Cadence Design Systems, Inc (NASDAQ: CDNS) Q1 2026 Earnings Call dated Apr. 27, 2026
Corporate Participants:
Richard Gu — Vice President of Investor Relations
Anirudh Devgan — President and Chief Executive Officer
John Wall — Senior Vice President and Chief Financial Officer
Analysts:
Charles Shi — Analyst
Jason Celino — Analyst
Vivek Arya — Analyst
Jim Schneider — Analyst
Siti Panigrahi — Analyst
Joe Quatrochi — Analyst
Ruben Roy — Analyst
Harlan Sur — Analyst
Lee Simpson — Analyst
Gianmarco Conti — Analyst
Jay Vleeschhouwer — Analyst
Kelsey Chia — Analyst
Andrew DeGasperi — Analyst
Gary Mobley — Analyst
Clarke Jeffries — Analyst
Joshua Tilton — Analyst
Blair Abernethy — Analyst
Presentation:
Operator
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 First Quarter 2026 Earnings Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers’ 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.
Richard Gu — Vice President of Investor Relations
Thank you, operator. I’d like to welcome everyone to our first-quarter of 2026 earnings conference call. I’m joined today by Anirud, 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 requeue with additional questions. Now I’ll turn the call over to Anirud.
Anirudh Devgan — President and Chief Executive Officer
Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. I’m pleased to report that Cadence had a strong start to 2026. With accelerating AI demand and disciplined execution, delivering one of the best Q1s in company’s history. Our record backlog of $8 billion was ahead of plan, reflecting strong customer confidence in our AI-driven portfolio and his pivotal role in enabling delivery of their increasingly complex chip and system design roadmaps. Given the accelerating momentum of our business, we are raising our 2026 revenue growth outlook to 17% and expect to achieve the Rule of 60 for the first time. John will provide more details in a moment. Agenic AI era is here and Cadence is leading the transformation of semiconductor and system design. At Cadence Live Silicon Valley 2026, we took a major step towards fully autonomous chip design, pioneering the industry’s most advanced and comprehensive full flow platform. We introduced Agent Stack, the head agent framework for our AI super agent, which enables knowledge sharing across the design flow and extend autonomous designs from chips to 3DIC to systems. Building on our revolutionary chipStack AI super agent for RTL Design and verification, we introduced two new breakthrough AI super agents, Vera Stack for analog and custom design and for digital implementation and sign-off. Together, these solutions span the entire chip design flow, creating a connected continuous learning platform that brings the industry closer to comprehensive automation. As the industry begins transitioning to agenic AI, the need for physically accurate and highly mathematical EDA solutions become even more critical. Our AI solutions are built on decades of domain expertise, proprietary data and tightly integrated physically accurate engines, delivering high fidelity results. We continue to view our platform as a three-layer kick with accelerated compute and data as the base layer, principal simulation and optimization as the critical middle layer and AI as the top layer. As I’ve said before, we believe the greatest value comes from the tight coupling of these layers, reinforcing each other to deliver much better results. As these super agents invoke our simulation, verification and implementation engines at-scale, we expect them to materially expand EDA consumption and drive higher usage across our platforms. We announced a strategic collaboration with Google to optimize the ChipStack AI super agent with Gemini on Google Cloud. By combining LLM reasoning with GCP scalable compute, this collaboration delivers a cloud-native platform for next-generation chip development. In Q1, we furthered our long-standed partnership with MediaTech through a wide-ranging expansion across our new Agentic AI offerings and core 3DIC and system analysis solutions. Physical AI is emerging as the next big wave of intelligence as AI moves into autonomous systems, autos, drones and robotics. And Cadence is uniquely positioned to lead this transition. The addition of Hexagon’s DNE leading structural and multibody dynamics technologies transforms our system analysis portfolio to leadership position in physical AI, enabling customers to build and train fundamentally new AI word models by narrowing the critical SIM to real gap. At Cadence Live Silicon Valley, we announced an expanded partnership on AI and robotics with NVIDIA. By combining our AI-driven solutions with NVIDIA’s advanced technologies, we are accelerating engineering workflows and boosting productivity across chip design, physical AI systems and hyperscale AI factories. Now let me provide an update on our businesses. Our IP business continued its strong momentum with 22% year-over-year revenue growth, driven by accelerating demand of AI, HPC and automotive workloads. Growing complexity of advanced node designs and chiplet-based architectures is driving strong demands of our differentiated star IP portfolio across interface, memory and foundation IP. We achieved meaningful competitive wins and customer expansions at marquee accounts, reflecting the breadth of our portfolio and more importantly, the differentiated performance of our solutions. We closed a record deal with a leading global foundry, marking our largest IP engagement with this customer to date and reinforcing our leadership at the most advanced nodes. With strong market tailwinds, focused strategy and expanding customer proliferation, we remain very well-positioned for continued growth in IP. Our core EDA business delivered another strong quarter with revenue growing 18% year-over-year, driven by increasing proliferation of our solutions at-market shaping customers. Our AI-driven solutions and increasingly our offerings are becoming an important part of customer renewals and expansions. Demand for our hardware accelerated in Q1, resulting in our best quarter ever, led by AI HPC customers and increasing demand in automotive and robotics. Palladium Z3 continues to be the gold standard for emulation and drove multiple competitive displacement. Momentum on verification software grew, particularly in and Verisium SIM AI and ChipStack generated tremendous customer interest with a large number of evaluations underway. Led by AI-driven cadence solution. Our digital platform continues to gain share, especially at the most advanced nodes. A global semiconductor design leader significantly increased their innovus usage and adopted our digital sign-off solutions. And a marquee AI infrastructure company expanded their usage of our sign-up solutions and their leading-edge ASIC designs. In custom and analog, our AI-driven Virtuoso studio continued its strong momentum in design migration and layer automation as it gets increasingly deployed by analog and mixed-signal leaders seeking greater productivity. Our system design and analysis business delivered 18% year-over-year revenue growth as AI-driven multiphysics simulation and 3DIC become essential to addressing growing system challenges. We have strong momentum in 3DIC, where our unified multi-die integrated design to analysis flow is helping customers address their rising chiplet and advanced packaging complexities. We also saw strong momentum in and clarity with multiple memory and advanced IC packaging customers, expanding their deployments as they move to higher-speed interfaces. Customer adoption is increasing as they look to address signal integrity, power integrity and thermal challenges earlier in the design flow-through deployment of a full cadence sign of flow. In closing, I’m pleased with our strong execution and the broad-based momentum of our business. As the AI era unfolds, Cadence is leading the charge to realizing much higher design productivity. Increasing design complexity and the growing need for productivity is creating a compelling long-term opportunity for Cadence. With our differentiated solutions and expanding Agentic AI portfolio, I believe we are very well-positioned to lead this transition and continue delivering meaningful innovation and value to our customers. Now, I will turn it over to John to provide more details on the Q1 results and our updated 2026 outlook.
