanced heterogeneous design.
Our leading Spectre at circuit simulator closed several deals.
With strong growth.
while our fast fight Spectre FX platform,
By the top 3 memory companies.
Our system design and Analysis business.
Delivered, another standout quarter.
With 35% year-over-year, Revenue growth.
On the packaging front.
There was strong customer uptake of our 3D IT technology.
And top foundries and semi-customers.
Embraced our AI-driven advanced substrate router.
Which provides tremendous productivity benefits.
Our AI-driven Allegro X PCB design platform.
Saw continued proliferation.
As multiple Aerospace and defense.
Hyperscale and EV customers.
Took advantage of the platform's meaningful productivity and next-generation capabilities.
Our Clarity and Celsius solvers.
So, our significant expansion at a major hyperscaler,
And Clarity secured a key when at a marquee AI company.
While our reality data center, digital twin,
Rose strong growth at a top hyperscaler.
Beta CA technology Integrations.
With our CFD thermal and electromagnetic products, we were released.
As beta CAE Solutions.
Continued to score key competitive wins.
But particularly in the automotive segment.
Finally, I'm pleased to share that we have entered into a settlement.
With the US Department of Justice.
and the U.S. Department of Commerce's Bureau of Industry and Security,
That resolved, the previously disclosed investigations.
Into certain transactions with customers in China that occurred between 2015 and 2021.
The settlement represents a mutually acceptable path forward for all parties.
And we believe this is in the best interest of our customers, partners, and shareholders.
I want to emphasize.
Cadence is deeply committed to the highest standards of compliance.
And we have significantly enhanced our compliance processes over the last few years.
And continue to implement improvement measures to proactively address evolving trade restrictions.
We remain focused on delivering for our customers and shareholders and executing the clear strategy we have laid out to drive innovation and enhance value creation.
In summary.
I'm delighted with our Q2 results.
And the continued momentum.
Across our broad and innovative portfolio.
The AI-driven era presents tremendous opportunities.
And the cooperative optimization of our comprehensive EDA and SDA portfolio.
With accelerated computing and GenAI, we are uniquely positioned.
To deliver breakthrough solutions across a wide range of markets.
Now, I will turn it over to John to provide more details on the Q2 results.
And our updated 2025 Outlook.
Thanks, Anna. Rude, and good afternoon, everyone.
I’m pleased to report that Cadence delivered excellent results for the second quarter of 2025, with broad-based momentum across all of our businesses.
Strengthened other regions more than offset the impact of the export restrictions on China outlined in the BIS letter dated May 23rd, which was later resent.
Robust design activity and customer demand, coupled with our strong execution, drove 20% revenue growth and 29% non-GAAP EPS growth year-over-year for Q2.
Here are some of the financial highlights from the second quarter, starting with the P&L.
Total revenue was $1.275 billion.
Gap operating margin was 19%, and non-GAAP operating margin was 42.8%.
And GAAP EPS was $0.59, with non-GAAP EPS at $1.65.
Next, turning to the balance sheet and cash flow.
The quarter end was $2,823 million, while the principal value of debt outstanding was $2.5 billion.
Operating cash flow was $378 million.
Dsos were 51 days, and we used $175 million to repurchase Cadence shares.
Before I provide our updated outlook, I'd like to share what's embedded.
As Andrew mentioned, I'm pleased that we've reached the settlement with the DOJ and BIS, resolving previously disclosed investigations into certain China sales from 2015 to 2021.
Totaling approximately $45 million over the 6-year period.
As part of the agreements, we'll make a payment of approximately $141 million in our third fiscal quarter.
Please see our Form 8-K, which includes additional details regarding the terms of the agreements.
On July 4th, 2025, the "Big Beautiful Bill" Act was enacted in the United States.
This act includes the restoration of favorable tax treatment for certain business provisions, including the immediate expensing of United States research and development expenditures.
We expect to decrease Cadence's United States federal tax payments for the remainder of fiscal 2025 by approximately $140 million.
Our updated outlook includes the timing of the settlement penalty, the cash tax benefit of the OBBA, and the usual assumptions that export control regulations that exist today remain substantially similar for the remainder of the year.
Our updated outlook for 2025.
Is revenue in the range of $5.21 to $5.27 billion.
Gap: Operating margin in the range of 28.5% to 29.5%.
Non-GAAP operating margin in the range of 43.5% to 44.5%.
GAAP EPS in the range of $3.97 to $4.00.
Non-GAAP EPS in the range of $6.85 to $6.95.
Operating cash flow in the range of $1.65 billion to $1.75 billion.
And we expect to use at least 50% of our annual free cash flow.
To repurchase kitten shares.
With that in mind for Q3, we expect Revenue in the range of 1 billion and 305 million to 1 billion and 3335 million.
Gap: Operating margin in the range of 32% to 33%.
Non-GAAP operating margin in the range of 45% to 46%.
