Ladies and gentlemen, good afternoon. My name is Abby and I'll be your conference operator today. At this time, I would like to welcome everyone to the Cadence 2nd Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. Thank you. And I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead.

Thank you, Operator. I'd like to welcome everyone to our second quarter of 2025 earnings conference call. I'm joined today by Anir 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, as well as the impact of our DOJ and BIS settlements. 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, all 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 only. If time permits, you can re-queue with additional questions. Now I'll turn the call over to Anirud.

Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. Cadence delivered exceptional financial results for the second quarter of 2025, 5, exceeding our Q2 revenue and EPS guidance, driven by ongoing broad-based trends across our AI-driven product portfolio. Bookings were stronger than expected, highlighting the strategic relevance of our AI-driven portfolio and the depth of our customer relationships. demand for our technologies continues to grow driven by customers embracing our products at scale and we are raising our financial outlook for the year to 13 revenue growth and 16 eps growth for 2025. john will provide more details on both our q2 results and the updated outlook we continue executing to our intelligent system design strategy initiated in 2018, which remains a clear differentiator in a rapidly evolving landscape. Our early investments delivering to our vision of unified EDA, IP, 3DIC, PCB, and system analysis are paying off. These capabilities are enabling us to lead through the accelerating waves of the AI supercycle. From AI infrastructure build out to physical AI in autonomous systems to the emerging frontier of sciences AI. Customer R&D investments remain robust, particularly as AI drives exponential design complexity, such as in advanced node design and complex system architectures. And this is translating into broad-based demand across our portfolio. Embedding agentic AI into our design platforms across core EDA system design and system simulation workflows enables the evolution from a traditional tool-based flows to autonomous, goal-driven agents. Our Cadence AI portfolio, powered by multiple autonomous silicon agents and built on our unified JEDI platform with NVIDIA accelerated compute, is delivering optimized designs and massive efficiency gains for our customers at cadence live 2025 we introduced the new millennium m2000 ai supercomputer featuring nvidia blackwell delivering ai accelerated simulation at unprecedented speed and scale across engineering and science workloads this tightly co-optimized hardware software full system stack delivers up to 80x higher performance and up to 20x lower power versus traditional cpu-based systems multiple customers provided endorsements including ascendance media tech and tree line biosciences in q2 we further our long-standing partnership with ADI through a broad proliferation of our core EDA software, including AI-driven Cadence Cerebras and Verisium solutions, as well as system software across PCB, advanced packaging, and system analysis. Also in Q2, we deepened our partnership with SK Hynix through a broad expansion of our EDA software, system software, and design IP solutions. And a major semiconductor company meaningfully expanded its relationship with Cadence in Q2 through a broad proliferation of our EDA, IP, and SDA portfolio. We furthered our long-standing collaboration with TSMC to accelerate time to silicon for customer designs using 3D IC and advanced node technologies such as TSMC's A16 and N2P through certified design flows silicon proven IP and ongoing technology collaboration we continued the strong momentum item in our IP business, delivering more than 25% year-over-year growth in Q2, driven by product strength and a broadening silicon solutions portfolio. AI and HPC use cases spearheaded the strong demand for our IP offerings, with advanced technologies such as hbm4 and 224 gig 30s matching key wins for scale up and scale out in the ai infrastructure space we built on our strategic collaboration with the emerging advanced foundry as they awarded us a large deal in q2 for our leading hbm4 solution We introduced the industry's first LPDDR6 memory IP, offering up to 50% higher performance to meet the growing memory and capacity needs of AI LLMs and agentic AI workloads. At Cadence Live 2025, we launched the Cadence Tensilica NeuroEdge 130 AI co-processor to accelerate physical AI applications. And in Q2, a market-shaping wireless technology company selected Tensilica Hi-Fi 5S as the standardized audio solution for its music and voice platforms. Our core EDA revenue grew 16% year-over-year in Q2. Further proliferation of our digital full flow at the most advanced nodes continued, and more than 50% of advanced nodes designs using our implementation solutions are now using Cadence Cerebris. In Q2, we launched Cadence Cerebrus AI Studio, the industry's first agentic AI multi-block and multi-user SOC design platform. This technology delivering up to 20% PPA improvement while accelerating chip delivery time by 5 to 10x was endorsed by Samsung and ST Microelectronics at launch. And Renesas successfully used our Pegasus physical verification solution to sign off an advanced node SOC after it demonstrated a significant throughput advantage. Our industry-leading Palladium Z3 and Proteum X3 platforms accelerated their momentum, delivering outstanding results, with Q2 being the best revenue quarter ever for our hardware systems. Demand for hardware was strong and broad-based, driven by AI, HPC, and automotive customers. Our verification software suite that includes Verisium, Accelium, and Jasper and leverages big data and AI to optimize verification workloads saw continued expansion with 27 new logos in Q2. Building upon 30 years of industry leadership, we launched the Virtuoso Studio 25.1 release, offering broad support for RF, photonics, MixSignal, and advanced heterogeneous design. Our leading SpectreX circuit simulator closed several deals with strong growth, while our FastPyce SpectreFX platform has now been adopted by the top three memory companies. Our system design and analysis business delivered another standout quarter, with 35 percent year-over-year revenue growth on the packaging front there was strong customer uptake of our 3d ic technologies and top foundries and semi-customers embraced our ai-driven advanced substrate router which provides tremendous productivity benefits our ai-driven allegrox PCB design platform saw continued proliferation as multiple aerospace and defense, hyperscale, and EV customers took advantage of the platform's meaningful productivity and next generation capabilities. Our Clarity and Celsius solvers saw significant expansion at a major hyperscaler, and Clarity secured a key win at a marquee AI company, while our reality data center digital twin drove strong growth at a top hyperscaler. Beta CAE technology integrations with our CFD, thermal, and electromagnetic products were released as Beta CAE solutions continued to score key competitive wins, particularly in the automotive segment. Finally, I'm pleased to share that we have entered into a settlement with the U.S. Department of Justice and the U.S. Department of Commerce's Bureau of Industry and Security that resolves the previously disclosed investigations into certain transactions with customers in China that occurred between 2015 and 2021. The Saturn Belt represents a mutually acceptable path forward for all parties, and we believe are in the best interest of our customers, partners, and shareholders. I want to emphasize that Cadence is deeply committed to the highest standards of compliance, And we have significantly enhanced our compliance processes over the last few years and continue to implement improvement measures to proactively address evolving trade restrictions. We remain focused on delivering for our customers and shareholders and executing the clear strategy we have laid out to drive innovation and enhanced value creation. In summary, I'm delighted with our Q2 results. and the continued momentum across our broad and innovative portfolio. The AI-driven era presents tremendous opportunities and the co-optimization of our comprehensive EDA and SDA portfolio with accelerated computing and Gen AI uniquely positioned us to deliver breakthrough solutions across a wide range of markets. Now, I will turn it over to John to provide more details on the Q2 results and our updated 2025 outlook.

