# Cadence Design Systems, Inc. (CDNS) — Narrative, Q3 Fiscal 2026 Cadence's fiscal year ends December 31; its fiscal quarters end March 31, June 30 and September 30. The business, risk and annual results sections below come from the Annual Report on Form 10-K for fiscal 2025 (accession 0000813672-26-000016, filed February 19, 2026). The current-quarter and subsequent-events sections come from the Form 10-Q for the quarter ended September 30, 2026 (accession 0000813672-26-000121) and the third-quarter earnings release and CFO commentary furnished on Form 8-K (accession 0000813672-26-000116, October 26, 2026). ## Business *Source: FY2025 Form 10-K, accession 0000813672-26-000016.* Cadence sells the software, emulation and prototyping hardware, and silicon intellectual property (IP) that engineers use to design and verify semiconductors and the electronic systems built around them. Its customers are semiconductor companies and systems companies (hyperscalers, automotive, aerospace and defense, mobile, consumer and industrial manufacturers) that design electromechanical products containing chips. No single customer accounted for 10% or more of revenue in fiscal 2025 or 2024. Fiscal 2025 revenue was $5.297 billion, 91% of it product and maintenance and 9% services. Most revenue is recurring. Software is licensed mainly under time-based licenses, typically two to three years with no right of return, often with the right to remix products during the term; a small portion is perpetual. Hardware is sold or leased, or reached through a Cadence-managed cloud. Design IP is licensed per design, sometimes with royalties as customers ship chips containing it. In fiscal 2025, 80% of revenue was recurring (recognized over time, plus short-term renewable and committed-spend arrangements) and 20% up-front, mainly hardware, individual IP licenses and certain multi-year software licenses. Contracted but unsatisfied performance obligations (backlog) were $7.8 billion at December 31, 2025, of which 53% (excluding $0.6 billion of non-cancelable commitments) was expected to be recognized within 12 months. Cadence reports one operating segment and groups its offerings into three product categories, which made up these shares of fiscal 2025 revenue: - **Core EDA (70%)** — software and hardware for designing and verifying chips: the Virtuoso platform for custom and analog design, Innovus for large digital designs and signoff, Jasper formal verification and Xcelium simulation, and the Palladium emulation and Protium FPGA prototyping hardware that large AI, GPU and processor designs depend on. Fiscal 2025 additions included agentic-AI verification technology and VLAB Works virtual prototyping for automotive software. - **Semiconductor IP (14%)** — interface and memory controllers and PHYs (PCI Express, CXL, HBM, GDDR, SerDes, USB), Tensilica configurable DSPs and verification IP. In fiscal 2025 Cadence added the Arm Artisan foundation IP business (standard cells, memory compilers, I/Os) and Secure-IC (embedded security IP). - **System Design and Analysis (16%)** — PCB and advanced-packaging design (Allegro X, OrCAD X), signal and power integrity (Sigrity X), RF (AWR), electromagnetic, thermal and fluid-dynamics simulation (Clarity, Celsius, Fidelity), 3D-IC design (Integrity), the Millennium multiphysics platform and Reality digital-twin software for data centers, plus molecular simulation for drug discovery. The fiscal 2024 BETA CAE acquisition and the Hexagon design and engineering business (closed February 2026; see Current quarter) extend this category into structural and multibody simulation. Management describes three demand horizons for its AI-driven strategy: infrastructure AI (high-performance computing and AI chips for data centers), physical AI (autonomous vehicles, robotics, industrial automation) and life-sciences AI. The underlying driver is rising design complexity. Customers buy tools that improve power, performance and area without a matching rise in engineering headcount. Cadence names Synopsys (which now owns Ansys) and Siemens EDA as its key competitors, along with Keysight, Schrödinger, CEVA, Altium (owned by Renesas), Zuken, in-house tool teams at large electronics companies, and a growing group of Chinese EDA vendors including Huada Empyrean, Xpeedic, X-EPIC, Primarius, Univista and Giga Design Automation. Hardware is built by subcontractors. Cadence had approximately 13,800 employees at December 31, 2025, a substantial majority in engineering roles. It has never paid a dividend and returns capital through share repurchases. ## Risk factors *Source: FY2025 Form 10-K, Item 1A, accession 0000813672-26-000016, with updates from the Q3 2026 Form 10-Q, Part II Item 1A, accession 0000813672-26-000121.* The risks below are the ones most specific to Cadence's economics and circumstances: - **Export controls and China.