How did results and full-year guidance change?

  • Cadence reported third-quarter revenue of 1.633 billion dollars, up 22% year over year and above market expectations of 1.616 billion dollars. Non-GAAP earnings per share excluding stock-based compensation were 2.11 dollars, above market expectations of 2.05 dollars.
  • The company raised the midpoint of its 2026 revenue guidance from 6.3 billion dollars to 6.402 billion dollars, above market expectations of 6.325 billion dollars. It raised the midpoint of its non-GAAP earnings per share guidance excluding stock-based compensation from 8.10 dollars to 8.40 dollars, above market expectations of 8.16 dollars. Previous guidance already included the Hexagon acquisition and its dilutive impact.
  • The improvement in profitability did not mean every metric exceeded expectations: the third-quarter non-GAAP operating margin excluding stock-based compensation was 44.1%, slightly below market expectations of 44.2%. The midpoint of full-year guidance rose from 44.25% to 44.7%, above market expectations of 44.4%.

How do AI tools drive design software revenue?

  • Strong performance in the core electronic design automation (EDA) and IP businesses in the third quarter drove organic recurring revenue growth of approximately 18% year over year. Goldman Sachs expects agentic tools to increase customers’ use of underlying EDA tools.
  • The pricing model has two layers: underlying tools continue to be charged on a subscription basis, while the agent layer uses a usage-based plus subscription model. Goldman Sachs believes this combination could gradually accelerate revenue growth as usage expands.
  • The newly launched Maestro includes specialized AI models trained for different EDA tasks and a router that selects models for tasks to use tokens more efficiently; these features are integrated with Cadence’s existing tools.

IP and hardware grew, but what fell short of expectations?

  • Driven by demand for AI and high-performance computing, third-quarter semiconductor IP revenue was 245 million dollars, up more than 30% year over year and above market expectations of 235 million dollars. New opportunities in automotive and robotics and expanded partnerships also support the growth outlook.
  • Hardware revenue exceeded 100 million dollars, setting a record. As verification complexity increases, demand for Palladium Z3 and Protium X3 continues to exceed supply.
  • However, third-quarter revenue from the system design and analysis business was 261 million dollars, below market expectations of 267 million dollars. Goldman Sachs also lowered its revenue forecasts for the business for 2026 and 2027 by 1.8% and 2.5%, respectively.

How did Goldman Sachs adjust its earnings forecasts and valuation assessment?

  • Goldman Sachs raised its revenue assumptions and increased its earnings per share forecasts for 2026–2028 to 8.40, 10.30 and 12.00 dollars, respectively, increases of 2.5%, 3.0% and 4.3% from its previous forecasts.
  • Goldman Sachs maintained its buy rating and 12-month price target of 470 dollars. Downside risks listed by the bank include export restrictions, market share losses and a decline in custom chip design.