Cadence Design Systems Inc (CDNS) Q3 2026 Earnings Call Transcript

your telephone keypad. Thank you. I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead.

Thank you, Operator. I'd like to welcome everyone to our third 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 be considered in isolation from or as a substitute for gap results. Reconciliations of gap to non-gap measures are included in today's earnings release. For the Q&A session today, I 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.

Thank you Richard. Good afternoon everyone and thank you for joining us today. I'm pleased to report that Cadence delivered another outstanding quarter. With all key metrics coming in well above our guidance, backlog reached a record of $8.2 billion, reflecting strong bookings driven by growing customer demand. Given our strong business momentum, expanding technology leadership, and compelling AI growth opportunities. We are raising our revenue outlook for the year to 21% growth and our EPS outlook by $0.30 to $8.40. John will provide more details on both our Q3 results and the updated financial outlook. Agentec AI represents a transformational market opportunity and Cadence is exceptionally well positioned to capitalize on it. Our differentiated three-layer framework is anchored by our physically accurate simulation and optimization engines and the critical middle layers. Tidely integrated with AI agents and orchestration at the top and accelerated compute and propriety data at the base. Agentec AI continues to evolve at a remarkable pace, with our AI super agents gaining strong traction. We are now addressing the longstanding customer demand for domain-specialized models. We believe the future of Agentec AI-based design is increasingly domain-specialized models combined with intelligent model routing for performance and reinforcement learning loops with underlying tools for recursive self-improvement today i'm excited to introduce maestro a portfolio of domain specialized ai models purpose built for chip and system design By controlling all three layers, our AI superagents, Maestro models, and proven EDA and SDA tools, we are uniquely positioned to deliver optimal performance, efficiency, and throughput results for our customers. Initial results are very compelling, demonstrating up to 30% higher quality and up to 5x greater token efficiency versus general purpose foundation model. Moreover, the Maestro models can be further post-trained on customers' proprietary data to deliver even better outcomes. Our model router chooses among our models and other leading frontier and open-width models as needed for optimal results. Customers can opt to deploy Maestro models in the cloud or in their on-prem environment. Maestro is gaining strong early customer traction with several deployments underway. Momentum of our AI super agents continues to accelerate. with compelling early results and more than 100 active customer engagement. We added a new agent to ChipStack for RTL generation and early PPA optimization. That created RTL delivering an average of 24% area and 18% power reduction versus pure foundation model generated code. importantly this demonstrates the power of combining our ai super agents with ai models and our underlying eda engines to achieve outcomes that foundation models alone cannot deliver honda is using the rtl generation agent and ai powered automation to improve productivity from specification to RTL development. In Q3, MediaTek deployed ChipStack into its production digital verification flow, achieving 50 to 70% improvement in verification coverage and 1.4 to 2x reduction in engineering effort, with deployment now scaling across design teams. In analog and custom design, ViraStack saw a 4x increase in customer engagement with deployments in various production designs at multiple customers. The combination of agentic workflow, embedded skills, and our virtuoso platform is unlocking significant new productivity opportunities in a traditionally difficult to automate domain. We are seeing strong customer interest in InnoStack, our digital AI superagent, at customers' push to improve PPA, accelerate design closure, and boost productivity. In Q3, the Renaissance MCU team successfully deployed InnoStack across a wide range of engineering tasks, achieving a 34X productivity improvement with plans to expand its usage to layout automation. Also in Q3, Samsung Foundry successfully used InnoStack to dramatically improve engineering efficiency and accelerate PPA exploration, reshaping its approach to technology migration and DTCO optimization. Social Next is deploying InnoStack in its production design environment, and I expect its combination with our advanced physical design tools to deliver up to a 5x overall productivity gain while maintaining design quality. In PCB and 3DIC design, the early response to our AuraStack AI super agent has been overwhelmingly positive. Nokia is deploying AuraStack on our Millennium supercomputer to advance electronic system design at scale. By unifying Agendic AI, our physics-based solvers, and accelerated compute in a secure on-prem platform, Nokia is achieving a 5x acceleration in key design and analysis workflows. Moving on to our businesses, we are delighted that all product groups delivered outstanding results, with year-over-year revenue growth of 20% in core EDA, 24% in IP, and 30% in SDNA. Accelerating design activity continues to drive strong demand for our core EDA, SDA, and IP products. At the same time, we are seeing amazing customer momentum for our agentic AI portfolio, which is also fueling increased demand for our underlying product.

We are pleased that recurring revenue sustained its strong momentum, growing 18% year over year.

