Earnings Call Transcript - CDNS Q1 2025

Operator, Operator

Good afternoon. My name is Tina and I will be your conference operator today. I would like to welcome everyone to the Cadence First Quarter 2025 Earnings Conference Call. All lines have been muted to prevent background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead.

Richard Gu, Vice President of Investor Relations

Thank you, Operator. I would like to welcome everyone to our first quarter of 2025 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, 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 Anirudh.

Anirudh Devgan, President and CEO

Thank you, Richard. Good afternoon everyone. And thank you for joining us today. I'm pleased to report that Cadence delivered excellent results for the first quarter of 2025. There is robust ongoing customer demand for innovative technologies. We exceeded our guidance on all key financial metrics, achieving 23% year-over-year revenue growth and a 34% increase in non-GAAP EPS. Given this outperformance and the continued strength of our business, we are raising our financial outlook for the year. John will provide more details in a moment. Before diving in, I would like to share my perspective on the prevailing macroeconomic uncertainty. Semiconductors remain foundational to realizing transformative technologies such as hyperscale computing, 5G, and autonomous systems, all fueled by the AI megatrend. We haven't seen any shifts in customer behavior at this time, as they continue investing in their next-generation designs, recognizing that today's R&D efforts are critical to deliver the groundbreaking products of tomorrow. Additionally, our ratable software business model, strong Q1 exit backlog, and a predominantly recurring revenue mix provide resilience and excellent visibility. Customers are increasingly relying on our product. As we execute our intelligent system design strategy and expand our differentiated end-to-end portfolio to serve a growing and diversified customer base. As the fast-evolving AI landscape expands the market opportunities and reshapes the entire chip and system development process, our Cadence.AI portfolio delivers unparalleled PPA, productivity, and time-to-market benefits. At GDC, we announced an expanded partnership with NVIDIA on their latest Grace Blackwell architecture. In addition to enabling up to an 80x acceleration of Cadence solvers, we are collaborating on developing a full-stack agentic AI solution for engineering and science, using the new Llama Nemotron Reasoning Model. We are also one of the first adopters of NVIDIA Omniverse Blueprint for AI Factory Digital Twins, advancing data center design and operational efficiency. In Q1, we expanded our footprint at several top-tier customers and furthered our relationship with key ecosystem partners. Last quarter, we announced a collaboration with Rapidus on 2-nanometer IP development. And this quarter, we are pleased to share that Rapidus has made a wide-ranging commitment to our core EDA software portfolio across digital, custom analog, and verification solutions. In Q1, we deepened our partnership with Socionext through a broad expansion of our EDA software, particularly AI-driven digital solutions along with our system software. We furthered our partnership with the marquee hyperscaler through a broad proliferation of our digital and verification software, particularly our AI-driven Cadence Cerebrus and Verisium solutions. We expanded our collaboration with Intel Foundry by officially joining the Intel Foundry Accelerator Design Services Alliance. From systems on chip to advanced IP for AI and HPC applications. Cadence's inclusion in the Alliance helps Intel Foundry customers remain at the forefront of innovation. Now let's talk about key product highlights for Q1. Our IP business grew 40% year-over-year in Q1. As we continue to benefit from the strong market opportunities offered by AI, chiplet-based architectures, and the foundry ecosystem build-out. We secured a major expansion at a global marquee system company for our AI, HPC design IP and deepened our partnership with a major foundry through their commitment to our memory and interface IP. Following our pending acquisition of Secure-IC last quarter, we continued to build out our design IP portfolio. And earlier this month, we entered into a definite agreement to acquire Arm's Artisan foundation IP business. A Tensilica DSP is the de facto choice for automotive ADAS and infotainment systems and continues to be widely integrated into vision, radar, lidar, and audio systems for autonomous driving, as well as emerging robotics use cases. Our core EDA revenue grew 16% year-over-year in Q1, with further proliferation of our digital full flow at the most advanced nodes. Cadence Cerebrus AI solution continued its strong momentum with nearly 50 new logos in Q1 and well over 1,000 tapeouts to date. Engineering Change Orders, or ECOs, are a critical part of any design process. AI is particularly suitable to dramatically improve ECOs. Using the new Cadence Conformal AI ECO Flows, MediaTek saw early positive results, generating 83% smaller ECO patches in nearly half the runtime. MediaTek also improved runtime and memory by 100 times, through its deployment of Conformal AI low power. Our collection of new smart ECO technologies has sped up Renesas automated functional ECO runtimes by more than 50%, while improving quality. Our flagship Virtuoso platform, the industry's gold standard for advanced node custom analog and mixed-signal design, continues to expand into new areas, such as photonics and circuit and yield optimization. Ever-increasing complexities in system verification and software bring up continue to drive secular demand for our market-leading Palladium Z3 and Protium X3 platforms. Demand for hardware was broad-based, with particular strength driven by AI, HPC, and hyperscaler customers. Our hardware products continue to proliferate at existing customers, especially top hyperscalers, while gaining notable competitive wins, including a market-shaping semiconductor company. Our verification software suite that includes Verisium, Xcelium, and Jasper leverages big data and AI to optimize verification workloads and saw continued expansion across aerospace and defense, electronics, and automotive segments. Our system design and analysis business delivered more than 50% year-over-year revenue growth in Q1, as our AI-driven optimization solutions integrated with our physics-based simulation platforms continue to deliver superior results across multiple end markets. Our Digital Twin Reality Data Center product gained momentum, signing multiple deals with large hyperscalers and cloud service providers in Q1. BETA CAE delivered a strong quarter and is opening up tremendous opportunities for us in the automotive vertical. Allegro X's omniverse integration was highlighted at GTC with photorealistic 3D views of a full multi-board system designed in Allegro X. Our AI-driven substrate router, the industry's premier solution for full package routing of complex 3D IC designs, saw strong customer interest and engagement during the early adopter program. In summary, I'm pleased with our Q1 results and the continued momentum of our business. The growing complexity of chip and system design, coupled with the transformative potential of AI-driven automation, creates significant opportunities for our products to enable and empower our customers. In addition to our strong business results, I'm proud of our high-performance inclusive culture and thrilled that Cadence was recently named by Fortune and Great Place to Work, yet again, as one of the 100 best companies to work for, ranking #11. Now I will turn it over to John to provide more details on the Q1 results and our updated 2025 outlook.

