The paragraph describes the opening of Cadence's First Quarter 2025 Earnings Conference Call. Tina, the conference operator, welcomes attendees and instructs on the call process, including a mute function to prevent background noise and a forthcoming question-and-answer session. Richard Gu, Vice President of Investor Relations, introduces himself and mentions the availability of the webcast and prepared remarks on the company's website. He highlights that the discussion will include forward-looking statements subject to risks and uncertainties, with actual results possibly differing from projections. Financial measures discussed are non-GAAP, with reconciliations included in the earnings release. Participants are asked to limit themselves to one question during the Q&A session. Anirudh Devgan, President, and CEO, is then introduced to speak.

Cadence reported strong financial results for the first quarter of 2025, with significant revenue growth and an increase in non-GAAP EPS. The company is raising its financial outlook due to robust customer demand for innovative technologies, particularly in semiconductors, which support advances like hyperscale computing, 5G, and autonomous systems. Despite macroeconomic uncertainties, customer investment in R&D remains strong. Cadence benefits from a resilient business model with recurring revenue and is expanding its product portfolio to meet diverse customer needs. The company's Cadence.AI portfolio offers significant advantages in the AI-driven market, and an expanded partnership with NVIDIA aims to enhance engineering and science solutions using a new AI model.

In the third paragraph, the article discusses various advancements and collaborations by the company in the first quarter. They are pioneering NVIDIA Omniverse Blueprint for AI Factory Digital Twins to enhance data center design. The company strengthened partnerships with key ecosystem players, expanded collaborations with Rapidus for 2-nanometer IP development, and broadened their EDA software applications with Socionext and a hyperscaler. They joined the Intel Foundry Accelerator Design Services Alliance, enhancing innovation for Intel Foundry customers. Their IP business saw a 40% year-over-year growth, driven by AI, chiplet-based architectures, and collaboration with major foundries. The company is also expanding its design IP portfolio through acquisitions, including Secure-IC and a definite agreement to acquire Arm's Artisan foundation IP business.

The paragraph discusses several advancements and successes in Cadence's technologies and solutions. Tensilica DSPs are widely used in automotive ADAS and robotics, contributing to a 16% growth in core EDA revenue in Q1. The Cadence Cerebrus AI solution gained traction with nearly 50 new clients and over 1,000 completed projects. The use of Cadence's Conformal AI ECO Flows has significantly improved efficiency and reduced runtime for companies like MediaTek and Renesas. The Virtuoso platform continues to expand into new areas such as photonics. Demand for verification and hardware solutions, especially Palladium Z3 and Protium X3 platforms, is strong, driven by AI, HPC, and hyperscaler clients. Cadence's verification software also showed growth across multiple industries, leveraging big data and AI for optimization.

In the first quarter, Cadence achieved over 50% year-over-year revenue growth in its system design and analysis business, largely due to its AI-driven optimization solutions and physics-based simulation platforms. The company's Digital Twin Reality Data Center product gained traction, and BETA CAE opened new opportunities in the automotive sector. Allegro X's integration with the omniverse and its AI-driven substrate router garnered strong customer interest. Overall, Cadence reported significant Q1 results, indicating growing opportunities in chip and system design, driven by AI automation. The company is also recognized for its inclusive work culture, ranking #11 on Fortune's list of 100 best companies to work for. John Wall reports that robust design activity and customer demand resulted in 23% revenue growth and a 42% non-GAAP operating margin, putting Cadence ahead of its 2025 forecast. The company also repurchased more shares than initially planned, reducing the overall share count.

The paragraph provides financial highlights from Cadence's first quarter, reporting a total revenue of $1.242 billion, a GAAP operating margin of 29.1%, and a non-GAAP operating margin of 41.7%. GAAP and non-GAAP EPS were $1 and $1.57, respectively. The cash balance stood at $2,778 million, debt at $2,500 million, and operating cash flow was $487 million, with $350 million spent on share repurchases. Cadence projects 2025 revenue between $5.15 billion and $5.23 billion, GAAP EPS between $4.21 and $4.31, and plans to use at least 50% of free cash flow for share repurchases. For Q2, expected revenue ranges from $1,250 million to $1,270 million, with specific GAAP and non-GAAP margins and EPS provided. Cadence is optimistic, raising its 2025 revenue and EPS forecast, highlighting its critical technology platform and resilient software model.

The paragraph discusses the company's growth in its core EDA business, highlighting a 13% year-over-year growth in China compared to 10% previously. Despite trade and regulatory challenges, there is increased domestic focus on chip design in China, especially in AI, automotive, and power management sectors, with companies like ByteDance and Alibaba initiating new programs. Anirudh Devgan expresses optimism about the growth potential in China, noting that the country's strong R&D investment and focus on AI development in data centers and physical systems like autos and drones are key growth drivers. Overall, the company is pleased with its Q1 performance across various product groups and geographies.

