Good afternoon. My name is Brianna and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead, sir.

Thank you, operator. I would like to welcome everyone to our third quarter of 2024 earnings conference call. I'm joined today by Anirudh Devgan, President and Chief Executive Officer; and John Wall, Senior Vice President and Chief Financial Officer. The webcast of this call and a copy of today's prepared remarks will be available on our website, cadence.com. Today's discussion will contain forward-looking statements, including our outlook on future business and operating results. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion. For information on factors that could cause actual results to differ, please refer to our SEC filings, including our most recent Forms 10-K and 10-Q, CFO commentary, and today's earnings release. All forward-looking statements during this call are based on estimates and information available to us as of today and we disclaim any obligation to update them. In addition, core financial measures discussed on this call are non-GAAP unless otherwise specified. The non-GAAP measures should not be considered in isolation from or as a substitute for GAAP results. Reconciliations of GAAP to non-GAAP measures are included in today's earnings release. For the Q&A session today, we would ask that you observe a limit of one question and one follow-up. Now, I'll turn the call over to Anirudh.

Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. Cadence delivered exceptional results for the third quarter of 2024 with broad-based strength across our product portfolio. We are on track for a strong second half and we are pleased to raise our full-year EPS outlook. John will provide more details on our financials in a moment. Generational trends such as hyperscale computing, autonomous driving, and 5G, all accelerated by the AI super cycle, continue to fuel strong design activity across multiple verticals, especially in data center and automotive. Our cutting-edge chip-to-system platforms empower customers to drive unprecedented innovation as they race to develop next-gen AI and agentic AI products while navigating escalating design complexities. We continue steadily executing to our intelligent system design strategy that triples our TAM opportunity while significantly expanding our portfolio across core EDA, IP, and system design and analysis. I'm excited about AI's incredible promise and how rapidly it is becoming an integral part of the design workflow, with customers steadily increasing their investments in AI-driven automation. Our Cadence.AI portfolio, powered by GenAI agents, AI-driven optimization, and big data analytics JedAI platform saw sales nearly triple over the last year, as it continued delivering unparalleled quality of results and productivity benefits. We continue partnering with NVIDIA to accelerate AI innovation and are using their latest NeMo and NIM microservices to build customized GenAI applications, delivering enhanced optimization and productivity. In Q3, we deepened our partnership with Arm through a broad expansion of our IP, hardware, and AI-driven design enablement solutions to help deliver Arm’s next-generation AI technologies and advanced Arm compute subsystems across multiple markets. We expanded our long-standing partnership with TSMC, with AI-optimized design flows certified for TSMC's N3 and N2P technologies. We are also collaborating on innovative solutions for next-generation technologies, like TSMC A16 and 3Dblox, that are paving the way for the AI factories of tomorrow. Demand for our industry-leading Integrity 3D-IC solution that enables system-level PPA optimization continues to grow with accelerating adoption by hyperscalers, OSAT, and foundries. We introduced the industry's first auto-router for both die-to-die and die-to-substrate connectivity. High-speed multi-layer PCB designs require increasing levels of miniaturization, advanced simulation, and AI-driven automation. Allegro X, with its tight integration with our analysis technology, and expanded collaboration platform, is ramping strongly and drove over 40% of our PCB sales this year. The transition to OrCAD X, our new mainstream PCB solution accelerated in Q3, with a third of our OrCAD customers converting to this new cloud-enabled solution. Cadence OnCloud is a key go-to-market platform to reach the long tail of smaller system customers and is seeing strong traction with over 400 customers, tens of thousands of online users, and orders doubling over the past year. We recently launched the Cadence OnCloud Marketplace and announced Cadence online support through OnCloud, which uses GenAI technology to provide insightful, contextual, and accurate answers to customer queries. As the digital transformation in aerospace and defense accelerates, we saw continued strength in this vertical as the US Air Force and Army expanded their commitment to Cadence’s solutions spanning from chips to boards to systems. Our hardware-accurate digital twins have been successfully used by Northrop Grumman in taping out several ASICs, helping accelerate the schedule by over two years. In Q3, we substantially grew our footprint at several marquee hyperscalers through a broad proliferation of our best-in-class hardware systems, IP, and software portfolio. Our system design and analysis business continued to outpace the market, delivering impressive results with over 40% year-over-year revenue growth in Q3. We are pleased with the strong growth of our multiphysics portfolio that couples our expertise in physics-based modeling with AI-driven optimization to deliver superior results to customers. Clarity and Celsius both grew strongly with competitive wins while our newly acquired BETA CAE products that round out our system analysis portfolio outperformed our expectations as we signed large deals with major EV companies. Our AI-driven optimality solution was adopted by several leading customers and Volta's Inside AI, used by top hyperscalers to successfully achieve an 80% AI drop reduction in their designs. Our IP business continued its strong momentum in Q3, delivering over 50% year-over-year revenue growth, as we executed to our profitable and scalable growth strategy. Increasing complexity of interconnect protocols, along with the growing outsourcing trend, and new foundry opportunities are providing strong tailwinds to our IP business. AI, HPC, and chiplet use cases were the primary drivers for the adoption of our differentiated HBM, PCIe, UCIe, DDR, and high-speed SerDes solutions in designs ranging from 7 nanometers down to the most advanced gate-all-around nodes. Our AI-assisted Tensilica audio DSP scored multiple design wins with marquee global customers across HPC, mobile, and automotive use cases. Our core EDA business, comprised of our custom, digital, and functional verification businesses, delivered 9% year-over-year revenue growth in Q3. Our new groundbreaking hardware systems offering industry-leading performance, capacity, and scalability experienced strong demand, especially at AI, hyperscale, and automotive companies. Verisium, our AI-driven verification platform, continued seeing rapid customer adoption, with several leading customers successfully using Verisium Sim AI for highly efficient coverage maximization. Proliferation of our digital full flow at the most advanced nodes accelerated with over 30 new full flow logos added over the past year. With nearly 450 tapeouts, customers are increasingly deploying Cadence Cerebrus AI solution as it continues to deliver unparalleled PPA and productivity benefits on a broad spectrum of designs. Our AI-driven Virtuoso Studio leverages the capabilities of our flagship Virtuoso platform while seamlessly integrating with other Cadence cutting-edge technologies to drive significant productivity benefits for analog, RF, and mixed signal designers. With this GenAI-driven automated design migration and new layout placement and routing technologies, customers are rapidly adopting Virtuoso Studio and it won 30 new logos in Q3. In summary, I'm pleased with our Q3 results and the continuing momentum of our business. The AI-driven automation era offers massive opportunities, and the co-optimization of our comprehensive EDA, SDA, and IP portfolio with accelerated compute and AI orchestration uniquely positions us to provide disruptive solutions to multiple verticals. Now, I will turn it over to John to provide more details on the Q3 results and our updated 2024 outlook.

