Silvaco Group, Inc. (SVCO) Earnings Call Transcript & Summary

Thank you. Good afternoon and welcome to the second quarter fiscal year 2026 conference call. All participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please note this event is being recorded. I would now like to turn the conference over to Chris Ziccarelli, Silvaco's CFO. Please proceed.

Thank you. Joining me on the call today is Wally Rines, Silvaco's CEO and Director. As a reminder, a press release highlighting the company's results, along with supplemental financial results, are available on the company's IR site at investors.silvaco.com. An archived replay of the call will be available on this website for a limited time after the call. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. It is important to also note that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements STATEMENTS CONTAINED IN TODAY'S PRESS RELEASE AND ON THIS CONFERENCE CALL. THE RISK FACTORS SECTION IN SILVACO'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED 12-31-2025 AND THE MOST RECENT QUARTERLY REPORT ON FORM 10-Q PROVIDE DESCRIPTIONS OF THESE RISKS. WITH THAT, I'D LIKE TO TURN THE CALL OVER TO OUR CEO, WALLY RINES. WALLY? WELL, THANK YOU,.

Good afternoon and welcome. We appreciate your joining us on today's call. I'm pleased to report that in the second quarter, we made solid progress on our strategic transformation, highlighted by multiple new partnerships, strong year-over-year growth across all product areas, and the company's return to non-GAAP operating profitability. for the first time in almost two years. For those of you who may be new or still coming up to speed on our story, to begin with a brief high-level summary of our ongoing strategic transformation. Over the last year, we've made significant progress on our plan to streamline operations, reduce costs, and focus on strategic growth drivers. Our objective is clear. Drive to profitability and position the company for sustainable, profitable growth. Looking at Q2 results through this lens of transformation, we see meaningful progress. We delivered another sequential quarter of non-GAAP operating expense reductions. We saw our first non-GAAP operating profit since late 2024, almost two years ago. We also delivered 48% revenue growth year over year and saw record bookings in revenue in our IP products. We also announced multiple strategic partnerships that fundamentally strengthen our position in the emerging market of AI-enabled manufacturing and process development. Partnering with NVIDIA on GPU enablement and with Dassault Systems on multi-physics and deepening our partnership with Micron highlights the value of our strategic focus on AI manufacturing. And now I'd like to talk about the three transformational partnerships. All three focus on Silvaco's leading multi-physics portfolio and give us more paths to market, more exposure to leading-edge AI assets, and broader reach as part of a more complete solution for our customers. The first strategic partnership is a collaboration with NVIDIA. As was announced by NVIDIA at the Design Automation Conference, we've collaborated to integrate NVIDIA accelerated computing and AI with our physics-based simulation portfolio to enable next-generation digital twins. With this partnership, Silvaco is combining decades of physics-based modeling expertise with NVIDIA's accelerated computing, CUDAx platform, and AI frameworks. Our combined technologies are expected to help customers reduce simulation cycles from weeks to days, improve accuracy and insight and to scale engineering and collaboration. We're excited about what this partnership means for our customers and for the industry as a whole. Now the second strategic partnership is with ESSO Systems Simulia. develop interoperable workflows. This partnership is focused on developing connected workflows that help semiconductor manufacturers achieve first-time right process development, accelerate their yield ramps, and make better manufacturing decisions before committing costly fab resources. Collaboration brings together complementary simulation technologies spanning reactor-scale plasma simulation, feature-scale semiconductor process modeling, and structural stress analysis. By connecting these domains through integrated workflows, we aim to help semiconductor companies better understand how equipment conditions influence wafer-level outcomes enabling more informed engineering decisions. By improving interoperability, customers can identify potential issues earlier in development and make decisions with greater confidence. The third strategic partnership builds upon our longstanding relationship with Micron. We announced today that Micron is investing $10 million in a Silvaco convertible note. More importantly, the two companies aligned on deeper strategic collaboration to continue building out the disruptive FTCO or FAB technology co-optimization foundation that Micron and Silvaco had built together. Micron was early to see the potential of combining AI with physics-based simulation to create a truly virtual platform to accelerate time to market. to take a moment to thank our friends and partners at Micron. Of these three partnerships, lay the foundation for accelerated growth. I mean, our strong pipeline into Q4, and with these new partnerships in place, We now expect to see record revenue in Q4 and to deliver double-digit revenue growth in 2027. Moving forward, we expect to continue benefiting from three significant growth drivers. First, FTCO. Silvaco has a strong foundation in multi-physics. Our investments in AI have created a disruptive FTCO workflow that broadens our user base well beyond traditional TCAD engineers and unlocks unique value propositions and use cases for our customers. The partnerships announced today reflect broad recognition of that differentiation and potential, and we remain focused on driving our advantage here in delivering above-average market growth in this area. We see outsized growth potential for this business driven by broadening the user base, adding AI functionality, and integrating more assets from across Silvaco to deliver a truly unique and disruptive platform. The second growth driver is IT. With the market leading assets acquired with Mixel, we see IT emerging as a solid growth driver. We delivered record IP bookings and revenue in Q2 and continue to see potential for this business to double year-on-year in 2026. This business grew revenue 238% year-on-year in second quarter. The market for our IP is vast at more than $1 billion. In this context, our expected $20 million of IP revenue in 2026 is just a drop in the bucket. We've also seen the most growth in our pipeline in the IP space, with the pipeline up more than 4x over the last year. Our focus on efficiency, AI integration, and redoubling sales efforts has a lot of room to run. We look forward to seeing our IT team continue to build a solid book of business with some of the largest players in the industry. Now the third growth driver is AI. Our view is that AI is a clear positive for Silvaco. We see significant increases in our capacity to innovate with our existing resources as we invest in usage of AI tools for internal development. For example, we've seen some forms of prototyping accelerating up to 30x. code analysis up to 11x, scripting about 10x, and debugging up to 5x. We expect these innovations to accelerate our roadmap, accelerate time to market, and position us to deliver profitable growth. On the product side, we continue to develop AI-focused products, including our FTCO workflow, integrating AI into existing products, adding agetic offerings, and using AI agents to further improve our customers' productivity. These innovations include an AI-enhanced version of our product called Utmost that reduces time to model by up to 50%. In our IT business, we're developing disruptive tools with AI that will accelerate the cadence and quality of our offerings. At EDA, three of the five largest chip companies turned to Silvaco for netlist reduction. With Javaro Pro, we can reduce terabyte netlist to gigabytes and reduce simulation times by an average of 6x. In conclusion, our strategic transformation is progressing well, and our roadmap and partnerships set a solid foundation for growth. I'd now like to turn the call over to Chris, who will discuss our financial results and outlook in more detail.

