Cadence Design Systems Inc Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : 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 quarter versus 10% in -- back in the December quarter. On top of this, 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?

Question: Lee Simpson - Morgan Stanley & Co LLC. - Analyst : Great. Great quarter to everyone. 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 US government, at least as you currently understand things?

Question: Gary Mobley - Loop Capital Markets LLC - Analyst : Yes. Sorry, guys. This question might be more for Anirudh. And the question is more and more tools that you sell like simulation, synthesis, place, and route, et cetera, run on generation-based compute and running GPU-based servers. How does this impact your licensing model? And more specifically, how does it potentially affect your annual contract value?

Question: Vivek Arya - Bank of America Securities - Analyst : (technical difficulty) 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 exposure ? 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?

Question: Gianmarco Conti - Deutsche Bank - Analyst : Yes. Congratulations on another great quarter. I guess, could you perhaps shed some detail into your hardware deliveries this quarter and whether you're seeing the demand for the third generation in line with what was expected, especially in customers except in the higher pricing in this environment. And also, I know that you've briefly mentioned about it not having any impact from tariffs. But could you share a few words on your Mexico plans where you assemble your -- your hardware and whether that could be a potential issue from a capacity production standpoint were the tariffs being enacted on that front?

Question: Jay Vleeschhouwer - Griffin Securities - Analyst : Anirudh, what would you say are the two or three most important technical or product enhancement deliverables this year that may have already occurred or yet to occur this year, even if not with an immediate impact on revenue, but in terms of enhancing your overall technical capabilities or positioning? And then related to that, maybe you could talk about some of the investments you're making in some critical technology areas that may not get a lot of attention, one being, for example, physical verification -- your physical verification, maybe the next-generation silicon for hardware, Gen four ? And then lastly, maybe talk about some of the incremental investments you're making in your acquired simulation solver products. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 28, 2025 / 9:00PM, CDNS.OQ - Q1 2025 Cadence Design Systems Inc Earnings Call

Question: Jason Celino - KeyBanc Capital Markets - Analyst : Great. Keeping to this IP topic, I think you planned to acquire ARM Artisan IP asset. I know this hasn't closed yet. But when we think about the foundational IP market, just curious why hasn't this been a bigger focus in the past and what's changed to make this opportunity more attractive? And then just to clarify with John, this pending acquisition is not included in guidance.

Question: Joseph Quatrochi - Wells Fargo Securities, LLC - Analyst : You mentioned that you were developing a full stack Agentic AI solution. I was wondering if you could talk about just the areas of the design workflow you're targeting first with that?

Question: Joe Vruwink - Robert W. Baird - Analyst : This might be an overly simplistic question relative to those before me. But your commentary and guidance strikes me as having greater visibility into strength during the second half of this year than maybe what's apparent just in our seat when analyzing the size of the 1Q beat or even your REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 28, 2025 / 9:00PM, CDNS.OQ - Q1 2025 Cadence Design Systems Inc Earnings Call quarter-end backlog value. Can you maybe just speak to some of the things that changed for the better in the last 60 to 90 days that make you feel better about the 2025 outlook?

Question: Joshua Tilton - Wolfe Research, LLC - Analyst : I always love it when the guy before you kind of steals your question. But I guess, just to put a finer point on things, I think Anirudh, you mentioned that the guidance still assumes that China is flat for the year. You guys are being prudent. I guess my question to that is, I understand there was an easier comp in 1Q, but year-to-date, are you guys seeing anything that suggests that China should actually grow flat for the year? Or I guess another way of saying it is the decision to keep China flat for the year and the guide prudence or more along the lines of your expectations of how things will shake out by the end of the year?

Question: Siti Panigrahi - Mizuho Securities - Analyst : Anirudh, if you see a lot of news going around, we saw DeepSeek early this year. Wondering how that's impacting the design velocity or even how you see the compute capacity will change. But at the same time also, we are seeing hyperscaler trying to push their data center build out. Are you seeing any kind of impact there? So would love to hear your views on this. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 28, 2025 / 9:00PM, CDNS.OQ - Q1 2025 Cadence Design Systems Inc Earnings Call

Question: Nay Soe Naing - Berenberg Bank - Analyst : Minus on your SG&A segment, please. a very impressive quarter in Q1. And I was just trying to understand if you could maybe share where the stat is coming on, especially when we put it against the product market and your peers in the last three years, you've been growing at 2x to 3x what your competitors have been able to do. So I was wondering if there are any competitive market wins that's driving your performance, if not, what are the reasons, please? And maybe if I could squeeze in a part -- a second part of this question. The solid performance we've had in the past, does it -- any chance at all create any headwinds for you or tough comp for you going forward?

Question: Ruben Roy - Stifel Financial Corp - Analyst : Anirudh, I had a similar question to Jason's on IP. And you touched on this in your answer to that question. But just wanted to make sure I understood in terms of sort of these, I would say, accelerated pace of recent tuck-ins on the IP side. It sounds like they're opportunistic rather than customer-driven, wanted to make sure I got that right. And then the second part of the question is just maybe if you can update sort of how you're thinking about IP in terms of longer-term growth from that segment given all that's going on with foundry and customers, et cetera.

Question: Blair Abernethy - ROSENBLATT SECURITIES INC - Analyst : Nice quarter. Anirudh, just wondering if you could give us sort of high-level thoughts on the data center digital twins. You bought future facilities back in July '22, there seems to be getting some traction out there. I just want to see how you feel about the size of the TAM, the size of the opportunity there with that asset and sort of are there expansion opportunities beyond data centers?