The paragraph discusses the company's outlook and strategy regarding the impact of U.S. tariffs on their business. Despite strong design activity in China, they are cautious and assume flat year-over-year revenue from China. Lee Simpson from Morgan Stanley inquires about the company's exposure to U.S. tariffs. Anirudh Devgan responds by affirming that their software and services are not subject to tariffs. Their hardware business, which involves ASIC fab from TSMC, has a diversified supply chain with manufacturing lines both in the U.S. and abroad, minimizing potential tariff impacts. Overall, they do not anticipate significant effects of tariffs on their hardware business due to this diversification.

The paragraph discusses the resilience of a company in uncertain times, highlighting its ties to the design cycle, diversified products and geographies, and a stable business model that allows them to confidently raise their outlook for 2025. In a subsequent discussion, Gary Mobley from Loop Capital asks about the impact of newer, generation-based computing, like GPU-based servers, on the company's licensing model and annual contract value. Anirudh Devgan responds by explaining the company's strategy involving a "three-layer cake" approach to computing. This includes running their software on a variety of CPUs, including x86 and ARM, collaborating closely with NVIDIA for GPU acceleration, and developing their own specialized hardware for Boolean calculations.

The paragraph discusses Cadence's diverse offerings, particularly in hardware and cloud solutions. They maintain a traditional licensing model while increasingly offering cloud-based solutions, including public cloud access and their own cloud services through outsourced data centers. They package hardware and software together, citing the Millennium and Palladium products as examples. This represents a new business model for Cadence. The paragraph includes a discussion between Vivek Arya from Bank of America and Anirudh Devgan from Cadence, where Arya inquires about Cadence's market share opportunities, specifically in relation to Intel. Devgan expresses satisfaction with Lip-Bu's appointment as Intel's CEO and notes that Intel has been a relative weak spot for Cadence.

The paragraph discusses Cadence's progress and future prospects in two key areas: IP (intellectual property) and hardware delivery. The speaker is pleased with improvements in the IP business and looks forward to deeper engagement with Intel as they refine their strategies. The conversation then shifts to hardware, where demand exceeds production capacity, but the company has an agile supply chain to manage this. Hardware for the U.S. market is made domestically, minimizing tariff impacts. There are also plans in Mexico, but capacity issues could arise if tariffs were imposed. Anirudh and John Wall address these points, expressing optimism about managing production and supply chain challenges effectively.

In the paragraph, Anirudh Devgan from the company highlights the significant investment in research and development, constituting 35% to 40% of their revenue. He discusses several key areas of focus for technical and product enhancements. A major emphasis is placed on the application of artificial intelligence (AI) in chip and system design, particularly through AI-driven design tools like Cerebrus. Devgan notes that more than 50% of their designs now incorporate AI-enabled tools. He also hints at other areas such as physical verification, next-generation silicon for hardware, and investments in acquired simulation solver products, though specifics are not detailed.

The paragraph discusses key areas of focus for AI and technology advancements over the next 5 to 10 years. It highlights the significant investment and progress in AI agentic features, particularly in relation to five major platforms. Additionally, it emphasizes the importance of 3D-IC technology, which is expected to grow significantly, enabling complex system analysis and supporting chip, system, and IP businesses. The paragraph also mentions the critical role of hardware-software co-optimization involving various CPUs and GPUs. Furthermore, there is a discussion about the pending acquisition of Arm's Artisan IP assets, which has not been included in financial guidance. The acquisition is seen as an opportunity in the foundational IP market, which has not been a major focus in the past but now appears more attractive.

In the paragraph, Anirudh Devgan discusses the company's strategy to enhance its IP portfolio through partnerships and acquisitions. He highlights the importance of Foundation IP, which has grown increasingly critical in recent years due to its interaction with software and the needs of expanding foundry capacities globally. As part of their efforts, the company has acquired Rambus' IP business and Secure-IC to fill gaps in their portfolio. Additionally, the company aims to acquire ARM's Artisan business to further strengthen their Foundation IP offerings, citing its strong market history and product credibility. The acquisition is expected to be finalized later in the year. Following this discussion, Jason Celino and Joe Quatrochi have a brief exchange before the operator introduces the next question from Wells Fargo.

In the paragraph, Anirudh Devgan discusses key areas of focus for their design workflow improvements, primarily highlighting verification, implementation, package and PCB design, and analog migration. He explains that verification is crucial and likens it to an NP-complete problem. Devgan mentions their SimAI offering, which enhances performance with endorsements from customers. He sees potential in enhancing implementation tools like Cerebrus and believes AI can significantly boost automation in package and PCB design with Allegro products, especially given the growing importance of 3D-IC systems. Additionally, he notes that AI could aid in the complex area of analog migration. Overall, Agentic AI aims to enhance automation across their product spectrum.

