Cadence Design Systems, Inc. (CDNS) Q3 2025 Earnings Call Transcript

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

Overview

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.

Key Financial Performance

Total Revenue $1.339 billion, representing a 14% year-over-year growth. This growth was driven by broad-based momentum across all product categories and geographies.

GAAP Operating Margin 31.8%, with no specific year-over-year comparison provided.

Non-GAAP Operating Margin 47.6%, with no specific year-over-year comparison provided.

GAAP EPS $1.05, with no specific year-over-year comparison provided.

Non-GAAP EPS $1.93, with no specific year-over-year comparison provided.

Cash Balance $2.753 billion at quarter end, with no specific year-over-year comparison provided.

Principal Value of Debt Outstanding $2.5 billion, with no specific year-over-year comparison provided.

Operating Cash Flow $311 million, with no specific year-over-year comparison provided.

Backlog $7 billion, with no specific year-over-year comparison provided. This increase was attributed to strong bookings and Cadence's continued technology leadership.

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Operating Highlights

Cadence.Ai portfolio: Embodies the strategy of design for AI and AI for design, empowering customers to build global AI infrastructure and infusing AI into products for automation and productivity.

Integrity 3D-IC solution: Supports TSMC's latest 3DFabric die-stacking configurations and next-gen AI infrastructure with HBM4 and LPDDR6 on N3P.

Tensilica audio and vision DSPs and Neo AI accelerator NPUs: Secured multiple design wins in mobile, automotive, and data center verticals.

Cadence Cerebrus AI Studio: Achieved 4x productivity improvement and 22% power reduction in AI design projects.

Partnership with Samsung: Expanded partnership with wide-ranging proliferation of EDA and system software across PCB, advanced packaging, and system analysis.

Partnership with TSMC: Expanded to support next-gen AI flows and technologies like N2 and A16.

Acquisition of Hexagon's D&E business: Brings structural analysis and multi-body dynamics technologies, accelerating expansion in automotive, aerospace, and industrial sectors.

Bookings and backlog: Bookings exceeded expectations with a backlog growing to over $7 billion.

Financial performance: Revenue for Q3 was $1.339 billion, with a non-GAAP operating margin of 47.6% and non-GAAP EPS of $1.93.

Hardware verification platforms: Achieved record Q3 performance with significant expansions at AI and HPC customers.

AI-driven strategy: Positioned to capture opportunities in AI with a comprehensive portfolio spanning EDA, IP, 3D-IC, PCB, and system analysis.

Expansion in SDA: Acquisition of Hexagon's D&E business positions Cadence at the forefront of automotive, aerospace, and industrial sectors.

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Risk or Challenges

Export Control Regulations: The financial outlook assumes that current export control regulations remain substantially similar for the remainder of the year. Any changes in these regulations could impact the company's operations and financial performance.

AI Design Complexity: The accelerating AI megatrend is driving exponential design complexity and new system architectures, which could pose challenges in maintaining technological leadership and meeting customer demands.

Supply Chain Dependencies: The company's growth is tied to partnerships with foundries and system leaders like TSMC and Samsung. Any disruptions in these partnerships or supply chain issues could adversely affect operations.

Competitive Pressures: The company faces competition in securing design wins and maintaining its leadership in AI, HPC, and automotive verticals. Competitive displacements and engagements highlight the ongoing pressure to innovate and retain market share.

Economic Uncertainties: Macroeconomic conditions, including potential downturns, could impact customer spending and the overall demand for the company's products and services.

Acquisition Integration Risks: The acquisition of Hexagon's D&E business, including MSC software, poses integration challenges that could affect operational efficiency and strategic objectives.

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Guidance & Outlook

Full Year 2025 Revenue Growth: Cadence has raised its full-year 2025 revenue growth outlook to approximately 14% year-over-year, with double-digit growth expected across all product categories.

Full Year 2025 EPS Growth: The company expects an 18% growth in EPS for the full year 2025.

Q4 2025 Revenue: Revenue is projected to be in the range of $1.405 billion to $1.435 billion.

Q4 2025 GAAP Operating Margin: GAAP operating margin is expected to be in the range of 32.5% to 33.5%.

Q4 2025 Non-GAAP Operating Margin: Non-GAAP operating margin is expected to be in the range of 44.5% to 45.5%.

Q4 2025 GAAP EPS: GAAP EPS is projected to be in the range of $1.17 to $1.23.

Q4 2025 Non-GAAP EPS: Non-GAAP EPS is projected to be in the range of $1.88 to $1.94.

Full Year 2025 Revenue: Revenue is expected to be in the range of $5.262 billion to $5.292 billion.

