Cadence Design Systems (CDNS) Q2 2026 earnings call transcript

Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the cadence second quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad.

Thank you.

And I will now turn the call over to Richard Goo, Vice President of Investor Relations for Cadence. Please go ahead.

Thank you, operator. I would like to welcome everyone to our second quarter of 2026 earnings conference call. I'm joined today by Anir Devgen, 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 four 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 Form 10K and 10Q. CFO commentary and today's earnings release.

All four looking statements during this call are based on estimates and information available to us as of today. And we disclaim any application to update them. In addition, all financial measures discussed on this call are non-gapped unless otherwise specified. The non-gapped measures should not be considered in isolation from or as the substitute for gap results. Reconciliations of gap to non-gapped measures are included in today's earnings release.

For the Q&A session today, we would ask that you observe a limit of one question only. If time permits, you can recue with additional questions. Now I turn the call over to Anir.

Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. I'm very pleased to report that cadence delivered outstanding financial results for the second quarter of 2026 with all key metrics exceeding our guidance.

We exited the quarter with record backlog that was above our expectations. We are seeing growing demand for AI-driven solutions across our expanding customer base.

The AI transformation is driving strong, broad-based performance across both design for AI and AI for design fronts. Given the growing business momentum and accelerating demand, we are raising our guidance for the year to 19% revenue growth and with higher profitability as we become more central to our customers as a strategic and trusted partner.

John will provide more details on both our Q2 results and the updated financial outlook. Let me start with the overall environment.

Design activity is growing as AI drives exponential design complexity and a new generation of system architectures spanning hyperscalar infrastructure and physical AI.

Customers are investing aggressively in these opportunities led by AI and HPC. We are also seeing continued science of improvement across the more traditional analog and consumer vertical.

Chip and system design present demanding engineering challenges that require deterministic physics-based engines, proprietary silicon correlated data, and deep design knowledge.

Our three-layer cake framework uniquely brings these capabilities together with accelerated compute and data at the bottom layer, physically accurate simulation and optimization solvers in the middle layer and AI agents and orchestration at the top layer.

Agentic AI is a demand accelerator for cadence as autonomous agents expand the design exploration space and call our underlying physically accurate engines more often, creating a durable tailwind that represents a significant long-term dam expansion opportunity. We extended our leadership in Agentic AI with auto stack AI super agent, delivering up to 15x higher productivity and 2x faster time-to-market for PCB and advanced packaging design.

Cadence is now the only provider with Agentic solutions spanning the full electronic system design flow from digital analog design and verification to advanced packaging and PCB.

We see strong early traction across our AI super agent portfolio with initial customer results, demonstrating meaningful productivity improvement and better design outcomes.

A chip stack AI super agent enabling higher verification productivity and faster design cycles has more than 20 customer engagement and is already deployed in production across multiple chip designs.

At Computex 2026, together with NVIDIA, we introduced the industry's first fully autonomous virtual AI design engineer, extending chip stack to even higher levels of autonomy.

Early customer results include more than 40x faster RTL validation, reducing a typical five-week verification cycle to less than a day on a state-of-the-art advanced node design.

In analog and custom design, VRAS stack is seeing strong customer interest with more than 25 customer engagement, achieving 2x to 10x productivity improvements compared to traditional design flows.

In-o-stack is also building momentum as customers adopt Agentic AI for advanced node SOC design. During the quarter, Rapidus announced a collaboration to integrate the Cadence In-o-stack AI super agent into its AI agent design solution, targeting up to a 2x faster design turnaround.

We continue to deepen our strategic partnerships across the ecosystem. We expanded our collaboration with Intel through a multi-air engagement focus on enabling its 14-air process, leveraging our design IP and Agentic AI-based EDA to co-optimize tool flows and methodologies for next generation HPC and mobile design.

This agreement is expected to be a meaningful driver of growth over the next few years. We also deepen our collaboration with Samsung Foundry on two nanometer and 3DIC technology, combining our AI driven flows and design IP to enable next generation AI, HPC and mobile systems.

Now, turning to our businesses, we are pleased that all product groups delivered double-digit year-over-year growth. Our IP business had an outstanding quarter growing over 40% year-over-year. AI performance is increasingly constrained by data movement, memory bandwidth and advanced packaging.

And our differentiated IP portfolio continued to see strong adoption. This was reflected in the strong demand for our star IP portfolio in AI and HPC application, including PCIe, UCIE, HBM and LP DDR6.