John Wall, Senior Vice President and CFO

Thanks Anirudh and good afternoon everyone. I'm pleased to report that Cadence delivered excellent results for the first quarter of 2025 with broad-based strength across all of our businesses. Robust design activity and customer demand drove 23% year-over-year revenue growth and 42% non-GAAP operating margin for Q1. We are tracking ahead of our original forecast for 2025. We repurchased more Cadence shares than initially planned in Q1, which reduced our share count. Here are some of the financial highlights from the first quarter starting with the P&L. Total revenue was $1.242 billion. GAAP operating margin was 29.1%, and non-GAAP operating margin was 41.7%. And GAAP EPS was $1 with non-GAAP EPS at $1.57. Next, turning to the balance sheet and cash flow. Cash balance at quarter end was $2,778 million, while the principal value of debt outstanding was $2,500 million. Operating cash flow was $487 million. DSOs were forty-four days and we used $350 million to repurchase Cadence shares. Before I provide our updated outlook, I'd like to share the assumptions that are embedded. 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 2025 is revenue in the range of $5.15 billion to $5.23 billion. GAAP operating margin in the range of 30.25% to 31.25%, non-GAAP operating margin in the range of 43.25% to 44.25%. GAAP EPS in the range of $4.21 to $4.31; non-GAAP EPS in the range of $6.73 to $6.83; operating cash flow in the range of $1.6 billion to $1.7 billion, and we expect to use at least 50% of our annual free cash flow to repurchase Cadence shares. With that in mind, for Q2, we expect revenue in the range of $1,250 million to $1,270 million. GAAP operating margin in the range of 27.5% to 28.5%, non-GAAP operating margin in the range of 41.5% to 42.5%, GAAP EPS in the range of $0.89 to $0.95 and non-GAAP EPS in the range of $1.55 to $1.61. 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, Cadence is off to a strong start to the year. We are raising our 2025 revenue and EPS outlook. Our technology platform is essential to customers' R&D investment and our resilient software model positions us well in navigating today's dynamic macro environment. 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.