I'm particularly proud of the significant wide-ranging agreement we have signed with top customers. We furthered our longstanding partnership with a global marquee systems customer through a significant wide-ranging expansion of our core EDA, hardware, and SDA solutions. In Q3, Cadence and a top telco deepened their long-term strategic partnership with a broad expansion across our AI offerings, EDA software, hardware, and SDA solutions. establishing Cadence as their primary design partner. Core EDA revenue growth was driven by broad-based trends across the portfolio. Our digital and sign-up business continued to expand, achieving 16 new full-flow wins during the quarter. As agentic flows increasingly require full vertical workflows, there is growing demand for our synthesis and sign-off solution. Our sign-off product saw growing adoption and our verification software products had strong growth in big digital and memory design with increasing usage at major hyperscaler and memory companies. As AI and HPC designs continue to grow in scale and complexity, Hardware-assisted verification has become an increasingly strategic capability for our customers. This is driving sustained, unprecedented demand for our Palladium and Proteum emulation platforms, which delivered yet another record quarter. we added several new logos and saw a meaningful expansion with marquee customers across a wide range of verticals. Our hardware cloud offering showed strong growth with a leading semiconductor company adopting more hardware cloud services to accelerate new product development. In analog and custom design, Spectre FX continues to gain momentum, highlighted by major comparative displacement at a marquee infrastructure silicon provider with multiple new two nanometer projects adopting our platform. Our IP business delivered another outstanding quarter, driven by deepening engagement with leading hyperscalers and semi-customers. We continue to benefit from strong AI-driven tailwinds, fueling accelerating AI infrastructure investment, growing adoption of custom silicon, and increasing demand for high-performance IP. Along with the transition to advanced nodes and chiplet-based architectures, these AI-driven trends are creating a strong pull for a differentiated star IP portfolio, across interface, memory, and foundation IP. We are well positioned for sustained growth as we continue to deliver superior power performance and area across our expanding advanced IP portfolio. A leading space technology company selected our IP portfolio for their custom chip program, paving the way for a broader services and silicon engagement. Tensilica delivered a record revenue quarter, and we announced a joint development with analog devices across next generation audio applications. Our system design and analysis business delivered another strong quarter, driven by growing adoption of our integrated solutions and proliferation of our expanded electronic and physical systems intelligence portfolio. Allegro Momentum continued, including a competitive displacement at a leading EV customer that chose Cadence's integrated PCB design and multiphysics analysis platform as its primary solution. Our Millennium platform had strong adoption, driven by deployment of our GPU-accelerated electronic and mechanical system suite along with our reality digital twin solution during the quarter switch a leader in sustainable high density AI infrastructure selected our millennium and reality digital twin solutions to advance the design and simulation of his next generation AI factory. The MSC business is the integral part of our physical AI strategy, and its integration is progressing well. MSC Atom, our industry-leading multibody dynamic solution, helped secure a comparative displacement at a leading power company, along with adoption of other Cadence products. In summary, Cadence delivered exceptional Q3, and I'm delighted with the accelerating momentum of our business. We are executing extremely well in a vibrant AI market, have our strongest competitive position ever, and are extending our leadership in AI. Our highly recurring and rideable business model combined with growing customer R&D investments is positioning us very well for continued strength in this dynamic AI environment. With that, I will turn it over to John to provide more details on our Q3 results and our updated 2026 outlook.

Thanks, Anirud, and good afternoon, everyone. Cadence delivered strong third-quarter results driven by robust demand across our businesses and growing momentum from AI-driven design. Growth is accelerating and broadening. Q3 revenue grew 22% year over year with strong double-digit growth across all product groups. We exceeded our guidance on every key financial metric and ended the quarter with record backlog of $8.2 billion. Here are some of the financial highlights from the third quarter, starting with the P&L. Total revenue was $1,633,000,000. Gap operating margin was 26.2%. Non-gap operating margin was 44.1%. Gap EPS was $1.05. Non-gap EPS was $2.11. Next, turning to the balance sheet and cash flow, our cash balance was $1,452,000,000, while the principal value of debt outstanding was $2,650,000,000. Operating cash flow was $424,000,000. DSOs were 66 days, and we used $400,000,000 to repurchase Cadence shares during the quarter, reflecting our confidence in the business and our commitment to returning capital to shareholders. underscoring that commitment our board has authorized an additional 2.5 billion dollars for our share repurchase program 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 now expect revenue the range of $6,387,000,000 to $6,417,000,000. GAP operating margin in the range of 28.2% to 29.2%. Non-GAP operating margin in the range of 44.2% to 45.2%. GAP EPS in the range of $4.84 to $4.90. Now on GAAP EPS in the range of $8.37 to $8.43. Operating cash flow of approximately $2 billion, and we expect to use more than 50% of our free cash flow to repurchase Caden shares in 2026. For Q4, we expect revenue in the range of $1,695,000,000 to $1,725,000,000. Gap operating margin in the range of 30% to 31%. Non-gap operating margin in the range of 44% to 45%. Gap EPS in the range of $1.23 to $1.29. and non-GAAP EPS in the range of $2.19 to $2.25. 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. Overall, I'm pleased with our Q3 results, especially our recurring revenue growth of 18% year-over-year. At the midpoint of our updated 2026 outlook, we now expect revenue growth of 21%, operating margin of 44.7%, and EPS of $8.40. As always, I'd like to close by thanking our customers, partners, and our employees for their continued support. And with that, Operator, we will now take questions.