GAAP EPS is expected to be in the range of $1.14 to $1.20.
And non-GAAP EPS in the range of $1.75 to $1.81.
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 GAAP to non-GAAP reconciliations.
In conclusion.
I'm pleased with our strong first-half results and the robust pipeline for the second half of the year.
At the midpoint, we now expect revenue growth of 13% and non-GAAP operating margin of 44% for the year.
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.
Telephone keypad.
As a courtesy to all participants, we ask that you please limit yourself to one question, and we'll pause for a moment to compile the Q&A roster.
And our first question comes from the line of Joseph Veurink with Beard. Your line is open.
Terms of the tools that this is going to need versus what the initial build-out of AI infrastructure has meant.
Yeah, Joe, this is a great question. First of all, I'm very pleased with our results and our performance.
And the demands of of demand of our products, which is, which is broad-based.
And also, I think there is, first of all, I believe there is overall optimism.
In the benefits of AI in our customers, you know? Both from.
You know, uh, what they can, you know, their own products and also how they can use AI internally?
So therefore, they are investing more in their innovation, and given the critical nature of our products, investing more in Cadence.
Now, it has several aspects to it, and you know I have been a big fan of physical AI for a long time. Because one unique advantage we have in Cadence is the privilege to work with all the top companies in the world. And we believe that, of course, AI infrastructure is huge.
But physical AI has the potential of being even bigger.
And then followed that with science is AI. That's why we have laid out this three-phase evolution of AI.
And now, you know, if you look in the in the marketplace also with autonomous cars or robots and drones it is becoming much more, you know public uh and you know our advantage is even though some of these things come out later, you know, the customers start investing in R&D before they come out in public, you know. So so, but I think physical AI will will play a very key role for our products because the, the, the Silicon required first of all, and physically, I will affect the whole 3 layers of the of that AI cake that I've talked about. So first of all, the Silicon is different uh, in in, in the car, or in the robot or in the edge devices is different than data center silicon. I mean it's still AI driven but it's more power optimized runs on lower battery, as you know. So the Silicon is different, the simulation and design is different, and of course, AI models themselves are different. They are more word model than llms.
But all these physical AI is still need to be trained, you know, even if the inference like for autonomous cars, runs on the car. The actual AI model is trained on the data center. So the beautiful thing of physical AI is not only it creates new opportunities for us. It also emphasizes the importance of uh, AI infrastructure in the data centers. So it is helping both sides of that equation. And so we are benefiting from that, you know, and we are as, you know, working with all the main AI data center players, you know, as they design, uh, chips and systems. So, so the impact is both
On the, um, data center side and the edge side, but this is still an evolving market. I think physical AI is still in the early innings. You know, there are still like 3 to 5 years of more development to go.
So, overall, I think what I would like to say is that, uh, the customer environment is, I feel personally, better than it was six months ago.
That's great. Thank you.
And our next question comes from the line of Gian Marco Conti with Deutsche Bank. Your line is open.
Yes. Hi there. Thank you for taking my questions. I mean, firstly, congrats on another amazing quarter. Um, simply what like to Cadence increase in the growth Outlook even though you cannot recognize 1 month of China Revenue, like, I guess like the Curiosity of whether there's there was a single stock of renewals across CDA or was this across all fronts, and, and maybe you can give a small comment on backlog and the development for the year. Thank you.
Yeah Janie. Great question. I mean, um, yeah, that it's been an interesting quarter. I mean, China was ended up being 9% of our Revenue in Q2 that's down from 11% in in q1, but we've seen strong demand, across all geographies uh, and strengthen other regions more than offsets any near-term softness related to China during Q2. Um, you know, we've we've spoken in the past about how well Diversified our customer bases and and we're increasingly seeing
Growth, um, and we're seeing the growth in bookings from AI HPC and and system design workloads globally. But um, we're very, very pleased with the the way backlog ended up at the end of, at the end of Q2, uh, it is stronger than we expected going into the quarter, despite all of the restrictions. But, um, and yeah. Um, we're we're very very pleased with where we are halfway through the year and Route anything to add.
In hardware. And, uh, and also, we are essential to all the major AI chips being designed using Palladium and our Eda software and then you know, all these agentic, AI tools, like, you know, cerebras AI Studio, I mean that's a phenomenal new product and then visium Allegro egg. So so I think both the software and Hardware business is doing well in core Eda and then IP had a great quarter. I mean, there's a lot of reasons behind that 1 is the AI infrastructure to build out. But also, you know, there are at least 4 major companies doing Advanced node foundries. Now, you know, with with tsmc, you know, our long-standing partner Samsung even today. There's a big announcement from Samsung Foundry, uh, you know, Intel with 18, a 14, a and Rapid Us in Japan. You know, I just came back from Japan with this big opening of Rapid. So there are at least 4 Advanced node, uh, Foundry is that all required IP. So, I think that's also driving, uh, strength in IP and then system continues to do well. Uh, because of our for
Focus on on, you know, 3D IC, which is the the fastest growing part of the system market. And and, you know, beta is is for providing us a good kind of integration with the rest of the flow and new products like Millennium. So if I look at all the 3 main, you know, areas I think I feel I'm we are very well positioned and the market itself seems to be improving with the AI super cycle. So
Got it. Thank you.
