Cadence Design Systems, Inc.

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 Gu, 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 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 10-K and 10-Q. 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 not be considered in isolation from or as a substitute for GAAP results. Reconciliations of GAAP to non-GAAP 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 re-queue with additional questions. Now, I'll turn the call over to Anirudh.

Anirudh Devgan 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 hyperscaler infrastructure and physical AI. Customers are investing aggressively in these opportunities led by AI and HPC. And we are also seeing continued signs of improvement across the more traditional analog and consumer verticals. 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 AuraStack 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 advance packaging and PCB. We see strong early traction across our AI superagent portfolio with initial customer results demonstrating meaningful productivity improvement and better design outcomes. A chip stack AI superagent enabling higher verification productivity and faster design cycles has more than 20 customer engagements 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, Virastack is seeing strong customer interest with more than 25 customer engagement, achieving 2x to 10x productivity improvements compared to traditional design flows. InnoStack is also building momentum as customers adopt agentic AI for Advanced Node SoC Design. During the quarter, Rapid has announced a collaboration to integrate the Cadence InnoStack AI superagent 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-year engagement focused on enabling its 14-year 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 3D IC technologies, 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 applications, including PCIe, UCIe, HBM, and LP DDR6. We also expanded engagement with leading memory, semiconductor and aerospace customers. We secured our first-ever Tensilica DSP design win with ST 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 Tempus and Certus sign-off tools on leading edge designs, 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 ASIC silicon vendor, underscoring their differentiated value in enabling the industry's most advanced design. In analog, we had a significant competitive win with Spectre at a leading semiconductor supplier, and our fast-buy simulator SpectreFX notched several production wins at leading customers. Our hardware business delivered another record quarter driven by continuous strength in Palladium Z3 and Protium X3. At 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 designs. Demand remains especially strong from AI and HPC customers, including hyperscalers and leading semiconductor companies. We added 12 new logos and saw meaningful expansion with several marquee AI customers, as well as a notable competitive 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 3D IC 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 competitive displacements. While the integration of recently acquired Hexagon's 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 domains 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 accelerating design activity, we continue to execute strongly, and our competitive 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, Anirudh, and good afternoon, everyone. Cadence delivered excellent results for the second quarter of 2026 with accelerating momentum in AI and broad-based strength 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 bustle of $8.1 billion. Here are some of the financial highlights from the second quarter, starting with the P&L. Total revenue was $1,584,000,000. GAAP operating margin was 28.4%. Non-GAAP operating margin was 45.5%, GAAP BPS was $1.33, and non-GAAP BPS was $2.11. Next, turning to the balance sheet and cash flow, our cash balance was $1 billion and $440 million, while the principal value of debt outstanding was $2 billion and $500 million. Operating cash flow was $635 million. DSOs were 65 days, and we used $200 million 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 $6,260,000,000 to $6,340,000,000. 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%. GAAP EPS in the range of $4.76 to $4.86. Non-GAAP EPS 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 range of $1,595,000,000 to $1,625,000,000. GAAP operating margin in the range of 27.5 to 28.5%. Non-GAAP operating margin in the range of 43.5 to 44.5%. GAAP EPS in the range of $1.11 to $1.17. And non-GAAP EPS in the range of $2.01 to $2.07. And as usual, we published a CFO commentary document on our investor relations website, which includes our outlet for additional items, as well as further analysis and GAAP to non-GAAP reconciliations. 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, and 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. and our first question comes from the line of Joe Quachocki with Wells Fargo. Your line is open.

Yeah, thanks for taking the question. Maybe first just if you could give us any help. You talked about agentic AI as being a long-term TAM expansion opportunity. 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 and to maybe hire 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 time 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. 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, Of course, we had great results in Q2 and the year so far. And there's a lot of strength in different parts of the business. But what I'm particularly proud of is the strength in the software businesses, if you look at our recurring growth. And that was particularly driven by 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 software and AI contributing to that growth. So we'll see how things progress for the rest of the year.

Yeah, Jo, I'll just add that, if I could just add, the customer engagement, as Anirudh said, continues 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 Varink with Baird. Your line is open.

Great, thanks. Staying on this topic, I wanted to ask about open source models designing chips and maybe if I just take Kimmy at face value, it seems like an agent sought out EDA tools and then orchestrated the flow when tasked with chip design. I guess my question is the implication for Cadence from all of this and two things come to mind. One, if customers now have agents capable of accessing your EDA tools, does that drive higher usage and more net consumption ultimately? And then two, where do you think the differentiation lies with a customer buying the Cadence mental models for orchestration versus customers maybe deciding to build on their own?

