Summary of Cadence Design Systems FY Conference Call Company Overview - **Company**: Cadence Design Systems (NasdaqGS:CDNS) - **Industry**: Engineering Software, specifically focused on Electronic Design Automation (EDA) and AI infrastructure Key Points and Arguments Company Positioning and Growth - Cadence is central to the AI infrastructure stack, providing engineering software that is essential for complex AI workloads, leading to exponential growth in demand for its services [3][4][6] - The company has experienced double-digit revenue growth over the past decade, with a recent upward revision of revenue growth guidance from 12% to 14% for the current year, driven by increased complexity in AI workloads [7][4] - Cadence's business model has evolved from being solely an EDA company to incorporating core EDA, IP business, and system design analysis, all of which are now sizable and interrelated [7][8] Record Backlog and Customer Demand - The company ended Q3 with a record backlog, indicating strong demand across all lines of business, particularly in AI and high-performance computing sectors [10][12] - Cadence is seeing significant design activity and new customer acquisition, especially in the automotive sector [12][10] Future Outlook and Visibility - Visibility for 2026 is considered strong, with expectations of continued demand for systems and hardware refresh cycles [18][19] - The company is cautious in its guidance, preferring to maintain a prudent approach to avoid inventory issues while ensuring steady growth [70][72] AI and EDA Market Dynamics - Most growth is expected to come from digital and remote sectors, with AI tools enhancing existing capabilities and driving additional revenue [23][47] - The complexity of designs is increasing, making EDA tools more essential for customers [46][47] Foundry Relationships - Cadence has strong partnerships with key foundries like TSMC, Samsung, and Intel, which are crucial for future customer engagements and design flows [41][42] - The foundry ecosystem is expanding, with Cadence increasingly engaged with companies like Samsung and Intel, which were previously less involved [41][42] Hardware Cycle and Production - The hardware refresh cycle is still in its early stages, with increasing demand for Cadence's products, particularly the Z2 and Z3 systems [55][61] - The company aims to maintain a backlog of orders with a lead time of 8 to 22 weeks, currently positioned in the middle of that range [63][65] Acquisition Strategy - Cadence announced the acquisition of Hexagon's Design and Engineering Business, which is expected to enhance its systems design analysis portfolio and provide new customer opportunities [87][88] - The integration process for acquisitions typically takes 12 to 15 months to realize revenue and cost synergies, with expectations of incremental margins improving over time [101][105] Design IP Focus - Cadence has shifted its stance on design IP, now recognizing its importance and potential for rational growth, particularly in advanced process nodes [167][180] - The company aims to build a robust IP portfolio aligned with market demands, focusing on advanced nodes and customer-driven development [180][206] Market Conditions in China - Demand in China has shown resilience post-restrictions, but the company anticipates a gradual decrease in the percentage of overall business from this region due to limited access to leading technology [260][266] - Growth in China is expected to be slightly below average compared to other regions over the next three to five years [275] Additional Important Insights - Cadence's approach to customer relationships is characterized by long-term partnerships rather than transactional engagements, which differentiates it from competitors like Synopsys [218][220] - The company emphasizes continuous improvement and learning from past acquisition experiences to enhance integration and profitability [136][140] This summary encapsulates the key insights from the Cadence Design Systems FY Conference Call, highlighting the company's strategic positioning, growth drivers, and market dynamics.

Financial Data and Key Metrics Changes - Total revenues for Q3 2025 were $376 million, up 12% year over year on a reported basis and 11% on a constant currency basis [25] - Year-to-date total revenues grew 11% and 10% on a reported and constant currency basis, respectively [25] - Subscription revenues grew 14% year over year for the quarter in reported and 12% in constant currency, representing 92% of total revenues, up 2 percentage points from the same quarter last year [26][25] - Adjusted operating income less stock-based compensation expense was $104 million for the quarter, up 16% year over year with a margin of 27.7%, and year-to-date adjusted operating income was $335 million, up 13% with a margin of 30.2% [30] Business Line Data and Key Metrics Changes - The resources sector was the fastest-growing sector in the quarter, with solid performance in public works/utilities driven by sustained global infrastructure investment [22] - Perpetual license revenues for the quarter were $11 million, essentially flat compared to the prior year, while professional services revenues declined 2% for the quarter [26] - E365 performance remained solid, contributing 300 basis points of ARR growth from new logos, primarily within the SMB segment [22] Market Data and Key Metrics Changes - Asia-Pacific had a strong quarter, followed by the Americas and EMEA, with North America leading growth in the Americas [23] - The Middle East continued to lead EMEA with strong performance, supported by robust investment in transport, water, and energy [24] - China's performance was consistent with expectations, representing only about 2% of total ARR [25] Company Strategy and Development Direction - The company is focusing on AI-driven innovations and partnerships, particularly with Google, to enhance asset analytics and infrastructure management [52][51] - Bentley Systems is investing in AI capabilities to improve engineering productivity and is engaging with customers to evolve its applications to better support AI use cases [46][18] - The company aims to shift from time and materials billing to value-based pricing, leveraging AI to enhance productivity and service delivery [49] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving annual financial targets, with expectations for stronger ARR growth in Q4 due to significant renewal activity [39][38] - The ongoing government shutdown has had minimal impact on revenues, with funding for awarded projects continuing to flow [40] - Concerns about permitting reform in the U.S. could affect future growth, but the company is well-positioned to benefit from upcoming developments in energy infrastructure [23] Other Important Information - Free cash flow was $111 million for the quarter and $384 million year-to-date, consistent with seasonal expectations [31] - The company fully paid down its senior debt, resulting in a net debt leverage of 2.2 times adjusted EBITDA, down from 2.9 times at the end of 2024 [32] Q&A Session Summary Question: Can you elaborate on the opportunity for better ARR growth and asset analytics? - Management indicated that they only monetize actual consumption and are not yet monetizing API consumption, but expect to see a strong renewal period in Q4 [36][37] Question: What impact has the government shutdown had on your business? - Management noted minimal impact, as direct revenue from the U.S. federal government is less than 1%, and funding for awarded projects continues [39][40] Question: How is the partnership with Google progressing? - The integration of Google Geo data across the portfolio is going well, with exciting opportunities for asset analytics and deeper infrastructure asset understanding [51][52] Question: Are you seeing proactive RFPs from customers around AI capabilities? - It is still early for specific AI capabilities requests, but there is a clear demand for data accessibility for AI purposes [53][54] Question: How do you plan to evolve your product development in light of AI? - The company aims to maintain a close feedback loop with users and iterate on product development to ensure readiness for market scaling [59][60]