Cadence Design Systems, Inc. (CDNS) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call highlights strong financial performance, with 35% YoY growth in system design revenue and a 29% increase in non-GAAP EPS. Despite minor concerns about China, the company shows robust demand across AI and HPC sectors, and a record backlog is expected by year-end. The Q&A session reveals positive sentiment from analysts, with strategic partnerships and AI advancements driving growth. The overall tone is optimistic, suggesting a positive stock price movement in the short term.

Key Financial Performance

Total Revenue $1.275 billion, representing a 20% year-over-year growth. This growth was driven by robust design activity, customer demand, and strong execution, which offset the impact of export restrictions on China.

Core EDA Revenue 16% year-over-year growth in Q2. This was due to the proliferation of digital full flow at advanced nodes and the adoption of Cadence Cerebrus by more than 50% of advanced node designs.

IP Business Revenue More than 25% year-over-year growth in Q2. This growth was driven by product strength and a broadening silicon solutions portfolio, particularly in AI and HPC use cases.

System Design and Analysis Business Revenue 35% year-over-year growth in Q2. This was attributed to strong customer uptake of 3D-IC technology and AI-driven advanced substrate router, as well as the proliferation of the AI-driven Allegro X PCB design platform.

Non-GAAP EPS $1.65, representing a 29% year-over-year growth. This was driven by strong revenue growth and operational efficiency.

Operating Cash Flow $378 million for Q2. This reflects the company's strong financial performance and cash generation capabilities.

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Operating Highlights

AI-driven product portfolio: Broad-based strength across AI-driven product portfolio, including the introduction of the Millennium M2000 AI supercomputer featuring NVIDIA Blackwell, delivering up to 80x higher performance and 20x lower power.

New product launches: Launched Cadence Cerebrus AI Studio, the industry's first Agentic AI, multi-block and multiuser SoC design platform, delivering up to 20% PPA improvement and 5x to 10x faster chip delivery.

IP offerings: Introduced LPDDR6 memory IP offering 50% higher performance and launched Cadence Tensilica NeuroEdge 130 AI Co-Processor for physical AI applications.

Partnerships and collaborations: Deepened partnerships with ADI, SK Hynix, and TSMC, including certified design flows and silicon-proven IP for advanced node technologies.

Customer endorsements: Received endorsements from customers like Ascendance, MediaTek, and Treeline Biosciences for new AI-driven solutions.

Revenue growth: Achieved 20% revenue growth year-over-year in Q2 2025, with total revenue of $1.275 billion.

Operational efficiencies: AI-driven platforms like Cadence Cerebrus and Allegro X PCB design platform delivered significant productivity and efficiency gains.

Strategic shifts: Resolved investigations with DOJ and BIS, agreeing to a $141 million settlement, and enhanced compliance processes.

Tax benefits: Benefited from the One Big Beautiful Bill Act, reducing U.S. federal tax payments by $140 million for fiscal 2025.

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Risk or Challenges

Export Restrictions on China: The company faced export restrictions on China as outlined in the BIS letter dated May 23, which was later rescinded. This indicates potential risks related to geopolitical and regulatory challenges that could impact revenue from the Chinese market.

DOJ and BIS Settlements: The company resolved investigations into certain transactions with customers in China from 2015 to 2021, resulting in a settlement payment of approximately $141 million. This represents a financial burden and highlights compliance risks.

Economic and Tax Policy Changes: The enactment of the One Big Beautiful Bill Act restored favorable tax treatment for R&D expenditures, reducing tax payments by $140 million. However, reliance on such policies introduces risks if future legislative changes are unfavorable.

Customer Concentration and Demand Shifts: Strong demand and customer R&D investments are driving growth, but any significant reduction in customer spending or shifts in demand could adversely impact the company’s financial performance.

Supply Chain and Technology Dependencies: The company’s reliance on advanced technologies like NVIDIA Blackwell and partnerships with foundries like TSMC introduces risks if supply chain disruptions or technology delays occur.

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Guidance & Outlook

Revenue Growth: Cadence has raised its financial outlook for 2025 to 13% revenue growth.

EPS Growth: The company expects 16% EPS growth for 2025.

Updated 2025 Revenue Outlook: Revenue is projected to be in the range of $5.21 billion to $5.27 billion.

Operating Margin: GAAP operating margin is expected to be in the range of 28.5% to 29.5%, and non-GAAP operating margin in the range of 43.5% to 44.5% for 2025.

Q3 2025 Revenue Outlook: Revenue is expected to be in the range of $1.305 billion to $1.335 billion.