Thanks, Anirud, and good afternoon, everyone. I'm pleased to report that Cadence delivered excellent results for the second quarter of 2025 with broad-based momentum across all of our businesses. Strength in other regions more than offset the impact of the export restrictions on China outlined in the BIS letter dated May 23rd, which was later rescinded. Robust design activity and customer demand, coupled with our strong execution, drove 20% revenue growth and 29% non-GAAP EBS growth year-over-year for Q2. Here are some of the financial highlights from the second quarter, starting with the P&L. Total revenue was $1,275,000,000. dollars. Gap operating margin was 19 percent and non-gap operating margin was 42.8 percent and gap EPS was 59 cents with non-gap EPS one dollar and 65 cents. Next turning to the balance sheet and cash flow cash balance at quarter end was two billion and eight hundred and twenty three million dollars while the principal value of debt outstanding was 2 billion and 500 million dollars operating cash flow was 378 million dollars dsos were 51 days and we used 175 million dollars to repurchase cadence shares before i provide our updated outlook i'd like to share what's embedded As Anarud mentioned, I'm pleased that we've reached a settlement with the DOJ and BIS, resolving previously disclosed investigations into certain China sales from 2015 to 2021, totaling approximately $45 million over the six-year period. As part of the agreements, we'll make a payment of approximately $141 million in our third fiscal quarter. Please see our Form 8 which includes additional details regarding the terms of the agreements. On July 4, 2025, the One Big Beautiful Bill Act was enacted in the United States. This Act includes the restoration of favorable tax treatment for certain business provisions, including the immediate expensing of United States research and development expenditures. We expect it to decrease Cadence's United States federal tax payments for the remainder of fiscal 2025 by approximately $140 million. Our updated outlook includes the timing of the settlement penalty, the cash tax benefit of the OBBBA, and the usual assumption that export control regulations that exist today remain substantially similar for the remainder of the year. Our updated outlook for 2025 is revenue in the range of $5.21 to $5.27 billion, GAAP operating margin in the range of $28.5 to $29.5%, non-GAAP operating margin in the range of $43.5 to $44.5%, GAAP EPS in the range of $3.97 to $4.07. Non-GAAP EPS in the range of $6.85 to $6.95. Operating cash flow in the range of $1.65 to $1.75 billion. And we expect to use at least 50% of our annual free cash flow to repurchase Cadence shares. With that in mind, for Q3, we expect revenue in the range of $1,305,000,000 to $1,335,000,000, GAAP Operating Margin in the range of 32% to 33%, non-GAAP Operating Margin in the range of 45% to 46%, GAAP EPS in the range of $1.14 to $1.20, cents, and non-GAAP EPS in the range of $1.75 to $1.81. 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 strong first-half results and the robust pipeline for the second half of the year. At the midpoint, we now expect revenue growth of 13% and non-GAAP operating margin of 44% for the year. 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.

Thank you. And at this time, I would like to remind everyone who wants to ask a question to please press star and then the number one on your telephone keypad as a courtesy to all participants we ask that you please limit yourself to one question and we'll pause for a moment to compile the q a roster and our first question comes from the line of joseph verink with baird your line is open uh great thank you for taking my question i wanted to ask a question on physical ai it seems like over the past quarter so many of your key development partners have had more to say around what they're doing with edge devices or even small language models maybe as a means to enabling

physical ai is this factoring into the booking strength you've seen recently and is it maybe leading to more spend or or different spend with cadence just in terms of the tools that this is going to need versus what the initial build-out of AI infrastructure has meant?