Thanks, Anirudh, and good afternoon everyone. I'm pleased to report that Cadence delivered strong Q3 results with total revenue of over $1.2 billion. We achieved 19% year-over-year growth. Our Q3 recurring revenue growth returned to low teens on a year-over-year basis. Our intelligent system design strategy is paying off with our system design and analysis business delivering strong growth and we continue to see robust demand for our emulation and prototyping systems. Here are some of the financial highlights from the third quarter, starting with the P&L. Total revenue was $1.215 billion. GAAP operating margin was 28.8% and non-GAAP operating margin was 44.8%. GAAP EPS was $0.87 with non-GAAP EPS of $1.64. Next, turning to the balance sheet and cash flow, we had a $2.5 billion senior notes offering in Q3 that was well-received by the market. We have used the majority of the net proceeds to retire maturing notes and prepaid term loans as well as for other general corporate purposes. Cash balance at quarter end was $2.786 billion while the principal value of debt outstanding was $2.850 billion. Operating cash flow was $410 million. DSOs were 44 days and we used $150 million to repurchase Cadence shares. Before I provide our updated outlook, I'd like to highlight that it contains the usual assumption that export control regulations that exist today remain substantially similar for the remainder of the year. Our updated outlook for 2024 is revenue in the range of $4.61 billion to $4.65 billion. GAAP operating margin in the range of 29% to 30%. Non-GAAP operating margin in the range of 42% to 43%. GAAP EPS in the range of $3.70 to $3.76. Non-GAAP EPS in the range of $5.87 to $5.93. Operating cash flow in the range of $1.0 billion to $1.2 billion. And we expect to use approximately 50% of our annual free cash flow to repurchase Cadence shares. With that in mind, for Q4, we expect revenue in the range of $1.325 billion to $1.365 billion. GAAP operating margin in the range of 33.2% to 34.2%. Non-GAAP operating margin in the range of 45.2% to 46.2%. GAAP EPS in the range of $1.09 to $1.15, and non-GAAP EPS in the range of $1.78 to $1.84. And as usual, we published a CFO commentary document on our investor relations website, which includes our outlook for additional items, as well as further analysis and GAAP to non-GAAP reconciliations. In conclusion, I'm pleased with our Q3 results. Our Q4 bookings pipeline looks exceptionally strong, and we are well positioned to deliver a strong 2024. As always, I'd like to close by thanking our customers, partners, and our employees for their continued support. And with that, operator, we will now take questions.

Your first question comes from Joe Vruwink with Baird.

Hi. Great. Hi, everyone. I appreciate the nature of your relationships with customers. Means, you typically know well in advance what product roadmaps might be. You're typically not learning new information off of public calls, but just given the number of headlines around advanced foundry efforts or maybe demand from China, I wanted to ask, have you learned anything over the past three months or so that you would point out as maybe being something worth considering, either good or bad as investors think about the 2025 opportunity for Cadence?

