The paragraph is an introduction to the Cadence Third Quarter 2024 Earnings Conference Call. It starts with the conference operator, Brianna, welcoming attendees and mentioning that the lines are muted to prevent background noise. Richard Gu, the Vice President of Investor Relations, then speaks, welcoming participants and introducing other key speakers: Anirudh Devgan, the President and CEO, and John Wall, the CFO. Richard notes that the call will include forward-looking statements subject to risks and uncertainties, which may cause actual results to differ from those presented. He also mentions the availability of non-GAAP financial measures, which are explained in the earnings release, and indicates that reconciliations with GAAP measures are provided. Finally, he outlines the format for the Q&A session and hands the call over to Anirudh Devgan.

Cadence achieved strong results in Q3 2024, raising its full-year EPS outlook. Growth is driven by trends like hyperscale computing, autonomous driving, and 5G, accelerated by the AI super cycle, enhancing design activities particularly in data centers and automotive sectors. The company is expanding its total addressable market through its intelligent system design strategy, capitalizing on AI's integration into design workflows. The Cadence.AI portfolio, powered by GenAI agents and big data analytics, saw sales nearly triple, spurred by partnerships with companies like NVIDIA and Arm. Cadence also expanded its collaboration with TSMC, optimizing AI design flows for advanced technologies.

The paragraph discusses Cadence's collaboration on advanced technologies like TSMC A16 and 3Dblox, increasing demand for their Integrity 3D-IC solution, and the introduction of an auto-router for die-to-die and die-to-substrate connectivity. It highlights the strong growth of Allegro X and the accelerated transition to OrCAD X, a cloud-enabled PCB solution. Cadence OnCloud is gaining traction, with significant customer and order growth. The digital transformation in aerospace and defense sectors is boosting demand for Cadence's solutions, with notable success in projects for the US Air Force, Army, and Northrop Grumman. Additionally, Cadence expanded its presence with several major hyperscalers through their hardware, IP, and software offerings.

In Q3, the system design and analysis business achieved over 40% year-over-year revenue growth, driven by strong performance in its multiphysics portfolio, Clarity and Celsius products, and new BETA CAE products, which secured major EV deals. The AI-driven optimality solution was adopted by key customers, notably achieving significant AI drop reduction in hyperscale design, while the IP business grew over 50%, fueled by increasing complexity, outsourcing trends, and foundry opportunities. The growth was supported by demand for AI, HPC, and chiplet applications, leading to the adoption of various high-speed solutions and design wins for the Tensilica audio DSP. Meanwhile, the EDA business saw a 9% revenue increase, with high demand for the new hardware systems from AI, hyperscale, and automotive sectors.

The paragraph highlights the success and growth of Cadence's AI-driven verification and design platforms. Verisium is seeing rapid adoption for its efficient coverage maximization, and the digital full flow has expanded significantly with over 30 new clients. Cadence Cerebrus AI solution is being widely deployed, offering significant design benefits. Virtuoso Studio is also gaining traction, adding 30 new clients in Q3. Overall, Cadence's Q3 results are strong, with AI automation offering significant opportunities. John Wall reports on financials, stating Cadence's robust Q3 with over $1.2 billion in revenue, a 19% year-over-year growth, and strong demand for their system design and analysis business, emulation, and prototyping systems.

The company reported Q3 total revenue of $1.215 billion, with GAAP and non-GAAP operating margins of 28.8% and 44.8%, respectively. GAAP EPS was $0.87, and non-GAAP EPS was $1.64. A $2.5 billion senior notes offering was conducted, primarily used to retire debt and for corporate purposes. The cash balance at quarter-end was $2.786 billion, with $2.850 billion in debt. Operating cash flow was $410 million, with $150 million spent on share repurchases. The 2024 outlook predicts revenues of $4.61 billion to $4.65 billion, GAAP operating margins of 29% to 30%, and non-GAAP operating margins of 42% to 43%. GAAP EPS is expected between $3.70 and $3.76, and non-GAAP EPS between $5.87 and $5.93. Operating cash flow is projected to range from $1.0 billion to $1.2 billion, with 50% of annual free cash flow to be used for share repurchases. For Q4, expected revenues are $1.325 billion to $1.365 billion, with GAAP operating margins of 33.2% to 34.2% and non-GAAP operating margins of 45.2% to 46.2%. GAAP EPS is anticipated to be $1.09 to $1.15, and non-GAAP EPS $1.78 to $1.84. The company is confident in its strong Q4 pipeline and 2024 outlook.