Yeah, Joe, this is a great question. And first of all, I'm very pleased by our results and our performance and the demand of our products, which is broad-based. And also, I think there is, first of all, I believe there is overall optimism in the benefits of AI in our customers, you know, both from, you know, what they can, you know, their own product and also how they can use AI internally. So therefore, they are investing more in their innovation. And given the critical nature of our products, investing more in Cadence. Now, it has several aspects to it. And, you know, I've been a big fan of physical AI for a long time, because one unique advantage we have in Cadence is the privilege to work with all the top companies in the world. And we believe that, of course, AI infrastructure is huge, but physical AI has the potential of being even bigger, and then followed that with science as AI. That's why we have laid this three-phase evolution of AI. And now, if you look in the marketplace also with autonomous cars or robots and drones, It is becoming much more, you know, public. And, you know, our advantage is even though some of these things come out later, you know, the customers start investing in R&D before they come out in public, you know. So, but I think physical AI will play a very key role for our products because the silicon required, first of all, and physical AI will affect the whole three layers of that AI cake that I've talked about. So, first of all, the silicon is different in the car or in the robot or in the edge devices. It's different than data center silicon. I mean, it's still AI-driven, but it's more power-optimized, runs on lower battery, as you know. So, the silicon is different. The simulation and design is different. And, of course, the AI models themselves are different. They're more word models than LLMs. But all these physical AIs still need to be trained. You know, even if the inference, like for autonomous car, runs on the car, the actual AI model is trained on the data center. So the beautiful thing of physical AI is not only it creates new opportunities for us, it also emphasizes the importance of AI infrastructure in the data centers. So it is helping both sides of that equation. And so we are benefiting from that, you know. And we are, as you know, working with all the main AI data center players, you know, as they design chips and systems. So the impact is both on the data center side and the edge side. But there's still an evolving market. I think physical AI is still in the early innings. You know, there's still like three to five years of more development to go. So, but overall, I think what I would like to say is that the customer environment is, I feel personally, is better than it was six months ago.

That's great. Thank you.

And our next question comes from the line of Gianmarco Conti with Deutsche Bank. Your line is open.

Yeah. Hi there. Thank you for taking my questions. I mean, firstly, congrats on another amazing quarter. Simply what led to Cadence's increase in the growth outlook, even though you could not recognize one month of China revenue? I guess the curiosity of whether there was a single stack of renewals across EDA or was this across all fronts, and maybe you can give us more comment on backlog in the development for the year.

Yeah, Gianni, great question. I mean, yeah, it's been an interesting quarter. I mean, China ended up being 9% of our revenue in Q2. That's down from 11% in Q1. But we've seen strong demand across all geographies and strengthen other regions more than offsets any near-term softness related to China during Q2. you know we've spoken in the past about how well diversified our customer base is and we're increasingly seeing growth and we're seeing the growth in bookings from AI HPC and system design workloads globally but we're very very pleased with the way backlog ended up at the end of at the end of Q2 it is stronger than we expected going into the quarter despite all of the restrictions but um and yeah um we're very very pleased with where we are halfway through the year and rude anything to add no john that's right i mean overall that i would like to say

the demand is broad-based you know you can see it in all the results of all the three main lines of business i mean hardware is doing phenomenally well uh you know we had a record quarter ever you know in terms of revenue and we have a clear lead in hardware and uh and also we are essential to all the major AI chips being designed using Palladium and our EDA software. And then, you know, all these agentic AI tools like, you know, Cerebrus AI Studio. I mean, that's a phenomenal new product. And then Varisium, Allegro X. So I think both the software and hardware business is doing well in core EDA. And then IP had a great quarter. I mean, there's a lot of reasons behind that. One is the AI infrastructure build out, but also, you know, there are at least four major companies doing advanced node foundries now, you know, with TSMC, you know, our longstanding partner, Samsung, even today, there's a big announcement from Samsung foundry, you know, Intel with 18A, 14A, and Rapidus in Japan, you know, I just came back from Japan with this big opening of Rapidus. So there are at least four advanced node foundries that all require IP. So I think that's also driving strength in IP. And then system continues to do well, because of our focus on 3DIC, which is the fastest growing part of the system market. And beta is providing us a good kind of integration with the rest of the flow and new products like Millennium. So if I look at all the three main areas, I think I feel we are very well positioned and the market itself seems to be improving with the AI super cycle. Got it.

Thank you.

And our next question comes from the line of Vivek Arya with Bank of America. Your line is open.

Thank you for taking my question. Just a near and a longer term China impact question. So on the near term, how much of a headwind was China in Q2? I know, John, you mentioned they went from 11 to 9%, but what was kind of the expectation? Then if we zoom out for all of 2025, I think in the past you had said China sales were expected to be flat year on year. Is that still the right approach? Because that would still imply quite a bit of a lift in the back half. And then, Anirudh, if we look longer term, what is the right China exposure for cadence? Does it naturally just come down over time? Or will it probably stay at this 9%, 10%, 11% kind of range over the longer term? Thank you.

Yeah, Vivek, look, I'll start because I understand your question. I mean, I would view our outlook for China to be optimistic but prudent. I mean, our guidance reflects what we believe to be a prudent and well-calibrated view of the second half of the year. The export control environment is dynamic. And while we've incorporated current regulatory framework as of today into our assumptions, we always add some prudence to account for potential variability, whether that's geopolitical or operational. But you're very, very pleased with how China is doing. I know last quarter we told you that we were expecting it to be flat. It's hard to see how China won't increase a little bit over last year. But we've been prudent with our guys.

