Cadence Design Systems Inc (CDNS) June 3, 2026 Conference Transcript

Good afternoon. Welcome back to this BFA Global Technology Conference. Really delighted and honored to have Anirudh Devkan, the Chief Executive Officer of Cadence Design Systems, join us. We'll go through the usual fireside. You know, please feel free to raise your hand if you'd like to bring something up. But before I start, let me read a quick disclosure statement from Cadence that today's discussion will contain forward-looking statements, including Cadence's 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. So Anirudh, welcome. Really, really happy to see you at our conference. And maybe as a start, what I would love to get from you, I think you have been in the CEO's role for roughly about four and a half, five years or so. And what's sort of the master plan as you look over the next, you know, five years? You know, you've gone through this transformation of the company from kind of just EDA, right, to kind of diversifying it into system design, multiphysics, right, more IP. But what's the kind of the grand strategy? What should investors expect over the next five years?

Yeah, thank you, Vivek. And it's great to be here. By the way, I'm a big fan of Vivek's. and in the Cadence Live in April, I gave this talk and your numbers just came out, your semi-market numbers. So I quoted Vivek and put it, and then all the analysts said I should also quote them, but Vivek always had very good numbers and analysis. So it's great to be here, Vivek. And then in terms of Cadence, yeah, last five years have been phenomenal growth, I think. and you know because we have uh have about 15 percent gagger in a tough market you know parts of the semi-market was good but part of the semi-market was not that good and then also our margin has improved you know we crossed rule of 60 this year now going forward i think the environment is is improving you know i think our customer environment is improving our comparative position has the best it has been so going forward i think and and of course i started all this sda in 2017 2018 and sda is still good but but the value of eda and ip is much higher because of resurgence of semiconductors resurgence of ai i mean not just in semi-companies but in hyperscaler companies so i think it will be more of the same but i feel that we are well positioned in all the three areas eda ip and sda and eda and ip have potential to to grow meaningfully the next five years sda still will be good don't get me wrong but i think the value of eda in 2026 is much higher than 20 20 18. got it you know the one question that has emerged uh this year for not just Cadence, but for the entire, you know, anyone connected to the software industry has been the potential of disruption from AI.

So give us kind of your, you know, measured view, Anirudhav, you know, are there certain parts of your design flow where AI can be disruptive? So how do you think about, you know, just the emergence?

