It has been about a month since the last earnings report for Cadence Design Systems (CDNS Quick QuoteCDNS - Free Report) . Shares have lost about 5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cadence due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Cadence Q4 Earnings Top Estimates

Cadence reported fourth-quarter 2025 non-GAAP earnings per share (EPS) of $1.99, which beat the Zacks Consensus Estimate by 4.7%. The bottom line increased 5.9% year over year, exceeding management’s guided range of $1.88-$1.94.

Revenues of $1.44 billion beat the Zacks Consensus Estimate by 1.1% and increased 6.2% year over year. The figure beat management’s guided range of $1.405-$1.435 billion. The top line was driven by broad-based demand for its solutions, especially the AI-driven portfolio, amid robust design activity. 

The company ended the quarter with a backlog of $7.8 billion and current-remaining performance obligations of $3.8 billion.

For 2025, revenues surged 14% to $5.297 billion, while non-GAAP EPS came in at $7.14, up 20%. 

Cadence has provided an outlook for 2026. Revenues are estimated to be in the range of $5.9-$6 billion. Non-GAAP EPS for 2026 is expected to be between $8.05 and $8.15.

Segment Performance

Product & Maintenance revenues (92.5% of total revenues) of $1.332 billion rose 7.5% year over year. Services revenues (7.5%) of $108 million fell 7.7% year over year. Geographically, the Americas, China, Other Asia, Europe, the Middle East and Africa, and Japan contributed 47%, 12%, 20%, 14% and 7%, respectively, to total revenues in the reported quarter.

Product-wise, Core EDA, Intellectual Property (“IP”) and Systems Design & Analysis accounted for 69%, 15% and 16% of total revenues, respectively.

The System Design & Analysis business, up 13% in 2025, is gaining from higher demand for BETA CAE solutions, Millennium M2000 AI Supercomputer, 3D-IC platform, Allegro X and Reality data center digital twin solution. 

It also signed a definitive agreement to acquire the Design & Engineering division of Hexagon AB, including its renowned MSC Software business. The buyout will aid in accelerating footprint expansion in SDA and gain access to newer opportunities across automotive, aerospace, industrial and physical AI.

Core EDA business, which includes Custom IC, Digital IC and Functional Verification, experienced 13% growth in 2025, driven by strong growth in AI-driven solutions like Cerebrus AI Studio, Virtuoso Studio and Spectre. The demand for new hardware systems remained robust, with more than 30 new customers and substantially higher repeat demand from AI and hyperscalers. Cadence had a strong backlog and expects 2026 to be a record year for the hardware business.  Further, Cadence added 25 new digital full-flow logos in 2025. Moreover, the recurring software business grew in double digits in the fourth quarter.

The IP business was up 25% in 2025, benefiting from a broadening silicon solutions portfolio and increasing demand for solutions in AI, HPC, automotive, foundry and chiplet use cases. It is witnessing increasing demand for the memory IP solutions, including LPDDR6 memory IP. Cadence unveiled the Tensilica HiFi iQ DSP IP, the sixth-generation addition to its widely adopted HiFi DSP family, marking a significant step forward for next-generation voice AI and immersive audio applications.

Margin Performance

Total non-GAAP costs and expenses increased 6.5% year over year to $781 million.

Non-GAAP gross margin expanded 300 basis points (bps) to 88.5%. Non-GAAP operating margin contracted 20 bps on a year-over-year basis to 45.8%.

Balance Sheet & Cash Flow

As of Dec. 31, 2025, Cash and cash equivalents were $3 billion compared with $2.753 billion as of Sept. 30.

Long-term debt was $2.48 billion as of Dec. 31, 2025, compared with $2.479 million as of Sept. 30. Management issued $2.5 billion of senior notes at a weighted average interest rate of 4.44% in September 2024.

Cadence generated an operating cash flow of $553 million in the reported quarter compared with the prior quarter’s $311 million. Free cash flow was $512 million compared with $277 million in the previous quarter.

 For 2025, operating cash flow was $1.729 billion while free cash flow was $1.587 billion. 

The company repurchased its shares worth $200 million in the fourth quarter and $925 million in 2025.

Q1 & FY26 Outlook

Non-GAAP operating margin for 2026 is forecasted to be in the range of 44.75% to 45.75%. Also, operating cash flow is expected to be $2 billion. Management expects to utilize at least 50% of its free cash flow to repurchase shares in 2026.

For the first quarter of 2026, revenues are estimated to be $1.42-$1.46 billion. The company reported sales of $1.24 billion in the year-ago quarter. 

Non-GAAP EPS is anticipated to be between $1.89 and $1.95. The company reported an EPS of $1.57 in the year-ago quarter.  Non-GAAP operating margin is estimated to be between 44% and 45% in the first quarter.

How Have Estimates Been Moving Since Then?

Since the earnings release, investors have witnessed a upward trend in fresh estimates.

VGM Scores

Currently, Cadence has a average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Interestingly, Cadence has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.