Thank you. At this time, I would like to remind everyone who wants to ask a question to please press star, then the number one on your telephone keypad. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. And if you're muted locally, please remember to unmute your device. As a courtesy to all participants, we ask that you limit yourself to one question. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Jason Salino from KeyBank Capital Markets. Please go ahead.

Hey, thank you for taking my question. Anarud, really nice to see the Maestro announcement. I'm not an EDA engineer. I'm not an AI scientist. So maybe can you just explain what this is a little bit better? It sounds like it's part model router, but also maybe domain-specific models. So, is Cadence developing these main specific models? Maybe just elaborate and then, you know, how monetization of this new product will work.

Hi, Jason. Thank you for the question. There's a lot in that release. So, let me try to unpack it a little bit. You know, first of all, you know, we are, you know, very pleased with the momentum of our agent stack and all the four super agents. And you can see there are, like, more than 100 engagements now. So as we worked with customers over the last six to nine months, several trends became pretty clear. And to me, we are launching Maestro as what I would call the next generation of agents. And there are three big factors in the next generation of agents. So one is, like what has happened in the last one year is that, of course, we worked with all the frontier labs from the very beginning. whether they're doing chip design themselves or we are using their LLMs. For over the last one year, there is this emergence of very, very good open-weight models. And I always wanted to do domain-specialized models, but now it's finally possible with open-weight models. And it's actually very cost-effective to post-train these models to deliver domain intelligence, which is remarkable. We're getting up to 30% better quality by using our tools and data to post train these models and also you don't need like it's a portfolio of models so all the way to like small decision decision lms to small and medium llms all the way up to you know frontier class open weight models post trained on our data and intelligence so that's the first part of maestro so it gives really you know customization for chip and system design and gives much, much better results. It's actually quite remarkable how much these models can be improved by post-training. Now, the second part of that is, you know, our agents, when they do these tasks, have a variety of tasks, right? So, we don't need only one size or type of model to do the task. So, the second part is model routing. You know, just like you don't need to use an airplane to go to your local grocery store, right? So similarly with agents, you have a variety of tasks that we need to do from simple tasks to like deep thinking and reasoning tasks. So the model router will efficiently, knowing what the task is from our super agent, use the right model. And that can easily give like up to 5x improvement in token efficiency. So either much lower cost or much more work for the same cost. And then the third thing is, which I always talked about, you know, this reinforcement learning loop with the underlying tools. And we have great example. For example, we talked about our new RTL agent that, you know, one of the customers publicly endorsed Honda, gave 24% area and 18% power because the integration with the underlying tools and how we call them, and continuous self-improvement, you know, whether it's skills or models, it gives us a unique advantage. So if you combine these three things together, you know, domain-specialized model, domain-specialized family of models, plus model routing, plus deep integration with our tools and data, it gives a unique, you know, differentiation that nobody else can do, and it also allows us to control you know all three layers of the cake and innovate in all three layers of the cake so i'm actually super excited and i think this is what's going to happen in all industries as these llms mature you know this domain specialized intelligence model routing and integration with underlying engine your next question comes from the line of jim schneider

from goldman sachs please go ahead good afternoon thanks for taking my question i was wondering if can maybe give us an update on the monetization of the agentic ai solutions you're seeing i believe last quarter you talked about recurring revenue growth of 20 this quarter was 18 maybe talk about what the difference there and the recurring was and maybe underlying that um whether there was any acceleration in the in the agentic part of that recurring revenue thank you yeah thanks for the question i'll start and then john can comment you know the i am very proud of the recurring growth you know and I mean this quarter there were some specific things you know like if you

compare it to Q3 of last year there were some specific things with China revenue moving around which is not there this year but in general you know recurring revenue is doing phenomenally well and if you step back and compare you know last year recurring revenue was 11 percent and you it's 18% for this quarter and it was very good last quarter. So I expect recurring revenue to do very well in 2026. And this is a result of, of course, our agentic AI solutions, but also agentic AI solutions driving more usage of our base tools, which as we always said is going to happen. So that's what we see.

