There is one way to profit from the AI race without betting on who wins it: sell every competitor the tools without which they cannot begin. Cadence (NASDAQ: CDNS) does exactly that - and last night it reported a quarter that illustrates why the model works: revenue of $1.584 billion, adjusted EPS that beat the company's own guidance, an operating margin of 45.5%, a record backlog - and a raised annual outlook.
About the Company: The One That Designs the Designers
A modern chip contains tens of billions of transistors. No human engineer can draw it by hand. Instead, every chipmaker in the world uses a software category called EDA - Electronic Design Automation. This is the software that designs the chip's structure, simulates its behavior, finds errors and prepares it for manufacturing.
This market is extremely concentrated: Cadence and Synopsys dominate it almost entirely. The meaning is that every advanced chip in the world - Nvidia's accelerator, Google's TPU, Apple's chip, Tesla's controller - is designed with the tools of one of the two.
And it is a strong business model for several reasons. It is based on multi-year subscriptions, meaning recurring, predictable revenue. The switching cost is enormous: a company that trained thousands of engineers on one platform, and built libraries and workflows on it, does not switch because of a discount. And alongside the software, Cadence also licenses intellectual property - ready-made circuit blocks that customers integrate into their own chips and pay royalties on.
The result: Cadence is not betting on who wins the chip race. It collects from all of them, either way.
What Was Reported: A Beat on Every Line
Revenue. $1.584 billion, versus $1.275 billion in the comparable quarter - growth of about 24%. The figure sits at the top end of the guidance range management gave ($1.555-1.595 billion).
Earnings. Adjusted EPS came to $2.11, versus $1.65 a year ago. And here is the point: this is above the top end of management's own guidance, which stood at $2.02-2.08, and also above the consensus of around $2.05. GAAP EPS jumped to $1.33 versus just $0.59 a year ago.
Profitability. The adjusted operating margin stood at 45.5% - the top of the range the company guided to (44.5%-45.5%). On a GAAP basis, the operating margin stood at 28.4%. For proportion: a 45% operating margin is among the highest in the entire software industry, and reflects pricing power stemming from the near-monopoly in the market.
And the figure that determines the future: the backlog. The order backlog reached a record $8.1 billion, of which $4.2 billion is expected to be recognized as revenue in the next 12 months. At a subscription company, this is the number that really matters: revenue tells what already happened, the backlog tells what has already been signed and is about to happen.
The Breakdown: Where Exactly the Growth Is
The segment detail reveals that growth is not uniform, and that the strongest engine is actually the smallest:
- Intellectual property: growth of over 40% year-over-year - the fastest engine. This is the business where Cadence licenses ready-made circuit blocks, and it is especially profitable.
- Core EDA: growth of 18% - the large, stable business.
- System design and analysis: a jump of 37% - the tools that simulate entire systems, not just a single chip.
Alongside these, the company noted early traction for its new AI agent products - tools that use artificial intelligence to design chips faster. In other words, Cadence does not only sell to the AI industry; it also uses AI to improve the product it sells.
The Outlook Was Raised
Management raised the annual guidance:
| Metric | Updated guidance | Previous range |
|---|---|---|
| Revenue | $6.26-6.34 billion (growth of about 19%) | - |
| Adjusted EPS | $8.05-8.15 | $7.85-7.95 |
| GAAP EPS | $4.76-4.86 | - |
| Adjusted operating margin | Target of 44.25% | - |
| Cash from operations | About $2 billion | - |
The Bull Thesis
Whoever reads it positively will point to a combination that is hard to find: 24% growth alongside a 45.5% operating margin. Usually one must choose - either grow fast and burn, or be profitable and slow. Cadence does both.
Beyond that: the record $8.1 billion backlog provides visibility into future revenue; the company beat consensus for a fourth consecutive quarter; it raised guidance - indicating management sees the momentum continuing; and its fastest engine (intellectual property, over 40%) is also its most profitable.
And the strongest structural argument of all: Cadence is neutral to the question of who wins. If Nvidia keeps dominating - it designs with Cadence. If Google and Amazon move to internal chips - they too design with Cadence. The more players enter the race and design more chips, the larger its market grows.
The Bear Thesis
Whoever reads it critically will point first to the valuation. Cadence trades at very high multiples, and when a stock is priced for perfection, even an excellent report can be met with indifference - or a decline, if something in the guidance disappoints. Per the coverage ahead of the report, the stock entered it under pressure.
Second, the concentration of the customer base. The market of advanced chip designers is small, and most of the revenue comes from a handful of giants. A slowdown in design spending at one of them is felt immediately.
Third, dependence on the chip investment cycle. If the pace of AI investment moderates - and that is exactly the question accompanying us all season - design is one of the first things postponed.
And fourth, regulation. Export restrictions on chip-design technologies to China have already affected the industry in the past, and this is a geopolitical risk outside the company's control.
The debate in one line
The bulls see an almost perfect model: 24% growth with a 45.5% margin, a record backlog, a raised outlook, and complete neutrality regarding who wins the chip race. The bears see a highly valued stock, a concentrated customer base, dependence on an investment cycle that may moderate, and regulatory risk toward China. Both sides are reading the same report.
My Angle
A personal opinion of Ilan Abramov - not advice, not a recommendation
What caught me in this report is not the 24% growth - but its combination with a 45.5% margin.
This season we covered many companies investing aggressively: Alphabet and Tesla doubled capital expenditure and their free cash flow flipped; Amazon is adding a third satellite constellation. All are right about the direction, and all are paying for it now. Cadence is the exact opposite: it benefits from that very same wave without paying the capital bill. It does not build factories and does not launch satellites - it sells software licenses to those who do.
This is the pattern I look for in every chain: which link collects regardless of the winner's identity. In power scarcity it was GE Vernova selling turbines to everyone; in photonics it is Lumentum; and in chip design it is Cadence. These links are more boring than the headlines, but they are also the ones that earn in every scenario.
And what I am watching going forward: the backlog. $8.1 billion, of which $4.2 billion within the coming year, means next year is already largely signed. If the backlog keeps growing next quarter - the thesis holds. If it stalls, that will be the earliest sign that the pace of chip-design investment is starting to moderate - long before it shows up in revenue.
Summary
Cadence delivered a quarter in which an operational flaw is hard to find: 24% growth, adjusted EPS above the company's own guidance, an operating margin of 45.5%, a record $8.1 billion backlog and a raised annual outlook. The fastest engine - intellectual property growing over 40% - is also the most profitable.
The question that remains open is not whether the business is good; the report answers that. The question is how much of the strength is already priced into the stock, and what will happen to demand for design tools on the day the pace of chip investment moderates. Until then, Cadence remains one of the cleanest ways in the market to gain exposure to the chip industry without betting on any particular company within it.
Sources: Cadence Design Systems's official results announcement for the second quarter of 2026 (July 27, 2026), including revenue, GAAP and adjusted earnings, the operating margins, the order backlog, the segment growth breakdown and the updated annual outlook; prior management guidance and analyst consensus as covered by Zacks, The Globe and Mail and TradingView. Data accurate as of the time of writing. The chart is shown in real time via TradingView. Nothing herein constitutes a forecast, recommendation or advice - see the full disclaimer at the bottom of the page.