On Monday, Cadence Design Systems (NASDAQ:CDNS) discussed first-quarter financial results during its earnings call. The full transcript is provided below.
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View the webcast at https://events.q4inc.com/attendee/818860995
Summary
Cadence Design Systems reported a strong Q1 2026 with 19% year-over-year revenue growth, driven by demand for their AI-enabled solutions, resulting in a record backlog of $8 billion.
The company raised its full-year 2026 revenue growth outlook to 17%, reflecting confidence in their expanding agentic AI offerings which are expected to drive increased EDA consumption.
Cadence continues to lead in the semiconductor design transformation with new AI superagents (VitaStack, InnoStack) and a strategic collaboration with Google Cloud, enhancing their cloud-native platform capabilities.
The IP business showed a 22% year-over-year growth with significant competitive wins, while the core EDA business grew 18%, showcasing strong customer adoption of their AI-driven solutions.
Management highlighted robust opportunities in physical AI and emphasized ongoing strategic investments in R&D and go-to-market capabilities, despite short-term dilution from the Hexagon acquisition.
Full Transcript
Abby (Operator)
Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence first quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. Thank you. And I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead.
Richard Gu (Vice President of Investor Relations)
Thank you, operator. I’d like to welcome everyone to our first quarter of 2026 earnings conference call. I’m joined today by Anirudh Devgan, President and Chief Executive Officer and John Wall, Senior Vice President and Chief Financial Officer. The webcast of this call and a copy of today’s prepared remarks will be available on our website, cadence.com today’s discussion will contain forward looking statements including our outlook on future business and operating results. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today’s discussion. For information on factors that could cause actual results to differ, please Refer to our SEC filings, including our most recent Forms 10K and 10Q, CFO commentary and today’s earnings release. All forward looking statements during this call are based on estimates and information available to us as of today and we disclaim any obligation to update them. In addition, all financial measures discussed on this call are non GAAP unless otherwise specified. The non GAAP measures should not be considered in isolation from or as a substitute for GAAP results. Reconciliations of GAAP to non GAAP measures are included in today’s earnings release. For the Q and A session today, we would ask that you observe a limit of one question only. If time permits, you can re queue with additional questions now. I’ll turn the call over to Anirudh.
Anirudh Devgan
Thank you, Richard. Good afternoon everyone and thank you for joining us today. I’m pleased to report that Cadence had a strong start to 2026 with accelerating AI demand and disciplined execution delivering one of the best Q1s in company’s history. Our record backlog of of $8 billion was ahead of plan, reflecting strong customer confidence in our AI driven portfolio and its pivotal role in enabling delivery of their increasingly complex chip and system design roadmaps. Given the accelerating momentum of our business, we are raising our 2026 revenue growth outlook to 17% and expect to achieve the rule of 60 for the first time. Sean will provide more details in a moment. Agentic AI era is here, and Cadence is leading the transformation of semiconductor and system design. At Cadence live Silicon Valley 2026, we took a major step towards fully autonomous chip design, pioneering the industry’s most advanced and comprehensive Agentic full flow platform. We introduced AgentStack, the head agent framework for our AI super agents which enables knowledge sharing across the design flow and extend autonomous designs from chips to three DIC to systems. Building on our revolutionary chip Stack AI Super Agent for RTL design and verification, we introduced two new breakthrough AI superagents, Vita Stack for analog and Custom Design and InnoStack for digital implementation and sign off. Together, these solutions span the entire chip design flow, creating a connected continuous learning platform that brings the industry closer to comprehensive automation. As the industry begins transitioning to Agentic AI, the need for physically accurate and highly mathematical EDA solutions become even more critical. Our AGENTI AI solutions are built on decades of domain expertise, proprietary data and tightly integrated physically accurate engines delivering high fidelity results. We continue to view our platform as a three layer cake with accelerated compute and data as the base layer, principle, simulation and optimization as the critical middle layer and Agentic AI as the top layer. As I’ve said before, we believe the greatest value comes from the tight coupling of these layers reinforcing each other to deliver much better results. As these super agents invoke our simulation, verification and implementation engines at scale, we expect them to materially expand to EDA consumption and drive higher usage across our platforms. We announced a strategic collaboration with Google to optimize the chip stack AI Super Agent with Gemini on Google Cloud by combining LLM Reasoning with GCP Scalable Compute. This collaboration delivers a cloud native platform for next generation chip development. In Q1, we furthered our long standard partnership with MediaTek through a wide ranging expansion across our new Agentic AI offerings and core EDA3 DIC and system analysis solutions. Physical AI is emerging as the next big wave of intelligence as AI moves into autonomous systems, autos, drones and robotics, and Cadence is uniquely positioned to lead this transition. The addition of Hexagon’s DNE leading structural and multibody dynamics technologies transforms our system analysis portfolio to a leadership position in physical AI, enabling customers to build and train fundamentally new AI world models by narrowing the critical Sim 2 real gap. At cadence Live Silicon Valley, we announced an expanded partnership on AI and robotics with