John Wall — Senior Vice President and Chief Financial Officer
Thanks,, and good afternoon, everyone. I’m pleased to report that Cadence delivered excellent results for the first-quarter of 2026 with accelerating momentum and broad-based strength across all our businesses. Robust design activity, coupled with our solid execution drove 19% year-over-year revenue growth and 45% operating margin for Q1. First-quarter bookings were ahead of expectations, resulting in a record backlog of $8 billion. Here are some of the financial highlights from the first-quarter, starting with the P&L. Total revenue was million. GAAP operating margin was 29.3%. Non-GAAP operating margin was 44.7%. GAAP EPS was $1.23 and non-GAAP EPS was $1.96. Next, turning to the balance sheet and cash-flow. Our cash balance was $1.407 million, while the principal value of debt outstanding was $2.925 million. Operating cash-flow was $356 million. DSOs were 67 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 expect revenue in the range of $6 billion and $125 million to $6 billion and $225 million. 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 $4.39 to $4.49 and non-GAAP EPS in the range of $7.85 to $7.95. Operating cash-flow in the range of $1.875 to $1.975 billion and we expect to use approximately 50% of our free-cash flow to repurchase Cadence shares in 2026. With that in mind, for Q2, we expect revenue in the range of $1.555 million to $1.595 million. GAAP operating margin in the range of 28.5% to 29.5% and non-GAAP operating margin in the range of 44.5% to 45.5%. GAAP EPS in the range of $1.07 to $1.13 and non-GAAP EPS in the range of $2.02 to $2.08. And as usual, we published a CFO commentary document on our Investor Relations website, which includes our outlook for additional items as well as further analysis and GAAP to non-GAAP reconciliations. In conclusion, Cadence is off to a strong start for the year. We are raising our 2026 revenue outlook to approximately 17% year-over-year growth. As always, I’d like to thank our customers, partners and our employees for their continued support. And with that, operator, we will now take questions.
Questions and Answers:
Operator
Thank you. At this time, I would like to remind everyone who wants 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. We will pause for just a moment to compile the Q&A roster. And our first question comes from the line of Charles Shi with Needham. Your line is open.
Charles Shi
Hi, good afternoon. Thanks for taking my question., I think I have a pretty high-level question, but this is probably top of the mind for a lot of investors. We obviously learned AI is probably good for EDA, good for license consumption, et-cetera. But we’re still hearing some concerns around AI’s ability to actually write the software and there are some doubts around whether AI can actually write better EDA-based tools like a base to, I mean virtual so universe those kind of tools. So and obviously, there are always many EDA start-ups happening at the same time. And so the question is, is AI’s ability to write software worry — worries you about the defensibility of the EDA-based tool business, we obviously once again, we understand AI is good for consumption of the base tool business, but want to get your thoughts. Thank you.
Anirudh Devgan
Yeah, hi, Charles. Thanks for the question. So I mean, there are multiple parts to this. Of course, I’m super-excited about Agentic AI applied to chip design and EDA. And your question is more specific to the base tool and whether AI can write those base tools. So first of all, I have to — I’m very confident in our position in the base tool and our competitive advantage, okay. And just to remind everyone, I mean we have about 15,000 people now in Cadence and about 10,000 are in R&D. We have more than half of them have advanced degrees. I think more than 1,000 of them have PhDs from the from the top universities. So we will anyway deploy AI internally like we are to write our software better. But I’m not worried that some other party will be able to write any better base tools. So — and our competitor of the base 2 is anyway best-in-class and I don’t see any reason that will change going-forward, okay. Now what I’m super-excited that we launched in Cadence Live is the part and the interplay of the Agentic tools with the base tools, you know, the AI orchestration combined with physical accurate base tool. And that creates new opportunities for us, both in terms of TAM expansion, because what AI allows us is to sell products in spaces we didn’t have products before like RTL generation, verification plan generation. And those products, I think will be — we will be consumed more on a subscription plus consumption model. So this is entirely new category for cadence. And then in-turn, like you said, AI will drive more of our base tools. So I feel pretty good about this kind of three-layer framework we have talked about and confident going-forward.
