Cadence Design Systems, Inc.
Analysis
Cadence has stopped selling tools and started selling automation. Four straight quarters of record backlog and repeated raises say customers are paying for it, but management still keeps agent revenue out of its own guidance.How much of the record backlog converts to revenue within two years?
- Agentic AI went from roadmap to shipped products.
ChipStack launched in Q4, is already in production and has more than 20 engagements, with three more agents added in Q2. Agents call Cadence's engines far more often, so management frames this as added revenue, not a replacement.
- IP has become the company's fastest-growing business.
IP grew nearly 25% in 2025 and then past 40% in Q2 FY2026, mostly organic, and the quarter brought a multi-year Intel 14A agreement management calls incremental. A business that once trailed its rival now pulls new foundries toward Cadence.Which foundries beyond Intel are buying Cadence IP today?
- Buying growth is costing money before it earns any.
Hexagon's design business adds $160 million of revenue this year but cuts earnings by about $0.28, because Cadence paid mostly cash for it. Management cut its margin outlook while raising revenue, so the deal has to earn its keep later.How much of the Hexagon drag disappears in 2027?
- Customers adopt the super agents faster than they added traditional seats. When agents run more Cadence software per design, customers pay more without Cadence winning new customers.
- IP and hardware keep winning as more foundries reach advanced nodes. Each new chip factory needs memory and interface designs, so more foundries means more places for Cadence to sell.
- Hexagon follows the BETA pattern of margin recovery. BETA dragged margins in its first year then helped them in the second, so Hexagon should stop costing money by 2027.
- Customers build their own agents and buy only the underlying engines. The more valuable layer stays with the customer, leaving Cadence to sell the cheaper tools underneath it.
- Agentic revenue stays a pilot and never appears in the guidance. Management deliberately left it out of the 2026 outlook, so a stall would leave growth resting on the older products.
- Hardware orders slip, and management only ever sees two quarters ahead. Hardware is the lumpiest revenue Cadence has, so one delayed order can take a large bite out of a quarter.
| Politician | Transaction | Amount | Traded | Filed |
|---|---|---|---|---|
Donald Trump Republican · Executive | Sale | ≥$1K | Aug 24 | Oct 8 |
Donald Trump Republican · Executive | Sale | ≥$1K | Jul 17 | Sep 22 |
Donald Trump Republican · Executive | Purchase | ≥$1K | Jun 15 | Aug 22 |
Donald Trump Republican · Executive | Purchase | ≥$1K | May 15 | Jul 1 |
Donald Trump Republican · Executive | Sale | ≥$15K | Mar 27 | May 13 |
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How Cadence Design Systems turned $5.3B of revenue into $1.5B of operating income.
| Revenue | ||
|---|---|---|
| Product and maintenance | $4.8B | ▲ 14.43% YoY |
| Technology Service | $475.2M | ▲ 11.08% YoY |
| Total revenue | $5.3B | |
| Gross profit | $4.6B | 86.4% |
| Operating income | $1.5B | 28.2% |