Yeah, thanks for the question. I mean, like I said before, you know, I 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, our... traditional physically accurate tools, ground truth, and bottom layer is compute and data. So the recent news just confirms that framework. And by the way, this will happen in all markets. 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, the value is in the agentic 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 Kimi 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 EDA tools to do that. So this is going to happen again and again. And there have been open source EDA tools for a while, I don't know, for decades. And they're used in some university or specialized settings. But to really do real designs, people use Cadence to do that. Now, the differentiation will be in all three. We want to differentiate in all three parts of the cake. So our knowledge graph and a mental model and how we do the reinforcement loops at the agents is really differentiated. How we call then the middle layer through deep API access and the strength of our middle 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 would 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, Joe, Anirudh always says that, like, agentic AI actually increases demand because agents invoke EDA tools continuously while exploring more design alternatives, and Kivi 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.

Thanks for taking my question. Anirudh, the IT business has accelerated to over 40% growth. 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 EPS dilution. Thank you.

John, you want to start on that? Yeah.

Yeah, sure, sure. Just in terms of Hexagon contribution, I mean, Hexagon is delivering as we originally expected, and it continues to contribute to SD&A growth, but the strength in our SD&A numbers is much broader. We're seeing momentum in 3D IC, in advanced packaging, in PCB, multi-physics, and physical AI. And the integration of Hexagon D&D is progressing well, and we see a significant opportunity to strengthen both the technology portfolio and go to market over time. that, yeah, also I guess on the IP side, 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 wouldn't annualize anyone's quarter. Our competitive position continues strengthening across interface IP, memory IP, and foundation IP and Intel, as Anirudh called out. It represents another example of customers choosing broader strategic engagement with us. So Anirudh, would you like to add?

Yeah, absolutely. Yeah, thanks. So Vivek, I'm very pleased with the 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, 3D IC. But both our, roughly speaking, both IP and SDNA are approaching like a billion dollar run rate. Okay, so at this point, it 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 the area for like TSMC and the leading nodes is better. So we are getting a lot of competitive 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, has always been focused and will continue to be focused. to leading nodes to star IP to AI and HPC segments. So I've talked about these five key IPs, which are interface IP, memory IP, and then we have expanded to foundation and other, but especially chip-to-chip IP, memory IP, interface IPs are super critical and they are growing well. And then the third thing is there are more and more foundries. 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 Rapidus. So the Foundry ecosystem is much more diverse than before. So I think these three reasons, 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 positive at this time.

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

Thanks for taking my question. Apologies for the background noise. Anirudh, I'm at that conference, and I can tell you the key thing here is the agentic AI, which kind of validated what you said. So my key question is, you talked about, you know, some of this agent, super agent, SIP stack, VERA stack that your customer's been using. So wondering what kind of feedback you are getting and the cost saving and the value that you bring to the customer and then I know John earlier you talked about monetization which might take you know contract renewal or cycle time but as you see the usage are you seeing any kind of accelerating adoption where the timeline can be compressed?

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 2x to 10x to in some cases 40x improvement 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 Q1, but we're working, I would say, roughly six months with our customers. and we'll see how it progresses. But like I said, the early add-on business is encouraging, but we have to still in the early days, so we'll see how it goes. But so far, the demand is tremendous.

Yeah, Siddhi, I think we view this as a demand accelerator. 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 can 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 agentic workflow products and increased use of our core tools.

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

Good evening. Thanks for taking my question. Continuing on the agentic AI theme, could you maybe talk a little bit about Some of the add-on engagements you're seeing for those tools and to what extent you're seeing them across more than the sort of 20 to 25 customers you've already noted. 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 core EDA software revenue in the next year, that would be great. Thank you.

Yeah, I think like you know us, right, we are very careful about projecting future, you know, next year numbers. But I think to step back a little bit, I think 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 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 memory and the consumer semi companies are also doing well now. So overall environment is much better than one year ago, which of course helps us, right? So that's number one. Number two, I think I just want to emphasize our competitive position I feel has never been better. So we are taking a lot of share in different customers, getting to much, much deeper engagement, whether it's agentic AI or hardware or IT. And you can see that in the numbers. And then the third part is this new TAM expansion opportunity, which is agentic. which we are clearly super excited about. We're 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 to, you know, to about 19% revenue growth with improved profitability. So I think I would like to say that some of the benefit is already there of this Genting and other, you know, next year and year after, I mean, you know us, we are prudent as ever, and we'll see how things progress.