The paragraph is a portion of an earnings call where an analyst, Joe Vruwink from Baird, asks about potential developments in the semiconductor industry that could impact future opportunities for Cadence. Anirudh Devgan, likely an executive at Cadence, responds by discussing the growing importance of semiconductors in the global economy and mentions increased commitments to build semiconductor infrastructure in various countries. He highlights improved relationships with major foundries like TSMC, Samsung, and Intel, as well as the development of new foundries like Rapidus in Japan. Joe then acknowledges Anirudh's response and comments on the company's bookings pipeline and fourth-quarter prospects.

In the paragraph, John Wall discusses the strong pipeline for Q4, comparing it to the end of 2021 when 40% of annual bookings occurred in Q4, indicating a similar trend this year with robust design activity across the board. In response to Jason Celino's question about the pipeline composition, Wall clarifies that the growth is broad-based across all business areas, with strong growth forecasts in various sectors, including the core EDA software and IP functional verification. Celino also briefly mentions China's de-risking assumptions, indicating an ongoing consideration from the previous quarter.

The paragraph discusses concerns about potential revenue declines from the China region, but highlights a positive trend in quarterly performance, indicating a recovery. John Wall notes that while China revenue is expected to be lower this year compared to last year—something that has only happened three times in the past 25 years—there has been a positive sequential recovery with each quarter improving. China is showing strong design activity. Additionally, Anirudh Devgan from Cadence mentions the success of the cadence.ed.ai suite, noting that it's being used by all of their top customers and showing promise for 2025 growth.

The paragraph discusses the integration and benefits of AI solutions across various platforms, including analog, digital, verification, PCB, package, and system analysis, for customers and internally within the company. AI provides significant improvements in power, performance, and area (PPA) metrics, achieving 5% to 20% better results and a 5x to 10x increase in productivity. The paragraph highlights the use of AI in designing complex chips, like the Palladium Z3, and the Cadence.AI solutions used within their IP group, achieving results comparable to a full process node migration. Cadence's cloud offerings also incorporate generative AI to enhance customer support services.

The paragraph discusses the application of Cadence.AI across various platforms and for customer support, enhancing efficiency. Gianmarco Conti inquires about the potential closure of a "hardware air pocket" in Q4 and seeks insights into 2025, particularly regarding FPGA orders and backlogs, which have slightly decreased. John Wall responds, stating there's no over-ordering of FPGAs and highlights robust demand and strong Q4 pipeline performance. However, he emphasizes the difficulty in predicting the following year's outlook at this point, especially without seeing the quality of Q4's bookings. Gianmarco Conti thanks him, and the operator introduces the next questioner, Lee Simpson from Morgan Stanley, who inquires about interest in the Millennium platform beyond NVIDIA.

The paragraph discusses the demand and impact of a new collaboration with Arm on compute subsystems, highlighting a strong ongoing partnership that now includes design and chiplets development. Arm is seeing strength in markets like HPC and automotive, and the partnership expansion aligns with Arm's evolving strategy. Anirudh Devgan expresses optimism about the potential of new systems, specifically the Millennium platform, to accelerate software like circuit simulation and system design through CPU and GPU combination, achieving significant speed improvements in matrix-heavy operations like CFD.

The paragraph discusses the alignment of AI and matrix multiplication with SD&A applications, highlighting the potential for advancements in computational fluid dynamics (CFD) within aerospace and automotive industries. It mentions Honda as an early development partner for Millennium. The conversation then shifts to Lee Simpson and Charles Shi, who ask about Intel and Samsung's reliance on internal electronic design automation (EDA) tools. Despite challenges, the use of commercial EDA tools from companies like Cadence might increase if Intel and Samsung's dependence shifts, potentially benefiting these companies. Anirudh Devgan acknowledges this possibility and considers it a good observation.

The paragraph discusses the company's strong historical partnerships with TSMC and ARM, while noting recent improvements in relationships with Samsung and Intel. The speaker highlights that challenges faced by Intel and Samsung often create opportunities for their company, which excels in competitive situations due to its superior product offerings. They mention ongoing collaboration with Intel and Samsung on new systems and AI-enabled software, although these developments take time. In response to a query about potential acquisition rumors of Altair Engineering Systems, the speaker clarifies that they do not comment on such rumors and affirm their strategy of focusing on organic growth, with occasional small mergers and acquisitions. The paragraph closes with a transition to the next question from Jay Vleeschhouwer of Griffin Securities, who references a previous discussion on AI and machine learning use cases.