Operator
And our next question comes from the line of Jason Celino with KeyBanc Capital Markets. Your line is open.
Jason Celino
Great. Thank you so much. And maybe just a clarifying question. So I noticed that the operating margin guide is coming down by a little bit. I’m curious if — like what are the main drivers of that, John? I know we’re layering in-kind of the Hexagon acquisition, but on like an absolute basis, it’s relatively small layering in that opex. So maybe you can just help us understand the guide on the margin? Thank you.
John Wall
Yeah, sure, Jason. Thanks for the question. Yeah, what you’re seeing there is primarily the impact of including the hexagon design and engineering business in the current outlook. The strategic opportunity there is very large, but the 2026 P&L reflects the timing of integration that the — we announced in the press release when we — when we closed the deal that we expect $160 million of revenue this year. That’s in the guide now. We expect it to be dilutive to the tune of about $0.28. The margin impact on the $160 million is kind of in the 5% to 10% range. But the dilution comes from — because we paid 30% of the acquisition price in shares and 70% in cash, so the interest component on the — or the lost interest income on the cash causes a lot of the dilution impact in the short-term. We’d expect it to be accretive in 2027. The — yes, so I think the way to think about it is financial 2026 is an integration year and the guide includes the acquired cost base, the financing impact, the acquisition-related integration costs and kind of near-term dilution. And that’s why revenue moves higher while EPS and operating margin are lower than the February guide. So, yeah, so $160 million. And I think in Q1, the impact was slightly less on the on the EPS that we had about $20 million of revenue from Q1 from Hexagon. So only about $0.01 kind of dilution impact. So EPS would have been like $0.01 higher if we didn’t have Pexagon.
Operator
And our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.
Vivek Arya
Thanks for taking my question. I know that in the last year, all we have been hearing non-stop are different news about chip shortages and the growing kind of price of chips and just the pricing power that many of your customers have. And my question is what effect shortages and the fact your customers have more pricing power? What effect does that have on their engagement with Cadence? Does it restrict, does it shift them towards higher ASP products? Just what impact do semiconductor shortages have on your growth and engagement trajectory? What has changed and what are you observing in your customer behavior? Thank you. Thank you.
Anirudh Devgan
Yeah. Thanks, Vivek, for the question. So I would say a few things. So first of all, I mean, the environment is pretty healthy both for the system companies and semi-companies. So that’s always good. You know, like you know, I mean some of the hyperscalers and AI semi-companies were already doing well last year, but now the memory companies are doing well, even analog mix companies are doing well. So we, of course, want to see our customers doing well and that creates a positive environment for engaging, especially with these new solutions we have. So that’s actually a pretty market improvement over the last three to six months. So that’s number-one. Number two, the shortage is, you know, it doesn’t directly — I mean, the customer is still committed to long-term R&D roadmaps and sometimes they may like do — like I’ve seen in few cases, the customers, for example, may do multiple foundries or nodes to make sure there is capacity at a particular node or foundry. So that would directly lead to more design activity for us. So in general, if the customer is healthy because the revenue is going up, they will do not only more in the current designs to accelerate them, but also may start new designs. I think that’s the second thing I would say. And third thing, which is more exciting for us is, you know, as we have these solutions, it can give more productivity for our customers and we can deliver more value ourselves. And the more value we deliver, the more opportunity we have to capture part of that value. And the customers are very open to those discussions as there is more automation. So we are actually like I mentioned, there’s a lot of engagement with chip stack and also the new agent stack,, there is no pushback at all. If we can deliver productivity, the customer is more than willing to engage. So that’s, I would say, Vivek are the at least the three broad areas I see in the current environment? Yeah.
Operator
And our next question comes from the line of Jim Schneider with Goldman Sachs. Your line is open.
Jim Schneider
Good afternoon. Thanks for taking my question. I was wondering if you could maybe unpack your commentary on the solutions, specifically around your indication they would drive increased consumption for base tools. Can you maybe talk a little bit about the pricing for those tools and how the Agentic solutions are being priced specifically? And then on-net, how — maybe if you could frame for us maybe how you might be able to capture more revenue value overall on-net between AGENTIC and conventional licenses? Thank you.
Anirudh Devgan
Yeah. Thanks for the question. So I think the opportunity is significant, I believe, and especially with Agentic because what this — and this happened over the last, let’s say, six to 12 months in my opinion and more so in six months is not only the tools have evolved, but tools are able — we can embed skills in them so they can do a lot more automation. For example, we launched stack which is analog automation. Analog has been a long problem to automate, right, very difficult to automate. But now with these flows and skills, we can automate that. So what does that mean in terms of pricing or how these things are concerned — consumed. So first of all, like I said, this kind of automation was not possible before. So all this work used to be done by the customers themselves, right? And in that case also, I talked to one big customer like for example, they said for analog or even for digital, every new design they require 2x more engineers. And anyway, it’s not — it’s like unrealizable headcount growth because they can’t hire 2x more engineers every time. So the way we plan to monetize and the early signs are positive is that first of all, we’ll sell new tools that we never sold, which is more like this was — this was manually done by customers like doing analog design or doing RTL. So that will be priced as a subscription plus consumption model, very similar to other kind of leading AI tools. So that’s a completely new category for cadence. And that will kind of bend the headcount curve for our customers, but that — the expected headcount curve was never realizable anyway. So this is the history of automation, as you know in EDA. We always need to do that, but this time we can do that with the Agentic kind of AI flow. And then once the agent runs, like when a user designs it a chip and this is pretty common, right, like let’s say that chip has 100 blocks just to keep it simple and there are 100 engineers, one engineer is running one block. So one engineer will run like one or two experiments he or she to see which — which settings or which design is better. But when the agent runs those blogs, they may try 10 or 100 variations of those things. And anyway, AI does lot more exploration than a human would do. So not only agent can make give more productivity, it by nature runs more of the base tools. So that’s why if you look at our usage of base tool is going up pretty significantly in this kind of environment. So this is the two-ways. And in those environments as a traditional business model, but in the base tools, but there’ll be more demand for it. And then the new business model, which is more automating what was manual with the flows.