Yeah, Jib, I think, I know we're getting a lot of questions about Agendic AI, but I think it's important to highlight that the raise that we just did for Q2 for the rest of the year reflects broad-based strength across the business, rather than any single customer or product. We saw strong future execution across core EDA, IP, hardware, and SDA. That, of course, is all benefiting from continued strength in AI driven demand as well. But the strength is broad based across all businesses and across all regions.

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

Good afternoon. Thanks for taking my question. Anirudh, you know, as the volume of AI inferencing compute workloads surpassed training workloads in the second half of last year, we know that inferencing is much more memory intensive, right? So we've seen this diversification of different types of memory architectures emerging to address inferencing. In addition to HPM DRAM, we've seen development of SRAM-based offload architectures. We've seen CXL-based conventional DRAM offload and even using enterprise SSD or flash-based memory, right? So given all of the focus on these memory architectures and memory controller architectures, is this translating into some tailwinds for your custom virtuoso family of EDA tool solutions or tailwinds 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. You know, because all of these, you know, memory or analog is all done, and Virtuoso is the leading platform for analog and mixed signal and custom design in the industry. So I'm very pleased to see, you know, overall environment plus, you know, this special, There's all this innovation that is driven by inferencing, helping all our businesses, 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 from semiconductor companies, 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 in 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 businesses. Analog for sure, verification with hardware, IP business, digital implementation, 3D IC 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, 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.

And the next question comes from the line of Charles Shi with Needham & Company. Your line is open.

Hi, good afternoon. Anirudh, I can ask about AI for a hundred ways, but I think the most important question on top of many people's minds right now, or I should say the scenario, a very extreme scenario that people fear about the most, is where you actually prompt, I don't know when we could get that, but prompt on a very, very powerful LLM in the future with your chip design requirement, then that LLM can autonomously generate GDS2 codes that gets sent to Foundry directly for PayPal without running them through any of the commercial EDA tools. So this is the one that Some people were envisioning, we strongly disagree, but do you think this end-to-end, so-called end-to-end, LLM-based chip design is a real possibility at all, or since you mentioned a three-layer case? Thanks.

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, you know, there will be a lot of improvements with AI. will be through this three-layer cake. 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 a varied set of hardware. I don't see that changing. Of course, some people may get worried about it from time to time, but the ground truth will prevail. This three-layer framework will prevail. And if you talk about commoditization, I think what is likely to happen is not the EDA tools get commoditized. What is likely to happen is at the agentic layer, there'll be a lot of choices for LLMs. So if you look at what is really happening right now in the marketplace is that the customers are demanding choice in their LLMs. And so, you know, which is Kimi is an example of that and GLM 5.2 and, you know, Nemotron, of course, great release by NVIDIA and then all the commercial models. So what the customers are asking me is, can the agent be more intelligent in choosing the right model for the right task, given the rapid progress in the LLMs? 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.

Great. Thanks for squeezing me in. I mean, I think most of my questions have been asked, but maybe I'll ask a generic sort of competitive one. It does look as though Cadence has expanded DTCO collaborations now with Intel, building out its Samsung roadmap, and you've also deepened relationships with TSMC. So your positioning in stack die and multi-chip designs is pretty much equal or better relative to peers, you'd say now. So its exposure to digital design and IP interface maybe differs from Synopsys. So I guess the question here is really, where are you seeing the most competitive pressure from some of your peers in contested accounts? And in the context of some of the other agentic AI push at your rivals, are you winning or losing share in that digital implementation and verification at the leading edge? Thanks.

Yeah, thanks for the question, Lee. 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 Libu 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 what we announced a month or two ago, 14A and DTCO, our agentic EDA solutions, our IP portfolio, which is much stronger. but I think it goes beyond that. And 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 just like it is in all the other leading companies. And same thing happened with Samsung over the last six to 12 months. So in terms of what we were weak at before a few years ago was 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. And there's still more to go, but at least the trajectory has definitely changed, in my opinion. And that especially applies to digital and verification businesses. And even in digital, we're always very, very strong in implementation, 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 we just always believe in simple things, right? Team, technology, and customers. We have the best team, I believe. Develop the best products and listen to these demanding customers. And that's how we stay ahead. We're not looking at 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.

