Silvaco Group Stock

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.

Thank you, Charles. Thank you. Our next question comes from the line of Craig Ellis of B-Relay Securities. Your line is now open.

Hello, yes, this is Rebecca Zamski on for Craig Ellis. My first question for you is on TCAD. How are you, like, could you provide some color in how you're looking at, like, the the trajectory in 3Q and 4Q and heading into 2027?.

Well, sure. The adoption continues at a steady rate, and our number of actual engagements continues to increase. The companies that we engage in cover a wide range of industries, but as has been noted, we are dealing with mainstream companies. semiconductor companies. While we started with Micron and spent almost five years working with them to work out the kinks and get a smooth process going, we're now in a position where we can take this capability to a much broader base of customers. It's been about one new announcement per quarter. We would expect that to accelerate some in coming quarters. And then the thing to dig into at that time will be, how quickly does the increase in license usage occur? So beyond services that might be part of the early part of an engagement, how many additional licenses are required to generate the data to build the models? And I think the answer is the more people use it, the more data they will need, the more licenses they will need. And it's something that while it starts with a single feasibility demonstration, it then quickly proceeds to additional types of process steps, additional simulation, And as we mentioned, it's not just LLMs, it's agentic AI.

That is the ability for agents to go in and query our models and come up with answers to basic questions, in many cases in natural language. that answer the analysis of optimum process capabilities and optimum parameter settings to achieve the best process and the best manufacturing yield.

Thank you. That was super helpful. And for, I believe you mentioned you're expecting double-digit growth in 4Q. What would be driving that growth? Like, would it be EDA, TCAD, IP, like, what?.

What do you see driving most of that growth? Well, I'll let Chris amplify, but it's pretty much across the business. And the reason that fourth quarters are strong is a disproportionate share of customers renew their contracts at that time. Our contracts are typically multi-year, and they tend to coincide with the calendar. when people, as they come to the end of the year, they now are putting their plans together. They know their needs for the coming year. And so historically, it's been a stronger quarter than the others and we don't see any reason for that to change.

And just to add to that, Wally, I mean, we do see some good growth even in 2026. TCAP, for one, is growing nicely year over year. Our IP business is delivering really strong growth. It looks like it's going to double or a little bit more year over year in 2026. And so Wally's right, the strength in Q4 is really across those main drivers. and those trends do continue into 27 as well. I'll just reiterate the pipeline, very strong for Q4 supporting that strong outlook. And also as we've dug into seasonality, there is indications that Q4 tends to be strong, particularly on the TCAT side.

So we expect that trend to be no different going into Q4 of this year as well. Thank you.

Thank you. Our next question comes from the line of Blair Abernethy of Frozen Blood Securities. Your line is now open.

Hi, thanks guys. A couple of questions. And I apologize, I missed the first part of your call, but I just wanted to dig into a couple of things on the announcements here. So the FTCO win that you had this quarter, did you indicate, was there revenue associated with that in Q2, or is there a ramp period to that?.

to revenue? There was some revenue associated with it. We expect that over time, of course, as the implementation continues, there can be more revenue, but this was this is more traditional one where there was upfront license revenue.

Okay, great. And Wally, did you give a sort of what... you know, what end market this went into? This one was more traditional semiconductor manufacturing. Okay, okay. Okay, and then as you look at your pipeline, good growth in the pipeline operations, opportunities to how should we think about that about 292 million split between you know TCAT, EDA, and IP, which this quarter obviously IP continued to do well. Does it reflect that or is it weighted to more.

towards, say, the TCAT side? The pipeline growth that we talked about is driven predominantly by the IP business. It's just really taken off. It's... much healthier than even we anticipated. And as Chris indicated, we're looking at more than doubling IP growth year to year. So once again, IP, short-term driver of very significant growth, TCAD and FTCO, the long-term driver of major transformation of the company.

Okay. Okay. And just a little more color. Absolutely right. The strongest sequential, the strongest growth over the last year in the pipeline for sure has been IP on a percentage basis. But the TCAD and FTC pipeline does remain strong as well. I just say those are the two strongest pieces of it. Both have grown nicely. IP just on a percentage basis has.

grown more. Okay. Okay. And then the EDA segment, which I know we've talked in the past about how you're looking at focusing investments on the growing areas. Overall, should we look at EDA as keeping out the company growth rate going forward or is it going to be what you're looking at? you know, shrink relative to the TCAT and SIP percentages? Well, we haven't forecast that. I think we came through a transition as part of the overall transformation that Chris talked about, where we focused our EDA business in a smaller number of products where we have high leverage. And we mentioned a a couple of those, Javaro's a particularly outstanding start. So we'll see growth in specific products, but we'll also see growth in solutions that are tied to our other two businesses. We have, in most cases, both the FTCO and the IP business provide opportunities for combinations of selling the EDA products along with the TCAD and IP solutions. And so as far as the long-term growth outlook for EDA, it's less of a major driver than the other two, but it still offers the potential for ongoing growth.

Okay, that's great. And I apologize if you covered this in your prepared remarks, but the SO-Semulya partnership, what does that involve from a standpoint of what does Silvaco have to do? And I'm somewhat familiar with the SOES simulation portfolio, but I guess what exactly, how are you guys going to leverage their obviously a much, much bigger your installed base. Yes, so they provide a real resource for us for us in terms of taking us to a lot of customers we haven't traditionally been in. But the partnership is to develop interoperable digital twin workflows for semiconductor manufacturing. And it turns out that we have somewhat complementary simulation technologies. The real objective is for manufacturing operations to understand how their equipment conditions influence wafer level outcomes. And that requires very broad simulation if you cover all the aspects of manufacturing. You need to do detailed structural analysis that goes beyond just the manufacturing process, but the end result in terms of stress and deformation and manufacturability.

And by working together with SO and comparing what we have and what they have, it became clear that we were stronger together than separately and we get the benefit of Dassault being a much larger company has many engagements that we don't have and it brings a lot of strength and we really don't give up anything as a result of this so it's it's a very positive relationship Okay, great. And then just, Chris, if I could, just two quick ones for you. When you use the term record revenues in Q4, are you referring to the highest Q4 ever or the highest quarter ever? Yes. The highest quarter ever. Okay, okay, great. And then just the, you know, The Micron convertible note, I'm assuming, is that, when did that close?.

Oh, that closed history in third quarter. Oh, sorry. Go ahead, Chris. No, no. Well, you got exactly right. It closed in Q3 before the call after the end of the quarter, so pretty recently.

Okay. Okay. But I should note, this is much more than just an investment by Micron in the company. This involves an affirmation and roadmap for going on with further developments, taking advantage of the impact that we've been able to provide with the FTCO technology, which was developed. cooperatively with Micron and reaffirming our future direction in enhancing that and adding new capabilities. Okay, great. Excellent. Thanks very much, guys. Appreciate it.

Thank you, Blair. Thank you. Thank you. Our next question comes from the line of Christian Schwab of Craig Holland. Your line is now open.

Great. My only question is a follow-up, Wally, on the Micron issue. investment, it's, you know, seemingly discuss it for a second there for further development to add new capabilities, but is that how that deal came together? Can you give us the details of, of, of how the Micron, uh, note investment, you know, came together? Was it to, to give you the capital to make future investments and create new capabilities that they wanted, or is there other details you could share? Well, absolutely. This was driven by strategic, strategic, uh, uh,.

leverage or commonality of interests and so it was the strategic group within the company that wanted to continue to grow and cement our relationship. From our point of view, Micron is a much more attractive source of funding than simply borrowing from disinterested parties. You're working with a partner, the partner invests in you and then part of it as highlighted in the quotes that micron provided is to help them develop their next generation processes and the dr. Gertrude Sandu I is in charge of that long-range process development and he has worked out a road and he's given a number of public speeches. He's also featured on our site describing what is unique about what Silvaco provides, what is the future of process development, how do we move from what has been a TCAD-only capability in the past the past and the use of numerous physical wafers to verify processes to the future, which will be done more and more virtually simply because pilot wafers are not going to be feasible. The processes are too complex. You can't look at that many variables. You can't handle the long cycle times.

It has to go virtual. Micron has been a leader in defining the path, and we've been very proud to work with them to demonstrate that, in fact, it does work, and it will be an engine of growth for the future. Great. Thanks for the clarity. No other questions. Thanks, Christian.

Thank you. I am showing no further questions at this time. I'd like to thank you all for your participation in today's conference. This does conclude the program, and you may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good afternoon, and welcome to Silvaco's First Quarter Fiscal Year 2026 Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Chris Zegarelli, Silvaco's CFO. Please proceed.

Thank you. Joining me on the call today is Wally Rhines, 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 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, provides descriptions of these risks.

With that, I'd like to turn the call over to our CEO, Wally Rhines. Wally?

