Cadence's Q3 2025: Contradictions Emerge on IP Growth, AI-Driven EDA Tools, and China's Revenue Impact

Date of Call: None provided

Financials Results

• Revenue: $1.339B; company raised full-year outlook to ≈14% revenue growth
• EPS: GAAP $1.05; non-GAAP $1.93; company raised full-year EPS growth target ≈18%
• Operating Margin: GAAP 31.8%; non-GAAP 47.6%; Q4 guidance GAAP 32.5%–33.5% / non-GAAP 44.5%–45.5%; FY2025 guidance GAAP 27.9%–28.9% / non-GAAP 43.9%–44.9%; Q3 results exceeded guidance

Guidance:

• Q4 revenue $1.405B–$1.435B; Q4 GAAP OPM 32.5%–33.5%; Q4 non‑GAAP OPM 44.5%–45.5%; Q4 GAAP EPS $1.17–$1.23; Q4 non‑GAAP EPS $1.88–$1.94.
• FY2025 revenue $5.262B–$5.292B; FY GAAP OPM 27.9%–28.9%; FY non‑GAAP OPM 43.9%–44.9%; FY GAAP EPS $3.80–$3.86; FY non‑GAAP EPS $7.02–$7.08; operating cash flow $1.65B–$1.75B.
• Expect to use at least 50% of annual free cash flow for share repurchases; outlook assumes current export control regime remains substantially similar.

Business Commentary:

* Strong Financial Performance and Bookings: - Cadence reported total revenue of $1.339 billion for Q3, exceeding guidance for revenue, operating margin, and EPS. - The company achieved a backlog of $7 billion, reflecting strong bookings growth driven by the accelerating AI megatrend and Cadence's comprehensive chip-to-systems portfolio.

• AI and Infrastructure Investment:
• Cadence expanded partnerships with Samsung and TSMC for AI infrastructure build-out, particularly in advanced packaging and 3DIC solutions.

• This investment is aimed at capturing the generational opportunity in AI, with a strategic focus on AI for design and AI for infrastructure.

• IP Business Momentum and Growth:

• Cadence's IP business grew over 20% for the second year, driven by strong demand for AI, HPC, and automotive applications.

• Growth is attributed to a focus on advanced nodes and a broadened foundry partnership, including TSMC, Samsung, Intel, and Rapidus, enhancing competitive positioning.

• Hardware and Emulation Platform Demand:

• The hardware business achieved record Q3 performance, with significant expansions at AI and HPC customers like OpenAI.
• The demand for Cadence's emulation platforms, such as Palladium and Protium, is driven by the need for verification and design of complex AI systems and chiplet architectures.

Sentiment Analysis:

Overall Tone: Positive

• Management: "Cadence delivered excellent results...raising our full-year outlook to approximately 14% revenue growth and 18% EPS growth." CFO: "We exceeded our guidance for Q3 revenue, operating margin, and EPS" and reported a record backlog of $7B. Multiple customer cited benefits (e.g., 4x productivity, 5–10x verification throughput), supporting upbeat positioning and demand momentum.

Q&A:

• Question from Vivek Arya (Bank of America Securities): What is driving the >20% IP growth, how sustainable is it, and what visibility do you have?
  Response: IP growth driven by focus on advanced-node AI/HPC design IP and Tensilica software-like profitability, plus increased foundry diversity (TSMC, Samsung, Intel, Rapidus); management expects IP to outgrow company average and be sustainably strong.

• Question from Jason Salino (KeyBank Capital Markets): Were Q3 renewals a material contributor to backlog and are renewals still on deck for Q4?
  Response: Management said backlog strength included renewals; core EDA and IP backlog is weighted to multi‑year recurring arrangements and renewals support durable double‑digit growth into Q4.

• Question from Joe Verink (Baird): Can you frame expectations/visibility for 2026 given current momentum?
  Response: Management declined to provide FY2026 guidance today but said record backlog and broad AI‑driven momentum position the company well for disciplined double‑digit top‑line ambition next year.