And our next question comes from the line of VC Arya with Bank of America. Your line is open.
Uh, thank you for taking my question. Uh, just near and longer term, uh, China impact question. Uh, so in the near term, how much of a headwind was, um, China in Q2? I know John, you mentioned they went from 11 to 9, but what was kind of the expectation? Then if we zoom out for all of 2025, um, I think in the past you had said China sales were expected to be flat year on year. Is that still the right approach? Because that would still imply quite a bit of a lift in, uh, the back half. And then until we look longer term, uh, what is the right China exposure for Cadence? Does it naturally just come down over time, or, you know, will it probably stay at this, you know, 9, 10, 11 percent kind of range, uh, over the longer term? Thank you.
Yeah, perfect. Look, I I'll start because I I I understand your question. I mean, I I, I would view our outlook for for China, to be optimistic. But prudent the um, I mean, our guidance reflects. What we believe to be a a prudent and well-calibrated view of the second half of the year and the export control, environment is dynamic. And and while we've Incorporated current regulatory, um, framework as of today into our assumptions. We we always add some Prudence to account for potential variability whether that's geopolitical or operational. But, um, but you're very
Everybody is pleased with how China is doing. I know last quarter we told you that we were expecting it to be flat. It's hard to see how China won't increase a little bit over last year, but we've been prudent with our guidance.
And we're very long term, I think China, you know, will of course, is going to invest in in chip design and system design just like all geographies.
But I think the percentage of revenue should be similar or maybe.
You know, uh, maybe a little down, but not because China won't do well; I think the rest of the world is doing phenomenally well, given all the investment you're seeing in the U.S.
And then Japan, Korea. I mean, so, so not, not to...
Say in particular about China, but I think the rest of the world and which we saw in Q2. Also, there is significant investment. So given that context, it is difficult to predict exactly what China will do.
But it's good to see that, you know, China is doing well, but the rest of the world is doing even better.
Mine of Heartland, sir, with JP Morgan. Your line is open.
Good afternoon and great job on the quarterly execution. You know, if I look at many of the AI xpu A6 and Merchants chip design programs that are in design right now, many of them are looking to transition from 2 and a half feet to 3 and a half feet Advanced packaging architectures which includes ships stacking, right. And many of these folks
There's a 3.5 deep packaging, and then how much is Advanced Packaging roughly contributing to your overall revenues?
Yeah, Harlem, that's a great question and a great observation. Of course, I mean the whole industry, especially in.
HPC, uh, and AI is moving to the chiplet based architectures. And also I think it's not just limited to to the data center. Even, you know, if you look at the latest Auto designs and all they all all the other markets will, I think over time move to this new packaging.
Architecture, and we are, you know, Cadence is uniquely and very well positioned. I mean, I think we have talked even earlier. Allegro is the platform of choice for package design. And 3D IC is another way of talking about package design. And then at the same time, we have virtual also, which is analog, you know, which is digital. And then all the system analysis tools, like Clarity and and, uh, voltage and Celsius for so so. So and that is all incorporated into into integrity. And then we closely worked with the tsmc, you know, the tsmc had an established job, by the way, in 3D. I see and we have worked closely with tsmc over the last several years, you know, to develop this 3D IC flow that is used by uh
Most of their main customers and then now you know, rapid Us in Samsung and Intel, we're working with all the other Founders to develop this kind of 3D IC flow because it will be critical for all the other founders.
And, you know, we don't explicitly call out Allegro in our SDNA business, but it is a significant part of that business. But also, it pulls in, you know, the other things. You know, it's not just Allegro by itself, but it naturally goes into analysis, tools, you know, and Clarity and all those things. Uh, and even the base tools like, uh, virtual and innovative.
But it is a platform of choice for all the major companies as they implement this, uh, new 3D IC or now 3.5D.
I c Technologies.
Thanks, dude.
You know, this is only the beginning, I think, and even in TSMC OIP, they showed a roadmap that this is only going to increase. I mean, this is the orthogonal axis to...
I mean, you know, this is an orthogonal axis to more so, first of all. Okay, we are always worried about, you know, this is a natural question from investors or employees sometimes: you know, how long will Moore's Law continue? So, first of all, Moore's Law anyway is going to go to at least 1 nanometer, right? So, we are at 3, you know, 2, 1, 0.41. Okay, that's 10 years. And I visited, you know, some of our research partners like IMEC, and they're planning, you know, Moore's Law to go till 2042.