Hi Joe, this is Anirudh. That's a good question. As you know, the significance of semiconductors to the global economy is growing and is increasingly recognized. Over the past quarter, I visited several countries, and there is a stronger commitment to expanding semiconductor capabilities. We're seeing this in various nations. Additionally, as we mentioned earlier this year, while TSMC is a leading foundry, our relationships with Samsung and Intel in this sector have improved, and we have been collaborating globally for several years. Overall, we are observing continuous investments in new foundries, including Intel, Samsung, and even Rapidus in Japan and other countries. We continue to work closely with major players like TSMC and Arm, and it is encouraging to see additional investments in other areas.

Okay, thanks for that. And then, John, you don't normally give backlog guidance, but you did comment on bookings pipeline and 4Q, and that stands out. Are you maybe able to go into a bit more color on what you might expect or what you would be looking for as kind of the forerunner to your 2025 performance?

Yeah, I mean thanks for picking up on that, Joe. I mean obviously we're not giving any outlook on 2025 yet. But it's a very, very strong pipeline right now for Q4. I think it's the biggest I've ever seen for Q4 pipeline. It reminds me a little bit. It's kind of similar to how we finished 2021. If you recall, in 2021, we had a really strong pickup in bookings in Q4 and ‘21. About 40% of our annual bookings came in Q4 of ‘21 and this year the second half seems to be setting up the same way but it's with exceptionally strong pipeline and we're seeing strong design activity everywhere.

Great. Thank you very much.

Your next question comes from Jason Celino with KeyBanc Capital Markets.

Hey, thanks for taking my questions. Maybe just following up on Joe's backlog question. So understand that the pipeline looks quite large. Is it fair to say that the composition of that pipeline is mostly being hardware driven? I guess curious what you're seeing from a new order pipeline perspective on kind of the Z3/X3.

Hi Jason, thanks for the opportunity to clarify that it's broad-based across all our businesses and all of them are performing really well. When I look at our forecast for the rest of the year, on a three-year compound annual growth rate basis, all business groups are set for strong growth, ranging from low double-digit growth in our core EDA software to mid-teen growth and nearly 30% growth in areas like IP functional verification, which includes hardware and system design analysis.

Okay, perfect. And then just one really quick one on China. I think last quarter I think you were trying to de-risk some of your assumptions. Obviously, this quarter, there were some incremental worries that the region might be taking another leg down. But obviously, Cadence and EDA can see very different purchasing habits and demand drivers from semi-cap and some of the smaller point solution providers. But do you still expect to see 13% of your revenues come from China this year? I guess what else can you tell us about the overall demand environment there?

Yeah, great question again, Jason. I mean, you're reading my mind. I mean, myself and my team were looking through China. We went back, we're data driven. We went back 25 years to have a look at our China revenue. I mean, we're expecting China revenue to be lower this year than last year. That's only happened three times in the last 25 years. First time was 2008. Obviously, there were macro things going on back in 2008. And it took until 2011 for us to reach a new high in China revenue, but it recovered immediately in 2009. It dipped in 2021, recovered immediately to a new high in 2022, and it looks like it's dipping in 2024. But I'm very, very pleased that Q2 was stronger than Q1 on a dollar basis. Q3 was stronger than Q2, and China seems to be recovering well with strong design activity.

Okay. Thank you very much.

Our next question comes from Gianmarco Conti with Deutsche Bank.

Yeah, hi, thank you very much for taking my questions and congrats again for a great quarter. Maybe perhaps if you could touch a little bit on the Cadence.AI suite. If you're seeing incremental appetite there, and is it going to be material for 2025 growth? If you could give us any data points or qualitative anecdotes, that would be amazing, thank you.

Yeah, absolutely. I mean, we are pretty pleased with how our Cadence.AI portfolio is doing. And like mentioned earlier, I mean, right now, I think it is used by all our top customers. So, now some of them are, the amount of proliferation is different at each customer, but right now we are engaged in all of our top customers with our AI solutions. And as you may know, we have five major AI platforms, analog, digital, verification, PCB, and package and system analysis. So it's a pretty rich portfolio. And the customers are routinely seeing anywhere from 5% to 20% improvement in PPA, which is significant. I think the value of AI is not just productivity, which is huge. I mean, we have a history of productivity improvement in EDA, but the value of AI is when it can give a better result. So that's where I think the real value and monetization can happen if the result is better. And we also design our own chips as well. As you know, Palladium, we design our own chip, one of the most complicated chips that are made by TSMC. And we design our own IP, right, in our IP group. So we are also applying our own solutions internally as well. So these are like true comparisons of AI versus non-AI solutions. So even in the latest Palladium Z3 chip, we saw like 15% improvement in power using Cadence Cerebrus. And in the latest AI IP we designed, we saw anywhere from 13% to 20% improvement in our IP group using our own Cadence.AI solutions, which is very consistent with what we see with top customers. So overall we are pleased with the benefit we are getting, especially with the improvement in PPA. And productivity improvements can be anywhere between 5x to 10x, but the PPA benefits are truly remarkable and almost equivalent to one kind of node, one process node migration typically get 15% to 20% PPA improvement and we can get that with AI. And then the last thing I would like to highlight with AI is our Cadence OnCloud offering. So we do have a Cadence customer support portal and we're applying GenAI in there to give better responses to our customers. And this is another big trend of applying AI to give better customer support. So overall, applying Cadence.AI, of course, working with all our top customers across all five major platforms, applying AI internally to improve our own designs, whether it's in hardware group or IP, and then applying AI for customer support can make us much more efficient.

