Cadence Design Systems Inc (CDNS) — Q1 2026 Earnings Call Transcript

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. (operator instructions) 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'd like to welcome everyone to our first 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. (operator instructions) Now I'll turn the call over to Anirudh.

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 the company's history. Our record backlog of $8 billion was ahead of plan, reflecting strong customer confidence in our AI-driven portfolio and its pivotal role in enabling delivery of their increasingly complex chip and system design road maps. 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. The agentic AI era is here, and Cadence is leading the transformation of semiconductor and system design. At CadenceLIVE Silicon Valley 2026, we took a major step towards fully autonomous chip design, pioneering the industry's most advanced and comprehensive agentic full-flow platform. We introduced AgentStack, the head agent framework for our AI Super Agent, which enables knowledge sharing across the design flow and extends autonomous designs from chips to 3D-IC to systems. Building on our revolutionary ChipStack AI Super Agent for RTL design and verification, we introduced two new breakthrough AI Super Agents, ViraStack for analog and custom design and InnoStack for digital implementation and signoff. 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 agentic AI, the need for physically accurate and highly mathematical EDA solutions becomes even more critical. Our agentic 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 cake, with accelerated compute and data as the base layer, principal simulation and optimization as the critical middle layer and agentic 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 Google Cloud Platform scalable compute, this collaboration delivers a cloud-native platform for next-generation chip development. In Q1, we furthered our long-standing partnership with MediaTek through a wide-ranging expansion across our new agentic AI offerings and core EDA, 3D-IC 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 design and engineering leading structural and multi-body dynamics technologies transforms our system analysis portfolio to a leadership position in physical AI, enabling customers to build and train fundamentally new AI world models by narrowing the critical sim-to-real gap. At CadenceLIVE Silicon Valley, we announced an expanded partnership on AI and robotics with NVIDIA. By combining our agentic 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 demand for 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 agentic 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 displacements. Momentum on verification software grew, particularly in Xcelium and Verisium SimAI, and ChipStack generated tremendous customer interest, with a large number of evaluations underway. Led by AI-driven Cadence Cerebrus 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 signoff solutions, and a marquee AI infrastructure company expanded their usage of our signoff solutions in 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 3D-IC become essential to addressing growing system challenges. We have strong momentum in 3D-IC, 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 Sigrity 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 signoff flow. In closing, I'm pleased with our strong execution and the broad-based momentum of our business. As the agentic 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.

Thanks, Anirudh, 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 $1.474 billion. 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 billion, while the principal value of debt outstanding was $2.925 billion. 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 $6.125 billion to $6.225 billion; 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; non-GAAP EPS in the range of $7.85 to $7.95; operating cash flow in the range of $1.875 billion 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 billion to $1.595 billion; GAAP operating margin in the range of 28.5% to 29.5%; 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.

(operator instructions) And our first question comes from the line of Charles Shi with Needham.

Anirudh, I have a pretty high-level question that's probably on many investors' minds. We obviously see agentic AI as something that can help with EDA and increase license consumption, but there are still concerns about AI's ability to actually write software. Some doubt whether AI could develop better EDA base tools, such as Virtuoso or Innovus, and with many EDA startups appearing, does AI's ability to write software make you worry about the defensibility of the EDA base tool business? We understand agentic AI can drive consumption of the base tools, but I'd like to hear your thoughts.

Yes. 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'm very confident in our position in the base tool and our competitive advantage. Just to remind everyone, we have about 15,000 people now in Cadence and about 10,000 are in R&D. More than half of them have advanced degrees. I think more than 1,000 of them have PhDs from the top universities. So we will 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. Our competitors are best-in-class, and I don't see any reason that will change going forward. Now what I'm super excited about is the agentic part and the interplay of the agentic tools with the base tools, the AI orchestration combined with physically accurate base tools. That creates new opportunities for us, both in terms of TAM expansion. Because what agentic AI allows us is to sell products in spaces we didn't have products before, like RTL generation and verification plan generation. Those products, I think, will be consumed more on a subscription plus consumption model. So this is an entirely new category for Cadence. And then in turn, as you said, agentic AI will drive more of our base tools. So I feel pretty good about this three-layer framework we have talked about and confident going forward.

(operator instructions) And our next question comes from the line of Jason Celino with KeyBanc Capital Markets.