And Vivek, long term, I think China will, of course, is going to invest in chip design and system design, just like all geographies, but I think the percentage of revenue should be similar or maybe a little down, but not because China won't do well, but I think the rest of the world is doing phenomenally well, right? All the investment you're seeing in the U.S. and then Japan, Korea, I mean, so not to say in particular about China, but I think the rest of the, and which we saw in Q2 also. There is significant investment. So given that context, it's difficult to predict exactly what China will do, but it's good to see that China is doing well, but the rest of the world is doing even better. Thank you.

And our next question comes from the line of Harlan Sir with JP Morgan. Your line is open.

Good afternoon and great job on the quarterly execution. If I look at many of the AI, XPU, ASIC, and merchant ship design programs that are in design right now, Many of them are looking to transition from 2.5D to 3.5D advanced packaging architectures, which includes chip stacking, right? And many of these programs are going to start taping out second half of this year. And in some cases, your customers are integrating up to like 10 chips in a single package, right? This is a very complex undertaking, integration, floor planning. On top of that, you've got signal integrity, thermal power challenges. I was wondering, how much is this contributing to the bookings and revenue strength as more of your customers are adopting your Integrity 3DIC or your Allegro X advanced packaging platforms to tackle these challenges of 3.5D packaging? And then how much is advanced packaging roughly contributing to your overall revenues?

Yeah, Harlam, that's a great question and a great observation, of course. I mean, the whole industry, especially in HPC and AI, is moving to this chiplet-based architectures. And also, I think it's not just limited to the data center. Even if you look at the latest auto designs and all the other markets will, I think, over time move to this new packaging architecture. And Cadence is uniquely and very well positioned. I mean, I think we have talked even earlier, Allegro is the platform of choice for package design, and 3DIC is another way of talking about package design. And then at the same time, we have Virtuoso, which is analog, InnoVers, which is digital, and then all the system analysis tools like Clarity and Volta's and Celsius. And that is all incorporated into integrity. And then we closely work with TSMC. You know, TSMC has done a fabulous job, by the way, in 3DIC, and we have worked closely with TSMC over the last several years to develop this 3DIC flow that is used by most of their main customers. And then now, you know, Rapidus and Samsung and Intel, we're working with all the other foundries to develop this kind of 3DIC flow because it will be critical for all the other foundries. And, you know, we don't explicitly call out Allegro in our SDNA business, but it is a significant part of that business. But also, it pulls in, you know, the other things. You know, it's not just Allegro by itself, but it naturally pulls in analysis tools, you know, and clarity and all those things. And even the base tools like Virtuoso and Inoverse. But it is a platform of choice for all the major companies as they implement this new 3d ic or now three and a half d ic technologies thanks anyone you know this is only in the beginning i think and even in tsmc oip they showed roadmap that this is only going to increase i mean this is the orthogonal access to i mean you know this is orthogonal access to morse law so morse law first of all okay we are always worried about you know this natural questions from investors or employees sometimes you know how long will the morse law continue so first of all morse law anyway is going to go to at least one nanometer right so we are at three you know two 1.41 okay that's 10 years and i visited you know some of our research partners like imac and they're planning you know morse law to go to 2042 with new transistor structures but at least for next 10 years i see morse law being strong But then this 3DIC and heterogeneous integration provides orthogonal levels of integration. And if you look at TSMC and other roadmaps, they have very aggressive roadmaps to be able to put more and more chips, like you said, in a package. So we are pushing on both of these dimensions. Moore's Law, we want to make sure we are aligned with all the latest technologies and customers. And then this 3DIC and heterogeneous integration. Great.

Thank you, Anilud.

Our next question comes from the line of Lee Simpson with Morgan Stanley. Your line is open.

Great, thanks, and well done, and another great quarter. I think it falls on me to maybe ask about the agentic systems. I know, again, this is the second quarter. You brought it up. It does look as though development's moving ahead, and I think if the comments are to be interpreted right, You are seeing some early sales, one assumes, in sort of pilot line development. But I'm still trying to put this into perspective. If we take a step back, do we need a new business model or a different go-to-market strategy to get full value here? And more generally, how will you monetize this added value that an agentic system will bring to the customer? Just any thoughts around that. And maybe timing as well, because it does look as though this is reliant on still early-stage reasoning models.

Yeah, Ali, that's a good question. So, I mean, as you know, we package them separate from our base tools. So, of course, base tools are phenomenal. But then we have these agentic workflows on top of our base tools. And customers are embracing both our base tools and the agentic AI flow. I mean, two great examples. I mean, one of them I mentioned briefly is in the back end, you know, Cerebrus. Cerebrus by itself, like I mentioned, is more than 50% of our designs are already using Cerebrus, which let's call it classical AI. But now with Cerebrus AI Studio, it's a whole workflow. So it's an agentic AI solution. Instead of just doing block implementation, it does floor planning. It does timing closure. So what typically a designer could do, like, you know, three to five million instance design, they could do like 30 to 50 million instance. So it's a massive productivity and PPA benefit as the AI does more of the manual work that was manual in the past. So that tool itself had a lot of early adopters, like you mentioned on the call, Samsung and SD and others. And then there is on the other side, which is verification and RTL writing. You know, this whole notion of LLMs generating and reasoning element generating code is a big thing, not just in software development like CC++, but also, you know, chip design and RTL. So those two areas are very, very positive. One is in the front end with RTL generation and verification, and the other is in the back end and, you know, PPA optimization. and those are different tools than our traditional tool set and we engage with customers in that and our philosophy always is because we have a long history of innovation and automation in EDA our philosophy is to deliver value to customers their workload is going up anyway and aligned with the top customers and usually they will reward us for that and that's our history over the last 10 years and so we are focused on innovation and productivity And we have all kinds of business models to monetize that in any way, and we'll see how that progresses over time.