Amazing. I think I'll just ask a quick follow-up. Is it safe to say that in Q4 we should see the air pocket of hardware kind of closing out? And if you could share sort of any commentary around 2025 visibility, particularly from your overordering of the FPGAs and the raw materials, I'm just kind of curious how does that translate into backlog? I know you don't specifically guide on backlog, but obviously, backlog was a little bit down sequentially. And so any commentary there, that will be amazing. Thank you.

Yes, Gianmarco, I certainly wouldn't categorize our ordering of FPGAs as over-ordering. We are ordering to fit the demand that we see. We're seeing very robust demand. The pipeline is super strong. But like I said, I haven't seen it as strong as this in any previous Q4 that I've been here. So we're set up for a tremendous Q4. At this time of the year, it's always difficult to give any indication as to what next year looks like and particularly in years like this, when you expect such a strong bookings quarter in Q4, we kind of have to get that landed and look at the quality of that before we give any indication as to what next year looks like. But I'm very, very pleased with the hardware demand, with the performance of the business and they're ramping up production all the time to meet the demand.

Okay. Thank you very much.

Our next question comes from Lee Simpson with Morgan Stanley.

Great. Good evening, everyone. So a couple of quick ones from me actually. Just looking at the Millennium platform, following on from the last question there, could you maybe characterize what is the interest beyond NVIDIA? When, who and how big do we think the demand will be for that platform? And maybe as a follow-on question, I'm just interested on the timing of the impact from new collaboration with Arm on CSS. Does that have any specific vertical to it? Is that autos? Or is it maybe the aerospace stuff that you were talking about there? Thanks.

Yes, good question, Lee. We have had a strong partnership with Arm for many years, particularly in their IP development for CPUs and GPUs. Our latest collaboration, which we mentioned, is expanding into compute subsystems and overall design, as Arm enhances their capabilities with more chiplets and droplets. While this relationship is broad-based, it's important to note that Arm is experiencing significant strength in several markets, including high-performance computing and automotive. As Arm evolves their strategy, our partnership strengthens not only in IP development but also in total computing solutions. Regarding your other questions about Millennium, I remain optimistic that these new systems will enable us to accelerate our software utilizing both CPUs and GPUs. Millennium is a prime example of this potential. We've achieved impressive results with our circuit simulation, particularly with Spectre, which is the leading platform in this area. With the latest systems, we can accelerate circuit simulation by five to ten times using CPU and GPU acceleration platforms, and this also applies to system design and analysis, which Millennium exemplifies. This is largely because the algorithms involved rely heavily on matrix multiplication, a fundamental operation in computational fluid dynamics and AI. These systems are well-optimized for applications that involve matrix multiplication. Thus, I am quite hopeful as we are seeing remarkable results, particularly in computational fluid dynamics with companies in the aerospace and automotive sectors. For instance, Honda has been an early development partner for Millennium. As our CPU and GPU platforms continue to advance, I believe we can extend this acceleration to a wider range of applications, and you'll observe this progression in the future.

That’s great. Thanks so much.

Our next question comes from Charles Shi with Needham.

Good afternoon, Anirudh and John. I want to ask another question about Intel and Samsung. But from another perspective, I mean, despite all the headlines, which were not so positive, we know that those two customers will where your market share historically has been a little bit underrepresented, but largely because they are still using the internal EDA tools. So I mean, given all the challenges, those two customers seem to be facing, although it doesn't sound like you're seeing any immediate changes. Is it possible that it can be a net positive for you guys? And if there is more dependence of those two customers on the commercial EDA tools, meaning more of the EDA development work being outsourced to the merchant EDA companies like Cadence, I want to get some thoughts on them and what could be, let's say, an inflection point for that to happen if it happens? Thanks.

Hi, Charles, that's a great observation. As you know, we have been very strong in the TSMC ecosystem for the past 5 to 10 years through our partnership with TSMC and ARM, whereas we have historically not been as strong with Samsung and Intel. However, I believe that is starting to change, particularly over the last year and this year. Every company experiences ups and downs, as you know. Both Intel and Samsung are excellent companies, and when they face challenges, it often presents more opportunities for us. We always focus on our products, believing we have the best solution, and we are seeing that with Intel, especially through our IP partnership and the strength of our new hardware platforms. We are collaborating with both companies on new systems and AI-enabled software. Typically, these things take time. In general, whenever there is competition with some of these large customers, we have historically performed well in those situations.

Got it. Thanks. Maybe the other question I want to ask is, hopefully, you can clarify because it has been the news that Cadence may be acquiring Altair or maybe looking to acquire Altair Engineering Systems. So mind if you provide some comments here.