Of course, it's giving you, you know, opportunities for more engagement with customers, but are there parts of the design flow that we should kind of watch out for for any kind of disruption well ai is is a net positive to us and there are multiple reasons for that so uh and i've said this a long time so sorry if some of this is repeat so first of all you know in terms of software you know we are both involved in the building of ai and the consumption of ai right you know so this design for ai and ai for design That is not true for any other software. Okay, we love our Aura software colleagues, but no other software is directly involved in building NVIDIA chips or Google TPUs. So I think that's one benefit. And then when we apply AI to us, it can be transformative in terms of productivity. And then people worry that, okay, if you're going to be 5x more productive, does that mean less usage of your base tools? But what you have to remember is even in that part, see that's why i'm so optimistic about not just about sda but eda and ip when we apply to ai to our products our workload is exponential see i talking to one big customer and this is true for all of them they're saying that every next chip they need 2x more engineers that's an unrealizable headcount curve. So AI is needed. AI will blunt the headcount curve, right? And if the workload is constant, you know, if it blunts the headcount curve, there's a worry that it reduces usage. In our case, because the workload demand is exponential, the blunting of headcount curves makes it possible. So the market expects, you know, 5, 10x improvement, just like we have delivered 100x over the last 20 years i just came back from imac i was telling some people and and this is supposed to continue kevin gave a good talk from tsmc and he's showing tsmc roadmap the number of transistors on these systems you know chip plus package will go up 48 or 50x in the next five years so to design all these things you need that productivity okay and that you can see that even like when like for example recently jensen talked about cadence at computex night by the way that's there's all work internally at nvidia and they highlighted it is that so when the customer is writing rtl and this is the kind of thing that we never had tools before it's a new time for us they were using excelium and jasper to write it because we need to verify that the RTL is correct. So now when ChipStack is writing it, it actually uses more Jasper and more Accelium. So actually the number of base tool usage is going up versus a non-agentic word. So that's the first thing that happens. And second thing is this new TAM expansion of this kind of capability that the users were doing manually. And we have now this agent product that we can provide to our customers. So in net, because of all these things, because we, first of all, participate in the build out of AI, that's one. Second, when we apply AI, you know, it's an exponential workflow, exponentially growing workflow. And third, the way we apply it, and this is what I've said forever, is that it uses the base tools more. You know, I've talked forever about this three-layer cake, so the agentic AI, then the ground truth tools, and then the base layer, which is compute and data. Now, if there is a certain application in which the base layer or the middle layer is very trivial or not as complicated, then maybe the LLMs can do everything themselves. But in this kind of complicated, physically accurate workload, you have to use the ground truth tools. You cannot do it without that. And actually, Jensen has a very good analogy. He was saying that, just to, you know, is that he was saying that, let's say, agent is like a robot, right? And let's say a robot comes in your home. if what you were doing was relatively simple that's picking like the bottle from one place to another place then maybe the robot can do that but if you're going to prepare food like or use a microwave is the robot going to warm the food with its hands or is going to use the microwave that's already there okay and in our case we are not even like a microwave we are like a nuclear reactor. So when a bunch of robots come, they're not going to build a nuclear reactor. They're going to use nuclear reactors in a more effective way. So I think the complexity of the task is also there. So for these three reasons, one, complexity of the task, two, the exponential nature of the workload, and three, that we also participate in the buildout, I think AI is a very big net positive for us.

Got it. So just to kind of close that, there is no, you know, genius sitting at any hyperscaler who is writing software that can completely remove their use of any part of the EDA process?

Oh, there are a lot of geniuses sitting in hyperscalers. All our customers are very smart, but they will develop all these things working with us. I think that's what we see. They want to enable, again, they want to use our tools and build on top of that and use our agents. Yeah, makes sense.

Now, one other thing I also find fascinating is you know at the leading edge right TSMC right their ability to drive the advancements and silicon and you are very strongly engaged right with the TSMC ecosystem right a lot more than some of the other ecosystems so as they raise their pricing is it fair to think that that actually puts a lot more pressure on the upfront design process so that's a good thing but does it also perhaps limits the number of design starts because these things are getting so much more expensive so how are you seeing those two kind of trends evolve like that one is complexity is growing and second is it then becoming a headwind to the number of design starts which often tends

to drive your business no number of design starts is still very good it's increasing and of course you know i've said this for a while not just for data center but for physical ai so right now the design activity is, yeah, it's very, very strong. And I think that it has chance to further improve as, because two years ago, I mean, there were some design activity inside the big system companies. Of course, some of the really, you know, big phone companies have done this for 10 years. But what is also new, you know all this, in last one year, the success of Google is a big, shiny example of verticalization and same thing in china i just came back from china you know success of xiaomi xiaomi is very impressive okay they have their own car they have their own model they have their own chips so once this kind of verticalization has happened in in like physical ai with xiaomi or or they also have llm models or with the with this big data center with google i think the more is happening to compete with that so the amount of design activity has picked up independent of this pricing dynamics of the foundry because the value is very high so so i see that increasing and then the the traditional semi-analog memory have also improved so overall the environment is much better than a year ago got it i'm glad you mentioned right the environment.

There were a few years in between where we saw the EDA IP industry have a more modest growth pace, closer to kind of low double digits rather than kind of the mid-teens. But that of course followed some years where it was high teens, but I think that was the time when China was also growing much faster.

