Why Is Cadence (CDNS) Down 3.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Cadence Design Systems (CDNS). Shares have lost about 3.7% in that time frame, underperforming the S&P 500.

But investors have to be wondering, will the recent negative trend continue leading up to its next earnings release, or is Cadence due for a breakout? Well, first let's take a quick look at the latest earnings report in order to get a better handle on the recent catalysts for Cadence Design Systems, Inc. before we dive into how investors and analysts have reacted as of late.

Cadence Q2 Earnings Top Estimates

Cadence delivered strong second-quarter 2026 results, driven by broad-based demand for its AI-oriented portfolio amid robust design activity and new system architectures across hyperscaler infrastructure and physical AI. Non-GAAP earnings per share (EPS) of $2.11 beat the Zacks Consensus Estimate by 2.9%, increased 27.9% year over year and topped management’s guided range of $2.02 to $2.08. 

Revenues of $1.584 billion beat the Zacks Consensus Estimate by 0.5% and increased 24.2% year over year. The figure was within the management’s guided range of $1.555-$1.595 billion. All the product groups witnessed double-digit growth. 

On the earnings call, the company cited agentic AI as a durable tailwind. Cadence expects agentic tools to drive higher EDA consumption and usage across its platform as customers run more simulations, verification and implementation cycles, thereby expanding the addressable market. Management highlighted “strong early traction” for its AI Super-Agent portfolio.

A standout metric was a record backlog of $8.1 billion, driven by strong bookings. 

Strong quarterly performance and accelerating AI demand led to a raise in its 2026 revenue outlook.

Cadence raised its full-year 2026 revenue outlook to a band of $6.26-$6.34 billion, compared with the earlier guided range of $6.125-$6.225 billion. 

Non-GAAP EPS for 2026 is now expected to be between $8.05 and $8.15, compared with the earlier guided range of $7.85 to $7.95. 

Segment Performance

Product & Maintenance revenues (90.3% of total revenues) of $1.431 billion rose 22.3% year over year. Services revenues (9.7%) of $154 million jumped 46.7% year over year.

Recurring revenues comprised 78% of total revenues, while the remainder was upfront revenues. 

The Americas contributed 43% of revenues, while China accounted for 15%, Other Asia 20%, Europe, Middle East and Africa 15% and Japan 7%, pointing to diversified demand across geographies.

Product-wise, Core EDA, Intellectual Property (“IP”) and Systems Design & Analysis accounted for 68%, 15% and 17% of total revenues, respectively.

The System Design & Analysis business, up 37% in the second quarter, is gaining from higher demand for Allegro X AI, 3D-IC and BETA CAE solutions. Management noted that the integration of Hexagon's D&E business was “progressing well” with some deals closed with key clients in the quarter.

Core EDA business, which includes Custom IC, Digital IC and Functional Verification, experienced 18% year-over-year growth. 

The demand for new hardware systems continued to gain traction, driven by AI/HPC customers. Apart from hardware, demand for digital full-flow solutions was steady, with expanded adoption of the Tempus and Certus sign-off tools. It added 12 new logos in the reported quarter as well as expanded business with several AI clients. 

The IP business was up 40% year over year in the second quarter. The company is witnessing higher demand for its Star IP portfolio across AI and HPC applications, including HBM, PCIe, UCIe and LPDDR6.

Profitability Numbers

Non-GAAP gross margin expanded 100 basis points (bps) to 88.2%. 
Total non-GAAP costs and expenses increased 18.4% year over year to $863 million.

However, non-GAAP operating margin expanded 270 bps on a year-over-year basis to 45.5%.

Balance Sheet & Cash Flow

As of June 30, 2026, Cash and cash equivalents stood at $1.44 billion compared with $1.407 billion as of March 31, 2026. 

Long-term debt was $2.482 billion, compared with $2.481 billion as of March 31, 2026. 

Cadence generated an operating cash flow of $635 million in the reported quarter compared with the prior quarter’s $356 million. Free cash flow was $582 million compared with $307 million in the previous quarter.

The company repurchased its shares worth $200 million in the second quarter.

Outlook

Non-GAAP operating margin for 2026 is now forecasted to be in the band of 43.75% to 44.75%, compared with the range of 43.5% to 44.5% guided earlier. 

Also, operating cash flow is expected to be $2 billion compared with $1.875 billion to $1.975 billion projected earlier. The company expects to utilize at least 50% of its free cash flow to repurchase shares in 2026.

For the third quarter of 2026, revenues are estimated to be $1.595-$1.625 billion. The company reported sales of $1.55 billion in the year-ago quarter. 

Non-GAAP EPS is anticipated to be between $2.01 and $2.07 compared with $1.92 reported in the year-ago quarter. 

Non-GAAP operating margin is estimated to be between 43.5% and 44.5% in the third quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

The consensus estimate has shifted 6.85% due to these changes.

VGM Scores

At this time, Cadence has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock has a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

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

Outlook

Estimates have been 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.

Performance of an Industry Player

Cadence belongs to the Zacks Computer - Software industry. Another stock from the same industry, Pegasystems (PEGA), has gained 15.1% over the past month. More than a month has passed since the company reported results for the quarter ended June 2026.

Pegasystems reported revenues of $420.72 million in the last reported quarter, representing a year-over-year change of +9.4%. EPS of $0.35 for the same period compares with $0.28 a year ago.

Pegasystems is expected to post earnings of $0.48 per share for the current quarter, representing a year-over-year change of +60%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.

Pegasystems has a Zacks Rank #5 (Strong Sell) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.

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