Charles, yeah, I mean, as you know, we don't comment on specific rumors, but I mean, as we have said before, I mean, we are very pleased with our strategy. We are very pleased that most of our growth is organic and sometimes we do some small tuck-in M&A, and that strategy has not changed. So that's our plan going forward, and we are pretty happy with how we are positioned. Yes.

Our next question comes from Jay Vleeschhouwer with Griffin Securities.

Thank you, good evening. Anirudh, you may remember that during the conference call a quarter ago, you mentioned various AI and machine learning use cases that are starting to emerge. We also discussed the potential for you to adjust your product packaging for different use cases or end markets over time. Perhaps we can connect those two points. Do you anticipate more vertical, domain-specific packaging for AI and machine learning applications? I know you currently have branded apps and are targeting various verticals. Do you envision taking some of those technologies and tailoring them specifically for certain end markets? Before my follow-up, could you also share some insights about your AI and machine learning development roadmap? Customers have expressed their expectations from you at Cadence Live, so could you address the improvements you plan to implement regarding capacity, memory footprint, scenario proliferation, and so forth? Then I will proceed with my follow-up.

Hi, Jay, those are really insightful observations. We are making significant investments in R&D and are quite satisfied with our AI and AI product roadmap. We'll gradually roll this out over time; I prefer not to disclose any specifics right now. Overall, we are investing heavily. As AI technology becomes more advanced, we are focusing on three key areas: AI orchestration, principal simulation and optimization, and foundational technology like CPU, GPU, and custom silicon. We are putting resources into all three. It could also make sense to create specialized solutions like we did with Millennium, which targets specific markets such as aerospace and automotive. We are generally optimistic about these developments. AI is broad, and I see it in two segments. Initially, it has a horizontal application, and we have a lot of horizontal technologies at our disposal. However, as we progress, AI monetization will increasingly require a vertical approach. I've publicly discussed the three phases of AI. Currently, we are in the first phase, which I refer to as infrastructure AI, starting with data centers and moving into edge devices such as laptops and smartphones. Within data centers, we are developing more vertical solutions like thermal management. The second phase, which I call physical AI, encompasses technologies like self-driving vehicles, drones, and robots. Even though the automotive market may seem weak, the design activity remains robust, indicating future potential. We've observed a similar pattern in data centers that we're now seeing in the automotive sector. The chips needed for automotive applications are often similar to those needed for drones and robots. The third phase, which is further along, I define as sciences AI, with life sciences being the most significant application. This is why we invested in OpenAI two years ago. To summarize, we see a progression from infrastructure AI to physical AI and then to sciences AI. While our business will continue to offer horizontal solutions suitable for various markets, as these sectors develop, we will also introduce some vertical solutions that align with major trends in infrastructure, physical AI, and sciences AI. Exciting times are ahead.

Okay. Sorry about that. So, you noted the strength in SD&A generally including some upside for the first full quarter with BETA CAE. But from a larger perspective, the fact is since you did your first acquisition for the ISD strategy, you've done 7 or 8 acquisitions over $2.1 billion of cumulative value. But you're still very much the challenger in that market with a fraction of market share relative to the market leaders. So maybe you could talk about how you're thinking about more tightly coupling across the various applications you have in CFD and SD&A and talk about how you're thinking about ramping up in go-to-market, especially, which is also something that I think you need to do to supplement what you've done on the code acquisition side?

Yes, Jay, that's a great point. First of all, especially with the recent BETA acquisition performing well, we believe our portfolio is quite complete. We have offerings in electromagnetics, thermal, CFD, and structural analysis. The important aspect to track is the growth rate, as it reflects not only our portfolio's completeness but also its market performance. We are pleased with our growth rate, which I believe outpaces the overall market. This success is partly due to the quality of our products, which are top-rated. For example, Clarity operates significantly faster than competitors, and Celsius uniquely handles both finite element and CFD for various applications. Our go-to-market strategy is focusing on three main approaches. The first is direct engagement, particularly with top customers, a strategy that has historically worked well for us in EDA, and we are applying it to SD&A by concentrating on leading companies. However, we also need to enhance this with two additional strategies, as other system design firms do. The second approach is the indirect channel through channel partners. The third is through e-commerce and cloud offerings. In Q3, we feel that we are effectively implementing our go-to-market strategy. For instance, aside from our direct efforts, we now have over 100 channel partners, a noteworthy increase. Additionally, our e-commerce platform, OnCloud, has tens of thousands of users. We are also ensuring that all our channel partners utilize OnCloud for their sales, so data is collected across all transactions, whether they occur through e-commerce or traditional methods. This will greatly facilitate cross-selling and lead generation. I believe we are on track with our go-to-market efforts, especially with the refining of our indirect channels and direct sales to customers, now that our products are in strong shape.