** China is a large market for Cadence, and U.S. trade rules directly limit what it can sell there. On May 23, 2025 the Commerce Department's Bureau of Industry and Security (BIS) required licenses for EDA software exports to China. That requirement was rescinded on July 2, 2025, but it reduced China revenue while in force, and the company warns it could be reimposed. A BIS rule extending Entity List restrictions to entities 50% or more owned by listed parties took effect September 29, 2025, then was suspended through November 9, 2026. The Q3 2026 10-Q notes that a U.S.–China extension of trade arrangements to January 10, 2027 is expected to extend that suspension, but BIS had not formally done so. Restrictions also push Chinese customers toward domestic EDA vendors, consistent with China's stated goal of leading every segment of the semiconductor industry by 2030. - **The BIS/DOJ export settlement.** In July 2025 Cadence settled export-control violations from 2015–2021 involving $45.3 million of sales by a subsidiary to a customer in China. It pleaded guilty to one count of conspiracy to commit export-control violations, paid aggregate net penalties and forfeitures of $140.6 million, and accepted a three-year probationary term with compliance, reporting, audit and cooperation obligations. Compliance with the BIS agreement is a condition of continued export privileges. The obligations extend to businesses Cadence acquires and to any acquirer of Cadence, which could limit or deter deals. The settlements also expose the company to further inquiries, including in China. - **Revenue timing and concentration in semiconductors.** Hardware and IP revenue is recognized on delivery, so quarterly results swing with the timing of shipments. Recurring software revenue, recognized over time, makes it hard to accelerate growth quickly, and a bookings shortfall depresses future periods. Demand depends on new design starts in a cyclical semiconductor and electronics industry, where consolidation can concentrate bargaining power in fewer, larger customers. - **Competition and technology pace.** Competitors include much larger combined rivals (Synopsys with Ansys), aggressive pricing, new entrants and customers' in-house tools. Cadence must keep pace with each new process node, 3D packaging and the shift to AI-driven design, and its R&D spending (33% of fiscal 2025 revenue) may not earn an adequate return. - **AI execution and regulation.** Cadence is investing heavily in generative and agentic AI products. Rivals may move faster, the market may develop more slowly, and AI regulation (the EU AI Act carries fines up to 7% of worldwide turnover) and unsettled IP law around AI add compliance and litigation exposure. - **Acquisitions and integration.** Cadence acquires businesses regularly, the largest being the roughly $3.0 billion Hexagon design and engineering purchase in 2026. Acquisitions can dilute margins and earnings at first, take time to integrate and to bring up to Cadence's security standards, and face growing antitrust and foreign-investment review, including U.S. outbound-investment rules effective January 2, 2025. - **Cybersecurity.** Cadence holds customer design data and its own source code. The Q3 2026 10-Q discloses that, as first reported for the quarter ended March 31, 2026, a threat actor obtained a limited amount of test, configuration and source-code files that the company says are not material. Cadence says there was no operational disruption and customer environments were not affected. - **Supply chain for hardware.** Palladium and Protium systems rely on single or limited suppliers and contract manufacturers. Disruptions have delayed deliveries before and could again. - **Geopolitics and international operations.** More than half of revenue has historically come from outside the U.S., about a third of costs are in foreign currencies, and key R&D sites are abroad. The Q3 2026 10-Q's updated risk factor cites armed conflicts including in Iran, the Middle East and Ukraine, Taiwan's role in the chip supply chain, tariffs, and retaliatory Chinese measures such as export controls on rare earths and an "unreliable entity list". - **Cash location and debt.** Cadence carries $2.5 billion of senior notes and a revolving credit facility whose covenants include a funded-debt-to-EBITDA ceiling. A large share of its cash is held by foreign subsidiaries: 29% at December 31, 2025 and about 85% at September 30, 2026, per the Q3 10-Q. If U.S. cash falls short of U.S. needs, Cadence may have to raise funds on less attractive terms. A credit-rating downgrade would raise borrowing costs. - **Tax.** A significant share of earnings comes from subsidiaries in Ireland and Hungary. Cadence's tax rate is exposed to global minimum tax (Pillar Two) rules, audits, and lower-than-expected earnings in low-tax jurisdictions. ## Management's discussion — fiscal 2025 *Source: FY2025 Form 10-K, Item 7 and financial statements, accession 0000813672-26-000016.