In the paragraph, Anirudh Devgan discusses the company's investment in AI and machine learning (ML) development, particularly in creating domain-specific product packaging for different markets. He highlights the company's significant R&D investments and emphasizes their focus on AI development across three layers: AI orchestration, principal simulation and optimization, and hardware such as CPUs and GPUs. Devgan mentions the possibility of verticalization, like their targeted approach for aerospace and automotive sectors. While he refrains from announcing specific details, he expresses satisfaction with their current AI roadmap and acknowledges that initial AI developments are typically more horizontally focused.

The paragraph discusses the three phases of AI monetization: infrastructure AI, physical AI, and sciences AI. Currently, the focus is on infrastructure AI, involving data centers and edge devices. The next phase is physical AI, covering self-driving vehicles, drones, and robots, which are experiencing significant design activity despite a weak auto market. The final phase is sciences AI, particularly in life sciences, supported by investments like the one in open AI. The company plans to develop both horizontal and vertical solutions addressing these AI phases and megatrends. Exciting developments are anticipated in these areas.

The paragraph discusses the strategy and progress of Anirudh Devgan's company following several acquisitions worth over $2.1 billion, which have made them a notable challenger in their market. Despite having a smaller market share compared to leaders, their portfolio, including CFD (Computational Fluid Dynamics) and SD&A (Structural Design & Analysis) applications, is considered complete, especially after successful acquisitions like BETA. The company's growth rate is outpacing the market, attributed to their best-in-class products and enhanced go-to-market strategies. They focus on three main approaches, including direct engagement with top customers, leveraging their direct sales history, particularly in the EDA (Electronic Design Automation) sector.

The paragraph discusses the company's go-to-market strategy, emphasizing a focus on both direct and indirect channels. The strategy includes working with more than 100 channel partners and expanding e-commerce and cloud offerings through the platform OnCloud, which enhances cross-selling and lead generation. The company has seen improvements in its go-to-market efforts, particularly in the indirect channel and direct sales, with notable progress in automotive through BETA and gaining momentum in aerospace and defense (A&D).

The paragraph discusses the performance and market positioning of a company involved in Aerospace and Defense (A&D), as well as other sectors like high-tech electronics and automotive. The company has a strong history with traditional clients like Northrop Grumman and is now working directly with the US Air Force and Army. The conversation shifts to the company's financial performance, focusing on its stock underperformance due to revenue instability and core EDA (Electronic Design Automation) growth falling below 10%. Anil and John from the company explain that the atypical revenue in the first two quarters was due to certain onetime events, and they assure that the third quarter is more indicative of their normal performance. Additionally, there is a discussion with Vivek Arya from Bank of America Securities regarding expectations for 2025 and the concern over revenue lumpiness affecting investors' outlook on the stock.

The paragraph discusses Cadence's financial outlook and business strategy. In Q4, Cadence expects unusual upfront revenue and needs to convert a significant pipeline before discussing 2025 projections. Vivek Arya inquires about the company's segmentation adjustments, particularly the introduction of "core EDA," which now encompasses core EDA software, functional verification, and hardware groups. John Wall explains that while EDA's core elements are combined, system design and analysis (SDA) and IP business are discussed separately due to their strong growth. They anticipate double-digit revenue growth for core EDA software and mid to high-teen growth for functional verification over a three-year CAGR basis.

The paragraph features a discussion during a Q&A session about the company's financial performance and expectations, particularly focusing on the IP (Intellectual Property) business. Clarke Jeffries from Piper Sandler asks about the company's fiscal year 2024 guidance and how the third-quarter results compared to expectations. John Wall explains that the company was cautious with its third-quarter guidance, which led to better-than-expected results. He mentions the ongoing momentum in the IP and SD&A (Software, Data & Analytics) businesses and expects this to continue into the fourth quarter. Anirudh Devgan adds that while the IP business showed strong growth in Q3 and is expected to continue in Q4, the company evaluates its performance over multiple quarters and years, indicating steady growth over a longer period.

The paragraph discusses the improved position of the company's IP (Intellectual Property) business, which has seen a 30% growth on a two-year CAGR basis. The company is historically strong in EDA (Electronic Design Automation) but had underperformed in IP over the past three years. Now, with advancements in technology nodes like 3-nanometer and 5-nanometer and partnerships with other foundries, their IP business is stronger than ever. Factors contributing to this strength include focus on advanced nodes, onshoring and trench-shoring activities, and the trend of disaggregation, requiring more IP development, like UCIe and memory interfaces. There are inquiries from investors about execution thresholds and whether some anticipated IP business for the second half occurred in Q3 or will move to Q4, as well as the impact on margin performance.