Chris? Thanks Wally. Good afternoon everyone. In Q2 we delivered $16.2 million in bookings and $17.8 million in revenue. Bookings grew 25% year over year and revenue grew 48% year over year. saw solid revenue growth across all product areas, but most notably in IP, where we delivered record bookings in revenue. IP revenue grew 238% year over year in Q2. On the TCAD side, during the quarter, we want another new FTCO customer. Looking forward, we continue to see strong interest in FTCO and expect to secure more FTCO customers through year end. FROM A GEOGRAPHIC PERSPECTIVE, WE SAW THE MOST GROWTH IN Q2 REVENUE FROM THE IMMEA REGION, WHICH GREW 30% SEQUENTIALLY AND ACCOUNTED FOR 10% OF TOTAL REVENUE IN THE QUARTER. THE The Americas remains our largest region, representing 46% of revenue in the quarter. Our revenue in the Americas has grown 30% over the last two quarters. Looking down the P&L, gap gross margin in Q2 was 85.2% and non-gap gross margin was 86.8%. Gap and non-gap gross margin sequentially decreased by 124 and 111 basis points respectively, which was driven by mix. GAP AND NON-GAP GROSS MARGIN ARE UP OVER 14 FULL PERCENTAGE POINTS AND 12 FULL PERCENTAGE POINTS YEAR OVER YEAR RESPECTIVELY. Both GAAP and non-GAAP gross margins have benefited from our restructuring activities. believe growth margins will remain in the range of mid to upper 80s going forward. Operating expenses for the quarter reflect our commitment to focused and disciplined spending. As of the end of Q2, we have successfully executed on our targeted $20 million in annualized spending reductions. quarter gap operating expenses were down 8.7 percent sequentially to 19.2 million non-gap operating expenses were down 7.8 percent sequentially to 14.8 million below the midpoint of the guided range from a total cost perspective which combines operating expenses and cost of sales Gap total cost declined 6.9% sequentially, and non-gap total cost declined 5.8% sequentially. Q2 results are the first time since the IPO when total non-gap spending declined in three consecutive quarters. Gap operating loss improved quarter over quarter to a $4 million loss. Non-gap operating profit was $635,000, well ahead of Q1 and ahead of prior expectations. This is the first quarter since late 2024 when the company delivered a non-gap operating profit. Gap net loss in the quarter was $3.7 million and gap EPS was an 11 cent loss. Non-gap net income in the quarter was $315,000 and a non-gap EPS of one cent. Next, turning to the balance sheet and cash flow. Cash and cash equivalents at quarter end was $13 million, up almost 20% sequentially. Q2 marks the second consecutive quarter of growth in unrestricted cash since the IPO. Cash balance at the end of the quarter did not include the $10 million from the micron convertible note, which closed in Q3. Net cash used in operating activities in Q2 was $5.5 million, half of the 11 million used in Q1. Please note that this $5.5 million included approximately 1.8 million in one-time items, including severance-related payments. Net of these items, net cash used in operating cash flow would have been $3.5 million. $3.7 million in Q2. We continue to expect positive operating cash flow later in the year. Now, turning to guidance for Q3 2026, we expect bookings of $18 million plus or minus 10% Revenue of $17 million, plus or minus 10%. Non-GAAP gross margin around 88%. Non-GAAP operating expenses of 14.5 million, plus or minus 5%. Looking forward, we see a very strong pipeline for the fourth quarter. While Q3 has tended to be seasonally soft for TCAD, we have historically seen strong TCAD growth in Q4. The strong pipeline, combined with a history of Q4 strength, supports our expectation of record revenue and continuing operating profitability in Q3. As a result, we also expect full year 2026 revenue to be above $70 million. Waking into 2027, we expect double-digit revenue growth, as well as non-GAAP operating profitability and positive cash flow from operations. In closing, we continue to see strong progress on our strategic transformation. We've seen our first non-GAAP operating profit since late 2024. We delivered record bookings in revenue and IP and announced multiple strategic partnerships that fundamentally strengthen our position in AI manufacturing. We also continue to improve customer productivity by leveraging AI. Wale and I want to thank the team for delivering these milestones. We look forward to continuing to deliver on our commitment to profitable growth. With that, operator, we will now take questions.