If you look over the next three, four years, are we now at this you know mid-teens you know kind of uh you know growth rate what were the headwinds that kind of made the growth rate slow down and now what are the tailwinds that you think can sustain the kind of growth rates that you are at right now yeah i mean the environment is i think there are three main things for us and of course we guide one year at a time and this year i think is very strong and we'll see how the next years go so first the design activity is much stronger and for all the reasons i mentioned hyperscalers are back in and other system companies like you know tesla or byd and okay the the parts of semi that were weaker relatively weaker have improved so that's number one the market is much better and we can drill down more into that but overall i think that's good the second part is comparatively we are in the best position we have ever been you know agenting we are ahead base eda we are ahead ip we are taking share hardware you know we have a unique platform with palladium so comparatively we are in the best position okay and then thirdly we have this new opportunity with with tam expansion with agent so if you asked me like now last few years there were some there's always some issue other like in the past we were not as strong in ip or you know some of the semi was was weak or we would not have full exposure to intel and samsung so i think all the we i feel good that right now a lot of things are aligned well uh and that is a change you know we have big opportunity at some of the companies we never worked before you know the parts of the semi has improved right we have new time expansion so we'll see how it goes but the environment is is probably the best it has been yeah got it uh you know we had um you know to your point we had on semiconductor right earlier we had um you know microchip and analog devices yesterday and it's so interesting to see that in the past 90 percent of the questions were about industrial and automotive and now how the questions are about the data center right so that is also i assume helping these companies come out of the downturn so are you starting to see that because you have a very strong exposure right to kind of the analog market as well so are you starting to see r d activity pick up there as well yeah absolutely and then also physically i also benefits that part of the market you know look at adi or st you know you know just to give some examples so i know and i think the design activity is strong and also not only that you know everybody wants to do more things things more effectively with this agentic flow so not only is the customer base doing well but the interest in more automation is there so we have the amount of engagements we have with like chip stack or vera stack or you know stack is is throughout our big customers whether they're traditional semi or their data center or analog mix signal or or system companies they all want to do things more efficiently right got it is that part of the agentic workflow right you mentioned some of these uh tools um maybe talk to us about you know are they a means of efficiency for you or are they a means of efficiency for your customers or or can they also become a source of you know more pricing power or stickiness right

like some of these agentic tools that you described? How do they fit into the equation?

First of all, we are a technology company first. We want to make sure we deliver value to our customers. So like what NVIDIA was showing, or we have so many other engagements with ChipStack like Qualcomm and MediaTek. If we can make things more efficient for what was a manual process, then that's a good time expansion opportunity for us. So that's the main thing we focus on, is providing value to our to our customers and then the way the chip stack works it also calls more of the base tool right now in terms of productivity benefit okay it applies to customers and us internally as well so we have about 15,000 people roughly okay about 4,000 are like customer facing or what these days would be called forward deployed engineers you know what we call like AEs okay application engineers and then 10 000 people are in r d okay so out of 10 000 you know 3 000 are in ip this is like broad numbers okay without getting into so i think with ip group we are also applying our own agentic solutions to to them right right that's the best way to prove it and i'm i am expecting at least a 2x productivity from the ip group so those 3 000 people should operate like 6000 because anyway we have so much demand for ip solutions and we will hire more but but they should be at least two so the way i look at it is at least 30 reduction in headcount per project and at least 30 reduction in schedule for a given project okay so that's like a 0.7 times 0.7 that's 0.4 that's 2x that's like a Moore's law kind of productivity okay and and sometimes we can go even better than that some customers told me they want 0.5 times 0.5 okay so that's like 4x so i think with this agentic flow there's opportunity of 2 to 3x improvement and that's huge right so now we will make sure that we deliver that to our customers and get this opportunity of the new time and then we applied internally on the and then this is just the IP group you know AEs can be more efficient and then the 7,000 people who are writing code you know they can be more efficient with like other regular AI tools like like Claude and Codex so so it's both providing value to our customers which is the main thing and then adding efficiency internally Now, internally, you see some of it already. You know, our incremental margin was 60%. Okay, that's pretty good. And our operating margin is about 44, 45, but incremental is at 60. So we will always try to drive that up and also provide this 2 to 3x to our customers. And again, this 2 to 3x or more is needed if the number of transistors is going to go up 48x. You know, you need much more than 2 to 3x. but we'll start with two to three X to our customers.

