Cadence Design Systems, Inc. (CDNS) Earnings

Management highlights

- Business and Market Environment - Overall design activity is growing rapidly, driven by exponential AI-related design complexity and new system architectures for hyperscaler infrastructure and physical AI. Customers are investing aggressively in AI and HPC, with continued improvement across traditional analog and consumer verticals. The overall business environment is significantly stronger than 12 months prior. - Agentic AI is a durable long-term tailwind and TAM expansion opportunity: autonomous design agents explore more design alternatives and call Cadence's underlying physically accurate design engines far more frequently than manual workflows. - Product Development - Cadence's three-layer CAKE framework (accelerated compute/data base layer, physically accurate simulation/optimization middle layer, AI agent/orchestration top layer) uniquely positions the company to capture AI-driven design demand. - Launched full-stack agentic AI solutions spanning the entire electronic system design flow: AuraStack for PCB and advanced packaging (delivering up to 15x higher productivity), ChipStack for verification (over 20 customer engagements, already in production, achieving 40X faster RTL validation with Nvidia), Virastack for analog/custom design (over 25 customer engagements, 2x-10x productivity gains), and InnoStack for advanced node SoC design, with a new collaboration with Rapid to integrate InnoStack into third-party agent solutions. - Strategic Partnerships - Expanded multi-year strategic collaboration with Intel focused on 14A process technology, co-optimizing Cadence design IP and agentic AI EDA flows for next-gen HPC and mobile design, expected to be a meaningful multi-year growth driver. This collaboration is 100% incremental to existing Cadence business with Intel. - Deepened collaboration with Samsung Foundry for 2nm and 3D IC technologies, combining AI-driven design flows and IP for next-gen AI, HPC, and mobile systems. - Maintains strong leading partnership with TSMC for 3D Fabric advanced packaging solutions.

Guidance

- Full year 2026 guidance was raised from prior levels, now expecting: revenue of $6.26 billion to $6.34 billion, representing 19% year-over-year revenue growth at the midpoint; GAAP operating margin of 27.75% to 28.75%; non-GAAP operating margin of 43.75% to 44.75% (44.25% at the midpoint); GAAP EPS of $4.76 to $4.86; non-GAAP EPS of $8.05 to $8.15 ($8.10 at the midpoint); operating cash flow of approximately $2 billion. Cadence expects to continue repurchasing shares, using approximately 50% of free cash flow for repurchases in 2026. - Q3 2026 guidance: revenue of $1.595 billion to $1.625 billion; GAAP operating margin of 27.5% to 28.5%; non-GAAP operating margin of 43.5% to 44.5%; GAAP EPS of $1.11 to $1.17; non-GAAP EPS of $2.01 to $2.07. - The updated full-year guidance reflects broad-based strength across all business segments, driven by AI demand, rather than reliance on any single customer or product. The guidance does not assume a sudden step-function in monetization of agentic AI, as the opportunity continues to develop.

Segment performance

Total Q2 2026 revenue was $1.584 billion, representing 24% year-over-year growth, with all segments delivering double-digit year-over-year growth: 1. IP: Grew over 40% year-over-year, driven by strong organic demand for differentiated star IP (including PCIe, UCIe, HBM, and LPDDR6) for AI and HPC applications. This growth also benefited from new strategic foundry partnerships, and the segment is approaching a $1 billion annual run rate. 2. Core EDA: Grew 18% year-over-year, driven by accelerating adoption of AI-powered solutions, expanded full-flow digital implementation and sign-off tool footprint at leading-edge AI and semiconductor customers, and competitive analog design tool wins. 3. Hardware (emulation/prototyping): Delivered a record quarter, with particularly strong demand from AI and HPC customers including hyperscalers, 12 new customer logos, and meaningful expansion with marquee AI customers. The segment continues to be supply-constrained rather than demand-constrained, with Cadence building systems as quickly as possible to meet backlog. 4. System Design and Analysis (SD&A): Grew 37% year-over-year, driven by growing demand for advanced packaging and PCB solutions for increasingly complex AI systems. Integration of the acquired Hexagon DNE business is progressing well, and the segment is also approaching a $1 billion annual run rate.

Risks & headwinds

- Export control regulations could change materially from current levels, which would impact the provided guidance outlook. - IP revenue can be timing-dependent from quarter to quarter, so strong quarterly growth should not be annualized without context. - Second-half 2026 operating margins are slightly lower than first-half margins due to deliberate targeted investments in integration of the Hexagon DNE business and the new Intel strategic partnership, to set up higher margins in 2027.

Analyst Q&A

• Q: Can you quantify the long-term TAM expansion opportunity from agentic AI?

  A: Management confirmed agentic AI creates new top-layer agent opportunities while reinforcing demand for the middle-layer core physically accurate engines. Customer engagement across all large customers is accelerating, with growing evaluations, pilots, and early deployments. Monetization will come from both new agent workflow products and increased usage of underlying core tools, but management does not assume a sudden step-function in revenue for guidance, as the opportunity is still developing. The current guidance raise is broad-based across software and AI, reflecting early traction.

• Q: What are the implications of open source/third-party agent models that access EDA tools for Cadence, and how does Cadence differentiate from customer-built or open source solutions?

  A: Recent demonstrations of open agent models using EDA tools confirm Cadence's three-layer cake framework: agents rely on proven, physically accurate core EDA tools for production design, which Cadence has long led. Cadence differentiates across all three layers: differentiated AI knowledge graphs/orchestration, deep API integration with its industry-leading core tools, and purpose-built hardware acceleration for design workflows. Most open source demonstrations are limited to small, outdated-node blocks; for mission-critical production designs, customers increasingly rely on Cadence's integrated solution, even if they build custom in-house agents for specific use cases. Agentic AI increases total demand for Cadence tools, as agents invoke engines far more frequently during design exploration.

• Q: What is driving the 40%+ year-over-year growth in IP, how much is organic vs inorganic, and what is the sustainable growth outlook?

  A: The strong IP growth is almost entirely organic, driven by three key factors: 1) improved IP quality (power, performance, area) on leading process nodes, leading to new competitive wins that Cadence did not participate in a few years ago; 2) focused strategy on high-demand star IP (interface, memory, chip-to-chip) for AI and HPC; 3) diversification of the foundry ecosystem, with new strategic engagements with Intel and Samsung expanding available customer demand. IP is now approaching a $1 billion run rate, providing meaningful scale, and while quarterly revenue can be lumpy, all demand indicators are positive. The new Intel partnership is a long-term growth driver for IP, in addition to broader existing momentum.

• Q: What is the competitive positioning of Cadence relative to peers, particularly in leading-edge digital implementation and multi-chip design?

  A: Cadence has materially improved its positioning with Intel and Samsung Foundry over the past 1-2 years, after historically having a stronger position with TSMC. The new multi-year Intel collaboration spans all Cadence product segments, marking a major positive trajectory change for the business. Cadence has long led in digital implementation place-and-route, and has now also expanded its sign-off tool footprint at all leading customers, improving the depth of digital engagement. Management attributes the improved position to ongoing investment in best-in-class product development aligned with customer demand, rather than competitor moves, and notes the competitive position is stronger than it has ever been.