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CADENCE DESIGN SYSTEMS INC (CDNS)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 2025 delivered strong top-line and non-GAAP profitability: revenue $1.275B (+20% YoY) and non-GAAP EPS $1.65, both above guidance and consensus; GAAP EPS was $0.59 due to a one-time DOJ/BIS settlement charge .
  • Guidance raised: FY25 revenue to $5.21–$5.27B, non-GAAP EPS to $6.85–$6.95, and operating cash flow to $1.65–$1.75B; non-GAAP operating margin increased to 43.5–44.5%, while GAAP operating margin lowered to 28.5–29.5% reflecting the settlement impact .
  • Mix dynamics: recurring revenue dipped to 78% in Q2 on hardware strength and temporarily paused ratable revenue in China; China fell to 9% of revenue while other regions offset the headwind .
  • Catalysts: Continued proliferation of agentic AI across EDA and SDA, record hardware demand, and IP strength (LPDDR6/5X, Samsung Foundry multi-year IP agreement) support sustained growth and the raised FY25 outlook despite export-control volatility .

What Went Well and What Went Wrong

What Went Well

  • Broad-based beat vs guidance and consensus: Revenue $1.275B vs $1.25B consensus; non-GAAP EPS $1.65 vs $1.56 consensus; non-GAAP operating margin 42.8% (up from 40.1% YoY) .
  • Segment momentum: Core EDA +16% YoY; IP >25% YoY; System Design & Analysis +35% YoY; management highlighted record hardware quarter and strong booking activity .
  • Management quote: “Cadence delivered an exceptional Q2, with 20% year-over-year revenue growth…enabling us to lead through the accelerating waves of the AI Supercycle” – CEO Anirudh Devgan .

What Went Wrong

  • GAAP compression: GAAP operating margin fell to 19.0% (from 27.7% YoY), GAAP EPS $0.59 (from $0.84 YoY) due to a $128.5M “loss related to contingent liability” tied to DOJ/BIS settlement ($140.6M cash outflow expected in Q3) .
  • Recurring mix decline: Recurring revenue fell to 78% (TTM 80%), driven by strong upfront hardware/IP and ratable China pauses in Q2 .
  • China headwinds: China revenue share dropped to 9% (from 11% in Q1); backlog excluded some China bookings at Q2-end while restrictions were in place, later rescinded .

Financial Results

Quarterly Performance vs Prior Periods

MetricQ4 2024Q1 2025Q2 2025
Revenue ($USD Billions)$1.356 $1.242 $1.275
GAAP Operating Margin (%)33.7% 29.1% 19.0%
Non-GAAP Operating Margin (%)46.0% 41.7% 42.8%
GAAP Gross Margin (%)83.8% 86.5% 85.6%
Non-GAAP Gross Margin (%)85.5% 88.4% 87.2%
GAAP Diluted EPS ($)$1.24 $1.00 $0.59
Non-GAAP Diluted EPS ($)$1.88 $1.57 $1.65
Product & Maintenance Rev ($MM)$1,239.287 $1,110.850 $1,170.510
Services Rev ($MM)$116.694 $131.516 $104.931
Operating Cash Flow ($MM)$441 $487 $378
Free Cash Flow ($MM)$404 $464 $334
DSO (days)48 44 51
Quarter-end Backlog ($B)$6.8 $6.4 $6.4
cRPO ($B, next 12m)$3.4 $3.2 $3.1

Q2 2025 Actuals vs S&P Global Consensus

MetricConsensusActual
Revenue ($USD Billions)$1.2499*$1.2754
Primary EPS ($)$1.5565*$1.65

Values retrieved from S&P Global.*

Segment and Mix

MetricQ4 2024Q1 2025Q2 2025
Core EDA (% of Revenue)68% 71% 71%
Semiconductor IP (% of Revenue)13% 14% 13%
System Design & Analysis (% of Revenue)19% 15% 16%
Recurring Revenue (%)76% 82% 78%
Up-Front Revenue (%)24% 18% 22%
Geography: Americas (%)49% 48% 49%
Geography: China (%)13% 11% 9%
Geography: Other Asia (%)17% 19% 19%
Geography: EMEA (%)15% 16% 16%
Geography: Japan (%)6% 6% 7%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($B)FY 2025$5.15–$5.23 $5.21–$5.27 Raised
GAAP Operating Margin (%)FY 202530.25–31.25 28.5–29.5 Lowered (settlement impact)
Non-GAAP Operating Margin (%)FY 202543.25–44.25 43.5–44.5 Raised
GAAP EPS ($)FY 2025$4.21–$4.31 $3.97–$4.07 Lowered (settlement impact)
Non-GAAP EPS ($)FY 2025$6.73–$6.83 $6.85–$6.95 Raised
Operating Cash Flow ($B)FY 2025$1.60–$1.70 $1.65–$1.75 Raised
GAAP Other Income & Expense ($MM)FY 2025$(57)–$(43) $(9)–$11 Raised
Non-GAAP Other Income & Expense ($MM)FY 2025$(54)–$(40) $(52)–$(32) Slightly Raised
GAAP Tax Rate (%)FY 2025~26 ~28 Raised
Non-GAAP Tax Rate (%)FY 202516.5 16.5 Maintained
DSO (days)FY 2025~50 ~50 Maintained
CapEx ($MM)FY 2025~150 ~160 Raised
Recurring Revenue (%)FY 2025~80 ~80 Maintained
Shares (diluted, M)FY 2025273–275 273–275 Maintained
Q3 Revenue ($B)Q3 2025—$1.305–$1.335 New
Q3 GAAP/Non-GAAP OM (%)Q3 2025—32–33 / 45–46 New
Q3 GAAP/Non-GAAP EPS ($)Q3 2025—$1.14–$1.20 / $1.75–$1.81 New