The paragraph is part of a discussion during an earnings call where Joe asks John Wall about improved visibility and optimism for the 2025 outlook, noting that the company is tracking ahead of its original forecast with strong Q1 results. John Wall attributes the positive outlook partly to strength in recurring revenue, which, once ahead in Q1, positively impacts subsequent quarters. Despite anticipating some increased expenses due to tariffs, they remain resilient and have raised prices. Joshua Tilton then asks about the guidance assuming flat growth for China, questioning if current year-to-date observations suggest that expectation is accurate, considering easier first-quarter comparisons.

In the paragraph, John Wall explains that the decision to keep China's financial outlook flat for the year is a prudent move given the current macroeconomic conditions. The company has experienced strong Q1 bookings and is tracking ahead of its original 2025 forecast, prompting them to raise their guidance. Joshua Tilton expresses appreciation for the information. Siti Panigrahi then asks Anirudh Devgan about the impact of advancements like DeepSeek on design velocity and compute capacity, as well as the influence of hyperscalers expanding their data centers. Anirudh acknowledges the importance of these advancements, noting that customers expect more efficient AI developments, paralleling the evolution of computing in the EDA industry.

The paragraph discusses the growing integration of AI in technology design, drawing parallels to past developments in CPUs and predicting similar trends for AI and GPUs. It highlights the increasing prevalence of AI in various sectors, including data centers and physical applications like cars and drones. The speaker notes the acceleration of AI design activities, particularly with designs aimed at future AI-enabled products, despite the current market conditions. NVIDIA and other major U.S. hyperscalers are mentioned as key players investing heavily in their AI designs. Additionally, the design of inference chips to improve AI efficiency is expected to increase. The speaker also emphasizes the role of advanced packaging technologies, like 3D-IC, in driving AI performance and complexity. Overall, there is no significant change anticipated in AI design activities, indicating ongoing robust development.

In the paragraph, Nay Soe Naing from Berenberg asks about the strong performance of a company's SG&A segment and its significant growth compared to peers over the past three years. The query focuses on whether this success is due to competitive market wins or other reasons, along with inquiring about potential challenges from past solid performance. John Wall responds by noting that an easy comparison base in Q1 '24 contributed to their strong performance. He mentions the acquisition of BETA, which began contributing in Q4 and helped boost results by selling alongside Cadence products and expanding reach through e-commerce. Anirudh Devgan adds that BETA's performance supports other parts of their portfolio and highlights the strength of their R&D products with better performance due to massive parallelism on CPUs or GPUs.

The paragraph discusses the company's confidence in its product innovation and the expanded reach through partnerships with auto companies via BETA. This collaboration not only enhances performance but also opens opportunities to sell other products to the same customers. Additionally, improvements have been made in the company's cloud offering and go-to-market strategy using indirect channels. Anirudh Devgan addresses a question regarding recent accelerated acquisitions in intellectual property (IP), clarifying that these moves are both opportunistic and customer-driven. The company sees a strong demand for high-quality IP, particularly in power and performance from leading foundries like TSMC, driving customer interest and portfolio expansion through both organic investment and acquisitions.

The article highlights a positive outlook on the foundry ecosystem, emphasizing significant partnerships and investments involving major companies like TSMC, Rapidus, Samsung, and Intel. This rich ecosystem is creating opportunities in intellectual property (IP) and is further supported by advancements in AI and 3D-IC technologies. The speaker is optimistic about the growing demand for their IP, anticipating growth exceeding Cadence's average. Additionally, when asked about data center digital twins, Anirudh Devgan expresses excitement about this area, bolstered by the acquisition of Future Facilities in July 2022 and a strong Q1 performance. There is also a notable partnership with NVIDIA, indicating an expanding total addressable market (TAM) and potential opportunities beyond data centers, such as package-related thermal and electromagnetic analysis.

In the paragraph, Anirudh Devgan discusses Cadence's collaboration with NVIDIA in designing data centers using Cadence Reality Digital Twin technology. This technology offers significant opportunities, showing a 10% improvement in power efficiency in data centers. The approach combines design and operational optimization through simulation and analysis, areas that traditionally lack such innovation compared to chip design. Devgan emphasizes the potential for growth in optimizing data centers and chip design. Despite being prudent in their assumptions, Cadence is optimistic about their technological impact. Finally, Devgan thanks stakeholders for their support, highlighting Cadence's strategic positioning in the semiconductor and system industry.

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