We also expanded engagement with leading memory, semiconductor and aerospace customers. We secured our first ever 10-silica DSP design win with SD microelectronics, reinforcing our strength in automotive and audio applications.

Core EDA grew 18% year-over-year, driven by growing adoption of our AI solutions. Proliferation of our digital full-flow solutions continued.

And we saw expanded adoption of Tempest and Serda's sign-off tools on leading-edge design with wins across hyperscalers, top semiconductor companies and startups.

We also expanded our implementation and sign-off footprint at Frontier AI companies, as well as at a marquee A6 silicon vendor, underscoring their differentiated value in enabling the industry's most advanced design.

In analog, we had a significant comparative win with Spectre at a leading semiconductor supplier. And our fast-buy simulator, Spectre FX, not several production wins at leading customers.

Our hardware business delivered another record quarter, driven by continued strength in Palladium Z3 and ProTM X3. A design approach unprecedented scale, hardware-assisted design and verification, is becoming a strategic capacity layer for our customers' AI roadmap.

These customers are designing some of the most complex chips and systems in the world, and they critically depend on our scalable, high-performance hardware platforms to realize their design.

Demand remains especially strong from AI and HPC customers, including hyperscalers and leading semiconductor companies. We added 12-ly no-goes and saw meaningful expansion with several marquee AI customers, as well as a notable comparative win with a major AI infrastructure provider.

System design and analysis revenue grew 37% year over year. As AI system complexity increases, customers are increasingly turning to our advanced packaging and PCB solutions.

Allegro XAI was adopted by several customers, driven by significant layout design time reduction. With our 3DIC technology and collaboration with TSMC's 3D fabric, advanced packaging solutions, we are enabling customers to confidently design cutting edge silicon for increasingly demanding AI workloads.

In structural simulation, our beta-CAE business had several comparative displacement, while the integration of recently acquired hexagon DNE business is progressing well.

With key deals closed with top customers, there is strong customer interest in our integrated full flow that combines our multi-physics products across the electrical, PFD and structural domain to best address next generation system design needs, including in the emerging field of physical AI.

In summary, Q2 was a great quarter for cadence, and I'm delighted with the continued momentum of our business. With the accelerating design activity, we continue to execute strongly, and our comparative position has never been better, as we lead the transformation to agentic AI in chip and system design.

With that, I will turn it over to John to provide more details on our Q2 results and our updated 2026 outlook.

Thanks, Harry, and good afternoon, everyone. Cadence delivered excellent results for the second quarter of 2026, with accelerating momentum in AI at broad-based strengths across all our businesses.

Robust design activity and customer demand drove 24% year-over-year revenue growth for Q2. With double-digit growth across all our product groups.

With strong execution, we generated Q2 operating margin of 45.5%. And second quarter bookings resulted in a record backup of $8.1 billion.

Here are some of the financial highlights for the second quarter starting with the P&L. Total revenue was $1 billion and $508, $4 million.

Gap operating margin with 28.4%. Non-gap operating margin with 45.5%. Gap BPS was $1.33. And non-gap BPS was $2.11. Next, turning to the balance sheet in cash flow, our cash balance was $1,440 million. While the principal value of debt outstanding was $2,500,000.

Operating cash flow was $635,000. DSOs were 65 days, and we used $200,000 to repurchase cadence shares. 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 in the range of $6,260 million to $6,340 million.

Gap operating margin in the range of $27.75 to 28.75%. Non-gap operating margin in the range of 43.75 to 44.75%. Gap BPS in the range of $4.76 to $4.86.

Non-gap BPS in the range of $8.05 to $8.15, operating cash flow of approximately $2 billion. And we expect to use approximately 50% of our free cash flow to repurchase cadence shares in 2026. For Q3, we expect revenue in the range of $1,595 million to $1,625 million, to $1,625 million.

Gap operating margin in the range of 27.5 to 28.5%. Non-gap operating margin in the range of 43.5 to 44.5%. Gap BPS in the range of $1.11 to $1.17.

And non-gap BPS in the range of $2.01 a month then to $2.07. And as usual, we published a CFO commentary document on our invest relations website, which includes our outlet for additional items, as well as further analysis and gap to non-gap reconciliation.