Operator, Operator

Your first question comes from Harlan Sur with JPMorgan. Please go ahead.

Harlan Sur, Analyst

Good afternoon. Thank you for taking my question. Good to see the strong mid-teens percentage year-over-year growth in the core EDA business. On your China business in particular, the team did continue to see year-over-year growth acceleration, right, to plus 13% in March versus 10% back in December. On top of this, you know, tariff, trade, regulatory dynamics are, I think driving more focus on domestic China chip design programs, especially in AI. Like we've heard, for example, ByteDance engaging on new custom AI chip programs. We've heard Alibaba as well in automotive; there continues to be more domestic China design programs firing both analog, power management, and digital. So is this domestic focus and design activity a potential tailwind for your China business? Are you getting more optimistic on a growth profile for your China business this year versus the team's prior view of flattish?

Anirudh Devgan, President and CEO

Hi, Harlan, great question. I'm quite pleased with our performance in Q1, with strengths across all product groups and geographies. Despite the dynamic macro environment, customers are investing for the future, and these R&D investments take time to materialize. We're closely linked to strong design activity. In China and several other countries, AI development is progressing through multiple cycles, including not just data centers but also the development of physical AI systems like autos, robots, and drones, with China showing particular strength in this area. Overall, I'm happy with the progress in silicon and system development for AI. Our China business has performed well at the start of the year, but we remain cautious and are assuming a flat outlook for China for the entire year. John, would you like to add anything?

John Wall, Senior Vice President and CFO

No, I think that's the important point: that design activity remains strong in China, but we are continuing to be prudent with the guide for the year and continue to assume that China revenue is flat year-over-year at the midpoint of that guidance.

Harlan Sur, Analyst

Okay, thank you very much.

Operator, Operator

Next question comes from Lee Simpson with Morgan Stanley. Please go ahead.

Lee Simpson, Analyst

Great. Thanks for putting me in and great quarter to everyone. Thanks. I mean, as we all know, your main offering is a software and services product, which may not have the same risk from reciprocal tariffing regimes that other parts of the semiconductor ecosystem does. And I think if you look at your hardware chip, it's an ASIC fab TSMC. So I guess one assumes this is only a limited exposure to tariffing into China. I guess what I'm asking more generally is, can you confirm if at all, at this point, where you think you do have any exposure to the tariffing regime announced by the U.S. government, at least as you currently understand things? Thanks.

Anirudh Devgan, President and CEO

Yes. So with respect to tariffs, there are 2 parts to it: one is the customer behavior, which I mentioned, we don't see any change at this time. The second is in our own products, and like you said correctly, software and services are not subject to tariffs. Now in terms of our hardware business, just to remind everyone, we do have multiple manufacturing lines in the U.S. and outside the U.S. And this was something we did as part of COVID a few years ago. So that's paying off well. So at this point, we don't believe that given our diversified supply chain, the tariffs will have an effect on our hardware business as well. Now on the other hand, we continue to monitor the situation. It is a dynamic situation. But I feel that we are more resilient for multiple reasons. One is that we are tied to the design cycle; we don't see that much change. Second is we are very diversified, both in terms of products and geographies. And third, we have our business model; it is a ratable business model. So even in these uncertain times, we feel that we have enough confidence and visibility to raise our outlook for 2025.

