CDNS Q3 Deep Dive: AI Demand and Hardware Momentum Offset Cautious Market Reaction

Electronic design automation company Cadence Design Systems (NASDAQ:CDNS) reported Q3 CY2025 results beating Wall Street’s revenue expectations, 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.

Is now the time to buy CDNS? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Cadence Design Systems’ third quarter results surpassed Wall Street’s expectations for both revenue and non-GAAP earnings per share, yet the market responded with a modestly negative reaction. Management attributed the solid performance to broad-based demand across electronic design automation (EDA), intellectual property (IP), and hardware platforms, particularly as AI-driven design activity accelerated across multiple industries. CEO Anirudh Devgan highlighted strong bookings and a record backlog, emphasizing that Cadence’s partnerships with major semiconductor and system companies continue to drive consistent growth. The company also benefited from a normalization of activity in China and robust hardware demand, which, according to Devgan, has “become almost an annual subscription” for large customers.

Looking ahead, Cadence’s raised full-year guidance reflects management’s confidence in sustained AI-fueled design complexity and customer demand across its EDA, IP, and hardware portfolios. Devgan pointed to the accelerating build-out of global AI infrastructure and the company’s investments in agentic AI and chiplet-based architectures as key drivers. While the company sees broad strength across geographies, CFO John Wall cautioned that the outlook assumes current export regulations remain unchanged, and Cadence continues to factor in prudence for potential regulatory shifts. Management reiterated a focus on expanding its product pipeline—especially in AI and system design analysis—while balancing growth with disciplined capital allocation and operating leverage.

Key Insights from Management’s Remarks

Management credited the quarter’s outperformance to strong adoption of AI-enabled design tools, expansion of strategic partnerships, and healthy demand for hardware and IP, with additional momentum from renewed business activity in China.

• AI-driven product adoption: Cadence’s AI-powered EDA tools, such as Cerebrus AI Studio and SimAI, saw increased uptake among leading customers including Samsung and NVIDIA. Management cited tangible productivity improvements, like a 4x boost in design efficiency and significant power reductions in new chip designs.
• Hardware platform momentum: Record hardware demand, particularly for the Palladium and Protium platforms, was driven by growth in AI and high-performance computing (HPC) markets. Customers are increasingly treating hardware purchases as recurring investments, reflecting ongoing complexity in chip design and verification.
• IP business strength: The IP segment delivered above-average growth, supported by customer wins in memory and AI-focused designs. The addition of Arm Artisan Foundation IP and new design wins in HBM4 and DDR5 contributed to expanded opportunities in advanced nodes and chiplet architectures.
• China market normalization: After disruptions due to export controls earlier in the year, business in China returned to typical patterns. Management attributed some backlog growth to deferred hardware deliveries and emphasized that design activity remains robust across the region.
• System design and analysis expansion: Investments in structural analysis, highlighted by the pending acquisition of Hexagon’s MSC software business and ongoing momentum in digital twin solutions, are positioning Cadence to address emerging opportunities in automotive, aerospace, and physical AI applications.

Drivers of Future Performance

Management expects continued growth to be led by AI infrastructure demand, product innovation in EDA and IP, and disciplined investment in new business lines, while remaining cautious about regulatory and macroeconomic risks.

• AI infrastructure and design complexity: The company anticipates sustained tailwinds from the global build-out of AI infrastructure, with rising chip complexity driving multi-year growth in EDA software, IP, and hardware. Management highlighted customer trends toward custom silicon and chiplet architectures as ongoing demand catalysts.
• Product pipeline and acquisitions: New investments in agentic AI, digital twin technology, and structural analysis—bolstered by acquisitions like Hexagon’s MSC software—are expected to expand addressable markets in sectors such as automotive and industrial. Management believes these additions will help cross the $1 billion revenue mark in system design and analysis by 2026 if acquisitions close as planned.
• Regulatory and geopolitical caution: Cadence’s forward guidance assumes stability in export regulations, but management remains cautious given potential for changes in global trade policy. The company is incorporating prudence into its outlook and continues to diversify geographically to mitigate region-specific risks.

Catalysts in Upcoming Quarters

In coming quarters, our analysts will be watching (1) the pace of adoption and monetization for Cadence’s AI-driven EDA and hardware products, (2) integration progress and revenue impact from recent acquisitions in system design and analysis, and (3) the resilience of IP and hardware demand amid evolving macro and regulatory environments. Developments in China and the rollout of agentic AI solutions will also be key markers for trajectory.

Cadence Design Systems currently trades at $346.01, down from $351.80 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

Stocks That Trumped Tariffs

Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.

The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today.

StockStory is growing and hiring equity analyst and marketing roles. Are you a 0 to 1 builder passionate about the markets and AI? See the open roles here.