Cadence Design Systems, Inc. Price & Performance (CDNS)

I would like to welcome everyone to our fourth quarter of twenty twenty four earnings conference call. I'm joined today by Anurad 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 be available on our website cadence.com Cadence. 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 ks and 10 Q. CFO commentary and today's earnings release All forward looking statements during this call are based on estimates Any information available to us as of today and we disclaim any obligation to update them. In addition, 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 and 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. I'm pleased to report that Cadence delivered exceptional results in the fourth quarter. Capping off a strong 2024 with 13.5% revenue growth and 42.5% non GAAP operating margin for the year We exited 2024 with a record backlog of $6,800,000,000 which is a testament to our compelling AI driven chip to systems portfolio and its growing proliferation among marquee system and semi customers.

The AI super cycle is entering a new phase With generative AI, Agentic AI and Physical AI fueling an explosion in compute demand and semiconductor innovation. We see AI adoption unfolding in multiple phases, starting with the build out of the AI infrastructure where we are already deeply engaged At the same time, we are actively integrating AI into our own products and we are also exploring AI potential to create new markets. Infrastructure AI phase is well underway. And we have been closely collaborating with market leaders on their next generation AI designs across both training and inferencing. In Q4, we advanced our long standing partnership with NVIDIA. Through commitments across a range of our EDA, hardware, IP and system software solutions. We are also using NVIDIA's latest [indiscernible] and NEM Microservices, to build customized Gen AI applications delivering enhanced optimization and productivity. We deepened our collaboration with Qualcomm through a significant expansion of our EDA and system software Also, we meaningfully expanded our strategic partnership with Marvell through a broad proliferation of our portfolio of products. Our Cadence AI portfolio continued gaining strong momentum with market shaping customers, Our AI powered products Cadence Cerebras [indiscernible] and Allegro XAI are proliferating at scale.

And our LLM base design agents powered by JetAI data platform are showing promising results in early engagement. Cadence Zebra's is rapidly becoming essential part of the design flow as it continued to deliver transformative PPA benefits to customers. With more than seven fifty tape outs to date, and over 300 in Q4 alone.

Our Vericium AI driven verification platform with its SIMAI and Debug AI apps gain share at key competitive accounts, as customers embrace the significant boost in verification quality and efficiency. Additionally, we are also applying AI to new mark [indiscernible] Such as life sciences, with our open eye drug discovery software. The growing foundry ecosystem is driving increased design activity and creating significant opportunities for our products. In 2024, we strengthened our collaboration with existing foundry partners and entered into new strategic engagements. We further our partnership with TSMC with AI optimized design flows certified for TSMC's N3 and N2P We strengthened our collaboration with GlobalFoundries and are partnering with Samsung on the SF2 ks all around process. We also partnered with Intel Foundry to provide design software and leading IP solutions at multiple Intel advanced nodes and in Q4, entered into a strategic collaboration [indiscernible] a two nanometer enablement technology. We deepened our partnership with Arm through a broad expansion of our IP hardware and AI driven design enablement solutions, and in Q4 successfully taped out industry's first ARM CSA Standard Based System Chiplet. Now let's talk about some of the specific product level highlights for Q4 and 2024.

Our System Design and Analysis business delivered strong results achieving over 40% growth in 2024.

Our multi physics analysis platform with AI driven optimization is delivering superior results to a rapidly expanding customer base across multiple verticals. Especially Aerospace and Defense, and automotive. Our Millennium CFD simulation platform ramped up over the year, Closing two meaningful deals in Q4 in the Aerospace and Defense and energy verticals. With Beta CAE we now provide a comprehensive multi physics platform covering electromagnetics, electro thermal, PFD and structural analysis. Beta CAE performed ahead of our expectations. With major expansion at several marquee automakers. Including at some of the fastest growing EV companies. Our Allegro X design platform, With its significant productivity and next generation capabilities, continued its momentum. Especially at Aerospace and Defense, hyperscale and EV customers. Allegro XAI the industry's first fully automated PCB design engine is enabling customers to realize up to a 10x productivity gain Our Integrity three d IC platform with its unified design, analysis and sign off capabilities, for multi chiplet architectures expanded its footprint at hyperscale and memory customers OSATs and foundries. Our IP business drove a strong finish to the year growing 28% year over year in Q4. Our AI HPC protocols, including our flagship HBM DDR, PCIe and UCI solutions propel our business with significant expansions and competitive displacement at top tier customers.