• Question from Lee Simpson (Morgan Stanley): China was up ~53% YOY and now ~18% mix—what is driving that and is it sustainable?
  Response: Management indicated China returned to normal after export‑control disruptions, Q3 included some Q2 makeup, activity is broad‑based across products, and they expect China to grow in 2025 absent unforeseen regulatory changes.

• Question from Siti Panigrahi (Mizuho): How will Cadence position SDA versus competitors after Beta CAE and announced MSC (Hexagon) acquisition?
  Response: Management said SDA will have two pillars—3DIC/chiplet (Allegro/Clarity/packaging) and physical‑AI/structural analysis (Beta + Hexagon solvers)—and expects the SDA run rate to exceed $1B in 2026 once the Hexagon acquisition closes.

• Question from Jim Schneider (Goldman Sachs): What productivity gains do AI features deliver for core EDA and how will that translate to adoption/revenue?
  Response: Management cited concrete metrics—SimAI driving 5–10x verification throughput and Cerebras AI Studio showing ~4x productivity and ~22% PPA improvements—expecting strong customer adoption with monetization over a couple contract cycles.

• Question from Harlin Sir (JP Morgan): Hardware upgrade-cycle demand—do you expect continued momentum into 2026?
  Response: Management said hardware demand remains very strong across AI/HPC/automotive, they're scaling manufacturing and inventory to meet elevated pipeline, and while visibility is shorter for hardware they expect the trend to continue but will guide prudently.

• Question from Jay Vleeschhouwer (Griffin Securities): Will the Nvidia–Intel joint work lift EDA/IP/hardware demand and require incremental investments (AEs)?
  Response: Management views CPU+GPU convergence as positive; Cadence is porting workloads to exploit CPU+GPU performance, expects improved tool performance and customer benefit, and sees the partnership as expanding opportunity rather than a net headwind.

• Question from Gianmarco Conti (Deutsche Bank): Beyond Q2 catch‑up, what sustainable growth should be assumed for China and risk of another ban?
  Response: Management reiterated China activity appears back to normal and should grow in 2025 absent new export restrictions; guidance assumes current export regime remains substantially similar and geopolitical risk is hard to predict.

• Question from Joe Quatrocchi (Wells Fargo): Can you explain OpEx dynamics—Q3 better than expected, Q4 a bit worse—related to Artisan timing or other items?
  Response: CFO said Q3 benefited from a small restructuring and healthy hardware margins; Q4 OpEx is higher partly due to acquisition‑related expenses and timing shifts of hardware deliveries.

• Question from Charles Shi (Needham): Can hardware and China momentum sustain into next year and will hardware refresh/timelines cause deceleration?
  Response: Management is confident in hardware secular demand and roadmap (current systems support 1T transistor designs), is heavily investing in R&D for next‑gen systems, and expects momentum to continue while remaining prudent in annual guidance.

• Question from Gary Mobley (Loop Capital): Of the $600M backlog increase, how much was China catch‑up from the export‑control repeal?
  Response: Management quantified roughly $150M (≈25% of the $600M increase) as Q2→Q3 China catch‑up, with the remainder driven by broad-based demand.

• Question from Clark Jeffries (Piper Sandler): With more bespoke AI/chiplet designs, does wallet expansion come with lower profitability or require changes in go‑to‑market?
  Response: Management said custom silicon by system companies expands demand for EDA/IP/hardware; Cadence expects healthy wallet growth, will maintain pricing discipline, and does not expect material profitability erosion.

• Question from Reuben Roy (Stifel): You mentioned collaborations on agentic AI—how widespread is this and how will it be monetized (standard vs bespoke)?
  Response: Management described JEDI (Joint Enterprise Data & AI) as the platform combining standard models/data with customer‑specific deployments, enabling agentic automation of RTL and verification tasks and monetization via both platform offerings and bespoke customer solutions.

• Question from Joshua Tilton (Wolfe Research): If China faces renewed tariff/export impacts, how does that factor into your guidance?
  Response: CFO said guidance is built on the assumption that today's export regime remains substantially similar through year‑end; they incorporate prudence for regulatory variability but cannot predict geopolitical changes.

Contradiction Point 1

IP Growth and Sustainability

It involves differing perspectives on the sustainability and growth potential of the IP business, which is crucial for the company's future revenue and market positioning.