Maybe just a clarifying question. I noticed the operating margin guidance is being lowered slightly. John, what are the main drivers of that? I know we're incorporating the Hexagon acquisition, but on an absolute basis that's a relatively small addition to OpEx. Could you help us understand the margin guidance?

Yes, sure, Jason. Thanks for the question. What you're seeing is primarily the impact of including the Hexagon design and engineering business in the current outlook. The strategic opportunity is very large, but the 2026 P&L reflects the timing of integration we announced in the press release when we closed the deal. We expect $160 million of revenue this year, and that's in the guide now. We expect it to be dilutive by about $0.28. The margin impact on the $160 million is in the 5% to 10% range. The dilution largely results from the financing mix: we paid 30% of the acquisition price in shares and 70% in cash, so the lost interest income on the cash causes much of the short-term dilution. We expect it to be accretive in 2027. Financially, think of 2026 as an integration year. The guide includes the acquired cost base, the financing impact, the acquisition-related integration costs, and near-term dilution. That is why revenue moves higher while EPS and operating margin are lower than the February guide. In Q1 the EPS impact was slightly less because about $20 million of Hexagon revenue was included in Q1, so the dilution was only about $0.01. EPS would have been roughly $0.01 higher without Hexagon.

(operator instructions) And our next question comes from the line of Vivek Arya with Bank of America Securities.

Anirudh, in the last year, all we have been hearing nonstop are different news about chip shortages and growing kind of price of chips and just the pricing power that many of your customers have. And my question is, what effect do shortages and the fact your customers have more pricing power, what effect does that have on their engagement with Cadence. Does it restrict chip starts? 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?

Yes. Thanks, Vivek. So I would say a few things. First of all, the environment is pretty healthy, both for the system companies and semiconductor companies. That's always good. Some of the hyperscalers and AI semiconductor companies who were already doing well last year are continuing to do well; memory companies are doing well, and even analog companies are doing well. Our customers doing well creates a positive environment for engaging, especially with these new solutions we have. That's a marked improvement over the last three to six months. Second, shortages don't directly reduce long-term R&D road maps. In some cases, customers may use multiple foundries or nodes to ensure capacity at particular nodes or foundries. That can directly lead to more design activity for us. If the customer is healthy because revenue is going up, they will do not only more on current designs to accelerate them, but also may start new designs. Third, and more exciting for us, is that our agentic solutions can give more productivity for our customers, and we can deliver more value. The more value we deliver, the more opportunity we have to capture part of that value. Customers are very open to those discussions as there is more automation. We are seeing a lot of engagement with ChipStack and also the new AgentStack, InnoStack and ViraStack. There is no pushback at all. If we can deliver productivity, the customer is more than willing to engage. Those are the three broad areas I see in the current environment.

(operator instructions) And our next question comes from the line of Jim Schneider with Goldman Sachs.

Could you unpack your comments on the agentic solutions, particularly your suggestion that they will drive increased consumption of base tools? Please discuss the pricing for those tools and how the agentic solutions are being priced. And finally, could you frame how you expect to capture more revenue overall between agentic and conventional licenses?

Yes. Thanks for the question. I think the opportunity is significant, especially with agentic AI. Over the last six to twelve months, and more so in six months, agentic tools have evolved and are able to embed skills that enable much more automation. For example, we launched ViraStack, which is analog automation. Analog has been a long-standing challenge to automate because it's very difficult, but now with these agentic flows and skills, we can automate it. So what does that mean in terms of pricing or how these things are consumed? First, this kind of automation was not possible before. Much of this work used to be done by the customers themselves, and they could not scale headcount to meet demand. For example, for every new design they might need two times more engineers, which is not realizable. The way we plan to monetize—and early signs are positive—is to sell new tools that we never sold, which are similar to work customers previously did manually, such as analog design or RTL generation. Those will be priced as a subscription plus consumption model, similar to other leading AI tools. That's a completely new category for Cadence. Second, when an agent runs, it explores many more variations than a human would. For example, if a chip has 100 blocks, humans might run one or two experiments per block, but an agent may try 10 or 100 variations. By nature, agents run more of the base tools. That's why our usage of base tools is going up significantly. So the monetization opportunity is twofold: the new agentic subscription/consumption products and increased usage of the underlying base tools.

And I would just add, Jim, that what we saw from Q1 is the overall pricing environment has improved. Pricing obviously remains value-based with us. We provide tremendous value to our customers, especially with our agentic flow, and we stand to benefit from our customers' success in that area. Also, any shift that you see from customers' labor spend to automation is likely to be irreversible and likely to accelerate over time.