Lee Simpson, Analyst

That great. Thanks.

Operator, Operator

Your next question comes from the line of Gary Mobley with Loop Capital. Please go ahead.

Gary Mobley, Analyst

Yes. Sorry, guys. Thanks for taking my question. This question might be more for Anirudh. And the question is, as more and more tools that you sell, like simulation, synthesis, place and route, etc., run on generation-based compute and running GPU-based servers. How does this impact your licensing model? And more specifically, how does it potentially affect your annual contract value?

Anirudh Devgan, President and CEO

That's a great question. I believe you’re asking about how the enhancement of our hardware, which supports our software, influences our business model. To start, I've mentioned this three-layer cake analogy before, with the foundational layer being accelerated compute. In the past, we primarily utilized x86 CPUs, but now we have diversified to include various types of CPUs, like ARM, as well as GPUs, particularly due to our strong partnership with NVIDIA. Additionally, we developed our own Boolean processor because while GPUs excel at numerical computations such as circuit simulations or computational fluid dynamics, they are not as efficient with Boolean calculations. For that, we created a specialized chip in Palladium known as a Boolean supercomputer. This gives us a robust range of hardware offerings. Regarding our market approach, we have retained our previous licensing model, which typically allows for subscriptions over a three-year term. We are also expanding our cloud solutions, which are seeing a notable increase. The cloud services can be hosted on public platforms, providing access to CPUs, like those ARM CPUs offered by AWS and other vendors, alongside GPUs. However, we also run our own cloud services through external data centers that are proving to be quite available. In our offerings, we are combining hardware and software, a prime example being Millennium, similar to our approach with Palladium for our own chips. This represents a new business model that we are observing to see how our customers respond. We still have the traditional software-only model, but we are also moving towards a cloud SaaS model, especially as our hardware capabilities expand.

Gary Mobley, Analyst

Thank you.

Operator, Operator

Our next question comes from Vivek Arya with Bank of America. Please go ahead.

Vivek Arya, Analyst

I wanted to check what Cadence's share gain opportunity is because when I look at your main competitor, they have significant sales exposure at Intel. I'm curious about Cadence's exposure and how soon we can see any potential share gains. These relationships tend to be sticky, so how large is the opportunity and how quickly can it start to show up for Cadence? Thank you.

Anirudh Devgan, President and CEO

Hi, Vivek. Great question. I believe your inquiry is about Intel, although I didn't catch the beginning of it. First off, I'm very pleased with Lip-Bu's appointment as CEO of Intel. As for Cadence, Intel has been a relatively weak area for us over the past 10 to 15 years; this isn't a new issue. Additionally, we've been focusing on our investment in IP. Overall, I'm encouraged by the improvements in both IP and Intel, which have been key areas for Cadence to enhance. I saw progress in our IP business last year and in Q1, and I feel confident about it moving forward. Regarding Intel, this presents a significant opportunity as they look to reformulate their strategy and collaborate with their ecosystem partners. We are eager to engage with Intel in more detail. Those discussions have already begun, and we will keep you updated on their progress.

Operator, Operator

Your next question comes from the line of Gianmarco Conti with Deutsche Bank. Please go ahead.

Gianmarco Conti, Analyst

Yes. Thank you. Congratulations on another great quarter. I guess could you perhaps shed some detail into your hardware deliveries this quarter and whether you're seeing the demand for the third generation in line with what was expected, especially in customers accepting the higher pricing in this environment. And also, I know that you've briefly mentioned about it not having any impact from tariffs. But could you share a few words on your Mexico plans where you assemble your hardware and whether that could be a potential issue from a capacity production standpoint were the tariffs being enacted on that front? Thank you.