Thank you. At this time we will conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Krish Sankar of TD Cowan. Your line is now open.

Hi, thanks for taking my question. And Wally and Chris, congrats on getting NVIDIA as a customer and a Micron investment. Wally, my first question is, I remember when you took over in November last year, you kind of said that SPCO alone can drive after revenues of the company. Micron has been a customer for a while for SEC and now you have NVIDIA. wondering, are these two enough? Because Micron has been around for a while, but doesn't scale up as much as I would have thought. And now with Nvidia, do you think that that statement is true? And if so, what kind of time frame where you think a PCO can really be meaningful for the company revenues? And then add a follow up.

So the FDCO is a longer-term strategic growth that grows incrementally every quarter as we announce new customers. The existing customers will, of course, grow, but it's new customers that spur the increased growth. And then once adoption begins in a company, then it spreads to more and more applications. applications in the manufacturing processes now the short-term driver for rapid growth is ip as you saw in our numbers while we had strong eda growth as well ip has had a remarkable growth in its backlog and as was highlighted 4x pipeline growth in the last year so what you should expect is overall a slow, steady growth of the FTCO-driven TCAD part of the business, which we expect will accelerate over time as more and more users join in and the existing users expand the use across more and more of their manufacturing processes.

and design processes. Got it. Very helpful. And then the other one is, you know, obviously you delivered on your up the promise that you said you're going to turn. And that's kind of good to see. I was going to say that when I look at it, like the revenue and bookings numbers, both of June and September are like a touch below what I thought it would have been. And I think Chris mentioned Q4 can be a big quarter. I'm just trying to understand how big country for B and when you mean double digits next year are we.

talking about low-team kind of a growth or mid-team kind of a growth, any color number would be helpful. Thank you. Well, sorry, I'll let Chris amplify, but basically because of our approach to revenue recognition, there is lumpiness quarter by quarter. As Chris highlighted, fourth quarters tend to be strong renewal quarters and that are tend to be the strongest quarter of the year, but the overall growth in any one quarter is not indicative of the longer-term growth. Chris?.