In conclusion, I'm pleased with our strong first half results and the robust pipeline and momentum heading into the second half of the year. At the midpoint, we now expect revenue growth of 19%, operating margin of 44.25%, EPS of $8.10%, that's operating cash flow of $2 billion for the year.

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. And at this time, I would like to remind everyone who would like to ask a question to please press star and then the number one on your telephone keypad. As a courtesy to all participants, we ask that you please limit yourself to one question. And we will pause for just a moment to compile the Q&A roster.

Yeah, thanks for taking the question. Maybe first, if you could give us any help. You talked about Agentic AI as being a long-term CAM expansion opportunities. Is there any quantification that you could give us on that TAM at this point? And maybe how do we think about that as driving EDA as a percent of R&D expense at maybe higher over time?

Yeah, hey Joe, thanks for the question. So like we said before, I mean, the great thing about Agentic AI is it opens up a new TAM opportunity.

At the same time, you know, it calls more of our underlying, you know, physically accurate software. So going back to the three-leg framework, so it's a new opportunity at the top layer and reinforces the middle layer. And I think that we are pleased by the interest. I mean, the interest is amazing actually, you know, almost all the big customers, almost all customers want to engage in our agent stack.

And now we have four super agents. So I think it's a great opportunity for us. Now, in terms of results, you know, what, what I'm, of course, we had great results, Q2 and, and the year so far. And there's a lot of strength in different parts of the business.

But what I want to particularly proud of is the strength in the software businesses. If you look at our recurring growth and that was particularly driven by a strength of add-on business. And so both we are seeing add-ons driven both basically for design for AI as our customers design more chips and also AI for design, which is our Agentic and AI portfolio.

And you can see that in our results. So what is particularly impressive, and this is, I think, the highest raise we ever had, is that it is broad-based, including, you know, software and AI contributing to that growth. So we'll see how things progress for rest of the year.

Yeah, Joe, I'll just add that, like, if I could just add the customer engagement, I'd better continue to accelerate. We're seeing increased evaluations and pilots and early deployments. And we continue to expect monetization through both new workflow products, as well as increased usage of underlying engines. But just to be clear, we're still not assuming a sudden step function in our guidance. The opportunity is continuing to develop well though.

And our next question comes from the line of Joe Burink with Baird. Your line is open.

Yeah, thanks for the question. I mean, like I said before, you know, I've said this for years now, like four or five years that the real AI, you know, orchestration and monetization will happen through this three layer cake, you know, just to remind everybody the top layer is AI agents and orchestration. The middle layer is these are traditional, you know, physically accurate tools, you know, ground truth and bottom layer is compute and data. So the reason news is just confirms that framework. And by the way, this will happen in all markets. You know, the value of AI will go more and more vertical than horizontal. And I've said this for a long time. So even in chip design, you know, the value is in the agent framework and all the mental model, all the knowledge graphs then calling the physically accurate tools on, you know, a rich set of hardware.

And this latest news, you know, in case of Kimmy doing that, I mean, I think that the, I mean, they said a chip, but I think it's a small block, which is about, you know, technology, which is like 20 years old on frequency, that is 20, 30 times slower than current frequency. So even to design a small block at such an old node, they needed kind of EDA tools to do that. So this is going to happen again and again.

And you know, there is, you know, there have been the open source EDA tools for a while, I don't know, for decades and, and they're used in some university or specialized settings, but to really do real designs, you know, people use cadence to do that. Now the differentiation will be in all three, you know, we want to differentiate in all three parts of the cake.

So, you know, our knowledge graph and a mental model and how we, you know, do the reinforcement loops at the agents is really differentiated, how we call then the middle layer, you know, through deep API access and the strength of our middle, you know, traditional tools is differentiated. And then even in the bottom layer, as you know, we have palladium, we have millennium, we have special hardware to do that. So our differentiation will be in all three, and then all three together, you know, we are more differentiated than we have ever been. So I'm very, you know, proud of our differentiation of the mode we have. And then the fact that these three layers will reinforce each other.

Now the customers may always have their own agents, just like they have their own, you know, flows right now. But to really do, you know, mission critical tasks, you know, they increasingly depend on cadence as you're seeing that in our engagement.

Yeah, and Joe Andrews always says that, like, a genetic AI actually increases demand because agents invoke EDA tools continuously while exploring more design alternatives than kiddie was a really good example of that.

And our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.