Great. That's a very full answer. Thank you.

And our next question comes from the line of Jim Schneider with Goldman Sachs. Your line is open.

Good afternoon. Thanks for taking my question. I was wondering if you maybe could talk a little bit more about the core EDA results, very strong in the quarter with a lot of growth. Can you maybe cite some of the drivers of the strength in the quarter, be it new customers or Cerebris pricing benefits or anything else that was one-time nature, and maybe give us a sense about how you expect the cadence of the core EDA revenue to trend in the back half of the year? Thank you.

Yeah, EDA, core EDA is doing phenomenally well. I mean, just to remind, I mean, I think most of our investors know this already, but just to remind that we have the broadest portfolio in core EDA. You know, we have digital, which we are leading position in, especially in the TSMC ecosystem. Virtuoso, which is de facto standard in analog mix signal. Verification, we have all the verification software tools and Palladium and Proteum in hardware. So Cadence has the most comprehensive EDA portfolio on the market. And as, you know, AI, you know, as AI adoption happens, you know, it's both the core product portfolio plus the AI-driven agents that we talked about. And we saw signs of that in Q2. And then some of the key customer wins we highlighted is, of course, SK Hynix. They're doing phenomenally well, as you know, with AI and HBM. You know, ADI, which is a long-term cadence partner. and then overall strength in hardware, which was very broad-based, then in IP and systems, which is outside of EDA. So overall, I think I'm pleased with that. Of course, as you know, we never focus on one individual quarter. There could be quarter-by-quarter variation, but overall I think EDA is doing well, and I expect it to grow going forward.

Yeah, and Jim, we're getting proliferation at marquee customers, And we're seeing the second half looks particularly strong on the software side as well as hardware on the core EDA.

And our next question comes from the line of Jason Salino with KeyBank Capital Markets. Your line is open.

Hey, thanks for taking my question. You know, John, if I think I heard you correctly, I think you said that China would be up a little bit this year versus flat previously. You know, this is on top of, I assume, you know, the China restrictions that were temporary. So this in itself seems important. I don't know if you'll be able to indulge this a little bit, but what do you think China growth could have been if those restrictions, you know, never happened? Like if we never had those six weeks?

Yeah, yeah, Jason. I mean, great question. Very, very difficult to kind of figure out what revenue would have been in that kind of parallel universe where that never happened. And the one thing I take comfort from, though, is that, you know, the restrictions came and they went. But so I tend to focus on the year. And when I look at the year that, you know, previously we thought the year would be flat for China with the strength that we've seen across the board, across all businesses and across all geographies, it's really hard to see China remaining flat year over year now that I think it'll be slightly up. But, of course, you know, we're normally very prudent with our guide, and I thought it was appropriate to remain prudent with the outlook for the year. So, we've been cautious but optimistic with that outlook.

Okay, great. Sounds good. Thank you.

And our next question comes from the line of Gary Mobley with Loop Capital. Your line is open.

Hi, guys. Thanks for taking my question. John, when we answered the year, I think your expectation, correctly if I'm wrong, was the year with a strong renewal period in the second half. And clearly your bookings in the first half of the year have exceeded your expectation by, I assume, several hundred million dollars. And so my questions are two-part. I want to confirm that the June quarter ending backlog excludes China. and, you know, with the strength in the first half that you've seen, what does that tell you about the potential for the second half bookings and exiting the year with perhaps record levels of backlog?

Yeah, Gary, I mean, very astute question. Yeah, to confirm, we had to exclude a number of China bookings from our backlog by the end of Q2. We had to reserve for those because at the end of Q2, the restrictions were still in place for us. So the closing backlog at the end of Q2 reflects a lower level of backlog than it would have been had those China restrictions been rescinded prior to June 30th. And then in terms of the outlook for the year, yeah, I'm pretty confident we're going to end up the year with a higher backlog than we started the year. So I'm very comfortable that we'll end up with a book-to-bill of one. Second half bookings, the renewal cycle is strong in Q3 and Q4. I think both Q3 and Q4 will have bookings that exceed our revenue in those quarters. And like I say, we expect at the end of the year, we'll have a new higher and record level of backlog than we had last year. Thanks, John.

And our next question comes from the line of Jay Fleecehauer with Griffin Securities. Your line is open.

Thank you. Anaru, you spoke earlier in answer to an earlier question in your prepared remarks about agentic AI. And I'd like to ask about the broader implications and requirements from that. One of the terms that's come up this year more broadly in software, not just in EDA, having to do with agentic is orchestration. And in your world specifically, if we think about what you're providing with agentic AI or AI generally, it's fundamentally, I think, a form of simulation. And therefore, the requirements for that would also seem to be new forms of process or data management and traceability, which is a critical function in simulation, if our thesis is right about what they're really doing. So beyond just introducing these agents and aides, how are you thinking about the broader portfolio and capabilities that you need to provide customers, particularly since you referred to their workflows?