That's fair, Wally. Thanks. And good question. I would just point out, I mean, we just hit a record on LTM revenue for the last 12 months, revenue about $72.5 million. If you look back, you know, our record revenue quarter was last year at about $18.7. So when we say we see confidence and hitting record revenue in Q4. It's obviously in excess of that. And, you know, those statements come from multiple sources. First, you know, the pipeline looks really strong, very healthy and broad going into Q4. So we're really encouraged by that. And Yes, that's sorry. That's one of the big drivers of it as well. And the partnerships that we talked about on the call that Wally mentioned are also going to contribute to that growth in Q4 as well as the Forex growth and IP pipeline also. Looking at next year when we say double-digit growth, I mean, we have to be careful. We haven't given more color on that, but you can expect, obviously, at least 10% growth or a little more. We said we'll be over $70 million in revenue in 26, so plus 10% gets you closer to, you know, high 70s or 80 on the year in 2027. You know, as we progress, we'll give more color on that. And the pipeline strength gives us confidence there. And the pipeline growth also gives us confidence on record revenue in Q4. And I would also observe that does come with profitability as well. We did drive operating expenses on the non-GAAP side down to about 14.8 in Q2, going to about 14 and a half in Q3. So as we keep tight control on operating expenses, that kind of sequential growth in Q4 should come with some nice leverage. Thanks, Chris. Thanks. Thanks.

Thank you. Our next question comes from the line of Charles Shee of Needham & Company. Your line is now open.

Hi, thanks for taking my question. Forgive me for any background noise. I'm at a conference right now. So, Chris, maybe let me just clarify. So you guided the September revenue seven, I think 17.8 right and the December has to be higher than 18.7 and I think at least relative to what I have modeled the two quarter combined the outlook hasn't really changed it's probably just a few uh you know uh a few thousand bucks shifting around that here and there and uh you Is that the message you're trying to convey, your answer to your last question?.

No, it's fair. We printed 17.8 million with Q2, guided to 17 in Q3 with a record in Q4. So yes, if you take a step back and look at what consensus was going into this call, yes, Q3 a little bit below consensus, Q4 would be above. Put them together. I think you're right. I think the message is longer range visibility, continued growth, record LTM revenue here in Q2. All of these things pointing to what Wally was talking about on the IP side with four times pipeline growth record revenue there in the quarter, seeing a half to about 20% increase in the next quarter. million in revenue there in 26 and then kind of growing from there in 27 and I think another point to make is all three partnerships we talked about today are all really focused on the AI manufacturing side so the FTCO message does resonate broadly you're seeing some pretty big names coming in to engage on what is going to be a big opportunity. So to Wally's point, it's going to be a steady growth on that front. We haven't really hit that inflection in the S curve, if you will, in FTCO, but these kind of leading indicators of large companies recognizing it and stepping in and participating in the ecosystem, I think is a good sign of.

momentum still to come. But Wally, did you want to give any more color on that? WALLY BRILLIANTONI No, I think you covered it fine. And I think Charles has it well. It's steady as you go, but it's a very positive outlook. The long term, much greater growth comes from FTCO, but in the short term, The IP business is surprisingly healthy. It surprised even us with the strength of customer interest in the products we have and the good execution we've had in improving our efficiency of developing and supporting that IP.