Good afternoon. I appreciate you joining us today. I am very pleased with our results in Q1. Momentum continues to build on multiple fronts. Financially, we delivered solid Q1 results and issued compelling guidance for Q2. In Q1, we saw bookings, revenue, and gross margin all above the midpoint of the guided range, which cut our non-GAAP operating loss in half sequentially. We delivered 26% year-over-year revenue growth.

Our Q2 guidance confirms that we expect to reach an important milestone in the quarter, that is delivering non-GAAP operating profitability for the first time since Q4 of 2024. From a cash perspective, Q1 was the first sequential growth in unrestricted cash on the balance sheet since the IPO in May of 2024. Our focus on financial discipline and predictability is delivering tangible results. Our team has rallied around this cause and is delivering solid results and important milestones.

I want to start with more good news on the AI front. For the second quarter in a row, we secured a new FTCO AI-driven manufacturing customer engagement in Q1. We're in discussions with several more companies and expect one of them to close in Q2. We also received an order from an existing FTCO customer for new functionality. Momentum continues to build for our AI-driven manufacturing strategy, both in terms of new as well as existing customers. While market adoption of FTCO is still in the early stages, these are signs that momentum is building, and the market is responding very positively to what AI manufacturing development can unlock for our customers.

Before providing more details on results, I want to give you an update on the company's strategic pivot on which Chris and I have been focused since joining the company. Our guiding principles have centered on playing to Silvaco's strengths, leveraging AI, targeting markets where we can build a top franchise, customer obsession, and financial discipline.

Leveraging Silvaco's strengths means extending our lead in target markets and deepening the moat around core technologies. That means delivering differentiated AI-driven solutions for power, memory, foundry, and display segments. In power, we have unique advantages, particularly for wide band gap semiconductor process and product development. For memory, our partnership with Micron is an example of how we can deliver real value to the biggest and best companies in the industry. In technology, we will widen our lead in core areas, including multiphysics simulation, which was critical to the introduction of FTCO.

AI is a crucial element of our strategic shift. We've deployed AI internally and are already seeing phenomenal results. We've seen up to 6x acceleration in graphical user interface development, up to 10x acceleration in new feature design and accelerated verification testing of IP. We've also built AI directly into more of our solutions. The best example is clearly AI-driven manufacturing or FTCO. Virtualized process development is turning into a must-have feature across the semiconductor industry. Other examples include building better mathematical optimizers and simulators and rolling out AI assistant, which increase ease of use. Deploying AI in our EDA tools means customers get to SPICE models quicker, design optimized layouts faster and optimize power, performance, and area in everything they design. Our AI-first approach to road map acceleration means that we are all in on developing optimized solutions that meet the needs of customers.

We also remain relentless about financial discipline. With our $20 million cost reduction initiative largely behind us, we're now building discipline into the culture of the company. We think in terms of efficient process, streamlined structure, and cost optimization. Taken together, we believe that these strategic priorities position us well to grow the top line faster than peers and to grow profitability faster than revenue. I look forward to reporting updates on these strategic initiatives in the quarters ahead.

But now let's turn back to quarterly results. We continue to see significant strength in TCAD. In Q1, TCAD bookings grew 13% sequentially and 49% year-over-year to $10.5 million. Revenue grew 10% sequentially and 22% year-over-year to $9.6 million. Growth in the quarter was driven by significant milestones for FTCO, including securing a new customer and broadening the product line to include additional functionality. Looking forward, we see solid momentum for FTCO. We see strong potential from engagements with governments, power applications, and semiconductor equipment companies.

On the government side, we inherited engagements in Photonics from our Tech-X acquisition. We have real opportunities to leverage the broader Silvaco portfolio for meaningful future engagements. With equipment companies and power applications, we see growing interest in FTCO and digital twin modeling that we expect to generate compelling growth opportunities going forward. We see these trends, AI-driven FTCO, government engagements and power and equipment companies as drivers that will drive growth for quarters and years to come.

After a strong Q4, we saw our semiconductor IP product line pause in Q1. Semiconductor IP delivered bookings of $3 million in the quarter, down 41% sequentially, but up more than 200% year-over-year. IP revenue was $4 million, down 21% sequentially, but up 270% year-over-year. Sequential softness in IP was driven by timing of new customer wins. We had a few key designs push out by roughly 1 quarter. Year-over-year trends in IP reinforce the fact that this business has reached a new baseline with the integration of Mixel's industry-leading MIPI PHY IP. Our IP sales pipeline continues to grow, particularly for our automotive soft IP and for Mixel PRO, our production-ready set of products that were introduced in the first quarter. Our IP pipeline has roughly doubled over the past year. These leading indicators support our view that we expect to deliver steady growth in IP through the rest of the year. We expect IP to grow sequentially into Q2 and to be our strongest grower this year.

Turning to EDA. We saw a decline in Q1 bookings and revenue. Q1 bookings came in at $3.8 million with revenue of $4.1 million. Here, we continue to focus on shifting priority to a handful of core products that we believe can deliver significant growth. We talked last time about potential for Jivaro as one of those core offerings. Another focus area is Utmost, which is a database-driven platform for device characterization and SPICE model extraction. We just released an AI-driven version of Utmost, which now delivers up to 10x performance improvements, a machine learning optimizer and other runtime enhancements. This is another example of how the team is building next-generation AI-driven solutions. Jivaro and Utmost are just two of the core EDA products that are positioned for growth as we focus development, sales, and field application resources on these drivers.

We expect stability in this area of the business in the short term and then a return to growth as these new priorities deliver results. While I'm proud of the progress we've made in a short amount of time, I also recognize the task before us. We've made great strides in stabilizing the business, enhancing liquidity, and streamlining operations and focusing strategically on the core products that we expect will deliver accelerated growth and profitability. We all look forward to driving our semiconductor IP business to new heights, getting EDA back to growth, and seeding the momentum we see in FTCO. We all continue to believe that the best is yet to come. I look forward to seeing how far we go in the coming quarters.

I'd now like to turn the call over to Chris, who will discuss our financial results and our outlook in more detail. Chris?

Thanks, Wally. Good afternoon, everyone. In Q1, we delivered $17.2 million in bookings and $17.8 million in revenue, both above consensus and above the midpoint of our guided range. Bookings and revenue both grew 26% year-over-year. Strength in the quarter came from TCAD. We won another new FTCO customer in the quarter and partnered with an existing FTCO customer to add new functionality to their deployment. Looking forward, we see strong interest in FTCO and expect to close one more new FTCO customer in Q2.

From a geographic perspective, we saw the most growth in Q1 from the Americas region, which grew 24% sequentially and accounted for 44% of total revenue in the quarter. Looking down the P&L, GAAP gross margin in Q1 was 86.4% and non-GAAP gross margin was 87.9%. GAAP and non-GAAP gross margin sequentially increased by 305 and 235 basis points, respectively, and came in ahead of guidance and consensus. GAAP and non-GAAP gross margin also increased 779 basis points and 788 basis points year-over-year, respectively. Both GAAP and non-GAAP gross margins have benefited from our restructuring activities. We believe gross margins will remain in this range of mid- to upper 80s going forward.

GAAP operating expenses were down 4.5% sequentially to $21 million. Non-GAAP operating expenses were down 3.6% sequentially to $16.1 million, above the midpoint of the guided range. From a total cost perspective, which combines operating expenses and cost of sales, GAAP total costs declined 6.5% sequentially and non-GAAP total costs declined 5.6% sequentially. Q1 results are the first time since the IPO when total non-GAAP spending declined in 2 consecutive quarters. Our guidance into Q2 indicates that spending is expected to continue declining sequentially.

GAAP operating loss improved quarter-over-quarter to a $5.7 million loss. Non-GAAP operating loss was $471,000, well ahead of Q4 and ahead of expectations. GAAP net loss in the quarter was $5.9 million, and GAAP EPS was a $0.19 loss. Non-GAAP net loss in the quarter was $574,000 and non-GAAP EPS, a $0.02 loss.

Next, turning to the balance sheet and cash flow. Cash and cash equivalents at quarter end was $10.9 million. As of Q1, we no longer have restricted cash on the balance sheet. Recall, cash, cash equivalents and marketable securities at the end of 2025 was $18.3 million, which included $8.3 million of restricted cash. Therefore, unrestricted cash at year-end was $10 million. Unrestricted cash grew almost 10% sequentially in Q1, the first-time unrestricted cash grew sequentially since the IPO. Net cash used in operating activities in Q1 was $11 million, up from $9.5 million in Q4. Please note that this $11 million included the $8.3 million final litigation settlement payment as well as $1 million in severance payments. Net of litigation and severance, net cash used in operating cash flow would have been $1.7 million in Q1. Adjusting for these same two factors, litigation and severance, Q4 net cash used in operations would have been $7.4 million. The improvement from $7.4 million to $1.7 million speaks to the meaningful improvement in our underlying economics. The improvement also supports our view that we will see positive operating cash flow by Q3.