John Wall, Senior Vice President and CFO

Gianmarco, great questions. Generally, our hardware revenue is limited by our production capacity because demand continues to outstrip our ability to supply the hardware products. As Anirudh mentioned earlier, we have a very resilient and agile supply chain capability, which reduces the direct impact of tariffs. We produce and build hardware for the U.S. market in the U.S. and for the international market outside the U.S. This gives us an optimized setup for hardware, so we're not seeing any real direct impact of tariffs in our numbers right now.

Gianmarco Conti, Analyst

Amazing. Thank you.

Operator, Operator

Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Jay Vleeschhouwer, Analyst

Thank you. Good evening. Anirudh, could you share the two or three key technical or product enhancements this year that might have already happened or are still to come? These could have an impact on your overall technical capabilities or positioning, even if they don't immediately affect revenue. Also, could you discuss some investments in critical technology areas that aren’t widely reported, such as physical verification or next-generation silicon for hardware? Lastly, please elaborate on any incremental investments in your acquired simulation solver products.

Anirudh Devgan, President and CEO

That's a great question, and it requires a detailed answer. To begin with, I'd like to emphasize that we are making significant investments in research and development, allocating approximately 35% to 40% of our revenue to this area. We always have numerous exciting projects underway. Some critical themes include the importance of artificial intelligence, particularly in chip and system design. We're seeing very positive results, and at this point, we anticipate that over 50% of our designs are now enabled by AI tools. We expect others will follow suit, but there is still much progress to be made with new features. You'll hear more about this throughout the year. The second major focus is on 3D-IC technology, which will be a key area of development over the next 5 to 10 years. Currently, our packages can accommodate sizes up to three times reticle size, but we expect them to manage up to ten times that within the next few years. There is substantial investment in 3D-IC involving advanced tool flows and analyses of complex systems, along with necessary intellectual property for high-speed connections. Lastly, we consider our hardware set, which includes ARM CPUs, x86 CPUs, Palladium hardware, and GPUs, to be foundational. We will share more on this at Cadence Live next week, as hardware and software co-optimization is essential for our industry. These are the three key areas of focus for our R&D efforts.

Jay Vleeschhouwer, Analyst

Okay, thanks Anirudh.

Operator, Operator

Your next question comes from the line of Jason Celino with KeyBanc Capital Markets. Please go ahead.

Jason Celino, Analyst

Great. Thank you. Keeping to this IP topic, I think you planned to acquire Arm's Artisan IP asset. I know this hasn't closed yet. But when we think about the foundational IP market, just curious why hasn't this been a bigger focus in the past and what's changed to make this opportunity more attractive? And then just to clarify with John, this pending acquisition is not included in guidance. Thank you.

John Wall, Senior Vice President and CFO

Yes. So let me take the second part first, Jason, just to clarify that, yes, it is not in our current guide. It's not closed yet, so we haven't put that into the guidance.

Anirudh Devgan, President and CEO

I am pleased with the partnership and acquisition. The Arm Foundation IP business has a strong history, starting with Artisan a long time ago, and it holds good credibility in the market. As our IP position improves due to our performance over the last two years, we need to expand our portfolio. I am satisfied with the current portfolio's performance and PPA, but we need to address gaps in our offerings. That is why we acquired Rambus' IP business and Secure-IC a few months ago. This is a critical aspect. Foundation IP has become increasingly important over the last five to seven years, especially concerning its interaction with software and place and route. Additionally, many foundries are being built in various countries, all requiring Foundation IP. Thus, Foundation IP has become more essential. We aim to enhance our IP portfolio to work effectively with our software tools. This opportunity came to acquire a leading product in this space, and we did not want to enter without a solid product. ARM's Artisan business has a good history and a strong product. We hope to finalize that acquisition later this year and discuss it with our customers.

Jason Celino, Analyst

Okay, thank you.

Operator, Operator

Your next question comes from the line of Joe Quatrochi with Wells Fargo. Please go ahead.

Joe Quatrochi, Analyst

Yeah, thanks for taking the question. You mentioned that you were developing a full stack Agentic AI solution. I was wondering if you could talk about just the areas of the design workflow you are targeting first with that?