And if I could add to that as well, Jay, it's way more than just BETA. I mean, BETA is fantastic in that we're getting more pull-through revenue, especially in automotive as a result of BETA rounding out our multiphysics platform. But we're also getting strong momentum in A&D. Do you want to talk more about the A&D?

Absolutely. What excites me about the A&D sector is that it goes beyond our traditional partnerships, like the one we have with Northrop Grumman, where we have extensive experience on both the silicon and system sides. We are also actively collaborating with the US Air Force and US Army. In terms of SD&A, there are three major markets: the traditional high-tech or electronics market, which is where we have established strengths, along with aerospace and automotive. With BETA enhancing our presence in the automotive sector, plus our strong background with Northrop and the capabilities of our portfolio, we believe we are well positioned in these three key markets.

Great. Thanks very much.

Our next question comes from Vivek Arya with Bank of America Securities.

Thank for taking my question. So, Anil, despite all the secular drivers, the stock has underperformed this year because of revenue lumpiness and we have seen the core EDA growth slip below 10%. I know you're not guiding to '25, but do you think investors should be prepared for a smoother year? Or are there other lumpy effects in IT or hardware or anything else that we should keep in mind? And if I had to try to quantify it, if I look at this $1.3-ish billion kind of exiting run rate from Q4, is this sort of the trend line for next year? Just how would you suggest investors get a handle for 2025 because I think this lumpiness has really impacted the stock this year.

Yeah, Vivek, I would say that the first two quarters were unusual for Cadence. We have previously pointed out that Q1 and Q2 were affected by certain one-time events. However, I believe Q3 is more reflective of our standard performance, though John can provide additional insights.

No, I agree. I certainly feel that Q3 represents our return to normal. I believe Q4 has a lot of upfront revenue that is unusual for that period, and we have a significant pipeline to convert. There is a lot of work ahead of us before we can discuss 2025. However, when I consider 2025, I see Q3 as a more typical quarter for Cadence.

Okay. And for my follow-up, I saw in the CFO commentary that you have something now called core EDA. You've always given the different segment sales, but if I'm not mistaken, you took SDA out and you have something called core EDA, I'm curious why you chose to do that? And do you have system design and analysis kind of growth CAGR in mind beyond just a generic kind of double digit. What is the organic growth rate that you think your SDA business can achieve over the next number of years?

I appreciate the question about 2025. When we refer to core EDA, we're discussing the combination of core EDA software, the functional verification group, and hardware. System design and analysis are usually considered separately, and we have a strong IP business as well. Both the IP business and the systems in analysis business are currently experiencing significant growth. The introduction of new hardware products has also led to substantial growth in functional verification. It's common for hardware to be packaged with core EDA software, which requires us to evaluate the value distribution between the two. Internally, we usually analyze core EDA as a unified category. By the end of the year, we expect core EDA software to achieve double-digit revenue growth on a three-year compounded annual growth rate basis. In terms of functional verification, we anticipate high-teen growth on a three-year CAGR basis. The IP sector appears very robust, and system design and analysis is performing the best of all. These observations align with what Anirudh discussed earlier.

Hello, thank you for your question. I would like to focus on fiscal '24 and ask what occurred in the quarter compared to the full-year guidance. There was significant momentum in the IP business with 59% growth. Can you clarify your expectations for Q4 IP contributions? In our last quarter discussion, we mentioned that IP and systems would drive upfront revenue in the second half, while verification might be in the high single-digits. Is that still accurate? I'm also curious about the full-year range being tightened but a beat in Q3; what factors contributed to the revenue landing differently than anticipated? I have a follow-up as well.

Sure, Clarke. I believe our revenue turned out as we expected. We took a cautious approach with our guidance in Q3, and we find that our team performs best when they are not overly aggressive. Our Q3 results reflect that strategy. We're also being cautious with our guidance for Q4. The IP business is gaining strong momentum, and I anticipate that this will continue in the fourth quarter along with SD&A. All of our business segments are doing exceptionally well at the moment. Anirudh, do you have anything to add?

Certainly. Here is the rewritten Earnings Call remark: I want to share some insights about the IP business. Q3 has shown strong performance, and we anticipate continued growth in Q4. However, it's important to evaluate the business over multiple quarters and years. When we look at the two-year CAGR for IP, it is performing well. The focus has been on quarterly performance, but the significant point is that IP is growing at around 30% on a two-year CAGR basis, placing us in a strong position. Historically, we have excelled in EDA and are recognized as a leader in that area. Over the last three years, our IP performance has not matched our potential, but I believe our IP business is currently at its strongest. There are several reasons for this. First, we have concentrated on advanced nodes, particularly at TSMC, and now our industry-leading IP at 3-nanometer and 5-nanometer is tailored for enterprise applications, which are gaining traction. Secondly, we are collaborating with additional foundries, and there is an increasing demand for IP as part of onshoring and trench-shoring initiatives worldwide. Lastly, the trend of disaggregation, especially with 3D-IC not only in high-performance computing but also in laptops and automotive sectors, is driving the need for IP solutions like UCIe and various memory interface IPs. Therefore, I feel confident that our IP group is well-positioned not just for Q3, but for sustained growth over the coming years.

