The paragraph is an introduction to the Cadence Fourth Quarter and Fiscal-Year 2024 Earnings Conference Call. It features Abby, the conference operator, introducing the call and handing it over to Richard Gu, Vice President of Investor Relations for Cadence. Richard welcomes attendees and introduces other key participants, including Anirudh Devgan, CEO, and John Wall, CFO. He mentions that the call will discuss forward-looking statements and notes that actual results may differ from projections due to risks and uncertainties. He advises on consulting SEC filings for further details and clarifies that non-GAAP financial measures will be discussed. Instructions for the Q&A session are provided, and then the call is turned over to Anirudh Devgan.

Cadence reported strong financial performance in the fourth quarter of 2024, with 13.5% revenue growth and a 42.5% non-GAAP operating margin, concluding the year with a record $6.8 billion backlog. The company attributes this success to its AI-driven chip-to-systems portfolio, which is gaining traction among top-tier customers in system and semiconductor industries. As the AI supercycle progresses, Cadence is engaged in building AI infrastructure and integrating AI into its products, exploring new market opportunities. Collaborations with key industry players like NVIDIA, Qualcomm, and Marvell have been expanded through enhancements in EDA, hardware, IP, and system software solutions. The Cadence.ai portfolio, including AI-powered products like Cadence Cerebrus, SimAI, and Allegro X AI, is experiencing significant momentum, with the company's LLM-based Design Agents showing encouraging outcomes in early trials.

The paragraph outlines the significant advancements and collaborations made by Cadence Cerebrus and its related platforms in the design and technology sectors. It highlights Cadence Cerebrus's impact on the design flow with numerous tape-outs, and its AI-driven verification platform, Verisium, gains market share by enhancing verification quality. The company is expanding into new markets, including life sciences with its OpenEye software. Collaborations were strengthened with TSMC, GlobalFoundries, Samsung, Intel Foundry, and Rapidus, enhancing AI-optimized design flow and IP solutions. Partnerships with ARM were deepened, resulting in successful innovations like the industry's first ARM CSA standard-based system Chiplet. Specific product highlights include over 40% growth in the System Design & Analysis business and significant deals in Aerospace & Defense and Energy through its multi-physics analysis and millennium CFD simulation platforms.

The paragraph highlights significant advancements and growth in BETA CAE's multi-physics platform and its successful expansion among major automakers, especially in the EV sector. It also emphasizes the continued momentum of the Allegro X design platform, particularly in Aerospace & Defense, hyperscale, and EV markets, with the Allegro X AI PCB design engine enhancing productivity significantly. The Integrity 3D-IC platform has expanded among memory customers and foundries. The IP business grew by 28% year-over-year in Q4, driven by AI HPC protocols like HBM, DDR, PCIe, and UCIe. The paragraph outlines the acquisition of Secure-IC to enhance the IP portfolio with embedded security products and details collaborations to advance memory interface IP development. AST SpaceMobile has committed to using the company's AI-driven IP solutions for global space-based cellular services, and the core EDA business grew by 15% year-over-year in Q4.

In 2024, Cadence experienced strong demand for its Palladium Z3 and Protium X3 systems, driven by the growing need for compute power, system complexity, and the necessity for first-time right silicon, particularly from AI and hyperscale customers. The company's hardware and digital portfolios both saw record growth, with significant customer additions. Cadence partnered with Equal1 on a groundbreaking Alpha 5 Quantum SoC and saw widespread adoption of its design tools like Virtuoso and Spectre among industry leaders. The company highlighted its strategic positioning in the AI era with AI-driven EDA, SDA, and IP solutions. John Wall noted Cadence's exceptional Q4 and full-year performance, emphasizing broad-based business strength and the promising outlook for 2025.

The company experienced strong financial performance, driven by robust design activity and customer demand, resulting in a 13.5% revenue growth and a 42.5% non-GAAP operating margin for the year. The fourth quarter saw strong bookings and record backlogs. Key financial metrics for the quarter included $1.356 billion in revenue, a GAAP operating margin of 33.7%, and non-GAAP EPS of $1.88. For the year, total revenue was $4.641 billion, with a GAAP operating margin of 29.1% and non-GAAP EPS of $5.97. The company held $2.644 billion in cash at year-end, with $2.5 billion in debt outstanding. It generated $1.261 billion in operating cash flow and repurchased $550 million in shares over the year. For 2025, expectations include revenues between $5.14 billion to $5.22 billion, with non-GAAP EPS ranging from $6.65 to $6.75, and plans to use 50% of free cash flow for share repurchases, assuming consistent export regulations and flat China revenue.