During the quarter, we also signed a nonbinding term sheet with our banking partner for a $10 million revolving line of credit. We expect to close on this facility during Q2.

Now turning to guidance. For Q2 2026, we expect bookings of $19 million plus or minus 10%, revenue of $18 million plus or minus 10% non-GAAP gross margin around 88%, non-GAAP operating expenses of $15.5 million plus or minus 5%.

In closing, the team delivered on several milestones in the quarter. We secured a second AI FTCO customer in as many quarters. We delivered growth in unrestricted cash for the first time since the IPO. We delivered 2 sequential quarters of spending reduction for the first time since the IPO. We see gross margins at highs and see non-GAAP operating profitability coming in Q2. Wally and I want to thank the team for delivering these strong results. We look forward to continuing to deliver on our commitment to profitable growth.

With that, operator, we will now take questions.

[Operator Instructions] Our first question comes from Robert Mertens from TD Cowen.

Our next question comes from Blair Abernethy from Rosenblatt Securities.

I apologize; I was not able to listen to the whole first part of your prepared remarks. So, if you've already repeated -- if this is a repeat, just let me know. But let's talk about the FTCO, in particular, the pipeline. It's interesting in your comments in your press release about governments looking at this, semiconductor equipment companies looking at this. Maybe, Wally, you can give us a sense of what does the market universe looks like to you today for the FTCO?

Yes. I'm glad you brought this up because the diversity of users is surprising even us. We started out, our big partner, of course, was Micron, initially developing the basic capabilities. But we've found that it's applicable in a variety of other areas. It's applicable with equipment companies and a different application again this quarter. As we mentioned, we've engaged with more in the coming quarter and are quite confident that at least one of those will close. And I think it just reflects on the capability it brings. You bring together a lot of data, you generate a lot of synthetic data, you build models and then people can use it to guide the pathway for evolving their processes, whether they are developing manufacturing equipment or putting a process in place, moving to a next-generation node. It just seems to have a great deal of very broad applicability.

Is the equipment makers looking at this in terms of design and development of their own equipment or in terms of working with their customers?

So, it's both. It is, in fact -- it does, in fact, give them an ability to tune their equipment, develop recipes, figure out results. But the -- one of the specific cases that was brought to my attention in the meeting with the customer this quarter was they want to accelerate the time it takes for setup of equipment. And by having a reliable model, they can, in fact, tune in what the ultimate results should be from the process step and therefore, drive how the setup should be done. Saves time. Time for capital equipment is depreciation cost. And so, their customers appreciate it and also appreciate the fact that they're able to process more in a shorter period of time.

So, is this -- if I got this right, Wally, is this a digital twinning for the install, effectively, the install and setup?

It is indeed. It is a digital twin that is able to simulate the actual behavior based upon what variables are input to the equipment or in the process recipe, the inflow of materials.

So, is there an avenue here, maybe I'm stretching this, but is there an avenue here whereby the equipment makers could be your partner in selling the FTCO to an end fab?

The existing engagements hadn't really addressed that, but I suppose that is a possibility going forward because, whereas they provide it for their particular piece of equipment, it's quite possible that the customers would ultimately want to license it more broadly, and we're able to address multiple different types of equipment because we have built a database associated or a set of tools associated with many different types of equipment. So, at the very least, it could be an introductory point. As far as will we set up an arrangement to OEM the product. Haven't done that yet, but that certainly is a possibility.

Okay. Okay. Interesting. And the other question I had was just around the IP business, which was up quite strong year-over-year. How much of that was really -- was Mixel? And how -- maybe how is the opportunity pipeline of the funnel looking for your IP business?

Well, as we mentioned, the IP business looks very strong for the rest of the year, and much of the growth year-to-year comes from the addition of Mixel. So, we had engagements in both. They are both contributing. And I would expect that as we go through the year, we'll start to see some additional contributions from the off-the-shelf or the production ready. Right now, it's all the traditional Mixel business complemented by a near equal amount of the traditional IP business that involves memory compilers, cell libraries, and other standardized foundational IP.

And as we had indicated earlier, Wally, to that point, the pipeline organically has roughly doubled for that business in the last year, and it's even more than that if you layer in the added opportunities that came from the Mixel acquisition. So, the pipeline trends are very encouraging in that business. While it did have a pause in Q1, we do see indicators of returning to growth sequentially in Q2.

Okay. Okay. Great. And then, Chris, just to ask you here, the -- it looks like your OpEx guide for next quarter, $15.5 million plus or minus. Are you -- is that -- are we down to the level that you wanted to be at? Is there more change or any more significant change as we kind of move from Q2 into Q3? Or is the business kind of where you want it?

Good question. As Wally and I kind of indicated when we joined, we do want to drive the business to profitability at flattish revenue. And I think the guide into Q2 indicating positive non-GAAP operating income is an indicator of that. And so, there are still some costs to come out. Blair, some of the international reductions do take some time. So, there are some downward trends in there, but there are also some tactical things we're investing in like the AI tools that Wally alluded to earlier. And so, my sense of it is it's in a pretty good spot now. It probably trends down to flattish from here. And I think we're going to be focusing on those growth drivers that we talked about. I mean IP is a good example, lots of good indicators of strength on the FTCO side. And you can see that even in the TCAD product line number, sequential growth, good year-over-year growth, really encouraging. And as IP gets to growth, that will just be an adder to that, and we should see some good leverage from that continued growth from here.

Okay. Great. And last question for you, Chris. Did you -- I didn't see it, but is there a backlog number that you provided? Or will there be one in your queue?

We indicated bookings. We talked about revenue. We didn't put a backlog number there, but you can look for the additional information posted online to see if you find what you need.

Our next question comes from the line of Craig Ellis from B. Riley Securities.

This is Rebecca Zamsky on for Craig Ellis. My question is on TCAD bookings, which I believe you said was $10.5 million, which were up 50% year-over-year. Is this run rate sustainable? And how should we be thinking about TCAD going through this year?

Yes. So, I think TCAD is a solid core business for the company. As you can see, it grew substantially year-to-year. I don't think the 50% growth continues, but we will see growth. I think it will be a solid business. And I'd note that our FTCO business is part of these TCAD numbers. It's reported in that segment. So, we have the benefit of the growth in a new and rapidly emerging business in FTCO. And then we have the basic strength of the TCAD business itself, which is doing well and should continue through the year.

Great. And on the FTCO wins, I believe you flagged there was one customer in Q1 and another one expected in Q2. Is this going to start becoming like a recurring quarterly event? Or would the new wins continue like, still be lumpy?

Well, we certainly hope so. And based upon the customer visits and interaction that we've had, I think we're quite hopeful that we'll be regularly adding new FTCO customers. And as I mentioned, they don't have to be the same type of application as ones in the past. We're continuing to find new applications and that, too, should help the growth of and the discovery of new possibilities.

Our last question comes from the line of Robert Mertens from TD Cowen.

Thanks for letting me ask a question on behalf of Krish Sankar. I just wanted to maybe triangulate within your guidance for the June quarter, it looks like sales are kind of flat, slightly up sequentially, and you had mentioned in your commentary some strength in the IP business growing through the year. Is it fair to say that next quarter that TCAD is probably growing into the June quarter as well and then maybe the EDA business contracts?

Chris?

Yes, I can take that one, Wally. Yes, I think it's fair to say that IP does grow sequentially. EDA could be flat to downish a little bit. TCAD could be flattish to up a little bit is kind of the way that we're thinking about it. But I did just want to provide a little extra color. There was an earlier question on remaining performance obligations or backlog, that number is at about $46.6 million in the quarter. So down slightly from what we saw in Q4, but remaining in that elevated high 40s range for the business.

Got it. And then maybe just a quick follow-up, just to get clarification. I think this was asked just in terms of the OpEx number. But are you sort of expecting these levels that you guided for the June quarter in the back half of the year? Is there any sort of savings on the SG&A line you expect to continue to bring down?

From an OpEx perspective, yes, as I indicated, there are continued downward pressures on spend. There are some of the targeted reductions that will be playing out in the coming quarters, most notably on the international side, some reductions do take a little bit more time than they do in other jurisdictions. There are some targeted places where we're making some incremental investments. The AI tools are one of them, and Wally alluded to solid indicators that we see a good ROI from those investments in terms of accelerating and broadening the road map. So, we're encouraged to see those benefits roll through the business and deliver upside to revenue. So, I do see a continued trend to kind of down a bit to flattish, as I said, on the OpEx side.

And the pipeline has been encouraging, and it continues to grow. Most notably, IP pipeline has been growing really nicely. And so, we do see room for growth from here, particularly on the IP front. But as that FTCO continues to roll through the business and the wins continue to build, that's an obvious tailwind on the TCAD side as well.

