Cadence Design Systems (CDNS)

Electronic design automation company Cadence Design Systems (NASDAQ:CDNS) reported revenue ahead of Wall Street’s expectations in Q3 CY2025, with sales up 10.1% year on year to $1.34 billion. Its non-GAAP profit of $1.93 per share was 7.8% above analysts’ consensus estimates.

Company Overview

Powering the chips behind everything from smartphones to AI accelerators for over 35 years, Cadence Design Systems (NASDAQ:CDNS) provides essential computational software, hardware, and intellectual property used by engineers to design and verify advanced electronic systems and semiconductors.

The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games, 3D tours or interactive movies.

Cadence's primary competitors include Synopsys (NASDAQ:SNPS), Siemens EDA (formerly Mentor Graphics, now part of OTCMKTS:SIEGY), and ANSYS (NASDAQ:ANSS). The company also competes with specialized tool providers, electronics manufacturers with in-house design capabilities, and emerging Chinese competitors like Huada Empyrean and Xpeedic.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Cadence Design Systems grew its sales at a 15.6% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds. Luckily, there are other things to like about Cadence Design Systems.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Cadence Design Systems’s annualized revenue growth of 15.3% over the last two years aligns with its five-year trend, suggesting its demand was stable.

This quarter, Cadence Design Systems reported year-on-year revenue growth of 10.1%, and its $1.34 billion of revenue exceeded Wall Street’s estimates by 0.9%.

Looking ahead, sell-side analysts expect revenue to grow 9.7% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and implies its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Cadence Design Systems’s billings punched in at $1.36 billion in Q3, and over the last four quarters, its growth was impressive as it averaged 21.8% year-on-year increases. This alternate topline metric grew faster than total sales, meaning the company collects cash upfront and then recognizes the revenue over the length of its contracts - a boost for its liquidity and future revenue prospects.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Cadence Design Systems is extremely efficient at acquiring new customers, and its CAC payback period checked in at 7.7 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Cadence Design Systems more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Cadence Design Systems’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 86.6% gross margin over the last year. That means Cadence Design Systems only paid its providers $13.36 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Cadence Design Systems has seen gross margins decline by 2.5 percentage points over the last 2 year, which is among the worst in the software space.

Cadence Design Systems produced a 90.7% gross profit margin in Q3, up 4.1 percentage points year on year. Zooming out, however, Cadence Design Systems’s full-year margin has been trending down over the past 12 months, decreasing by 1.1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Cadence Design Systems has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 28.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Cadence Design Systems’s operating margin might fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Cadence Design Systems generated an operating margin profit margin of 31.8%, up 3 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Cadence Design Systems has shown robust cash profitability, driven by its attractive business model and cost-effective customer acquisition strategy that enable it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 28.4% over the last year, quite impressive for a software business.

Cadence Design Systems’s free cash flow clocked in at $277 million in Q3, equivalent to a 20.7% margin. The company’s cash profitability regressed as it was 10.9 percentage points lower than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Cadence Design Systems’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 28.4% for the last 12 months will increase to 29.5%, giving it more flexibility for investments, share buybacks, and dividends.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Cadence Design Systems is a profitable, well-capitalized company with $2.75 billion of cash and $2.48 billion of debt on its balance sheet. This $274.1 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was great to see Cadence Design Systems’s full-year EPS guidance top analysts’ expectations. We were also happy its billings narrowly outperformed Wall Street’s estimates. On the other hand, its EPS guidance for next quarter was in line. Overall, this print had some key positives. Investors were likely hoping for more, and shares traded down 1.4% to $346.87 immediately after reporting.

Updated: December 4, 2025 at 9:28 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Cadence Design Systems.

Cadence Design Systems possesses a number of positive attributes. Although its revenue growth was a little slower over the last five years and analysts expect growth to slow over the next 12 months, its admirable gross margin indicates excellent unit economics. And while its operating margin hasn't moved over the last year, its efficient sales strategy allows it to target and onboard new users at scale.

Cadence Design Systems’s price-to-sales ratio based on the next 12 months is 16x. Looking at the software landscape right now, Cadence Design Systems trades at a pretty interesting price. If you believe in the company and its growth potential, now is an opportune time to buy shares.

Wall Street analysts have a consensus one-year price target of $384.20 on the company (compared to the current share price of $336.94), implying they see 14% upside in buying Cadence Design Systems in the short term.