* Revenue grew 14% to $5,296.8 million from $4,641.3 million. Product and maintenance revenue rose 14% to $4,821.6 million on software, hardware and IP growth that management attributes to customers' continued investment in complex designs. Services rose 11% to $475.2 million on cloud and IP services. Every region grew: the United States rose 7% to $2,311.0 million (44% of revenue), China 19% to $680.0 million (13%), Other Asia 17% to $1,005.2 million, EMEA 13% to $790.6 million, Japan 31% to $341.7 million, and Other Americas 81% to $168.3 million. The China figure was achieved despite lower software deliveries there while the May–July 2025 BIS license requirement was in force. The recurring share of revenue fell to 80% from 83% as up-front hardware and IP grew faster. Total operating expenses rose 12% to $2,884.8 million. Research and development increased 14% to $1,768.8 million, mostly on headcount, including from acquisitions. Marketing and sales rose 6% to $802.6 million, and general and administrative rose 14% to $313.4 million, partly on contributions to the Cadence Giving Foundation and acquisition-related professional fees. Income from operations was $1,492.0 million. Operating margin slipped to 28% from 29%, which management attributes primarily to the $128.5 million charge for the BIS/DOJ settlement. A restructuring plan begun in September 2025 added $29.2 million of charges for the year. Interest expense rose to $116.5 million from $76.0 million, a full year of interest on the $2.5 billion of senior notes issued in September 2024. The effective tax rate was 27.1% versus 24.4%, including $33.4 million of tax expense because the settlement loss is not deductible. Net income was $1,108.9 million, or $4.06 per diluted share, versus $1,055.5 million, or $3.85. Operating cash flow rose to $1,728.8 million from $1,260.6 million on higher business levels and timing of collections, partly offset by the settlement payments. The U.S. law enacted July 4, 2025 (the One Big Beautiful Bill Act) restored immediate expensing of U.S. R&D and cut fiscal 2025 cash taxes by about $151 million. Cash used for investing was $460.5 million and cash used for financing $949.0 million, mainly share repurchases. Cash and equivalents ended the year at $3,001.3 million, with no revolver borrowings. Three tuck-in acquisitions closed in fiscal 2025, each disclosed with its consideration: - VLAB Works, acquired May 29, 2025, for $121.1 million net of cash acquired (Core EDA). - The Arm Artisan foundation IP business, acquired August 26, 2025, for $128.5 million (Semiconductor IP). - Secure-IC, acquired October 30, 2025, for $139.6 million net of cash acquired (Semiconductor IP). At year-end the pending Hexagon deal was valued at approximately €2.70 billion, about €1.89 billion in cash and the rest in Cadence shares, with closing expected in the first quarter of 2026. Management guided to a fiscal 2026 effective tax rate of about 27%. ## Current quarter — Q3 fiscal 2026 (three months ended September 30, 2026) *Sources: Q3 2026 Form 10-Q, accession 0000813672-26-000121; Q3 2026 earnings release (Exhibit 99.01) and CFO commentary (Exhibit 99.02), Form 8-K accession 0000813672-26-000116.* **Revenue grew 22%, helped by the Hexagon acquisition, while GAAP margin compressed.** Revenue rose to $1,633.3 million from $1,338.8 million. Product and maintenance revenue grew 23% to $1,487.3 million and services 11% to $146.0 million. The 10-Q attributes product growth to software, hardware and IP demand from customers investing in complex designs. Contracts assumed with the Hexagon business are classified mainly in System Design and Analysis. By the earnings release's figures, Core EDA revenue grew 20%, IP 24% and System Design and Analysis 30% year over year, with hardware posting another record quarter. Category shares were 69% Core EDA, 15% IP and 16% System Design and Analysis. By region, the United States grew 27% to $674.1 million, EMEA 31% to $248.9 million, Other Asia 29% to $312.4 million and Japan 24% to $107.1 million. China grew 4% to $255.2 million, and Other Americas fell 17% to $35.6 million. Up-front revenue was 21% of the total versus 18% a year earlier. The trailing-twelve-month recurring share eased to 78%. Costs grew faster than revenue. Total operating expenses rose 29% to $893.0 million. R&D was up 27% to $537.5 million, marketing and sales up 26% to $242.5 million, and general and administrative up 45% to $113.0 million, of which $25.4 million of the increase was higher charitable contributions. Amortization of acquired intangibles across cost of revenue and operating expense rose to $79.9 million from $26.0 million, mostly from Hexagon intangibles. Restructuring charges were $42.2 million under a plan begun in September 2026, consisting of severance from headcount reductions, with payments expected through