[Operator Instructions]

With that, this concludes the question-and-answer session. I would now like to turn it back to Walden Rhines for closing remarks.

Well, thank you. We're pleased with the continued momentum in our business, looking forward to profitability next quarter and the AI-driven FTCO continues to provide a great opportunity for us moving forward. Like so many businesses, AI is helping us both internally and helping us with our customers and creating new business opportunities. We look forward to sharing them with you in the coming quarters. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good afternoon, and welcome to the Silvaco's Fourth Quarter Fiscal Year 2025 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chris Zegarelli, Chief Financial Officer for Silvaco. Please proceed.

Thank you. Joining me on the call today is Wally Rhines, Silvaco's CEO and Director. As a reminder, a press release highlighting the company's results, along with supplemental financial results are available on our 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 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 12/31/2024, and the most recent Form 10-Q filing with the Securities and Exchange Commission provide descriptions of these risks.

With that, I'd like to turn the call over to our CEO, Wally Rhines. Wally?

Thanks, Chris. Good afternoon, and thank you all for joining the call. I'm pleased with our performance in the fourth quarter of 2025. We're executing our turnaround plan faster than anticipated, which can be seen clearly in the numbers. For Q4, we delivered bookings at the high end of the guided range, revenue and gross margin above the high end and non-GAAP operating expenses at the low end, all resulting in a much lower operating loss than expected in the quarter. Our Q1 guide is strong as well. I'm proud of the team for delivering such strong results and positioning us for a faster-than-expected recovery in the business. Chris will walk you through the details later in the call. But now I'll turn to discussing our progress toward the return of the business to a strong predictable growth.

I'd like to start with big news on the AI front. We reached an important milestone in Q4 ahead of our prior expectations. During the quarter, a second customer adopted our AI-driven solution for manufacturing process development known as FTCO. This win with a customer in Asia and is outside of our Memory segment. We believe that this win confirms the clear customer value of our AI solution beyond memory and points to significant opportunities ahead. This AI bundle delivered above-average bookings and revenue, reflecting the high value placed on our unique set of AI capabilities. It's very encouraging to see adoption of our AI solutions faster than expected.

In our total TCAD business in Q4, we saw a 70% sequential increase in bookings to $9.2 million and a 34% sequential increase in revenue to $8.7 million, driven by adoption of FTCO by a new customer. We continue to enhance this AI-driven process development platform with new and upgraded features that put more AI features in front of more design and manufacturing engineers to slash their development times, save money and enable first-time right silicon. We believe that the transition to more AI-enabled sales will be a long-term tailwind to the business.

After a soft 2025, we also expect the pace of TCAD contract renewals to accelerate in 2026. These trends support our expectation that the TCAD business will grow sequentially in Q1 and will grow for the full year 2026 as well. In Q4, we also saw a meaningful inflection in the semiconductor IP business. We delivered record IP revenue and bookings of over $5 million in the quarter, driven by our first full quarter of Mixel revenue post acquisition. Mixel's industry-leading MIPI PHY IP continues to have a strong following globally, led by its reputation for unparalleled quality. We're building on that reputation by leveraging the entirety of the Silvaco sales force to drive more growth in Mixel products.

We're also broadening our offerings from custom solutions to production-ready or PRO Pro products. Our Pro portfolio is silicon proven in 9 different foundries and 12 different manufacturing nodes. Mixel IP has proven to enable up to 35% reduction in die area and up to 50% reduction in leakage power. The MIPI PHY market is over $300 million per year, and we still have a relatively modest share. We're positioned for steady growth in this area as we ramp MIPI Pro products, which serve the largest part of the market. Outside of Mixel, Andy Wright, Head of Silvaco's IP business, has done a great job of increasing our internal capacity for foundational IP elements such as memory compilers and standard cells.

As we look to the latter part of 2026 and into 2027, we see considerable opportunity to grow these areas given our increase in efficiency. Our IP business continues to be positioned as our fastest grower in 2026 and is already almost 30% of our business as we exit 2025. We expect to continue to deliver steady growth in IP sales across interface and foundational IP elements as well as our acceleration in MIPI. This is a story to watch in 2026.

Now turning to EDA. We saw a significant decline in our Q4 bookings and revenue after all-time records in Q3. Bookings for Q4 came in at just under $4 million with revenue of $4.4 million. Here, we continue to focus on shifting priority to a handful of core products that we believe can deliver significant growth. One of these focus areas is Jivaro, which continues to see relatively strong customer interest and has a strong pipeline for new business potential.

Jivaro has been adopted by leading companies as it accelerates post-layout SPICE simulations by up to 10x with sign-off accuracy. Jivaro and the other core EDA products are well positioned for growth as we focus development, sales and field application resources on core growth drivers. We expect stability in EDA in the short term and then a return to growth as these new priorities deliver results later in the year. Underlying this improved business performance are the series of restructuring steps that we put in place almost from day 1.

We drove targeted reductions in support groups as well as in product areas to enable the teams to focus on core growth drivers. We also challenged product and support teams to limit direct customer support work done by business unit R&D staff so that they could focus more on product development. This change alone has had the benefit of simultaneously improving our gross margins while increasing R&D capacity. We also put in place leading AI tools to accelerate our software development. We're continuing to drive other process improvements to continue improving our ability to plan, drive and execute the business. These changes have been widely embraced across the company, and I look forward to seeing how they continue to accelerate our execution and to delight our customers.

And while I'm proud of the team for the significant progress we made in the quarter, I want to reiterate that we still have a lot of work in front of us. In the coming quarters, we expect to build on momentum from the fourth quarter. For example, we'll continue to deliver significant growth in our IP business. We can already see evidence of this improvement in a strengthening pipeline, which we expect to convert into strong revenue in 2026. We also see good growth in TCAD as renewals grow and interest continues to increase around our AI solutions.

For EDA, we'll see benefit from our restructuring activities later in the year as we focus on key growth segments. And overall, we expect our AI-driven machine learning capability to change the way semiconductor manufacturing process development is done and to add broad capabilities for fab engineers to improve yields, throughput and failure analysis. As I said last quarter, Chris and I are firmly committed to an aggressive acceleration of Silvaco's business. We're off to a good start, but the best is yet to come.

I'd now like to turn the call over to Chris, who will discuss our financial results and our outlook in more detail. Chris?

Thanks, Wally. Good afternoon, everyone. In Q4, we delivered $18.3 million in bookings near the high end of our guided range. Strength in the quarter came from IP products and our TCAD solutions. IP delivered more bookings in Q4 than it did in the entire year of 2024. IP bookings grew almost 5x sequentially as Mixel started to meaningfully contribute to the business. TCAD bookings were also particularly strong, up 70% to $9.2 million with the close of another AI-driven process development win with a large OEM in Asia.

Strong bookings helped propel revenue to $18.3 million in the quarter, above the high end of the guided range. TCAD and IP revenue grew strongly in the quarter, up 34% and almost 3x, respectively. IP strength was driven by Mixel, while TCAD strength was driven by our latest FTCO win. EDA, on the other hand, saw a significant sequential decline after setting records in Q3. 65% of revenue in the quarter came from license revenue and the remaining 35% from maintenance and service. From a geographic perspective, we saw the most growth in Q4 from the APAC region, which spiked to 57% of total revenue in the quarter. APAC strength was driven by FTCO.

Looking down the P&L, GAAP gross margin in Q4 was 83.3% and non-GAAP gross margin was 85.6%. Gross margin increased roughly 5 full points sequentially and came in well ahead of guidance. As part of our restructuring activities, Wally and I set clear expectations for the field application teams to prioritize customer support, while R&D teams focused primarily on product development. We also drove some reductions in these areas as well. Taken together, these changes resulted in much faster-than-expected improvement in our gross margin. We believe this trend is sustainable.

GAAP operating expenses were down almost 8% sequentially to $22 million. Non-GAAP operating expenses were down 5% sequentially to $16.7 million, below the midpoint of the guided range. This result is more meaningful than it may appear. We think about total spending as the combination of cost of sales and operating expenses. In our business, the majority of cost of sales is the cost of our colleagues supporting customers. From this perspective, our total non-GAAP spending, which combines both cost of sales and operating expenses, trended from $21.3 million in Q3 to $19.3 million in Q4, a sequential decrease of just over 9%. Our guidance indicates that this trend continues in Q1 with a similar level of sequential reduction in total spending. We expect further reductions in Q2. These reductions are ahead of our expectations and reinforce our commitment to driving the business to profitability.

We indicated on our last call that we were committed to reducing annualized non-GAAP operating expenses by at least $15 million annually. We now believe that we will deliver $20 million in gross annualized non-GAAP spending reductions. Our guiding principle remains the same. We intend to turn the business profitable at flat revenue. Achieving this goal will create a strong foundation for future profitable growth.

