Cadence's Q3 2025 Earnings Call: Contradictions Emerge in China Revenue, Hardware Demand, and AI's EDA Impact

Date of Call: October 27, 2025

Financials Results

• Revenue: $1.339 billion for Q3; company raised FY'25 outlook to ~14% revenue growth
• EPS: GAAP EPS $1.05; non-GAAP EPS $1.93; updated FY'25 non-GAAP EPS outlook $7.02–$7.08 (~18% growth)
• Operating Margin: GAAP operating margin 31.8%; non-GAAP operating margin 47.6%; FY'25 outlook GAAP 27.9%–28.9% and non-GAAP 43.9%–44.9%

Guidance:

• Q4 revenue expected $1.405B–$1.435B.
• Q4 GAAP operating margin 32.5%–33.5%; non‑GAAP operating margin 44.5%–45.5%.
• Q4 GAAP EPS $1.17–$1.23; Q4 non‑GAAP EPS $1.88–$1.94.
• FY'25 revenue expected $5.262B–$5.292B (~14% growth); FY non‑GAAP EPS $7.02–$7.08; GAAP EPS $3.80–$3.86.
• FY operating cash flow $1.65B–$1.75B and company plans to use at least 50% of annual free cash flow for share repurchases.
• Outlook assumes current export control regulations remain substantially similar.

Business Commentary:

* **Revenue and Earnings Growth: - Cadence Design Systems reported total revenue of $1.339 billion for Q3 2025, with a 31.8% GAAP operating margin and 47.6% non-GAAP operating margin. - - The company's bookings exceeded expectations, growing the backlog to over $7 billion. - The growth was driven by strong demand for design and infrastructure build-out in the AI era.

• AI and EDA Growth:
• Cadence's AI-driven design and verification solutions, such as Cerebrus AI Studio and SimAI, demonstrated significant improvements, including a 4x productivity improvement in design and 5-10x improvement in verification throughput.

• The adoption of AI tools across industries and the exponential design complexity in AI-driven systems contributed to this growth.

• IP Business Momentum:

• The IP business achieved over 20% growth for the second consecutive year.

• This growth is attributed to a focus on AI and HPC verticals, strong demand for SerDes and PCIe IPs, and partnerships with leading foundries such as TSMC, Samsung, and Intel.

• Hardware and Software Design Demand:

• Hardware, including emulation and prototyping platforms, achieved record Q3 revenues, with strong demand expected to continue into 2026.
• The demand is driven by increasing design complexity, the proliferation of chiplet architectures, and the need to emulate larger AI designs.

Sentiment Analysis:

Overall Tone: Positive

• "Cadence delivered excellent results"; management said they are "raising our full year outlook to approximately 14% revenue growth and 18% EPS growth"; "bookings exceeded our expectations with backlog growing to over $7 billion"; and "we exceeded our guidance for Q3 revenue, operating margin and EPS."

Q&A:

• Question from Vivek Arya (BofA Securities): Your IP business is tracking >20% growth—what's driving this growth, how sustainable is it, and what visibility do you have?
  Response: IP growth is driven by focus on AI/HPC/advanced-node design IP, Tensilica's software‑like profitability, expanding foundry partnerships (TSMC, Samsung, Intel, Rapidus) and strong customer demand; management expects IP to outgrow Cadence average and to remain durable.

• Question from Jason Celino (KeyBanc Capital Markets): With the Q3 backlog uptick, were renewals a material driver and do renewals remain on the docket for Q4?
  Response: Yes—renewals are present; bookings were strong across EDA, IP, hardware and SDA, and backlog is weighted to multiyear recurring arrangements supporting durable double‑digit growth.

• Question from Joseph Vruwink (Robert W. Baird): Given acceleration and strong bookings, can you frame expectations for 2026 or comment on visibility into next year?
  Response: All five product lines and geographies show broad‑based momentum and record backlog, but management will not provide FY'26 guidance today; framework remains disciplined with double‑digit top‑line ambition.

• Question from Lee Simpson (Morgan Stanley): China appears up ~53% Y/Y and 18% of mix—what's driving China strength (IP, hardware, EDA)?
  Response: China activity returned to normal after export‑regulation disruption; Q3 included some hardware delivery catch‑up from Q2 but overall design activity is broad‑based across EDA, IP and hardware.

• Question from Sitikantha Panigrahi (Mizuho Securities): How will Cadence position SDA after BETA CAE and the announced Hexagon MSC acquisition versus competitors?
  Response: Hexagon deal creates two SDA pillars—package/3D‑IC (Allegro/Sigrity/Clarity) and structural/physical‑AI solvers—expected to push SDA run rate past $1B in 2026 (post close) and better position Cadence for physical AI and chiplet markets.

• Question from James Schneider (Goldman Sachs): What productivity/tailwind metrics from adding AI features to core EDA can you quantify and how will that drive adoption/revenue?
  Response: AI for design yields large gains: SimAI shows 5–10x verification throughput improvements; Cerebrus delivered ~4x productivity and ~22% PPA improvements in customer cases; adoption is strong but monetization typically lags by ~one to two contract cycles.

• Question from Harlan Sur (JPMorgan): Given the hardware upgrade cycle and lead times, do you expect continued momentum and growth in 2026 for emulation/prototyping hardware?
  Response: Hardware demand is very strong and structurally supported by rising design complexity; management expects momentum into 2026 but remains prudent on annual guidance due to shorter visibility and is scaling manufacturing and inventory to meet demand.