Anirudh Devgan, President and CEO

Great question. This approach can be applied to nearly all aspects of the design process. However, some areas are particularly critical, such as verification, which is always essential. Even though we have excellent products in both hardware and software, determining when verification is complete can be challenging. If you examine our SimAI offering, which integrates with our logic simulator, it can enhance performance by five to twenty times. We have numerous customer endorsements for using CMAI in verification, indicating its importance as a focus area for Agentic AI. Additionally, the implementation phase presents opportunities for improvement; tools like Cerebrus can be further developed, and you will soon see advancements in digital design and Agentic AI from us. Another area that historically has not been highly automated but is gaining significance is package and PCB design, including Allegro, Allegro X, and Allegro X AI. I'm optimistic that as package design becomes increasingly essential, particularly in a 3D-IC system, the need for automation in packaging and PCB design will grow. AI should be able to facilitate this automation. Another significant area is analog migration, which combines art and science, but AI can offer assistance here as well. These are some of the key areas we plan to focus on, but the reach of Agentic AI spans our entire product range.

Joe Quatrochi, Analyst

Very helpful. Thank you.

Operator, Operator

Your next question comes from the line of Joe Vruwink with Baird. Please go ahead.

Joe Vruwink, Analyst

Thank you. This might be an overly simplistic question relative to those before me. But your commentary and guidance strikes me as having greater visibility into strength during the second half of this year than maybe what's apparent just in our seat when analyzing the size of the 1Q beat or even your quarter-end backlog value. Can you maybe just speak to some of the things that changed for the better in the last 60 to 90 days that make you feel better about the 2025 outlook?

John Wall, Senior Vice President and CFO

Yes, Joe. I will take that one. We are tracking ahead of our original forecast for 2025 with solid Q1 results. We only provided guidance a few weeks ago for the year, so not much has changed. We have seen a bit more strength in our recurring revenue, which, as you know, any improvement in recurring revenue positively impacts the rest of the year. A small increase in Q1 tends to carry through into Q2, Q3, and Q4. We are ahead of the original forecast, even with the expectation that we will incur slightly higher expenses due to tariffs. However, we remain resilient on the tariff side and felt it was appropriate to raise the price.

Joe Vruwink, Analyst

Okay, thank you.

Operator, Operator

Your next question comes from the line of Joshua Tilton with Wolfe Research. Please go ahead.

Joshua Tilton, Analyst

Hi, guys. Can you hear me?

John Wall, Senior Vice President and CFO

Loud and clear, Josh.

Joshua Tilton, Analyst

Great. Thank you for sneaking me in. I always love it when the guy before you kind of steals your question. But I guess, just to put a finer point on things, I think Anirudh, you mentioned that the guidance still assumes that China is flat for the year. You guys are being prudent. I guess my question to that is, I understand there was an easier comp in 1Q, but year-to-date, are you guys seeing anything that suggests that China should actually grow flat for the year? Or I guess another way of saying it is, is the decision to keep China flat for the year and the guide prudence or more along the lines of your expectations of how things will shake out by the end of the year? Thanks.

John Wall, Senior Vice President and CFO

Yes, Josh, I’ll address that as well. We believe it’s wise to stay cautious in the current macro environment. Our company has shown resilience in this situation, as having a high gross margin and offering essential products positions us well. We experienced strong bookings in Q1, exceeding expectations, particularly in recurring revenue. This performance allowed us to track ahead of our original forecast for 2025, leading us to decide to raise our guidance.

Joshua Tilton, Analyst

Super, helpful guys. Thank you.

Operator, Operator

Your next question comes from the line of Siti Panigrahi with Mizuho. Please go ahead.