We continue to broaden our IP portfolio with high growth Star IP products And last month, we entered into a definitive agreement to acquire Secure The addition of their Embedded Security IP product will augment our rapidly expanding portfolio of leading edge silicon proven IP including interface, [indiscernible] AI and DSP solutions.

We announced a collaboration with Rapidus to provide a broad set of our advanced memory interface IP for the two nanometer backside power process node. An AST [indiscernible] committed to our AI driven IP solutions, and EDA tools on their AST5000 ASIC. A custom low power architecture for global space based cellular broadband services. Our core EDA business comprising our digital custom analog and verification grew 15% year over year in Q4. Insatiable demand for more [indiscernible] along with system complexity and the need for first time rights continue to drive strong demand for our best in class Palladium Z3 and Protium X3 systems, Our hardware family delivered yet another record year adding over 30 new customers and almost 200 repeat customers in 2024. With particularly strong demand from AI and hyperscale customers. Our digital portfolio had another strong year gaining 36 new full flow customers in 2024, including 17 in Q4.

Cadence partnered with Equal One, on the development of its Alpha five Quantum SoC that runs at cryogenic temperatures. With our design and implementation tools being central to this revolutionary design. [indiscernible] Tackle the most complex design and simulation challenges in analog, mixed signal and RF design. Virtuoso Studio, delivering industry's leading AI powered layout automation and optimization continued its strong ramp and is now deployed at over four fifty customers.

MediaTek, adopted SpectraX running on NVIDIA's Hopper GPUs for its two nanometer designs. Achieving up to a 6x performance boost while maintaining full accuracy. VectorFX FastPise is now in production usage at more than 75 customers.

Including top memory vendors as well as SoC and mixed signal companies. In closing, I'm pleased with our outstanding performance in 2024. And excited about the business momentum and opportunities ahead. As the AI era continues to unfold, our AI driven EDA SDA and IP portfolio powered by Gen AI Cadence, and Accelerated Computing, is delivering transformative results uniquely positioning us to capitalize on these massive opportunities. Now I will turn it over to John to provide more details on the Q4 results and our 2025 outlook. Thanks, Anarud.

Good afternoon, everyone. I'm pleased to report that Cadence delivered an outstanding Q4 and 2024. With broad based strength across all of our businesses. Robust design activity and customer demand combined with our strong execution drove 13.5% revenue growth and 42.5% non GAAP operating margin for the year. Fourth quarter bookings were exceptionally strong and we ended the year with a record backlog of $6,800,000,000 and a record CRPO of $3,400,000,000 Here are some of the financial highlights from the fourth quarter and the year starting with the P and L. Total revenue was $1,356,000,000 dollars For the quarter, and $4,641,000,000 the year.

GAAP operating margin was 33.7% for the quarter and 29.1% for the year.

Non GAAP operating margin was 46% for the quarter and 42.5% for the year. GAAP EPS was $1.24 for the quarter and $3.85 for the year.

And non GAAP EPS was $1.88 for the quarter and $5.97 for the year.

Next, turning to the balance sheet and cash flow.

Our cash balance was $2,644,000,000 at year end.

While the principal value of debt outstanding was 2,500,000,000.0 Operating cash flow was $441,000,000 in the fourth quarter, and $1,261,000,000 dollars for the full year. PSOs were forty eight days, we used $550,000,000 to repurchase Cadence shares during the year. Before I provide our outlook for 2025, I'd like to share some assumptions that are embedded. Our outlook is based on our usual assumption that export control regulations in place today remain substantially similar for the remainder of the year. At the midpoint of revenue guidance, we are assuming 2025 China revenue year over year. And our non GAAP EPS outlook on a tax rate of 16.5%. In our outlook for 2025, we expect revenue in the range of $5,140,000,000 to $5,220,000,000 GAAP operating margin in the range of 30.3% to 31.3% Non GAAP operating margin in the range of 43.25% to 44.25% GAAP EPS in the range of $4.19 to $4.29 Non GAAP EPS in the range of $6.65 to $6.75 operating cash flow in the range of $1,600,000,000 to $1,700,000,000 and we expect to use approximately 50% of our free cash flow to repurchase Cadence shares in 2025. For Q1, we expect revenue in the range of $1,230,000,000 to $1,250,000,000 GAAP operating margin in the range of 27% to 28% non GAAP operating margin in the range of 40% to 41% GAAP EPS in the range of 93 to $0.99 and non GAAP EPS in the range of $1.46 to $1.52 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, I'm pleased that we finished the year with record backlog and CRPO, We are starting 2025 with a very strong outlook for non GAAP incremental margin.