And our next question comes from the line of Jason Salino with KeyBank Capital Markets. Your line is open.

Great, thank you. You know, great to hear another record, you know, hardware quarter. I know, John, you kind of mentioned this as always as a pipeline business, and you kind of wait to the middle of the year to get better visibility for the second half. But maybe can you speak to the type of demand activity you are seeing for hardware? I did notice that inventory picked up nicely in the second quarter, both on a year-over-year and a quarter-over-quarter basis. Thanks.

Yeah, great question, Jason. Yeah, we continue to see strong hardware demands, 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 supply constrained by customer demand rather than demand constrained. And we're building the systems as quickly as we can to deliver against the backlog. And yes, part of the increase to the year was due to hardware strikes but we are seeing strength right across the board.

And our next question comes from the line of Gianmarco Conti with Deutsche Bank. Your line is open.

Yeah, thank you for squeezing me in as well. So yeah, amazing performance on IP. Maybe if you could share a few more words on IntelWin, exactly what does that entail? What parts of the portfolio was that displacement? How big is roughly the contract meant to draw down? Over how much time? And is this in guides? Just kind of like the layout on the details, if you could share any of that, please. Thank you.

Sure, I can comment a little bit more. I mean, but this is a multi-year 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 EDA 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 process. Now, this doesn't include, you know, as Intel Foundry gets more customers, they're 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 those customers will acquire these IPs and any differentiated tools that come out from this DTCO. So we will see how it goes. But IP strength is, of course, Intel is a part of it, but it's much more broad-based. And even our overall strength, I think I want to highlight and and John already mentioned is not coming from one particular thing. So, I mean, there are four or five things that are driving this raised outlook. So Intel is one of them for sure. IP is one of them. Hardware is a key focus, but it's, you know, hardware. And if you look at our recurring growth is very good, right? So hardware is important growth, but so is EDA and agentic solution and 3DIC and SDNA. 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 We're investing around these opportunities like Intel as well as trying to integrate Hexagon's D&E business because we're very focused on improving margins for next year. You'll notice that the second half is slightly lower margins than the first half, but that's a reflection of us making targeted investments. These are deliberate investments, not a deterioration in the underlying model by any means. Our organic incremental margins remain very attractive, and we expect kind of acquisition profitability and profitability of IP to continue to improve as we go into 2037.

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

Thanks, John. I think you just answered my question. So let me just make sure I understand that. So yeah, I was looking at the implied operating margin near 43% and R&D expenses up probably 19% year-over-year based on 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, it's not just hiring, but it's investment in systems and everything. We're trying to invest heavily in systems. in making sure we do a full and proper integration of Hexagon's design engineering business, as well as some of the other businesses, the smaller businesses that we've pulled into system design analysis. And 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 investments in the second half of the year. Now there's always some prudence in our expense expectations. Anirudh and I always want to give the team enough scope to be able to invest and capture the increased profitability opportunities that they can get. But our focus is really on in 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 Citi. Your line is open.

Hi, Anirudh. So regarding Intel, is the engagement around porting a more likely an incremental driver to the sort of 20-25% growth that the team has been delivering for the IP business? And also, will it be a meaningful driver to your EDA business in the coming quarters or how How long should we think about that trajectory as they're entering into your EDA business?

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 agreements, so this one is a new agreement on top of that. And it's a multi-year agreement with multiple parts of that business. and then what I'm also, and I think Libu 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're already talking to them other, you know, future roadmap of Intel Foundry. And then, of course, there is different parts of Intel, as you know, the product groups and, you know, they're investing in their server business and their client business. So again, we are 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, you know.

So I'm very, very proud of this development.

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

Thank you. Good evening. Anirudh, I'd like to ask you about the Practical implications of or requirements for implementing AI and agents and all that you've spoken of this evening. That is to say, when you think about the pre-sale and post-sale support and customer support that you have to provide, How would that compare to, let's say, what you used to have to do for classical EDA? Is there something quantitatively or qualitatively or technically different now that you need to do that you haven't had to do before? And what I have in mind, for example, is that over the last few months, there's been a very clear uptrend in your AE openings to classic leading indicator for customer adoption. You've also said that Jet AI is, unquote, the critical path for agentic adoptions. Maybe you could talk about that as well.