The paragraph provides a financial outlook for Q1, including expected revenue, operating margins, and EPS ranges, both GAAP and non-GAAP. It highlights a record year-end backlog and a strong start to 2025, indicating confidence in the company's non-GAAP incremental margin. During the Q&A, Jason Celino from KeyBanc Capital Markets questions the disparity between the significant backlog improvement and a lower-than-expected full-year guidance starting point. John Wall responds, noting strong year-end momentum and pipeline, with broad-based business strength in Q4 backlog and bookings, driven by a strong renewal quarter.

The paragraph discusses the company's outlook and performance across different geographical regions, particularly emphasizing contrasting results between China and other markets. In 2024, the company experienced strong growth outside of China, while China saw a decline of over $100 million compared to 2023. Historically, China has only had three down years, with 2024 being one of them. To be cautious, the company plans for China to remain flat in 2025 due to unpredictability. A question from Joe Quatrochi of Wells Fargo addresses changes in RPO balance due to export restrictions and potential hardware cycle impacts in China. John Wall indicates that the guidance is conservative and focused on managing expenses for 2025, while noting strong design activity in China's Q4.

The paragraph is a discussion between Anirudh Devgan and John Wall regarding the design activity in China. Anirudh highlights that design activity is strong across various sectors, including automotive, where major companies are designing chips. Despite macroeconomic uncertainties, the design activity is picking up. John Wall notes that while hardware performance in China was strong in 2023, it weakened in 2024, leading to a year-over-year decline. He expresses uncertainty about predicting outcomes for 2025 in China. The conversation then shifts to a new question from Ruben Roy.

The investor is inquiring about whether changes to the Entity List have influenced the company's cautious outlook on China. John Wall responds that the company's prudent approach is due to having experienced a third consecutive down year in 25 years, and they decided to assume flat growth as a way to mitigate risk. Vivek Arya from Bank of America Securities questions the deceleration in recurring revenue growth despite improvements in the AI market. John confirms that the assumption of flat growth in China contributes to the slowdown, noting a significant impact from the Chinese market on the core EDA and hardware sides, leading to decreased recurring revenue from 2023 to 2024.

The paragraph discusses the expected revenue growth for Cadence, highlighting an 80% recurring and 20% upfront revenue mix for the year. Anirudh Devgan notes strong performance in hardware and IP, with hardware anticipated to continue its success into 2025 due to superior products and customer satisfaction. The IP business, historically weaker, saw a significant 30% growth in 2024 and is expected to continue improving in 2025. This growth is attributed to technically superior products, increased customer engagement, and rising foundry activity worldwide, requiring more IP and EDA solutions.

The paragraph discusses Cadence's strategic investments in expanding its IP portfolio, highlighting recent acquisitions from Rambus and Security IP, and emphasizing the importance of IP in the company's growth strategy, particularly in 2024. In response to a question from Lee Simpson of Morgan Stanley, John Wall explains that the adoption of chiplet reference designs is a global trend across various industries, not limited to a specific region or sector. While chiplet designs initially gained traction in high-performance computing for AI and server products, they have now expanded into automotive and laptop applications. Cadence, with its focus on 3D-IC and chiplet-based design since the early 2000s, is well-positioned due to its comprehensive EDA, packaging, system, and IP offerings.

The paragraph discusses the company's focus on "IP 2.0," which emphasizes silicon solutions and chiplet architecture, leading to investments in chiplets within both EDA (Electronic Design Automation) and IP (Intellectual Property) areas. It is expected that this focus will accelerate globally across various sectors. In response to a question from Charles Shi regarding core EDA growth, John Wall explains that while the aim is for double-digit revenue growth in core EDA, factors such as the downturn in China from 2023 to 2024 affect year-over-year growth expectations. Despite these challenges, the company is pleased with its hardware business progress and the demand for its products. Anirudh is invited to add further comments.

In the paragraph, Anirudh Devgan discusses their strong product positioning in analog and digital verification, despite two issues in 2024 related to China and a transition year for hardware. Despite these challenges, they are well-positioned and performing well with customers. Gianmarco Conti from Deutsche Bank inquires about the impressive backlog and upfront revenue in hardware, particularly in relation to the adoption of Z3 and X3, and whether this indicates an accelerated ramp-up. John Wall confirms a strong demand and bookings for hardware, contributing to a significant backlog and a more balanced revenue distribution for Cadence throughout the year.