As always, I'd like to thank 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 And your first question comes from the line of Jason Celino with KeyBanc Capital Markets. Your line is open.

Hey, thanks for taking my question.

When we look at the backlog number, the 1,200 or the $1,200,000,000 of sequential improvement. That's like the biggest we've ever seen much higher than kind of what I think some of us were expecting. But then when we look at the guide for the full year, the 11.5% starting point is a little lower than where you started other years in in the past. So maybe John, you help us just reconcile the confidence in the backlog and kind of how you're approaching guidance for 2025 Cadence?

Yes, sure, Jason. Thanks for the opportunity to clarify. Yes, we're very pleased with the strength and momentum that we carried into year end and into this year. We did allude to it in the call last time, and we thought the pipeline looked extremely strong and we just wanted the team to focus on converting that. We saw broad based strength across all of the businesses on backlog. On bookings for Q4. But it was a strong renewal quarter. Q4 that in contrast, I mean, when I look at this year, second half is probably stronger for renewals in the first half. So we'll probably burn some of that backlog in the first half of the year, but it'll come back in Q3 and Q4. And the duration our backlog duration is normally somewhere in the region of two point four to two point six years every year, and we ended up at the high end of that range for this year. When I look at the year in total for 2024, we were super pleased with the strength The growth outside of China was high teens. China, of course, declined just over $100,000,000 in dollar terms. From 2023 to 2024.

And we did back test that, I think I mentioned that on the last call as well. We went back to 1999 and looked at the last twenty five years of of performance in China in dollar terms. And there were only three years where we had down year And 2024 was the third time we experienced a down year in dollar terms in China. We've never had two consecutive down years in China, and we thought it would be prudent to assume in the guide for 2025 that China was flat. Because it's notoriously hard to predict and I want to manage an expense plan based on a prudent guide.

And your next question comes from the line of Joe Quatrochi with Wells Fargo. Your line is open.

Yes. Thanks for taking the question. I wanted to follow-up on that note on the China piece. One, was there any change into the RPO balance from the export restrictions? And then two, I guess on that flat kind of expectation for 2025, should we assume that the hardware cycle specifically in China is maybe more of a 2026 driver then?

Oh, yes, good question. I mean, basically, I was trying to be prudent with the guide and make sure that we're managing expenses very effectively for 2025. But I mean, when I look at the booking activity for Q4, it was quite strong. Think we're seeing strong design activity in China. Anurad, do you want to comment on any of that? [indiscernible] Actually, it's good to see design activity across the board. And in all verticals.

Now talking specifically about China, actually, I was there in November and it's good to see design activity picking up. As you know, there's a lot of design activity in for example, in automotive. Where at least five or six like major auto companies driving the EV revolution and almost all of them are designing chips now. And we have privilege of working with all the major auto companies there. And also with our new systems portfolio, especially including beta, not only we are engaged with them on the chip design side, but also on the packaging board and system side. So overall, I do think that China activity is strong, like it is strong in I think in terms of the guide, it's just just best to be prudent and then see how it goes given all these macro uncertainty. We thought it's better to be put in on the guide, but the design activity seems to be actually picking up and we'll see it's difficult to predict how that goes through the year. But so far so good. And Joe, you mentioned the specific metrics in terms of CRPO. There's nothing no real material impact on any of that from what we're seeing in China But you're right to call it hardware though.

I mean, we had a strong hardware year in 2023. In China and it was kind of weaker in 2024. And that was that's why the year is down year over year in China. And I just didn't want to be predicting what would happen for 2025. It's just very, very difficult for us to predict what happens in China for 2025.

And your next question comes from the line of Ruben Roy with Stifel. Your line is open.