A lot of engagement is agentic and a lot of usage of our base tools so that provides a lot of growth for recurring and then you add that with with you know our ongoing strength in ip and hardware and you get a very very good set of results yeah i'd agree with that i mean it's it basically reflects strong demand across our software portfolio and and healthy customer expansions and continued strength in core eda um yeah i i think that's the way to look at it in terms of strong hiking goals to recurring revenue we're very pleased with this uh your next question comes from the line of vivek aria from

bank of america securities please go ahead uh thanks for taking my question um anirudh we recently heard um three things from your uh competitors that they can grow uh sales and if at a mid-team space next year and then compound it to 30 that they can achieve 50 percent of big margins. And then also, interestingly, there is a royalty-based model that can help add nearly a billion dollars to their top line over the next several years.

So I realize, right, this is not the call to give a multi-year growth outlook, but I was just hoping to get your perspectives on how you envision sort of this growth and royalty component for Cadence and how well is Cadence positioned to maintain or expand your market share and your leading operating margins over time thank you yeah thanks for the question vivek so overall you know i'm very pleased with with our growth and and not just growth but uh profitability and margin and you know we always talk about like rule of 40 metrics or revenue growth plus margin so i think we will end the year you know if you look at our guide about 21 revenue growth and slightly less than 45 percent margin so we will end up you know north of 65 in 2026 okay that's the important thing to point out okay and and you know we still have one more quarter to go so we'll see you know it's an important quarter for us fourth quarter is always important so we'll see how that finishes and we can update you like we usually do in in february for the next year but overall the The environment, I think, is very positive for us. You know, as you know, the AI build out continues. There's a wonder amount of design activity in all aspects of AI and even the traditional companies and analog big signal companies, digital companies, memory companies, system companies. So the amount of design activity is the strongest that I have seen. And our, you know, we're gaining share in almost all segments of our business, whether it's IP or hardware or EDA, you know, Agentec AI. So our product portfolio, I think, is the strongest it has ever been. And then we have this huge opportunity with Agentec AI. And I think we are redoing, you know, how Agentec AI will be defined for all industries with our own domain-specialized models and the flexibility to continue to work with all the frontier models. So if you look at all these three things, I feel Cadence is in a very, very strong position. Now in terms of your specific question on royalty, we are always looking at different kind of business models. So in IP, we always had royalty for a while in Tensilica, and now we have royalty in our design IP business as well.

But to me, that's just one vector. you know we're always looking at how to best serve give value to our customers and then get of course value in return your next question comes from the line of city panagrahi from mizuho please go ahead uh thank you congrats on a good quarter uh i just want to ask on hardware i see even the inventory uh again uh grew this this quarter i'm wondering uh you know uh hardware is a strong quarter. How sustainable hardware growth for heading into next year, 2027? Any color would be helpful there. And quick clarification, John, there is a spike in GNA expense in Q3. Was there anything one time there? Thank you.

Yeah, sure, Citi. Great. Look, I'll take the hardware question first. The hardware continues to perform exceptionally well. I mean, we delivered another record quarter supported by strong demand from ai and hpc customers and we're also seeing growing interest in cloud-based hardware access the hardware assisted verification is becoming increasingly important because customers are designing systems of unprecedented complexity and they need the capacity to verify those designs before committing to silicon um we have a strong pipeline entering q4 and we continue to expect another record year for hardware and as always hardware can be lumpy from quarter to quarter depending on product deliveries and customer installation schedules but the underlying demand environment remains very strong very healthy uh and we're very very encouraged by the pipeline of customer engagement um the in terms of of inventory the increase in hardware inventories to support customer orders that uh we have a significant backlog that we're we're trying to work our way through uh but there are no capacity or supply chain constraints in terms of addressing that we're just building inventory to hit that uh to hit those numbers and then you asked about uh about gna um that's in in uh part of the quarterly movement uh this quarter reflects the timing of of annual charitable contributions which occurred in q3 this year compared to q4 last year so i would extrapolate that timing difference into the underlying gna run rate um so so there's a a slight impact in gna uh in q3 because of that uh those charitable contributions yeah and city just

Just to add on the hardware piece, I mean, Palladium and Proteum performing exceptionally well. Not just for AI, and of course, we are working with all the major AI companies, but also even any other kind of chip design right now, hardware became a indispensable, almost indispensable way to design these things. Now, one thing is always like, will this trend continue? And we'll see, but there's one mega trend, okay? So, you know, hardware is, you probably know this already, but just to highlight it even further, hardware is normally sold or consumed based on design size. So, if the design size is bigger, then you need more and more hardware. So, actually, I was recently, just an example of what is going to happen to design size. I mean, the design sizes are already big, but what's going to happen to design size in the future? So, just to give you an example, I was at iMac recently. I gave a talk at IMAG, which is a European research consortium, and TSMC also gave a talk, same session. So TSMC showed their process roadmap and said in the next five years, the chip size will go up by 48x, 48x. Now typically this would happen to be like 5 to 10x in the old days, but I think it's going to be 48x because you have to add regular technology scaling plus 3DIC. You know, so all these 3DIC packaging, wafer scale integration. So that's going to even further create more and more demand for hardware and, you know, die-to-die IP and things like that. But so now our customers are not only verifying one chip or one chiplet. They are verifying those chiplets working with other chiplets. And the size of the chiplets is going up and the amount of chiplets are going up. So I think this trend, you know, one criticality of hardware-based design and verification combined with the growth in size is going to continue for some time.