I'm curious what's driving this, how much is organic versus inorganic and what is kind of the sustainable growth rate for IP. And then if we zoom out, I just wanted to clarify with John, what the contribution is now with hexagon and the EPS valuation.

Thank you. Yeah, John, you want to start on that? Yeah. Yeah, sure. In terms of hexagon is delivering as we originally expected, and it continues to contribute to SDA growth. But the strength in our SDA numbers is much broader. We're seeing momentum in 3DIC in advanced packaging and PCB. Multifysics and physically AI. And the integration of hexagon DAD is progressing well. And we see a significant opportunity to strengthen both the technology portfolio and go to market over time.

But yeah, also, I guess on the IP, the IP had an outstanding quarter, driven by AI, HPC, advanced node activity, memory bandwidth, chiplets, and advanced packaging. There were strong customer engagements and meaningful wins. But IP revenue can be timing dependent from quarter to quarter. We're pleased with the momentum. But I would emulate any one quarter. Our competitive position continues strengthening across interface IP, memory IP and foundation IP.

Intel, as Andrew called out, it represents another example of customers choosing broader strategic engagement with us.

Andrew, would you like to add? Yeah, absolutely. Yeah, thanks John. So we're very pleased with IP performance and SDA performance. I mean, before I get into specific IP, you know, the good thing is, I mean, these things are growing. Of course, IP is growing very well, SDN is growing very well, you know, but also they have enough scale now. So, EDA, you know, we're always, I believe the leading EDA provider, you know, with analog, digital, you know, verification, packaging, 3DIC. But both our roughly speaking, both IP and SDN are approaching like a billion dollar run rate.

Okay, so at this point gives a lot of strength in our portfolio to engage with, you know, our customers. Now IP, particularly, and I mentioned this before, as you know, like, I think there are three big mega trends. One is, of course, our IP is much better than before. You know, the quality of our IP, the PPA, you know, power performance in area for like TSMC and the leading nodes is better. So we are getting a lot of comparative wins in IP that, you know, two years ago, we would not participate in. So that's one thing.

Second reason is our IP strategy is more focused, you know, as always being focused and will continue to be focused to leading nodes to star IP to, you know, you know, AI and HPC segments. So I've talked about this five key IPs, you know, you know, which interface IP, memory IP, and then we have expanded to foundation and other, but this specially chip to chip IP, memory IP interface IPs are, are super critical and they are growing, growing well. Okay. And then the third thing is there are more and more, uh, uh, foundries.

You know, we talked about Intel. I'm very proud of this new partnership with Intel and it's, of course, much broader than IP, but IP is a part of it. And then our engagement with Samsung, we mentioned last quarter and rapid. So the founder ecosystem is much more diverse. Uh, than before. So I think these three reasons, uh, our IP business is doing phenomenal.

And also most of it is just to clarify is organic growth. I mean, this great growth we posted most of it is organic growth. Now, how does it proceed in the future? We'll see. But all the signs are, are positive at this time.

And our next question comes from the line of CP, Panagrahi with Mizuho. Your line is open.

Yeah, I see the demand is great, like I mentioned, you know, for these agents. And we have, I mean, the exciting thing is that the use cases are, I mean, we have publicly talked about so many of them. And, you know, like two X to 10 X to, in some cases, 40 X improvement. Uh, and this is only the ones that we can publicly talk about. You know, this is a very small subset of our engagement. So the amount of use cases and the benefit is real. Okay. And the interest is definitely real in terms of number of engagements and, and how many customers want to engage with us. And our strength of our portfolio with the three layer cake, you know, is very well differentiated.

So I'm very pleased. I mean, this is like, you know, we are maybe six months into, you know, our launch of these products, you know, we launched them in Q one, but we working, I would say roughly six months with our, with our customers. And, uh, we'll see how it progresses. But like I said, the early, you know, add on business is encouraging, but we have to still in the early days, so we'll see how it goes.

Uh, but so far the demand is, is, is tremendous.

Yeah. I think we, we do this as a demand accelerator. You know, the customers are not trying to do any less design work. They're trying to keep up with design complexity, which is accelerating faster than engineering headcount and scale. We've always said that. And agents expand the design exploration space and call the underlying cadence engines more often that creates opportunities for new, which I think work for products at the increase use of our core tools.

And our next question comes from the line of Jim Schneider with Goldman facts. Your line is open.