GAAP operating loss improved quarter-over-quarter to a $6.8 million loss. Non-GAAP operating loss was just over $1 million, well ahead of Q3 and ahead of expectations. GAAP net loss in the quarter was $7.2 million and GAAP EPS was a $0.24 loss. Non-GAAP net loss in the quarter was $0.8 million and non-GAAP EPS was a $0.03 loss.

Next, turning to the balance sheet and cash flow. Cash and marketable securities at quarter end was $18.3 million, including $8.3 million of restricted cash due to the Nangate settlement. Given that we have executed cost reductions ahead of prior expectations and given strength in bookings and revenue, our underlying burn rate net of onetime items has declined significantly in Q1. We expect that the $10 million of unrestricted cash on the balance sheet as of year-end will support operations as we drive to positive operating cash flow later in the year. We expect to approach operating cash flow breakeven in Q2 and to see positive operating cash flow in Q3.

Now turning to guidance. For Q1 2026, we expect bookings of between $15 million and $19 million, revenue of between $15 million and $19 million, non-GAAP gross margin of around 85% and non-GAAP operating expenses of $14.5 million to $16.5 million. In closing, we believe that with improved financial discipline and a focus on key growth opportunities, we will set the stage for profitable growth going forward. We would also note that the non-GAAP operating profitability is within the high end of the guided range for Q1, which is ahead of our prior expectations.

And with that, operator, we will now take questions.

[Operator Instructions] Our first question will be coming from the line of Craig Ellis of B. Riley Securities.

Congratulations on the strong execution team. Wally, I wanted to start one -- that's a fairly high-level question for you. When you came in, you outlined a number of growth priorities, and it seems like we're off on the right foot as we close out 4Q and 1Q. Can you just go into more detail on where you're happy with the business' execution and on the 2 or 3 things you really want to see the business execute on as we go through the first half of this year?

Sure, Craig. I'd be glad to. And it's true. I've now been here for over 5 months. And I now have a much better perspective on where the opportunities lie, where the weaknesses are and where we need to move ahead. I think the first thing of note, of course, was that we needed more financial flexibility. And so the cost reduction program has been executed well. It's always difficult, but I think morale has improved greatly. And now after the majority of it is over, people are back to work and thinking about new opportunities.

The survey of all of the product lines was -- became more detailed as I -- this last quarter, met with customers, traveled the world, Asia, Europe. I spent time with our Mixel employees in Egypt. I spent time in India with new customers. I've come to the conclusion that we have an incredible long-term opportunity driven by artificial intelligence and the whole change that's underway in how process development is done and how wafer fabs engineers and product engineers optimize their processes, optimize their manufacturing, sign defects, look for yield problems. And that, I think, builds well on the core manufacturing capability of Silvaco and provides the long-term growth engine.

The thing that I was particularly pleased by, though, was in the short term, such strength in IP, driven, as Chris indicated, by the strength of the Mixel business, but also the rest of the IP product line as Andy Wright has brought in new disciplines, made it more efficient, greatly increased our capacity and the great marriage that came by joining a well-seasoned significant sales force with a negligible sales force at Mixel has produced a very promising outlook for very rapid growth for the IP business in the year ahead.

EDA, while it is down, has selected good opportunities. Jivaro is a category killer and is, in fact, a sign-off tool, at least one major company and then at a slew of other very leading semiconductor companies. And it's one of a handful of EDA products that can provide not only the strength of contract renewals going forward, but some potential for growth. But it's going to be a stabilization issue in the short term and then growth in the longer term.

So summarizing, great long-term opportunity in the evolution of TCAD to the next generation of AI-driven process development, great-looking short-term IP business driven by Mixel, but complemented by the efficiencies in the existing business and a good stable base of key targeted products in EDA, which although they won't grow in the short term, they provide the strong renewal base of revenue, and it makes me very glad that I joined Silvaco.

That's really helpful, Wally. Chris, I'll direct a follow-up to you. And it's in part a clarification and then in part a question. The clarification for the nice Asia foundry FTCO deal. Did that fully rev rec in the first quarter? Or is that a multi-quarter rev rec? And can you provide any color there? And then the second part of the question, love the incremental expense the team is able to achieve going from $15 million to $20 million. Can you give us some color on where you're realizing that incremental $5 million in savings?

Yes, Craig, happy to do it. So from a rev rec perspective, on the FTCO win, it was not all recognized in Q4. So a significant amount of it was recognized. The rest of it will run over the term of the contract. And as you saw, good momentum in FTCO leads to good numbers in TCAD, good strong growth sequentially. And as Wally was indicating, we're seeing incremental interest there, a good pipeline on FTCO, a lot to be excited about as we look at new FTCO opportunities through this year and beyond. In terms of cost savings, I think we laid it out last call that, obviously, we were incrementally more focused on support organizations, for example, for reductions, but we also did look across the organization to streamline, reset some org structures, for example, and extract some value.

I think for me, Craig, and I pointed it out in the prepared remarks, but I want to emphasize it here, some of our spending does go through cost of sales. So one of the reasons why you saw gross margin perform so well in the quarter and why we think it's sustainable at these levels is that we were able to have the product teams really focus on product development and have most of the customer support work being done by the field application engineers. And that just leads to a much more cost-effective view on cost of sales. And it also increases capacity on the R&D side where the team can focus more on engineering those new exciting AI-driven products that Wally was alluding to.

So I think it was broad-based, a little bit more on the support side. We have been streamlining. We do think some more cost does come out into Q2. So I can already confidently say there will be a sequential decline again in Q2, and that's where profitability will be within our grasp after delivering some pretty good numbers here in Q4, and I think a pretty good guide for Q1.

Good numbers indeed.

And our next question will be coming from the line of Kevin Garrigan of Jefferies.

Wally and Chris, let me echo my congrats on the results and all the progress. Wally, previously, you mentioned the adoption process of FTCO was always kind of a gating factor. Your second FTCO customer was faster than you expected. So are you able to kind of speed up the adoption process? Or what was the driver of the faster-than-expected adoption? And can that translate to other engagements?

I think the -- our efficiency at closing and ramping FTCO customers is going to continuously increase. The initial engagements were very upfront service-oriented, a lot of bringing the customer online. This particular one was based both on the vision they could see ahead as well as some initial purchases to get things going. And I think in the future, the message is becoming better honed. Our field sales organization is able to communicate the value and the pipeline is increasing for the number of customers. So I think I would expect that the time it takes to go from initial engagement to real revenue is going to decrease as we move forward and as people see what the benefits are for applying AI to the next generation of processes.

Okay. Perfect. And then, Chris, can you just kind of give us any color on how we should think about bookings by segment in Q1? Should we expect it to be more kind of TCAD-driven and SIP versus EDA?

That's a good guess, and I would agree with that we're seeing continued strength in TCAD sequentially in Q1. So that's a very strong story. IP after delivering really good numbers in Q4, it's in the same range, maybe down a slight tick. And EDA feels flattish sequentially. So yes, a good TCAD uplift in Q1.

Congrats again on all the results.

And our next question will be coming from the line of Robert Mertens of TD Cowen.

This is Robert on for Krish. Maybe just to go back to the FTCO product, just how you're thinking about the new customers ramp through the year and your older customer, if you expect any acceleration of orders in calendar year '26 or more of the upside could be a '27 story?

Yes. Well, if you want me to take that, I guess you're talking to Chris first. But the way the pipeline is shaping up, we expect it to be a 2026 story. It's -- we have enough additional customers in the queue -- and I'd point out that there are 2 elements to this TCAD growth sector. One is the people who are traditional TCAD users. And we have a strong renewal contract -- strong queue of contract renewals that provide growth in the base business. The FTCO is really a different thing. It's how you ship and develop processes in a totally different way. It doesn't really head on compete with our traditional TCAD business. It's really a different business.

And as more and more people are realizing that, then it's not something where we have much direct competition with customers. It's just a case of selling the value of moving to a new paradigm for process development. And we're just being helped along a great deal by all the NVIDIA publicity and the people talking about tools, Anthropic, OpenAI and so on where everyone is looking and saying, how is my world going to change. And the people who've done TCAD or use TCAD to develop and optimize their processes in the past are asking that question. And so we just need to be there with an answer that they can act upon quickly, and it seems to be going very well.

And our next question will be coming from the line of Christian Schwab of Craig-Hallum Capital Group.

Solid results. I just have one quick question. Can you give us an idea of what you're anticipating either percentage-wise or dollar-wise in growth from the Mixel acquisition in '25 versus '26?