Your next question comes from the line of Joe Katroche from Wells Fargo. Please go ahead.

Yeah, thanks for taking the question. I was curious if you could just kind of talk about the change in the 26 outlook, particularly from an operating profit perspective. because I think, you know, when you flow through just kind of the incremental margin on the upside in revenue, it's quite significant relative to maybe you're kind of targeted over 50%. So maybe just any help there in terms of understanding what's going on there.

Sure. Yeah. Look, we continue to be very pleased with the underlying profitability of the business. Despite integrating Hexagon's D&E business and making targeted investments in our strategic growth opportunities, we're now expecting approximately 44.7% non-GAAP operating margin for 2026, which is slightly above last year. But if you look at the revenue growth this year over last year, it's about 1.1 billion. Non-GAAP operating profit is growing about 500 million. And when you consider the Hexagon D&E being part of that, and that's not really contributing much in the way of operating profit at all this year. And I think we said at the start of the year, where we were expecting hexagon D&E to be about 160 million for the year. It's doing slightly better than that, but it's pretty much on target. I mean, if you back that out, we'd be where you typically expect us to be, which is kind of mid-teens for revenue growth, high-teens for EPS growth, and in our usual kind of 54%, 55% incremental margin range. So the hexagon D&E is kind of impacting the incremental margin for this year but we'd expect that to help us next year because the integrations go really well um we're taking steps now to to improve things for next year in the same way as we did with beta the last couple of years your next question comes from the line of charles xi from needham and company please go ahead oh thanks for taking my question And hey, Anilu, glad to hear about the Maestro model portfolio just announced today.

In light of your competitor who announced the GPT synopsis, can you tell us what your thoughts are regarding collaborating maybe with Frontier Labs for a specialized model, given that Maestro, So, based on what you just described, it sounds like it's a collection of open models post-trained by Cadence, and I think now your customers also have choices between your model portfolio and, let's say, GTT synopsis. What do you tell your customers when they have both choices and why they should pick Cadence?

Yeah, thanks for the question, Charles. So first of all, I just want to point out that, you know, we have worked with OpenAI from the very beginning of when they got started. You know, so in terms of chip design and we have all kinds of, you know, collaborations with OpenAI. And same thing with with Entropic and Gemini, you know, the three leading frontier models. So we always discuss all kinds of collaborations with them. Now, in terms of what we want to make sure, and Maestro, the key thing is Maestro is not just our own models, but it still has maximum flexibility to use the right model for the right task. So let's say for a certain percentage of the task, a certain frontier model is better, we will, of course, use that to give the best performance to our customers. But the key thing in our solution is that we want to control the three layers of the cake, and we want to control the interaction with our customers. You know, we want to be the primary interface to our customers, which is what our customers want. And in return, you know, our agents will provide them a lot of value, and we'll use the right LLM for the task, okay? But the critical thing is as we became the primary interface, and we guarantee the confidentiality of our data and their data. So the other thing we will allow with Maestro is if a customer wants to post-train Maestro further, and this is another request from our customers, we will allow that. If the customers want to have it on-prem, we will allow that. If the customer wants to host on the cloud, we will allow that. okay so it gives maximum flexibility and maximum performance by combining all three layers and only cadence can provide this and that will give without any doubt the best results for our customers your next question comes from the line of harlan sir from jp morgan please go ahead yeah good afternoon thanks for taking my question and last quarter you mentioned the pickup in the more traditional analog power microcontroller segments of the market right targeting industrial automotive, consumer, IoT.

That's the positive cyclical dynamics we're seeing now as excess customer inventories have bottomed in these end markets. Are you continuing to see the positive demand trends in this segment? And, you know, these same companies are now very focused on embedding next generation physical AI-based capabilities into their chip designs, right? Your MCU customers, for example, are adding NPU capabilities to their chip designs. Your analog customers are designing more sensor-related capabilities into their chips, more A-to-D, D-to-A converters, on-chip DSP processing, is this also translating into a better book of business for the Cadence team?