One thing that has come up more frequently is, is the EDA industry utilizing its pricing power? Interestingly, I find that the same pushback comes with the semi-cap equipment industry, right? Both are kind of ways of complexity. The usual pushback, right? Which is your customer, their customers are making so much more money.

Are we seeing it already? and we just don't notice it as much or are having not yet seen it and that goodness is so so talk to us about has this increase in complexity the use of all these ai tools has it actually helped you improve your pricing power versus what it has been historically well we try to always get the right value from our customers and you know first like i said our culture is first to deliver value and these are like the biggest customers in the world right so it's not that they are short of money okay all these big 60 70 companies that that drives 60 70 percent of our revenue so my philosophy always is if we can provide value they are always fair to us okay now a lot of the growth in the past has been driven by volume more than price because they're doing more and more and the way to get the right value for us is is to deliver more value so i do think this agentic flow in which they are able to substitute more of human tasks with agents is a unique opportunity because we will deliver a tremendous value like 2, 3, 4x and this is the right way to capture more value for us.

Because it drives more consumption of base tools and your value is kind of more levered to the consumption of your tools, right?

Not only that, it's a new time first of all it's a new time right because like if we were we are having tools to write rtl like i was giving the previous example there were no tools like that so it's a new time to and then they they can they always have exponential workload so i think if something can give them 2 to 4x productivity or 40x in case of nvidia yes they will use that so it's a new time and then that time also drives more of the base tool so it's a multiplicative effect but our philosophy always is you know we are very thankful to all these big 70 customers and relationship we have for years if we provide value to them they will provide value back to us so my focus is having the best super agents you know for chip stack we are stack you know this is you know stack this is a new way of monetizing because if they get so much benefit they are more than willing to share that with us all right makes sense um you know you mentioned uh growth in ip yeah so why did it lag historically and what is helping it now pick up and it's now become you know one of the faster growing parts of your business yeah i mean ip first of all i mean i also intentionally in the beginning uh didn't invest as much in it just to be honest because we wanted to make sure that we are good in eda first you know you know cadence has been a you know if you followed cadence there have been a transition of one business group and another so i also personally invested more in eda because that's the core of our business and if you're strong in eda then everything follows from that okay so first four years when i was doing i was more focused on eda then i think few things have changed in ip one is because of this ai and disaggregation you know some star IP is a lot more valuable and we are focused on these five star IPs which you know just to without getting too tech you know DDR the memory subsystem PCI UCI which is chip to chip HBM and then 30 okay so we are always focused on advanced node star IP because again we and part of the IP business was tensilica which is more profitable but But we always thought if we focus on few-star IPs and do a good job, you can get a better margin and better behavior. Because our customers see, even these really big customers, we always focus on win with the winners, the really big guys. Because once you win with the winners, the other stuff just happens naturally. The big with the winners, they always buy best in class. They're not interested in, they're not buying something for, they want to buy best in class. So it's better to focus on few things and do them well, rather than have a big portfolio. So that's the second difference, which I think has played out well now. It took a few years for that. And third thing, which is probably the most important, is I've, over the years, changed all the R&D teams in Cadence, and we always have very technical leadership and very good R&D teams. And finally, in IP, I finally believe that the team is world class. it wasn't word class before and but I think lower the last few years they are word class and you know if you look at all the GM's in cadence they are all technical there because that's what our customers want okay so as a result you know the these are standard based IPs even these five things I mentioned you know DDR is a standard right so when somebody chooses or not depends on how good the PPA is for performance in area and we are using TSMC or whatever so So it's the same process, same requirements. But how good your R&D team is, it depends. So our PPA now is pretty good. The R&D team is good. So if the product is good, it sells, right? So I think, and then there are a few other things that happened, disaggregation helped us. And then now Intel and Samsung and other rapiders. But the main thing is, I think we have the right IP strategy, which is more focused at these five key IPs then advanced nodes, and we have a great R&D team now.