John, I hate to waste my one question on another follow-up on China. But I am getting this question from investors and just around the entity list. Wondering if there had been any changes. It seemed like there were additions to the entity list kind of going into the end of the year and is that informing sort of your prudent view on China or is it really just kind of coming up with that down year and kind of assessing renewals and kind of timing of hardware ramp or has something changed, I guess, this question around that take a list? Thank you.

Yes. Thanks, Ruben. No, I think I would put it down to general prudence. There's nothing really changed in China, but we did see we had a down year, our third down year in '25 in twenty five years. And we just thought it would be prudent to assume flatten that would derisk guide for everybody.

And your next question comes from the line of Vivek Arya with Bank of America Securities.

I'm trying to to get a better handle on what's the right interpretation of the recurring revenue growth that is slowing down. I assume obviously China is one aspect of it. But if I were to just take the 24 recurring revenue, right, and then look at I think you are guiding 80% recurring revenue that does suggest a bit of a deceleration. Why is that when the market for AI and all these other products is improving so much. Why is the recurring revenue sales for decelerating? So much?

Hi, Vivek. Yes, thanks for the question. The yes, when we look at recurring revenue growth, of course, the The assumption that we have in for China being flat is a headwind for that recurring revenue growth because like if we look at the impact of China decelerating by €100,000,000 from €23,000,000 to 2024, The vast majority of that was in core EDA and mainly on the hardware side. But we're seeing that impact the recurring revenue numbers. Of course, the recurring revenue is the expected mix for this year is expected to go to 80% recurring 20% upfront, but that's more a reflection of the strength that we're seeing in our upfront revenue businesses. They're growing faster than the than the average cadence business. Anurag, do you want to talk to any of that?

Yes, absolutely. I mean, of course, I think we're good to see strength across the board, but but especially hardware and IP has performed really well. In 2024. And I expect that they will do well in '25. There are multiple reasons driving that, which we can get into, but we have a phenomenal product in hardware, We're well ahead of what what the customers will need for several years and in terms of all our engagements with the customers, they're very pleased with our hardware system. So we had a record '24 also. We had strong demand hardware going forward. And same thing on IT. IP, I think has been a weaker area for us over the years. But I think it did turn around, of course, one year doesn't make a trend, but it did turn around significantly in 2024. So I think it is up, IP is up and it's driven by multiple reasons. So one reason our portfolio is just just better technically. The PPA, especially at advanced nodes, we are delivering better power performance area for our IP [indiscernible] Also customers are we are engaged now with almost all the major customers in IP. We always engage with them on on EDA and hardware.

At this point, customers want more and more [indiscernible] and the third reason is as you know, there is a lot more foundry activity not just the leader foundry from Taiwan, but also in other parts of the world, whether it's Intel or Samsung or Rapidas, GlobalFoundries. So that also requires more and more IP and EDA. So as a result, we are I am more confident in the IP business going forward. I think it should have another good year in 2025. From what I can see right now. And also we are investing more in the IP business in terms of expanding the portfolio. So as you see, we acquired like last year, we acquired about a year ago IP products from Rambus and then recently we acquired Security IP, which is another critical piece of the IP portfolio. So overall, I think ADAS has been always very strong in EDA, always very strong in three d IC, always being very strong in hardware. And IP has been one area that we wanted to do more and and especially '24 is the turning point for IP. And together positions us well into the future. And your next question comes from the line of Lee Simpson with Morgan Stanley.

Line is open.

Great. Thanks for squeezing me in here.

I really just wanted to ask around the triplet reference designs that you've clearly done very well with in China with the EV makers. Is this the sole source of strength for the Chipot reference design? And maybe if we that business out of China for this year, What does that do for the size of decline that we might see in China inferred in that flat number?

Ali, that's a good question. Mean, first thing I would like to say that triplet design is happening across the globe and also in all [indiscernible] It is not specific to a particular region or vertical. Of course, it started with, as you know, with high performance computing with all these big AI and server products, but automotive and even laptops, they're all getting disaggregated. Okay. So we are always being focused on three d IC and chiplet based design from, I don't know, maybe fifteen years ago.

Maybe it was too early. I think our first reference flow with TSMC on three d IC was like 02/2007 or 02/2008, okay. But of course, it has picked up steam in the last few years.

And we are particularly well positioned given we have EDA products packaging products, system products.