Yes, Haram, that's a great point. So I think the momentum is very strong in analog and mixed signal, and you can look at their results as well, you know, driven by physical AI and overall recovery of the market. and of course memory which we work with all the big memory companies is having you know of course amazing uh improvement from a year or two ago and i think what it shows up is you know first of all we are very very strong in big signal companies so because we have the most complete portfolio with both analog and digital so these are designs like you mentioned are are more and more mixed signals, so that plays to Cadence's trend. And also Virastack, you know, I'm really, you know, pleased by the momentum in Virastack, because as analog customers, whether they are mixed signal companies or, you know, these big AI companies also have huge analog teams. I don't know if you realize that, some of these big AI companies, you know, designing their own IPs and all have huge analog teams. So there is a massive demand for analog productivity, which we could not provide earlier. I mean, we always wanted to, but you know, with Agentec AI now we can do a lot more in analog productivity. And you can see that in some of the customer codes we have seen and the amount of engagements we have with ViraStack. So overall, I'm pretty pleased, not just with the environment of analog mixed signal, but also the new capabilities we are launching with ViraStack.

Your next question comes from the line of Joe Vrewink from Baird. One moment, please go ahead. Joe Vrewink, a reminder to unmute your device. Your line is open. Moving on for now, your next question comes from the line of Lee Simpson from Morgan Stanley. Please go ahead.

Thanks for fitting me in here. Anruid, it does seem as though you and your peer are pursuing very distinct routes to monetizing agentic ai uh in chip design i mean i i thought you answered the one of the previous questions quite well it really does ring out that you've you're looking to have your own control on the modeling your deployment flexibility comes through so you can see that adoption as you see it versus you know a frontier model centric partnership is something you think will will gain quite good adoption but is there something in the performance that we need to to better appreciate or even in the delivery costs that really led you to go down this route in strategy? And maybe just a follow-up question. You did mention that a leading space company was adopting some of your IP. Just wonder if there's anything specific to call out there. Are they taking just typical IP blocks or does it come with any broader IP services attached? Thanks.

Yeah, let me answer the second part first and come back to the first one. I mean, in general, like we have mentioned that now 45% of our business is coming from the system companies, the non-traditional, the traditional semi. So these are new customers. And what is also encouraging to see is that it's not just the big AI hyperscalers where they're doing design, but we are seeing a lot of other system companies like the one we highlighted, like a space company, even companies in finance doing their own chips. As we make chip design easier and easier, this is always the promise that more and more companies will do that. And when these new companies do design, we naturally have IP opportunities, but also hardware and also naturally design services because they're getting started. And we have one of the best design services capabilities as we are the best at using our own products. So, I think this is some space we have to watch, but I'm pretty encouraged by, you know, more system companies doing chip design. Now, in coming back to the AI solution, you know, we want to have control and we want to give flexibility to our customers. So, this is the right way to look at it. So, and there is a lot of value in the model itself. and it is actually pretty cost-economical to post-train a frontier-class model. Okay, this could not have happened like two years ago, but now it's actually pretty manageable cost to, and, you know, you get pretty remarkable results, like I mentioned, by very incremental cost to post-train a frontier model. And, of course, that's an important thing to have in the bag along with a commercially available frontier model. It's just choosing the best solution of the two. And then in our own agentic development, right, we have our own IP team, you know, a lot of people using our, of course, using AgentStack and all the solutions. So the benefits of cost, you know, apply to us as well. So even though there is some, you know, incremental expense to train them, there is also incremental saving in our own deployment of AI. So overall, I think it should not affect any financial model of cadence. It only gets stronger as we add like a new kind of revenue capability and all the margin progression and all should go, you know, as we have planned for a while. But, you know, what Maestro does is this flexibility, but also gives, you know, customization ability. It gives control and then it gives cost saving. So this is best of all words.

Yeah, Lee, if I could add there, I think that that's a very, very important point. that Anarim makes in terms of the flexibility, we really want customers to have choice and control over the models they use, while benefiting from Cadence's domain expertise and deep integration with our design tools. I mean, our strategy remains centered on delivering high value engineering software rather than building a large general purpose AI infrastructure business. We're focused on improving the efficiency and the value of authentic workflows and maintaining attractive software economics as customer adoption scales. But with the flexibility works in our model, our model allows customers to use their own LLM infrastructure and bear their associated model compute costs if they want to. And CAID monetizes the underlying design agents and our agentic orchestration capabilities. The economics of particular deployment options can vary, of course, but the principle is that greater customer usage should create greater value for CAID. And I think that's where we differentiate ourselves.

Your next question comes from the line of Joe Vrewink from Baird. Please go ahead.

Hi, can you hear me?

Yes, Joe, please go ahead.

Great. I wanted to go back to ViraStack and InnoStack. I think it's fair that the analog and back-end areas haven't seen the AI proliferation yet like front-end design has. Are you seeing this change? Is specialized models and post-training something that helps better address these domains? And if all of this is starting to happen, is there a commensurately higher revenue implication for cadence relative to even what has been seen to date?