John Wall
Yeah. And I would just add, Jim, that what we saw from Q1 was — I mean the overall pricing environment has improved. Our pricing obviously remains value-based with us. We provide tremendous value to our customers, especially with our flow and we stand to benefit from our customer success in that area that also any shift that you see from customers’ labor spend to automation, that’s likely to be irreversible and likely to accelerate over-time?
Operator
And our next question comes from the line of CT with Mizuho. Your line is open.
Siti Panigrahi
Great. Thank you. I want to switch to the IP business. Anirud, you talked about IP entering now third year of strong growth. Could you give an update like what you saw in Q1? And are there HBM, LP, DTR6 and all that remaining still the key drivers or — and the newer foundry like, Intel Foundry, are they contributing meaningfully to the IP demand yet. And John, just to clarify also on your EPS guidance, you said $0.28 dilution, but you lowered only $0.20. Just want to clarify that your organic basis you raised by $0.08 EPS. Thank you.
John Wall
I’ll take the last part first. Yes, yes, we did. We raised by $0.08.
Anirudh Devgan
And it is a great start to the year, okay. And not just in IP across-the-board. And I was looking at with our team. I think this is one of the strongest raises we have had in Q1. We only gave you guidance in February. So two months later, I think it’s one of the strongest raises we have had. Now all the businesses are doing well and especially IP is off to a great start, okay. And I think it will do well going-forward from what I think I see. And there are at least three big reasons in my mind for IP growth. And like I said, it’s the third year now. So we don’t like to talk about things too early, but after three years of strong growth, I think that is a good trend, you know. So the first thing is our IP quality and performance is just better, you know. We have a new team, just the performance, just because these things are standard-based IPs, right, like DDR or PCIE. So the spec is same, but if our power or area is better than the competitor or what the customer can do, then they will buy our IP. So the most promising thing to me is because the strength of our R&D team, our PPA is better and that is leading to a lot of competitive wins and pretty significant major customers. And I highlighted some of them in Cadence Life. So these are like really big kind of marquee names. So that gives me strength that the team is operating well. So that’s number-one. Number two, our portfolio is expanding like we have highlighted with like HBM and some of it is organic, some of it is acquired, like HBM we acquired from Rambus and then we improved it. But UCIE, which is a critical chip to chip technology was all developed organically, okay. So the second reason is that our portfolio is expanding. The third reason is these new foundries, okay, and it’s very encouraging to see. Of course, we want to make sure we are best-in-class in TSMC, which is the leading foundry. But now there are at least three other major foundries, as you know, Samsung, Intel and Rapidus at advanced nodes and then global and others at mainstream modes. So the amount of design activity with AI and number of increasing foundries requires more IP. So that’s why I’m actually pleased to note today like in the prepared remarks that we had a pretty significant deal, one of the largest ones at a leading global foundry, okay. And just to clarify, that is not Intel, okay. We are actually pleased with our discussions with Intel with Libbo and team on 18A and especially on 14A. I think Intel realizes they need to invest more in 14A and this time be more ready because the availability of IP and EDA solutions as 14A is critical as they go talk to their customers. So we are making very good progress with Intel and we will have soon, we’ll have more to say on our engagement with Intel. But I’m also pleased with this engagement with the other global foundry. So overall, IP growth seems robust and I’m very pleased where we are. And we are already — we’re always very strong in EDA. But historically, last few years, we have not done as well in IP. But right now, I think we are very well-positioned and also well-positioned in SDA.
Operator
Our next question comes from the line of Joe with Wells Fargo. Your line is open.
Joe Quatrochi
Yeah, thanks for taking the question. But maybe just to kind of focus on the discussion really on EDA. I mean I guess when you take a step-back and you think about EDA’s share of R&D expense and clearly, we’re seeing an acceleration of R&D expense across a number of different companies. How should we think about EDA’s contribution to that or percent of that? And where could that go given the value maybe you’re providing from AI because we’re also seeing, right, memory costs are increasing, things like that, that also need to flow-through that R&D line?
Anirudh Devgan
Yeah, good question. And we have to observe it closely, right? You know us we rather like print things than kind of predict what will happen because it’s better to show than to. But as you know, historically, we have said EDA used to be 7% of R&D and now it’s more like 11% of R&D. So it has gone up and R&D spend itself will go up significantly. But I think there is a real potential, especially with AI for that 11% to go up. And all the big CEOs I talked to, they are — they are not only willing, they want to see that happen. They want to invest in more automation and compute to make it happen. So I’m pretty sure right now, I think it will go up. Now how much it will go up, we will see, right? But I think there is a meaningful opportunity for automation to be a higher percentage of R&D, plus R&D itself to go up.