And also IP needs to go that way. So we have what I would call IP two point zero is more focused not just on individual IP, but silicon solutions and shiplet architecture. So that's why you're seeing investment for us on chiplets, not just on the EDA side, but also on the IP side. But I think it's going to happen I believe, in across all geographies, across all verticals, and it's only going to accelerate going forward.

Question comes from the line of Charles Shee with Needham and Company. Your line is open. [indiscernible] And John, I think I do want to ask a little bit about core EDA. Looks like based on the segment information, the core EDA growth in 2024 was somewhere in the high single digit range at seems like it has been growing at the at a more like a double digit. But at the same time, system design and analysis continue to grow at a very strong double digit growth. I wonder if you can give us a little bit of your long term view, is this going to be the new normal going forward like the more traditional EDA actually going to more like a high single digit grower, but SD and A is more like where that can contribute to Cadence outperformance going forward? I want to get you some long term thoughts there.

Hi, Charles. That's yes. Generally in core EDA, I mean, we're always targeting double digit revenue growth and profit and sustainable revenue growth is really important to us. We'd be very, very pleased with the progress that we're making with the hardware business over the last number of years. But of course, the the down year China from 2023 to 2024 impacts that that core EDA growth year over year from 23% to 24%. And then our assumption for 25% obviously impacts that as well. But we're delighted with the value we're providing to customers. [indiscernible] the just the sheer demand for our products right across the core EDA space. Andrew, do you want to add In terms of product portfolio, I think we are better positioned than we ever have been. If you look at analog, digital verification in terms of core EDA and design activities strong. Of course, in 2024, there are two issues like John mentioned. One is [indiscernible] also hardware had a transition year. So even though Q4 was phenomenally strong in hardware, we went through the transition in Q2 and Q3. So that's, of course, part of Core EDA. So we'll see how it proceeds going forward, but we are well positioned.

We We are doing very well with customers in all these evaluations and new design starts. So we'll see how things progress going forward.

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

Yes. Hi. Thank you for taking my question. So firstly, congrats on another fantastic quarter. Perhaps just a follow-up question on hardware. Given again the impressive backlog number and the increase in that from revenue we saw this quarter, is it fair to assume that Z3 and X3 is being adopted at a faster pace and that the mix of volume and pricing is what's driving a strong Q1 guide. And going forward, is it fair to assume acceleration also not from revenue given the closing of the AirPockets? I think a fair few investors are looking at a strong harder ramp I'm wondering if there is much of it inside that $6,800,000,000 backward number. Any color on that would be great. Thank you. [indiscernible] tremendously strong bookings quarter for hardware in Q4.

We're seeing huge demand across all of our functional verification platform. But so we were delighted with the with the progress that we've made there. We have strong backlog leading into the first quarter. So yes, I mean, you're seeing a more normal kind of shape to revenue this year for Cadence Cadence. Expect about 24% of the revenue in to come in Q1. Similarly, about 24% in Q2. Second half of the year is going to be hard or do you expect Q4 to be higher than Q3, but we'll be able to tell you more about that in the second half when see the pipeline for hardware in the middle of the year. [indiscernible] [indiscernible] Yes, hardware demand is phenomenal. And of course, Q4 strength is not based on just hardware even though it was phenomenal. Like I mentioned, IP is doing doing fabulous and overall three d IC and overall our complete EDA portfolio systems growth as you saw in Q4. Specifically on hardware, I mean, as you know, we have now both new systems, Z3 and X3. They have been in full production We gained several competitive wins in Q3 and Q4. And it's the strength of our portfolio, which is a custom chip that we make, which is in Palladium Z3 and FPGA system for for Protium.

And almost all like large designs, especially all large AI designs are using Palladium as the platform of choice. And I do expect that this trend will increase over time.

So because we are the only company that designs its own chip. To do emulation. So if you look at this, some of the biggest chips in the world are designed through palladium and we have more than 100 chips in one rack, which are liquid cooled connected optically And then you can connect 16 of these racks together So it's like more than 2,000 full reticle TSMC chips.