Full Year 2025 GAAP Operating Margin: GAAP operating margin is expected to be in the range of 27.9% to 28.9%.

Full Year 2025 Non-GAAP Operating Margin: Non-GAAP operating margin is expected to be in the range of 43.9% to 44.9%.

Full Year 2025 GAAP EPS: GAAP EPS is expected to be in the range of $3.80 to $3.86.

Full Year 2025 Non-GAAP EPS: Non-GAAP EPS is expected to be in the range of $7.02 to $7.08.

Full Year 2025 Operating Cash Flow: Operating cash flow is expected to be in the range of $1.65 billion to $1.75 billion.

Share Repurchase Plan: Cadence 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 $200 million to repurchase Cadence shares. Additionally, 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:What is driving the growth of Cadence's IP business and how sustainable is it?

A:The growth of Cadence's IP business is driven by its focus on AI and HPC at advanced nodes, partnerships with major foundries (TSMC, Samsung, Intel, Rapidus), and customer demand due to better PPA. The business is expected to grow better than Cadence's average growth rate, sustaining a three-year trend.

Q:Do you still have renewals on the docket for Q4?

A:Yes, there are renewals on the docket for Q4. The strong performance in Q3 was driven by accelerating AI infrastructure build-out and strong demand across EDA, IP, hardware, and SDA.

Q:Can you frame expectations for next year based on current visibility?

A:Cadence is well-positioned with all five lines of business performing well and growing double digits. However, management remains prudent and will provide updates in January or February.

Q:What is driving the strong performance in China, and is it sustainable?

A:The strong performance in China is driven by broad-based design activity and the lifting of export regulations. Management expects China to grow year-over-year for fiscal '25, but future geopolitical risks remain uncertain.

Q:What is Cadence's strategy in the simulation analysis market?

A:Cadence is focusing on merging silicon and systems, with investments in AI infrastructure, physical AI, and sciences AI. The acquisition of Hexagon strengthens its position in physical AI and structural analysis, creating two strong pillars in SD&A: 3D-IC and HPC, and physical AI.

Q:What are the tailwinds from AI features in Cadence's core EDA products?

A:AI features in Cadence's EDA products, such as SimAI and Cerebrus AI Studio, improve productivity and PPA significantly. Adoption is strong among major customers, and monetization is expected to improve over time.

Q:What is the demand outlook for Cadence's hardware platform?

A:Demand for Cadence's hardware platform remains strong, driven by AI, HPC, and automotive markets. Management expects continued momentum and growth in 2026, supported by scaling manufacturing capacity and strong pipeline visibility.

Q:What is the impact of the NVIDIA-Intel partnership on Cadence?

A:The NVIDIA-Intel partnership is expected to increase demand for EDA tools, IP, and hardware. Cadence is already optimizing its tools for CPU-GPU combinations and sees this as a positive development for its business.

Q:What is the sustainable growth rate in China, and are there risks of another ban?

A:Management expects China to grow year-over-year, but the growth rate is uncertain. Risks of another ban exist, but the current environment appears stable, with design activity back to normal.

Q:What are the OpEx dynamics for Q3 and Q4?

A:Q3 OpEx benefited from a small restructure and healthy hardware gross margins, while Q4 OpEx will increase due to new expenses from acquisitions.

Q:Can hardware and China maintain their current momentum next year?

A:Management expects hardware and China to maintain momentum, with hardware demand driven by AI and chip complexity. However, guidance remains prudent due to variability in hardware visibility.

Q:What is Cadence's investment in next-generation hardware systems?

A:Cadence is investing heavily in R&D for next-generation hardware systems, which will support future demand and larger chip designs. The current systems already support 1 trillion transistor designs.

Q:How is Cadence addressing the trend of custom silicon for AI?

A:Cadence is well-positioned to support the trend of custom silicon for AI, with strong partnerships and investments in EDA, IP, and hardware. Profitability remains disciplined, and the trend is expected to drive growth.

Q:What is Cadence's approach to agentic AI?

A:Cadence is investing in agentic AI to automate manual tasks in chip design, such as RTL development. The JedAI platform supports both standardized and customer-specific solutions, enabling broader adoption.

Q:How does Cadence account for potential impacts from China in its guidance?

A:Cadence incorporates prudence for regulatory variability and assumes the current export regime remains similar. Management remains cautious but optimistic about the geopolitical environment.

Q:Review of Unclear Management Responses

A:Management avoided providing specific guidance for FY '26, citing prudence and the need for more visibility. They also did not provide a clear sustainable growth rate for China or detailed impacts of potential geopolitical risks.

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Earnings Word Cloud

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