New transistor structures. But at least for the next 10 years, I see more laws being strong. However, then there's 3D IC and heterogeneous integration, which provides orthogonal levels of integration. If you look at TSMC and other roadmaps, you know, right? They have very aggressive roadmaps to be able to put more and more chips, like you said, in a package. So we are pushing on both of these dimensions: you know, Moore's Law. We want to make sure we are aligned with all the latest technologies and customers. And then this 3D IC and heterogeneous integration.
Great. Thank you, Anna Wood.
My next question comes from the line of Lee Simpson with Morgan Stanley. Your line is open.
Great, thanks. And uh, well done and another great quarter. Um, I think it falls to me to maybe ask about the agentic systems. I, i, i note again, this is a second quarter. You you brought it up. Uh, it does look as though developments moving ahead. And I think if, you know, if the comments are to be interpreted, right? You are seeing some early sales what assumes in in sort of pilot line, uh, development. But, but I'm I'm trying to, I'm still trying to put this into perspective. What if we take a step back, do we need a new business model, or a different? Go to
Market strategy to get full value here and more generally, you know, how will you monetize this added value that an agentic system will bring to the customer? Just any thoughts around that and maybe timing as well, because it does look as though this is relying on still early-stage reasoning models. Thanks.
Workflows on top of our base tools and customers are embracing, both our base tools and the agentic AI flow, I mean 2 great examples. I mean, 1 of them, we I mentioned briefly is uh, in the back end, you know, cerebras cerebras by itself. Like, like I mentioned is more than 50% of our designs are already using cerebras.
Which let's call it classical AI. But now with cerebras AI Studio, it's a whole workflow. So it's more it's a agentic are solution instead of just doing block implementation, it does floor planning. It does timing closure. So what typically, uh, a designer could do like uh, you know, 3 to 5 million instance design. They could do like 30 to 50 million instance. So it's, it's a massive productivity and PPA benefit as as the AI does more of the manual work that was manual in the past, so that tool itself had a lot of early, uh, adopters,
Like we mentioned on the call, Samsung and SD, and others, and then there is on the other side, which is verification and RTL writing. You know, there's a whole notion of uh LLMs generating and reasoning and element generating code is a big thing, not just in software development like C++ but also, you know, chip design and RTL. So those two areas are very, very positive. One is in the front end with RTL generation and verification, and the other is in the back end, and you know, PPA optimization.
And that those are different tools than our traditional tool set and we we engage with customers on that. And our philosophy always is because we have a long history of innovation and Automation in Eda. Our philosophy is to deliver value to customers. Their workload is going up anyway and aligned with the top customers and usually they will you know reward us for that. Uh and that's our history over the last 10 years and so we are focused on Innovation and productivity and we have all kinds of business models to monetize that in any way. And we'll see how that progresses over time.
Great. That's a very full answer. Thank you.
And our next question comes from the line of Jim Schneider with Goldman Sachs. Your line is open.
Good afternoon. Thanks for taking my question. I was wondering if you, uh, you maybe could talk a little bit more about the core Eda results. Very strong in the quarter. Uh, with a lot of growth. Can you maybe site some of the drivers of the strengths in the quarter? Be it new customers or uh, cerebral, uh, pricing benefits, um, or anything else that was 1, time in nature and maybe give us a sense about how you expect the Cadence of the core Eda Revenue to Trend in the back half of the Year. Thank you.
It is doing phenomenally well. I mean, those two reminders... I think most of our investors know this already, but just to remind everyone that we have the broadest portfolio in CDA. We have digital, in which we are in a leading position, especially in the TSMC ecosystem, which is also the de facto standard in analog signal verification. We have all the verification software tools, and Palladium and Protium in hardware. So, Cadence has the most comprehensive EDA portfolio on the market.
And as you know, AI...
Uh, you know, as AI adoption happens, you know, it's both the core product portfolio plus the AI-driven agents that we talked about, and we saw signs of that in Q2.
And then some of the key customer wins. We highlighted is, of course, skindex, this is they're doing phenomenally well, as, you know, with the with the AI and hbm, you know, ADI, which is long-term Cadence partner and then overall strength in Hardware, which was very broad-based, then in IP and in and systems, which is outside of Eda. So, overall, I think, you know, uh, I'm I'm pleased with that. Of course, as you know, we never focus on, uh, you know, 1 individual quarter. They could be quarter by quarter variation, but overall I think Eda is doing well and I expect it to grow going forward. Yeah.
Yeah, and Jim, we're getting proliferation at marquee customers. And we're seeing the second half look particularly strong in the software side, as well as hardware on the inquiry.
And our next question comes from the line of Jason Selino with KeyBanc Capital Markets. Your line is open.
Hey, thanks for taking my question. Um, you know John, if I heard you correctly, I think you said that China would be up a little bit this year versus flat previously.
China's growth could have been different if those restrictions, you know, had never happened. Like if we never had those six weeks.
thanks.