I can take that. Yes, absolutely. Feel free to add more color, if you'd like. I mean, as you saw sequentially from Q3 to Q4 from a booking standpoint, IP grew $4 million sequentially. A good piece of that was from Mixel. And if you just annualize that quarterly performance, you can get a sense of what that business is doing, call it, approaching double digits. And then as Wally said, there's the PRO or Pro products and there's increased efficiency within the team and leveraging of the sales force. So we think growth comes from there, but that gives you a sense of the baseline of where they're coming from and how we do see that growing sequentially into this year and more momentum probably in the second half is what I'd say as we lay the groundwork for really supporting those Pro products that we just recently announced.

Go ahead, Wally.

And thanks for that growth. Between that and strong TCAD year, we really expect to deliver double-digit revenue growth in the current calendar year.

Great. That was going to be my next question. No other questions.

[Operator Instructions] Our next question will be coming from the line of [ Dennis Peaca ] of Needham & Company.

So my first question is basically about your 3 segments. So performance-wise, what do you think we can expect from all of these in 2026? Do you think you could provide some sort of color that's either quantitative or qualitative in nature in terms of which ones would do better than the other?

Okay. As we indicated in the summary, the really large percentage growth will come in IP. But the core business of TCAD continues, will be strong. It's a profitable growing business. And so it's -- while not the fastest grower in the coming year, it will grow just as Chris indicated. The third is we will grow less had a record growth this past year, and that's EDA. So we expect it to simply be stable, a good part of the business, having strong renewals, but the growth of individual products will be slower. So fastest growth, IP, second fastest, TCAD and the new FTCO, which is almost a totally different business from TCAD and then IP third. I'm sorry, EDA. Yes.

No, that's great. And then so for my second question, you mentioned that you're going to be doing like an incremental $5 million in annualized OpEx reduction. Can you tell us what is this additional source of savings that you found?

Chris?

Yes. No, I can speak to that. I mean we were always executing this broad streamlining and cost reduction effort within the company. Last call, we said at least $15 million. But as we've been working through the synergies, we found some good opportunities in SG&A, for example, to really streamline and kind of focus the team and activities. And we've also found some opportunities in selected businesses as well. I think for me, this is all part of the broader strategy of getting the business profitable at flat revenue. You can see with the reductions in OpEx in Q4, which was faster than expected, a continuation into Q1, and it will continue into Q2. This is just showing that move towards profitability.

And then as we hit the growth drivers that Wally was alluding to, there's a lot of profitable growth that comes from that kind of upside once we kind of get that firm foundation in place. So expect some incremental reductions to go from here. As Wally indicated, most of it has already been executed. There is a little bit more to go, and that's kind of what you see in the coming quarters in terms of sequential reduction.

And I am showing no further questions. I would now like to turn the call back to Wally for closing remarks.

Well, we thank you all for joining us today. It's been a great quarter for us, and our outlook is strong and getting very exciting here. So we look forward to talking to you again in the near future. And thank you again for joining us today.

And this concludes today's program. Thank you for participating. You may now disconnect.

Good afternoon, and welcome to Silvaco's Third Quarter Fiscal Year 2025 Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Greg McNiff, Investor Relations for Silvaco. Please proceed.

Thank you. Joining me on the call today are Wally Rhines, Silvaco's CEO and Director; and Chris Zegarelli, Silvaco's CFO.

As a reminder, a press release highlighting the company's results, along with supplemental financial results and an earnings presentation 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 contained in today's press release, earnings presentation and on this conference call. The Risk Factors section in Silvaco's annual report on Form 10-K for the year filed 12/31/2024, and the most recent Form 10-Q filing with the Securities and Exchange Commission provide descriptions of these risks.

With that, I'd like to turn the call over to the Silvaco's CEO, Wally Rhines. Wally?

Good afternoon. I'm pleased to be part of Silvaco, and I look forward to regular communication with you, our investors. Since I became CEO, I've engaged with customers, employees and investors who provided invaluable feedback on our strengths, challenges and most importantly, the road ahead. The conclusion is clear, Silvaco is a company with great potential, supported by a rich history, dedicated core customers and strong foundational elements.

Two broader themes came out of these discussions. First, our success requires us to focus on key products that are sufficiently differentiated to become leaders in their respective categories of use. Achieving this requires reduced attention on mature products and concentrated focus on a limited number of growth opportunities. I can see multiple areas where this shift in focus will pay off, namely in AI, interconnect IP and power. Second, it's clear that Silvaco allows spending since the IPO to grow much faster than revenue. This was also clear to me from day 1. We've already taken steps to reverse this trend to strengthen our financials and to free up resources needed to accelerate growth. I'm confident that these 2 areas, strategic focus on core growth drivers and financial discipline are the keys to strengthening the business and delivering profitable growth. I'll provide more color on the first, and Chris will walk you through the second.

Stepping into the CEO role at Silvaco is like deja vu all over again for me. When I joined Mentor Graphics as CEO in 1993, the company had failed to meet expectations for many quarters. None of Mentor's products were #1 in their categories. The company was not profitable and cash conservation was an issue. During my time at Mentor, I learned a great deal about the EDA business, closed dozens of acquisitions, grew market value more than 10x before acquisition by Siemens, substantially increased profitability and developed and grew a number of products, including Calibre and Tessent, which by themselves generated most of the company's profits.

I find Silvaco in a similar position to where I find Mentor. The company has failed to meet expectations after the IPO, it's not yet profitable, and the products are not #1 in their markets, except in some very specialized categories. I believe that my Mentor playbook can be applied to Silvaco. The first step is focusing on 2 key areas: financial and operational discipline and focusing on select core growth drivers.

We believe the key to reinvigorating the business lies in focusing on the right markets with differentiated solutions to solve critical customer challenges. We have a very clear example of this in Silvaco's AI machine learning product for process development called FTCO. Silvaco created this unique AI product that gives customers a valuable tool to solve real manufacturing challenges. This single product enabled Silvaco to establish a partnership with Micron. It will also be one of our foundational growth drivers looking forward.

We can learn from FTCO as an example of building disruptive technology that can create meaningful value for our customers and for us. Another example is Mixel, the acquisition that closed in the third quarter. With Mixel, we expect the IP business to grow rapidly. Customers have nothing but praise for Mixel's perfect quality and responsiveness. And Andy Wright, our new Head of the IP business, has breathed life and growth into the rest of Silvaco's once small IP business. I see synergies emerging that exceed our initial expectations. The Silvaco sales force will become a force multiplier for Mixel, while the rest of the Silvaco IP business is learning from the world-class development processes that have earned Mixel such praise in the industry.

My expectation is that the legacy Silvaco businesses can and will learn from Mixel best practices. In the EDA business, as in TCAD, we have years of legacy products, many of which continue to generate significant maintenance revenue. These can generate steady revenue with little cost if we increase the cost discipline in our business. Skilled engineers who support the mature products continue to add features and enhancements long after the products have stopped achieving new design wins. In general, the customers neither want nor do they adopt the new versions of the software. Only a small amount of resources required to keep the products useful and skilled engineers can be moved to products with growth opportunities, providing them with increased motivation and excitement.

One example of a growth product that solves key customer problems is Jivaro. It's been adopted by companies like NVIDIA, Samsung, SK Hynix and many others to accelerate post-layout SPICE simulations by more than a factor of 10 with sign-off accuracy. Looking across Silvaco, solutions that include AI, power analysis and interconnect IP are consistently winning new customer engagements.

As we deemphasize areas that are subscale or generating immaterial new revenue, we can free up resources to accelerate our stronger products, including FTCO and TCAD. Our success also depends on establishing fiscal and operational discipline. The data speaks for itself. Since our company's IPO, financial performance has been disappointing. Revenue growth has lagged peers and operating expenses have grown much faster than revenue. Underestimation of the time and effort required to bring on the new FTCO customers produced disappointing results for what should be a key growth franchise.

The fact that expenses have grown much faster than revenue is another problem. Expense reduction has therefore become our top priority. We've initiated a significant cost reduction program at the beginning of the quarter. Chris and I have set a clear expectation with the team that we will drive the business to profitability at current revenue levels so that growth can produce incremental profit. Chris will discuss these actions and early progress on this goal in more detail. Operational discipline also requires a strong focus on execution. We've added several key new leaders to the team in the last few months, including our CFO, heads of the IP and EDA businesses and our Head of Business Development. The energy I see in this team is exactly what we need to create a culture of speed and high-quality execution.

I see a team that's not satisfied with the status quo and one that wants to win. With our renewed focus on core growth drivers, we'll be able to invest at the right levels in the right areas to ensure that we close gaps with competitors and establish Silvaco as the leading name in EDA for our targeted growth segments, including AI, power and interconnect IP. Another contributor to the company's underperformance has been delays in integrating and extracting value from our 2 most recent M&A transactions.