Siti Panigrahi, Analyst

Hi, thanks for taking my question. Anirudh, if you see a lot of news going around, we saw DeepSeek early this year. Wondering how that's impacting the design velocity or even how you see the compute capacity will change. But at the same time also, we are seeing hyperscalers trying to push their data center build-out. Are you seeing any kind of impact there? So would love to hear your views on this.

Anirudh Devgan, President and CEO

Yes, Siti, that's a great question. This is a significant topic for the entire industry. When I speak with customers, DeepSeek represents one advancement, but many customers are looking for several advancements like this. The efficiency of AI is expected to increase, which is similar to the history of electronic design automation (EDA). When AI first emerged, it was characterized by dense competition. In the 1970s, EDA began with dense competition and then evolved into sparse computing, partitioning, hierarchy, and latency—all of which are computer science methods applicable to AI. I anticipate that there will be multiple DeepSeek moments, not just one. Additionally, the use of AI is expected to become increasingly common. This trend has already occurred with CPUs, and I foresee a similar evolution with AI and GPUs. From a design perspective, we are focused on that side rather than production. We're observing a growing acceleration in the design of AI applications, particularly for data centers. NVIDIA is an excellent partner, and they are performing exceptionally well. Similarly, the major U.S. hyperscalers and companies in other countries are also making substantial investments in their designs, which we are pleased to support. Regarding physical AI applications—such as cars, planes, and drones—there is significant design activity taking place. Although the current car market may not be as robust, there are ongoing designs for future AI-enabled products. As AI becomes more efficient, I expect to see increased use for inference, leading to more design work for chips that support that demand. Currently, I feel optimistic about design activity. Even in data centers, advancements like 3D-IC are set to dramatically increase complexity. At present, we have Blackwell, which features two large dies with high-performance memory, but the packaging roadmaps from all foundries are very ambitious. This will likely stimulate new AI designs and enhance performance and efficiency. Overall, we do not observe any significant changes in design activity for AI at this time.

Siti Panigrahi, Analyst

Thanks for that color.

Operator, Operator

Your next question comes from the line of Nay Soe Naing with Berenberg. Please go ahead.

Nay Soe Naing, Analyst

Hi, thank you for taking my question. Regarding your SG&A segment, it was a very impressive quarter in Q1. I would like to understand where the statistics are coming from, especially in comparison to the product market and your competitors over the last three years. You have been growing at two to three times the rate of your peers. Are there any competitive market wins driving your performance? If not, what are the reasons behind it? Also, I would like to ask if the strong performance you've had in the past might create any headwinds or tough comps for you going forward. Thank you.

John Wall, Senior Vice President and CFO

Thanks for the question. And you're right to raise the comps because I think one of the benefits for Q1 is that Q1 '24 was a pretty easy comp for us on the SG&A side. When BETA performed well in Q1 '25, but we only acquired that in the middle of the year last year. So I think the first time BETA turned up in our results was Q4. And then BETA is providing a huge amount of pull-through business for Cadence. So Cadence products are being sold alongside BETA products, and that's really helping us for growth. We're expanding reach to the longer tail customers through our e-commerce model. And we've seen strength in automotive and aero and defense. And I don't know, Anirudh, do you want to add anything about BETA?

Anirudh Devgan, President and CEO

BETA is performing great and also it has a pull-through to other parts of our portfolio. One thing we are always confident. And I think you've seen some benchmarks in the industry in the past that our R&D products are solid. They are rewritten. They have no accuracy loss. They have much better performance because of massive parallelism whether it is on CPUs or GPUs. So we are always confident on our product side, and we continue to innovate there. I think what BETA helps is to increase the reach of those products because they are working with all the auto companies. And so not only we can benefit from the performance of beta, but also can sell our other products to those customers. And then we also improved our cloud offering and go-to-market with an indirect channel. So I think you are seeing some benefits of that, better go-to-market operation on the system side.

Nay Soe Naing, Analyst

Okay, thank you.

Operator, Operator

And our next question comes from the line of Ruben Roy with Stifel. Please go ahead.

