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CADENCE DESIGN SYSTEMS INC (CDNS)·Q3 2025 Earnings Summary

Executive Summary

  • Q3 revenue and EPS beat consensus; revenue $1.339B vs $1.323B consensus and non-GAAP diluted EPS $1.93 vs $1.79 consensus; GAAP EPS $1.05. Management raised FY 2025 revenue outlook to $5.262–$5.292B and non-GAAP EPS to $7.02–$7.08. Backlog reached a record $7.0B and cRPO for the next 12 months was $3.5B . Values in this sentence referencing consensus were retrieved from S&P Global.*
  • Non-GAAP operating margin expanded to 47.6% (from 44.8% YoY), with broad-based strength across EDA, IP, hardware, and SDA; China mix rose to 18% on normalization post export-control changes .
  • Q4 guidance implies sequential growth (revenue $1.405–$1.435B; non-GAAP EPS $1.88–$1.94) and continued operating leverage; FY guidance raised on revenue and non-GAAP EPS but lowered on GAAP EPS and GAAP OI&E given tax rate/OI&E dynamics and prior legal settlement impacts .
  • Stock-relevant catalysts: record hardware expansions (OpenAI Palladium, AI/HPC customers), Arm Artisan foundation IP acquisition, definitive agreement to acquire Hexagon’s D&E (MSC) to strengthen SDA for “physical AI,” and deepening partnerships with Samsung/TSMC/NVIDIA .

What Went Well and What Went Wrong

  • What Went Well

    • Revenue and EPS beat with margin expansion: non-GAAP operating margin 47.6% (+280 bps YoY); non-GAAP EPS $1.93 (+18% YoY) .
    • Hardware had a record Q3 with significant expansions at AI/HPC customers; “We deepened our overall collaboration with OpenAI as they expanded their commitment to our Palladium emulation platform in Q3” .
    • Strategic positioning in AI: “Cadence is uniquely positioned to capture this generational opportunity with a differentiated and comprehensive portfolio spanning EDA, IP, 3DIC, PCB, and system analysis” .

  • What Went Wrong

    • GAAP metrics remain affected by non-operating items; FY GAAP EPS guidance lowered to $3.80–$3.86 (from $3.97–$4.07) and GAAP OI&E worsened to $(18)–$(10) for FY 2025, partly reflecting prior legal settlement impacts and tax/OI&E outlook changes .
    • Working capital intensity ticked up: DSO rose to 55 days in Q3, and operating cash flow was $311M vs $378M in Q2 and $487M in Q1 .
    • China/regulatory remains a watch item; management embeds prudence assuming current export regime remains similar and noted Q3 included 25% ($150M) catch-up from Q2 to Q3 in backlog .

Financial Results

MetricQ1 2025Q2 2025Q3 2025
Total Revenue ($USD Millions)$1,242 $1,275 $1,339
GAAP EPS ($)$1.00 $0.59 $1.05
Non-GAAP EPS ($)$1.57 $1.65 $1.93
GAAP Gross Margin (%)86.5% 85.6% 86.4%
Non-GAAP Gross Margin (%)88.4% 87.2% 88.0%
GAAP Operating Margin (%)29.1% 19.0% 31.8%
Non-GAAP Operating Margin (%)41.7% 42.8% 47.6%
Segment/LineQ1 2025Q2 2025Q3 2025
Product & Maintenance Revenue ($USD Millions)$1,111 $1,170 $1,208
Services Revenue ($USD Millions)$131 $105 $131
Revenue Mix – Core EDA (%)71% 71% 71%
Revenue Mix – Semiconductor IP (%)14% 13% 14%
Revenue Mix – System Design & Analysis (%)15% 16% 15%
Geography Mix – China (%)11% 9% 18%
KPIsQ1 2025Q2 2025Q3 2025
Backlog ($USD Billions)$6.4 $6.4 $7.0
cRPO Next 12 Months ($USD Billions)$3.2 $3.1 $3.5
DSO (days)44 51 55
Free Cash Flow ($USD Millions)$464 $334 $277
Cash & Equivalents ($USD Millions)$2,778 $2,823 $2,753
Debt Principal ($USD Millions)$2,500 $2,500 $2,500
Share Repurchases ($USD Millions)$350 $175 $200

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Total Revenue ($USD Billions)FY 2025$5.210–$5.270 $5.262–$5.292 Raised
GAAP Operating Margin (%)FY 202528.5–29.5 27.9–28.9 Lowered
Non-GAAP Operating Margin (%)FY 202543.5–44.5 43.9–44.9 Raised
GAAP EPS ($)FY 2025$3.97–$4.07 $3.80–$3.86 Lowered
Non-GAAP EPS ($)FY 2025$6.85–$6.95 $7.02–$7.08 Raised
GAAP OI&E ($USD Millions)FY 2025$(9)–$11 $(18)–$(10) Lowered
Non-GAAP OI&E ($USD Millions)FY 2025$(52)–$(32) $(33)–$(25) Raised
GAAP Tax Rate (%)FY 2025~28 ~29 Raised
Non-GAAP Tax Rate (%)FY 202516.5 16.5 Maintained
Cash Flow from Operations ($USD Billions)FY 2025$1.65–$1.75 $1.65–$1.75 Maintained
Capital Expenditures ($USD Millions)FY 2025~160 ~150 Lowered
Q4 Revenue ($USD Billions)Q4 2025—$1.405–$1.435 New/Updated
Q4 GAAP/Non-GAAP EPS ($)Q4 2025—$1.17–$1.23 / $1.88–$1.94 New/Updated