Yeah. Yeah. Uh, Jason. I mean, great question. Very, very difficult to to kind of figure out what Revenue would have been in that kind of parallel universe where that never happened. The the 1 thing I take comfort from though is that, you know, the the restrictions came and they went. But, um, so I, I think the focus on the year and and when I look at the year that, you know, previously we thought the year would be flat for China, um, with the strength that we've seen a cross the border, cross all businesses in the cross all geographies. It's it's really hard to see. China remaining flat uh year-over-year. Now that, uh, I think it'll be slightly up, but of course, you know, we're we're normally very prudent with our with our guide and, and I thought it was appropriate to re, uh, remain prudent with the outlook for the year. Um, so we've been cautious, uh, but optimistic with that Outlook,
Okay, great. Uh, sounds good, thank you.
Okay guys, thanks for taking my question. John, when we enter the year I think your expectation correctly for wrong was
The year with a strong renewal period in the second half.
And clearly, your bookings in the first half of the year have exceeded your expectations by, I assume, several hundred million dollars.
And so my questions are 2-part. Um,
I want to confirm that the June quarter ending backlog excludes China. And...
You know, with the strength in the first half that you've seen, what does that tell you about the potential for the second half? Bookings, and exiting the year with perhaps record levels of backlog?
Yeah. Gary, I mean, very astute question. Um, the, yeah, we, to confirm, um, we had to exclude, um, a number of China bookings from, um.
Uh, from our backlog, by the end of Q2, we had to reserve for those because at the end of Q2 the, um, the restrictions were still in place for us. Um, so the the closing backlog at the end of Q2 reflects a lower level of backlog than it would have been, uh, had those China restrictions been rescinded prior to June 30th but, um, and, and then, in terms of the outlook for the year, um, yeah, I'm pretty confident. We're going to end up the the year with, uh, with a higher backlog than we started the year. So, uh, I'm I'm very comfortable that we'll end up with a book to Bill of 1, second half. Uh, bookings. The, the renewal cycle is, is strong in Q3. And Q4, uh, I I think both Q3 and
In Q4, we'll have bookings that exceed our revenue for those quarters. And like I say, we expect that by the end of the year, we'll have a new higher and record level of backlog compared to last year.
Thanks John.
And our next question comes from the line of J. Fleece with Griffin Securities. Your line is open.
Uh, thank you. Um, honorable, you spoke earlier in answer to an earlier question, and in your prepared remarks, uh, about agentic AI. And I'd like to ask about the broader implications and requirements. Uh, one of the terms that come up this year, uh, more broadly in software, not just in EDA, having to do with agentic, is orchestration. And in your world specifically, if we think about what you're providing with the agentic AI or AI generally, it's fundamentally, I think, a form of simulation. Um, and therefore, the requirements for that would also seem to be, um, new forms of process or the data management and traceability, which is a critical function in simulation. Uh, if our thesis is right about what you're really doing. So beyond just introducing these agents and aides, how are you thinking about the broader?
Uh, portfolio and capabilities that you need to provide customers, particularly since you referred to their workflows. Thank you.
Yeah, J. That's a great point. So,
Yes, you are absolutely right. I mean, we want to make more of a workflow automation, just like I mentioned with Cerebras AI Studio. So it's not doing a point function; it is doing multiple functions together with reasoning.
And the critical need is, you know, apart from the, you know, LLMs and all this critical need for, for uh,
Like a data structure, a database to store all these actions.
The data storage to because we need to capture. Not just 1 tool or 1 point in time, you know, multiple tools and multiple flows like just like a human would do. So Jedi has become a very essential part of our AI deployment to customers and it's a very flexible system, you know, because some of our customers, some really big customers want Jedi to be on Prem because the data is very, very sensitive. Some customers are okay with you know, Jedi being on the cloud, you know, okay to use cloud llms or or cloud data management and then some customers want a hybrid, you know, on-prem and Cloud solution. So Jedi uniquely positions us to make that kind of
uh,
Invisible to the user. Jedi is critical, along with the AI agents, to deliver this solution to our customers. We are able to do much more, and we'll do much more of a full workflow solution, along with Jedi and then the agents on top, whether it's for ACM, Cerebras, or Algor X.
Got it, thanks.
Question comes from the line of Joe Kotak with Wells Fargo. Your line is open.
Yeah, thanks for taking the question. Uh just to follow up on another question on, on the, uh, China impact. I mean, I guess can you help us understand what would have RPO been had? The the restrictions uh, not been in place exiting the quarter. It had been rescinded, prior to exiting the quarter, just that difference. So we know what RPO I guess, technically really is now. And then just to clarify on the full year guide increase is that all driven by the upside from China or is it other regions as well?