Are used to emulate the world's most complicated designs. And there is no other system that even comes close. So the nearest competitor to Palladium Z3 is actually Palladium Z2. And then I think going forward, this is the nature of the architecture, also the inherent advantages it has over FPGAs. And we like FPGAs, it's useful for some software workloads in Protium, but the gap between custom ASIC and FPGA is only going to increase in the future. Because even Z3 is a more advanced node than FPGA, And you can see that in other workloads too, not just in emulation. All the AI workloads, all acceleration, custom ASIC is very superior to FPGA. And going forward, that will continue. And in terms of we have at least a ten year lead in designing these custom ASICs for emulation. So hardware was phenomenal. And we expect that to continue. Now of course the actual second half, we'll have more update We have good backlog for the first half and depending on what happens the first half, we can update the rest of the year in the middle of the year. And your next question comes from the line of Jay Fleishower with Griffin Securities.

Your line is open.

Thank you. Good evening.

Under John, your backlog came in at about $500,000,000 above where we were for the quarter. So I assume that NVIDIA alone could certainly have accounted for a large portion of that, but your current RPO year over year growth progressively slowed over the course of the year from 14% year over year in Q1 117%, now 6% year over year. As of Q4. Maybe you could dissect that in terms of the composition of software versus hardware and IP And then maybe on the GEO side, what the current R growth might look like if you were to exclude China? Yes, Jay, thanks for the question. I think what you focus on there is the annual value of the backlog and Yes, I mean, we're very focused that we need to grow that annual value And I think that would be an important point for us for 2025. We're very pleased with the amount of bookings that we recorded with customers in Q4, very, very strong pipeline got converted. But we know we can do better on the annual value and we're going to work on that And ex China, of course, China is a headwind to that number.

We would expect the CRPO to improve naturally. In 2025. But I would expect backlog number to decline a little bit in the first half. We'll burn some of it in the first half just because of the timing of when renewals come up in the year. Q4 twenty twenty four was a strong renewals quarter. Q3 and Q4 are the kind of the strongest renewals quarters for 2025.

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

Hi, guys. Thanks for taking my question. John, you seem to imply that revenue will be 48%, 52% first half versus second half of the year, but you're OpEx guide or your operating margin guide seems to apply the opposite direction directional change for for non GAAP OpEx.

Normally, you would see a second half increase versus first half.

What's the dynamic there in the OpEx for the second half versus the first half?

Hey, Gary. Thanks for spotting that and giving me the we normally have a midyear merit cycle where we increase salaries in in July. We've moved that to January and started in 2025. So the profile for the year typically in the past you would have seen us improving margin Q1 to Q2 and then typically taking a drop off from Q2 to Q3. This year, we'd expect the profitability profile to improve right throughout the year with Q2 margins exceeding Q1, Q3 exceeding Q3 and Q4 exceeding Q3. We thought that was the it was better to move to an annual cycle from the start of the year, so as not to cause that kind of disruption in the quarter over quarter numbers from Q2 to Q3 going forward?

And your next question comes from the line of Harlan Sur with JPMorgan. Your line is open.

Good afternoon. Thanks for taking my question. On the full year guidance, if you drive within the upper range of the guidance for this year, your three year revenue CAGR is going to drop below 15% to be more specific more like 13.5% for the first time in a number of years.

And if I look at the environment, right, you've got AI leading edge design starts and activity, at an all time high. You're going through a strong upgrade cycle on your hardware business. I know you're taking a more conservative view on China, which I think is prudent, but up outside of China, we know auto and industrial semiconductor trends are still fairly muted. We also know a couple of your large leading edge IDM customers continue to face competitive difficulties.

So outside of China, can you guys just help us understand like where else are you taking a more cautious view on the 2025 outlook?

Yes. I think, Harlan, what you're referring to is the I mean, when you look ex China, I mean, if we exclude China, that last year we were high teen year over year growth. And what's implied in the guide is low teen year over year growth. I mean, normally, we start the year prudently anyway. And I think what you're highlighting is we believe we provide tremendous value to our customers that and it's important for our customers to extract that value from what we're providing. So they we focus on proliferation and adoption of our technology and we're confident we'll extract that value from customers over time. But essentially, that's all that's in the guidance. China is the kind of headwind. I guess, is the assumption that that's flat. But we're pleased with low teen growth across the rest of the business.