Yeah. I mean, first of all, I mean, there is, you know, we started with chip stack, but then we have launched like the three other major super agents, as you know, PiraStack for analog, InnoStack for backend, and AuraStack, the latest one for package and PCB. And I have to say the demand is actually phenomenal. Demand is phenomenal, especially because ChipStack is doing great, but also these other agents are even more integrated with our base tools. So InnoStack, if you look at our endorsement, typically when we work with customers to get a public endorsement, is only happens like one out of 10 customers because not everybody wants to talk about what they're doing. But we have maybe 10 endorsements this quarter. So that tells you the extent of the deployment of all these agents. And if you look at InnoStack, Renes I was talking about like 34X productivity improvement. Samsung Foundry, see there are other use cases that can happen, not just physical design. You know, one big use case is, you know, design technology co-optimization with the Foundry. So the InnoStack is a critical agent for that. Socio next talked about 5x productivity improvement. Rapidus talked about 2x improvement. So there's a multiple X improvement happening with InnoStack. ViraStack already said the demand is off the charts. And AuraStack, this is the latest area where innovation hasn't happened. So Nokia showed 5x productivity improvement with AuraStack. So Chips tag is probably a year now in deployment and these are maybe six to nine months, but there is acceleration deployment of these, the newer, but they're even more tightly integrated with the base tools. And then Maestro adds further differentiation on top of these capabilities. So I feel very, very confident. And what's gonna happen is, we have a lot of R&D investment in our traditional tools in the middle layer. but now we are putting significant differentiation and investment in the top layer. We are defining, I believe, what will be the agentic flow for the future in all industries. So as we make the agentic the top layer and more and more complicated, more and more integrated, more and more differentiated, it is very difficult to compete with cadence in the agentic AI. Whether you're a startup or if you are trying to write a customer, try to write some agent, but the capabilities with model routing, with domain-specific models with tight integration with agent and the tools, this is something that our customers can't do themselves. So that also broad very well for all these customers realizing that and working more and more closely, not just in the middle layer, but in the top layer with us.

So I feel very good in terms of how the speed and differentiation of our Your next question comes from the line of Jave Leeshauer from Griffin Securities. Please go ahead.

Thank you. Good evening. En route in your prepared remarks, you made some important references to the components of your core EDA, particularly in digital. It's demonstrable that over the last number of years, you've gained considerable share in core EDA. But I'd like to delve into what the components of that share gain have been. In other words, when we think about the various large categories that comprise core EDA, especially digital, would it be fair to say that the single largest difference in terms of the dollar and share gain you've had over the last number of years has been with Inovus in implementation and perhaps to a lesser degree in areas like synthesis, RTL simulation, analysis, and so forth, perhaps you can speak about the breadth of where that incremental revenue and share has come from in core EDA to the extent that it's not really largely concentrated in place

Yeah, Jay, great question. So, yes, I mean, if you look at over five, seven years, we have gained so much. in digital implementation, you know, with InnoVers becoming basically the platform of choice for advanced nodes design. And then what is particularly encouraging in the last six to 12 months is not just InnoVers, but all the tools around InnoVers. And, you know, we always, I have talked about for 10 years now, you know, of course there's integration at lower nodes. So that was going to happen anyway, as we go to three nanometer, two nanometer, it's difficult to separate sign-off from implementation or synthesis from implementation. But then with this agentic AI, there's a further kind of need for vertical flows which are well integrated. And I mentioned this last quarter also. I'm particularly pleased to see, I mean, not only our tools in synthesis and sign-off are much, much better now versus a few years ago, that we are getting this real full-flow deployment at not just small or medium customers, but some very, very large customers are deploying our full digital flow. And this is a great trend for Cadence. At the same time, we maintain our undisputed leadership in analog. And then because of the strength of Palladium, the strength of Jasper, strength of Verisium and Egentic Flows, ChipStack, it is also helping our verification business and logic simulation So overall, that's why I was saying I feel that all the three big parts of EDA, we are in a very, very strong position and gaining momentum, not just individual tools being better and proven by large companies, but also this integration that advanced, integration with the agentic solution.