And maybe if you could quantify the impact of those add ons in terms of either the guidance arrays or what it could mean for, uh, for core EDA software revenue in the next year, that would be great. Thank you.

Yeah, I think like, like you know, as right, we are very careful about projecting future, you know, next year numbers. But all I think the two step back is a step back a little bit. I think the, um, the three things that I'm super excited about is one is that overall environment is much better. I mean, this also helps us a lot. I mean, not just the AI companies, you know, the super hyperscalers are, I mean, the commitment to silicon is much higher than like 12 months ago. And you can see that, you know, you're following all the hyperscalers. So the amount of designs and the number of designs each hyperscaler is doing is impressive.

And then the AI semi companies are, you know, are growing immensely. And then like, you know, the analog and, and memory and the, you know, consumer, semi companies are also doing well now. So overall environment is much better than, um, you know, one year ago, which, which, which of course helps us, right? So that's number one. Number two, I think I just want to emphasize our comparative position. I feel has never been better.

So we are taking a lot of share in different customers, getting too much, much deeper engagement, uh, whether it's, whether it's agentic AI or hardware or, or IP, and you can see that in the numbers. And then the third part is this new time expansion opportunity, which is agentic, which we are clearly super excited about. It's still in the early stages. So if you combine those three things, I think that is what is leading to such good results and such good guidance. You know, just to remind you, this is the highest we have raised annual.

Revenue in a single quarter. Okay. And two, you know, to, to about 19% revenue growth with improved profitability. So I think I would like to say that, um, some of the benefit is already there of this. Again, other, you know, next year and year after, you know, as we are prudent as our ever and, and we'll see how things progress.

Yeah. I, I think just, I don't forget a lot of questions about it. I, but I think it's important to highlight that you're the race that we just did for, uh, for Q two for the rest of the year reflects broad race strength across the business, you know, rather than any single customer or product. That's it. We saw strong Q two execution across core EDA, IP hardware, and SDRA. Now that of course is all benefiting from continued strength and AI driven demand as well. But, but the strike is broad based across, you know, all businesses across all regions.

And our next question comes from the line of Harlan Sir with JP Morgan. Your line is open.

Is this translating into some tailwind for your custom. Virtual so family of VDA two solutions or kill wins for your CXL based or. Memory compiler IP portfolios or both.

Yes, Harlan. That's a great point. So yeah, like John mentioned, the strength is broad based. And definitely the analog group, you know, which is part of EDA. Is also seeing very strong momentum because all of these, you know, all of these things are very common for analog and make signal and custom design in the industry. So I'm very pleased to see, you know, overall environment plus, you know, this special, this all this innovation that is driven by inferencing helping both, you know, all our businesses, you know, analog, digital and verification.

But what is exciting to me in this? I mean, you know, this anyway, with this inferencing is that there is much more varied architectures. You mentioned and also much more varied customers. So all the big customers believe at this point that, of course, they will use standard products, you know, from semiconductor companies from the really big semiconductor companies, like Nvidia who are doing great, but also believe that they will have their own custom silicon.

And then on top of that, you know, different versions of that custom silicon, you know, for memory access and also networking, right? There's a lot of activity networking as well. And then I would say like over the last six months, I see a lot more activity in startups. You know, startups were kind of dormant. But in the last six months, there are like some very high-profile startups that are starting, not just in AI, but in networking and even CPU.

So I think the overall environment is good and it is affecting all our, you know, businesses, analog for sure, you know, verification with hardware, IP business, digital implementation, you know, 3DIC is a big thing where we have leadership. So that's what leading to this broad-based trend. But the conviction of the hyperscalers to do their own silicon and try, you know, like you pointed out, different architectures.

And that's bound to happen. I mean, you know, if there is one bottleneck, you know, the customers come up with different memory architectures to solve that bottleneck or different networking architecture. So I expect this to continue. I mean, this is, as the market gets bigger, you know, that as the AI infrastructure market gets bigger, there will be more and more innovation to optimize each part of that market.

And all that innovation will require, you know, cadence products to make that happen.

Next question comes from the line of Charles Shee with Needham and Company. Your line is open.

Yeah, Charles. I mean, like I said before, I mean, before I said this for years, the way this improvement will happen. And of course, the, you know, there will be a lot of improvements with AI will be through this three layer cake. You know, so we will have agents like we have super agents.

