Cadence Design Systems Inc Q2 2025 Earnings Call Transcript

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

Question: Joe Vruwink - Robert W. Baird & Co Inc - Analyst : I wanted to ask a question on physical AI. It seems like over the past quarter or so, many of your key development partners have had more to say around what they're doing with edge devices or even small language models maybe as a means to enabling physical AI. Is this factoring into the bookings strength you've seen recently? And is it maybe leading to more spend or different spend with Cadence just in terms of the tools that this is going to need versus what the initial build-out of AI infrastructure has meant?

Question: Gianmarco Conti - Deutsche Bank AG - Analyst : I mean, firstly, congrats on another amazing quarter. Simply, what led to Cadence increase in the growth outlook, even though you could not recognize one month of China revenue? I guess, the curiosity is whether there was a single stack of renewals across EDA or was this across all fronts? And maybe you can give us more comment on backlog and the development throughout the year?

Question: Vivek Arya - Bofa Merrill Lynch Asset Holdings Inc - Analyst : Just a near and a longer-term China impact question. So on the near term, how much of a headwind was 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, 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 the back half? And then Anirudh, if we look longer term, what is the right China exposure for Cadence? Does it naturally just come down over time? Or will it probably stay at this 9%, 10%, 11% kind of range over the longer term?

Question: Harlan Sur - JPMorgan Chase & Co - Analyst : Great job on the quarterly execution. If I look at many of the AI xPU, ASIC, and merchant chip design programs that are in design right now, many of them are looking to transition from 2.5D to 3.5D advanced packaging architectures, which includes chip stacking, right? And many of these programs are going to start taping out second half of this year. And in some cases, your customers are integrating up to like 10 chips in a single package, right? This is a very complex undertaking, integration, floor planning on top of that, you got signal integrity, thermal power challenges. Wondering how much is this contributing to the bookings and revenue strength as more of your customers are adopting your Integrity 3D-IC or your Allegro X REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 28, 2025 / 9:00PM, CDNS.OQ - Q2 2025 Cadence Design Systems Inc Earnings Call advanced packaging platforms to tackle these challenges of 3.5D packaging? And then how much is advanced packaging roughly contributing to your overall revenues?

Question: Lee Simpson - Morgan Stanley - Analyst : Well done on another great quarter. I think it falls to me to maybe ask about the agentic systems. I know again, this is the second quarter you brought it up. It does look as though development is moving ahead. And I think if the comments are to be interpreted right, you are seeing some early sales, one assumes in sort of pilot line development. But I'm still trying to put this into perspective. 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, 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. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 28, 2025 / 9:00PM, CDNS.OQ - Q2 2025 Cadence Design Systems Inc Earnings Call

Question: James Schneider, Ph.D. - Goldman Sachs Group Inc - Analyst : I was wondering if you maybe could talk a little bit more about the core EDA results, very strong in the quarter with a lot of growth. Can you maybe cite some of the drivers of the strength in the quarter, be it new customers or Cerebrus pricing benefits or anything else that was onetime 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?

Question: Gary Mobley - Loop Capital Markets LLC - Analyst : John, when we entered the year, I think your expectation, correct me if I'm wrong, was (technical difficulty) 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 expectation by, I assume, several hundred million dollars. And so my questions are two part. I want to confirm that the June quarter ending backlog excludes China. And 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? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 28, 2025 / 9:00PM, CDNS.OQ - Q2 2025 Cadence Design Systems Inc Earnings Call

Question: Jay Vleeschhouwer - Griffin Securities Inc - Analyst : Anirudh, you spoke earlier in answer to an earlier question and in your prepared remarks about agentic AI. And I'd like to ask about the broader implications and requirements from that. One of the terms that's come up this year 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 agentic AI or AI generally, it's fundamentally, I think, a form of simulation. And therefore, the requirements for that would also seem to be new forms of process or data management and traceability, which is a critical function in simulation, if our thesis is right about what you're really doing. So beyond just introducing these agents and aids, how are you thinking about the broader portfolio and capabilities that you need to provide customers, particularly since you refer to their workflows?

Question: Joe Quatrochi - Wells Fargo Securities LLC - Analyst : Just to follow up on another question on the China impact. I mean, I guess, can you help us understand what would have RPO been had the restrictions not been in place exiting the quarter that 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?

Question: Charles Shi - Needham & Company LLC - Analyst : Maybe this is for John. John, I think you reported recurring revenue as a percentage in Q2 was 78%. This is probably a multiyear low. And I wonder what's the expectation for the full year, the recurring revenue percentage? And what is the long-term normalized level? Maybe just as a related question, if I may. I believe your hardware is mostly manufactured in the US and presumably, there should be no direct tariff

Question: Clarke Jeffries - Piper Sandler - Analyst : Just a clarification on the tax benefits. I heard $140 million for the remainder of the year. Just to clarify, is that for two 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 near-term windfall but normalized over time and no change to appetite? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 28, 2025 / 9:00PM, CDNS.OQ - Q2 2025 Cadence Design Systems Inc Earnings Call

Question: Siti Panigrahi - Mizuho Securities USA LLC - Analyst : Most of my questions have been answered, but I just want to follow up to one of your comments on the strong bookings. How do you characterize the demand for your traditional semi customer versus systems like hyperscaler, that segment? And do you see any kind of positive sign on the traditional semi customer?