Operator
Our next question comes from the line of Reuben Roy with Stifel. Your line is open.
Ruben Roy
Yeah. Thank you. John, I want to go back to the operating margin discussion. It’s great to see that you guys are targeting Rule of 60 by the end-of-the year here. Just thinking about that though, it’s driven on revenue acceleration. Obviously, we’ve got the Hexagon integration costs here. But are you thinking about the operating model relative to operating margin as you get over $6 billion in revenue, does the operating model look a lot different than it did at $5.3 billion? Is this sort of 43% to 45% range, how we should be thinking about the operating margins or — and I asked that because obviously, you’re investing in the AI and other sort of new product areas. Just wondering if you can give us a little bit of an idea of how you’re thinking about the operating margin structure at this revenue run-rate longer-term as you integrate Hexagon? Thank you.
John Wall
Yeah. Sure, Reuben. Thanks for the question. Yeah, I think when we look at our like organic incremental margin is closer to 60% these days than 50%. And as we get our arms around these acquisitions, it typically takes us 12 to 18 months-to improve the profitability up to kind of something close to our expectations that cadence that — and I would liken the profile to the way beta. So in ’24 and ’25, you kind of had an operating margin profile where we had the dilutive impact of the beta acquisition in ’24, but then your margins improved dramatically in ’25 as we got the synergies and we got the benefits of making that more profitable. I would expect a similar pattern for ’26 and ’27 when it comes to hexagon. We have a slight headwind in the short-term, but there’s plenty of opportunities to improve the profitability there. And also with the benefits that we’re seeing in terms of customer engagement accelerating on the Agenic AI front, I think there’s even more opportunities to stretch that incremental operating margin going-forward. Yeah.
Operator
Our next question comes from the line of Harlan Sur with JPMorgan. Your line is open.
Harlan Sur
Yeah, good afternoon. Thanks for taking my question. If I take your 2Q guidance and look at your implied second-half guidance, the average quarterly revenue run-rate in the second-half is actually slightly below the 2Q level. Is there — is there some lumpiness in the Hexagon business in the second-half maybe moving customers to multi-year license agreements or is it due to some lumpiness in the core business, maybe a more first-half weighted hardware or IP shipment profile?
John Wall
Yeah. Thanks for the question, Harlan. Yes, surely. Look, the first-half is very strong and the second-half I described as containing appropriate prudence. The — your comment on Hexagon, Hexagon’s D&E business is correct. They are more kind of first-half weighted in terms of their profile. When I looked at last year’s revenue, the — for Hexagon, the — I think Q3 and Q4 were their worst two quarters of the year, they tend to have a lot of early year kind of dated contracts. But overall, I think the second-half really — I mean, it doesn’t — HexaCon doesn’t impact the first-half, second-half that much. It’s — it’s really — I think we had such — as Andrew said, Q1 guide represents one of the highest raises we’ve had at this time of the year. And we normally like to wait until we have two quarters under our belt to raise the guide. We couldn’t help but raise the guide given the strength of Q1 bookings and the strength we saw across-the-board. So we just wanted to wait until July to update the second-half. And our
Operator
Next question comes from the line of Lee Simpson with Morgan Stanley. Your line is open.
Lee Simpson
Great. Thanks for squeezing me in. I just wanted to ask about physical AI. I mean, you’ve made some pretty good acquisitions. You now announced collaborations, especially with NVIDIA. So I’m just trying to get a sense for the momentum here and what really is still the early years in this breakout. And I think in particular, the take-up of your emulation tools, especially as it relates to closing the SIM to real gap in robotics and probably even self-driving chips as well, whether or not that’s going to really lead to an outsized value capture for Cadence? And when do we actually see this in the numbers as well? Thanks.
Anirudh Devgan
Yeah. Thanks for the question, Lee. So I mean like I talked about it forever now that we look at this thing as a three-layer cake, right, and there are multiple slices of the cake and the first slice was data center AI or infrastructure AI and the second big slice is physical AI. And of course, I’ve said this for five years now, where I believe physical AI will be bigger than data center AI by long chart because you’re talking about like trillions of dollars of product opportunity and it will reconfirm the data center layer — data center slice because to deploy, for example, AI model in the car, you need to train it on the data center anyway. So I think it will even help the data center slice. Now for the — for our portion, yes, we made this acquisition we are super-excited about and we have this right now training flow for word models and also more complete simulation environment. So what is exciting about Hexagon is with combination of our previous technologies like millennium and cascade and beta, we do have finally a complete solution for physical AI the middle layer kind of principle simulation and optimization layer. And then that can be used to do these word models, which will be different in the top layer. But other thing I want to emphasize, apart from the SDNA and the AI part, that physical AI itself will drive a lot of silicon design. So it is also good for EDA and IP. And this is you’re starting to see that, of course, companies like Tesla mentioning that they don’t have enough silicon because of physical AI. So physical AI not only is good for SDA and AI, it is also really good for silicon and it also is the sweet-spot of cadence, because Cadence always had both analog and digital in solutions and that’s why we’re always good with all the major semiconductor companies for automotive. And now with all the system and OEM companies for automotive and as that translates to drone and robots, it will also turbocharge the silicon business. That’s why I’ve been always been excited about Physical AI, not just for the AI and SDA part, but also for EDA and IP.
Operator
Our next question comes from the line of Jean-Marco Compty with Deutsche Bank. Your line is open.