In the second half of the year, there is an expectation of increased difficulty, although Q4 is projected to be stronger than Q3, particularly in hardware demand. Anirudh Devgan highlights the success of the company's EDA portfolio, including 3D-IC and IP. Specific emphasis is placed on the success of the Palladium Z3 and Protium X3 systems, which have achieved significant competitive wins. Palladium is particularly noted for its role in designing large AI systems, leveraging custom ASICs for superior performance compared to FPGAs. The systems utilize liquid-cooled, optically connected racks to emulate complex designs, making them unmatched in the industry, with the closest competitor being the earlier Palladium Z2. The trend of custom ASICs outperforming FPGAs is expected to continue given the advanced technology used in Palladium Z3.

The paragraph discusses a financial update from a company, highlighting its strong performance and backlog, specifically noting a $0.5 billion backlog increase, potentially due to contributions from NVIDIA. The company's year-over-year growth in remaining performance obligations (RPO) has slowed throughout the year, from 14% in Q1 to 6% in Q4. John Wall addresses the annual value of the backlog, emphasizing its importance for 2025 growth. Despite strong Q4 bookings, the company plans to improve annual value, especially considering China as a headwind. They anticipate a natural improvement in RPO ex-China for 2025, although some backlog decline and burn-off is expected in the first half due to renewal timing.

The paragraph involves a financial discussion during an earnings call. Gary Mobley from Loop Capital asks about the discrepancy between revenue and operating expense (OpEx) projections for 2025, highlighting an unusual trend where OpEx doesn't increase in the second half of the year. John Wall responds, explaining the company has changed its salary increase cycle from mid-year to January, starting in 2025, which alters the usual OpEx pattern. He notes this change aims to improve the profit margin progressively throughout the year without the typical Q2 to Q3 drop. Harlan Sur from JPMorgan then asks about the company's full-year guidance, pointing out that if the company hits the upper range of its guidance, its three-year revenue compound annual growth rate (CAGR) will drop below 15% for the first time in years. He notes the high activity in AI design starts and hardware upgrades, indicating a strong business environment.

In the paragraph, John Wall and Anirudh Devgan discuss their company's outlook on the semiconductor market, particularly noting a conservative view on China, where they expect growth to be flat. They highlight that when excluding China, they experienced high teen year-over-year growth last year, and are anticipating low teen growth going forward. They emphasize the importance of providing value to customers and are confident in extracting value from their technology over time. Additionally, Devgan states they focus on both revenue growth and profitability, and expect improvement in both areas for 2025, with guidance exceeding the "Rule of 40" at over 55%.

Anirudh Devgan discusses the traction of AI products like Cerebrus, SimAI, and Allegro, explaining their role in driving Annual Contract Value (ACV) uplift across segments such as digital design and verification. He highlights that Cadence Cerebrus and other platforms, including Verisium and Allegro X, are widely adopted among major customers. Regarding edge devices, Devgan mentions the progression of AI through multiple phases, with the current focus on physical AI for power-constrained applications in edge environments, such as cars, robots, and drones. While design activities for edge devices have begun, the release of such products may take a few years.

The paragraph discusses the current state and future prospects of AI technology and hardware in various industries. It highlights that while there is a current slowdown in semiconductor revenue for the automotive sector, significant research and development investments are being made in electric vehicles, autonomous vehicles, drones, and robots. These developments are expected to drive demand for domain-specific AI silicon. The discussion then shifts to questions from Joshua Tilton with Wolfe Research, focusing on Cadence's expectations related to China's market performance and the company's hardware sales guidance strategy. John Wall from Cadence responds, confirming that their approach to hardware forecasting remains consistent, typically providing visibility six months ahead due to the nature of the hardware pipeline business.

In the paragraph, John Wall discusses the challenges of predicting China revenue due to limited visibility into the sales pipeline for Q1, which is leading them to cautiously forecast flat growth. He highlights that while China showed consistent quarterly growth through the previous year, the current situation calls for a more conservative outlook. Anirudh Devgan then concludes the call by expressing optimism about Cadence's growth prospects as they enter 2025 with a strong product lineup and a customer-first approach. He acknowledges Cadence's recognition as a top workplace and thanks stakeholders for their support. The call is then formally concluded.

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