(operator instructions) And our next question comes from the line of Siti Panigrahi with Mizuho.

Great. I want to switch to the IP business. Anirudh, you talked about IP entering now third year of strong growth. Could you give an update on what you saw in Q1? And are HBM, LPDDR6 and all that remaining still the key drivers? Or are the new foundries like Rapidus, 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.

I'll take the last part first. Yes, we raised by $0.08 on an organic basis.

Siti, it's a great start to the year, not just in IP but across the board. This is one of the strongest raises we've had in Q1. All the businesses are doing well and especially IP is off to a great start. There are at least three big reasons in my mind for IP growth. First, our IP quality and performance are better. With standard-based IP like DDR or PCIe, if our power-area-performance is better than competitors', customers will buy our IP. Our R&D strength is leading to better PPA, which is driving competitive wins at major customers. Second, our portfolio is expanding—some organically and some by acquisition. For example, HBM we acquired from Rambus and improved. UCIe was developed organically. Third, the emergence of additional foundries is encouraging. Besides TSMC, Samsung, Intel and Rapidus at advanced nodes and others at mainstream nodes increase design activity, which drives IP demand. We also closed a significant IP deal at a leading global foundry, one of the largest ones, which is not Intel. We are making very good progress with Intel as well and will have more to say on that engagement. Overall, IP growth seems robust and we are well positioned.

(operator instructions) Our next question comes from the line of Joe Quatrochi with Wells Fargo.

Maybe just to kind of follow up on the discussion earlier 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.

Good question. Historically, EDA used to be about 7% of R&D and now it's more like 11% of R&D, so it has gone up as R&D spend itself increases. I think there is real potential, especially with agentic AI, for that 11% to go up further. The big CEOs I talk to want to invest more in automation and compute to make that happen. So I think R&D and automation spending as a percentage can increase. How much it will go up remains to be seen, but there's a meaningful opportunity for automation to be a higher percentage of R&D while R&D itself rises.

(operator instructions) Our next question comes from the line of Ruben Roy with Stifel.

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 how 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? And I ask that because you're investing in agentic AI and other 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.

Sure, Ruben. When we look at our organic incremental margin, it's closer to 60% these days than 50%. As we integrate acquisitions, it typically takes 12 to 18 months to improve profitability up toward our expectations. I would liken the profile to the BETA acquisition, where we saw dilutive impact in '24 but margins improved dramatically in '25 as we realized synergies. I would expect a similar pattern for Hexagon across '26 and '27—slight headwind in the short term but opportunities to improve profitability. With accelerating customer engagement on agentic AI, there's even more opportunity to stretch incremental operating margin going forward.

(operator instructions) Our next question comes from the line of Harlan Sur with JPMorgan.

If I take your Q2 guidance and look at your implied second half guidance, the average quarterly revenue run rate in the second half is actually slightly below the Q2 level. Is there some lumpiness in the Hexagon business in the second half, maybe moving customers to multiyear license agreements? Or is it due to some lumpiness in the core business, maybe a more first-half weighted hardware or IP shipment profile?

Thanks for the question, Harlan. The first half is very strong, and the second half contains appropriate prudence. Hexagon's design and engineering business is more first-half weighted; historically, Hexagon's Q3 and Q4 have been their weakest quarters, with a lot of early-year dated contracts. But overall Hexagon doesn't materially change the first-half/second-half dynamics. We had such a strong Q1 and bookings that we raised the guide; we normally wait for two quarters under our belt to raise guidance, but Q1 strength prompted an early update. We prefer to wait until July to update the second half.

(operator instructions) Our next question comes from the line of Lee Simpson with Morgan Stanley.

I just wanted to ask about physical AI. You've made some pretty good acquisitions and 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. 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 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, Lee. We view the opportunity as a three-layer cake; there are multiple slices. The first slice was data center AI or infrastructure AI, and the second big slice is physical AI. I've believed for years that physical AI could be larger than data center AI because it covers a much broader addressable market—trillions of dollars of product opportunity. Deploying models in physical systems also reinforces the data center layer because you need data-center training to enable edge deployment. Hexagon is exciting because, combined with our previous technologies like Millennium, Cascade and BETA, we now have a more complete solution for physical AI in the principal simulation and optimization layer. That lets customers build more accurate world models and closes the sim-to-real gap. Physical AI will also drive silicon design demand—companies building physical AI systems will require more silicon. This is already translating into demand for EDA and IP. Companies like Tesla have cited silicon shortages related to physical AI. Physical AI is therefore important not just for SD&A but also for EDA and IP, and Cadence is well positioned because we cover both analog and digital in addition to system-level solutions.