Nvidia. By combining our Agentic AI driven solutions with Nvidia’s advanced technologies, we are accelerating engineering workflows and boosting productivity across chip design, physical AI systems and hyperscale AI factories. Now let me provide an update on our businesses. Our IP business continued its strong momentum with 22% year over year revenue growth driven by accelerating demand of AI, High Performance Computing (HPC) and automotive workloads. Growing complexity of advanced node designs and chiplet based architectures is driving strong demands of our differentiated star IP portfolio. Across interface, memory and foundation IP we achieved meaningful competitive wins and customer expansions at marquee accounts reflecting the breadth of our portfolio and more importantly the differentiated performance of our solutions. We closed a record deal with a leading global foundry marking our largest IP engagement with this customer to date and reinforcing our leadership at the most advanced nodes. With strong market tailwinds, focused strategy and expanding customer proliferation, we remain very well positioned for continued growth in ip. Our core EDA business delivered another strong quarter with revenue growing 18% year over year driven by increasing proliferation of our solutions at market shaping customers. Our AI driven solutions and increasingly our Agentic offerings are becoming an important part of customer renewals and expansions. Demand for a hardware accelerated in Q1 resulting in our best quarter ever led by AI, High Performance Computing (HPC) customers and increasing demand in automotive and robotics. Palladium Z3 continues to be the gold standard for emulation and drove multiple competitive displacement. Momentum on verification software grew particularly in Excelium and Verisim. Sim AI and chip stack generated tremendous customer interest with a large number of evaluations underway led by AI driven cadence cerebral solution. Our digital platform continues to gain share especially at the most advanced nodes. A global semiconductor design leader significantly increased their innovus usage and adopted our digital sign off solutions and a marquee AI infrastructure company expanded their usage of our sign off solutions and their leading edge ASIC designs in custom and analog. Our AI driven virtuoso studio continued its strong momentum in design migration and layout automation as it gets increasingly deployed by analog and mixed signal leaders seeking greater productivity. Our system design analysis business delivered 18% year over year revenue growth as AI driven multiphysics simulation and 3D IC become essential to addressing growing system challenges. We have strong momentum in 3Dic where our unified multi die integrated design to analysis flow is helping customers address their rising chiplet and advanced packaging complexities. We also saw strong momentum, insigrity and clarity with multiple memory and advanced IC packaging customers expanding their deployments as they move to higher speed interfaces. Customer adoption is increasing as they look to address signal integrity, power integrity and thermal challenges earlier in the design flow through deployment of a full cadence sign off flow. In closing, I’m pleased with our strong execution and the broad based momentum of our business. As the Agentic AI era unfolds, Cadence is leading the charge to realizing much higher design productivity. Increasing design complexity and the growing need for productivity is creating a compelling long term opportunity for Cadence. With our differentiated solutions and expanding agentiq AI portfolio, I believe we are very well positioned to lead this transition and continue delivering meaningful innovation and value to our customers. Now I will turn it over to John to provide more details on the Q1 results and our updated 2026 outlook.
John Wall (Senior Vice President and Chief Financial Officer)
Thanks Anirudh and good afternoon everyone. I’m pleased to report that Cadence delivered excellent Results for the first quarter of 2026 with accelerating momentum and broad based strength across all our businesses. Robust design activity coupled with our Solid execution drove 19% year over year Revenue growth and 45% operating margin for Q1 first quarter bookings were ahead of expectations, resulting in record backlog of $8 billion. Here are some of the financial highlights from the first quarter, starting with the P and L total revenue was $1,474,000,000. GAAP operating margin was 29.3%, non GAAP operating margin was 44.7% GAAP EPS was $1.23 and non GAAP EPS was $1.96. Next, turning to the balance sheet and cash flow. Our cash balance was $1,407,000,000, while the principal value of debt outstanding was $2,925,000,000. Operating cash flow was $356,000,000. DSOs were 67 days and we used $200,000,000 to repurchase Cadence shares. Before I provide our updated outlook, I’d like to highlight that it contains the usual assumption that export control regulations that exist today remain substantially similar for the remainder of the year. For our updated outlook for 2026, we expect revenue in the range of $6,125,000,000 to $6,000,000,000 and $225,000,000 dollars. GAAP operating margin in the range of 27.5 to 28.5% non GAAP operating margin in the range Of 43.5 to 44.5% GAAP EPS in the range of $4.39 to $4.49 non GAAP EPS in the range of 7.85 to $7.95 operating cash flow in the range of 1.875 to $1.975 billion and we expect to use approximately 50% of our free cash flow to repurchase Cadence shares in 2026. With that in mind, for Q2, we expect revenue in the range of $1,555,000,000 to $1,595,000,000 GAAP operating margin in the range of 28.5 to 29.5% non GAAP operating margin in the range Of 44.5 to 45.5% GAAP EPS in the range Of $1.07 to $1.13 and non GAAP EPS in the range of $2.02 to $2.08. And as usual, we published a CFO commentary document on our investor relations website which includes our outlook for additional items as well as further analysis and GAAP to non GAAP reconciliations. In conclusion, Cadence is off to a strong start for the year. We are raising our 2026 revenue outlook to approximately 17% year over year growth. As always, I’d like to thank our customers, partners and our employees for their continued support and with that operator we will now take questions.
