Cadence raises full-year guidance: backlog supports growth as Hexagon temporarily weighs on margins

How much did third-quarter results and full-year guidance exceed expectations?

Third-quarter 2026 revenue was $1.633 billion, up 22% year over year and approximately $20 million above market expectations; non-GAAP earnings per share were $2.11, above the expected $2.05. Management said there was no significant pull-forward of orders in the results.
The company raised its 2026 revenue guidance from $6.3 billion to more than $6.4 billion, projecting year-over-year growth of 21%; non-GAAP earnings per share guidance rose to $8.40, above the market expectation of $8.16. Fourth-quarter earnings per share guidance was $2.22, approximately 9% above the market expectation of $2.04.
Growth spanned multiple businesses: the system design and analysis business, including Hexagon, grew 30% year over year, core EDA grew 20%, and design IP grew 24%.

Backlog reached a record $8.2 billion at the end of the third quarter, up from $8.1 billion in the second quarter; year-over-year growth in recurring revenue accelerated to approximately 18%. Fourth-quarter revenue guidance was approximately $60 million above expectations, supported by the backlog.
Current remaining performance obligations (cRPO), representing orders to be fulfilled over the next year, were $4.2 billion, approximately 2.5 times the midpoint of fourth-quarter revenue guidance. Morgan Stanley believes fourth-quarter revenue is essentially covered by backlog and is unlikely to fall short unless a macroeconomic shock occurs.
The hardware business set another quarterly record and added 12 customers, deepening relationships with large cloud service providers; the company did not disclose hardware revenue. The new customers also led the bank to conclude that growth was not driven solely by existing customers purchasing ahead of schedule.

The newly launched Maestro combines proprietary models, task routing and reusable agent skills, and supports customer-specific training and on-premises deployment, with a focus on giving customers control and flexibility over deployment. Some customers will receive early access in the fourth quarter of 2026.
The company says the solution can improve design quality by up to 30% and increase token efficiency to 5 times its previous level. Morgan Stanley believes Maestro and AI agents are supporting demand for the core business, but Cadence has not disclosed AI revenue separately; ultimate commercial value depends on customer adoption, performance in production environments and delivery costs.

Management identified Hexagon as the main drag on incremental margins and expects it to contribute little operating profit in 2026. Third-quarter non-GAAP operating margin was 44.1%, in line with expectations but below 47.6% in the year-earlier period.
Third-quarter amortization expense was $79.9 million, approximately 4.9% of revenue, above the historical level of approximately 1.9%; the bank estimates additional acquisition-related amortization at approximately $49 million. Restructuring charges were $42.2 million, a cash cost in the period, and Morgan Stanley expects them to decline as integration is completed.
Despite those pressures, the company raised its 2026 non-GAAP operating margin guidance from 44.25% to 44.7%. Management expects integration measures to support margins in 2027, and the bank also expects integration to potentially enhance margins by then.

The company repurchased approximately $400 million of stock in the third quarter and announced a new $2.5 billion repurchase program. Its long-term goal remains to return 50% of free cash flow through repurchases, but it expects to exceed that proportion in 2026; third-quarter cash was $1.45 billion and debt was $2.65 billion.
Morgan Stanley raised its 2026 and 2027 earnings per share forecasts by 3% and 1%, respectively, to $8.63 and $9.92. The bank says the company trades at approximately 32 times its updated 2027 earnings per share forecast, below its historical range of 40–45 times; it maintains an overweight rating and a $400 price target, based on approximately 40 times forecast 2027 earnings.