Our tools are central will continue to be central to that. And of course, we'll run on very set of hardware. I don't see that that changing, you know, of course, some people may make, may get very worried from time to time, but the ground, the ground truth will prevail. Okay, this, this three legs framework will prevail. And, and what if you talk about commoditization, I mean, I think what is likely to happen is not the media tools get commoditized. What is likely to happen is at the agentic layer, there will be a lot of choices for LOM. So if you look at what is really happening right now in the marketplace is that the customers are demanding choice in their LOMs.

And so, you know, which is Kimi, the example of that and GLM 5.2 and, you know, Nematron, of course, great release by Nvidia and then all the commercial models. So what the customers are asking me is like, can you can the agent be more intelligent in choosing the right model for the right task, you know, given the rapid progress in the other lens. I think that's most likely to happen, but the three layer framework, criticality of our tools will be here to stay.

And our next question comes from the line of Lee Simpson with Morgan Stanley, your line is open.

Thanks. Yeah, thanks for the question. So first thing, you know, I just want to say that I'm very proud of this new Intel collaboration because Intel is a company we tried to work closer for a very long time. I mean, this is not a one or two year old problem. This is like a 10 or 20 year old problem. Okay. So, but finally, we have a great collaboration with Intel, with Libbo and his new team.

And I think we are working on it for a while now, but it's good to announce it in Q2. And it's a pretty broad based collaboration, of course, starting with, you know, what we announced a month or two ago, you know, 14 a and DTCO. Our, you know, agentic EDA solutions or IP portfolio, which is much stronger.

But I think it goes beyond that. And, you know, you'll see that we are engaging Intel in all parts of Intel with all parts of our product portfolio. So I'm really pleased to see our position improving at Intel and our collaboration being, you know, just like it is all the other leading companies. And same thing happened with Samsung over the last, you know, six to 12 months. So in terms of what we were weak at before, you know, a few years ago was, you know, we were doing great with the TSMC ecosystem. We have a great partnership with TSMC. But I've said for a while we were weak at Intel and Samsung and that definitely has changed, you know, and there's still more to go, but at least the trajectory has definitely changed in my opinion.

And then, especially, and that specially applies to digital and verification businesses and even in digital, you know, we're always very, very strong in implementation, you know, place and route. But now, as we had mentioned in my prepared remarks, also strong in sign off. So the depth of our digital engagement is also improving at all customers. So overall, I'm pretty pleased with our position and, you know, we just, you know, we just always believe in, you know, simple things like team technology and customers. We have the best team, I believe, you know, develop the best products and listen to these demanding customers.

And that's how we stay ahead, you know, we're not looking at who is doing who else is doing that, but are we really satisfying the demanding workload of our customers. And I believe right now we are in a great position.

Question comes from the line of Jason Seleno with key bank capital markets, your line is open.

I did notice that inventory picked up nicely in the second quarter, both on a year over year and a quarter of a quarter basis. Yeah, great question, Jason. Yeah, we continue to teach strong hardware demands, you know, particularly from AI and HPC customers. Hardware assisted verification is becoming a strategic capacity layer for customers, designing the most complex chips and systems.

There could be quarterly timing effects, but demand remains solid. And we continue to expect 2026 to be another record hardware year and I would profile hardware is that it still remains compliant supply constraints by customer demand, rather than demand constraints. And we're building the system as quick as we can to deliver against the backlog. And yes, part of the increase was to the year with due to hardware strikes, but we are seeing strikes right across the board.

And our next question comes from the line of Gian Marco Comte with Deutsche Bank.

Thank you. Sure, I can comment a little bit more. I mean, but this is a multi arrangement, you know, and of course, some of the benefit is this year, but most of it is to come. Okay. And then, you know, we will also invest more right in Intel and Intel customers, which is to be expected. But in terms of IP, I mean, it's much broader than IP because it includes ED and DTCO, but in terms of IP, we have a pretty good portfolio.

So we will, you know, we will make that available on Intel, Intel process. Now, this doesn't include, you know, as Intel Foundry gets more customers there buying IP from us. This is just our arrangement with Intel right now. As you know, we are always conservative in those projections, but still, I mean, Intel Foundry is as you know, talking to a lot of customers. So it's the possibility of those customers to acquire, you know, these IPs and any differentiated tools that come out from this DTCO. So we will see how it goes, but IP strength is, you know, of course, Intel is a part of it, but it's much more broad base.