Q3 2025 Operating Margin: GAAP operating margin is projected to be in the range of 32% to 33%, and non-GAAP operating margin in the range of 45% to 46%.

Q3 2025 EPS: 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.

Operating Cash Flow: Operating cash flow for 2025 is projected to be in the range of $1.65 billion to $1.75 billion.

Share Repurchase: The company plans to use at least 50% of its annual free cash flow to repurchase shares.

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Shareholder Return Plan

Share Repurchase: We used $175 million to repurchase Cadence shares. We expect to use at least 50% of our annual free cash flow to repurchase Cadence shares.

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Key Q&A

Q:Is the recent bookings strength influenced by developments in physical AI and edge devices?

A:Yes, the bookings strength is influenced by developments in physical AI and edge devices. Cadence is benefiting from investments in AI infrastructure and physical AI, which includes autonomous cars, robots, and drones. These developments emphasize the importance of AI infrastructure in data centers and edge devices, creating opportunities for Cadence.

Q:What led to Cadence's increase in growth outlook despite not recognizing one month of China revenue?

A:The growth outlook increase was driven by strong demand across all geographies, particularly in AI, HPC, and system design workloads. Strength in other regions offset the near-term softness in China. Additionally, hardware, software, and IP businesses performed well, with hardware achieving record revenue.

Q:What is the near-term and long-term impact of China on Cadence's business?

A:Near-term, China went from 11% to 9% of revenue in Q2, with expectations for slight growth year-over-year despite export control restrictions. Long-term, China is expected to continue investing in chip and system design, but its percentage of revenue may decrease as other regions grow faster.

Q:How is the transition to 3.5D advanced packaging architectures contributing to Cadence's revenue?

A:The transition to 3.5D advanced packaging architectures is contributing significantly to Cadence's revenue. Customers are adopting Cadence's Integrity 3D-IC and Allegro X platforms to address challenges in chip stacking, signal integrity, and thermal power. This trend is expected to grow as the industry moves towards chiplet-based architectures.

Q:What is the progress and monetization strategy for Agentic AI systems?

A:Agentic AI systems are progressing well, with early sales and adoption in workflows like Cerebrus AI Studio and Verisium. These systems enhance productivity and PPA by automating manual tasks. Cadence packages these tools separately and engages with customers to deliver value, with various business models to monetize the solutions.

Q:What drove the strong core EDA results in the quarter?

A:Strong core EDA results were driven by a comprehensive portfolio, including digital, analog, verification, and hardware tools. Key customer wins, such as SK Hynix and ADI, and the adoption of AI-driven tools like Cerebrus and Verisium contributed to the growth. Hardware demand also played a significant role.

Q:What was the impact of China restrictions on Cadence's backlog and bookings?

A:China restrictions led to a temporary pause in recognizing certain bookings, which were excluded from the backlog at the end of Q2. Despite this, Cadence expects to end the year with a record backlog and a book-to-bill ratio greater than 1, driven by strong renewal activity and global demand.

Q:What is the outlook for recurring revenue growth and its impact on Cadence's business?

A:Recurring revenue growth is expected to remain stable at around 80% of total revenue, with upfront revenue from IP and hardware growing faster. Core EDA software is performing well, and Cadence expects balanced growth across all business segments and geographies.

Q:What are the adoption barriers for Agentic AI systems?

A:Adoption barriers for Agentic AI systems include operational challenges in integrating new workflows and potential concerns about job displacement. However, customers are accustomed to automation and face increasing workloads, making AI adoption necessary to meet productivity demands. The key factor is the effectiveness of Cadence's solutions in delivering measurable benefits.

Q:What is driving the growth in Cadence's system design analysis (SDA) business?

A:Growth in the SDA business is driven by demand for 3D-IC and Allegro platforms, which address disruptions in system design close to the chip and in data center simulation. The acquisition of BETA and the introduction of Millennium have also contributed to channel expansion and product adoption.

Q:Review of Unclear Management Responses

A:Management avoided directly addressing the specific revenue impact of China restrictions and the exact contribution of Agentic AI systems to overall revenue. Responses included general optimism and broad statements about growth without providing detailed numerical data or clarity on these topics.

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Earnings Word Cloud

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The earnings call summary presents a positive outlook with projected revenue and EPS growth for 2025, strong operating margins, and a commitment to share repurchases. The Q&A section highlights sustained growth driven by AI and HPC, strong demand in China, and positive impacts from partnerships like NVIDIA-Intel. While there are some geopolitical risks and cautious guidance for 2026, the overall sentiment remains optimistic, supported by robust financial metrics and strategic initiatives in AI and hardware. The lack of market cap information limits precise impact prediction, but overall, a positive stock movement is expected.

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