Perfect. Just to clarify or follow up on that, I think the main question from investors will be whether there are remaining execution thresholds for some of the IP business that was expected in the second half. Will more of it come in Q4, or did some of it arrive in Q3? Lastly, regarding margin outperformance, how would you explain the margin improvement this quarter? Certainly, IP revenue might enhance the perception of incremental margin, but is there anything notable regarding how operating expenses performed against your expectations? Thank you.

Sure, Clarke. Those are great questions. Regarding the IP side, we have strong momentum there. You might be referring to a large contract we signed at the beginning of the year, which included milestones set for the second half. Some of those milestones were met in Q3 and generated revenue. There are additional milestones that will generate revenue in Q4, and this is a multi-year contract that should keep that momentum going into next year. As for the margins, Cadence is an outstanding business. The core EDA business provides a solid foundation for margins and sustainable revenue growth, and we scale effectively. As we expand in other areas, some of the growth tends to level off. It's great to hear you mention incremental margin. Typically, much of that revenue growth contributes to operating margin, and you can really see the impressive impact it has on operating margin when growth occurs.

Our next question comes from Harlan Sur with JPMorgan.

Hey, good afternoon. Thanks for taking my question. Your inventories are up sequentially, that's an all-time high. I think it's implying a very strong demand profile and backlog for your new Z3 and X3 hardware systems. Is demand exceeding your near-term supply and manufacturing capabilities? In other words, is the Q4 shipment profile for your hardware system supply or manufacturing constraint? I'm just trying to get a sense on how many quarters, the strong upgrade cycle can extend into next year?

Yes, Harlan, the demand for our hardware is very strong. However, the growth in our inventory is primarily due to a multi-year contract we signed with a key supplier. We discussed this in last quarter's call, and it is also affecting our operating cash this year. Our purchases for hardware inventory over the next three years are expected to be around the low to mid $100 million range.

Perfect. Okay. And then back to the China business. So as you think about 2025 and anniversary in a more normalized business environment for your China business this year, there's a lot of puts and takes where you've got the hardware upgrade cycle, you've got the potential direct or indirect headwinds from maybe more US regulatory actions. You've got the macro environment, which in extreme cases, maybe does impact design activity. So kind of a lot of moving pieces, right, but I think that the best leading indicator over the next few quarters on growth is design starts and planned design starts, right? So Anirudh you track design starts in China, you track some of the upcoming programs. How does the design activity funnel look? Is it increasing? Is it staying flat? And then when you overlay your hardware upgrade cycle on top of this, what's the early sort of qualitative view on China as you look into next year, would you expect continued acceleration in year-over-year comps?

Harlan, that's a good question for me. Overall, China has shown improvement in the last two quarters, although it's challenging to forecast trends for next year. I do believe that there is overall progress in China, particularly with our enriched portfolio, especially in the automotive sector. What stands out to me is how well companies in China are performing in automotive, as nearly all major auto manufacturers are now designing chips. This is now widely recognized. We are pleased to collaborate with them on both the SDA and EDA sides, particularly regarding silicon. We just need to see how this evolves into 2025. However, I think design activity remains strong in China and beyond, largely fueled by the AI super cycle and the significant activity we're observing with hyperscalers, both in China and the US, which indicates robust demand for AI in the coming years. We'll keep monitoring this situation.

Yeah. And Harlan. Although, I mean, obviously, we can't predict what 2025 is going to bring, we did go back and back test the last 25 years. It's only the third year that we've seen a down year in China revenue on a dollar basis. And we've never seen two down years in a row. And I'm pleased to see that Q2 was stronger than Q1 this year. Q3 is stronger than Q2 this year. Pipeline looks strong. Anecdotally, from the team out in China, they're seeing a lot of design activity strength out there. So we wouldn't expect a second down year based on that history, but it's just very hard to predict '25.

Appreciate that. Thank you for the insights.

Our next question comes from Ruben Roy with Stifel.

Thank you. John, I wanted to ask a quick question, returning to the bookings pipeline and the strength there, great to hear that. But I know you said it was broad-based. Just wondering if we could drill into the hardware part of it, just a little bit more. I think historically, you've said that hardware visibility is a little limited relative to the rest of your business. I'm just wondering given that you have this new ramp, has that changed at all? Is your visibility on kind of hardware bookings extending at this point? Or is it kind of similar to the previous systems?

Great question. Typically, on the hardware side, we have a pipeline view of about two quarters. Opportunities generally appear around two quarters in advance of when the customer intends to use the hardware in production, often linked to design projects for which they may need a hardware emulation system. They usually know these projects will start this quarter or next quarter, so we maintain a six-month view. At this time of year, a six-month view is very valuable because a lot happens in the fourth quarter, which is consistently a strong bookings quarter for us. We have a solid pipeline and a good history of converting leads, and we hope to convert as much as possible in Q4. We will update you on our outlook for 2025 after we close Q4.