And even, you know, and even our overall strength, I think I want to highlight in. And John already mentioned is not coming from one particular thing. So I mean, there are four or five things that are driving this race outlook. So Intel is one of them for sure. IP is one of them. Hardware is a key focus, but it's in a hardware. And if you look at our recurring growth is very good, right? So hardware is important growth, but so is EDA and Agentix solutions and 3DIC and SDA. So, so I feel right now there are like four or five engines that are driving our growth, but we are definitely very proud of the Intel agreement and the new partnership.

I know your question is primarily around revenue and things like that, but I want to highlight that there is some kind of expense in the second half as well, because we're investing around these opportunities like Intel, as well as trying to integrate hexagons D and E business because we're very focused on improving margins for next year. So you'll notice the second half is kind of slightly lower margins than the first half. But that's the reflection of our week of us making targeted investments. These are deliberate investments and not a deterioration in the underlying model by any means. It's this organic incremental or organic incremental margins remain very attractive and we expect kind of acquisition, profitability and profitability to continue to improve as we go into 2037.

And our next question comes from the line of Ruben Roy with Stephen. Your line is open.

So, yeah, I was looking at the implied operating margin near 43% and expenses are in the expenses up, you know, probably 19% year over year based on, you know, implied guidance for the full year versus around 10% growth last year. Of course, hexagon accounts for a part of that. But I guess, you know, how much of this is sort of the core business? And I guess I was thinking through agentic AI and go to market. Is that sort of hiring you're already committed to? Is that driving some of the expense increase? And how do you expect that to roll into 2027? Thank you.

Yeah, sorry, but it's investment in systems and everything that we're trying to invest heavily in making sure we do a full and proper integration of hexagon design engineering business, as well as some of the other businesses, the smaller businesses that we pulled into systems design analysis. But we're very focused on that in the second half of this year. I think I highlighted it last year that we had, I think, 20, 25 million set aside specifically for investment in the second half of the year. Now, there's always some prudence in our expense expectations. And I always want to give the team an off scope to be able to invest and capture the increased profitability opportunities that they can get.

But our focus is really on the second half of this year to grab those opportunities and set ourselves up so that we have better operating margins next year.

And our next question comes from the line of Kelsey Chia with city, your line is open.

Yeah, I mean, just to make sure I understand the question. I think the Intel business that we announced is all incremental to our business 100%. Because we already had existing Intel agreement. So this one is a new agreement on top of that. And it's a multi-agreement with multiple parts of that business. And then what I'm also, and I think LeBou has said that publicly also, I mean, we announced 14A, but I think Intel to be successful in the foundry business has to do more than 14A. So, you know, we already talked to them other future roadmap of Intel foundry. And then, of course, there is different parts of Intel as you know, the product groups and they're investing in their server business and their client business.

So again, we are proud to be working with Intel closely and just like we work with other big customers. So I think it's more a normalization of our relationship with Intel like we work with all the other household names. So I'm very proud of this development.

And our next question comes from the line of Jay Fleesauer with Griffin Securities. Your line is open.

Yeah, thanks Jay for that question. That's a great question. I mean, in general, of course, you know, we are growing, so we will invest right both in R&D and application engineering.

Agending AI, it does not require some massive step increase in investment. That's one to be clear about that. You know, it is more of our traditional business because we are, of course, very, very asset light, right? We don't, you know, we're not building compute farms. All this is done by our customers. Okay, just to be clear. Now, of course, some of the skills are different, but our team anyway is expert in computation software as you know, and they can pick up agentic AI some hiring, we will do.

So it's more of a business as usual, I will say, and also we can make AI, you know, there are implications that we have not, we are applying a lot of AI internally to make things even more efficient. So, for example, AEs, yes, we are hiring AEs, but you know, AI can dramatically reduce AI workload and make them much more productive.

So then more of the AEs can participate in, you know, pre sales activity rather than post sales support, right? And same thing in R&D, of course, we are deploying, you know, AI for software development. And of course, they are deploying our agent stack and all our agents for IP development to make them more efficient. So, and this is what John was saying earlier. So we'll see how that progresses, you know, is, I think AI has the opportunity to even reduce our cost in some cases, but we are not, you know, you should not model in some massive investment. I think the investment we talked about is more for, for SDNA, right, for the integration, and you always talked about Jay, that how we need to have a full flow.

And I feel that finally we have a full flow in SDNA. So investing in that, you know, investing in Intel. But the agenda guy will go through our regular sales motion and regular AI and R&D support.