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2 2025)Current Period (Q3 2025)Trend
AI initiatives (Design for AI, AI for design)Expanded NVIDIA partnership; Cerebrus momentum; SDA +50% YoY Deepened Samsung/TSMC partnerships; agentic AI platforms (SimAI, Cerebrus AI Studio); OpenAI Palladium expansion Strengthening
Hardware demand (Palladium/Protium)Transition effects in Q2; strong pipeline, capacity scaling Record Q3 hardware; scaling manufacturing and inventory to meet demand Accelerating
IP business+40% YoY (Q1); +25% YoY (Q2) Competitive wins (HBM4/DDR5); Arm Artisan foundation IP acquisition; strong bookings Strengthening
China/regulatoryTemporary restrictions impacted Q2; prudence in outlook Normalization; China at 18% of mix; guidance assumes current export regime Improving but monitored
SDA/“Physical AI” strategyBeta CAE acquisition prior year; AI-driven multi-physics momentum Definitive agreement to acquire Hexagon’s D&E (MSC) to build structural/multi-body pillar; target ~$1B run-rate in 2026 post close Expanding
Backlog/renewalsBacklog $6.4B; healthy renewals set-up Record $7.0B backlog; multi-year recurring EDA/IP arrangements support durable growth Strengthening

Management Commentary

  • “Cadence delivered excellent results for the third quarter of 2025… we are raising our full year revenue outlook to ~14% growth year-over-year.” — Anirudh Devgan, CEO .
  • “Hardware had a record Q3… we deepened our overall collaboration with OpenAI as they expanded their commitment to our Palladium emulation platform.” — Anirudh Devgan .
  • “Bookings exceeded our expectations, with backlog growing to over $7 billion… raising our full-year outlook to approximately 14% revenue growth and 18% EPS growth.” — Anirudh Devgan .
  • “For Q4, we now expect revenue in the range of $1.405B to $1.435B… non-GAAP EPS in the range of $1.88 to $1.94.” — John Wall, CFO .

Q&A Highlights

  • IP sustainability and visibility: Management emphasized focus in AI/HPC at advanced nodes, foundry proliferation (TSMC/Samsung/Intel/Rapidus), and competitively stronger PPA as drivers; expects IP to grow above corporate average next year .
  • Renewals/backlog mix: Broad-based strength across EDA/IP/hardware/SDA; multi-year recurring arrangements supporting durable double-digit growth .
  • China normalization: Region “back to normal” behavior; Q3 included hardware deliveries prioritized after Q2; still embeds prudence assuming export regime remains similar .
  • Hardware cycle outlook: Demand secularly strong; capacity scaling; visibility ~6 months; designing next-gen systems; current platforms emulate ~1 trillion transistors, with roadmap to support next wave .
  • Agentic AI monetization: JEDI platform enables standardized plus customer-specific deployments on-prem or cloud; targets automation of RTL development and verification workflows .

Estimates Context

MetricQ3 2025 ConsensusQ3 2025 ActualSurprise
Revenue ($USD Millions)1,323*1,339 Beat
Primary EPS ($)1.79*1.93 Beat
Forward ConsensusQ4 2025FY 2025
Revenue ($USD Millions)1,424*5,281*
Primary EPS ($)1.91*7.03*
# of Estimates (Rev/EPS)18 / 17*23 / 23*

Values retrieved from S&P Global.*

Where estimates may adjust: upward for non-GAAP EPS and revenue on continued hardware/IP/SDA demand and raised FY outlook; GAAP estimates may reflect higher tax rate and OI&E assumptions .

Key Takeaways for Investors

  • High-quality beat: Q3 revenue and non-GAAP EPS beat with non-GAAP operating margin at 47.6%; FY revenue and non-GAAP EPS guidance raised; backlog at record $7.0B . Values referencing consensus were retrieved from S&P Global.*
  • Hardware momentum is a multi-year secular tailwind with AI/HPC demand; OpenAI Palladium expansion and capacity scaling point to continued strength into 2026 .
  • IP positioning in AI/HPC and Arm Artisan acquisition strengthens differentiation and foundry breadth; expect above-average IP growth vs company .
  • SDA expansion via Hexagon’s D&E (MSC) creates a second pillar for “physical AI”; management targets ~$1B run-rate in 2026 post close, enhancing medium-term growth optionality .
  • China recovered to 18% of mix in Q3; management embeds prudence on export controls—watch for regulatory headlines, but demand appears broad-based across geographies .
  • Working capital/cash: DSO rose to 55; FCF moderated to $277M; company continues buybacks (~$200M planned in Q4 and at least 50% of FY FCF) .
  • Near-term trading setup: Q4 guide implies sequential growth with non-GAAP EPS $1.88–$1.94; catalysts include continued AI design activity, hardware deliveries, and SDA/IP wins; risks include regulatory variability and OI&E/tax rate impacts on GAAP optics .