Yeah, Joe just take second part of that question first. I mean, the the the increase is because of the strength we're seeing across the board and across all geographies. Um, I mean, we were doing our updating our guide. The, the guide we gave you at the end of last quarter, uh, was without any kind of restrictions. And at the time we were updating the guide, we we obviously knew the those restrictions have been rescinded. So, so it is an Apples to Apples view. When you compare the guides. Now against this time, last quarter, we've taken the year up by 50 million, um, and we've taken up, uh, EPS by about 12 cents, um, and that's on the, on the back of very strong, bookings activity, um, and, uh, performance. That's, that's we're seeing right across the globe, um, in relation to the, the backlog impact of China, when we, um, when we held up revenue for China, any of those orders in which Revenue was paused, uh, as, as a result of the China restrictions, as of the end of Q2, we had to back out the booking,
Um, from the backlog at that time. Um, but I think if you look on a year-over-year basis, the the right way to look at it is that we will end up the year, uh, with, uh, with a higher and record level of backlog. Uh, the book to bill will be greater than 1 for the year, uh, which, which indicates a very strong um, uh, bookings half for us in the second half of the, of this year. But that's, that's mainly due to strength across all regions, across all geographies and, and we have a high level of renewal activity that just naturally falls into Q3 and Q4, because we have a number of expiring contracts in those quarters.
Thank you.
And our next question comes from the line of Charles Shei with Nem. Your line is open.
Taking my question, maybe this is for John. I.
I think you reported a recurring Revenue as a percentage. Uh, in Q2 was 78% this is probably a multi-year low and uh, wonder what's the expectation for the full year? Uh, the recurring Revenue percentage and what is the long term normalized? The level? Um, maybe this is a related question. If I may, um, I believe your Hardware is mostly manufactured in the US, and presumably there should be no, uh, direct tariff impact. But there was there any customer Behavior related, uh, pulling in, uh, that was seen in Q2 and possibly also in Q3, thank you.
In China during Q2 caused the recurring Revenue percentage to dip to about 78%, uh, uh, for the quarter. But if you look typically we, we look at that as a kind of a rolling annual number. It's we'd expect it to be about 80/20 80% recurring, uh, and 20%, um, upfront. Uh, and, and that's, that's been growing. I mean, in the past that was probably 70, uh, what was it 8515? And now, it's gone gone more towards 80 80/20, but that's really the result of the strength in our in demand, for our upfront businesses, which mainly come out of Ip and and uh and Hardware.
Thank you, I appreciate that.
And our next question comes from the line of Reuben Roy with Stifel. Your line is open.
Yes, thank you for letting me answer your question. Honor route. I wanted to, uh, touch back on IP. Um, I know IP historically has been a little bit. Lumpy volatile whenever the word you want to use, but you've had quite a bit of strength recently. Um, IP was up, and I think 30% last year, 40% last quarter and another 25%, this quarter you talked about, you know, you brought a broadening, uh, portfolio. But it sounds like a lot of this is going into uh, Ai and HPC. And you know, obviously um faster design Cycles in those markets Etc, in in recent years,
I'm wondering if you could talk about your longer-term perspective on IP growth. Is this sort of sustainable at potentially higher rates than you've thought about historically for that segment? Thank you.
Yes, uh, that's a great question. And you know, in general, I think I am much more optimistic in IP.
Than I was, let's say, 2 or 3 years ago, and I mean, there are multiple reasons for that. One is, you know, we are investing more in IP now because we feel, first of all, that our EDA position is very, very strong. You know, for years, we invested in EDA and we continue to do that. But at this point, we feel we are in a strong position in EDA.
We are in a growing position in SDNA given, you know, 3D IC and, you know, the strength of Allegro and AI.
And IP historically, we didn't invest as much. But things have changed. One is because of this, you know, like a previous question, you know, there's an emergence of chiplet-based architectures. I think it provides more opportunities for IP. The emergence of multiple advanced-node foundries, you know, there are at least four major ones now, provides more opportunities for IP.
And our portfolio has also improved with some good M&A. You know, like we got HP M4 from Rambis, and there are several others over the last few years. So I feel now we have crossed a critical mass for IP to be a good business for us, and you are seeing that last year. So one year doesn't make a trend; I think we are seeing that this year.
And so, I do expect that, in the longer term, IP can grow faster than Cadence's average.
Uh, which is, which is what we like to see in these. And now it will have slightly lower margin than Eda, but of course it can grow faster. So, as a rule of 40, you know, that's a good area that and we continue to invest in that and especially with the AI, you know, driven IPS new foundies, you know, this onshoring. I think it's a good business uh, for us and good growth for next. Several years, I expect
Clark Jeffries with Piper Sandler. Your line is open.
Hello, uh, thank you for taking the question. Just a clarification on the tax.
Benefits. Uh, I heard $140 million for the remainder of the year. Just to clarify, is that for 2 quarters, and that the annualized benefit might be close to double that? And then, just from a philosophy perspective, does this change around R&D expensing sort of change your appetite for incremental investment, or is it a near-term windfall that normalizes over time, and there's no change to appetite? Thank you.