(operator instructions) Our next question comes from the line of Gianmarco Conti with Deutsche Bank.

Perhaps on hardware, another strong quarter, of course. But as we think about the next refresh cycle for Palladium and Protium, historically you've roughly been on a two-year cadence. Should we expect Z4, X4 within the next 12 to 18 months? Or is the bar to upgrade higher now given how recently customers absorbed the first generation? And perhaps related, are you seeing any of your own agentic AI tooling materially compress the internal hardware development timelines to the same extent that customers are reporting that same 10x productivity on RTL?

Great question. We use our own products extensively—software, hardware and system design—and we continually design next-generation systems. We will always design new hardware, but I'm not announcing product timing today. Our competitive position is strong; we are the only company that designs its own chips for these systems, and we have at least a 10-year lead in emulation. Protium and Palladium road maps continue. The current Z3 system has the capability to support designs up to one trillion transistors, while the largest systems today are in the 100 billion to 200 billion transistor range. The industry is projected to reach one trillion transistors by 2030, and we will have Z4 before 2030. On the agentic tooling compressing our internal development timelines, yes—we use agentic AI internally as well to improve productivity across software and hardware design teams. We are increasing headcount where appropriate, but agentic AI is making teams significantly more productive.

(operator instructions) Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Now that you've completed the Hexagon MSC acquisition, it would appear that you are the fourth largest non-EDA industrial simulation company. Your share is perhaps one-tenth of that total market, aside from EDA simulation. The question is, now that you've assembled all these pieces, invested over $5 billion over the last five or six years, can you speak in some detail about what your principal technical and 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 long-time channel partner. Maybe talk about some of those critical elements to grow your revenues and share in that business.

Jay, a lot there; let me unpack it. We're satisfied with the scope of our SDA business after this acquisition. The SDA run rate will be roughly $1 billion and is focused in two important areas that we want: the part of SDA that is closely related to EDA—3D-IC—and the part that is growing in physical AI, which Hexagon strengthens. For 3D-IC, Allegro is the leading packaging platform, and we've completed that offering with Clarity, Sigrity and Celsius for thermal and electromagnetics. This part of SDA is closest to chip design and is growing due to AI. With Hexagon, we get stronger structural and multibody dynamics capabilities that are critical to physical AI. There are three focus areas going forward: first, systems integration—integrating our solvers and tools into a full flow now that we have CFD, structural, multibody and pre/post-processing pieces; second, improving solver performance with GPU acceleration and surrogate AI models, where we can drive order-of-magnitude improvements; third, go-to-market—Hexagon brings a strong go-to-market team and reseller relationships that improve our reach. We'll integrate the solutions and apply agentic flows to system design. We're confident in our R&D and go-to-market plans and see meaningful growth opportunities in SDA.

(operator instructions) Our next question comes from the line of Kelsey Chia with Citigroup.

Anirudh, you mentioned that the AgentStack helps address talent gaps for chip designers. It sounds like AgentStack adoption is just accelerating from here. Based on your conversations, is that the case? Or are you seeing cases where customers prefer to build or use their own agentic stack versus adopting Cadence's? And so is Cadence able to charge for AgentStack or the increased base licenses as an incremental add-on within an existing fee or contract? Or is that monetization tied to renewals?

Good question. Customers will often write some of their own agents—large customers historically write custom flows—and that will continue in an agentic world. However, the critical super agents—like those for RTL design and verification, analog design and physical design—are large categories where customers benefit from using our prebuilt agentic super agents because we have deep coupling to the base tools and provide that at a low API level. When customers see InnoStack, ViraStack and ChipStack, they often conclude there's no point in building those super agents themselves. They will still write custom agents or skills for their specific needs, and we welcome that. AgentStack is open to customer extension and skill development. On monetization, our subscription model remains the anchor. Add-on monetization comes incrementally through agentic workflow products that are usage-based or consumption-based. Agentic AI doesn't replace core EDA engines; it calls them more often and intelligently, so monetization is twofold: new agentic workflow products and increased usage of the underlying base tools through more exploration, verification and optimization.