Understood. Thanks, John. And then a quick one, I hope for Anirudh. Just kind of thinking through what you said on some of the new AI kind of areas that you're working on, you mentioned NVIDIA and NIM, NeMo and I think your competitors talked a little bit about that. I imagine you would characterize that as a later phase AI revenue opportunity, but just wondering if you could maybe talk through how we should think about timing of when we might see some of those types of products at the market. And Also, you said that you're building custom applications. Are you getting inbound requests from customers like hyperscalers or otherwise for that type of AI feature set?

I want to emphasize our JedAI platform, which serves as our enterprise data and AI platform. It allows us to support multiple GenAI solutions, making us essentially LLM agnostic. We can integrate various engines as different customers have unique preferences. JedAI acts as a primary deployment vehicle and is compatible with all our tools and the major five AI platforms, providing us with the flexibility to tailor solutions to customer needs. Additionally, the platform can be utilized to customize not only our solutions but also specific customer solutions. JedAI operates on both cloud and on-premise setups, accommodating large customers who prefer not to use cloud services. After several years of development, JedAI positions Cadence uniquely to implement various AI solutions and LLMs in the market.

Thank you, Anirudh.

Our next question comes from Siti Panigrahi with Mizuho.

Thanks for squeezing me in. And Anirudh, it's good to be on the call, just initiated coverage. So I want to keep it at a high level and really just for the interest of time, one question here. When I look at your three years revenue CAGR trend, it has been accelerating from single digit to now mid-teens. And Anirudh, you talked about so many growth drivers and even products, new products coming to market. I'm wondering how would you rank order this growth opportunity and product when you think about the growth in the foreseeable future? And what gives you that confidence to sustain this kind of double-digit revenue growth?

Thank you for the question and for starting coverage. I want to emphasize that we are consistently focused on revenue growth, which, as you noted, has improved thanks to various systemic drivers. At the same time, profitability has also enhanced and continues to grow each year. This combination certainly benefits our shareholders. In Q3, we achieved better results not only in revenue but also in profitability. There are many drivers contributing to this, particularly advancements in AI and our efforts to excel in new areas like SD&A and IP. I remain optimistic about our IP business as we continue to prioritize profitability moving forward.

Our final question comes from Joshua Tilton with Wolfe Research.

Hey, guys. Thanks for squeezing mine in. I want to start with a bit of a nuanced question, although I think it is important. John, you talked to how previously you have seen down years in China, but you've never seen two down years in a row. And I guess you mentioned your data-driven, you looked at the historical numbers. But can you give us any sense of what helps to drive the recovery a year after you had a down year? And what I'm trying to get at is, do I have to believe in some type of bigger hardware demand or more upfront contribution or something along the lines of things that may not be recurring? Or is it just more a function of we had a weak year and there was a return to normal demand environment going forward? I guess I'm just trying to understand outside of history, what is similar this year versus the previous years where you've seen down years and why you don't expect to once again not see two down years in a row.

Thank you for the opportunity to provide additional insight. Looking back over the past 25 years, we have experienced significant momentum and design activity among our customer base, particularly with an increasing presence in China. There have only been two previous years before this one where we observed a decline in revenue from China year-over-year. In 2008, which had some unique characteristics, we transitioned from an upfront revenue model to a ratable revenue model. This change contributed to a few years before we reached a new peak in China revenue. The only other dip occurred in 2021, but revenue rebounded to a record in 2022. Notably, we launched new hardware systems during that time and have noticed a correlation between hardware sales and revenue from China, as hardware revenue tends to drive more software sales there. This year, the new hardware introduced is selling and being delivered more outside of China, but I anticipate that a greater share will go to China next year, which should benefit our software revenue. Looking at this year specifically, while there was a dip in China revenue in Q1, we have seen recovery since then, with Q2 and Q3 showing improvements. As hardware sales continue to pick up, I believe it will contribute positively to our software revenue.

Super helpful. Just a quick follow-up. Can you provide any updates on the contribution from BETA for the quarter and whether you're still on track to meet or exceed the $40 million target for the full year?

We are seeing a significant contribution from BETA when considering the additional revenue generated from all our automotive customers through the sale of traditional Cadence technology alongside BETA. However, it's a relatively small addition, and we are not providing separate guidance for BETA.

I will now turn it back to Anirudh Devgan for closing remarks.

Thank you all for joining us this afternoon. It's an exciting time for Cadence with strong business momentum and growing opportunities with semiconductor and system customers. We launched the Fem.AI initiative and committed to an initial investment of $20 million to lead the gender equity revolution in the AI workspace. This has also led through our Cadence Giving Foundation. With a world-class employee base, we continue delivering to our innovative roadmap and working hard to delight our customers and partners. On behalf of our Board of Directors, we thank our customers, partners, and investors for their continued trust and confidence in Cadence.

Thank you for participating in today's Cadence third quarter 2024 earnings conference call. This concludes today's call. You may now disconnect.