• Question from Jay Vleeschhouwer (Griffin Securities): Will the NVIDIA+Intel joint work lift EDA/IP/hardware demand and require increased AE investments?
  Response: Yes—CPU+GPU convergence benefits Cadence; the company is porting workloads to CPU+GPU to improve tool performance and is engaged on specific NVLink/IP design work; this should uplift consumption and tool optimization efforts.

• Question from Gianmarco Conti (Deutsche Bank): Beyond Q3 catch‑up, how should we think about sustainable growth in China and the risk of another ban?
  Response: Management views China design activity as back to normal and expects China to grow in FY'25, but cautions geopolitical unpredictability; guidance explicitly assumes the current export regime remains substantially similar and includes prudence for regulatory variability.

• Question from Joseph Quatrochi (Wells Fargo): Help us understand OpEx dynamics—Q3 was better than expected, Q4 worse; is this related to Artisan timing or other items?
  Response: OpEx variance reflects timing of hardware deliveries (shift between Q3 and Q4), a small Q3 restructuring benefit and incremental expenses tied to recent acquisitions.

• Question from Yu Shi (Needham & Company): Can current hardware (Z3/X3) support 1T‑transistor designs and do you foresee an earlier refresh cycle given AI pace?
  Response: Current systems already support ~1T designs and next‑gen hardware is under development; customers are buying hardware more frequently (near‑annual behavior), R&D investment is substantial, and management is confident in roadmap and sustained demand.

• Question from Gary Mobley (Loop Capital): Backlog grew ~$600M from $6.4B to $7.0B—how much of the increase was China backlog inclusion vs growth?
  Response: About $600M total backlog increase; management estimates roughly 25% (~$150M) was Q2→Q3 China catch‑up, with the remainder reflecting broader business strength.

• Question from Clarke Jeffries (Piper Sandler): As AI projects require more bespoke chiplet/custom memory designs, will wallet share expand or will profitability/growing pains emerge and do you need to change GTM/investment?
  Response: Custom silicon demand is accelerating among system companies, expanding opportunity for EDA/IP/hardware; Cadence expects healthy incremental demand while maintaining pricing discipline and investing to support bespoke designs.

• Question from Ruben Roy (Stifel): On agentic AI collaborations mentioned in prepared remarks—is this broad across customers and how might monetization work (standard vs custom)?
  Response: Agentic AI work is both standardized and customer‑specific via JedAI (supports cloud or on‑prem deployments); it targets automating manual RTL and verification tasks and will be monetized through platform offerings plus bespoke customer integrations.

• Question from Joshua Tilton (Wolfe Research): How does your guidance handicap potential negative impacts from China if tariffs/regime changes occur this quarter?
  Response: Guidance assumes today's export regime remains substantially similar through year‑end and incorporates prudence for regulatory variability; management cannot predict future policy changes but factors in conservative assumptions.

Contradiction Point 1

China Revenue Expectations

It involves differing expectations for revenue growth in China, which is a significant market for Cadence Design Systems, potentially impacting investor expectations and strategic planning.

What drove China's strong performance in Q3? - Lee Simpson (Morgan Stanley)

2025Q3: Design activity in China returned to normal post-export restrictions lifting. The region performed slightly better than expected and is expected to grow year-over-year in 2025. - [John Wall](CFO) and [Anirudh Devgan](CEO)

Will the domestic focus and design activities in China be a tailwind for your China business? Are you more optimistic about the growth outlook for your China business this year? - Harlan Sur (JPMorgan)

2025Q1: Our performance in China is strong, driven by customer investments in future R&D, especially in AI development. However, we remain prudent and assume China revenue is flat for the year. - [Anirudh Devgan](CEO)

Contradiction Point 2

Hardware Demand and Backlog Dynamics

It concerns the demand for Cadence's hardware platform and the associated backlog, which are critical for assessing the company's sales and operational strategies.

How would you assess the momentum in your hardware platform over the past five quarters? - Harlan Sur(JPMorgan)

2025Q3: Hardware has strong demand, particularly in AI, HPC, and auto markets. Lead times are being improved, and we expect Q4 to be strong with a fresh hardware high in backlog. Inventory is building to meet demand. - [Anirudh Devgan](CEO)

What is the outlook for recurring revenue, and have tariffs affected customer behavior? - Yu Shi(Needham & Company)

2025Q2: Hardware demand and IP strength led to lower recurring revenue in Q2, but it is expected to return to a normal 80-20 split. - [John M. Wall](CFO)

Contradiction Point 3

AI's Impact on EDA Tools

It explores the impact of AI on EDA tools, which is a critical area for Cadence's product development and customer value proposition, potentially influencing strategic decisions and product roadmaps.

How will AI features affect core EDA tools and productivity metrics? - James Schneider (Goldman Sachs)

2025Q3: AI enhances productivity in EDA by improving design efficiency. 5x to 10x improvements in logic verification and significant benefits in physical design and verification. - [Anirudh Devgan](CEO)

Did recent additions to the entity list affect your view of China? - Ruben Roy (Stifel)

2024Q4: While AI impacts EDA and can enhance productivity, it's going to take a while before it's pervasive. - [Anirudh Devgan](CEO)