Ruben Roy, Analyst

Thank you for allowing me to ask a question. Anirudh, I had a similar question to Jason's on IP. And you touched on this in your answer to that question. But just wanted to make sure I understood in terms of sort of these, I’d say, accelerated pace of recent tuck-ins on the IP side. It sounds like they are opportunistic rather than customer-driven, wanted to make sure I got that right. And then the second part of the question is just maybe if you can update sort of how you're thinking about IP in terms of longer-term growth from that segment given all that's going on with foundry and customers, et cetera. Thank you.

Anirudh Devgan, President and CEO

Yes, that's a great question. There are several factors regarding our IP. Firstly, our performance has improved significantly. The portfolio we have, particularly the PPA, has shown strong power performance in collaboration with TSMC, which is the leading foundry. The quality and performance of our IP have enhanced, driving an increase in customer demand. Customers are eager for us to provide more IP and expand our portfolio. Consequently, we are making investments organically and will consider acquisitions if they align well with our strategy. The strong customer interest is encouraging us to broaden our offerings. Secondly, the foundry landscape is expanding. We value our partnership with TSMC and have noted significant investments from companies like Rapidus, as well as our relationships with Samsung and Intel. There are at least four major advanced node foundries, in addition to others like Global and UMC at mainstream nodes. This diverse foundry ecosystem creates more opportunities for our IP. Finally, developments in AI, 3D-IC technology, and die-to-die interfaces also contribute positively. For these reasons, I remain optimistic. We are performing well, expanding our portfolio, and the market is indicating a need for more IP from us. Following a strong year and a very good first quarter, I anticipate our IP segment will grow at a rate exceeding Cadence's average moving forward.

Ruben Roy, Analyst

Perfect. Thank you.

Operator, Operator

Our final question comes from the line of Blair Abernethy with Rosenblatt Securities. Please go ahead.

Blair Abernethy, Analyst

Thank you for fitting me in. Great quarter. Anirudh, could you share your thoughts on the data center digital twins? Since acquiring Future Facilities in July '22, it seems to be gaining traction. I’m interested in your perspective on the size of the total addressable market and the opportunities that asset presents, as well as any potential for expansion beyond just data centers.

Anirudh Devgan, President and CEO

Absolutely. The two areas that I have been very excited about, especially on the system side, one is, which is very close to the package, like I mentioned thermal, electromagnetics, warpage because there is a massive transformation right next to the chip. And we are in a very strong position with Allegro and all the analysis tools. The second area is all the way at the data center level. That's why we acquired Future Facilities. And actually, it had a very strong Q1, and we also have a great partnership with NVIDIA there. NVIDIA is designing their data centers with our Cadence Reality Digital Twin and also working with joint partners, as we go to market with them together on Cadence Reality. And that opportunity is huge. I mean, even we apply it to our own IT group; for example, we have our own data centers, right? So the product is general enough to be used in any data center, and we saw like a 10% improvement in power, which is huge. Because typically, that's the area that has not seen a lot of analysis and automation because it is typically done in like a typical construction kind of work whereas chip design is very analytical mathematical. So that area needs more kind of optimization and simulation. So I am optimistic about these two extremes. One is all the way to data center and second is all the way very close to the chip on the package. And that's where you see us investing.

Blair Abernethy, Analyst

Great. Thanks very much for the color.

Operator, Operator

I will now turn the call back over to Anirudh Devgan for closing remarks.

Anirudh Devgan, President and CEO

Thank you all for joining us this afternoon. It's an exciting time for Cadence as our broad portfolio and product leadership ideally positions us to maximize the growing opportunities in the semiconductor and system industry. And on behalf of our employees and our Board of Directors, we thank our customers, partners and investors for your continued trust and confidence in Cadence.

Operator, Operator

Thank you for participating in today's Cadence's first quarter 2025 earnings conference call. This concludes today's call. You may now disconnect.