Gianmarco Conti
Afternoon, yeah. Thanks for squeezing me into. And perhaps on hardware, another strong quarter, of course, but as we think about the next refresh cycle for and, historically, you’ve roughly been on a two-year cadence. And should we expect Z4X4 within the next 12 to 18 months? Was the upgrade higher now given how recently customers absorbed the first-generation? And perhaps related, are you seeing any of your own AI tooling materially compress the internal hardware development timelines to the same extent that customers are reporting that same 10x productivity on RTL? Thank you.
Anirudh Devgan
Yeah, absolutely. Great question. So first of all, like I said, we have where most of our headcount is engineering, right, whether it’s R&D or customer support. So we always want to use our own products in both our hardware groups, which is the significant design team. We do both software, hardware and all the system design-in palladium and Protium. And also just to remind you in our IP team, you know, it’s a great — you know, they’re working very well together, our IP team and EDS teams because IP, we have so much demand and instead of again increasing headcount, we are always sensitive about how much headcount will increase and we are increasing headcount in all areas, include IP, but we can make them a lot more productive with AI. Now on the hardware part, yeah, I’m very pleased. I mean, it’s a remarkable start to the year. Our competitive position is amazing. We are the only company that does its own chip, as you know. We have at least a 10-year lead-in that infaladium. And then also is doing now in which we use the FPGA solution. Now just to be clear, we always design next-generation systems, you know. And because we control the whole stack, including the system design and silicon design. One thing to remember is we will do it much faster than what the FPGA cadence will be. FPGA companies will also do next-generation FPGA designs. But because we are own ship, we do our own design, it will be much faster than FPGA. So what that means is the lead of palladium over FPGA systems will only continue to increase as we introduce new products, okay. But I’m not going to get into like when we’re going to introduce new products because the current products are doing amazingly well. Of course, we are designing Z4 and Z5. But what you have to remember is the current Z3 system has the capability to design 1 trillion transistor systems, okay. And right now, the biggest systems in the world are 100 billion to 200 billion transistor. So we have a lot of leeway. The industry is supposed to reach 1 trillion transistor by 2030. One thing I’ll assure you is we’ll have a Z4 system before 2030. So there is no issue of whether Z3 can handle the capacity and requirements. So we’re just happy to work with our customers. At the same time, we want to assure our investor and customers we have a very, very good roadmap on hardware systems. Yeah.
Operator
Our next question comes from the line of Jay with Griffin Securities. Your line is open.
Jay Vleeschhouwer
Thank you. Good evening., now that you’ve completed Hexagon MSC acquisition, it would appear that you are the fourth largest non-EDA simulation company, let’s Call-IT industrial simulation with multiphysics. Your share is perhaps one-tenth of that total market, again, aside from EDA simulation. So the question is, now that you’ve assembled all these pieces, invested over $5 billion over the last five or six years, could you speak in some detail about what your principal technical and/or go-to-market objectives or executables are going to be for the next year or so? Synopsys talked about what they’re doing with Ansys. Perhaps you could do the same for your pieces. It also seems you’re becoming a little bit more vertically-integrated in go-to-market with the acquisition of a longtime channel partner. So maybe talk about some of those critical elements here to grow your revenues and share in that business.
Anirudh Devgan
Yes, Jay, that’s a lot loss there, right? There’s a lot there. So let me try to unpack some of it. I’m sure we can talk more if I don’t get to all the pieces there. But first of all, we are satisfied with the scope of our SDA business now after this acquisition. So I mean, this is rough numbers. So I think it will be roughly $1 billion of run-rate. And what is more exciting to me is that it is focused in the two important areas of SDA. I’m a fan of SDA for a while now, I don’t know, maybe eight years now, but — but not all SDA is created equal, okay. To me, we want to do the part of SDA that is either growing well or is closely related to EDA. So the part of SDA that is closely related to EDA is, of course, 3DIC, okay. So we have an inevitable position in 3DIC with Allegro being the leading packaging platform and then we completed that with Clarity and Sigurity and Celsius. So all the thermal electromagnetics. So at integrity, so I’m pretty happy with the 3DIC portion, which is like the closest to chip design. The part of SDA that is closest to chip design and the part that is growing the most because of AI. Now the other part now with Hexagon is all this physical AI and first design of cars and robots. So that with this acquisition is complete and we can do a much better integration of the — of that part of SDA. And there are multiple things happening there, okay, there are at least two, three key things. So first thing is, we will integrate the whole solution. This — we — I know you asked me this before, when will you integrate. So I think now that we have all the pieces of critical mass, this is the right time to integrate because we have CFD now, we have structural, we have multibody dynamics, we have pre and post, okay. So we have a lot of effort to make a full-flow solution, integrate them. And I kind of hinted at that at Cadence Live. The other thing, the way to integrate these solutions, which is true for EDA, but will be true in this area is agentic flow. So you will see from us agentic flow to do system design and that part of the market has not seen that much — it’s even worse automation than chip design that I had a lot of automation. But there will be agentic flow which will integrate all these things in a better way. The second thing we will do is that there is lot of room for improvement of these solvers and especially in our history of improving the base solvers, you know, adding GPU acceleration, adding phys AI or AI surrogate models. So for example, there is a potential for at least order of magnitude improvement of performance of these new solvers. So that’s the second thing we’ll do in terms of R&D. And third thing, what I’m also pleased with Hexagon is we did get like a good go-to-market team. That’s one area we have not been as strong because we were — most of the others was mostly organic. And we did move some of our people into go-to-market, but with Hexagon D&E business, we get a much stronger go-to-market team. And then like we mentioned, we also acquired some resellers to strengthen go-to-market, okay. At this point, I’m very confident of our R&D solution and it will get improved by Gentech solutions. It will get improved by speeding up the solvers, but we also need to invest in go-to-market and Hexagon gives us a good start. So you will see that too. So these are the three kind of focus areas of improvement of SDA.