September 2027. Operating margin fell to 26% from 32% (26.2% versus 31.8% in the release). The 10-Q gives three reasons: acquisition costs, including amortization, outpacing acquired revenue; the higher contributions; and product mix. Non-GAAP operating margin was 44.1% versus 47.6%. Net income was $289.7 million versus $287.1 million, and diluted EPS was unchanged at $1.05. The effective tax rate was 29.0% versus 26.9%. Non-GAAP diluted EPS rose to $2.11 from $1.93. For the nine months, revenue rose 22% to $4,692.0 million and net income to $992.5 million ($3.61 per diluted share) from $720.8 million ($2.64). The nine-month gain partly reflects comparison with the 2025 settlement charge and includes $88.6 million of investment gains in other income. Nine-month operating margin was 28% versus 27%. **Hexagon design and engineering acquisition (closed February 23, 2026).** Cadence acquired the design and engineering business of Hexagon Smart Solutions AB, including MSC Nastran structural analysis and Adams multibody dynamics software. Consideration was approximately $3.0 billion net of $154.6 million of cash acquired: $2.2 billion in cash plus 3.2 million Cadence shares valued at $902.2 million. The issuer's February 23, 2026 Form 8-K (accession 0000813672-26-000019) reports 3,224,473 shares issued to the seller. The preliminary allocation assigned $2,170.2 million to goodwill and $1,248.0 million to intangibles amortized over a weighted 7.8 years. On a pro forma basis, as if Hexagon had been owned throughout both periods, nine-month revenue would have been $4,755.6 million in 2026 versus $4,073.2 million in 2025. Cadence also completed three other, unnamed acquisitions in the first nine months of 2026 for an aggregate $83.8 million in cash, net of cash acquired. **Balance sheet and cash.** Cash and equivalents fell to $1,452.0 million at September 30, 2026 from $3,001.3 million at year-end. Cash paid for business combinations, net of cash acquired, was $2,143.4 million for the nine months, mostly for Hexagon, and was the largest use of cash. About 85% of the remaining cash was held by foreign subsidiaries. Cadence borrowed $875.0 million and repaid $725.0 million on its revolver during the nine months, leaving $150.0 million outstanding. The $500 million of 4.200% notes due September 2027 are now classified as current. Debt principal stood at $2.65 billion. Nine-month operating cash flow was $1,414.4 million versus $1,175.3 million. For the third quarter alone, the CFO commentary reports operating cash flow of $424 million and free cash flow of $362 million. Cadence repurchased 1.3 million shares for $400.0 million in the quarter ($800.0 million year to date), leaving $601.6 million of authorization at quarter-end. Backlog reached a record $8.2 billion, of which about $4.2 billion was expected to be recognized in the next 12 months. **Guidance (from the October 26, 2026 release and CFO commentary).** Management raised its fiscal 2026 revenue growth outlook for the third time this year: - **Revenue:** $6.387–$6.417 billion, up from $6.260–$6.340 billion previously, about 21% growth at the midpoint. - **Operating margin:** 28.2%–29.2% GAAP and 44.2%–45.2% non-GAAP. - **Diluted EPS:** $4.84–$4.90 GAAP and $8.37–$8.43 non-GAAP. - **Cash and taxes:** operating cash flow of about $2.0 billion, capital expenditures of about $240 million, and a GAAP tax rate of about 27%. - **Fourth quarter:** revenue of $1.695–$1.725 billion, GAAP EPS of $1.23–$1.29 and non-GAAP EPS of $2.19–$2.25, with about $400 million of repurchases planned for the quarter. On products, the release highlights the launch of Maestro, a set of AI models specialized for chip and system design, and more than 100 active customer engagements for its AI Super Agents. **Operating environment.** In February 2026 the U.S. Supreme Court struck down tariffs imposed under the International Emergency Economic Powers Act. Tariffs under other statutes remain, and the administration has pursued new measures. Cadence says Middle East conflicts, including with Iran, have not materially affected its results to date. ## Subsequent events *Source: Q3 2026 Form 10-Q, Note 8 and Part II Item 2, accession 0000813672-26-000121; Form 8-K Item 8.01, accession 0000813672-26-000116.* - **Share repurchase authorization increased by $2.5 billion (October 23, 2026).** After the quarter closed, the board approved up to an additional $2.5 billion of repurchases under the existing program, on top of the $601.6 million remaining at September 30, 2026. Repurchases may be made in the open market, in privately negotiated or accelerated transactions, or under Rule 10b5-1 plans. The program has no expiration date. The 10-Q reports no other post-quarter acquisitions, divestitures, financings or litigation outcomes. The Hexagon acquisition and the other 2026 acquisitions closed within the reporting period and are covered above.