Yes, thanks. Maybe Wally, a second question for you. I want to zoom out a little bit on the topic of AI. I didn't go to DAC. I saw you were there at the time of the NVIDIA announcement. But I think in general, especially for LLM, I I know AI has like a reinforcement learning, all those classic AI stuff going on. But LLM wise, people are in general, among the investment community, are pretty worried about the disruption risk for the overall EVA industry, but I think specifically for you guys, Are you worried about that? Do you think our M maybe could be applied somewhere in a part of the the workflow that the Silvaco tools are participating in. And especially for TCAT, do you see opportunity where LLM can be applied, not just reinforcement learning? Yes. Yes, as was brought out at DAC, all the indicators are that for a company like Silvaco,.

AI is a net positive and a significant one at that. TCAD's a fairly mature business, been around for many years. Silvaco's been in it for 40 years, and so it needs its next growth spurt. And just in time, AI has come along with the ability to generate digital twins or surrogate models. requires a lot more simulation to generate synthetic data. The announcement that NVIDIA made at the Design Automation Conference was indicative of how companies like NVIDIA are helping us to take that capability to customers. They add yet another platform where we can, in fact, host our physics-based models. In the NVIDIA announcement, they pointed out that they can provide the compute and the infrastructure, but what they lack are the physics-based models that generate the synthetic data. That's what Silvaco has been developing and using for the last 40 years. We have a wealth of those models, a wealth of customer experience with applying those models. And so adding an additional platform is great. Working with a company like NVIDIA and taking advantage of their increased compute capability with the CUDAx libraries, we can generate a lot of money. a lot more data a lot faster and then host it both on our own platforms as well as their physics nemo platform and i think it's going to be a major plus for us and you might say well okay it's plus in ftco and in tcad but what about the ip business and the reality we're seeing is that it's a help for us too. The productivity gains have been enormous. Our ability to develop and support IT is accelerating. The fear that AI will do away with the need for the electronic design automation industry was refuted quite well at the Design Automation Conference. And for one reason, a large share of our IP requires qualification for standards, automotive standards and other networking standards. And so individual designers can't short circuit that. They have to buy their IP from third parties. And we are a third party that has a portfolio and that portfolio is growing as is the customer base.

Thanks, Wally. And maybe last question. The announcement of NVIDIA partnership, obviously we don't really understand what exactly is required from your cost side or investment side from that perspective. But using GPU accelerated computing to, you know, to do that. to enable some of the traditional chip design workflows. In many cases, I would imagine probably require you to invest in GPU infrastructure, or maybe you do not have to. But any additional CapEx is going to be required to enable all the work covered by that platform.

Thank you. Yes. Well, we've been increasing our capex to support the amount of GPU capacity. And so the long-term roadmap, that will continue to grow. But it's not a big disruption. Chris can cover the basics. growth rate, but I think the connection with NVIDIA gives us an opportunity for cooperative development. It allows us to generate much more data. And really, FTCO is enabled only by the ability to generate a large amount of data in these digital twins or surrogate models. And if you do it all with traditional computing, it's much slower. If you do it with GPUs, it can be accelerated dramatically. It's been demonstrated that certainly up to 10x in specific cases. And the faster you can generate that data, the more digital twin models that will be available, better customers can then use those models to do rapid queries to ask simple process questions where the model, instead of doing a 10-hour simulation, now gives you an instantaneous answer. That's the goal. That's the early result that's been achieved by our leading customers, and we expect that will spread across the industry.

industry. And just to add to that, Wally, I think that's exactly right. So while operating expenses have come down quite meaningly from Q3, where it peaked last year to what we just reported for Q2, with OPEX at 14.8, even within that time, we have been investing incrementally in things like AI tools that we referenced earlier in the and seeing some pretty dramatic impacts on the development side. We've also been investing in things like GPU hardware to set up that infrastructure. We do plan to continue to invest in that. And I would just point out, you know, we turned profitable here in Q2 from a non-GAAP operating income perspective that continues in Q3 based on the guides. you know, record revenue in Q4 means it continues again in Q4 and guided to it again for the full year of 27. So the business has definitely turned the corner on profitability. Positive cash flow follows. So we have been investing, you know, targeted amounts in things like AI tools and infrastructure. Expect us to continue to do that to fully. engage on this NVIDIA partnership for one, and it's just that balance of prioritized investments and ensuring we deliver the right results for investors while investing in the right assets to accelerate growth for the medium and longer term. Thank you, Wally and Chris. That's all from me.