CDNS · Research
Cadence Carries $8.2B of Contracted Backlog Into the Hexagon Integration
Cadence grew Q3 revenue 21.99% to $1.63B, with product and maintenance up 23.15%. It closed the $3.0B Hexagon design and engineering deal in February, added $2.5B of buyback authority in October and carries $2.48B of notes.
| Scorecard | Read |
|---|---|
| Thesis | Cadence owns the design flow that every advanced chip passes through, and $8.2B of contracted backlog makes the next two years unusually visible |
| What proves it wrong | Backlog shrinks for two quarters, or export rules cut China, 15.62% of Q3 revenue, by more than a third |
| Next catalyst | Q4 and fiscal 2026 results, February 2027; date not yet announced |
| Key multiple | 44.09x EV / GAAP EBITDA of $2.16B |
| Debt | $2.48B carrying: 2027 Notes $500M at 4.20%, 2029 Notes $1.0B at 4.30%, 2034 Notes $1.0B at 4.70% |
| Stock pay | $543.00M from the cash flow line, 8.86% of revenue |
What Cadence sells and how it gets paid
Cadence sells software, hardware and IP used to design chips and the systems around them. Revenue is product and maintenance, $1,487.31M in Q3, and services, $146.00M [1].
Product and maintenance grew 23.15% and services 11.34%. Nine-month revenue was $4,691.98M, up 21.66% [1].
By product group, Core EDA was 69% of Q3 revenue, Semiconductor IP 15% and System Design and Analysis 16% [1]. A year earlier Core EDA was 71%, so IP and system analysis are gaining share.
Most software is sold as time-based licenses, recognized over the contract term. Hardware emulation systems and some IP are recognized at delivery, which makes quarters lumpy [1].
Every region grew. Europe, the Middle East and Africa grew fastest at 31.33%, Other Asia 28.70% and Japan 23.96% [1].
China grew 4.13% to $255.14M, and its share fell to 15.62% of revenue [1]. The filing describes export control restrictions on advanced-node production in China and Entity List additions as risks [1].
Backlog and visibility
Contracted but unsatisfied performance obligations were $8.2B at Sep 30, 2026. That includes $0.9B of non-cancelable commitments where customers choose products later [1].
Backlog of $8.2B is 1.34 times trailing revenue. For a software company that sells multi-year licenses, that is a strong floor under the next two years.
The Hexagon deal
On Feb 23, 2026, Cadence acquired the design and engineering business of Hexagon Smart Solutions for about $3.0B net of cash, $2.2B in cash plus 3.2M Cadence shares [1].
The deal extends System Design and Analysis into mechanical and multiphysics simulation, closer to Autodesk and PTC territory. It also added intangibles that raise D&A, which is one reason GAAP operating income lags revenue growth.
The toll-gate test
Cadence is one of the clearest toll gates in software. With Synopsys, it supplies the flows that foundries certify, and leading chips are designed on one or the other.
The weak test is pricing. Cadence charges for tool access, not for chip outcomes, so it captures a small share of the value its customers create.
The owner-cash staircase
Start with GAAP EBITDA of $2.16B: operating income of $1.77B plus D&A of $384.72M over the twelve months [1]. Each step down the staircase removes one thing an owner cannot spend.
Step one is operating cash flow of $1.97B, below EBITDA by $190.48M. Operating cash is close to EBITDA.
Interest on the notes and cash taxes take some, and multi-year prepayments add back.
Step two subtracts stock pay of $543.00M, taken from the cash flow line. That leaves $1.42B.
Stock pay is 8.86% of revenue. It is the largest gap on the staircase, larger than capex.
Step three subtracts all capex of $204.29M, including capitalized software. Owner cash is $1.22B, or 19.91% of revenue and 56.55% of EBITDA.
Capex of $204.29M covers buildings, equipment and emulation hardware used internally.
| Step | Twelve months | What the gap is |
|---|---|---|
| GAAP EBITDA | $2.16B | Operating income plus D&A |
| Operating cash flow | $1.97B | Working capital, cash taxes, interest and non-cash items |
| After stock pay | $1.42B | Stock pay treated as a real cost |
| After all capex | $1.22B | What an owner could take out |
Owner cash is 19.91% of revenue and 56.55% of EBITDA. The conversion is solid, but the multiple on owner cash is far above the multiple on EBITDA because stock pay is real.