Yeah, Jay, that's a great point. So, yes, you're absolutely right. I mean, we want to make more of a workflow automation, just like I mentioned with Cerebris AI Studio. So it's not doing a point function. It is doing multiple functions together with reasoning. And the critical need is, apart from the LLMs and all, there's a critical need for a data structure or database to store all these actions. So what I'm pretty pleased about is the response of our customer to JEDI. We talked about JEDI being our joint enterprise data and AI platform. and it has both the data storage to because we need to capture not just one tool or one point in time you know multiple tools and multiple flows like just like a human would do so jedi has become a very essential part of our ai deployment to customers and it's a very flexible system you know because some of our customers some really big customers want jedi to be on prem because their data is very very sensitive some customers are okay with you know jedi being on the cloud, you know, okay to use cloud LLMs or cloud data management, and then some customers want a hybrid, you know, on-prem and cloud solution. So Jedi uniquely positions us to make that kind of invisible to the user. But Jedi is critical along with the AI agents to deliver this solution to our customers.

And we are able to do much more, and we'll do much more of a full workflow solution along with jedi and then the agents on top whether it's varicium or cerebras or allegro x got it thanks and our next question comes from the line of joe kotrocki with wells fargo your line is open yeah thanks for taking the question uh just to follow up on another question on on the china impact i mean i guess can you help us understand what would have rpo been had the the restrictions uh not been in place exiting the quarter it had been rescinded prior to exiting the quarter just

that difference so we know what rpo i guess technically really is now and then just to clarify on the full year guide increase is that all driven by the upside from china or is it other regions as well yeah joe just take second part of that question first i mean the the the increase is because of the strength we're seeing across the boards and across all geographies I mean, when we were updating our guide, the guide we gave you at the end of last quarter was without any China restrictions. And at the time we were updating the guide, we obviously knew that those restrictions had been rescinded. So it is an apples to apples view when you compare the guide now against this time last We've taken the year up by 50 million. We've taken up EPS by about 12 cents. And that's on the back of very strong bookings activity. performance that we're seeing right across the globe. In relation to the backlog impact of China, when we held up revenue for China, any of those orders in which revenue was paused as a result of the China restrictions as at the end of Q2, we had to back out the bookings from the backlog at that time. But I think if you look on a year-over-year basis, the right way to look at it is that we will end up the year with a higher and record level of backlog. The book to bill will be greater than one for the year, which indicates a very strong bookings half for us in the second half of this year. But that's mainly due to strength across all regions, across all geographies. And we have a high level of renewal activity that just naturally falls into Q3 and Q4 because we have a number of expiring contracts in those quarters.

Thank you.

And our next question comes from the line of Charles Shi with Needham. Your line is open.

Taking my question, maybe this is for John. Hey, John, I think you reported the recurring revenue as a percentage in Q2 was 78%. This is probably a multi-year low. And I wonder what's the expectation for the full year, the recurring revenue percentage, and what is the long-term normalized level? Maybe this is a related question, if I may. I believe your hardware is mostly manufactured in the U.S., and presumably there should be no direct tariff impact, but was there any customer behavior-related pull-ins that was seen in Q2 and possibly also in Q3?

Yeah, Charles, great questions. On the hardware side of the business, I mean, the hardware demand continues to amaze us really i mean that the the tremendous products that we have there that um and the team is continuously trying to improve our production capability and manufacturing capability to produce those hardware systems as quickly as possible to try and keep up with that demand we we make hardware systems in north america for the north american market and outside north of america for the for the international market so so we think our tariff exposure is quite limited. Just generally on the strength in hardware in Q2, combined with us having to pause a lot of rateable revenue in China during Q2 caused the recurring revenue percentage to dip to about 78% for the quarter. But if you look, typically, we look at that as a kind of a rolling annual number. We'd expect it to be about 80-20, 80% recurring, and 20% upfront. And that's been growing. I mean, in the past, that was probably 70, what was it, 85-15, and now it's gone more towards 80-20. But that's really the result of the strength in demand for our upfront businesses, which mainly come out of IP and hardware.

Thank you.

I appreciate that. and our next question comes from the line of ruben roy with stifle your line is open yes thank you for letting me ask a question honor rude i wanted to uh touch back on ip um i know ip historically has been a little bit lumpy volatile whatever the word you want to use but you've had quite a bit of strength recently um ip was up i think 30 last year 40 last quarter another 25% this quarter, you talked about your broadening portfolio, but it sounds like a lot of this is going into AI and HPC and obviously faster design cycles in those markets, et cetera, in recent years. I'm wondering if you could talk about your longer-term perspective on IP growth. Is this sort of sustainable at potentially higher rates than you've thought about historically for that segment? Thank you.

Yes, that's a great question. And, you know, in general, like, I think I am much more optimistic in IP than I was, let's say, two, three years ago. And I mean, there are multiple reasons for that. One is, you know, we are investing more in IP now, because we feel, first of all, that our EDA position is very, very strong. For years, we invested in EDA, and we continue to do that. But at this point, we feel we are in a strong position in EDA. We are in a growing position in SDNA, given 3DIC and strength of Allegro and AI. And IP, historically, we didn't invest as much, but things have changed. One is because of this, like a previous question, this emergence of chiplet-based architectures I think provides more opportunities for IP. The emergence of multiple advanced node foundries, you know, there are at least four major ones now, provides more opportunities for IP. And our portfolio has also improved with some good M&A, you know, like we got HBM4 from Rambus and there's several others over the last few years. So I feel now we have crossed a critical mass for IP to be a good business for us. And you're seeing that last year, the one year doesn't make a trend. I think we are seeing that this year. And so, but I do expect in the longer term that IP can grow faster than cadence average, which is what we like to see in these. And it will have slightly lower margin than EDA, but of course it can grow faster. So at a rule of 40, you know, that's a good area that we continue to invest in that. And especially with the AI, you know, driven IPs, new foundries, you know, this on-shoring, I think it's a good business for us and good growth for the next several years, I expect.