What's driving your IP business growth, and is it sustainable? - Vivek Arya(BofA Securities)

2025Q3: The IP business is profitable and focused on AI and HPC. It benefits from a strategy focused on advanced nodes and the growing number of foundries at leading nodes. IP business demand is strong due to better PPA and customer adoption. IP growth is expected to outperform Cadence's average in the coming years. - Anirudh Devgan(CEO)

Can IP growth be sustained at higher rates? - Ruben Roy(Stifel)

2025Q2: IP growth is sustainable given a strong EDA and SDA position, chiplet-based architectures, and advanced node foundries. Cadence expects continued IP growth, surpassing overall company averages. - Anirudh Devgan(CEO)

Contradiction Point 2

Impact of AI on EDA Tools

It concerns the impact of AI integration on EDA tools, which is a strategic focus area for Cadence, affecting productivity and adoption rates.

How does AI integration in EDA tools affect productivity and adoption rates? - Jim Schneider (Goldman Sachs)

2025Q3: AI integration improves productivity in verification and design, with 5x to 10x efficiency. The adoption of AI tools is increasing, driven by the exponential growth in complexity and the need for automation. - Anirudh Devgan(CEO)

Which areas of the design workflow are you prioritizing with the full-stack agentic AI solution? - Joe Quatrochi (Wells Fargo)

2025Q1: The full-stack agentic AI solution is being applied to verification, digital design, package and PCB design, and analog migration. Cadence believes AI will revolutionize these areas, improving automation and efficiency. - Anirudh Devgan(CEO)

Contradiction Point 3

China's Revenue Growth and Backlog Impact

It involves the impact of China's revenue performance on overall growth and backlog, which is crucial for understanding regional performance and company projections.

What portion of the $600 million backlog increase was due to China inclusion? - Gary Mobley (Loop Capital)

2025Q3: Anirudh Devgan: About 25% of the $600 million backlog growth is due to China's catch-up, with the rest from overall business strength. - Anirudh Devgan(CEO)

How does the significant sequential improvement in backlog align with the confidence in backlog and 2025 guidance? - Jason Celino (KeyBanc Capital Markets)

2024Q4: The growth outside China was high teens, while China declined by over $100 million. - John Wall(CFO)

Contradiction Point 4

China Revenue Impact and Growth

It involves differing interpretations and expectations regarding the impact of China's revenue and growth, which is crucial for regional revenue forecasts and strategic planning.

What is driving China's year-over-year growth despite recent turmoil? - Lee John Simpson(Morgan Stanley)

2025Q3: Anirudh Devgan: China's design activity has returned to normal. Q3 performance was helped by recovering from Q2 disruptions. John Wall: Q4 and full-year outlook assume current export regime remains similar. Strength is broad-based in China. - Anirudh Devgan(CEO), John Wall(CFO)

What drove Cadence's growth outlook increase despite China revenue loss? How is backlog development shaping up for the year? - Joseph D. Vruwink(Baird)

2025Q2: China revenue ended at 9%, down from 11% in Q1. The export restrictions influenced Q2, but China is expected to grow slightly year-over-year. The updated outlook accounts for China's improved performance. - John M. Wall(CFO)

Contradiction Point 5

China Revenue Growth Projections

It involves differing expectations for revenue growth in China, which is a significant market for Cadence, impacting financial projections and strategic focus.

What is driving year-over-year growth in China amid recent turmoil? - Lee Simpson (Morgan Stanley)

2025Q3: Anirudh Devgan: China's design activity has returned to normal. Q3 performance was helped by recovering from Q2 disruptions. John Wall: Q4 and full-year outlook assume current export regime remains similar. Strength is broad-based in China. - Anirudh Devgan(CEO), John Wall(CFO)

Do you see benefits from domestic chip design programs, especially in AI, for your China business? Are you more optimistic about growth in 2025? - Harlan Sur (JPMorgan)

2025Q1: Despite strong performance in China in Q1, the company maintains a prudent approach, assuming flat revenue for the year due to uncertainties. The focus on domestic AI development is evident, but Cadence remains cautious about China's growth projection for 2025. - Anirudh Devgan(CEO)