Operator
Our next question comes from the line of Kelsey Chia with Citigroup. Your line is open.
Kelsey Chia
Hi, thank you and good afternoon., you mentioned that the agent stack helped address talent gaps for chip designers. It sounds like the agent stack adoption just accelerating from here. Based on your conversation, is that the case? Or are you seeing cases where customers prefer to build or use their own stack versus adopting cadences? And is so is Cadence able to sort of charge for agent stack or the increased base licenses as an incremental add-on within an existing three-year contract or is that monetization tied to renewals? Yeah. Thank
Anirudh Devgan
You. There’s a lot of good questions there, okay. So make sure I — and I’ll start and John can add to that. Now first of all, I think just to be clear, the customers will always write their own agents as well, if I understand the first part of your question. Even in our pre-agentic flow, we would have given a lot of flexibilities to our customers. We had a tickle or a Python interface to our tools and they would always have their own flows. I mean, this is natural for big customers. I mean, these are who’s who of tech companies. So they always want to have some differentiation from one flow to another. So — and that will happen in the agent word itself. So I think most of our customers are writing some of their own agents. But the key thing is that the critical agents, okay, like these big super agents we talked about, like RTL design and verification, analog design and physical design. These are like super categories and also the value of the agentic flow is not just in the agent itself. It’s always the coupling of the agent with the base tools because we operate the agent at a much lower level of interaction, this API call which is not possible for customers to do. So what has happened as an example, as we showed or Vera Stack and chip stack to our customers, they realize, oh, there is no point writing these kind of agents, okay. So they would rather use the super agents we have because not only we are good in flow, we are good in the coupling tool, the base tools. Now they will still write some agents to customize things which are specific to them and we naturally welcome that. And then the agent stack allows the environment to — for the customer to write its own agent, but also the customer to write its own skills. We want the customers to write their own skills in Inner stack, which may be specific for a part of design. So this has always been our strategy to be more open to customer kind of customizing their own environment, okay. And I think the second question is on renewals versus new — I mean, it’s a combination of that always, John, maybe you want to comment on?
John Wall
Yes. Thanks, and thanks, Kelsey. Our subscription model remains the anchor arrangement with our customers. The add-on monetization then comes incrementally through workflow products that are kind of usage-based or consumption-based for capacity and through our token and card models. What’s different about AI is that it doesn’t replace the core EDA engines. It calls them more often and it calls them intelligently. So the monetization opportunity is twofold really. So you’ve got like the new workflow products and then you’ve got the increased usage of the underlying base tools through more exploration, more verification, more optimization and more compute. Now that said, we’re obviously being disciplined in our 2026 outlook. We’re not assuming a sudden step-function in AI monetization in the guide, but we do believe AI expands the long-term growth opportunity for Cadence.
Operator
Our next question comes from the line of Andrew DeGasperi with BNP Paribas. Your line is open.
Andrew DeGasperi
Thanks for fitting me in. I just had a two-part question. One is marquee — I think you called out in the prepared remarks that a marquee AI infrastructure company expanded the use of sign-off solutions. I just want to clarify, was this a cloud provider? And then second, at Cadence Live, you discussed about physical AI in terms of the timeline of adoption being around two years. But yet you called out that automotive and robotics companies have adopted hardware. I was just wondering, does this mean that, that physical AI timeline has been brought forward? Or is this just a natural evolution of how these new markets will adopt EDA? And if so, when would we see that kind of software benefiting from that? Thank you..
Anirudh Devgan
I think with physical AI and also AI in general, I mean, as I’ve said for a long-time, two contract cycles and that is generally true. Though I think because of this new category of TAM expansion, which is more labor productivity related along with the base tools. I think there is a potential that the monetization of AI could happen sooner than two contract cycles. Okay. I don’t want to predict too much. And like John said, we are not putting it in our guide, but I think definitely the more opportunity is there because of all the shortages, because all the build-outs, because of physical AI. So we are — and like the previous question, we always can add-in the renewal, but we always have capability to do add-ons, which we have already seen, okay. So that’s the — that’s what I would like to say. On the sign-off, we are very happy — has been the leading solution for implementation, especially at TSMC and now increasingly with Samsung, Intel and Rapidus. But sign-off is where-is coming on strong at TSMC and other customers. And we are working with all the leading AI players. And I think the one we mentioned specifically is a major kind of AI infrastructure/ASIC company and we are glad to see that adoption. Yeah. And our
Operator
Next question comes from the line of Gary Mobley with Loop Capital. Your line is open.
Gary Mobley
Hi, guys. Thanks so much for fitting my question in. John, I think if I’m not mistaken, 2026 is going to be a low renewal period by then I mean existing long-time customers scheduled to renew this year, kind of like 2022 was. And so was the strong bookings in the first-quarter a reflection of some add-on sales as salespeople trying to meet their quota and do we expect that type of behavior to last through the balance of the year? Yeah.