Thank you.

And our next question comes from the line of Clark Jeffries with Piper Sandler. Your line is open.

Hello. Thank you for taking the question. Just a clarification on the tax benefits. I heard $140 million for the remainder of the year. just to clarify, is that for two quarters and that the annualized benefit might be close to double that? And then just from a philosophy perspective, does this change around R&D expensing sort of change your appetite for incremental investment or near-term windfall but normalized over time and no change to appetite? Thank you.

Hi, Clark. Yeah, I mean, no change at all to our approach and our strategy and our R&D investments. I mean, we love investing in R&D. We think we do that quite well. But in relation to the tax consequences of the OBBBA thing, the primary change in fiscal 2025 relates to the immediate expensing of domestic R&D. The cash tax impact of that, we get benefit of about $140 million before the end of this year, but there's a smaller portion of an impact to the GAAP P&L. Now, from a non-GAAP perspective, we use an effective tax rate of 16.5%. That normalizes everything. So, the impact of the OBBBA doesn't change our non-GAAP rate. For this year, it's still at 16.5%.

But the one-time difference on on cash taxes for the year is about 140 million now we you'll see the benefit of that in q4 um the but it's already incorporated into our annual guys thank you and our next question comes from joshua tilton with wolf research your line is open hey guys thanks for uh sneaking me in and congrats on a great quarter uh and a nice raise to the full year outlook um most of my questions have been answered already, so maybe more of like a medium-term thought question. When you look at the guide for the full year, it still kind of implies that the recurring revenue side of the business is going to see muted growth. Now, I know some of this is because, you know, there was a little bit of a hole this quarter because of China.

But how do we think, you know, long-term, the trajectory of recurring revenue growth from here and your confidence in the durability of, you know, total growth is maybe you roll off the hardware cycle or you start to see uh slower growth on the upfront side thanks no great question the um yeah i think we what we've seen over the last few years is we've seen it drift towards kind of a lower level of recurring revenue higher level of upfront revenue but that's mainly been as a result of you know ip and hardware and sdna to a certain extent growing faster than the average cadence business that um i think i mean right now it's we're at 80 20 we're not guiding anything we're at 80 20 for this year that we continue to expect that split. We're not guiding for next year yet, but I actually think that the core EDA software is doing so well that there's quite a good chance that 80-20 remains for quite some time because we're seeing good growth there. We're seeing a lot of growth right across the whole portfolio of the cadence business and across all geographies right now. So we're very, very pleased with the way that's working out. And really, the change in recurring revenue is just a slight change in how customers consume our technology and our solutions, and it's how we provide them. And we're just delighted with the continuous adoption from those customers.

Love to hear it. Thanks for sneaking me in, guys. Appreciate it.

Thanks.

And our next question comes from Neso9 with Berenberg. Your line is open.

Hi, thank you for taking a question from me and also congrats on the quarter and the good race and the four-year guide. A question on agentic AI, please. I was wondering if you could maybe share your thoughts on what do you think will be the toughest adoption barriers, because from my point of view at least, the agentic AI products that you guys have, unlike you know the broader uh software that we've seen roi you know shouldn't really be a uh a sticky point here so i was wondering you know what would be the the sticking points here would it be the the operational challenges i.e customers adopting or implementing your agentic workflows in their established workflows today or is it more of a human element here where uh unfamiliar with

technology or people are somewhat worried that um you know their jobs may be at risk from adopting your ai solutions thank you yes very insightful question i think one thing i would like to emphasize that there is a difference in chip design and system design versus general software you know what i've seen you know versus like because this is engineering software versus kind of IT or enterprise software. And our history in EDA, I mean, there's a few things that are different. First of all, engineering software or EDA, we have already provided over years a massive level of automation. Now, it was not because of AI. It was used in the past was because of, you know, classical methods. So our users and customers are already used to a lot of automation. If I look at like 20 years ago to now, I think the EDA productivity, productivity by EDA has gone up by like 100x, you know, like things like, you know, what used to take like 500 people five years to design would now take like 50 people like one year to design or something like that. So or like half a year to design. So our users are already used to a lot of automation, which may not be the case in like classical kind of software. The second thing is that our workload, our workload of our customers is going up exponentially because of Moore's law and 3DIC. So this is a very different environment than, you know, if the workload is constant in some industry that is not evolving. In chip design, you know, like by 2030, the chips will be, you know, right now they're 100 to 200 billion transistors. It's expected the chips will be 1 trillion transistors by 2030. Then you add all the software, you add the new architecture. So the workload will go up by 30, 40x in the next five years. There's not even enough talent or headcount to hire to meet that requirement of 30x. So this is not an industry in which the workload is going to be fixed. And then the worry of the people is if you use AI, your job will be affected. Here, you need AI to cope up with the 30x. So I believe that the customers, and this is talking to all the big CEO, customer CEOs, they will invest in R&D, okay, but they will, in headcount, but they don't want to invest 30 times the headcount, okay? I think the headcount in our customers' R&D would go up maybe by 2, 3x, but the remaining gap of 10x in productivity has to be made up with more automation. And they are willing to invest in agentic AI and more compute to balance that, because there's not even that many engineers you can hire. So the two things which are very different in EDA and SDA versus general software, one, our customers are used to more and more automation over the last 30 years. And second, the workload is going up so much that they have no other choice but to use automation and AI. So I think that's why the real test for us will not, in my opinion, be whether the customers are willing. I think the customers are willing is the productivity of our solution. So what I've seen with our customers is if the product works, if they give better PPA, if they're faster, our customers will always adopt that because they have more in work to do. And that's what we focus on, like Cerebra's AI Studio, does it give 20% better PPA or does Verisium give 510x benefit? And this is the history of our customers. And because these are the best and the brightest companies in the world, right, all MAG7 are our customers, all the top 50 companies in the world. So, we deliver value. I've always seen they will adopt it because the workload that they're doing is increasing a lot.