To the Gap, you know. Um, now from, um, from a non-gaap perspective, we use a, an effective tax rate of 16.5%, that normalizes everything. So, so the the impact of the obba, uh, doesn't change our our non-cap rate, uh, for this year, it's still at 16.5%, um, but the, the 1 time difference on on cash taxes for the year is about 140 million. Now we, you'll see the benefit of that in Q4, um, the but it's already incorporated into our annual guys.
Thank you.
With Wolf Research, your line is open.
Hey guys, thanks for sneaking me in, and congrats on a great quarter and a nice race for the full year outlook.
Most of my questions have been answered already so maybe more of like a a medium-term thought question. When you look at the guide for the full year, it's still kind of implies that the recurring Revenue side of the business is going to see uh muted growth. Now I know some of this is because you know there was a little bit of a hold this quarter because of China but how do we think you know long term the trajectory of recurring Revenue growth from here uh and your confidence in the durability of you know. Total growth is maybe you roll off the hardware cycle or you start to see uh slower growth on The Upfront side. Thanks.
No great question the um, yeah. I think we what we've seen over the last few years is we've seen a drift towards kind of a lower level of recording Revenue, higher level of upfront Revenue, but that's mainly been as a result of, you know, IP and hardware and sdna to a certain extent growing faster than the average Cadence business that. Um uh, I think I mean, right now, it's, we're at 8020. We're not guiding anything. We're at 8020 for this year that, uh, we continue to expect that. That, split that. Um, we're we're not guiding for next year yet, but but actually think that the core Eda, uh, software is doing so well, that um, there's there's quite a good chance that 80/20 remains for quite some time that because we're seeing some we're seeing good growth there. Um, that like we're we're we're seeing a lot of growth right across the whole portfolio of of um of the Cadence business and and across all geographies right now. Um, so we're very, very pleased with the with the way that's working out and and really the change in recurring, revenue is just uh, slight change in how
Customers consume our technology and our Solutions and it's it's how we how we provide them. Uh and we're just delighted with the continuous adoption from those customers.
Love to hear it. Thanks for sneaking in, guys. Appreciate it.
Thanks.
To our next question comes from Nazo, 9, with Baron Berg. Your line is open.
Hi, thank you for taking, uh, the question from me and also, congrats on the quarter and it's a good race and before your guide, um, a question on agentic AI, please. I was wondering if you could, maybe share your thoughts on what you think will be the um the the the toughest adoption barriers because, you know, from from my point of view, at least the agentic AI product that you guys have unlike in the broader, uh, software AI that we've seen Roi, you know, should really be a uh a sticky Point here. So I was wondering you know, what would be the sticking points here? Would it be the the operational challenges? I customers adopting or implementing your agentic workflows in their established workflows today, or is it more of a human element here? Where uh, unfamiliar with the technology or people of some would worry that? Um, you know, their jobs may be at risk from adopting your uh, a
Stations. Thank you.
Yes, very insightful question. I think one thing I would like to emphasize is that there is a difference in chip design and system design.
Users are already used to a lot of automation, which may not be the case in classical kinds of software. The second thing is that our workload...
Our workload for our customers is going up exponentially because of more slow and 3D IC. So this is a very different environment than, you know, if the workload is constant in some industry that is not evolving in chip design. You know, by 2030, the chips will be, you know, right now they're 100 to 200 billion transistors, and it's expected that the chips will be 1 trillion transistors by 2030. Then you add all the software, you add the new architecture. So the workload will go up by 30 to 400 times in the next 5 years. Okay, there's not even enough talent or headcount to hire to meet that requirement of 30 times. So this is not an industry in which the workload is going to be fixed. Okay? And then the worry of the people is, if you use AI, you know, your job will be affected here. You know, you need AI to cope with the 30 times increase. So I believe that the customers, and this is talking to all the big CEO customers, will invest in our solutions.
R&D, okay, but they will increase headcount. However, they don't want to invest 30 times the headcount. I think the headcount in our customers' R&D will go up maybe by 2 to 3 times, but the remaining gap of 10 times in productivity has to be made up with more automation. They are willing to invest in agent AI and more compute.
Balance that because there's not even that many Engineers, you can hire. So the the 2 things, which are very different in Eda and, and SDA versus General software 1, our customers are used to more and more automation over the last 30 years. And second, the workload is going up so much that they have no other choice but to use Automation and AI. So I think that's why the, the the the the real test for us, will not in my opinion. Be whether the customers are willing. I think the customers are willing is the productivity of our solution. So what I've seen with our customers is If the product works, if they give better PPA, if they're faster, our customers will always adopt that.