Abby (Operator)
Thank you. At this time I would like to remind everyone who wants to ask a question to please press STAR and then the number one on your telephone keypad. As a courtesy to all participants, we ask that you please limit yourself to one question. We will pause for just a moment to compile the Q and A roster. And our first question comes from the line of Charles Shih with Needham. Your line is open.
Charles Shih (Equity Analyst)
Hi, good afternoon. Thanks for taking my question. Anirudh, I think I have a pretty high level question, but this is probably top of the mind for a lot of investors. We obviously learned agentic AI is probably good for EDA, good for license, consumption, etc. But we’re still hearing some concerns around AI’s ability to actually write the software. And there are some doubts around whether AI can actually write better EDA based tools like Based Tool, I mean Virtuoso Universe, those kind of tools. And obviously there are always many EDA startups happening at the same time. And so the question is AI’s ability to write software worries you about the defensibility of the EDA based tool business? Obviously, once again we understand that agentic AI is good for consumption of the base tool business, but want to get your thoughts? Thank you.
Anirudh Devgan
Yeah, hi Charles, thanks for the question. So I mean there are multiple parts to this. Of course I’m super excited about agentic AI applied to chip design and eda. And your question is more specific to the base tool and whether AI can write those base tools. So first of all, I’m very confident in our position in the base tool and our competitive advantage. And just to remind everyone, I mean we have about 15,000 people now in cadence. About 10,000 are in R and D. We have more than half of them have advanced degrees. I think more than thousand of them have PhDs from the top universities. So we will anyway deploy AI internally like we are to write our software better. But I’m not worried that some other party will be able to write any better base tools. And our competitor of the base tool is anyway best in class. And I don’t see any reason that will change going forward. Okay, now what I’m super excited that we launched in CadenceLIVE is the agentic part and the interplay of the agentic tools with the base tools, the AI orchestration combined with physical accurate based tools. And that creates new opportunities for us both in terms of TAM expansion. Because what agentic AI allows us to, is to sell products in spaces we didn’t have products before, like RTL generation, verification, plan generation. And those products I think will be consumed more on a subscription plus consumption model. So this is entirely a new category for Cadence. And then in turn, like you said, agentic AI will drive more of our base tools. So I feel pretty good about this kind of three layer framework we have talked about and confident going forward.
Abby (Operator)
And our next question comes from the line of Jason Salino with Keybanc Capital Markets. Your line is open.
Jason Salino (Equity Analyst)
Great, thank you so much. Maybe just a clarifying question. So I noticed that the operating margin guide, you know, it’s coming down, you know, by a little bit curious if, if like what are the main drivers of that? John and I know we’re layering in kind of the Hexagon acquisition, but on like an absolute basis it’s, it’s relatively small layering in that, that opex. So maybe you can just help, help us understand the, the guide on the margin. Thank you.
John Wall (Senior Vice President and Chief Financial Officer)
Yeah, sure, Jason, thanks for the question. Yeah. What you’re seeing there is primarily the impact of including the hexagon design and engineering business in the current outlook. The strategic opportunity there is very large. But the 2026 PNL reflects the timing of integration that the, we announced in the press release when we, when we closed the deal that we expect 160 million of revenue this year. That’s, that’s in the guide now. We expect it to be dilutive by about 28 cents. The margin impact on the 160 million is kind of in the 5 to 10% range. But, but the dilution comes from, because we paid 30% of the acquisition price in shares and 70% in cash. So the interest component or the loss interest income on the cash causes a lot of the dilution impact in the short term. We’d expect it to be accretive in 2027. So I think the way to think about it is financially 2026 is an integration year and the guide includes the acquired cost base, the financing impact, the acquisition related integration costs and kind of near term dilution. And that’s why revenue moves higher while EPS and operating margin are lower than the February guide. So yeah, it’s 160 million. And I think in Q1 the impact was slightly less on the EPS that we had about 20 million of revenue from Q1 from Hexagon, so only about $0.01 kind of dilution impact. So EPS would have been like $0.01 higher if we didn’t have Hexagon.
Abby (Operator)
And our next question comes from the line of Vivek Arya with Bank of America securities. Your line is open.
Vivek Arya (Equity Analyst)
Thanks for taking my question. You know, Aniruddh, in the last year all we have been hearing nonstop are different news about chip shortages and growing kind of price of chips and just, you know, the pricing power that many of your customers have. And my question is what effect do shortages and the fact your customers have more pricing power, what effect does that have on their engagement with cadence? You know, does it restrict Chip start? Does it shift them towards higher ASP products? Just, just what impact do semiconductor shortages have on your growth and engagement trajectory? What, what has changed and …
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