Andrew? Just to point out, yeah, one thing to point out is, of course, we are always looking at both revenue growth and profitability. So and I think we expect not only I would consider good revenue growth in 2025, but also good improvement in profitability. So if we add them together like rule of 40, I think this is the first time we are guiding more than 55 in the beginning of the year. That's right. It's very important to focus on both those things like we have done for years now.

And your next question comes from the line of C. P. Panigrahi with Mizuho.

Taking my question. Can you hear me?

Yes, yes. Okay, great.

So, Anil, you talked about some of your AI products, Sabre, CMAI and Alitu, all that. Getting traction. Help us understand how is that driving your ACV uplift right now? Are you seeing more impacts on the the which segment, right, digital design verification, any of that? And in the same context also, could you talk about I know you talk about [indiscernible] area of growth. When do you think that's going to when you're going to see that inflection point?

Yes, those are two good good question. So in terms of AI product itself, like we have mentioned in the past, we We have these five major platforms, which now at this point we are engaged with all our major customers on. Of course, the the in a few years ago, we started with digital implementation, which is Cadence Cerebras. I think at this point, we are Cadence Cerebras Cadence adopted by all our major customers.

And then verification with Vericium and then Allegro Cadence and Optimality, Virtuoso Studio, And these are all platforms which are something you have to add to your base config, So we are seeing customer adopt more and more of these of these solutions. Now in terms of your question on Edge, I always believe I said so many times in the past that AI will have multiple phases to it. Of course, the first phase was more infrastructure, more on the on the data center side. But I believe one of the biggest phases will be what we have called for a long time is physical AI, which will be more in the physical world, more edge devices, more cars and robots and drones and then also sciences AI, you know, with things like life sciences and material sciences. So it will go through these at least these three big horizons. So the good thing with the physical AI, which is more on the edge or more, if they are more power [indiscernible] [indiscernible] We already see a lot of design activity starting on that. Now some of the products may come out few years later, but just like on the data center side, we saw products in 2022 or 2023, but the design activity was there few years before that.

And especially in physical AI, they are by nature edge and also more mixed signal. In which Cadence is very well [indiscernible] So that's why I was saying, even though there is weakness right now in the auto in terms of semi revenue, but in terms of investment in R and D, there's a lot of investment in R and D with EVs and self driving Same thing with drones and robot, which is independent of humanoid robots, industrial application and aero and defense applications will be huge for those things. So I think that will drive a different kind of AI and require even more domain specific silicon for AI on those devices.

And your final question comes from the line of Joshua Tilton with Wolfe Research. Your line is open.

Hey guys, thanks for sneaking me in at the end here. I'm just going to keep it to two quick clarifications. My first one is on China.

I know there's been a lot of questions, but I guess John, I'm just trying to understand has anything changed since last quarter that's either increasing or decreasing your conviction that China won't have two down years in a row? And then on the hardware side, if I remember correctly, historically, you talked to AE10's only guide like six months of visibility.

Specifically for hardware. Are you taking a similar approach this year as you set the guidance for 2025.

Thanks, Josh. Yes. And so taking the second question first, yes, exactly the same approach. But hardware to pipeline business, we typically have a good visibility into the pipeline about two quarters out. We finished with very, very strong kind of hardware bookings quarter in Q4 and have plenty of backlog to deliver against in the first half of the year. But demand the pipeline still looks strong, but visibility into the pipeline this time of the year is more difficult. We'll have more visibility into hardware in the second half by the time we get to the summer. But so exactly the same approach that you've seen us do in previous years. [indiscernible] question on China, can you repeat it again?

Has anything changed since last quarter that's either increasing or de I was just worried about my ability to predict what China revenue would be. I mean, I was very pleased that like all through last year, Q1 was the low quarter. Q2 was higher than Q1, Q3 was higher than Q2, Q4 ended up higher than Q3 for China revenue. [indiscernible] just it's tough to have visibility into the pipeline for Q1 because quarters are only getting assigned now and the salespeople tend to keep their cards very close to their chest this time of the year. It's not in the absence of any other information that's the prudent thing would be to derisk the guide and assume flat. For China. And then as if our experience is better than that, we'll take the guide up through the year.

And I will now turn the call back to Anurud Devkin for closing remarks.

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And ladies and gentlemen, thank you for participating in today's Cadence Fourth Quarter and Fiscal Year twenty twenty four Earnings Conference Call. This concludes today's call and you may now disconnect.