For Mixel, we underestimated the time required to activate the sales resources in Silvaco and to establish new modes of distribution, including off-the-shelf sales of non-customized IP. For Tech-X, growth remains dependent on overall market adoption of its plasma and optical solutions. Focus on this effort should accelerate realization of the value that Tech-X brings.

Looking forward, we expect both Mixel and Tech-X to contribute meaningful growth in 2026. We remain optimistic on the longer-term contributions of both of these acquisitions. Now taking a step back, there's a lot of value and strength from Silvaco's rich history. The company continues to benefit from the fact that users of EDA software are reluctant to change and older products continue to generate maintenance revenue long after growth from new customers has slowed. This gives us a stable foundation upon which to build. It also gives us many compelling assets with which to focus and grow. We have a lot of work in front of us.

In the coming quarters, we expect to rightsize the business, streamline the portfolio and focus on key growth segments to enable us to deliver steady, profitable growth. We recognize it will take some time for you to see this redoubled focus in the numbers. I encourage you to watch for our OpEx to trend flat to down, gross margins to improve and evidence of growth starting to materialize in 2026. Chris and I are firmly committed to an aggressive acceleration of Silvaco's business. I'm looking forward to increased personal interaction with Silvaco customers. We appreciate your support as we execute on these growth plans. I'm confident that we will deliver strong results as this new strategy is implemented.

I'd now like to turn the call over to Chris, who will discuss our financial results and the outlook in more detail. Chris?

Thanks, Wally. Good afternoon, everyone. Silvaco delivered record quarterly revenue and bookings in Q3. Bookings increased 131% year-over-year to $22.8 million. Strength in the quarter was driven by closing a significant EDA contract with one of our core customers in the United States. Revenue came in at $18.7 million, up 70% year-over-year. 74% of revenue in the quarter came from license revenue and the remaining 26% from maintenance and service. EDA saw the most growth sequentially in Q3, while TCAD and IP trended down slightly.

From a geographic perspective, we saw the most growth in Q3 from the Americas, which spiked to 55% of total revenue in the quarter. APAC represented 40% of total revenue. EMEA stayed flattish and at 5% of revenue in the quarter. Looking down the P&L, GAAP gross margin in Q3 was 77.9%, up 326 basis points year-over-year, and non-GAAP gross margin was 81.5%, up 179 basis points year-over-year. Gross margin improvement was driven by growth in revenue exceeding growth in cost of sales.

Going forward, we expect gross margin to benefit from our cost reduction plans. GAAP operating loss expanded year-over-year but improved slightly quarter-over-quarter to a $9.3 million loss. Non-GAAP operating loss was $2.3 million, down slightly year-over-year. GAAP net loss in the quarter was $5.3 million, up from the $6.6 million loss posted in the same period last year. Non-GAAP net loss in the quarter was $2.1 million, down slightly from the $1.8 million loss posted in the same period last year. GAAP EPS was an $0.18 loss and non-GAAP EPS was a $0.07 loss.

Next, turning to the balance sheet and cash flow. Cash and marketable securities was $27.8 million, including $12.4 million of restricted cash due to the Nangate settlement. Cash used in operating activities was $7.8 million. Remaining performance obligations or RPO at quarter end stood at $48 million with 54% expected to be recognized as revenue within the next 12 months. With OpEx up more than 50% year-over-year and cash down since the IPO, we have begun implementing a broad cost reduction program. We began with an early retirement incentive program in the U.S. and Asia and an early leaver program in Europe. We are taking other steps in addition to these programs, including reducing office footprints, reducing discretionary spend and minimizing use of consultants and contractors.

These steps when taken together and when fully implemented, are expected to reduce annualized non-GAAP operating expenses by at least $15 million annually. We also anticipate these actions to drive an increase in gross margin, enabling more leverage from future growth. Our guiding principle from Wally is to turn the business profitable at flat revenue. Achieving this goal will create a strong foundation for future profitable growth.

Now turning to guidance. For Q4 2025, we expect bookings of $15 million to $19 million, revenue of $14 million to $18 million, non-GAAP gross margin in the range of 78% to 82%, and non-GAAP operating expenses of $16 million to $18 million.

In closing, we believe that with improved financial discipline and a focus on key growth opportunities, we will set the stage for profitable growth going forward.

And with that, operator, we will now take questions.

[Operator Instructions] Our first question comes from Craig Ellis with B. Riley Securities.

Appreciate all the color team. Wally, I wanted to start with you, and it's a higher-level question relating to your transition from the Board to the CEO role. It sounds like in a fairly short amount of time at that lower level of detail, you've got a real competent grasp of what you've got in the portfolio, both things that are advantaged in the marketplace and other businesses that have lost their advantage. And you talked about mixing out some revenue. One, is that read correct? And two, how significant is the revenue mix out that is ahead of the company?

Well, thanks, Craig. Yes, indeed, being on the Board, you really don't get the level of visibility down to individual products and people that are making the difference in the company or that holding us up from making further progress. So it's -- the last few months now have given me the opportunity to see that in a lot of detail. I think your assessment is correct. There is a substantial opportunity ahead. There are specific things that I'm quite certain will grow. And then there are others that could grow given the right level of focus. But as I noted and as Chris noted in his comments, we've let the expense base grow faster than the revenue, and that's been a limiter in the available resources we can put on these key growth areas.

And so going forward, while painful, I think we will be able to write that trend and be able to free up the resources we need to take advantage of some very specific areas of strength. And with that, I think we can restore confidence that Silvaco can do what it was originally intended to do as we went public.

Excellent. Chris, I'll ask the follow-up question to you. It's a 2-parter. One, you did a good job speaking to the geographic areas where you hope to take about $15 million out of the business. So the tactical question is, over what time period should we expect that to occur? And the more strategic question is, as you've been in and have had a chance to assess the systems, the processes that are in place, the forecasting mechanisms, given the difficulty the business had in delivering forecast, how do you feel about the dashboard that's in place for you and Wally? And do you feel like it's one that today can deliver reliable results? Or are there some things you need to do to make either system or people or process changes so that the business can forecast more accurately?

Very good question, Craig, and thanks so much for that. Both questions are good. From a time period perspective, the way that we're looking at it, you should expect most of the cost to be out of -- by the end of this year. But that means you won't see as much of the impact in Q4, but you should see a reduction in OpEx in Q1 and then the rest of it should be throughout the rest of 2026. So expect to see a step down in Q1 OpEx as most of it is out by the end of the year.

And fair question on the forecasting methodologies and tools as well. That's something that Wally and I looked at almost immediately from day 1. And I'll tell you, the tools are in place. We do see the data. The pipeline is robust. We do review what is expected in the coming quarters. So I'm confident that what we've given is something we have high visibility into and something that we're confident in. But that being said, Craig, you know me, I think there are things we can do to further improve and build upon that, and that's something that I'll be working on with the team. But I'm confident that what you heard from us is something we're confident in and we will deliver on.

[Operator Instructions] Our next question comes from Charles Shi with Needham & Company.

First off, Wally, never thought that we're going to have a conversation like this. But once again, looking forward to working with you and Chris. So maybe the first question, maybe for Wally. I understand the priority probably is to -- if I may, just to get the housing order. But Wally, you mentioned about Calibre, you mentioned about the Tessent, those were the 2 successful products of Mentor, which were -- are basically the golden standard for the industry.

I think it will be ideal for some of the Silvaco products to get there. What do you think what kind of products in the portfolio today has the potential to get to what the Calibre is, what the Tessent is today? And by the way, how do you get there? The reason why I asked this is I do read your biography and I knew both -- it takes probably both effort and maybe you need a little bit luck to really get there. But time has changed. And what's your thought there in that question?

Yes. Well, thank you, Charles. It's good to talk again. We've been talking over many years. And you're right. When I just joined Mentor, initiated the work that developed Calibre, and we did an acquisition that was the basis for Tessent. And yet it took quite a long time before those became the dominant industry standards in their space. I believe the way you do this is you start out with a focused market and a focused set of customers and see something that you can be the leader in. And so I've been searching within Silvaco, where are the seeds that can lead to the same kind of success.

Good example is where they've taken tools that were really created for IC design and applied them to displays, for example, and the manufacturing of those displays where they built a franchise with 6 different display companies using the same flow. Once you build a franchise that's dominant or excuse me, being -- that is the leader in that area, then you expand to next areas. So you ask me, where do I see that potential? Well, as I mentioned in the earlier comments, the Silvaco has been very early into actually building machine learning models around process development.

And it's a market that others haven't been chasing. It's relatively specialized and it takes a lot of work, and you need a TCAD foundation to build upon. So that eliminates the number of companies that could do it. But I think that's the kind of basis that can lead to a franchise, that can lead to an industry-leading product. Similarly, if you're in the IP business, you being a supplier of general purpose IP may generate revenue, but it doesn't generate market advantage and profitability at the same level as if you pick specific types of IP and become a leader. So I think the acquisition of Mixel was well thought out clearly in MIPI. There are only 2 major suppliers. They have a strong reputation. And then you say, okay, well, what comes beyond?