In the paragraph, John Wall attributes the margin outperformance to strong momentum in their IP revenue, aided by a large multiyear contract that triggered revenue in Q3 and will continue into Q4 and beyond. He emphasizes that their core EDA business provides a solid foundation for margins and profitable, sustainable growth. The growth momentum in other areas typically translates into increased operating margins. In a subsequent question, Harlan Sur from JPMorgan highlights the sequential increase in inventories to an all-time high, which suggests strong demand for new Z3 and X3 hardware systems. He inquires if demand exceeds near-term supply and manufacturing capabilities and seeks a sense of how long this strong upgrade cycle may continue into the next year. John Wall confirms the strong demand for the hardware.

The paragraph discusses the impact of a multiyear contract with a key supplier on inventory growth and operating cash flow. The focus then shifts to the company's business in China, specifically in the context of 2025 and the potential challenges due to US regulatory actions, macroeconomic factors, and the hardware upgrade cycle. Harlan Sur asks Anirudh Devgan about design activities in China, to which Anirudh responds that while predicting the future is difficult, there has been improvement in the Chinese market over the past two quarters. He notes the company's diverse portfolio, particularly in the auto sector, and their involvement in various end markets for chip design.

The paragraph discusses the strong design activity in China's automotive sector, which now includes designing chips, and the collaboration with these companies on SDA and EDA. Despite being unable to predict 2025, historically, China has rarely experienced a drop in revenue for consecutive years. In 2023, Q2 exceeded Q1, and Q3 surpassed Q2, indicating robust pipeline activity. The speaker is optimistic about avoiding a second consecutive down year in China's revenue. Ruben Roy questions John Wall about the strength and visibility of hardware bookings within the company's business, noting that historically hardware visibility has been limited but asking if the new ramp has improved this.

The paragraph includes two main parts: First, John Wall discusses the typical hardware pipeline, which usually provides a six-month outlook on opportunities due to design projects, with a strong focus on Q4 being significant for bookings. He mentions the importance of converting these opportunities by Q4 to provide an outlook for 2025. Second, Ruben Roy asks Anirudh Devgan about their AI initiatives, particularly regarding NVIDIA, NeMo, and custom applications. Anirudh mentions their JedAI platform, an enterprise data and AI platform that supports various GenAI solutions, making them effectively LLM agnostic.

The paragraph discusses the flexibility and adaptability of Cadence's JedAI platform, which can support various AI solutions and cater to different customer needs, including those who prefer on-premise solutions. Anirudh Devgan highlights the platform's compatibility with multiple AI platforms and its ability to deploy customized solutions. He expresses confidence in Cadence's sustained double-digit revenue growth driven by systemic growth drivers and a focus on both revenue growth and profitability. The discussion is in response to a question from Siti Panigrahi regarding Cadence's accelerating revenue growth trend and future growth opportunities.

The paragraph discusses a conversation between Siti Panigrahi, the operator, and Joshua Tilton regarding the company's performance and strategies. A specific focus is on the company's experiences with down years in China, with John Wall explaining that historically they've never had two consecutive down years in this market. He attributes this resilience to strong design activity and a growing customer base. Tilton is trying to understand whether the recovery after a down year is due to non-recurring factors like increased hardware demand or merely a return to normal demand conditions. John Wall highlights the company's consistent past performance, noting that only twice in 25 years has there been a decline in China revenue year-over-year.

The paragraph discusses the company's transition from an upfront revenue model to a ratable revenue model in 2008, which impacted their revenue in China, taking a few years to recover. Despite a dip in China revenue in 2021, it reached a new high in 2022, partly due to launching new hardware systems that correlate with increased software sales. The expectation is for more hardware sales to China next year, boosting software revenue. In the current year, China's revenue has been recovering since Q2. The speaker, John Wall, highlights the significant contributions from BETA, which is not separately guided, particularly in relation to automotive customers and the selling of traditional Cadence technology. The discussion concludes with brief remarks from Joshua Tilton and Anirudh Devgan.

Cadence is experiencing strong business momentum and increasing opportunities with semiconductor and system customers. They have launched the Fem.AI initiative with an initial $20 million investment to promote gender equity in AI, supported by the Cadence Giving Foundation. The company continues to follow its innovative roadmap with a world-class workforce, aiming to satisfy customers and partners. The Board of Directors expressed gratitude to customers, partners, and investors for their trust. The operator then concluded the third quarter 2024 earnings call.

This summary was generated with AI and may contain some inaccuracies.