And our next question comes from the line of Joshua Tilton with Wolf Research. Your line is open.

Because you are now becoming more of a strategic partner to your customers. That makes sense. Thanks. Sure. So I started out a loop with just some Josh, I'll take the recording revenue question. I mean, recording revenue grew about 24% year over year or two. And that was driven primarily by strong core ego. So they are driven demand to share gains and healthy renewals and expansions to add on business.

Within that, probably hexagon contributed roughly four points. But even adjusting for that, you know, recurring revenue is like high teams to 20% on an normalized performance basis, which we view as a very strong result. And we also, you know, we would continue to expect the full year mix to be roughly, you know, 80% recurring and 20% upfront.

On the agenda, I stuff that's essentially like when you look at the way we sell that, the first of all customers continue purchasing our underlying EVA software. And then what they do is they purchase teams, agent licenses and orchestrate engineering workflows. So generally our economic scale with cost for adoption.

I'd like to add to the rest of Josh's question. Yeah, I think Josh. What we are saying is that, I mean, we were always strategic to our semiconductor customers, right? Of course, we are part of engineering. We're part of R&D, right? I mean, we are not like other kinds of soft enterprise kind of software, this engineering software. So we are central to them making their products and their revenue. I think what has happened lately over the last, let's say, one year is given in semi companies, you know, our engagement is there's a much higher level in the company, because, you know, EDA and chip design and agent take AI opportunities are very meaningful to our customers.

You know, as, as, you know, there's more demanding roadmap at, as, you know, Moore's law is kind of slowing down. This is well known, not producing enough improvement. So the improvement has to come with design efficiency, you know, better optimization, better use of AI agents and also the middle layer, right, the PPA provided by, and we do this, you know, with the boundaries and with the customers and DTCO is part of it for better optimization of power and performance area, then, you know, was possible if Moore's law was delivering, you know, was, was really moving fast. Right now it is slowed down. So that's on the semi side. And on the system side, I think the realization that semiconductor is essential has happened now in the last six to 12 months, you know, or so.

So all the max seven companies, all of all the big really household norms, you know, silicon is a critical part of the roadmap. So therefore, you know, cadence engagement is super critical at these customers. And the way to monetize that is, you know, we provide more value to them and then, you know, we can get more value for us as you see in our results.

And our final question comes from the line of Gary Mobley with Stonax. Your line is open.

I mean, it's a great question. I think Andrew spoke to it a little bit there to Josh's question. But, well, we've been, we always say it's strategy first, right? I mean, we've been continued to execute against our intelligent system design strategy. Andrew has mapped that out for us for the last decade or so. But the, and what we're seeing is that all the underlying like structural demand drivers continue to strengthen, you know, the semiconductor complexity, AI infrastructure investment, engineering productivity, physical AI, engineering workflows, all of those trends seem to still be in their early stages. And I think that's feeding it to really solid booking for us.

And this year is, you know, probably one of the low years when you look at the kind of a three year cycle on renewals. This year is kind of probably one of the lower of the three years. But we're seeing very, very good strength in adult opportunities as Andrew mentioned earlier in the call. I was very, very pleased with progress and how things are going.

Andrew, do you think to add? No, John, that's a great summary. I mean, like John said, Gary, that. Yeah, this year is a low book book in the year. And also, normally, first half we draw down on our backlog, but this year has been good growth. So we'll see how that how that progresses, but we are very pleased.

And like John mentioned, you know, the environment is good. And I'd just like to point out that, you know, I feel the three big reasons are, you know, like, you know, like John was also saying the environment is great. Both both like the AI, new AI comers, the traditional AI and the regular companies, our products and compared to position is fabulous.

And then this new time opportunity with the GENTI AI. So if you combine all these three things, I mean, the first half has been great. It sets up nicely for rest of the year. And then we'll see how things progress.

And I would now like to turn the call back over to Mr. Honore Devgen for closing remarks.

Yeah, thank you all for joining us this afternoon. It's exciting time for cadence as we enter the second half of 2026 with AI driven product leadership and strong business momentum.

On behalf of our employees and our board of directors, we thank our customers, partners and investors for their continued trust and confidence in cadence.

And ladies and gentlemen, thank you for participating in today's cadence second quarter 2026 earnings conference call. This concludes today's call and you may now disconnect.