So we'll see how it proceeds, but overall, I feel pretty good about it. your next question comes from the line of gary mobley from stone x please go ahead hi guys good afternoon thanks for taking my question um your bookings in the first somewhere in the ballpark of i don't know mid 20 call 26 year over year if i recall correctly this was supposed to be a low renewal period 2026 was supposed to be so so my question is you know what's driving the strong backlog the strong bookings is it um you know utilizing traditional eda tools

as a result of you know ai agent workflows is it a reflection of the strength of the semiconductor industry in any color that you can add there uh would be helpful thank you sure thanks gary i mean we're very pleased with the bookings with the bookies performance and the growth of backlogs uh particularly given that 2026 as you mentioned was is a comparatively lighter renewal year for us the strength reflects healthy underlying design activity expanded customer engagements and strong add-on opportunities across our portfolio and what we're seeing is that cadence is becoming increasingly important to customers as they look to accelerate their engineering roadmaps and address more complex design challenges uh the backlog itself provides good visibility into into into that uh but it's important to remember that you know that's that backlog and bookings number reflects the timing of revenue recognition that depends on the structure and delivery of individual arrangements and stuff like that but um so there's a there's always a blend of time and value in those but uh but strong bookings in a lighter renewal year are particularly encouraging because they reflect expanding customer engagements and not simply the renewal calendar that says we're very very pleased with that booking strength thank you so Gary needless to say I mean we've done three quarters there's still one more quarter to go which is traditionally as on this course yeah so we'll see where we are yes thank you your next question comes from the

line of Lachlan Brown from Rothschild please go ahead hi Anarud John thanks for squeezing me in Are you seeing much evidence that new AI design tools like chip stack lowering the barriers to entry for custom silicon for non-traditional designers? And I appreciate that Linux expand naturally takes time, but are there signs that new logos could become more of a meaningful growth driver for that TAM expansion going forward?

Yes, absolutely. I mean, like I've talked about this for years that, you know, as we make chip design easier to do, there will be more and more people doing chip design. And, you know, if you step back, you know, we made chip design maybe over the last 20 years, a hundred times easier to do because, you know, maybe 20 years ago, all these IBM Intel would do like CPU design with 500 people in like five years. Now you can do a CPU design six months with like 50 people. So that's like 100 times better. And that's what led to more and more designs. And with AI, we can add another five to 10x. So it'll be like 1000 times easier than probably 20, 25 years ago. And this was invariably lead to more and more design activity. And you can see that even with the hyperscalers, if you go back one or two years ago, it was not clear that the hyperscalers will do or, you know, we always get questions, will they continue to do? But now with Google and now Meta and Microsoft and Amazon and Tesla, everybody is doing more and more designs. Now, at the same time, the traditional semiconductor companies are also doing well, of course, the big semi-company. And this is only going to accelerate, in my opinion. You know, with like we talked about space companies, finance companies, physical ai car companies the amount of design activity we are seeing in automotive is actually quite remarkable uh and robotics and things like that and then then these things robotics also require a lot of different chips right the amount of chips that are there in one hand you know they're like 25 chips in one hand of a humanoid robot to control all the individual motors so i think we are we i i believe this for years and i think you will see more and more of this And our job is to make these things easier to use, you know, have more, you know, give more flexibility to our customers, like we did with our agent solution in Maestro, so they can do more and more of themselves.

Your final question comes from the line of Kelsey Chia from Citi. Please go ahead.

Hi. Hi, Anirudh and John. Congrats on the great results. My question is on EDA. EDA growth has been very strong for the last three quarters, 18%, 19% year-on-year growth, well above the historical growth rate. And it sounds like majority of that growth is primarily driven by hardware, and agentic AI attribution is still quite small. Is that a fair characterization, or could you give us a sense of customer adoption levels for agentic workflow today? and as much of the sort of revenue acceleration from agenting AIs to ahead of us?

Yeah, thanks for the question. Yes, of course, we are very proud of the hardware growth. But as you know, we will break out recurring and non-recurring growth. So like, you know, I was mentioning earlier and John mentioned also, our recurring growth has improved from 11% last year to 18 percent. So that is not hardware. That's X hardware. Because hardware will typically show up in non-recurring growth. So that's a major improvement of our recurring growth from last year to this year. And that is a combination of agentic AI plus the growth of underlying tools and design starts on the software side?

Yeah, Kelsey, I think, you know, based on, like, this is the Andrew's answer, Lachlan's question there a few minutes ago, that, you know, essentially we believe Ingentic AI is a demand accelerator for EDA. I mean, customers have always built their own workflows around cadence tools, and we expect them to continue to develop their own agents as well. Our strategy accommodates that. And what's exciting is that agents can perform much more design exploration than an individual engineer calling our underlying engines repeatedly. And that creates the potential for significantly more consumption of our core EDA tools. And I think you're starting to see that reflected in our EDA growth this year.

At this time, there are no further questions. I will now turn it back to Anaru Devgan for closing remarks.

Thank you all for joining us this afternoon. It's an exciting time for Cadence as we finish our Q3 with AI-driven product leadership and strong business momentum. The Wall Street Journal ranked Cadence's board number two among all S&P 500 companies in its 2026 Best Boards list. And on behalf of our employees and of our board of directors, we thank our customers, partners, and investors for their continued trust and confidence in Cadence.

Thank you for participating in today's Cadence Third Quarter 2026 Earnings Conference Call. This concludes today's call. You may now disconnect.