John Wall
Thanks for the question, Gary. Yes, I mean the 2026 is kind of lighter than 2025 for actual renewals on an annual value basis. But what we often see that that’s the — that those are some of the strongest growth years for us because of all the add-on activity. Yeah, we were really, really pleased with the — with the Q1 bookings strength and it was right across-the-board across all lines of business. So yeah, so Gary, I mean it bodes well for the year, but — but look, it’s just 1/4. As you know, we like to wait for a couple of quarters before taking up the guide in the second-half. And although the last few years, Q1 has been strong and this one has been very, very strong. So we had to take-up the guide at the end of Q1. Our
Operator
Next question comes from the line of Clark Jeffries with Piper Sandler. Your line is open.
Clarke Jeffries
Hello. Thank you for taking the question. I just wanted to ask around the largest IP arrangement to date with the Global Foundry. Was it really the extension of that agreement to additional nodes, the scope of more content or the addition of agent-ready AI flows that made the biggest difference to get that to the largest arrangement you’ve ever seen.
Anirudh Devgan
Yeah, that’s a particularly IP contract. So that one particular is focused on IP. And the two things that drove it is that it is a new node, new advanced node, more specifically 2 nanometer and more content in IP, because we have a much broader portfolio now our
Operator
Next question comes from the line of Joshua Tilton with Wolfe Research. Your line is open.
Joshua Tilton
Hey guys, thanks for sneaking me in here. Maybe just a two-parter, a little unrelated, so I apologize. But anything to call-out on what drove such a strong quarter for China? And then maybe just a second part to that. Can you help us just bridge what is driving such a great organic raise to the full-year relative to the organic beat in the quarter? I know you mentioned the record backlog, but is there anything one-level deeper you can give us, especially in the context of it sounds like you’re trying to tell us that even though you raised by a pretty solid amount that there still seems to be some conservatism in the guide for the second-half. So any help there would be greatly appreciated. Thanks, guys.
John Wall
Sure, Josh. Thanks for the question. I’ll take this one. The — so Josh, yeah, China, it was 13% of Q1 revenue. The — and that was just kind of broadly consistent with what we were expecting. Yeah, we still expect China to be about 13% for the year. The — I think it can be lumpy from quarter-to-quarter. So I think the year-over-year comps probably look generous because Q1 in 2025 wasn’t that good in China. So the — it being 13% revenue in Q1, probably the growth rate looks strong, but — but it’s just — it’s a really important region for us that yeah, and we’re very, very pleased with the 13%. The — in relation to the guide, yeah, I mean we’re — look, the Q1 was a very strong start to the year. We exceeded all our metrics and the — and I guess when we — when we back-out the hexagon, the $160 million of hexagon and the $0.28, we’re basically raising the year-by $65 million at the midpoint for revenue and about $0.08 for — for EPS. Also on the cash-flow front, but operating cash, the way we paid-for per hexagon, the reported guide includes approximately $180 million of pre-close hexagon tax liabilities that are economically part of the acquisition consideration, but are classified in operating cash-flow. I think just the geography and the accounting forces us to put it through operating cash. If you adjust our operating cash guide for that underlying — that for that pre-closed Hexagon tax liability that we’re paying, the operating cash-flow outlook is approximately $2.1 billion, which would be about $100 million above our original guide. So there’s a lot of strength we saw across the businesses. So the $65 million, it’s what we took revenue up by, but we’re seeing $100 million extra in cash that there’s potentially strength in the second-half, but we thought it was too early to raise the second-half right now.
Operator
And our final question comes from the line of Blair Abernethy with Rosenblatt Securities. Your line is open.
Blair Abernethy
Thanks very much for squeezing me in, guys. Just want to ask about the millennium platform. How is the adoption going there on a route? And just in general, the health in some of your non-semi verticals like automotive, aerospace, industrial equipment and so forth, just any commentary around that would be great.
Anirudh Devgan
Yes, absolutely. So yeah, Millena is doing great. I don’t know if you saw, you know Jensen was there at Cadence Live and did a nice autograph on Millennium Box. So we are pleased with the partnership with NVIDIA there. And I mean, there are two-ways to two kind of high-level applications and we are working on this kind of CFD or SDA application for a while and that’s going well, especially in auto and also in drones, okay. So there’s a lot of what cascade acquisition we made is very good at very-high accuracy CFD, which also applies to aerospace and defense. So there is autos, but also A&D is millennium uptick and we have several customers, some we can talk about, some we can’t, okay. So that’s in the traditional millennium. And the other part this year, like I mentioned in Cadence Live, we have all kinds of EDA application now on millennium, which is super exciting. And the most exciting part of EDA application in millennium is 3D IC sign-off, because right now, the biggest issue is the complexity of these 3D IC systems, not just to design them, which we can do in integrity and, but to sign them off. So there’s this huge system that need to do thermal simulation, you know, electromagnetic simulation, power delivery simulation and they are more naturally like a matrix without getting too technical. They are closer to a matrix multiply and numerical solver, which is great for GPU acceleration. So right now, I see millennium as applying to more traditional areas like autos and then new areas like aerospace and drones and then applying to 3D IC sign-offs. So we are super-excited about the millennium opportunity along with our traditional hardware systems.
Operator
And I will now turn the call-back to for closing remarks.
Anirudh Devgan
Thank you all for joining us this afternoon. It’s an exciting time for Cadence as we begin 2026 with product leadership and strong business momentum. And 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.
Operator
And ladies and gentlemen, thank you for participating in today’s Cadence First Quarter 2026 Earnings Conference Call. This concludes today’s call and you may now disconnect.