Balance sheet and debt, from the debt note
Debt is three senior note issues: $500M at 4.20% due Sep 10, 2027, $1.0B at 4.30% due Sep 10, 2029 and $1.0B at 4.70% due Sep 10, 2034 [1]. Carrying value is $2.48B.
Cash was $1.45B, so net debt is $1.03B, or 0.48x GAAP EBITDA [1]. The first maturity, $500M in September 2027, is covered by cash on hand.
What gets overlooked
Hexagon raised acquired intangibles, so amortization depresses GAAP operating income. EBITDA corrects for that; owner cash does not need to.
Buybacks are large. Cadence spent $800.03M on repurchases in nine months, and on Oct 23, 2026 the board approved up to an additional $2.5B [1].
Hardware revenue is recognized at delivery, so a strong emulation quarter can flatter growth. Product and maintenance growth of 23.15% includes some of that timing.
Stock received for employee taxes on vesting was $195.61M in nine months [1]. That is cash spent to offset dilution, on top of buybacks.
Where the money goes
R&D was $537.54M in Q3, up 27.07% and 32.91% of revenue [1]. Cadence spends a third of revenue on the product, more than on marketing and sales of $242.48M.
General and administrative rose 44.83% to $113.02M, partly from integrating Hexagon [1]. Amortization of acquired intangibles jumped to $33.78M from $10.23M [1].
Those two lines explain why GAAP operating income grows more slowly than revenue this year. Neither reflects weaker demand.
The prior year included a $128.55M loss on a contingent liability in the nine months [1]. Comparisons of nine-month operating income look better than the underlying trend because of it.
Revenue rose $294.47M year on year in Q3. R&D absorbed $114.51M of that increase, more than a third, which shows where management is placing the bet.
Concentration and export risk
Export control is the near-term risk. The filing describes restrictions on advanced node IC production in China, and a rule effective September 29, 2025 that extended Entity List restrictions to entities 50% or more owned by listed parties [1].
China's share fell to 15.62% of Q3 revenue, and growth there was 4.13% against 21.99% overall [1]. If China revenue fell by a third, total growth would drop by about 5 points.
Other Asia, which includes Taiwan and Korea, grew 28.70% to $312.38M [1]. Foundry and memory customers there offset the slowdown in China.
Superintelligence risk and opportunity
Chip demand from superintelligence workloads is the main growth driver for design tools. Larger and more complex chips need more simulation, verification and emulation.
Cadence is also building agents into the flow itself, so one engineer can run more of the design. If pricing follows the work done rather than seats, that is a new revenue line.
The risk is that agents lower the skill needed to run competitors' tools. The moat is the foundry certification, which agents do not change.
Management and capital allocation
Capital goes to acquisitions that widen the system flow, such as Hexagon, and to buybacks. The board added $2.5B of authority in October [1].
Leverage is modest at 0.48x net debt to EBITDA, so the balance sheet can carry both the Hexagon integration and buybacks.
Peers on the same basis
Peer figures come from each company's latest periodic filing [2][3][4]. Figures are derived from filed statements, and nothing here is a price view.
Synopsys is the only true peer in chip design. Autodesk and PTC are the comparison for the system simulation business Hexagon brought in.
Bull, base and bear cases
| Case | What it needs | What it looks like |
|---|---|---|
| Bull | Chip complexity keeps rising and Hexagon cross-selling works | Revenue growth near 20%; backlog above $8.2B; China stable |
| Base | Growth settles into the low to mid teens | Backlog flat; margins steady; buybacks absorb stock pay |
| Bear | Export rules widen and design starts slow | China down sharply; backlog falls; Hexagon intangibles weigh on GAAP income |
Catalysts and what to watch
Q4 and fiscal 2026 results come in February 2027. Cadence has not announced the date.
Watch backlog against $8.2B, China revenue against 15.62% of the total, and the System Design and Analysis share with Hexagon in it.
Watch buyback pace under the new $2.5B authority, and whether stock pay keeps rising faster than revenue.
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