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024)Previous Mentions (Q1 2025)Current Period (Q2 2025)Trend
AI/Technology InitiativesProliferation of Cerebrus, SimAI, Allegro X AI; NVIDIA partnership; record hardware demand Raised outlook; expanded NVIDIA partnership; agentic AI stack in development Agentic AI emphasized; Cerebrus AI Studio launch; Millennium M2000 with NVIDIA Blackwell Strengthening
Supply Chain/Export ControlsPrudence on China; renewals stronger in 2H; backlog duration high Assuming China flat; diversified hardware manufacturing mitigates tariffs China at 9% of rev; restrictions in Q2 later rescinded; backlog excluded paused China bookings Improving but volatile
Tariffs/MacroMinimal direct tariff impact; prudent FY25 start Limited tariff exposure; resilient model Prudent view maintained; broader demand offset China headwinds Stable
Product PerformanceHardware demand exceeds capacity; record bookings Strong core EDA; hardware proliferation Best hardware revenue quarter; broad-based strength across lines Strengthening
Regional TrendsChina down in 2024; ex-China high-teens growth China assumed flat; activity picking up China 9% Q2; strength elsewhere more than offset Mixed
Regulatory/Legal——DOJ/BIS settlement resolved; $140.6M cash outflow; $128.5M GAAP charge Resolved/one-time
R&D ExecutionHeavy R&D investment; future hardware gen; physical verification, solvers Agentic AI across flow; edge/physical AI; packaging automation Sustained high R&D; agentic workflows; JEDI data platform orchestration Strengthening

Management Commentary

  • CEO framing AI cycle: “The strength and breadth of our products are enabling us to lead through the accelerating waves of the AI Supercycle” .
  • CFO on Q2 strength and China: “China ended up being 9% of our revenue in Q2…strength in other regions more than offsets any near-term softness related to China” .
  • CFO on settlement and cash taxes: “We’ll make a payment of approximately $141,000,000 in our third fiscal quarter…OBBBA…decrease U.S. federal tax payments…by approximately $140,000,000” .
  • CEO on agentic AI workflows: Cerebrus AI Studio delivering floorplanning, timing closure with up to 5–10x faster delivery and ~20% PPA improvement; verification via LLM-based RTL and SimAI .

Q&A Highlights

  • Physical AI momentum: Edge devices, autos, robots driving differentiated silicon and workflows; customers investing ahead of public launches .
  • China dynamics: Prudent but optimistic outlook; Q2 backlog excluded some China bookings; expecting book-to-bill ≥1 in 2H with record year-end backlog .
  • Advanced packaging/3D-IC: Integrity 3D-IC and Allegro X adoption with foundry collaborations (TSMC A16/N2P; Samsung; Intel; Rapidus); chiplet architectures ramping across HPC/AI .
  • Agentic AI monetization: Packaged separately from base tools; customers adopting agentic workflows atop traditional flows; focus on measurable ROI (PPA, productivity) .
  • Mix/recurring: Recurring dropped to 78% on hardware strength and paused ratable China revenue; long-term mix ~80/20 recurring/upfront expected .

Estimates Context

  • Q2 2025 beat vs S&P Global consensus: Revenue $1.2754B vs $1.2499B*, EPS $1.65 vs $1.5565*; upside driven by broad-based strength in EDA/hardware/IP and resilient demand across geographies .
  • Where estimates may adjust: FY25 non-GAAP EPS and revenue raised; GAAP margin/ EPS lowered for one-time settlement; consensus likely to move higher on non-GAAP metrics and cash flow outlook.

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Beat-and-raise quarter: Strong execution across EDA, hardware, IP; raised FY25 revenue, non-GAAP margin/EPS, and cash flow despite regulatory headwinds .
  • One-time GAAP impact: DOJ/BIS settlement led to $128.5M charge and GAAP compression; removed in non-GAAP and Q3 forward look; watch GAAP/ cash timing in Q3 .
  • Mix matters: Hardware/IP strength and China pauses reduced recurring mix; expect reversion toward ~80% recurring as ratable revenue normalizes .
  • Structural AI tailwinds: Agentic AI workflows and 3D-IC/ chiplet architectures are expanding TAM and ACV; Millennium M2000 + NVIDIA Blackwell adds SDA upside .
  • China volatility mitigated: Q2 impact offset by strength elsewhere; prudent guidance embeds export-control variability; backlog poised to end 2025 at record levels .
  • Near-term trading: Positive setup on beat-and-raise and Q3 guide; monitor Q3 cash outflow timing (settlement) and recurring mix normalization .
  • Medium-term thesis: Cadence’s AI-led portfolio, deep foundry ties (TSMC, Samsung, Intel, Rapidus), and hardware leadership underpin double-digit growth with expanding non-GAAP margins .

Additional Relevant Press Releases (Q2 window)

  • LPDDR6/5X 14.4Gbps Memory IP (industry-first): key for AI LLMs and agentic workloads; chiplet-ready subsystem .
  • Expanded collaboration with Samsung Foundry: multi-year IP agreement and certified AI-driven flows on SF2P; power integrity for 3D-IC with Voltus/Integrity .