There are lots of I/O standards that they can expand into, plus there's the existing Silvaco business that's really quite successful, actually has more demand than we can currently service in areas like memory compilers and even in the standard cell-based libraries. So -- and lastly, of course, I mentioned the area of power where Silvaco models I found for silicon carbide, gallium nitride and other things form a foundation for differentiated products. My strategy, do what others aren't doing, pick things you can do better than anyone else, build upon those franchises, and that's indeed exactly what I plan to do here at Silvaco.

Wally, you partially answered my second question, but I do want to maybe just double down on that to get a little bit more color. Speaking of Mixel, I know you just closed the deal last quarter, but it sounds like you think highly of the team -- of the product. And wonder if you can walk us through again what exactly they do. I think I can see the press release by SerDes, PHY. But what exactly they do that make you think that this is a high-quality product, the high-quality team and what makes you think it's actually the benchmark for the rest of the Silvaco team as you mentioned in the prepared remarks?

Yes. And I'm basing that on customer feedback, talking to actual users, asking them what they think. And they're quite specific in saying if all of Silvaco produce the kind of quality and the execution to schedule and other things that Mixel had, we would be champions of the IP business. So it's not just my impression talking to people. It's my conclusion from dealing with customers and looking at the track record, 27 years and they've never had a customer find a bug in their IP, really admirable. And another aspect is they have the vast majority of their -- of the people that are developing the products and supporting them are based in Cairo, Egypt.

I have a long history there at Mentor. I started the group and it became a very valuable resource to us for having cost-effective engineers who are very well educated, very experienced. The Cairo University and Ain Shams have programs in EDA, and I found that's a very good basis to build upon. So put it all together, I think it's a great acquisition. I think you will see substantial growth next year because of that. And I think the interaction with Mixel will greatly improve the performance of the existing Silvaco business. And the 2 together will cause substantial growth in the coming year.

[Operator Instructions] Our next question comes from Blair Abernethy with Rosenblatt Securities.

I'm sorry, I missed the very beginning of the call, but I wanted to ask a little bit about the pipeline. And Wally, I know you've only really been getting into the weeds of it for a couple of months now. But how are you thinking about the pipeline of the business as it stands? And is the FTCO, how is that looking to you? I know it's a longer sales cycle, but how does that opportunity look from your standpoint at this point?

Yes. Well, first, with regard to the overall pipeline, there is a large base of very mature products that produce pretty stable maintenance revenue and give the opportunity to grow each year. So roughly half our total business can be generated just from those renewals, which don't require an enormous amount of effort. The rest of the business requires more direct effort. And I think it's been highlighted before that the FTCO is a big opportunity. It's a big opportunity because Silvaco has gotten ahead of the game and because Silvaco has a teacher customer in Micron who's been quite vocal about expressing the value of it.

The disappointing part is it's evolved very slowly. There was a continuing expectation last year that we would announce additional customers. That hasn't occurred. And the reason it hasn't occurred is there is an adoption process that requires an extensive amount of interaction with the customer, customizing it to the uniqueness of their processes. And so it requires a funnel of customer opportunities and then a lot of resource to go with it. So disappointment in how quickly it's arisen, optimism at what it can become and how it can take AI into one more branch of EDA that other people are not focusing on that Silvaco can and has the base business in TCAD to build upon and create success as we bring on those additional customers.

Okay. Great. And then, Chris, the -- just on the expense savings, is this out of the core business? Is there any of the acquisitions that you did this year that are impacted by that? And just to clarify, you said that you'll be completely done by the end of this fiscal?

So a majority of it will be -- we believe a majority of it will be out by the end of this fiscal year, so by the end of the year. You won't see the benefit of that really until Q1 just from a full quarter's perspective. And then the rest of it will come out through 2026. It is -- the cost areas are pretty broad. For example, Mixel had an office in California. We have a headquarters in California. So we can put those 2 together and kind of save costs there. We'll reduce office footprints in other places. It's mostly what I would call the core Silvaco side of the business is kind of what we're looking at when we do these actions. So it's, again, to get us to rightsize the cost structure and then help us be more nimble and focus on growth.

[Operator Instructions] Our next question comes from Krish Sankar with TD Cowen.

Wally, welcome back and nice to have a seasoned operator at the helm.

Thank you.

I had 2 questions. Maybe the first one for Chris. When I look at your guidance, it looks like the revenues are looking a little lighter. And I thought that Q4 is seasonally strong for you. And if I look at the full year revenue guide, it's only up like 2% despite all the acquisitions. So I'm kind of wondering, are there any idiosyncratic things in Q4 or what is going on? And I had a follow-up for Wally.

Okay. No, that's a very fair question. So when we look at Q4, I think you're right. I mean, in Q3, the Mixel acquisition, for example, was a nominal addition to revenue, as you can see in the numbers. It will be a stronger contributor in 2026. There is some sequential growth there in Q4, but it will be stronger next year. Tech-X is more of a stronger grower in 2026 as well. When we look at next quarter, I mean, you saw the EDA strength in Q3 based on how we recognize revenue, EDA will step down sequentially in Q4, but TCAD and the IP business are expected to increase sequentially, which is how we landed on these numbers.

I would just point to what Wally said earlier, I mean, there was some expectation that a second FTCO engagement would materialize sooner than expected. We're still working on several engagements. We're still confident in that, but we're not seeing that in Q4 of this year.

Super helpful, Chris. And then Wally, I'm just kind of curious, do you have all the pieces of the pie to grow from here? Or do you need more M&A to complete the product circle? Or is there a goal to increase term base or software licenses as a percentage of revenue?

Yes. We're somewhat limited in the number of acquisitions we can do going forward just based upon the resources we have to do them. So what Chris and I have come down to is, look, we need to grow with the existing companies or the existing resources we have. We've done 3 good acquisitions that will add to growth. And the base -- the overall business needs to be stable and growing, but at a lower level. So looking forward, we're planning things around no significant acquisitions for a while now. And that's why, as Chris noted, that we want to be sure that at the current revenue levels, we can be profitable so that the growth we experience, both from these acquisitions and any growth in other parts of the business will fall through as profitably and create a clear path ahead. So we don't have to wait for the time that we accelerate our acquisitions once again.

[Operator Instructions] Our next question comes from Christian Schwab with Craig-Hallum Capital Group.

Great. I just was -- regarding the $15 million in OpEx reductions on a year-over-year basis, should we assume that kind of comes from the midpoint of your OpEx guidance for this quarter, meaning kind of $68 million minus $15 million to get to $53 million. Is $53 million kind of the target or $55 million or $51 million? [ Is this ] crystal clear to me?

This is Chris. I can take that one. So you can look at the midpoint of the guide in Q4 as the starting point. I would just comment that the $15 million will be realized when all of the actions are implemented over the course of 2026. So you wouldn't expect it to be all '25 to '26. It will be mostly out by the end of this year. You'll see a benefit in Q1. The rest will play out through the year. And so the full year-over-year impact would be less just given the timing of the reductions. I hope that gives you a good sense of how we're looking at it.

Yes, that helps. And then on Mixel, it kind of sounded like there was some commentary about time to accelerate sales, et cetera. I know you guys have previously highlighted that you expected $3 million to $5 million in revenue quickly after closing the acquisition in the remainder of '25. I assume you didn't attain that goal. Can you give us an idea of what you do anticipate selling then?

We didn't attain it in the third quarter. We will see more growth in the fourth quarter. And as you alluded to, I think, here, the great machine of profitability in EDA is when you take a company with great product, but limited distribution and combine it with a company that has worldwide distribution and maybe not as much in the way of products. That's the great way that the EDA industry grew. That's how Cadence started by acquiring ECAD and then build upon it. And the same thing is true here. I think Mixel is a great example. They have basically one salesperson producing the level of revenue that they have today.

You combine that with our sales force and the inevitable result is that we can keep them fully loaded with demand and then they can continue to add resource and grow the revenue. So that's -- it's almost a perfect model for the kind of acquisition for which there is leverage for a company like Silvaco.

Great. And then my last question, more longer term on a multiyear time frame basis. Given the product set that you have in hand, and it sounds like no meaningful acquisitions in the near term, if we never made another acquisition again, what type of top line growth prospects do you think the company has like a range of outcomes?

The longer term clearly needs to be double digit. We're in an industry that's growing double digit, and we expect to gain share out in the future. So clearly, the long-term target is there. Getting there, we are below that clearly today. And so we'll have to increase as we head through 2026. But I don't think long term is 5 years away. I think it's much closer, and we can return certainly to low double digits and then in the longer term, mid-double digits as we move forward.

[Operator Instructions] And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.