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. Agentic AI, it does not require some massive investment and many more. So it's a step increase in investment. I just want 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 computational software, as you know, and they can pick up agentic AI. Some hiring we will do. 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, okay, 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. And same thing in R&D, of course, we are deploying AI for software development. And of course, they are deploying our agents tag and all our agents for IP development to make them more efficient. And this is what John was saying earlier. So we'll see how that progresses. I think AI has the opportunity to even reduce our costs in some cases, but you should not model in some massive, I think the investment we talked about is more 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 agentic AI will go through a 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.

Hey guys, thanks for sneaking me in. Maybe just one clarification and one thematic question for Anirudh. On the clarification, Can you just maybe, you know, unpack for us what's driving the strength and other recurring revenue that kind of stood out to us this quarter and any commentary there would be helpful. And then maybe on the thematic side onward, unless I misheard you in your prepared remarks in the beginning, you talked about becoming more of a strategic partner for your customers. The question is for you, but John, feel free to jump in here. Maybe like help us as financial analysts, like understand what that means From a business perspective, are you growing wallet share? Are you able to charge more? How are you as a company capturing value financially because you are now becoming more of a strategic partner to your customers? Does that make sense?

Shall I start, Anirudh? Josh, I'll take the recurring revenue question. I mean, recurring revenue grew about 24% year over year in Q2, and that was driven primarily by strong core EDA growth. Some AI-driven demands, there's share gains and healthy renewals and expansions through add-on business. Within that, probably Hexagon contributed roughly four points. But even adjusting for that, recurring revenue is like high teens to 20% on a normalized performer basis, which we view as a very strong result. And we would continue to expect the full year mix to be roughly 80% recurring and 20% upfront. on the agentic AI stuff that's essentially like when you look at the way we sell that, first of all, customers continue purchasing our underlying EVA software. And then what they do is they purchase teams, agent licenses that orchestrate engineering workflows. So generally, our economic scale with customer adoptions, Anirudh, would you like to add to address the rest of Josh's question?

Yeah, I think, Josh, what we are saying is that, I mean, we are always strategic to our semiconductor customers, right? Of course, we are part of engineering. We are part of R&D, right? I mean, we are not like other kinds of soft enterprise kind of software. This is 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 even in semi-companies, our engagement is at a much higher level in the company. because EDA and chip design and agentic AI opportunities are very meaningful to our customers. As there's more demanding roadmap, as Moore's Law is kind of slowing down, this is not producing enough improvement. So the improvement has to come with design efficiency, better optimization. for better use of AI agents, and also the middle layer, the PPA provided by, and we do this with the foundries and with the customers, and DTCO is part of it, for better optimization of power and performance area. Then it was possible if Moore's Law was delivering, was really moving fast. Right now it has 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 or so. So all the Mag7 companies, all the big really household norms, silicon is a critical part of the roadmap. So therefore, cadence engagement is super critical at these customers. And the way to monetize that is we provide more value to them and then 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 Stonex. Your line is open.

Thanks for sneaking me in. This may be a question more for John. One thing that stands out is what appears to be about a 55% increase in your bookings in the first half of the year versus the same period last year. I assume you're going to build on what is normally a seasonally strong second half of the year, and I thought this was a low renewal period for some more substantial customers. Maybe if you can speak to what's driving that booking strength. Is it a reflection of the strength of the chip cycle? Is it a function of the strong chip design activity, or is it a function of some of the AI tools driving increasing usage of more copies of classic EDA tools?

There's a great question. I think Anirudh spoke to it a little bit there, to Josh's question. We always say it's strategy first. We've been continuing to execute against our Intelligent Systems Design Strategy. Anirudh has mapped that out for us for the last decade or so. and what we're seeing is that all the underlying structural demand drivers continue to strengthen. The semiconductor complexity, AI infrastructure investment, engineering productivity, physical AI, agentic workflows, all of those trends seem to still be in their early stages. And I think that's feeding into really solid bookings for us. And this year is. and 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 add-on opportunities as Anirudh mentioned earlier in the call. I'm very, very pleased with progress and how things are going. Anirudh, anything to add?

No, John, that's a great summary. I mean, like John said, Gary, that Yeah, this year is the low bookings 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 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 John was also saying, the environment is great. both like the AI, new AI commerce, the traditional AI and the regular companies. Our products and competitive position is fabulous. And then this new TAM opportunity with Agentic 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. Anirudh Devgan for closing remarks.

Thank you all for joining us this afternoon. It's an 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.