You know, for better or worse, you know, investors will always look at the two kind of leading companies in the EDA space, right, and try to, you know, both are high-quality businesses. What do you think gives Cadence the edge in terms of potentially gaining share over the next few years? Is it that you have a specific mix of businesses, or within, you know, those businesses, you have an opportunity to take share in certain things?

I mean, first of all, we are very strong in core EDA, okay? I mean, there's no doubt about that. And we didn't have as much opportunity, and you can see that in the TSMC ecosystem. So in terms of BPA, and also in terms of scope, right? So we have analog. We're the only company that has all the tools. So we have analog, we have digital, we have verification, we have packaging. So core EDA, we are very, very strong. You know, in IP, we are getting much stronger with this kind of strategy I mentioned. And then we have SDA, but I would consider the right amount of SDA. You don't want to over-SDA yourself, you know. The right amount of SDA, which is focused on 3DIC and physical AI. So I feel very good about the mix. And I think we have a very good R&D-driven culture, okay. You know, I'm R&D by nature. I said all the leaders are R&D. Because, see, when you interact with these top 60, 70 companies, they're all very technical, too. You know, they want R&D to R&D interaction. You know, they're trusting that, you know, huge roadmaps to a company. So they want that confidence that the other side, because we are deeply embedded with their roadmaps. So we have a whole culture of we will enable R&D to R&D interaction. and and that's thing we have gained over the years and I think that is unique to cadence and so I think we are well positioned as the market you know improves so I mean it's a good industry you know what I tell the investors is yeah you can invest in both but just invest more in cadence yeah you know you say that very objective is also true right if you go back and look at it last five years yeah okay uh so uh on um you know one other i think interesting thing about you know

cadence and the eda space is you were sort of the early leading indicator of this growth that we are now seeing in you know cloud ai what do you think about the whole excitement and um you know interest in kind of physical ai edge ai they still seem a little bit further out but if anyone has kind of early you know visibility around that so do you think investors should be paying more attention like are those going to be real markets you know real players how much of a design activity are you seeing in physical ai robotics right edge ai yeah i'm a big fan you know of physical ai and i've been for a few years by the way i say the same thing year after year for a few years and people used to tell me what are you saying what is what physical ai you know but now i think it

becomes more because we do have some early view of what what is happening and it's still like i always said like three to seven years okay so it's still like uh now it is already but if it's three years then they already start designing for that so we already if you look at all the car companies and you know of course the big famous thing is what elon is saying right i mean they're investing a lot in their ai chips and also then you know with robots and all and then if you see what is happening like rivian is doing things and then in china there is a lot of activity already so byd and neo and x-pen they're all cadence customers okay so that's you know or xiaomi now not just making cars but making robots and they're very impressive so i think you're already seeing signs of that in Tesla and in China and then some of the traditional companies too. And then you're starting to see the signs of that with like ADI and TI and all the traditional semi-companies. And then even NVIDIA, Qualcomm, MediaTek. So I think it will be a big market. Now, what I want to make sure is that as a company, we are well positioned for physical AI. I believe we are well positioned for data center AI and also we are well positioned physically. So there is simulation part but also the base silicon content will go up a lot. If robotics is going to be the biggest market ever then the amount of chips that go into robots will be high. If the chips is high you need to design them and now exact timing is very difficult to say. You know like there's data center, there's physical AI. It's like when it happens. But for us, we want to be best prepared for that. Now, it may happen sooner. It may happen later. This may correct, may not correct. I think one thing I want to tell investors is because I believe we are well positioned with data center and physical AI, and we are not directly tied to, there is pros and cons of that, directly tied to the actual silicon volume. If things are good, it should be good. But even if things turn south a little bit, it should still be good for cadence. So the physical AI part is to make sure we don't miss the next big thing while focusing on the current big thing, which is agentic and data center. With that, Anirudh, thank you so much. Really appreciate your time.