And because they have more work to do and that's what we focus on like cerebras AI Studio. Does it give 20% better PPA or does vcm give 5 10x benefit? And this is the history of our customers. And because these are the, the best, and the biggest, the brightest companies in the world, right? We are all Max 7 are our customers, all the top 50 companies in the world. So we deliver value, I've always seen, they will adopt it because the workload that they're doing is increasing a lot. And the, the AI tools create more demand for our core idea tools as well, right? But we always said it would take a couple of contracts cycles and um, and and we're always very mindful of the, the balance between delivering Cutting Edge, Innovation, and ensuring our Solutions, remain accessible and valuable and useful to, to customers of all sizes. I mean, the increasing design complexity, particularly with AI and advanced nodes, naturally creates
Demand for more sophisticated tools and and and IP. But our our goal is always to deliver measurable Roi through productivity gains, faster, time to Market and the improved PPA, the outcomes that customers can get from using our core Eda. So. So we do think core Eda has growth in there and, uh, could well, um, we could well benefit from that over the next few years.
That makes a lot of sense. Thank you very much. Thank you for the thoughtful answers.
And then our next question comes from the line of CP Pornography with Mizuho; your line is open.
Great. Uh, thanks for taking my question. Yeah, most of my questions have been answered, but I just want to follow up on one of your comments on that strong bookings. How do you characterize the demand for your traditional semi customers versus systems, like hyperscalers? Uh, that segment. And, uh, do you see any kind of positive signs on the traditional semi customer?
Yeah, that's a very important question. I mean,
First of all, the system companies are doing more and more than before, as you would expect. You know, uh, not just the classical data center but hyperscalers, which are also, you know, like physical AI, like cars, and...
And then on the semi side, of course, some customers are doing phenomenally well, right? Like Nvidia and, you know, some of the like Broadcom. So I think your question is more traditional semi. So I do think, I mean, of course, you know this recovery in traditional semi has been projected for a long time, but I do think there is some recovery now. I mean, at least in the memory market, there seem to be mixed signals. And we highlighted, for example, ADI that's doing phenomenally well, and we had a very good arrangement. ADI has a long-term partnership with Cadence, but we had a very good expansion in Q2.
Traditional semi are also doing but it's still early and we'll, we'll, we'll wait and see. But for us, you know, we are as you know, we are very Diversified both geographically and customer wise. So, uh, it's important but not critical for us. Uh, uh. So we are patient. So the recovery will happen in traditional semi, maybe some of it is starting and to the extent it happens, you know, we, we will be ready for it. So, but we are not critically dependent on a particular customer set recovering. At a particular time. Yeah.
Thank you.
Comes from the line of
Rosenblat, your line is open.
Thanks for squeezing in guys and a great quarter. Um honor, we just want to ask you again about the system design analysis, the traditional simulation multi physics. Simulation, um, you were out growing the market, pretty substantially, even if we back out a couple extra, uh, months from data, CAE. Um, you still uh you know, mid to high 20s. It looks like organic growth. What's driving? That organic growth is is it is Millennium uh, helping with that. And I'm just wondering, you know, as you look at that market which is sort of a 10%, kind of growth Market. How long do you think you can sustain that that significant growth
Yeah, good question.
I mean, like I mentioned, the growth is driven by multiple things.
I mean 3D IC and the strength in Allegro that pulls in other products is a key factor, you know, it's not just Allegro or 3D IC by itself but all the analysis tools because I think most of the disruption in the system space is either very very close to the chip. You know, like uh with 3D IC or it is very very far like uh, like data center simulation and we have great partnership and products in, you know, Cadence reality, which is full data center. Simulation and then, you know, very close to the chip which is allegro and, and 3D IC and integrity.
So, those markets, I think, should be growing faster than the overall system market because that's where the disruptions are happening and that's where we are focused on.
And then Beta is helping to pull in some of the other, uh, you know, because we—you know, one of the key channel challenges in the system side is to build out the channel. And even though...
Not only did Beta provide great products, but it also helped us on the channel side. Okay? So that's the second reason.
And then I'm super optimistic about Millennium, you know, and we kind of spearheading this kind of Revolution, you know, I, I can talk about it for a long time, you know, the CPU plus GPU integration with partnership with, uh, with Jensen and Nvidia and you know, AI together. But I think it's still in a very early Innings. So, Millennium is still in very, very early Innings. I mean, we have a lot of, uh, uh, Pipeline and demand, but we still has to play out. So, but overall, I think we, we'll see. But we are pleased with our positioning in system specially because we are positioned in the, in the more exciting part of the system Market. I believe, I encourage you to keep focused on the kind of year, the, the annual kind of Outlook. Uh, for for the company because quarter over quarter numbers, um, Can can look a bit odd sometimes as as you called, out in your question, beta is included in our Q2 numbers this year, but wasn't there last year? Yeah.
That's great. That's great. Thanks very much, guys.
And I would now like to turn the call back over to Anirudh Devgan for closing remarks.
Thank you all for joining us this afternoon.
Is this an exciting time for Cadence, with strong business momentum and growing opportunities with semiconductor and system customers?
With our world-class employee base, we continue delivering on 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 second quarter 2025 earnings conference call. This concludes today's call, and you may now disconnect.