The AI tools create more demand for our core ADA tools as well, right? But we always said that we take a couple of contract cycles. And we're always very mindful of the balance between delivering cutting-edge innovation and ensuring our solutions remain accessible and valuable and useful to customers of all sizes. I mean, the increasing design complexity, particularly with AI and advanced nodes, naturally creates demand for more sophisticated tools and IP. But our goal is always to deliver measurable ROI through productivity gains, faster time to market, and the improved PPA, the outcomes that customers can get from using our core EDA. So we do think core EDA has growth in there and we could well benefit from that over the next few years. That makes a lot of sense.

Thank you very much. Thank you for the thoughtful answers.

And our next question comes from the line of C.P. Panigrahi with Mizuho. Your line is open.

Great. Thanks for taking my question. Yeah, most of my questions have been answered, but just want to follow up to one of your comments on that strong bookings. How do you characterize the demand for your traditional semi-customer versus systems like hyperscaler, that segment? and do you see any kind of positive sign on the traditional semi-customer?

Yeah, that's a very important question. I mean, first of all, the system companies are doing more than before, as you would expect, you know, not just the classical data center, but hyperscalers, which are, but also, you know, like physical AI, like cars. And then on the semi side, of course, some customers are doing phenomenally well, right, like NVIDIA and, you know, some of them like Broadcom. So I think your question is more traditional semi. So I do think, I mean, of course, you know, this recovery in traditional semi has been projected for a long time. But I do think there is some recovery now. I mean, at least in the memory market, there seems to be in the mixed signal. And we highlighted, for example, ADI that's doing phenomenally well. And we had a very good, ADI is a long-term partner of Cadence, but we had a very good expansion in Q2. so i think there are some signs that the traditional semi are also doing but it's still early and we will wait and see but for us you know we are as you know we are very diversified both geographically and customer wise so it's important but not critical for us so we are patient so the recovery will happen in traditional semi maybe some of it is starting and to the extent it happens you know we will be ready for it so but we are not critically dependent on a particular customer set recovering at a particular time.

Thank you.

Our last question comes from the line of Blair Abernathy with Rosenblatt. Your line is open.

Thanks for squeezing me in, guys, and a great quarter. Anirudh, just want to ask you again about the system design analysis, the traditional simulation, the multi-physics simulation. You're outgrowing the market pretty substantially even if we back out a couple extra months from data CAE. You're still mid to high 20s, it looks like, organic growth. What's driving that organic growth? Is Millennium helping with that? And I'm just wondering, as you look at that market, which is sort of a 10% kind of growth market, how long do you think you can sustain that significant growth?

Yeah, good question. I mean, like I mentioned, the growth is driven about multiple things i mean 3d ic and the strength in allegro that pulls in other products is a key factor you know it's not just allegro or 3d ic but itself but all the analysis tools because i think most of the disruption in the system space is either very very close to the chip you know like with 3d ic or it is very very far like like data center simulation and we have great partnership and products in, you know, Cadence Reality, which is full data center simulation, and then, you know, very close to the chip, which is Allegro and 3DIC and Integrity. So those markets, I think, should be growing faster than the overall system market, because that's where the disruptions are happening, and that's where we are focused on. And then Beta is helping to pull in some of the other, you know, because, you know, one of the key channel challenges in the system side is to build out the channel. And even though not only beta provided great products, it also helped us on the channel side. Okay. So that's the second reason. And then I'm super optimistic about Millennium, you know, and we kind of spearheading this kind of revolution. You know, I can talk about it for a long time, you know, the CPU plus GPU integration with partnership with Jensen and NVIDIA and, you know, AI together. But I think it's still in very early innings. So Millennium is still in very, very early innings. I mean, we have a lot of pipeline and demand, but it still has to play out. But overall, I think we'll see, but we are pleased with our positioning in systems especially because we are positioned in the more exciting part of the system market, I believe.

To finish, I'd encourage you to keep focused on the annual kind of outlook for the company because quarter-over-quarter numbers can look a bit odd sometimes. As you called out in your question, beta is included in our Q2 numbers this year but wasn't there last year.

That's great. That's great. Thanks very much, guys.

And I would now like to turn the call back over to Anurud Devgin 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. With a world-class employee base, we continue delivering to our innovation 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.

And ladies and gentlemen, thank you for participating in today's Cadence second quarter 2025 earnings conference call. This concludes today's call and you may now disconnect.