Kelsey, to add, the subscription model remains the anchor, and the add-on monetization will be through usage-based consumption models, tokens and cards. The guide is disciplined; we are not assuming a sudden step-function in AI monetization in 2026, but we do believe agentic AI expands the long-term growth opportunity.

(operator instructions) Our next question comes from the line of Andrew DeGasperi with BNP Paribas.

I just had a two-part question. One, is the marquee AI infrastructure company you called out a cloud provider? And second, at CadenceLIVE, you discussed physical AI in terms of a two-year timeline to adoption. Yet you called out that automotive and robotics companies have adopted hardware. Does this mean the physical AI timeline has been brought forward? Or is this just a natural evolution of how these markets will adopt EDA? If so, when do we see that kind of revenue benefit?

On the signoff adoption, we're working with all the leading AI players, and the example I mentioned is a major AI infrastructure/ASIC company. Innovus has been the leading solution for implementation, especially at TSMC, and adoption is growing with other foundries. Regarding physical AI, I've said previously that adoption takes around two contract cycles, and that remains a reasonable view. However, the new TAM expansion related to labor productivity and base tool usage could accelerate monetization sooner than that. We're not baking a step-function into our 2026 guide, but the opportunities are there and we are seeing incremental add-ons at renewals and through new products already.

(operator instructions) Our next question comes from the line of Gary Mobley with Loop Capital.

John, I think, if I'm not mistaken, 2026 is going to be a lower renewal period compared with years like 2022. Was the strong bookings in the first quarter a reflection of some add-on sales as salespeople are trying to meet their quotas? And do you expect that type of behavior to last through the balance of the year?

Thanks, Gary. 2026 is lighter than 2025 on renewals on an annual value basis, but we often see strong growth years due to add-on activity. Q1 booking strength was broad-based across all lines of business, and we were very pleased. It's just one quarter, and we prefer to wait for multiple quarters before making larger guide adjustments, but Q1 strength supported an upward revision.

(operator instructions) Our next question comes from the line of Clarke Jeffries with Piper Sandler.

I just wanted to ask around the largest IP arrangement today with a 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?

That particular IP contract was focused on IP for an advanced new node—specifically a 2-nanometer node—and included more content in IP because our portfolio is broader. So it was driven by new node engagement and expanded content scope.

(operator instructions) Our next question comes from the line of Joshua Tilton with Wolfe Research.

Anything to call out on what drove such a strong quarter for China? And then can you help us bridge what is driving such a great organic raise for 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 given the second half conservatism in the guide?

Josh, China was 13% of Q1 revenue, broadly consistent with expectations, and we expect China to be about 13% for the year. It can be lumpy quarter-to-quarter. Q1 2025 comps in China were weaker, so the year-over-year growth may look generous. Regarding the guide bridge, Q1 was a strong start across all metrics. Excluding Hexagon's $160 million, we basically raised the year by $65 million at the midpoint for revenue and about $0.08 for EPS. On the cash flow front, the reported guide includes approximately $180 million of pre-close Hexagon tax liabilities that are economically part of the acquisition consideration but classified in operating cash flow. If you adjust for that, the operating cash flow outlook is approximately $2.1 billion, about $100 million above our original guide. There's strength across the business, but we preferred to be cautious on the second half until we get further visibility.

(operator instructions) And our final question comes from the line of Blair Abernethy with Rosenblatt Securities.

Just want to ask about the Millennium platform. How is adoption going there, Anirudh? And in general, the health in some of your non-semi verticals like automotive, aerospace, industrial equipment and so forth. Any commentary around that would be great.

Millennium is doing well. We are pleased with the partnership with NVIDIA and the traction we've seen. There are two main applications: traditional SDA areas, like automotive and aerospace, where Cascade and Millennium handle high-accuracy CFD, and newer EDA applications this year, such as 3D-IC signoff. 3D-IC signoff involves thermal, electromagnetic and power delivery simulation and maps well to GPU-accelerated numerical solvers. We see Millennium applying to autos, drones, aerospace and 3D-IC signoff. We're excited about Millennium's opportunity alongside our traditional hardware systems.

And I will now turn the call back to Anirudh Devgan for closing remarks.

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. 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 First Quarter 2026 Earnings Conference Call. This concludes today's call, and you may now disconnect. Goodbye.